Joint Ventures Involving Tax-Exempt Organizations, 2023 Cumulative Supplement E-Book

Michael I. Sanders

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 843

Veröffentlichungsjahr: 2023

Beschreibung

A comprehensive review of the latest developments for tax-exempt organizations engaged in joint ventures

In the 2023 Cumulative Supplement to the fourth edition of Joint Ventures Involving Tax-Exempt Organizations, veteran tax attorney Michael I. Sanders delivers an essential update to the premier text on the subject of joint ventures with tax-exempt organizations. You’ll discover every relevant and recent development in the liability of, and consequences to, exempt organizations participating in joint ventures with for-profit and other tax-exempt entities.

This authoritative guide offers unmatched access to relevant IRC provisions, Treasury regulations, IRS rulings, relevant judicial rulings, and legislative developments that impact exempt organizations considering or involved in joint ventures. You’ll also find:

• Sample models, checklists, and numerous citations to Internal Revenue Code sections, Treasury Regulations, case law, and IRS rulings
• Suggestions for structuring joint ventures and minimizing the risk of audit or penalties

Written by a recognized expert in this complex and rapidly evolving field, the 2023 Cumulative Supplement is a must-read resource for tax attorneys, accountants, and professionals working with tax-exempt organizations.

Leseprobe

Table of Contents

Cover

Table of Contents

Title Page

Copyright

Dedication

Preface

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 FOUNDATIONS' ACTIVITIES THAT LIMIT EXCESS BUSINESS HOLDINGS

§ 1.24 OTHER DEVELOPMENTS

NOTES

CHAPTER 2: Taxation of Charitable Organizations

§ 2.1 INTRODUCTION

§ 2.2 CATEGORIES OF EXEMPT ORGANIZATIONS

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

§ 2.4 CHARITABLE ORGANIZATIONS: GENERAL REQUIREMENTS

§ 2.5 CATEGORIES OF CHARITABLE ORGANIZATIONS (REVISED)

§ 2.6 APPLICATION FOR EXEMPTION

§ 2.7 GOVERNANCE

§ 2.8 FORM 990: REPORTING AND DISCLOSURE REQUIREMENTS

§ 2.9 REDESIGNED FORM 990

§ 2.10 THE IRS AUDIT

§ 2.11 CHARITABLE CONTRIBUTIONS

NOTES

CHAPTER 3: Taxation of Partnerships and Joint Ventures

§ 3.1 SCOPE OF CHAPTER

§ 3.3 CLASSIFICATION AS A PARTNERSHIP (REVISED)

§ 3.4 ALTERNATIVES TO PARTNERSHIPS

§ 3.7 FORMATION OF PARTNERSHIP

§ 3.8 TAX BASIS IN PARTNERSHIP INTEREST

§ 3.9 PARTNERSHIP OPERATIONS

§ 3.10 PARTNERSHIP DISTRIBUTIONS TO PARTNERS

§ 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

§ 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

§ 6.3 USE OF A FOR‐PROFIT SUBSIDIARY AS PARTICIPANT IN A JOINT VENTURE (REVISED)

§ 6.5 PRIVATE FOUNDATIONS AND PROGRAM‐RELATED INVESTMENTS (REVISED)

§ 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 (REVISED)

§ 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

NOTES

CHAPTER 9: Debt‐Financed Income

§ 9.1 INTRODUCTION

§ 9.2 DEBT‐FINANCED PROPERTY

§ 9.3 THE §514(C)(9) EXCEPTION (REVISED)

§ 9.6 THE FINAL REGULATIONS

NOTE

CHAPTER 10: Limitation on Excess Business Holdings

§ 10.1 INTRODUCTION (REVISED)

§ 10.2 EXCESS BUSINESS HOLDINGS: GENERAL RULES (REVISED)

§ 10.3 TAX IMPOSED

§ 10.4 EXCLUSIONS

NOTES

CHAPTER 11: Impact on Taxable Joint Ventures: Tax‐Exempt Entity Leasing Rules (Revised)

§ 11.3 INTERNAL REVENUE CODE § 168(H)

§ 11.5 RESTRICTIONS ON TAX‐EXEMPT USE PROPERTY (NEW)

NOTES

CHAPTER 12: Health Care Entities in Joint Ventures

§ 12.1 OVERVIEW

§ 12.2 CLASSIFICATIONS OF JOINT VENTURES

§ 12.3 TAX ANALYSIS

§ 12.4 OTHER HEALTH CARE 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 HEALTH CARE 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

§ 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

431

(REVISED)

§13.12 THE INFLATION REDUCTION ACT (NEW)

APPENDIX 13B

NOTES

CHAPTER 14: Joint Ventures with Universities

§ 14.1 INTRODUCTION

§ 14.3 COLLEGES AND UNIVERSITIES IRS COMPLIANCE INITIATIVE

§ 14.5 FACULTY PARTICIPATION IN RESEARCH JOINT VENTURES

135.1

§ 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

§ 19.7 SPECIAL ISSUES: CONSEQUENCES OF DEBT REDUCTION

NOTE

Index

End User License Agreement

Guide

Cover

Title Page

Copyright

Dedication

Preface

Acknowledgments

Table of Contents

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Index

End User License Agreement

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joint ventures involving

tax-exempt organizations

2023 Cumulative Supplement

Fourth Edition

Michael I. Sanders

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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

The charitable sector in the United States and worldwide continues to face economic pressures brought on by the rising inflation, the war in Ukraine, the need to resettle undocumented migrants from the southwest border, causing charities to stretch their already limited resources and create innovative techniques, including use of the joint venture structure to accomplish their charitable goals. According to a recent USA Giving USA report, in more than 60 years there has not been such a steep single‐year decline in real dollars being contributed to charities. This results from declines in real income and the stock market and impacts on all three main sources of philanthropy: corporate, individuals, and foundations. In addition, charities are likely to face cutbacks in government grants and contracts, which are second in importance to earned income in nonprofit revenue.

It is noteworthy that the philanthropic community is facing criticism over the now popular use of LLCs, among other techniques, by successful entrepreneurs to fund their charitable goals in order to bypass the application of the private foundation rules, which were enacted in 1969 Tax Reform Act. In this regard, Yvon Chouinard, the founder of Patagonia, transferred all his voting stock to a “purpose trust”; Google co‐founder Sergey Brin set up a new nonprofit, Catalyst4, as a section 501(c)(4) organization; and, as previously discussed, Chan Zuckerberg Initiative (CZI), along with donor advised funds sponsored by major investment companies, such as Fidelity Charitable, are examples of the application of for‐profit philanthropy, which has been expanding. Yet these structures do not face the same requirements regarding transparency and accountability as do private foundations. Nevertheless, over the decades, the use of “mission driven” joint ventures between section 501(c)(3) organizations and for‐profits have continued to expand and maintain a critical role in sustainability of the charitable sector. The sector demands new solutions and is continuing to evolve within the context of a rapidly changing society, which, as discussed in this text, is becoming more complex and is driven by a distinctly so‐called capitalistic influence.

In Chapter 2, under the operational test, the “commerciality doctrine” is expanded upon, with a discussion of its impact on many successful ventures, and involve ventures between exempt organizations and for‐profits. Many successful projects could not be developed but for these incentives. In the discussion, Professor John Colombo's excellent paper delivered at the NYU NonProfit Conference in October, 2022, is highlighted. The analysis also cites the late Bruce Hopkin's discussion of the emergence of “entrepreneurialism.” There is a further discussion of the form 1023EZ, including the reporting of information provided on the form along with proposed recommendations by the Treasury Inspector General for Tax and suggested revisions to the narrative.

Also under Chapter 2 there is a discussion of the subject involving environmental preservation requirements in the context of “charitability.”

In Chapter 3, there is a detailed analysis of fiscal sponsorship agreements. A Fiscal Sponsor is a nonprofit organization that provides fiduciary oversight, financial management, and other administrative services to help build the capacity of charitable projects. It is often used to attract donors even when a particular cause is not recognized as tax exempt under section 501(c)(3).

In Chapter 7, there is a brief discussion of IRS News Release 2023‐65, which expands on the definition of abusive transactions.

In Chapter 9, as to the section 514(c)(9) exception, there is a brief discussion of the Eighth Circuit holding and remand to the District Court of the Mayo Clinic case along with the reference to the IRS not accepting the determination in view of the Treasury regulations requirement that the primary function of an educational organization must be the presentation of formal instruction.

In Chapter 10, there is a discussion regarding a structure that Yvon Chouinard, the founder of Patagonia, announced, involving the transfer of voting stock to a newly created “purpose trust” and all the nonvoting stock which represented 98 percent of the value of the company into a social welfare organization, a section 501(c)(4) organization. The implications of the structure as well as references to Google co‐founder Sergio Brin's, the nonprofit Catalyst4, a section 501(c)(4) organization, is also discussed.

In Chapter 11, as to the impact on taxable joint ventures and the tax‐exempt use property, there is an extensive discussion of the use of the section 168(h) election of a “blocker” along with a critique of the existing limitations under the law. This section also points out pitfalls that need to be avoided and recognizes that often one of parties may inadvertently fail to file an election or the organization may confuse which ownership tier is required to make the election, or that the entity wholly owned by the nonprofit (“the blocker”) is required to file a corporate return. The chapter also includes a hypothetical, which illustrates the application of the rules in a somewhat complex case.

In Chapter 13, there is an update on opportunity zones (OZ) funding, including statistics on the use of the OZ program from both an investment standpoint and pricing as well as an extensive analysis and expansion of the working capital safe harbor. A discussion of the pros and cons and how QOZBs may handle an abandonment of their original plans and a modification in the case of events occurring outside the QOFs control; a scaled down project with a partial return of investment; a QOZB sale of the project and return of capital to the investor and whether a portion of the funds may be invested into non‐QOZB property. There is also a discussion of additional working capital safe harbor issues; and finally, a detailed discussion and analysis of the Inflation Reduction Act including focus on renewal energy tax credits under the recently enacted legislation.

In Chapter 16, regarding the area of syndicated conservation easements, there is a discussion of the Consolidated Appropriation Act, which limits the deduction for charitable contributions of conservation easements in certain situations. Section 605 includes a provision that limits the tax deduction by capping at 2.5 times “relevant basis” subject to certain exceptions.

The bottom line, once again, is that there is no paradigm for joint ventures especially in view of the steep single year of decline in charitable contributions, which are the main sources of philanthropy, in the face of the pandemic and other societal crises such as inflationary pressures of the Russian attack on Ukraine, gun violence, and mass shootings. The pressure on mission‐driven charitable institutions continues to grow. Accordingly, exempt organizations need to be even more creative in forging new paths as discussed in Chapter 6 in the text, in order to solve many of the issues affecting society. As previously stated, applying old solutions to new problems will not effectively address the pressing needs of the sector. The opportunity zone fund rules should be expanded in 2023 to include additional reporting and disclosure requirements and more census tracts especially in rural communities, as an example. In some cases, mission‐driven charities may rely upon use of PRIs and MRIs along with LLCs and other techniques in order to fulfill their goals.

Acknowledgments

I want to call attention to the work of DyTiesha Dunson, formerly a graduate tax student at Georgetown Law School who has expanded on her analysis of NILs, which is included in Chapter 14 of the text. I also want to thank Robert A. Wexler, a long‐time colleague and friend, for providing the materials related to newly developed concept of a “purpose trust” and other alternatives to a private foundation. In this regard, he shared research prepared by Susan Gary and him, which was delivered at the ABA Tax Section meeting in May, 2023. I also want to notice Andrew Logan, who contributed significant materials related to the Form 1023EZ update as well as the Inflation Reduction Act.

And again, I especially acknowledge Linda Schrader, whose extraordinary kindness and sensitivity have been invaluable to the preparation of the manuscript as well as the coordination with the staff of John Wiley & Sons. Linda has been critical to the entire process since the beginning of this 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

§ 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 Foundations' 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.

§ 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 1,254 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 the ability to require a 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 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 FOUNDATIONS' 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.

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‐sponsored charity to raise tax‐deductible contributions to be distributed to former employees who demonstrate need. In addition, a supplemental unemployment benefit trust under §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 health care 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, the IRS provided guidance to employers for how to exchange employee elections to forgo 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

The CARES Act expanded the definition of educational assistance for purposes of section 127 of the Internal Revenue Code of 1986, as amended, to include certain employer payments made after March 27, 2020, under an “educational assistance program”178 for repayment of employee student loans. As a result, through the end of the 2025 taxable year, an employer can make tax‐free payments to its employees for student loan assistance of up to $5,250 per year. Payments in excess of $5,250 per year (and payments that are not made pursuant to an educational assistance program [as described below]) would be included in the employee's gross income. Additional rules and requirements related to qualified payments and educational assistance programs are described below.

The payments can be made to the employee or directly to the lender, for repayment of either principal or interest, so long as the payments are made with respect to a “qualified education loan” and certain requirements under section 127 of the Code are met. A qualified education loan would generally include any student loan that is part of a federal postsecondary education loan program that is incurred for “qualified education expenses” of the employee's education, such as tuition and fees, room and board, books, certain supplies and equipment, and certain other necessary expenses for the employee's education. The qualified education expenses must generally be paid or incurred with student loan proceeds within a reasonable period of time before or after the employee takes out the loan.

In order for the payments to employees to qualify for the gross income exclusion, the payments must be made pursuant to a separate written educational assistance program established for the exclusive benefit of the employer's employees so as to provide them with educational assistance.

The employer can establish certain restrictions (subject to the nondiscrimination rules under section 127 of the Code, discussed below) on an employee's eligibility under the program such as job relationship requirements, limitation on when and where the courses can be taken, preapproval by the program manager or the employee's supervisor, proof of completion of the course, minimum course grades, and completion of a certain period of employment after completion of the course.

The following are additional requirements of the educational assistance program under section 127 of the Code:

The program benefits employees who qualify under rules set up by the employer (such as those described above in the immediately preceding bullet point) that do not discriminate in favor of highly compensated employees (i.e., an employee who (i) during the current or preceding tax year is or was a more than 5 percent owner with respect to the employer, or (ii) earned compensation in excess of $130,000 (for the 2021 tax year) unless such employee was not also in the top 20 percent of employees by pay for the preceding year and the employer chooses not to treat such individual as a highly compensated employee);

The program does not provide for more than 5 percent of its total benefits during the year to its more than 5 percent shareholders or owners (or their spouses or dependents);

The program does not allow the employees to receive cash or other benefits that must be included in gross income instead of educational assistance; and

The employer must give reasonable notice of the program to its eligible employees.

An employer can choose to treat the following individuals as employees for purposes of the income exclusion rules: a current employee; a former employee who retired, left on disability, or was laid off; a leased employee who provided services under the employer's primary direction or control on a substantially full‐time basis for at least a year; and self‐employed individuals (such as an owner of a business if the employer is a sole proprietorship, or a partner who performs services for a partnership if the employer is a partnership).

The program does not need to be funded to qualify.

The employer may, but is not required to, obtain a determination letter from the IRS that the program is a qualified educational assistance program.

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.

178

The term “educational assistance” means (a) the payment, by an employer, of expenses incurred by or on behalf of an employee for education of that employee (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment); (b) in the case of payments made before January 1, 2021, the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan (as defined in § 221(d)(1)) incurred by the employee for education of the employee; and (c) the provision, by an employer, of courses of instruction for such employee (including books, supplies, and equipment) but does not include payment for, or the provision of, tools or supplies that may be retained by the employee after completion of a course of instruction, or meals, lodging, or transportation. The term “educational assistance” also does not include any payment for, or the provision of, any benefits with respect to any course or other education involving sports, games, or hobbies. (See § 127(c)(1).)

CHAPTER 2Taxation of Charitable Organizations

§ 2.1 Introduction

§ 2.2 Categories of Exempt Organizations

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

§ 2.4 Charitable Organizations: General Requirements

§ 2.5 Categories of Charitable Organizations (Revised)

§ 2.6 Application for Exemption

§ 2.7 Governance

§ 2.8 Form 990: Reporting and Disclosure Requirements

§ 2.9 Redesigned Form 990

§ 2.10 The IRS Audit

§ 2.11 Charitable Contributions

§ 2.1 INTRODUCTION

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 five 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 a 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 10 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 US ___ (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 the “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

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 expendituresto 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 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 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. See Rev. Proc. 2000‐8 regarding electronic filing of Forms 1024. The IRS revised and updated Form 1024 and provided for it to be electronically submitted at www.pay.gov. Organizations seeking determination under § 501(a) (other than those described in § 501(c)(3) or § 501(c)(4) and those seeking group rulings), including those organizations that have been required to submit letter requests to seek determination, are generally required to electronically submit the Form 1024 effective date of January 3, 2022. There is a 90‐day transition period for late filings provided as well.

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 I.R.B., July 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

Gifts to a 501(c)(4) organization, whether in cash or appreciated securities, are not subject to gift tax; however, such amounts are not deductible from the donor's taxable income regardless of whether the gifts are in the form of cash, securities, or other assets. If the gift is in the form of appreciated securities, the subsequent sale of the securities does not cause the § 501(c)(4) organization to be liable for tax on the appreciation. See subsection 2.11(e) regarding charitable contributions to SMLLCs.

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

(a) Organizational Test

(iii) 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.

(iii) The Commensurate Test

p. 69. Add the following at the end of the subsection (following Note) and renumber current (iv) to (v):

In view of the recent COVID‐19 pandemic and the budgetary pressures that followed, charities are pursuing more diverse means of generating revenues, including impact investing (Section 6.8), tax credit structures (Chapter 13), and opportunity zone funds (Section 13.11), some of which may run afoul of the commerciality doctrine.107.1

(iv) The Commerciality Doctrine (Revised)