Court Enjoins CAL AG From Demanding Form 990, Schedule B

• Published date: 01 July 2016
• DOI: http://doi.org/10.1002/npc.30208
• Date: 01 July 2016

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

COURT ENJOINS

CAL AG FROM

DEMANDING FORM

990, SCHEDULE B

The US District Court for the Central District of California, on April 21, per-

manently enjoined the attorney general of California from demanding the Form

990, Schedule B, filed by a public charity with the IRS (Americans for Prosperity

Foundation v. Harris). Following a trial, the court found the Schedule B disclosure

requirement unconstitutional as applied to this charity (APF).

Facts

California law requires charitable organizations to file copies of their annual

information returns, including Schedule B (list of principal donors), with the state

as a condition of fundraising in the state. During 2001–2010, APF filed its Forms

990 with the state without Schedule B; it was listed as being in compliance

with the law. The attorney general’s policy changed in 2013, when that office

demanded completed Schedule Bs.

In this litigation (earlier summarized in the March 2016 and July 2016 issues),

the California attorney general has been contending that the state has a compel-

ling interest in receiving this information to protect the public. That office also

claims that the information is needed to determine whether organizations have

violated any laws.

Trial testimony showed that the lawyers and auditors for the state “seldom

use Schedule B when auditing or investigating charities.” One investigator testi-

fied that, out of about 540 investigations over 10 years, five involved a Schedule

B. The court’s record was said to lack “even a single, concrete instance in which

pre-investigation collection of a Schedule B did anything to advance the Attorney

General’s investigative, regulatory or enforcement efforts.”

During the trial, the court heard “ample evidence establishing that [APF],

its employees, supporters and donors face public threats, harassment, intimida-

tion, and retaliation once their support for and affiliation with the organization

becomes publicly known.” The court found that APF supporters have been sub-

jected to “abuses that warrant relief on an as-applied challenge.” It wrote that it

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 33 Number 7

July 2016

Also in This issue…

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DOI:10.1002/npc

Treasury, IRS Issue Update to

2015–2016 Priority Guidance Plan 2

Final PRI Regs Issued 3

Deductions for Gift of

Easement Denied Because of

Faulty Formula for Distribution

of Extinguishment Proceeds 4

Legal Assistance Organization

Doomed on Private Inurement,

Private Benefit Grounds 4

Motorsports Organization Ruled

Ineligible for Exemption, Largely

on Private Benefit Grounds 5

Executive Compensation

Amounts and Arrangements

Held Amply Reasonable 6

Other Recent IRS Private Letter

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Without Appropriation 7

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