- 2022–2023 Priority Guidance Plan (released 11/4/22) – see, among other things, 4 donor advised fund priorities:
- Regulations under §4966 regarding donor advised funds, including excise taxes on sponsoring organizations and fund management.
- Regulations under §4967 regarding prohibited benefits, including excise taxes on donors, donor advisors, related persons, and fund management.
- Regulations under §4958 regarding donor advised funds and supporting organizations.
- Guidance regarding the public-support computation with respect to distributions from donor advised funds
- Where is my application for tax-exempt status?
- TE/GE FY 2023 Program Letter – see, among other things, four priorities – enhance taxpayer service, strengthen compliance activities, workforce development, transform operations
- IRS compliance strategies, including on §4960 (tax on excess tax-exempt organization executive compensation) and hospital unrelated business activities
- Taxpayer Advocate Service (TAS) – IRS employees but independent of IRS – act on behalf of taxpayer (e.g., assist taxpayers in resolving problems with IRS, identify problem areas, propose changes, identify potential legislative changes) – IRS needs to move to electronic forms (IRS is still drowning in paper – 5 million forms still unprocessed, 2.8 million taxpayers still waiting for refunds with no letter and identity theft filter not yet resolved) – IRS Form 911: Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order) – Exempt Organizations should know about and appropriately use TAS (be nice!)
- Automatic revocation for missed information return filings – This can apply even if an organization files a Form 990-N every year but is found to be ineligible to file the Form 990-N for 3 consecutive years
- Misc. Updates:
Attorney General Developments: Platform Regulations and Other Current Issues
Background: In 2021, California passed a new set of laws (referred to as AB 488) regulating charitable crowdfunding, charitable fundraising platforms, and platform charities that go into effect on January 1, 2023. In May 2022, the Attorney General released proposed regulations implementing AB 488. On November 21, 2022, the Attorney General released modifications to these proposed regulations for public comment due by 5:00 p.m. on December 7, 2022.
- National Association of State Charity Officials (NASCO) – Each state has their own laws regulating the solicitation of funds for charitable purposes. Only 13 jurisdictions have a dedicated charities bureau or division. Approximately 50% of jurisdictions have less than three (3) dedicated FTEs. See 2021 State Charity Registration Provisions published by NASCO
- AB 488 goes into effect January 1, 2023, but the regulations will not be promulgated by such date, which means there is a lack of definitive guidance regarding compliance to start the year. In recognition of this problem, new registration requirements will first be due January 2024 and annual reports will first be due in 2025
- A challenge for charities will be to comply with multiple regimes should other states and jurisdictions adopt similar laws (Tanya Ibanez has not heard of any other states moving forward on similar laws right now)
- Charity delinquency and suspension lists are accessible on the CA AG Registry Reports website. One problem is the delay in updating the Registry after all of the requirements have been met to cure any delinquency or suspension issues
- Proposed Regulations: Disposal of Charitable Assets – AB 900 imposes the same requirements on charitable trusts that presently exist for charitable corporations. (Corp. Code, §§5913, 9633.) Charitable trustees must provide 20 days notice to the Attorney General before transferring or disposing of substantially all charitable asset; “substantially all” assets to mean an asset or assets equal to or exceeding 75 percent of the value of all assets held at the time of the notice or at any time during the six-month period before submitting the notice.
- California Donor Advised Fund Survey – there may be convenings of stakeholders if there are potential laws being contemplated
Working with the IRS Post-Pandemic
NEO Law Group Principal Erin Bradrick joined two nonprofit law luminaries Doug Mancino and Marcus Owens in a session moderated by Debi Heiskala.
- Exemption applications – mandatory e-filing of Forms 1023, 1024, and 1024-A – still some glitches and quirks (pending applications have been deleted when the software updates occur) – inconsistent processing times
- Determination issues – Form 1024-A optional expedite process (attestation: 40% cap on time and expenditures on partisan political activities); No processing of group exemptions until publication of the final revenue procedure or other guidance
- Annual filings – difficulties within filings for self-declared exempt organizations, 990-N filers, and organizations with pending exemption applications; delays due to mistaken auto-revocations (e.g., paper filing timely filed not processed or lost by the IRS), errors in the EO Business Master File (consider using the dedicated fax line – 855.247.6123)
- Contacting the IRS – IRS staffing challenge as many experienced EO employees are retiring
- Correspondence delivered via US Mail or commercial delivery services will eventually be answered, but the waiting time will be heavily dependent on IRS resource constraints. Delays may extend for months to more than a year, depending on the office involved
- Examinations – Initial contact letter will typically include the phone and fax number (but not email ) of the revenue agent. Paper still seems preferable in exams for both IRS and client’s representative vs. IRS Secure Messaging
- Independent Office of Appeals – appears to be more independent
- Working with the IRS of the future – Taxpayer First Act mandates a new structure – Reorganization will require substantial revision of Internal Revenue Manual
Luncheon Speaker: David Callahan, founder and editor of Inside Philanthropy
- Philanthropy – tech and newer philanthropy with the “break and recreate” approach – Callahan was asked, “How’s that going?” (he acknowledged the presumed reference to Samuel Bankman-Fried)
- Tension between philanthropy and democracy – Billionaire philanthropy is anti-democratic, but it can also produce substantial and valuable public goods, and the lack of donor accountability allows it to be used as risk capital for experimentation on the production of public good
- Philanthropy and public accountability – while philanthropy has largely escaped critical review by lawmakers and the public, the times they are a-changin’. With the current populist culture and perceptions about billionaires, philanthropy, and equity, philanthropy will not escape accountability. See how other industries have fared when they were also initially not under the radar – e.g., accounting, colleges and universities, Major League Baseball
- See some reviews of Callahan’s book, The Givers: HistPhil; SSIR
Charitability: New Purposes and Old Law
- Drugs – illegality doctrine – problematic where purpose is educational but may advocate against existing law – promotion of illegal activity? (but couldn’t that apply to all kinds of charitable advocacy?)
- Abortion – Many states have passed criminal and civil laws against abortion and include penalties for “aiding and abetting” abortion; criminal risk is currently uncertain for organizations funding abortion access in states where it is illegal
- Donor advised funds – ACE Act (Accelerating Charitable Efforts Act)
Accounting Update: What EO Practitioners Need to Know
- GAAP Update: Leases – FASB Accounting Standards Update No. 2016-02 (effective for fiscal years beginning after December 15, 2022)
- The guidance was changed to increase transparency and comparability across entities by requiring balance sheet recognition of leases and note disclosure of certain information about lease arrangements; change would minimize the opportunity for organizations to structure leasing arrangements to achieve a particular accounting outcome on the statement of financial position.
- GAAP Update – Contributed Nonfinancial Assets – FASB Accounting Standards Update No. 2020-07 (effective for annual periods beginning after June 15, 2021)
- The amendments in this Update improve financial reporting by providing new presentation and disclosure requirements about contributed nonfinancial assets for NFPs, including additional disclosure requirements for recognized contributed services.
- GAAP Update – Other Accounting Standards –Current Expected Credit Losses (CECL) – FASB Accounting Standards Update No. 2016-13 (effective for annual periods beginning after December 15, 2022)
- The amendment changes the requirements from an incurred loss model to an expected loss model and affects, among other things, trade receivables, contract assets, loan and debt instruments, certain lease receivables, notes receivables, and loan commitments.
- Statement on Auditing Standards (SAS) No. 134
Using Endowments During Crises
- The trustees of an endowed institution are the guardians of the future against claims of the present. Their task is to preserve equity among generations. The trustees of an endowed organization assume the institution to be immortal. They want to know, therefore, the rate of consumption from endowent that can be sustained indefinitely… In formal terms, the trustees are supposed to have a zero rate of time preference. — James Tobin
- Endowments are restricted assets; not fully expendable by the beneficiary organization:
- Among the expressly enumerated prudence factors in UPMIFA is “the preservation of the endowment fund” even beyond the organization’s existence
- Because only the income is expendable for the organization, principal cannot be pledged as collateral for debts of the organization, nor captured for debt in bankruptcy
- Charitable institutions cannot unilaterally change an endowment restriction, nor any other donor-designated purpose, even during crises
- However, the endowment laws (UPMIFA in 49 states and DC) do not place the same restrictions on board-designated- or quasi-endowments
- Practical matter 1: What is the ”right” amount for a charity to spend or grant annually? It depends … But who decides?
- Practical matter 2: How much endowment should a charity have? It depends … But who decides how much is enough?
- Policy matter: When should the government tax tax-exempt assets/income? Interesting discussion. – Hoarding issue – What if the 21% income tax on investment income applied?
Hot Topics Power Hour (“Top 12 List”)
- IRS’s strict construction of substantiation and appraisal requirements – including for substantiating a donation to a DAF (charity must have exclusive legal control over the assets contributed)
- Public policy / illegality (Including re: Dobbs) – General Rule: a 501(c)(3) organization cannot be operated for illegal purposes or purposes contrary to public policy. See, e.g., Rev. Rul 75-384 (org that encouraged anti-war protestors to commit violations of local ordinances did not qualify under 501(c)(3) or 501(c)(4)); Bob Jones University. Fellowships and grant programs are illegal and/or contrary to public policy??
- Continuing battle over DAF regulation – ACE Act seems unlikely to pass but may seem to see it come back to life
- IRS notice on LLCs – Notice 2021-56
- Employer sponsored disaster relief programs
- Creating enforceable and more durable trusts and restricted grants – Dead hand control (see, e.g., The Art of the Steal)
- Cryptocurrency and NFTs – Denial 202129016 (April 27, 2021): Service denied 501(c)(3) status to organization seeking to improve digital currency technology by coordinating a global community to collaboratively develop a freely available, user-driven, open source software that allows access to the industry of cryptocurrency
- Split dollar insurance compensation arrangements – allows businesses and individuals to loan monies to employees provided the money is only used to purchase life insurance
- Gifts of carried interests in investment funds
- Newman’s Own exception – can use family trust as a sole member
- Patagonia model of giving – see Benefits Of Patagonia Donation Model Could Draw Followers (Law 360, registration or subscription may be required), which includes quotes from WCTEO presenters Ofer Lion, Alex Reid, and me.
- Regulation of online giving – CA AB 488 (effective 1/1/23 even though regs will not be finalized until later in 2023) and beyond (failing reliance on Charleston Principles as guideline for online giving)
Trust Me, I’m a Fiduciary: A Modern Perspective on Traditional Duties
l had the pleasure of participating on a panel with Rose Chan Loui and David Shevlin, moderated by LaVerne Woods. We’ll carve out some of the highlights from this presentation for a separate blog post.