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.
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.
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Means Oversight Subcommittee Chair John Lewis (D-Ga) for an expedited refund process and guidance with respect to the repealed tax, the Internal Revenue Service (the “IRS”) posted specific instructions on its website on January 21, 2020 describing how to apply for such refund: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
Repeal of Unrelated Business Income Tax on Qualified Transportation Fringe Benefits
Late 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.”[1]
Section 512(a)(7) was enacted pursuant to the 2017 U.S. tax legislation known as the “Tax Cuts and Jobs Act.” The provision 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. Despite certain guidance passed at the end of 2018, the provision caused concern amongst tax-exempt organizations because of the prospect of increased tax liability, the lack of clarity for determining the taxable amount of such benefits, and the additional administrative burdens triggered for certain organizations.
Pursuant to the new legislation, Section 512(a)(7) was repealed with retroactive effect to the date of its enactment. As a result, organizations should file an amended Form 990-T to claim a refund for any taxes paid related to such qualified transportation fringe benefits. 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.
New York State Codifies the Johnson Amendment
On October 23, 2019, Governor Andrew M. Cuomo, signed legislation incorporating the federal Johnson Amendment into New York law. As previously described, the Johnson Amendment denies tax-exempt status under section 501(c)(3) of the Internal Revenue Code (the “Code”) to (and imposes excise taxes on) any organization that engages in political campaign activities. The new legislation amended section 1116 of New York Tax Law, which will now deny tax-exempt status for N.Y tax purposes to any organization that engages in political campaign activities, either on behalf or in opposition of any candidate for public office. Continue Reading
Proskauer’s 24th Annual Trick or Treat Seminar
Proskauer’s 24th Annual Trick or Treat Seminar was held on Wednesday, October 31 and discussed timely topics and best practices specifically tailored to the not-for-profit community.
The seminar discussed:
- Protect Yourself: A Practical Guide to Strategic Risk Management and Insurance
- How to Solicit a Donor in Fifteen Minutes: The Ultimate Cheat Sheet
- Compensation and Benefits Update: New Excise Taxes, Litigation, and Other Developments
- Time to Care: Developments and Trends in Family and Personal Leave
Amanda Nussbaum welcomed everyone and briefly discussed recent tax law changes and areas of focus for the Internal Revenue Service and introduced the presenters.
Here are some key points from each presentation:
John Failla discussed insurance risk management issues affecting nonprofit organizations. John explained how nonprofits can employ enterprise risk management techniques to identify and prioritize emerging risks. He discussed the importance and benefits of reviewing insurance contracts with counsel at least annually. Finally, John discussed the top ten insurance pitfalls that nonprofit organizations face, including cyber and privacy risks, computer crime and social engineering, liability from the acts of volunteers, sexual abuse and employment practices liability coverages, and the need for procedures and training to ensure compliance with notice, cooperation and consent requirements in insurance policies.
David Pratt discussed a range of opportunities, including charitable lead trusts created during life and at death, leaving IRAs, 401(k)s and other qualified plans, as well as tax deferred annuities to charity to avoid the income taxes that would otherwise be imposed. He focused on using insurance in charitable planning as a wealth replacement tool and as a way to leave money to charity, particularly with policies that are very often forgotten about (i.e., low hanging fruit). David also discussed how donors have appreciated securities and low basis real estate, and how these assets can be used in connection with charitable giving. Finally, David discussed how charitable giving, in general, is a way for a donor to decide what charities he or she may want to give to, rather than paying taxes and letting the government decide.
Seth Safra discussed compensation and benefits developments. First, Seth discussed recent developments and open issues related to the 21% excise tax on compensation in excess of $1 million and on certain separation pay. Next, Seth discussed the March 31, 2020, deadline to restate preapproved section 403(b) plans and to update individually designed 403(b) plans for qualification requirements. Finally, Seth discussed benefits litigation, including cases before the Supreme Court that will address standing for claims related to pension investments and whether receiving a disclosure is sufficient to establish “actual knowledge” for purposes of ERISA’s statute of limitations; lessons learned from recent section 403(b) litigation decisions and settlements; and ongoing litigation related to actuarial factors used to calculate pension benefits.
Laura Fant discussed recent trends and developments in the area of employee leave. She first covered the latest updates regarding the federal Family and Medical Leave Act (“FMLA”), including updates to the model certification and designation forms and recent Department of Labor opinion letters and case law addressing FMLA leave. She then turned to the topic of paid sick leave, including recent changes to the rules governing the New York City Earned Safe and Sick Time Act. Laura also discussed the new trend of “personal time” laws – that is, laws requiring employers to provide a certain amount of leave that can be used by employees for any reason. Maine and Nevada have already passed such laws, with other jurisdictions, including New York City, considering similar legislation. Laura then provided an update on the New York Paid Family Leave Law and talked about the nationwide trend of paid family and medical leave laws being enacted, including in Connecticut, Massachusetts, and Washington, D.C. Finally, Laura gave an overview of other leave-related developments in New York, including time off for victims of domestic and related violence and paid time off to vote.
Deadline Approaching for 403(b) Sponsors to Review Plan Documents for Compliance
Section 403(b) plans must be maintained pursuant to a written plan document that meets detailed requirements set forth in IRS regulations. If a plan contains a defect as to form (e.g., a provision does not comply with the regulations or a required provision is missing), the plan can be at risk for losing its qualification for favorable tax treatment. The IRS allows a “remedial amendment period” to correct form defects in individually designed plans that were timely adopted, but the remedial amendment period ends March 31, 2020 (subject to a short extension for recently incurred plan defects).
It is not uncommon for the IRS to identify possible defects in well-drafted plan documents that were adopted in good faith. The “remedial amendment period” offers employers an opportunity to review existing language in light of developments over the last several years and to clean up or improve the language retroactively without penalty.
After March 31, 2020, retroactive correction will no longer be permitted outside of the IRS Employee Plans Compliance Resolution System (EPCRS). Because the March 31, 2020 deadline is not likely to be extended by the IRS, sponsors of individually designed section 403(b) plans are encouraged to review their 403(b) plan documents and consult with their advisers to determine if there are any provisions that should be cleaned up by March 31, 2020.
A Good 403(b) or a Bad 403(b)? A Question IRS Auditors Look to Answer
For a discussion of section 403(b) plan compliance, please see the post on Proskauer’s Employee Benefits & Executive Compensation Blog.
Parsonage Exclusion Found by Seventh Circuit to Be Constitutional
On March 15, 2019, the U.S. Court of Appeals for the Seventh Circuit held in Gaylor v. Mnuchin that the tax exemption for “ministers of the gospel” (defined below) under Section 107(2) of the Internal Revenue Code (the “Code”) does not violate the Establishment Clause[1] of the First Amendment and, therefore, is constitutional, overruling the district court decision.[2]
In Gaylor, the Freedom From Religion Foundation (the “FFRF”)[3] sued the Treasury Department after the Internal Revenue Service (the “IRS”) denied the refund claims of FFRF’s co-presidents who sought to exclude the portion of their salaries paid in the form of a housing allowance. The central issue in the case on appeal was whether the district court was correct in holding that the exclusion for housing allowances under Section 107(2) is a law “respecting an establishment of religion.”
Overview of Section 107
Section 107, commonly referred to as the “parsonage exclusion,” excludes from gross income housing furnished to a “minister of the gospel” (or, “minister”) as part of his or her compensation. For the purposes of this Code section, a “minister of the gospel” is “a duly ordained, commissioned, or licensed minister of a church or a member of a religious order”[4] and applies to religious leaders of any denomination.[5] The housing may be provided in kind under Section 107(1), in which case the rental value of the home including utilities are excluded,[6] or in the form of an allowance under Section 107(2), in which case the allowance is excluded to the extent it is considered “reasonable compensation” for the minister’s services[7] and is actually used in the taxable year in which it is received to pay for rent, the purchase of a home or expenses directly related to providing a home.[8] A cap on the exclusion under Section 107(2) equal to the fair rental value of a home, including furnishings, appurtenances and utilities, was added by Congress in response to constitutional concerns over the holding in Warren v. Commissioner, where the Tax Court determined that the language of the statute did not impose any such restriction.[9]
Consistent with exemptions under the “convenience-of-the-employer” doctrine for secular employees whose jobs have housing requirements, Congress enacted Section 107 to provide a housing exemption for ministers whose homes are often used as part of, or located in a certain area for, their ministry. While Section 107(1) was generally accepted by the FFRF to put ministers on equal footing as other employees who may exclude certain employer provided in kind housing under Section 119(a)(2),[10] the FFRF argued that the exemption under Section 107(2) for housing allowances is “different” and “better” than those for secular employees under the Code. Section 107(2) differs primarily from Section 119(a)(2) in that it excludes housing allowances as well as in kind housing and it does not require ministers to use their homes as a part of their ministry or to live in certain proximity to their “work” (i.e., their congregation).
Exclusion under Section 107(2) Found Constitutional
The court found that Section 107(2) does not violate the Establishment Clause as it has a secular legislative purpose, its principal effect is neither to endorse nor to inhibit religion and it does not cause excessive government entanglement.[11] The court additionally analyzed whether Section 107(2) is consistent with the “historical practices and understandings” of the Establishment Clause, following the mandate of Town of Greece v. Galloway.[12]
Although the primary housing exclusion provided under Section 119(a)(2) only excludes in kind housing, the court noted that there are “myriad” provisions in the Code that provide in cash and in kind housing exemptions for various categories of employees[13] and that limiting the parsonage exclusion to in kind housing tended to discriminate against ministers of smaller or poorer denominations.[14] Furthermore, Section 107(2) was found to avoid “excessive entanglement” with religion that would result if the IRS needed to inquire into the use of a minister’s home and what activities constitute “worship.” Although the IRS nonetheless must determine who qualifies as a “minister of the gospel” under Section 107,[15] the court reasoned that it involves less entanglement than the alternative of applying the requirements of Section 119(a)(2), which would force the IRS to determine what the “business” of a church is and how far the “premises” of the church extend.
Notably in determining whether Section 107(2) has the primary effect of advancing or inhibiting religion, the court declined to apply Justice Brennan’s plurality opinion in Texas Monthly that a tax exemption for religious publications violated the Establishment Clause because “[e]very tax exemption constitutes a subsidy that affects nonqualifying taxpayers,”[16] concluding that the Brennan plurality opinion was not binding under the Marks test.[17] As the Texas Monthly plurality was not binding, the court felt bound by Walz and Amos to conclude that tax exemptions do not constitute sponsorship of a religion.[18]
Turning to the historical significance test of Town of Greece, the court also found that Section 107(2) is constitutional because of the tradition throughout American history to provide tax exemptions for religion, particularly for church-owned properties. In other words, a tax exemption for parsonage is not what has been historically understood as constituting an “establishment of religion” and therefore is not a violation of the Establishment Clause.[19] The court dismissed both the district court’s finding that Section 107(2) is distinguishable from historical tax exemptions for religion since it is an income and not a property tax exemption, and the position of FFRF that a historical analysis of the Establishment Clause is only applicable when determining the constitutionality of legislative prayer.
Future of Section 107(2)
The ruling by the Seventh Circuit in Gaylor v. Mnuchin does not necessarily settle the constitutionality of Section 107(2). Whether the FFRF will appeal the case or whether the Supreme Court will review it is uncertain.
[1] The Establishment Clause of the First Amendment states that “Congress shall make no law respecting an establishment of religion,” U.S. Const. amend. I, and has been held to not only forbid Congress from establishing a state religion but also to limit the government’s ability to “favor one faith over another” or to show “adherence to religion generally,” McCreary County v. ACLU, 545 U.S. 844 (2005), and thus to generally obligate “governmental neutrality between religion and religion, and between religion and nonreligion,” Epperson v. Arkansas, 393 U.S. 97, 104 (1968).
[2] Gaylor v. Mnuchin, 278 F. Supp. 3d 1081 (W.D. Wis. 2017).
[3] The FFRF is a non-profit educational organization under Section 501(c)(3) of the Code that promotes “the constitutional principle of separation of state and church” and “educate[s] the public on matters relating to nontheism.” What is the Foundation’s Purpose?, Freedom From Religion Foundation, https://ffrf.org/faq/item/14999-what-is-the-foundations-purpose (last visited March 28, 2019).
[4] Treas. Reg. Section 1.1402(c)-5(a)(1).
[5] See, e.g., Salkov v. Comm’r, 46 T.C. 190 (1996) (holding that a Jewish cantor was a “minister of the gospel”).
[6] Treas. Reg. Section 1.107-1(a).
[7] See Rev. Rul. 78-448 (rental allowance cannot exceed reasonable compensation for services where the minister performs only occasional and insubstantial services for a church).
[8] See Treas. Reg. Section 1.107-1(c).
[9] See Pub. L. No. 107-181, § 2(a), 116 Stat. 583 (2002); Warren v. Commissioner, 114 T.C. 343 (2000), appeal dismissed, 302 F3d 1012 (9th Cir. 2002). In Warren, the IRS challenged the position of Richard Warren, a minister of the gospel within the meaning of Section 107, that the exclusion under Section 107(2) was not limited to the fair rental value of a home. Concerns that the Tax Court’s broad interpretation of Section 107(2) in its holding for Warren violated the Establishment Clause prompted Congress to add the fair rental value cap in 2002. This legislative change made the government’s appeal of the case moot, and the appeal was dismissed by the Ninth Circuit accordingly.
[10] Section 119(a)(2) exempts in kind lodging that an employee must accept as a condition of employment and that is furnished on the business premises of, and is for the convenience of, the employer. Treas. Reg. Section 1.119-1(b).
[11] The aforementioned conclusions are based off of the “Lemon” test, first articulated in Lemon v. Kurtzman, 403 U.S. 602 (1971). Lower courts have generally applied the Lemon test, amongst other tests, when analyzing an Establishment Clause question, although there are some doubts about its continuing vitality.
[12] 572 U.S. 565, 576 (2014).
[13] See, e.g., Section 162 (housing provided to an employee away on business for less than a year); Section 134 (housing provided to current or former members of the military); Section 912 (housing provided to government employees living abroad).
[14] See, e.g., Larson v. Valente, 456 U.S. 228, 244 (1982).
[15] Even so, the IRS has specifically said it will not issue rulings or determination letters regarding whether an individual is a “minister of the gospel” for Federal tax purposes. See Rev. Proc. 2019-3.
[16] Texas Monthly, Inc. v. Bullock, 489 U.S. 1, 14 (1989) (Brennan J., plurality opinion).
[17] The Marks test references Marks v. United States, which held that when “a fragmented Court decides a case and no single rationale explaining the result enjoys the assent of five Justices, the holding of the Court may be viewed as that position taken by those Members who concurred in the judgments on the narrowest grounds.” 430 U.S. 188, 193 (1977).
[18] See Walz v. Tax Comm. Of City of N.Y., 397 U.S. 664, 675 (1970) (“The grant of a tax exemption is not sponsorship since the government does not transfer part of its revenue to churches but simply abstains from demanding that the church support the state.”); Corp. of the Presiding Bishop of the Church of Jesus Christ of Latter-Day Saints v. Amos, 483 U.S. 327, 337 (1987) (“We do not see how any advancement of religion achieved by the [exempt religious organization] can be fairly attributed to the Government, as opposed to the Church.”).
[19] This “historical significance” test developed under Town of Greece v. Galloway, 572 U.S. 565 (2014) and requires that the Establishment Clause be interpreted “by reference to historical practices and understandings.”
