This Week in Tax Reform
The discussion around tax reform is still alive and well, as demonstrated by hearings this week in both the House and the Senate.
On Tuesday, Chairman Orrin Hatch (R-UT) of the Senate Finance Committee held a second hearing on corporate tax integration: Debt vs. Equity, Corporate Integration Considerations. Our readers are familiar with the potential negative implications of corporate integration on philanthropy. Chairman Hatch has acknowledged these concerns and has indicated that he intends to craft a plan that accounts for them.
Importantly, Chairman Hatch noted that his discussion draft for a corporate integration plan will be released soon—perhaps sooner than the end of June, as we previously expected.
In the House, Chairman of the Ways and Means Tax Policy Subcommittee, Charles Boustany (R-LA), held a hearing to discuss Perspectives on the Need for Tax Reform. Ideas focused on simplification of the tax code and spurring economic growth. This is the fourth in a series of tax reform hearings in the House.
Council on Location: The World Humanitarian Summit
The World Humanitarian Summit—which took place this week in Istanbul—was a two-day event organized to discuss how the global community delivers aid for the world’s most vulnerable people.
Participants included the Council’s Director of Global Philanthropy, Natalie Ross, government representatives, civil society organizations (including several Council members), and more than 350 corporate attendees.
To read more about this event, you can read Natalie’s blog post in Alliance Magazine here.
“Industry Issue Resolution” Program Expanded to Include Tax-Exempt and Governmental Entities
Recently, the IRS released Rev. Proc. 2016-19 effectively expanding the “industry issue resolution” program (IIR). This expansion now allows tax-exempt and governmental entities to resolve frequently disputed or burdensome tax issues through pre-filing guidance rather than post-filing examination. The Council welcomes this inclusion and believes it will allow the philanthropic sector to get more directly involved in the regulatory processes.
Previously, the IIR program was available to taxpayers under the IRS jurisdiction of the Large Business and International (LB&I) and Small Business and Self Employed (SB/SE). This meant only taxpayers under those designations, and industry associations representing them, could resolve issues on an industry-wide basis, as opposed to taxpayer-by-taxpayer. The benefit is they could suggest issues and possible options for resolution.
Once issues are submitted, the IRS, in conjunction, with the Department of Treasury, evaluates the suggestions and attempts to select issues from different industries. If selected, the guidance will be in the form of a Revenue Procedure or Revenue Ruling.
Rev. Proc. 2016-19 now allows taxpayers under the jurisdiction of the Tax Exempt and Government Entities (TE/GE) division to avail themselves of the IIR program. And this is good news considering the significant delays the sector has previously experienced in, for example, the Equivalency Determination matter, and other complicated regulatory processes. As such, issues confronting the grantmaking and philanthropy sectors may now be selected for guidance.
Scholarships & Quid Pro Quos: Honoring Those Who Served Through a Writing Competition
A prospective donor, an organization dedicated to veterans’ history and affiliated with a local historical society, approached a community foundation about establishing a creative scholarship program. The scholarships would benefit students at area colleges majoring in history, and the primary criteria for selection was based on the submission of a scholarly essay on veterans or military history related to the region. The selected students’ essays would then be added to the organization’s archives of local veteran history.
Intrigued with establishing such a scholarship, the foundation contacted the Council to see whether there were any legal considerations they should be aware of.
First, Legal Affairs advised on the potential tax liability the recipients may face. Since the selected essays will be archived, the issue that arises is whether under § 117 of the Internal Revenue Code, the scholarships would be viewed by the IRS as payment for research or other services as opposed to a qualified scholarship. If the recipients are required to grant intellectual property rights in the essays to the historical society as part of the selection process, it may turn part or all of the scholarship into taxable income. In essence, it could be a quid pro quo (i.e., payment for the paper). The legal team informed the foundation that recipients can avoid the tax if their essays were not required to be added to the archives. In this regard, the awarded students could voluntarily donate their papers to the historical society.
In addition, the legal team cautioned that if the organization is to be the donor to the fund, the foundation should carefully consider the composition of the selection committee. Pursuant to the Pension Protection Act, the foundation must ensure the committee is not controlled by the donor in terms of numbers. If, in the event, more than a majority of the selection committee is associated with the organization for the purpose of judging the essays, the foundation will need to document that such members were appointed because of objective criteria related to their expertise (i.e., local experts in military history). Such a practice, said the legal team, would help overcome the argument that those persons were only appointed because of their relationship to the donor organization.
For more information on this or any other tricky legal matters, please contact the Council’s Legal Affairs team at email@example.com.
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.
Exclusive from our colleagues at the National Council of Nonprofits.
Reversing the Trend on Tax-Exemption Challenges
All 50 states exempt from taxation the property owned by foundations and charitable nonprofits when used for their charitable missions. Yet national headlines report of court challenges in New Jersey against Princeton University and a major hospital, Connecticut legislation targeting Yale University and other large nonprofits, Massachusetts bills legalizing demands for payments in lieu of taxes (PILOTs), and tax assessors in Michigan nibbling away at the standards for demonstrating tax exempt status. To name only a few examples. 2016, however, is shaping up to be the year when the collective response of foundations and nonprofits reverse the trend from suffering challenges to demonstrating the value and impact of the exemption.
In response to more than 40 cases of inconsistent interpretation of the law by tax assessors, legislation in Michigan seeks to remove the subjectivity in how county tax assessors determine what a charitable institution is entitled to with regard to exemption from property taxes. The bill is being promoted by the Michigan Nonprofit Association and the Council of Michigan Foundations.
Nonprofits in New Jersey are joining in the Princeton litigation by filing friends-of-the-court briefs and exploring legislative options to address problems created by recent procedural rulings that leave nonprofits and other property owners vulnerable to arbitrary property tax challenges. The case pending against Princeton has been brought by a small group of local residents who are asserting that the university should no longer be considered a charitable nonprofit eligible for tax exemption, and they are suing the local government as well for failing to enforce the law. Moreover, the judge in the case has declared that the university has the burden of re-proving its property tax exemption in response to the residents’ challenge, even though it has been deemed by the municipal tax assessor to be tax exempt. The broader nonprofit community is very concerned about the ability of third parties to challenge exemptions recognized by governments in part because of the cost and uncertainty such lawsuits impose. More importantly, nonprofits recognize that the third-party lawsuit option empowers disgruntled residents to harass organizations with missions they oppose, such as reproductive health, substance abuse treatment, or environmental concerns.
Impact litigation is another approach to restoring tax exemptions. Foundations and nonprofits in Minnesota have been bedeviled for years by efforts of local governments to get around property tax exemptions by imposing special assessments and fees on such things as street lights. This year, the Minnesota Council of Nonprofits and others shifted their advocacy strategy away from appeals to reasonableness by city officials and turned to the courts. A lawsuit before the state Supreme Court addresses the question of whether organizations exempt from property taxation should “be required to pay local taxes disguised as regulatory service fees and used to finance general government services properly paid through ad valorem [property] taxes.” In an amicus brief, the state association of nonprofits stated the argument succinctly: “When municipal taxes collected for the provision of general city services are recast as fees, as the City has done with its [right of way] assessment, the privilege and entitlement of tax-exemption is wrongfully and detrimentally eroded.” The Supreme Court is expected to rule on the case in the coming weeks.
Charitable Giving Needs to be Encouraged
Earlier this month, former Senator Judd Gregg (R-NH) proposed that Donald Trump cut tax rates by “slicing back the major deductions such as those for health insurance, state and local taxes, and charitable donations.”
The Council was instrumental in a response by the Charitable Giving Coalition that was published in The Hill last week. The response makes clear that “limiting the value of the charitable deduction would inhibit the ability of charities to serve individuals and communities across the country during a time when charities continue to struggle raising additional funds to meet increased demands for their services.”
The response also recognizes Trump’s commitment to preserving the charitable deduction and supports the CHARiTY Act (S. 2750) introduced by Senators Thune (R-SD) and Wyden (D-OR) which likewise demonstrates the importance of preserving the full scope and value of the deduction.
You can support this bill as well by contacting your Senators and asking them to co-sponsor this legislation. Send an email using our automated system today.