Meeting of the Exempt Organizations Committee of the American Bar Association’s Section on Taxation – January 21, 2005

The highlights:

Introductory Session:

The panel briefly mentioned new laws on the treatment of donations of:

(i)                  intellectual property (Notice 2004-7); and

(ii)                used cars (see addendum to Publication 4302).

Martha Sullivan, Director Exempt Organizations Division, participated by phone and described some of the structural changes to her division, including:

(i)                  a new data analysis unit;

(ii)                a new compliance unit; and

(iii)               new agents to help with the compliance initiatives.

Native American Philanthropy:

Native Americans make up 1.5% of the nation’s population but receive only 1/6 of 1% of philanthropic funds.  80% of Native Americans live below the poverty line.  The effect of gaming on the wealth of Native Americans is typically overestimated.  In 2000, about 3000 tribes engaged in gaming that brought in roughly $8 billion in revenue.  However, despite the large revenues, it should be noted that only 10 tribes made 50% of the total gaming revenue, and many tribes earned very little profit.

There are three structural considerations for tribal foundations:

(i)            incorporate (advantage:  separate identity from government and gaming operations; disadvantages:  governmental immunity from suit may be compromised);

(ii)          organize under state law or tribal law, if applicable law has been or will be enacted (note:  some tribes may have some concern or distrust for falling under state law);

(iii)        gain exemption under 501(c)(3) or 7871 (as a government or subdivision of government entitled to statutory immunity if it is an “integral part”).

Government and Government Affiliates:

Five types of entities were compared:

(i)           State or political subdivision (no filing requirement; 50% charitable contribution limit);

(ii)         Integral part of state or political subdivision (generally no filing requirement, but with exceptions, such as for insurance companies; 50% charitable contribution limit);

(iii)        Section 115 entities (must file Form 1120; 30% charitable contribution limit);

(iv)        Instrumentality (must file Form 1120; 30% charitable contribution limit);

(v)         501(c)(3) organization (50% charitable contribution limit as publicly supported or supporting organization of governmental entity; exempt from filing Form 990)

Using Exempt Organizations as Tax Shelter Accommodation Parties is Not Exempt from Problems:

Robert Wexler, Partner, Silk, Adler & Colvin, described the use of exempt organizations as accommodation parties in tax shelters and noted that the increased scrutiny of exempt organizations has created an unfavorable climate for shelter promoters seeking to use exempt organizations as accommodation parties.  The structure of shelter transactions depends on the presence of 4 parties:  See Notice 2004-30.

Concluding Remarks:

The panel members from the IRS warned about the following abusive transactions:

(i)          exempt organizations serving as accommodators and/or promoters of fraudulent tax shelters;

(ii)          supporting organizations designed to support individuals rather than charities;

(iii)         credit counseling organizations engaged in fraudulent activities;

(iv)         s corporation buy-back from exempt organization;

(v)          donor advised funds in which the donor retains ultimate control of funds