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Tax-Exempt Organizations

November 15, 2017
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The landscape of tax reform continues to change, with further mark-ups, compromises, and changes occurring in the near future. But we believe it important to communicate to you where we are now. Below is a detailed comparison of the Senate proposed tax legislation (released on November 13, 2017) as compared to the House proposed tax legislation, which includes mark-ups.

Topic

House Bill (H.R. 1)

Senate Plan

Elimination of Exemption for Professional Sports Leagues

Not addressed.

The plan would eliminate language that provides exemptions for professional sports leagues and expressly exclude them from the definition of a business league under §501(c)(6).

Unrelated Business Taxable Income

The bill would increase unrelated business taxable income by the amount of certain fringe benefit expenses for which a deduction is disallowed, effective for amounts paid or incurred after 2017.

The bill would not address the inclusion of certain fringe benefit expenses in unrelated business taxable income.

 

The bill would require that income derived from the licensing of an organization’s name or logo be treated as derived from an unrelated trade or business regularly carried on and included in the organization’s unrelated business taxable income notwithstanding provisions that otherwise exclude passive income from unrelated business taxable income.

 

The bill would also require that organizations that carry on more than one unrelated trade or business separately calculate unrelated business taxable income for each trade or business, effectively prohibiting using deductions relating to one trade or business to offset income from a separate trade or business.

 

The changes would apply to tax years beginning after 2017.

Modifications to Intermediate Sanctions Excise Tax on Excess Benefit Transactions

Not addressed.

The plan would impose an excise tax on a tax-exempt organization involved in an excess benefit transaction equal to 10% of the excess benefit unless the organization establishes that minimum due diligence standards have been met, or satisfies the Secretary of the Treasury that other reasonable procedures were followed.

 

The plan would eliminate the rebuttable presumption of reasonableness contained in regulations and convert the regulations’ procedures into the standard by which an organization can establish that minimum due diligence has been performed.

 

The plan would eliminate the special rule regarding organization managers being treated as not “knowingly” participating where the manager relied on professional advice and the regulatory rule that a manager does not act knowingly where the organization satisfies the rebuttable presumption. However, the bill would retain reliance on professional advice as a factor in determining whether the manager “knowingly” participated in the transaction.

 

The plan would add investment advisors and athletic coaches to the definition of “disqualified persons” for purposes of the excess benefit transaction rules.

Modifications to Intermediate Sanctions Excise Tax on Excess Benefit Transactions (cont.)

The plan would also extend the intermediate sanctions excess benefit transaction rules to organizations described in §501(c)(5) (labor and certain other organizations) and §501(c)(6) (business leagues and certain other organizations).

 

The changes would apply to tax years beginning after 2017.

Excise Tax on Tax Exempt Organization Executive Compensation

The bill would impose a 20% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees. The tax would apply to all remuneration (including non-cash benefits) except for payment to tax- qualified retirement plans and amounts that are excludible from the executive’s gross income. This provision would also apply to parachute payments made to such individuals. The changes would apply to tax years beginning after 2017.

Same as H.R. 1 as passed by the House Ways & Means Committee.

Private Foundation Excise Tax on Investment Income

The bill would simplify the private foundation excise tax on investment income and would reduce the rate from 2% to 1.4%, effective for tax years beginning after 2017.

Not addressed.

Private Foundation Excise Tax on Failure to Distribute Income

For purposes of the private foundation excise tax on failure to distribute income, the bill would exclude organizations operating art museums from the definition of operating foundations, unless the museum is open for at least 1,000 hours during the tax year, effective for tax years beginning after 2017.

Not addressed.

Excise Tax on Investment Income of Private Colleges and Universities

The bill would impose a 1.4% excise tax on certain private colleges and universities. This provision would apply only to private institutions that have more than 500 students and assets of at least $100,000 per full-time student (not including assets used directly by the institution in carrying out the institution’s educational purpose). The changes would apply for tax years beginning after 2017.

Same as H.R. 1 as passed by the House Ways & Means Committee.

Exception From Excess Business Holding Tax for Independently- operated Philanthropic Business Holdings

The bill would exempt certain private foundations (PFs)  from the 10% excise tax for holding a 20% interest in a for- profit business, as well as the 200% excise tax for PFs that do not divest itself of the holding by the close of the subsequent tax year. To qualify for the exception, the PF would have to satisfy the following four conditions: (i) the PF must own 100% of the for-profit business’ voting stock, (ii) the PF must not have acquired the for-profit business by a means other than purchasing the business, (iii) the for-profit business must distribute all of its net operating income for any given tax year to the PF within 120 days of the close of the tax year, and (iv) the for-profit business’ directors and shareholders cannot be substantial contributors nor make up a majority of the PF’s board of directors. The changes would apply for tax years beginning after 2017.

Not addressed.

Churches Permitted to Make Statements Relating to Political Campaign in Ordinary Course of Activities

The bill would provide that churches (and their integrated auxiliaries and conventions or associations of churches) could make political statements in the ordinary course of activities in carrying out exempt purpose if the incremental expenses incurred are de minimis, effective for tax years ending after the date of the enactment.

Not addressed.

Additional Reporting Requirements for Donor Advised Fund Sponsoring Organizations

The bill would require donor advised funds to annually disclose (i) the average amount of grants made from their donor advised funds, and (2) their policies on inactive donor advised funds for frequency and minimum level of distributions, effective for returns filed for tax years beginning after 2017.

Not addressed.