Catching Up

Published date01 April 2020
Date01 April 2020
April 2020 7
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
on self-dealers — the initial tax (IRC § 4941(a)) and the
additional tax (IRC § 4941(b)). The first tax has a rate
of 10 percent; the second a rate of 200 percent. There
are also taxes on foundation managers where there is
knowing participation (the scienter requirement). That,
however, is hardly the end of the matter. As Aprill points
out, the foundation self-dealing tax subjects the entire
amount of a self-dealing transaction to excise tax. Also,
by statute, the initial self-dealing tax cannot be abated
by the IRS (IRC § 4962(b)). Then, there is the correction
feature, by which the self-dealer is required to pay the
amount involved to the foundation (IRC § 4941(e)(3)).
Practicing with the self-dealing rules for the 50
years they have been in effect, I have always regarded
this statutory scheme as, in effect, regulating behavior.
That is why many, including the IRS on occasion, refer
to these rules as prohibiting self-dealing. Aprill refers to
the “intended in terrorem effect” of IRC § 4941 and the
rule’s “paralyzing terror.”
Aprill observes that the self-dealing taxes “have
the Pigouvian impulse to protect the public from harm
by imposing an excise tax.” She, however, posits three
reasons why the self-dealing taxes are not Pigouvian in
nature. One, the additional tax rate of 200 percent is not
“small.” Two, the initial tax subjects the entire amount
involved in a self-dealing transaction to tax, “even if the
transaction benefits the foundation,” so that the requi-
site “social costs” are not involved. Third, a Pigouvian
tax assumes uniform social costs across all individuals
and firms; she wonders whether “differences between
large and small foundations, between corporate and
family foundations, local and national foundations, old
and new foundations, etc. should shape the applicable
excise tax rules.”
These, of course, are valid points. But I see in my
practice consistent patterns of behavior: transactions or
arrangements avoided because of fear of the self-deal-
ing rules and transactions occurring in ignorance of the
rules. Thus, perhaps like many taxes, the self-dealing
ones are not having a sweepingly perfect effect. Yet, tak-
ing the five elements of this tax regime collectively into
account, this package of tax rules looks like a “Pigouvian
tax” from here.
Now, the caveat. Aprill makes a good case for
the proposition that the self-dealing sanctions do not
entail taxes to begin with, being rather mere penalties.
The following items could not be included in last
month’s issue, due to space constraints.
A battle over dot-org is brewing. The Internet Society
is a nonprofit organization that helps develop internet
policy. It controls the .org domain through the Public
Interest Registry. The society is contemplating selling
the management of .org to a private equity firm (for
more than $1 billion) to develop an endowment. But,
according to the January 8 New York Times, the pro-
posed sale is meeting with a “fierce backlash,” with
critics arguing that a “less commercial corner of the
internet should not be controlled by a profit-driven
private equity firm, as a matter of both principle and
practice.” A nonprofit corporation has been formed,
the Cooperative Corporation of .ORG Registrants, to
assume management of .org.
Final regulations in explanation of the Opportunity
Zone program were issued on December 19, 2019
(T.D. 9889). The essence of this program is summa-
rized in the December 2018 issue. In a statement,
Treasury Secretary Steven Mnuchin said: “Oppor-
tunity zones are helping to revitalize communities
and create jobs for hardworking Americans. These
regulations provide clarity and certainty for investors,
which will enhance the flow of capital to new and
expanding businesses, and create sustained eco-
nomic growth in communities that have been left
behind.” [17.7 (2020 Cum. Supp.)]
The IRS corrected its press release concerning the
new e-filing rules summarized in the February 2020
issue, beginning on p. 6. On p. 7 of that issue, left
column, first complete paragraph, the second and
third sentences should read: “For tax years ending
before July 31, 2021, the IRS will accept either paper
or electronic filing of Form 990-EZ. For tax years end-
ing July 31, 2021, and later, Forms 990-EZ must be
filed electronically.” [28.2, 28.7, 28.9]
The US Supreme Court, on January 22, heard argu-
ments in the case styled Espinoza v. Montana Depart-
ment of Revenue (referenced in last month’s issue). This
litigation involves the constitutionality of so-called
Blaine Amendments (which exist in 37 states).
The Court, on January 21, declined to expedite its
review of the case involving the continuing constitu-
tionality of the Patient Protection and Affordable Care
Act (State of Texas et al. v. United States (summarized
most recently in last month’s issue); petitions to that
end were filed by the House of Representatives (U.S.
House of Representatives v. Texas) and a coalition
of states (California et al. v. Texas). The US Court of
Appeals, on January 29, denied a rehearing of State
of Texas et al. v. United States by a vote of 8–6.
The IRS issued a technical advice memorandum,
dated October 9, 2019, and released on January 10,
holding that the game of standard flash does not
qualify as a bingo game (IRC § 513(f)) and that the

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