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Library of Congress Cataloging-in-Publication Data:
ISBN 9781118317112 (main edition)
ISBN 9781119766155 (supplement)
ISBN 9781119766254 (ePDF)
ISBN 9781119766216 (ePub)
Cover Design: Wiley
Cover Image: ©iStock.com/Felix Mockel
To my wife of 50+ wonderful years, Judy, whose love, devotion, and patience have made this book possible; and to David, Patty, Hayley, and Jacob; Noah, Brooke, Emme, and Ryder Aaron; Adam, Randi, Gabby, and Eva; and Sammy, Rebecca, Benjamin, and Jonah.
Nonprofits and their boards have two constituencies: the charitable classes they serve and the financial security of their own organizations. At the time of this writing, with COVID-19 cases again rising across the United States, there is heightened need to evaluate both their financial viability and their ability to serve their charitable classes with a focus on the joint venture structure.
It is important to note that 97% of nonprofits have budgets of $5M or less and 92% have under $1M, but charities are not just critical to their charitable classes, they are also critical to our economy. Collectively, charitable nonprofits are the third-largest workforce in the nation—larger than construction, finance, and manufacturing.1
In the Great Recession, as for-profits slashed their payrolls, nonprofits were sources of employment, as they were in a position to expand their staffs. However, circumstances are different in 2020 COVID-19 America. With the U.S. economy closing, reopening, and closing again in different parts of the country, charities and other nonprofits are again struggling. Code § 501(c)(3) and 501(c)(19) organizations (veterans associations) were eligible for assistance under the Payroll Protection Program (“PPP”), but information released regarding charitable organizations that received these loans indicates that large institutions fared better in navigating the application process than did smaller organizations.2 There are other federal assistance programs with additional ones reportedly in the pipeline.
Government funding of nonprofit activities, already a declining revenue source for nonprofits, will only decrease further as consumer spending on tourism, live sports events, brick-and-mortar retail, restaurants, and so on has come to a halt. In 2018, states collected $83 billion in taxes from travel and tourism, $152 billion from sports betting. Those tax bases have taken an extreme hit. “While it is not clear at this early stage what services state and local governments would have to cut to make up the shortfall, the biggest expenditures annually go toward education, public welfare, which includes Medicaid spending, and hospitals and health care, according to the Urban Institute. Nevada and Florida's tourism-specific taxes on things like gaming and hotel beds go toward education and infrastructure funding, respectively.”3
Moreover, through the lens of hindsight, the Tax Cuts and Jobs Act tax law change that basically eliminated the charitable deduction tax incentive for most Americans (who now claim the standard deduction and don't itemize) was unfortunate and untimely. Even the new above-the-line $300 deduction for non-itemizers will not be sufficient to incentivize the amount of donations that are needed. On the other hand, media reports indicate that many wealthy persons with donor-advised funds (whose undistributed assets in 2018 were estimated at $120 billion) have apparently voluntarily increased distributions from their accounts in response to the crisis.4
In this unprecedented environment, many nonprofits will not survive. Others, with assets or valuable programs in place, will seek mergers or joint venture partners, including for-profit equity. Now more than ever we need Congressional action to increase private giving to our charities by enacting minimum payout requirements for donor-advised funds as well as increased tax incentives for charitable giving by non-itemizers, such as an unlimited above-the-line deduction for non-itemizers.
In Chapter 1, there is discussion of the impact of COVID-19 and business owners interested in providing financial assistance to furloughed or terminated employees, including a discussion of employer-sponsored charity and section 139 payments.
In Chapter 2, there is a review of the impact of the CARES Act on contributions by individuals and corporations along with the advantages of a § 501(c)(4) organization compared to § 501(c)(3) as to participation in policy-making, especially in the wake of COVID-19.
In Chapter 6, there is an analysis of IRS Private Letter Ruling 202005020, which examines the use of a wholly-owned for-profit subsidiary and raises new concerns as to whether the traditional structural model is being reexamined by the IRS. The chapter also reviews Christian online streaming services, which may raise UBIT issues, as well as the growth of benefit and flexible corporations as partners in joint ventures in view of the more holistic and community-minded view of business in society.
In Chapter 8, there is analysis of the impact of the recently issued proposed regulations on the silo rules; the use of the North American Industry Class System (NAICS), which is fundamental to the new rules; and the aggregation test and the impact of the CARES Act. There is also discussion as to how a philanthropic owner of an LLC can mitigate the financial consequences of sacrificing an immediate tax deduction for contributions made to a philanthropic LLC.
In Chapter 12, there is a brief discussion regarding the scrutiny of nonprofit hospitals, including the executive compensation that began before the COVID-19 crisis.
In Chapter 13, there is a detailed analysis of the impact of the opportunity zone fund final regulations, which focuses on the unprecedented economic impact of COVID-19 on the industry. Also, a study of the historic tax credit rules with a focus on the Gateway Hotel tax court case and its ramifications on whether the transfer of tax credits to an indirect owner of the partnership constitutes taxable income to the partnership, along with a discussion of structuring alternatives.
In Chapter 14, there is a further examination of joint ventures with faculty members such as professors, scientists, and researchers, with the addition of four scenarios that illustrate the concepts, including the use of a C corporation blocker.
In Chapter 16, conservation organizations involved in joint ventures are studied, including an examination of recent IRS rulings and procedures, especially in cases of syndicated conservation easements.
The bottom line, once again, is that there is no one paradigm for joint ventures, especially in the face of the COVID-19 pandemic and its continued pressures on fundraising. In view of the financial distress that tax-exempt organizations face, they need to be creative, that is, flexible, and forge new paths to create and solve many issues affecting the future and the operations of the organization. This text is intended to suggest mechanisms to accomplish the very worthy goals of the charitable community, especially at a time of the pandemic crisis. The author believes that the opportunity zone legislation is likely to be expanded and should create an extremely attractive alternative that allows funds to be redirected into designated census tracts. In addition, many socially minded organizations may attempt to be reclassified as a 501(c)(4) as compared to a 501(c)(3) (see Chapter 2 in this regard). Finally, many prominent philanthropists are considering foregoing tax exemption completely to accomplish their charitable goals (see Section 6.8).
I gratefully acknowledge the assistance of my colleagues at Blank Rome LLP; Kendra Merchant for her excellent analysis on the final regulations involving opportunity zone funds and her review of the historic tax credit chapter; Lorenzo Thomas at Blank Rome, who has updated the Debt Restructuring and Asset Protection section in Chapter 19; and Gayle Forst for her contributions to the research of the Supplement. I want to call attention to the work of a number of the graduate tax students at Georgetown University Law Center who have taken my class, Special Topics in Exempt Organizations, and have written papers that provide substantive materials, which are included in the text. Javan A. Kline has written on the expansion of distance learning and examples regarding research joint ventures, including additional case studies; Eunice Lim has written a paper describing the advantages of foregoing tax exemption and the mitigation of financial tax consequences; Chase McBeath has written with regard to the political advocacy process relative to § 501(c)(4)s; James A. Maroules has discussed Christian streaming services and their potential UBIT impact; and Michelle Gough, JD, PhD, has analyzed the expansion of benefit and flexible purpose organizations. I again thank Amanda H. Nussbaum, who presented with me at Georgetown University Law Center on UBIT in PE practice and has provided materials referenced in the UBIT chapter. Finally, as always, I appreciate the outstanding contribution of Ronald Schultz at Alliant Group for his lectures at Georgetown University Law Center, his analysis of the IRS recent private letter ruling on the use of a for-profit corporate subsidiary, and his draft of current development regarding conservation organizations.
I especially acknowledge Linda Schrader, whose extraordinary kindness and sensitivity have been invaluable in the preparation of the manuscript as well as her coordination with the staff at John Wiley & Sons; Linda has been critical to the entire process since the beginning of the treatise.
p. 11. Add the following new paragraph at the end of this section:
There is continued congressional focus on university endowments in light of the soaring cost of tuition and the perceived relatively low rate of financial assistance provided by colleges and universities with substantial endowments. See Chapter 14 for a discussion on policy changes that are being proposed, including imposing an annual payout requirement on endowment funds, among others.
pp. 13–14. Delete the last paragraph on p. 13 and replace with the following:
The CDFI Fund has made 1,254 allocation awards totaling $61 billion in allocation authority since the NMTC Program's inception. Since inception through FY 2019, CDEs have disbursed a total of $52.5 billion in QEI proceeds to low-income community businesses (QALICBs).
p. 15. Add the following to the last paragraph of this section:
In January 2014, Treasury and the IRS issued Revenue Procedure 2014-12, 2014-3 I.R.B. 414, which established a safe harbor for federal historic tax credit investments made within a single tier through a master lease pass-through structure. The guidance was issued in response to the Historic Boardwalk decision referenced earlier.
p. 18. Add the following to the end of footnote 65:
PLR 201744019 (revocation of exemption of a § 501(c)(3) exempt hospital that was not operated exclusively for § 501(c)(3) purposes because it lacked ability to require for-profit manager to operate for charitable purposes).
p. 21. Add the following new paragraph to the end of this section:
In Section 4.10, there is an analysis of a virtual joint venture hypothetical, as to which a similar rationale should apply in a case in which the IRS proposes the revocation of an existing 501(c)(3) organization, alleging impermissible private benefit following an examination of its relationship with a for-profit entity. This commentator believes that the rationale should apply, notwithstanding the fact that no formal joint venture arrangement exists between the parties.
p. 28. Insert the following new paragraph at the end of this section:
The Internal Revenue Service recently issued final guidance for private foundations that updates examples that relate to program-related investments that pass muster under § 4944(c). The rules (T.D. 9762) provide changes and examples that were first provided in the 2012 Proposed Regulations. See subsection 6.5(b) for a detailed discussion of the new examples.
In April 2016 the IRS issued final guidance for private foundations that updates a number of examples of program-related investments that won't trigger excise taxes. Final Rules (T.D. 9762) illustrate changes to the examples provided in the 2012 Proposed Rules. In one change involving Example 11, a private foundation that invested in a drug company subsidiary developing a vaccine for disease predominantly affecting poor people in developing countries recognizes that, in addition to distributing the vaccine at affordable prices, the subsidiary is allowed to sell the vaccine to those who can afford it at fair market value prices. In Chapter 6, each of the examples and its revised Treasury guidelines are set forth.
p. 30. Add the following new paragraph to the end of this subsection:
In the Bipartisan Budget Act of 2015, the partnership audit rules have been revised, the effect of which is that adjustments of income, gain, loss, deduction, or credit are to be determined at the partnership level and the taxes attributable thereto will be assessed and collected at the partnership level. The new rules are effective beginning taxable years after December 31, 2018, although small partnerships may opt out before then. See Chapter 3 for a discussion of the application of the new rules.
p. 30. Add the following to the end of footnote 101:
See discussions regarding contribution of LLC/partnership interests to charity in subsection 2.11(f), infra, and Section 3.11, Sale or Other Disposition of Assets or Interests.
p. 34. Add the following paragraph after the first full paragraph on this page:
In September 2015, National Geographic Society formed a joint venture with 21st Century Fox, called the National Geographic Partners, a for-profit media joint venture. In this new venture, Fox contributed a substantial amount of cash to National Geographic, which increased its endowment to nearly $1 billion, in exchange for the contribution of significant assets, including its television channels and related digital and social media platforms. See subsection 6.3(b)(iv) for an analysis of the structure.
p. 45. Add the following footnote to the end of this section:
163.1See discussion regarding the contribution of LLC/partnership interests to charity in subsection 2.11(f).
p. 47. Add the following as footnote 175 to the last sentence of this section:
175In Burwell v. Hobby Lobby Stores, Inc., the Supreme Court cited p. 555 in this book, which described Google.org advancing its charitable goals while operating as a for-profit corporation. See footnote 24 of the Hobby Lobby decision, 134 S.Ct. 2751 (2014). The court recognized that while operating as a for-profit corporation, it is able to invest in for-profit endeavors, do lobbying, and tap Google's innovative technology and workforce. It acknowledged that states have increasingly adopted laws formally recognizing hybrid corporate forms.
p. 47. Add the following at the end of the subsection:
With the growing impact of COVID-19, many business owners are interested in providing financial assistance to their furloughed or terminated employees, even though they cannot afford to keep them on their payroll. An attractive option is the creation of an employer's-sponsored charity to raise tax-deductible contributions to be distributed to former employees who demonstrate need. In addition, a supplemental unemployment benefit trust under section 501(c)(17) can be formed as part of a plan to pay supplemental unemployment compensation benefits. Under section 139, employers can provide assistance directly to an employee free of income tax, provided the funds are used to pay or reimburse amounts that are reasonably expected to be incurred for incremental personal, family, or living expenses as a result of the COVID-19 crisis.
Under section 139, payments may cover the following expenses: (1) unreimbursed medical expenses and health-related expenses; (2) home expenses due to telecommuting; (3) housing costs for additional family members; (4) increased childcare and tutoring costs due to school closings; (5) additional commuting expenses; and (6) increased costs of home office supplies.
An employer-sponsored charity may cover not only those employees who are suffering under the impact of COVID-19 but may cover future hardships as well. However, charities benefiting individuals are permissible if the class of eligible beneficiaries is broad enough to be considered “indeterminable.” For example, a charity designed to benefit past, current, and future employees of an entire restaurant group due to the pandemic and future disasters is broad enough and the beneficiaries are not immediately identifiable because unknown future employees and current employees who are victims of future disasters are eligible beneficiaries. Secondly, the individuals who are invested with the authority to make the grants—the board of directors or a committee appointed by the board—must consist of a majority of individuals who do not exert “substantial influence” over the business with rank-and-file employees and should be included among the decision makers. Finally, individuals who demonstrate a financial need are eligible to receive assistance, but the charity should avoid giving a “one size fits all” grant to every employee. Acceptable purposes for such grants include payment of necessary healthcare expenses; providing cost of childcare or educational expenses for children of employees; or short-term grants meant to cover basic living expenses.
In Notice 2020-46, IRS provided guidance to employers for how to exchange employee elections to forego vacation, sick, or personal leave for cash payments that the employer makes to charitable organizations for COVID-19 relief. An employee who elects to relinquish aid leave will not be taxed on the value of the leave, if the payments in exchange for the leave are made by the individual's employer prior to January, 1, 2021, to a § 170(c) organization that provides “relief to victims of the COVID-19 pandemic.”