Exempt Organizations Update
FY 2011 EO Work Plan
Dallas CPA Society
Continuing Education Conference
Douglas N. Varley
Caplin & Drysdale, Chartered
Washington, D.C. 20005
Roadmap
• Exempt Organizations
– News from Capitol Hill
– IRS (EO) Guidance
– Noteworthy Court Cases
• Looking Ahead to FY 2011
– Treasury Guidance Plan
– IRS (EO) Workplan
– Focus on International Issues
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News from Capitol Hill
Sen. Baucus Calls for Investigation Re Political Activity
• On September 29, 2010, Senate Finance Committee
Chairman Max Baucus asked IRS Commissioner Shulman to
survey major 501(c)(4), (c)(5),and (c)(6) organizations to
determine compliance with limits on political activity.
“With hundreds of millions of dollars being spent in election
contests by tax exempt entities, it is time to take a fresh look
at current practices and how they comport with the Internal
Revenue Code's rules for nonprofits.”
• Issues include:
– “primary purpose” test
– compliance with the proxy tax requirements of IRC section
6033(e)
– excess benefits to donors?
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News from Capital Hill
Gift Tax and Section 501(c)(4)
• IRS is auditing five returns of donors who
contributed to (c)(4) organizations.
• Rev. Rul. 82-216, 1982-2 C.B. 220. (c)(4)
gifts are taxable.
• Carson, 71 TC 252 (Affirmed, 641 F2nd 864,
10th Cir. 1981); Stern, 436 F.2d 1327 (5th Cir.
1971).
• IRS: “not part of a broader effort”
• GOP Senators weigh in.
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News from Capital Hill
Ways and Means Report on AARP
In March, Ways & Means issues “Behind
the Veil” report on AARP. Questions:
• Use of Subsidiary corporations
• Lobbying on Health Care bill
• Compensation
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News from Capital Hill
Exemption as a Tax Expenditure?
• At a hearing in March, Senator Grassley
questioned tax exemption for fee for service
charities – hospitals, software companies.
• Congress should calculate the “tax
expenditure” associated with exemption, not
just deductions.
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News from Capitol Hill
Senate Finance Staff Report re Megachurches
•
Sen. Grassley’s Staff Report re: Tax Issues Raised by Media-Based
Ministries – released in January 2011
•
Citing his positive experience with the Independent Sector,
Sen.Grassley asked the Evangelical Council for Financial
Accountability (ECFA) to lead a discussion about how to address the
issues raised by his staff.
•
ECFA announced the establishment of its Commission on
Accountability and Policy for Religious Organizations, which will
address tax and policy issues involving religious organizations –for
example:
– whether churches should file Form 990,
– whether legislation is needed to curb abuses of the clergy housing
allowance exclusion, and
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– whether the current prohibition against political campaign
intervention by churches and other nonprofits should be repealed
or modified.
IRS (EO) Guidance
In March, the IRS released proposed
regulations under section 6104(c), as
amended by the Pension Protection Act of
2006 . Section 6104(c) expands permitted
disclosures to appropriate state officers,
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IRS (EO) Guidance
PLR 201043041 holds that “blocker”
subsidiary works to prevent attribution of
The IRS recently released proposed
UBTI to CRUT.
regulations under section 6104(c) of the
Internal Revenue Code, as amended by
the Pension Protection Act of 2006
(reprinted below).
Section 6104(c)
expandson a
PLR 201114036
“providing
services
permitted disclosures to appropriate state
regular basis for feesofficers,
is a trade or business
ordinarily carried on for profit and is not an
activity that is substantially related to any
exempt purpose except insofar as it provides
revenue.” Really?
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IRS (EO) Guidance
• Denial 201113036: EO’s operations are so
functionally interrelated with relate company,
so as to result in an impermissible private
benefit to Company and Company's
shareholder.
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IRS (EO) Guidance
• The IRS issued Notice 2011-6 to provide guidance regarding
the implementation of new Treasury regulations governing tax
return preparers.
• Beginning January 1, 2011, a Preparer Tax Identification
Number (PTIN) must be obtained by all tax return preparers
who are compensated for preparing, or assisting in the
preparation of, all or substantially all of any U.S. federal tax
return, claim for refund, or other tax form submitted to the IRS
except specified forms.
• Forms 990, 990-T, 1023, 1024 are not excluded.
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Mayo Foundation v. United States
• IRS victorious in upholding regulations under which medical
residents and similar full-time employees cannot qualify as
students exempt from FICA.
• Supreme Court held that tax regulations are entitled to higher
Chevron deference.
– Rejected arguments based on absence of a specific statutory
delegation of power.
– Rejected arguments based on age of regulation, past
inconsistency, timing of promulgation, etc.
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Hastings Law School Case
• Supreme Court upholds Law School’s “open
to all students” recognition policy against first
amendment challenge. Christian Legal
Society v. Martinez.
• SC ruled for the school on grounds that the
state does not have to subsidize all activity
equally.
• Similar to Taxation w/ Representation v.
Reagan. Implications for Citizens United
and exempt organizations?
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Governance Requirements
• Ohio Disability Association, 2009 TCM.
Organization with one director denied
exemption in part b/c insufficient oversight.
• Rev. Rul. 66-219 held on director not a per
se bar to exempt status.
• But, calls for candid and full disclosure.
Otherwise, there is an inference that the
organization will not operate for exempt
purposes.
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501(c)(6) Exemption Denied
Asmark Institute v. Commissioner , T.C. Memo. 2011-20 (filed
Jan. 24, 2011).
• Asmark provided a series of services to promote regulatory
compliance to agribusiness; converted to nonprofit status.
• Services provided for a fee were held commercial, and the
services offered for free were marketing tools to promote its
commercial activities.
Bluetooth SIG v. United States, 611 F.3d 617 (9th Cir. 2010)
• Association’s primary functions were to develop, market, and
license Bluetooth technology, for which it held the trademarks
and patents.
• Its activities were not directed at the improvement of business
conditions for an entire line of business (didn’t benefit
15 nonmembers).
Unrelated Business Cases
Ocean Pines Ass’n v. Comm’r, 135 T.C. No. 13 (2010).
• A section 501(c)(4) homeowner’s association was deemed to
have unrelated business income from the operation of parking
lots and a beach club not open to the general public.
• Revenue from parking lots did not qualify as rental income .
• NOTE: no convenience exception under section 513(a)(2).
Bartels Trust v. U.S., 2010-2 U.S.T.C. ¶50,602 (Fed. Cir. 2010).
• Trust income from the sale of margin-financed securities was
subject to UBIT because margin-financed securities are debtfinanced property under sections 512 and 514.
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Treasury/IRS Priority Guidance Plan for FY2011
Of interest to Exempt Organizations:
•
Unfinished business from last year:
–
–
–
–
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Final regulations re: supporting organizations
Regulations re: donor-advised funds
Regulations on group returns
Final regulations on IRS investigations of churches (IRC section
7611)
Treasury/IRS Priority Guidance Plan for FY2011
New Projects:
•
•
Guidance on new requirements (section 501(r)) for nonprofit hospitals.
Guidance updating grantor and contributor reliance criteria under Code
sections 170 and 509.
Guidance on excess business holdings rules in IRC section 4943, as amended
by the PPA.
Guidance on program-related investments under IRC section 4944.
Update final regs under IRC section 6104, relating to disclosure to state charity
agencies.
Final regulations under Code section 6104 reading disclosure of certain
administrative actions that are required to be made available to the public.
Final regs under Code section 170 regarding updated appraisal requirements
for certain charitable contributions.
•
•
•
•
•
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EO Work Plan for FY 2011
Audit/Compliance projects winding down to be integrated into
general casework:
• Combined Annual Wage Reporting
– EO reviewed employment tax reporting by comparing information reported
on Form W-2 (to SSA) and Form 941 (to IRS)
• Consumer Credit Counseling
– 63 Organizations examined; IRS revoked, terminated or proposed
revocation in 41 cases.
• Down Payment Assistance
– EO examined DPA organizations that are funded solely by home sellers.
IRS revoked, terminated or proposed revocation for 87 of 91 orgs.
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EO Projects Winding Down…
• Executive Compensation Compliance Initiative: Loans Project
•
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– Executive Comp Compliance Initiative Report (March 2007) raised
concerns about substantial loans to “TDOKEs.”
– Loans Project began with 200 compliance checks and 50 single
issue exam. Based on those results, additional organizations
were selected – total of 169 audits ensued.
Results?
– Assessment of > $5.5 million in section 4958 taxes
– Assessment of >$480 thousand in employment taxes for income
not previously reported.
– Proposed revocation or termination (18 cases)
– Written advisory issued (75 cases)
– Change or delinquent return secured (including related returns)
(39 cases)
– No Change (37 cases)
IRS College & University Audit Project
(in progress…)
• October 2008: Questionnaire sent to 400 colleges and
universities
• May 2010: Interim Report released
• Today: Selective audits of 40 schools underway
– Focused on UBIT, executive compensation and endowment
issues
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Controlling Organizations
Section 512(b)(13) Project
• IRS is focusing on tax treatment of payments between
controlled entities and their tax-exempt parent organizations.
Issues include:
– UBIT
– Allocation of Income and Deductions among taxpayers
– Transfer of Property
• PPA changed the rules (but only for pre-PPA
arrangements)
• IRS is collecting information through college/university
audits and other initiatives.
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National Research Program
Study of Employment Tax Returns
Lois Lerner has said that IRS is increasingly interested in EOs as
employers. Closing the “tax gap.”
•
•
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IRS is examining the employment tax returns of 1500 organizations,
with 500 selected randomly each year over a three-year period.
Specific areas of interest included: worker classification, fringe
benefits, officer compensation, employee expense reimbursements,
and non-filers.
Tax year 2008 returns are being examined now. Exams of 2009
returns will commence in early 2011.
Non-501(c)(3) Compliance Project
• IRS is increasing its focus on section 501(c)(4), section
501(c)(5) and section 501(c)(6) organizations to determine
compliance with IRC requirements.
• Private inurement?
• Primary purpose test?
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Supporting Organizations Compliance Project
• To combat reported and perceived abuses by section 509(a)(3)
organizations, IRS has taken a two-pronged approach:
(1) Instructions to EO Determinations function and (2) Audits.
• 300 Examined, with 280 closed so far . . .
–
–
–
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30 terminated
72 revoked
59 reclassified as private foundations or public charities
Charitable Spending Initiative
• Study of sources and uses of funds in the sector and their
relationship to the accomplishment of charitable purposes.
• Examined organizations include those where returns indicate:
– high fundraising costs
– UBIT and little program service expense
– low ratios of program service expense to total revenues
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International Focus: Charities
• EO concern is whether charitable assets are being diverted
internationally for non-charitable purposes. Current efforts
intended to explore:
–
–
–
–
–
Foreign entities receiving IRS recognition of exempt status
Information referred from the JITSIC
Charities reporting foreign addresses on Form 990
Charities that participate in “gifts in kind” programs
Large private foundations with international operations or
international transactions
• OFACwarning against terrorist exploitation of charities
– FAQs, Voluntary Guidelines, Risk Matrix, other materials at
http://www.treasury.gov/resource-center/terrorist-illicitfinance/Pages/protecting-index.aspx
– Dialogue with Treasury Guidelines Working Group has ended
• Schedule F changes
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Questions?
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Thank You
For questions, feel free to contact:
Douglas N. Varley
Caplin & Drysdale
One Thomas Circle N.W., Suite 1100
Washington, D.C. 20005
Office -- 202-862-5000; Fax -- 202-429-3301
Email: mowens@capdale.com; dholmes@capdale.com; mdurham@capdale.com
www.capdale.com
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