IRS Releases Significant Fringe Benefit Guidance

The Internal Revenue Service released significant guidance on employer-provided fringe benefits. Many employers do not fully comply with the complex rules governing the provision of fringe benefits; the failure to comply with these rules can make the benefits fully taxable to the employee and require both the employer and employee to pay additional taxes and penalties. As a result, employers should carefully review their fringe benefit practices.

Revenue Ruling 2006-56, 2006-46 IRB 874, involved long-haul truck driving company that provided a mileage-based daily allowance for meals and incidental expenses ("M&IE") to its drivers. The company required its drivers to substantiate their mileage but not their M&IE. Instead, the company elected to use a "per diem" rate published by the IRS to satisfy the substantiation requirements. However, the actual allowances provided by the company to its drivers for M&IE routinely exceeded the per diem rate.

The company did not require its drivers to return the amount of their M&IE allowance in excess of the per diem rate. In addition, the company did not have any mechanism or process to track the M&IE allowances or permit it to determine whether allowances exceeded the per diem rate; nor did the company treat amounts in excess of the per diem rate as wages.

Based on these facts, the IRS concluded that the company engaged in a "pattern of abuse" in its M&IE allowance practices. As a result, the IRS ruled that the entire amount of the M&IE allowance was taxable to the drivers, rather than simply the excess amount reimbursed to drivers.

The rather draconian result in this ruling should cause employers to carefully scrutinize their fringe benefit practices, particularly those involving reimbursements of business expenses. As all employers should know, employers may only exclude reimbursements of employee business expenses from gross income if the reimbursements are made under an "accountable plan".

IRS Releases 2007 Goals: Includes Gaming,
Community Foundations and Higher Education

The Internal Revenue Service announced its 2007 project goals. These goals will focus on gaming, employment taxes, telephone excise tax refund, community foundations and unrelated business income of colleges and universities.

The IRS indicated that it would begin to scrutinize gaming activities, such as bingo, conducted by exempt organizations in about 10 states to determine the level of noncompliance.

IRS Releases Formula for Telephone Tax Refund

The Internal Revenue Service released a formula to permit business, including exempt organizations, to estimate their federal telephone excise tax refund, rather than review nearly four years of old phone records.

In May, the IRS announced that businesses and exempt organizations would be permitted to request refunds of the excise tax on their 2006 tax returns. To request a refund, exempt organizations should complete Form 8913, Credit for Federal Telephone Excise Tax Paid, and attach the form to Form 990-T. On the form, the exempt organization can either determine the actual amount of refundable long-distance telephone excise taxes paid between March 2003 and July 2006 or use a formula to estimate this amount.

Congressional Update: ACORN, NCAA

Senate Finance Committee Charles Grassley (R-Iowa) asked the Internal Revenue Service to investigate the activities of ACORN, a tax-exempt organization facing allegations of voter fraud. Senator Grassley also requested the president of the organization to respond to a series of 62 questions to determine whether the organization operated inconsistently with its tax-exempt status.

The House Ways and Means Committee also wrote to the National Collegiate Athletics Association to ask whether intercollegiate athletics further the tax-exempt purpose of the NCAA and its member institutions.

AHA Releases Competing Community Benefit Guidelines

On November 13, 2006, the American Hospital Association released updated guidance on community benefit reporting. The AHA guidelines adopt the CHA/VHA standards, particularly with respect to reporting all community benefit as "cost". The AHA, however, recommends include reporting bad debt and Medicare shortfalls at cost.

The AHA standards differ from the competing CHA standards, which exclude bad debt and Medicare shortfalls from the calculation of community benefit. The Senate Finance Committee has expressed a preference for the more stringent CHA standards.

IRS Revamps Process for Processing Exemption Applications

The Internal Revenue Service remains backlogged in its processing of exemption applications. Earlier this year, the IRS released a website to allow exempt organizations to check on the status of their exemption applications. Currently, the IRS is processing exemption applications filed in April 2006.

The IRS also plans to divide exempt applications into three categories to speed processing. These categories will allow the IRS to receive a written determination or request for additional information within 60 days of submission, if the application can be processed immediately or simply requires minor additional information.

IRS Announces Procedures for Changing
Public Charity Classification

The Internal Revenue Service announced procedures for public charities to switch their classifications to take advantage of the IRA donation rules including the Pension Protection Act or to avoid restrictions on distributions by private foundations to certain types of public charities See Announcement 2006-93, 2006-48 IRB ___.

Changes to the law made by the Pension Protection Act, permits individuals to donate a portion of the IRA balances to certain types of organizations, but not "supporting organizations" described in section 509(a)(3) of the Internal Revenue Code. Many colleges and universities have created separate foundations to house their endowments and treated these foundations as 509(a)(3) supporting organizations. However, many of these foundations also accept gifts from the public and, as a result, may be able to seek public charity status.

To switch public charity classification, the organization must submit a written request for reclassification according to the rules in Revenue Procedure 2006, 4 and include a statement requesting reclassification from section 509(a)(3) to either section 509(a)(1) or 509(a)(2) and include either: (1) pages one, two and three (Parts IV and IV-A) and the signature page of the most recently filed Form 990; or (2) Form 8743, Support Schedule for Advance Ruling Period.

IRS Planning Guidance on Verification of
Supporting Organization Status

The Pension Protection Act does not permit foundations to make "qualified distributions" to Type-3 supporting organizations that are "not functionally integrated." There is no mechanism, however, for foundations to determine the classification of a supporting organization or whether the organization will be considered functionally integrated. The Department of Treasury anticipates releasing guidance to clarify these provisions shortly.

IRS Requires "Transactions of Interest" Reporting

As part of the tax shelter rules made by the American Jobs Creation Act of 2004, the Internal Revenue Service has proposed a package of tax shelter rules mandating heightened disclosure by taxpayers and material advisors for "transactions of interest." These are transactions that the IRS has not determined are abusive, but have the potential for abuse and for which the IRS lacks sufficient information.

Exempt organizations, which increasingly have been used as conduits for tax shelters, should be aware of these rules when entering into certain types of transactions with a potential for abuse, or which are similar to transactions the IRS has identified as abusive.

Final Anti-Terrorist Financing Guidelines Released

The Department of Treasury released a final version of its voluntary anti-terrorist financing guidelines. These guidelines require organizations having operations overseas to conduct a risk-assessment of the dangers of receiving funds from foreign sources. There remains significant confusion about the guidelines, which are voluntary, but which the Internal Revenue Service and other agencies appear to be treating as regulations.