Joint Ventures Involving Tax-Exempt Organizations, 2019 Cumulative Supplement E-Book

Michael I. Sanders

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Nonprofit Authority
• Sprache: Englisch

Seitenzahl: 474

Veröffentlichungsjahr: 2019

Beschreibung

Effective strategies for non-profit entities in a profit-based world Joint Ventures Involving Tax-Exempt Organizations examines the procedures, rules, and regulations surrounding joint ventures and partnerships, emphasizing tax-exempt status preservation. Revised and updated to align with changes made to numerous tax codes and laws within the last year, this supplement offers expert interpretation and practical guidance to professionals seeking a complete reference, including an analysis of impact of the "siloing" of the UBIT rules, the new Opportunity Zone Funds which will incentivize investors in designated census tracts, inter alia. Sample documents enable quick reference and demonstrate real-world application of new laws and guidelines. The discussion delves into planning strategies that can be applied to joint ventures and partnerships while maintaining tax-exempt status, and which joint ventures are best suited for a particular organization. Widely accepted business strategies for profit-based entities, joint ventures, partnerships, and alliances are increasingly being used by nonprofits in need of additional financial support in challenging economic environments. This book provides invaluable guidance to appropriate planning and structuring while complying with tax-exemption guidelines. * Identify the most appropriate transactions for nonprofit organizations * Recognize potential problems stemming from debt restructuring and asset protection plans * Reference charitable organization, partnerships, and joint venture taxation guidelines * Understand which joint venture configurations are best suited to tax-exempt organizations Joint ventures and partnerships are currently employed by a variety of not-for-profit organizations while maintaining their tax-exempt status. Hospitals, research laboratories, colleges and universities, charter and special-needs schools, low-income housing developments, and many others are reaping the benefits of joint venture participation--but without careful planning and accurate interpretation of current laws, these benefits can be erased by loss of tax-exempt status. Joint Ventures Involving Tax-Exempt Organizations provides practical, up-to-date guidance on realizing the full benefits and avoiding the hazards unique to nonprofit organizations.

Leseprobe

Table of Contents

Cover

Preface

NOTES

Acknowledgments

CHAPTER 1: Introduction: Joint Ventures Involving Exempt Organizations

§ 1.4 UNIVERSITY JOINT VENTURES

§ 1.5 LOW-INCOME HOUSING AND NEW MARKETS TAX CREDIT JOINT VENTURES

§ 1.6 CONSERVATION JOINT VENTURES

§ 1.8 REV. RUL. 98-15 AND JOINT VENTURE STRUCTURE

§ 1.10 ANCILLARY JOINT VENTURES: REV. RUL. 2004-51

§ 1.14 THE EXEMPT ORGANIZATION AS A LENDER OR GROUND LESSOR

§ 1.15 PARTNERSHIP TAXATION

§ 1.17 USE OF A SUBSIDIARY AS A PARTICIPANT IN A JOINT VENTURE

§ 1.22 LIMITATION ON PRIVATE FOUNDATION'S ACTIVITIES THAT LIMIT EXCESS BUSINESS HOLDINGS

§ 1.24 OTHER DEVELOPMENTS

CHAPTER 2: Taxation of Charitable Organizations

§ 2.1 INTRODUCTION (REVISED)

§ 2.2 CATEGORIES OF EXEMPT ORGANIZATIONS (REVISED)

§ 2.3 § 501(C)(3) ORGANIZATIONS: STATUTORY REQUIREMENTS (REVISED)

§ 2.4 CHARITABLE ORGANIZATIONS: GENERAL REQUIREMENTS

§ 2.6 APPLICATION FOR EXEMPTION

§ 2.7 GOVERNANCE

§ 2.8 FORM 990: REPORTING AND DISCLOSURE REQUIREMENTS (REVISED)

§ 2.10 THE IRS AUDIT

§ 2.11 CHARITABLE CONTRIBUTIONS (REVISED)

NOTES

CHAPTER 3: Taxation of Partnerships and Joint Ventures

§ 3.1 SCOPE OF CHAPTER

§ 3.3 CLASSIFICATION AS A PARTNERSHIP

§ 3.4 ALTERNATIVES TO PARTNERSHIPS

§ 3.7 FORMATION OF PARTNERSHIP

§ 3.8 TAX BASIS IN PARTNERSHIP INTEREST

§ 3.9 PARTNERSHIP OPERATIONS

§ 3.11 SALE OR OTHER DISPOSITION OF ASSETS OR INTERESTS

§ 3.12 OTHER TAX ISSUES (REVISED)

NOTES

CHAPTER 4: Overview: Joint Ventures Involving Exempt Organizations

§ 4.1 INTRODUCTION

§ 4.2 EXEMPT ORGANIZATION AS GENERAL PARTNER: A HISTORICAL PERSPECTIVE

§ 4.6 REVENUE RULING 2004-51 AND ANCILLARY JOINT VENTURES

§ 4.9 CONVERSIONS FROM EXEMPT TO FOR-PROFIT AND FROM FOR-PROFIT TO EXEMPT ENTITIES

§ 4.10 ANALYSIS OF A VIRTUAL JOINT VENTURE

CHAPTER 5: Private Benefit, Private Inurement, and Excess Benefit Transactions

§ 5.1 WHAT ARE PRIVATE INUREMENT AND PRIVATE BENEFIT? (REVISED)

§ 5.2 TRANSACTIONS IN WHICH PRIVATE BENEFIT OR INUREMENT MAY OCCUR

§ 5.3 PROFIT-MAKING ACTIVITIES AS INDICIA OF NONEXEMPT PURPOSE

§ 5.4 INTERMEDIATE SANCTIONS (REVISED)

§ 5.7 STATE ACTIVITY WITH RESPECT TO INSIDER TRANSACTIONS

NOTES

CHAPTER 6: Engaging in a Joint Venture: The Choices

§ 6.1 INTRODUCTION

§ 6.2 LLCS (REVISED)

§ 6.3 USE OF A FOR-PROFIT SUBSIDIARY AS PARTICIPANT IN A JOINT VENTURE

§ 6.5 PRIVATE FOUNDATIONS AND PROGRAM-RELATED INVESTMENTS

§ 6.6 NONPROFITS AND BONDS (REVISED)

§ 6.7 EXPLORING ALTERNATIVE STRUCTURES

§ 6.8 OTHER APPROACHES

NOTES

CHAPTER 7: Exempt Organizations as Accommodating Parties in Tax Shelter Transactions

§ 7.2 PREVENTION OF ABUSIVE TAX SHELTERS

§ 7.3 EXCISE TAXES AND PENALTIES

NOTES

CHAPTER 8: The Unrelated Business Income Tax

§ 8.1 INTRODUCTION

§ 8.3 GENERAL RULE

§ 8.4 STATUTORY EXCEPTIONS TO UBIT (REVISED)

§ 8.5 MODIFICATIONS TO UBIT (REVISED)

§ 8.7 CALCULATION OF UBIT (REVISED)

NOTES

CHAPTER 9: Debt-Financed Income

§ 9.1 INTRODUCTION

§ 9.2 DEBT-FINANCED PROPERTY

§ 9.6 THE FINAL REGULATIONS

NOTE

CHAPTER 10: Limitation on Excess Business Holdings

§ 10.1 INTRODUCTION

§ 10.2 EXCESS BUSINESS HOLDINGS: GENERAL RULES (REVISED)

§ 10.3 TAX IMPOSED

§ 10.4 EXCLUSIONS

NOTES

CHAPTER 12: Healthcare Entities in Joint Ventures

§ 12.1 OVERVIEW

§ 12.2 CLASSIFICATIONS OF JOINT VENTURES

§ 12.3 TAX ANALYSIS

§ 12.4 OTHER HEALTHCARE INDUSTRY ISSUES

§ 12.5 PRESERVING THE 50/50 JOINT VENTURE

§ 12.9 GOVERNMENT SCRUTINY

§ 12.11 THE PATIENT PROTECTION AND AFFORDABLE CARE ACT OF 2010: § 501(R) AND OTHER STATUTORY CHANGES IMPACTING NONPROFIT HOSPITALS

§ 12.12 THE PATIENT PROTECTION AND AFFORDABLE CARE ACT OF 2010: ACOS AND CO-OPS: NEW JOINT VENTURE HEALTHCARE ENTITIES

NOTES

CHAPTER 13: Low-Income Housing, New Markets, Rehabilitation, and Other Tax Credit Programs

§ 13.2 NONPROFIT-SPONSORED LIHTC PROJECT (NEW)

§ 13.3 LOW-INCOME HOUSING TAX CREDIT (REVISED)

§ 13.4 HISTORIC INVESTMENT TAX CREDIT

§ 13.6 NEW MARKETS TAX CREDITS (REVISED)

§ 13.10 THE ENERGY TAX CREDITS

§ 13.11 THE OPPORTUNITY ZONE FUNDS: NEW SECTION 1400Z-1 AND SECTION 1400Z-2 (REVISED)

APPENDIX 13B (NEW)

NOTES

CHAPTER 14: Joint Ventures with Universities

§ 14.1 INTRODUCTION

§ 14.3 COLLEGES AND UNIVERSITIES IRS COMPLIANCE INITIATIVE (NEW)

§ 14.5 FACULTY PARTICIPATION IN RESEARCH JOINT VENTURES

§ 14.6 NONRESEARCH JOINT VENTURE ARRANGEMENTS

§ 14.7 MODES OF PARTICIPATION BY UNIVERSITIES IN JOINT VENTURES (REVISED)

NOTES

CHAPTER 15: Business Leagues Engaged in Joint Ventures

§ 15.1 OVERVIEW

§ 15.2 THE FIVE-PRONG TEST

§ 15.3 UNRELATED BUSINESS INCOME TAX

NOTES

CHAPTER 16: Conservation Organizations in Joint Ventures

§ 16.1 OVERVIEW

§ 16.2 CONSERVATION AND ENVIRONMENTAL PROTECTION AS A CHARITABLE OR EDUCATIONAL PURPOSE: PUBLIC AND PRIVATE BENEFIT

§ 16.3 CONSERVATION GIFTS AND § 170(H) CONTRIBUTIONS (REVISED)

§ 16.7 EMERGING ISSUES

NOTES

CHAPTER 17: International Joint Ventures

§ 17.5 GENERAL GRANTMAKING RULES

§ 17.11 APPLICATION OF FOREIGN TAX TREATIES

NOTES

CHAPTER 19: Debt Restructuring and Asset Protection Issues

§ 19.1 INTRODUCTION

§ 19.2 OVERVIEW OF BANKRUPTCY

§ 19.3 THE ESTATE AND THE AUTOMATIC STAY

§ 19.4 CASE ADMINISTRATION

§ 19.5 CHAPTER PLAN

§ 19.6 DISCHARGE

NOTE

Index

End User License Agreement

Guide

Cover

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joint ventures involving tax-exempt organizations

2019 Cumulative Supplement

Fourth Edition

Michael I. Sanders

Copyright © 2020 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ISBN 978-1-118-31711-2 (main edition)ISBN 978-1-119-61585-9 (supplement)ISBN 978-1-119-61596-5 (ePDF)ISBN 978-1-119-61589-7 (ePub)

Cover Design: WileyCover Image: ©iStock.com/Felix Mockel

To my wife of 50 wonderful years, Judy,

whose love, devotion, and patience

have made this book possible;

and to David, Patty, Hayley, and Jacob;

Noah, Brooke, Emme, and Ryder Aaron;

Adam, Randi, Gabby, and Eva;

and Sammy, Rebecca, Benjamin, and Jonah.

Preface

It seems that whenever I sit down to write the preface of an annual supplement or new edition, I'm struck by the increasing challenges exempt organizations face in raising and keeping financial resources to fund their exempt programs…. We do not yet know whether the anticipated reduction of charitable giving due to the increased standard deduction will occur long term, but, as reported in “Giving USA 2019: The Annual Report on Philanthropy of the Year 2018,” individual giving declined 3.4 percent adjusted for inflation.1 Of course, all of these factors lead to greater pressure for organizations to be creative in their approach to increasing revenue, including the participation in joint ventures.

The charitable sector has faced additional challenges because of media attention to alleged improprieties occurring at some high-profile organizations, with the so-called Varsity Blues and NRA investigations garnering much coverage. Varsity Blues involves criminal charges against a private college admissions advisor who accepted donations to a charity he had established in exchange for a promise of assistance in the admissions process to parents of college applicants.2 The charges against the advisor, who has pled guilty, and the parents involve allegedly false representations regarding the abilities and qualifications of the student applicants. For our purposes, however, the more important factor relates to the basic structure of the transactions, whereby the parents claimed charitable deductions for “contributions” the college advisor allegedly used to make payments to coaches, athletic departments, and college testing monitors. There are also allegations of inappropriate spending activities at the NRA, alleged improper political activity by a high-profile private foundation, and alleged practices resulting in impermissible private benefit to numerous leaders at a large state medical system. It is noteworthy that as far as is publicly known, perhaps due to confidentiality of taxpayer information, state Attorneys General or U.S. Attorneys, and not the IRS, have spearheaded the investigations into these matters.

On the other hand, the charitable community welcomes the new opportunity zone legislation that was included in the 2017 Tax Act and incentivizes individual and corporate investments in qualified census tracks that have been designated by state governments. In October 2018 and April 2019, the Treasury Department issued proposed regulations that provide answers to many open questions related to structural issues in organizing opportunity-zone funds as well as second-tier opportunity-zone businesses. This guidance provided answers to many open issues related to the definition of substantially all, the use of qualified OZ business property, the treatment of leased tangible property, the sourcing of gross income in a QOZ, a reasonable period of QOFs to reinvest proceeds from the sale of qualifying assets without paying a penalty, and various other topics. While the guidance can generally be relied upon by taxpayers, there still remain a number of unanswered questions, which are discussed in Chapter 13.

Although the ultimate impact is not yet foreseeable, the 2017 Tax Act is stimulating exploration of planning techniques and structural changes that might reduce the tax impact. For example, if a tax-exempt organization has several unrelated businesses that are now treated as separate and “siloed,” should they be “dropped” into one or more C corporations so that the revenue from all can be offset by losses, thereby reducing the tax paid at the 21 percent rate? In many cases, a joint venture would be suitable to attract funds to support charitable projects. In light of the reduced corporate tax rate, would a C corporation be an appropriate joint venture vehicle as compared to the traditional LLC? How do the changes to IRC Section 163(j), limiting deductibility of NOLs to 80 percent with perpetual carryforward, affect planning? What impact does the Code section 4960 excise tax have on volunteer services? Analysis of these issues will depend a great deal on additional IRS guidance and could be affected, and potentially upended, by future Code changes, such as tax rate increases, if Congressional party leadership changes in future elections.

In Chapter 2, there is further discussion of Section 501(c)(4) organizations and the attempt by the IRS to change the long-standing policy with regard to disclosure of donor names, which had traditionally been done on Form 990 for transparency. There is also discussion of the Panera Bread Foundation case, which examines the relationship between a for-profit and nonprofit organization, where the foundation provides grants and assistance by giving away free food. Finally, the chapter examines the extension of the mandatory electronic filing of annual information returns and the impact of the Varsity Blues investigation on the charitable community.

In Chapter 3, there is a discussion of the final regulations relative to partnership audits that were published in February 2019. The focus is on a partnership that is interested in electing out of the audit regime.

In Chapter 5, in the context of private inurement and private benefit, there is a discussion of major news stories involving the National Rifle Association and the University of Maryland Medical System, which brings into consideration the adoption of conflict-of-interest policies (see Appendix 12A) and the focus on good governance.

In Chapter 6, there is discussion of the use of the LLC in comparison with other business entities in structuring a joint venture, including the potential benefits of foregoing tax exemption in the philanthropic community. There is also a further discussion on social impact bonds and impact investment, including a summary of the work of Sean Delany and Jeremy Steckel, the article “Balancing Public and Private Interest in Pay for Success Programs”; the authors conclude that despite the inconsistent jurisprudence surrounding the private benefit doctrine, applying it to pay for success programs demonstrates that it protects against valid concerns not addressed elsewhere in the Code.

In Chapter 8, there is further discussion of the new UBTI “silo” rule. The IRS recently issued interim guidance in Notice 2018-67. There is an analysis, in the context of ownership change, as to whether the net operating losses of a tax-exempt entity can be used by a surviving tax-exempt corporation in a merger. Finally, there is a discussion of the new tax under the 2017 Tax Act on transportation fringe benefits and qualified parking.

In Chapter 10, there is a discussion of the new section 4943(g), the legislation that was intended to provide a lifeline to Newman's Own Foundation.

In Chapter 13, there is detailed analysis of some significant changes relative to the low-income housing tax credit section, new market tax credits, and the recent regulations covering the new opportunity zone funds, which have received significant national attention. As to nonprofit-sponsored LIHTC projects, some nonprofits have taken somewhat aggressive positions in an attempt to in effect compel renegotiation of their financial upside in transactions that have closed years earlier. There is also discussion of the various interpretations of Section 42(i)(7) that continue to result in uncertainty among nonprofit entities, project investors, and for-profit partners as to the applicability of the “right of first refusal.” There is also a brief update on the 2019 new market tax credit allocation by the CDFI Fund; the NMTC program will terminate after the 2019 round unless it is extended by Congress before year-end. Finally, there is an expanded analysis of the Treasury-proposed regulations relative to opportunity zone funds, the new potentially “dynamic” tax incentive program that was created to spur economic growth in an investment in designated distressed communities. The proposed regulations, which were published in October 2018 and April 2019, provide significant guidance that answered many of the questions that investors and practitioners had about the incentive program. However, there are still a number of unanswered questions, which are discussed in Chapter 13. In addition, as Appendix 13B, I have attached the Tax Compliance Checklist for U.S. taxpayers who invest in opportunity zone funds; this checklist was prepared by Paul Saint-Pierre of PSP Advisors and outlines many of the significant compliance issues.

In Chapter 14, relative to joint ventures with universities, there is discussion of the publication of the nondiscrimination policy in the form of Revenue Procedure 2019-22 (the first IRS publication in 45 years), which relates to school nondiscrimination policy.

In Chapter 16, conservation organizations involved in joint ventures are studied, including an examination of additional rulings and cases that affect the rules.

The bottom line once again: there is no one paradigm for joint ventures, especially in the face of the 2017 Tax Act and its continuing pressures on fundraising. Tax-exempt organizations and their for-profit counterparts need to be creative; that is, be flexible and forge new paths to create and solve many issues affecting the future and the operations of the organization. This text is intended to suggest mechanisms to accomplish the very worthy goals referenced in the charitable community. The opportunity zone fund legislation is likely to create an extremely attractive alternative and allow funds to be redirected into designated census tracts. In addition, many socially minded organizations may attempt to be reclassified as a Section 501(c)(4) structure as compared to a 501(c)(3); see Chapter 2 in this regard. And finally, many prominent philanthropists may forego tax exemption to accomplish to charitable goals (see Section 6.8).

NOTES

1

https://givingcompass.org/pdf/key-findings-from-giving-usa-2019-the-annual-report-on-philanthropy-for-the-year-2018/?gclid=Cj0KCQjwiILsBRCGARIsAHKQWLPcEVK7oLPoxRPDhYMkkXhtcdLWslC4Ez0aD9iOQJbrJVBtJ7gBJ7EaAkWWEALw_wcB

.

2

https://www.nytimes.com/2019/03/12/us/college-admissions-cheating-scandal.html

.

Acknowledgments

I gratefully acknowledge the assistance of my colleagues at Blank Rome, LLP, especially Gayle Forst for her contributions and time in the research and review of the manuscript of the Supplement. I want to call attention to the work of Isak Khorets, graduate student at the Georgetown University Law Center, for his research on Section 4960; Amanda H. Nussbaum, who presented at Georgetown University Law Center on UBIT in PE practices, qualified transportation fringe benefits, and qualified sponsorship payments; Sean Delany and Jeremy Steckel, for allowing me to review their article “Balancing Public and Private Interest in Pay for Success Programs: Should We Care About the Private Benefit Doctrine?”; and Paul Saint-Pierre, the principal advisor of PSP Advisors, LLC, for his draft of the tax compliance checklist for U.S. taxpayers investing in qualified opportunity funds, which is included as an appendix to Chapter 13. I also thank Ronald Schutz at Alliant Group for his review and draft of the current of developments regarding conservation organizations.

I especially acknowledge Linda Schrader, whose extraordinary kindness and sensitivity have been invaluable in the preparation of the manuscript as well as her coordination with the staff of John Wiley & Sons; Linda has been critical to the entire process over the decades.

CHAPTER 1Introduction: Joint Ventures Involving Exempt Organizations

§ 1.4 University Joint Ventures

§ 1.5 Low-Income Housing and New Markets Tax Credit Joint Ventures

§ 1.6 Conservation Joint Ventures

§ 1.8 Rev. Rul. 98-15 and Joint Venture Structure

§ 1.10 Ancillary Joint Ventures: Rev. Rul. 2004-51

§ 1.14 The Exempt Organization as a Lender or Ground Lessor

§ 1.15 Partnership Taxation

§ 1.17 Use of a Subsidiary as a Participant in a Joint Venture

§ 1.22 Limitation on Private Foundation's Activities That Limit Excess Business Holdings

§ 1.24 Other Developments

§ 1.4 UNIVERSITY JOINT VENTURES

p. 11. Add the following new paragraph at the end of this section:

There is continued congressional focus on university endowments in light of the soaring cost of tuition and the perceived relatively low rate of financial assistance provided by colleges and universities with substantial endowments. See Chapter 14 for a discussion on policy changes that are being proposed, including imposing an annual payout requirement on endowment funds, among others.

§ 1.5 LOW-INCOME HOUSING AND NEW MARKETS TAX CREDIT JOINT VENTURES

pp. 13–14. Delete the last paragraph on p. 13 and replace with the following:

The CDFI Fund has made 1,032 awards totaling $50.5 billion in allocation authority since the NMTC Program's inception. Through January 2017, CDEs disbursed a total of $42.8 billion in QEI proceeds to more than 4,224 qualified active low-income community businesses (QALICBs).

§ 1.6 CONSERVATION JOINT VENTURES

p. 15. Add the following to the last paragraph of this section:

In January 2014, Treasury and the IRS issued Revenue Procedure 2014-12, 2014-3 I.R.B. 414, which established a safe harbor for federal historic tax credit investments made within a single tier through a master lease pass-through structure. The guidance was issued in response to the Historic Boardwalk decision referenced earlier.

§ 1.8 REV. RUL. 98-15 AND JOINT VENTURE STRUCTURE

p. 18. Add the following to the end of footnote 65:

PLR 201744019 (revocation of exemption of a § 501(c)(3) exempt hospital that was not operated exclusively for § 501(c)(3) purposes because it lacked ability to require for-profit manager to operate for charitable purposes.)

§ 1.10 ANCILLARY JOINT VENTURES: REV. RUL. 2004-51

p. 21. Add the following new paragraph to the end of this section:

In section 4.10, there is an analysis of a virtual joint venture hypothetical, as to which a similar rationale should apply in a case in which the IRS proposes the revocation of an existing 501(c)(3) organization, alleging impermissible private benefit following an examination of its relationship with a for-profit entity. This commentator believes that the rationale should apply, notwithstanding the fact that no formal joint venture arrangement exists between the parties.

§ 1.14 THE EXEMPT ORGANIZATION AS A LENDER OR GROUND LESSOR

p. 28. Insert the following new paragraph at the end of this section:

The Internal Revenue Service recently issued final guidance for private foundations that updates examples that relate to program-related investments that pass muster under § 4944(c). The rules (T.D. 9762) provide changes and examples that were first provided in the 2012 Proposed Regulations. See subsection 6.5(b) for a detailed discussion of the new examples.

In April 2016 the IRS issued final guidance for private foundations that updates a number of examples of program-related investments that won't trigger excise taxes. Final Rules (T.D. 9762) illustrate changes to the examples provided in the 2012 Proposed Rules. In one change involving Example 11, a private foundation that invested in a drug company subsidiary developing a vaccine for disease predominantly affecting poor people in developing countries recognizes that, in addition to distributing the vaccine at affordable prices, the subsidiary is allowed to sell the vaccine to those who can afford it at fair market value prices. In Chapter 6, each of the examples and its revised Treasury guidelines are set forth.

§ 1.15 PARTNERSHIP TAXATION

(a) Overview

p. 30. Add the following new paragraph to the end of this subsection:

In the Bipartisan Budget Act of 2015, the partnership audit rules have been revised, the effect of which is that adjustments of income, gain, loss, deduction, or credit are to be determined at the partnership level and the taxes attributable thereto will be assessed and collected at the partnership level. The new rules are effective beginning taxable years after December 31, 2018, although small partnerships may opt out before then. See Chapter 3 for a discussion of the application of the new rules.

(b) Bargain Sale Including “Like Kind” Exchange

p. 30. Add the following to the end of footnote 101:

See discussions regarding contribution of LLC/partnership interests to charity in subsection 2.11(f), infra, and Section 3.11, Sale or Other Disposition of Assets or Interests.

§ 1.17 USE OF A SUBSIDIARY AS A PARTICIPANT IN A JOINT VENTURE

p. 34. Add the following paragraph after the first full paragraph on this page:

In September 2015, National Geographic Society formed a joint venture with 21st Century Fox, called the National Geographic Partners, a for-profit media joint venture. In this new venture, Fox contributed a substantial amount of cash to National Geographic, which increased its endowment to nearly $1 billion, in exchange for the contribution of significant assets, including its television channels and related digital and social media platforms. See subsection 6.3(b)(iv) for an analysis of the structure.

§ 1.22 LIMITATION ON PRIVATE FOUNDATION'S ACTIVITIES THAT LIMIT EXCESS BUSINESS HOLDINGS

p. 45. Add the following footnote to the end of this section:

163.1See discussion regarding the contribution of LLC/partnership interests to charity in subsection 2.11(f).

§ 1.24 OTHER DEVELOPMENTS

p. 47. Add the following as footnote 175 to the last sentence of this section:

175In Burwell v. Hobby Lobby Stores, Inc., the Supreme Court cited p. 555 in this book, which described Google.org advancing its charitable goals while operating as a for-profit corporation. See footnote 24 of the Hobby Lobby decision, 134 S.Ct. 2751 (2014). The court recognized that while operating as a for-profit corporation, it is able to invest in for-profit endeavors, do lobbying, and tap Google's innovative technology and workforce. It acknowledged that states have increasingly adopted laws formally recognizing hybrid corporate forms.

CHAPTER 2Taxation of Charitable Organizations

§ 2.1 Introduction (Revised)

§ 2.2 Categories of Exempt Organizations (Revised)

§ 2.3 § 501(c)(3) Organizations: Statutory Requirements (Revised)

§ 2.4 Charitable Organizations: General Requirements

§ 2.6 Application for Exemption

§ 2.7 Governance

§ 2.8 Form 990: Reporting and Disclosure Requirements (Revised)

§ 2.10 The IRS Audit

§ 2.11 Charitable Contributions (Revised)

§ 2.1 INTRODUCTION (REVISED)

p. 50. Insert quotation marks around IRC on line 8 and add a comma after contributions and churches in footnote 2.

p. 52. Insert the following after the last paragraph of this section:

In the 2017 Tax Act (Pub. L. No. 115-97) (the “Tax Act”), the following changes affect tax-exempt organizations:

New 2017 Legislation

Charitable contributions are likely to decline as a result of the lowering of the individual income tax brackets (a maximum rate of 37 percent) while doubling of the standard deduction. These rates and the standard deduction sunset after December 31, 2025. It is projected that only 5 percent of taxpayers will have sufficient itemized deductions that exceed the standard deduction that will enable them to continue to claim a charitable contribution deduction, which may curtail charitable giving. Moreover, the estate tax exemption was doubled so that individuals now have $11 million of exemption and married couples are able to exclude $22.4 million from their estate tax. This provision also sunsets after December 31, 2025. Finally, there is a reduction in the C Corporation rates to 21 percent, which is a permanent change. It is important to note that C Corps have been the largest investor in joint ventures including the low income house tax credit and new market tax credits. (See

Chapter 13

.)

The AGI annual limitation has been increased to 60 percent for cash contributions; the provision also sunsets after December 31, 2025. There is obvious concern that major donors are likely to be the only taxpayers in a position to give away up to 60 percent of their AGI in a given year. In addition, the rule that requires contemporary written acknowledgment (§ 170(f)(8)(D)) no longer applies if the donee organization files a return that includes similar content. See subsection 2.11(f). The charitable sector benefits because they have been pressured by donors to fill forms out in lieu of providing a standard acknowledgement. The proposed regulations required the reporting of the donors tax ID numbers/FNS, and charities were concerned that it could lead to theft.

Code § 4960 proposes a new 21 percent excise tax on tax-exempt organizations (modeled on § 162(m)) for (i) any “remuneration” paid to a covered employee that exceeds $1 million (whether or not such amounts are reasonable) and (ii) on “excess parachute payments” paid to a covered person under a separation agreement (i.e., severance payments that exceed 3 times the person's annual compensation averaged over the past five years). In this regard “covered employees” include the top 5 most highly compensated employees (or former employees) from the tax year or anyone who was a covered employee from any preceding taxable year beginning in 2017. “Remuneration” is defined as “all wages” under § 3401(a), excluding Roth contributions, paid by a tax-exempt organization or related party with respect to employment of the covered person. See subsection 5.4(b).

5.1

CAVEAT

The intermediate sanctions and excess benefit rules of Code § 4958 still apply.

CAVEAT

The Act extends these new executive compensation limitations to tax exempts not limited to 501(c)(3)s or 501(c)(4)s, but including businesses, federal and state and local entities under § 115(1), and political organizations. Unlike the intermediate sanctions excise tax, § 4960 taxes applies to the organization itself not covered employee or organizational manger.

The excess tax applies to deferred compensation remuneration, which is viewed as paid where it is no longer subject to a substantial risk of forfeiture under § 457(f)(3)(B). Thus amounts that are “vested” but not yet received by a covered employee will be subject to tax.5.2

There is a new unrelated business income tax (UBIT) on transportation, parking, and gym fringe benefits unless the amounts are deductible under Code § 274 because they are treated as part of the employee's taxable compensation.

The unrelated business income tax rate is now 21 percent, which will provide relief to many exempt organizations, which have been paying as much as 35 percent on unrelated taxable income. However, this rate reduction may be offset by the new rule that net operating losses from one activity may no longer offset income from another activity. Tax-exempt organizations will need to calculate tax on each unrelated business separately.

QUERY

May all “investment” activities be treated as one activity for offsetting purposes? Will each of the gains and losses have to be separately stated? Treasury will need to publish regulations to resolve this issue.

There is now a new 1.4 percent tax on net investment income of certain colleges and universities defined as “applicable educational institutions” (i) that have at least 500 tuition-paying students, (ii) that have more than 50 percent of tuition-paying students located in the United States, and (iii) whose assets aggregated at fair market value are at least $500,000 per student at the end of the preceding taxable year. See Section 14.1. Related organizations to colleges and universities are required to have their assets and net income considered when determining whether the institution meets the asset-per-student threshold and for purposes for determining net investment income.

CAVEAT

This new legislation is targeted at highly compensated college and university athletic coaches and presidents, some of whom have million-dollar salaries.

CAVEAT

The new Bipartisan Budget Act of 2018 clarifies the Tax Act to provide that the “at least 500” and “more than 50 percent” of students tests both refer only to tuition-paying students.

CAVEAT

This new excise tax is estimated to raise approximately $1.8 billion in revenue over ten years and affect only about 35 institutions.

A related organization will include one in which the educational institution (a) controls or is controlled by (b) one or more persons who control the institution or (c) are supported organizations or supporting organizations with respect to the institution. The foregoing rules will require Treasury Regulations to clarify the scope of the new provision.

Section 170(l) is amended to eliminate the special rule and now denies deductions for college booster seats including season tickets.

Provisions that did not survive the Tax Act.

It is important to examine a number of provisions that were considered by the House and Senate but that did not survive the Conference Committee. The following provisions may well be reconsidered next time extensive tax legislation is considered by Congress. Beware of the potential that some, if not all, of these provisions will be “in play” in the near future.

In the application of the initial tax on a disqualified person pursuant to the intermediate sanctions rules, the rebuttable presumption of reasonableness would have been eliminated. (See subsection 5.4(c)(ii).) Procedures would be promulgated by the IRS to establish that an organization has performed minimum standards of due diligence (essentially the same as those that pertain in connection with the previously described presumption) with respect to a transaction or other arrangement involving a disqualified person (proposed IRC § 4958(d)(3)). The existing rule by which an organization manager's participation in a transaction ordinarily is not “knowing” participation for purposes of the intermediate sanctions rules if the manager relied on professional advice would be eliminated (proposed IRC § 4958(g)). The definition of a disqualified person, for purposes of the intermediate sanctions rules, would be expanded to include investment advisors and athletic coaches at private educational institutions (see proposed IRC § 4958(f)(1)(G), proposed revision of IRC § 4958(f)(8)(B)).

5.3

The private foundation's excise tax would be reduced to a single rate of 1.4 percent (revised IRC § 4940(a), proposed repeal of IRC § 4940(e)). Also a rule would be enacted stating that an entity cannot be a private operating foundation as an art museum unless the museum is open during normal business hours to the public for at least 1,000 hours annually (proposed IRC § 4942(j(6)).

A sale or licensing by an exempt organization of the entity's name or logo (including any related trademark or copyright) would be treated as an unrelated business regularly carried on (proposed IRC §§ 512(b)(20), 513(k)). Income derived from such licensing would be included in the organization's gross unrelated business income, notwithstanding the exclusion for certain types of passive income (including other forms of royalties). See subsection 8.5(d). The unrelated business income tax would not apply to research limited to publicly available research (see IRC § 512(b)(9)). The application of UBIT to state and local retirement plans (proposed IRC § 511(d)) would be clarified.

Charitable organizations would be allowed to make statements relating to political campaigns in the ordinary course of program activities, where the expenses are de minimis (proposed IRC § 501(s)), a very controversial proposal opposed by both the Independent Sector and the Council on Foundations.

The tax exemption for professional sports leagues (IRC § 501(c)(6)) would be repealed.

The standard mileage rate for the use of an automobile for charitable purposes would be adjusted to take into account the variable costs of operating the vehicle rather than the existing law's 14 cents-per-mile deduction.

Additional reporting requirements for sponsoring organizations of donor advised funds would be enacted, consisting of the average amount of grants expressed as a percentage of asset value and a statement as to whether the organization has a policy as to the frequency and minimum level of distributions (proposed IRC § 6033(k)(4)).

At the end of its spring term, the Supreme Court issued a decision that some have speculated could lead to governmental outsourcing of more activities to nonprofits. The case, Manhattan Community Access Corp. v. Halleck et al., 587 U.S. ___ (2019), involved the question of whether a nonprofit was a “state actor” when New York City delegated the operation of public access channels to it. A cable operator typically operates public access channels itself unless the local government elects to operate them or selects a private entity to do so. If found to be a state actor, the organization would be subject to the First Amendment. In this case, New York City designated a nonprofit to operate the public access channels of a New York cable system. The nonprofit, MNN, aired a film that was critical of it, but later barred the film's producers from future access to the channels. The producers brought suit on grounds that this action violated their First Amendment free-speech rights. The five–four split focused on whether operating public access channels is a traditional, exclusive public function, with the majority ruling that very few functions are exclusive public functions. Consistent with this ruling, if the government delegates an activity to a private organization, such as a nonprofit, and does not direct its operations or act in partnership with it, the nonprofit's speech-related activities will not be subject to First Amendment limits.

§ 2.2 CATEGORIES OF EXEMPT ORGANIZATIONS (REVISED)

p. 52. Delete the last two sentences in footnote 9 and replace with the following:

According to the National Center for Charitable Statistics, there were 1,202,719 §501(c)(3) organizations as of April 2016. http://nccs.urban.org/statistics/quickfacts.cfm.

p. 54. Delete the last sentence in this subsection and insert the following:

See Section 2.3 and subsequent sections for analysis and discussion of these rules. The following presents a brief comparison of § 501(c)(3) and § 501(c)(4) organizations, social welfare organizations that are being formed with increasing frequency.

(a) § 501(c)(4) Organizations: A Brief Overview

Section 501(c)(4) organizations have greater organizational and operational flexibility than § 501(c)(3) organizations. Their numbers have substantially increased since the Supreme Court Citizens United case,22.1 with further growth anticipated as a result of the 2017 increase in the standard deduction. See subsection 2.6(c). In light of changes in the Tax Act reducing the numbers of taxpayers eligible to claim a deduction for contributions to § 501(c)(3) organizations, there is an expectation of increased donations to § 501(c)(4) organizations that can, as described later, engage in unlimited lobbying and a certain amount of political activity on behalf of candidates and issues they support.

Section 501(c)(4) provides tax exemption for civic organizations and local associations of employees that are not organized and operated for profit and are operated exclusively for the promotion of social welfare.22.2 Like § 501(c)(3) organizations, the earnings of § 501(c)(4) entities cannot inure to the benefit of any private shareholder or individual,22.3 and the § 4958 excise tax is imposed on excess benefit transactions between a disqualified person and § 501(c)(4) organization.22.4 See Section 5.4.

Contributions to § 501(c)(4) organizations are not deductible as charitable contributions under § 170(c),22.5 although dues or contributions to § 501(c)(4) organizations may be deductible as business expenses under § 162.22.6

A § 501(c)(4) organization must be operated exclusively for the promotion of social welfare.22.7 However, regulations under § 501(c)(4) have defined “exclusively” to mean “primarily” engaged in the promotion of social welfare.22.8 Accordingly, unlike the absolute prohibition on political activity by § 501(c)(3) organizations, a § 501(c)(4) organization may engage in political activity provided that the organization's political activity does not constitute its primary activity. If a § 501(c)(4) organization's political activities exceed this restriction, the organization may be subject to a tax on expenditures made for political activities under § 527(f).22.9

Neither the IRC nor the regulations contain a numerical definition of “primarily.” Some practitioners advise § 501(c)(4) organizations that “primarily” may be interpreted as 51 percent of their total expenditures, in effect allowing § 501(c)(4)s to allocate up to 49 percent of total expenditures to political activity.22.10 Other practitioners take a more conservative approach to minimize risk of a challenge to tax exemption or imposition of excise taxes and advise limiting political activity to less than 40 percent of total expenditures to political activity.

Section 501(c)(4) organizations may also engage in an unlimited amount of lobbying, provided that the lobbying is related to the organization's exempt purpose to promote social welfare.22.11 Consequently, an organization whose substantial lobbying activities would cause it to be characterized as an action organization under § 501(c)(3), and therefore disqualified as a § 501(c)(3), may nonetheless qualify for exemption under § 501(c)(4).22.12

The IRS has issued final regulations, effective July 19, 2019, addressing the requirement of §501(c)(4) organizations to submit Form 8976, “Notice of Intent to Operate Under Section 501(c)(4).” The final regulations are consistent with the temporary regulations in requiring that the form be filed within sixty (60) days of the date the organization is formed (T.D. 9873). In addition, if an entity seeks a determination letter from the IRS recognizing its exempt status, it can elect to file Form 1024-A.22.13 Section 501(c)(4) organizations are also subject to annual filing requirements using Form 990 or 990EZ.22.14 See subsection 2.6(c) and Section 2.8.

As a general rule, § 501(c)(3) organizations could qualify under § 501(c)(4), whereas not all § 501(c)(4) organizations would qualify as a § 501(c)(3) under the more stringent rules placed on § 501(c)(3) organizations.22.15

In a bow to pressure from conservative groups in Congress, the IRS changed long-standing policy in regard to disclosure of donor names by §501(c)(4) organizations, which traditionally has been done on Form 990 for transparency. Following the 2010 Citizens United decision, there has been a substantial uptick in the formation and political activity of §501(c)(4) organizations, which would no longer have to disclose their donors on Form 990. The names of donors disclosed on Schedule B of Form 990 were not made available to the public, only to the IRS; nevertheless, many commentators were critical of the new rules as facilitating “dark money” in politics. According to a former director of the IRS's exempt organizations division, donor information “is of material importance for determining whether organizations are operating appropriately and within the boundaries of the rules” (Rev. Proc. 2018-38, 2018-31 IRB, 07/17/2018).22.16 However, on July 30, 2019, a federal judge overturned the IRS ruling. The state of Montana, joined by the state of New Jersey, brought a lawsuit alleging that the IRS could not simply waive the donor disclosure requirements, which were established by IRS regulation, without providing an opportunity for public comment in accordance with the Administrative Procedure Act.

§ 2.3 § 501(C)(3) ORGANIZATIONS: STATUTORY REQUIREMENTS (REVISED)

(a) Organizational Test

(ii) Dedication of Assets.   p. 57. In footnote 36, change brackets to parentheses.

(b) Operational Test

p. 57. In footnote 38, change note 40 to note 37.

p. 58. Add the following to the end of footnote 42:

The IRS will revoke the exempt status of an organization that conducts no activities at all. See PLR 201623011.

(i) Operating Exclusively for Exempt Purposes.   p. 59. The second paragraph under this section is a continuation of the first paragraph and should not be indented.

p. 60. The first full paragraph on this page is a continuation of the previous paragraph and should not be indented.

p. 61. Delete the citation in footnote 65 and replace with the following:

Kentucky Bar Foundation, 78 T.C. at 930.

(ii) Prohibition against Inurement.   p. 62. Delete the citation in footnote 72 and replace with the following:

American Campaign Academy, 92 T.C. at 1068.

p. 63. Combine footnotes 74 and 75 into one footnote 74.

§ 2.4 CHARITABLE ORGANIZATIONS: GENERAL REQUIREMENTS

(a) Organization Must Benefit a Charitable Class (New)

p. 98. Insert the following at the end of the subsection:

Panera Bread Foundation, related to Panera Bread, the for-profit restaurant chain, has filed a Tax Court petition for reversal of the IRS revocation of its tax exemption.280.1 The Panera Foundation asserts that it provides grants and assistance by giving away free food through its Panera Cares Café program, which operates cafes in the location of former Panera restaurants; payment for food is voluntary in the cafes. It also provides job training to high-risk youth and persons with developmental disabilities. Panera Bread, the for-profit, is Panera Cares' primary source of funds besides the voluntary payments from customers. The relationship between the for-profit and nonprofit was described in the Foundation's Form 1023. The IRS revoked the Foundation's exemption, explaining that most customers have the ability to pay for its products:

Providing food and drink to members of the general public absent a showing of need is not a charitable purpose under section 501(c)(3). In addition, operating a restaurant open to the general public during commercial business hours and accepting retail cost or greater in payments from individuals receiving the food items indicate a substantial non-exempt purpose. Also, this activity was funded primarily through support by a related for-profit entity and through the operation of cafes similar in appearance and operation to the related for-profit, rather than through donations or other support indicating community oversight from the general public, further showing that the operations of the cafes were for substantial non-exempt private rather than public purposes.

CAVEAT

Practitioners have predicted that the IRS will settle the case. The IRS's rationale, that primary funding from a related for-profit rather than donations or other community support demonstrate substantial nonexempt private purposes, seems to be a “stretch.”

§ 2.6 APPLICATION FOR EXEMPTION

(a) Individual Organizations

p. 118. Before the first paragraph of (a) Individual Organizations, insert the following:

(i) General Procedure

(A) INDIVIDUAL ORGANIZATIONS

p. 118. Delete the citation in footnote 396 and replace with the following:

Rev. Proc. 2019-5, 2019-1 IRB 230 (12/28/2018). Note that the information contained in Rev. Proc. 2019-5 is updated annually in January.

pp. 118–119. Delete second and third sentences of the first paragraph under (a) and substitute with the following:

Organizations seeking exemption under § 501(c)(3) must submit a completed Form 1023 to Internal Revenue Service, Attention: EO Determination Letters, Stop 31, P.O. Box 12192, Covington, KY 41012-0192 if by mail, or to Internal Revenue Service, Attention: EO Determination Letters, Stop 31, 201 West Rivercenter Boulevard, Covington, KY 41011 by overnight mail. The user fee structure has been simplified and is now $600 for recognition of exemption under § 501 using Form 1023 and Form 1024 and 1024-A (see subsection 2.6(c)). Smaller organizations are eligible to file Form 1023-EZ electronically at www.pay.gov along with a $275 user fee.

p. 119. Insert the following before the first full paragraph on this page:

NOTE

As of January 2018, IRS has issued revised Forms 1023, Form 2848 (Power of Attorney), Form 1023-EZ (which includes a short summary of an organization's exempt purposes), as well as Form 1024-A to be used only by organizations seeking exemption under § 501(c)(4). (See subsection 2.6(c).) It is important to use the newest version of these forms because the IRS has indicated that it will return applications on the old forms and ask that the applicant resubmit using the current version. Specifically, the current version of Form 1023 is dated December 2017 and Form 1024 is dated January 2018. Form 8718, User Fee for Exempt Organization Determination Letter Request, should be submitted with exemption applications other than those using Forms 1023 and 1023-EZ.

p. 121. Insert the following after the first full sentence on this page:

Although the IRS has improved its turnaround time for reviewing exemption applications, it has concurrently shortened the amount of time given to respond to a request for additional information, which underscores the importance of timely response to IRS information document requests (IDRs). In addition, in the past, when an applicant did not respond to one or more IDRs, EO would close the case as “failure to establish.” Going forward, where there is a failure to respond to an IDR, or a follow-up IDR, the IRS will issue a proposed denial, which will trigger a new process. Rather than supplementing the application, the applicant will now have to file a protest with Appeals, which actually provides a right it did not have under the former procedures of “failure to establish.” From the IRS's viewpoint, a denial letter will take agents more time to prepare than “failure to establish,” but when a denial becomes final, it will serve to instruct the public as to the issues it “is denying.”407.1

p. 121. Add the following to the end of the first full paragraph on this page:

The streamlined application for small organizations, Form 1023-EZ can only be filed electronically at https://irs.gov/form1023. (See 2.6(a)(ii), Special Procedure for Small Organizations.)

p. 122. Insert the following new subsection before (b):

(ii) Special Procedure for “Small” Organizations.   On July 1, 2014, the IRS released a short-form application for recognition of § 501(c)(3) tax-exempt status, the Form 1023-EZ, Streamlined Application for Recognition of Exemption Under § 501(c)(3) of the Internal Revenue Code.418.1 According to IRS Commissioner John Koskinen, the short form was introduced in part to “reduce lengthy processing delays” for organizations seeking exemption from tax. In January 2018, IRS introduced a new version of Form 1023-EZ that seeks some additional information, such as a brief statement of purpose, but remains much simpler to complete and file than Form 1023, with an application fee of $275. The revised Form 1023-EZ adds two “disqualifiers”—that is, criteria that render an organization ineligible to file for exemption using the simplified form. Organizations that are or were exempt under a different subsection of § 501(c) cannot use Form 1023-EZ, which is consistent with the IRS's policy, announced in 2017, that an organization can not alter the § 501(c) provision under which it was exempt in settlement of an audit that proposes revocation. The other new disqualifier is that organizations with a pending Form 1023 cannot submit Form 1023-EZ, which had been a strategic maneuver by organizations frustrated by slow review times.

Before an organization can complete and file the Form 1023-EZ, it must review the 30 questions on the eligibility worksheet. If the answer to any of the questions is “yes,” then the organization is ineligible to use the Form 1023-EZ. Organizations seeking exemption under § 501(c)(3) that are ineligible to use the Form 1023-EZ may still file the Form 1023.

The questions include the following:

Do you project that your annual gross receipts will exceed $50,000 in any of the next three years?

Have your annual gross receipts exceeded $50,000 in any of the past three years?

Do you have total assets the fair market value of which is in excess of $250,000?

Were you formed under the laws of a foreign country (United States territories and possessions are not considered foreign countries)?

Is your mailing address in a foreign country (United States territories and possessions are not considered foreign countries)?

Are you a successor to, or controlled by, an entity suspended under § 501(p) (suspension of tax-exempt status of terrorist organizations)?

Are you organized as an entity other than a corporation, unincorporated association, or trust?

Are you formed as a for-profit entity, or are you a successor to a for-profit entity?

Were you previously revoked, or are you a successor to a previously revoked organization (other than an organization the tax-exempt status of which was automatically revoked for failure to file a Form 990-series return for three consecutive years)?

Are you a church or convention or association of churches described in § 170(b)(1)(A)(i)?

Are you currently recognized as tax exempt under another section of IRC § 501(a), or were you previously exempt under another section of IRC § 501(a)?

Are you a school, college, or university described in § 170(b)(1)(A)(ii)?

Are you a hospital or medical research organization described in § 170(b)(1)(A)(iii) or a hospital organization described in § 501(r)(2)(A)(i)?

Are you applying for exemption as a cooperative hospital service organization under § 501(e)?

Are you applying for exemption as a cooperative service organization of operating educational organizations under § 501(f)?

Are you applying for exemption as a qualified charitable risk pool under § 501(n)?

Are you requesting classification as a supporting organization under § 509(a)(3)?

Is a substantial purpose of your activities to provide assistance to individuals through credit counseling activities such as budgeting, personal finance, financial literacy, mortgage foreclosure assistance, or other consumer credit areas?

Do you or will you invest 5 percent or more of your total assets in securities or funds that are not publicly traded?

Do you participate, or intend to participate, in partnerships (including entities or arrangements treated as partnerships for federal tax purposes) in which you share losses with partners other than § 501(c)(3) organizations?

Do you sell, or intend to sell, carbon credits or carbon offsets?

Are you a health maintenance organization (HMO)?

Are you an accountable care organization (ACO) or an organization that engages in, or intends to engage in, ACO activities (such as participation in the Medicare Shared Savings Program [MSSP] or in activities unrelated to the MSSP described in Notice 2011-20, 2011-16 I.R.B. 652)?

Do you maintain or intend to maintain one or more donor advised funds?

Are you organized and operated exclusively for testing for public safety and requesting a foundation classification under § 509(a)(4)?

Are you requesting classification as a private foundation?

Are you applying for retroactive reinstatement of exemption under § 5 or 6 of Rev. Proc. 2014-11, after being automatically revoked?

As a result of the worksheet, the Form 1023-EZ is primarily designed for smaller, U.S.-based, public charities (e.g., public charities with gross receipts of $50,000 or less and assets of $250,000 or less). The IRS estimates that “as many as 70 percent of all applicants qualify to use the [Form 1023-EZ].”418.2

There are several key differences between the long-form Form 1023 and the short-form Form 1023-EZ. First, whereas Form 1023 is 26 pages long, Form 1023-EZ is only 2½ pages long. Second, Form 1023-EZ can only be filed electronically.418.3 Third, applicants filing Form 1023-EZ are asked to provide a description of their activities not to exceed 255 characters, which is substantially less information than required on Form 1023. Finally, Form 1023-EZ does not require applicants to provide copies of their governing documents; instead, applicants are required to attest that (1) the governing documents limit the organization's purpose to one or more exempt purposes within § 501(c)(3)418.4; (2) the governing documents do not expressly empower the applicant to engage, other than as an insubstantial part of its activities, in activities that in themselves are not in furtherance of one or more exempt purposes418.5; (3) the governing documents contain the dissolution provision required under § 501(c)(3) or the applicant does not need an express dissolution provision in its governing documents because it relies on the operation of state law in the state in which it was formed for its dissolution provision.418.6

According to the IRS, as of March 2015, the IRS is able to process a Form 1023-EZ in less than 30 days. During the previous six months, the IRS approved more than 90 percent of the Form 1023-EZ applications that it received. Additionally, the backlog of applications that were more than 270 days old was reduced by 91 percent. Those Form 1023-EZ applications that were not approved were denied because an organization used the form when it was not eligible to do so.

CAVEAT

Some practitioners have been critical of the Form 1023-EZ. George Yin, current University of Virginia Law professor and former chief of staff on the Joint Committee on Taxation, in particular has argued that Form 1023-EZ is a misuse of IRS compliance resources because the IRS has “created a self-certification process to obtain (c)(3) status”418.7 by “obtaining no information from the applicant upfront.”418.8 According to the National Taxpayer Advocate, Nina Olsen, the IRS has approved some exemption applications that it should not have.418.9 Additionally, the Form 1023-EZ has solved the backlog of exemption applications, but instead of determining whether an organization should be granted exemption from tax, the Form 1023-EZ shifts enforcement to the back end and forces the IRS to perform an audit or compliance check to determine whether the organization should have been granted exemption from tax in the first place.418.10

Form 1023-EZ submissions