Here are some of the highlights from the American Bar Association Exempt Organizations Committee meeting held on January 19, 2024 as part of the ABA Midyear Tax Meeting. Thanks to all who looked after me when I took a bit of a tumble!

Federal Tax Update from the IRS and Treasury

• Tax-exempt entities (including charities) can benefit from 12 clean energy tax credits using new options under the Inflation Reduction Act. [I’ll be writing more about this soon.]
• Elective pay makes certain clean energy tax credits and the CHIPs manufacturing credit effectively refundable (see Elective Pay and Transferability Frequently Asked Questions). The entity can receive the full value of the credit because the IRS treats the elective payment amount as a tax payment. We then count it as overpayment on the return and refund it to the entity.
• Transferability llows entities that can’t use elective pay but do qualify for an eligible tax credit to transfer all or a portion of the credit to a third-party buyer in exchange for cash. The buyer and seller would negotiate and agree to the terms and pricing. See Elective pay and transferability (IRS); IRS Pub 5817-G (Clean Energy Tax Incentives: Elective Pay Eligible Tax Credits).
• Exempt Organizations – Reporting Changes to IRS
• EO operational requirements: obtaining copies of exemption determination letter from IRS
• Revenue procedures of interest to exempt organizations
• Accountable care organization petitions Tax Court to challenge IRS denial of 501(c)(4) status (EY)
• DOJ Seeks to Overturn Mayo Clinic’s Win in UBIT Refund Case (Tax Notes)
• PLR 202342002 (excess business holdings case – 5-year extension granted)
• PLR 202342009 (art lending program – art is asset held for use directly in carrying out the foundation’s exempt purposes, acquisition costs are qualifying distributions)
• PLR 202347002 (changes to benefits to clergy of church advanced religious purposes)

Spirit of 69

• Premise – Charities must have a mission. A mission is a theory of change. Change challenges the status quo. Therefore, all charities challenge the status quo. Their political opponents retaliate by tightening the tax law with overbroad measures to curb “waste, fraud, and abuse” when the true purpose is to censor charitable speech and inhibit social change. This “Spirit of 69: is a reactionary movement that contradicts the basic premise underpinning charitable tax and governance.
• House Ways and Means Chair, Wilbur Mills (D-Arkansas) and other segregationists retaliated against the Ford Foundation and other funders of the Civil Rights movement by enacting the Tax Reform Act of 1969 to limit the power of foundations.
• Should there be limitations on the power of private capital dedicated to public interests?
• Do concerns about concentrations of power apply equally to wealthy and/or privileged donors as to the professionally managed and immortal institutions?
• Should there be limitations on the power of government to regulate waste, fraud, and abuses of nonprofit institutions?

What is a Donor Advised Fund?

• The Pension Protection Act of 2006 provided a definition of a DAF and created excise taxes for specific improper uses of DAFs. We’ve had limited guidance from the IRS and waited for regulations since 2006. See Notices 2006-109, 2007-21, 2017-73.
• DAF Proposed Regulations – IRC Section 4966 were published in November 2023. Proposed regulations tend to start broad and get narrowed (not the other way around). The effective date has many concerned about the need for compliance because it is proposed to be retroactive to the start of the year in which final regulations are published. The deadline for public comments is February 15, 2024.
• The proposed regulations clarify that most public charities are exempted from falling under the definition of a donor with respect to a DAF.
• The proposed regulations generally treat personal investment advisors of donors as donor advisors, who cannot receive compensation from the DAF (this will be hotly commented upon).
• The proposed regulations treat advisory committee members with respect to a fund (regardless of whether they’ve been recommended by the donor) as donor advisors unless they fall within certain exceptions.
• There are 3 other Priority Guidance Plan items on DAFs to follow (thought the timing and sequence of proposed and final regulations has yet to be determined or announced).

Can Nonprofit Governance Contain Artificial Intelligence?

• I added a nonprofit lawyer’s perspective on this panel that focused particularly on the very high-profile OpenAI events at the end of last year.
• Artificial intelligence (AI) has different forms deserving of recognition and understanding by the public, including generative AI and artificial general intelligence (AGI). See, e.g., Artificial General Intelligence Issues and Opportunities (United Nations).
• Nonprofit governance (in the charity context) requires board members to act with fiduciary duties of care and loyalty with attention to the mission and values of the organization. Board members cannot put commercial goals and private interests ahead of the organization’s charitable goals and public interest. A charity will not qualify as exempt under IRC Section 501(c)(3) if more than an insubstantial part of its activities does not further its charitable purpose.
• However, nonprofits can create for-profit subsidiaries and participate in joint ventures with noncharitable partners, subject to certain limitations and restrictions. See, e.g., Can a Nonprofit Own a For-Profit? Can a For-Profit Own a Nonprofit? and Nonprofit Joint Ventures: Basics.
• The OpenAI structure appears to include a joint venture in which the OpenAI nonprofit has a stake. See Five Days of Chaos: How Sam Altman Returned to OpenAI (Cade Metz (a fellow panelist for this presentation), Tripp Mickle, Mike Isaac, Karen Weise and Kevin Roose, NY Times); Nonprofit Radio: OpenAI and Nonprofit-Money Collaborations. The firing and subsequent rehiring of Sam Altman appears to have been driven by money (very, very large amounts of money), and it would be difficult, at least for me, to see how the nonprofit laws could practically be very effective to protect charitable values over commercial goals in the context of a joint venture of this magnitude and size. Our fellow panelist and governance guru Rani Doyle calls out boards to act and provide effective, purpose-driven insight and foresight.

When Is Campus Speech Terrorism?

• The regulations defining “charitable” for § 501(c)(3) purposes recognize that advocacy or presentation of controversial opinions may be a charitable purpose
• The regulations defining “educational” take a somewhat different approach by providing that organizations advocating a particular viewpoint are “educational” if they present a “sufficiently full and fair exposition of the pertinent facts” to permit a listener to form an independent opinion but not if their principal function is the mere presentation of “unsupported opinion.”
• The tax exemption of an organization otherwise exempt under § 501(c)(3) may be suspended for any period during which the organization is designated or identified by the U.S. government as a “terrorist organization” or supporter of terrorism. I.R.C. § 501(p).
• Does (or should) controversial, campus speech jeopardize the federal tax exemptions for colleges and universities? No, if it’s only speech. However, note that, there are some narrow First Amendment exceptions (beyond illegal conduct per se) that might justify denial of § 501(c)(3) tax exemptions. Examples are threats or incitement of illegal conduct and, possibly, a pattern of harassment (e.g., disrupting classes or public events, blocking access to the classroom, random acts of violence to personal property, sending targeted emails, and the like).
• See Towards a Constitutional Revocation of Terrorism’s Tax Exemption (Darryl Jones).