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Conference Speakers: IRS Promising Focused Guidance for Exempt Organizations in 2020

Chris Gaetano
Published Date:
Dec 17, 2019

GettyImages-174879501 IRS Internal Revenue Service

The IRS Office of Chief Counsel, which writes all the notices and guidance that practitioners rely upon, is aiming to release several new proposed and final regulations relevant to exempt organizations over the course of next year, mostly pertaining to changes brought about by the Tax Cuts and Jobs Act (TCJA). 

Speaking at the Foundation for Accounting Education's Exempt Organizations Conference on Dec. 17, IRS attorneys Stephanie Robbins and David Repass talked about how the IRS has changed its approach to the Priority Guidance Plan (PGP), an annually released document that outlines which regulations the IRS intends to focus on in the coming year. Repass said that the IRS recently decided to include in the PGP only regulations that it intended to complete that year, in contrast to its previous approach, which also included longer-term projects that were likely to remain incomplete in that time frame. 

"About a year ago, a decision was made: Let's narrow it down to the stuff we're working most strenuously on, and there's a hope we might get it all out next year," said Repass, noting that the list includes only items that the IRS is sincerely trying to get done in a year. 

One is the 1.4 percent tax on net investment income for major colleges and universities. The tax applies to private educational institutions with at least 500 full-time equivalent students, which have assets other than those used in its charitable activities worth at least $500,000 per student. Repass said there are very few educational institutions that this provision applies to—about 40 schools nationwide. 

Because "Congress didn't want to waste too much ink" the TCJA used the same net investment income calculation rules that currently apply to private foundations; this calculation defines "net investment income" as dividends, rents, royalties and capital gains. But he said that, since the IRS released proposed regulations over the summer, schools have been arguing that there are too many differences between a university and a private foundation for the rules to strictly translate one to one. 

For instance, while a school receives interest on loans, those loans are made for students, are usually set at below market rates, and often include special terms and conditions that are particular to educational institutions. Or, he pointed out, if a school has a dormitory, and then charges students to live there, it is technically rent, but it is not a rental property in the same way a private foundation may hold rental property. But then, he asked, what if the school owns a shopping center and rents it out to other businesses? This situation is then pretty much the same as a traditional rental property, and so the tax would probably apply there. 

"The initial thought is we don't need regulations under this code section, because everything is clear, but we found out it's not so clear," he said. 

Another item on the agenda is guidance on the tax on unrelated business taxable income (UBTI). Robbins said the IRS released initial guidance last year which clarified how to identify separate trades or businesses not related to the organization's exempt status, how this income could be treated in various situations, and how the tax interacts with other sections of the code. Robbins said that "we are very far along in the process of publishing proposed regulations" that will be more detailed than the initial notice, and she expects that they will be out "soon." 

A related piece of guidance that Robbins said would be out soon relates to the increase in UBTI by disallowed fringe benefits. The rule increases UBTI if the organization pays for or otherwise incurs charges on certain transportation fringe benefits, parking benefits, or on-premises athletic facilities that discriminate in favor of highly compensated employees. She said her office is working on finding out how this increase functions within the overall UBTI regime. Repass said that this change has led to many surprised exempt organizations that didn't know it was coming. 

"It's a very hot-button issue because there are many, many exempt organizations that have never paid UBT before, and suddenly, under these rules, they are treated as having more than $1,000 in UBT income because what would be a disallowed function to a taxable employer is more than $1,000, and that is treated as if it were from an unrelated trade or business," he said. 

Repass said the IRS is also revising its regulations on the identities of large donors to exempt organizations. The IRS published a revenue procedure last year that said that an organization, when filing a 990-B, in most cases can leave out column A, which is for the names and addresses of those who donated $5,000 or more. While "that made a lot of 501(c)(4), (5), (6), et cetera happy they didn't have to report that anymore," he said that Montana Governor Steve Bullock sued the IRS and won this past July over the rule. The district court said that making this change via revenue procedure was invalid. Repass said that a month after the case was decided, the IRS began the process of working the change through the traditional administrative procedure of proposed regulation, comment period and final regulation. He said this has proven to be a controversial measure, noting that the IRS has received over 8,000 comments. 

"We looked through most of them—now we have to make lists of what each one of them said and know how to discuss it in the preamble," he said. 

The proposed regulation, he said, also raises the reporting threshold from $5,000 to $50,000 for those that don't want to file a paper return. He said his office also put out a notice saying that anyone who has filed a 990 already without the names and addresses of donors won't be subject to penalties. 

The IRS will also be looking at when to grant LLCs tax-exempt status. He said that the IRS, since about 2000, has taken the position that if an LLC satisfies the organization tests and operational tests generally applied to charities, then the LLC, especially if it has members who are themselves tax-exempt organizations, can probably be recognized as tax exempt on its Form 1023 (which is submitted to be recognized as a 501(c)(3)). In 2020, he said, the IRS will release a notice outlining the IRS's current procedure on this matter and ask the public for further input on when it is and is not appropriate to grant tax-exempt status to an LLC, which will then go into more substantive regulations. 

He also went over a small change that will be proposed next year allowing tax-exempt educational institutions to post their statement of racial nondiscrimination online; he said when the measure was first introduced in the '70s, responding to Bob Jones University's policy of not admitting black students which led it to lose tax-exempt status, the IRS demanded this notice be placed in a newspaper, radio or TV ad. The IRS will propose that these organizations can place the same notice on their websites or, if they lack a website of their own, someone else's. 

"It has to be big enough and stand out that anyone going there will have to at least stumble across it; they don't have to go looking for it. It has to be obvious that's what it is and catch your eye as you scroll down," he said. 

Beyond regulations, Robbins said exempt organizations can expect revised forms in the coming year as well. She said that the Form 1023 is going completely electronic, which she said will streamline and simplify the process of gaining tax-exempt status. She said there will be less confusion over what's relevant. The IRS will provide a three-month transition period, meaning that the new electronic form will be available starting January, and paper forms will be phased out entirely by March. 

As a result of the Taxpayers First Act, the Form 990, Form 990-PF, Form 8872, and Form 1065 must all be filed electronically next year as well, though the IRS will still accept paper Forms 990-T and Form 4720, as it is still working to convert them to an electronic format.  

Repass said that if practitioners have legal questions, they might benefit from a presubmission conference before going right to requesting a private letter ruling, which requires much more filing. He said it will save both the taxpayer and the IRS time and money because sometimes issues can be resolved before a private letter ruling is actually required. 

"We might think you're coming at this issue from the wrong direction, that there might be other issues you should think about, or you might be educating us at the same time. ... Hopefully, we will have helped you out some in narrowing your issue and focusing on what the law is, so you don't [spend] a lot of time on something we don't care about," he said.

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