TE/GE FY 2017 Work Plan Issued

• Published date: 01 November 2016
• DOI: http://doi.org/10.1002/npc.30254
• Date: 01 November 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

TE/GE FY 2017 WORK

PLAN ISSUED

The IRS, on September 29, unveiled the Tax Exempt and Government Enti-

ties FY 2017 Work Plan. This document states that in FY 2016 Exempt Organiza-

tions Examinations embarked on an “overarching compliance strategy” to ensure

that tax-exempt organizations complied with the requirements for exemption.

The agency implemented a “data driven case selection process” with a goal of

identifying and addressing existing and emerging high-risk areas of noncompli-

ance. Resources were focused on five issue areas: tax exemption, protection of

assets, the tax gap, international spending, and emerging issues.

As of June 30, 2016, EO Examinations had completed 4,984 examinations.

The issue areas were filing, organizational, and operational matters (2,109);

employment tax issues (1,323); unrelated business income issues (611); discon-

tinued operations and revocations (195); private inurement and private benefit

matters (192); legislative, political, and governance issues (59); and other matters

(495).

In FY 2017, the IRS will implement newly developed models for the Forms

5227, 990-T, and post-determination compliance program. It will work on the

referral system, continue in the five strategic issue areas, and continue review of

exempt hospitals. The agency will utilize data sources to identify organizations at

risk for private inurement and private benefit issues, and to “identify anomalies”

on returns filed by private foundations. It will be implementing a statistical sam-

pling methodology to assess compliance by exempt organizations.

Note: More details on this document will appear in next month’s issue. ◆

SUBSTANTIAL COMPLIANCE DOCTRINE

MAKES DRAMATIC COMEBACK, WITH

COURT FINDING VALID APPRAISAL AND

BARGAIN SALE

The US Tax Court ruled, on September 20, that a company’s appraisal was valid

for charitable deduction purposes, by application of the substantial compliance

doctrine, and that it engaged in a legitimate bargain-sale transaction based on

that appraisal’s value (Cave Buttes, LLC v. Commissioner).

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 33 Number 11

November 2016

Also in This issue…

Community Foundations’

Funds Subject of ABA Group

Submission to Treasury, IRS 3

Is There a Broader Role for

the New Guidance as to

Management Contracts? 3

GAO Issues Report on

Exemptions for Tax Regs and

Other Guidance 5

Report Issued on Property Tax

Exemptions for Charity and

Governments’ Money Woes 6

Study on Foundations’

Investments Issued 6

Status of Corporate Integration

Proposal 7

Recent IRS Private Letter Rulings 7

Other Developments 8

© 2016 Wiley Periodicals, Inc.

View this newsletter online at

wileyonlinelibrary.com

DOI:10.1002/npc