Not For Profit/Exempt Organizations Blog

The Impact of Americans for Prosperity Foundation v. Bonta on Donor Disclosure Laws

On July 1, 2021, the Supreme Court struck down a California donor-disclosure law as facially unconstitutional in its decision in Americans for Prosperity Foundation v. Bonta.[1]  The law required nonprofits operating or soliciting contributions in California to disclose to the Attorney General of California information about all of its donors who contribute more than $5,000 each year (generally, through a requirement that nonprofits submit a copy of their Schedule Bs from their IRS Form 990s).[2]  The decision clarified the rules applicable to disclosure requirements with respect to the First Amendment, and while the decision itself addressed nonprofit disclosures, its scope could stretch significantly beyond this area.

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Final Regulations on Executive Compensation Excise Tax (Section 4960) Carries Forward Most Concepts from Proposal

On January 19, 2021 the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) published in the Federal Register Final Regulations (the “Final Regulations”) interpreting the excise tax under Section 4960 of the Internal Revenue Code on certain executive compensation paid by tax-exempt organizations. The Final Regulations maintain most of the concepts from the interim guidance (Notice 2019-09 (the “Notice”), discussed here and here, and Proposed Regulations (the “Proposed Regulations”), discussed here), with a few changes.

The Final Regulations became effective January 15, 2021, but they will apply only for tax years that start after December 31, 2021.  Until then:

  • Taxpayers may rely on the interim guidance under Notice 2019-09 or the Proposed Regulations, or the Final Regulations, but only if they apply the rules in their entirety; and
  • The IRS will continue to allow a reasonable, good faith interpretation of the statute, if interpretation takes into account the legislative history. The Notice and the Proposed Regulations include a list of positions that the IRS considers to be an unreasonable (not good faith) interpretation of the statute.

The following is an update to our 10 key points under the Section 4960 regulations. (Throughout this post, “Sections” refer to sections of the Internal Revenue Code.)

  1. No Grandfathering

The excise tax under Section 4960 applies for compensation that is paid or becomes vested during taxable years that start after December 31, 2017.  The IRS has rejected requests to grandfather amounts paid under agreements that were in effect before Section 4960 was passed.  The IRS reasoned that the statute does not provide authority for grandfathering: in contrast to Section 4960, Congress included a grandfathering provision for changes made at the same time to Section 162(m); the IRS has concluded that if Congress intended to also allow grandfathering for Section 4960, it would have said so.

  1. “ATEO” (Applicable Tax-Exempt Organization) Includes Most Tax-Exempts

Consistent with earlier guidance, the Final Regulations provide that ATEOs include all organizations that: (i) are exempt from taxation under Section 501(a) (i.e., organizations described in Section 501(c) or (d)), (ii) are farmers’ cooperatives organizations described in Section 521(b)(1), (iii) have income that is excluded under Section 115(1), or (iv) are political organizations described in Section 527(e)(1).  Under the Final Regulations, Section 4960 does not apply to a governmental entity that claims exemption from federal income tax based on sovereign immunity (such as many public universities), but only if the entity is not also tax-exempt under Section 501(a).  A governmental entity that also has Section 501(a) tax-exempt status may relinquish its Section 501(a) status if it wishes to avoid designation as an ATEO.

Even if a governmental entity is not an ATEO, compensation paid by the governmental entity is still taken into account for purposes of identifying covered employees of related ATEOs; and the governmental entity can still be subject to the Section 4960 tax if it is related to an ATEO.

The Final Regulations also provide that a foreign organization described in Section 4948(b) (generally, an organization that was not created or organized in the U.S. or in any U.S. possession, or under the law of the United States, any state, D.C., or any U.S. possession and that has received substantially all of its support (other than gross investment income) from sources outside the United States) is not an ATEO.  An organization’s status as a Section 4948(b) organization is determined as of the end of its taxable year.

The Final Regulations leave open for future guidance the treatment of Federal instrumentalities.

  1. Must Aggregate ATEOs With Related Organizations (the “Related Group”): 50% Test

Like the Proposed Regulations, the Final Regulations require that remuneration for each covered employee must include not only remuneration from the ATEO but also remuneration from all “related organizations.”  For this purpose, relatedness is similar to a controlled group test, except that the threshold for relatedness is 50% rather than 80%.  As with a controlled group, organizations can be related on the basis of different factors, including voting rights or rights to value of a corporation, profits or capital interests in a partnership, beneficial interests in a trust, or control over the organization’s board or similar governing body.

In finalizing the regulations, the Treasury and IRS rejected requests to count only remuneration paid by an ATEO for services provided to the ATEO.  Treasury and the IRS concluded that loosening the aggregation rule could increase the potential for abuse.

Throughout this post, we refer to the ATEO and its related organizations as the “Related Group.”

  1. Covered Employees: Once Covered Always Covered – But With Some Relief

In general, covered employees are the top five highest paid employees of the ATEO.  All “common law” employees of the ATEO must be taken into account, even if they are part-time.  There is no compensation threshold in order to be covered: the top five highest-paid employees are covered even if no one in the organization has compensation approaching $1 million.

Individuals who are not common law employees, such as non-employee directors and independent contractors, are disregarded.  But officers are presumed to be common law employees, and therefore generally must be taken into account unless one of the exceptions below applies.

Identifying the covered employees and tracking them is critically important for two reasons:

  • First, even if an individual does not receive $1 million, separation payments to the individual could trigger the “parachute payment” tax described under #6, below.
  • Second, the statute has a “once covered, always covered” rule, which means that “covered employee” status stays with an individual indefinitely—even after the individual’s service with the ATEO has ended.

For example, suppose a former employee of a tax-exempt foundation is later hired into the corporate office of a related for-profit.  If that individual was a covered employee of the foundation for any taxable year beginning after December 31, 2017, future compensation for service to the for-profit would be subject to the $1 million cap—leaving the possibility that the excise tax could be triggered long after the individual’s service to the foundation, even if the individual never again provides services to the foundation.

Like the Proposed Regulations, the Final Regulations include two exceptions for ATEOs that are affiliated with for-profits: (1) a “nonexempt funds” exception and (2) a “limited hours” exception.  To qualify for either exception, the ATEO must not pay or promise any remuneration to the individual.  In addition to not paying compensation directly, the ATEO must not promise deferred compensation, even if it is subject to vesting conditions, and the ATEO must not reimburse another entity for any part of the individual’s remuneration (whether through a direct reimbursement or a fee).  In addition, the following conditions must be satisfied:

  • For the nonexempt funds exception,the employee’s time spent providing services to the ATEO (and any related ATEOs) over the applicable year and the preceding year must not exceed 50% of his or her total time for the Related Group during that period.  (Under the Proposed Regulations, the 50% test was measured only over the applicable year.) For purposes of this test, service time can be measured by hours or days (where any day in which the individual works for at least an hour on behalf of an ATEO counts as a full day worked for the ATEO).  For this exception, the prohibition against paying or promising remuneration to the employee applies not only to the ATEO but also to any for-profit organization that is controlled by the ATEO. Solely for purposes of the nonexempt funds exception, the Final Regulations allow the ATEO’s level of control over another organization to be determined without regard to certain downward attribution rules.
  • For the limited hours exception, the employee’s time spent providing services to the ATEO (and any related ATEOs) over the applicable year must be less than 10% of his or her total time for the Related Group during that year. Again, service time can be measured by hours or days (where any day in which the individual works for at least an hour on behalf of an ATEO counts as a full day worked for the ATEO).  Like the Proposed Regulations, the Final Regulations include a safe harbor, under which an individual who does not work more than 100 hours for the ATEO (and any related ATEOs) in a year will automatically be treated as below the 10% threshold.  Unlike the nonexempt funds exception, this exception does not prohibit compensation paid or promised by a taxable organization that is controlled by the ATEO.

The exceptions should help to avoid excise taxes as a result of compensation paid by for-profits to employees who provide limited services to ATEOs.  But it is important to keep the “once covered, always covered” rule in mind.  If an individual ever becomes a covered employee, he or she will retain covered status even if service and compensation levels later drop below the level for an exception.

Under the Final Regulations, every ATEO must have its own list of covered employees.  Where two or more ATEOs are related to one another, each ATEO must have its own list.  Consequently, if an individual is employed by more than one related ATEO, he or she could be a covered employee of more than one ATEO.

However, the Final Regulations include a “limited service” exception (carried forward from the Notice and the Proposed Regulations) for cases where an individual provides service to more than one related ATEO.  Under the limited service exception, an ATEO can disregard an individual for a tax year if, for that year, the ATEO paid less than 10% of the individual’s total remuneration from the Related Group, and at least 10% of the individual’s total remuneration from the Related Group is paid by another related ATEO.  If no other related ATEO paid at least 10% of the individual’s total remuneration, the individual must be included in the covered employee analysis for the ATEO that paid the highest percentage of the individual’s total remuneration.

Again, the exception does not erase covered employee status for someone who was a covered employee in a prior year.  As described below, failure to apply the “once covered, always covered” rule is on the list of positions that the IRS considers to be an unreasonable interpretation of the statute.

  1. Special Timing Rule for Remuneration

For purposes of the $1 million cap, “remuneration” generally has the same definition as wages under Section 3401 (the income tax withholding rules), but there is an important timing difference for amounts that are earned in one year and paid in a later year.  Rather than wait until remuneration is paid, deferred compensation must be included in remuneration for the year in which it becomes vested under Section 457(f)—i.e., when the remuneration is no longer subject to a substantial risk of forfeiture.

Unlike Section 457(f), the Final Regulations do not have a short-term deferral rule for purposes of applying Section 4960.  Treasury and the IRS rejected requests to take deferred compensation into account for purposes of Section 4960 when the applicable amounts are included in income.

The absence of a short-term deferral rule means, for example, that a bonus payable in January or February for service during the prior year could count toward the $1 million cap for the prior year.  The analysis turns on whether the bonus is conditioned on continuing to provide services during the year of payment.  If the bonus is conditioned on continuing to provide services during the year of payment, it would count for the year of payment; but if the bonus is not conditioned on providing services during the year of payment, it would count for the prior year.  Similarly, the focus on vesting rather than income inclusion suggests that Section 83(b) elections should be disregarded for purposes of the $1 million cap—although the Final Regulations do not directly address Section 83(b) elections for purposes of the $1 million cap.

In light of this rule, the vesting schedule for retention bonuses and other deferred compensation can have a dramatic impact on the excise tax.  For example, suppose an executive’s five-year employment agreement provides for $150,000 per year of deferred compensation, to be paid only if the individual serves out the term.  If the deferred compensation vests at the end of the term, the full $750,000 ($150,000 per year times 5 years) would count for Section 4960 purposes in the last year of the term.  If the individual has more than $250,000 of salary or other remuneration for that last year, the organization would have to pay an excise tax—even though the accruals never reach $1 million per year.  In contrast, if the deferred compensation were to vest ratably (for example, $150,000 at the end of each year), the excise tax might not be triggered.

If deferred compensation becomes vested before the year of payment, the remuneration for the year of vesting would be the present value as of the end of that year.  (The Final Regulations provide that discounting for present value is not required if payment will be made within 90 days.)  Earnings (or growth in value) for the period after vesting would count for Section 4960 purposes each year as they accrue.  In contrast, income tax on earnings would generally be deferred until the year of payment.

  1. Beware of “Parachutes”: They’re Easier to Trigger Than You Might Expect

As noted above, separation pay to covered employees can trigger the “parachute payment” tax even if the individual’s compensation never reaches $1 million.  For this purpose, separation pay includes any amount that becomes payable as a result of a covered employee’s involuntary separation from employment with an employer—i.e., amounts that would not become payable if not for the involuntary separation.  Similar to Section 409A, “involuntary” separation includes resignation for “good reason” if certain conditions are satisfied.

In general, the parachute tax is triggered if separation pay equals or exceeds 3 times a covered employee’s “base amount.”  For the following reasons, the tax can be triggered even if an individual’s severance never gets close to 3 times salary:

  • First, the “3 times” test is not based on current compensation, but rather is based on the individual’s “base amount.” The base amount is the individual’s average taxable wages (as reported in Box 1 of Form W-2) over the preceding five years (or, if less, the individual’s period of employment with the ATEO).  If an individual’s compensation has increased over the years, the base amount can be significantly smaller than the individual’s salary at the time of separation.
  • Second, for purposes of parachute payments, remuneration is not limited to taxable compensation. With limited exceptions (such as payments under a tax-qualified or Section 403(b) plans), all amounts in the nature of compensation must be taken into account.  For example, the value of continued health insurance, which is often more than $30,000 per year, and life insurance must be taken into account for purposes of the parachute analysis.
  • Third, separation pay includes not only severance, but also vesting of bonuses, equity (even if a Section 83(b) election was previously made) and deferred compensation. For example, if an individual has a deferred compensation balance that is conditioned on continued service but becomes vested upon involuntary termination without cause, at least part of the balance would count for purposes of the parachute payment calculation.

It is important to analyze separation payments carefully, because the consequences of hitting the 3 times threshold can be dramatic.  Although the threshold for triggering the excise tax is 3 times the base amount, the tax applies to separation pay in excess of 1 times the base amount.  For example, suppose an individual’s base amount is $100,000.  The excise tax would be triggered if the individual’s separation pay (taking into account the value of deferred compensation that becomes vested and fringe benefits) is $300,000 or more.  If the individual’s separation pay is $299,999.99, the excise tax would not be triggered.  But if the individual’s separation pay is $300,000.00, the excise tax would be $42,000 (21% of the excess of $300,000 over $100,000).  The penny makes a big difference.

The Final Regulations include anti-abuse rules to prohibit avoidance by shifting the time of payment proximate to an involuntary separation.  For example, if an employer accelerates the vesting of a bonus or deferred compensation so that it is paid shortly before employment is terminated, the amount accelerated could be treated as contingent on the separation of employment that soon followed.

  1. Medical Services Exception: Reasonable, Good Faith Allocation

By statute, the excise tax under Section 4960 does not apply for amounts paid for medical and veterinary services; and amounts paid for medical and veterinary services must be disregarded for purposes of determining the ATEO’s five highest paid employees.  For example, compensation that hospitals pay to doctors and nurses must be disregarded to the extent that the compensation is for medical services (as distinct from compensation for administrative services, whether paid directly by the ATEO or by a related organization such as a management services organization).

Where an individual performs both medical/veterinary and administrative services (for example, a Chief Surgeon), the Final Regulations carry forward the “reasonable allocation” rule from the Notice and the Proposed Regulations.  Consistent with the prior guidance, the Final Regulations provide that the employer can follow an allocation specified in an employment agreement (or other written arrangement), if the allocation is reasonable and made in good faith.  Another possible approach would be to allocate based on time records or to allocate based on compensation for individuals with comparable duties (e.g., determine the medical portion based on compensation paid to other doctors in the same field who do not have administrative responsibility, or determine the administrative portion based on compensation paid to administrators who do not also have medical responsibility).  The Final Regulations clarify that the reasonable, good faith allocation rule applies both for current remuneration and for deferred compensation.

  1. Applicable Year for Organizations With Non-Calendar Fiscal Years

Like the prior guidance, the Final Regulations provide that the applicable tax year is the calendar year ending with or within the ATEO’s tax year.  For example, if an ATEO’s fiscal year ends on June 30, the applicable year for the tax year ending June 30, 2021, is calendar year 2020.  If the excise tax applies for compensation paid during 2020, it would have to be reported on Form 4720, and paid, by the Form 990 filing deadline for the ATEO’s tax year ending June 30, 2021—i.e., by November 15, 2021.  For amounts paid in calendar year 2021, the excise tax would have to be reported and paid by the Form 990 filing deadline for the ATEO’s tax year ending June 30, 2022—i.e., by November 15, 2022, subject to extension.  An extension for filing Form 990 automatically extends the deadline for filing Form 4720, but an estimated tentative tax must be paid by the due date without extension.

The applicable year for purposes of Section 4960 is the same as for purposes of Form 990.  But the compensation calculations for Section 4960 are not the same as for Form 990.  For example, the requirement to count compensation in the year of vesting (described in #5, above) does not apply in the same way for Form 990 purposes.  Consequently, the amount treated as current compensation for Section 4960 will not necessarily be the same as the amount reported as current compensation on Form 990.

  1. Allocation and Payment of Excise Tax

If a covered employee receives compensation from more than one affiliated organization (taxable or non-taxable) and the excise tax is triggered, the tax must be allocated among the organizations, including for-profit organizations.  In general, each organization’s allocation is determined by a ratio.  The numerator is the amount of remuneration that is paid or payable by the organization for the year, and the denominator is the covered employee’s total remuneration for the year from the Related Group.  Like the prior guidance, the Final Regulations include rules to prevent double-counting.

  1. Per Se Unreasonable and Non-Good Faith Interpretations

The IRS will continue to allow a reasonable, good faith interpretation of the statute for periods before the Final Regulations apply. For this purpose, the Final Regulations incorporate by reference the warning from the Notice and the Proposed Regulations that the following positions are per se not reasonable, good faith interpretations:

  • Failing to apply the “once covered, always covered” rule—for example, treating an individual as no longer covered after a certain period of time has passed.
  • Failure of a related organization—which may be a for-profit or a governmental entity that is not an ATEO—to pay its share of the excise tax under Section 4960.
  • Counting remuneration for medical or veterinary services for purposes of identifying the ATEO’s five highest-compensated employees.
  • Having a single group of five covered employees for a group of related ATEOs. Each ATEO must have its own list of covered employees.

*          *          *

The excise tax under Section 4960 will reach many tax-exempt organizations and their affiliates—even if annual compensation does not reach $1 million.  Proskauer’s team of tax, compensation, benefits, and non-profit specialists helps tax-exempt organizations and their affiliates structure compensation arrangements to mitigate the impact of the excise tax.

10 Keys to Excise Tax on Executive Compensation Paid by Tax-Exempt Organizations

Proposed Regulations under Section 4960 of the Internal Revenue Code provide important guidance for tax-exempt organizations and their affiliates regarding an excise tax on certain executive compensation.  The U.S. Department of the Treasury (“Treasury”) and Internal Revenue Service (the “IRS”) are accepting comments until August 10, 2020.  (Throughout this post, “Sections” refer to sections of the Internal Revenue Code.)

As a refresher, Section 4960 was enacted as part of the 2017 Tax Cuts and Jobs Act (the “TCJA”).  Effective for taxable years beginning after December 31, 2017, Section 4960 imposes an excise tax at the corporate tax rate (currently at 21%) on certain remuneration in excess of $1 million and on certain separation pay (“excess parachute payments”).  The excise tax falls on “applicable tax-exempt entities” (“ATEOs”) and related organizations.  It is intended to have the same economic effect as a for-profit corporation losing a tax deduction.

The Proposed Regulations are generally consistent with the IRS’s interim guidance under Notice 2019-09 (the “Notice”), which is discussed here and here.  But the Proposed Regulations elaborate on certain points and include some helpful changes in response to comments.

If finalized, the Proposed Regulations will apply for tax years beginning on or after the final regulations are published in the Federal Register.  Until then, tax-exempt organizations may apply a “reasonable, good faith” interpretation of the statute.  For this purpose, tax-exempt organizations may rely on the Proposed Regulations or the Notice.  Although the Proposed Regulations are not binding, they include a list of positions that the IRS considers to be an unreasonable interpretation of the statute.

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IRS Issues Final Regulations on Nonprofit Donor Disclosure Requirements

On May 26, the Internal Revenue Service (“IRS”) and the U.S. Department of the Treasury issued final regulations (the “Final Regulations”) relaxing nonprofit donor disclosure requirements under section 6033[1] of the Internal Revenue Code (the “Code”) for many non-charitable tax-exempt organizations. Stated generally, section 6033 requires organizations exempt from taxation under section 501(a) (including section 527 political organizations) to file an annual information return with the IRS, such as a Form 990, Form 990-EZ, or Form 990-N. Section 6033 and the regulations thereunder grant the IRS discretionary authority to determine what information must be reported on such return in light of the efficient administration of the internal revenue laws.

The Final Regulations largely adhere to the proposed regulations issued in September 2019 (the “Proposed Regulations”) and provide that tax-exempt organizations other than section 501(c)(3) charitable organizations, such as section 501(c)(4) social welfare organizations and section 501(c)(6) trade associations, are no longer required to annually disclose the names and addresses of “substantial contributors” (those contributing $5,000 or more) on Schedule B of their Forms 990 or 990-EZ. The Final Regulations confirm, however, that all tax-exempt organizations must continue to report the amounts of contributions from each substantial contributor and maintain the names and addresses of such contributors in their books and records, should the IRS request this information at a later date. Moreover, the revised disclosure rule does not extend to section 501(c)(3) charitable organizations or section 527 political organizations, and such organizations must continue to disclose the names and addresses of substantial donors on annual information returns.

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Proposed Regulations on UBTI Provide Guidance to Tax-Exempt Organizations Making Fund Investments

On April 23, 2020, the Treasury Department and the Internal Revenue Service (the “IRS”) issued proposed regulations (the “Proposed Regulations”) under Section 512(a)(6) of the Internal Revenue Code (the “Code”).  Section 512(a)(6) was enacted as part of the 2017 Tax Cut and Jobs Act (the “TCJA”) and requires exempt organizations (including individual retirement accounts) to calculate unrelated business taxable income (“UBTI”) separately with respect to each of their unrelated trades or businesses, thereby limiting the ability to use losses from one business to offset income or gain from another.

Read the full post on our Tax Talks blog.

Proposed Regulations Provide Guidance to Exempt Organizations on Identifying Separate Unrelated Trade or Businesses

On April 23, the Treasury Department and the Internal Revenue Service (the “IRS”) issued helpful proposed regulations under section 512(a)(6) of the Internal Revenue Code (the “proposed regulations”).  Section 512(a)(6) was enacted as part of the 2017 Tax Cut and Jobs Act (the “TCJA”) and requires exempt organizations (including individual retirement accounts) to calculate unrelated business taxable income (“UBTI”) separately with respect to each of their unrelated trades or businesses, thereby limiting the ability to use losses from one business to offset income or gain from another.[1]  In August 2018, the Treasury Department and the IRS issued Notice 2018-67 (the “Notice”), which provided interim guidance on the application of section 512(a)(6).  The proposed regulations liberalize and simplify the initial guidance in the Notice.  In short:

  1. Very helpfully, the proposed regulations use the two-digit North American Industry Classification System (“NAICS”) codes as the primary method of identifying separate trades or businesses, rather than the six-digit codes suggested in the Notice. This reduces the numbers of trades or businesses from over 1,050 under the Notice to twenty under the proposed regulations, which will greatly reduce the compliance burden for many tax-exempt entities and enhance their ability to use losses.
  2. The proposed regulations helpfully liberalize the rules contained in the Notice that allow tax-exempt entities to treat investment activities (including, in particular, “qualifying partnership interests” (“QPIs”)) as a single trade or business (and thereby aggregate net income and gains and losses from those investment activities). However, the proposed regulations should clarify that traditional minority rights that may be held by a tax-exempt entity in an investment partnership do not disqualify an interest in that partnership from being a QPI.

The proposed regulations will apply to taxable years beginning on or after the date the regulations are published as final; however, taxpayers may rely on the proposed regulations before they are finalized.  In addition, until the proposed regulations are finalized, exempt organizations may rely on a reasonable, good-faith interpretation of what constitutes a separate trade or business under current law or the methods described in the Notice for aggregating or identifying separate trades or businesses.

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The FFCRA and CARES Act: Key Provisions Affecting Nonprofit Organizations

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act (“FFCRA”) (H.R. 6201), and on March 27, 2020, he signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748). This alert summarizes certain loan and tax-related provisions of these new laws that are most relevant to nonprofit organizations.

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IRS Issues New Guidance for Virtual Currency Donations

The U.S. Internal Revenue Service (IRS) quietly added two new questions and answers regarding virtual currency donations to its answers to Frequently Asked Questions on Virtual Currency Transactions (FAQs) on December 26, 2019.  The two new answers address the responsibilities of charitable organizations when accepting donations of virtual currency, including cryptocurrency.

For a discussion of this new guidance, please see the post on Proskauer’s Blockchain and the Law blog.

IRS Provides Guidance on Unrelated Business Income Tax Refunds

On Friday, December 20, 2019, President Trump signed into law government funding legislation for the 2020 fiscal year that includes a provision repealing Section 512(a)(7), commonly referred to as the “parking tax,” with retroactive effect to the date of its enactment.[1]  Section 512(a)(7) was enacted pursuant to the 2017 U.S. tax legislation known as the “Tax Cuts and Jobs Act” and required tax-exempt employers to increase their unrelated business taxable income (“UBTI”) by amounts paid or incurred for qualified transportation fringe benefits provided to employees, including the provision of parking and public transportation benefits.  In connection with the repeal of this provision, tax-exempt organizations can file an amended Form 990-T (Exempt Organization Business Income Tax Return) to claim a refund for any taxes paid related to such qualified transportation fringe benefits.

In response to the urging of House Ways and Means Committee Chair Richard E. Neal (D-Mass) and Ways and Means Oversight Subcommittee Chair John Lewis (D-Ga) for an expedited refund process and guidance with respect to the repealed tax, the Internal Revenue Service (the “IRS”) posted specific instructions on its website on January 21, 2020 describing how to apply for such refund:

  • Write “Amended Return” at the top of Form 990-T. If the amended return is being filed only to claim a refund, credit, or adjust information due to the repeal of Section 512(a)(7), the organization should write “Amended Return – Section 512(a)(7) Repeal.”
  • Complete the Form 990-T as done originally, with certain specific modifications depending on whether the Form 990-T is for the 2017 or 2018 taxable year, as detailed in the IRS instructions.
  • Attach a statement indicating the line numbers on the original return that were changed and the reason for each such change (e., stating “repeal of Section 512(a)(7)”).

Organizations should be mindful of the time limit for filing these refund claims, which is typically the later of three years from the time the original Form 990-T was filed, or two years from the time the tax was paid.

Organizations are encouraged to consult their own tax advisors as to whether a state tax refund is available as well.[2]

[1] See Division Q of H.R. 1865, the “Further Consolidated Appropriations Act, 2020.”

[2] In New York State, amounts paid or incurred by tax-exempt organizations for qualified transportation benefits were not subject to tax, as the New York State tax code was decoupled from the changes made to the federal UBTI rules at the end of 2018.  Thus, no New York State tax would have been due with respect to these amounts.

Simplification of the Net Investment Income Tax for Private Foundations

On December 20, 2019, President Trump signed into law changes to the private foundation excise tax on net investment income under Section 4940 of the Internal Revenue Code.[1]

For purposes of Section 4940, net investment income is the excess of gross income from interest, dividends, rents and royalties (“gross investment income”), plus capital gain net income, over expenses paid or incurred in the production or collection of gross investment income or for the management of property held for the production of gross investment income.[2]  Prior to the new legislation, Section 4940 imposed an excise tax of 2% on the net investment income of most domestic tax-exempt private foundations.[3]  This tax rate could be reduced to 1% if a foundation made certain charitable distributions during the tax year equal to or greater than the sum of (a) the assets of the foundation for the tax year multiplied by its average percentage payout for the five tax years preceding that year, plus (b) 1% of the foundation’s net investment income for the tax year.  In order to qualify for the 1% rate, the foundation also could not be liable for any taxes under Section 4942 (taxes on failure to distribute income) for any of the previous five tax years. Continue Reading

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