Early on December 2, 2017, the Senate passed the Tax Cuts and Jobs Act (the “Senate Bill”). This blog entry describes certain provisions of the Senate Bill that would have the most significant impact on the nonprofit community, including important differences between the Senate Bill and the prior version of the Senate bill and the bill passed by the House of Representatives (the “House Bill”) (both of which we described several weeks ago in “Updates for Tax-Exempt Organizations from the Senate Markup to the Tax Cuts and Jobs Act”).
Elizabeth M. Mills
Updates for Tax-Exempt Organizations from the Senate Markup to the Tax Cuts and Jobs Act
Over the last several days, there have been significant developments relating to the Tax Cuts and Jobs Act, the pending tax reform legislation in Congress.[1] On Thursday, a detailed summary of the Senate Finance Committee’s proposal was released (the “Senate Markup”),[2] and the House Ways and Means Committee voted (in a 24-16, party-line vote) to advance their bill for consideration by the full House of Representatives (the “House Bill”).[3] This alert describes certain provisions of the Senate Markup and House Bill that would have the most significant impact on the nonprofit community, including important differences between the two proposals. We described significant elements of the initial version of the House Bill last week in “New Rules for Tax-Exempt Organizations in the Tax Cuts and Jobs Act.”
New Rules for Tax-Exempt Organizations in the Tax Cuts and Jobs Act
House Republican Tax Bill Imposes Excise Tax on Wealthy Private Universities and Excess Compensation of Highly Paid Employees; Subjects State Pension Plans to UBTI Rules
On Thursday, November 2, House Republicans led by Speaker Paul Brady (R-WI) and Chairman of the House Ways & Means Committee Kevin Brady (R-TX), released the first public draft of the much-anticipated Tax Cuts and Jobs Act (the “bill”). (Our full coverage of the bill can be found here.)
In addition to providing substantial rate cuts for corporations and many pass-through businesses and repealing the estate tax, the 429-page document contains several provisions of interest to public charities and private foundations (as well as their advisors).
New Electronic Form 8976 to Alert IRS About Section 501(c)(4) Status; 1023-EZ Application Reduced to $275
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.)
IRS To EOs: We Can’t Help
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.
New Flexibility for Joint Ventures Using Tax-Exempt Bond-Financed Property
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.
IRS Encourages Private Foundations to Consider Charitable Purposes in Investing Its Assets
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.
IRS Commissioner Says IRS is “Under New Management;” What’s Happened Over the Past Year In the IRS Affecting Tax-Exempt Organizations?
On March 31, 2015, the Commissioner of the IRS reported in a speech to the National Press Club that the IRS is “under new management” due to major changes in management staff over the last few years. Many of these management changes, as well as changes in organization and procedures, were in the Tax-Exempt and Governmental Entities (TEGE) branch of the IRS.
Organizational Changes. Previously, an Exempt Organizations Rulings and Agreements branch was responsible for issuing exemption determination letters. This function was headquartered in Cincinnati but several types of applications were required to be referred to an EO Technical branch in Washington (formerly referred to as the National Office). EO Technical also issued private letter rulings and gave technical advice. This was unlike other branches of the IRS. Elsewhere branches of the IRS Chief Counsel’s office, rather than technical staff reporting to the associate commissioners, were responsible for the private letter ruling and technical advice function. In Announcement 2014-34, the IRS explained that its Tax Exempt and Government Entities Division (TE/GE) was being realigned. Technical responsibility for preparing technical advice and private letter rulings, as well as revenue rulings, revenue procedures, announcements, and notices, was shifted to TEGE Counsel effective January 2, 2015. The EO Rulings and Agreements branch will retain its authority to issue determination letters approving or denying tax-exempt status as well as miscellaneous determinations addressed in Form 8940.
Senate Finance Committee Staff Compiles Past Proposals for Exempt Organization Tax Reform
As part of a series of papers outlining tax reform options for the Senate Finance Committee (SFC), the SFC staff recently published a paper on tax reform options for tax-exempt organizations and charitable giving. Like the other staff papers on tax reform options, the exempt organizations paper compiles suggestions that have been made by witnesses at SFC hearings, by policy experts, by bipartisan commissions, and elsewhere. Thus, the paper does not set forth new proposals, but gathers in one place numerous proposals that have been made, with links to sources of those proposals where available. For exempt organizations, the proposals range from taxing all commercial activities of tax-exempt organizations, to revising the unrelated business income tax rules for organizations conducting commercial activities, to requiring specified payout levels from endowments, to limiting executive compensation that tax-exempt organizations may pay. With respect to the tax deduction for charitable contributions, the proposals range from repealing the deduction, to fundamentally changing the deduction, to incrementally reforming the deduction in a variety of ways.
In Annual Procedure Update (Usually a Yawner), IRS Imposes 27-Month Deadline For Filing Exemption Applications For All Types of Exempt Organizations Seeking Retroactive Recognition of Exemption And Denies Retroactive Recognition of Exemption if Forms 990 Not Filed
The IRS continues to implement the “three years and you’re out” rule for Form 990 non-filers added by the Pension Protection Act of 2006 (the “PPA”). That legislation amended Section 6033 of the Internal Revenue Code to provide that exempt organizations required to file a Form 990-series return (i.e., a Form 990, Form 990-EZ or Form 990-N) that do not file the return for three consecutive years will have their tax-exempt status automatically revoked going forward. Organizations subject to automatic revocation are required to file exemption applications with the IRS to regain exempt status, even if they were not originally required to file an application for recognition of exempt status. Further, exempt status will not be restored retroactively unless the IRS finds there was reasonable cause for the failure to file.