Highlights from the ABA Exempt Organizations Committee Meeting 1/28/21

Published on: by Gene Takagi Category:EVENTS, IRS & FEDERAL TAX ISSUES
legal scale with the words "tax" and "exempt" on opposite sides

Here are some of the highlights from the virtual ABA Exempt Organizations Committee meeting held on January 28, 2021 as part of the ABA 2021 Midyear Tax Meeting.

News from the IRS, Treasury, and the Hill

The Election is Over – or Is It?

 Beth Kingsley, Harmon, Curran, Spielberg & Eisenberg LLC; Heidi Abegg, Webster, Chamberlain & Bean, LLP; Rosemary Fei, Adler & Colvin 

  • Post-election activities include: litigation (party or amicus), recounts, ballot chasing or curing, rallies and protests, advocacy regarding Presidential College Electors, advocacy regarding government officials’ duties/conduct
  • Activities carried out for the purpose of protecting individuals’ right to vote and have their votes counted can be consistent with 501(c)(3), but a charity must be careful not to violate (1) the prohibition against political campaign intervention, (2) the prohibition against private benefit (more than incidental to furthering an exempt purpose), and (3) the prohibition against substantial lobbying
  • Rev. Rul. 2007-41 provides factors regarding whether a charity’s activities may constitute prohibited political campaign intervention (see pp. 8-9)
  • Proceedings to determine the outcome of an election, such as litigation and recounts, may be prohibited political campaign intervention, based on limited IRS guidance
  • Possible permissible activities by a charity include: urging the Secretary of State to count all ballots, advocating for a fair process, publishing objective statements (e.g., “count every ballot”) while avoiding the messaging of any of the candidates; ballot chasing and curing, filing amicus briefs, urging compliance with election laws at protests and rallies, and protesting outside of a courthouse hearing a challenge to ballot counting
  • The way the U.S. President is elected creates additional complexities on how to characterize certain nonprofit activities (e.g., Is the campaign over after the votes have been cast?)
  • Transition teams – winning candidate and losing candidate may both have such teams, and there is a lack of rule about their conduct and composition
    • They don’t appear to be government agencies
    • Some may be exempt under 501(c)(4), some may be exempt under 527; it may be possible to structure one as a 501(c)(3) on the basis of lessening the burdens of government, but there would be many hurdles
    • They may be easier for charities to support after the person has been elected and holds office; no longer an electioneering issues but private benefit issue may remain
    • A charity’s communications to influence the Senate’s vote to confirm a President’s judicial or executive branch nominee would generally count as lobbying for tax purposes 
  • IRC Section 527(f) imposes a tax on certain political expenditures made by a 501(c) organization (including but not limited to charities), up to the amount of that organization’s investment income in that same tax year; such political expenditures include those on the selection, nomination, or appointment of an individual to public office (but practitioners generally believe that absent IRS guidance to the contrary this tax does not apply to charity expenditures to influence judicial appointments and possibly Senate appointments) 

The Future of Impact Investment Funds

David A. Levitt, Principal, Adler & Colvin; Stephanie Thomas, Partner, Morrison & Foerster LLP; Jenny Yip, Managing Partner, Adjuvant Capital

  • Impact Investments (a definition): “Investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.” – The Global Impact Investing Network (GIIN)
  • 3 characteristics:
    • Intention to generate a positive social or environmental impact 
    • Target some level of financial return, from below market to risk-adjusted market rate
    • Commitment to measurement and reporting of social or environmental impact
  • Various structures:
    • Nonprofit/Exempt Organization (EO) as GP / Manager
    • EO as Parent of For-profit Special Purpose Vehicle (SPV)
    • EO as Investor for investment screening and/or monitoring
  • Stacked Deck Fund with different types of investors, but EOs making PRIs/MRIs must be careful of not providing a prohibited private benefit to other investors by taking a lower tranche of investment to subsidize higher tranches with investors looking to make a market rate of investment (any private benefit must be incidental, qualitatively and quantitatively, to furthering the EO’s charitable purposes)
  • Program-Related Investment (PRIs) – see, e.g., IRS webpage on PRIs; 2016 Regs – Examples of Program-Related Investments
  • Discussion: How do core principles of tax exemption affect impact fund structures – and what might PLR 202041009 change? 
    • Is furtherance of charitable purpose primary (over financial return)?
    • Do the documents support prioritization of the charitable purpose?
  • Charitable for 501(c)(3) operational test-consistency, relatedness for UBIT purposes, and special relationship/value for UPMIFA purposes are related concepts but should be analyzed separately

Loan Forgiveness Under the Paycheck Protection Program (PPP)

Stephen E. Ruscus, Morgan Lewis; Amber Mackenzie, Senior Technical Reviewer and Acting Branch Chief, Exempt Organizations Branch 1 (EEE), Office of Chief Counsel, IRS; Sarah Daya, Office of Associate Chief Counsel (Income Tax and Accounting), IRS; Patrick Clinton, Office of Associate Chief Counsel (Income Tax and Accounting), IRS; Dianna Seaborn, Director of the Office of Financial Assistance, Office of Capital Access, U.S. Small Business Administration

  • SBA regulations generally prohibit nonprofits from receiving SBA business loans, but CARES Act provided that 501(c)(3) nonprofits can be eligible for Payroll Protection Program (PPP) loans
  • Still some unknowns regarding “economic necessity” and how endowment and other restricted funds might be considered in such assessment – PPP applications include a certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
  • Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (EAA) revives the PPP with ~$285 billion, reopening and strengthening the program for First-Draw and second-time borrowers, and extending the lifetime of the program to March 31, 2021
  • First Draw and Second Draw loans are generally not combined for determining whether the borrower would be subject to the $2 million automatic audit requirement
  • First Draw Borrowers can increase First Draw loan if the full amount was not previously taken or all or portions were returned
  • Loan proceeds can cover: payroll costs; group healthcare benefits; mortgage interest payments; rent; utilities; other debt interest; operations expenditures (e.g. software); property damage costs; supplier costs and worker protection (e.g. PPE)
  • Covered loan forgiveness is excluded from the gross income of a recipient (Notice 2020-32, since obsoleted by Rev. Rul. 2021-2) – as noted above, loan forgiveness will count as public support and total support (contributions from a governmental unit)
  • EAA reverses Notice 2020-32 to permit deduction of expenses paid for by PPP funds (effectively providing a double tax benefit to the taxpayer, though EOs may not be impacted)