Nonprofit Update #10
August 20 1997
Federal Law Update
President Clinton recently signed the Taxpayer Relief Act of 1997. This huge bill contains various provisions of interest to Non-Profits. Below you will find a capsule summary. I have a lengthier summary available upon request.
Stock Gifts to Private Foundations. The full fair market value deduction under section 170(e)(5) for gifts of appreciated publicly traded stock to private foundations, which expired earlier this year, will be extended for the period June 1, 1997 through June 30, 1998.
Private Foundations; Payment Due Date. Section 6655(g)(3) is amended so that a calendar-year foundation’s first-quarter estimated tax payment is due on May 15, the same day From 990-PF is due. Fiscal year foundations must make their first-quarter, estimated tax payment by the 15th day of the fifth month of their taxable year.
Increase in Standard Mileage Rate. The act increases the standard mileage rate for purposes of computing a charitable deduction from 12 cents to 14 cents per mile, effective for taxable years beginning after December 31, 1997.
Higher Education. Under President Clinton’s Hope scholarship credit, students or their guardians can claim for the first two years of postsecondary education a credit worth 100 percent of expenses up to $1,000 and 50 percent of expenses on the second $1,000. For the third and fourth years, the credit would be worth 20 percent of expenses up to $5,000.
Also, the tax-favored treatment of state-sponsored prepaid tuition plans will be expanded to include room and board. An above-the-line deduction for student loan interest would be allowed; the maximum deduction would be $1,000 in 1998 and would increase each year thereafter.
A new IRA for education expenses also is provided and penalty-free withdrawals from traditional IRAs for educational expenses will be allowed.
In addition, the Act extends the section 127 tax exclusion for up to $5,250 of employer-provided educational assistance to undergraduates. Graduate-level expenditures are not covered.
Lastly, the Act amends section 108(f) so that individual’s gross income does not include forgiveness of loans made by tax exempt organizations if the proceeds are used to pay tuition or to refinance student loans.
Corporate Contributions of Computer Equipment. Under current law corporate donations of certain property may qualify for a charitable contribution deduction equal to the donor’s basis in the property plus one-half of the amount of the ordinary income that would have been realized if the property had been sold. The maximum deduction, however, cannot exceed twice the basis of the donated property. The Act expands the list of qualifying property to include computer technology and equipment which is used in grades K-12. The donated property must be less than two years old.
Charitable Remainder Trusts. Under the Act a trust cannot qualify as a charitable remainder annuity trust if the annuity for any year is greater than 50% of the initial fair market value of the trust’s assets. A trust cannot qualify as a charitable remainder unitrust if the percentage of assets that are required to be distributed at least annually is greater than 50%. In addition, the value of the charitable remainder must be at least 10% of the net fair market value of the property transferred in trust on the date of contribution to the trust.
Exclusion from UBIT for Qualified Corporate Sponsorships. Under current law corporate sponsorship payments to a tax-exempt organization may constitute UBIT. The act states that "qualified sponsorship payments" received by an exempt organization or college or university are exempt from UBIT, as long as such payments are not made in exchange for advertising the sponsor’s products; acknowledgment of the sponsor’s support is acceptable. "Qualified sponsorship payments" are generally defined as any payment made by a person engaged in a trade or business in which the person will receive no substantial return benefit other than the use or acknowledgment of the name or logo of the person’s trade or business in connection with the non-profit’s activities.
Further, the amount of a qualified sponsorship payment cannot be contingent on attendance at an event, broadcast ratings, and other indicators of public exposure to an activity. However, a payment that is contingent on an event taking place would still qualify. Also, mere distribution or display of a sponsor’s products at the event should not affect the determination of whether a payment made by the sponsor is a qualified sponsorship payment.
In addition, payments for advertising or acknowledgments in an exempt organization’s regularly scheduled periodicals, such as monthly journals, would not qualify for exemption from UBIT. Such payments would qualify, however, if the sponsor receives an acknowledgment in a program or brochure distributed at a sponsored event.
Gift Tax Filing Requirements. Previously a gift tax return was required to be filed for gifts to charities in excess of $10,000, even though no gift tax was payable. Under the act, gifts to charity will not be subject to section 6019 gift tax filing requirements, as long as the entire value of the transferred property qualifies for the gift tax charitable deduction under section 2522 and the donated property is the donor’s entire interest in the property.
Tax-Exempt Bonds. The act deletes the $100,000 limit on proceeds that may remain unspent after six months for certain governmental and qualified 501(c)(3) bonds otherwise exempt from the rebate requirement. Other provisions exempt earnings on bond proceeds invested in bona fide debt service funds from the arbitrage rebate requirement and the penalty requirement of the 24-month exception if the spending requirements of that exception are otherwise satisfied and repeal the 150 percent of debt service yield restriction.
Taxable Subsidiaries. Despite objections from many in the non-profit community, House-Senate conferees retained a provision to modify the control test under section 512(b)(13) that is used to determine the extent to which an exempt entity controls its taxable subsidiary.
Currently, if 80 percent or more of a subsidiary is owned by or otherwise under the power of the exempt parent, the subsidiary is considered controlled by the parent and the sub’s payments to the parent of royalties, rents, interest, and annuities are taxable as unrelated business income. The act lowers the 80 percent threshold to 50 percent.
Also, payments of interest, rent, annuities, or royalties from a controlled entity to an exempt organization will be subject to UBIT to the extent they reduce the net unrelated income (or increase any net unrelated loss) of the controlled entity.
Pension Fund Losses Exemption. One of the world’s largest private pension systems, the Teacher’s Insurance Annuity Association-College Retirement Equities Fund (TIAA-CREF), will lose its tax-exempt status.
Risk Pools. Another provision affects tax-exempt, state sponsored organizations that provide medical coverage to "high-risk" individuals who, because of pre-existing medical conditions, have difficulty obtaining coverage elsewhere. The new law expands the definition of "high-risk individual" to include the child of such an individual, provided: the taxpayer is allowed a deduction for a personal exemption for the child for the taxable year; the child has not turned 17 as of the close of the calendar year in which the taxable year of the taxpayer begins; and the child is a son, daughter, stepson, stepdaughter, or foster child of the taxpayer.
Workers’ Compensation. The act clarifies that an organization created by a state to provide workers’ compensation insurance is exempt from taxation under section 501(c)(27).
Timeshare. Timeshare associations will be able to be taxed as Homeowner’s Associations under section 528, provided they meet various tests concerning the makeup of their income and expenditures as well as organizational and operational tests.
New IRS Publication
For the first time in several years the IRS has updated IRS publication 557, Tax Exempt Status for Your Organization. This publication is very well written and contains a wealth of information for both new and existing Non-Profits. It is available for downloading on the Department of Revenue Home Page.
Department of Revenue Internet Home Page
The Department of Revenue was one of the first state agencies to have an Internet Home Page [http://www.sctax.org] and we recently added a non-profit section. This section contains the three updated IRS publications:
526, Charitable Contributions
561, Determining the Value of Donated Property
557, Tax Exempt Status for Your Organization
It also contains all of the prior Non-Profit Updates which I have been mailing as well as the IRS Exempt Organization Search site. It will also contain the upcoming Department of Revenue Publication, State Tax Guide for Non-Profits, as well as the Annual Reporting Requirements memo.
We welcome your input regarding what else should be on it.
State Tax Guide for Non-Profits
We continue to make progress on the State Tax Guide publication. The draft Sales Tax chapter is now available for review and comment. Let me know if you, or someone in your office would be willing to review it.
Regrettably, there have been a spate of news stories regarding criminal investigations involving non-profits. The Post & Courier recently reported that a federal Judge in Charleston sentenced two Hilton Head residents to jail for defrauding a charity that was to aid retired clergy. The paper stated that the couple used money from the charity to purchase luxury residential properties, pay travel and living expenses and make private investment and mortgage payments.
The Greenville News reported that the FBI is investigating the disappearance of $100,000 from the group Alliance for a Smoke Free South Carolina.
Various papers in the state reported that the Department of Revenue had a couple arrested for alleged tax evasion through the use of various trusts. A CPA who signed the tax returns was also arrested.
Both Time and Newsweek carried a story three weeks ago about the lavish lifestyle the leader of the National Baptist Convention was enjoying. Buried in Newsweek’s story was the quote: "Prosecutors are looking into whether Lyons and Edwards broke state tax laws by registered a top-of-the-line $135,000 Mercedes-Benz S600V to the church- a move that allowed them to avoid paying sales tax."
Clippings of interest to the non-profit community from the state and national print media for the rough time period January to August 1, 1997 are now available upon request. Please e-mail, write, call (803) 737-1906, or fax (803) 737-5020 my Assistant Jane Baker if you would like a copy.