October 27, 1998
Non-Profit update #17
Below you will find a number of items of general interest to the non-profit community.
Jeri Cook replaces Jane Baker
Jeri Cook has recently replaced Jane Baker as Special Projects Administrator for the Department of Revenue. She will head up our non-profit initiatives. Her phone number is (803)898-5445 and fax number is (803)898-5020.
IRS Publishes 1999 CPE Text
The Internal Revenue Service recently published the 21st edition of the Exempt Organizations Professional Education (CPE) program. The 397 page text consists of two parts. Part I contains 17 essays on technical topics and Part II, current developments, recapitulates the technical developments since 1996. As always, the CPE contains a wealth of information, and as detailed below, many of the topics covered have been targeted for review in the IRSís annual audit workplan. The CPE text covers the following topics:
- Whole Hospital Joint Ventures
- Intellectual Property
- Internet Service Providers
- Exemption of Medicaid HMOs and MSOs under IRC 501(c)(3)
- Update on Excise Tax and Occupational Tax on Wagering
- Allocation and Accounting Regulations for Arbitrage Bonds
- Identifying Abusive Transactions Involving IRC 501(c)(3) Organizations and Tax-Exempt Bonds
- IRC 457 Deferred Compensation Plans
- Veteransí Organizations
- Disaster Relief and Emergency Hardship Programs
- The proposed Regulations on the Disclosure Requirements for Annual Information Returns
- Application of IRC 6700 and 6701 to Charitable Contribution Deductions
- UBIT: Current Developments
- Donor Control
- Thirty Years After the 1969 TRA - developments under Chapter 42
- Fraternity Foundations
- Current Developments
IRS EO Workplan Released
The IRS Exempt Organization Division annually issues its work plan which essentially details the agencyís audit and other priorities. The fiscal year 1999 plan contains a number of items including the following:
- Coordinated Examination Procedure (CEP) audits -- healthcare and higher education continue as the top priority.
- Tax-Exempt Bond initiatives include a review of compliance with the arbitrage rules as well as adherence to the proper use of proceeds with respect to small issue bonds.
- Travel Tours.
- Health Maintenance Organizations. The IRS will look at whether certain HMOs are exempt because a substantial part of their activities includes providing commercial-type insurance.
- Exempt Organizations that sell donated goods will be examined to determine whether the goods are sold for significantly less than the value represented to the donor by the exempt organization. This initiative will focus, in large part, on the donation of used automobiles to charities. Problems in vehicle donation programs have generated quite a bit of press, including a lengthy article in The Chronicle of Philanthropy. Several state have recently passed legislation to curb perceived abuses in the donation of vehicles, planes, and boats.
- Corporate Sponsorship Guidance.
- Section 501(c)(12) Rural Electric Cooperatives; reporting of debt forgiveness as an item of income will be examined.
Deadline for Electronic Tax Paying for Non-Profits Rapidly Approaches
The deadline for non-profits to deposit taxes via electronic funds transfer (EFT) is January 1, 1999. (The original deadline of July 1, 1998, was extended to allow organizations to adapt to the changes brought about by eliminating paper deposit coupons in favor of EFT.)
If an organizationís combined liability for payroll taxes and federal income tax withholding was $50,000 or more during the 1995 or 1996 calendar year, it must complete the EFT by the new year or face penalties. In the event that the EFT is not completed on time or during instances where organizations continue to use paper coupons, the IRS will assess the organization a penalty of 10% of the deposit amount.
The change to electronic deposits generally does not require expensive new equipment, but it is dependent upon enrollment in the IRSís Electronic Federal Tax Payment System (EFTPS).
Deadline for Implementing New Accounting Standard Looms
New AICPA Statement of Position (SOP) 98-2, takes effect in fiscal years beginning on or after December 15, 1998. The purpose of the SOP is to prevent charities from overstating the amount of funds they use for programs (as opposed to "overhead"). The SOP provides considerable guidance over which costs should be applied to fundraising expenses and which costs should be applied to program or administrative expenses. Under SOP 98-2 non-profits must:
Count the cost of fundraising appeals entirely as a fundraising expense unless the charity proves that an appeal does more than just ask for contributions. The charity must demonstrate that the appeal meets criteria in three areas: its purpose, the people it is directed toward, and its content;
Count entirely as a fundraising expense those appeals conducted by fundraising consultants or charity staff members if a majority of their compensation is based on how much money is raised in those appeals; and
Count entirely as a fundraising expense those appeals that use slogans to encourage people to take action, such as to stop smoking, but do not clearly explain the need for, or benefits of, such action.
The March 26, 1998, issue of The Chronicle of Philanthropy discusses in detail the new statement.
Summary of South Carolina Not-For-Profit Laws
The September 1998 issue of the Exempt Organization Tax Review (Volume 21.3) contains a summary of the various South Carolina laws affecting non-profits, including the Non-Profit Corporation Act, Solicitation of Charitable Funds Act, Charitable Immunity, as well as a short discussion of the South Carolina Income, Sales and Use, Property, and Admissions Taxes, and the various exemptions.
Resources Available at the South Carolina State Library
Visitors to the South Carolina State Library can now access a number of electronic resources from seven workstations on the libraryís main floor, including FC Search, which profiles over 45,000 private foundation and corporate giving programs.
Non-Profit Postal Information
The Alliance of Non-Profit Mailersí new website, http://www.nonprofitmailers.org, features Tools for Nonprofit Mailers, as well as other publications, such as The Basics of Nonprofit Mail, and Eligibility Restrictions: What You Need to Know Before You Mail.
Review of Not-For-Profit Accounting Software
The December 1997 issue of Accounting Technology (pages 26-31) contains a lengthy review of various not-for-profit accounting software.
The August 13, 1998, issue of The Chronicle of Philanthropy contains a lengthy article on charitable split dollar insurance, and discusses the IRSís concern over this technique.
The May 21, 1998, issue of The Wall Street Journal contains an article detailing the IRSís crackdown on gifts of unvested stock options, particularly for gift and estate planning purposes where the gift is valued at rock-bottom prices.
The title of the article on the front page of the May 29, 1998, issue of The Wall Street Journal says it all: "The SO Trend: How to Succeed in Charity Without Really Giving: A ĎSupporting Organizationí lets the Wealthy Donate Assets, Still Keep Control".
The August 1998 issue of The ABA Journal contains a one-page article detailing some common hazards for individuals and their advisors seeking estate tax deductions for charitable bequests.
State Ranking for Charitable Giving
Attached is a portion of an article from The Chronicle of Philanthropy which provides a state-by-state ranking for charitable giving.
Secretary of State Jim Miles Warns: Charity Fraud is Growing
Last legislative session the General Assembly returned the Charities Division back to the Secretary of Stateís Office. Secretary of State Jim Miles recently hired two additional charities investigators. His office currently has about 20 cases under investigation.
Articles Cited in this Letter
We have limited copies of the various articles cited in this letter. Please contact Jeri Cook if you would like one.