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.

In PLR 20113041, the IRS revoked the tax exemption of a public charity based on excess benefit and private inurement issues revealed during the course of its examination. This ruling highlights practices that charities should avoid in order to maintain their tax-exempt status. This ruling also confirms that the IRS is paying close attention to what charities are doing in their “back” offices.
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           On March 17, 2011, the New York State Attorney General’s Charities Bureau published “A Practical Guide to the New York Prudent Management of Institutional Funds Act” (the “Guide”).  The Guide provides a summary of the New York Prudent Management of Institutional Funds Act (“NYPMIFA”) as well as practical guidance on its application. Although the Guide is not an official regulation, since the Charities Bureau is tasked with enforcement of NYPMIFA, not-for-profit institutions are well advised to take this guidance into serious consideration.           

            As we have previously reported, NYPMIFA was enacted into law on September 17, 2010. It updates the Uniform Management of Institutional Funds Act, which had governed charitable endowment funds since 1978, with New York’s unique version of the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”). By doing so, New York became the forty-seventh state to have enacted a version of UPMIFA.   

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.           

As we have previously reported, the Affordable Care Act (the “Act”) included additional requirements for tax-exempt hospitals to maintain their tax-exempt status; these changes are effective for tax years starting after March 23, 2010, the enactment date of the Act.  　

These additional requirements included Form 990 reporting obligations for …

Federal legislation often includes provisions that lead to unintended consequences. One such provision in the Patient Protection and Affordable Care Act (the “Act”) likely has left some hospital benefits managers scratching their heads: a requirement that certain group health plans may not impose greater restrictions on out-of-network emergency care services (Section 10101(h) of the Act).)

Specifically, under the Act, starting in 2011, non-grandfathered plans must provide coverage for emergency services without regard to whether the provider is in-network or out-of-network.

In Mayo Foundation for Medical Education and Research v. United States , the U.S. Supreme Court upheld the validity of a Treasury Regulation that states that the student exception from FICA (Social Security and Medicare) tax does not apply to medical residents because they work at least 40 hours per week. Applying the deferential two-part standard of review from Chevron  the Supreme Court concluded that the relevant statutory provision was ambiguous and the regulation was a permissible interpretation of the statute.

For background on the medical resident FICA issue, click here.

As we have previously reported, since the 1990’s many academic medical centers and individual medical residents have filed claims with the IRS seeking refunds of FICA taxes paid on medical resident salaries based on the argument that the residents are students and thus exempt from FICA. In March 2010, the IRS announced that it would concede and pay outstanding claims for periods before April 1, 2005. April 1, 2005 is the date the new FICA regulation precluding student status for full-time workers  went into effect.

On the last day of 2010, the National Taxpayer Advocate, in its tenth annual report to Congress, recommended that Congress enact a statute of limitations on revocation of a charity’s tax-exempt status, to run concurrently with the current period of limitation on assessments. That period generally is (absent fraud, tax evasion or non-filing) either three or six years.  (This specific recommendation appears on page 391 of the report). 

Under current law, a charitable organization could face revocation of its tax-exempt status and a corresponding assessment in current years based on an audit of years that are closed for purposes of assessment (even though the charitable organization may have met all the requirements to maintain its tax-exempt status in the years open for assessment).

The CFA Institute has released guidance on the management of the financial resources of philanthropic organizations. Specifically, the CFA Institute developed the Investment Management Code of Conduct for Endowments, Foundations, and Charitable Organizations to specifically address the management of what are typically longer-term or permanent financial assets of these organizations. Board members and officers should be aware of the principles articulated in the Code of Conduct to successfully manage the investment of these types of assets and to ultimately protect the organization’s investments.
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On Friday, December 17, 2010, the President signed into law the unwieldy titled, “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010”.   In order to help explain the provisions in the new law, the Joint Committee on Taxation issued a Technical Explanation.  The Tax Relief Act has many provisions which affect charities, such as changes to the estate tax, income tax rates, capital gains rates, a payroll tax cut, and other changes to the tax law.