■
January 2009
News and Analysis
Year in Review: Exempt Organizations Faced Challenges, Opportunities in 2008 . . . . . . . . . . 9
EO Workplan Focuses on Good Governance, IRS Official Says . . . . . . . . . . . . . . . . . . . . . . . . . 12
IRS Exempt Bonds Team Committed to Stopping Abuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
IRS Ready to Post Official New EO Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Grassley Considering Legislation on Tax-Exempt Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Tax Analysts Makes Public New Type of IRS Legal Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Exempt Organizations That File Old Return Could Be Penalized . . . . . . . . . . . . . . . . . . . . . . . 17
Sponsors Get More Time to Adopt Written Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
IRS Chief Counsel Advice
ILM 200850027, Holder of REMIC Interest May Not Deduct Charitable Contribution . . . . . 24
ILM 200848020, Trust Is Not Entitled to Deduction for Payments to Charities . . . . . . . . . 26
Failure-to-File Penalty Applies to Use of Outdated Exempt Organization Form . . . . . . . . . . . 28
Focus on the IRS
IRS Releases Fiscal 2009 Exempt Bonds Work Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Announcement 2008-105; 2008-48 IRB 1219, Fast-Track Settlements Now Available for
Tax-Exempt Entities, Government Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Notice 2009-3; 2009-2, IRS Provides Relief From 2009 Written Plan
Requirement for Some Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
REG-158747-06, IRS Publishes Proposed Regs on Withholding Requirements for
Government Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Focus on Treasury
Treasury Responds to Lawmaker’s Concerns About Rules for Type III Supporting
Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Court Opinions
Michael Sklar et ux. v. Commissioner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Donald W. Nicholas et ux. v. Commissioner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Moshe Shafrir et ux. v. Commissioner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
RCL Properties Inc. et al. v. United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Letter to the Editor
Marvin Friedlander Reflects on Long IRS Career . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Volume 63, Number 1
Table of Contents
EDITOR’S NOTEBOOK . . . . . . . . . . . . . . . . . . . . . . 5
CALENDAR OF UPCOMING EVENTS . . . . . . . . . . . . 7
NEWS AND ANALYSIS
Year in Review: Exempt Organizations Faced
Challenges, Opportunities in 2008 . . . . . . . . . . . 9
EO Workplan Focuses on Good Governance, IRS
Official Says . . . . . . . . . . . . . . . . . . . . . . . . . 12
IRS Exempt Bonds Team Committed to Stopping
Abuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
IRS Ready to Post Official New EO Return . . . . . . 15
Grassley Considering Legislation on Tax-Exempt
Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Tax Analysts Makes Public New Type of IRS Legal
Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Exempt Organizations That File Old Return
Could Be Penalized . . . . . . . . . . . . . . . . . . . . 17
Sponsors Get More Time to Adopt Written Plans . . 20
IRS CHIEF COUNSEL ADVICE
IRS Letter Rulings . . . . . . . . . . . . . . . . . . . . . .
IRS E-Mail Chief Counsel Advice . . . . . . . . . . . .
IRS Legal Memorandums . . . . . . . . . . . . . . . . .
IRS Program Manager Technical Assistance . . . . .
Full Text ILMs
ILM 200850027, Holder of REMIC Interest
May Not Deduct Charitable Contribution . . .
ILM 200848020, Trust Is Not Entitled to
Deduction for Payments to Charities . . . . . .
Full Text PMTA
Failure-to-File Penalty Applies to Use of
Outdated Exempt Organization Form . . . . . .
FOCUS ON THE IRS
IRS News . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IRS Tax Correspondence . . . . . . . . . . . . . . . . . .
Applicable Federal Rates . . . . . . . . . . . . . . . . . .
Federal Register . . . . . . . . . . . . . . . . . . . . . . . .
Internal Revenue Bulletin . . . . . . . . . . . . . . . . .
Public Comments on Regulations . . . . . . . . . . . .
IRS Publications . . . . . . . . . . . . . . . . . . . . . . .
Full Text Documents
IRS Releases Fiscal 2009 Exempt Bonds Work
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21
23
23
24
24
26
28
31
31
32
32
32
33
34
Full Text Guidance
Announcement 2008-105; 2008-48 IRB 1219,
Fast-Track Settlements Now Available for
Tax-Exempt Entities, Government Entities . . . 43
Notice 2009-3; 2009-2, IRS Provides Relief
From 2009 Written Plan Requirement for
Some Retirement Plans . . . . . . . . . . . . . . . . 47
REG-158747-06, IRS Publishes Proposed Regs on
Withholding Requirements for Government
Entities . . . . . . . . . . . . . . . . . . . . . . . . . . 48
FOCUS ON TREASURY
Incoming Treasury Letters . . . . . . . . . . . . . .
Outgoing Treasury Letters . . . . . . . . . . . . . .
Treasury News . . . . . . . . . . . . . . . . . . . . . .
Full Text Correspondence
Treasury Responds to Lawmaker’s Concerns
About Rules for Type III Supporting
Organizations . . . . . . . . . . . . . . . . . . .
. . . 65
. . . 65
. . . 65
. . . 65
FOCUS ON CONGRESS
Summaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Washington Roundup . . . . . . . . . . . . . . . . . . . . 67
COURT OPINIONS
Summaries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Court Petitions and Complaints . . . . . . . . . . . . .
Justice Department Documents . . . . . . . . . . . . .
Justice Department Briefs . . . . . . . . . . . . . . . . .
Taxpayer Briefs . . . . . . . . . . . . . . . . . . . . . . . .
Full Text Court Opinions
Ninth Circuit Affirms Religious School Tuition
Payments Are Not Charitable Contributions .
Couple’s Noncash Contribution Deductions
Allowed . . . . . . . . . . . . . . . . . . . . . . . . .
No Deductions for Individual Who Failed to
Substantiate, Court Says . . . . . . . . . . . . . . .
69
69
69
70
70
70
78
80
Magistrate Grants Motion to Compel; IRS
Ordered to Disclose Study Documents . . . . . 82
CURRENT LITIGATION STATUS REPORT . . . . . . . . 87
STATE TAX NEWS . . . . . . . . . . . . . . . . . . . . . . . . 89
LETTERS TO THE EDITOR
Marvin Friedlander Reflects on Long IRS Career . . 93
34
EO TAX BIBLIOGRAPHY
. . . . . . . . . . . . . . . . . . . 95
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January 2009
The Exempt Organization Tax Review
Copyright, Tax Analysts, 2008
ISSN 0899-3831
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The Exempt Organization Tax Review™
Donald C. Alexander
Washington, D.C.
Richard S. Gallagher
Milwaukee, Wis.
Michael W. Peregrine
Chicago, Ill.
Ellen P. Aprill
Los Angeles, Calif.
Joseph Greif
Washington, D.C.
Gary C. Pokrant
Bethesda, Md.
Harvey Berger
Washington, D.C.
Peter C. Guthery
Denver, Colo.
Ward S. Pynn
Walnut Creek, Calif.
Jody Blazek
Houston, Texas
Bertrand M. Harding Jr.
Washington, D.C.
Celia Roady
Washington, D.C.
Bonnie S. Brier
Philadelphia, Pa.
Sarah C. Harlan
Portland, Ore.
Frederick H. Rothman
New York, N.Y.
Bernadette M. Broccolo
Chicago, Ill.
Gail M. Harmon
Washington, D.C.
Phillip G. Royalty
Washington, D.C.
Evelyn J. Brody
Chicago, Ill.
James K. Hasson Jr.
Atlanta, Ga.
Ralph S. Rumsey
Ann Arbor, Mich.
Barbara Schwartz Bromberg
Cincinnati, Ohio
Richard S. Hobish
New York, N.Y.
Lisa A. Runquist
North Hollywood, Calif.
Thomas J. Brorby
Austin, Texas
Bruce R. Hopkins
Kansas City, Mo.
Michael I. Sanders
Washington, D.C.
Olivia S. Byrne
Rockville, Md.
Thomas K. Hyatt
Washington, D.C.
Thomas Silk
San Francisco, Calif.
Milton Cerny
Washington, D.C.
Laura Kalick
Washington, D.C.
Randall Snowling
Washington, D.C.
Carolyn C. Clark
New York, N.Y.
James B. Lyon
Hartford, Conn.
Richard A. Speizman
Washington, D.C.
Sheldon S. Cohen
Washington, D.C.
Douglas M. Mancino
Los Angeles, Calif.
John Spirtos
Washington, D.C.
Edward D. Coleman
Washington, D.C.
Jerry J. McCoy
Washington, D.C.
John C. Stophel
Chattanooga, Tenn.
Bruce D. Collins
Washington, D.C.
Suzanne Ross McDowell
Washington, D.C.
Mitchell Stump
West Palm Beach, Fla.
Gregory L. Colvin
San Francisco, Calif.
Anne M. McGeorge
Greensboro, N.C.
T.J. Sullivan
Washington, D.C.
Dominic L. Daher
San Francisco, Calif.
James J. McGovern
Washington, D.C.
Conrad Teitell
Stamford, Conn.
Harvey P. Dale
New York, N.Y.
David Wheeler Newman
Los Angeles, Calif.
D. Benson Tesdahl
Washington, D.C.
Deirdre Dessingue
Washington, D.C.
Kathleen M. Nilles
Washington, D.C.
Thomas A. Troyer
Washington, D.C.
Howard Donkin
Seattle, Wash.
Carolyn M. Osteen
Boston, Mass.
Mark B. Weinberg
Rockville, Md.
Marion R. Freemont-Smith
Boston, Mass.
Marcus S. Owens
Washington, D.C.
Stanley S. Weithorn
Palo Alto, Calif.
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
The Exempt Organization Tax Review Advisory Board
It’s been quite a year, hasn’t it? The election of the
nation’s first African-American president, the Beijing
Olympics, and the economic meltdown were just some of
the big stories in 2008.
It’s been a big year for tax-exempt organizations as
well, with plenty of tax-related developments. The redesigned information return seemed to be on everyone’s
minds as EOs and practitioners studied the form and
prepared to start using it in 2009. There also were pastors
who endorsed candidates from the pulpit in defiance of
the rules banning campaign intervention by charities and
churches, and the IRS kept busy with compliance projects
focusing on hospitals, colleges and universities, and
other areas. For a thorough review of these and other
developments affecting EOs, read the year in review
article in the news section.
Officials in the IRS Exempt Organizations Division are
looking ahead. They recently held a briefing to discuss
the division’s workplan for fiscal 2009, which includes
projects on student loan organizations, executive compensation, and the spending practices of charities. This
edition of EOTR has a couple of articles on the workplan,
which is available from Tax Analysts and will be reprinted in the February edition of EOTR. You also will
find coverage of the Tax-Exempt Bonds function’s workplan, which is reprinted in Focus on the IRS of this
edition.
EOs that offer tax-sheltered annuity plans got some
good news last month when the IRS offered transition
relief concerning final section 403(b) regulations, which
take effect January 1. The IRS said plan sponsors will
have until the end of 2009 to fulfill the regs’ written plan
requirement. The IRS notice announcing the relief is
reprinted in this edition, and there is a news story with
practitioner reaction.
Marvin Friedlander
In this issue of EOTR, you will find a letter from
Marvin Friedlander, who is retiring after 41 years at the
IRS. In his letter, Marvin reflects on his long career.
The Exempt Organization Tax Review
I have covered Marvin’s remarks at many conferences
over the years and have interviewed him on the phone,
and I have found him to be a remarkable person. I always
have been impressed with his firm grasp of the tax law,
his candor, and his sense of humor. I also could tell that
he loved his work and that he had great respect for the
nonprofit sector. I wish him the best in his well-deserved
retirement.
David Jones
David W. Jones, who also had a long and distinguished career at the IRS, died November 8. He started
work at the IRS in 1966 after graduating from law school.
When he retired in 2005, he was senior technical adviser
to the director of the Exempt Organizations Division.
David was well known among EO practitioners, and
he was a frequent speaker at conferences. When I covered
his remarks, he often talked about the Form 990, and his
comments were always informative and helpful to EO
reps and practitioners who needed to hear the latest on
IRS policy. He also had detailed knowledge of tax policy
and was very dedicated to his work.
EOTR extends condolences to David’s family.
Submissions to
The Exempt Organization Tax Review
If there is a development or issue affecting taxexempt organizations and you would like to write
about it, Tax Analysts encourages you to submit
articles to The Exempt Organization Tax Review to be
considered for publication. Send articles to my
attention at fstokeld@tax.org. I look forward to
hearing from you.
Fred Stokeld
January 2009 — Vol. 63, No. 1
5
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
by Fred Stokeld
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
In-House Advertisement
Intentionally Removed
2009
Redesigned Form 990, Sioux Falls, S.D. Sponsored by
the South Dakota CPA Society. For more information, go
to http://www.sdcpa.org/cde.cfm?event=239610.
January 8 – 10
January 27
American Bar Association Section of Taxation Midyear
Meeting, New Orleans. The Exempt Organizations Committee will meet on Friday, January 9. For more information, log on to http://www.abanet.org/tax.
990’s Do Matter, Bismarck, N.D. Sponsored by the
Minnesota Council of Nonprofits and the North Dakota
Association of Nonprofit Organizations. For more information, go to http://www.mncn.org/event_manage
ment.htm#990real.
January 12 – 16
January 28
43rd Annual Heckerling Institute on Estate Planning,
Orlando, Fla. Sponsored by the University of Miami
School of Law. For more information, call 305/284-4762,
go to http://www.law.miami.edu, or write to
Heckerling@law.miami.edu.
D.C. Bar Taxation Section Exempt Organizations Committee Luncheon, Washington. For more information, call
202/737-4700 or go to http://www.dcbar.org.
January 14
January 29
990’s for Real People, Bloomington, Minn. Sponsored by
the Minnesota Society of CPA’s. For more information, go
to http://www.mncpa.org/professional/secure/course
desc.asp?code=990RP4.
990’s for Real People, Portland, Ore. Sponsored by the
Oregon Society of CPA’s. For more information, go to
http://www.orcpa.org/showclass.asp?Show=07072.
January 30
January 15
Redesigned Form 990 Planning Primer, Portland, Ore.
Sponsored by the Oregon Society of CPA’s. For more
information, go to http://www.orcpa.org/showclass.
asp?Show=07073.
990’s Do Matter, Mankato, Minn. Sponsored by the
Minnesota Council of Nonprofits. For more information,
go to http://www.mncn.org/event_management.htm
#990real.
February 5 – 6
January 20
Joint Meeting of the Great Lakes TE/GE Council, the Gulf
Coast TE/GE Liaison Council, and the Mid-Atlantic Pension
Liaison Group, Baltimore. No registrations will be accepted at the door. For more information, contact David
Walters at dwalters@bodmanllp.com.
990’s Do Matter, St. Cloud, Minn. Sponsored by the
Minnesota Council of Nonprofits. For more information,
go to http://www.mncn.org/event_management.htm
#990real.
Comment Due Dates
Column (1) of the table below lists the dates by which written comments on proposed regulations must be received by
the IRS, or lists hearing dates. Send comments to the Internal Revenue Service, P.O. Box 7604 Ben Franklin Station,
Washington, D.C. 20044, and include the IRS file number, as indicated in column (3) of the table. Comments may also
be submitted electronically through the IRS’s Web site at http://www.irs.ustreas.gov/prod/tax_regs/comments.html.
(1)
Comments Due By/
Hearing Scheduled
January 26 (hearing scheduled)
January 22 (hearing scheduled)
January 23 (hearing scheduled)
The Exempt Organization Tax Review
(2)
Code Section
Section 147(f)
Section 45D
Section 170
(3)
File Number
REG-128841-07
REG-142339-05
REG-140029-07
January 2009 — Vol. 63, No. 1
7
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
January 22
Calendar of Upcoming Events
March 5 – 6
April 1 – 3
Legal Issues in Museum Administration, Boston. Sponsored by the American Law Institute-American Bar
Association. The program also is available via a live
webcast. For more information, call 1-800-CLE-NEWS or
go to http://www.ali-aba.org.
American Bar Association Section of Taxation May Meeting, Washington. The Exempt Organizations Committee
will meet on Friday, May 8. For more information, log on
to http://www.abanet.org/tax.
June 11 – 12
AICPA National Not-For-Profit Industry Conference,
Washington. Sponsored by the American Institute of
Certified Public Accountants. For more information, log
on to http://www.cpa2biz.org.
April 6 – 7
Representing & Managing Tax-Exempt Organizations,
Washington. Sponsored by Georgetown University Law
Center Continuing Legal Education. For more information, log on to http://www.georgetowncle.org.
8
January 2009 — Vol. 63, No. 1
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
45th Annual Non-Profit Legal & Tax Conference, Washington. For more information, contact Rebecca Johnston
at 202/785-9500 or rjohnston@wc-b.com, or go to http://
www.legalandtaxconference.com.
May 7 – 9
The IRS also grappled with the definition of hospital
for purposes of Schedule H. The final instructions defined a hospital as ‘‘a facility that is, or is required to be,
licensed, registered, or similarly recognized by a state as
a hospital.’’
by Fred Stokeld — fstokeld@tax.org
Tax-exempt organizations were confronted with many
challenges in 2008. As the economy slid into a recession,
charitable organizations had to respond to increasing
requests for help even as donations dropped. There was
also continued pressure from Congress, the IRS, and the
public for greater accountability and transparency in
exempt organizations.
But nonprofits also had new opportunities, through
enhanced disclosure requirements and a redesigned
information return, to demonstrate their good works and
to ensure their compliance with the tax laws.
New Information Return and Schedules
The IRS presented the redesigned Form 990, ‘‘Return
of Organization Exempt From Income Tax,’’ and numerous schedules at the end of 2007, and organizations were
told they would be required to file the form in 2009. That
gap in time allowed nonprofits to review the form in 2008
and become familiar with it. (For prior coverage of the
redesigned form’s release, see The Exempt Organization
Tax Review, Jan. 2008, p. 9; Doc 2007-27908; or 2007 TNT
246-2.)
The redesigned Form 990 was
discussed at almost every exempt
organizations tax conference in 2008,
as well as in webcasts and
minicourses.
Officials from the IRS Exempt Organizations Division
went to great lengths to educate organizations about the
new return; it was discussed at almost every exempt
organizations tax conference in 2008, and the Service
conducted webcasts and minicourses about the form. The
IRS’s release of draft instructions to the redesigned form
in April and the publication of final instructions in
August provided more answers.
Throughout the year, however, there were issues regarding the redesign that kept coming up. One issue was
whether bad debt (the amount patients are charged but
do not pay) and unreimbursed Medicare costs could be
reported in the community benefit table in the new
form’s schedule for hospitals (Schedule H). IRS officials
said the amounts could not be listed in the table but
could be listed in Part III of the schedule.
The Exempt Organization Tax Review
IRS officials said that they believe
there is a link between good
governance practices and compliance
with the tax laws.
Another schedule that got a lot of attention was
Schedule O, ‘‘Supplemental Information to Form 990.’’
The IRS, in keeping with the new return’s emphasis on
greater disclosure, said filers could more fully explain
their answers in the return on Schedule O. Officials
cautioned, however, that they did not want the schedule
to become a garbage dump into which organizations put
a ton of information in an unorganized way.
An issue that generated a lot of comments was the
definition of key employee for purposes of reporting
executive compensation and other transactions. In
August, the IRS announced that the definition proposed
in the draft instructions would be changed.
The IRS said that other than officers, directors, and
trustees, the only persons that must be reported as key
employees will be those who earn more than $150,000 for
the year; those who had control or influence similar to
that exercised by an officer, director, or trustee or who
managed or had authority or control over at least 10
percent of an organization’s activities (responsibility
test); and those who were among the organization’s top
20 earners who met both the $150,000 test and the
responsibility test.
Perhaps the most controversial part of the form was
Part VI, ‘‘Governance, Management, and Disclosure.’’
The section asks for the number of members of an
organization’s governing body, whether an organization
has a written conflict of interest policy, and other
governance-related questions.
Critics wondered why the IRS was so interested in
governance issues. In response, IRS officials said that
although they did not want to tell exempt organizations
how to govern themselves, they believe there is a link
between good governance practices and compliance with
the tax laws. Officials also said that organizations are not
required to have conflict of interest policies and other
practices asked about in Part VI but might want to
consider whether those policies would be appropriate for
them.
Schedule D, ‘‘Supplemental Financial Statements,’’
includes space for reporting balance sheet items by types
of assets, reporting of federal income tax liabilities, and
January 2009 — Vol. 63, No. 1
9
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Year In Review: Exempt
Organizations Faced Challenges,
Opportunities in 2008
News and Analysis
Nonprofit hospitals have a lot of
leeway in determining what activities
and programs will help them meet the
community benefit standard, stated a
GAO report.
As the end of the year approached and the first year
for filing the new form drew closer, the IRS advised
nonprofits that it had offered transition relief to smaller
organizations, allowing many of them to initially file
Form 990-EZ, ‘‘Short Form Return of Organization
Exempt From Income Tax,’’ instead of the redesigned
Form 990. Relief also is available to filers of Schedule H
and filers of Schedule K, ‘‘Supplemental Information on
Tax-Exempt Bonds.’’ Officials encouraged organizations
eligible for transition relief to take advantage of it.
A provision in temporary and proposed regulations
that were published to implement the new Form 990
proved very popular with exempt organizations. The
provision eliminates the advance ruling process for
501(c)(3) organizations.
In the past, an organization applying for classification
as a publicly supported charity rather than a private
foundation had to declare that it expected to be publicly
supported and after five years had to prove to the IRS
that it met that test by filing Form 8734, ‘‘Support
Schedule for Advance Ruling Period.’’ Under the new
rules, an organization is not required to file Form 8734
when five years have passed; instead, it must show,
beginning in its sixth year, that it is publicly supported on
Form 990 Schedule A, ‘‘Supplementary Information for
Organizations Exempt Under Section 501(c)(3).’’ (For T.D.
9324, see The Exempt Organization Tax Review, Oct. 2008, p.
40; Doc 2008-19078; or 2008 TNT 175-11.)
Hospitals
In addition to Schedule H, the IRS made its presence
in the nonprofit healthcare world known in other ways in
2008. The agency wrapped up its study of exempt
hospitals and prepared to release a report of its findings
by the end of the year. Officials said the report would
show that the levels of compensation paid to nonprofit
hospital executives are high and that hospitals frequently
use the rebuttable presumption of reasonableness, the
three-pronged process for determining if a compensation
10
January 2009 — Vol. 63, No. 1
arrangement is reasonable. In April, an IRS tax law
specialist reported that the compensation findings had
led to some exams.
Another report, published by the Government
Accountability Office, said nonprofit hospitals have a lot
of leeway in determining what activities and programs
will help them meet the community benefit standard that
is required for exemption. It also pointed to a lack of
consensus among government and industry bodies on
whether bad debt should count as a community benefit,
and said there also is no agreement on whether the
unreimbursed cost of Medicare should count.
The IRS took issue with several of the GAO’s findings.
The latitude the community benefit standard gives exempt hospitals is not as broad as the GAO claimed, the
Service said in a statement after reviewing a draft of the
report. The IRS also said Schedule H has clear standards
for determining and measuring community benefit.
Senate Finance Committee ranking minority member
Chuck Grassley, R-Iowa, said the report demonstrated
the weakness of the community benefit standard and
suggested that congressional action might be needed.
(For prior coverage, see The Exempt Organization Tax
Review, Nov. 2008, p. 144; Doc 2008-21984; or 2008 TNT
200-6. For the GAO report, see The Exempt Organization
Tax Review, Nov. 2008, p. 182; Doc 2008-21967; or 2008
TNT 200-22.)
Grassley’s interest in the operations of nonprofit hospitals surfaced at other times during the year. In September, after reading newspaper articles about two hospitals’
billing practices and treatment of uninsured patients, the
senator started inquiries of the hospitals.
Grassley wrote to the University of Chicago Medical
Center after The Washington Post reported that the hospital was trying to steer patients with little or no insurance
away from its emergency room to neighborhood clinics.
The University of Texas M.D. Anderson Cancer Center
heard from the senator after The Wall Street Journal
published an article that said the medical center had
demanded a leukemia patient pay $45,000 upfront because it did not honor her insurance policy. (For prior
coverage, see The Exempt Organization Tax Review, Oct.,
2008, p. 16; Doc 2008-18779; or 2008 TNT 171-4.)
Meanwhile, in the courts, a nonprofit health maintenance organization’s battle to have its exempt status
restored continued. The IRS contends that Vision Service
Plan (VSP) does not qualify for exemption as an organization described in section 501(c)(4) because it operates
primarily for the benefit of its subscribers and not
exclusively to promote social welfare. VSP counters that
the IRS is acting contrary to its previously held positions
on community benefit.
So far, the courts have sided with the IRS. But in
August, VSP asked the U.S. Supreme Court to hear the
case. (For the petition, see Doc 2008-17381 or 2008 TNT
155-53. For prior coverage, see The Exempt Organization
Tax Review, Sept. 2008, p. 275; Doc 2008-17370; or 2008
TNT 155-2.)
2008 Election Year Activities
As is true with most election years, the controversy
about the section 501(c)(3) ban on partisan political
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
reporting on uncertain tax positions under Financial
Accounting Standards Board Interpretation No. 48.,
‘‘Accounting for Uncertainty in Income Taxes.’’ In a July
16 letter to the IRS, members of the American Bar
Association’s Section of Taxation and Health Law Section
noted that many organizations, especially smaller ones,
will not have audited financial statements and therefore
will not have easy access to the accounting standards
outlined in the Form 990 draft instructions. They asked
the IRS to provide in the final instructions excerpts from
the relevant accounting standards or an Internet reference so that the accounting standards would be available
to smaller organizations. (For the letter, see Doc 200815657 or 2008 TNT 138-22.)
News and Analysis
Pastors at more than 30 churches
spoke out about candidates’ positions
in the hopes of provoking the IRS to
act and thereby setting up a court
challenge.
Attorneys knowledgeable about the issue were doubtful that the protest, which was organized by the Alliance
Defense Fund, would work. They said it was unlikely the
matter would end up in court, and even if it did, courts
that have ruled on similar cases in the past have not been
persuaded by the argument that the prohibition on
campaign intervention violates First Amendment free
speech protections.
A number of pastors from different denominations
condemned the protest, and almost 100 churches took
part in a counterinitiative in which pastors spoke in favor
of separation of church and state. (For prior coverage, see
The Exempt Organization Tax Review, Nov. 2008, p. 146; Doc
2008-20866; or 2008 TNT 190-5.)
There were other high-profile developments involving
campaign intervention in 2008. In February, the IRS
began an investigation of the United Church of Christ
(UCC) regarding a 2006 speech that Barack Obama, then
a Democratic senator from Illinois and a UCC church
member, had delivered at the denomination’s General
Synod. Newspaper articles had reported that Obama staff
members had set up tables outside the building where
the meeting took place to promote the senator’s emerging
presidential campaign.
In May, the IRS cleared the UCC of any wrongdoing. It
noted that the denomination’s leaders had invited
Obama to speak long before he began his White House
bid and that he was asked to appear as a noncandidate.
The IRS also pointed out that the UCC did not authorize
Obama’s staff to set up tables outside the meeting site
and that because the tables were on public property, the
UCC was not responsible for them. (For prior coverage,
see The Exempt Organization Tax Review, June 2008, p. 266;
Doc 2008-11265; or 2008 TNT 100-3.)
Another case that made headlines involved the Democratic Leadership Council (DLC), a section 501(c)(4)
organization that lost its tax-exempt status retroactively.
The IRS contended the DLC had omitted or misstated
facts on its exemption application. In April, a federal
court in Washington ruled against the IRS, concluding
that the DLC had not misrepresented information on its
The Exempt Organization Tax Review
application and that the IRS violated regulations governing retroactive revocation. The government is appealing.
(For Democratic Leadership Council Inc. v. United States, No.
1:05-cv-01067 (D. D.C. Apr. 4, 2008), see The Exempt
Organization Tax Review, May 2008, p. 188; Doc 2008-7710;
or 2008 TNT 69-18.)
There also was a flap about a video produced by a
section 501(c)(3) organization that warned about the
dangers of radical Islam. The video, produced and distributed by the Clarion Fund, contained graphic images
of terrorist attacks but did not mention any candidates by
name. But the Council on American-Islamic Relations
argued the distribution of the video was an attempt to
sway the presidential election in favor of Republican
nominee Sen. John McCain of Arizona, and filed complaints with the IRS and the Federal Election Commission. In its complaints, the council mentioned reports that
the Clarion Fund had posted a pro-McCain article on a
Web site before taking it down.
The Clarion Fund said it did not do anything inappropriate.
Earlier in the year, the IRS launched its latest political
activities compliance initiative (PACI) with an emphasis
on Internet-based campaign intervention. The Service
said there have been many cases of possible campaign
intervention by charities that link their Web sites to those
of other organizations and that electronic proximity,
including the number of clicks needed to move from a
charity’s Web site to a site opposing or supporting a
candidate, is a factor in deciding whether campaign
intervention has taken place. (For prior coverage, see The
Exempt Organization Tax Review, May 2008, p. 148; Doc
2008-8785; or 2008 TNT 77-3.)
A report prepared by the Treasury Inspector General
for Tax Administration, released in June, found some
problems with the PACI. The report said it sometimes
takes too long for referrals of possible campaign intervention to make it to the exam function and recommended that the Exempt Organizations Division begin
tracking the timeliness of all significant activities involved in processing referrals.
IRS Tax-Exempt and Government Entities Commissioner Steven T. Miller did not agree with the tracking
idea, saying it would impede flexibility. But he said the
Exempt Organizations Division had added two days to
the time it takes a group manager to assign a case to an
agent, required the PACI referral committee to continue
meeting when necessary to review referrals, and trained
30 more PACI agents. (For prior coverage, see The Exempt
Organization Tax Review, Aug. 2008, p. 144; Doc 200814499; or 2008 TNT 127-5.)
Colleges and Universities
Colleges and universities have received some unwanted publicity in recent years, thanks to reports in
2005 about the lavish lifestyle of the president of American University and, more recently, criticism that wealthy
schools are not doing enough to help students afford
tuition. Congress and the IRS both looked at higher
education institutions in 2008.
Grassley hammered schools with large endowments
for not using more of their funds on tuition assistance.
January 2009 — Vol. 63, No. 1
11
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
campaign activity by charities and churches became
heated in 2008. An interesting twist in 2008 was the
decision by a number of pastors to openly defy the IRS
and endorse candidates.
The aggressive approach began in January when a
Wisconsin pastor placed a full-page ad in The Wall Street
Journal that challenged the IRS to investigate a supposedly political sermon he delivered in 2006. Several
months later, on Pulpit Freedom Sunday, pastors at more
than 30 churches across the country spoke out about
candidates’ positions in the hopes of provoking the IRS to
act and thereby setting up a court challenge to the
campaign intervention prohibition.
News and Analysis
‘While endowment values and
pay-outs for financial aid may be
decreasing, there’s still money for the
president’s salary increase,’ Grassley
said.
Grassley often mentioned establishing a 5 percent
payout requirement for schools with the biggest endowments, an idea that was panned by critics who said the
requirement would be too prescriptive. He rejected that
complaint, pointing out that private foundations have a
similar requirement and are doing well. He also praised
Harvard University when it announced it was lowering
tuition for families below specific income levels and
commended Yale University when it increased its endowment payout.
The IRS also was interested in endowments and asked
a lot of questions on the topic in a questionnaire it began
sending in the fall to roughly 400 colleges and universities. The survey asked how endowments are invested
and sought details on how investment decisions are
made, and it asked how endowment funds are distributed. It also asked if schools have procedures to make
sure endowment distributions are used as donors intended.
In addition to endowments, the questionnaire requested information on conflict of interest policies, the
availability of schools’ audited financial statements to the
public, and what colleges and universities charge for
tuition. There were also extensive questions on compensation, which asked respondents to provide details of the
compensation arrangements of their six highest-paid
individuals.
In November, not long after the questionnaires were
sent, the IRS clarified several of its questions. It also gave
schools more time to complete the survey.
Outlook for 2009
Like most sectors of the U.S. economy, the exempt
organizations community is entering the new year with
some uncertainty. Will the first year of filing the redesigned Form 990 go smoothly, or will there be hiccups?
What action, if any, will the IRS take against churches
that took part in Pulpit Freedom Sunday? Will the
sagging economy cause a further drop in charitable
giving, and, if so, how will Congress and the IRS respond?
A year from now there should be some answers.
❖ ❖ ❖
12
January 2009 — Vol. 63, No. 1
EO Workplan Focuses on Good
Governance, IRS Official Says
by Simon Brown — sbrown@tax.org
The IRS’s fiscal 2009 workplan for tax-exempt organizations will continue the Service’s focus on promoting
transparency, accountability, and good governance
within the sector, IRS Exempt Organizations Division
Director Lois Lerner said November 25.
At a press briefing at IRS headquarters in Washington
to discuss the workplan, Lerner said her division will be
launching a charitable spending initiative, examining
student loan organizations, and continuing compliance
initiatives involving colleges and universities and charitable gambling. (For the complete workplan, see Doc
2008-24955 or 2008 TNT 229-23.)
Speaking on the overall mission of the workplan,
Lerner said: ‘‘Our goal is not to shut down any exempt
organizations as long as we can get them [to be] compliant.’’
‘Our goal is not to shut down any
exempt organizations as long as we
can get them [to be] compliant,’ Lerner
said.
Lerner said the EO Division wants to know how
charitable organizations are spending the donations they
receive, especially in light of the financial crisis. The
workplan outlines the method for gathering that information, explaining that the Form 990 exempt organizations information return, internal or external databases,
compliance studies and questionnaires, and examinations will be used. Executive compensation will also be a
component. Lerner said the project will be long term.
Lerner also said she is concerned that exempt student
loan organizations may be open to abuse because many
of them also have related for-profit subsidiaries. The
workplan states that the subsidiaries are sometimes
partially or entirely owned by the officers of the exempt
organization. Lerner said not all student loan organizations that have for-profit partners are jeopardizing their
exempt status, but that many organizations will be under
scrutiny because it ‘‘does raise some questions.’’ She said
a review of student loan organizations is especially
important now because many banks are taking fewer
risks on transactions like student loans, leaving student
loan organizations to take their place.
The IRS in October sent compliance check questionnaires to 400 colleges and universities. Lerner said the
questionnaire is intended to help the IRS learn more
about the sector and is not set up as a ‘‘gotcha.’’ She said
a major focus will be unrelated trade or business
activities and how colleges and universities report the
revenue and expenses from those activities. She would
not say how many of the 400 colleges and universities
will be audited, but said it will be a ‘‘small number,’’
adding that none would receive a full audit. She said any
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
His mood did not improve when a compensation survey
conducted by The Chronicle of Higher Education showed
that many college and university presidents take home
large paychecks.
‘‘The Chronicle’s study shows that the executive suite
seems insulated from budget crunches,’’ Grassley said in
a statement. ‘‘While endowment values and pay-outs for
financial aid may be decreasing, there’s still money for
the president’s salary increase.’’
News and Analysis
❖ ❖ ❖
IRS Exempt Bonds Team Committed
To Stopping Abuses
by Fred Stokeld — fstokeld@tax.org
Officials in the IRS Tax-Exempt Bonds Office (TEB) on
December 3 made clear that stopping abusive transactions involving exempt financing will continue to be a
top priority in fiscal 2009.
At a briefing in Washington to discuss TEB’s new
workplan, TEB Director Clifford Gannett reported that
last year approximately $19 million of the $50 million his
office collected through closing agreements involved
abusive transactions. The current financial crisis has
highlighted several areas, including the housing market
and derivatives, in which abuse has occurred, he said.
The IRS plans to redouble its efforts to look at abuses
involving derivatives, according to Gannett.
‘‘We continue to really spotlight [abusive transactions], and that’s really where we are using quite a bit of
our resources,’’ Gannett said. (For the workplan, turn to
p. 34.)
The IRS plans to redouble its efforts
to look at abuses involving
derivatives, said Gannett.
Robert Henn, TEB field operations senior manager,
provided more details about the IRS’s plans to address
the use of derivatives and other financial products to
divert rebatable arbitrage. The IRS will begin the second
phase of its qualified hedging initiative, he said, reporting that the agency has identified 100 cases in which an
issuer has indicated involvement in a qualified hedge. He
said the IRS will look at those cases and that agents have
undergone training to enable them to evaluate the values
of swaps independently without having to rely solely on
what they are told by issuers and underwriters.
Henn also said the IRS is wrapping up cases from the
first phase of the qualified hedging project. The issues
that have come up in those cases involve pricing and
qualification, he said, adding that he expects similar
issues will be found in phase two.
TEB will continue its project on student loan bonds,
according to Henn, who said the IRS has identified
problems in almost all of the examinations it has conducted so far. He said the most significant problem is the
transfer of proceeds between bond issues and the inability to track investment yields. Another problem is the
purchase of related-party loans, he said.
‘‘It goes to whether or not all the proceeds have been
used in the proper way, and [it] could have an impact on
the qualified status of those bonds,’’ Henn said.
Also in the works are three research projects that will
look at possible problem areas, Henn said. The projects
will not include examinations initially; after the IRS gets
more information on each area, it will decide whether
examinations are necessary, he explained.
The Exempt Organization Tax Review
January 2009 — Vol. 63, No. 1
13
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
potential audits will probably focus on executive compensation as well as unrelated business activities.
Lerner also said the results of the questionnaire probably will not answer the question whether colleges and
universities should have mandatory payouts from their
endowments. In September Senate Finance Committee
ranking minority member Chuck Grassley, R-Iowa, and
Rep. Peter Welch, D-Vt., held a roundtable discussion on
mandatory payouts, something that the representatives
of higher education institutions who appeared at the
hearing opposed. (For prior coverage, see The Exempt
Organization Tax Review, Oct. 2008, p. 18, Doc 2008-19163,
or 2008 TNT 175-7.) Lerner said that information reported
on Form 990 and other reporting on endowments may
help shed more light on the issue, but that it will take
time to gather the information.
One of the ongoing initiatives outlined in the workplan concerns gambling. Lerner said many charities that
conduct gambling operations report their earnings only
to their states and do not file with the IRS. The workplan
notes that in 2007 and 2008, the IRS researched 18 state
databases to locate organizations that filed with the state
only. Based on that information, the IRS opened approximately 800 examinations of organizations that failed to
file, according to the workplan. In 2009 the examinations
will be completed and the results will be reported, the
workplan says.
Cheryl A. Teser, a senior program analyst in the IRS
Tax-Exempt and Government Entities Division, said at a
November conference in Los Angeles that the IRS’s
findings have provided the agency with an opportunity
to increase compliance by charities involved in gambling
as well as to educate them about their filing requirements.
News and Analysis
The IRS wants to know what happens
to bond proceeds given to unsuccessful
charter schools, Henn said.
Henn also said the IRS will work to make a bondholder unit that was set up in 2007 fully operational. The
purpose of the unit is to identify bondholders when TEB
makes a preliminary determination that bonds are taxable, he said.
Gannett said a planned compliance check questionnaire for issuers of governmental bonds, which was to be
sent in November, has been delayed, probably until the
end of January. Issuers will also get more time to respond
to the survey, he added.
Moving to other areas, Chamberlin said TEB is still
trying to educate bond issuers on the importance of filing
the forms in the Form 8038 series on time. There are still
issuers who are not filing the forms in a timely manner
and are not asking for more time to complete them, he
said.
There are still issuers who are not
filing the Form 8038 series forms in a
timely manner and are not asking for
more time to complete them,
Chamberlin said.
Chamberlin also brought up the allocation of clean
renewable energy bonds (CREBs). In fiscal 2008, $400
million worth of CREB volume cap amounts were allocated; in fiscal 2009 the figure will be $800 million, he
reported. The allocation will take place in the second half
of the fiscal year, and guidance on requesting the allocation amounts is being developed, he added.
Impatience With Delaying Tactics
Gannett said TEB will pursue Circular 230 action
against practitioners who willfully engage in delaying
tactics regarding the resolution of their cases. A few
practitioners give information to the IRS in a piecemeal
way to extend the period of negotiations to a point at
which, even if the IRS’s position that bonds are taxable is
upheld, the statute of limitations has expired, he explained.
‘‘The statute of limitations has foreclosed us from
going back and assessing parties that we need to assess,’’
Gannett said.
❖ ❖ ❖
Voluntary Compliance
Another official at the briefing was Steven Chamberlin,
manager of compliance and program management for
TEB, who spoke about the exempt bond unit’s Voluntary
Closing Agreement Program (VCAP).
Chamberlin said that TEB had just released its updated VCAP procedures, which are available on the
exempt bonds section of the IRS Web site. A feature of the
updated procedures is a section with specific ways of
resolving eight types of violations, ranging from excessive nonqualified use to impermissible advance refundings.
‘‘What we’re hoping this will do is provide issuers
with additional incentives to make sure they timely
perform their due diligence in their transactions [and]
identify violations that bring them into the Service. And
where those violations fall into these categories we can
expeditiously move to resolution without doing a tremendous amount of analysis,’’ Chamberlin said.
14
January 2009 — Vol. 63, No. 1
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
One project will look at charter schools. The IRS wants
to know what happens to bond proceeds given to unsuccessful charter schools, Henn said.
Another project will focus on exempt financing transactions involving community development districts. The
IRS wants to look at the authority of those districts to
issue bonds and, perhaps more important, what they are
acquiring through the exempt financing, Henn said.
Finally, there will be a project on tax increment financing, said Henn.
Henn said that in 2009 TEB will continue efforts to
refine its examination case processing procedures. One
change has been to have examiners start discussing
problems as early as possible in the examination process.
‘‘Once we’ve identified a problem, we begin the
dialogue on that, asking the issuer for their reaction to the
issues that we’re raising, and their representatives [are]
providing us with their arguments as to why perhaps our
interpretation may not be correct,’’ Henn said. He added
that TEB no longer issues preliminary adverse determination letters; instead, it issues Form 5701, ‘‘Notice of
Proposed Adjustment,’’ which provides ‘‘an opportunity
for us to put something in writing and to get something
back in writing from the issuers, so that hopefully we can
come to a resolution.’’
News and Analysis
by Fred Stokeld — fstokeld@tax.org
The IRS is about to make available the official version
of the redesigned information return for tax-exempt
organizations as well as the form’s instructions, an
agency official said December 17.
At a program in Washington that was sponsored by
the D.C. Bar Taxation Section’s Exempt Organizations
Committee, IRS Exempt Organizations Division Director
Lois Lerner said the new Form 990, ‘‘Return of Organization Exempt From Income Tax,’’ and the instructions
will appear on the IRS Web site the week of December 22.
EOs will begin filing the form in 2009 for the 2008 tax
year, although smaller organizations initially can use
Form 990-EZ, ‘‘Short Form Return of Organization
Exempt From Income Tax.’’
Lerner said she has heard from accountants who say
they already have encountered problems with filing the
form, and she encouraged filers who discover problems
to let the IRS know about them.
‘‘When you actually sit down to fill the thing out,
you’re going to find things that we just missed,’’ Lerner
said. ‘‘We need to know about them, you need to bring
them to our attention.’’ Filers who want to point out
problems should get in touch with Stephen Clarke, an
IRS tax law specialist who is project manager for the
Form 990 redesign, or they can contact her, Lerner said.
On another matter related to the filing of information
returns, Lerner referred to a recent incident in which the
Social Security numbers of a private foundation’s grant
recipients were made public after the foundation included them on its Form 990-PF, ‘‘Return of Private
Foundation or Section 4947(a)(1) Nonexempt Charitable
Trust Treated as a Private Foundation.’’ The IRS cannot
redact those numbers, she said, adding that filers should
not include anything on a return that the Service has not
requested.
Turning to other topics, Lerner said a muchanticipated report on the IRS’s study of tax-exempt
hospitals will be published soon. She said the report will
be lengthy, about five times larger than the IRS expected.
The IRS also has been studying community foundations. It sent surveys to about 3,000 foundations and
received a lot of replies from organizations that said they
were not community foundations, Lerner said. She
added that there will be some examinations of community foundations, with a focus on donor-advised funds.
Lerner reminded the audience that an IRS study of
colleges and universities recently got under way. She said
it is unlikely the agency will develop a Form 990 schedule
for higher education institutions, noting that many of the
questions that would be on a schedule already appear on
the redesigned return.
The IRS also is trying to learn more about EOs’
funding sources and how EOs spend their money, Lerner
said. The IRS will look at unrelated trade or business
activities, types and amounts of direct and indirect
unrelated business expenses, officer compensation, and
fundraising expenses, she explained.
The Exempt Organization Tax Review
Lerner said the IRS will prepare a report on its political
activities compliance initiative for 2008, adding that the
agency probably will not have it ready by March but will
try. She said the IRS received a significantly higher
number of referrals of possible campaign intervention by
charities and churches this election cycle than in the
previous election but that ultimately the number of
referrals selected for examination was about the same.
She attributed the increase in complaints to the public’s
heightened awareness of the section 501(c)(3) political
activity prohibition.
Lerner said she has been asked about the IRS’s
progress in developing a voluntary compliance program
for EOs. She assured the audience the IRS is still working
on it and wants to have something available this year.
‘‘We want organizations that are hiding in the leaves
to come in, get clean, go forward in compliance, continue
to file, and not lose their exemption,’’ Lerner said.
Lerner also reported that the IRS’s cyber assistant,
which is designed to help organizations apply for exempt
status online, will be tested this year.
❖ ❖ ❖
January 2009 — Vol. 63, No. 1
15
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
IRS Ready to Post Official
New EO Return
News and Analysis
by Fred Stokeld — fstokeld@tax.org
A Senate Finance Committee GOP staff member on
December 18 confirmed that discussions are taking place
regarding the possible introduction of legislation on
tax-exempt hospitals next year.
In a conversation with Tax Analysts, the tax counsel
for committee ranking minority member Chuck Grassley,
R-Iowa, said the senator and his tax staff are taking
another look at a 2007 discussion draft prepared by
committee staff that contained possible nonprofit hospital reforms, including a requirement that a section
501(c)(3) hospital dedicate at least 5 percent of its operating expenses or revenues to charity care. (For the
discussion draft, see Doc 2007-16840 or 2007 TNT 140-45.
For prior coverage of a 2007 roundtable on hospital
reforms, see The Exempt Organization Tax Review, Dec.
2007, p. 236; Doc 2007-24194; or 2007 TNT 211-4.)
The tax counsel went on to say that legislation is
possible, especially if the IRS does not change the community benefit standard that hospitals must meet to
qualify for exemption, a standard Grassley has called
weak and vague. When asked what the legislation might
include, the tax counsel replied that all the ideas in the
discussion draft are on the table.
News of Grassley’s interest in legislation on nonprofit
hospitals was reported in The Wall Street Journal on
December 18.
Michael W. Peregrine, a partner at McDermott Will &
Emery, Chicago, told Tax Analysts the possibility of
hospital legislation raises the stakes for a report on the
IRS’s study of exempt hospitals, which is expected to be
released very soon. T.J. Sullivan, a partner at Drinker
Biddle, Washington, said any legislation on charity care
and community benefit should be postponed until Congress learns more about the operations and activities of
nonprofit hospitals from information reported on Schedule H, the new hospital schedule that accompanies the
redesigned information return for exempt organizations.
❖ ❖ ❖
TAX ANALYSTS
BOARD OF DIRECTORS
Christopher Bergin
Tax Analysts
Falls Church, Virginia
Edward W. Erickson
North Carolina State University
Raleigh, North Carolina
Thomas L. Evans
Kirkland & Ellis LLP
Washington, D.C.
Larry R. Langdon
Mayer, Brown, Rowe & Maw LLP
Palo Alto, California
Richard G. Larsen
Ernst & Young
Washington, D.C.
Martin Lobel
Lobel, Novins & Lamont LLP
Washington, D.C.
Michael J. Murphy
Sutherland Asbill & Brennan LLP
Washington, D.C.
Pamela F. Olson
Skadden, Arps, Slate, Meagher & Flom LLP
Washington, D.C.
Deborah H. Schenk
NYU School of Law
New York, New York
Arthur W. Wright
Retired
University of Connecticut
Storrs, Connecticut
Eric M. Zolt
UCLA School of Law
Los Angeles, California
16
January 2009 — Vol. 63, No. 1
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Grassley Considering Legislation on
Tax-Exempt Hospitals
News and Analysis
by Amy S. Elliott — aelliott@tax.org
In response to a successful Freedom of Information
Act suit brought by Tax Analysts, the IRS has released a
form of guidance that previously was withheld from the
public under deliberative process privilege claims.
That newest form of released guidance is known as
program manager technical assistance (PMTA) — internal memorandums containing legal advice written by the
Office of Chief Counsel (OCC) and directed to IRS
national program managers.
The circumstances of the documents’ release have
raised questions about the thoroughness of the disclosure
process, which in the case of PMTAs has unfolded over
the past decade. To date, the Service has released 531
PMTAs (written from 1993 to 2008) to Tax Analysts. A
total of 36 PMTAs have been published by Tax Analysts.
A total of 523 PMTAs are now available to the public in
paper form at the IRS Freedom of Information Reading
Room in Washington.
Inconsistencies marred the public release of these
documents, a release that was never announced by the
IRS and that was supposed to have occurred quarterly
beginning October 2007. Instead, the last four releases
(slated for December 2007 and February, June, and
October of 2008 and totaling 103 PMTAs) never made it
to the reading room until Tax Analysts alerted the Service
to the oversight on December 9. The reading room now
contains a set of 523 PMTAs that were not part of the
court-ordered release of the first batch of eight but that
stem from a settlement with Tax Analysts.
‘The IRS will continue to make
quarterly releases [of PMTAs],
generally during the first week of the
month following the quarter,’ said
Friedland.
‘‘The IRS will continue to make quarterly releases [of
PMTAs], generally during the first week of the month
following the quarter,’’ said Bruce Friedland of the IRS
Media Relations Office. ‘‘We do not typically make
EXEMPT ORGANIZATIONS THAT FILE OLD RETURN COULD BE PENALIZED
Tax-exempt organizations that file the old version
of the exempt organization information return instead of the redesigned form could face penalties,
according to a memorandum from the IRS Office of
Chief Counsel.
The August 5 memo from Michael B. Blumenfeld,
senior technician reviewer in Exempt Organizations
Branch 1, Tax-Exempt and Government Entities Division, to David L. Fish, manager, Exempt Organizations Technical Guidance and Quality Assurance,
notes that in December 2007 the IRS released a
redesigned version of Form 990, ‘‘Return of Organization Exempt From Income Tax,’’ along with several
new schedules. Except for some smaller organizations that have been provided transition relief,
exempt organizations are required to file the new
form in 2009 for the 2008 tax year, according to the
memo. (For the memo, see p. 28.)
Blumenfeld’s memo, which Tax Analysts obtained
through a Freedom of Information Act request, responded to an earlier memo from Fish that expressed
concern that some organizations would use the old
form and refuse IRS directions to use the new
version. Fish also was concerned that some filers
would use the new form but attach old versions of
schedules and vice versa.
In his response, Blumenfeld acknowledged several points Fish had made in his memo, in particular
that the format of the revised form is substantially
different from the 2007 return in that it asks for more
and different information. Also, the IRS’s system for
processing the Form 990 has been changed to accommodate the redesigned return, making it impossible
for the agency to process the old form, he said.
The Exempt Organization Tax Review
As a result, Blumenfeld continued, use of the old
return would make it more difficult for the IRS to
administer tax laws by denying it material information. Therefore, the failure-to-file penalty under section 6652(c)(1)(A) could be applied if an organization
files the old return instead of the new one, he said.
He also said a plan articulated by Fish to ask a filer
of the old return to complete the redesigned form
before applying penalties is a sound administrative
practice that could put the IRS in a favorable light if
a dispute ended up in court.
D. Greg Goller, a partner at Grant Thornton LLP,
said the IRS position is clear. ‘‘Even with all the
publicity surrounding the revised Form 990 for 2008,
the IRS anticipates that some organizations may
inadvertently attempt to satisfy their annual filing
requirement by using the old version and/or thereafter refuse to file the revised version,’’ he told Tax
Analysts. ‘‘In either case, the memo from chief counsel leaves little doubt about how the IRS intends to
respond.’’
Michael A. Clark, a partner at Sidley Austin LLP,
said it is interesting that the IRS is worried about
filers using the old form. ‘‘It’s notable that they
already have the procedure worked out — send out
a request for the new form, and assert penalties if it
is not filed,’’ he told Tax Analysts. ‘‘This would seem
to be a reasonable approach, and should weed out
the cases involving innocent errors.’’
by Fred Stokeld — fstokeld@tax.org
January 2009 — Vol. 63, No. 1
17
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Tax Analysts Makes Public New
Type of IRS Legal Advice
News and Analysis
‘I am disappointed with the
haphazard method the IRS is pursuing
in getting this guidance to the public,’
said Bergin.
The first eight PMTAs were released to Tax Analysts
under direct order of the U.S. District Court for the
District of Columbia in February 2007. Tax Analysts
published the documents that month, but without much
explanation of their significance.
Also, Tax Analysts at the time categorized the documents under its document presentation system as ‘‘IRS
Technical Advice Memorandums.’’ In December 2008 Tax
Analysts recategorized this type of document as ‘‘IRS
Program Manager Technical Assistance.’’ (For the eight
court-ordered PMTAs, see Doc 2007-6400 or 2007 TNT
52-19; Doc 2007-6404 or 2007 TNT 52-24; Doc 2007-6405 or
2007 TNT 52-23; Doc 2007-6402 or 2007 TNT 52-21; Doc
2007-6401 or 2007 TNT 52-26; Doc 2007-6407 or 2007 TNT
52-25; Doc 2007-6406 or 2007 TNT 52-22; and Doc 20076403 or 2007 TNT 52-20.)
Decade-Long Clash Over Disclosure
The litigation over disclosure of PMTAs — a dispute
that began in 1996 — was resolved by a July 2007
agreement between Tax Analysts and the Service that set
forth a schedule for future PMTA releases to Tax Analysts
and the general public. That agreement, titled ‘‘Stipulation of Dismissal’’ and issued by the U.S. District Court
for the District of Columbia, established in writing the
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January 2009 — Vol. 63, No. 1
expectation that beginning on October 1, 2007, and on a
‘‘going-forward’’ basis, the IRS would process and release to the public those PMTAs subject to disclosure.
(For the Stipulation of Dismissal, see Doc 2008-24026 or
2008 TNT 240-37.)
Under the settlement agreement, the IRS released 523
additional PMTAs to Tax Analysts spanning from 1995 to
2008. These were released in six batches: in July and
October of 2007 and in January, February, July, and
October of 2008. Tax Analysts has already released the
first group of these — the 28 of the 523 PMTAs that are
dated in 2008. Tax Analysts will release the remaining
PMTAs on a regular basis in the future.
Litigation History
In 1996 Tax Analysts filed a FOIA suit to force the IRS
to release, among other types of guidance, written legal
guidance issued by the OCC in response to official
queries by national program managers and industry
directors.
The case worked its way up to the D.C. Circuit Court,
which in 2002 issued an opinion affirming the lower
court’s determination as to which documents should be
disclosed or withheld and what principles should apply.
(For prior coverage, see Doc 2002-11167 or 2002 TNT 89-4.
For the D.C. Circuit opinion, Tax Analysts v. IRS, 294 F.3d
71 (D.C. Cir. 2002), see Doc 2002-14346 or 2002 TNT
116-8.)
On remand to the D.C. district court, the judge resolved a few outstanding differences and ordered the IRS
to disclose eight of the PMTAs in question to Tax Analysts. (For prior coverage, see Doc 2007-3467 or 2007 TNT
28-4. For the D.C. district court’s 2007 opinion, Tax
Analysts v. IRS, No. 96-2285 (D.C. 2007), see Doc 20073370 or 2007 TNT 28-18.)
The standard used for releasing PMTAs is set forth in
Tax Analyst’s 2002 D.C. circuit court victory and applied
by the district court in its 2007 opinion. According to the
2002 opinion, when the guidance ‘‘reflects OCC’s considered position on a precise issue [and] contain[s] legal
analysis, conclusions and advice,’’ it must be disclosed. If
OCC prepared the guidance ‘‘merely to ‘discuss the
wisdom of an aging policy,’ or [to] recommend new
agency policy,’’ it should not be disclosed.
In addition to PMTAs, the Service disclosed to Tax
Analysts — and Tax Analysts will be releasing — what
has been referred to as ‘‘hybrid’’ technical assistance
memorandums written to the commissioner of the IRS
Tax-Exempt and Government Entities Division. In accordance with the agreement with the Service, any memorandums that contain ‘‘more than a minimal amount’’ of
content reproduced in a publicly available private letter
ruling or technical advice memorandum will be released
to Tax Analysts.
Substance of the New Guidance
An analysis of the newly released batch of 28 PMTAs
dated in 2008 reveals statements on a wide variety of
subject matter:
• no interest is owed on refunds paid within 45 days
of an amended tax return (Doc 2008-24583, 2008 TNT
240-9);
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
announcements that we are placing material in the reading room, and we have no plans to make announcements
regarding PMTAs.’’
Although Tax Analysts has been receiving PMTAs
from the IRS directly since July 2007, it had no knowledge
that any had been released to the public and was under
the impression that there were no documents in the IRS
reading room that were not also available in the electronic reading room or electronically via other sources.
‘‘I am disappointed with the haphazard method the
IRS is pursuing in getting this guidance to the public,’’
said Christopher Bergin, president and publisher of Tax
Analysts, which publishes Tax Notes. ‘‘Tax Analysts will
continue to work to help improve the process.’’
Friedland added that the IRS hopes to automate the
process to make PMTAs available in the electronic reading room sometime in the future.
Despite the delayed disclosure of the guidance, there
is a sense that the PMTAs will be of interest to practitioners. ‘‘They certainly will provide some light on the
way the national office thinks with respect to certain
issues,’’ said Walter Goldberg, executive director of Grant
Thornton LLP’s national tax office, who reviewed a small
sample of the PMTAs for Tax Analysts. ‘‘They all seem to
deal with legal issues, which under section 6110 of the
code are the types of chief counsel advice that the Service
has been disclosing over the years openly. But they also
deal with some procedural issues surrounding the legal
advice.’’
News and Analysis
The Exempt Organization Tax Review
• income derived by a social club under a reciprocal
agreement with another such club should still be
treated as nonmember income (Doc 2008-24717, 2008
TNT 240-28);
• the IRS considers the amount of due diligence
required to ascertain a taxpayer’s correct mailing
address (Doc 2008-24718, 2008 TNT 240-29);
• the IRS can disclose confidential federal tax information to two Ohio income tax agencies (Doc 200824719, 2008 TNT 240-30);
• tips paid using gift cards should be reported by
service providers as cash tips (Doc 2008-24720, 2008
TNT 240-31);
• how the IRS can correct a notice of federal tax lien
that mistakenly listed a nonliable individual (Doc
2008-24721, 2008 TNT 240-32);
• mobile home retail sales should be treated as sales of
real property (Doc 2008-24722, 2008 TNT 240-33);
• parents cannot claim the child tax credit if children
are non-U.S. citizens but may take a dependency
exemption if children reside in Mexico or Canada
(Doc 2008-24723, 2008 TNT 240-34);
• the IRS considers worker classification in Indian
tribal governments (Doc 2008-24724, 2008 TNT 24035); and
• the IRS must pay interest on some excess deposits
made in connection with a disputed underpayment
(Doc 2008-24775, 2008 TNT 240-36).
❖ ❖ ❖
January 2009 — Vol. 63, No. 1
19
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
• a tax return preparer’s promotional material opt-out
is insufficient (Doc 2008-24584, 2008 TNT 240-10);
• a failure-to-file penalty may be applied if a taxpayer
uses an outdated Form 990 (Doc 2008-24585, 2008
TNT 240-11) (for coverage of this PMTA, see the box
on p. 17; the PMTA is reprinted on p. 28);
• the IRS may not create a bright-line rule denying all
requests to extend the time to pay estate tax if Form
4768 shows no tax liability (Doc 2008-24586, 2008
TNT 240-12);
• the IRS does not have to accept cash at all taxpayer
assistance centers (Doc 2008-24587, 2008 TNT 24013);
• unsigned tax returns cannot be processed, but
signed, incomplete returns can be (Doc 2008-24588,
2008 TNT 240-14);
• the Central Collection Agency may hire contract
attorneys but may not disclose federal tax information to them (Doc 2008-24589, 2008 TNT 240-15);
• a housing credit agency may only be fined once per
year for failure to timely submit an annual report
(Doc 2008-24590, 2008 TNT 240-16);
• some Form 990 failure-to-file penalties may be administratively waived (Doc 2008-24591, 2008 TNT
240-17);
• the IRS cannot impose a penalty on an overstated
amount of tax withheld if no tax is due (Doc
2008-24605, 2008 TNT 240-18);
• the IRS can administer the health coverage tax credit
despite the expiration of the act that identified
eligible recipients of the credit (Doc 2008-24606, 2008
TNT 240-19);
• the IRS must give effect to a trust fund recovery
penalty protest letter filed by a representative with a
defective or missing power of attorney form (Doc
2008-24609, 2008 TNT 240-20);
• the IRS can use state adjusted income data to
determine taxpayer deficiencies without taxpayer
consent (Doc 2008-24610, 2008 TNT 240-21);
• gain from a metal exchange traded fund treated as a
trust gets capital gain treatment (Doc 2008-24611,
2008 TNT 240-22);
• the IRS does not owe interest on an overpayment
refund if the taxpayer first elected to have the
overpayment apply to future tax liability (Doc 200824612, 2008 TNT 240-23);
• IRS agents do not have to, but should, sign confidentiality agreements to gain access to state and
local government facilities (Doc 2008-24613, 2008
TNT 240-24);
• the IRS weighs in on the administrative hurdles to
performing tax compliance checks on every applicant for federal government positions (Doc 200824614, 2008 TNT 240-25);
• the IRS can issue a second notice of deficiency for a
nonfiling taxpayer, particularly in cases in which
there is additional unreported income (Doc 200824643, 2008 TNT 240-26);
• the IRS should retain copies of taxpayer returns
prepared by Volunteer Income Tax Assistance sites
in order to review site quality (Doc 2008-24716, 2008
TNT 240-27);
News and Analysis
by Fred Stokeld — fstokeld@tax.org
One week after an official at the IRS hinted at transition relief as the effective date for final regulations on
tax-sheltered annuity plans approached, the agency announced the relief was coming.
In Notice 2009-3, released on December 11, the IRS
said sponsors of section 403(b) plans that do not have
written plans in place by January 1, the effective date of
the final regs, will be given more time to adopt written
plans or to amend existing ones. The plans will satisfy the
requirements of section 403(b) and of the regulations if
the plan sponsor has adopted a written plan by December 31, 2009; the sponsor in 2009 operates the plan with a
reasonable interpretation of section 403(b) and the final
regs; and the sponsor does all it can to correct retroactively any operational failures of the plan that occur in
2009.
The IRS said additional guidance is in the works,
including a revenue procedure to help section 403(b)
plans have their plan documents approved by the IRS
and to permit plans to make remedial amendments to
correct provisions retroactively through rules that are
similar to those applicable for section 401(a) qualified
plans. (For Notice 2009-3, 2009-2, turn to p. 47.) For T.D.
9340, see The Exempt Organization Tax Review, Sept. 2007,
p. 302; Doc 2007-17141; or 2007 TNT 142-4.)
In the last few months, Robert J. Architect, a senior tax
law specialist in the IRS Employee Plans Division, has
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January 2009 — Vol. 63, No. 1
said repeatedly that the effective date of the final regs
would not be delayed despite pleas from many practitioners. But during an IRS phone forum on December 4,
he urged commentators who have requested a later
effective date and other changes to be on the lookout for
announcements from the IRS in the weeks leading up to
January 1. (For prior coverage, see Doc 2008-25568 or 2008
TNT 235-3.)
Several attorneys who recently asked that the effective
date be delayed were pleased with the IRS’s decision.
‘‘This is very good news,’’ David W. Powell of the Groom
Law Group told Tax Analysts. ‘‘It provides two primary
things. First, relief on the written plan document requirement until the end of 2009, which is particularly important because many small nonprofits have been scrambling to try to finalize plan documents by the end of the
year. Second, operational relief if the plan is operated in
accordance with a reasonable interpretation of section
403(b), taking into account the final regulations.’’
David Levine, also with the Groom Law Group,
praised the provision on retroactive correction. ‘‘The
broad-based retroactive correction feature will come as
great comfort to the many 403(b) plan sponsors who are
eager to comply with the 403(b) regulations but have
been concerned whether they will be able to get their
information sharing and other vendor coordination procedures in place before January 1, 2009,’’ he said. (For a
letter from the attorneys requesting a delayed effective
date, see Doc 2008-22712 or 2008 TNT 208-63.)
❖ ❖ ❖
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Sponsors Get More Time to Adopt
Written Plans
Section 141 — Private Activity Bond Defined
MANAGEMENT CONGESTION SYSTEM WON’T CAUSE
BONDS TO BE PRIVATE ACTIVITY OR INDUSTRIAL DEVELOPMENT BONDS. The Service has ruled that the imple-
mentation by a nonprofit public benefit corporation of a
new congestion management system for electric power
transmission projects will not be treated as a deliberate
action that causes the bonds to be section 141 private
activity bonds or industrial development bonds.
Full Text Citations: LTR 200850003; Doc 2008-26163; 2008
TNT 241-25
Section 170 — Charitable Deduction
SERVICE RULES ON TAX CONSEQUENCES OF CHARITABLE GIFT ANNUITY PURCHASE. The Service has ruled
that when an individual purchases a charitable gift
annuity under a gift annuity agreement, the individual
will be entitled to a charitable contribution deduction
under section 170 and a gift tax charitable deduction
under section 2522(a), and neither deduction will be
excluded by section 170(f)(10)(A).
Full Text Citations: LTR 200847014; Doc 2008-24687; 2008
TNT 227-14
Section 501(c)(3) — Charities
SUPPORTER OF HEALTH AND EDUCATIONAL INSTITUTIONS IS DENIED EXEMPT STATUS. The Service has de-
nied exempt status to an organization that claimed to
support section 501(c)(3) organizations, such as hospitals,
academic medical centers, and educational institutions,
finding that the organization’s commercial services could
not be classified as charitable.
Full Text Citations: LTR 200847018; Doc 2008-24691; 2008
TNT 227-21
STUDENT HOUSING DEVELOPER’S EXEMPT STATUS
DENIED FOR FAILURE TO ENGAGE IN A CHARITABLE
PURPOSE. The Service has determined that a student
housing developer does not qualify for tax-exempt status
as an organization described under section 501(c)(3)
because it operates primarily as a developer and does not
provide housing for students in a manner that constitutes
charitable activity.
Full Text Citations: LTR 200847019; Doc 2008-24692; 2008
TNT 227-22
organization that will be the vehicle for its donor to
complete work on a patent for which he will be well
compensated does not qualify for tax-exempt status
because its primary purpose is to provide a private
benefit to the donor; the organization also does not
qualify as a supporting organization.
Full Text Citations: LTR 200849017; Doc 2008-25631; 2008
TNT 236-33
ATHLETIC ORGANIZATION DOES NOT QUALIFY FOR
EXEMPT STATUS. The Service has ruled that an organiza-
tion that operates a soccer team does not qualify for
tax-exempt status as an organization described in section
501(c)(3) because it operates for the nonexempt purpose
of promoting social or recreational sports among adults
rather than serving the public.
Full Text Citations: LTR 200849018; Doc 2008-25632; 2008
TNT 236-34
ORGANIZATION SERVING PRIVATE INTERESTS IS DENIED
EXEMPT STATUS. The Service has ruled that an organiza-
tion that provides medical and other benefits to its
members does not qualify for tax-exempt status as an
organization described in section 501(c)(3) or section
501(c)(4) because it serves the private interests of its
members and not a public interest.
Full Text Citations: LTR 200850036; Doc 2008-26196; 2008
TNT 241-48
ORGANIZATION SERVING PRIVATE INTERESTS LOSES
EXEMPTION. The Service has revoked the tax-exempt
status of a housing organization because its net earnings
inured to the benefit of individuals with personal and
private interests in the organization, it operated to serve
private interests, and it did not maintain records showing
it operated exclusively for exempt purposes.
Full Text Citations: LTR 200850038; Doc 2008-26198; 2008
TNT 241-49
BOOSTER CLUB’S EXEMPT STATUS IS REVOKED BECAUSE INCOME INURED TO INSIDERS. The Service has
revoked the tax-exempt status of a youth sports team
booster club because its income has inured to parents of
the players and to the owners of a gym.
Full Text Citations: LTR 200850039; Doc 2008-26199; 2008
TNT 241-50
ORGANIZATION’S EXEMPT STATUS IS REVOKED. The
Service has revoked an organization’s tax-exempt status
as an organization described under section 501(c)(3)
because it is not operated exclusively for an exempt
purpose, and a substantial part of its activities furthered
private interests.
Full Text Citations: LTR 200850041; Doc 2008-26201; 2008
TNT 241-51
The Exempt Organization Tax Review
January 2009 — Vol. 63, No. 1
21
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
IRS Letter Rulings
ORGANIZATION THAT WILL HELP DONOR WITH PATENT IS
DENIED EXEMPT STATUS. The Service has ruled that an
IRS Chief Counsel Advice
organization’s tax-exempt status as an organization described under section 501(c)(3) because it is not operated
exclusively for an exempt purpose and a substantial part
of its activities furthered private interests.
Full Text Citations: LTR 200850042; Doc 2008-26202; 2008
TNT 241-52
ORGANIZATION’S EXEMPT STATUS IS REVOKED FOR
REPORTING FAILURES. The Service has revoked an
organization’s tax-exempt status because it failed to
provide information requested by the IRS and it failed to
file its annual information returns.
Full Text Citations: LTR 200850043; Doc 2008-26203; 2008
TNT 241-53
ORGANIZATION’S EXEMPT STATUS IS RETROACTIVELY
REVOKED FOR REPORTING FAILURES. The Service has
retroactively revoked an organization’s tax-exempt status
because it failed to meet the reporting requirements
under sections 6001 and 6033.
Full Text Citations: LTR 200850044; Doc 2008-26204; 2008
TNT 241-54
ORGANIZATION’S EXEMPT STATUS IS REVOKED. The
Service has revoked an organization’s tax-exempt status
because it failed to show it was operated exclusively for
exempt purposes and it failed to show its net earnings
did not inure to the benefit of private shareholders or
individuals.
Section 501(c)(10) — Fraternal Lodges
SERVICE DENIES FRATERNAL LODGE’S APPLICATION
FOR TAX-EXEMPT STATUS. The Service has denied a
fraternal lodge’s application for tax-exempt status, noting
its failure to establish a fraternal purpose, failure to
operate under the lodge system, and failure to contribute
any net earnings to a charitable or fraternal purpose.
Full Text Citations: LTR 200847017; Doc 2008-24690; 2008
TNT 227-23
Section 501(c)(12) — Insurance Associations
SERVICE RULES ON COOPERATIVE’S ELECTRIC, GAS DISTRIBUTION. The Service has ruled on the purchase by a
rural electric cooperative of a utility’s retail natural gas
and electric distribution accounts and the conversion of
the utility’s customers to members of the cooperative,
concluding the cooperative’s retail distribution of electric
and natural gas to members is consistent with section
501(c)(12).
Full Text Citations: LTR 200849016; Doc 2008-25630; 2008
TNT 236-35
Section 501(c)(15) — Insurance Companies
INSURANCE ENTITY’S EXEMPT STATUS IS REVOKED. The
Service has revoked an organization’s tax-exempt status
because it was not operated as an insurance company
within the meaning of section 501(c)(15).
Full Text Citations: LTR 200850040; Doc 2008-26200; 2008
TNT 241-59
Full Text Citations: LTR 200850047; Doc 2008-26207; 2008
TNT 241-55
Section 501(c)(19) — Veterans’ Orgs.
ORGANIZATION’S EXEMPT STATUS IS RETROACTIVELY
REVOKED. The Service has retroactively revoked an
VETERANS’ GROUP LOSES EXEMPTION DUE TO SUBSTANTIAL INCOME FROM NONMEMBERS. The Service has
organization’s tax-exempt status as an organization described under section 501(c)(3), finding that it is not
organized and operated exclusively for charitable purposes.
revoked the tax-exempt status of a veterans’ organization, concluding that the organization earned so much
income from bar sales and hall rentals to nonmembers
that it operated as a for-profit business.
Full Text Citations: LTR 200850050; Doc 2008-26210; 2008
TNT 241-56
Full Text Citations: LTR 200850037; Doc 2008-26197; 2008
TNT 241-60
ORGANIZATION’S EXEMPT STATUS IS REVOKED. The
Section 512 — Unrelated Business Taxable Income
Service has revoked an organization’s tax-exempt status
as an organization described under section 501(c)(3)
because more than an insubstantial part of its activities
benefit private interests.
PAYMENTS OF ENDOWMENT FUND WILL NOT CREATE
UNRELATED BUSINESS INCOME. The Service has ruled
Full Text Citations: LTR 200850059; Doc 2008-26219; 2008
TNT 241-57
Section 501(c)(7) — Clubs
SERVICE REVOKES EXEMPT STATUS OF CLUB WITH
EXCESS INCOME FROM NONMEMBERS. The Service has
that a tax-exempt supporting organization’s receipt of a
share of a higher education institution’s endowment
fund, the organization’s receipt of payments from the
fund regarding its share, and the organization’s redemption of any part of the share will not generate unrelated
business taxable income.
Full Text Citations: LTR 200850048; Doc 2008-26208; 2008
TNT 241-61
revoked the tax-exempt status of a club because it has
received too much income from sources outside its
membership and because of excessive use of the club’s
facilities by nonmembers.
Full Text Citations: LTR 200850035; Doc 2008-26195; 2008
TNT 241-58
22
January 2009 — Vol. 63, No. 1
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
ORGANIZATION’S EXEMPT STATUS IS RETROACTIVELY
REVOKED. The Service has retroactively revoked an
IRS Chief Counsel Advice
that a tax-exempt supporting organization’s receipt of a
share of a higher education institution’s endowment
fund, the organization’s receipt of payments from the
fund related to its share, and the organization’s redemption of any part of the share will not generate unrelated
business taxable income.
Full Text Citations: LTR 200850049; Doc 2008-26209; 2008
TNT 241-62
Section 691 — Income in Respect of a Decedent
SERVICE RULES ON PARTIAL ASSIGNMENT OF IRA TO
CHARITIES. The Service has ruled that the partial assign-
ment of an individual retirement account to three charities following the death of the owner of the IRA will not
be a transfer within the meaning of section 691(a)(2).
IRS E-Mail Chief Counsel Advice
Section 170 — Charitable Deduction
SERVICE DESCRIBES RULES FOR SUBSTANTIATING
CHARITABLE CONTRIBUTIONS IN CONSERVATION EASEMENT CASE. In e-mailed advice, the Service has outlined
the rules and procedures governing deductions for qualified charitable contributions in a conservation easement
case, focusing on the requirements for contemporaneous
written acknowledgments of such contributions.
Full Text Citations: ECC 200848076; Doc 2008-25179; 2008
TNT 232-58
Full Text Citations: LTR 200850004; Doc 2008-26164; 2008
TNT 241-63
Section 4941 — Foundation Self-Dealing
IRS Legal Memorandums
REFORMATION OF TRUST IS NOT SELF-DEALING. The
Service has ruled that the reformation of a charitable
remainder unitrust to provide for the distribution of
unitrust payments will not be an act of self-dealing.
Section 170 — Charitable Deduction
Full Text Citations: LTR 200850046; Doc 2008-26206; 2008
TNT 241-72
Section 4945 — Taxable Expenditures
FOUNDATION’S SCHOLARSHIP GRANTS AREN’T TAXABLE
EXPENDITURES. The Service has ruled that awards
granted through a private foundation’s scholarship program for students with financial need will not constitute
taxable expenditures and that the awards are excludable
from the recipients’ gross income.
Full Text Citations: LTR 200850034; Doc 2008-26194; 2008
TNT 241-73
GRANTS FOR PUBLIC HEALTH TRAINING AREN’T TAXABLE EXPENDITURES. The Service has ruled that awards
made through a private foundation’s grant-making program that is designed to train individuals to help improve the health of the people in a community will not
constitute taxable expenditures.
HOLDER OF REMIC INTEREST MAY NOT DEDUCT CHARITABLE CONTRIBUTION. In a legal memorandum, the
Service has concluded that a corporation with a residual
interest in a real estate mortgage investment conduit that
believes a charitable contribution it made is deductible
because the amount is less than 10 percent of its excess
inclusion income may not claim a deduction for the
contribution.
Full Text Citations: ILM 200850027; Doc 2008-26187; 2008
TNT 241-17; reprinted at p. 24
Section 642 — Trust Tax Rules
TRUST IS NOT ENTITLED TO DEDUCTION FOR PAYMENTS
TO CHARITIES. In a partially redacted legal memoran-
dum, the Service has concluded that a trust is not entitled
to an income tax deduction under section 642(c) for
payments made to charities.
Full Text Citations: ILM 200848020; Doc 2008-25123; 2008
TNT 231-11; reprinted at p. 26
Full Text Citations: LTR 200850045; Doc 2008-26205; 2008
TNT 241-74
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January 2009 — Vol. 63, No. 1
23
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
PAYMENTS OF ENDOWMENT FUND WILL NOT CREATE
UNRELATED BUSINESS INCOME. The Service has ruled
IRS Chief Counsel Advice
Full Text ILM
Section 501(c)(7) — Clubs
Holder Of REMIC Interest May Not
Deduct Charitable Contribution
SERVICE’S POSITION ON TREATMENT OF SOCIAL CLUB
INCOME UNDER RECIPROCAL AGREEMENT IS UNCHANGED. In program manager technical assistance, the
ILM 200850027
Service has advised that its position has not changed
since holding in a 1985 general counsel memorandum
that income derived by a section 501(c)(7) social club
under a reciprocal agreement with a social club of like
nature should be treated as nonmember income from the
general public.
Full Text Citations: Doc 2008-24717; 2008 TNT 240-28
Section 6652 — Nonfiling of Information Return
SERVICE MAY WAIVE EO FAILURE TO FILE PENALTIES. In
program manager technical assistance, the Service has
concluded that certain additions to tax and penalties
stemming from noncompliance with the section 6033
requirements for forms 990, 990-EZ, and 990-PF may be
administratively waived.
Full Text Citations: Doc 2008-24591; 2008 TNT 240-17
FAILURE-TO-FILE PENALTY APPLIES TO USE OF OUTDATED EXEMPT ORGANIZATION FORM. In program man-
ager technical assistance, the Service has concluded that
generally the section 6652(c)(1)(A) failure-to-file penalty
may be applied if a taxpayer uses an outdated Form 990
for tax-exempt organizations instead of the redesigned
version of the form.
In a legal memorandum, the Service has concluded that a
corporation with a residual interest in a real estate mortgage
investment conduit that believes a charitable contribution it
made is deductible because the amount is less than 10 percent
of its excess inclusion income may not claim a deduction for the
contribution.
Number: 200850027
Release Date: 12/12/2008
CC:ITA:B01:
POSTN-126676-08
UILC: 170.08-00, 860E.01-00
date:
August 28, 2008
to:
Elizabeth S. Martini
Attorney
(Manhattan, Group 3)
(Large & Mid-Size Business)
from:
John P. Moriarty
Branch Chief, Branch 1
(Income Tax & Accounting)
Full Text Citations: Doc 2008-24585; 2008 TNT 240-11; reprinted at p. 28
Susan Thompson Baker
Assistant Branch Chief, Branch 2
(Financial Institutions & Products)
Section 7871 — Indian Tribes Treated as States
SERVICE ADDRESSES WORKER CLASSIFICATIONS IN INDIAN TRIBAL GOVERNMENTS. In program manager tech-
nical assistance, the Service has concluded that the employment relationship of board members of an Indian
tribal government must be analyzed under the Service’s
multifactor common law test only after first determining
whether the taxpayer is entitled to relief under section
530 of the Revenue Act of 1978.
Full Text Citations: Doc 2008-24724; 2008 TNT 240-35
subject: Charitable contributions and REMICs
LEGEND
Taxpayer = * * *
Year 1 = * * *
Year 2 = * * *
$X = * * *
$Y = * * *
$Z = * * *
FACTS
Editor’s Note: Full text documents are reprinted
exactly as they were received from the issuing
agency.
24
January 2009 — Vol. 63, No. 1
Taxpayer is a corporation that holds a residual interest
in a real estate mortgage investment conduit (REMIC). In
tax years Year 1 through Year 2, Taxpayer recognized
excess inclusion income (EII) but otherwise had only net
operating losses. Specifically, for tax year Year 1, Taxpayer recognized EII in the amount of $X, had unspecified net operating losses (NOLs), and made a charitable
contribution in the amount of $Y.
Taxpayer asserts that its taxable income for purposes
of calculating the percentage limitation under
§ 170(b)(2)(A) of the Internal Revenue Code includes its
EII under § 860E. Further, taxpayer asserts that its $Y
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
IRS Program Manager Technical
Assistance
IRS Chief Counsel Advice
ISSUES
(1) Does taxable income for purposes of calculating the
percentage limitation under § 170(b)(2)(A) of the Internal
Revenue Code on corporate charitable contribution deductions include Taxpayer’s EII under § 860E?
(2) May Taxpayer in Year 1 deduct $Y as a charitable
contribution deduction under § 170 when Taxpayer only
has EII and net operating losses during the taxable year
of the charitable contribution?
CONCLUSIONS
(1) Taxable income for purposes of calculating the
percentage limitation under § 170(b)(2)(A) means taxable
income under § 63 as adjusted for EII under § 860E.
(2) Taxpayer in Year 1 may not deduct $Y as a
charitable contribution deduction under § 170. In general,
a holder of a residual interest in a REMIC may not offset
EII by an otherwise allowable charitable contribution
deduction, and, in this case, the taxpayer did not have
other taxable income in Year 1.
LAW AND ANALYSIS
Section 63(a) generally provides that ‘‘taxable income’’
means gross income minus the deductions allowed by
chapter 1 of the Code (other than the standard deduction). Under § 860E(a)(1) the taxable income of any
holder of a residual interest in a REMIC for any taxable
year is not less than the holder’s excess inclusion for such
taxable year.
Section 170 provides a deduction for qualified charitable contributions. However, under § 170(b)(2)(A), deductions for charitable contributions made by a corporation is limited to a maximum of 10 percent of the
corporation’s taxable income for the taxable year.
For purposes of calculating the percentage limitation
under § 170(b)(2)(A), a corporation’s taxable income is
defined as taxable income under § 63 computed without
regard to —
(1) the deduction for charitable contributions under
§ 170;
(2) the special deductions for corporations allowed under part VIII (except § 248, relating to
organizational expenditures), subchapter B,
chapter 1 of the Code;
(3) any net operating loss carryback to the taxable
year under § 172;
(4) section 199; and
(5) any capital loss carryback to the taxable year
under § 1212(a)(1).
Sec. 170(b)(2)(C); § 1.170A-11(a) of the Income Tax Regulations.
Under section 860E, the taxable income of a holder of
a residual interest in a REMIC is not less than the holder’s
excess inclusion. Taxable income for purposes of calculating the percentage limitation under § 170(b)(2)(A) on
corporate charitable contributions is adjusted only by the
items listed in § 170(b)(2)(C). Section 170(b)(2)(C) does
The Exempt Organization Tax Review
not provide an adjustment for EII under § 860E. Therefore, the general rule that the taxable income of a holder
of a residual interest in a REMIC is not less than the
holder’s excess inclusion applies. That is, pursuant to
§ 860E (and despite Taxpayer’s NOLs), Taxpayer’s taxable income in Year 1 is $X. As a result, Taxpayer’s
percentage limitation under § 170(b)(2)(A) is 10 percent
of $X, or $Z.
Under § 170(b)(2)(A), Taxpayer’s deduction for charitable contributions made in Year 1 is limited to $Z.
However, even though $Y is less than $Z, Taxpayer may
not necessarily deduct its Year 1 qualified charitable
contribution. Instead, Taxpayer’s otherwise allowable
deductions (including the charitable contribution deduction under § 170) may be limited under other provisions
of the Code such as § 860E.
Under § 860E a taxpayer’s EII may not be offset by
otherwise allowable deductions. Section 1.860E-1(a) provides as follows:
Excess inclusion cannot be offset by otherwise
allowable deductions — (1) In general. Except as
provided in paragraph (a)(3) of this section, the
taxable income of any holder of a residual interest
for any taxable year is in no event less than the sum
of the excess inclusions attributable to that holder’s
residual interests for that taxable year. In computing the amount of a net operating loss (as defined in
section 172(c)) or the amount of any net operating
loss carryover (as defined in section 172(b)(2)), the
amount of any excess inclusion is not included in
gross income or taxable income. Thus, for example,
if a residual interest holder has $100 of gross
income, $25 of which is an excess inclusion, and $90
of business deductions, the holder has taxable
income of $25, the amount of the excess inclusion,
and a net operating loss of $15 ($75 of other income
- $90 of business deductions).
Under § 1.860E-1(a) of the regulations (subject to an
exception relating to certain financial institutions not
here relevant), the taxable income of any holder of a
residual interest for any taxable year is in no event less
than the sum of the excess inclusions attributable to that
holder’s residual interests for that taxable year. Accordingly, to the extent of EII, the taxable income of the holder
of the residual interest in the REMIC may not be offset by
a charitable contribution deduction otherwise allowable
to the holder under § 170. Assuming all other requirements under § 170 are satisfied, Taxpayer in Year 1 may
only deduct $Y to the extent Taxpayer’s other taxable
income exceeds its EII. In this case, Taxpayer has no other
taxable income, and, therefore no part of the $Y charitable
contribution is deductible in Year 1.
If you have any questions regarding the § 170 issue,
please call Nancy Lee (CC:ITA:B01) at * * *, and if you
have any questions regarding the § 860E issue, please call
Richard LaFalce (CC:FIP:B02) at * * *.
❖ ❖ ❖
January 2009 — Vol. 63, No. 1
25
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
charitable contribution in Year 1 is deductible under § 170
because $Y is less than 10 percent of Taxpayer’s EII for
that taxable year, or $Z.
IRS Chief Counsel Advice
ILM 200848020
In a partially redacted legal memorandum, the Service has
concluded that a trust is not entitled to an income tax
deduction under section 642(c) for payments made to charities.
Number: 200848020
Release Date: 11/28/2008
CC:PSI:B01:SASchmoll
PRESP-122219-08
Third Party Communication: None
Date of Communication: Not Applicable
UILC: 642.03-02
date:
July 28, 2008
to:
Territory Director, Northeast Area
(Examination, PSP)
from:
Audrey Ellis, Senior Counsel, Branch
(Passthroughs & Special Industries)
subject: * * *
This Chief Counsel Advice may not be used or cited as
precedent.
LEGEND
Trust = * * *
Decedent = * * *
Charities = * * *
State = * * *
D1 = * * *
D2 = * * *
D3 = * * *
Date = * * *
a% = * * *
b% = * * *
c% = * * *
k=***
ISSUE
Is Trust entitled to an income tax deduction under
§ 642(c)(1) for payments made to the Charities?
CONCLUSION
Trust is not entitled to an income tax deduction under
§ 642(c)(1) for the payments made to the Charities
because the payments were not made pursuant to the
governing instrument.
FACTS
Decedent died on D1. Decedent left a last will and
testament which established Trust. At the time of Decedent’s death, Decedent owned an individual retirement
account (IRA), of which the designated beneficiary was
Trust. Trust’s only asset was the IRA.
Article SECOND, paragraph (b) of Trust provided that
the trustee shall transfer and pay over a% of the Trust
property over to the beneficiaries of Trust annually on
26
January 2009 — Vol. 63, No. 1
Date in the following shares: b% to each of Decedent’s six
children, and c% to each of the Charities.
Additionally, Trust contains no termination date, and
does not specifically provide for the disposition of a
child’s b% share of the a% distribution if a child dies
during the existence of Trust. Trust does not provide for
any modification of the annual payments by the trustee.
On D2, Trust was reformed by a court order in State.
The court order modified the interests of the Charities
and the Decedent’s six children. The purpose of the
reformation was to ensure that the Trust would meet the
regulatory definition of a designated beneficiary trust
under § 401(a)(9) and the regulations thereunder.
Article SECOND, paragraph (b) of reformed Trust
provides that the trustee shall transfer and pay over c% of
the value of Trust outright to each of the Charities no later
than D3. Trust distributed c% of Trust corpus to each of
the Charities prior to D3.
Additionally, Article SECOND, paragraph (c) of reformed Trust provides that the balance of Trust corpus
will be held in six separate shares, one for each of
Decedent’s children. Each child is entitled to an a%
annual unitrust interest from his or her respective separate share, with the corpus of each separate share to be
distributed outright to the respective beneficiary when he
or she attains age k.
LAW AND ANALYSIS
Section 642(c)(1) provides that in the case of an estate
or trust there shall be allowed as a deduction in computing its taxable income any amount of the gross income,
without limitation, which pursuant to the terms of the
governing instrument is, during the taxable year, paid for
a purpose specified in § 170(c).
Section 1.642(c)-1(a)(1) provides that any part of the
gross income of a trust which, pursuant to the terms of
the governing instrument, is paid during a taxable year
for a charitable purpose shall be allowed as a deduction
to the trust.
In Crown Income Charitable Fund v. Commissioner, 8
F.3d 571, 573 (7th Cir. 1993), aff’g 98 T.C. 327 (1992), the
Seventh Circuit addressed the issue of commutation. The
trust at issue in Crown Income Charitable Fund contained a provision permitting the trustees to commute the
charitable interest only if, as a matter of law, it was clear
that doing so would not adversely affect the maximum
charitable deduction otherwise available. The trustees of
the Crown Income Charitable Fund distributed trust
assets in excess of the annuity amount to the charitable
beneficiary over a number of years and deducted, under
§ 642(c), the full amount distributed to the charitable
beneficiaries. Both the Seventh Circuit and the Tax Court
held that the excess distributions were not deductible
under § 642(c) because those instruments were not made
pursuant to the terms of the governing instrument.
In Brownstone v. United States, 465 F.3d 525 (2nd Cir.
2006), a deceased husband’s will created a marital deduction trust, which granted the husband’s surviving wife a
general testamentary power of appointment. When the
wife died, she exercised her power in favor of her estate,
the residue of which passed to charitable organizations.
The trustee of the marital deduction trust distributed $1
million to the wife’s estate and claimed a charitable
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Trust Is Not Entitled to Deduction for
Payments to Charities
IRS Chief Counsel Advice
The Exempt Organization Tax Review
made pursuant to the governing instrument, and Trust is
not entitled to a deduction for such payments under
§ 642(c).
CASE DEVELOPMENT, HAZARDS AND OTHER
CONSIDERATIONS
***
This writing may contain privileged information. Any
unauthorized disclosure of this writing may undermine
our ability to protect the privileged information. If disclosure is determined to be necessary, please contact this
office for our views.
Please call Steven Schmoll of this office at (202)
622-3050 if you have any further questions.
❖ ❖ ❖
January 2009 — Vol. 63, No. 1
27
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
contribution deduction under § 642(c), because the $1
million distribution passed entirely to the charitable
beneficiaries under the wife’s will.
The Second Circuit in Brownstone held that the distribution to the charities was made pursuant to the wife’s
power of appointment and not pursuant to the governing
instrument, the deceased husband’s will. The Second
Circuit interpreted the definition of governing instrument narrowly, stating that an instrument subject to the
creating instrument (the wife’s will) could not combine
with the creating instrument (the husband’s will) and
qualify as the governing instrument. The sole governing
instrument in Brownstone is the husband’s original will;
therefore, the marital deduction trust is not entitled to a
deduction under § 642(c) since the distribution was made
pursuant to the wife’s will.
In Lyeth v. Hoey, 305 U.S 188 (1938), the Supreme
Court held that property received in the settlement of a
bona fide will contest is treated for federal income tax
purposes as passing to the beneficiaries by inheritance.
In Middleton v. United States, 99 F.Supp. 801 (D.C. Pa.
1951), the court held, applying principles derived from
Lyeth, that amounts distributed to a charity pursuant to
an agreement compromising a will contest were made
‘‘pursuant to the terms of the will.’’ The court concluded
that the income from the property that was distributed to
the charity was permanently set aside for a charitable
purpose and allowed a deduction for these amounts for
the years prior to the year that the parties entered into the
settlement agreement. See also Estate of Wright v. United
States, 677 F.2d 53 (9th Cir. 1982), cert. Denied, 459 U.S.
909 (1982); Emanuelson v. United States, 159 F.Supp. 34
(D.C. Conn. 1958).
In Emanuelson, decedent left two conflicting wills —
one which left 2/3 of the residue of decedent’s estate to
certain charities, and another which left the entire residue
to non-charitable legatees. After decedent’s death, a
controversy arose among the beneficiaries of the two
wills. The controversy was resolved in a written compromise agreement between the two sets of beneficiaries,
under which 52/480 of the residue passed to the charities
named in one of the wills. Payments made to the charities
under the written compromise agreement were held to be
made pursuant to the will.
Rev. Rul. 59-15, 1959-1 C.B. 164, citing Emanuelson,
held that a settlement agreement arising from a will
contest qualifies as a governing instrument.
In this case, there was no conflict with respect to Trust.
In both the original Trust and in the modified Trust, the
Charities are entitled to c% of Trust property each. The
purpose of the court order was not to resolve a conflict in
the Trust; it was to obtain the tax benefits that would
ensue if Trust were to qualify as a designated beneficiary
trust under § 401(a)(9) and the regulations thereunder.
Neither Rev. Rul. 59-15 nor Emanuelson hold that a
modification to a governing instrument will be construed
to be the governing instrument in situations where the
modification does not stem from a conflict. Additionally,
both Crown Income Charitable Fund and Brownstone
have a narrow interpretation of what qualifies as pursuant to a governing instrument. Therefore, the accelerated
payments to the four Charities are not considered to be
IRS Chief Counsel Advice
Failure-to-File Penalty Applies to Use of
Outdated Exempt Organization Form
In program manager technical assistance, the Service has
concluded that generally the section 6652(c)(1)(A) failure-tofile penalty may be applied if a taxpayer uses an outdated Form
990 for tax-exempt organizations instead of the redesigned
version of the form.
date:
August 5, 2008
to:
David L. Fish
Manager,
EO Technical Guidance & Quality Assurance
SE:T:EO:RA:G
from:
Michael B. Blumenfeld
Senior Technician Reviewer,
Exempt Organizations Branch 1
(Tax Exempt & Government Entities)
CC:TEGE:EOEG:EO1
subject: Request for Opinion on the Assertion of a Penalty under I.R.C. 6652(c)(1)(A)
ISSUE
This is in response to your May 21, 2008 memorandum
requesting our opinion on whether the failure to file
penalty of section 6652(c)(1)(A) may be applied when a
taxpayer files an outdated version of Form 990 instead of
the redesigned version of the form.
CONCLUSION
The failure to file penalty of section 6652(c)(1)(A) may
be applied when a taxpayer files an outdated version of
the Form 990 instead of the redesigned version of the
form because this will constitute (a) a failure to file in the
manner prescribed, section 6652(c)(1)(A)(i), and/or (b) a
failure to include all of the required information required
to be shown on the return, section 6652(c)(1)(A)(ii).
FACTS
On December 20, 2007, the Internal Revenue Service
released a redesigned version of the Form 990, Return of
Organization Exempt from Income Tax. The form was
redesigned to keep pace with the changes to the laws that
apply to tax-exempt organizations and the increasing
size, diversity and complexity of the sector. With the
exception of certain smaller organizations for which there
is a graduated transition period, tax-exempt organizations are required to use the redesigned form for the 2008
tax year.
You are concerned that some tax-exempt organizations
will file the old version of the form rather than the
redesigned version of the form, and that they may refuse
to comply with subsequent direction for them to file the
redesigned version of the form. In addition, you are
concerned that you may receive filings that contain the
28
January 2009 — Vol. 63, No. 1
LAW and ANALYSIS
Section 6033(a)(1) states that every organization
exempt from taxation under section 501(a) shall file an
annual return, stating specifically the items of gross
income, receipts, disbursements, and such other information for the purpose of carrying out the internal revenue
laws as the Secretary may by forms or regulations
prescribe. Section 1.6033-2(a)(2)(i) of the Income Tax
Regulations provides, in part, that every tax-exempt
organization, with exceptions not noted here, shall file its
annual return on Form 990.
Section 6033(b) lists 14 specific items that must be
reported on an annual return by organizations exempt
from taxation under section 501(c)(3). Section 6033(b)(14)
specifically provides that organizations shall furnish in
the annual return ‘‘such other information for purposes
of carrying out the internal revenue laws as the Secretary
may require.’’
Section 6652(c)(1)(A) provides:
In the case of —
(i) a failure to file a return required under
section 6033(a)(1) . . . on the date and in the
manner prescribed therefor (determined with
regard to any extension of time for filing), or
(ii) a failure to include any of the information
required to be shown on a return filed under
section 6033(a)(1) . . .,
there shall be paid by the exempt organization $20
for each day during which such failure continues
[$100 per day for organizations with gross receipts
exceeding $1,000,000].1
Section 6652(c)(4) provides that ‘‘[n]o penalty shall be
imposed under this subsection with respect to any failure
if it is shown that such failure is due to reasonable cause.’’
The section 6652 penalty for failure to file a return was
enacted in 1969. The 1969 version of the penalty applied
if an organization failed to file a return required under
sections 6033, 6034 or 6043(b).2 Congress added this civil
penalty because the existing sanctions for failure to file
information returns — revocation or criminal penalties —
were so great that they were never enforced. H.R. Rep.
91-413 at 37, reprinted in 1969-3 C.B. at 224. The primary
purpose of the penalty, according to the legislative history, is to provide the Service with the information it
needs to enforce the revenue laws. The legislative history
also reflects a concern with the timeliness of the information, that more information should be made readily
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Full Text PMTA
redesigned version of the core form with the old versions
of the schedules and vice versa.
You note that the redesigned version of the Form 990
requests different information and is in a completely
different format than the former version of the form.
Further, you note that your system for processing the
form has been adjusted to accommodate the revised
version of the form, and that it will be impossible as a
practical matter for you to process the former version of
the form. If tax-exempt organizations file versions of the
form that you cannot process, it will impede your ability
to perform your oversight function.
IRS Chief Counsel Advice
The Exempt Organization Tax Review
required to be shown on a return filed under section
6033(a)(1).’’4 The budget committee report stated:
[T]he present-law penalty applicable to exempt
charitable organizations and charitable trusts for
failure to file an information return required in
section 6033 should also apply where the organization fails to include required information or to
show the correct information on Form 990 or 990PF. The mere filing of a return without fully and
accurately furnishing the required information
does not serve the enforcement and accountability
objectives of the return requirement.
H.R. Rep. No. 100-391, 1617 (1987) (emphasis added). The
conference report clarified that:
The amendment to section 6652 expands the scope
of the penalty provisions to apply to cases where a
tax exempt organization files an annual information return but, without reasonable cause, fails to
furnish on the return any required information, or
furnishes incorrect information.
H. Rep. No. 495, 100th Cong., 1st Sess. 1015 (1987)
(emphasis added).
It is apparent that part (ii) provides an additional
ground for asserting the penalty. As amended, section
6652(c)(1)(A) imposes a penalty in cases where an
organization fails to file an information return as well as
in cases where an organization files a return but fails to
report all of the information required on the return. As
stated in GCM 39861, the penalty under subsection (i)
applies even when a return is filed but material information is omitted, because this is not considered a return.
‘‘The penalty under subsection (ii) applies where the
return contains all the material information but omits
information required to be shown on a return filed under
section 6033.’’ Id. After the 1987 amendments, it appears
that § 6652(c)(1)(A) provides a basis for imposing the
penalty when any required information is omitted,
whether or not that information is material.
The IRS released a redesigned Form 990, Return of
Organization Exempt From Income Tax, on December 20,
2007. With the exception of certain smaller organizations
for which there is a graduated transition period, organizations must begin using the redesigned form for the
2008 tax year (returns filed in 2009). You have stated that
the revised 2008 Form 990 is in a completely different
format from the old 2007 Form 990. Not only is different
information sought in the new Form 990, but the
similarly requested information is now located in different parts of the form. The Service’s processing system for
the Form 990s (such as transcription of certain parts of
the form) has been adjusted to accommodate the complete revision to the form, and it will be impossible as a
practical matter for the Service to process an old version
of the Form 990 once these new changes are in place.
Thus, a failure to file the redesigned version of the Form
990 will hinder the Service in performing the duties and
responsibilities placed upon it by Congress for proper
administration of the revenue laws. It is our understanding that the Service would effectively be denied all the
information on the return, including many items the
Service would view as material. Therefore, under these
circumstances, the section 6652(c)(1)(A) penalty could be
January 2009 — Vol. 63, No. 1
29
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
available to the public and State officials, and that
effective administration requires obtaining complete annual information returns.
The 1969 version of the penalty provided a penalty
only in the case of a ‘‘failure to file a return.’’ See note 2,
supra. In Rev. Rul. 77-162, 1977-1 C.B. 400, the Service
held that a failure to file a return for purposes of applying
the section 6652 penalty occurs when an organization
files an incomplete return by omitting material information. In support of the holding, the Service reasoned that
an incomplete return hinders the Service’s ability to
administer the internal revenue laws, and seriously impairs the public’s right to obtain meaningful information
about tax-exempt organizations via the public inspection
requirements. Thus, the Service concluded that when
material information is omitted from the return, a return
is not filed in the manner prescribed.
Following the revenue ruling, our office has consistently advised that an organization has ‘‘failed to file a
return’’ as described in 6652(c)(1)(A)(i) where the
organization files a form but omits information on the
form that the Service needs to properly administer the tax
laws and to perform the duties and responsibilities
placed on it by Congress; that is, when the organization
has failed to report material information. The duties and
responsibilities that may have been hindered include
making exempt organization returns available for public
inspection and conducting audits of exempt organizations to determine their compliance with statutory provisions. See GCM 39861 (1991); GCM 39805 (1989); GCM
38943 (1982); GCM 38760 (1981); and GCM 37785 (1978).3
We also have consistently noted that whether an item
is material is an administrative rather than a legal question. The materiality depends upon what the Service
requires to administer the tax laws and is a matter of
judgment to be exercised by the Service. See IRC
§ 6033(b)(14). Thus, the materiality of specific items of
information is not a matter where the Service can rely on
specific legal authorities.
In GCM 39072, our office addressed the issue of filing
the wrong version of a form involving employee plans.
The Service required Forms 5500-C or 5500-K (‘‘long
forms’’) to be filed only once every three years; the Form
5500-R (‘‘short form’’) was to be filed for the other two
remaining years. The Employee Plans Division requested
our advice concerning whether the timely and complete
filing of a third Form 5500-R could be treated as an
incomplete return and, if so, whether assessment of a
6652 penalty was appropriate. GCM 39072 stated that the
Form 5500-R did not contain many of the items contained
on the long forms, and ‘‘[a]s a result, even if completed in
full, the Form 5500-R would not contain all of the critical
items necessary to constitute a complete return of the
5500-C or 5500-K variety.’’ The GCM expressed concern
about a good faith filing of the return and an automatic
computer generated penalty, but concluded that ‘‘the
return may be treated as incomplete from the time the
taxpayer is notified that the return is incorrect. Thereafter, a refusal to file the proper form or a delay (not due
to reasonable cause) in filing the proper form, would
result in assessment of the penalty.’’
Section 6652 was amended in 1987 to add part (ii), a
penalty for failure to include ‘‘any of the information
IRS Chief Counsel Advice
LITIGATING HAZARDS
In the absence of case law on the section 6652(c)
penalty, and because the phrase ‘‘required information’’
in section 6652(c)(1)(A)(ii) is not defined by the statute, a
court’s approach to the application of the penalty with
respect to missing information that the IRS does not
consider material is likely to be affected by the reasonableness of the IRS’s process in securing use of the correct
form and by the significance of the problems the IRS
faces in meeting its tax administration responsibilities.
This memo addresses only the circumstance where an
organization files an old version of the Form 990 rather
than the redesigned form. Thus, it addresses a circumstance in which multiple pieces of information solicited
by the correct form have not been provided, and the
return submitted cannot be processed. Under that circumstance, we believe the Service can demonstrate to a
court that it has taken a reasonable and measured approach and that the burden on tax administration is
significant if the Service cannot secure a return on the
correct form. This advice does not address the potential
litigation hazards we may face under different circumstances, such as where the taxpayer has used the correct
form but has failed to provide certain potentially nonmaterial information on the return.
If you have any questions, please contact Amber
MacKenzie or me at (202) 622-6070.
30
January 2009 — Vol. 63, No. 1
1
Endnotes
The maximum penalty with respect to any one return is the
lesser of $10,000 or 5 percent of the organization’s gross receipts
[$50,000 for organizations with gross receipts exceeding
$1,000,000]. Id.
2
The original 6652 penalty was found at IRC section
6652(d)(1) and read, in its entirety:
(d) RETURNS BY EXEMPT ORGANIZATIONS AND BY
CERTAIN TRUSTS. —
(1) PENALTY ON ORGANIZATION OR TRUST. — In
the case of a failure to file a return required under
section 6033 (relating to returns by exempt organizations), section 6034 (relating to returns by certain trusts),
or section 6043(b) (relating to exempt organization), on
the date and in the manner prescribed therefore (determined with regard to any extension of time for filing),
unless it is shown that such failure is due to reasonable
cause there shall be paid (on notice and demand by the
Secretary or his delegate and in the same manner as tax)
by the exempt organization or trust failing so to file, $10
for each day during which such failure continues, but
the total amount imposed hereunder on any organization for failure to file any return shall not exceed $5,000.
3
We have stated that case law regarding omissions from tax
returns is distinguishable from omissions on information returns. See, e.g., GCM 36372 (1975). Whereas failing to provide
certain information on a tax return may not impact the Service’s
ability to compute the tax liability, omissions on an annual
information return will prevent the Service from carrying out
the responsibilities placed on it by Congress, including making
available complete copies of filed Form 990s to the public. Thus,
information requested on the Form 990 might be material, for
example, to administer the tax laws by verifying whether the
organization is in compliance with the exemption and other
related provisions; to capture enough meaningful information
about exempt organizations for the public, including state
officials, grant making entities, and individual donors; and to
respond to and inform Congress.
4
In 1986, section 6652(d)(1) was redesignated as section
6652(c)(1), although the wording did not change. In 1987,
section 6652(c)(1) was narrowed to deal only with annual
returns under section 6033 [annual returns under sections 6034
or 6043(b) were moved to section 6652(c)(2), and the reasonable
cause exception was moved to 6652(c)(3)]. In addition, the 1987
Act split section 6652(c)(1)(A) into (i), which contained the
original wording regarding failure to file a return on the date
and in the manner prescribed therefor, and (ii), which contained
the added language regarding a failure to include any of the
information required to be shown on a return filed under
section 6033, or to show the correct information. This is substantially the same language found in section 6652(c)(1)(A)
today, although the monetary amount of the penalty has since
been increased.
❖ ❖ ❖
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
applied on the basis that the organization had failed to
file a return in the manner prescribed.
In addition, the Secretary has required new information on the 2008 Form 990 that was not requested on the
2007 Form 990. Congress gave the Secretary broad power
to decide what information is needed for the proper
administration of the revenue laws that apply to taxexempt organizations. 6033(b)(14). That power may be
implemented by issuing forms or regulations. IRC
§ 6033(a)(1). A tax-exempt organization that files an old
version of the form will fail to provide some ‘‘information
required to be shown on a return filed under section
6033(a)(1).’’ Therefore, whether or not the materiality of
the missing information or the processing obstacles
would support the conclusion that the organization has
failed to file a return, the section 6652(c)(1)(A) penalty
could be applied to an organization which filed an older
version of the Form 990 and not the 2008 version on the
basis that it failed to include information required to be
shown on a return.
We note that you intend to request that an organization file the redesigned form before you apply the section
6652(c)(1)(A) penalty. The policy objective behind the
section 6652(c)(1)(A) penalty is securing compliance with
the section 6033 information reporting requirements.
While corresponding with the organization is not a
prerequisite before imposing the penalty, it is consistent
with the policy objective behind the provision. In addition, we believe this practice would place the Service in a
more favorable light upon judicial review. Thus, corresponding with the organization before imposing the
penalty is a sound administrative practice, and may also
enhance the prospects that a court would sustain the
assessment of the penalty.
IRS EO DIVISION PUBLISHES ANNUAL REPORT, WORKPLAN FOR NEW FISCAL YEAR. The IRS Exempt Organi-
zations Division on November 25 published a report on
its accomplishments in 2008 as well as its workplan for
fiscal 2009, which includes projects designed to enhance
compliance with tax laws governing tax-exempt organizations.
Full Text Citations: Doc 2008-24955; 2008 TNT 229-23
IRS RELEASES FISCAL 2009 EXEMPT BOND WORK PLAN.
The IRS has released its fiscal 2009 work plan for taxexempt bonds, outlining the Tax-Exempt and Government Entities Division’s operating priorities and program
guidance and emphasizing efforts to detect and deter
abusive tax shelters, increase enforcement activity, and
maintain good communication with the municipal bond
community.
Full Text Citations: Doc 2008-25403; 2008 TNT 234-17; reprinted at p. 34
IRS SETS HEARING FOR PROPOSED REGS ON SUBSTANTIATION AND REPORTING RULES FOR CHARITABLE CONTRIBUTIONS. The IRS has set a January 23 public hearing
date for proposed regulations that implement recent
legislative changes to the substantiation and reporting
rules for charitable contributions.
Full Text Citations: Doc 2008-25014; 2008 TNT 230-5
IRS TOUTS AVAILABILITY OF SAVER’S CREDIT. The IRS
has advised low- and moderate-income workers of the
availability of the saver’s credit, which helps offset part
of the first $2,000 that a worker voluntarily contributes to
an IRA, section 401(k), or other retirement savings plan;
the IRS explains how the credit works and provides
information on special rules that apply to the credit.
Full Text Citations: Doc 2008-25224; 2008 TNT 232-10
FAST-TRACK SETTLEMENTS NOW AVAILABLE FOR TAXEXEMPT ENTITIES, GOVERNMENT ENTITIES. The IRS has
extended the fast-track settlement program to allow
tax-exempt entities and government entities to expedite
case resolution of issues under examination by the IRS’s
Tax-Exempt and Government Entities Division.
Full Text Citations: Doc 2008-25227; 2008 TNT 232-8; reprinted at p. 43
has issued guidance providing relief during 2009 for
sponsors of section 403(b) plans regarding the requirement to have a written section 403(b) plan in place by
January 1, 2009.
Full Text Citations: Doc 2008-26115; 2008 TNT 240-41; reprinted at p. 47
IRS PUBLISHES PROPOSED REGS ON WITHHOLDING
REQUIREMENTS FOR GOVERNMENT ENTITIES. The IRS
has published proposed regulations providing guidance
for government entities that are required to comply with
section 3402(t) and withhold income tax when making
payments to persons providing property or services.
Full Text Citations: Doc 2008-25497; 2008 TNT 235-4; reprinted at p. 48
HEARTLAND DISASTER RELIEF ACT PROVIDES INCENTIVES FOR MAKING CASH DONATIONS, IRS SAYS. The IRS
has advised individuals and corporations that make cash
contributions for disaster relief efforts in the Midwest
that the Heartland Disaster Tax Relief Act suspends the
percentage-of-income limits that normally apply when
taxpayers deduct the contributions on their 2008 returns.
Full Text Citations: Doc 2008-24906; 2008 TNT 229-9
IRS Tax Correspondence
Section 403(b) — Tax-Deferred Annuities
IDAHO GROUP SEEKS ADDITIONAL GUIDANCE ON MODEL
PLAN LANGUAGE FOR TAX-SHELTERED ANNUITY PLANS.
Susan Clark of the Idaho Coalition Against Sexual and
Domestic Violence has asked the IRS to clarify guidance
on tax-sheltered annuity plans, specifically inquiring as
to whether model language has been drafted for section
501(c)(3) organizations making retirement contributions
under section 403(b).
Full Text Citations: Doc 2008-25048; 2008 TNT 232-67
Section 511 — Unrelated Business Income Tax
INDIVIDUAL SEEKS CLARIFICATION OF INTERIM GUIDANCE ON PUBLIC INSPECTION OF UBIT RETURNS FILED
BY CHARITIES. Louella Pittman, commenting on interim
guidance on the public disclosure requirement for charities’ Form 990-T on unrelated business income tax, has
asked whether there is published guidance that supports
the exclusion of Forms 926 and 8621 from public inspection copies of the Form 990-T.
Full Text Citations: Doc 2008-25049; 2008 TNT 232-68
The Exempt Organization Tax Review
January 2009 — Vol. 63, No. 1
31
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
IRS News
IRS PROVIDES RELIEF FROM 2009 WRITTEN PLAN
REQUIREMENT FOR SOME RETIREMENT PLANS. The IRS
Focus on the IRS
Federal Register
The following tables set forth the applicable federal
rates (AFR) for January 2009. The rates are published
monthly for purposes of sections 42, 382, 412, 1274, 1288,
7520, and 7872, as well as various other code sections.
Table 1 contains the short-term, mid-term, and longterm AFR for January. Table 2 provides the short-term,
mid-term, and long-term adjusted AFR for January.
In addition, for purposes of section 382, the adjusted
federal long-term rate for January is 5.49 percent and the
long-term, tax-exempt rate for ownership changes during
January is 5.49 percent.
The appropriate percentage for the 70 percent present
value low-income housing credit is 7.65 percent; the
appropriate percentage for the 30 percent present value
low-income housing credit is 3.28 percent.
Further, the AFR for determining the present value of
an annuity, an interest for life or a term of years, or a
remainder or reversionary interest is 2.4 percent.
Table 1
JANUARY 2009 AFR
Annual
Semiannual
AFR
110% AFR
120% AFR
130% AFR
0.81%
0.89%
0.97%
1.05%
Short-Term
0.81%
0.89%
0.97%
1.05%
0.81%
0.89%
0.97%
1.05%
0.81%
0.89%
0.97%
1.05%
AFR
110% AFR
120% AFR
130% AFR
150% AFR
175% AFR
2.06%
2.27%
2.48%
2.69%
3.10%
3.62%
Mid-Term
2.05%
2.26%
2.46%
2.67%
3.08%
3.59%
2.04%
2.25%
2.45%
2.66%
3.07%
3.57%
2.04%
2.25%
2.45%
2.66%
3.06%
3.56%
3.57%
3.93%
4.30%
4.65%
Long-Term
3.54%
3.89%
4.25%
4.60%
3.52%
3.87%
4.23%
4.57%
3.51%
3.86%
4.21%
4.56%
AFR
110% AFR
120% AFR
130% AFR
Quarterly
Monthly
Section 170 — Charitable Deduction
COMMENTS REQUESTED ON GUIDANCE ON APPRAISAL
REQUIREMENTS FOR CHARITABLE CONTRIBUTIONS OF
PROPERTY. The IRS, as part of a paperwork reduction
effort, has requested comments on transitional guidance
(Notice 2006-96) on the new definitions of qualified
appraisal and qualified appraiser under section 170(f)(11)
and on substantial or gross valuation misstatements
under section 6695A; comments are due by January 20,
2009. (For the notice, see The Exempt Organization Tax
Review, Nov. 2006, p. 168; Doc 2006-21534; or 2006 TNT
203-3.)
Full Text Citations: Doc 2008-24571; 2008 TNT 226-16
GUIDANCE, REGS, AND FORMS SUBMITTED FOR OMB
REVIEW. The IRS has submitted for Office of Manage-
ment and Budget review, and has requested comments
on, various forms, regs, and notices; comments are due
by January 7, 2009.
Full Text Citations: Doc 2008-25740; 2008 TNT 237-35
IRS ALERTS TAXPAYERS TO RULES AFFECTING YEAREND DONATIONS. The IRS has reminded individuals and
businesses making contributions to charity of important
tax law changes that have taken effect in recent years,
including a tax break available to some IRA owners, new
guidelines for donations of clothing and household
items, and new rules for substantiating cash donations.
Full Text Citations: Doc 2008-25826; 2008 TNT 238-7
Section 501 — Tax-Exempt Organizations
COMMENTS REQUESTED ON TE/GE COMPLIANCE CHECK
QUESTIONNAIRES. The IRS, as part of a paperwork
reduction effort, has requested comments on the TaxExempt and Government Entities Division’s compliance
check questionnaires; comments are due by February 2,
2009.
Full Text Citations: Doc 2008-25321; 2008 TNT 233-17
Table 2
JANUARY 2009 ADJUSTED AFR
Annual
Semiannual
Short-term
1.81%
1.80%
Mid-term
3.45%
3.42%
Long-term
5.49%
5.42%
Source: Rev. Rul. 2009-1; 2009-2
Quarterly
1.80%
3.41%
5.39%
Monthly
1.79%
3.40%
5.36%
Internal Revenue Bulletin
Section 170 — Charitable Deduction
IRS ANNOUNCES 2009 STANDARD MILEAGE RATES. The
IRS has announced the optional standard mileage rates
used in computing the deductible costs paid or incurred
on or after January 1, 2009, for operating an automobile
for business, charitable, medical, or moving purposes.
Full Text Citations: Doc 2008-24804; 2008 TNT 228-6
32
January 2009 — Vol. 63, No. 1
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Applicable Federal Rates
Focus on the IRS
list of organizations that have failed to establish, or have
been unable to maintain, their status as public charities or
as operating foundations.
Full Text Citations: Doc 2008-26120; 2008 TNT 241-8
Section 501(c)(3) — Charities
ORGANIZATION NOT TAX-EXEMPT. The Service has an-
nounced that Family Home Providers Inc., Cumming,
Ga., does not qualify as a tax-exempt organization under
section 501(a) and is not an organization described in
section 501(c)(3) or section 170(c)(2).
Full Text Citations: Doc 2008-24650; 2008 TNT 227-9
Public Comments on Regulations
Section 147 — Private Activity Bond Rules
GROUP OPPOSES PROPOSED CHANGES TO PUBLIC
APPROVAL REQUIREMENTS FOR TAX-EXEMPT BONDS.
Ben Boyce of the Living Wage Coalition of Sonoma
County, Calif., has complained that proposed regulations
on the public approval requirements for tax-exempt
private activity bonds would greatly diminish public
input on important issues that affect the quality of life for
communities within the project areas. (For REG-12884107, see The Exempt Organization Tax Review, Oct. 2008, p.
77; Doc 2008-19077; or 2008 TNT 175-12.)
Full Text Citations: Doc 2008-24737; 2008 TNT 228-15
INDIVIDUAL OPPOSES PROPOSED CHANGES TO PUBLIC
APPROVAL PROCESS FOR TAX-EXEMPT BONDS. Daniel
Willett has complained that proposed regulations on the
public approval requirements for tax-exempt private
activity bonds will hurt the efforts of community and
labor organizations by shortening the public notice period and allowing issuers to provide fewer details on
projects.
Full Text Citations: Doc 2008-25606; 2008 TNT 237-15
GROUPS OFFER ALTERNATIVES TO PROPOSED REGS ON
PUBLIC APPROVAL REQUIREMENTS FOR TAX-EXEMPT
BONDS. Good Jobs New York, Good Jobs First, and the
Fiscal Policy Institute have suggested that proposed
regulations on the public approval requirements for
tax-exempt private activity bonds be amended to increase the public notice period, prohibit the cancellation
of public hearings, and require issuers to provide more
project details.
Full Text Citations: Doc 2008-25607; 2008 TNT 237-16
UNION OBJECTS TO PROPOSED REGS ON PUBLIC
APPROVAL REQUIREMENTS FOR TAX-EXEMPT BONDS.
The International Brotherhood of Teamsters has complained that proposed regulations on the public approval
process for tax-exempt private activity bonds would
undermine transparency by reducing the public notice
period, allowing issuers to cancel public hearings, and
allowing issuers to provide fewer details about projects.
Full Text Citations: Doc 2008-25669; 2008 TNT 237-17
Section 170 — Charitable Deduction
AICPA SEEKS CLARITY IN PROPOSED CHARITABLE CONTRIBUTION SUBSTANTIATION REGS. Robin Taylor,
Thomas Hilton, and Alan Einhorn of the American
Institute of Certified Public Accountants have submitted
comments on proposed regulations on the substantiation
and reporting rules for charitable contributions, urging
the IRS to clarify the terms ‘‘generally accepted appraisal
standards’’ and ‘‘qualified appraiser.’’ (For REG-14002907, see The Exempt Organization Tax Review, Sept. 2008, p.
302; Doc 2008-17144; or 2008 TNT 153-7.)
Full Text Citations: Doc 2008-24160; 2008 TNT 223-22
APPRAISAL GROUP COMMENTS ON PROPOSED REGS ON
CHARITABLE CONTRIBUTION SUBSTANTIATION RULES.
The Appraisal Institute, generally commending the IRS
for proposed regulations on the substantiation and reporting rules for charitable contributions, has identified
specific issues for clarification and has suggested that the
IRS apply a single set of rules for all fair market valuations of property.
Full Text Citations: Doc 2008-24161; 2008 TNT 223-23
GROUPS COMMENT ON APPRAISER REQUIREMENTS
UNDER PROPOSED CHARITABLE CONTRIBUTION RULES.
Three professional appraisal organizations, commenting
on proposed regulations on the substantiation and reporting rules for charitable contributions, have asked the
IRS to define or clarify various terms and standards for
the proposed appraisal requirements and to provide
identity theft protections on forms appraisers use.
Full Text Citations: Doc 2008-24163; 2008 TNT 223-24
APPRAISER COMMENTS ON PROPOSED REGS ON CHARITABLE CONTRIBUTION SUBSTANTIATION REQUIREMENTS. Charles Goldsmid has submitted comments on
the definition of qualified appraiser in proposed regulations on the substantiation and reporting rules for charitable contributions, urging the IRS to define appraisal
membership and training through recognized national
professional trade associations as meeting the minimum
education requirements.
Full Text Citations: Doc 2008-24166; 2008 TNT 223-25
APPRAISER ADDRESSES PROPOSED REGS ON CHARITABLE CONTRIBUTION SUBSTANTIATION. Appraiser
Roslyn Bakst Goldman, commenting on proposed regulations on the substantiation and reporting requirements
for charitable contributions, has urged the IRS to make
the Uniform Standards of Professional Appraisal Practice
mandatory.
Full Text Citations: Doc 2008-24167; 2008 TNT 223-26
The Exempt Organization Tax Review
January 2009 — Vol. 63, No. 1
33
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
IRS LISTS WOULD-BE PUBLIC CHARITIES NOW CLASSIFIED AS PRIVATE FOUNDATIONS. The IRS has published a
Focus on the IRS
Euwema of United Way of America has sought clarification of several aspects of proposed regulations on the
substantiation and reporting rules for charitable contributions, citing the lack of certain reporting requirements
and information on the treatment of undesignated contributions.
Full TextDocuments
IRS Releases Fiscal 2009
Exempt Bonds Work Plan
Full Text Citations: Doc 2008-24168; 2008 TNT 223-27
CFC OFFICE COMMENTS ON PROPOSED REGS ON CHARITABLE CONTRIBUTION SUBSTANTIATION RULES. Mark
Lambert of the Office of Personnel Management’s Office
of Combined Federal Campaign (CFC) Operations has
sought clarification of several aspects of proposed regulations on the substantiation and reporting rules for
charitable contributions, including whether the IRS will
remove the requirements described in Notice 2008-16.
Full Text Citations: Doc 2008-24797; 2008 TNT 228-16
APPRAISER SUGGESTS CHANGE TO PROPOSED SUBSTANTIATION RULES FOR CHARITABLE CONTRIBUTIONS.
Mark Weston of Hunsperger & Weston Ltd. has suggested that proposed regulations on the charitable contribution substantiation rules be revised to require that
Form 8283 contain information about the claimed value
of a gift before the form is signed by a prospective donee.
Full Text Citations: Doc 2008-25046; 2008 TNT 232-64
APPRAISER COMMENTS ON PROPOSED REGS ON CHARITABLE CONTRIBUTION SUBSTANTIATION RULES. Samuel
Luceno, commenting on proposed regulations on the
substantiation and reporting rules for charitable contributions, has suggested that the definition of qualified
appraiser be revised to recognize designations by the
American Society of Appraisers.
Full Text Citations: Doc 2008-25050; 2008 TNT 232-65
APPRAISERS SEEK INCLUSION OF USPAP UNDER
PROPOSED REGS ON CHARITABLE CONTRIBUTION SUBSTANTIATION REQUIREMENTS. Beth Weingast of the
Appraisers Association of America, commenting on proposed regulations on the substantiation and reporting
rules for charitable contributions, has suggested that the
IRS specifically adopt the Uniform Standards of Professional Appraisal Practice and apply the same rules and
regs to estate appraisals.
Full Text Citations: Doc 2008-25609; 2008 TNT 237-18
IRS Publications
Section 3131 — Employment Tax Definitions
IRS RELEASES PUBLICATION CONTAINING GUIDANCE
FOR INDIAN TRIBAL GOVERNMENTS ON EMPLOYMENT
TAXES. The Service has released Publication 4268 (rev.
Nov. 2008), Indian Tribal Governments Employment Tax
Desk Guide.
Full Text Citations: Doc 2008-25209; 2008 TNT 233-21
34
January 2009 — Vol. 63, No. 1
The IRS has released its fiscal 2009 work plan for taxexempt bonds, outlining the Tax-Exempt and Government
Entities Division’s operating priorities and program guidance
and emphasizing efforts to detect and deter abusive tax shelters,
increase enforcement activity, and maintain good communication with the municipal bond community.
FY2009
TAX EXEMPT BONDS
WORK PLAN
Planning Guidelines
Executive Summary
Tax Exempt Bonds
FY2009 Implementing Guidelines
The work plan provides program guidance and direction to all TEB employees.
TEB Operating Priorities support the IRS’s Strategic
Plan. The IRS Strategic Plan outlines strategic goals that
guide the future direction of the agency.
• Improve service to make voluntary compliance
easier; and
• Enforce the law to ensure everyone meets their
obligations to pay taxes.
In support of these goals and the Plan’s strategic
foundations, TEB has committed to the following Operating Priorities:
• Maintain increased enforcement actions against
high-risk cases and abusive tax schemes;
• Detect and deter abusive tax shelters through education and examination strategies;
• Address the use of derivatives and other financial
products to divert rebatable arbitrage;
• Expand TEB’s compliance presence in the taxexempt bond market through increased use of compliance check initiatives and correspondence examinations;
• Refine TEB’s examination case processing procedures and practices;
• Encourage greater participation in TEB’s voluntary
compliance programs; and
Editor’s Note: Full text documents are reprinted
exactly as they were received from the issuing
agency.
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
UNITED WAY COMMENTS ON PROPOSED REGS ON
CHARITABLE CONTRIBUTION SUBSTANTIATION. Kenneth
Focus on the IRS
TEB will continue to train its workforce to ensure that
employees have the skills necessary to execute TEB’s
operating priorities. TEB intends to continue to expand
its specialty training programs to allow employees to
focus on specialized areas of tax-exempt financing. TEB
will continue its use of the employee survey to identify
opportunities for improvements in employee satisfaction.
Operating Priorities
TEB leadership continues to be grateful for the support and business results of its highly skilled workforce.
In FY2008, TEB delivered its planned business results
despite an unanticipated loss of substantial hiring
authority and a continuing shrinkage in its workforce
due to attrition. TEB also continued to be at the forefront
of directly addressing serious abuses in the municipal
financing industry. TEB provided invaluable assistance to
other IRS functions and external agencies involved in
ongoing investigations.
In FY2008, TEB continued to meet or exceed its
performance goals related to examination closures,
closures of voluntary closing agreement requests, and
customers reached. TEB also strengthened its relationship with various members of its customer segment in
FY2008 by holding its annual TEB Work plan Press
Conference and participating in numerous outreach
events.
As reflected in TEB’s employee participation in Survey
2009, TEB’s participation in the overall employee engagement process remains high. TEB leadership is appreciative of the satisfaction TEB employees take in their work.
Field Operations (FO) will continue its focus on
identifying abusive tax-exempt bond transactions and
their promoters. It is expected that, similar to FY2008,
TEB will direct substantial resources toward examining
arbitrage motivated and/or abusive transactions with a
continuing emphasis on addressing abuses involving
swaps and other derivative contracts. FO will continue to
utilize the IRC section 6700 tax promoter penalty, to
target the promoters of abusive transactions and the lack
of diligence by market professionals. TEB will make
referrals of professionals to the Office of Professional
Responsibility (OPR), Criminal Investigation (CI) and
other agencies when appropriate. TEB will also dedicate
substantial resources to providing training and other
technical assistance to other IRS offices and government
agencies.
Field Operations will continue to implement discrete
arbitrage compliance initiatives developed by the TEB
Arbitrage Team. The second stage of the qualified hedging transactions initiative will be ongoing during FY
2009. TEB will also be completing its work on cases
opened in FY 2008 as part of an arbitrage compliance
initiative directed toward assessing rebate payment compliance. TEB plans to initiate additional arbitrage initiatives directed toward reviewing such items as late arbitrage payments, yield reduction payments, and
substantial qualified administrative costs.
Compliance and Program Management (CPM) will
continue to coordinate the implementation of projects
directed toward assessing the level of compliance of
different tax-exempt bond market segments. In FY 2008,
TEB issued a report of its findings with respect to its
charitable financing compliance check initiative. In FY
2009, TEB will be commencing a similar compliance
check initiative related to governmental bonds. These
initiatives are directed toward encouraging post-issuance
compliance.
CPM will continue with its primary responsibility of
negotiating and executing voluntary closing agreements
pursuant to the Tax Exempt Bond Voluntary Closing
Agreement Program (TEB VCAP). CPM will also pursue
implementation of additional streamlined voluntary
compliance programs. These programs will set forth
standardized terms for resolving common violations.
A high priority of TEB is to communicate effectively
with the diverse membership of the municipal bond
community. TEB will continue to develop partnerships
with state and local government officials, regulatory
agencies, industry, and national professional associations, as well as their state and local affiliates and
members within each of our customer segments.
The Exempt Organization Tax Review
FY2008 Accomplishments
SECTION I — Customer Education and Outreach
Overview of Customer Education and Outreach
TEB will focus on providing the participants in the
municipal bond industry with quality service. TEB will
assist participants in understanding their tax responsibilities by conducting tailored educational programs.
TEB will also monitor non-compliance trends for the
purpose of designing proactive education and outreach
products for use by TEB customers.
Each TEB office will plan to fully support opportunities for education and outreach to customers in the
various bond industry segments with a focus on assistance to professionals who provide tax advice or monitor
post-issuance use or arbitrage compliance. TEB personnel
will participate in workshops, seminars, and meetings
sponsored by bond industry groups and associations to
effectively leverage limited TEB resources. These outreach efforts will focus on educating customers with
respect to the federal tax requirements that must be met
throughout the life cycle of municipal bonds in order to
maintain the tax-exempt status of interest income of the
bonds.
Compliance and Program Management
The TEB CPM staff is responsible for:
• Improving and expanding TEB’s voluntary compliance programs;
• Enhancing education and outreach programs with
external stakeholders;
January 2009 — Vol. 63, No. 1
35
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• Enhance information gathering through refinements
to the tax-exempt bond returns and reporting
through form revisions.
Section I provides the specific program priorities and
goals/objectives for the Customer Education & Outreach
function.
Section II provides the specific program priorities and
goals/objectives for TEB Compliance Activities.
Focus on the IRS
Field Operations
TEB FO will continue to assist CPM in the development and delivery of targeted outreach programs by
participating in seminars/meetings and partnering with
outside stakeholders. FO will also assist CPM in identifying areas of abuse and noncompliance warranting the
development of market segment initiatives and arbitrage
initiatives.
Focus Group
FO and CPM employees will continue to participate in
the TEB Focus Group. The TEB Focus Group facilitates
quality examinations and ensures that examinations are
conducted in a timely and efficient manner and result in
consistent treatment of issues raised nationwide. The
Focus Group includes agent and manager representatives
from the FO groups, CPM representatives, and representatives from Counsel. The TEB Focus Group plans to
hold three meetings in FY2009. CPM and each of the FO
groups will participate in one of the FY2009 focus group
meetings.
Performance Measures for CE&O
The following performance indicators will be used in
FY 09:
36
January 2009 — Vol. 63, No. 1
Tax Exempt Bonds
Number of Outreach Events
Customer Reached
FY2008
Goal
40
5,000
FY2009
Goal
40
5,000
SECTION II — Compliance Activities
Overview of Compliance Activities
TEB will focus on identifying and correcting noncompliance, ensuring consistency and fairness in application
of law, and resolving issues at the lowest possible level
using appropriate resolution mechanisms.
TEB Field Operations is responsible for:
• Conducting examinations using standardized procedures and audit guidelines;
• Measuring the compliance levels of market segments by conducting project initiatives and identifying emerging trends;
• Applying IRC section 6700 promoter penalties,
where appropriate;
• Operating the TEB Bondholder Unit for the purpose
of identifying bondholders of tax-exempt bonds,
when appropriate;
• Coordinating with other business operating divisions to apply tax to bondholders and conduit
borrowers, when appropriate;
• Identifying best practices and recommending
changes in procedures; and
• Coordinating with, and referring appropriate cases
to, other IRS functions, including OPR and CI.
TEB Compliance and Program Management staff is
responsible for:
• Coordinating referral information with the TEB
Referral Committee;
• Working VCAP submissions;
• Working willful neglect determinations on late-filed
returns;
• Coordinating arbitrage work through the Arbitrage
Team;
• Classifying returns and closing examination cases
on AIMS;
• Conducting mandatory review (technical advice
requests, etc.);
• Maintaining and updating the third party contact
database;
• Assisting field personnel in the identification and
development of complex and emerging technical
issues; and
• Administering TEB’s quality review of closed
examination cases.
For FY2009, the principal activity of the program will
be to continue to participate in ongoing investigations of
arbitrage motivated and/or abusive transactions. It is
anticipated that examination FTE applied to arbitrage
motivated and/or abusive transactions will continue to
increase in FY2009 and that the greatest increase will be
related to the use of swaps and other derivative contracts
to divert rebatable arbitrage. Training activities will continue to be conducted, as necessary, to ensure consistent
and uniform issue development and resolution.
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
• Developing and issuing, as needed, specialized educational materials and publications;
• Expanding the TEB Internet and Intranet sites and
otherwise leveraging technology to meet customer
and FO needs;
• Identifying and assisting in the implementation of
special projects;
• Developing and evaluating the results of market
segment surveys and questionnaires, compliance
check initiatives, and examination project initiatives
to determine compliance levels and to identify
emerging trends and issues;
• Issuing determination letters in response to applications for allocations of volume cap;
• Classifying returns related to general examination
program activity;
• Revising Form 8038 series returns and other taxexempt bond related returns;
• Coordinating with Customer Account Services
(CAS) return filings, taxpayer inquiries, and revisions to Form 8038 series returns;
• Providing assistance, when requested, to the Director’s staff and FO on administrative and technical
matters;
• Coordinating legislative proposals with internal and
external offices and agencies with a primary goal of
increasing overall community compliance levels;
and
• Working with the Office of Chief Counsel and the
Department of Treasury on published guidance
projects, with a primary goal of improving tax
administration.
Focus on the IRS
The Exempt Organization Tax Review
In FY 2009, TEB will also initiate a number of research
projects. Projects under consideration for FY 2009 include
initiation of a research project related to charter school
financings and initiation of a project analyzing taxexempt financed transactions involving community
development districts.
The Arbitrage Team will review Forms 8038-R, Request for Recovery of Overpayments Under Arbitrage
Rebate Provisions, and determine whether the request
can be surveyed or will require further investigation. All
requests requiring further development will be assigned
to a revenue agent on the Arbitrage Team for processing.
CPM will perform compliance checks on late filed
bond returns forwarded by the Ogden Service Center
CPM will make determinations regarding whether the
failure to file timely is due to willful neglect by following
the procedures set forth in Rev. Proc. 2002-48, 2002-37
I.R.B. 531, or Rev. Proc. 2005-40, 2005-28 I.R.B. 83. CPM
will, when necessary, contact the issuer for an explanation. CPM will classify for examination cases involving
non-responsive issuers.
CPM will also coordinate the process of allocating tax
credit bond volume cap to applicants. TEB anticipates a
significant increase in the resources that will be required
to process increases in allocable tax credit bonds in FY
2009.
FY2009 Audit Procedures
The audit techniques for conducting examination
activities are field, office, and correspondence. Generally,
the managers in FO are responsible for determining
which audit technique is appropriate for a case based on
the potential issues involved, the scope of the examination, and the most effective way to gather required
information.
Managers will determine when the collection of bondholder names becomes a priority during an ongoing
examination of a bond return. Managers should consult
with the manager responsible for operation of the Bondholder Unit, when appropriate. As soon as a proposed
determination of taxability is made, the Bondholder Unit
will initiate efforts to identify bondholder names and
open bondholder examinations. The Bondholder Unit
will also be responsible for acquiring statute extensions,
issuing deficiency notices, and making discrepancy adjustments while bondholder cases remain under TEB
jurisdiction.
FO managers will coordinate with other business
operating divisions all potential adjustments to the borrower’s tax return, including adjustments under IRC
sections 150(b) and 168(g). FO managers should coordinate early in the examination process in order to preserve
potential adjustments for expiring tax years.
Examination Categories
For FY2009, TEB resources will be allocated to the
following areas:
• Solid Waste Disposal Facilities
• Yield Burning
• Failure to Rollover Escrowed Securities to Zero
Interest Rate State and Local Government Securities
• Loan Pools
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In FY2009, TEB will continue to focus on abusive and
arbitrage-driven transactions involving long investment
periods or large investment amounts, including pooled
financing cases, cases involving forward floats, escrow
puts and other devices used to burn yield in advance
refunding issuances, cases involving the use of derivatives to burn yield, including swaps, strips and swaptions, and the over-issuance of tax and revenue anticipation notes (TRANS). The issuance of bonds for the
primary purpose of diverting rebatable arbitrage remains
TEB’s highest compliance risk and enforcement focus.
Managers will assign these transactions priority status
and ensure all appropriate penalties and sanctions are
applied.
In FY2009, TEB will continue to examine qualified
hedging transactions with a view toward completing
approximately 100 examinations as part of a focused
examination project. This project has been designed
based on the findings of previous examinations of a small
sample of hedging transactions.
In FY 2009, TEB will continue to work the remainder
of the discrete arbitrage compliance examinations
opened in FY 2008 to address compliance issues related
to the nonpayment of required rebate payments. It is
anticipated that a summary report of TEB’s findings
regarding this initiative will be issued in FY 2009.
The FY2008 program goals include a renewed focus
toward improving post-issuance compliance with the use
and payment restrictions found in IRC 141. The first stage
in this program, initiated during FY2006, was a charitable
financing examination project consisting of approximately 30 focused examinations of charitable financings.
The first stage of the initiative was directed at measuring
compliance in the area of charitable health care and
housing financings and has been completed.
Stage two of the initiative involved the development
and distribution of a post-issuance compliance questionnaire to 207 charities. TEB has analyzed the responses to
the questionnaire and prepared a report outlining TEB’s
findings.
Stage three of the initiative involved the development
and distribution of a post-issuance compliance questionnaire to a sample of governmental units during FY2008.
TEB anticipates receiving and analyzing the responses to
this questionnaire in FY 2009.
TEB will develop a compliance project that will
address apparent non-compliance with the issuance cost
requirements. This compliance project will most likely
incorporate ‘‘soft-contact’’ letters.
TEB also plans to continue to examine a small sample
of qualified student loan bond issuances opened in
FY2008. Once the examinations are completed, TEB will
analyze the results of the initiative and assess compliance
trends in the student loan bond market segment.
In FY 2009, TEB anticipates initiating examinations of
certain specialty tax-exempt bonds and/or tax-credit
bonds. For instance, TEB may initiate examinations of
bonds issued to finance qualified green building and
sustainable design projects. See section 701 of the American Jobs Creation Act of 2004 mandating that a determination be made not later than five years after the date of
issuance that projects financed with such bonds substantially complied with basic eligibility requirements.
Focus on the IRS
The following items are descriptions of TEB training
courses:
Research Program
RESEARCH TRAINING
The TEB market segmentation is a systematic method
to define the universe by conducting examinations of a
sample of returns on a nationwide or geographic basis
and reflecting results/conclusions from the samples in a
profile of the applicable market segment. The objective of
TEB market segmentation is to continually build information and knowledge through conducting research on
the compliance levels of various types of bond issuances.
These research projects assist in the targeting of direct
compliance activities to areas of actual or suspected
noncompliance.
Annually, the Director, TEB will conduct meetings
with all of TEB’s managers to develop the subsequent
fiscal year market segment project initiatives. The Director will also consider the findings from completed examination and compliance check initiatives as well as voluntary compliance initiatives when identifying the market
segments that will be reviewed.
Course 4237: RICS — Phase I
Voluntary Resolution Programs
This training will teach participants how to use electronic software of a commercial tax service to research tax
law, court cases, revenue rulings, finance industry publications, municipal bond information, and other tax
related materials. The training provides advanced instruction and function-specific exercises.
CPM will work documents submitted as part of the
tax-exempt bond voluntary closing agreement program
(VCAP) (Notice 2008-31) and other voluntary resolution
programs (e.g., Rev. Proc. 97-15, 1997-1 C.B. 635). CPM
will work with other responsible offices to develop and
expand its voluntary compliance programs and procedures. FO will work with CPM to direct wide-spread,
non-abusive cases to the voluntary program through
timely announcements of proposed audit initiatives.
Compliance Support Function
The CPM staff provides administrative and research
support to the field compliance function. This support
includes AIMS activities, referral analysis and research,
claims processing, and third-party contact data. The CPM
staff also will research available database information to
provide field agents supporting documentation and information regarding examinations. See attachment.
Performance Measures for Compliance Services
The following performance indicators will be used in
FY 09:
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January 2009 — Vol. 63, No. 1
Tax Exempt Bonds
Voluntary Closing Agreement
Cases Closed
Examination Closed
Examination Timeliness
Examination Quality
Compliance Checks
FY2008
Goal
FY2009
Goal
60
460
244
90%
120
70
475
260
85%
220
ATTACHMENT I
TEB TRAINING COURSES
This training is a 5-day course (including training and
travel time) based on the RICS Phase I Training Guide
that covers RICS functionality for basic RICS users. The
primary purpose of the training is to support the classification of TE/GE returns and TE/GE non-return units.
This training is ideal for new TE/GE classifiers and other
new RICS users.
Course 4256: RICS — Phase II
This training is a 5-day course (including training and
travel time) based on the RICS Phase II Training Guide
that covers RICS functionality for experienced RICS
users. This training is for all experienced RICS users.
Course 5108: Introduction to Specialized Research
Software
TEB TECHNICAL TRAINING
Course 4207a: Discrepancy Adjustments
This training provides agents with the basic knowledge and skills necessary to propose discrepancy adjustments to taxpayers Forms 1040 and 1120 as a result of a
TEB examination. This course is one week in length.
Training will be scheduled for new agents to TEB as
needed in FY2009.
Course 4232: Basic Tax Exempt Bond Training —
Phase I
This training provides agents with the basic knowledge and skills necessary to conduct examinations of
municipal financing arrangements. This course is three
weeks in length. Training is scheduled for new agents to
TEB in the first quarter of FY2009.
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
• Tax and Revenue Anticipation Notes
• Tax Promoter Penalties (Section 6700)
• Section 501(c)(3) Charities
• Hospitals
• Single Family Housing
• Multi-Family Housing
• Tax Incremental Financing
• Student Loans
• Qualified Zone Academies
• Other specialty bonds and tax-credit bonds
These examination areas and other examination
categories will be separately identified for technical time
and inventory tracking reporting purposes through particular Activity Codes for the type of return and specific
Project Codes.
Focus on the IRS
This training provides agents with the advanced
knowledge and skills necessary to conduct examinations
of municipal financing arrangements. Topics include
advance yield on bonds, yield on investments, allocation
and accounting, reimbursements, reissuances, refundings, pooled financings, and financial products. This
course is two weeks in length. Training is scheduled for
new agents to TEB in the first quarter of FY2009.
Course 4233: TEB Technical Field Conference (CPE)
This training will cover current technical and operational developments in the bond area. There will be
discussions of significant issues under examination and
techniques used to develop the issues. Training will be
conducted in the third quarter. The length of training is 5
course days (including training and travel time). The
targeted audience is all TEB Technical Employees.
Course 9682b: Improving Performance thru Data
Driven Decision Making
This training will introduce a nine-step problemsolving model. Participants use a current business challenge to analyze and solve problems. This course is one
week in length.
TEB SPECIAL EMPHASIS TRAINING
Course: Qualified Hedging Transactions Initiative
This training provides Arbitrage Team members and
agents assigned qualified hedging transaction initiative
cases and the managers responsible for the initiative with
a knowledge of the issues and requirements related to
swaps. The course will consist of a review of assigned
cases and discussion of techniques to further develop the
related issues. The training will be 24 hours.
Course: Specialty Bonds Initiative
This training provides managers and agents assigned
specialty bond initiative cases with a knowledge of the
issues and requirements related to the type of specialty
bonds or tax-credit bonds subject to the initiative. The
course will consist of a review of assigned cases and
discussion of techniques to further develop the related
issues. The training will be 24 hours.
Course: Rebate
This course will provide agents training in the use of
Excel spreadsheets with respect to calculating arbitrage
rebate, including computing investment yield, valuing
investments, and computing the rebate amount and yield
reduction payments. The training will be 24 hours and be
taught as part of a group meeting.
Course: Abusive Transactions Update
This course provides agents with training regarding
the development of examinations of potentially abusive
The Exempt Organization Tax Review
transactions. The course will provide an update on recent
developments in abusive transactions. The training will
be 24 hours.
Course: TEB Compliance Overview
This course provides non-TEB personnel an update of
TEB compliance activities and how TEB issues interact
with other functions in TE/GE. The training will be 8
hours and will be offered when requested by other
functions in TE/GE.
Course: TEB Technical Update
This course provides an update on technical issues in
TEB to Service Center and Call Site personnel. The
training highlights emerging issues in TEB and provides
information to personnel dealing with pre-filing and post
filing compliance.
REPORT GENERATION SOFTWARE (RGS)
TRAINING
Course 4207a: EP/EO RGS (NT) Discrepancy
Adjustments Training — Full
This training will cover the technical and procedural
aspects of discrepancy adjustments as well as the RGS
training on using the new windows version of RGS
software to perform discrepancy adjustments. The targeted audience and date to be held will be locally
determined. The length of the training is 4 days (including training and travel time).
Course 4248: RGS Coordinators Training
This training provides the TEB Division RGS Coordinator with information concerning their responsibilities
as division coordinator. One person from OPR or one
from FO will attend this 16 hours course (including
training and travel time).
TE/GE REPORTING AND ELECTRONIC
EXAMINATION SYSTEM (TREES)
Course: TREES
This training provides an overview and hands on
training on the use of TREES. The course will be 24 hours.
ATTACHMENT II
Workload Selection
TEB will continue to refine the workload selection
criteria utilized in prior years. Workload selection will be
monitored to ensure that key areas identified through
examination and compliance check project initiatives,
market segment risk assessment and focus groups are
addressed and that the actions being assigned represent
the optimal approach to the identified issue. The Workload Selection Process described in this section will be a
primary tool TEB uses to identify and prioritize workload in concert with its Annual Work Plan.
An effective Workload Selection Process should accomplish several key tasks. It should:
January 2009 — Vol. 63, No. 1
39
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Course 4259: Advanced Tax Exempt Bond Training —
Phase II
Focus on the IRS
There are two primary methodologies used to initiate
project initiative. They are:
1. Market Segment Compliance Measurement — This
methodology includes the systemic selection of
each market segment over a period of time to
measure noncompliance of that segment or type of
bond. For example, small issue manufacturing
bonds and single family housing bonds would
constitute separate market segments.
2. Emerging Issues — This methodology measures
noncompliance by identifying cases based on the
existence of a potential emerging or identified
issues within the TEB return population.
The annual Market Segment Risk Assessment report
provides a description of the types of bond issues for
which returns have been filed during a specific year prior
to the work plan year. The bond returns are categorized
by the type of bond issue. Each category or segment is
assigned a compliance risk factor (high, medium or low).
The comparison of the volume (number of returns filed
and dollar amount of the total issues in a segment) from
one year to the next can impact the risk factor assigned to
the segment.
The FY2009 Annual Work Plan will impact the Workload Selection Process in that it will typically quantify the
amount of resources that will be expended on any given
market segment. For example, the number of examinations is dependent upon the resources devoted to these
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January 2009 — Vol. 63, No. 1
various segments. Resource allocation decisions are
made by the Director of TEB and will be consistent with
the overall goals of the business plan.
The Balanced Measures are consistent with the overall
outline of the IRS organizational measures:
Employee Satisfaction
Customer Satisfaction
Business — Results — Quality & Quantity
These three measures represent one of the levers of
change for the successful modernization of the Internal
Revenue Service. The actions undertaken in the Workload Selection Process will be consistent with these
measures.
The purpose of this Workload Selection Process is to
outline the methodology used to identify and prioritize
those returns or customers that warrant an examination.
It will also identify and prioritize those customers who
may be less compliant on a given national issue. The
FY2009 Annual Work Plan quantifies resource expenditures dedicated to the various initiatives.
This Workload Selection Process does not affect the
ability of a group manager to request approval of compliance matters based on their knowledge of an issue that
they believe requires immediate action. However, such
requests must be directed to the Manager, CPM and
approved by the Manager, CPM and must be justified as
to their importance as well as any negative impact on
other work.
Methodology
The Workload Selection Process for FY2009 will generate examination work for the five TEB field groups.
Much of the casework will be derived from recommendations and potential compliance issues identified in
Compliance/Project Initiatives, Compliance Questionnaires, the Market Segment Risk Assessment (see Attachment VIII) and Referrals (including I.R.C. section 6700
leads).
The following areas will be emphasized in the FY2009
Workload Selection Plan:
Claims
All claims for refund filed through the Ogden Service
Center are controlled on AIMS and forwarded for
processing. Some claims require taxpayer contact and
others can be closed based on the information provided
with the claim. The Arbitrage Team Leader will submit
closed claim case files to the CPM AIMS unit for closing.
If the claim is allowed, CPM will forward the Manual
Refund form for the case to Ogden for issuance of the
refund. CPM will close the case on AIMS.
Claim cases remain priority cases.
Referrals/Information Items
TEB referrals come from many sources: the media,
informants, other Operating Divisions, Appeals, etc. All
TEB referrals and information items that are submitted
for examination consideration, except certain IRC 6700
cases resulting from a lead, are routed to CPM for review
and approval. CPM personnel research information items
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
1. Generate work that addresses issues pertaining to
non-compliance on a national level.
2. Be data driven, to the fullest extent possible.
3. Be consistent with TEB’s balanced measures.
4. Ensure fair treatment of each taxpayer.
5. Ensure adequate controls are in place in accordance
with Servicewide work assignment and approval
requirements.
6. Be flexible enough to accommodate Work Plan
adjustments, e.g., new legislation and court decisions.
7. Provide the TEB field group managers the flexibility they need to balance local concerns with national priorities.
The Workload Selection Process for FY2009 incorporates information from several sources. All of these
sources are necessary to ensure the Workload Selection
Process is data driven, consistent with our balanced
measures and reflective of our customers’ needs. This
approach will also ensure that TEB efficiently uses its
enforcement resources. TEB products that have a direct
impact on this Workload Selection Process include:
1. TEB Compliance/Project Initiatives
2. TEB Market Segment Risk Assessment
3. FY2009 Annual Work plan
4. TEB Balanced Measures
5. Findings from focus groups, other ad-hoc meetings
and other customer communicated items that identify customer needs.
Compliance/Project Initiatives
Focus on the IRS
Promoter Penalty Cases
IRC section 6700 of the Code imposes a penalty on any
‘‘person’’ who commits certain actions described in the
Code section. TEB identifies IRC section 6700 leads by:
a. Working cooperatively and coordinating, to the
extent permitted under IRC section 6103, with
counterparts at the Securities and Exchange Commission (SEC); National Association of Securities
Dealers (NASD); Municipal Securities Rulemaking
board (MSRB); and, Offices of State auditors, etc.
b. Reviewing, as part of its normal examination activities, the use, expenditure and investment of proceeds of the bond issue and what the various
participants knew, or should have known, with
regard to such use, expenditure or investment of
bond proceeds. In those instances where abusive
transactions are found, TEB will use existing databases or John Doe summonses to determine
whether there are similar transactions done by the
same parties.
c. Monitoring industry materials and publications to
identify new financial techniques and schemes.
TEB operates an IRC section 6700 Committee to evaluate, at the discretion of the Director, recommendations
from FO that FO be granted approval to open a promoter
penalty case. The Committee is comprised of representatives from Chief Counsel and TEB.
Group managers will assign IRC section 6700 cases
priority status and ensure that penalties are applied
when appropriate. TEB will use administrative tools,
formal guidance and other issue resolution strategies to
aggressively combat abusive transactions.
ATTACHMENT III
Market Segment Risk Assessment
Risk Assessment analysis supports TEB’s continuing
effort toward completion of existing project initiatives
and development and implementation of additional
project initiatives. The assessment process also prioritizes
potential areas of noncompliance. The initial TEB risk
The Exempt Organization Tax Review
assessment analysis relying on Statistics of Income (SOI)
data for tax year 1987 — 1995 was useful and revalidated.
For FY2009, the data is taken from 2004. Each type of
bond issue is considered as a separate market segment
and assigned a rating potential for noncompliance of low,
medium and high risk. Future examination activities will
be based on this analysis as well as staffing, available
guidelines and other relevant factors. For FY2009, field
personnel will be applied in such a manner as to ensure
the timely completion of existing projects in the area of
charitable financing and qualified hedging transactions
and the initiation of any additional efforts related to those
projects. In addition, TEB may initiate other new compliance initiatives after taking into account TEB’s increased
activities relating to arbitrage motivated and/or abusive
transaction.
The Tax Exempt Bond (TEB) function has broadly
identified its bond population as either governmental or
private activity bonds. Governmental and private activity bonds have been further classified as either new long
and short term bonds issues, or as refunding issues. Bond
issuers are required to file information returns (Form
8038, 8038-G, 8038-GC) to provide identifying information about issued bonds. Forms 8038 and 8038-G include
line items titled ‘‘Type of Issue’’ in which the bond issuer
is required to identify the purpose or purposes for which
the proceeds of the bond issue are expected to be used.
TEB considers each type of bond issue as a separate
market segment.
The Statistics of Income (SOI) function extracts data
from these returns and provides a compilation (in the
form of tables) of the data to CPM. TEB substantially
relies on SOI data in its compliance risk analysis.
ASSESSMENT OF COMPLIANCE RISKS BY MARKET
SEGMENT
Summary
TEB has defined noncompliance as the improper use
of the economic benefit provided by tax-exempt bonds.
Cases of noncompliance have been developed through
referrals from internal IRS offices, other federal agencies,
information or media sources, information gathering and
compliance initiatives, and regular classification of returns. TEB has made an estimate in terms of low, medium
or high potential for noncompliance for the types of bond
issues.
Governmental Bonds
Governmental bonds are generally considered low
risk. However, governmental educational bonds issued
to finance public school construction expenditures were
determined to have a medium risk of noncompliance due
to the special arbitrage rebate exception for such bonds
and prior examination findings. Tax and revenue anticipation notes (TRANS) and bond anticipation notes
(BANS) have also been labeled as medium risk due to
ongoing examination activities that have concluded that
the notes have been oversized in multiple cases for
arbitrage purposes. Hospital/Healthcare bonds have
been labeled as medium risk due to increased indications
of noncompliance related to financings impacted by
January 2009 — Vol. 63, No. 1
41
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
on IDRS and RICS to provide relevant return filing
information for the subject of the referral and information
item.
To ensure unbiased selection of cases for examination,
referrals must be approved by both the Manager, CPM
and the Manager, FO or their representatives (the Referral Committee) before assignment to a field group.
Three forms are prepared for each Referral: a TEB
Referral, Information Reports and Information Items
Record and a Tax-Exempt Bond Information Item Tracking Sheet. These forms become part of the examination
case file. In addition, a copy of each form is retained in a
Referral Log in CPM. The group manager completes the
form during the case closing and a copy of the form is
pulled during the closing of the case in CPM and
associated with the copy in the Referral Log. The examination results are notated in the Log. The Logs are
housed in CPM and provide a historical reference record
of referred bond issues.
Focus on the IRS
Private Activity Bonds
As a whole, the potential for noncompliance for private activity bonds is somewhat greater than that for
governmental bonds due to the presence of private
borrowers and more complicated rules and regulations.
Under the private activity bond category, the solid waste
disposal bonds, qualified 501(c)(3) bonds, and hospital/
healthcare bonds have been determined to have a high
risk of noncompliance.
• High Risk:
Solid Waste: Solid waste issues were rated high based
on the results of solid waste cases associated with a
compliance initiative. Based on current examination
activity, there are indications that the industry has
broadly misinterpreted the regulations applicable to solid
waste bonds.
501(c)(3): This category of bonds has been determined
to have a high risk of noncompliance due to the size of
the category, the low level of TEB VCAP requests relating
to post-issuance compliance, and information gathered
through outreach and compliance efforts. Revenue
agents have been trained in this segment and an initiative
was commenced in FY 2006. A questionnaire was also
issued to charities in FY 2007 to assess the compliance
practices and procedures employed by charities with
respect to their bonds. Feedback from these compliance
initiatives suggests potential problems related to inadequate record retention, failure to pay arbitrage rebate,
substantial private use of facilities, and other weaknesses
related to debt management and monitoring.
Hospital/Healthcare: As a result of the changing
healthcare industry, hospital systems have faced financial
situations that have required them to either merge with
other hospital systems or privatize. Bond issues in this
market segment were reviewed both as part of FY 2006
examination initiative and the questionnaire project and,
as indicated above, noncompliance issues were identified. Consequently, bonds issued to finance hospitals and
related facilities are at high risk of noncompliance.
• Medium Risk
The recent examination initiative relating to multifamily housing bonds have reflected a lower-risk segment than expected. Therefore, the risk level has been
reduced to medium.
Small Issue: A prior compliance initiative directed
toward small issue bonds determined that there were
substantial noncompliance concerns in this sector. Most
of the recently identified infractions related to small issue
bonds have related to inadvertent violations of the $10
Million capital expenditure limitation. Therefore, the risk
level has been reduced to medium.
Airport: Examinations of airport bonds support a
medium risk assignment.
Sewage: Examinations of sewage bonds support a
medium risk assignment.
Student Loans: Similar to other areas, such as single
family mortgage bonds, student loan bonds involve
complex arbitrage calculations and the ability to earn and
divert illegal arbitrage. Therefore, a medium risk of
noncompliance has been assigned to this category of
financings.
• Low Risk:
Bonds issued to finance or refinance docks and
wharves, enterprise zone, local electric facilities, gas and
energy, water furnishing facilities, redevelopment, empowerment zone, and other non-government output
facilities were determined to have a low risk of noncompliance, primarily due to the low volume of bond issues
related to each category.
RELIABILITY OF ASSESSMENT OF COMPLIANCE
RISKS BY MARKET SEGMENT
The information used to determine the above compliance risks is data from SOI analysis of tax exempt bond
returns. The information is considered in conjunction
with the outcome of prior year and current examinations
to determine the compliance risk level of each segment.
ATTACHMENT IV
TEB Form 5440
The attached Form 5440 is applicable for FY2008.
❖ ❖ ❖
Single family mortgage, multi-family housing, small
issue, airport, sewage, and student loan bonds have been
determined to have a medium level of risk of noncompliance.
Housing: Housing bonds, which may be issued to
finance single family homes or multi-family housing
projects, are determined to have a medium risk of
noncompliance. With respect to single family mortgage
financings, the risk level has been reduced from prior
years after the completion of guidance resolving a significant legal issue for the sector. Current examinations
continue to reflect a medium risk of noncompliance,
primarily with arbitrage-related or set aside requirements.
42
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The Exempt Organization Tax Review
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hospital mergers and privatization. Lastly, the compliance risk for advance refunding issues has been labeled
as high risk due to continuing concerns relating to yield
burning and the use of escrow puts, forwards, hedges,
and other derivative instruments to earn and divert
illegal arbitrage.
Focus on the IRS
Fast-Track Settlements Now Available for
Tax-Exempt Entities, Government Entities
Announcement 2008-105;
2008-48 IRB 1219
The IRS has extended the fast-track settlement program to
allow tax-exempt entities and government entities to expedite
case resolution of issues under examination by the IRS’s
Tax-Exempt and Government Entities Division.
DESCRIPTION OF TE/GE FAST TRACK SETTLEMENT
This announcement provides an opportunity for
entities with issues under examination by the Tax Exempt
and Governmental Entities Division (TE/GE) to use Fast
Track Settlement (FTS) to expedite case resolution. The
TE/GE FTS will enable TE/GE entities that currently
have unagreed issues in at least one open period under
examination to work together with TE/GE and the Office
of Appeals (Appeals) to resolve outstanding disputed
issues while the case is still in TE/GE jurisdiction. TE/GE
and Appeals will jointly administer the TE/GE FTS
process. TE/GE FTS will be used to resolve factual and
legal issues, and it may be initiated at any time after an
issue has been fully developed, but before the issuance of
a 30-day letter (or its equivalent). TE/GE FTS will be
available to taxpayers for a pilot period of up to two
years, beginning upon the date of publication of this
announcement. Upon completion of the two-year pilot
period, TE/GE and Appeals will evaluate the program,
consider necessary adjustments, and determine whether
to make the program permanent.
RELIANCE ON AND DIFFERENCES FROM LMSB AND
SB/SE FAST TRACK SETTLEMENT
The procedures for using TE/GE FTS rely on the
provisions of Revenue Procedure 2003-40, 2003-1 C.B.
1044, and Announcement 2006-61, 2006-2 C.B. 390, which
implement Large and Mid-Size Business (LMSB) and
Small Business/Self-Employed (SB/SE) Taxpayer FTS
Dispute Resolution Programs, respectively.
TE/GE FTS, during the two-year pilot period, extends
the provisions of the LMSB and SB/SE FTS programs to
TE/GE cases and provides for direct oversight of the
program by TE/GE and Appeals. TE/GE FTS therefore
involves procedures almost identical to the LMSB and
SB/SE FTS procedures described in Rev. Proc. 2003-40
and Ann. 2006-61. The key differences between the
LMSB, SB/SE and TE/GE FTS procedures are as follows:
• The TE/GE Group Manager or designee fulfills the
duties of the LMSB Team Manager or SB/SE Group
Manager;
• The Appeals FTS Program Manager, after consultation with the TE/GE Group Manager, selects and
manages cases eligible for TE/GE FTS. The Appeals
The Exempt Organization Tax Review
CASE ELIGIBILITY AND EXCLUSIONS
Generally, TE/GE FTS is available for cases involving:
income tax, exclusion of income from interest paid on
municipal obligations, employment tax, estate and gift
tax, excise tax, and exemption, foundation or qualification issues or other such TE/GE functional issues as
appropriate when:
• Issues are fully developed;
• The taxpayer has stated a position in writing; and
• There are a limited number of unagreed issues.
TE/GE FTS will not be available for:
• Issues that can be resolved through other established settlement initiatives, such as, but not limited
to, the Self Correction Program ‘‘SCP’’, the Audit
Closing Agreement Program ‘‘Audit CAP’’, or other
programs described in Rev. Proc. 2006-27, 2006-1
C.B. 945;
• Correspondence examination cases;
• Cases in which the taxpayer has failed to respond to
IRS communications and no documentation has
been previously submitted for consideration by
TE/GE;
• Cases in which Appeals does not have jurisdiction
(including determination of penalties under § 6700
of the Code);
• Listed Abusive Tax Avoidance Transactions (ATAT);
• Cases involving potential for civil or criminal fraud;
• Rebate claim cases;
• Selected initiatives as determined on an annual
basis by the TE/GE Commissioner or his delegate;
• Tax Equity & Fiscal Responsibility Act (TEFRA)
partnership cases;
• Issues designated for litigation;
• Issues under consideration for designation for litigation;
• Frivolous issues, such as, but not limited to, those
identified in Rev. Proc. 2008-2, 2008-1 I.R.B. 90, or
any successor guidance;
• ‘‘Whipsaw’’ issues, i.e., issues for which resolution
with respect to one party might result in inconsistent treatment in the absence of the participation
of another party; or
• Issues that have been identified in a Chief Counsel
Notice, or equivalent publication, as excluded from
the FTS process.
If an issue is determined not to be eligible for the FTS
program, all issues in the case are not eligible for the FTS
program. Additionally, the Appeals FTS Program Manager will determine whether Appeals has the necessary
staffing resources before accepting the case into the
program.
TE/GE FTS will not be the appropriate dispute resolution process for all cases involving TE/GE taxpayers.
The TE/GE Group Manager or designee and the taxpayer will evaluate their individual circumstances of
their case to determine if this process meets their needs.
January 2009 — Vol. 63, No. 1
43
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Full Text Guidance
Team Manager responsible for TE/GE Programs
serves as the FTS Program Manager; and
• The TE/GE FTS process is designed to be completed
within 60 days of acceptance of the TE/GE FTS
Application. The process can be extended beyond
the 60-day period if agreed to by all parties.
Focus on the IRS
APPLICATION PROCESS
SETTLEMENT PROCESS
TE/GE FTS employs various alternative dispute resolution techniques to promote agreement. An FTS Appeals
Official will serve as a neutral party. The FTS Appeals
Official will not perform in a traditional Appeals role, but
will use dispute resolution techniques to facilitate settlement between the parties. A TE/GE Appeals Officer
trained in mediation or, in limited cases, a mediationtrained Appeals Team Case Leader, will serve as the
neutral FTS Appeals Official.
During TE/GE FTS, the taxpayer (or taxpayer’s authorized representative) and TE/GE representatives, including at least one representative with decision-making
authority from both TE/GE and the taxpayer, will meet
with the FTS Appeals Official. Any person engaged in
practice before the IRS must have a power of attorney
from the taxpayer (Form 2848, Power of Attorney and
Declaration of Representative). The taxpayer and TE/GE
representatives should include individuals with the information and expertise necessary to assist the parties
and the FTS Appeals Official during the settlement
process. The FTS Appeals Official may ask the parties to
limit the number of participants to facilitate the process.
The FTS Appeals Official will hold the FTS session at
the date and location agreed to by both parties. Prior to
the FTS session, the FTS Appeals Official will advise the
participants of the procedures and establish ground
rules. The FTS Appeals Official may modify the rules and
procedures during the session to adapt to changes in
circumstances. The FTS session may include joint sessions with all parties, separate meetings, or both as
determined appropriate in the sole judgment of the FTS
Appeals Official.
The FTS Appeals Official will use a FTS Session Report
to assist in planning the FTS session and to report on
developments during the session. The FTS Session Re-
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January 2009 — Vol. 63, No. 1
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
A taxpayer that is interested in participating in TE/GE
FTS, or that has questions about the program and its
suitability for the taxpayer’s case, may contact the TE/GE
Group Manager of the Examining Agent conducting the
audit for the period(s) currently under examination.
Either the taxpayer, Examining Agent or the TE/GE
Group Manager may initiate an application to the TE/GE
FTS process at any time after an issue has been fully
developed but before a 30-day letter (or its equivalent) is
issued.
A FTS Application, attached as Exhibit 1, should be
submitted. A Form 5701, (Notice of Proposed Adjustment) or
a Revenue Agent Report will be prepared by the TE/GE
Examining Agent. To facilitate the understanding of the
parties’ opposing views, a written response from the
taxpayer must be included with the FTS Application.
If the case is not accepted for inclusion in TE/GE FTS,
the TE/GE or Appeals representative will discuss other
dispute resolution opportunities with the taxpayer, including 30-day letter procedures contained in IRS Publications 1, Your Rights As A Taxpayer, or 5, Your Appeal
Rights and How To Prepare a Protest If You Don’t Agree. The
decision not to accept a case into the TE/GE FTS program
is not subject to administrative appeal or judicial review.
port will include a list of all issues approved for the FTS
program, a description of the issues, the amounts in
dispute, conference dates, a plan of action for the FTS
session and other information useful to the process as
determined by the parties and the FTS Appeals Official.
The FTS Appeals Official also will prepare and update an
Agenda to guide the communication, set the order of
issue discussion, and pose questions to clarify the issues.
During the session, the FTS Appeals Official will provide
decision makers from both parties with copies of the
Agenda and the FTS Session Report.
Generally, the FTS Appeals Official will consider only
those issues outlined in the FTS Session Report, except by
mutual agreement of the parties. If the taxpayer presents
information during the session that the taxpayer had not
previously presented during the audit, the FTS Appeals
Official will adjust the targeted completion date to give
the appropriate IRS officials time to evaluate the information.
During the session, the FTS Appeals Official may
propose settlement terms for any or all issues. If the
taxpayer accepts the FTS Appeals Official’s settlement
proposal, but the TE/GE Group Manager rejects it, the
TE/GE Area Manager or equivalent TE/GE management
official with jurisdiction for the case must review the
rejection of the settlement proposal and either concur in
writing with the rejection or accept the settlement proposal on behalf of TE/GE. If the TE/GE Area Manager or
equivalent TE/GE management official concurs with the
Group Manager’s rejection of the settlement proposal,
and an acceptable alternative settlement cannot be
reached, the issue will be closed out of the FTS program
as unagreed.
If the parties resolve any of the disputed issues at the
conclusion of the session, the parties and the FTS Appeals
Official shall sign the FTS Session Report acknowledging
acceptance of the terms of settlement for purposes of
preparing computations. The signature of the parties on
the FTS Session Report does not constitute a final settlement, nor does it waive restrictions on assessment,
terminate consents to extend periods of limitation, start
the running of any periods of limitation, or constitute
agreement to close the case. Post-settlement procedures
are described below.
The TE/GE FTS process is confidential. IRS employees
involved in any way with the TE/GE FTS process are
subject to the confidentiality and disclosure provisions of
the Internal Revenue Code. By signing the FTS Agreement, attached as Exhibit 1, the taxpayer consents, pursuant to section 6103(c), to the disclosure of the taxpayer’s returns and return information pertaining to the
issues being considered in the TE/GE FTS process to
those persons named on the Agreement as participants in
the process. IRS employees, the taxpayer and persons
invited to participate by the IRS or the taxpayer shall not
voluntarily disclose information regarding any communication made during the TE/GE FTS session, except as
provided by statute.
The prohibition against ex parte communications between Appeals Officers and other IRS employees provided by § 1001(a) of the Internal Revenue Service
Restructuring and Reform Act of 1998 does not apply to
the communications arising in the TE/GE FTS process
Focus on the IRS
POST-SETTLEMENT PROCEDURE
If the parties reach an agreement on all or some issues
through the TE/GE FTS process, the TE/GE or Appeals
FTS Official, as appropriate, will use established issue or
case closing procedures and applicable agreement forms,
including preparation of a Form 906, Closing Agreement
On Final Determination Covering Specific Matters, if appropriate.
If applicable, the IRS will report a proposed resolution
reached as a result of TE/GE FTS to the Joint Committee
on Taxation in accordance with section 6405. The IRS may
reconsider a proposed settlement, as reflected in a signed
FTS Session Report, upon receipt of comments on the
proposed settlement from the Joint Committee on Taxation. If the taxpayer declines to agree with any changes
by the IRS upon reconsideration, TE/GE will close the
case unagreed, and the taxpayer will retain all the usual
rights to request Appeals consideration of any unagreed
issues.
DELEGATION OF AUTHORITY
This announcement constitutes a delegation by the
Commissioner of Internal Revenue of settlement
authority to Grade 14, 13 and 12 Appeals Officers who
are assigned to be Appeals FTS Officials for TE/GE FTS
cases described in this announcement. This delegation of
settlement authority includes the responsibility for arriving at the final disposition from the Government’s perspective, approving the final settlement in accordance
with the delegated authority, and executing the appropriate closing documents. This authority may not be
redelegated.
EFFECTIVE DATE
TE/GE FTS is effective upon publication of this announcement in the Internal Revenue Bulletin.
COMMENTS
The IRS invites interested persons to comment on this
program. Send submissions to:
Internal Revenue Service-Appeals
Attn: Leonard C. Horton
4050 Alpha Road
Farmers Branch, TX 75244-4201
Leonard.C.Horton@irs.gov
FURTHER INFORMATION
For further information regarding this announcement,
contact either: Charles F. Fisher, TE/GE Team Leader, at
(302) 286-1510 (not a toll-free number), Charles.F.Fisher@irs.
gov or Leonard C. Horton, Appeals Program Analyst, Tax
Policy & Procedure (Alternative Dispute Resolution) at
(972) 308-7330 (not a toll-free number), Leonard.
C.Horton@irs.gov.
❖ ❖ ❖
UNRESOLVED CASES
With respect to TE/GE FTS cases that are returned for
traditional Appeals consideration for any reason, ex parte
restrictions will not be imposed on intra-Appeals communications. Appeals management will take appropriate
measures to ensure these cases are handled impartially.
PRECEDENTIAL VALUE OF SETTLEMENT
AGREEMENTS
A resolution reached by the parties through the
TE/GE FTS process will not bind the parties for taxable
periods or issues not covered by the TE/GE FTS agreement, unless such taxable periods or issues are addressed
expressly in a closing agreement reached as part of the
TE/GE FTS process.
The Exempt Organization Tax Review
January 2009 — Vol. 63, No. 1
45
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
because the Appeals personnel are facilitating an agreement between the taxpayer and TE/GE and are not
acting in their traditional Appeals settlement role.
Any recommended settlement by the FTS Appeals
Official of an issue in FTS shall be subject to the procedures including procedures in the Internal Revenue
Manual and existing published guidance, which would
be applicable if the issue was being considered by
Appeals. FTS therefore creates no special authority for
settlement by the FTS Appeals Official. For example, if
the FTS issue is coordinated in either the Technical
Advisor Program or the Appeals Technical Guidance
program, the proposed settlement of that issue is subject
to established procedures, including submission of the
proposed settlement to the Appeals Coordinator for
review and concurrence.
If the parties fail to resolve any issue in FTS, the
taxpayer retains the option of requesting that the issue be
heard through the traditional Appeals process.
Except as specifically provided above, both parties
retain the right to withdraw throughout the entire TE/GE
FTS process. A party wishing to withdraw should provide written notice to the FTS Appeals Official and the
other party.
Focus on the IRS
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
The Exempt Organization Tax Review
January 2009 — Vol. 63, No. 1
46
Focus on the IRS
Notice 2009-3; 2009-2
The IRS has issued guidance providing relief during 2009
for sponsors of section 403(b) plans regarding the requirement
to have a written section 403(b) plan in place by January 1,
2009.
Part III — Administrative, Procedural and Miscellaneous
Relief From Immediate Compliance With 2009 §
403(b) Written Plan Requirement
This notice provides relief during 2009 for sponsors of
§ 403(b) plans with respect to the requirement to have a
written § 403(b) plan in place by January 1, 2009. This
notice also briefly describes other programs the Service
intends to establish relating to § 403(b) plans.
Service’s Employee Plans Compliance Resolution System
(EPCRS) at section 6 of Rev. Proc. 2008-50 (2008-35 I.R.B.
464).
The relief under this notice applies solely with respect
to the 2009 calendar year, and may not be relied on with
respect to the operation of the plan or correction of
operational defects in any prior or subsequent year.
Upcoming Guidance
As part of the establishment of the prototype program,
the Service will publish a request for comments on a draft
revenue procedure on obtaining Service approval of
prototype § 403(b) plans that will be adopted by eligible
employers, and on sample plan language for drafting
prototype plans. The Service also intends to establish a
determination letter program for individually designed §
403(b) plans once the § 403(b) prototype program is
established. The programs described in the revenue
procedure will also provide for a retroactive remedial
amendment of § 403(b) plans for years after 2009. The
Service will also modify EPCRS to include additional
§ 403(b) issues.
Background
Final regulations under § 403(b) were published on
July 26, 2007 (72 Fed. Reg. 41128) (the final regulations).
Effective January 1, 2009, sponsors of § 403(b) plans are
generally required to maintain a written plan that satisfies, in both form and operation, the requirements of the
final regulations. Although many sponsors of § 403(b)
plans have already adopted a written § 403(b) plan, the
Service and Treasury are aware that some sponsors may
not have a written § 403(b) plan in place by January 1,
2009.
Further, there is no current program under which a
plan sponsor can obtain assurance that the written form
of its plan satisfies § 403(b), other than through a private
letter ruling. The Service and Treasury have therefore
concluded that compliance with the final regulations
would be facilitated by the establishment of both preapproved and individually designed plan programs and
that transition relief should be provided to all § 403(b)
plan sponsors who have made appropriate efforts to
comply with the written plan requirement in the final
regulations.
Effect on Other Documents
Section 6 of Rev. Proc. 2007-71, regarding the date
amendments are adopted, is modified.
Drafting Information
The principal authors of this notice are Angelique
Carrington and James P. Flannery of the Employee Plans,
Tax Exempt and Government Entities Division. For
further information regarding this notice, please contact
the Employee Plans taxpayer assistance answering
service at 1-877-829-5500 (a toll free number) or e-mail
Ms. Carrington or Mr. Flannery at Retirement
PlanQuestions@irs.gov.
❖ ❖ ❖
Relief for 2009
The Service will not treat a § 403(b) plan as failing to
satisfy the requirements of § 403(b) and the final regulations during the 2009 calendar year, provided that:
(1) on or before December 31, 2009, the sponsor of the
plan has adopted a written § 403(b) plan that is intended
to satisfy the requirements of § 403(b) (including the final
regulations) effective as of January 1, 2009;
(2) during 2009, the sponsor operates the plan in
accordance with a reasonable interpretation of § 403(b),
taking into account the final regulations; and
(3) before the end of 2009, the sponsor makes its best
efforts to retroactively correct any operational failure
during the 2009 calendar year to conform to the terms of
the written § 403(b) plan, with such correction to be based
on the general principles of correction set forth in the
The Exempt Organization Tax Review
January 2009 — Vol. 63, No. 1
47
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IRS Provides Relief From
2009 Written Plan Requirement for
Some Retirement Plans
Focus on the IRS
REG-158747-06
The IRS has published proposed regulations providing
guidance for government entities that are required to comply
with section 3402(t) and withhold income tax when making
payments to persons providing property or services.
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[REG-158747-06]
RIN 1545-BG45
Withholding Under Internal Revenue Code Section
3402(t)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains proposed regulations relating to withholding under section 3402(t) of the
Internal Revenue Code (Code). The proposed regulations
reflect changes in the law made by the Tax Increase
Prevention and Reconciliation Act of 2005 that require
Federal, State, and local government entities to withhold
income tax when making payments to persons providing
property or services. These proposed regulations provide
guidance to assist the government entities in complying
with section 3402(t). The regulations also provide certain
guidance to persons receiving payments for property or
services from government entities. This document also
contains proposed amendments to regulations under
sections 3406, 6011, 6051, 6071, and 6302 of the Code.
DATES: Written or electronic comments and requests for
a public hearing must be received by March 5, 2009.
ADDRESSES: Send submissions to: CC:PA:LPD:PR
(REG-158747-06), room 5205, Internal Revenue Service,
PO Box 7604, Ben Franklin Station, Washington, DC
20044. Submissions may be hand-delivered Monday
through Friday between the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (REG-158747-06), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,
Washington, DC, or sent electronically via the Federal
eRulemaking Portal at http://www.regulations.gov/ (IRS
REG-158747-06).
FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, Jean Casey, (202) 6226040; concerning submissions of comments or to request
a public hearing, Richard Hurst at Richard.A.Hurst@
irscounsel.treas.gov or (202) 622-7180 (not toll-free
numbers).
48
January 2009 — Vol. 63, No. 1
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26
CFR part 31 under section 3402(t) of the Code. This
document also contains proposed amendments to 26 CFR
part 31 under sections 3406, 6011, 6051, 6071, and 6302 of
the Code.
Section 3402(t) of the Code was added by section 511
of the Tax Increase Prevention and Reconciliation Act of
2005, Public Law 109-222 (TIPRA), 120 Stat. 345, which
was enacted into law on May 17, 2006. Section 3402(t)(1)
provides that the Government of the United States, every
State, every political subdivision thereof, and every instrumentality of the foregoing (including multi-State
agencies) making any payment to any person providing
any property or services (including any payment made in
connection with a government voucher or certificate
program which functions as a payment for property or
services) shall deduct and withhold from such payment a
tax in an amount equal to 3 percent of such payment.
Under the statute, section 3402(t) applies to payments
made after December 31, 2010.
Exceptions to section 3402(t) withholding are contained in section 3402(t)(2). Section 3402(t)(2) provides
that section 3402(t) withholding shall not apply to any
payment —
(A) Except as provided in section 3402(t)(2)(B), which
is subject to withholding under any other provision of
chapter 24 (Collection of Income Tax at Source on Wages,
sections 3401 through 3406) or chapter 3 (Withholding of
Tax on Nonresident Aliens and Foreign Corporations,
sections 1441 through 1464) of the Code;
(B) Which is subject to withholding under section 3406
(backup withholding) and from which amounts are being
withheld under such section;
(C) Of interest;
(D) For real property;
(E) To any government entity subject to the requirements of section 3402(t)(1), any tax-exempt entity, or any
foreign government;
(F) Made pursuant to a classified or confidential
contract described in section 6050M(e)(3);
(G) Made by a political subdivision of a State (or any
instrumentality thereof) which makes less than
$100,000,000 of such payments annually;
(H) Which is in connection with a public assistance or
public welfare program for which eligibility is determined by a needs or income test; and
(I) To any government employee not otherwise
excludable with respect to his or her services as an
employee.
Section 3402(t)(3) provides for the coordination of
section 3402(t) with other Code sections. Section
3402(t)(3) provides that, for purposes of sections 3403 and
3404 and for purposes of so much of subtitle F (except
section 7205) as relates to chapter 24, payments to any
person for property or services which are subject to
withholding shall be treated as if such payments were
wages paid by an employer to an employee.
The legislative history in connection with section
3402(t) indicates that ‘‘[t]he withholding requirement
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
IRS Publishes Proposed Regs on
Withholding Requirements for
Government Entities
Focus on the IRS
Explanation of Provisions
The proposed regulations provide rules about which
government entities are subject to the requirement of
section 3402(t) withholding, which payments are subject
to section 3402(t) withholding (and which are excepted
from such withholding), when withholding is required
on such payments, and how government entities pay and
report the tax to the IRS. The proposed regulations also
include transition rules providing relief from liability for
the tax imposed by section 3402(t) with respect to payments under existing contracts. The proposed regulations
also provide temporary relief from penalties and interest
if a government entity makes a good faith effort but fails
to withhold on payments as required under section
3402(t).
The regulations provide guidance primarily on what
government entities need to do to comply so that they
can make timely preparations. The Treasury Department
and IRS anticipate issuing further guidance to address
questions raised by taxpayers who expect to receive
payments subject to section 3402(t) withholding from
government entities including, but not limited to, how to
claim credits and how to claim the benefit of statutory
exemptions from withholding under section 3402(t).
The Exempt Organization Tax Review
Although some commenters requested that the Treasury
Department and IRS issue guidance exempting payments
from withholding where the 3-percent rate for withholding prescribed under section 3402(t) is expected to exceed
either the profit margin in the taxpayer’s industry or the
income tax the taxpayer will owe for reasons particular to
the taxpayer’s business, the Treasury Department and
IRS have determined that exemptions of this type would
be contrary to the requirements of the statute. Commenters also requested that they be permitted to credit
amounts withheld under section 3402(t) against Federal
taxes other than income taxes, such as employment taxes.
Consistent with the statute’s purpose of addressing income tax noncompliance, the Treasury Department and
IRS propose to allow credits to be claimed only against
income tax.
Government Entities Subject to Section 3402(t)
Section 3402(t)(1) applies to ‘‘the Government of the
United States, every State, every political subdivision
thereof, and every instrumentality of the foregoing.’’
Section 3402(t) does not restrict the term the Government of
the United States in any manner. Therefore, the entire
Federal government, including the executive branch, the
legislative branch, and the judicial branch, is subject to
the requirements of section 3402(t). Thus, Congress, the
Administrative Office of the United States Courts, the
Executive Office of the President, Federal agencies, and
all other components of the Federal government are
included in the definition of Government of the United
States and are required to withhold under section 3402(t).
The term State includes the District of Columbia. See
section 7701(a)(10) of the Code. For purposes of section
3402(t), the term State does not include Indian tribal
governments. Section 7871(a) prescribes when an Indian
tribal government is to be treated as a State under the
Code, and section 7871(a) does not provide that Indian
tribal governments will be treated as States for purposes
of section 3402(t). Consequently, the term political subdivision also does not include a subdivision of an Indian
tribal government. See section 7871(a) and (d). Accordingly, because Indian tribal governments and their subdivisions are not among the listed government entities
subject to section 3402(t), payments by Indian tribal
governments and their subdivisions are not subject to the
withholding requirements of section 3402(t).
The definition of political subdivision in the proposed
regulations follows the definition in the section 103
regulations. Section 1.103-1(b) of the Income Tax Regulations provides, in part, that the term political subdivision
denotes any division of any State or local government
unit that is a municipal corporation or that has been
delegated the right to exercise part of the sovereign
power of the unit.
Although the Code makes references to government
instrumentalities in multiple sections, the Code and
regulations do not currently provide a definition of
instrumentality. In Rev. Rul. 57-128, 1957-1 CB 311, the
IRS adopted a six-factor test for use in determining what
is an instrumentality of a State or a political subdivision
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applies regardless of whether the government entity
making such payment is the recipient of the property or
services.’’ H.R. Conf. Rep. No.109-455, 109th Cong., 2d
Sess. at 300 (2006). Further, the conference report also
provides, with respect to the exception provided by
section 3402(t)(2)(H), that ‘‘payments under government
programs to provide health care or other services that are
not based on the needs or income of the recipients are
subject to withholding, including programs where
eligibility is based on the age of the beneficiary.’’ H.R.
Conf. Rep. No. 109-455 at page 301. In addition, with
respect to section 3402(t)(2)(A), the conference report
states that section 3402(t) withholding ‘‘does not apply to
payments of wages or to any other payment with respect
to which mandatory (e.g., U.S.-source income of foreign
taxpayers) or voluntary (e.g., unemployment benefits)
withholding applies under present law.’’ H.R. Conf. Rep.
No. 109-455 at page 301. The origins of the provision
indicate that it was conceived to address tax noncompliance. See also, ‘‘Options to Improve Tax Compliance and
Reform Tax Expenditures’’ (JCS-2-05), Joint Committee
on Taxation, Jan. 27, 2005.
Notice 2008-38, 2008-13 IRB 683, published by the IRS
on March 31, 2008, invited public comments regarding
guidance under section 3402(t). In particular, Notice
2008-38 requested comments on the application of section
3402(t) to credit cards and payment cards, payments to
payees not subject to United States taxation, passthrough
entities in which a government entity is a partner or
owner, government contractors and subcontractors, and
de minimis payments. The Notice also requested comments on when and how amounts withheld under section 3402(t) should be transmitted to the IRS. See
§ 601.601(d)(2)(ii)(b).
Many comments were received in response to Notice
2008-38, and the comments were taken into consideration
in developing the proposed regulations.
Focus on the IRS
Persons Subject to Withholding Under Section 3402(t)
Section 3402(t) applies to government payments to
‘‘persons’’ providing any property or services. Section
7701(a)(1) of the Code provides that, when used in the
Code, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof, the term
person shall be construed to mean and include an individual, a trust, estate, partnership, association, company,
or corporation. Because no alternative definition of person
is provided in section 3402(t), the definition in section
7701(a)(1) and the regulations under section 7701(a)(1)
applies. Therefore, section 3402(t) withholding can apply
to payments for property or services to individuals,
trusts, estates, partnerships, associations, companies, or
corporations.
Payments Subject to Section 3402(t) Withholding
The proposed regulations provide that a payment
subject to withholding arises when the government
entity or its payment administrator pays a person for
providing property or services. Under the proposed
rules, the withholding requirements of section 3402(t)
will not apply to any payment that is less than the
payment threshold amount, which is $10,000. The Treasury Department and IRS are proposing this payment
threshold of $10,000 because the burden of withholding
on smaller transactions is likely to be substantial and
outweigh the benefits of increased withholding. This
threshold corresponds to a minimum withholding of
$300.
Under the proposed rules, multiple payments made
by a government entity to any person generally would
not be aggregated in determining whether the payment
threshold amount has been met. However, the proposed
regulations provide an anti-abuse rule to ensure that the
payment threshold is not manipulated to avoid the
required withholding. If a government entity divides a
payment into two or more separate payments primarily
to avoid the payment threshold for one or more pay-
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January 2009 — Vol. 63, No. 1
ments, the separate payments would be treated as one
payment made on the date that the first payment was
made for purposes of this rule. For example, if a government entity is scheduled to make a contractual payment
to a person for landscaping services of $15,000 on July 2,
2011, but divides the payment into payments of $7,000
and $8,000 made on July 1, 2011, and July 2, 2011,
respectively, the government entity would be treated as
having made a single payment of $15,000 on July 1, 2011.
This anti-abuse rule would not apply if the primary
reason for division into separate payments is unrelated to
section 3402(t).
If a government entity makes a single payment of
$10,000 or more to any person for more than one property
or service provided by that person, the government
entity would be required to withhold on the payment.
For example, if a person bills a government entity $5,000
each day for seven days for services provided each day,
but the government entity makes one payment of $35,000
in satisfaction of these bills, the payment threshold is
applied to the $35,000 payment.
Many commenters requested guidance on how the
requirements of section 3402(t) apply to prime contractors and subcontractors. Under the proposed rules, if a
government entity or its payment administrator makes a
payment to a person that is subject to withholding under
section 3402(t), no subsequent transfer of cash or property by that person to another person is treated as a
payment for section 3402(t) purposes. Thus, if the government entity enters into a contract with a prime
contractor for property and services, and that prime
contractor separately contracts with subcontractors for
delivery of certain property and services, then withholding under section 3402(t) applies only to payments by the
government entity or its payment administrator to the
prime contractor, and does not apply to successive payments by the prime contractor to its subcontractors.
The proposed regulations apply to payments made by
the government entity or its payment administrator. For
purposes of the proposed regulations, a payment administrator is any person that acts with respect to a payment
solely as an agent for a government entity by making the
payment on behalf of the government entity to a person
providing property or services to, or on behalf of, the
government entity. Transfers of funds from a government
entity to a payment administrator to be used by the
payment administrator, on the government entity’s behalf, to pay persons for providing property or services
are not payments subject to withholding under section
3402(t). However, if the government entity pays the
payment administrator a fee for its services, the government entity would treat the fee as a payment subject to
withholding. The government entity is liable for the
withholding required and responsible for all related
reporting regardless of whether the government entity or
its payment administrator makes the payment and regardless of when the payment for property or services is
made under this section.
Credit Card Payments
Many commenters questioned how the requirements
of section 3402(t) apply to payments made by government credit card or payment card. Under the proposed
The Exempt Organization Tax Review
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thereof for purposes of an exception from the requirement to pay tax under the Federal Insurance Contributions Act (FICA). The factors are: (1) Whether the organization is used for a government purpose and performs
a government function; (2) Whether performance of its
function is on behalf of one or more States or political
subdivisions; (3) whether there are any private interests
involved, or whether the States or political subdivisions
involved have the powers and interests of an owner; (4)
whether control and supervision of the organization is
vested in public authority or authorities; (5) if express or
implied statutory or other authority is necessary for the
creation and/or use of such an instrumentality, and
whether such authority exists; and (6) the degree of
financial autonomy and the source of its operating
expenses. A number of revenue rulings published by the
IRS illustrate the application of this test. See, for
example, Rev. Rul. 65-26, 1965-1 CB 444; Rev. Rul. 65-196,
1965-2 CB 388; and Rev. Rul. 69-453, 1969-2 CB 182. See
§ 601.601(d)(2)(ii)(b). The Treasury Department and IRS
invite comments on use of the same or a similar test for
purposes of section 3402(t).
Focus on the IRS
Section 3402(t)(2)(A) — Payments Subject to Withholding
Under Chapter 3 or Chapter 24 and Section 3402(t)(2)(B) —
Payments from Which Backup Withholding Is Withheld
Section 3402(t)(2)(A) provides an exception from the
requirement of section 3402(t) for amounts that are
subject to withholding under some other provision of
chapter 3 or chapter 24 (other than section 3406). Thus,
payments that are subject to withholding under the wage
withholding regime or the regime for withholding of tax
on nonresident aliens and foreign corporations are
exempt from withholding under section 3402(t). Furthermore, consistent with the legislative history, amounts for
which the payee may elect withholding are exempt from
withholding under section 3402(t), regardless of whether
the payee in fact makes such an election. These payments
include: (1) Unemployment compensation as defined in
section 85(b) (section 3402(p)(2)); (2) social security benefits as defined in section 86(d) (section 3402(p)(1)(C)(i));
(3) any payment referred to in the second sentence of
section 451(d) that is treated as insurance proceeds,
relating to certain disaster payments received under the
Agricultural Act of 1949, as amended, or Title II of the
Disaster Assistance Act of 1988 (section 3402(p)(1)(C)(ii));
(4) any amount that is includible in gross income under
section 77(a), relating to amounts received as loans from
the Commodity Credit Corporation that the taxpayer has
elected to treat as income (section 3402(p)(1)(C)(iii)); and
(5) any payment of an annuity to an individual.
A special rule applies for payments subject to backup
withholding. Section 3402(t)(2)(B) provides that a payment that is subject to 28 percent withholding under
section 3406 (backup withholding) is not excepted from
the requirement of 3 percent withholding under section
3402(t) unless backup withholding is actually being deducted from the payment. Thus, if backup withholding is
required with respect to a payment made by a government entity and the government entity performs backup
withholding on the payment, section 3402(t) does not
apply. If the government entity fails to backup withhold
on such a payment, the government entity would remain
liable for backup withholding regardless of whether it
imposed withholding under section 3402(t) with respect
to the payment. Proposed amendments to the regulations
under section 3406 clarify that if backup withholding is
required, withholding under section 3402(t) is not
required.
The Exempt Organization Tax Review
Under the proposed regulations, payments made to
nonresident aliens or foreign individuals that are exempt
from United States taxation pursuant to a treaty would be
exempt from withholding under section 3402(t) because
such payments are subject to withholding absent application of the treaty. Specifically, absent a treaty, United
States source fixed or determinable, annual or periodical
(FDAP) income paid to a nonresident alien individual or
foreign corporation is subject to withholding under chapter 3, except for income that is effectively connected with
a U.S. trade or business (other than compensation for
personal services) pursuant to sections 1441 and 1442.
Relevant examples of FDAP include salaries, compensation and emoluments.
Imposing a new withholding requirement on nonresident aliens and foreign corporations that owe no United
States tax would serve no purpose. Foreign persons that
are exempt from withholding under sections 1441 and
1442 by reason of an income tax treaty are not the source
of the tax noncompliance problem that section 3402(t)
was enacted to address. Further, our existing documentation procedures are intended to ensure that those
claiming treaty benefits are in fact entitled to treaty
benefits. See, for example, Form W-8BEN, ‘‘Certificate of
Foreign Status of Beneficial Owner for United States Tax
Withholding,’’ and Form 8233, ‘‘Exemption From Withholding on Compensation for Independent (and Certain
Dependent) Personal Services of a Nonresident Alien
Individual.’’ Accordingly, the proposed regulations under section 3402(t) provide that the ‘‘subject to withholding under chapter 3’’ exception in section 3402(t)(2)(A)
applies to payments with respect to which a foreign
person claims a zero rate of tax under an income tax
treaty. Thus, if a foreign person furnishes documentation
establishing entitlement to an exemption from withholding under chapter 3 by reason of an income tax treaty,
government entities would not be required to withhold
under section 3402(t) from payments to such person.
Section 3402(t)(2)(C) — Interest
Section 3402(t)(2)(C) provides that payments of interest are exempt from withholding. The proposed regulations do not provide a definition of interest. The Treasury
Department and IRS request comments concerning
whether a definition of interest is needed and if so, what
that definition should be.
Section 3402(t)(2)(D) — Payments for Real Property
Section 3402(t)(2)(D) provides that payments for real
property are not subject to section 3402(t). Because the
exception is not limited to payments for fee ownership,
the proposed regulations provide that payments for real
property include payments for leasing real property and
leasehold improvements.
Commenters asked whether real property included
payments made under contracts for the construction of
buildings or other public works. Neither the statute itself
nor the legislative history defines ‘‘real property’’ for
purposes of section 3402(t).
The proposed regulations adopt the position that
payments for the construction of buildings or public
works are not payments for real property excepted by
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51
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regulations, when a government entity or its payment
administrator uses a credit card or payment card to pay
a person for providing property or services, payment
occurs at the point of sale when the government credit
card or payment card is tendered and not when the
government entity pays the credit card company. The
government entity is liable for the withholding and
reporting associated with the payment, and this liability
is not transferred to any other party involved in the credit
card or payment card transaction, including, but not
limited to, the acquiring bank, the issuing bank, or the
credit card association. (The acquiring bank may be
separately required to report amounts it pays under new
section 6050W, which was enacted as part of the Housing
Assistance Tax Act of 2008, Div. C of Public Law 110-289.)
Focus on the IRS
Section 3402(t)(2)(E) — Payments to Government Entities
Subject to Section 3402(t), Tax-Exempt Organizations, and
Foreign Governments
Section 3402(t)(2)(E) provides exceptions from section
3402(t) withholding for payments to any government
entity subject to the requirements of section 3402(t)(1),
payments to any tax-exempt entity, and payments to any
foreign government. The determination of whether an
entity is a government entity such that payments it
receives are exempt parallels the determination whether
the entity is a government entity required to withhold on
payments it makes. Thus, if a government entity is
required to withhold under section 3402(t)(1), payments
to that government entity are not subject to withholding
under section 3402(t). The proposed regulations also
clarify that, even if no withholding is required on payments from a government entity because the government
entity qualifies for the exception of section 3402(t)(2)(G)
for political subdivisions and instrumentalities making
total payments of less than $100 million (discussed later
in this preamble), payments to that government entity are
not subject to withholding.
The proposed regulations define the term tax-exempt
entity for purposes of section 3402(t)(2)(E) as any organization exempt from federal income tax under section
501(a) as an organization described in section 501(c),
501(d), or section 401(a).
Section 3402(t)(2)(F) — Payments Made Pursuant to a
Classified or Confidential Contract
Section 3402(t)(2)(F) provides an exception from section 3402(t) withholding for payments made pursuant to
a classified or confidential contract described in section
6050M(e)(3). Section 6050M(e)(3) describes a contract
between a Federal executive agency and another person
if —
(A) The fact of the existence of such contract or the
subject matter of such contract has been designated and
clearly marked or clearly represented, pursuant to the
provisions of Federal law or an Executive order, as
requiring a specific degree of protection against unauthorized disclosure for reasons of national security, or
(B) The head of such Federal executive agency (or his
designee), pursuant to regulations issued by such agency,
determines, in writing, that filing the required return
under section 6050M (related to information returns
required to be filed by any Federal executive agency with
respect to persons receiving contracts) would interfere
with the effective conduct of a confidential law enforcement or foreign counterintelligence activity.
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January 2009 — Vol. 63, No. 1
Section 3402(t)(2)(G) — The Exception for Political
Subdivisions and Instrumentalities Making Total
Payments Under $100,000,000
Section 3402(t)(2)(G) provides that payments made by
certain smaller government entities are not subject to
withholding under section 3402(t). Specifically, a political
subdivision of a State (or any instrumentality thereof)
that makes less than $100,000,000 of payments for property or services annually (other than for payroll or of
another type exempt from withholding under these proposed regulations) is not required to withhold under
section 3402(t) on any of its payments. The proposed
regulations provide a simple rule for determining before
each year starts whether the exception provided by
section 3402(t)(2)(G) applies to a given political subdivision or instrumentality. The determination would be
based on the payments made during the accounting year
of the political subdivision or instrumentality ending
with or within the second preceding calendar year. For
example, to determine whether the political subdivision
or instrumentality is subject to withholding with respect
to payments made in 2011, the proposed regulations
would look to whether payments made by the political
subdivision or instrumentality for its accounting year
ending with or within the calendar year 2009 equaled or
exceeded $100,000,000. For this purpose, the accounting
year is considered to be the year used by the political
subdivision or instrumentality to keep its accounting
books and determine budgets. In most cases, political
subdivisions and instrumentalities would be able to
make a reasonably accurate estimate whether the exception applies before the end of the accounting year ending
in 2009 based on budgetary projections. However, in
cases where the payments are expected to be near the
$100,000,000 threshold, the time between the end of the
accounting year in 2009, when a definitive determination
could be made, and December 31, 2010, should give the
political subdivision or instrumentality sufficient time to
prepare for withholding under section 3402(t) for payments made in 2011.
In determining whether the political subdivision or
instrumentality has made $100,000,000 of total payments,
the proposed regulations would require that all payments for property and services made during the
accounting year be considered with the exception of
those payments qualifying for any of the exceptions
provided by § 31.3402(t)-4(a) through (l) of the proposed
regulations. For this purpose, payments that are less than
the $10,000 payment threshold count toward the
$100,000,000 test.
This exception provided by section 3402(t)(2)(G) does
not apply to the United States Government, States, or
instrumentalities of the United States Government or
States.
The Treasury Department and IRS request comments
on the application of section 3402(t)(2)(G), particularly
with regard to whether the rules for determining whether
the exception applies would provide adequate time to
modify systems for compliance with section 3402(t),
whether a special rule should be considered allowing the
averaging of multiple accounting years for political subdivisions and instrumentalities that have unusually high
The Exempt Organization Tax Review
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section 3402(t)(2)(D). Payments for the construction of a
building are payments for services to build the building
and personal property to be used in the construction of
the building rather than payments for real property. This
position is consistent with statutes governing construction contracts of the Federal government. See, for example, 40 USC 3131-3134 (the ‘‘Miller Act’’).
Focus on the IRS
Section 3402(t)(2)(H) — Payments in Connection with a
Public Welfare or Public Assistance Plan
Section 3402(t)(2)(H) provides an exception from section 3402(t) withholding for any payment in connection
with a public assistance or public welfare program for
which eligibility is determined by a needs or income test.
The proposed regulations adopt a broad definition of in
connection with to include payments made to third parties
under a public assistance or public welfare program for
the benefit of the recipient of benefits under the program.
The proposed regulations also are consistent with the
legislative history in providing that a program for which
eligibility is determined under a needs or income test
does not include a program under which eligibility is
based on age only (for example, Medicare). The proposed
regulations provide that, for purposes of this exception, a
program providing disaster relief to victims of a natural
or other disaster is considered to be a program for which
eligibility is determined under a needs test.
Section 3402(t)(2)(I) — Payments to a Government
Employee with Respect to Services as an Employee
Section 3402(t)(2)(I) provides an exception from section 3402(t) withholding for payments to any government employee not otherwise excludable with respect to
the employee’s services as an employee. The proposed
regulations broadly interpret this exception to exclude
from section 3402(t) withholding any form of compensation that is paid to the employee or on the employee’s
behalf. For example, the proposed regulations exclude
employer contributions to employee benefit and deferred
compensation plans as well as employee contributions to
such plans. This exception applies to any payments by an
employer for fringe benefits or deferred compensation to,
or for the benefit of, an employee.
The proposed regulations provide that the section
3402(t)(2)(I) exclusion from section 3402(t) withholding
also applies to: (a) Travel reimbursements paid by a
government entity to a government employee under
accountable plans within the meaning of section 62(c) for
the individual employee’s travel, lodging, and meal
expenses; and (b) the government employee’s payments
to third parties that provide travel, lodging, and meals
that are reimbursable under such travel reimbursement
plans. Most payments for individual travel, lodging, and
meal expenses would fall beneath the $10,000 payment
threshold. Nevertheless, this exception may be significant
in determining whether the government entity making
the payments qualifies for the exception under section
3402(t)(2)(G) for political subdivisions of a State (or their
instrumentalities) making payments under $100,000,000,
as payments under section 3402(t)(2)(I) are excluded
when calculating the total amount of payments.
Section 31.3401(a)-4(a) of the Employment Tax Regulations provides that if a reimbursement or other expense
allowance arrangement meets the requirements of section
62(c) and § 1.62-2 and the expenses are substantiated
within a reasonable period of time, payments made
The Exempt Organization Tax Review
under the arrangement that do not exceed the substantiated expenses are treated as paid under an accountable
plan and are not wages. Thus, these payments would
qualify for the exception under section 3402(t)(2)(I).
By comparison, if the travel reimbursement or payment by the employer is not paid under an accountable
plan, the reimbursement would be treated as paid under
a nonaccountable plan. Payments to the employee under
a nonaccountable plan are includible in gross income and
wages and subject to income tax withholding under
section 3402(a). Thus, such payments would be excepted
from withholding under section 3402(t) by section
3402(t)(2)(A).
Exception for Certain Payments Received by Nonresident
Alien Individuals and Foreign Corporations
In general, in the case of a nonresident alien individual
or a foreign corporation (foreign person), sections 872(a)
and 882(b) provide that gross income for United States
income tax purposes consists of (1) gross income derived
from sources within the United States; and (2) gross
income derived from sources outside the United States
(foreign source income), but only if it is effectively
connected with a trade or business within the United
States. The source of income is determined under sections 861 through 865. The source of income derived from
the performance of services is the place where the
services are performed as provided in sections 861(a)(3)
and 862(a)(3), whereas the source of income from the
purchase and sale of inventory property (other than
unprocessed timber) is the location where the sale takes
place as described in § 1.861-7(c) of the Income Tax
Regulations (see also sections 861(a)(6) and 862(a)(6)).
Therefore, if a foreign person provides services or sells
inventory property in a foreign country, it will have no
United States income tax liability with respect to the
income earned from providing the services or selling the
property — even to a United States government entity —
provided that the income is not effectively connected
with the conduct of a trade or business within the United
States.
Accordingly, the proposed regulations exclude such
payments made to foreign persons from 3-percent withholding under section 3402(t). For administrative reasons, subjecting these foreign source payments to withholding under 3402(t) would be unduly burdensome to
the foreign persons receiving such payments and the IRS.
The foreign persons, most of whom are not presently
United States income tax filers, would have to get taxpayer identification numbers (TINs) and file refund
claims. Likewise, the IRS would have to issue TINs,
process the claims, and refund all of the funds collected.
Withholding on foreign source payments to foreign persons has no potential to reduce tax noncompliance because the potential income resulting from the payments
is not subject to United States income taxation. Procedures to be followed by government entities and
foreign persons for purposes of claiming this exception
from section 3402(t) withholding will be issued at a later
date.
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expenditures in a given accounting year, and whether the
determination of total payments under the proposed
regulations is practicable.
Focus on the IRS
Exception for Payments to Indian Tribal Governments
Deposits and Reporting of Amounts Withheld Under
Section 3402(t)
In determining rules for reporting amounts withheld
under section 3402(t), the Treasury Department and IRS
have considered the administrative burden on government entities imposed by reporting, the need for payees
to receive timely and accurate information about the
amounts withheld, and the need for IRS systems to
process the information reported. Many comments reflected a preference for using an existing system and
adapting current forms and procedures to accommodate
section 3402(t) withholding, rather than creating a new
system and forms for such withholding. The commenters
indicated that using an existing system would ease
compliance by government entities and would ease the
processing of the payment and reporting of such tax.
The Treasury Department and IRS believe the existing
procedure for reporting nonwage withholding on Form
945, ‘‘Annual Return of Withheld Federal Income Tax,’’
and reporting payments subject to withholding on Form
1099-MISC, ‘‘Miscellaneous Income,’’ with slight modifications to existing forms, would provide the most satisfactory method of payment and reporting. Because most
government entities have a system for issuing Form
1099-MISC, using this system with modifications for
reporting section 3402(t) withholding should ease compliance. Additionally, using Form 1099-MISC would give
payees the information they need to timely file their
income tax returns claiming credit for the withholding.
Because this system would be similar to the system used
currently for reporting and paying nonwage income tax
withholding, the IRS would be able to process the
withholding timely and on a cost-effective basis.
Accordingly, the proposed amendments to the regulations under section 6011 provide that payors required to
withhold amounts under section 3402(t) must file Form
945 reporting the amounts withheld. Proposed amendments to the regulations under section 6302 further
provide that the amounts withheld under section 3402(t)
must be deposited and reported in the same manner as
other nonwage withheld amounts, such as withholding
on gambling winnings and pensions. Pursuant to existing
regulations, such amounts are treated as if they were
employment taxes for purposes of the deposit rules, but
are subject to special rules for determining the payor’s
deposit schedule, as provided in § 31.6302-4.
Additionally, proposed amendments to regulations
under section 6051 provide that payors required to
withhold amounts under section 3402(t) must file information returns and furnish payee statements on Form
1099-MISC reporting such payments and tax withheld.
Because this reporting would be done pursuant to regu-
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January 2009 — Vol. 63, No. 1
Payments for Jury Duty, Utilities, and Fuel Surcharges
Commenters asked whether jury duty pay is subject
to withholding under section 3402(t). Jury duty pay
generally will not meet the $10,000 payment threshold
provided in the proposed regulations. No special rule for
jury duty pay is provided.
Commenters also requested guidance about utility
payments. Rates for utility services are generally prescribed through a State regulatory process. Commenters
expressed concern about the consequences of paying
something less than the regulatorily prescribed rate to the
utility. In fact, utility companies — like all persons
receiving payments subject to withholding under section
3402(t) — would be paid the full amount charged, albeit
in the form of a combination of a cash payment and a
deposit of tax made to the IRS. Therefore, unless otherwise excepted, utility payments are subject to withholding under section 3402(t) on the same basis as payments
for other property and services.
Commenters also requested that fuel surcharges be
exempted from withholding, arguing that a fuel surcharge provided under a contract is merely a cost recovery mechanism used to garner the lowest possible rates
for the government by controlling volatile cost components in bid calculations. Although the use of separately
stated charges for certain costs may well serve this
purpose in contracting, section 3402(t) provides no exception for fuel surcharges or any other separately stated
cost item. Section 3402(t) requires withholding on payments made regardless of how the payee may apply them
against costs. Therefore, the proposed regulations do not
provide an exception for payments allocated to fuel
surcharges or any other separately stated costs.
Application of Section 3402(t) to Passthrough Entities
Commenters requested guidance with respect to the
application of section 3402(t) where either the payor or
the payee is a partnership or S corporation (‘‘passthrough
entities’’). With respect to payments from a passthrough
entity, the proposed regulations provide that such payments are not generally subject to withholding under
section 3402(t) unless 80 percent or more of the
passthrough entity is owned by government entities that
are required to withhold under section 3402(t)(1). With
respect to payments to a passthrough entity, the
proposed regulations provide that such payments are
generally subject to withholding under section 3402(t)
unless 80 percent or more of the passthrough entity is
owned by persons described in section 3402(t)(2)(E)
(government entities required to withhold under section
3402(t)(1), tax-exempt entities, and foreign governments).
An 80-percent threshold is consistent with similar thresholds in various areas of the tax law. See, for example,
section 775(b)(3) and §§ 1.414(c)-2(b)(2) and 301.7701(i)1(d)(3)(i)(A). The proposed regulations also provide that,
as a general rule, whether a passthrough entity is subject
to section 3402(t) is determined on the first day of the
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Indian tribal governments are not subject to United
States income tax. Subjecting payments made by government entities to Indian tribal governments to withholding under section 3402(t) would be unduly burdensome
for the same reasons discussed above with respect to
certain payments made to foreign persons. Therefore, the
proposed regulations except these payments from
3-percent withholding under section 3402(t).
lations under section 6051, the exceptions provided in the
regulations under section 6041 relating to Form 1099
would not apply (for example, the exception for payments to corporations).
Focus on the IRS
Effective Date and Transition Relief for Existing Contracts
The proposed regulations provide that the regulations
will generally be effective for payments made after the
later of December 31, 2010, or the date that is 6 months
after the publication of final regulations. Commenters
questioned whether section 3402(t) would apply to payments made under contracts in existence prior to the
effective date of section 3402(t). They noted that many
government entities are party to multi-year contracts.
These contracts did not contemplate the withholding of
income tax from payments under the contracts. Future
contracts can address the withholding requirement and
its effect on the contractor’s cash flow. Accordingly, the
proposed regulations provide that payments made under
written binding contracts in effect on the later of December 31, 2010, or the date that is 6 months after the
publication of final regulations are not subject to withholding under section 3402(t), unless such contract is
materially modified. Payments pursuant to contracts
entered into after the later of December 31, 2010, or the
date that is 6 months after the publication of final
regulations will be subject to section 3402(t).
Under the proposed regulations, if there is a material
modification to an existing contract after the later of the
effective date of the legislation or six months after the
issuance of final regulations under section 3402(t), the
contract would cease to be an existing contract for
purposes of this transition relief and payments under the
contract would become subject to the withholding requirements of section 3402(t). The Treasury Department
and IRS are considering whether contracts that contain
the option of renewal should be considered new contracts as of the date of renewal. The final regulations may
provide that a contract that is renewable as of a certain
date is treated as a new contract on the first date the
contract is renewed. The Treasury Department and IRS
request comments on how option terms in contracts,
including, but not limited to, options to renew, should
affect the transition relief for payments under written
binding contracts.
Credit Against Income Tax
The Treasury Department and IRS received numerous
comments from taxpayers expecting to receive payments
subject to section 3402(t) withholding. Most of these
comments asked how taxpayers would take the credit for
the section 3402(t) withholding. Section 31 provides the
general crediting rule for withholding of income tax.
Specifically, section 31(a)(1) provides that ‘‘[t]he amount
withheld as tax under chapter 24 shall be allowed to the
recipient of the income as a credit against the tax imposed
by this subtitle.’’ Chapter 24 includes section 3402(t), and
The Exempt Organization Tax Review
section 31(a)(1) is in subtitle A, income taxes. Thus, by its
terms, section 31(a)(1) applies to persons who have had
income tax withheld from a payment pursuant to section
3402(t) and allows a credit against income tax only.
Section 31(a)(2) provides the general rule on the
timing of the allowance of the credit: ‘‘The amount so
withheld during any calendar year shall be allowed as a
credit for the taxable year beginning in such calendar
year. If more than one taxable year begins in a calendar
year, such amount shall be allowed as a credit for the last
taxable year so beginning.’’ Thus, absent a special rule,
the rule of section 31(a)(2) generally applies for purposes
of withholdings required under chapter 24, which includes section 3402(t).
Section 31(c) provides a special rule solely for backup
withholding. Under section 31(c), any credit allowed by
section 31(a) for backup withholding under section 3406
must be allowed for the taxable year of the recipient of
the income in which the income is received. Congress did
not provide a similar exception for the timing of the
credit for section 3402(t) withholding. Section 31(c) is
limited by its terms to section 3406 withholding only.
Thus, the general rule of section 31(a)(2) applies to
section 3402(t) withholding rather than the special rule of
section 31(c).
The effect of section 31(a)(2) is that fiscal year taxpayers may be entitled to take credit for withholding
under section 3402(t) only in a taxable year subsequent to
the taxable year in which the amount was withheld. For
example, if amounts were withheld under section 3402(t)
from a June 30 fiscal year taxpayer during the period
from January 1, 2011, to June 30, 2011, the taxpayer will
be entitled to take credit for the withheld tax on its
income tax return for the fiscal year ending June 30, 2012,
rather than its income tax return for the fiscal year ending
June 30, 2011.
The Treasury Department and IRS recognize that, in
the case of fiscal year taxpayers, the application of the
rule in section 31(a)(2) requiring that the credit be taken
in the second of two possible taxable years may be
burdensome for taxpayers. The Treasury Department and
IRS request comments on what impact the timing rule in
section 31(a)(2) described above for income tax credits
will have on taxpayers that have tax withheld under
section 3402(t).
Crediting Against Estimated Income Tax Liability
Taxpayers may take into account the income tax
withheld under section 3402(t) and allowed as a credit
under section 31 in determining estimated tax liability
pursuant to sections 6654 and 6655. With respect to
individual taxpayers, section 6654(g)(1) provides that, for
purposes of determining the application of the penalty
for an individual’s failure to pay estimated tax, the
amount of the credit allowed under section 31 for the
taxable year shall be deemed a payment of estimated tax.
As with other income tax withheld, an individual recipient may account for income tax withheld in computing
estimated income tax liability on Form 1040-ES, ‘‘Estimated Tax for Individuals.’’ Because most individuals are
calendar year taxpayers, the section 3402(t) withholding
would generally be treated as a payment of estimated tax
for the same calendar year, and the individual’s liability
January 2009 — Vol. 63, No. 1
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entity’s taxable year. The Treasury Department and IRS
believe that this general rule simplifies compliance and
administration by requiring one annual determination of
whether a passthrough entity’s payments are subject to
withholding under section 3402(t). However, the proposed regulations provide that any manipulation of the
ownership percentage with an intent to avoid application
of section 3402(t) would be recharacterized as appropriate to reflect the actual ownership percentage.
Focus on the IRS
Similar rules apply to corporate taxpayers. In determining the amount of estimated tax required to be paid
to avoid the section 6655 penalty applicable to corporations for failure to pay estimated tax, section 6655(g)(1)(B)
provides in effect that credits against tax under section 31
are taken into account. Thus, corporate taxpayers can
also take into account the amount of credit allowed under
section 31(a) in determining income tax liability and in
computing estimated income tax liability. As with individual taxpayers, corporate taxpayers on a fiscal year
could have the problem of delay in taking account of the
credit if withholding occurs in the part of the calendar
year before the beginning of the fiscal year that begins in
that calendar year.
Credit Against Employment Taxes or Other Taxes
Many commenters requested that taxpayers be
allowed to take credit for section 3402(t) withholding
with respect to employment taxes or other taxes. The
statute directs that crediting follow the rules under
section 31(a), which provide for crediting against income
tax. Where the statute permits income tax payments to be
treated as employment tax payments, or vice versa, it
makes specific provision for that treatment. See, for
example, section 3507(d) (providing for the treatment of
advance payments of the earned income credit as payments of the income tax withholding and FICA liability
of the employer); section 3510(b) (providing that domestic employment taxes are treated as taxes due for estimated tax purposes under section 6654); and section
31(b) (providing for the crediting against income tax of
the special refund of social security tax under section
6413(c) applicable when an employee receives wages
from two or more employers in excess of the social
security tax contribution and benefit base). The Code
does not provide for withholding under section 3402(t) to
be treated as payments of the taxpayer’s employment tax
liability.
Rate of Income Tax Withholding
Some taxpayers requested that the Treasury Department and IRS provide for lower withholding rates for
taxpayers with lower profit margins or lower marginal
income tax rates. The statute provides for a uniform
3-percent rate of withholding. Thus, the proposed regulations apply withholding at the 3-percent rate to all
payments for services and property from which withholding under section 3402(t) is required to be made.
Liability for Section 3402(t) Withholding in the
Event of Failure to Withhold
If a government entity fails to withhold the tax imposed by section 3402(t), section 3403 applies. Under
section 3402(t)(3) and section 3403, the government entity
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January 2009 — Vol. 63, No. 1
is generally liable for the payment of the tax to the IRS
unless it can prove that the payee has paid its income tax
liability.
Section 3403 provides that the employer shall be liable
for the payment of tax required to be deducted and
withheld under chapter 24, and shall not be liable to any
person for the amount of any such payment.
Section 31.3403-1 of the Employment Tax Regulations
provides that every employer required to deduct and
withhold the tax under section 3402 from the wages of an
employee is liable for the payment of such tax whether or
not it is collected from the employee by the employer. If,
for example, the employer deducts less than the correct
amount of tax, or if the employer fails to deduct any part
of the tax, the employer is nevertheless liable for the
correct amount of the tax. Section 3402(t)(3) provides that
for purposes of section 3403, payments to any person for
property or services that are subject to withholding under
section 3402(t) are treated as if such payments were
wages paid by an employer to an employee.
Thus, sections 3402(t)(3) and 3403 establish the
liability of the government entity for the amount of the
tax imposed by section 3402(t) if it fails to withhold.
However, section 3402(d) provides an exception to the
entity’s liability for income tax withholding in certain
cases. Under this exception, if the entity required to
withhold fails to do so, and thereafter the tax is paid, the
tax will not be collected from the entity that failed to
withhold. Thus, for purposes of section 3402(t), the
government entity generally will be liable if it fails to
withhold unless it is able to demonstrate, consistent with
IRS procedures, that the taxpayer reported the amounts
that were subject to withholding on its income tax return
and paid the income tax due.
Transition Rule for Penalties and Interest on Underpayments
The proposed regulations provide a special transition
rule for a government entity’s liability for interest and
penalties with respect to the failure to pay the tax on
payments for property and services made before January
1, 2012. Under the transition rule, a government entity
would not be liable for penalties and interest with respect
to liability for withholding imposed by section 3402(t), on
payments for property or services made before January 1,
2012, if the entity made a good faith effort to comply with
the requirements of section 3402(t). However, this transition rule would not provide relief from liability for the
amount of tax required to be withheld under section
3402(t).
Proposed Effective Date
These regulations are proposed to apply to payments
made after the later of December 31, 2010, or six months
after the date of publication of final regulations. In
addition, the regulations will not apply to payments
under contracts existing on the later of December 31,
2010, or six months after the date of publication of final
regulations.
Special Analyses
It has been determined that this notice of proposed
rulemaking is not a significant regulatory action as
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for other payments of estimated tax for that year would
be reduced. However, if the individual is a fiscal year
taxpayer, the individual may not take into account the
withholding for estimated tax purposes until the fiscal
year that begins in the calendar year in which the tax is
withheld.
Focus on the IRS
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final
regulations, consideration will be given to any written (a
signed original and eight (8) copies) or electronic comments that are timely submitted to the IRS. All comments
will be available for public inspection and copying. A
public hearing will be scheduled if requested in writing
by any person that timely submits written or electronic
comments. If a public hearing is scheduled, notice of the
date, time, and place for the hearing will be published in
the Federal Register.
Drafting Information
The principal author of these proposed regulations is
A. G. Kelley, Office of the Division Counsel/Associate
Chief Counsel (Tax Exempt and Government Entities).
However, other personnel from the IRS and the Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions,
Railroad retirement, Reporting and recordkeeping requirements, Social Security, Unemployment compensation.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 31 is proposed to be
amended as follows:
PART 31 — EMPLOYMENT TAXES AND
COLLECTION OF INCOME TAX AT SOURCE
Paragraph 1. The authority citation for part 31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. The following §§ 31.3402(t)-0, 31.3402(t)-1,
31.3402(t)-2, 31.3402(t)-3, 31.3402(t)-4, and 31.3402(t)-5 are
added, § 31.3402(t)-6 is added and reserved, and
§ 31.3402(t)-7 is added to read as follows:
§ 31.3402(t)-0 Outline of the Government withholding
regulations.
This section lists paragraphs contained in
§§ 31.3402(t)-1 through 31.3402(t)-5, and § 31.3402(t)-7.
§ 31.3402(t)-1 Withholding requirements on certain
payments made by government entities.
(a) In general.
(b) Special rules.
The Exempt Organization Tax Review
(c) Deposit and reporting requirements.
(d) Effective/applicability date.
§ 31.3402(t)-2 Government entities required to
withhold under section 3402(t).
(a) In general.
(b) Government of the United States.
(c) State.
(d) Political Subdivision.
(e) [Reserved].
(f) Possessions of the United States.
(g) Passthrough entities.
(h) Small entity exception.
(i) Effective/applicability date.
§ 31.3402(t)-3 Payments subject to withholding.
(a) In general.
(b) Payment threshold of $10,000.
(c) No withholding on successive payments.
(d) Payments made through a payment administrator
or to a contractor.
(e) Payments by credit card or payment card.
(f) Examples.
(g) Effective/applicability date.
§ 31.3402(t)-4 Certain payments excepted from
withholding.
(a) Payments subject to withholding under chapter 3
or chapter 24 (other than section 3406).
(b) Payments subject to withholding under section
3406 with backup withholding deducted.
(c) [Reserved].
(d) Payments for real property.
(e) Payments to government entities, tax-exempt
organizations, and foreign governments.
(f) Payments made pursuant to a classified or confidential contract.
(g) Exception for political subdivisions or instrumentalities thereof making less than $100,000,000 of payments for property or services annually.
(h) Payments made in connection with a public
assistance or public welfare program.
(i) Payments made to any government employee with
respect to his or her services.
(j) Payments received by nonresident alien individuals
and foreign corporations.
(k) Payments to Indian tribal governments.
(l) Payments in emergency or disaster situations.
(m) Effective/applicability date.
§ 31.3402(t)-5 Application to passthrough entities.
(a) In general.
(b) Definitions.
(c) Payments from a passthrough entity.
(d) Payments to a passthrough entity.
(e) Effective/applicability date.
January 2009 — Vol. 63, No. 1
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defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It also has been determined
that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to this regulation, and
because the regulation does not impose a collection of
information on small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue Code, this regulation has been submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact on small business.
Focus on the IRS
§ 31.3402(t)-7 Effective date and transition rules.
(a) General rule.
(b) Exception for payments made under existing written binding contracts.
(c) Good faith exception for interest and penalties on
payments before January 1, 2012.
§ 31.3402(t)-1 Withholding requirement on certain
payments made by government entities.
(a) In general. Except as provided in §§ 31.3402(t)-3(b)
and 31.3402(t)-4, the Government of the United States,
every State, every political subdivision thereof, and every
instrumentality of the foregoing (including multi-State
agencies) making any payment to any person providing
any property or services shall deduct and withhold from
such payment a tax in an amount equal to 3 percent of
such payment.
(b) Special rules. See § 31.3402(t)-2 for government
entities required to withhold under this section,
§ 31.3402(t)-3 for what constitutes a payment to a person
for property or services and when such payment is
deemed to occur for purposes of this section, and
§ 31.3402(t)-4 for payments that are excepted from withholding under this section.
(c) Deposit and reporting requirements. See § 31.6302-4
for deposit requirements with respect to withholding
under section 3402(t). See §§ 31.6011(a)-4(b) and 31.6051-5
for the reporting requirements with respect to withholding under section 3402(t).
(d) Effective/applicability date. (1) Except as provided in
paragraph (d)(2) of this section, this section is effective
for payments by the Government of the United States,
every State, every political subdivision thereof, and every
instrumentality of the foregoing (including multi-State
agencies) to any person providing property or services
made after the later of December 31, 2010, or the date that
is 6 months after the date of publication in the Federal
Register of final regulations under section 3402(t).
(2) Payments made under a written binding contract
that was in effect on the later of December 31, 2010, or the
date that is 6 months after the publication in the Federal
Register of final regulations under section 3402(t), are not
subject to the withholding requirements of this section.
The preceding sentence does not apply to payments
made under any contract that is materially modified after
the later of December 31, 2010, or the date that is 6
months after the date of publication in the Federal
Register of final regulations under section 3402(t).
§ 31.3402(t)-2 Government entities required to
withhold under section 3402(t).
(a) In general. The requirement to withhold under
section 3402(t) and § 31.3402(t)-1(a) applies to the
Government of the United States (see paragraph (b) of
this section) and every State (see paragraph (c) of this
section), as well as instrumentalities of the foregoing. The
requirement also applies to political subdivisions of
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January 2009 — Vol. 63, No. 1
every State (see paragraph (d) of this section), and their
instrumentalities, unless the small entity exception of
§ 31.3402(t)-4(g) applies.
(b) Government of the United States. The Government of
the United States includes the legislative branch, the
judicial branch, and the executive branch, and all components of the United States Government. Thus, departments and agencies are included within the definition of
United States Government.
(c) State. The term State includes the District of
Columbia. However, an Indian tribal government is not
considered a State for purposes of section 3402(t) and
§ 31.3402(t)-1(a). See section 7871(a).
(d) Political subdivision. The term political subdivision for
purposes of section 3402(t) and § 31.3402(t)-1(a) is defined as a political subdivision within the meaning of
§ 1.103-1(b) of this chapter, except that a subdivision of an
Indian tribal government is not considered a political
subdivision. See section 7871(a) and (d).
(e) [Reserved].
(f) Possessions of the United States. For purposes of
section 3402(t) and § 31.3402(t)-1(a), the government of a
possession or territory of the United States is not treated
as a government entity subject to the withholding requirements of section 3402(t)(1).
(g) Passthrough entities. See § 31.3402(t)-5(c) for the
treatment of payments from certain passthrough entities
as subject to the withholding requirements of
§ 31.3402(t)-1.
(h) Small entity exception. See § 31.3402(t)-4(g) for the
exception from the withholding requirements of
§ 31.3402(t)-1 for political subdivisions and instrumentalities thereof making less than $100,000,000 of payments for property or services annually.
(i) Effective/applicability date. This section is effective the
later of January 1, 2011, or the date that is 6 months after
the date of publication in the Federal Register of final
regulations under section 3402(t).
§ 31.3402(t)-3 Payments subject to withholding.
(a) In general. A payment is subject to withholding for
purposes of §§ 31.3402(t)-1 through 31.3402(t)-7 when
paid by a government entity to any person, as defined in
§ 301.7701-6(a) of this chapter, for property or services. If,
however, the government entity uses a payment administrator to pay a person for property or services, payment
occurs when the payment administrator pays such person. The government entity subject to the withholding
requirements of § 31.3402(t)-1 is liable for the withholding required and responsible for all related reporting
regardless of whether the government entity or its payment administrator makes the payment for property or
services.
(b) Payment threshold of $10,000 — (1) In general. The
term payment threshold means an amount equal to $10,000.
The withholding requirements of § 31.3402(t)-1 will not
apply to any payment that is less than the payment
threshold. Whether a payment is equal to or in excess of
the payment threshold is determined when the payment
is made.
(2) Payment threshold applied per payment. If a government entity makes a single payment to a person for
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§ 31.3402(t)-6 Crediting of tax withheld under section
3402(t) [Reserved].
Focus on the IRS
The Exempt Organization Tax Review
be paid to persons providing property or services, the
determination of whether the payment threshold is met
on the portion that is the fee is made at the time of the
transfer of funds to the payment administrator.
(e) Payments by credit card or payment card. For purposes
of section 3402(t), a payment made by a government
entity by credit card or payment card to a person for
property or services occurs when the credit card or
payment card is tendered at the point of sale. The
government entity is liable for withholding under section
3402(t) and reporting associated with such withholding.
See section 6050W of the Internal Revenue Code for
separate reporting obligations imposed on the acquiring
bank of the person receiving payment by credit card or
payment card.
(f) Examples. This section is illustrated by the following
examples:
Example 1. (i) Prime contractor X has a contract with a
government entity to provide services and property to
the government entity. X contracts with numerous subcontractors to provide services and property in connection with the contract. While the engagement of any
particular subcontractor is subject to approval by the
government entity, the subcontractors are not parties to
the contract between X and the government entity, and
the government entity is not a party to the contracts
between X and subcontractors. Under its contract with
the government entity, X submits an invoice for $48,000
for providing services and property to the government
entity, including charges for services and property provided by two subcontractors, M and N. The invoice
reflects charges of $16,000 for M and $2,000 for N. The
government entity pays X the entire amount of the
invoice in one payment of $48,000. X pays M for M’s
billed portion of the invoice in a single payment of
$16,000, and X pays N for N’s billed portion of the invoice
in a single payment of $2,000.
(ii) Under the facts of this Example 1, X is the person
providing property or services to, or for the benefit of, the
government entity with respect to the entire amount of
the $48,000 payment under the invoice, including the
charges for services or property provided by its subcontractors M and N. X is not a payment administrator (as
defined in paragraph (d)(1)(i) of this section) because X is
not making payments solely as an agent of the government entity to persons providing property or services.
Instead, X makes payments to subcontractors M and N
pursuant to X’s separate contracts with these subcontractors to which the government entity is not a party.
Therefore, under paragraphs (a) and (d)(2) of this section,
the entire amount of the $48,000 payment to X under the
invoice, including the charges for services and property
provided by its subcontractors M and N, is the payment
subject to withholding for purposes of section 3402(t).
(iii) Under paragraph (b)(1) of this section, the determination whether the payment meets the payment
threshold is based on the entire amount of the payment
from the government entity to X. Withholding under
section 3402(t) applies to the government entity’s $48,000
payment to X because the payment meets the payment
threshold and is not otherwise excepted from section
3402(t) withholding. Thus, the payment is subject to
withholding of 3 percent, or $1440.
January 2009 — Vol. 63, No. 1
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property or services combining charges for more than
one transaction with the person, the determination of
whether the payment threshold provided by paragraph
(b)(1) of this section applies will be based on the amount
of the single payment, rather than the amount attributable to each separate transaction. Thus, if a government
entity makes a single payment of $10,000 or more to a
person, the government entity will be required to withhold on the payment, even if the payment is for more
than one property or service. The same rule applies if a
government entity enters into multiple transactions with
a single person, each of which would result in a payment
of less than $10,000 if paid separately, but elects to make
a single payment covering all the transactions such that
the aggregated payment is $10,000 or more. Under these
circumstances, the government entity is required to withhold on the aggregated payment.
(3) Anti-abuse rule. If a government entity or payment
administrator divides a payment or payments to any
person for property or services into two or more payments primarily to avoid the $10,000 payment threshold
provided in paragraph (b)(1) of this section on one or
more of these payments, the divided payments will be
treated as a single payment made on the date that the
first of these payments is made.
(c) No withholding on successive payments. If a government entity or its payment administrator makes a payment that is subject to the withholding requirements of
§ 31.3402(t)-1 to a person, no subsequent transfer of cash
or property from that payment by such person to another
person is treated as a payment subject to withholding for
purposes of §§ 31.3402(t)-1 through 31.3402(t)-7.
(d) Payments made through a payment administrator or to
a contractor — (1) Definition — For purposes of this
section —
(i) A payment administrator is any person that acts with
respect to a payment solely as an agent for a government
entity by making the payment on behalf of the government entity to a person providing property or services to,
or on behalf of, the government entity.
(ii) A payment administrator is treated as a person
providing property or services for purposes of the withholding requirements of section 3402(t) to the extent it
receives a fee from the government entity for its services
as a payment administrator for the government entity.
(2) Payments to a contractor. If a person provides
property or services to a government entity under a
contract and is not a payment administrator, the person,
who is in privity with the government entity, is treated as
the person providing property or services subject to
withholding under section 3402(t) for all payments received from the government entity, regardless of whether
some payments the person receives relate to invoices for
property or services provided by subcontractors.
(3) Application of payment threshold. Where a government entity uses a payment administrator to make a
payment, the determination of whether the payment
meets the payment threshold is made at the time the
payment administrator makes the payment to the person
providing property or services. If a government entity
makes one transfer of funds to a payment administrator
that is composed of a fee to compensate the payment
administrator for its services and other funds that are to
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(v) Withholding is required under section 3402(t) on
the payment by Z, a payment administrator, to a person
providing property or services to, or on behalf of, a
government entity provided the payment meets the
payment threshold and is not otherwise excepted. Under
paragraph (d)(3) of this section, the determination of
whether the payment threshold is met on the payment Z
makes to a person providing property or services is made
at the time Z pays the person providing property or
services. Under the facts of this Example 2, Z’s payment to
P of $18,000 meets the payment threshold, and therefore
withholding of $540 under section 3402(t) applies. Z’s
payment to R of $7,000 does not meet the payment
threshold, and therefore, no withholding under section
3402(t) is required.
(vi) The government entity, not Z, is liable for any
withholding required under section 3402(t) on the payments from Z to persons providing property or services.
Also, the government entity, not Z, is responsible for any
reporting required under § 31.6051-5 on the payment
from Z to persons providing property or services. See
paragraph (a) of this section. Each person providing
property or services with respect to which withholding is
required, not Z, is the person receiving the payment for
purposes of the reporting required under § 31.6051-5 if
withholding under section 3402(t) applies. Thus, the
government entity is responsible for issuing P a Form
1099 reflecting the amount of the payment from Z to P of
$18,000 and the amount of withholding of $540.
(g) Effective/applicability date. This section is effective
for payments by the Government of the United States,
every State, every political subdivision thereof, and every
instrumentality of the foregoing (including multi-State
agencies) to any person providing property or services
made after the later of December 31, 2010, or the date that
is 6 months after the date of publication in the Federal
Register of final regulations under section 3402(t).
§ 31.3402(t)-4 Certain payments excepted from
withholding.
(a) Payments subject to withholding under chapter 3 or
chapter 24 (other than section 3406) — (1) In general.
Payments are excepted from withholding under section
§ 31.3402(t)-1(a) if they are subject to withholding under
chapter 3 of the Internal Revenue Code (Code) or under
sections 3401 through 3405 of the Code (other than
section 3402(t)).
(2) Payments subject to withholding under chapter 3.
Payments subject to withholding under chapter 3 include
those payments that are subject to, but exempt from,
withholding under chapter 3 on the ground that the
payments are exempt from United States income tax
pursuant to an income tax convention to which the
United States is a party.
(3) Payments subject to withholding at election of payee.
For purposes of this exception from section 3402(t),
payments for which the payee may elect withholding are
exempt from withholding under § 31.3402(t)-1(a) regardless of whether the payee in fact makes such an election.
These payments include —
(i) Unemployment compensation as defined in section
85(b) (see section 3402(p)(2));
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(iv) Payments made by X to the subcontractors, M and
N, are not payments by the government entity or its
payment administrator. Thus, X’s $16,000 payment to M
and X’s $2,000 payment to N for services or property
under the contract are not subject to withholding under
section 3402(t). See paragraphs (c) and (d)(2) of this
section.
(v) The government entity is liable for the $1440
withholding required under section 3402(t) on its payment to X and is responsible for the related reporting
required under § 31.6051-5. See paragraph (a) of this
section. X is the person receiving the payment for purposes of reporting under § 31.6051-5. Thus, the government entity is responsible for providing X with a Form
1099 including the entire amount of the payment
($48,000) and the entire amount of the withholding
($1440).
Example 2. (i) Z has a contract with a government
entity to make payments as an agent of the government
entity to persons providing services or property to, or on
behalf of, the government entity. The only services Z
provides under the contract are its services in acting as an
agent for the government entity in making payments to
persons providing property or services to, or on behalf of,
the government. The government entity transfers funds
of $71,000 to Z, which includes a fee of $1,000 to Z for its
services as an agent under the contract. Z then makes
payments of the $70,000 remainder of the funds to
persons providing property or services to, or on behalf of,
the government entity, including a single payment of
$18,000 to P and a single payment of $7,000 to R.
(ii) Under the facts of this Example 2, Z is a payment
administrator (as defined in paragraph (d)(1)(i) of this
section) because Z makes payments solely as an agent for
the government entity to persons providing property or
services to, or on behalf of, the government entity. Under
paragraphs (a) and (d) of this section, Z is not treated as
a person providing property or services with respect to
$70,000 of the transfer of funds (the amount of the funds
to be paid to persons providing property or services to, or
on behalf of, the government entity). Because Z is not
treated as a person providing property or services with
respect to this $70,000 portion of the funds, this portion of
the transfer of funds by the government entity to Z is not
subject to withholding under section 3402(t) when transferred to Z.
(iii) Under paragraph (d)(1)(ii) of this section, the
payment administrator is treated as a person providing
property or services with respect to the portion of the
$71,000 fund transfer that is a fee for its services as a
payment administrator, or $1,000. Under paragraph
(d)(3) of this section, the determination of whether the
payment threshold is met with respect to the fee portion
of the payment from the government entity to Z is made
at the time of the payment from the government entity to
Z. Because the $1,000 fee portion of the payment falls
beneath the $10,000 payment threshold, withholding
under section 3402(t) is not required with respect to that
portion of the payment.
(iv) P and R are persons providing services or property to, or on behalf of, the government entity with
respect to the payments they receive from Z.
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The Exempt Organization Tax Review
a political subdivision of a State) that makes less than
$100,000,000 of payments for property or services annually.
(2) Determination of whether an entity is a political
subdivision of a State. The determination of whether an
entity is a political subdivision of a State is made under
§ 31.3402(t)-2(d).
(3) Determination of whether a political subdivision or
instrumentality makes less than $100,000,000 of payments for
property or services annually. The determination of whether
the exception provided by paragraph (g)(1) of this section
applies is made for each calendar year. For purposes of
any calendar year, the determination of whether a
political subdivision or instrumentality makes less than
$100,000,000 of payments for property or services annually is based on the total payments made by the entity for
property or services in the entity’s accounting year
ending with or within the second preceding calendar
year. For purposes of this paragraph (g), payments that
would have qualified for the exceptions from withholding under § 31.3402(t)-4(a) through (l) had these regulations been in effect shall not be included in calculating
the total payments made. However, payments that would
have been excepted from withholding only because such
payments were less than the $10,000 payment threshold
contained in § 31.3402(t)-3(b) are included in calculating
the total payments for purposes of this paragraph (g).
Also, payments that were not subject to withholding
under section 3402(t) solely based on the effective date
rules or transition rules contained in § 31.3402(t)-1(d),
§ 31.3402(t)-2(i), § 31.3402(t)-3(g), § 31.3402(t)-4(m),
§ 31.3402(t)-5(e), or § 31.3402(t)-7 are included in calculating total payments for purposes of this paragraph (g).
For purposes of this determination, the accounting year
refers to the fiscal year (consisting of 12 months) or
calendar year used by the government entity in setting its
budgets and keeping its accounting books. If a political
subdivision or instrumentality was not in existence in the
second preceding calendar year or if no 12month accounting year exists ending in the second preceding
calendar year, the determination of whether this exception applies for a calendar year shall be based on the total
payments as projected for the accounting year consisting
of 12 months ending in that calendar year.
(4) Example. (i) Government entity X, which qualifies
as a political subdivision or instrumentality thereof for
the calendar years 2011 and 2012, uses a fiscal year
ending June 30 to determine its budgets and to keep its
accounting books. During its fiscal year ending June 30,
2009, X made payments to persons for property and
services of $200,000,000, including $102,000,000 of payments that would have been excepted under § 31.3402(t)4(a) through (l) if section 3402(t) had been in effect.
(ii) During its fiscal year ending June 30, 2010, X made
payments for property and services of $210,000,000,
including $106,000,000 that would have been excepted
under § 31.3402(t)-4(a) through (l) if section 3402(t) had
been in effect. In addition, during the fiscal year ending
June 30, 2010, X made $15,000,000 of payments that were
below the payment threshold of $10,000 in § 31.3402(t)3(b) if section 3402(t) had been in effect.
(iii) For the calendar year 2011, X determines whether
it is eligible for the exception provided by this paragraph
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(ii) Social security benefits as defined in section 86(d)
(see section 3402(p)(1)(C)(i));
(iii) Any payment referred to in the second sentence of
section 451(d) that is treated as insurance proceeds,
relating to certain disaster payments received under the
Agricultural Act of 1949, as amended, or Title II of the
Disaster Assistance Act of 1988 (see section
3402(p)(1)(C)(ii));
(iv) Any amount that is includible in gross income
under section 77(a), relating to amounts received as loans
from the Commodity Credit Corporation that the taxpayer has elected to treat as income (see section
3402(p)(1)(C)(iii)); and
(v) Any payment of an annuity to an individual.
(b) Payments subject to withholding under section 3406
with backup withholding deducted. A payment is not subject
to withholding under section 3402(t) if the payment is
subject to withholding under section 3406, relating to
backup withholding, and if backup withholding is actually being withheld from such payment.
(c) [Reserved].
(d) Payments for real property. Payments for real property are not subject to the withholding requirements of
§ 31.3402(t)-1. For purposes of this exception, the term
payments for real property includes the purchase and the
leasing of real property. However, payments for the
construction of buildings or other public works projects,
such as bridges or roads, are not payments for real
property.
(e) Payments to government entities, tax-exempt organizations, and foreign governments — (1) Government entities.
Payments are not subject to withholding under section
3402(t) if the payments are made to government entities
that are subject to the withholding requirements of
section 3402(t)(1) pursuant to § 31.3402(t)-2. For purposes
of this exception, payments to government entities that
qualify for the exception for political subdivisions and
instrumentalities making less than $100,000,000 of payments for property and services annually, as provided by
section 3402(t)(2)(G) and paragraph (g) of this section, are
treated as payments to government entities that are
subject to the withholding requirements of section
3402(t)(1).
(2) Tax-exempt organizations. Payments to an organization that is exempt from taxation under section 501(a) as
an organization described in section 501(c), 501(d), or
401(a) are not subject to withholding under section
3402(t).
(3) Foreign governments. Payments to foreign governments are not subject to withholding under section
3402(t). For purposes of this paragraph (e), a government
of a possession or territory of the United States is treated
as a foreign government.
(f) Payments made pursuant to a classified or confidential
contract. Payments made pursuant to a classified or
confidential contract described in section 6050M(e)(3) are
not subject to withholding under section 3402(t).
(g) Exception for political subdivisions or instrumentalities
thereof making less than $100,000,000 of payments for property or services annually — (1) In general. Section 3402(t)
withholding is not required on payments made by a
political subdivision of a State (or any instrumentality of
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January 2009 — Vol. 63, No. 1
from sources outside the United States, as determined
under sections 861, 862, 863, and 865, and is not effectively connected with the conduct of a trade or business
within the United States by the foreign person.
(k) Payments to Indian tribal governments. Section
3402(t) withholding shall not apply to any payment made
to an Indian tribal government or its political subdivisions.
(l) Payments in emergency or disaster situations. The
Secretary may provide by publication in the Internal
Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter) for additional exceptions from section 3402(t) withholding for certain payments made in an emergency or
disaster situation if the Secretary determines that withholding from the payments would impede a government
entity’s efforts to respond to the emergency or disaster.
(m) Effective/applicability date. This section is effective
for payments by the Government of the United States,
every State, every political subdivision thereof, and every
instrumentality of the foregoing (including multi-State
agencies) to any person providing property or services
made after the later of December 31, 2010, or the date that
is 6 months after the date of publication in the Federal
Register of final regulations under section 3402(t).
§ 31.3402(t)-5 Application to passthrough entities.
(a) In general. This section sets forth rules that provide
that section 3402(t)(1) does not apply to payments made
by passthrough entities except as described in paragraph
(c) of this section. In addition, the rules provide that
section 3402(t)(1) applies to payments made to passthrough entities except as described in paragraph (d) of
this section.
(b) Definitions. The following definitions set forth the
meaning of certain terms for purposes of this section:
(1) Passthrough entity. The term passthrough entity
means a partnership (for Federal income tax purposes) or
an S corporation.
(2) Owner. The term owner means a partner (for Federal
income tax purposes) or an S corporation shareholder.
(3) Ownership percentage. The term ownership percentage
means an owner’s interest, as a percentage, in partnership profits or capital (whichever is greater) in the case of
a partnership, or an owner’s interest, as a percentage, in
S corporation stock in the case of an S corporation.
(4) Testing day. The term testing day refers to the first
day of a passthrough entity’s taxable year.
(c) Payments from a passthrough entity — (1) General rule.
Section 3402(t)(1) shall not apply to payments made by
passthrough entities during the taxable year, except as
provided in paragraph (c)(2) of this section.
(2) Exception. Section 3402(t)(1) shall apply to any
payment during the taxable year from a passthrough
entity if the aggregate ownership percentage held, directly or indirectly, in the entity on the testing day by
government entities described in section 3402(t)(1) is at
least 80 percent. For purposes of this paragraph (c)(2),
any manipulation of the ownership percentage with an
intent to avoid application of section 3402(t) will be
recharacterized as appropriate to reflect the actual
ownership percentage.
The Exempt Organization Tax Review
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(g) based on the total payments X made for its accounting
year ending June 30, 2009. Because total payments for
this purpose exclude payments that would be excepted
under § 31.3402(t)-4(a) through (l), total payments were
$200,000,000 less $102,000,000, or $98,000,000. Therefore,
for calendar year 2011, X would qualify for the exception
provided by this paragraph (g), and would not be
required to withhold under section 3402(t).
(iv) For the calendar year 2012, X determines whether
it is eligible for the exception provided by this paragraph
(g) based on the total payments it made for its accounting
year ending June 30, 2010. Because total payments for
this purpose exclude payments that would have been
excepted under § 31.3402(t)-4(a) through (l), but include
payments below the payment threshold of $10,000 provided under § 31.3402(t)-3(b), total payments were
$210,000,000 less $106,000,000, or $104,000,000. Therefore,
for calendar year 2012, X would not qualify for the
exception provided by this paragraph (g) and would be
required to withhold under section 3402(t).
(h) Payments made in connection with a public assistance
or public welfare program — (1) In general. Section 3402(t)
withholding shall not apply to payments made in connection with a public assistance or public welfare program for which eligibility is determined by a needs or
income test.
(2) Needs or income test. Eligibility for a public assistance or public welfare program is not considered to be
determined by a needs or income test if eligibility for the
program is based solely on the age of the beneficiary. A
public assistance program providing disaster relief to
victims of a natural or other disaster is considered to be
a program for which eligibility is determined under a
needs test. Payments under government programs to
provide health care or other services that are not based on
the needs or income of the recipient are subject to section
3402(t) withholding, including programs where eligibility is based on the age of the beneficiary.
(3) Payments to third parties. The exception provided by
this paragraph (h) also applies to payments made to third
parties to provide benefits to beneficiaries under a public
assistance or public welfare program for which eligibility
is determined by a needs or income test.
(i) Payments made to any government employee with
respect to his or her services. Section 3402(t) withholding
shall not apply to payments made to any government
employee with respect to his or her services as an
employee of the government. This exception applies to
contributions to deferred compensation plans on behalf
of an employee, contributions to employee benefit plans
on behalf of an employee, fringe benefits provided to
employees, and payments to employees under accountable plans for the individual travel expenses of the
employee. This exception also applies to payments made
by the government employee under accountable plans to
providers of the employee’s travel, meals, and lodging
when the government employee is traveling on government business.
(j) Payments received by nonresident alien individuals and
foreign corporations. Section 3402(t) withholding shall not
apply to any payment received by a nonresident alien
individual or foreign corporation (foreign person) for
providing services or property if the payment is derived
Focus on the IRS
§ 31.3402(t)-6 Crediting of tax withheld under section
3402(t).
[Reserved].
§ 31.3402(t)-7 Effective date and transition rules.
(a) General Rule. Except as provided in paragraph (b)
of this section, the requirement to withhold under §
31.3402(t)-1(a) applies to payments made after the later of
December 31, 2010, or the date that is 6 months after the
date of publication in the Federal Register of final
regulations under section 3402(t).
(b) Exception for payments made under existing written
binding contracts. Payments made under a written binding contract that was in effect on the later of December 31,
2010, or the date that is 6 months after the date of
publication in the Federal Register of final regulations
under section 3402(t), are not subject to the withholding
requirements in § 31.3402(t)-1. The preceding sentence
does not apply to payments made under any contract
that is materially modified after the later of December 31,
2010, or the date that is 6 months after the date of
publication in the Federal Register of final regulations
under section 3402(t).
(c) Good faith exception for interest and penalties on
payments made before January 1, 2012. Government entities
that make a good faith effort to comply with the provisions of these regulations will not be liable for penalties
and interest with respect to income tax withholding
under section 3402(t) that the government entity failed to
withhold from payments made before January 1, 2012.
However, this provision shall not relieve the government
entity of liability for income tax that it failed to withhold.
See, however, § 31.3402(d)-1.
Par. 3. Section 31.3406(g)-2 is amended by adding
paragraphs (h) and (i) to read as follows:
§ 31.3406(g)-2 Exception for reportable payment for
which withholding is otherwise required.
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The Exempt Organization Tax Review
(h) Certain payments made by government entities. A
government entity that is required to withhold both on
reportable payments pursuant to section 3406(a) and on
certain payments pursuant to section 3402(t), must comply with the withholding requirements of section 3406,
and not section 3402(t), with respect to a payment to
which both types of withholding would apply. Pursuant
to section 3402(t)(2)(B), withholding under section 3402(t)
shall not apply if amounts are being withheld under
section 3406 with respect to a payment. If a government
entity fails to withhold as required under section 3406,
the payment will not be deemed to be subject to withholding under another provision of the Code for purposes of this paragraph (h). Thus, even if the government
entity withholds on such payment pursuant to section
3402(t), it will remain liable for the amount required to be
withheld under section 3406.
(i) Effective/applicability date. Paragraph (h) relating to
certain payments made by government entities applies to
payments made by government entities under section
3402(t) made after the later of December 31, 2010, or the
date that is 6 months after the date of publication in the
Federal Register of final regulations under section
3402(t).
Par. 4. Section 31.6011(a)-4 is amended by adding
paragraphs (b)(6) and (d) to read as follows:
§ 31.6011(a)-4 Returns of income tax withheld.
*****
(b) * * *
(6) Certain payments made by government entities
subject to withholding under section 3402(t).
*****
(d) Effective/applicability date. Paragraph (b)(6) relating
to certain payments made by government entities subject
to withholding under section 3402(t) applies to payments
made by government entities under section 3402(t) made
after the later of December 31, 2010, or the date that is 6
months after the date of publication in the Federal
Register of final regulations under section 3402(t).
Par. 5. Section 31.6051-5 is added to read as follows:
§ 31.6051-5 Statement and information return required
in case of withholding by government entities.
(a) Statements required from government entities. Every
government entity required to deduct and withhold tax
under section 3402(t) must furnish to the payee a written
statement containing the information required by paragraph (d) of this section.
(b) Information returns required from government entities.
Every government entity required to furnish a payee
statement under paragraph (a) of this section must file a
duplicate of such statement with the Secretary. Such
duplicate shall constitute an information return.
(c) Prescribed form. The prescribed form for the statement required by this section is Form 1099-MISC, ‘‘Miscellaneous Income.’’
(d) Information required. Each statement on Form 1099MISC must show the following —
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(d) Payments to a passthrough entity — (1) General rule.
Section 3402(t)(1) shall apply to payments made to
passthrough entities during the taxable year, except as
provided in paragraph (d)(2) of this section.
(2) Exception. Section 3402(t)(1) shall not apply to any
payment during a taxable year to a passthrough entity if
the aggregate ownership percentage held, directly or
indirectly, in the entity on the testing day by persons
described in section 3402(t)(2)(E) is at least 80 percent. For
purposes of this paragraph (d)(2), any manipulation of
the ownership percentage with an intent to avoid application of section 3402(t) will be recharacterized as appropriate to reflect the actual ownership percentage.
(e) Effective/applicability date. This section is effective
for payments by the Government of the United States,
every State, every political subdivision thereof, and every
instrumentality of the foregoing (including multi-State
agencies) to any person providing property or services
made after the later of December 31, 2010, or the date that
is 6 months after the date of publication in the Federal
Register of final regulations under section 3402(t).
Focus on the IRS
§ 31.6071(a)-1 Time for filing returns and other
documents.
§ 31.6302-1 Federal tax deposit rules for withheld
income taxes and taxes under the Federal Insurance
Contributions Act (FICA) attributable to payments
made after December 31, 1992.
*****
(e) * * * (1) * * *
(iii) * * *
(E) Certain payments made by government entities
under section 3402(t); and
*****
(n) Effective/applicability date. Except for the deposit of
employment taxes attributable to payments made by
government entities under section 3402(t), §§ 31.6302-1
through 31.6302-3 apply with respect to the deposit of
employment taxes attributable to payments made after
December 31, 1992. Section 31.6302-1(e)(1)(iii)(E) applies
with respect to the deposit of employment taxes attributable to payments made by government entities under
section 3402(t) made after the later of December 31, 2010,
or the date that is 6 months after the date of publication
in the Federal Register of final regulations under section
3402(t).
Par. 8. Section 31.6302-4 is amended by revising paragraph (b)(5) and adding paragraphs (b)(6) and (e) to read
as follows:
§ 31.6302-4 Federal tax deposit rules for withheld
income taxes attributable to nonpayroll payments
made after December 31, 1993.
*****
(3) Information returns — (i) General rule. Each information return in respect of wages as defined in the Federal
Insurance Contributions Act or of income tax withheld
from wages which is required to be made under
§ 31.6051-2 or of income tax withheld from payments by
government entities as required under § 31.6051-5 shall
be filed on or before the last day of February (March 31 if
filed electronically) of the year following the calendar
year for which it is made, except that, if a tax return
under § 31.6011(a)-5(a) is filed as a final return for a
period ending prior to December 31, the information
statement shall be filed on or before the last day of the
second calendar month following the period for which
the tax return is filed.
*****
(b) * * *
(5) Amounts withheld under section 3406, relating to
backup withholding with respect to reportable payments;
and
(6) Amounts withheld under section 3402(t), relating
to certain payments made by government entities.
*****
Par. 7. Section 31.6302-1 is amended by adding paragraph (e)(1)(iii)(E) and revising paragraph (n) to read as
follows:
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
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January 2009 — Vol. 63, No. 1
*****
(e) Effective/applicability date. Paragraph (b)(6) relating
to certain payments made by government entities applies
to payments made by government entities under section
3402(t) made after the later of December 31, 2010, or the
date that is 6 months after the date of publication in the
Federal Register of final regulations under section
3402(t).
❖ ❖ ❖
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
(1) The name, address, and taxpayer identification
number of the person receiving the payment subject to
withholding under section 3402(t);
(2) The amount of the payment withheld upon;
(3) The amount of tax deducted and withheld under
section 3402(t);
(4) The name, address, and taxpayer identification
number of the government entity filing the form;
(5) A legend stating that such amount is being reported to the Internal Revenue Service; and
(6) Such other information as is required by the form.
(e) Time for furnishing statements. The statement must
be furnished to the payee no later than January 31 of the
year following the calendar year in which the payment
subject to withholding was made.
(f) Cross references. For provisions relating to the time
for filing the information returns required by this section
and to extensions of the time for filing, see §§ 31.6071(a)1(a)(3) and 1.6081-1(b)(3), respectively. For penalties
applicable to failure to file information returns and
furnish payee statements, see sections 6721 through 6724.
(g) Effective/applicability date. This section is effective on
the later of January 1, 2011, or the date that is 6 months
after the date of publication in the Federal Register of
final regulations under section 3402(t).
Par. 6. Section 31.6071(a)-1 is amended by revising
paragraph (a)(3)(i) to read as follows:
Treasury News
Section 401 — Pension Plans
Section 148 — Arbitrage Bond Restrictions
GUIDANCE ON GROUP TRUSTS SHOULD BE UPDATED,
ATTORNEY SAYS. Louis Mazawey of the Groom Law
TREASURY PUBLISHES SEMIANNUAL REGULATORY
AGENDA. The Treasury Department has released its semi-
Group, in a letter to Treasury, has recommended that
guidance on group trusts be updated so that Puerto Rican
trusts and insurance company separate accounts may
participate in group trusts without jeopardizing the exempt status of the trusts or the participating plans.
annual regulatory agenda, listing the guidance it will be
working on during fiscal 2009.
Full Text Citations: Doc 2008-24827; 2008 TNT 228-28
Full Text Citations: Doc 2008-25666; 2008 TNT 236-45
Full Text Correspondence
Outgoing Treasury Letters
Section 509(a)(3) — Supporting Organizations
TREASURY RESPONDS TO LAWMAKER’S CONCERNS
ABOUT RULES FOR TYPE III SUPPORTING ORGANIZATIONS. Kevin Fromer, Treasury assistant secretary for
legislative affairs, has informed Sen. Mel Martinez,
R-Fla., that Treasury and the IRS are considering the
lawmaker’s concerns about the appropriate metric for
required distributions by Type III supporting organizations, as described in an advance notice of proposed
rulemaking. (For REG-155929-06, see The Exempt Organization Tax Review, Sept. 2007, p. 296; Doc 2007-17917; or
2007 TNT 149-9
Full Text Citations: Doc 2008-24406; 2008 TNT 224-13; reprinted at p. 65
Editor’s Note: Full text documents are reprinted
exactly as they were received from the issuing
agency.
The Exempt Organization Tax Review
Treasury Responds to Lawmaker’s
Concerns About Rules for Type III
Supporting Organizations
Kevin Fromer, Treasury assistant secretary for legislative
affairs, has informed Sen. Mel Martinez, R-Fla., that Treasury
and the IRS are considering the lawmaker’s concerns about the
appropriate metric for required distributions by Type III
supporting organizations, as described in an advance notice of
proposed rulemaking.
November 7, 2008
The Honorable Mel Martinez
United States Senate
Washington, DC 20510
Dear Senator Martinez:
Thank you for your recent letter to Secretary Paulson
regarding regulations to prescribe distribution requirements for certain Type III supporting organizations. After
consulting with the Office of Tax Policy, I would like to
offer the following response.
‘‘Supporting organizations’’ that provide support to
certain section 501(c)(3) exempt organizations are classified for Federal tax purposes as public charities, rather
than as private foundations, which are subject to more
stringent rules, including a payout requirement. In the
Pension Protection Act of 2006, Congress directed the
Treasury Department to promulgate new regulations
with a payout requirement for so-called ″nonfunctionally integrated″ Type III supporting organizations. Consequently, the Treasury Department and Internal Revenue Service (IRS) promulgated an Advance
Notice of Proposed Rulemaking dated August 2, 2007,
which would require a non-functionally integrated Type
January 2009 — Vol. 63, No. 1
65
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Incoming Treasury Letters
Focus on Treasury
The Advance Notice requests comments on the payout
requirement and on transition rules for existing organizations. The Treasury Department and IRS are evaluating
comments received in response to the Advance Notice
and are taking those comments into consideration as we
develop proposed regulations. In particular, the Treasury
Department and IRS are considering your concerns re-
66
January 2009 — Vol. 63, No. 1
garding the appropriate metric for required distributions
by Type III supporting organizations.
Thank you for your continuing interest in this important matter.
Sincerely,
Kevin I. Fromer
Assistant Secretary for
Legislative Affairs
❖ ❖ ❖
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
III supporting organization to distribute annually to its
supported organizations an amount equal to 5 percent of
the fair market value of its assets, similar to the payout
requirement for private foundations.
Washington Roundup
Section 55 — Alternative Minimum Tax
Section 170 — Charitable Deduction
H.R. 7336 WOULD PROTECT PRIVATE ACTIVITY BOND
EXEMPTION FROM AMT. H.R. 7336, introduced by House
Ways and Means Committee member Richard E. Neal,
D-Mass., would prevent the alternative minimum tax
from eliminating the tax exemption for interest on state
and local private activity bonds.
Full Text Citations: Doc 2008-26241; 2008 TNT 241-79
Section 142 — Exempt Facility Bond Defined
S. 3700 WOULD PROVIDE BOND INCENTIVES FOR PASSENGER RAIL PROJECTS. Senate Finance Committee
INDEPENDENT SECTOR HEAD SAYS CONGRESS SHOULD
RAISE CHARITY MILEAGE RATE. In a November 25 state-
ment on the IRS’s recent change in standard mileage rates
for vehicle use, Diana Aviv, president and CEO of Independent Sector, an umbrella group of nonprofits, noted
that volunteers can deduct just 14 cents per mile when
driving on behalf of charities and called on Congress to
raise the mileage rate.
Full Text Citations: Doc 2008-24972; 2008 TNT 229-34
member John F. Kerry, D-Mass., has introduced S. 3700,
the High-Speed Rail for America Act of 2008, which
would offer, among other provisions, ‘‘a constant and
reliable source of funding for high-speed passenger rail
and intercity passenger rail in the form of tax-exempt
bonds and tax credit bonds.’’
Full Text Citations: S. 3700; High-Speed Rail for America Act
of 2008. Doc 2008-24634; 2008 TNT 226-21
The Exempt Organization Tax Review
January 2009 — Vol. 63, No. 1
67
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Summaries
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
In-House Advertisement
Intentionally Removed
Court Petitions and Complaints
Section 162 — Business Expenses
Section 501(c)(4) — Civic Leagues, etc.
NO DEDUCTIONS FOR INDIVIDUAL WHO FAILED TO SUBSTANTIATE, COURT SAYS. The Tax Court has upheld the
DOJ ARGUES NINTH CIRCUIT PROPERLY HELD EYE CARE
PROVIDER NOT TAX EXEMPT. The Justice Department has
disallowance of business expense, dependent, and HOPE
scholarship deductions by an individual and the related
penalties against him, saying he failed to substantiate the
business or dependent claims and had exhausted the
statutory eligibility to claim the HOPE credit. Moshe
Shafrir et ux. v. Commissioner, T.C. Memo. 2008-280 (Dec.
15, 2008).
Full Text Citations: Doc 2008-26381; 2008 TNT 242-17; reprinted at p. 80
Section 170 — Charitable Deduction
NINTH CIRCUIT AFFIRMS RELIGIOUS SCHOOL TUITION
PAYMENTS ARE NOT CHARITABLE CONTRIBUTIONS. The
Ninth Circuit has affirmed a Tax Court decision that held
that a couple is not entitled to claim charitable contribution deductions for tuition payments to their children’s
Jewish day schools, finding no error by the Tax Court in
holding that payments for religious education are not
deductible. Michael Sklar et ux. v. Commissioner, No.
06-72961 (9th Cir. Dec. 12, 2008).
Full Text Citations: Doc 2008-26245; 2008 TNT 241-13; reprinted at p. 70
argued that the Ninth Circuit correctly held that a
nonprofit health maintenance organization that offers
vision care services does not qualify for exemption from
federal income tax as a social welfare organization under
section 501(c)(4) and thus review by the U.S. Supreme
Court is unwarranted. Vision Service Plan Inc. v. United
States, No. 08-164 (Sup. Ct. Nov. 17, 2008). For the Ninth
Circuit opinion, see The Exempt Organization Tax Review,
Mar. 2008, p. 342; Doc 2008-2009; or 2008 TNT 22-8.
Full Text Citations: Doc 2008-24853; 2008 TNT 229-15
Section 7611 — Church Tax Inquiry Restrictions
GOVERNMENT OBJECTS TO MAGISTRATE’S RECOMMENDATION TO DENY SUMMONS ENFORCEMENT PETITION
AGAINST CHURCH. The Justice Department has objected
to a magistrate judge’s recommendation that an IRS
petition to enforce a summons against a church be
denied, arguing that the magistrate’s recommendation
cannot be reconciled within the scope of congressional
direction for church audit procedures or IRS operations.
United States v. Living Word Christian Center, 0:08-mc00037-ADM-JJK (D. Minn. Dec. 3,2008).
Full Text Citations: Doc 2008-25702; 2008 TNT 236-19
COUPLE’S NONCASH CONTRIBUTION DEDUCTIONS
ALLOWED. The Tax Court, in a summary opinion, has
held that a couple is entitled to deduct noncash contributions based on the wife’s testimony and the couple’s
documentary evidence. Donald W. Nicholas et ux. v. Commissioner, (T.C. Summ. Op. 2008-155 (Dec. 15, 2008).
Full Text Citations: Doc 2008-26383; 2008 TNT 242-21; reprinted at p. 78
Section 6226 — Partnership Court Review
MAGISTRATE GRANTS MOTION TO COMPEL; IRS
ORDERED TO DISCLOSE STUDY DOCUMENTS. A magis-
trate judge has granted a motion to compel and ordered
the IRS to disclose documents and data related to an IRS
study known as the ″matrix″ in a suit challenging a final
partnership administrative adjustment and the disallowance of charitable deductions for conservation easements
based on valuation information it gathered in the matrix.
RCL Properties Inc. et al. v. United States, No. 1:08-cv-00055
(D. Colo. Dec. 11, 2008).
Justice Department Documents
Section 501(c)(3) — Charities
CHARITY LEADERS WITH ALLEGED TERRORIST TIES
CONVICTED ON TAX CHARGES, DOJ SAYS. The Justice
Department announced in a November 24 release the
conviction in Dallas of Shukri Abu Baker and Ghassan
Elashi, two leaders of the Holy Land Foundation of Relief
and Development, of conspiracy to impede the IRS and
filing false tax returns in an alleged scheme to support
Hamas, a designated terrorist organization.
Full Text Citations: Doc 2008-24990; 2008 TNT 229-30
Full Text Citations: Doc 2008-26262; 2008 TNT 242-18; reprinted at p. 82
The Exempt Organization Tax Review
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Summaries
Court Opinions
Section 3101(b)(10) — Student FICA Exemption
DOJ ARGUES MEDICAL RESIDENTS NOT ENTITLED TO
FICA STUDENT EXCLUSION. In a brief for the Eighth
Circuit, the Justice Department has argued that a district
court erred in finding that a university is entitled to a
FICA tax refund based on its finding that medical residents qualify for the student exclusion from FICA, insisting that the amended regulation reasonably defines
‘‘student’’ to exclude full-time employees. Regents of the
University of Minnesota v. United States, No. 08-2193 (8th
Cir. Aug. 29, 2008). For the district court opinion, see The
Exempt Organization Tax Review, May 2008, p. 195; Doc
2008-7321; or 2008 TNT 66-12.
Full Text Citations: Doc 2008-24984; 2008 TNT 230-16
Taxpayer Briefs
Section 3101(b)(10) — Student FICA Exemption
UNIVERSITY OF MINNESOTA ARGUES MEDICAL RESIDENTS ENTITLED TO FICA EXCLUSION. In a brief for the
Eighth Circuit, the University of Minnesota has argued
that a district court properly granted it summary judgment based on its holding that the full-time employee
rule of the amended FICA regulations is invalid and that
the university’s medical residents therefore satisfy the
student exception to FICA. Regents of the University of
Minnesota v. United States, No. 08-2193 (8th Cir. Sept. 25,
2008).
Full Text Citations: Doc 2008-24987; 2008 TNT 231-33
Full Text Court Opinions
Ninth Circuit Affirms Religious School
Tuition Payments Are Not Charitable
Contributions
The Ninth Circuit has affirmed a Tax Court decision that
held that a couple is not entitled to claim charitable contribution deductions for tuition payments to their children’s Jewish
day schools, finding no error by the Tax Court in holding that
payments for religious education are not deductible.
FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
MICHAEL SKLAR; MARLA SKLAR,
Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
No. 06-72961
Tax Ct. No. 395-01
OPINION
Appeal from a Decision of the United States Tax Court
Argued and Submitted
February 4, 2008 — Pasadena, California
Filed December 12, 2008
Before: Harry Pregerson and Kim McLane Wardlaw,
Circuit Judges, and Ronald B. Leighton,* District Judge.
Opinion by Judge Wardlaw
COUNSEL
Jeffrey I. Zuckerman (argued), Curtis, Mallet-Prevost,
Colt & Mosle, LLP, Washington, D.C., for the petitionersappellants.
Ellen Page DelSole (argued), Eileen J. O’Connor, and
Kenneth L. Greene, Department of Justice, Washington,
D.C., for the respondent-appellee.
OPINION
WARDLAW, Circuit Judge:
Editor’s Note: Full text documents are reprinted
exactly as they were received from the issuing
agency.
70
January 2009 — Vol. 63, No. 1
Michael and Marla Sklar (‘‘the Sklars’’) appeal from a
decision of the Tax Court affirming the disallowance of
deductions they claimed for tuition and fees paid to their
children’s Orthodox Jewish day schools. See Sklar v.
Comm’r, 125 T.C. 281 (2005). We have jurisdiction pursuant to 28 U.S.C. § 7482(a)(1), and we affirm.
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Justice Department Briefs
Court Opinions
I. FACTUAL AND PROCEDURAL BACKGROUND
The Sklars are Orthodox Jews who in 1995 had five
school aged children. Rather than send their children to
public school to meet California State educational requirements, the Sklars enrolled each of their children in
one of two Orthodox Jewish day schools, Emek Hebrew
Academy (‘‘Emek’’) and Yeshiva Rav Isacsohn Torath
Emeth Academy (‘‘Yeshiva Rav’’). They did so ‘‘because
of their sincerely and deeply held religious belief that as
Jews they have a religious obligation to provide their
children with an Orthodox Jewish education in an Orthodox Jewish environment.’’ In 1995, the Sklars paid a total
of $27,283 to Emek and Yeshiva Rav which included
$24,093 for tuition, $1300 for registration fees, $1715 for
other mandatory fees, and $175 for an after school
Mishna program at Emek.1 During 1995, Emek and
Yeshiva Rav each were exempt from federal income tax
under I.R.C. § 501(c)(3), which provides tax exempt
status for certain institutions ‘‘organized and operated
exclusively for religious, charitable, . . . or educational
purposes,’’ among others. Both schools also qualified as
organizations described in I.R.C. § 170(b)(1)(A), which
allows donors to deduct charitable donations to qualifying institutions.
Both schools provided daily exposure to Jewish heritage and values. Their goals included educating their
students in Jewish heritage and values, as well as the
tenets of the Jewish faith. To this end, time was allocated
in the school day for prayers and religious studies,
students were required to adhere to Orthodox Jewish
dress codes, and boys and girls attended classes separately.
A child’s day at each school included specified hours
devoted to courses in religious studies and specified
hours devoted to secular studies. The length of time that
each student participated in secular classes, as opposed
to religious studies, and the length of the total school day
varied with the gender and grade level of the particular
student.
Quality secular education that fulfilled the mandatory
education requirements of the State of California also was
a goal of both schools. Emek sought to provide a thorough and well balanced curriculum in both religious and
secular studies so that every student could succeed ‘‘in
the most rigorous yeshiva [(Jewish)] high schools and
other institutions of higher learning.’’ Yeshiva Rav sought
to prepare its students for matriculation to yeshiva high
schools and to attend a college or seminary.
During the school years in issue, the Sklars paid
tuition and mandatory fees to Emek and Yeshiva Rav for
their children’s education. To ensure payment, the Sklars,
like other parents, were required to contract with each
school to pay, and to give to each school postdated checks
covering, the tuition for the upcoming school year. Both
schools provided tuition discounts to families based on
financial need, if documented by detailed financial information submitted to the schools’ scholarship committees,
but the Sklars did not seek or receive such assistance.
Although an Orthodox Rabbinic ruling precluded either
school from expelling students from the Jewish studies
The Exempt Organization Tax Review
B. The Prior Litigation
In 1993, the Sklars learned of a confidential closing
agreement2 the Internal Revenue Service (‘‘IRS’’) had
executed with the Church of Scientology that purportedly allowed deductions for certain religious educational
services such as auditing and training. The Sklars subsequently amended their tax returns for 1991 and 1992,
and filed a return for 1993, including new deductions for
a portion of the tuition they had paid to their children’s
schools. See Sklar, 125 T.C. at 288. The IRS allowed these
deductions, apparently under the impression that the
Sklars were Scientologists. See id. The Sklars claimed
similar deductions in 1994, but these were disallowed. Id.
at 288-89. The IRS Notice of Deficiency explained that
because the costs were for personal tuition expenses, they
were not deductible. The Sklars pursued an unsuccessful
petition for redetermination before the Tax Court regarding their 1994 deductions, which subsequently came
before us. Judge Reinhardt, writing for our Court in an
opinion joined by Judge Pregerson, upheld the Tax
Court’s denial of the deduction. See Sklar v. Comm’r (Sklar
I), 282 F.3d 610 (9th Cir. 2002), amending and superseding
Sklar v. Comm’r, 279 F.3d 697 (9th Cir. 2002).
In Sklar I, the Sklars made virtually identical arguments to those they assert here, based predominantly on
their theories that a portion of their tuition payments are
tax deductible because they received in exchange only
intangible religious benefits and the Scientology Closing
Agreement is an unconstitutional establishment of religion from which they should also benefit.
The Sklar I panel soundly rejected the Sklars’ argument that certain 1993 amendments to the Tax Code
rendered their tuition payments deductible as payments
to exclusively religious organizations for which the
Sklars received only intangible religious benefits. 282
F.3d at 612-14. Specifically, the panel noted that the
amendments addressed ‘‘clearly procedural provisions’’
and that the deduction the Sklars alleged would be ‘‘of
doubtful constitutional validity.’’ Id. at 613.
Next, the Sklar I panel held that the IRS was compelled
to disclose the contents of its Closing Agreement with the
Church of Scientology, at least to the extent it fell under
I.R.C. § 6104(a)(1)(A), see 282 F.3d at 614-18, and that such
disclosure was necessary as a practical matter because
the agreement affects ‘‘not just one taxpayer or a discrete
group of taxpayers, but a broad and indeterminate class
of taxpayers with a large and constantly changing membership.’’ Id. at 617. Further, the panel held ‘‘where a
closing agreement sets out a new policy and contains
rules of general applicability to a class of taxpayers,
disclosure of at least the relevant part of that agreement
is required in the interest of public policy.’’ Id. In Sklar I,
the panel therefore rejected
the argument that the closing agreement made with
the Church of Scientology, or at least the portion
establishing rules or policies that are applicable to
Scientology members generally, is not subject to
January 2009 — Vol. 63, No. 1
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A. Taxpayers
program during the school year, nonpayment of tuition
could result in expulsion from secular studies and the
schools’ refusal to allow the children to register for
classes in the subsequent school year.
Court Opinions
72
January 2009 — Vol. 63, No. 1
ible as a ‘‘dual payment’’ or ‘‘quid pro quo payment,’’ a
payment made in part as consideration for goods and
services and in part for charitable purposes. In American
Bar Endowment, the Supreme Court held that the taxpayer
must satisfy a two-part test to be entitled to the § 170
deduction for a quid pro quo payment:
First, the payment is deductible only if and to the
extent it exceeds the market value of the benefit
received. Second, the excess payment must be
made with the intention of making a gift.
477 U.S. at 117 (internal citation and quotation marks
omitted). The Sklar I panel held that the Sklars failed to
introduce evidence demonstrating both ‘‘that any dual
tuition payments they may have made exceeded the
market value of the secular education their children
received,’’ 282 F.3d at 621, or ‘‘that they intended to make
a gift by contributing such ‘excess payment.’ ’’ Id. The
panel also suggested that for the purpose of demonstrating the first part of the American Bar Endowment test, the
‘‘market value’’ for the tuition payments would be the
cost of a comparable secular education offered by private
schools, evidence the Sklars had failed to introduce,
perhaps, because of the ‘‘practical realities of the high
cost of education.’’ Id.
C. The Current Litigation
On their 1995 tax return, the Sklars claimed $15,000 in
deductions for purported charitable contributions that
comprised a portion of their five children’s tuition at
Emek and Yeshiva Rav. The deduction was based on their
estimate that 55% of the tuition payments were for purely
religious education, an estimate supported by letters
submitted two years later (in 1997) that were drafted by
each of the schools at the Sklars’ request. Sklar, 125 T.C. at
288-89.
The IRS disallowed the $15,000 deduction. The IRS
also determined the Sklars had ‘‘failed to meet the
substantiation requirements of Internal Revenue Code
Section 170(f)(8) with respect to the disallowed $15,000.00
of claimed charitable contributions.’’ The Sklars petitioned the Tax Court for a redetermination of deficiency,
asserting that (1) the tuition and fee payments to exclusively religious schools are deductible under a dual
payment analysis to the extent the payments exceeded
the value of the secular education their children received
(a question left somewhat open in Sklar I); (2) Sections
170(f)(8) and 6115 of the Internal Revenue Code, as
enacted in 1993, authorized the deduction of tuition
payments for religious education made to exclusively
religious schools (an issue all but foreclosed by Sklar I);
and (3) that the 1993 Closing Agreement between the
Commissioner and the Church of Scientology constitutionally and administratively requires the IRS to allow
other taxpayers to take the same charitable deductions
for tuition payments to their religious schools (a question
the panel discussed at length but declined to decide in
Sklar I). Before the Tax Court, the Sklars and the IRS
stipulated that in 1993 the IRS had executed a confidential closing agreement with the Church of Scientology,
settling several outstanding issues between the IRS and
the Church of Scientology. See id. at 298. Under this
agreement, members of the Church of Scientology were
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
public disclosure. The IRS is simply not free to enter
into closing agreements with religious or other taxexempt organizations governing the deductions
that will be available to their members and to keep
such provisions secret from the courts, the Congress, and the public.
Id. at 618. The Sklar I panel nevertheless opined, without
resolving the issue, that the Tax Court’s ruling that the
Closing Agreement was irrelevant to the deductibility of
the Sklars’ tuition payments was ‘‘in all likelihood correct.’’ Id. It continued:
The Tax Court concluded that the Sklars were not
similarly situated to the members of the Church of
Scientology who benefitted from the closing agreement. While we have no doubt that certain taxpayers who belong to religions other than the
Church of Scientology would be similarly situated
to such members, we think it unlikely that the
Sklars are. Religious education for elementary or
secondary school children does not appear to be
similar to the ‘‘auditing’’ and ‘‘training’’ conducted
by the Church of Scientology.
Id. at 618 n.13; see also Hernandez v. Comm’r, 490 U.S. 680,
684-85 (1989) (describing ‘‘auditing’’ and ‘‘training’’).
The Sklar I panel then turned to the Sklars’ Establishment Clause and administrative consistency arguments.
Although it was not required to decide those issues
because the Sklars had ‘‘failed to show that their tuition
payments constitute a partially deductible ‘dual payment’ under the Tax Code,’’ Sklar I, 282 F.3d at 620, the
panel noted that had it been required to do so, it would
have first concluded that the IRS policy constitutes an
unconstitutional denominational preference under Larson
v. Valente, 456 U.S. 228 (1982).3 See Sklar I, 282 F.3d at
618-19. The panel reasoned that the denominational
preference embodied in the Closing Agreement was
unconstitutional because it ‘‘cannot be justified by a
compelling governmental interest.’’ Id. However, the
panel indicated it would not be willing to extend that
preference to other religious organizations for three reasons: First, an extension of the preference would amount
to state sponsorship of all religions, which the panel
doubted ‘‘Congress or any agency of the government
would intend.’’ Id. at 619-20. Second, an extension of the
preference would be ‘‘of questionable constitutional validity under Lemon,’’4 because administering the policy
‘‘could require excessive government entanglement with
religion.’’5 Id. at 620. Third, the requested policy violated
appeared to violate I.R.C. § 170. Id.
The panel also indicated it would reject the Sklars’
administrative consistency claim because it ‘‘seriously
doubted’’ that the Sklars were similarly situated to the
Scientologists.6 The panel further stated that even if the
Sklars were similarly situated, ‘‘because the treatment
they seek is of questionable statutory and constitutional
validity under § 170 of the IRC, under Lemon, and under
Hernandez, we would not hold that the unlawful policy
set forth in the closing agreement must be extended to all
religious organizations.’’ Id. at 620.
Finally, relying on United States v. American Bar Endowment, 477 U.S. 105 (1986), the Sklar I panel rejected the
argument that the Sklars’ tuition payments were deduct-
Court Opinions
(1) Some schools charge more tuition than Emek
and Yeshiva Rav Isacsohn, and some charge less;
and (2) the amount of tuition petitioners paid is
unremarkable and is not excessive for the substantial benefit they received in exchange; i.e., an education for their children.
125 T.C. at 293-94. The Tax Court concluded that the
Sklars failed to demonstrate that any part of their tuition
payments was intended as a charitable contribution and
that the well established law precluding deduction of
tuition payments to schools providing both secular and
religious education controlled. Second, the Tax Court
held that the 1993 amendments to the Code ‘‘did not
change what is deductible under section 170.’’ Id. at
296-97. In keeping with our reasoning in Sklar I, the Tax
Court concluded that neither § 170(f)(8), nor § 6115, as
amended in 1993, nor the accompanying legislative history suggested that Congress intended to make a substantive change to the Code or to overrule the ‘‘long line
of cases’’ precluding deductibility of tuition payments to
religious schools. Id. at 296. Third, the Tax Court held that
the Closing Agreement between the IRS and the Church
of Scientology is irrelevant to the question of whether the
Sklars are entitled to the § 170 deductions. Id. at 299.
Finally, the Tax Court concluded that the Sklars’ separate
payments for Mishna classes, which were held apart from
other classes at Emek, should not be treated any differently than the tuition and fee payments. The Sklars
timely appeal.
II. DISCUSSION
A. Standard of Review
‘‘We review the Tax Court’s conclusions of law and its
construction of the tax code de novo, and no deference is
owed that court on its application of the law.’’ Sklar I, 282
F.3d at 612. We review the Tax Court’s factual determinations for clear error and its evidentiary rulings for
abuse of discretion. See Sparkman v. Comm’r, 509 F.3d
1149, 1155-56 (9th Cir. 2007).
B. The Sklars’ 1995 Tuition Payments Are Not
Deductible as Charitable Contributions Under the
Internal Revenue Code
[1] Section 170 of the Internal Revenue Code allows
taxpayers to deduct ‘‘any charitable contribution,’’ de-
The Exempt Organization Tax Review
fined as ‘‘a contribution or gift to or for the use of’’ certain
eligible entities enumerated in § 170(c), including those
exclusively organized for religious purposes and educational purposes. I.R.C. § 170(a)(1), (c). ‘‘[T]o ensure that
the payor’s primary purpose is to assist the charity and
not to secure some benefit,’’ we require such contributions to be ‘‘made for detached and disinterested motives.’’ Graham v. Comm’r, 822 F.2d 844, 848 (9th Cir. 1987).
Therefore, ‘‘quid pro quo’’ payments, where the taxpayer
receives a benefit in exchange for the payment, are
generally not deductible as charitable contributions. See
Hernandez v. Comm’r, 490 U.S. 680, 689-91 (1989). In
keeping with this framework, tuition payments to parochial schools, which are made with the expectation of a
substantial benefit, or quid pro quo, ‘‘have long been held
not to be charitable contributions under § 170.’’ Id. at 693;
see also DeJong v. Comm’r, 309 F.2d 373, 376 (9th Cir. 1962)
(‘‘The law is well settled that tuition paid for the education of the children of a taxpayer is a family expense, not
a charitable contribution to the educating institution.’’).
[2] In Hernandez, the Supreme Court considered
‘‘whether taxpayers may deduct as charitable contributions payments made to branch churches of the Church
of Scientology’’8 in return for services known as ‘‘auditing’’ and ‘‘training.’’ 490 U.S. at 684. Both are considered
forms of religious education. ‘‘Auditing’’ involves a form
of spiritual counseling whereby a person gains spiritual
awareness in one-on-one sessions with an auditor. By
participating in ‘‘training,’’ a person studies the tenets of
Scientology, gains spiritually, and may seek to become an
auditor. Members of the Church of Scientology sought to
deduct payments for auditing and training as charitable
contributions for religious services. The Court held that
such payments for religious educational services ‘‘do not
qualify as ‘contribution[s] or gift[s].’ ’’ Id. at 691. Rather,
‘‘[t]hese payments were part of a quintessential quid pro
quo exchange: in return for their money, petitioners
received an identifiable benefit, namely, auditing and
training sessions.’’ Id. The Court reasoned ‘‘ ‘[t]he sine qua
non of a charitable contribution is a transfer of money or
property without adequate consideration.’ ’’ Id. (quoting
American Bar Endowment, 477 U.S. at 118).
[3] The Court further rejected the taxpayers’ argument
that a quid pro quo analysis was not even appropriate,
because the payments for auditing and training services
resulted in receipt of a purely religious benefit. Id. at
692-93. The Court first found no support in the language
of § 170, which makes ‘‘no special preference for payments made in the expectation of gaining religious
benefits or access to a religious service.’’ Id. at 693.
Second, the Court reasoned that accepting the taxpayers’
‘‘deductibility proposal would expand the charitable
contribution deduction far beyond what Congress has
provided.’’ Id. at 693. For example, ‘‘some taxpayers
might regard their tuition payments to parochial schools
as generating a religious benefit or as securing access to
a religious service,’’ which would be incorrect because
‘‘such payments . . . have long been held not to be charitable contributions under § 170.’’ Id. Finally, the Court
noted that ‘‘the deduction petitioners seek might raise
problems of entanglement between church and state’’
because it would ‘‘inexorably force the IRS and reviewing
courts to differentiate ‘religious’ benefits from ‘secular’
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authorized to deduct as charitable contributions at least
80% of the fees for qualified religious services provided
by the Church of Scientology. See id. at 298-99.
The Tax Court again rejected the Sklars’ arguments,
holding that the tuition and fee payments to the Jewish
Day Schools were not deductible under any of the Sklars’
theories.7 First, the Tax Court rejected the Sklars’ effort to
prove that the tuition and fee payments so exceeded the
market value of the secular education their children
received that they took on a ‘‘dual character,’’ i.e. that the
payments had the character of both a purchase of education and a charitable contribution. Id. at 291-94; see also
American Bar Endowment, 477 U.S. at 117. It found that the
Sklars’ expert report regarding tuition at various Los
Angeles area schools demonstrated only that
Court Opinions
1. The 1993 Amendments to the Tax Code Did Not
Overrule Hernandez
To circumvent Hernandez’s clear holding, the Sklars
resurrect their Sklar I argument that the 1993 amendments to IRS §§ 170(f)(8) and 6115 overruled the Court’s
holding in Hernandez that only gifts or contributions may
be deducted under § 170. According to the Sklars, the
1993 amendments provide for the deduction of tuition
payments for which they receive only intangible religious
benefits. We agree with the Tax Court that the Sklar’s
interpretation of the 1993 amendments is misguided.
[4] Amended § 170(f)(8) requires the taxpayer to
‘‘substantiate[ ] the contribution by a contemporaneous
written acknowledgment of the contribution by the
donee organization.’’ I.R.C. § 170(f)(8)(A). This acknowledgment must include an estimate of the value of any
goods or services the donor received in exchange, ‘‘or, if
such goods or services consist solely of intangible
religious benefits, a statement to that effect.’’ I.R.C.
§ 170(f)(8)(B)(iii). The amendment also defines an ‘‘intangible religious benefit’’ as one ‘‘which is provided by an
organization organized exclusively for religious purposes and which generally is not sold in a commercial
transaction outside the donative context.’’ Id. As the Tax
Court correctly held, Sklar, 125 T.C. at 296-97, and as we
have previously suggested, Sklar I, 282 F.3d at 613, this
amendment creates an exception only to the new substantiation requirement created by § 170(f)(8)(A).9 Nothing in the amendment’s language suggests that Congress
intended to expand the types of payments that are
deductible contributions. As the Sklar I panel explained:
Given the clear holding of Hernandez and the absence of any direct evidence of Congressional intent
to overrule the Supreme Court on this issue, we
would be extremely reluctant to read an additional
and significant substantive deduction into the
statute based on what are clearly procedural provisions regarding the documentation of tax return
information, particularly where the deduction
would be of doubtful constitutional validity.
Id.
[5] The second pertinent 1993 amendment requires
donee organizations to disclose limitations on the deductibility of certain quid pro quo payments to the
donors of such payments. See I.R.C. § 6115. Amended
§ 6115(a) requires any organization that ‘‘receives a quid
pro quo contribution in excess of $75’’ to provide the
donor with a written statement declaring that the deductible portion of the contribution cannot include ‘‘the value
of the goods or services provided by the organization,’’
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along with ‘‘a good faith estimate of the value of such
goods or services.’’ However, § 6115(b) explains:
For purposes of this section, the term ‘‘quid pro quo
contribution’’ means a payment made partly as a
contribution and partly in consideration for goods
or services provided to the payor by the donee
organization. A quid pro quo contribution does not
include any payment made to an organization,
organized exclusively for religious purposes, in
return for which the taxpayer receives solely an
intangible religious benefit that generally is not
sold in a commercial transaction outside the donative context.
I.R.C. § 6115(b) (emphasis added). The Sklars read the
exemption from the disclosure requirement for organizations organized exclusively for religious purposes which
provide solely an intangible religious benefit completely
out of context. The Sklar I panel explained why the Sklars’
reading of the exemption is unsupportable:
[Section] 6115 requires that tax-exempt organizations inform taxpayer-donors that they will receive
a tax deduction only for the amount of their donation above the value of any goods or services
received in return for the donation and requires
donee organizations to give donors an estimate of
this value, exempting from this estimate requirement
contributions for which solely intangible religious
benefits are received.
282 F.3d at 613.
Nor does the legislative history of these amendments
even mention Hernandez, and the House Report specifically states that, although the new requirements apply
only to quid pro quo contributions for commercial benefits, ‘‘[n]o inference is intended . . . [regarding] whether
or not any contribution outside the scope of the bill’s
substantiation or reporting requirements is deductible (in
full or in part) under the present-law requirements of
section 170.’’ H.R. Rep. No. 103-111, at 786 n.170 (1993),
reprinted in 1993 U.S.C.C.A.N. 378, 1017 n.170. Thus, the
House Report confirms that Congress intended to preserve the status quo ante, and hardly serves as support
for the Sklars’ argument.10
[6] To put to rest the Sklars’ statutory claim, we now
hold that neither the plain language of the 1993 amendments nor the accompanying legislative history indicates
any substantive change to Hernandez’s holding that payment for religious education to religious organizations is
not deductible. We agree with the observation of both the
Tax Court and the Sklar I panel that had Congress
intended to overrule judicial precedent and to provide
charitable contributions for tuition and fee payments to
religious organizations that provide religious education,
it would have expressed its intention more clearly. See 282
F.3d at 613; 125 T.C. at 296-97.
2. The Tuition Payments Were Not ‘‘Dual
Payment’’ Contributions
[7] The Tax Court correctly concluded that no part of
the Sklar’s tuition payments is deductible under a ‘‘dual
payment’’ analysis. See Sklar, 125 T.C. at 290-94, 299-300.
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ones.’’ Id. at 694. While declining to pass on the constitutionality of such hypothetical inquiries, the Court
noted that ‘‘‘pervasive monitoring’ for ‘the subtle or overt
presence of religious matter’ is a central danger against
which we have held the Establishment Clause guards.’’
Id. (quoting Aguilar v. Felton, 473 U.S. 402, 413 (1985)).
Thus, the Hernandez decision clearly forecloses the Sklars’
argument that there is an exception in the Code for
payments for which one receives purely religious benefits.
Court Opinions
First, the payment is deductible only if and to the
extent it exceeds the market value of the benefit
received. Second, the excess payment must be
‘‘made with the intention of making a gift.’’
Id. at 117 (quoting Rev. Rul. 67-246, 1967-2 Cum. Bull. 104,
105 (1967)). The Court held that Revenue Ruling 67-246
embodied the proper standard, reasoning: ‘‘The sine qua
non of a charitable contribution is a transfer of money or
property without adequate consideration. The taxpayer,
therefore, must at a minimum demonstrate that he purposely contributed money or property in excess of the
value of any benefit he received in return.’’ Id. at 118.
In American Bar Endowment, taxpayer members of a
charitable organization sought to deduct under § 170
refunds from insurance policies negotiated and purchased on their behalf by the charitable organization,
which they donated to the organization. See id. at 106-09,
116-18. They claimed that the premiums paid for the
insurance, part of which was subsequently refunded due
to the ‘‘experience rating’’ of the policies, were dual
payments. Id. The Supreme Court held that the taxpayer
members met neither prong of the two-part test for
deductibility of dual payments. Stating that the ‘‘most
logical test of the value of the insurance [the benefit
received in return for their payment] is the cost of similar
policies,’’ the Court held that because three of the four
taxpayers ‘‘failed to demonstrate that they could have
purchased similar policies for a lower cost,’’ they failed to
demonstrate that their payment exceeded the market
value of the benefit received. Id. at 118. Because the fourth
taxpayer, who did prove that there was a comparable
insurance program at a lower premium rate for which he
was eligible, failed to demonstrate that he knew about
the available lower premium during the tax years at
issue, the Court held that he failed the second prong of
the test — ‘‘that he intentionally gave away more than he
received.’’ Id.
[8] The Sklars again have failed to meet their burden of
satisfying either prong of the two-part test for a dual
payment, and we seriously doubt that they could ever
make the showing that would support a ‘‘dual payment’’
deduction for tuition for combined religious and secular
education.11 In Sklar I, the panel concluded that the Sklars
failed to satisfy the requirements for partial deductibility
of their tuition payments. Our analysis has not changed,
despite the Sklars’ effort to introduce evidence as to
market value.
[9] First, the Sklar I panel reasoned that the Sklars
‘‘failed to show that they intended to make a gift by
contributing any such ‘excess payment.’ ’’ 282 F.3d at 621.
In fact, the Sklars have never even argued — not in Sklar
I, not before the Tax Court and not before us — that they
intended to make a gift as a portion of their tuition
payment. Indeed, the record is to the contrary. In their
brief, the Sklars explain at length that they pay the tuition
The Exempt Organization Tax Review
and fees to send their children to Orthodox Jewish
schools because it is a religious imperative of Orthodox
Judaism. They ‘‘sent their children to Yeshiva Rav
Isacsohn and Emek in 1995 because of their sincerely and
deeply held religious belief that as Jews they have a
religious obligation to provide their children with an
Orthodox Jewish education in an Orthodox Jewish environment.’’ Because they paid for religious education out
of their own deeply held religious views, and because the
record demonstrates that throughout the school day —
during recess, lunch and secular, as well as religious,
classes — the schools inculcate their children with their
religion’s lifestyle, heritage, and values, the Sklars have
actually demonstrated the absence of the requisite charitable intent.
Second, the Sklar I panel reasoned that ‘‘the Sklars
have not shown that any dual tuition payments they may
have made exceeded the market value of the secular
education their children received.’’ Id. The panel stated
that the Sklars needed to present evidence that their total
payments exceeded ‘‘[t]he market value [of] the cost of a
comparable secular education offered by private
schools.’’ Id. Before the Tax Court, the Sklars introduced
expert testimony asserting that ‘‘Catholic schools are the
most reasonable comparison benchmarks for the schools
attended by the Sklar children.’’ Based on his estimation
of tuition paid for Archdiocesan Catholic schools12 in Los
Angeles County in 1995, the Sklars’ expert concluded
that the market value of the secular education the Sklars’
children received was between $1483 and $1724, such
that in 1995 the Sklars made ‘‘excess payments’’ of almost
$5000 per child. The Sklars’ expert also included tuition
data for other Los Angeles schools in his report. The Tax
Court correctly concluded that the evidence in the record
indicated: ‘‘(1) Some schools charge more tuition than
Emek and Yeshiva Rav Isacsohn, and some charge less;
and (2) the amount of tuition petitioners paid is unremarkable and is not excessive for the substantial benefit
they received in exchange; i.e., an education for their
children.’’ 125 T.C. at 293-94. Before us, the Sklars have
failed to demonstrate — or even argue on appeal — that
the Tax Court’s factual findings as to the data set forth in
their expert’s report are clearly erroneous.
[10] Thus, the Tax Court did not err by concluding that
the Sklars failed to show that any part of their tuition fees
was a charitable deduction, subject to a dual payment
analysis. We conclude that under Hernandez and the
Internal Revenue Code, their tuition and fee payments
must be treated like any other quid pro quo transaction,
even if some part of the benefit received was religious in
nature. See 490 U.S. at 691-94. We therefore agree with the
Tax Court that the Sklars’ tuition is not deductible, in
whole or in part, under § 170.
C. The 1993 Closing Agreement Does Not
Constitutionally and Administratively Require the
IRS To Allow Charitable Deductions for the Sklars’
Tuition Payments to Religious Schools
The Sklars reassert their Sklar I argument that in light
of allegedly similar deductions allowed for members of
the Church of Scientology under a closing agreement
with the IRS, the disallowance of deductions for Orthodox Jewish religious education violates the Establishment
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In American Bar Endowment, the Supreme Court considered the question of the extent to which payments to
organizations that bear the ‘‘dual character’’ of a purchase and a contribution are deductible under § 170. 477
U.S. at 116-18. IRS Revenue Ruling 67-246 had set forth a
two-part test for determining the extent to which such
payments are deductible:
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The second Larson inquiry is whether or not the
facially discriminatory policy is justified by a compelling governmental interest. 456 U.S. at 246 47,
102 S. Ct. 1673. Although the IRS does not concede
that it is engaging in a denominational preference,
it asserts in its brief that the terms of the settlement
agreement cannot be used as a basis to find an
Establishment Clause violation because ‘‘in order to
settle a case, both parties are required to make
compromises with respect to points on which they
believe they are legally correct.’’ This is the only
interest that the IRS proffers for the alleged policy.
Although it appears to be true that the IRS has
engaged in this particular preference in the interest
of settling a long and litigious tax dispute with the
Church of Scientology, and as compelling as this
interest might otherwise be, it does not rise to the
level that would pass strict scrutiny. The benefits of
settling a controversy with one religious organization can hardly outweigh the costs of engaging in a
religious preference. Even aside from the constitutional considerations, a contrary rule would create
a procedure by which any denomination seeking a
denominational preference could bypass Congressional law-making and IRS rulemaking by engaging in voluminous tax litigation. Such a procedure
would likely encourage the proliferation of such
litigation, not reduce it. Larson, 456 U.S. at 248, 102
S. Ct. 1673 (holding that even assuming arguendo
that the government has a compelling governmental interest for a denominational preference, it must
show that the rule is ‘‘closely fitted to further the
interest that it assertedly serves’’). Because the
facial preference for the Church of Scientology
embodied in the IRS’s policy regarding its members
cannot be justified by a compelling governmental
interest, we would, if required to decide the case on
the ground urged by the Sklars, first determine that
the IRS policy constitutes an unconstitutional denominational preference under Larson, 456 U.S. at
230, 102 S. Ct. 1673.
282 F.3d at 618-19 (footnote omitted). However, the Sklar
I panel declined to follow the Sklars’ suggestion that they,
too, are entitled to an unconstitutional denominational
preference for three reasons:
First, we would be reluctant ever to presume that
Congress or any agency of the government would
intend that a general religious preference be
adopted, by extension or otherwise, as such preferences raise the highly sensitive issue of state sponsorship of religion. In the absence of a clear expression of such intent, we would be unlikely to
consider extending a policy favoring one religion
where the effect of our action would be to create a
policy favoring all. Second, the Supreme Court has
previously stated that a policy such as the Sklars
wish us to create would be of questionable constitutional validity under Lemon, because the administration of the policy could require excessive government entanglement with religion. Hernandez,
490 U.S. at 694, 109 S. Ct. 2136; see Lemon, 403 U.S.
at 612-13, 91 S. Ct. 2105. Third, the policy the Sklars
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Clause and principles of administrative consistency. They
also argue that the Tax Court abused its discretion in
denying discovery about the Closing Agreement, including compelling its production.13 Before the Tax Court, the
Sklars and the Commissioner ‘‘stipulated that an agreement dated October 1, 1993, between the Commissioner
and the Church of Scientology settled several longstanding issues.’’ 125 T.C. at 298. A letter the Sklars had
received from the IRS was also admitted. It established
that the Closing Agreement ‘‘allows individuals to claim,
as charitable contributions, 80 percent of the cost of
qualified religious services.’’ Id. The Sklars argued that
because of the Closing Agreement, the Commissioner is
constitutionally and administratively precluded from
disallowing their deductions for school tuition and fees,
which they contend are ‘‘jurisprudentially indistinguishable’’ from the auditing and training provided by the
Church of Scientology.
The Tax Court correctly dispatched that argument by
citing to Sklar I. See 125 T.C. at 299. There the panel stated
that ‘‘[w]e seriously doubt that the Sklars are similarly
situated to the persons who benefit from the Scientology
closing agreement because the religious education of the
Sklars’ children does not appear to be similar to the
‘auditing’, ‘training’ or other ‘qualified religious services’
conducted by the Church of Scientology.’’ 282 F.3d at 620;
see also id. at 618 n.13. We also conclude that tuition and
fee payments to schools that provide secular and religious education as part of one curriculum are quite
different from payments to organizations that provide
exclusively religious services. Because the Sklars are
situated differently than members of the Church of
Scientology, the Tax Court did not abuse its discretion in
determining that the Closing Agreement itself was not
relevant, and therefore not discoverable in the Sklars’
redetermination proceedings.
[11] Nor did the Tax Court err in its conclusion that
‘‘the agreement reached between the [IRS] and the
Church of Scientology does not affect the result in this
case,’’ Sklar v. Comm’r, 125 T.C. at 299, because ‘‘the
analysis in [American Bar Endowment ] controls here.’’ Id.
(internal citation omitted). The Sklar I panel previously
assumed the contents of the Closing Agreement, with
reference to a Wall Street Journal article that purported to
reprint the agreement in full. See Sklar I, 282 F.3d at 615;
Scientologists and IRS Settle for $12.5 Million, Wall St. J.,
Dec. 30, 1997, at A12; agreement reprinted in Wall St. J.
Interactive Edition (www.wsj.com). The panel also held
that the IRS must make the Closing Agreement publicly
available.14 282 F.3d at 614-18. The Sklar I panel further
presumed from the IRS’s failure to disclose that the terms
of the Closing Agreement were as set forth in the Wall
Street Journal article, and concluded that the Closing
Agreement constitutes an unconstitutional denominational preference. Id. at 619. We cannot improve upon the
original panel majority’s elucidation of the principles at
stake:
Applying [Larson v. Valente, 456 U.S. at 246 47,] to
the policy of the IRS towards the Church of Scientology, the initial inquiry must be whether the
policy facially discriminates amongst religions.
Clearly it does, as this tax deduction is available
only to members of the Church of Scientology.
Court Opinions
Id. at 619-20.
The Sklar I panel also rejected the Sklars’ administrative inconsistency claim on two grounds:
First, in order to make an administrative inconsistency claim, a party must show that it is similarly
situated to the group being treated differently by
the agency. United States v. Kaiser, 363 U.S. 299, 308
[(1960)]. We seriously doubt that the Sklars are
similarly situated to the persons who benefit from
the Scientology closing agreement because the religious education of the Sklars’ children does not
appear to be similar to the ‘‘auditing’’, ‘‘training’’ or
other ‘‘qualified religious services’’ conducted by
the Church of Scientology. Second, even if they
were so situated, because the treatment they seek is
of questionable statutory and constitutional validity under § 170 of the IRC, under Lemon, and under
Hernandez, we would not hold that the unlawful
policy set forth in the closing agreement must be
extended to all religious organizations.
Id. at 620 (citation omitted).
[12] These principles are as correct today as they were
six years ago. We adopt the full force of the conclusions
they dictate. To conclude otherwise would be tantamount
to rewriting the Tax Code, disregarding Supreme Court
precedent, only to reach a conclusion directly at odds
with the Establishment Clause — all in the name of the
Establishment Clause. The principle the Sklars advance
does not stop with them and their 1995 taxes; its logic
would extend to all members of religious organizations
who benefit from educational services that are in whole
or part religious in nature. The Tax Court correctly held
that neither the Establishment Clause nor principles of
administrative consistency allow the Sklars the deductions they seek, and the Tax Court’s denial of discovery
regarding the Closing Agreement in proceedings involving the deductibility of the Sklars’ tuition and fees was
not an abuse of discretion.
CONCLUSION
The Tax Court correctly affirmed the IRS’s disallowance of deductions the Sklars claimed for tuition and fees
paid to their children’s Orthodox Jewish day schools. The
decision of the Tax Court is AFFIRMED.
Endnotes
*
The Honorable Ronald B. Leighton, United States District
Judge for the Western District of Washington, sitting by designation.
1
Mishna is the study of Jewish oral law.
2
Under § 7121 of the Internal Revenue Code, the IRS is
authorized to execute ‘‘closing agreements.’’ A closing agreement is ‘‘an agreement in writing with any person relating to the
liability of such person (or of the person or estate for whom he
acts) in respect of any internal revenue tax for any taxable
period.’’ I.R.C. § 7121(a); see also 26 C.F.R. § 301.71211. Such
closing agreements are intended to be ‘‘final and conclusive,
and, except upon a showing of fraud or malfeasance, or
misrepresentation of a material fact,’’ shall not be reopened or
annulled. I.R.C. § 7121(b).
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3
Larson v. Valente established an analytical framework to
assess the constitutionality of statutes granting denominational
preferences. 456 U.S. 228, 245-52 (1982). To survive an Establishment Clause challenge under Larson, a statute which grants a
denominational preference must be justified by a ‘‘compelling
governmental interest’’ to which it is ‘‘closely fitted.’’ Id. at
247-48, 252; see also id. at 246 (‘‘[T]his Court has adhered to the
principle, clearly manifested in the history and logic of the
Establishment Clause, that no State can pass laws which aid one
religion or that prefer one religion over another.’’ (internal
citation and quotation marks omitted)).
4
In Lemon v. Kurtz, 403 U.S. 602 (1971), the Supreme Court
established a three-prong test to determine whether the state
has violated the Establishment Clause: ‘‘First, the statute must
have a secular legislative purpose; second, its principal or
primary effect must be one that neither advances nor inhibits
religion; finally, the statute must not foster an excessive government entanglement with religion.’’ Id. at 612-13 (1971) (internal
citations and quotation marks omitted).
5
In Hernandez v. Commissioner, 490 U.S. 680 (1989), the
Supreme Court rejected the claim that payments made to the
Church of Scientology for purely religious education and training were deductible as gifts or contributions under I.R.C. § 170.
Id. at 692-94. Among other reasons it gave for its decision, the
Court explained that ‘‘the deduction petitioners seek might raise
problems of entanglement between church and state.’’ Id. at 694;
see also infra Part II.B (discussing § 170 and Hernandez).
6
Judge Silverman, concurring, concluded that the question of
whether the Sklars were ‘‘similarly situated’’ to the Scientologists had ‘‘no bearing on whether the tax code permits the Sklars
to deduct the costs of their children’s religious education as a
charitable contribution.’’ Sklar I, 282 F.3d at 622. Rather, he
concluded that the Sklars were absolutely barred from taking
the deduction by the Internal Revenue Code and Supreme
Court precedent. See id. at 622-23.
7
The Tax Court also ruled that the Sklars were not liable for
an accuracy-related penalty the IRS had imposed under I.R.C.
§ 6662, an issue not before us on this appeal.
8
In Hernandez, the Commissioner had stipulated before the
Tax Court that ‘‘the branch churches of Scientology are religious
organizations entitled to receive tax-deductible charitable contributions under the relevant sections of the Code.’’ 490 U.S. at
686. This stipulation isolated the statutory issue of ‘‘whether
payments for auditing or training sessions constitute ‘contribution[s] or gift[s]’ under § 170.’’ Id. Similarly, the parties to the
current litigation stipulated before the Tax Court ‘‘that an
agreement dated October 1, 1993, between the Commissioner
and the Church of Scientology settled several longstanding
issues.’’ 125 T.C. at 298.
9
Although the Sklars rely on the new substantiation requirement as support for their deduction of tuition payments, they
did not fully comply with the requirement themselves. Section
170(f)(8)(C) requires that substantiation be provided by the
earlier of (1) the date on which the return is filed or (2) the due
date for filing the return. However, the Sklars did not submit the
required supporting documentation until November 1997. The
IRS argues that this untimely substantiation should serve as an
absolute bar to the Sklars’ claimed deductions. However, some
of the Sklars’ deductions, such as payments for Mishna classes,
were not subject to the substantiation requirement because they
fell below the $250 threshold described in section 170(f)(8).
‘‘Separate contributions of less than $250 are not subject to the
requirements of section 170(f)(8), regardless of whether [they
sum up to] $250 or more.’’ 26 C.F.R. § 1.170A-13(f)(1) (as
amended in 1996). Because we conclude that no part of the
Sklars’ payments were deductible, we need not reach the issue.
10
In light of certain well-established deductible payments to
religious organizations in exchange for intangible religious
benefits, such as pew rents and church dues, see Hernandez, 490
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seek would appear to violate section § 170. See
Hernandez, 490 U.S. at 692-93, 109 S. Ct. 2136.
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❖ ❖ ❖
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Couple’s Noncash Contribution
Deductions Allowed
The Tax Court, in a summary opinion, has held that a
couple is entitled to deduct noncash contributions based on the
wife’s testimony and the couple’s documentary evidence.
T.C. Summary Opinion 2008-155
UNITED STATES TAX COURT
DONALD W. AND PENNY N. NICHOLAS,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
Docket No. 18199-07S
Filed December 15, 2008
Henry Anthony Ebarb, for petitioners.
Christopher J. Sheldon, for respondent.
GERBER, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code
in effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by
any other court, and this opinion shall not be treated as
precedent for any other case.
Respondent determined a deficiency of $712 in petitioners’ Federal income tax for the taxable year 2005. The
sole issue remaining is whether petitioners are entitled to
deduct noncash contributions of $4,906.
Background
Petitioners are married and resided in Arizona at the
time that their petition was filed. Mr. Nicholas is retired,
and Mrs. Nicholas is a kindergarten teacher. Petitioners
were very active in their church and involved in charitable activities, and they are generous contributors.
Although their adjusted gross income (AGI) from all
sources was $89,092, on their original return they reported $43,637 in charitable contributions. Petitioners’
pattern of charitable giving and the relatively large
amount of contributions reported compared to their
income have been their established long-term practice.
Petitioners had a $6,012 carryover of contributions from
their 2004 return in which they had exceeded the 50percent-of-AGI limitation on deductions for any taxable
year.
With respect to the 2005 tax year, Mrs. Nicholas, as she
had in prior years, totaled the cash and noncash contributions for the year and provided her return preparer
with the total amount of $37,6252 for the year. That
amount comprised $32,875 of cash contributions and
$4,906 of noncash contributions. The accountant, thinking that the total comprised solely cash contributions,
reported the entire amount on petitioners’ 2005 return as
a cash contribution.
Respondent decided to examine petitioners’ 2005 return and requested that petitioners substantiate their
contributions. When petitioners realized that $4,906 of
the claimed contributions consisted of noncash contributions to various charities, they timely filed an amended
income tax return for their 2005 tax year including a
The Exempt Organization Tax Review
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U.S. at 701-02, it seems plausible that Congress contemplated
these sorts of contributions in amending §§ 170(f)(8) and 6115 in
a manner that did not impose the arduous task of valuing the
intangible religious benefits, such as the ability to participate in
religious celebrations, that donors receive in exchange for these
contributions.
11
Indeed, the Tax Court expressed skepticism as to whether a
dual payment analysis would ever be appropriate in this
context. See 125 T.C. at 293 (‘‘[M]ore fundamentally, the record
speaks to whether a dual payments analysis applies in this case
at all.’’).
12
The flaws in the expert report itself are too numerous to
mention, but we point out only one: the archdiocesan schools
are subsidized in large measure by the parishes in the Archdiocese in order to force down the costs of education and to afford
all Catholic children the opportunity to attend Catholic schools.
Thus, by choosing archdiocesan schools as the basis for his
comparative market value, the Sklars’ expert guaranteed that
the tuition and fees paid to the Sklars’ schools would greatly
exceed the tuition at the archdiocesan Catholic schools.
13
The Sklars made several efforts to obtain the Closing
Agreement. The IRS repeatedly objected and sought protective
orders on grounds of relevance and in reliance on I.R.C. § 6103,
which makes confidential certain taxpayer ‘‘return information,’’ including closing agreements. The Tax Court sustained
the IRS’s objections, without disclosing its reasoning, and the
document was not admitted into evidence.
14
In Sklar I, we held that closing agreements ‘‘constitute, at
least in part, information required to be disclosed under § 6104,’’
282 F.3d at 615 n.7, and that ‘‘in appropriate circumstances,
disclosure may be required under § 6104 or otherwise,’’ id. at
616. Section 6104 of the Code compels certain 501(c) and 501(d)
organizations to disclose any documents submitted in support
of an application for exemption. However, § 6103 prohibits the
disclosure of closing agreements and other confidential ‘‘return
information.’’ Id. Considering the interaction of the two sections,
we held that ‘‘§ 6103 does not categorically prohibit the disclosure of closing agreements,’’ but on the contrary ‘‘the disclosure
prohibitions of § 6103 are subject to the mandatory disclosure
requirements of § 6104.’’ Id. Our holding in Sklar I is binding
here, although we do not decide the extent to which the Closing
Agreement might be discoverable in an appropriate forum.
Court Opinions
Discussion
The sole issue for our consideration is whether petitioners have substantiated the $4,906 of noncash contributions claimed. Respondent was suspicious of petitioners because they did not claim any noncash contributions
on their original 2005 income tax return. When respondent decided to audit petitioners’ return, petitioners
realized that the $37,625 in contributions claimed included both cash and noncash amounts. Accordingly,
they amended their 2005 income tax return and revised
their reporting to break their contributions down into
cash contributions of $32,875 and noncash of $4,906.
Respondent, however, remained suspicious and did not
accept petitioners’ documentation and explanation of the
noncash amount.
Questions respondent’s counsel asked at trial seem to
indicate that respondent believed petitioners fabricated
the noncash amount to back up the figure claimed on the
original return. Conversely, we note that petitioners’
documentation of cash contributions of $32,875 was
accepted in full.
The Court’s role in this controversy is exclusively that
of fact finder to decide to what extent petitioners have
substantiated their claimed noncash contributions. The
parties did not raise the question of who had the burden
The Exempt Organization Tax Review
of proof or whether it shifted. See sec. 7491(a). In general,
the Commissioner’s determination set forth in a notice of
deficiency is presumed correct, and the taxpayer bears
the burden of showing that the determination is in error.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Petitioners accepted their burden of showing that they
were entitled to the claimed noncash contribution deductions. Respondent does not question whether petitioners’
Form 8283 filed with their amended return met the
statutory and regulatory requirements for reporting noncash contributions. Respondent questions only whether
petitioners’ documentary and oral explanations are sufficient to support their claimed noncash contribution
deductions.
We begin our analysis by noting that Mrs. Nicholas’s
testimony was consistent and forthright even though it
was subjected to extensive and vigorous crossexamination. She adequately explained why petitioners’
original return did not separate out the noncash contribution deductions. Mrs. Nicholas explained her approach
to recollecting the cost of the contributed assets; but more
significantly, she explained how she was able to place a
reasonable current value on the assets. Petitioners’ evidence supporting their noncash contributions was less
precise than the evidence of their cash contributions, but
the Court was persuaded that the assets were contributed
and values were appropriately derived.
The Court was persuaded by Mrs. Nicholas’s forthright testimony and the documentary evidence petitioners provided. In addition, we are cognizant that
petitioners are extremely generous in their charitable
giving as reflected by their cash contributions, which
approximated one-half of their income. Respondent was
fully satisfied with petitioners’ proof of $32,875 of cash
contributions, and that amount of verified cash contributions represents almost 90 percent of the total amount of
2005 contributions. The income tax deficiency attributable to the disallowance of the noncash contribution
deductions was only $712, and petitioners pursued this
matter, with representation, as a matter of principle.
Ultimately, the Court believes Mrs. Nicholas’s testimony and accepts her documentation, and we hold that
petitioners are entitled to deduct $4,906 in noncash
contributions for their 2005 tax year.
To reflect the foregoing,
Decision will be entered under Rule 155.
1
Endnotes
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for 2005, the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
2
The total contribution for 2005 was $43,637, which comprised the $37,625 for 2005 and a $6,012 carryover from prior
years.
❖ ❖ ❖
January 2009 — Vol. 63, No. 1
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Form 8283, Noncash Charitable Contributions, reporting
information that petitioners believed would account for
the noncash contributions of assets to charitable entities
for 2005. On the amended 2005 return petitioners reported $32,875 in cash and $4,906 in noncash contributions, along with the $6,012 carryover from prior years.
Respondent reviewed petitioners’ documentation for
the $32,875 in cash contributions and allowed deduction
of the entire amount that petitioners had claimed on their
amended 2005 return. Respondent, after reviewing petitioners’ documentation and considering Mrs. Nicholas’s
oral statements, disallowed the entire $4,906 of noncash
contributions claimed on the 2005 return.
For the 2005 tax year Mrs. Nicholas maintained notes
on envelopes and on other documents recording the
types of asset, names of charitable recipients, costs, and
estimated values of petitioners’ noncash contributions. In
substantially all instances petitioners had a receipt
and/or letter from the charitable recipient. As is typical
with contributions of assets valued under $500, the
charitable organization left it to the donor to fill out the
items and values, which Mrs. Nicholas did. Although
Mrs. Nicholas did not have receipts to substantiate the
original cost of each item, she had been the purchaser and
had recollection of the amounts. More critically, Mrs.
Nicholas frequented garage sales and flea markets and
had a keen sense of the value of her contributed items.
The items contributed included books, CDs, used furniture and lamps, and similar types of items. Petitioners
were avid readers and accumulated large volumes of
books which they stored in their home. Many of the
books concerned religious topics, and some were children’s books that petitioners regularly purchased for
their children. On regular occasions, as books and other
items accumulated, Mrs. Nicholas would make a trip to
the Salvation Army or some other charitable organization
and make a donation.
Court Opinions
The Tax Court has upheld the disallowance of business
expense, dependent, and HOPE scholarship deductions by an
individual and the related penalties against him, saying he
failed to substantiate the business or dependent claims and had
exhausted the statutory eligibility to claim the HOPE credit.
T.C. Memo. 2008-280
UNITED STATES TAX COURT
MOSHE SHAFRIR AND LILIA VALITOVA,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
Docket No. 8482-07.
Filed December 15, 2008.
Moshe Shafrir, pro se.
Catherine G. Chang, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined a deficiency of
$8,270 in petitioners’ Federal income taxes for 2004, a
$1,675 addition to tax under section 6651(a)(1), and a
$1,654 accuracy-related penalty under section 6662(a).
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for 2004, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
At issue is petitioner Moshe Shafrir’s entitlement to
deductions for business expenses, dependency exemptions, and Hope Scholarship credits beyond those
allowed by respondent. Petitioner Lilia Valitova is a
petitioner only because she filed a 2004 joint Federal
income tax return with her husband. References to petitioner are to Moshe Shafrir.
FINDINGS OF FACT
Some of the facts have been stipulated and are so
found. At the time the petition was filed petitioner
resided in California.
In 1980 petitioner graduated from the Technion-Israel
Institute of Technology in Israel with a bachelor’s degree
in architecture and town planning. Thereafter, petitioner
married, moved to the United States, and eventually
became licensed as an architect in California.
In 2004 petitioner was employed as an architect in San
Jose, California, and in San Francisco, California. Petitioner also worked as an independent architect.
At his home petitioner maintained a cellular telephone
line and three telephone land lines. All of the telephone
lines were used by petitioner and his family in their
personal affairs and also by petitioner in his work as an
independent architect.
In 2004 petitioner took 29 automobile trips totaling
7,320 miles to various cities in California, and petitioner
kept a mileage log relating thereto. The trips were
described in petitioner’s mileage log as being taken for
the purpose of either ‘‘meeting with potential clients’’
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January 2009 — Vol. 63, No. 1
(837 miles) or ‘‘marketing, urban, and architectural
study’’ (6,483 miles). With respect to trips described as
made for the purpose of meeting with potential clients,
petitioner also noted in his log the client’s name, the
location and subject of the meeting, and the architectural
work involved.
With respect to trips described as made for the purpose of marketing, urban, and architectural study, petitioner made no further notes in his log, but petitioner
explained at trial that these trips were not made in
connection with a particular client or a particular architectural work assignment but were made to generally
inform petitioner as to the current urban planning and
architecture of the cities visited. On these trips petitioner
generally stayed overnight with friends or at campsites in
National parks, and petitioner occasionally brought his
family along with him.
In 2004 petitioner’s son and daughter attended college
as full-time students, and petitioner’s son also worked as
a full-time chef at a restaurant.
On his 2002 and 2003 Federal income tax returns,
petitioner claimed Hope Scholarship credits for education expenses he incurred in 2002 and 2003 on behalf of
his son and daughter. In 2005 petitioner’s son timely filed
his own 2004 individual Federal income tax return on
which he claimed himself as a dependent and on which
he reported $27,309 in income relating to his employment
as a chef.
On January 18, 2006, petitioner late filed his 2004
return to which petitioner attached a Schedule C, Profit
or Loss From a Business (Sole Proprietorship), relating to
his work as an independent architect, petitioner reported
business expenses of $11,478. Petitioner also claimed
$6,200 in dependency exemptions and $3,000 in Hope
Scholarship credits with respect to his son and daughter.
On audit respondent determined that petitioner had
not substantiated and therefore was not entitled to the
claimed $11,478 Schedule C expenses, the $6,200 dependency exemptions, and the $3,000 Hope Scholarship
credits. Respondent also determined that petitioner was
liable for the addition to tax under section 6651(a)(1) and
the accuracy-related penalty under section 6662(a).
On April 16, 2007, petitioner filed with this Court his
petition relating to respondent’s statutory notice of deficiency.
On April 26, 2008, petitioner’s son filed with respondent a Form 1040X, Amended U.S. Individual Income Tax
Return, for 2004 on which he disclaimed himself as a
dependent and with which he included a $493 payment
for the additional taxes owed in connection with his
disclaimer of his dependency exemption.
Before trial the parties entered into various settlement
concessions with respect to the disallowed Schedule C
expenses relating to petitioner’s work in 2004 as an
independent architect. The schedule below reflects the
expenses claimed by petitioner on the Schedule C attached to his 2004 return, the amounts conceded by either
petitioner or respondent, and the amounts still in dispute:
The Exempt Organization Tax Review
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No Deductions for Individual Who
Failed to Substantiate, Court Says
Court Opinions
The parties also agreed that the claimed dependency
exemption for petitioner’s daughter was allowable.
OPINION
Generally, as to claimed deductions a taxpayer bears
the burden of proof, and respondent’s determinations are
entitled to a presumption of correctness.1 Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933); Durando v.
United States, 70 F.3d 548, 550 (9th Cir. 1995). A taxpayer
is required to maintain and to submit to respondent upon
request documentation sufficient to establish the amount
and purpose of deductions claimed. Sec. 6001; sec.
1.6001-1(a), Income Tax Regs.
Where appropriate, the Court may estimate the
amount of the expenses and allow deductions therefor.
Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743
(1985).
Under section 162 a taxpayer is allowed to deduct all
ordinary and necessary business expenses paid or incurred during the year. However, deductions for personal, living, or family expenses are not allowed unless
expressly provided under the Code. Sec. 262(a).
At trial petitioner submitted documentation relating
only to the telephone and travel expenses. No documentation was submitted with regard to the other claimed
Schedule C expenses still in dispute.
With regard to the telephone expenses of $1,973, the
documentation petitioner submitted does not provide
sufficient information to distinguish which expenses
were incurred in petitioner’s work as an architect and
which expenses were incurred in petitioner’s personal
and family affairs. Petitioner has not properly substantiated the claimed telephone expenses and has not submitted sufficient evidence for us to make an estimate of
deductible telephone expenses. See Vanicek v. Commissioner, supra at 742-743. The $1,973 in disputed telephone
expenses are not allowed as ordinary and necessary
business expenses.
The Exempt Organization Tax Review
Regarding the $2,397 travel expenses still in dispute
(relating just to the trips described as made for the
purpose of marketing, urban, and architectural study),
expenses incurred by a taxpayer to further his general
education are generally treated as nondeductible personal expenses unless they qualify as business expenses
under section 162. Sec. 274(m)(2); Boser v. Commissioner,
77 T.C. 1124, 1133-1134 (1981), affd. without published
opinion (9th Cir., Dec. 22, 1983); sec. 1.262-1(b)(9), Income
Tax Regs.
In Postman v. Commissioner, T.C. Memo. 1974-145, we
held that an architect’s expenses incurred while traveling
with his family in Europe for the purpose of acquiring
increased understanding of various architectural styles
did not qualify as deductible ordinary and necessary
business expenses. See also Cole v. Commissioner, T.C.
Memo. 1983-88 (expenses incurred on businessman’s
travel to different cities to educate himself generally on
store management and good business practices did not
qualify as deductible ordinary and necessary expenses).
The business purpose of the $2,397 travel expenses
still in dispute has not been adequately substantiated and
the $2,397 are not allowed as ordinary and necessary
business expenses.
Regarding petitioner’s claimed dependency exemption for his son, generally a taxpayer is allowed an
exemption for a dependent if, among other things, the
taxpayer has provided over one-half of the dependent’s
support and the dependent has not claimed himself as a
dependent for the same year. Secs. 151(a), (c), 152(a).
In determining whether a taxpayer provided over
one-half of the support for a claimed dependent, the
amount of support provided by the taxpayer is compared
to the total amount of support which the claimed dependent received from all sources. Sec. 1.152-1(a)(2)(i), Income Tax Regs. ‘‘[S]upport’’ is defined as, among other
things, food, shelter, clothing, education, and medical
and dental care. Id.
Where a claimed dependent has income in the year in
which he is claimed as a dependent, only that portion of
January 2009 — Vol. 63, No. 1
81
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Claimed by
Conceded by
Conceded by
Claimed Schedule C Expenses
Petitioner
Petitioner
Respondent
Still in Dispute
Advertising
$495
$0
$0
$495
Computer depreciation
328
328
0
0
Software depreciation
976
0
0
976
Heater depreciation
5
0
0
5
Legal/prof. services
416
0
300
116
Office supplies
358
0
0
358
Repairs/maintenance
385
0
0
385
Prof. literature
756
0
0
756
Mailing/shipping
321
0
0
321
Printing/copying
401
0
0
401
Prof. training
1,305
0
0
1,305
Architect’s license
200
0
200
0
Telephone
1,973
0
0
1,973
Trips
2,711
0
314
2,397
Total amount
*$10,630
$328
$814
$9,488
*It is unclear from the record the reason for the discrepancy between the $11,478 claimed expenses on the Schedule C attached
to petitioner’s 2004 tax return and the $10,630 total expenses listed in the above schedule.
Court Opinions
Endnote
1
Petitioner makes no argument that he qualifies under sec.
7491(a) for a shift in the burden of proof.
❖ ❖ ❖
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January 2009 — Vol. 63, No. 1
Magistrate Grants Motion to Compel; IRS
Ordered to Disclose Study Documents
A magistrate judge has granted a motion to compel and
ordered the IRS to disclose documents and data related to an
IRS study known as the ‘‘matrix’’ in a suit challenging a final
partnership administrative adjustment and the disallowance of
charitable deductions for conservation easements based on
valuation information it gathered in the matrix.
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Civil Action No. 08-cv-00055-LTB-KLM
(Consolidated with 08-cv-00056-LTB-KLM;
08-cv-00473-LTB-KLM; and 08-cv-00474-LTB-KLM)
RCL PROPERTIES, INC.,
KOZAD PROPERTIES, LTD.,
GLENHILLS RANCH, LTD.,
AMY HILL KOZELSKY,
BOBBY F. HILL, and
DOROTHY A. HILL,
Plaintiffs,
v.
UNITED STATES OF AMERICA,
Defendant.
ORDER
ENTERED BY MAGISTRATE
JUDGE KRISTEN L. MIX
This matter is before the Court on Plaintiffs’ Motion to
Compel [Docket No. 34; Filed August 4, 2008] (the
‘‘Motion’’). Defendant filed a Response on October 27,
2008 [Docket No. 57], and Plaintiffs filed a Reply on
November 18, 2008 [Docket No. 63]. The Court set the
Motion for hearing on December 1, 2008 [Docket No. 61].
In advance of the hearing, the parties agreed to limit their
dispute significantly from the dispute that existed at the
time the Motion was filed. The dispute has been narrowed to four document requests which seek documents
and data underlying or related to a study created by the
Internal Revenue Service (‘‘IRS’’) identified as the ‘‘matrix’’ (Requests for Production 2, 12, 15, and 22 [Docket
No. 35]).
Plaintiffs dispute the value of their allowable deductions for conservation easements derived by the IRS via
the matrix and bring this action to settle their tax liability
pursuant to the Tax Equity and Fiscal Responsibility Act,
26 U.S.C. § 6226. Specifically, Plaintiffs contend that the
Final Partnership Administrative Adjustments (‘‘FPAA’’)
imposed by the IRS, which largely disallowed Plaintiffs’
claimed easement deductions, were erroneous. ‘‘The
matrix is a compilation of valuation data on thirty-five
(35) sales of real property subject to conservation easements located throughout the State of Colorado. . . . The
matrix is largely a body of factual information with
certain assumptions, analysis, and conclusions reached
by the [IRS] concerning the effect of a conservation
easement on value.’’ Reply [#63] at 1-2. The matrix is
important, Plaintiffs argue, because it reflects information
gathered and used by the IRS, in part, to value the
The Exempt Organization Tax Review
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the claimed dependent’s income which is actually spent
on the claimed dependent’s support is considered in
determining total ‘‘support’’ under section 152. See
Carter v. Commissioner, 55 T.C. 109, 112 (1970).
Petitioner claims that in 2004 his son did not spend
any of the $27,309 earned as a chef for his own support,
that petitioner provided over one-half of his son’s support, and that because of his son’s disclaimer on his son’s
amended 2004 tax return, petitioner should be allowed
the exemption for his son.
Petitioner has submitted no credible evidence to corroborate that he provided over one-half of his son’s
support for 2004 and that his son did not provide over
one-half of his own support. Petitioner’s son does not
qualify under section 152(a), and petitioner may not treat
his son under section 151(a) and (c) as a dependent for
2004.
Under section 25A(b)(2), Hope Scholarship credits
may be claimed for the first 2 years of a student’s
postsecondary education. Because petitioner claimed
Hope Scholarship credits for 2002 and 2003 with respect
to his son and daughter, the Hope Scholarship credits
petitioner claims for 2004 are disallowed.
Section 6651(a)(1) imposes an addition to tax for a
taxpayer’s failure to timely file a tax return unless the
taxpayer proves that such failure is due to reasonable
cause and not willful neglect. See United States v. Boyle,
469 U.S. 241, 245 (1985). By virtue of the adjustments that
we sustain herein, respondent has carried his burden of
production under section 7491(c) as to the addition to tax
and the penalty.
Petitioner provided no explanation and submitted no
evidence to suggest that his failure to timely file his 2004
return was due to reasonable cause. We sustain respondent’s imposition of the section 6651(a)(1) addition to tax.
Section 6662(a) and (b)(1) imposes an accuracy-related
penalty equal to 20 percent of the underpayment of the
taxes required to be shown on a return where the
underpayment, or a portion thereof, is due to negligence
or disregard of rules or regulations.
For purposes of section 6662(b)(1), the term ‘‘negligence’’ includes ‘‘any failure by the taxpayer to keep
adequate books and records or to substantiate items
properly.’’ Sec. 1.6662-3(b)(1), Income Tax Regs.
Where a taxpayer can demonstrate reasonable cause
for the underpayment, an exception to the section 6662(a)
penalty may be granted. Sec. 6664(c)(1).
Petitioner has not explained his failure to keep and
maintain proper documentation to substantiate the
Schedule C expenses that we disallow and his expenses
relating to the dependency exemption for his son that we
disallow. The claimed Hope Scholarship credits for his
son and daughter were clearly not allowable.
We sustain respondent’s imposition of the accuracyrelated penalty under section 6662(a).
To reflect the foregoing,
Decision will be entered under Rule 155.
Court Opinions
A. Relevance
The standard for relevance in the discovery context is
broad and production should be allowed for any documents or information ‘‘having any tendency to make the
existence of any fact that is a consequence to the determination of the action more probable or less probable
than it would be without the evidence.’’ Fed. R. Evid. 401;
Cardenas v. Dorel Juvenile Group, Inc., 232 F.R.D. 377, 382
(D. Kan. 2005) (‘‘Relevancy is broadly construed, and a
request for discovery should be considered relevant if
there is ‘any possibility’ that the information sought may
be relevant to the claim or defense of any party.’’ (citations omitted)). In addition, ‘‘[r]elevant information need
not be admissible at the trial if the discovery appears
reasonably calculated to lead to the discovery of admissible evidence.’’ Fed. R. Civ. P. 26(b)(1).
In its Response, Defendant generally argued that the
majority of ‘‘the information sought has no relevance to
the resolution of the value of the conservation easements,
and would not lead to the discovery of admissible
evidence’’ on the issue of ‘‘Plaintiffs’ tax liability for the
years at issue.’’ Response [#57] at 1.
[T]he issue in this case is neither whether the
engineer, revenue agent, or anyone else at the IRS
The Exempt Organization Tax Review
correctly ascertained the facts, nor whether the IRS
employee correctly applied the facts to the law.
Rather the issue is whether the adjustments discussed in the FPAA are correct. . . . [T]hat determination will be based upon documents generated in
the course of the transactions, as well as testimony
by the participants and experts for one or both
parties. It will not be based on the thought processes of IRS employees. . . .
....
What plaintiffs seek, [in] essence, are the opinions
and analysis of the IRS Revenue Officers and/or
IRS Engineers who have worked these cases. . . .
[T]his information is considered irrelevant even in a
proceeding involving the taxpayer involved in the
controversy in litigation.
Response [#57] at 6, 11. At the Motion hearing, Defendant
further argued that the burden of proof Plaintiffs face at
trial does not necessitate discovery of this information.
Specifically, Defendant contends that because the trial
court reviews de novo whether the FPAA was correct,
documents and data underlying the conclusions of the
IRS agents, rather than Defendant’s testifying experts, is
not relevant to that determination.
Plaintiffs contend that despite the trial court’s de novo
review, they possess the burden of proof at trial. See
Beresford v. United States, 123 F.R.D. 232, 233 (E.D. Mich.
1988). First, there is a presumption of correctness given to
the FPAA. See id. (noting that the IRS’s assessment ‘‘is
presumed correct until plaintiff shows otherwise’’).
Plaintiffs argue that possession of the documents and
information they seek would allow them to rebut the
presumption of correctness afforded to the IRS’s FPAA
determination. Second, Plaintiffs must not only rebut the
presumption of correctness by providing prima facie evidence that the FPAA was incorrect, but they also bear the
burden of proving the correct assessment amount. See
Sealy Power, Ltd. v. Comm’r, 46 F.3d 382, 387 (5th Cir. 1995);
Portillo v. Comm’r, 932 F.2d 1128, 1133 (5th Cir. 1991).
Plaintiffs argue that the matrix documents and data and
identity of additional properties are necessary to satisfy
both burdens.
Plaintiffs’ argument is summarized as follows:
Valuation is about opinion as to fact, and in order
for Plaintiffs to adequately defend the audit, they
must meet a burden of proof showing that the
determination made by the [IRS] was incorrect.
That determination reflected in the [IRS’s] report
relies upon the matrix, which is factual in nature.
Obviously, matters of fact are admissible at trial,
whereas opinions as to applicable law are not.
Plaintiffs seek to compel discovery only of factual
matters, not legal analysis or policy matters.
....
. . . The matrix and the specific valuation are inextricably intertwined. Plaintiffs must rebut the presumption of correctness that arises from the issuance of the FPAA which, in turn, will require
Plaintiffs to distinguish the valuations made in the
Valuation Report (including the data relied upon by
the matrix). In order to disprove the conclusion
January 2009 — Vol. 63, No. 1
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charitable contributions for conservation easement deductions that Plaintiffs are entitled to take on property
they own.
The IRS based its FPAA determinations on documents
and data contained in the matrix. Defendant has already
produced to Plaintiffs the matrix graph (the IRS’s conclusions) and excerpts from the matrix (documents and data
relating to seven of the thirty-five properties which the
IRS found to be comparable to the properties at issue).
Reply [#63] at 2. Plaintiffs argue that they need the entire
matrix (all documents and data relating to the thirty-five
properties) and the identity of approximately two hundred additional properties encumbered by easements
that the IRS rejected for inclusion in the matrix. Id. at 15.
Plaintiffs contend that this discovery will enable them to
challenge the IRS’s FPAA determinations. Specifically,
they argue that the matrix and identity of the additional
properties would reveal the analysis and methodology
used by the IRS to determine the value of Plaintiffs’
easements and enable Plaintiffs to bear their burden of
rebutting the valuation made by the IRS and putting
forth the appropriate valuation. Id. at 16-23.
At the December 1, 2008 Motion hearing, the parties
discussed their respective positions [Docket No. 65].
Defendant’s argument against discovery is two fold: (1)
the information contained in the documents and data is
not relevant; and (2) the documents are protected from
discovery by 26 U.S.C. § 6103 which prohibits disclosure
of return information. Plaintiffs assert contrary arguments to both contentions, and also allege that it would
not be possible for them to compile the information
contained in the documents on their own. See also Reply
[#63] at 10-11. While Plaintiffs contend that much of the
information came from public documents, it took five IRS
employees more than one year to compile, organize,
review, and analyze all of the documents that went into
creating the matrix and matrix graph. Id. at 7, 10-11.
Court Opinions
Reply [#63] at 14, 17.
Plaintiffs further argue that ‘‘the opinion of fact itself is
the question to be determined. . . . This is not about
policy or law; it is about value.’’ Id. at 23. Although the
FPAA carries a presumption of correctness, and Defendant argues that there is nothing inherent in the burden
of proof at trial to require information regarding how the
underlying FPAA was derived, the Court notes that the
presumption of correctness ‘‘does not serve to excuse
[Defendant] . . . from providing some factual foundation
for its assessments.’’ Portillo, 932 F.2d at 1133. While
Defendant has already provided documents and data
related to the seven matrix properties that IRS agents
deemed comparable, Plaintiffs simply request the information excluded from the valuation analysis by the IRS
both to demonstrate that the IRS valuation was not
correct and to support their own argument regarding
valuation. Further, by producing at least some documents and data from the matrix and matrix graph, it
appears that Defendant concedes that at least a portion of
this underlying material is relevant. It is not enough for
Defendant to aver that it does not plan to use other
matrix information at trial or to provide such information
to its experts, because the IRS ‘‘has already received the
advantage of [having all the] information’’ available to it
when it made its assessment. See Beresford, 123 F.R.D. at
233. Plaintiffs should be in the same position to bear their
burden at trial.1
The Court finds that information considered by the
IRS — the seven comparable properties — and information rejected by the IRS — the twenty-eight other properties reflected in the matrix and the two hundred
additional properties rejected for inclusion in the matrix
— are relevant to Plaintiffs’ burden of proof in this
litigation. See id. at 235. It may be true that the latter
documents and information have marginal relevance
given the trial court’s de novo review, i.e., they may not be
directly relevant to the trial court’s determination given
that the court will not consider the rationale underlying
the IRS’s opinion. See, e.g., R.E. Dietz Corp. v. United States,
939 F.2d 1, 4 (2d Cir. 1991) (recognizing that the basis for
the IRS’s conclusions is of no consequence to the trial
court’s de novo review); Pierson v. United States, 428 F.
Supp. 384, 390 (D. Del. 1977) (same). However, I cannot
conclude that the discovery Plaintiffs seek has no possible relevance or could not aid Plaintiffs in meeting their
burden of proof by leading to the discovery of other
admissible evidence.
B. Discovery Protection Pursuant to § 6103
26 U.S.C. § 6103 protects certain taxpayer information
— taxpayer ‘‘return[s] and return information’’ — from
unnecessary disclosure. Return information is broadly
defined as anything that contains the identity of a taxpayer, ‘‘the nature and source of their income,’’ receipts,
deductions, tax liability, assets, tax payments, fines, forfeitures, etc. 26 U.S.C. § 6103(b)(2)(A). ‘‘[B]ut such term
does not include data in a form which cannot be associated with, or otherwise identify, directly or indirectly, a
particular taxpayer.’’ Id. § 6103(b)(2). If a document or
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January 2009 — Vol. 63, No. 1
information is considered ‘‘return information,’’ it may
nevertheless be subject to discovery if it is directly related
to resolution of a dispute at issue in a legal proceeding. 26
U.S.C. § 6103(h)(4)(B).
In its Response, prior to the issues being narrowed,
Defendant argued that ‘‘much, if not most of the information at issue was obtained through IRS summonses in
the names of unrelated taxpayers.’’ Response [#57] at 10.
However, Plaintiffs contend that the majority of the
documents came from sources independent of the individual taxpayer. Reply [#63] at 7, 20 (‘‘There has been no
evidence that a tax return of any taxpayer who donated
an easement provided any information whatsoever
which was used to prepare the matrix valuation study.’’).
Plaintiffs’ contention is not contradicted by the declaration of IRS engineer Kerry Packard who indicated that
‘‘the vast majority of this information is from public
record, and that the summonses were ‘‘issued to several
Colorado land trusts.’’ Declaration of Kerry L. Packard
[#57-2] at 2. Further, ‘‘while the identification of the
property may have come from a land trust, the factual
documents appear only to be real estate records from the
[clerk and recorder’s] office, and the analysis performed
by the [IRS].’’ Reply [#63] at 20. As such, Defendant’s
contention stands in direct contrast to Plaintiffs’ contention that the documents they seek were derived from
sources other than individual taxpayer returns.
From a review of the parties’ pleadings and arguments, I find that it is unclear what portions of the
disputed documents Defendant contends are protected
from disclosure as return information. To the extent that
some of the documents were derived from IRS summonses, these summonses appear to have been issued to
land trusts, not to individual taxpayers, and sought only
the identity of a property, not return information. See
Reply [#63] at 7, 20. Further, it is unclear whether the mere
identification of the other two hundred easementencumbered properties would fall into a protected
category.
The nonmoving party has the burden to substantiate
its objection to discovery pursuant to resolution of a
motion to compel. Klesch & Co. v. Liberty Media Corp., 217
F.R.D. 517, 524 (D. Colo. 2003). ‘‘When a party files a
motion to compel and asks the Court to overrule certain
objections, the objecting party must specifically show in
its response to the motion to compel, despite the broad
and liberal construction afforded by the federal discovery
rules, how each request for production or interrogatory is
objectionable.’’ Sonninno v. Univ. of Kan. Hosp. Auth., 221
F.R.D. 661, 670-71 (D. Kan. 2004). Defendant has failed to
adequately support its contention that the documents
and data contained in the matrix were derived from
taxpayer returns or should otherwise be classified as
return information. Further, the Court notes that if the
matrix contained protected return information, Defendant would have undoubtedly objected to producing the
matrix graph, documents and data related to seven of the
thirty-five properties that make up the matrix. In addition, disclosing the identity of the two hundred additional properties not selected for inclusion in the matrix
likewise would not appear to reveal any private return
information.
The Exempt Organization Tax Review
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stated in the matrix, the underlying factual information must be available to Plaintiffs.
Court Opinions
The Exempt Organization Tax Review
Id. at 235. Accordingly,
IT IS HEREBY ORDERED that the Motion is
GRANTED. The information ordered disclosed herein
shall only be used for purposes of this litigation.
IT IS FURTHER ORDERED that the parties shall file a
proposed stipulated protective order detailing the
agreed-upon treatment of the material produced as a
result of this discovery Order on or before December 31,
2008. To the extent that the parties cannot agree on the
terms of the protective order, on or before the same date,
Plaintiffs shall file a motion for protective order setting
forth the parties’ respective positions.
IT IS FURTHER ORDERED that Defendant shall
produce the documents, data, and information responsive to Requests for Production 2, 12, 15, and 22 (which
the parties concede seek production of the documents
and data relating to the remaining twenty-eight properties at issue in the matrix and the identity of the approximately two hundred other easement-encumbered properties only) within fourteen (14) calendar days of entry of
the protective order.
DATED: December 11, 2008
By The Court:
Kristen L. Mix
United States Magistrate Judge
Endnote
1
Although Defendant contended at the hearing that all that is
required for Plaintiffs to rebut the FPAA is an expert report
reaching a contrary conclusion, it has cited no legal support that
Plaintiffs’ burden is so easily overcome.
❖ ❖ ❖
January 2009 — Vol. 63, No. 1
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Regardless of whether the remaining documents and
information are protected return information, I find that
Plaintiffs have a articulated a necessity for disclosure of
this information to satisfy their burden of proof, such that
the ‘‘directly related’’ exception pursuant to
§ 6103(h)(4)(B) is implicated. This exception applies ‘‘if
the treatment of an item reflected on such return is
directly related to the resolution of an issue in the
proceeding.’’ 26 U.S.C. § 6103(h)(4)(B). In such a case,
even protected return information may be discoverable.
As in Beresford, where the Court found the documents
and data underlying the IRS’s assessment were necessary
for plaintiff to rebut the presumption of correctness, I
agree that the matrix and identity of two hundred
additional properties are directly related to Plaintiffs’
‘‘ability to challenge the valuation in this proceeding.’’
Beresford, 123 F.R.D. at 235. Although Defendant contends
that the IRS only used the documents and data related to
the seven comparable properties, presumably there was a
reason that the IRS rejected for comparison the remaining
twenty-eight matrix properties and the other two hundred easement-encumbered properties. As such, while
the latter information may not ultimately have been
relied upon, the IRS had the advantage of this information in determining which properties were comparable
and in reaching its valuation of the disputed easements.
See id. at 233. Plaintiffs should be in the same position to
meet their burden.
Further, such disclosure is consistent with [§ 6103’s]
scheme of permitting disclosure to only those persons who have a legitimate need to know and can
be made under a protective order limiting the
disclosure for the purposes of this litigation. Any
use of the information at trial could be made in
redacted form to code the identity[, if any], of other
taxpayers.
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
In-House Advertisement
Intentionally Removed
Social Welfare
Vision Service Plan v. USA, E.D. Cal., No. Civ. S-041993. The IRS revoked the tax-exempt status of Vision
Service Plan (VSP), a section 501(c)(4) organization, effective January 1, 2003. VSP then filed suit, seeking a
determination that it is a social welfare organization
described under section 501(c)(4) and an order for a
private letter ruling recognizing its 501(c)(4) status. The
district court determined that because less than half of
VSP’s net income went toward uncompensated services,
VSP’s primary activity is not social welfare. It therefore
granted the United States its motion for summary judgment. That many enrollees are small businesses or live in
rural areas — factors listed in the Internal Revenue
Manual — was deemed insufficient. Losses from providing services to members on Medicare, Medicaid, or
California’s Healthy Families Program were also disregarded by the court because VSP took part in a competitive bidding process to get those contracts.
The district court said that VSP’s alleged losses improperly included discounts provided by participating
doctors. Excluding those discounts, VSP spent only 12.5
percent of its net income, or around 1 percent of its gross
income, on Medicaid, Medicare, and Healthy Families
participants. The court expressed skepticism about the
accuracy of VSP’s financial figures, but concluded that
even if they are accurate, they fall well short of the 50
percent mark required to satisfy the requirement that
VSP be engaged primarily in social welfare.
The court’s opinion may be seen at Doc 2005-25157 or
2005 TNT 242-65. VSP appealed to the Ninth Circuit in
February 2006 (Case No. 06-15269), which affirmed the
district court’s decision in a memorandum opinion (see
Doc 2008-2009 or 2008 TNT 22-8; reprinted at p. 342 in the
March 2008 edition of The Exempt Organization Tax
Review). A petition for rehearing en banc in the Ninth
Circuit was circulated to the court on March 14 but
denied on April 9. On August 7, VSP filed for certiorari
with the Supreme Court. (For the petition, see Doc
2008-17381 or 2008 TNT 155-53.)
Five of VSP’s subsidiaries have brought refund suits,
which have been consolidated for discovery and summary judgment purposes. The government filed a summary judgment motion in February.
Student FICA Tax Exemption
U.S.A. v. Mount Sinai Medical Center of Fla., Inc.,
11th Cir., No. 06-11693-GG. In an opinion released May
The Exempt Organization Tax Review
18, the Eleventh Circuit ruled that medical residents are
not categorically ineligible for the student FICA tax
exemption. Mount Sinai had appealed the ruling of the
Southern District of Florida that medical residents did
not qualify for the exemption under section 3121(b)(10).
The Eleventh Circuit found that the district court improperly relied on legislative history without first determining whether the statute is unambiguous and used
sections 3121(b)(6)(B) and 3121(d)(3) as examples of
Congress’s ability to draft specific exclusions from the
student FICA exemption. The case was remanded for
further proceedings.
In a July 28 partial final opinion (docket number
02-22715), the U.S. District Court for the Southern District
of Florida concluded that because Mount Sinai qualified
as a school, college, or university and because its residents were students, the residents qualified for the FICA
exemption. The court ordered the government to refund
$2.5 million in FICA taxes that Mount Sinai had paid on
the stipends of the residents. (For the opinion (Doc
2008-17049, 2008 TNT 152-11), see The Exempt Organization Tax Review, Sept. 2008, p. 332.) The government has
alleged in its amended complaint that the $2.5 million
was miscalculated. A hearing on that allegation has not
yet been scheduled.
Albany Medical Center v. United States, 2d Cir., No.
07-0949. Albany Medical Center has appealed the summary judgment granted to the government by the U.S.
District Court for the Northern District of New York. In
that case, Albany sought to obtain a refund of employment taxes paid for resident doctors between 1995 and
1999. For the district court opinion in Albany Medical
Center v. United States, No. 04-1399 (N.D.N.Y. Jan. 10,
2007), see Doc 2007-982 or 2007 TNT 10-18. The appellant’s brief can be seen at Doc 2007-15772 or 2007 TNT
130-10. The appellee brief was filed on August 10, and
oral arguments were heard on July 8, 2008.
University of Chicago Hospitals v. United States, 7th
Cir. No. 07-1838. The Justice Department has appealed
the decision of the U.S. District Court for the Northern
District of Illinois denying it summary judgment that the
student FICA tax exemption does not apply to resident
doctors. University of Chicago Hospitals (UCH) had filed
for refunds of FICA taxes paid in 1995 and 1996.
In a September 23 opinion, the Seventh Circuit affirmed the district court’s holding.
For the Seventh Circuit opinion, see The Exempt
Organization Tax Review, Nov. 2008, p. 228. For the district
court opinion, see Doc 2006-19211 or 2006 TNT 179-15.
For the Justice Department’s brief, see Doc 2007-14030 or
2007 TNT 115-21; the UCH brief is at Doc 2007-16181 or
2007 TNT 134-12.
January 2009 — Vol. 63, No. 1
87
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Editor’s note: New summaries and those amended
since last month’s edition of The Exempt Organization
Tax Review are preceded by a ✶ .
Current Litigation Status Report
Political Activities
88
January 2009 — Vol. 63, No. 1
The Justice Department’s Tax Department initially
appealed to the U.S. Court of Appeals (docket number
08-5193), but on December 16 the court clerk signed a
stipulated dismissal.
Charitable Deduction
✶ Michael Sklar et ux. v. Commissioner, 9th Cir. No.
06-72961. The Ninth Circuit affirmed an opinion of the
Tax Court that a couple could not claim charitable
deductions for tuition payments made to Jewish day
schools that their children attended (For the 9th Circuit
opinion (Doc 2008-26245; 2008 TNT 241-13), turn to p. 70.)
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
✶ Democratic Leadership Council, Inc. v. USA, D.C.
District Court, Docket No. 05-1067. The Democratic
Leadership Council (DLC) filed suit on May 27, 2005, for
recovery of federal income tax and interest, based on
revocation of its section 501(c)(4) exempt status for the
1997 to 1999 tax years. The DLC alleges, and the IRS
denies, that the IRS examination reports were based on
the Service’s judgment that the DLC ‘‘primarily benefitted affiliated New Democrat elected officials, with a
secondary benefit to the Democratic Party, rather than
benefitting the community as a whole.’’ The DLC was
founded to develop policy for economic, social, and
foreign policy issues; it was granted section 501(c)(4)
status in February 1986.
In its complaint, the DLC referred to the Log Cabin
Republicans, the Ripon Society, and the National Rifle
Association, 501(c)(4) organizations that have maintained
exempt status despite expressly endorsing particular
candidates or parties, to argue that the IRS’s current
position is inconsistent with its long-standing position.
On April 9, the court granted the DLC’s motion for
summary judgment. In making its decision, the court
found that the DLC did not omit or misstate material
facts in its exemption application, and had operated as
that application represented it would. The IRS therefore
violated reg. section 601.201(n)(6)(i) by retroactively revoking the organization’s exempt status. ‘‘It may be that
the DLC is unworthy of [section] 501(c)(4) status. But the
Government gave it that status and cannot retroactively
revoke it in these circumstances,’’ the court said. For the
opinion, see The Exempt Organization Tax Review, May
2008, p. 188.
Illinois
FTB Proposes Amendments to Exempt
Organization Rules
DOR Explains Taxability of Construction
Contractors on Sales to Exempt
Organizations
The California Franchise Tax Board has proposed
amendments to exempt organization rules to allow incorporated subordinates to obtain tax exemption by virtue
of being part of a group, as opposed to filing for
California tax exemption separately.
The Illinois Department of Revenue has issued a
general information letter to explain that a contract to
incorporate tangible personal property into real property
owned by an exempt organization or governmental entity is considered tax free if the entity has obtained an
active exemption identification number (‘‘E’’ number).
Full Text Citations: Doc 2008-25564; 2008 STT 237-9
Colorado
DOR Amends Gross Conservation Easement
Credit Regulation
The Colorado Department of Revenue has amended a
regulation regarding the gross conservation easement
credit to update qualifications for claiming the credit and
for appraisers.
Full Text Citations: Doc 2008-25087; 2008 STT 232-13
District of Columbia
Full Text Citations: Doc 2008-24311; 2008 STT 225-8
DOR Explains Tax Treatment of Nonprofit
Organizations
The Illinois Department of Revenue has issued a
general information letter to explain what nonprofit
organizations must do to make tax-exempt purchases
and the situations in which the organizations may sell
tangible personal property without incurring retailers’
occupation tax liability.
Full Text Citations: Doc 2008-24706; 2008 STT 229-6
DOR Explains Retailers’ Occupation Tax on
Sales by Exempt Organizations
The Illinois Department of Revenue has issued a
general information letter to explain that exclusively
religious, educational, or charitable organizations with
exemption identification numbers may engage in limited
retail selling without incurring retailers’ occupation tax
liability.
Full Text Citations: Doc 2008-25765; 2008 STT 239-9
Final Act 17-503 Authorizes TIF for Grocery
Stores in Downtown Retail Priority Area
District of Columbia Act 17-503, signed into law as L
17-262, provides the use of tax increment financing (TIF)
for grocery and specialty food stores in the downtown
priority area and authorizes the issuance of bonds for a
project to be supported with the TIF.
Full Text Citations: Doc 2008-25824; 2008 STT 239-5
The Exempt Organization Tax Review
January 2009 — Vol. 63, No. 1
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California
State Tax News
Ohio
DOR: Wholly Owned Nonprofit Exempt
From Sales and Use Tax
Supreme Court Remands Property Tax Case
for Trade Secret Status Determination
The Massachusetts Department of Revenue has issued
a letter ruling to explain the conditions under which
supplies and materials purchased to construct a lowincome housing project sponsored by a nonprofit are
exempt from sales tax.
Full Text Citations: Doc 2008-24146; 2008 STT 224-11
The Ohio Supreme Court has remanded a property tax
exemption case to the Board of Tax Appeals to determine
the trade secret status of particular documents and
whether a foundation’s exemption applications constitute waiver of its trade secret rights.
Full Text Citations: Doc 2008-26043; 2008 STT 241-13
Michigan
Washington
Treasury Department Announces Certified
Community Foundations for Tax Year 2008
The Michigan Department of Treasury has issued a
revenue administrative bulletin to list the names, addresses, and phone numbers of the various community
foundations that have been certified by the department
for tax year 2008; contributions to a certified community
foundation may be eligible for tax credits.
Full Text Citations: Doc 2008-25419; 2008 STT 236-8
Treasury Department Lists Certified
Education Foundations for Tax Year 2008
The Michigan Department of Treasury has released a
revenue administrative bulletin to list the various education foundations that have been certified by the department for tax year 2008; contributions to a certified
education foundation are eligible for business tax credits.
Full Text Citations: Doc 2008-25421; 2008 STT 236-9
North Carolina
Appeals Court: Housing Authority Property
Is Tax Exempt
The North Carolina Court of Appeals has affirmed
that a public housing property owned by a limited
liability company and the Housing Authority, a quasigovernmental entity, is exempt from ad valorem taxes
because the property belongs to the Housing Authority,
which has sufficient interest in the property to create an
equitable title.
Full Text Citations: Doc 2008-24742; 2008 STT 229-12
90
January 2009 — Vol. 63, No. 1
DOR Issues Sales Tax Exemption for Yoga
Studios
by Dave Wasson, Spokane
Yoga studios have successfully argued that they
should be exempt from collecting sales tax in Washington.
Following a dispute with several yoga instructors, the
Department of Revenue decided November 19 to stop
requiring collection of the tax after December 1 and to
drop its demands for back taxes that had been made
against some studios. Studios that have been collecting
the sales tax have been advised to continue doing so until
December 1.
At issue is whether yoga is a taxable physical fitness
service or an exempt educational service. The department has given yoga instructors conflicting interpretations over the years.
Now, following a meeting that drew more than 100
yoga enthusiasts to protest the department’s attempts to
begin collecting back taxes from some studios, the department will suspend collection of the sales tax for all
studios as it looks for ways to clarify otherwise confusing
and ill-defined provisions in state tax law in the months
ahead.
‘‘After reviewing the history of Department activity in
this area, I have come to the conclusion that we have
contributed to the confusion by our unclear guidance,’’
Leslie Cushman, the DOR’s deputy director, wrote in a
letter advising department staff to stop requiring collection of the tax.
Department officials say they want to find a way to
distinguish between the activities provided in yoga studios and the types of exercise programs generally offered
through gyms and health clubs.
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Massachusetts
State Tax News
DOR Proposes Expedited Rule Amendment
Regarding Low-Income Housing Exemption
The Washington Department of Revenue has proposed an expedited property tax rule amendment regarding the criteria for true and fair value to comply with new
legislation.
The Washington Department of Revenue has proposed an expedited rule amendment concerning lowincome housing to explain the exemption that may be
claimed by nonprofit entities providing rental housing or
lots for mobile homes within a mobile home park for
occupancy by a very low-income household.
Full Text Citations: Doc 2008-25327; 2008 STT 234-14
The Exempt Organization Tax Review
Full Text Citations: Doc 2008-25339; 2008 STT 235-17
January 2009 — Vol. 63, No. 1
91
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DOR Proposes Expedited Rule Amendment
on Low-Income Property Tax Exemption
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
In-House Advertisement
Intentionally Removed
To the Editor:
After some 41 years employed by the Internal Revenue Service, I thought it would be fun to reminisce a bit
upon my retirement. Recollections about life in a bureaucracy are tedious affairs so my looking backwards will be
fairly succinct.
I modeled my behavior on those IRS employees who
believed that a government official can be both knowledgeable and decent. It took me a while to realize that tax
issues came in two flavors: Issues that are important to be
resolved for a particular organization and issues that are
important to be resolved for the larger exempt organizations community. The trick then is to figure out how to
promulgate issues that have a widespread impact. It also
took me a while to realize that engaging executives was
crucial to getting something accomplished. And while
immediate action is a nice thought, the long view is often
necessary.
In looking back, I am pleased that I had a chance to
deal with healthcare issues where the challenge was to
work cooperatively with practitioners in developing effective strategies for coping with an ever-changing landscape. I am also proud of my role in helping to establish
a variety of solutions for housing organizations. That we
were able to provide timely guidance to exempt organizations involved in disaster relief assistance was very
satisfying. My work on revising Form 1023 was an
exciting opportunity to help shape the approach by
which the IRS regulates exempt organizations. Of course,
these success stories were hardly solo adventures. They
required considerable input from others within the EO
Division and from Counsel, Treasury, and the interested
EO community.
Some of my fondest memories are wrapped up in the
numerous educational texts and seminars with which I
was involved. I would frequently receive phone calls
from IRS people who either attended the seminars or saw
my name associated with a particular subject area. As a
tax nerd, they probably did not realize that I loved
talking with them about their tax issues. But, that was
also true of practitioners who called about a wide variety
of matters. Their trust in my opinion was both flattering
and helped inform my views about what was occurring
in the EO community.
When I took over as the chief of our technical group, I
tried my best to figure out solutions. I did not want to
simply be another impediment to exempt organizations
realizing their important mission. Over the years, I could
not help from turning discussions with some of my
younger colleagues into learning opportunities. For sheer
fun, nothing could beat dealing with the media and with
The Exempt Organization Tax Review
congressional staffers. It was great to have the backing of
our IRS public affairs and legislative specialists who
encouraged me to be forthright while helping to steer me
away from inadvertently adding to the confusion or
concern that prompted the inquiry.
Over the years I was privileged to work with so many
enormously talented practitioners, especially those who
were able to balance their clients’ needs with a clear sense
of the tax law and public expectations for their charitable
clients. I will refrain from mentioning names of individual practitioners because the list would be way too
long, plus receiving praise from an IRS official may not
be a client-friendly favor. I would be remiss in not
mentioning the assistance I received over the years from
EO lawyers and accountants from the American Bar
Association, the American Institute of Certified Public
Accountants, and from the American Health Lawyers
Association. These publicly spirited lawyers and accountants were adept at providing valued advice about
Marvin R. Friedlander
January 2009 — Vol. 63, No. 1
93
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Marvin Friedlander Reflects on
Long IRS Career
Letter to the Editor
94
January 2009 — Vol. 63, No. 1
writing a plain language guide for exempt organizations.
I shanghaied Rick Darling, a reviewer who worked in
EO’s Rulings and Agreements office, into being my
co-author. Bobby Zarin, the director, EO Education and
Outreach, had just been hired when we finished the first
draft. She immediately agreed to assist in editing and
producing this new publication.
Then we experienced the horror of September 11. I
rushed to have the publication issued electronically even
before the printed version was ready because organizations needed immediate guidance to respond to the crisis.
However, our forms and publications folks assured me
that their rules required that an IRS publication must first
be issued in hard copy before it could be electronically
posted even though the hard copy could not be published for several months. When I explained the predicament to the Tax-Exempt and Government Entities Commissioner, Evelyn Petschek, she quickly assured me that
she would make a few calls and that I should let her
know if there were any further roadblocks. The draft
publication was posted electronically, well before the
hard copy was published.
When I retire at the end of the calendar year, I don’t
anticipate working in the exempt organizations tax law
field. I asked that my farewell be kept low key. I suppose
I will do the requisite puttering and gardening. I like
reading and writing. I also have two teenagers who seem
to believe that life requires constant drama. My dear wife
has learned to put up with me . . . barely. The dog always
needs a walk. And my health is again stable. This is a
good time for me to embark on another part of the
journey.
Your friend and colleague,
Marv Friedlander
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
exempt organization tax matters. They were also willing
to put up with my corny jokes whenever I had the
opportunity to address their members.
I will not be so shy in recalling some of the many,
many wonderful IRS people with whom I enjoyed a
collegial relationship. In recent years, I appreciated working with Lois Lerner, Rob Choi, Ron Schultz, Jeanne
Callahan, Bobby Zarin, Steve Pyrek, and my amigo, Joe
Urban. Over a long period of time, I enjoyed working
closely with Marcus Owens, Steve Miller, Cindy Westcott, Jack Reilly, David Jones, Rick Darling, Bob Fontenrose, Bill Brockner, Larry Brauer, Howard Schoenfeld,
Chuck Barrett, and Leon Kaplan. I also worked with
many excellent attorneys from the Office of Chief Counsel and Treasury, including Sarah Ingram, Cathy Livingston, James Brokaw, Mike Blumenfeld, Don Spellmann,
and Susan Brown.
I am so grateful to the EO managers with whom I
worked, including Gerry Sack, David Fish, Steve
Grodnitzky, Debra Kawecki, and Bob Harper. When I
first entered EO, Joe Tedesco, Edward (Buz) Coleman,
Paul Kane, and Connie Rosenberg were very kind to the
new kid. Paul Streckfus holds a somewhat unique position. I enjoyed my association with him when he was a
happy-go-lucky tax law specialist and throughout his
remarkable transition into a muckraking journalist. I am
leaving out many talented people who must know that I
also enjoyed working closely with them. There is just not
enough space to list all the IRS, Treasury and Counsel
folks I had the pleasure of knowing over the years.
I would like to bore you with one story among the
many positive experiences from my EO career.
I had been assigned the disaster relief beat. After a
while, I realized that the same questions were being
asked during each disaster. Therefore, I decided to begin
The National Center on Philanthropy and the Law is preparing a comprehensive bibliography of international research
materials pertaining to the law of nonprofit organizations. Citations to the English-language resources, including legal treatises,
law review, and other articles; selected published outlines; and government documents will be included.
In cooperation with The Exempt Organization Tax Review, we intend to publish, in the EOTR, a monthly selection of
additions to our bibliography. The 123rd installment follows. We will be grateful for suggestions for articles and other items to
be included. Our legal bibliography will be made available to students, faculty, and others worldwide. The Center intends to
produce the bibliography in book format, with periodic journal updates. Legal citations in the print version primarily will be
indexed by topic.
We envision ultimate publication of the complete bibliography via CD-ROM, through the LEXIS and WESTLAW online
services, and as an Internet database on the World Wide Web. Electronic versions of the database will support robust searching
techniques, including keywords and field-restricted searches.
We hope that our legal bibliography will serve as a valuable research tool for the nonprofit community.
The Center welcomes your advice and input as we complete that project. Please contact Susan Belkin at the address below.
We appreciate your assistance and look forward to hearing from you.
National Center on Philanthropy and the Law
New York University School of Law
110 West 3rd Street, 2nd Floor
New York, NY 10012-1074
Phone: (212) 998-6075
Fax: (212) 995-3149
E-mail: ncpl.biblio@nyu.edu
URL: http://www.law.nyu.edu/ncpl/
The Law of Nonprofit Organizations:
A Selected Monthly Bibliography
ANNOUNCEMENT: The entire NCPL Nonprofit
Law Bibliography is now available online, without
charge. First-time users, please visit the bibliography
information Web page at http://www.law.nyu.edu/ncpl/
library/bibliography.html to learn more about using the
bibliography. Those already familiar with the bibliography may access its directory at http://ncpl.law.nyu.edu/
NCPLSearch/.
Copyright © 2008 National Center on Philanthropy
and the Law. Please send suggestions for the NCPL’s
nonprofit legal bibliography project to the following
e-mail address: ncpl.biblio@nyu.edu. For more information, visit our Web site at http://www.law.nyu.edu/ncpl/.
John T. Bigalke and Stephen J. Burrill, ‘‘Time for a
Second Look at SOX Compliance,’’ Healthcare Fin.
Mgmt., Aug. 2007, at 57.
Alan R. Andreasen, ‘‘Cross-Sector Marketing Alliances: Partnerships, Sponsorships, and CauseRelated Marketing,’’ in Nonprofits and Business: A
New World of Innovation and Adaptation (2008).
Jeff Breinholt, ‘‘Misperceptions and Misrepresentations About U.S. Counterterrorism Efforts,’’ 43 Wake
Forest L. Rev. 627 (2008).
Karen Atkinson, ‘‘Charities and Political Campaigning: The Impact of Risk-Based Regulation,’’ 29
Liverpool L. Rev. 143 (2008).
The Exempt Organization Tax Review
Matthew Bishop, ‘‘Philanthrocapitalism on Trial,’’
Chron. Philanthropy, Oct. 30, 2008, at 73.
Matthew Bolton and Alex Jeffrey, ‘‘The Politics of
NGO Registration in International Protectorates:
The Cases of Bosnia and Iraq,’’ Disasters, Dec. 2008,
at 586.
Charles Brecher and Oliver Wise, ‘‘Looking a Gift
Horse in the Mouth: Challenges in Managing Philanthropic Support for Public Services,’’ 68 Supp. 1
Pub. Admin. Rev. S146 (2008).
Evelyn Brody, ‘‘Business Activities of Nonprofit
Organizations: Legal Boundary Problems,’’ in Nonprofits and Business: A New World of Innovation and
Adaptation (2008).
January 2009 — Vol. 63, No. 1
95
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
National Center on Philanthropy and the Law’s
Nonprofit Legal Bibliography Project
EO Tax Bibliography
Coverage, Claims and Consequences: An Insurance Handbook for Nonprofits (Melanie Lockwood Herman ed.,
2008).
Simon Brown, ‘‘Colleges Express Opposition to Mandatory Payouts From Endowments,’’ 62 Exempt
Org. Tax Rev. 18 (2008).
Henry Jones, ‘‘New IRS Regulations Projected to Improve Tax-Exempt Application,’’ 62 Exempt Org. Tax
Rev. 11 (2008).
Simon Brown, ‘‘IRS Must Act on Pulpit Freedom
Sunday, Former Official Says,’’ 62 Exempt Org. Tax
Rev. 146 (2008).
Eric Kelderman, ‘‘Charity Hospitals Report Data in
Divergent Ways,’’ Chron. Philanthropy, Oct. 30, 2008,
at 69.
Simon Brown et al., ‘‘Officials at Health Lawyers
Conference Discuss Hospitals, EO Issues,’’ 62 Exempt Org. Tax Rev. 13 (2008).
Joe Carlson, ‘‘Unlocking the Community Chest,’’ 38
Mod. Healthcare 6 (2008).
Terrance S. Carter et al., Charities Legislation & Commentary, 2009 Edition (2008).
Jeremiah Coder, ‘‘Congress Scrutinizes Tax-Exempt
Bonds for Stadiums,’’ 62 Exempt Org. Tax Rev. 23
(2008).
Joseph J. Cordes and C. Eugene Steuerle, ‘‘The Changing Economy and the Scope of Nonprofit-Like
Activities,’’ in Nonprofits and Business: A New World
of Innovation and Adaptation (2008).
Danshera Cords, ‘‘Charitable Contributions for
Disaster Relief: Rationalizing Tax Consequences
and Victim Benefits,’’ 57 Cath. U. L. Rev. 427 (2008).
Anita Dehne et al., ‘‘Taxation of Nonprofit Associations in an International Comparison,’’ 37 Nonprofit
& Voluntary Sector Q. 709 (2008).
Elizabeth Dillinger, comment, ‘‘A Not So Starry Night:
The Pension Protection Act’s Destruction of Fractional Giving,’’ 76 UMKC L. Rev. 1045 (2008).
Laura K. Donohue, ‘‘Constitutional and Legal Challenges to the Anti-Terrorist Finance Regime,’’ 43
Wake Forest L. Rev. 643 (2008).
Eric Kelderman, ‘‘IRS Denies Organization’s Application as a Church,’’ Chron. Philanthropy, Oct. 30, 2008,
at 69.
Carolyn Wright LaFon, ‘‘IRS Answers Questions
About Elimination of Advance Ruling Process,’’ 62
Exempt Org. Tax Rev. 12 (2008).
Linda M. Lampkin and Harry Hatry, ‘‘Measuring the
Nonprofit Bottom Line,’’ in Nonprofits and Business:
A New World of Innovation and Adaptation (2008).
Judy D. Lewis and Quepha Lynn, ‘‘Political Interventions: Actions Tax-Exempt Organizations Should
Avoid,’’ CPA J., June 2008, at 14.
Anup Malani and Guy David, ‘‘Does Nonprofit Status
Signal Quality?’’ 37 J. Legal Stud. 551 (2008).
Donald Morris, ‘‘Tainted Money and Charity: Do
501(c)(3)s Have a Right to Refuse a Gift?’’ 37
Nonprofit & Voluntary Sector Q. 743 (2008).
Alistair M. Nevius, ‘‘Prop. Regs. Govern Charitable
Contribution Substantiation and Reporting,’’ 39 Tax
Adviser 640 (2008).
Michael W. Peregrine, ‘‘More Than Just Conflicts:
Form 990’s Focus on Decision-Making Integrity,’’ 62
Exempt Org. Tax Rev. 153 (2008).
Benjamin J. Richardson, ‘‘Putting Ethics Into Environmental Law: Fiduciary Duties for Ethical Investment,’’ 46 Osgoode Hall L. J. 243 (2008).
Doug Eadie, Meeting the Governing Challenge: Applying
the High-Impact Governing Model to Your Organization (2008).
Michael W. Ryan, comment, ‘‘Not All Practices Make
Perfect: How the Treasury’s Revised Anti-Terrorist
Financing Guidelines Still Fail to Adequately Address Charitable Concerns,’’ 43 Wake Forest L. Rev.
739 (2008).
David L. Forst et al., ‘‘Discretion to Allocate Among
Beneficiaries Did Not Disqualify Trust as CRUT,’’
109 J. Tax’n 242 (2008).
Paul S. Ryan, ‘‘527s in 2008: The Past, Present, and
Future of 527 Organization Political Activity Regulation,’’ 45 Harv. J. on Legis. 471 (2008).
J.Y. Gilg, ‘‘Charity Begins at the Tribunal,’’ 152 Solic. J.
16 (2008).
Kathryn A. Sampson, ‘‘Nonprofit Risk; Nonprofit Insurance,’’ 2008 Ark. L. Notes 83.
Ase Berit Grodeland, ‘‘Suspiciously Supportive or
Suspiciously Obstructive? — The Relationship Between Local Government and NGOs in Bosnia &
Herzegovina, Serbia, and Macedonia,’’ 31 Int’l J.
Pub. Admin. 911 (2008).
Hillel Schmid et al., ‘‘Advocacy Activities in Nonprofit
Human Service Organizations,’’ 37 Nonprofit &
Voluntary Sector Q. 581 (2008).
Teresa D. Harrison, ‘‘Taxes and Agglomeration Economies: How Are They Related to Nonprofit Firm
Location?’’ 75 S. Econ. J. 538 (2008).
Eileen Sherr, ‘‘Guidance Issued on Dividing CRTs,
Assisting Divorcing Couples,’’ 39 Tax Adviser 641
(2008).
96
January 2009 — Vol. 63, No. 1
Jeffrey G. Sherman, ‘‘Can Religious Influence Ever Be
‘Undue’ Influence?’’ 73 Brook. L. Rev. 579 (2008).
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Evelyn Brody, ‘‘Governing the Nonprofit Organization: Accommodating Autonomy in Organizational
Law,’’ 46 Can. Bus. L. J. 343 (2008).
EO Tax Bibliography
Stephen Rathgeb Smith, ‘‘The Challenge of Strengthening Nonprofits and Civil Society,’’ 68 Supp 1 Pub.
Admin. Rev. S132 (2008).
Burton Sonenstein and Christa Velasquez, ‘‘Innovative
Foundation Financing: The Annie E. Casey Foundation,’’ in Nonprofits and Business: A New World of
Innovation and Adaptation (2008).
Hal T. Stern, ‘‘Capturing Your Charity Care: 5 Recommendations,’’ Healthcare Fin. Mgmt., Sept. 2007, at
124.
Fred Stokeld, ‘‘IRS Survey of Colleges Seeks Information on Compliance,’’ 62 Exempt Org. Tax Rev. 143
(2008).
Fred Stokeld, ‘‘Postissuance Compliance Remains
Focus of Exempt Bonds Team,’’ 62 Exempt Org. Tax
Rev. 19 (2008).
Fred Stokeld, ‘‘Questions Raised About Instructions
on Revised Form 990,’’ 62 Exempt Org. Tax Rev. 14
(2008).
Conrad Teitell, ‘‘IRS Issues Safe-Harbor Charitable
Lead Unitrust Samples,’’ Taxwise Giving, Nov. 2008,
at 1.
Fred Stokeld, ‘‘Effective Date of Regs on Tax-Sheltered
Annuity Plans Approaching, Official Notes,’’ 62
Exempt Org. Tax Rev. 25 (2008).
David M. Townsend and Timothy A. Hart, ‘‘Perceived
Institutional Ambiguity and the Choice of Organizational Form in Social Entrepreneurial Ventures,’’
Entrepreneurship Theory & Prac., July 2008, at 685.
Fred Stokeld, ‘‘GAO: Hospitals Have Latitude in
Determining Community Benefit,’’ 62 Exempt Org.
Tax Rev. 144 (2008).
Marni M.K. Whitaker, ‘‘Not-for-Profit Corporations
and Defects and Deficiencies in the Ontario Corporations Act,’’ 46 Can. Bus. L. J. 379 (2008).
Fred Stokeld, ‘‘Grassley Starts Inquiries of Two
Exempt Hospitals,’’ 62 Exempt Org. Tax Rev. 16
(2008).
Ian Wilhelm, ‘‘Politics and Prayer,’’ Chron. Philanthropy, Oct. 30, 2008, at 44.
Fred Stokeld, ‘‘Illinois Hospital Exemption Case Highlights Ongoing Community Benefit Issues,’’ 62 Exempt Org. Tax Rev. 17 (2008).
Joseph Woodruff, ‘‘One Foundation’s Legal Battle: A
Cautionary Tale for All Nonprofits,’’ Nonprofit
World, Sept./Oct. 2008, at 23.
The Exempt Organization Tax Review
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Maxim Sinitsyn and Burton A. Weisbrod, ‘‘Behavior of
Nonprofit Organizations in For-Profit Markets: The
Curious Case of Unprofitable Revenue-Raising
Activities,’’ 164 J. Instit. & Theoretical Econ. 727
(2008).
January 2009 — Vol. 63, No. 1
97
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
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