I had a great time attending and (for the first time) presenting at the 17th Annual Western Conference on Tax-Exempt Organizations (WCTEO) co-sponsored by Loyola Law School and the IRS on November 21 and 22. I was honored to be presenting with some of the country’s leading nonprofit and tax law experts. Special thanks to Conference organizer Ellen April (Loyola Law School) for making me feel so welcome.
Washington Update. Ruth Madrigal (Treasury), Judith Kindell (IRS), and Kirk Paxson (IRS) providing an update of what’s been happening in Washington (a lot!). Among the items on the Treasury-IRS 2013 Priority Guidance Plan, which was updated earlier this week: (1) updated grantor and contributor reliance criteria under IRC Sections 170 and 509; (2) final regulations under §4944 on program-related investments; (3) final regulations under §§501(r) and 6033 on additional requirements for charitable hospitals; (4) additional guidance on §509(a)(3) supporting organizations; (5) regulations under §6033 on group returns; and (6) final regulations under §7611 relating to church tax inquiries and examinations.
Lessons on UBIT from Colleges and Universities Report. Ofer Lion (Hunton & Williams), Kindell and Gene Takagi. Kindell (IRS) led off with a high level overview of factors leading to the Report. I provided a very brief description of the elements of unnrelated business income: (1) a trade or business, (2) regularly carried on, and (3) not substantially related to the charitable or other exempt purpose that is the basis of the organization’s exemption. And Ofer, who kindly led our effort and provided the supplemental materials, summarized the findings from the Report related to unrelated business income and the lessons learned. See Ofer’s excellent article Unrelated Business Income and Executive Compensation: Final Report on Tax-Exempt Colleges and Universities Compliance Project Provides Guidance for All Nonprofits. Ofer and I then followed the formal part of the presentation with a role-play of an attorney-client meeting involving a fictitious, cutting edge nonprofit tech organization.
Internal Affairs Doctrine and Impact of Incorporating Outside California. Belinda Johns (California Attorney General’s Office), Elizabeth Pollman (Loyola Law School) and James Schwartz (Manatt Phelps) discussed the internal affairs doctrine, a conflict of laws principle which generally provides that the appropriate law to govern matters regarding the relationships between and among directors, officers, and shareholders of a corporation is the state of incorporation. California has a statutory exception to the doctrine codified in Corporations Code Section 2115 (whose reach has come into question). While Section 2115 doesn’t apply to nonprofit corporations, John emphasized the AG’s position that it has jurisdiction over foreign corporations holding assets in charitable trust in California and its authority to protect Caifornia residents. Charitable trust enforcement action can be brought under the Supervision of Trustees and Fundraisers for Charitable Purposes Act as well as the Corporations Code, Civil Code, Business and Professions Code, Probate Code and Penal Code.
Role of the Taxpayer Advocate Service and EOs. Jill MacNabb (National Taxpayer Advocate) described the Taxpayer Advocate Service (TAS) and its possible role in helping get exemption applications “unstuck” in the system. Of course, with applications routinely taking 18 months or longer if requiring additional development, it’s difficult to say when you should contact TAS. See the National Taxpayer Advocate’s Special Report to Congress regarding Political Activity and the Rights of Applicants for Tax-Exempt Status. It was wonderful talking with Jill at a faculty dinner following day one of the Conference and learning about her connections to Italy.
Lunch keynote featuring Marcus Owens (Caplin Drysdale). Owens covered some history of the exempt organizations division and discussed current problems, including the overallocation of IRS resources on 100 to 200 501(c)(4) applicants at the expense of tens of thousands of 501(c)(3) applicants. He closed with some possible solutions, such as restructuring to a public-private regulatory system (like with public securities).
Exempt Organization’s Exploitation of Intellectual Property. Doug Mancino (Hunton & Williams), Jill Cohen (Davis Wright & Tremaine), and Stephen Clark (Getty Trust) described a number of common arrangements in which an exempt organization may exploit its intellectual property both in futherance of its exempt purpose and as an activity unrelated to furthering its exempt purpose. Mancino noted: “The monetization of IP should be accomplished in the most tax-efficient manner possible and structured to avoid conflicts, inurement and private benefit and the diversion of resources and focus from the core educational and research missions.”
Operating Donor Advised Funds in the Absence of Regulations. LaVerne Woods (Davis Wright & Tremaine) noted the huge growth in donor-advised funds (DAFs) since 2006 when DAFs were first defined. While it’s curious why the IRS chose to first focus on the much small subsector of Type III supporting organizations, Madrigal stated that the regulations promised years ago are not expected anytime soon. Bill Choi (Rodriguez, Horii, Choi & Cafferata) succinctly described what we know and what we still don’t know about donor-advised funds as we wait for the regulations from Treasury. Among the many interesting issues discussed by Choi:
If a tax is imposed under IRC §4967 (prohibited benefits), no additional tax is imposed
under IRC §4958 (excess benefits). IRC §4967(b). How do you distinguish between a prohibited benefit and an excess benefit? A prohibited benefit occurs when a sponsoring
organization makes a distribution from a donor-advised fund which results in a donor, donor advisor, or related person receiving, directly or indirectly, a more than incidental benefit. IRC §4967(a)(1). An excess benefit occurs when the sponsoring organization makes a distribution from a donor-advised fund of any grant, loan, compensation, or other similar payment to a donor, donor advisor, or related person. IRC §4958(c)(2). Does this mean an excess benefit in the donor-advised fund context requires a direct payment to a disqualified person, while a prohibited benefit occurs when a disqualified person receives a more than incidental benefit from a distribution made to a third party? The Council on Foundations appears to take this position, explaining that IRC §4958(c)(2) (excess benefits) would apply if the sponsoring organization made a grant directly to a donor to enable the donor to pay a child’s tuition at a private school. On the other hand, IRC §4967 (prohibited benefits) would apply if the sponsoring organization made a grant to the private school that was then applied to pay the donor’s child’s tuition.
Ethical Issues for Exempt Organizations. Jack Siegel (Charity Governance Consulting) discussed various case scenarios involving ethical issues: attorney trust accounts, entity (not officers or employees) as client, conflicts of interest, attorneys also serving as board members, and competence and diligence.
Current Developments. Bruce Hopkin‘s (Polsinelli) regular presentation on current developments for tax-exempt organizations is always a highlight of the Conference. Among his observations:
- Operation in a substantially comercial manner continued to be a common basis for denial of recognition or revocation of exempt status.
- 501(c)(6) business leagues require members, and according to one PLR, its members must have a voice in its operations (query whether this means they must be voting members).
- Fundraising parent members of a gymnastics booster club may be considered insiders for private inurement. Capital Gymnastics Booster Club v. Commissioner.
- Compliance check questionnaire concerning group exemptions is informative. Form 14414.
- Compliance check of self-declaring exempt organizations is informative. Form 14449.
Breakout Sessions: Form 990 Update; Enforcement of pledges; Private Foundation Hot Topics. Erin and I attended the Private Foundation session in which Jody Blazek focused on practical tips for private foundations, including recognizing no distribution requirements in the first year, qualifying for the 1% excise tax on investment income, and avoiding self-dealing penalty taxes, which cannot be abated. She also identified a great free resource she helped to develop for pre-grant due diligence: GrantSafe (from FoundationSource).
The Once and Future Charitable Contribution Deduction. Reynolds Cafferata (Rodriguez, Horii, Choi & Cafferata) discussed law and policy regarding the charitable contribution deduction. “Charities need to understand the various proposals to limit the charitable deduction and how those limitations might affect an organization. The different proposals being considered to limit the charitable deduction will likely impact certain types of organizations more dramatically than other organizations.”
Exempt Organization Audit Update. This was a more of a technical presentation featuring Mark Weiner (Treasury) and Mancino. The following resources may be helpful in understanding this area: Charity and Nonprofit Audits and How to Appeal an IRS Decision on Tax-Exempt Status. I very much appreciated Mark’s kind comments to me after the Conference as we discussed certain subtle nuances of the UBIT laws.
Panel of Experts – Q&A. Blazek, Mancino and Woods. This was an opportunity for the attendees (including many experienced exempt organizations lawyers and accountants) to ask some of the most knowledgeable experts in the field.