House and Senate Pass Tax Reform Bills

• Date: 01 January 2018
• Published date: 01 January 2018
• DOI: http://doi.org/10.1002/npc.30413

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

HOUSE AND SENATE

PASS TAX REFORM

BILLS

House Bill

The House of Representatives, on November 16, passed on a party-line

vote (227–205) its version of the Tax Cuts and Jobs Act (H.R. 1). This legislation is

summarized in last month’s issue. The House Ways and Means Committee report

accompanying this measure is H. Rep. No. 115-409.

Two changes were made to the bill, pertaining to the law of tax-exempt organiza-

tions, after last month’s issue of the newsletter went to press:

• The provision that would impose a 1.4 percent excise tax on the investment

income of certain private colleges and universities was amended to ensure

that the assets subject to tax include those that are held by related organiza-

tions, in addition to those directly held by the educational institution (Act §

5103).

• The provision allowing political campaign speech in the ordinary course of

activities and with only de minimis expenses (proposed IRC § 501(s)) was

expanded to apply to all charitable (IRC § 501(c)(3)) entities; it would apply

for tax years beginning after 2018 and would sunset after 2023 (Act § 5201).

Commentary: As to the tax to be imposed on the payment of certain execu-

tive compensation, a case can be made for introducing a parity in the exempt

organizations context comparable to the limit on the business expense deduction

for compensation paid by publicly held corporations (IRC § 162(m)(1)). This provi-

sion, however, is also based on the notion that tax exemption is a “tax subsidy”

beneficently handed down to the nonprofit community by the federal govern-

ment, which is not true as a matter of law, and that compensation paid to exempt

organizations’ executives is an unwarranted “diversion of resources.”

It is hard to believe that the proposed modification of the Johnson Amend-

ment would trigger a $2.1 billion revenue loss (see below). The Joint Committee

on Taxation has apparently assumed that charities will be expending considerable

amounts of money on “de minimis” politicking. In any event, this provision, when

confined to churches and certain related religious organizations, would have

been blatantly unconstitutional (see the discussion of the Gaylor decision in last

month’s issue).

According to data from the National Association of College and University Busi-

ness Officers, the proposed tax in the House bill would apply to about 70 colleges,

while about 30 would be taxed under the Senate bill. ◆© 2018 Wiley Periodicals, Inc.

View this newsletter online at

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DOI:10.1002/npc

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 35 Number 1

January 2018

Also in This issue...

Joint Committee Scores Tax

Reform Proposals 3

Perils of Use of For-Profit

Management Company

Illustrated 4

Facial Challenge to California’s

Schedule B Disclosure Rule Fails 4

Nonprofit Pharmacy Fails to Gain

Recognition of Exemption 6

Foundation’s Return of Funds

to Which It Wasn’t Entitled

Ruled Not Taxable Expenditure 6

Other Recent IRS Private Letter

Rulings 6

Contemplating Excise Tax on

University Endowments 7

Proposal Would Codify Concept

of “Philanthropic Business” 7

Proposal Would Codify Minimum

Standards of Due Diligence for

Intermediate Sanctions Purposes 8

Other Developments 8