Washington Snapshot - January 23, 2015

Senate Finance Committee Looks to Tax Reform

Hatch and Wyden Launch Bipartisan Tax Reform Working Groups

On Thursday the chairman and ranking member of the Senate Finance Committee, Senators Orrin Hatch (R-UT) and Ron Wyden (D-OR), announced five new bipartisan tax reform working groups. The groups will focus on distinct policy areas: 1) individual income tax; 2) business income tax; 3) savings and investment; 4) international tax; and 5) community development and infrastructure.

According to the statement from the Senate Finance Committee, “The groups will analyze current tax law and examine policy trade-offs and available reform options within the group’s designated topic areas. Each group will be co-chaired by one Republican and one Democrat member.” Each group will work with the Joint Committee on Taxation (JCT) to create a detailed report on their issue. The goal is to have a completed final report at the end of May.

Hatch said in the release, “With the launch of these working groups, members will have an opportunity to thoroughly examine the code and put forward smart ideas that will help lay the groundwork for a bipartisan tax overhaul…”

The Council’s policy team is examining opportunities to participate in this process, identifying the issues that could be put on the table, and expanding our constructive information and education efforts with Senators.

Other News from the Hill

President Obama Meets with Key Lawmakers

On Tuesday, President Obama met with key Congressional leaders at the White House to talk about upcoming issues and priorities. The Wall Street Journal reported that the president said, “he would work with Republicans on areas where their interests converge, including trade, simplifying the tax code and national-security issues.”

Although some issues remain highly controversial, Republicans largely saw the meeting as positive. Senator John Cornyn (R-TX), the majority whip, described the meeting as “all in all, a net plus.” Both sides favorably discussed the possibility of meeting more frequently. USA Today quoted White House spokesman Josh Earnest who said, “The president's approach to these things is there're plenty of areas where we're going to disagree, but we can't allow those disagreements to become a deal-breaker over all the areas where we might agree."

Thune Says Tax Reform Action "Will Depend Entirely" on the White House

On Thursday at the Republican Senate Retreat, Senate Republican Conference Chairman John Thune (R-SD) said, “there was ‘great interest’ from his party in reforming the tax code, arguing it would boost the economy and create jobs, according to a report in The Hill.”

But Thune stressed that “an overhaul of the tax system won’t get done this Congress unless President Obama and the White House ‘put their shoulder into it.’” Thune said, “I would like to mark bills up, but I think it will depend entirely on whether the White House wants to engage and really lean into it…”

Ryan and Ways and Means May Tackle Business-Only Reform

Tax Notes reported Friday morning that Ways and Means Chairman, Paul Ryan (R-01WI), told reporters at the Republican Retreat this week that “Republicans have not yet collectively decided whether they would insist on a comprehensive approach, and he did not rule out a business-only one.”

BNA also reported on the interview and quoted Ryan saying, “In the Ways and Means Committee, we are going to have our own retreat and we're going to discuss these matters. I don't want to get ahead of these issues before we have come to our own consensus on the committee on the direction we want to take and we haven't done that yet. We're doing that soon.”

We will keep our readers apprised of any further clarification on the agenda for Chairman Ryan and the Ways and Means Committee.

News from the Administration

State of the Union Next Week

On Tuesday evening, President Obama will deliver his sixth State of the Union address in front of a joint session of Congress. While we do not know everything that will be in the address, it has been reported that the president is likely to highlight initiatives around cybersecurity and internet access. He has been highlighting these topics in recent events leading up to his address.

We are delighted that President and CEO of the Rhode Island Foundation, Neil Steinberg, will join Members of Congress in the House chamber on Tuesday evening. Steinberg was invited by Senator Jack Reed (D-RI) to be his guest at the speech.

“Neil really personifies the values of service and citizenship. He is dedicated to Rhode Island and passionate about finding innovative ways to accelerate economic progress and help make a difference” said Senator Reed.

We will be sure to update our readers next week on anything the president said that could impact our sector. And we certainly hope Neil will post photos from the event.

IRS Releases Updated Revenue Procedures

It’s a new year and the IRS has released several updated Revenue Procedures that may be of interest to some of our readers.

• Revenue Procedure 2015-1 updates procedures for obtaining private letter rulings.
• Revenue Procedure 2015-2 updates procedures for requesting technical advice.
• Revenue Procedure 2015-9 allows grantors and donors to rely on the determination letter for Form 1023-EZ applicants.
• Revenue Procedure 2015-10 updates procedures for obtaining various foundation determinations including status as an operating foundation and type of supporting organization status. IRS Form 8940 is commonly used to request these determinations.

Any foundation that may be seeking a determination, private letter ruling or technical advice should review the most recent version of the appropriate IRS Revenue Procedure to avoid any outdated instructions and errors. Check out the IRS website to learn more.

Update on Government Cost Reimbursement to Nonprofits

As we reported last week, the White House Office of Management and Budget (OMB) has finalized new rules on government grantmaking that will benefit nonprofits that receive government dollars.

This week, Tim Delaney, President & CEO of the National Council of Nonprofits, wrote an encouraging op-ed in The Chronicle of Philanthropy celebrating these new rules and calling for nonprofits and foundations to work together to apply these new rules.

Delaney said, “They [the rules] promise benefits for everyone: governments, nonprofits, grant makers, and the public. Nevertheless, the real work has only just begun. Nonprofits and foundations will play a critical role in determining whether the new rules are carried out in a way that meets their full promise—or if they end up doing little.”

Trending in Legal Affairs

Questions on Unrelated Business Income Tax

The impact of commercial activity on tax exemption is a muddled area of the law. It is no surprise then that the legal team receives requests for opinions on whether a proposed activity that will yield an economic profit would subject the foundation to an unrelated business income tax.

One particular request involved a community foundation that was asked to serve as an agent for a church that wanted to establish an endowment. The endowment would make program related investment loans to a charity the church supported – a Christian radio station. The church had asked the foundation to do recordkeeping for them and in return, would pay the foundation a fee. Cautiously, this member queried whether the fees received would be unrelated business income.

Very generally, and without addressing the many specialized exceptions, an unrelated trade or business is an income-producing activity that is regularly carried on and not “substantially related” to an organization’s exempt purposes apart from the need for income to support its charitable or other exempt mission. IRC §§ 511-14.

While Legal Affairs cannot provide definitive legal advice on matters, our opinion is that the fees received would not be unrelated business taxable income to the foundation. While bookkeeping, indeed, is a type of trade or business, the line of inquiry was whether the activity of keeping the church’s records would rise to the level of “regularly carried on.” Consulting the Treasury Regulations, Legal Affairs determined that while record keeping for the church for a fee would likely be “regularly carried on,” the income would be mitigated by the fact that doing so is substantially related to the foundation’s exempt purpose. Since the foundation’s mission is to assist small nonprofits, providing bookkeeping services for the church for a fee probably would not be unrelated business income.

To make this trending topic all the more relevant, this week, the IRS released Publication 598 Tax on Unrelated Business Income of Exempt Organizations.

For more information on this or any other tricky legal matters, please contact the Council’s Legal Affairs team at legal@cof.org.

Access to the Council’s legal team is a valuable member benefit. Council attorneys are available to discuss your legal questions and to provide legal information by telephone, email and through our various publications and newsletters. This information is intended for educational purposes and does not create an attorney-client relationship. The information is not a substitute for expert legal, tax or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.

Philanthropy News and Op-Eds

Emmett Carson Pushes Back Against Critical Article

This week in a letter to the editor published in the SF Gate, CEO of the Silicon Valley Community Foundation, Emmett Carson, Ph.D., pushed back against a previously published article critical of donor advised funds. Carson said the article “paints a distorted and dangerous view of charitable giving. Uncontested, it discourages giving when we want it most.”

In the original article, Joe Garofoli had questioned the motivations and practices around donor advised funds and quoted one source who outrageously equated DAFs with money-laundering.

Carson responded, “Thousands of everyday Americans use community foundations and other donor-advised funds providers to support causes they believe in. Suggesting that this choice amounts to “money-laundering” is inflammatory and disingenuous. Like farmers storing grain for inevitable hard times, these donors want to be strategic and flexible in their giving.”

Governor of Maine Proposes Taxing Large Nonprofits

Maine Governor Paul LePage (R) has proposed a plan that would “eliminate state revenue sharing with municipalities in exchange for allowing them to tax larger nonprofit organizations” according to the Portland Press Herald. This measure would allow towns and cities to collect property taxes on nonprofits with “$500,000 or more of assessed value.”

According to the article the biggest impact would be on colleges and hospitals, as churches and municipalities would remain tax exempt. This troubling proposal highlights an important trend, state and local governments are looking for revenue anywhere they can find it. We will be sure to watch this issue as it develops.