Community Foundations' Funds Subject of ABA Group Submission to Treasury, IRS

• DOI: http://doi.org/10.1002/npc.30256
• Date: 01 November 2016
• Published date: 01 November 2016

Bruce R. Hopkins’ NONPROFIT COUNSEL

3

November 2016

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

not sufficiently detailed. The court disagreed. The court

found that there was an adequate statement that the

report was prepared for income tax purposes, that the

date of value was close enough to the date of contribu-

tion, and that a proper definition of fair market value

was used in the report. In summary, the court con-

cluded, the LLC “complied either strictly or substantially

with each of the requirements for a qualified appraisal

report.”

As to the value of the property, the most contested

issue in the case was whether there was physical access

to the property. The court found that there was such

access, based on the existence of a well-maintained

gravel road. The government then argued there was

not legal access. The court found that an express, or

in the alternative an implied, easement existed for this

purpose. The LLC also was persuasive on the point that

it had the option to purchase access to the property

by going through a formal application process with

the flood control district. The court also considered

and resolved zoning issues in relation to the property’s

value. The court then addressed the sufficiency of the

appraisers’ reports, finding the LLC’s appraisal “entirely

reasonable,” and adopted that valuation as its finding.

The IRS’s final argument, based on the notion, as

articulated by the court, that it may be “missing the

boulder for the gravel” (the latter being the “little con-

tested points”), was that the LLC has “orchestrated a

voluntary, open-market sale transaction to appear as if it

was a bargain sale to enable its partners to entirely off-

set their significant capital gain with a charitable-contri-

bution deduction.” The LLC is not, however, wrote the

court, “blasting a new loophole in the Code.” Having

accepted the donor’s appraisal report in its entirety, the

court determined that the LLC was entitled to the full

amount of the deduction. In so holding, the court relied

heavily on a Tax Court decision finding that, following

extensive negotiations in an attempt to sell property at

fair market value, an organization made a valid bargain

sale of the property to a turnpike commission that

wanted the land to complete a highway interchange

(Consolidated Investors Group v. Commissioner (sum-

marized in the March 2010 issue)). [9.19, 21.5(c)] ◆

COMMUNITY FOUNDATIONS’

FUNDS SUBJECT OF ABA

GROUP SUBMISSION TO

TREASURY, IRS

The American Bar Association Section of Real Prop-

erty, Trust and Estate Law, Charitable Planning and

Organizations Group, submitted comments to the Trea-

sury Department and IRS on funds traditionally held by

community foundations in relation to prospective regu-

lations concerning the donor-advised funds law.

The Group noted that the Foundation Center esti-

mated that community foundations made grants in fiscal

year 2015 totaling $6 billion. These grants were made

from a variety of community foundation funds, includ-

ing designated funds, field-of-interest funds, scholarship

funds, agency funds, and fiscal sponsorship funds. The

point of the submission is to “clarify” that these funds

are not donor-advised funds.

These funds, the Group stated, are typically gov-

erned by an advisory committee. This is pertinent

because the law permits Treasury to exempt a fund

advised by a committee from the definition of a donor-

advised fund where the committee is not directly or indi-

rectly controlled by the donor or any person appointed

or designated by the donor for the purpose of advising

with respect to distributions from the fund, along with

related persons (IRC § 4966(d)(2)(C)(i)).

The Group urged Treasury to adopt the definition of

control used in Prop. Reg. § 1.509(a)-4(f)(5)(ii) (in the sup-

porting organizations context)—a “50 percent or more”

test. As to the matter of related persons, the Group asked

Treasury to use the intermediate sanctions rules that

define the term disqualified person (IRC § 4958).

These exceptions are important because donor-

advised funds can be involved in the imposition of

penalties for making grants to individuals (IRC § 4967(a)

(1)). But these other types of funds are not so taxed,

including certain scholarship funds (IRC § 4966(d)(2)(B)).

[11.8(b), 12.3(b)(iii)] ◆

IS THERE A BROADER ROLE

FOR THE NEW GUIDANCE

AS TO MANAGEMENT

CONTRACTS?

The IRS issued a revenue procedure that provides

safe harbor conditions under which a management

contract does not result in private business use of prop-

erty financed with governmental tax-exempt bonds or

cause the modified private business use test for property

financed with qualified 501(c)(3) bonds to be met (Rev.

Proc. 2016-44). This revenue procedure supersedes part

or all of prior guidance (including the canonical Rev.

Proc. 97-13).

Prior guidance (97-13) specified various permitted

terms of contracts that depend on the extent to which

the compensation is a fixed amount. That is, the greater

the percentage of fixed compensation, the longer the

permitted term of the management contract.

These safe harbors were expanded to address cer-

tain developments involving accountable care orga-