exempt organizations: washington update - pulp fusion

May 8, 2013

By

Douglas N. Varley

Caplin

& Drysdale, CharteredWashington, D.C. 20005

Exempt Organizations: Washington Update

A Presentation to the Dallas CPA Society Continuing Education Conference – Convergence 2013

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Presented By:Title of Attorney

Roadmap

Exempt Organizations—Review of Recent activity– Guidance from Treasury– IRS FY2012 Guidance and EO Annual Report– News from Capitol Hill

Looking Ahead to FY2013– IRS EO FY2013 Work Plan– IRS/Treasury Priority Guidance Plan

In addition:– Noteworthy Cases– State AG Developments

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Final & Temporary Regulations Re: Type III SOs and Proposed Payout Requirements for Non-Functionally Integrated SOs

• On December 28, 2012, Treas. issued final and

temporary regulations re: requirements to qualify as a

Type III Supporting Organization.

• The IRS also issued a NPRM regarding the payout

requirements for non‐functionally integrated Type III

SOs. – NFI Type III SOs

must annually distribute the greater

of 85% of adjusted net income or 3.5% of the FMV of

investment assets. Final regs

allow set‐asides to count

toward the distributable amount.

• IRS issued internal memo in February 2013 instructing

managers to classify Type IIIs

based on December 2012

final & temp regulations

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IRS EO FY 2012 Report (published Jan. 25, 2013)

• Governance Study – Preliminary Results– Completed analysis of 1,300 governance checksheets

from 501(c)(3)s– Found control of organization concentrated in one individual or small

group associated with noncompliance

– Will examine statistical sample of 501(c)(3)s and (c)(4)s in FY2013

• Affordable Care Act – Continued Implementation– Proposed new regulations for charitable hospitals under §

501(r)– Working on community health needs assessments guidance

• Federal‐State Coordination– 70% increase in referrals to IRS from state charity regulators and tax

agencies over past 6 years

– In FY2011, IRS EO made 27,000 disclosures to 8 state tax and charity

agencies that have met information sharing eligibility requirements

• Plain Language Course for EO personnel – “Express Yourself”

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2012: IRS Guidance Highlights

• Notice 2012‐52 re: Treatment of SMLLCs

• Auto‐Revocation Update

• Group Ruling Questionnaire

• National Research Project (employment tax audits)

• Other Audit Activity

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Notice 2012-52: IRS Confirms Deductibility of Contributions to Domestic Disregarded LLCs

• On July 31, 2012, the IRS confirmed that donors may claim charitable deductions for their contributions to domestic disregarded LLCs

that are wholly owned

and controlled by U.S. charities.

• The Service remains silent on the issue with respect to disregarded entities organized under foreign law, leaving the treatment of those entities to be

determined under the existing regulations.

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Automatic Revocations—Update

• PPA added IRC §

6033(j) – automatic revocation for EOs

that

fail to file Form 990s for 3 consecutive tax years.

• Taxpayer Advocate 2012 Annual Report to Congress critical

of TE/GE delays and errors in revocation/reinstatement

process

• Auto‐Revocation List is updated periodically and searchable

via “EO Select Check”

on the IRS website.

– As of the last update (April 2013), 500,092 organizations had been revoked.

– As of March 2013, about 37,000 revoked organizations

had applied for reinstatement. As of December 2012, just

under 15,000 revoked organizations had been reinstated.

• Group exemption holders beware: if central organization fails

to file, all

subordinate organizations are auto‐revoked. 178

central organizations have been automatically revoked.

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Group Ruling Questionnaire

• IRS recently issued a questionnaire to 2,000 central organizations holding group rulings.

• Purpose is to understand relationship w/ subordinates, compliance with “supervision and

control”

requirements of Rev. Proc. 80‐27.

• The questionnaire is a “voluntary compliance check,”

not an audit. For now…

• IRS will report the results to the public in 2013 for comment.

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Other 2012 Audit Activity

From the EO Work Plan:

• Large Private Foundations• Community Foundations • 990‐T/UBIT –

forthcoming audits

• College & University project winding down – report just

released

• Note: IRS cites failure to respond to requests for

information in revocation of tax‐exempt status. – See, e.g., PLRs

201240029, 201240028 , 201222046, 201209008,

201209007

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IRS States that a Conservation Easement Subject to a “Swap” is Not Deductible

• Info. Ltr. 2012‐0017 states that the contribution of a “swappable”

easement is not deductible under section 170(h).

– “Swap”

allows donee

to remove property from the conservation

easement in exchange for protection of other property or cash.

– Deduction allowed if a “swap”

satisfies Treas. Reg. 1.170A‐14(g)(6):

• unexpected changes make use of the property for conservation purposes

impractical;

• the restrictions are extinguished by judicial proceeding; and

• donee’

uses proceeds from a subsequent sale or exchange of the property in a

manner consistent with the conservation purposes of the original

contribution.

– Does a donee

that agrees to swaps lose its tax‐exempt status or

status as an eligible donee? Chief Counsel for IT & A have asked

TE/GE.

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IRS: Granting Conservation Easement for “Mitigation Credits” is a “Sale or Exchange”

• In PLR 201222004, a ranch owner negotiated a “mitigation bank

agreement”

by which the owner would grant a perpetual

conservation easement on land to a governmental agency and

would receive “mitigation banking credits”

in exchange.

– “Mitigation banking credits”

may be retained and used to mitigate

development activity in other nearby natural habitats or may be sold to others

who may use the credits to satisfy compensatory mitigation requirements.

The owner planned to sell the credits.

• The IRS held that the transaction was a “sale or exchange of

property”

under section 1001 (thus any gain or loss to the taxpayer

would be recognized).

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IRS Focus on 501(c)(4) Organizations and Political Activity

• Tea Party groups received detailed requests for additional

information on section 501(c)(4) applications.

• Case in point: Emerge America – ME, MA, and NV state affiliates denied exemption in 2011.– AZ, CA, KY, NM, and WI affiliates revoked in 2012.– Citing American Campaign Academy, the revocations were based on private

benefit (to a political party) rather than on impermissible political activity. The

organizations’

educational programs were limited to women in a particular

party.

• Other Denials – PLR 201224034 : purposes included political change and promoting solutions to

a state’s problems through grassroots advocacy. IRS held that organization

primarily benefited its sole director, and there was “no community input or

oversight.”

– Denial 201214035: organization supported foreign political candidates.

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News from Capitol Hill Senators Weigh In on 501(c)(4)s and Political Activity

• April 2013: Sen. Whitehouse (D‐RI) urges prosecution of political c4s– Says DOJ should prosecute for making false statements.

• February 2012: Letter from 7 Democratic Senators– “We urge you to protect legitimate section 501(c)(4) entities by preventing non‐

conforming organizations that are focused on federal election activities from

abusing the tax code.”

• March 2012: Letter from 7 Democratic Senators– promotes a “bright line”

test (e.g., 51 percent) says section 501(c)(4)

organizations should report percentage of social welfare activity on Form 990.

• August 2012: Letter from 10 Republican Senators:– “public confidence in the non‐partisan integrity of the agency demands that you

issue no sub‐regulatory guidance nor engage in any similar efforts that would

effectuate immediate changes without a lengthy period of review,

separated in

time from the current heated political environment.”

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News from Capitol Hill The Fiscal Cliff

• President Obama Signed The American Taxpayer Relief Act of 2012 on

January 2, 2013.

– Rates go up for married couples with taxable income over

$450,000.

– Capital gains tax maximum tax rate increases to 20 percent.

– Estate/Gift/GST exemption amount remains at $5M, indexed for

inflation but the maximum rate increases to 40 percent.

– The charitable deduction remains intact (for now), but:

• itemized deductions are phased out for married couples with

AGI over $300,000 ($250,000 for singles). Taxpayers lose

itemized deductions equal to the lesser of (a) 3% of the excess

of AGI above the threshold or (b) 80% of otherwise allowable

itemized deductions.

• Urban Institute and Tax Policy Center study says Pease

limitation has negligible effects on tax incentive for charitable

giving, and tax benefit will rise for top income tax bracket.

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News from Capitol Hill Tax Reform Rumblings

• Rep. Camp and Sen. Baucus have stated are committed to tax

reform

• House Ways & Means Hearing – February 2013– Discussion of charitable deduction

• Meetings on hill regarding tax reform –

still at listening stage

• Issues affecting EOs could include:– Charitable deduction– Breadth of definition of “charity”

(e.g., hospitals, credit unions)– Commercial activities– Donor‐Advised Funds and Supporting Organizations– Large size of endowments– Political activity –

especially by 501(c)(4)s

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News from Capitol Hill Senator Grassley

• Colleges and universities– Treasury Secretary Jack Lew’s pay and perks at NYU– Growth and pay in perks as tuition increases and regardless of

performance

– Growth in college administration vs. instructors– Endowment and other tax‐favored asset accumulation– Best use of donated funds (student perks, aesthetic projects, donors

pet causes)

– Manipulation of data to lure students– High student loans and defaults

• Hospitals profiting from discount drug programs designed to benefit

poor and uninsured

• Travel by Smithsonian employees

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IRS EO FY 2013 Work Plan (published Jan. 25, 2013)

• Significant Diversions of Assets – 285 organizations– EO will conduct exams with review of governance policies in FY2013

• Unrelated Business Income– 512(b)(13) study ongoing – PPA amendments re UBTI– FY2013 will examine sample of orgs reporting substantial gross UBI for

3 consecutive tax years, but reporting no income tax due

• Employment Tax Compliance– Third and final year of IRS‐wide research project – 2,500 returns remaining to complete in FY2013

• International Activities of Charities– FY2013 focus on exams of organizations with high amounts of foreign

grant expenditures

• 501(c)(4), (5), & (6) “Self Declarers”– FY2013 questionnaire to self‐declarers filing Form 990 in 2010 or 2011

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Treasury/IRS Priority Guidance Plan for FY2013 (published Nov. 19, 2012)

Projects of particular interest:

– Revenue Procedures updating grantor and contributor reliance criteria under sections 170 and 509.

– Guidance under sections 4942, 4945 on reliance standards for making equivalency determinations.

– Final regs & guidance on supporting organizations.– Final regs program‐related investments (section 4944) . – Regs on donor‐advised funds (section 4966).– Final regs under I.R.C. §

6104(c).

– Final regs on church tax inquiries, examinations.– Regs on group returns (section 6033). – Revenue Procedure under I.R.C. §

6033 to update and

consolidate all non‐regulatory exceptions from filing.

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Treasury/IRS Priority Guidance Plan for FY2013 Final Regulations Under I.R.C. 6104(c)

• PPA amended section 6104(c) to expand disclosure to state

officials:

– Information re: pending applicants for exempt status, including returns and

return information.

– Proposed (rather than final) determinations.– IRS may provide such information on its own initiative, if it believes the

information is evidence of noncompliance with state requirements.

• Treasury proposed regulations in March 2011.

• In an October 28, 2011 letter to Treasury, 43 state AGs sought

further liberalization of the disclosure process, particularly

freeing state charity officials from section 7213 criminal

sanctions for inadvertent disclosure of information.

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Still Awaiting Guidance from Treasury re: Donor-Advised Funds

• Treasury’s conclusions in 12/5/2011 report to Congress on DAFs/SOs:

– Deduction rules for SOs/DAFs “are appropriate.”– DAFs have higher payout rates than PFs, so DAF payout

requirement would be “premature.”

– DAFs’

and SOs’

legal control is a bulwark against donor abuses.

• Sen. Grassley: study “gives abusive organizations cause for

celebration.”

• Congressional Research Service last summer issued analysis of DAFs:

– “donors appear to have actual control of grant making because

sponsoring organizations typically follow their advice….In many

cases they effectively have investment control as well.”

– DAFs “can also reduce current charitable giving by encouraging

fund accumulation, a concern that presumably motivated the

minimum distribution rules for private foundations.”

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Noteworthy Cases Ocean Pines Association—Parking Lot and Beach Club Produce UBTI

• In Ocean Pines Association, Inc. v. Comm’r, 672 F.3d 284 (March 2, 2012)

the 4th

Circuit held that revenue from members‐only parking lots and

beach club of a section 501(c)(4) organization was UBIT.

• Membership was limited to residential property owners in Ocean Pines,

MD. POA maintained two parking lots and an oceanfront beach club

in

Ocean City, Maryland which was eight miles away. Access was limited for

non‐members.

– “The Association’s parking lots—which are open during summer days

only to Association members—and its beach club—which permits

public access only to restrooms and food services . . . serve only the

private interests of the Association members.”

– The 6th

Circuit held that the parking lots and beach club was not

“substantially related”

to the Association’s purpose of the promotion

of social welfare. Net income was UBTI.

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Noteworthy Cases Section 4958

Section 4958 imposes tax for excess benefits provided to disqualified persons

by public charities and 501(c)(4)s:

– Tax on DP: initial tax is 25% of excess benefit; additional tax of 200% if not corrected– Tax on Manager: initial tax is 10% of excess benefit

• Rutherford v. Comm’r, U.S. Tax Court (Dec. 14, 2012)

– In stipulated decision, initial and additional tax on DP were $49,999 and $399,998.

• Quartet of related tax court cases decided July‐September 2012

– Stipulated decisions, resulted in $227,371 of 4958(a)(1) tax and

$303,194 of income tax

– Rural Media Group, Inc. v. Comm’r; RFD‐TV Theater Group LLC v. Comm’r; RFD

Communications, Inc. v. Comm’r; Patrick Gottsch v. Comm’r

• Additional cases resulting in deficiencies in 2010 and 2011

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Noteworthy Cases Conservation Easements

• In Scheidelman v. Comm’r, T.C. Memo 2013‐18 (Jan. 16, 2013), taxpayer was disallowed

deduction on remand from Second Circuit because appraisal was not a qualified appraisal

that genuinely sought to determine value.

• In Belk v. Comm’r, 140 T.C. No. 1 (Jan. 28, 2013), taxpayer was disallowed deduction for golf

course because easement contained provision allowing donor to substitute the property for

another contiguous parcel.

• In Mitchell

v. Comm’r, 138 TC No. 16 (2012), taxpayer was disallowed deduction because

mortgagee’s deed was not subordinated to conservation easement deed until 2 years after

donation.

• In Carpenter v. Comm’r, TC Memo 2012‐1 (2012), taxpayer’s deduction was disallowed when

conservation easement deed allowed for extinguishment by mutual written agreement of

donor and donee if circumstances arose that rendered easement’s purpose impossible to

accomplish. Easement was not enforceable in perpetuity, as required.

• In Esgar Corp. v. Comm’r, TC Memo 2012‐35 (2012), the Tax Court held that under the

“before and after”

valuation method of the easement (i.e., pre‐easement over post‐

easement) the property’s “highest and best use”

before the easement was not gravel mining,

but agriculture. In dealing with buyers/investors, gravel was an

afterthought, if anything; no

separate market existed for mining.

• In Dunlap v. Comm’r, TC Memo 2012‐126 (2012), a deduction was denied because the

taxpayer failed to demonstrate that the value of a façade easement was greater than zero.

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Significant State Charity Developments

• The NY State JCOPE formally introduced proposed regulations, on

September 12, 2012, requiring disclosure of contributions to

organizations that lobby.

• NY Attorney General Eric Schneiderman announced proposed

regulations on December 12, 2012, which require annual disclosure

of election‐related activities by non‐section 501(c)(3), tax‐exempt

organizations required to be registered with the NY AG.

• In 2011, and again in 2012, the MA Senate passed a budget that

included a provision prohibiting compensation of non‐employee

officers, directors, or trustees by any MA “public charity”

unless the

charity applied to the AG, who must approve of the paying of

compensation. The amendment did not survive in the final versions

of the MA budgets for FY 2012 or FY 2013. But stay tuned.

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Questions?

Caplin & DrysdaleOne Thomas Circle, N.W.Suite 1100Washington, DC 20005

O: 202.862.5000 F: 202.429.3301

www.caplindrysdale.com

The information contained in this presentation provides background information about certain legal issues and should not be regarded as rendering legal advice to any person or entity. As such, the information is not privileged and does not create an attorney-client relationship with Caplin & Drysdale, Chartered, or any of the firm’s lawyers. This presentation does not constitute an offer to represent you, and you should not act, or refrain from acting, based upon any information so provided. In addition, the information contained in this presentation is not specific to any particular case or situation and may not reflect the most current legal developments, verdicts, or settlements. In the event that you have questions about and are seeking legal advice concerning your particular situation in light of the matters discussed in the presentation, please contact us so that we can take the necessary steps to form an attorney-client relationship if that is warranted.

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exempt organizations: washington update - pulp fusion

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