Recent Developments for Non-Profit Organizations Summer 2008

July 30, 2008

IRS Releases Revised Publication 557

Newly revised Publication 557, issued in June 2008 and titled Tax-Exempt Status for Your Organization, reflects the changes made to the tax laws affecting tax-exempt organizations under the Pension Protection Act of 2006. The new version includes information on the following changes made by the Pension Protection Act:

  • New requirement that section 501(c)(3) organizations must make Form 990-T available for public inspection.
  • Increase in certain excise taxes under the excess benefit transaction rules and private foundation rules.
  • Additional standards for credit counseling organizations.
  • New Form 990-N and notification requirements for organizations not required to file Form 990.
  • New excess benefit transactions rules applicable to donor advised funds and sponsoring organizations.
  • New excise taxes on prohibited tax shelter arrangements.
  • New requirements for supporting organizations.
  • Electronic filing requirements for organizations with $10 million or more in total assets.

IRS Issues New Guidance on Separating Charitable Remainder Trusts

In Revenue Ruling 2008-41, the IRS provides guidelines on the division of a charitable remainder trust into two or more separate and equal charitable remainder trusts, one for each beneficiary living at the time of division in two particular circumstances. Under these guidelines, each trust will continue to qualify as a charitable remainder trust under Internal Revenue Code section 664(d).

The revenue ruling clarifies the treatment of divisions done in accordance with these guidelines and provides: (1) the division is not considered a sale, exchange, or other disposition producing gain or loss; (2) the basis of assets remains the same; (3) the holding period of an asset includes the holding period as held by the original trust before the division; (4) no act of self-dealing occurs under section 4941; and (5) no taxable expenditure is made under section 4945 and “expenditure responsibility” is not required.

The ruling outlines two scenarios involving a division of a charitable remainder trust. In one, a trust has two equal recipients of the annuity or unitrust amount with all of the annuity or unitrust amount going to the survivor. The other scenario involves two married recipients who are obtaining a divorce and each separate trust terminates upon the death of the recipient with the assets being distributed to the remainder beneficiaries.

Use of New Form 990 and Other IRS Matters

At a recent conference, IRS Exempt Organizations Division Director Lois Lerner indicated that several new questions on the Form 990, including those concerning unrelated business income, political activities, executive compensation, foreign activity, and conflicts of interest, may inspire new compliance initiatives. Ms. Lerner stated that no one question or answer would trigger an audit, but in the context of other information, answers may lead to further inquiries.

The IRS plans to begin its compliance project focusing on colleges and universities by sending out a questionnaire to 400-500 private and public colleges and universities. The project was delayed after the IRS realized that some of the language in the questionnaire was confusing to the education community. The questionnaires are expected to go out in late July or August.

The IRS has improved its response time for considering applications for recognition of exemption. Agents now answer 56% of exemption letters within 60-90 days of receipt. Letters involving more complex issues take longer and have to wait to be addressed by a more experienced agent. To further improve this response time, the IRS is considering eliminating the five-year advance ruling period for organizations seeking classification as a publicly-supported organization so that final rulings would be issued from the outset and financial information would be tracked on the new Form 990, Schedule A.

Alternative Minimum Tax and Extenders Tax Relief Act of 2008

In June, Senate Minority Leader Mitch McConnell (R-Ky) introduced S. 3098, the Alternative Minimum Tax and Extenders Tax Relief Act of 2008, which would extend certain provisions from the Pension Protection Act of 2006 that expired at the end of 2007. These provisions include the tax-free distributions from individual retirement plans for charitable purposes, the enhanced charitable deductions for contributions of food inventory and book inventory, and the basis adjustment to stock of S corporations making charitable contributions of property. The bill would extend each of these provisions until December 31, 2009.

IRS Releases Sample Charitable Lead Unitrust Provisions

On Friday, July 25, 2008, the IRS released Revenue Procedures 2008-45 and 2008-46 providing sample forms, annotations, and alternate provisions for inter vivos and testamentary charitable lead unitrusts (CLUTs). These Revenue Procedures follow Revenue Procedures 2007-45 and 2007-46 released last year for charitable lead annuity trusts.

The suggested language is similar in many respects to that previously provided for charitable remainder trusts and charitable lead annuity trusts and to the form language used by many practitioners.

Sample forms are provided for both grantor and nongrantor inter vivos CLUTs and for a lead period measured by one or more lives as well as a term of years.

IRS Workshops for Small- and Mid-Sized Section 501(c)(3) Organizations

The IRS Exempt Organizations Division recently announced the dates and locations for the fall of 2008 for its one-day workshops for small- and mid-sized section 501(c)(3) organizations. The workshops are designed for administrators, volunteers or tax practitioners who are responsible for an organization's tax compliance. Each presentation covers the necessary actions to maintain tax-exempt status, actions that could jeopardize that status, and tax compliance obligations. Pre-registration is required and more information can be found on the IRS website from the Charities & Non-Profits page by clicking on the Calendar of Events.

Dates:

October 21, 22, and 23 in Chicago, Illinois
November 18, 19, and 20 in Detroit, Michigan
December 2, 3, and 4 in Memphis, Tennessee

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