Here are some of the highlights from the virtual ABA Exempt Organizations Committee meeting held on February, 2022 as part of the ABA 2022 Midyear Tax Meeting.
News from the IRS and Treasury
New “no rule area” for IRS (Rev Proc 2022-3): no rulings on whether an act of self-dealing occurs when a private foundation owns or receives an interest in an LLC or other entity that owns a promissory note issued by a disqualified person (e.g., PF board member)
IRS revises Form 1024, used by most types of organizations to apply for exempt status [other than under 501(c)(3) and 501(c)(4)], to allow / eventually require (until 4/4/22) electronic filing
Annual IRS Revenue Procedures Include No-Determination for 501(c)(5)s Relating to Controlled Substances (e.g., marijuana, psilocybin mushrooms) – see Nonprofit Law Prof Blog
IRS makes Tax Exempt Organization Search primary source to get exempt organization data | the IRS will no longer update the Form 990 Series data on Amazon Web Services (but Guidestar/Candid will apparently continue to post 990s)
IRS PMTA 2022-01 Basis of Assets of Former Public Charities for Section 4940 Purposes https://irs.gov/pub/lanoa/pmta-2022-01.pdf…
Advocacy that could cross the line for 501(c)(3) prohibited political campaign intervention includes advocacy on wedge issues between candidates. But now that EVERYTHING is a wedge issue, guidance on such advocacy has become very problematic.
Public charities: Reg 56.4911-2(b)(5) Special rule for certain mass media advertisements (re grass roots lobbying) – social media? of course, but ..
Would be great to have the IRS give 501(c)(3) exemption letters to single member LLCs (disregarded entities) whose single members are 501(c)(3) organizations. May help for state law (e.g., property tax exemption) and fundraising purposes.
Comments to Notice 2021-56 (Standards for Section 501(c)(3) Status of LLCs) accepted through Sunday, February 6 | ABA EO Committee comments forthcoming – One question: Should an LLC with individuals or non-exempt entities be able to qualify for 501(c)(3) status?
IRS Announcement 2021-18 requires filing orgs to follow the Form 990 instructions and abolishes the reasonable cause exception from penalties for using the prior reporting procedure re reporting compensation paid to management companies (Announcement 2001-33)
Race-based grantmaking, scholarships, PRIs, prudent investments – tax & civil rights legal implications being discussed | Tax issues – Operational Test, charitable class, private benefit, illegality | Individuals may be conduits to target true beneficiaries (individual recipients may receive benefits considered incidental to furthering the exempt purpose of the 501(c)(3) organization)
Applicable Anti-Discrimination Laws that may affect grantmakers – Title VII, Equal Protection, First Amendment, Section 1981, Title VI
ABA Tax Section proposed that IRS consider guidance providing that “charitable purpose” include aid or assistance to individual representatives of groups that have been impacted by structural or institutional racism regardless of whether they are themselves impoverished or distressed
Notable example Rev. Rul. 74-587 re: factors in determining charitable purpose including “minority or other disadvantaged groups” (proxy for race)
Race-based grantmaking – find a charitable purpose (use multi-factors in context), find a charitable class (no authority saying BIPOC in and of itself qualifies as a charitable class), find conduits that serve charitable purpose/class, use additional structures (c4/for-profit)
Private employers generally may not consider protected characteristics in hiring or other decisions, except if there is a “manifest” underrepresentation of minority or women employees in certain positions & employer’s plan does not “unnecessarily trammel” interests of majority
Race & employment: Use neutral hiring criterion that incorporate a broad definition of diversity like experience in / ability to work with diverse colleagues; record of breaking down barriers for themselves or others; relationships / experience working in communities served
Section 1981 prohibits race discrimination in making/enforcing contracts – What is a contract for 1981 purposes: Look at nature of opportunity to join (is it discriminatory?) and nature of program and compensation (is it a contract?) – see Anti-Discrimination Laws – Section 1981
Are private race-based scholarships subject to Section 1981? Probably not, if no strings attached. Yes, if an athletic scholarship that requires performance by student athlete (Jackson v. Drake U.). Section 1981 may apply to non-employment internships & fellowship programs.
Defense to Section 1981: First Amendment associational rights (interests of organization outweigh government’s interest in prohibiting discrimination) – e.g., Boy Scouts (may be used in racial justice space); First Amendment artistic expression.