Susan M. Kirsch July 16, 2009 Exempt Organization Tax Update Schneider Downs Nonprofit Services Industry Group
CURRENT ENVIRONMENT 2
Cu Curr rrent nt Envi nviro ronmen nment The Eco conomy April 2009: IRS EO Director Promises Help to Tax Exempts During Economic Crisis – Mergers and Acquisitions (New IRS Pub 4779) – UBIT – Governance – Prohibited Transactions 3
Cu Curr rrent nt Envi nviro ronmen nment Co Collegi giat ate Spo Sports May 20, 2009: Senator Grassley calls for more disclosure of money in college sports after the Congressional Budget Office (“CBO”) released its report “Tax Preferences for Collegiate Sports.” – CBO used Indianapolis Star database of financial information from164 Division 1 athletic programs. – Fact that congressional analysts had to rely on newspaper for source data highlights how little is available about how these programs work. 4
Cu Curr rrent nt Envi nviro ronmen nment Collegi Co giat ate Spo Sports (c (cont ont.) Policy options highlighted in the CBO report include: • Limiting the deduction of charitable contributions • Limiting the use of tax-exempt bonds • Limiting the exemption from income taxation • Subject the income of athletic programs to UBIT 5
Cu Curr rrent nt Envi nviro ronmen nment Pay ayments to Resear archers March 2009: Senator Grassley Investigates Payment to Harvard Researchers by Drug Companies. – Requested Pfizer to provide details of its payments to at least 149 faculty members at Harvard Medical School. – Raised similar concerns (i.e. conflict of interest) about researchers at other universities. August 2007: Sent letters to several universities seeking information about the reporting system applicable to academic researchers regarding outside consulting income . 6
Cu Curr rrent nt Envi nviro ronmen nment Compensat Co ation February 2009: Senator Grassley issues remarks regarding The Chronicle’s Report addressing compensation for private college employees other than presidents. – Colleges get big tax breaks to help them achieve their missions. – Trustees need to make sure assets are used in the best possible way to fulfill charitable mission. – Is $4 million for a single professor or football coach the best use of resources? 7
Cu Curr rrent nt Envi nviro ronmen nment Endowmen ents ts January 2009: Senator Grassley sent letters to the 136 wealthiest colleges and universities. – Requested data on student aid, cost of attendance, tuition increases and endowment spending over the last 10 years. September 2008: Senator Grassley held a roundtable discussion on rising tuition costs and how endowments help offset those costs. – Participants included cross section of the higher-education community. – No commitment on future legislation. – Senator Grassley prefers self-regulation. 8
Cu Curr rrent nt Envi nviro ronmen nment Alternat ative In Investments – Offs ffshore Blo Blocke cker Co Corporat ations • May 2007: Senate Finance Committee (“SFC”) held closed-door meeting to review nonprofits using the foreign blocker corporation as a tax planning tool when investing in hedge funds. • September 26, 2007: SFC held a hearing to review the issue resulting in proposals to restrict the endowments of educational institutions with respect to the distributions and expenditures. 9
Cu Curr rrent nt Envi nviro ronmen nment Alternat ative In Investments – Offs ffshore Blo Blocke cker Co Corporat ations (c (cont. ont.) • 2008 Dirty Dozen Tax Scams including hiding income offshore. • February – March 2009: Senator Levin (D-Mich.) and Representative Doggett (D-Texas) introduced bills S 506 and HR 1265 entitled “Stop Tax Haven Abuse Act of 2009”. These bills are designed to curtail alleged abuses of investments or businesses outside the U.S. 10
What’s t’s Next • May 2009: NAICU Washington Update reported Senator Grassley is expected to step down as ranking member of the Senate Finance Committee in 2011 to become ranking member of the Senate Judiciary Committee. • Unclear whether non-profit financing and governance issues will remain a priority for Finance Committee after Grassley’s departure. 11 11
CURRENT DEVELOPMENTS 12 12
Cu Curr rrent nt De Develo lopm pment nts Employer-Pr -Provided Cell Phones Ju June 200 2009 • Cell phones are listed property (i.e., cars). • Working condition fringe benefit treatment available if substantiation requirements of IRC 274(d) are met (i.e. accountable plan). • Notice 2009-46: IRS seeking comments on proposals to simply cell phone business substantiation, due September 4 th . 13
Cu Curr rrent nt De Develo lopm pment nts Employer-Pr -Provided Cell Phones (c (cont. ont.) Three alternative methods being considered: – Minimal personal use method (two proposed) – all use qualifies as business if employee establishes that a personal cell phone is available for use or a specified amount of minimal personal use is disregarded. – Safe harbor substantiation method – employer treats certain percentage as business. – Statistical sampling method – personal use methodology in Rev. Proc. 2004-29 permissible. 14
Cu Curr rrent nt De Develo lopm pment nts 2009 009 Dirty Dozen Tax ax Scam Scams April 200 2009 • IRS names “abuse of charitable organizations and deductions” to list. • Attempts by donors to maintain control over donated assets or income from donated property. • Valuation of non-cash assets donated to charity. 15
IRS State of the Union 16
IRS Annu IR Annual Re Report ort IRS FY 09 EO Wor Work Plan and An Annual Repo port rt – Annual Report – new initiative to provide statistical information on the EO division. – Highlights that the IRS has almost doubled enforcement contact between FY04 and FY08. – Governance. – Checklist for examining agents to determine whether an organization’s governance practices impacted the tax compliance issues identified during examination. – Form 990 governance questions to be used in potential compliance initiatives, including compensation and transactions with interested persons. 17
IR IRS Annu Annual Re Report ort June, 2009- Assistant Commissioner Ingram Speaks to Georgetown Conference – Explosive growth of TE sector – Good governance as key – IRS steps to manage this growth June, 2009-Independent Contractor vs. Employee – New IRS presentation on issue – Also see IRS Pub 1779 18
20 2008 08-09 Pri riori ority Guid Guidanc nce Plan • Pilot voluntary compliance program. • Revenue procedure to modify Rev. Proc. 75-50 on the publication requirement by a private school of its nondiscriminatory policy. • Final regulations on excise taxes on prohibited tax shelter transactions and related disclosure requirements. • Proposed regulations on new excise taxes on donor advised funds. • Proposed regulations on IRS disclosure to state charity agencies. • Guidance regarding contributions of inventory. • Final regulations on substantiation and reporting requirements for cash and noncash charitable donations. 19
IR IRS 20 2009- 9-20 2013 13 Str Strate tegic ic Plan Continued Oversigh Co ght of the Tax ax-E -Exempt Sect Sector Provide outreach and guidance to ensure widespread adherence to the requirements for tax-exempt status. Proactively address misuse of tax-exempt organizations and/or tax-exempt status. Maintain focus on universities, hospitals and other major segments. 20
IR IRS Execut utiv ive Co Compe pens nsation tion Re Review iews Execu xecutiv tive Co Compen ensation tion 200 Compliance Checks 50 Additional Single–Issue Exams Focus on Organizations with Loans to Officers/Trustees Continue Hospital Compliance Project Compliance Exams 90 Limited Scope Field Exams – Small and Mid-size 501(c)(3) Organizations Review of Colleges/Universities via Questionnaires 21
IRS COMPLIANCE INITIATIVES 22
Co Compli plianc nce In Initi tiati tives Co College ge & University Co Complian ance ce Questionnai aire •UBI questions dominated (15 of 33 pages) •The IRS requested the following for 47 activities: – Identify whether activity was reported as a taxable and provide reason why any of the activities was not reported as UBI. – Identify those activities that derived a loss for the past 3 out of 5 years and explain using a code the reason for it. 23
Co Compli plianc nce In Initi tiati tives College & Universi sity ty Com ompliance Ques Qu estion onnaire • For UBI loss activities: Did taxpayer plan to make a profit in the future? (e.g., activity was in start-up phase, costs were significantly greater than anticipated, etc.) • For taxable activities, identify the type of expenses incurred (i.e. direct and indirect) and explain the cost allocation method used. • IRS questioning accuracy of UBIT reporting and lawmakers to consider taking action. 24
Co Compli plianc nce In Initi tiati tives Trad Tr ade/Bus /Business vs. Ho Hobby • IRS Fact Sheet, FS-2008-23, discusses appropriate guidelines for determining when an activity is a business or a hobby not engaged in for profit . • Fact Sheet lists 8 key factors to assist exempt organizations evaluate if NOL deduction should be . 25
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