FY 2018 TE/GE Work Plan Issued

• Published date: 01 December 2017
• DOI: http://doi.org/10.1002/npc.30402
• Date: 01 December 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

December 20174THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

FY 2018 TE/GE WORK PLAN

ISSUED

The Tax Exempt/Government Entities Division work

plan for fiscal year 2018 was released on September

28. TE/GE Commissioner Sunita Lough wrote in an

accompanying message that the division is “positioned

to implement some exciting changes.” Referencing the

“IRS’s and TE/GE’s declining workforce,” she added that

“efficiency, effectiveness and transparency” remain the

division’s “bywords going forward.”

The accomplishments for FY 2017 are said to be

modification of certain eligibility criteria for Form 1023-

EZ, alignment of the cross-functional Employment Tax

Knowledge Network with the other five EO K-Nets,

issuance of proposed adverse determination letters to

organizations that did not provide complete responses to

requested information, and processing of Forms 8976.

Emphasis is placed on “data-driven approaches,” which

include improvement in Forms 990, 990-EZ, and 990-PF

compliance models and examinations of private founda-

tions based on “potential anomalies” found on their annual

information return filings. Casework efforts include the con-

tinued pursuance of referrals (complaints) alleging noncom-

pliance by tax-exempt organizations and postdetermination

compliance examination of entities that received recognition

of exemption by means of Form 1023-EZ.

As is the case in recent years, the work plan is long

on management matters and production of online tech-

nical products and short on new initiatives involving the

law of tax-exempt organizations. As to the latter, three

items are of note:

• In early 2018, EO will revise Form 1023-EZ, to include

a required activity description and additional ques-

tions on gross receipts, asset thresholds, and public

charity/private foundation classification. Critics such

as the National Taxpayer Advocate will presumably

be happier, as the streamlined application becomes

less streamlined. The IRS dryly (I think) noted that,

“as a result of these changes, EO expects the aver-

age processing time for a Form 1023-EZ to increase.”

• The IRS stated that it will examine organizations that

operated as for-profit entities prior to their “conver-

sion” to charitable entities. Inclusion of this item is

a surprise. I hope this is a positive development for

these entities. The current IRS ruling posture is harsh,

viewing these situations as evidence of inherent com-

merciality and private inurement, which is not the

law (see, e.g., the December 2015 issue).

• The IRS also stated that it will examine organizations

that “show indicators of potential private benefit or

inurement to individuals or private entities.” This is

laudable, although it is hard to see how the IRS can

do more in these areas, inasmuch as application of

the private inurement and/or private benefit doc-

trines appears in nearly every weekly crop of private

letter rulings. [2.2(e)] ◆

$33 MILLION CHARITABLE

DEDUCTION LOST BECAUSE

MORTGAGES NOT FULLY

SUBORDINATED TO EASEMENT

The US Tax Court, on October 10, held that a $33 million

charitable deduction for a contribution of a façade ease-

ment was unavailable to the donor because mortgages on

the building were not fully subordinated to the easement,

in that the donee was not guaranteed to receive its share

of proceeds in the event the easement was extinguished

(Palmolive Building Investors, LLC v. Commissioner).

Facts

Palmolive Building Investors (Palmolive) executed an

easement deed in favor of the Landmarks Preservation

Council of Illinois (Council), a qualified organization (IRC

§ 170(h)(3)), the purpose of which is to preserve the exte-

rior perimeter walls of the Palmolive Building’s façade.

The deed places various restrictions on Palmolive and its

successors with respect to the easement and the building.

At the time the deed was executed, two mortgages

encumbered the building; they obligated Palmolive to

maintain insurance on the entire property, including the

façade, and granted Palmolive’s right to insurance pro-

ceeds to the mortgagees. Palmolive ostensibly obtained

mortgage subordination agreements from the two banks.

The deed, however, provides that, in the event the ease-

ment is extinguished through a judicial proceeding, the

mortgagee banks will have claims prior to that of the

Council to any proceeds received from the condemnation

proceedings, until the mortgages are satisfied.

Law

The tax regulations provide generally that, in order

for the conservation purpose of a contribution to be

enforceable in perpetuity, the “interest in the property

retained by the donor . . . must be subject to legally

enforceable restrictions . . . that will prevent uses of the

retained interest inconsistent with the conservation pur-

poses of the donation” (Reg. § 1.170A-14(g)(1)).

A deduction is not permitted for an interest in prop-

erty that is subject to a mortgage unless the mortgagee

subordinates its rights in the property to the right of the

donee organization (Reg. § 1.170A-14(g)(2)). A conser-

vation purpose can be treated as protected in perpetuity

if the restrictions are extinguished by a judicial proceed-

ing and the donee’s resulting proceeds are used in a

manner consistent with the conservation purposes (Reg.

§ 1.170A-14(g)(6)(i)). The donee is required to have a