Focus on IRS and Treasury

We’re all familiar with section 501(c)(3), (c)(4), and (c)(7) organizations, but a big problem comes when we have an organization that straddles these sections. Some wags call (c)(3) the no-fun section — too much fun and you are a (c)(4) or (c)(7). In the PLR I am about to discuss, the organization even agreed not to promote fun or camaraderie, but to no avail.

1 – Hospital Groups Seek Schedule H Reporting on Consolidated Basis

2 – Annual ABA Guidance Wish List

All I can say is, hope springs eternal.

1 – Lois Lerner Addresses NACUBO

2 – HFMA Weighs In on New Requirements
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1 – Lois Lerner Addresses NACUBO

According to Bloomberg News, the IRS’ Lois Lerner, Director, Exempt Organizations, told the National Association of College and University Business Officers that nonprofit colleges and universities may be failing to report the full extent of their unrelated business taxable income to the Internal Revenue Service.

1 – Old Business

In regard to last Thursday’s email in regard to Revocation 201025083, I have been informed by the IRS that it has been pulled and replaced with a corrected version. You are to pretend that you never read “Second Chance Foundation” in the earlier version.

1 – Georgia on My Mind (or at least the IRS’)

2 – Today’s D.C. Bar Program to Discuss C&U Interim Report
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Yesterday, I went to the meeting of the Exempt Organizations Committee of the ABA’s Tax Section. I didn’t learn much, but that’s good, because that means I have been covering most of what has been happening in these pages. The big news, which happened outside the meeting, was the release of the Interim Report on Nonprofit Colleges and Universities Compliance Project, which is now available on irs.gov. For those short of time, Lois Lerner recommended reading the executive summary, which I’m reprinting below. Much will no doubt be written about the interim report, but here are items I found of interest right off the bat from the report (my comments in CAPS).

“The overall response rate was high (97%) … Additional follow-up will be conducted in the case of the 13 organizations that did not respond at all to the questionnaire, as well as those organizations that did not respond completely.” SHOULD WE SEND DUNCE CAPS TO THE 13 ORGANIZATIONS THAT DID NOT RESPOND?

“Nearly half (48%) of small colleges and universities reported never filing a Form 990-T, compared with 29% for medium and 4% for large colleges and universities.” I SUSPECT MOST COLLEGES AND UNIVERSITIES DO HAVE SOME UBIT. SEEMS LIKE SOME TARGETED AUDITS ARE IN ORDER.

“Consistent target and actual spending rates of approximately 5% of endowment assets were reported across all size categories.” WASN’T IT ME WHO SAID ON THURSDAY THAT “A FIXED RATE BECOMES IN EFFECT A CEILING”? SEEMS LIKE COLLEGES AND UNIVERSITIES HAVE FOLLOWED THE RATE THAT APPLIES TO PRIVATE FOUNDATIONS (SECTION 4942) TO A TEE.”

“In the case of large organizations, the highest paid employee (other than an [officer, director, trustee, or key employee]) was most often a sports coach (43% of organizations).” DOES THIS SURPRISE ANYONE?

“More than half of the organizations in each size category reported using the rebuttable presumption procedure to establish executive compensation.” THIS SURPRISES ME. I WOULD HAVE EXPECTED ALMOST 100%.
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I’m sending along two recent comment letters on the proposed supporting organizations regulations, one from the ABA’s Tax Section and one from Ruth Madrigal of Caplin & Drysdale. These letters join many others that have been submitted. What I notice — and correct me if I’m wrong — is that all the comment letters are from or on behalf of supporting organizations. It’s too bad supported organizations seem left out of the conversation. I suspect the National Committee for Responsive Philanthropy, for example, does not have the resources to hire an advocate to argue on behalf of supported organizations.

What I call ideological cases are among the most difficult cases the IRS’ EO Division must wrestle with. The Freedom Alliance, subject to a complaint letter by CREW (see below), features Newt and Ollie, two guys who are no strangers to the EO area. Can a Democratic Administration be trusted to handle a case of this nature?

Unfortunately, the IRS — in particular, its EO Division — appears to be in disarray when it comes to handling sensitive cases of this nature. For example, the latest PACI report is now over a year late. Equally troubling is the fact that the operations of the EO Division are becoming less and less transparent as it increasingly hides behind section 6103, the argument apparently being that section 6103, which now takes up 41 pages in the Internal Revenue Code (CCH edition), has become so complicated that no one at the IRS can know what can and cannot be released. At the same time, sections 6104 and 6110 are being increasingly ignored. Where is Sarah Palin — or is that Tina Fey? — when we need her most to shed some light on what is going on in Washington?

The Council on Foundations has talked a lot over the years about a centralized equivalency determination information repository, EDIR for short, and now wants Treasury (and I assume IRS) approval and guidance. I have no objection per se to EDIRs, but the proposal does highlight the need for guidance and clarification in what I consider a confused area of EO tax law.

COF, in its letter, reprinted infra, states: “It is well-established that an organization may further charitable purposes by providing a resource that supports or increases the efficiency of charitable work conducted by other organizations.” Well, yes and no. It seems to me this area of EO tax law has become confusing as to when an organization seeking 501(c)(3) status can gain it by helping other 501(c)(3)s on a fee-for-service basis at market rates. Sometimes the IRS says it’s okay, other times no. According to the COF letter, “Fees are only a bar to charitable status if, in their specific context, they negate the organization’s charitable purpose or indicate a substantial nonexempt purpose.” That sounds pretty close to “anything goes” to me. Maybe that should be the standard, but is it the standard now? If so, who set the standard, and where is it set forth?

In the old days, issues raised in the COF letter might have merited a GCM analysis by the Office of Chief Counsel. Today, GCMs are gone — to quote TE/GE Commissioner Sarah Hall Ingram, “I haven’t seen one in years” — and supposedly nothing has replaced them. As I’ve said before, equally mystifying is what folks in Counsel do do — I’m told I’m not the only one who has this question. I’m sure Cathy Livingston finds this question annoying, but perhaps she could address this in her May 7 remarks to the ABA.

Also in the old days, issues raised in the COF letter might have been the subject of a Technical Issue Meeting in the EO Division, but I’m told TIMs have gone the way of GCMs. I suppose it’s no wonder that Janne Gallagher directed her letter and her efforts to Treasury, since she probably concluded that no one at IRS would be willing to tackle the technical tax issues she is raising in her letter.

If anyone would like to address the technical tax issues raised in the COF letter, please do so. I don’t pretend to know the answers, but I suspect I’m not the only one confused as to what the law is — or should be — in this area.

For those of us who are not health care tax specialists, Milt Cerny sends along his firm’s explanation of the new legislation impacting tax-exempt hospitals. Marc Owens and members of Clergy VOICE supplement their February 23 letter to IRS Commissioner Douglas Shulman in a March 29 letter. For the earlier letter, see EO Tax Journal 2010-31, dated 2/24/10.