Here are some of the highlights from the American Bar Association Exempt Organizations Committee meeting held on January 16 as part of the ABA Midyear Tax Meeting. As with all of our posts capturing highlights of events, my interpretations, opinions, and additions of supplemental resources may be sprinkled in with the information provided by the presenters.

Roundtable Discussion on the Latest Legislative, Judicial, and Regulatory Developments Impacting Tax-Exempt Organizations

Join us for a roundtable discussion as we interview key leaders in government to discuss the latest legislative, judicial, and regulatory developments impacting tax-exempt organizations.

Moderator: Elinor Ramey, Lowenstein Sandler
Panelists: Lynne Camillo, Deputy Associate Chief Counsel, Employee Benefits, Exempt Organizations, and Employment Taxes at IRS Office of Chief Counsel; Seth Groman, IRS Office of Chief Counsel; Andrew Lai, Legislation Counsel, Joint Committee on Taxation; Amber MacKenzie, Attorney Advisor, Department of Treasury

• Recent legislative developments – OB3 Act – IRC 4960 – broadened scope of covered employees (not just 5 highest compensated anymore); “Endowment tax” on colleges and universities with at least 3,000 tuition-paying students (up from 500) and flat rate (1.4%) changed to tiered system (1.4% to 8%); Charitable contribution rules – new floor for corporations (deductible only if exceeds 1%, which effectively lowers total cap from 10% to 9%); new floor for individuals who itemize (deductible only to the extent it exceeds 0.5% and new deduction for non-itemizers (subject to certain limitations on charitable recipients – e.g., not to a DAF); credit to scholarship granting organizations (SGOs) capped at $17,000; there was also other legislation that went through the House that ultimately were not enacted; college athletics letter from Sen. Cantwell
• Group exemptions – Rev. Rul. 2026-8 and Notice of Issuance – 5+ year freeze on group exemption applications will be lifted on January 19, 2026
• IRS 2025-2026 Priority Guidance Plan – Section 501(c)(3) Issues – (1) Guidance on the application of the fundamental public policy against racial discrimination, including consideration of recent caselaw, in determining the eligibility of private schools for recognition of tax-exempt status under §501(c)(3); and (2) Guidance on the statutory prohibition in §501(c)(3) against participation or intervention in political campaigns (the “Johnson Amendment”). Also other exempt organizations-related issues addressed in the PGP include – (1) Guidance under §25F on the income tax credit for contributions of individuals to SGOs; (2) Guidance under §§128, 139J, 530A, 6434, and 6659 regarding Trump accounts; (3) Regulations under §2010 regarding extension and enhancement of increased estate and gift tax exemption amounts and related issues; and (4) Guidance under §4960 regarding excess compensation paid by applicable tax-exempt organizations, including the expanded definition of “covered employee
• Notable 2025 and ongoing cases: Memorial Hermann ACO, Mira Vista; Freedom Path; NRB

Accounting, Tax, Structuring, and Reporting Considerations associated with Complex Grants and Grant Agreements

Tax-exempt organization practitioners (including an accountant) will discuss various accounting, tax, structuring, and reporting considerations associated with complex grants. Topics will include the differences between recoverable grants and loans, and expenditure responsibility grants to support capital expenditures and for-profit grantees. The panel discussion will explore the key legal definitions and regulations, including the characterization of grants as gifts, loans and contracts, as well as how financial reporting definitions align with, or differ from, legal definitions.

Moderator: Justin Zaremby, Patterson Belknap Webb and Tyler
Panelists: Jennifer Becker Harris, Clark Nuber; Shirley McLaughlin, Adler & Colvin; David A. Shevlin, Simpson Thacher & Bartlett LLP

• Recoverable grants and recoverable loans live in the space between grants and PRIs (which are generally more complex)
• A recoverable grant may help a grantee’s balance sheet (doesn’t show up as debt); a recoverable loan may help a grantee’s credit history and help grantor mitigate some private benefit risks; the distinction between a grant and loan is important in managing and aligning expectations, documenting the transaction, reporting, and accounting treatment (an accounting policy may be important – e.g., modified cash basis)
• For a recoverable grant or recoverable loan, if there are returns of original funds (not interest or amounts exceeding the original contribution) that were previously taken as qualifying distribution (QD) the amount should be added to the current year distributable amount calculation (Part IX) – But see Rev Rul 77-252 exception: if (1) the original QD was taken more than 5 years ago and (2) the private foundation can determine it did not need the QD for payout purposes, then the recovery does NOT need to be added back to the current year distributable amount
• Expenditure Responsibility (ER) basics – IRC Section 4945(h) – note also that ER is part of the deregulation plan
• Distinguishing a grant from a contract – important regarding how to reflect income, how it impacts public support tests, whether ER is required, how it must be reported, how boards must think about director fiduciary duties in relation to the transaction – important to know which party will own/control the work product created by the fund
• Private operating foundations (POFs) may want to frame expenses as contracts versus grants to meet the POF tests

Criminal Tax 101: Exploring the Ins and Outs of a Criminal Tax Investigation and the Particular Risks that Tax-Exempt Organizations Face

Tax-exempt organization practitioners have been navigating new areas of the tax laws over the course of the past year, and the criminal tax laws are now on that list. This panel will provide an overview of the process of a criminal tax investigation, highlight the potential triggers of such an investigation and the particular risks that tax-exempt organizations face, and discuss best practices for responding to and navigating a criminal tax investigation.

Moderator: Alexander Reid, BakerHostetler 
Panelists: Evan J. Davis, Hochman Salkin Toscher Perez P.C.; Karen Kelly, Kostelanetz LLP; Joe Rillotta, Meadows Collier

• IRS Criminal Investigations (IRS-CI) is increasing scrutiny on nonprofits for misuse of funds beyond charitable purposes
• IRS-CI uses subpoenas, search warrants, and grand jury investigations to collect evidence
• Recommendation: Organizations should implement strong internal controls to avoid prosecution and reputational harm
• Wall Street Journal article (10/15/25): Trump Team Plans IRS Overhaul to Enable Pursuit of Left-Leaning Groups
• Bondi Memorandum for all federal prosecutors law enforcement agencies Department of Justice grant-making components
  • Federal law enforcement will target individuals, organizations, and funders whom the DOJ contends are “domestic terrorists” under a definition that links political violence to “anti-fascist” beliefs
  • “In general terms, domestic terrorism is criminal conduct that occurs primarily inside the territory of the United States and that involves acts dangerous to human life that appear to be intended to intimidate a civilian population; influence the policy of government by intimidation or coercion; or affect the conduct of government by mass destruction, assassination, or kidnapping. … For too long, rampant criminal conduct rising to the level of domestic terrorism—e.g., organized doxing of law enforcement, mass rioting and destruction in our cities, violent efforts to shut down immigration enforcement, targeting of public officials or other political actors, etc.—has been tolerated. For some culpable actors, such as certain Antifa-aligned extremists, their animating principle is adherence to the types of extreme viewpoints on immigration, radical gender ideology, and anti-American sentiment listed below, with a willingness to use violence against law-abiding citizenry to serve those beliefs. …. Acts of domestic terrorism are priority matters for federal law enforcement and will be zealously investigated and prosecuted. Such acts may include organized rioting, looting, doxing, and swatting; and conspiracies to impede or assault law enforcement, destroy property, or engage in violent civil disorder.”
  • “[F]ederal law enforcement and federal prosecutors should consider any applicable tax crimes in cases in which extremist groups are suspected of defrauding the Internal Revenue Service. As it receives referrals for violations of tax obligations, the DOJ should investigate and, where appropriate, prosecute those responsible.”
  • “[T]he FBI shall establish a cash reward system for information that leads to the successful identification and arrest of individuals in the leadership of domestic terrorist organizations”
• How an organization learns about being investigated – search warrant, grand jury subpoena, IRS summons, witness interview
• Steps in a prosecution – IRS review, DOJ Tax unit, DOJ Tax Conference, U.S. Attorney’s Office, Grand Jury subpoena
• Possible crimes for false statements on Form 1023 or Form 990
  • Be careful in describing planned activities in Form 1023 to avoid future IRS claim that tax-exemption was recognized based on the organization’s false representations
  • Be careful to make appropriate responses to Form 990 question about whether the organization has engaged in any activities not previously reported to the IRS
• DOJ Criminal Division Evaluation of Corporate Compliance Programs
• DOJ is placing a new emphasis on compliance programs being “adequately resourced” and personnel being “empowered to function effectively” (i.e. independent, well-trained, and with access to data for purposes of monitoring)
• Receiving very large gift from a donor, especially if for redistribution or use in a foreign country – due diligence on the donor and source of funds may be important (e.g., to ensure not from a designated terrorist organization or criminal operation)

Navigating the Practical Implications of the Illegality and Public Policy Doctrine in Light of 2025 Executive Orders and Presidential Actions

I had the honor or participating on the panel with Karl Mill, Kayla Ruben, and Tom Schroeder (moderator). I’ll share more of this session on a separate post, but here are a few highlights (mostly from Karl’s segment):

• The final Public Service Loan Forgiveness rule resulting from Executive Order 14235, Restoring Public Service Loan Forgiveness, has made the “illegality” risk for revocation of tax-exempt status feel more real and imminent even though revocation remains a formal, audit-driven process with constraints
• Lawyers should avoid unnecessarily amplifying the threat but also should not presume to determine a client’s appropriate level of risk tolerance
• Leadership duties are principally to the mission and not the bottom line; board members should determine whether the mission is best advanced with a healthier bottom line or by holding the line

Tax-Exempt Organizations Case Study: Higher Education – The Last (Unconsolidated) Bastion

As a sector, higher education is facing reductions in undergraduate enrollment (and the number of high school graduates generally), increases in cost and complexity, and more limited federal and state funding. In a perhaps overdue reaction, higher education is now in the early stages of a major consolidation movement. Mergers, acquisitions, strategic alliances and closures are all up. When it comes to higher education consolidation transactions, corporate, nonprofit and tax issues must be addressed in alignment with Department of Education requirements for changes of control, the required consents of accreditation agencies, and other regulatory bodies. This panel will address the legal and regulatory “life cycle” of such transactions, from seeking potential partners (nondisclosure agreements, LOIs), conducting comprehensive due diligence (and the inevitable problems with federal student loan compliance), transaction structuring (the one-step, two-step dance), dealing with employment and other cost reduction issues, and addressing (in advance) various “before and after” issues (real property ownership, carrying on the name and legacy, tenure, donor-restricted funds, UBIT/NOLs and other tax issues, etc.).

Panelists: Ofer Lion, Seyfarth Shaw; Donna Mangold, Loeb & Loeb LLP

• Macro-trends impacting the evolution of higher education: How colleges and universities can adapt to create value in the 21st century (David Richardson, TIAA Institute)
• Seeking potential partners – may involve expressions of interest, nondisclosure agreements, letter of intent, brokers’ and finders’ fees
• Possible structures – resource- or cost-sharing agreements, joint ventures (which raise a variety of tax issues, particularly if the joint venture is with a for-profit – see, e.g., Rev. Rul. 98-15, Rev. Rul. 2004-51)
• Valuation of the nonprofit partner’s in-kind contributions, often of IP, can be difficult and contentious (nonprofit must avoid an impermissible private benefit)
• Structure – Joint ventures: make sure you have an exit strategy in the event that either (1) the venture is unsuccessful or (2) if a pivot to non-exempt purposes is required to avoid financial losses or to pursue greater financial returns
• Structure – Conversion: nonprofit-to-for-profit: typically triggered by the need for capital or talent that may be better recruited or retained with the use of stock options and other profit-based incentive compensation
• Structure – Conversion: for-profit-to-nonprofit: typically triggered by the need for philanthropic capital, exempt bond financing, governmental restrictions on for-profits in the education sector, or public relations
• Structure – Change of control, asset sale/contribution: be careful of potential successor liability (de facto merger); possible depreciation recapture (if a tax-exempt organization took depreciation deductions on certain assets to reduce UBTI, upon the sale of such assets, it may need to recapture the depreciation as taxable ordinary income subject to UBIT)
• Structure – Merger: all assets and liabilities generally transfer by operation of law
• Department of Education (ED) Two-Step: change in control followed at some later date by merger – see Updated Guidance and Procedures for Changes in Ownership
• Due diligence: Tip – see IRS Compliance Questionnaire Colleges and Universities (2008)
• Consent requirements: ED, State AGs, State Education Departments, Accreditation Commissions, Exempt Bond Issuers
• Fiduciary duties
• Center for Excellence in Higher Education case – valuation issues on both sides of the deal
• See, e.g., Barney v. Commissioner. T.C., No. 5310-22 (12/30/2025)