Not-For-Profit/Exempt Organizations Blog : Non-Profit Lawyers & Attorneys : Proskauer Rose Law Firm : Tax & Corporate Law for 501(c), 501(3) Organizations

A new provision which was slipped in to the annual announcement of procedures for exempt organization determinations and letter rulings provides a way for governmental entities to voluntarily terminate their Section 501(c)(3) status. This is important for governmental hospitals that otherwise could be faced with new exemption requirements and penalties.

In the past, many local governmental entities, such as hospital authorities or hospital districts, obtained determinations from the IRS that they were tax-exempt organizations described in Section 501(c)(3) of the Internal Revenue Code. A common reason for obtaining recognition of Section 501(c)(3) status (in addition to their sovereign immunity as governmental entities from federal income tax) was so that the governmental entity’s employees could take advantage of Section 403(b) tax-sheltered annuities.  (A government entity may not establish or maintain a Section 401(k) plan unless it adopted the plan before May 6, 1986.  While governmental entities are permitted to maintain Section 457(b) plans, which are defined contribution plans providing for employee contributions similar to Section 401(k) plans, Section 457(b) plans are subject to lower contribution limits than the overall contribution limits for Section 401(k) plans and Section 403(b) annuities).

Section 501(c)(3) governmental entities were relieved of the burden of having to file a Form 990, which at that time was really the only disadvantage to Section 501(c)(3) status. (Governmental educational institutions were already subject to unrelated business income tax on their income that would have been taxable had they not been governmental institutions.) When the “intermediate sanctions” applicable to transactions with public charities became effective in 2005, imposing potential excise taxes on persons involved in transactions with Section 501(c)(3) organizations that were not public charities, the implementing regulations specifically provided that governmental entities with Section 501(c)(3) recognitions were not covered. 

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The IRS has granted an automatic extension for certain tax-exempt organizations to file their annual returns electronically. The extension is being provided because the IRS’s electronic filing system (the “Modernized eFile system” or “MeF”) will not be available for filing Forms 990, 990-EZ, 990-PF, and 1120-POL from January 1, 2012 through February 29, 2012 (the “Suspension Period”). The extension is only available for organizations with filing due dates (whether original or extended) during the Suspension Period (“Affected Organizations”). Ordinarily, organizations with a fiscal year ending August 31 or September 30 would have filing deadlines during the Suspension Period. Under Notice 2012-4, Affected Organizations will automatically be granted an extension of time to file electronically to March 30, 2012.

Since the relief is automatic, an Affected Organization does not have to file Form 8868, Application for Extension of Time to File an Exempt Organization Return as long as the organization files its return by March 30, 2012. However, an Affected Organization will still have the option to file a Form 8868 to request an automatic extension of time to file during the Suspension Period. For example, if an Affected Organization’s original deadline to file its Form 990 is on February 15, 2012, the organization may properly complete and file a Form 8868 by such date to receive an automatic three-month extension of time to file ending on May 15, 2012. An Affected Organization that has previously received only one three-month extension of time to file will also continue to have the option to file Form 8868 to request a second automatic three-month extension.    

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The IRS presents webinars on a variety of subjects.  In August, the IRS presented a webinar conducted by two IRS representatives on the special rules affecting charities that make grants to foreign organizations or engage in activities in foreign countries.

In a fairly comprehensive course, the following significant points were made:

1.    A U.S. charity can do anything in a foreign country that it can do here, provided that the activity is consistent with the charity’s exempt purposes.

2.    For purposes of the rule that a charity may not devote a substantial part of its activities to legislative lobbying:

a.    lobbying includes action by the public in a referendum, ballot initiative, constitutional amendment or similar procedure;

b.    actions by executive, judicial or administrative bodies are not considered legislation;

c.    legislation includes foreign laws; and

d.    in certain countries ruled by authoritarian or theocratic regimes, it is questionable whether the governing body is a legislature or if a legislative process even exists.

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Treasury just released the 2011—2012 Priority Guidance Plan. The Plan lists 317 projects that are priorities for Treasury resources through June 2012. Included in these projects are 13 projects directly related to Exempt Organizations. Many of the other projects such as the 66 employee benefits, executive compensation and employment taxes projects may affect Exempt Organizations. 

Among the projects directly relating to Exempt Organizations are:

• Updating grantor and contributor reliance criteria; 
• Regulations on additional requirements for charitable hospitals;
• Final regulations on the new supporting organization requirements;
• Update on guidance for distributions by private foundation to foreign charities;
• Guidance on excess business holdings and program-related investments rules;
• Regulations on new donor advised funds rules; and
• Final regulations on church tax inquiries and examinations.

Treasury also released final regulations under various Code Sections to implement the redesigned Form 990 .  According to Treasury "All tax-exempt organizations required to file [990s] are affected by these regulations."

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 The IRS released a new form last week for tax-exempt organizations to request determinations about their tax-exempt status (other than an initial application for exemption). There was previously no form for making such requests. The one-page Form 8940 , Request for Miscellaneous Determination, can be used to make a request for:

• advance approval of private foundation scholarship procedures;
• advance approval of certain private foundation set-asides;
• advance approval of private foundation voter registration activities;
•  exemption from Form 990 filing requirements;
• advance approval that a potential grant or contribution constitutes an "unusual grant" excluded from certain public support calculations;
• change in type (or initial determination of type) of a Code Section 509(a)(3) supporting organization;
• reclassification of foundation status, including a voluntary request from a public charity for private foundation status;
• termination of private foundation status under Code Section 507(b)(1)(B)　(advance ruling request); and
• termination of private foundation status under Code Section 507(b)(1)(B)　(60-month period ended).

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                 The IRS recently released a new list of FAQ and tips for Part VI of Form 990, which requires an exempt organization to provide certain information about its governing board and management, as well as its governance policies and disclosure practices. 

               Of particular interest is the clarification that questions in Section B (about whether an exempt organization has adopted certain governance policies such as a written conflict of interest policy and a written whistleblower policy) may be answered affirmatively if a committee of the board with the power to do so has approved such policies by the close of the tax year. This should come as welcome news to those exempt organizations that reacted negatively to a 2010 revision to the instructions, which stated that an organization should only answer yes to these questions if its entire governing board adopted the policies. Some exempt organizations complained that requiring full board approval was in contrast to their usual practice of delegating the authority to adopt such policies to a committee of the governing board. An IRS official indicated earlier this week that in addition to making this point clear in the new FAQ, the IRS will be revising the 2011 instructions to Form 990 accordingly. 

 

Some of the other key points of guidance in the new FAQ are highlighted below:

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As reported in our prior blog entry, the Report of Foreign Bank and Financial Accounts, Form TD-F 90-22.1 (“FBAR”) must be filed by a U.S. person that holds a financial interest in, or signature or other authority over, a foreign financial account if the aggregate value of all such U.S. person’s foreign financial accounts exceeds $10,000 at any time during the year. These reporting requirements apply to a tax-exempt organization even if the organization is not required to file an annual return on Form 990.  

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In a tightly written plain English opinion, the D.C. Circuit Court of Appeals in Polm Family Foundation v. U.S.  explained an important requirement of Type II supporting organizations.

To be a Type II supporting organization, a charity must satisfy three tests:

 

1.                  the organizational test set forth in IRC Section 509(a)(3)(A),

2.                  the relationship test set forth in IRC Section 509(a)(3)(B)(ii), and

3.                  the control test set forth in IRC Section 509(a)(3)(C).

While the district court  concluded that the charity failed both the relationship test and the control test, the Court of Appeals based its decision on the failure to satisfy the organizational test. The Court said that this test was the most straightforward. 

 

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               At a recent conference on nonprofit governance sponsored by Georgetown Law Center, an IRS official stated that fringe benefits have become the most common trigger of intermediate sanctions under Section 4958 of the Code. 

As most of you know, or should know, Section 4958 of the Code, enacted in 1996, imposes excise taxes on both “disqualified persons” who receive an “excess benefit” from an exempt organization and any organization manager who knowingly participates in an excess benefit transaction. 

When an economic benefit is not treated as compensation by the organization, the benefit is presumed to constitute an excess benefit transaction in its entirety, unless the disqualified person can establish that it was properly excludable from income for income tax purposes, or involved a legitimate non-compensatory transaction with the organization. 

In February of 2010, the IRS began its first Employment Tax National Research Project in 25 years. This three-year “study” focuses on uncollected taxes in the area of employment for both taxable and exempt entities. As part of this study, 2,000 taxpayers are being selected each year for a comprehensive audit. Fringe benefits are one of the main areas of focus in these audits, making this a priority issue for the IRS.

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            On March 15, 2011, the Treasury published proposed regulations providing guidance on the IRS’s expanded authority to disclose information to appropriate state officers (“ASOs”) under Section 6104(c) of the Code, as amended by the Pension Protection Act of 2006 (the “Act”) . Section 6104(c) of the Code governs when the IRS may disclose certain information to an ASO about Section 501(c)(3) organizations (“charitable organizations”), organizations that have applied for recognition as charitable organizations (“applicants”), and certain other exempt organizations. Prior to the Act’s enactment, the IRS was only permitted to disclose a final determination denying an applicant exempt status, a final determination revoking a charitable organization’s exempt status, the issuance of a notice of deficiency of tax under Section 507 (the termination tax) or chapter 41 or 42 (which relate to excise taxes on prohibited activities), and, upon request of an ASO, returns and other information relating to any of these aforementioned disclosures.           

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Last week, the IRS and Treasury Department released their annual Priority Guidance Plan for the 2010-2011 federal fiscal year.  The 34-page plan is available here.  The IRS exempt organizations web page  identifies and lists eighteen items in the plan that affect exempt organizations.  Of the eighteen items, eleven were also included in last year’s plan - indicating that both plans are ambitious and that IRS and Treasury attention has been understandably diverted to health care reform and other new developments. 

Items listed in this year’s plan include: guidance on tax-exempt hospital requirements under the new Section 501(r) of the Internal Revenue Code; guidance on program-related investments under Section 4944 of the Internal Revenue Code (also on last year’s plan); finalizing proposed regulations on new requirements for supporting organizations (also on last year’s plan); regulations on donor-advised funds (also on last year’s plan); finalizing church audit procedural regulations; and developing regulations concerning the calculation of unrelated business taxable income for Section 501(c)(9) voluntary employees' beneficiary associations (to replace 1986 temporary regulations). 

As always, the IRS and Treasury are eager for substantive comments on their guidance projects.

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In our April 7, 2010 blog entry on the health care tax credit, we explained that the credit was designed to encourage small employers, including exempt organizations, to offer health insurance coverage for the first time or maintain the coverage they already have.  The IRS today has released a draft version of the form that small businesses and exempt organizations will use to calculate the small business health care tax credit when they file income tax returns next year.  The IRS also announced how eligible exempt organizations –– which do not generally file income tax returns –– will claim the credit during the 2011 filing season.

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Small not-for-profit organizations at risk of losing their tax exemption because of their failure to file the Form 990-N or Form 990-EZ for the 2007, 2008, and 2009 taxable years can preserve their status by filing these returns by October 15, 2010.  The IRS announced yesterday a one-time relief program for these organizations that will give them a "pass" until October 15, 2010.

On July 26, 2010, the IRS also posted a list of the organizations at-risk of losing their tax-exempt status because, according to the IRS, they have not filed their returns for 2007, 2008, and 2009.  Organizations should confirm whether or not they are listed on this list.  And even if an organization does not appear on this list, it should still check its records and determine whether it is at risk of automatic revocation because of not satisfying annual filing requirements.  In fact, the IRS acknowledges that the list may be incomplete and certain organizations at risk of automatic revocation may not be listed. 

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The deadline for filing the Report of Foreign Bank and Financial Accounts, Form TDF 90-22.1, (FBAR) by U.S. persons that held a financial interest in a foreign financial account for calendar year 2009 if the aggregate value of all the U.S. person's foreign financial accounts exceeded $10,000 at any time during the year is almost here -- all FBAR filings must be received by the U.S. Department of Treasury on June 30, 2010 (not just postmarked by such date).  There are no extensions and the failure to file an FBAR can result in significant penalties.

As discussed in our March, 2010 blog entry on the FBAR filing requirement, the term "financial interest" is defined very broadly.  In the case of pension plans, it would include any employee benefit plan that maintains an investment in a foreign financial account and also applies to the institutional trustees or board of trustees of such plan.  It may also apply to the individual members of the board of trustees of a plan or a plan sponsor.  Accordingly, some individual trustees and plan sponsors may want to file the FBAR on a protective basis.

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We tweeted live from the Georgetown Conference that occurred on April 22-23, 2010.  Our tweets from the conference highlight IRS next steps and agenda items, as well as discuss other topics of interest to exempt organizations.

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Under the recently enacted health care reform legislation, many small businesses and tax-exempt organizations are now eligible for a new federal tax credit.  This credit is designed to encourage small employers to offer health insurance for the first time or maintain coverage they already have.

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Earlier this year, the IRS reminded all exempt organizations that, regardless of their size, they must file the Form 990 on time in order to preserve their tax-exempt status.

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U.S. taxpayers, including not-for-profit/exempt organizations, with a financial interest in or signatory authority over a foreign financial account are generally required to file the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (FBAR) with the Department of the Treasury each June 30 if the aggregate value of all of the U.S. person’s foreign financial accounts exceeds $10,000 at any time during the year.  Taxpayers must also report whether they have such interests on their tax returns (for example, Forms 1040, 1041, 1065, 1120, and 990).

Under new IRS guidance, persons who have only signatory authority over a foreign financial account for calendar year 2009 and previous years has been extended again to June 30, 2011.  In addition, owners of foreign hedge funds and private equity funds do not have to file FBARs for calendar year 2009 and previous years.  And, persons who are relieved of filing FBARs this year also do not have to report the interest on their own returns.  Holders of foreign mutual funds, however, will need to file FBARs by June 30, 2010 for calendar year 2009 and previous years.

The Treasury Department also published proposed regulations clarifying which taxpayers will be required to file FBARs and which accounts will be reportable.  The Notice and the proposed regulations add some clarity to FBAR requirements and delay some filing deadlines. 

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Even hard-core tax mavens don't usually get excited when the IRS releases instructions for tax forms.  An exception this year is the release of instructions for the 2009 Form 990, the form to be filed by tax-exempt organizations (other than private foundations) for calendar year 2009 and tax years starting in 2009.  The new instructions, as well as the new forms, are available here.

As we've reported previously, the IRS did a top-to-bottom redo of the Form 990 for the 2008 reporting year.  The redo added a number of very specific questions about board composition, policies, conflicts of interest, identity of related parties, and transactions between interested persons.  Organizations that conduct certain activities (such as hospitals or schools) or have certain assets or liabilities (such as endowments, art collections, or tax-exempt bonds) also have new schedules to complete.

In moving from 2008 to 2009, the IRS made very few changes to the forms and schedules.  A number of changes made in the instructions are for clarification in response  to the many questions posed to the IRS by organizations in completing the initial round.  Some other changes are more substantive.

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The IRS completely redesigned Form 990, the Return of Organization Exempt from Income Tax, to be filed for calendar year 2008 and subsequent periods.  This Form is filed by most tax-exempt organizations and is open to public inspection.  One stated purpose of the makeover was to increase transparency and disclosure of exempt organization operations, thereby improving governance and highlighting conflicts of interest and insider dealings.  One major change in the Form is that it requires extensive reporting concerning the organization’s governance and management policies, the independence of its board, and board members’ and key employees’ family and business relationships with each other and with the reporting organization.

Organizations that report on a calendar year basis will already have filed their first year of the new form and at this point should review their information-gathering procedures to identify any needed improvements.  Organizations that have a June 30 year-end either will already have filed with the new form for the period ending June 30, 2009 or will be in an extension period for filing.  Organizations that have not yet filed the new form should be reviewing their disclosure questionnaires to make sure they are collecting all needed information.

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In Announcement 2009-88, set to be published in Internal Revenue Bulletin 2009-52, dated December 28, 2009, the IRS lists organizations that have failed to establish or have been unable to maintain their status as public charities or as private operating foundations.

Accordingly, grantors and contributors to these organizations may no longer rely on previous rulings or designations in the IRS's Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under Section 508(b) of the Code. 

 

Notably, the listing does not indicate that the organizations have lost their status as organizations described in Section 501(c)(3) of the Code, which are eligible to receive deductible contributions.  Instead, these organizations are simply no longer public charities.

 

Continue reading for the full text of the Announcement.

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On November 24, 2009, the IRS issued its Priority Guidance Plan for 2009-2010.  The Plan contains 315 projects to be completed over a twelve-month period from July, 2009 through June, 2010. 

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Parsonage is a seemingly innocuous five line tax benefit in the Code.  This "innocent" provision of the Code, Section 107, appears to have befuddled many ministers and their professional advisors, however.

 

About 90 years ago, Congress promulgated an exclusion from income for the rental value of the housing provided to a “minister of the gospel,” which includes priests, rabbis, imams and any other duly ordained, commissioned or licensed member of the clergy.  Alternatively, the minister can exclude the rental allowance paid as part of compensation, to the extent actually used as rent or other costs of home ownership.  Since 2002, the allowance is capped at fair rental value, including furnishings and appurtenances (such as a garage), plus the cost of utilities.

 

While there are IRS publications that explain the tax nuances of parsonage (e.g., Publication 517 and The Tax Guide for Churches and Religious Organizations), the unusual tax treatment of ministers can still be very confusing.

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The IRS has reported that user fees will increase for all applications for exemption (Forms 1023, 1024, and 1028) postmarked after January 3, 2010:

• $400 for organizations whose gross receipts are $10,000 or less annually over a 4-year period (Currently $300)
• $850 for organizations whose gross receipts exceed $10,000 annually over a 4-year period (Currently $750)
• $3,000 for group exemption letters (Currently $900).

What's More...

Cyber Assistant, a web-based software program designed to help 501(c)(3) applicants prepare a complete and accurate Form 1023 application, will become available during 2010.  Once the IRS announces the availability of Cyber Assistant,  the user fees will change again:

• $200 for organizations using Cyber Assistant (regardless of size) to prepare their Form 1023
• $850 for all other organizations not using Cyber Assistant (regardless of size) to prepare their Form 1023.

We will let you know as soon as Cyber Assistant is available.

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