Appellate Court, in Applications Processing Cases, Rejects IRS Mootness Defense; “Catch‐22” Invoked

• Published date: 01 October 2016
• Date: 01 October 2016
• DOI: http://doi.org/10.1002/npc.30242

IRS ISSUES FINAL

REGULATIONS

CONCERNING RECEIPT

OF UBTI BY

REMAINDER TRUSTS

The IRS, on June 19, issued final regulations that provide guidance on the

tax effect of receipt of unrelated business taxable income (UBTI) by charitable

remainder trusts (T.D. 9403). The regulations, which affect remainder trusts that

have UBTI in tax years beginning after December 31, 2006, accompany the

change in the statutory law made by enactment of the Tax Relief and Health Care

Act of 2006 (see the February 2007 issue). A summary of the regulations in pro-

posed form is in the May 2008 issue.

Background

Prior to this law change, a charitable remainder trust could not be tax-exempt for

any year in which the trust had any UBTI. A trust in this circumstance was taxed on its

income, for each such year, under subchapter J as though it were a nonexempt, com-

plex trust. Today, however, charitable remainder trusts that have UBTI remain exempt

from federal income tax but are subject to a 100-percent excise tax on their UBTI.

Technicalities

This excise tax is imposed by IRC ß 664(c)(2)(A). The amount of UBTI is deter-

mined pursuant to IRC § 512; the modifications in IRC § 512(b) apply, including the

$1,000 specific deduction created by IRC § 512(b)(12). This excise tax is treated as

imposed under the excise tax rules that apply to private foundations and other tax-

exempt organizations (IRC chapter 42). Currently, the appropriate form to report

and pay the excise tax on charitable remainder trusts with UBTI is Form 4720.

Examples

For 2007, a charitable remainder annuity trust on the calendar year has

$60,000 of ordinary income, including $10,000 of gross income from a partnership

that constitutes unrelated business income to the trust. The trust does not have any

deductions that are directly connected with that incme. The trust has, for 2007,

administration expenses (deductible in computing taxable income) of $16,000,

resulting in net ordinary income of $44,000. The amount of UBTI is computed by

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 25 Number 8

August 2008

ALSO IN THIS ISSUE…

NYT Takes Measure

of Charitable Sector 2

IRS Rules Restructuring Plan

Will Eliminate Excess Business

Holdings 3

Churches and Politics:

New Developments 5

TIGTA Lightly Rebukes

TE/GE Division on PACI 5

Millionaires’ Amendment

Ruled Unconstitutional 7

Other Developments 7

Bruce R. Hopkins’

NONPROFITCOUNSEL

© 2008 Wiley Periodicals, Inc.

Published online in Wiley InterScience

(www.interscience.wiley.com).

DOI:10.1002/npc.20055

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

APPELLATE COURT,

IN APPLICATIONS

PROCESSING

CASES, REJECTS IRS

MOOTNESS DEFENSE;

“CATCH-22” INVOKED

Reversing the district court, the US Court of Appeals for the District of

Columbia Circuit, on August 5, held that two cases against the IRS regarding the

controversy concerning the processing of certain applications for recognition of

exemption cannot be dismissed as moot because the doctrine of voluntary cessa-

tion is inapplicable (informal consolidation of True the Vote, Inc. v. IRS; Linchpins

of Liberty v. US). In its opinion, the appellate court referenced this “unequal

treatment” of “victim” applicant organizations by the IRS, the agency’s “uncon-

stitutional acts,” the IRS’s “discriminatory processing and delay,” and viewpoint

discrimination on the part of the IRS.

The court of appeals affirmed the district court on two other points, including

the parties’ IRC § 6103 claims (discussed in NorCal Tea Party Patriots v. IRS (S.D.

Ohio (2014)).

Facts

Although the facts in these and other cases are amply familiar, it is instructive to

contemplate the DC Circuit’s phraseology. The court wrote that, “[i]nstead of process-

ing these applications in the normal course of IRS business,” the agency “selected out

these applicants for more rigorous review on the basis of their names, which were in

each instance indicative of a conservative or anti-Administration orientation.” In the

aftermath of the filing of these lawsuits, the court observed, the IRS “took action to

end some unconstitutional acts against at least a portion of the plaintiffs.” Referring to

Z Street, Inc. v. Koskinen (summarized in the August 2015 issue), the court stated that

it “once again consider[s] the implications of the Internal Revenue Service affording

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 33 Number 10

October 2016

Also in This issue…

Treasury, IRS Issue 2016–2017

Priority Guidance Plan 3

Sales of Product by Catalog and

in Retail Outlets Held Unrelated

Business 3

IRS Crafts Provision to Facilitate Use

of CRATs 4

Exempt Social Welfare Organization

Converts to Quasi‑governmental

Entity 5

(No) Exempt Business League

Corner 5

Other Recent IRS Private Letter

Rulings 6

Private Foundations Held Liable for

Taxes as Transferees of Transferee 6

IRS Publishes Highlights of Its Study

of Charities 1985–2010 7

IRS Publishes Private Foundation

Data 7

Taxpayer Advocate Service

Continues Fret Over Form 1023‑EZ 7

Other Developments 8

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DOI:10.1002/npc