Archives                                                                           May 2002 Cover Story IRS Releases Final Corporate Sponsorship Regs Election Connection IRS Grants Amnesty Period to Negligent PAC Report Filers Employment Matters D.C. Government Extends COBRA Benefits Court Cases Wrongful Termination for Doing the Right Thing: Riggs v. Home Builders Institute IRS Update IRS Makes Welcome Changes to Form 990's Schedules A and B IRS Releases Final Corporate Sponsorship Regs After more than two years, the IRS has at last released finalized corporate sponsorship regulations for exempt organizations. The regulations provide guidance on the application of unrelated business income tax (UBIT) to sponsorship payments received by an exempt organization. While the regulations are mostly identical to the proposed regulations released in March, 2000, there are some noteworthy changes regarding the "insubstantial value" exception, exclusive provider arrangements, and internet links to the sponsoring organization. The finalized regulations confirm that sponsorship payments made to an exempt organization by a business or corporate donor will not be subject to UBIT as long as there is no expectation or arrangement that the donor will receive a substantial return benefit in exchange. Under this safe harbor, these "qualified sponsorship payments" will be treated the same as any other corporate contribution to the nonprofit organization and contributions of money and property will constitute public support for section 501(c)(3) public charities. If a nonprofit does provide a substantial return benefit to its sponsor, only the portion of the sponsor's payment that exceeds the fair market value of the return benefit will be allocable as a qualified sponsorship payment. Whether the remainder could be subject to UBIT depends on traditional UBIT analysis (e.g., royalty income is not subject to UBIT). Consistent with section 513(i) of the Internal Revenue Code, the IRS has defined a "substantial return benefit" as a benefit other than 1) the exempt organization's use or acknowledgment of the sponsor's name or logo in connection with its activities; or 2) the provision to the sponsor of certain goods or services having an insubstantial value. Regarding the first point, the final regulations adopt the proposed regulations' distinction between an acknowledgment and an advertisement, which is considered a substantial benefit. [For examples of permissible acknowledgments, see NN 4/00]. The IRS has altered course slightly regarding the second point. The proposed regulations defined goods or services having "insubstantial value" as those having a fair market value of not more than 2% of the sponsorship payment or $79 (originally the cap was $74, but it has since been adjusted for inflation). In response to criticism from the exempt organization community, the final regulations scrap the $79 ceiling. Under the final regulations, benefits are disregarded if their aggregate fair market value for the organization's tax year is not more than 2% of the amount of the payment. Nonprofits may be disappointed by the IRS's decision to finalize a standard regarding exclusivity arrangements. An exclusive sponsor arrangement is a sponsorship payment made to a nonprofit in exchange for the right to be the only sponsor of an event or activity, or the only sponsor representing a particular trade, business or industry. This type of sponsorship does not itself create a substantial return benefit. However, an exclusive provider relationship, where the exempt organization agrees to limit the sale or distribution of products or services that compete with those of its sponsor, does result in a substantial benefit to the donor. In this instance, the portion of the sponsorship payment attributable to the exclusive provider arrangement may be taxable, depending on the application of traditional UBIT analysis. For example, a university could enter into an agreement by which a particular soft drink company is the only soft drink sponsor of a particular sporting event. This kind of exclusive sponsor agreement does not in itself result in UBIT. However, if part of the agreement is that the college can only sell that company's soft drinks at its football games, then this does result in unrelated business income. On the other hand, the supplementary information accompanying the regulations point out that in some cases an exclusive provider relationship does not result in UBIT because of traditional UBIT analysis: if the agreement with a soft drink company provides that the company sells its product only through vending machines that the company stocks and maintains, then the university might not have the requisite active involvement in the sales to trigger UBIT. Although there are ways around the exclusive provider rule, many nonprofits have criticized the rule on the basis that it will stifle their ability to attract lucrative sponsorship agreements. The regulations offer two useful examples of how a nonprofit can provide hyperlinks to a sponsor's web page (i.e., by clicking on the sponsor's logo) from its own web site without incurring UBIT liability. Taking its cue from comments submitted in response to the proposed regulations, the IRS reasoned that such a link constitutes a permissible acknowledgment of the sponsor. If the nonprofit couples a hyperlink with an endorsement to purchase the sponsor's products or services, however, the hyperlink will be considered an advertisement subject to UBIT. While the regulations explicitly state that these examples apply only to sponsorship transactions, nonprofits can take comfort from the fact that the IRS clearly considered commentary from the exempt organization community in drafting this portion of the regulations. It is to be hoped that the IRS will do likewise when it addresses web issues that affect other activities of nonprofits. The regulations are available through the Federal Register, Vol. 67, No. 80, 4/25/02. You can access the Federal Register at the Government Printing Office's web site, www.access.gpo.gov/su_docs/index.html. By Mark Sawchuk IRS Grants Amnesty Period to Delinquent PAC Report Filers The IRS has announced a voluntary compliance program for section 527 political organizations that have not satisfied new reporting requirements enacted by Congress in June, 2000. This program applies to 527s that have either failed to file certain forms or need to correct previously filed forms. The voluntary compliance program, enacted in the wake of widespread confusion regarding the new 527 reporting requirements, establishes an amnesty period for the filing of IRS Forms 8871, 8872, 990 and 1120-POL. The IRS will not impose any tax, penalties, or interest on a delinquent 527 as long as the organization files or corrects a missing or incomplete form by July 15, 2002. This amnesty does not apply to requirements that pre-date the new law, so tax will still be due on investment income reported on Form 1120-POL. Political organizations will definitely want to take advantage of this amnesty program; an organization that does not file Form 8872 by the due date, for example, will be subject to a tax of 35% on contributions and expenditures not disclosed on the form. The 2000 legislation enacting these reporting requirements was primarily aimed at so-called "soft money PACs" that do not report to the FEC. However, it has imposed an unfortunate "double whammy" on state and local PACs, many of whom must now file disclosure reports with the IRS as well as with state and local agencies. Proposed legislation that would have eliminated some of these duplicative filing requirements for state and local PACs was defeated in Congress last month, so many of these organizations should look into the amnesty program. National organizations may want to consider whether their local affiliates which operate PACs that participate in elections for state, county, or municipal office would benefit from the amnesty. For more information on what forms your organization should file, see NN 3/02 or visit the section of the IRS's web site devoted to 527 organizations, www.irs.gov/polorgs. IRS Fact Sheet FS-2002-11 is a particularly helpful guide to the new filing requirements, and Notice 2002-34 describes how to take advantage of the voluntary compliance program. By Mark Sawchuk D.C. Government Extends COBRA Benefits The District of Columbia City Council has recently passed legislation that will extend eligibility of health benefits continuation coverage to employees of small organizations who do not currently qualify for Federal COBRA. Under the federal law known as COBRA, when employees terminate their employment, they and their dependents must be given the option of continuing their group health benefits at their own expense for up to 18 months [see NN 9/01 for more information on COBRA requirements]. However, federal COBRA applies only to organizations with 20 or more employees. D.C. law now requires that employers with fewer than 20 employees extend continuation benefits to employees and their dependents, provided that the employees meet certain criteria for coverage. Under the D.C. law, continuation benefits are only extended to employees for three months, as opposed to 18 months for Federal COBRA. Employees are required to pay the full cost for the continuation of coverage, which cannot exceed 102% of the group rate. Employers must notify terminated employees of their right to continue coverage no more than 15 days after the health benefits coverage ends. Workers who elect to continue coverage must pay the full amount for their continuation within 45 days after termination of coverage. Employees who are terminated for gross misconduct or qualify for Federal COBRA benefits are not eligible for the D.C. benefits. The D.C. "Continuation of Health Coverage Emergency Act of 2001" became effective on an emergency basis on December 17, 2001. Any employer with health insurance contracts issued or renewed by health insurers on or after 30 days after the effective date of the Act, December 17, 2001, must be in compliance. By Anne Cornelison Wrongful Termination for Doing the Right Thing: Riggs v. Home Builders Institute In an interesting decision in the United States District Court for the District of Columbia, an employee won the right to bring a wrongful termination suit against his former nonprofit employer after refusing to engage in illegal activities on the nonprofit's behalf. Mr. Frank Riggs, former President and Chief Executive Officer of the section 501(c)(3) nonprofit organization Home Builders Institute (HBI), alleged that he had been fired for refusing to involve himself in political and legislative activities on behalf of the National Association of Home Builders (NAHB), the organization for which HBI serves as the educational and training arm. According to Riggs, these activities would have violated section 501(c)(3) of the Internal Revenue Code, as well as Department of Labor regulations prohibiting the use of certain federal funds for lobbying and political activities. Riggs also declined to use his influence as a former Congressman and national leader of the Republican Party to advance NAHB's efforts to influence political campaigns and legislation. The court reasoned that "there is a clear mandate of public policy against the subsidization of private political activity by the taxpayers in this case . . . that is solidly based on section 501(c)(3) and [Labor Department regulation] 20 C.F.R. § 638.814." Accordingly, it ruled that Riggs had stated a valid legal claim for wrongful termination in violation of public policy. Wrongful termination suits are an exception to the at-will employment doctrine which allows employers to terminate their non-contractual employees at any time, for any reason. By Anne Spielberg IRS Makes Welcome Changes to Form 990's Schedules A and B As nonprofits put together the information needed to complete their 2001 Form 990, they will appreciate several changes that the IRS has made this year to Schedules A and B. The changes help clarify some of the return's more mystifying sections. Section 501(c)(3) public charities are required to file Form 990-Schedule A every year. The central feature of this form is a public support grid, where charities list their receipts over the past four fiscal years and compute their level of public support. For years, the support grid has required an organization to attach a list of "excess contributors" who have given more than a specified amount to the organization over the calculation period. On the 2001 return, however, the instructions direct the preparer to create a list of excess contributors for the organization's records, not to include the list with the filed return. The same is true for organizations that wish to exclude certain "unusual grants" from their public support calculation. Whereas previous returns asked the organization to attach a list showing the name of the grantor and other information about such grants, the 2001 return directs the organization to file that list with its records instead of with the IRS. [See NN 4/01 , NN 5/01, and NN 12/01 for information about the public support test]. The IRS has also entirely rewritten portions of the accompanying instructions to Part IV and Part IV-A of Schedule A. The new instructions contain more examples and do a better job of explaining the complex rules that govern the public support test. The IRS has even provided a sample list of "excess contributors" so that charities have an example of the kinds of records they should be keeping. These changes should make filling out Schedule A slightly easier, and may reassure charities concerned about donor privacy. While the IRS was never supposed to make excess contributor and unusual grant lists publicly available, not filing them at all eliminates the possibility that the lists might accidentally be released. The issue of donor privacy is one of the main reasons that the IRS has substantially modified Schedule B of the 990. Schedule B is a simple form on which exempt organizations provide information about their major contributors for the year. Schedule B was created for the 2000 return to standardize the method of reporting donor information, but the form gained notoriety thanks to a statement across the top saying "This form is generally not open to public inspection except for section 527 organizations." [See NN 12/01]. Many found this statement misleading because the IRS has released copies of the schedule filed by other exempt organizations, including 501(c)(3)s and (c)(4)s, with only donors' names and addresses redacted. (Prior to the creation of Schedule B, no part of contributor lists were made publicly available.) The misleading statement has been removed from the top of the 2001 version of Schedule B, and the form's instructions explicitly state that only the names and addresses of contributors are not open to public inspection. Other information may be redacted only if it "clearly identifies the contributor," although it is unclear by whom and according to what criteria such a determination will be made. While nonprofits might prefer a return to the old system before the creation of Schedule B, the IRS has at least clarified what information it will routinely make publicly available. By Mark Sawchuk 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. Newsletter Home | HarmonCurran Home