IRS Issues 2008 Exempt Organizations
Implementing Guidelines

Recently, IRS Exempt Organizations (EO) released its 2008 Implementing Guidelines, which recount 2007 accomplishments and detail plans for 2008. Among such plans are the following initiatives:

Continued Implementation of the Pension Protection Act of 2006: implementing the PPA provisions and educating the tax-exempt community was a top priority in 2007 and will continue to be a priority in 2008.

Form 990 Redesign: further work on the redesigned Form filed by tax-exempt organizations will continue.

Executive Compensation: the Executive Compensation Compliance Project will continue to review the compensation practices of a broad spectrum of exempt organizations.

Tax-Exempt Hospitals: the Hospital Compliance Project will continue to determine how tax-exempt hospitals report that they meet the community benefit standard. The Project will also continue to review the hospitals’ compensation practices.

Credit Counseling Organizations: enforcement efforts will continue for the Credit Counseling Initiative, which examines large credit counseling organizations and has brought about greater scrutiny of incoming applications. The Initiative also significantly reduces the number of new credit counseling organizations.

Seller-Funded Down Payment Assistance Programs: the Down Payment Assistance (DPA) Initiative will continue to uncover problems with seller-funded programs that purport to help low income persons buy a home. The Initiative will also examine organizations to determine whether they are violating the requirements for exempt status, and will report results in 2008.

Employment Taxes: projects will identify organizations that file inconsistent employment tax information with the SSA and IRS, with the Combined Annual Wage Reporting (CAWR) program comparing Form W-2 data reported to the SSA with the employer data reported to the IRS on Form 941.

National Research Program (NRP): a comprehensive effort to measure compliance for different types of taxes and various taxpayers will be added in 2008. NRP will provide a statistically valid representation of the compliance characteristics of taxpayers. The NRP is currently developing a Servicewide reporting compliance study for employment taxes.

EO Research and Compliance Initiative (Colleges and Universities): EO will conduct this initiative and will gather information from a stratified sampling of colleges and universities.

Voluntary Compliance Program: the IRS will develop this program to assist in bringing into compliance tax-exempt organizations that have failed to file returns for three years. It will also enable organizations to avoid automatic revocation by filing the missing returns and paying all taxes and applicable interest without facing any penalties.

Donor Control and Non-cash Contributions: programs will focus on the issues of donor control and contribution valuation.

Section 509(a)(3) Supporting Organizations: the IRS will review 500 organizations in their third to fifth year of existence to determine whether they continue to qualify and will conduct compliance checks of 300 organizations that were expected but failed to file a Form 990.

Charitable Trusts: the EO Compliance Area (EOCA) will identify and examine CRTs that did not distribute their assets in the final year and will look at the first year of the CRT to ensure that it was set up properly and that the deduction was proper. The IRS also will examine non-exempt charitable trusts that had filed Form 990 or 990-PF but did not file Form 1041 even though they had taxable income.

Other Compliance Projects: franchises or business ventures; small insurance companies; political activity; community foundations; gaming; § 527 organizations; TEDS (electronic determinations case processing system); and Cyber Assistant implementation.

Quick Hits

Church Letter Challenges IRS to Examine
Sermon Comments for Campaign Intervention
A Wisconsin pastor has challenged the IRS to investigate a November 2006 sermon that included political references made prior to an election, believing that the IRS has a mistaken interpretation of the tax code and that preaching about politics is a part of freedom of speech and religion. Under IRS rules, churches are not allowed to explicitly or implicitly endorse particular candidates for political office without risking their tax-exempt status. The pastor questions whether clergy speaking to their congregations is the same as a church, as a legal entity, endorsing a candidate. The IRS concluded in September 2007 that a church had intervened in the 2004 presidential campaign when it made comments about then-presidential candidates. The IRS has declined to comment at this time on the pastor’s letter, which was published in the Wall Street Journal on January 16, 2008.

Ohio House Bill 396 –
Funds Appropriated to Community Purpose 501(c)(3)s
House Bill 396 (Reps. Hottinger, Dodd), a bill to authorize a board of county commissioners to appropriate funds to 501(c)(3) organizations that serve a community purpose, aims to resolve a locally generated legal opinion on county authority, according to its sponsors. Dodd said the bill “supports the belief that local government is the best government because it reaffirms the role of commissioners as stewards of tax dollars, and reaffirms the accountability that commissioners have to their constituents: either the money is given to charitable organizations for legitimate purposes that benefit the county, or the voters will hold those commissioners responsible at the ballot box for wasting taxpayer dollars.”

Hottinger said the language would extend to counties the same authority townships currently hold in regards to appropriating funds for certain nonprofit groups. The bill potentially could be amended to allow counties to audit the nonprofits they are funding.

IRS Outlines Procedures for Issuing
Exempt Status Determination Letters
In Rev. Proc. 2008-9, the IRS has outlined procedures for issuance of determination letters and rulings on the tax-exempt status of organizations. The revenue procedure applies to all organizations other than those subject to Rev. Proc. 2008-6 on pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans. It notes that processing of determination letter applications is now centralized in IRS’s exempt organizations determinations office and district offices no longer exist. Still, some applications may be processed in other offices or referred to the exempt organizations technical unit. A determination letter is a written statement issued by the exempt organizations unit or an appeals office in response to an application for recognition of exemption from federal income tax under §§ 501 and 521. The procedure also addresses revocation or modification of determination letters or rulings and offers guidance on exhaustion of administrative remedies for purposes of obtaining a declaratory judgment.

Substantiation of Lump-Sum Charitable
Contributions Through Combined Federal Campaign
IRS Notice (2008-16) explains the rules for substantiating lump-sum charitable contributions made through the Combined Federal Campaign or similar program. To substantiate a deduction, § 170(f)(17) requires that a taxpayer maintain a bank record or written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. Taxpayers making lump-sum charitable contributions through the CFC or a similar program may rely on the notice until regulations incorporating § 170(f)(17) requirements are issued. A deduction for a lump-sum contribution made in taxable years beginning after August 17, 2006, will not be allowed unless the recordkeeping requirements of § 170(f)(17) are met. The notice said the nexus between the PCFOs (or similar organizations) and actual donees will be reviewed as part of the regulations- writing process. The anticipated regulations may require disclosure to each donor of the actual amount distributed to the ultimate recipient organizations through the CFC or the similar program and the date of that distribution.

Summary of Bill to Extend Exemption on
IRA Distributions to Qualified Charities
The Congressional Research Service has issued a fact sheet summarizing bills introduced in the 110th Congress to extend a code provision allowing tax-free distributions from IRAs for the purpose of making charitable contributions. The provision, which expired December 31, 2007, allowed taxpayers to exclude from gross income IRA distributions contributed to a qualified charity. In its report, Qualified Charitable Distributions From Individual Retirement Accounts: A Fact Sheet , CRS lists the bills introduced in the 110th Congress that would extend the provision for one or two years, or make it permanent.

Ohio AG Sues Charter School for
Charitable Trust Violations
A Cincinnati charter school has become the fourth startup that Attorney General Marc Dann has sued for alleged violation of charitable trust responsibilities. The AG alleges that Harmony Community School failed to accomplish its primary charitable purpose of educating its students, while receiving $31.9 million in public funding since 1998. He asked the court to terminate the school’s charitable trust, to permanently enjoin the institution and its governing authority from operating a community school, and to redirect the state funding to other schools. Mr. Dann’s evidence consists of 600 pages that he says detail the school’s academic failure, financial mismanagement, ethical lapses, and consumer fraud. The AG is basing his legal strategy against charter schools on charges that the institutions have not met their fiduciary responsibilities as charitable trusts because they have consistently failed to achieve minimum state academic performance standards while drawing down millions in taxpayer funds to operate. Ron Adler, President of the Ohio Coalition for Quality Education, says that the AG is overstepping his legal authority and not acting impartial but instead trying to find a way to close charter schools.