Tax Potpourri
Not-For-Profit Advisor , 2005 Fall

• Disclosure of family and business relationships between officers, directors, trustees, and key employees
• Compensation or other benefits paid to former officers, directors, trustees, and key employees
• Separate schedules for compensation of contractors for professional services versus other services
• Foreign grant-making and foreign bank accounts
• Contributions of real property conservation easements
• Lending activity between organizations and officers, directors, trustees and key employees
• Credit counseling activities

The draft forms are available on the IRS’s website: http://www.irs.gov/charities/charitable/article/0,,id=146362,00.html.

State Oversight of Public Charities
As we’ve reported in previous issues of the Not-For-Profit Advisor, over the past 18 months or so, charities have been the subject of extreme interest by Congress, in particular the Senate Finance Committee. Senator Charles Grassley has held a series of hearings to discuss abuses by charities, and the Panel on the Nonprofit Sector, convened by Independent Sector in response to these congressional concerns, has issued two sets of recommendations for improvements to charitable organization operations and oversight. Included in these recommendations are mandatory annual audits of charities with at least $1 million in revenue, increased oversight of certain types of charities, and best practices for corporate governance.

While Congress is reviewing the results of its hearings and the Panel’s recommendations, as many as 20 states are moving forward with oversight provisions of their own. Many of the states are seeking to extend the provisions of Sarbanes-Oxley, which currently only apply to publicly held entities, to charitable organizations. Advocates for exempt organizations are concerned that this may result in duplicative federal and state filing requirements, as well as overly burdensome filings and procedures that some see as inappropriate and unworkable for small, volunteer-based organizations.

Senator Grassley has indicated that he expects the Senate Finance Committee to take up this discussion again this fall. We’ll continue to monitor these developments and inform our clients as needed of the impact on their operations.

New Form 1098-C for Vehicle Donations
The IRS recently released Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes. This form is intended to fulfill the requirements enacted in the 2004 American Jobs Creation Act for donations of such items. Except in limited circumstances, donors of automobiles, boats, and airplanes may only deduct the cost of these contributions rather than the fair market value. The new form, which is available on the IRS’s website, is to be used by the charitable recipients of these donations to report the donations to the IRS and to provide the required written acknowledgment to the donor. For more information on these rules, see the Winter 2005 issue of the Not-For-Profit Advisor*.

Re-establishment of Leave Donation Program
Shortly after the September 11, 2001 terrorist attacks, the IRS instituted a program by which employees could "donate" paid time off to charitable organizations. In the wake of the Hurricane Katrina disaster, the IRS has unveiled plans to reinstate this program through the end of 2006.

Under this program, employees can choose to relinquish rights to a portion of their vacation and other paid leave time; in lieu of the donated time, the employer sends cash contributions to a qualifying charity specifically for Hurricane Katrina relief. Participating employees won’t be taxed on the foregone paid time off but will also not receive a tax deduction for the contribution (since they are allowed to exclude the compensation from their income). Employers will be allowed to deduct the payments to charity as ordinary business deductions rather than as charitable contributions.

Proposed Regulations Explain Interaction of Tax Exempt Status and Intermediate Sanctions
The IRS recently issued proposed regulations that provide guidance as to the interaction between the intermediate sanctions rules, which provide for penalties on excess benefit transactions with insiders, and qualification for tax-exempt status.

In addition to providing several examples that explain the requirement that a Section 501(c)(3) organization serve a public rather than a private interest, the new regulations also elaborate on a statement accompanying the 1996 intermediate sanctions legislation, indicating that intermediate sanctions penalties may be imposed in lieu of, or in addition to, revocation of exempt status.

Included in the regulations are guidelines and several examples that explain when excess benefit transactions will, and won’t, result in revocation of exempt status. For example, the regulations state that the following issues will be taken into consideration in determining whether the organization’s exemption should be revoked:

• The size and scope of the excess benefit transaction(s)
• The size and scope of the organization’s exempt activities
• Whether there have been repeated excess benefit transactions
• Whether the excess benefit has been corrected
• Whether the organization has taken steps to ensure that the transaction is not repeated