Joint Ventures Involving Tax-Exempt Organizations, 2020 Cumulative Supplement E-Book
Michael I. Sanders
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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Nonprofit Authority
- Sprache: Englisch
A comprehensive, revised, and expanded guide covering tax-exempt organizations engaging in joint ventures Joint Ventures Involving Tax-Exempt Organizations: 2020 Cumulative Supplement, Fourth Edition examines the liability of, and consequences to, exempt organizations participating in joint ventures with for-profit and other tax-exempt entities. This authoritative guide provides unbridled access to relevant IRC provisions, Treasury regulations, IRS rulings, and pertinent judicial decisions and legislative developments that impact exempt organizations involved in joint ventures. * Features in depth analysis of the IRS's requirements for structuring joint ventures to protect a nonprofit's exemption as well as to minimize UBIT * Includes sample models, checklists, and numerous citations to Internal Revenue Code sections, Treasury Regulations, case law, and IRS rulings * Presents models, guidelines, and suggestions for structuring joint ventures and minimizing the risk of audit * Contains detailed coverage of: new Internal Revenue Code requirements impacting charitable hospitals including Section 501(r) and related provisions; university ventures, revised Form 990, with a focus on nonprofits engaged in joint ventures; the IRS's emphasis on good governance practices; international activities by nonprofits; and a comprehensive examination of the New Market Tax Credits and Low Income Housing Tax Credits arena Written by a noted expert in the field, Joint Ventures Involving Tax-Exempt Organizations: 2020 Cumulative Supplement, Fourth Edition is the most in-depth discussion of this critical topic.
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Table of Contents
Cover
Title Page
Copyright
Dedication
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 (REVISED)
§ 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 (REVISED)
NOTES
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
§ 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
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?
§ 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 (REVISED)
§ 6.5 PRIVATE FOUNDATIONS AND PROGRAM-RELATED INVESTMENTS
§ 6.6 NONPROFITS AND BONDS
§ 6.7 EXPLORING ALTERNATIVE STRUCTURES (REVISED)
§ 6.8 OTHER APPROACHES (REVISED)
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
§ 8.5 MODIFICATIONS TO UBIT
§ 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
NOTES
CHAPTER 10: Limitation on Excess Business Holdings
§ 10.1 INTRODUCTION
§ 10.2 EXCESS BUSINESS HOLDINGS: GENERAL RULES
§ 10.3 TAX IMPOSED
§ 10.4 EXCLUSIONS
NOTES
CHAPTER 12: Healthcare Entities in Joint Ventures
§ 12.1 OVERVIEW (REVISED)
§ 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-OP: 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
§ 13.3 LOW-INCOME HOUSING TAX CREDIT (REVISED)
§ 13.4 HISTORIC INVESTMENT TAX CREDIT (REVISED)
§ 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
NOTES
CHAPTER 14: Joint Ventures with Universities
§ 14.1 INTRODUCTION (REVISED)
§ 14.3 COLLEGES AND UNIVERSITIES IRS COMPLIANCE INITIATIVE
§ 14.5 FACULTY PARTICIPATION IN RESEARCH JOINT VENTURES (REVISED)
§ 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 (REVISED)
§ 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 (REVISED)
§ 19.2 OVERVIEW OF BANKRUPTCY (REVISED)
§ 19.3 THE ESTATE AND THE AUTOMATIC STAY (REVISED)
§ 19.4 CASE ADMINISTRATION (REVISED)
§ 19.5 CHAPTER 11 PLAN (REVISED)
§ 19.6 DISCHARGE
§ 19.7 SPECIAL ISSUES: CONSEQUENCES OF DEBT REDUCTION (NEW)
NOTE
Index
End User License Agreement
Guide
Cover
Table of Contents
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joint ventures involving tax-exempt organizations
2020 Cumulative Supplement
4th Edition
Michael I. Sanders
Copyright © 2021 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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ISBN 9781118317112 (main edition)
ISBN 9781119766155 (supplement)
ISBN 9781119766254 (ePDF)
ISBN 9781119766216 (ePub)
Cover Design: Wiley
Cover 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
Nonprofits and their boards have two constituencies: the charitable classes they serve and the financial security of their own organizations. At the time of this writing, with COVID-19 cases again rising across the United States, there is heightened need to evaluate both their financial viability and their ability to serve their charitable classes with a focus on the joint venture structure.
It is important to note that 97% of nonprofits have budgets of $5M or less and 92% have under $1M, but charities are not just critical to their charitable classes, they are also critical to our economy. Collectively, charitable nonprofits are the third-largest workforce in the nation—larger than construction, finance, and manufacturing.1
In the Great Recession, as for-profits slashed their payrolls, nonprofits were sources of employment, as they were in a position to expand their staffs. However, circumstances are different in 2020 COVID-19 America. With the U.S. economy closing, reopening, and closing again in different parts of the country, charities and other nonprofits are again struggling. Code § 501(c)(3) and 501(c)(19) organizations (veterans associations) were eligible for assistance under the Payroll Protection Program (“PPP”), but information released regarding charitable organizations that received these loans indicates that large institutions fared better in navigating the application process than did smaller organizations.2 There are other federal assistance programs with additional ones reportedly in the pipeline.
Government funding of nonprofit activities, already a declining revenue source for nonprofits, will only decrease further as consumer spending on tourism, live sports events, brick-and-mortar retail, restaurants, and so on has come to a halt. In 2018, states collected $83 billion in taxes from travel and tourism, $152 billion from sports betting. Those tax bases have taken an extreme hit. “While it is not clear at this early stage what services state and local governments would have to cut to make up the shortfall, the biggest expenditures annually go toward education, public welfare, which includes Medicaid spending, and hospitals and health care, according to the Urban Institute. Nevada and Florida's tourism-specific taxes on things like gaming and hotel beds go toward education and infrastructure funding, respectively.”3
Moreover, through the lens of hindsight, the Tax Cuts and Jobs Act tax law change that basically eliminated the charitable deduction tax incentive for most Americans (who now claim the standard deduction and don't itemize) was unfortunate and untimely. Even the new above-the-line $300 deduction for non-itemizers will not be sufficient to incentivize the amount of donations that are needed. On the other hand, media reports indicate that many wealthy persons with donor-advised funds (whose undistributed assets in 2018 were estimated at $120 billion) have apparently voluntarily increased distributions from their accounts in response to the crisis.4
In this unprecedented environment, many nonprofits will not survive. Others, with assets or valuable programs in place, will seek mergers or joint venture partners, including for-profit equity. Now more than ever we need Congressional action to increase private giving to our charities by enacting minimum payout requirements for donor-advised funds as well as increased tax incentives for charitable giving by non-itemizers, such as an unlimited above-the-line deduction for non-itemizers.
In Chapter 1, there is discussion of the impact of COVID-19 and business owners interested in providing financial assistance to furloughed or terminated employees, including a discussion of employer-sponsored charity and section 139 payments.
In Chapter 2, there is a review of the impact of the CARES Act on contributions by individuals and corporations along with the advantages of a § 501(c)(4) organization compared to § 501(c)(3) as to participation in policy-making, especially in the wake of COVID-19.
In Chapter 6, there is an analysis of IRS Private Letter Ruling 202005020, which examines the use of a wholly-owned for-profit subsidiary and raises new concerns as to whether the traditional structural model is being reexamined by the IRS. The chapter also reviews Christian online streaming services, which may raise UBIT issues, as well as the growth of benefit and flexible corporations as partners in joint ventures in view of the more holistic and community-minded view of business in society.
In Chapter 8, there is analysis of the impact of the recently issued proposed regulations on the silo rules; the use of the North American Industry Class System (NAICS), which is fundamental to the new rules; and the aggregation test and the impact of the CARES Act. There is also discussion as to how a philanthropic owner of an LLC can mitigate the financial consequences of sacrificing an immediate tax deduction for contributions made to a philanthropic LLC.
In Chapter 12, there is a brief discussion regarding the scrutiny of nonprofit hospitals, including the executive compensation that began before the COVID-19 crisis.
In Chapter 13, there is a detailed analysis of the impact of the opportunity zone fund final regulations, which focuses on the unprecedented economic impact of COVID-19 on the industry. Also, a study of the historic tax credit rules with a focus on the Gateway Hotel tax court case and its ramifications on whether the transfer of tax credits to an indirect owner of the partnership constitutes taxable income to the partnership, along with a discussion of structuring alternatives.
In Chapter 14, there is a further examination of joint ventures with faculty members such as professors, scientists, and researchers, with the addition of four scenarios that illustrate the concepts, including the use of a C corporation blocker.
In Chapter 16, conservation organizations involved in joint ventures are studied, including an examination of recent IRS rulings and procedures, especially in cases of syndicated conservation easements.
The bottom line, once again, is that there is no one paradigm for joint ventures, especially in the face of the COVID-19 pandemic and its continued pressures on fundraising. In view of the financial distress that tax-exempt organizations face, they need to be creative, that is, 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 of the charitable community, especially at a time of the pandemic crisis. The author believes that the opportunity zone legislation is likely to be expanded and should create an extremely attractive alternative that allows funds to be redirected into designated census tracts. In addition, many socially minded organizations may attempt to be reclassified as a 501(c)(4) as compared to a 501(c)(3) (see Chapter 2 in this regard). Finally, many prominent philanthropists are considering foregoing tax exemption completely to accomplish their charitable goals (see Section 6.8).
Notes
1
Tim Delaney, “Nonprofits and Funders: Coronavirus Requires Immediate State Advocacy,”
Nonprofit Quarterly
, Apr. 7, 2020.
2
Ruth McCambridge, “PPP Recipient List: Reading Between the Lines Reveals Big Holes for Nonprofits,”
Nonprofit Quarterly
, July 7, 2020.
3
Daily Tax Report
, April 7, 2020.
4
https://www.washingtonpost.com/lifestyle/style/zombie-phil¨._campaign=wp_main&utm_medium=social&ut._source=twitter
.
Acknowledgments
I gratefully acknowledge the assistance of my colleagues at Blank Rome LLP; Kendra Merchant for her excellent analysis on the final regulations involving opportunity zone funds and her review of the historic tax credit chapter; Lorenzo Thomas at Blank Rome, who has updated the Debt Restructuring and Asset Protection section in Chapter 19; and Gayle Forst for her contributions to the research of the Supplement. I want to call attention to the work of a number of the graduate tax students at Georgetown University Law Center who have taken my class, Special Topics in Exempt Organizations, and have written papers that provide substantive materials, which are included in the text. Javan A. Kline has written on the expansion of distance learning and examples regarding research joint ventures, including additional case studies; Eunice Lim has written a paper describing the advantages of foregoing tax exemption and the mitigation of financial tax consequences; Chase McBeath has written with regard to the political advocacy process relative to § 501(c)(4)s; James A. Maroules has discussed Christian streaming services and their potential UBIT impact; and Michelle Gough, JD, PhD, has analyzed the expansion of benefit and flexible purpose organizations. I again thank Amanda H. Nussbaum, who presented with me at Georgetown University Law Center on UBIT in PE practice and has provided materials referenced in the UBIT chapter. Finally, as always, I appreciate the outstanding contribution of Ronald Schultz at Alliant Group for his lectures at Georgetown University Law Center, his analysis of the IRS recent private letter ruling on the use of a for-profit corporate subsidiary, and his draft of current development 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 at John Wiley & Sons; Linda has been critical to the entire process since the beginning of the treatise.
CHAPTER 1Introduction: Joint Ventures Involving Exempt Organizations
§ 1.4 University Joint Ventures
§ 1.5 Low-Income Housing and New Markets Tax Credit Joint Ventures (Revised)
§ 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 (Revised)
§ 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 (REVISED)
pp. 13–14. Delete the last paragraph on p. 13 and replace with the following:
The CDFI Fund has made 1,254 allocation awards totaling $61 billion in allocation authority since the NMTC Program's inception. Since inception through FY 2019, CDEs have disbursed a total of $52.5 billion in QEI proceeds to 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 (REVISED)
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.
p. 47. Add the following at the end of the subsection:
With the growing impact of COVID-19, many business owners are interested in providing financial assistance to their furloughed or terminated employees, even though they cannot afford to keep them on their payroll. An attractive option is the creation of an employer's-sponsored charity to raise tax-deductible contributions to be distributed to former employees who demonstrate need. In addition, a supplemental unemployment benefit trust under section 501(c)(17) can be formed as part of a plan to pay supplemental unemployment compensation benefits. Under section 139, employers can provide assistance directly to an employee free of income tax, provided the funds are used to pay or reimburse amounts that are reasonably expected to be incurred for incremental personal, family, or living expenses as a result of the COVID-19 crisis.
Under section 139, payments may cover the following expenses: (1) unreimbursed medical expenses and health-related expenses; (2) home expenses due to telecommuting; (3) housing costs for additional family members; (4) increased childcare and tutoring costs due to school closings; (5) additional commuting expenses; and (6) increased costs of home office supplies.
An employer-sponsored charity may cover not only those employees who are suffering under the impact of COVID-19 but may cover future hardships as well. However, charities benefiting individuals are permissible if the class of eligible beneficiaries is broad enough to be considered “indeterminable.” For example, a charity designed to benefit past, current, and future employees of an entire restaurant group due to the pandemic and future disasters is broad enough and the beneficiaries are not immediately identifiable because unknown future employees and current employees who are victims of future disasters are eligible beneficiaries. Secondly, the individuals who are invested with the authority to make the grants—the board of directors or a committee appointed by the board—must consist of a majority of individuals who do not exert “substantial influence” over the business with rank-and-file employees and should be included among the decision makers. Finally, individuals who demonstrate a financial need are eligible to receive assistance, but the charity should avoid giving a “one size fits all” grant to every employee. Acceptable purposes for such grants include payment of necessary healthcare expenses; providing cost of childcare or educational expenses for children of employees; or short-term grants meant to cover basic living expenses.
CAVEAT
The charity should retain documentation regarding the employee's eligibility for a grant and verification that the employee used the funds for eligible purposes.176
CAVEAT
Businesses that contemplate severance payments to workers should consider structuring such payments so that they qualify under section 139. If so, the payments would appear to be exempt from income tax and most payroll taxes. However, any payments pursuant to a legal or contractual obligation to pay severance would be difficult to categorize as section 139 payments. Secondly, section 139 contemplates payments commensurate with expenses they intend to offset, while severance payments are often computed based upon years of service and salary levels.
In Notice 2020-46, IRS provided guidance to employers for how to exchange employee elections to forego vacation, sick, or personal leave for cash payments that the employer makes to charitable organizations for COVID-19 relief. An employee who elects to relinquish aid leave will not be taxed on the value of the leave, if the payments in exchange for the leave are made by the individual's employer prior to January, 1, 2021, to a § 170(c) organization that provides “relief to victims of the COVID-19 pandemic.”
CAVEAT
Although not explicit in the IRS notice, the use of the phrase “victims of the COVID-19 pandemic” can be read to mean that the permissible use of the donations extends not only to assist people who contract the disease, but also to people who lose their jobs or are otherwise financially harmed by the pandemic.177
Notes
176
It is important to note that as an alternative, employers may be able to assist their employees by making qualified disaster relief payments on a tax-free basis under section 139 of the Code, previously discussed.
177
Employers will have the choice of deducting these contributions either under the rules of Code § 170, as a charitable contribution deduction, or under section 162, which relates to the deduction for ordinary and necessary business expenses. The benefit of taking a deduction under Code § 162 as opposed to Code § 170 is that the employer will not be subject to certain limitations that section 170 imposes on the amount of the payment that is deductible in the year of the payment.
CHAPTER 2Taxation of Charitable Organizations
§ 2.1 Introduction (Revised)
§ 2.2 Categories of Exempt Organizations (Revised)
§ 2.3 § 501(c)(3) Organizations: Statutory Requirements
§ 2.4 Charitable Organizations: General Requirements
§ 2.6 Application for Exemption
§ 2.7 Governance
§ 2.8 Form 990: Reporting and Disclosure Requirements (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 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 acknowledgment. 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 tax applies to the organization itself, not covered employee or organizational manager.
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. Note that this has been repealed under the Taxpayers Certainty and Disclosure Act of 2019.
The unrelated business income tax rate is now 21 percent, which will provide relief to many exempt organizations that 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 the 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.
CARES Act
The newly enacted Coronavirus Aid, Relief, and Economic Security Act (commonly known as “CARES Act”) includes a number of provisions designed to encourage charitable contributions of cash to both individuals and corporations. Individual donors making gifts to qualified charities may deduct up to 100 percent of their 2020 adjusted gross income over and above the usual cap of 60 percent (or 50 percent if charitable contributions are made through a combination of cash and other assets). Corporate taxpayers that make qualified contributions can deduct such contributions up to 25 percent of adjusted taxable income, rather than the 10 percent limitation from the 2017 Tax Cuts and Jobs Act. Excess contributions may be carried forward for the next five taxable years; however, various deduction limitations should be restored in 2021 and thereafter. Qualified contributions do not include contributions for the establishment of new or maintenance of an existing donor-advised fund, or for gifts to private foundations (other than pass-through foundations and private operating foundations).
For tax years beginning in 2020, individual taxpayers who claim the standard deduction on their federal tax return as opposed to itemizing deductions are permitted to make qualifying contributions up to $300 annually and to use such contributions as an above-the-line deduction in computing their adjusted income.
§ 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
Political advocacy has become an essential way for policy to be shaped in the United States in order to better represent communities across the country. In view of the limitations that charitable organizations face in order to participate in this political process, organizations formed under § 501(c)(4) may fill the gaps left by public charity spending as well as to respond to corporations with incentives to advocate for policy that is counteractive to a charitable purpose, even if inadvertent. Section 501(c)(4) organizations provide essentially the same services as a § 501(c)(3) charity without the benefit of tax deductibility of donations. With regard to this growing requirement to participate in some form of policymaking influence, the § 501(c)(4) organization stands as a critical element to serve those in need by maximizing the activities that will help benefit the underprivileged.
Furthermore, in the wake of COVID-19, billions of lives have been impacted all over the world, many adjusting to a new reality when it comes to social norms of each society as well as the potential economic hardships that lie ahead. The need for representation is essential with regard to the enactment of stimulus packages that benefit large corporations to a greater extent than the average American taxpayer.22.13 This is one of the challenges that organizations that engage in charitable activities must face as the political class is dividing up the slices of pie and the traditional § 501(c)(3) public charities cannot compete with the level of lobbying and political participation permitted. The § 501(c)(4) organization stands ready as a David to many Goliaths that appear to pillage and enjoy the spoils of legislative victories at the expense of many needy Americans. While the highly politicized Supreme Court decision Citizens United has plagued § 501(c)(4) organizations as a veil to hide corporate and super PAC influence, social welfare organizations are an important part of serving communities at large. COVID-19 has brought a new understanding of what it means to be a community, and hopefully the next tax-exempt organizations that “rise out of the flames” of COVID-19 will help illuminate the community good provided by § 501(c)(4) organizations as well as the need to be politically involved.
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.22.14 Section 501(c)(4) organizations are also subject to annual filing requirements using Form 990 or 990EZ.22.15 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.22.16
In a bow to pressure from conservative groups in Congress, the IRS changed longstanding 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).22.17 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.
In May 2020, the IRS issued final regulations on donor disclosure, providing that social welfare organizations as well as § 501(c)(6) trade associations are no longer required to report large donors ($5,000 or more) on Schedule B on Form 990. Section 501(c)(3) organizations and section 527 political organizations remain subject to statutory requirements for donor disclosure.22.18
§ 2.3 § 501(C)(3) ORGANIZATIONS: STATUTORY REQUIREMENTS
(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
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 Forms 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 Form 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 cannot 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)?
