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IRS CURRENT DEVELOPMENTS, UBIT, AND SOCIAL MEDIA UPDATE. Agenda. What’s going on at the IRS Discussion regarding UBIT The Internet and Social Media . IRS CURRENT HIGHLIGHTS. INTRODUCTION: IRS ACTIVITY AND TAX REFORM. Congress and IRS have been focusing on nonprofits

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agenda
Agenda
  • What’s going on at the IRS
  • Discussion regarding UBIT
  • The Internet and Social Media
irs current highlights

IRS CURRENT HIGHLIGHTS

Client name - Event - Presentation title

introduction irs activity and tax reform
INTRODUCTION: IRS ACTIVITY AND TAX REFORM
  • Congress and IRS have been focusing on nonprofits
  • The IRS studies often result in legislation, e.g. hospital study resulted in 501(r)
  • Recent College and University Compliance Program Final Report also has had an impact, especially with regard to UBIT and Compensation
  • Congress has held dozens of hearings and conducted 11 working groups on Tax Reform
  • Rep. Camp came up with draft legislation, the Tax Reform Act of 2014 (TRA 2014) that covers the gamut and we will be talking about the provisions that could impact exempt organizations.
  • The Joint Committee on Taxation (JCT) has “scored” TRA 2014
  • Prognosis
general tax update and tax reform including tra2014 provisions
GENERAL TAX UPDATE AND TAX REFORMIncluding TRA2014 Provisions
  • Status of “Extenders” Bills
  • Internet Sales Tax Proposals
  • Supporting Organizations/DAF Guidance Issued 2013
  • Other - Current
  • House Ways and Means Committee - draft tax reform package

Dave Camp - TRA2014

tra2014 provisions house ways and means committee dave camp
TRA2014 PROVISIONSHouse Ways and Means Committee/Dave Camp
  • February 2014 release of comprehensive draft tax reform plan
  • Broad and dramatic provisions impacting many areas
  • Charitable Giving
    • An individual’s contributions could be deducted only to the extent in which they exceed 2% of the individual’s AGI.
    • Deductions for most donations of real property would be limited to cost basis.
    • The 50% income-based (AGI) percentage limit for certain contributions would be reduced to 40%.
tra2014 provisions draft tax reform act of 2014
TRA2014 PROVISIONSDraft “Tax Reform Act of 2014”
  • Elimination of Special Rule – College Athletic Event Seating Rights
    • Under existing law a special rule permits taxpayers to deduct as a charitable contribution 80% of the value of a contribution made to an educational institution to secure the right to purchase tickets for seating at an athletic event in a stadium at that institution.
    • Under the provision, the special rule that provides a charitable deduction of 80% of the amount paid for the right to purchase tickets for athletic events would be repealed.
  • Provisions Impacting Tax Exempt Entities . . .
tra2014 repeal of type ii and type iii supporting organizations
TRA2014: REPEAL OF TYPE II AND TYPE III Supporting Organizations
  • Current law:
    • Certain organizations that provide support to another public charity may also be classified as public charities rather than private foundations, even if not publicly supported
  • Supporting Organization (SO) must meet three tests. Essentially, the classification depends on how close its relationship is to the supported organization, with Type I supporting organizations having the closest relationship (akin to a parent-subsidiary relationship)
    • SUPPORTING ORGANIZATION TESTS - to qualify as a supporting organization, an organization must meet all three of the following tests:
      • (1) the organizational-and-operational test,
      • (2) the lack-of-outside-control test, and
      • (3) the relationship test.
tra2014 repeal of type ii and type iii supporting organizations continued
TRA2014: REPEAL OF TYPE II AND TYPE IIISupporting Organizations (Continued)
  • RELATIONSHIP TEST - a supporting organization must hold one of three relationships with the supported public charity. The organization must be:
      • Type I - operated, supervised, or controlled by a publicly supported organization;
      • Type II - supervised or controlled in connection with a publicly supported org.; or
      • Type III - operated in connection with a publicly supported organization.
  • Draft Provision:
    • Type II and Type III supporting organizations would be repealed
    • Organizations that support public charities would need to qualify as Type I supporting organizations, or they would be treated as private foundations
    • Type II and III existing on date of enactment would have until the end of 2015, to qualify under Type I definition or as a public charity, or be treated as a PF
    • JCT estimate: provision would increase revenues by $1.4 billion over 2014-2023
irs 2013 irs eo workplan ubit
IRS 2013 IRS EO Workplan UBIT
    • EO continued work on its Unrelated Business Income Project begun in 2012
  • Statistics of Income

- 2006 tax year, less than 50% of returns filed showed positive amounts of UBTI

    • This year IRS will be examining a “statistically valid” sample of nonprofits that have reported “substantial” UBI for 3 consecutive years but have reported no income tax due
    • We see a lot of organizations in exactly this situation
      • May be legitimate (e.g., LLC/LP investments and/or business activities that will eventually turn around)
      • May be result of aggressive expense allocations
      • May be caused by netting a perennial loss activity (that does not qualify as a trade or business) with other activities which do produce UBI
      • Sometimes, all of the above
irs 2013 exempt organization workplan college and university compliance program cucp
IRS 2013 Exempt Organization Workplan College and University Compliance Program(CUCP)
  • The Project was begun over 4 years ago in 2008 when the IRS sent a 33-page questionnaire to 400 colleges and universities that included public, private, small, large and medium sized institutions. An interim report was issued in 2010.
  • As a result of the answers to the questionnaire, IRS decided to examine 34 of the schools and waited until those examinations were completed to come out with the final report
  • April 25, 2013—IRS issued the CUCP Final Report
cucp final report ubit
CUCP Final Report—UBIT
  • Underreporting of UBTI resulted in an increase in UBTI for the schools totaling approximately $90 million in the aggregate and disallowance of more than $170 million in losses and net operating losses (NOLs)
  • Disallowance of losses due to lack of profit motive;
  • Improper expense allocations, such as where expenses for related activities were used to offset unrelated income or where an allocation of overhead to unrelated activities was unreasonable;
  • Errors in computations or substantiation of NOLs; and
  • Misclassification of an activity as exempt when it was really unrelated.
  • Main areas of focus:
  • Fitness and recreation centers and sports camps, arenas and golf courses; and advertising and facility rentals
cucp final report compensation
CUCP Final Report--Compensation
  • Compensation of the most highly paid was also under the microscope, especially, coaches, investment managers, highly paid faculty and administrators.
  • Employment Taxes The IRS also reviewed employment taxes of the colleges and universities. As a result of the project there were wage adjustments totaling about $36 million and resulting taxes and penalties of $7 million.
  • Retirement Plans Also, with regard to retirement plan adjustments there were increases in wages of more than $1 million and the assessment of more than $200,000 in taxes and penalties.
summary
Summary
  • Although IRS EO resources have diminished, they are more focused in areas of perceived abuse and potential revenue.
  • Congress is concerned about the abuses and potential revenue loss and could increase the IRS EO budget and enact bright line tests to make enforcement easier and collect more revenue.
  • Documentation is key!
  • Stay tuned
slide15

UBIT

Client name - Event - Presentation title

unrelated business income tax
Unrelated Business Income Tax
  • Who is subject to UBIT?
    • IRC 501(c) organizations, Pension plans/pension trusts

and state and municipal colleges and universities

  • Elements of unrelated business taxable income (“UBTI”):
    • “Income” derived from a:
      • “Trade or business” that is
      • “Regularly carried on” and
      • Not “substantially related” to the organization’s exempt purposes
      • Subject to exceptions/modifications
unrelated business income
Unrelated Business Income
  • Potentials Sources of UBI
  • Investment in partnerships (LP, LLP, LLC, SMLLC)
  • Debt financed property
  • Advertising
  • Alternative investments
  • Laboratory revenue
  • Retail pharmacy
  • Management services
  • Gift shop
  • Fitness centers
ubit modifications for most exempt organizations
UBIT Modifications (for most Exempt Organizations)
  • Interest and dividends
  • Rental income (special rules for personal property, services, net profits)
  • Royalties
  • Gains and losses from sales, exchanges, or other dispositions
  • Net operating loss deduction
  • Charitable Contribution deductions for contributions made to another qualified organization (Deduction limits are set at 10 percent of income from unrelated business activities without regard to the deduction for contributions)
  • Specific deduction of $1,000.
advertising
Advertising
  • Subject to unrelated business income tax
  • “Any message or other programming which is broadcast, published, displayed or distributed in exchange for any remuneration, and which promotes or markets any company, service, facility or product.”
  • Advertising does not include acknowledgements
pass through entities
Pass-through entities
  • A joint venture, partnership, an interest in a limited liability company (LLC)
      • Entity level tax is not imposed on a pass-through entity
      • Activities are attributed to organization as a partner and member
      • Income and expense retain their character to organization as a partner or member

Examples of possible issues in the UBI context

      • Activities may adversely effect tax-exempt status
      • Distributable income may be taxable as UBI
ubit deductions
UBIT Deductions

Allowable Deductions

  • Ordinary and necessary
  • Proximate and primary relationship to the business activity
  • Related Party Rules
  • Meals and Entertainment
  • Fines and Penalties
  • Excess readership costs
ubi expenses
UBI Expenses
  • Item must first be a deductible item under the IRC
  • If there are losses from the activity on a continual basis, the IRS and the courts have taken the position that there is no profit motive and therefore the trade or business requirement has not been met.
      • Portland Golf Club, 497 US 154(1990)
      • Groetzinger, 480 US 23(1987)
      • There may be a legitimate reason for the loss
statute of limitations and ubi
Statute of Limitations and UBI
  • In general, for federal income tax purposes, the government has three years from the date a tax return is filed to go back and assess taxes and otherwise, there is a statute of limitations on going back further unless there is a material understatement of tax liability, i.e., greater than a 25% understatement and then the statute of limitations is generally six years.
  • If an organization never filed a tax return, then there is no limitation on how far back the government can go to assess taxes, interest and penalties.
  • If a net operating loss was generated in a year where the statute is closed, but the loss is being carried forward, IRS can look at the circumstances surrounding the loss and disallow in a future year.
the internet and social media

THE INTERNET AND SOCIAL MEDIA

Client name - Event - Presentation title

the internet and social media1
The Internet and Social Media
  • Cost effective way for nonprofits to increase communications and fundraising to wide audience
  • Most popularly used:
          • Websites
          • Emails
          • Facebook
          • Twitter
          • YouTube
irs activity with social media
IRS Activity With Social Media
  • IRS is actually very active with social media. They have:
          • Multiple Twitter accounts
          • Facebook pages
    • Very little guidance has been given to organizations regarding social media
    • Official IRS stance: Treat online communications (Internet, Facebook, Twitter) same as other forms of communications
why should organizations be concerned about social media from tax perspective
Why should organizations be concerned about social media from tax perspective?
  • IRS agents have been trained to look at your website and social media
  • Free access to organization’s information and potential audit trail for IRS and states regarding:
          • Political activities/ lobbying
          • Are online and social media activities in accordance with organization’s exempt purpose
          • Potential sources of UBIT such as:
            • Advertising vs. Qualified Sponsorship Income
          • Charitable solicitation (also of interest to state regulators)
ubit implications of social media
UBIT Implications of Social Media
  • As discussed earlier, IRS Code and Regulations are enforced and applied to an organization’s online and social media activities same as normal activities.
  • Example of UBIT potential implication of Social Media
          • Advertising versus Qualified Sponsorship Payments
          • Examples of what qualifies as a Qualified Sponsorship Payment versus Advertising in online activities are shown in IRC Reg. 1.513-4(f)
irs regulations
IRS Regulations
  • Example (11). W, a symphony orchestra, maintains a website containing pertinent information and its performance schedule. The Music Shop makes a payment to W to fund a concert series, and W posts a list of its sponsors on its website, including the Music Shop's name and Internet address. W's website does not promote the Music Shop or advertise its merchandise. The Music Shop's Internet address appears as a hyperlink from W's website to the Music Shop's website. W's posting of the Music Shop's name and Internet address on its website constitutes acknowledgment of the sponsorship. The entire payment is a qualified sponsorship payment, which is not income from an unrelated trade or business.
ubit implications of social media continued
UBIT Implications of Social Media (continued)
  • Example:
  • Organization tweets that one of its corporate sponsors is running a special on hammers and receives a commission based on number of tweeters who access the sponsor’s site.
        • In applying IRS current rules and regs regarding this:
          • Tweet would be considered advertising
          • Commission would constitute UBI
          • Could that tweet taint the overall Corporate Sponsorship agreement with sponsor?
ubit implications of social media continued1
UBIT Implications of Social Media (continued)
  • Another hot item: Value of Facebook “Like”
    • Facebook “like” may have some value
    • Some analysis has valued a “Like “ at over $100
  • This could impact sponsorship payments:
      • If a sponsorship payment falls into the “qualified sponsorship payment” safe harbor, it will be excluded from UBI.
      • If an organization encourages its fans/members to “like” a sponsor’s Facebook page, this could be seen as a substantial return benefit, and a portion of the sponsorship payment could be advertising revenue subject to UBIT.
best practices regarding social media
Best practices regarding Social Media
  • Develop and enforce social media policies for the organization as well as guidelines for its employees.
  • Remember a lot of damage can be done in 140 characters with an attachment.
  • Want to avoid the nightmare stories of “drunken” or “destructive “ tweets or Facebook posts from disgruntled employees or representatives of the organization.
  • As with normal offline activities, consult your tax advisor and legal counsel regarding making sure the organization’s online and social media activities are structured correctly in order to minimize IRS and legal scrutiny and exposure as well as to protect the organization’s reputation.
summary1
Summary
  • Unrelated Business Income is a very hot topic with the IRS and it is a good time to get one’s house in order in this area
  • The recently completed IRS college and university report is an eye-opener in the UBI area and many lessons are there for all of us
  • Social media and the internet can also cause UBI problems– know what your organization is doing online
questions
Questions?
  • To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this presentation (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. 
  • Material discussed in this tax presentation is meant to provide general information and should not be acted on without professional advice tailored to your organization’s individual needs.