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Archives
June 2001
New Tax Law Lacks Goodies for Exempt Organizations
There is disappointingly little that is good for exempt organizations in the tax bill President Bush signed into law in early June. Working versions of the bill had contained several friendly features, including provisions allowing tax payers who do not itemize to deduct charitable donations, more generous ceilings on corporate gifts to charities and tax-free charitable donations from IRAs. None of these provisions made it into the law. Also dropped from the final package were provisions contained in the Senate version that would have exempted state and local political committees from federal notice and reporting requirements. Nonetheless, there are several provisions in the new law that should be of interest to exempt organizations. The following are a few of the highs and lows:
Phase-out of the Estate Tax
The estate tax exemption is gradually increased from $1 million this year to $3.5 million in 2009 and the highest level estate tax rates are incrementally repealed. In 2010 the estate taxes are repealed altogether. Reductions in rates and the ultimate repeal of the estate tax are expected to result in diminished lifetime and testamentary charitable donations. Donors may be less generous in outright gifts to charity and split interest trusts which reduce both current taxable income and taxable estates.
Increased Contribution Limits to Qualified Pension Plans and IRAs
Elective deferrals by employees in 403(b), 401(k), and 457 plans are currently limited to $10,500 annually. Employees of nonprofits will be interested to know that under the new law, the ceiling will be raised to $15,000 by the year 2006. In addition, the law decouples the limits on section 457 plans and other qualified plans, so if an employee has both a 457 plan and a 403(b) plan, the limit on contributions to each plan will be $15,000, regardless of how much money is contributed to the other plan.
Expansion of the Estate Tax Rule For Qualified Conservation Easements
The law eliminates restrictions on the location of the land, thus allowing qualified conservation easements on lands located anywhere in the U.S. or its possessions.
By Paul J. Tanis
Gifts That Keep on Costing: The Rules Governing Foundation Grants to Individuals
Private foundations are taxed on grants to individuals for "travel, study, or other similar purposes," unless they receive advance approval for their grant-making procedures. Foundations that make disbursements to individuals need to understand this rule because the penalties for lack of compliance can be stiff: Taxes may be levied not only on the foundation making the grant, but also directly on any officer, director, trustee or other foundation manager who agrees to make the expenditure knowing that it is taxable. If the foundation fails to remedy a taxable expenditure by seeking reimbursement, foundation taxes escalate to 100% of the amount of the expenditure and 50% of the amount of the expenditure can be levied against any foundation manager who does not agree to a correction.
IRS has issued useful guidance on this topic, although applying the guidance in particular situations can be tricky. The following are examples of disbursements that require advance approval of the grant-making procedure:
- a grant made to an individual to further the individual's scientific research;
- scholarships, fellowships, internships, and certain prizes and awards;
- some program-related investments, such as microenterprise loans.
- a grant to an indigent person for the purchase of furniture
- compensatory payments, such as salaries, consultant fees, and reimbursement of travel and other expenses incurred by or on behalf of the organization.
To obtain IRS advance approval for a program of travel and study grants, a foundation must send a request to the IRS fully describing the foundation's procedures for awarding grants and demonstrating that the grants are used for proper purposes. In general, the foundation must 1) demonstrate to the IRS that the grants will awarded on an objective and nondiscriminatory basis, 2) describe the foundation's reporting and record keeping procedures, and 3) explain the foundation's procedure for exercising supervision over grants. If the IRS has not responded within 45 days of the date of submission, the foundation is entitled to consider the application approved. If the IRS later notifies the foundation that the advance ruling was disapproved, grants made prior to actual notice of the disapproval are not considered taxable expenditures and receive the favorable treatment they would have had if the advance ruling had been approved.
By Paul J. Tanis
Private Access Can Result in Private Benefit
In a recent letter ruling, the IRS ruled that a tax-exempt trust could not allow a writer to have exclusive access to its archive of historical materials without jeopardizing its tax exempt status. The ruling is interesting because the IRS' decision turned on the issue of access, not the writer's family relationship to the trust.
The trust in question, classified as a private foundation, is run primarily by members of one family and maintains an archive of documents and other materials relating to the life and times of one preeminent family member. Owing to the fragile nature of many of the documents and ongoing conservation efforts, the collection is closed to the public. The trust sought IRS advice when the great-niece of the family member who started the foundation requested access to the foundation archives in order to research primary sources for a book about her ancestor, for which she had already signed a contract with a publisher. The foundation did not request or authorize the book and would not receive payment for the author's use of the archives.
Despite the author's family relationship to the trust and service on several of the foundation's advisory committees, the IRS found that she does not meet the statutory definitions of a "disqualified person" and therefore would not be at risk for excise taxes on self-dealing. However, the IRS ruled that allowing the author to have exclusive access to these materials would enable her to receive significant private benefit through her book contract. Therefore, this transaction would be inconsistent with the trust's public, charitable purpose and would jeopardize the trust's tax exemption.
The ruling is a reminder that nonprofits that have at their disposition unique resources that could be exploited for private, commercial purposes should ensure that access to these resources do not primarily benefit any one person or group. It also underlines the fact that the IRS frequently turns to the concept of "private benefit" to regulate transactions that are technically legal but that are inconsistent with a 501(c)(3)'s public, charitable purposes.
By Mark Sawchuk
Don't Hold Your Breath on IRS Internet Guidance
Nonprofits who are expecting guidance on how to apply IRS regulations to their web-based activities will be disappointed to learn that the IRS has not made much progress in this direction.
Last October, the IRS issued Announcement 2000-84, a request for comments on exempt organization web activities [see NN 12/00, p. 1]. But the IRS' recently released business plan for the 2001-2002 fiscal year lacks any guidance projects pertaining to the activities of exempt organizations on the Internet. IRS Exempt Organization Specialist Judith Kindell recently confirmed that while the IRS has received over 4,000 responses to Announcement 2000-84, it has not had an opportunity to read them all.
Ms. Kindell indicated that many respondents misunderstood Announcement 2000-84 as an indication of IRS plans to regulate the Internet. She emphasized that the IRS does not intend to draft separate standards or radical new rules for web-based activities when these are equivalent to non-Internet activities that are already regulated.
By Mark Sawchuk
Avoiding Excess Benefit
Earlier this year, the IRS issued extensive-and complicated-temporary regulations on intermediate sanctions, the excise tax levied on top officials of nonprofit organizations who receive excess compensation for their services [see NN 2/01, p. 1]. As a welcome example of the "kinder, gentler" IRS approach to tax-exempt organizations, Steven Miller, Director of Exempt Organizations, has released a plain-language explanation of how charities can take advantage of a procedure for creating a "rebuttable presumption of reasonableness" that is contained in the regulations. While Mr. Miller's suggestions are not official IRS policy, they will help charities satisfy the requirements of this procedure.
The rebuttable presumption procedure enables a charity whose board obtains certain "compensation comparability data" to set compensation levels for its top officials that will be presumed by the IRS to be reasonable. This data may be based on industry surveys, documented levels of compensation being paid to persons holding similar positions in similar organizations, or expert compensation studies carried out by professional consultants. Charities using this procedure must accumulate separate compensation data for each affected position. If possible, the comparability data should make use of all forms of compensation, including salaries, bonuses, deferred compensation, fringe benefits, liability insurance premiums, and foregone interest on loans.
Mr. Miller stresses that charities must keep careful and detailed records of the compensation comparability data they relied on and the means by which they obtained the data-for example, through documented telephone inquiries. The board should also keep records of the terms of the approved compensation package, which board members participated in the decision, and any action of a board member with a conflict of interest.
To read all of Mr. Miller's suggestions, access the Chronicle of Philanthropy's web site at www.philanthropy.com/free/update/2001/05/2001051401.htm.
By Mark Sawchuk
Intermediate Sanctions Hearing Scheduled
When the long-awaited intermediate sanctions regulations were released earlier this year, many in the exempt organization community were surprised because the IRS classified them as temporary and requested additional comments, particularly with respect to donor-advised funds. Now the IRS has scheduled a public hearing on the regs for July 31, 2001, at 10 am in Room 7218 of its D.C. building located at 1111 Constitution Avenue, NW. Those who previously submitted written comments and wish to present a 10-minute oral commentary at the hearing should submit an outline of the topics to be discussed (signed original and 8 copies), with a breakdown of the amount of time to be devoted to each topic. Outlines must be received by July 10 and should be sent to the Internal Revenue Service, Regulations Unit CC (REG-246256-96), Room 5226, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Alternatively, outlines may be sent to the IRS web site at www.irs.gov/tax_regs/regslist.html.
By Mark Sawchuk
Directors' and Officers' Liability for Corporate Misdeeds
A principal reason to incorporate is to limit liability. In most circumstances, corporate directors, officers and shareholders (in the nonprofit context, a membership organization's members) may not be called upon, by virtue of their position, to use their own assets to pay the corporation's debts.
Volunteer Protection Laws
Nonprofits have additional protections for their volunteers including unpaid directors and officers under both federal and state law. All 50 states and the District of Columbia have some form of volunteer protection statutes, typically requiring that the charity carry some level of liability insurance as a prerequisite for coverage under the statutes. Three years ago, Congress passed the Volunteer Protection Act, which further limited volunteer liability and capped punitive damages [see NN 7-8/97, page 2].
Despite these protections, nonprofit directors and officers, volunteer or paid, can be found personally liable for corporate misdeeds under certain circumstances.
The federal and state volunteer protection statutes have a laundry list of requirements. Volunteers must be acting within the scope of their responsibilities and the action cannot have been willful or caused by gross negligence or reckless misconduct. Frequently, the volunteer will not be protected for illegal actions, although some jurisdictions extend protection to actions that the volunteer had no reason to know were illegal. Unless the action causing the injury falls into the categories enumerated by the governing protective statute, the volunteer status of the person will not provide any additional protection.
Piercing the Veil (Limited Liability Loopholes)
In some rare instances, volunteer board members can be held personally liable for wrongful actions of a nonprofit corporation. A director or officer who "personally participates" or cooperates in a corporation's wrongful or illegal action, can be held personally liable. This is true even if the action is taken in the name of the corporation and the corporation is also liable.
In some cases, simply voting in favor of a wrongful or illegal action can amount to "personal participation." For example, in 1975, the Fourth Circuit held the directors of a community swimming pool personally liable for damages because they voted to approve a policy discriminating against black applicants. In that case, the court held that although an attorney had advised the board that the policy was legal, the advice did not protect the directors from liability because the policy amounted to intentional wrongdoing.
In an earlier case, volunteer directors were held personally liable when they voted to transfer leased farm equipment to a bank as security on a mortgage. Their claim of ignorance of the lease was to no avail, because they were negligent in not determining the status of the farm equipment prior to the transfer.
The best way to protect the assets of nonprofit directors and officers is to purchase directors' and officers' insurance and to include in the corporate documents provisions allowing the corporation to indemnify board members and agents from liability incurred in performing duties for the organization.
By Doug Smith
Watch Those Independent Expenditures
The Nonprofit Navigator periodically features articles by experts in the nonprofit community. This article, written by Liz Towne of the Alliance for Justice, was originally distributed by the Alliance through its Nonprofit Action Network (NPAN), an e-mail network that keeps members informed of the latest developments in nonprofit advocacy. To join NPAN, visit www.afj.org/fai/npansign.cfm.
The Federal Election Commission has finalized its new regulations that define when a communication is coordinated with a candidate, campaign, or party committee [see NN 1/01, p. 1]. The regulations, which took effect May 9, were drafted in response to the United States District Court for the District of Columbia's decision in the FEC vs. The Christian Coalition case.
Third-party organizations can make expenditures on communications that expressly advocate the election or defeat of a clearly identified candidate. These expenditures, referred to as independent expenditures, occur when a third party pays for and creates, distributes or produces a political communication. As the name implies, independent expenditures cannot be coordinated with a candidate, campaign, or political party.
Under the new regulations, there are three instances where a permissible independent expenditure on a political communication loses its independent nature and becomes a coordinated communication. A coordinated communication will result where:
- the communication is requested or suggested by the candidate, campaign, or political party;
- the candidate, campaign, or political party has exercised control in the decision-making authority over the content, timing, location, mode, intended audience, volume of distribution, or frequency of placement; or
- the candidate, campaign or political party has had substantial discussion or negotiation with the third-party about the content, timing, location, mode, intended audience, volume of distribution, or frequency of placement of the communication.
The new coordination regulations define political communications to include those that are broadcasted, placed in newspapers, magazines, outdoor advertising facilities, and mailed or included in any electronic medium, including the Internet.
These new regulations may soon be supplanted by campaign finance reform legislation [see NN 4/01, p. 1]. Provisions of the McCain-Feingold campaign finance reform bill (which passed in the Senate on April 2, 2001) direct the FEC to promulgate new coordination rules with a broader definition of coordination. If campaign finance reform becomes law and this provision remains, the FEC will have to go back to the drawing board to begin drafting new coordination regulations.
By Liz Towne
This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.
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