The Protecting Americans from Tax Hikes (“PATH”) Act of 2015, enacted in December 2015, requires organizations to notify the IRS if they desire to operate under Section 501(c)(4) of the Internal Revenue Code (“Code”). (Only organizations described in Section 501(c)(3) of the Code are required to apply for and receive recognition of their tax-exempt status; other organizations, such as social welfare organizations described in Section 501(c)(4), may apply to the IRS for recognition of exempt status but are not required to do so in order to be exempt.) The PATH Act added a new Section 506 to the Code. Section 506 requires Section 501(c)(4) organizations to notify the IRS, within 60 days of organizing, that they are operating as Section 501(c)(4) organizations. Because of concern about IRS screening of Section 501(c)(4) organizations that may be conducting political activities, the IRS is currently prohibited from issuing guidance concerning qualifications for Section 501(c)(4) organizations. However, the notice required under Section 506 will provide the IRS more timely information about the formation of organizations claiming Section 501(c)(4) status than would be the case if the organizations’ first IRS contact was the filing of Form 990 as long as nearly two years after organization. (For previous discussions of concern about political activities of Section 501(c)(4) organizations, see http://nonprofitlaw.proskauer.com/2012/12/21/new-york-attorney-general-issues-proposed-regulations-to-require-nonprofits-to-publicly-disclose-their-political-expenditures-and-their-donors-identities/ and http://nonprofitlaw.proskauer.com/2013/01/02/proposed-legislation-would-require-nonprofit-organizations-participating-in-california-political-campaigns-to-disclose-the-identity-of-their-donors/.)
In early July, 2016, the IRS implemented Section 506 by (i) publishing temporary and proposed regulations concerning the required filing (https://www.federalregister.gov/articles/2016/07/12/2016-16337/requirement-to-notify-the-irs-of-intent-to-operate-as-a-section-501c4-organization), (ii) releasing Revenue Procedure 2016-41, 2016-30 I.R.B., setting forth details of the filing requirements (https://www.irs.gov/pub/irs-drop/rp-16-41.pdf), and (iii) releasing a new form, Form 8976, for this filing (https://www.irs.gov/charities-non-profits/electronically-submit-your-form-8976-notice-of-intent-to-operate-under-section-501c4). The rule requires that new organizations electronically file the newly released Form 8976 with the IRS within 60 days of organization. Absent an applicable reasonable cause exception or an extended due date, organizations and individuals who do not submit Form 8976 on time are subject to fines. The IRS will acknowledge the receipt of the notification within 60 days of receiving it. This acknowledgement does not constitute recognition of tax exemption, but simply that the notification has been received. The filing is not subject to public inspection. A $50 filing fee is imposed for the Form 8976.
Organizations which were organized on or before July 8, 2016 who previously filed specified forms with the IRS on or before that date do not need to submit Form 8976. The filings satisfying these exception include an application for a written determination of recognition as a 501(c)(4) organization (Form 1024), and an annual information or annual electronic notification (the Form 990 series). (This exception exists because the IRS already knows of the filing organization’s existence without the need for it to file a Form 8976.) Organizations organized on or before July 8, 2016 that had not made either of these filings before July 8, 2016 must file Form 8976 by September 6, 2016.
In a separate action (Revenue Procedure 2016-32, at https://www.irs.gov/irb/2016-22_IRB/ar10.html), the IRS reduced the filing fee for organizations submitting Form 1023-EZ from $400.00 to $275.00, effective July 1, 2016. The Form 1023-EZ is a short-form, online-only application to be recognized as a 501(c)(3) organization for small organizations. (We previously described the Form 1023-EZ at http://nonprofitlaw.proskauer.com/2015/04/10/irs-commissioner-says-irs-is-under-new-management-whats-happened-over-the-past-year-in-the-irs-affecting-tax-exempt-organizations-2/).
On June 21, 2016, the Internal Revenue Service (IRS) issued anticipated proposed Treasury Regulations prescribing rules under Section 457 of the Internal Revenue Code for the income taxation of deferred compensation arrangements for employees of tax-exempt organizations and state and local governments. The IRS also released new proposed Treasury Regulations under Code Section 409A.
Generally, the proposed regulations are more flexible and practical than the rules previously suggested by the IRS in Notice 2007-62 and also than what was expected by many practitioners. While the proposed regulations require clarification on a number of points, these new rules will provide useful guidance in designing compensation for executives of tax-exempt organizations. Among other things, these rules:
- follow Code Section 409A in recognizing a termination by an employee for “good reason” as an involuntary severance from employment;
- unlike under Code Section 409A, recognize required compliance with a noncompetition agreement as a substantial risk of forfeiture;
- contrary to prior IRS policy statements, permit, in certain situations, elective deferral of current compensation and a rollover of existing substantial risk of forfeiture;
- define bona fide severance pay plans that are exempt from Code Section 457, including by imposing a limit on the amount of severance that can be paid under such a plan of two times a participant’s prior year’s rate of compensation (similar to the Code Section 409A coverage exception), but without the alternative lower limit based on two times the limit for recognizing compensation under qualified plans;
- define bona fide sick pay and vacation plans that are exempt from Code Section 457;
- specify with flexibility how to determine present value when calculating the amount to be taxed under Code Section 457(f); and
- emphasize that both Code Section 457(f) and Code Section 409A apply to most deferral arrangements.
The key provisions in the proposed regulations that relate to tax-exempt organizations are discussed in more detail in our recent client alert, which is available here.
Our colleagues over at our Tax Talks blog covered Proskauer’s recent work in connection with the widely-publicized forgiveness of nearly $15 million in medical debt by John Oliver on his June 5th show.
It was our pro bono representation of RIP Medical Debt, a Section 501(c)(3) charity that provides charitable aid by purchasing and forgiving the medical debt of people in poverty, that ensured that the debt forgiveness was given as a gift, and therefore, did not cause the debtors to recognize the cancellation of debt income for federal income tax purposes.
Please see the full blog post here.
On February 19, 2016, the IRS and Treasury Department issued proposed regulations regarding (i) prohibitions on certain contributions to Type I and Type III supporting organizations and (ii) requirements for Type III supporting organizations. These proposed regulations reflect changes to the law made by the Pension Protection Act of 2006, which changed the requirements an organization must satisfy to qualify as a Type III supporting organization.
Every January, the IRS releases a series of revenue procedures detailing how organizations can obtain private letter rulings and determinations and listing issues on which the IRS will not rule during the coming year. This year’s procedures make clear that tax-exempt organizations will no longer be able to receive a ruling or any comfort from the IRS that changes in their operations are consistent with their tax-exempt status. In other words, exempt organizations are on their own.
Until recently, an organization could request a private letter ruling from the Exempt Organizations technical branch that a particular activity or transaction would not generate unrelated business taxable income or adversely affect exempt status. The IRS would not rule on factual issues, such as whether a proposed transaction was at a fair market value price, and would not rule on a few specific issues, such as whether participation in a joint venture with a for-profit entity would affect exempt status.
Proskauer’s 20th Annual Trick or Treat Seminar was held on Friday, October 30.
The Seminar discussed:
- Non-Profit Revitalization Act of 2013: Recent Developments and Outstanding Issues
- Recent Developments in Independent Contractor Misclassification
- Purpose Investing for Charities
- Benefits Update
Amanda Nussbaum welcomed everyone to the 20th Annual Trick or Treat Seminar, commented on some of the trends in nonprofit law over the last twenty years, and introduced the presenters.
On October 26, 2015, the IRS released final regulations under Sections 141 and 145 of the Internal Revenue Code concerning the use of property financed with tax-exempt bond proceeds. The bulk of the new regulations fill a long-reserved spot in Treasury Regulation Section 1.141-6 concerning allocation of bond proceeds to financed property. In addition, in an important new development, amendments to Treasury Regulations Sections 1.141-3 and 1.145-2 now provide that partnerships that include governmental entities or Section 501(c)(3) tax-exempt organizations can use and own bond-financed property. Permitted use is in proportion to the exempt’s ownership of the joint venture, except to the extent that the use generates unrelated business income for the exempt joint venturer. The new regulations can be applied to outstanding bonds as well as new bonds.
As we previously reported, the IRS has updated its guidance with helpful examples concerning program-related investments for private foundations. In its recently issued Notice 2015-62, the IRS provides further assurance that private foundations may take the accomplishment of charitable purposes into account in investing decisions, in addition to financial return.
Among other restrictions, private foundations are subject to Section 4944 of the Internal Revenue Code. Section 4944 imposes excise taxes on a private foundation that makes a “jeopardizing investment,” as well as on the foundation’s directors, officers, and management who knowingly participate in the making of the investment. Jeopardizing investments do not include “program-related investments.” These are investments made without any significant purpose of financial return. Notice 2015-62 does not address program-related investments; rather, it addresses investments having a charitable as well as financial purpose.
On September 16, 2015, the IRS issued proposed regulations concerning the time and manner for donee organizations to file information returns that report required information about charitable contributions. The proposed regulations would implement an exception to the requirement that a taxpayer who claims a charitable contribution deduction for any contribution of $250 or more to obtain substantiation in the form of a “contemporaneous written acknowledgement” from the donee organization.
Previously, some taxpayers have argued that donations can be substantiated by filing an amended Form 990, even years after the claimed donation is made; however, the IRS has rejected this position. Instead, pursuant to the proposed regulations, the IRS will develop an optional “specific-use information return for donee reporting” intended to provide for timely reporting, while also minimizing reporting burdens on donees and protecting donor privacy.
In April, the New York State Attorney General’s office released guidance addressing key provisions of the New York Not-for-Profit Corporation Law. For in-depth analysis of the Attorney General’s guidance, click here for an article by Proskauer attorneys Roger Cohen and Ellen Moskowitz. For this blog’s coverage of the New York Not-for-Profit Corporation law, click here.