IRS Conjures New Basis for Revocation: Failure to Pay Employment Taxes

Date01 May 2018
Published date01 May 2018
DOIhttp://doi.org/10.1002/npc.30459
Bruce R. Hopkins’ NONPROFIT COUNSEL
3
May 2018
THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY
Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc
As the court stated the matter, according to the plain-
tiffs in this case, the executive order and accompanying
guidance documents issued by the Office of Management
and Budget “trammel on an array of federal statutes, all of
which require federal agencies to consider statute-specific
factors in deciding whether to promulgate or to repeal
regulations, and none of which permits the implementing
agencies—or the President—to premise those decisions on
the adoption or repeal of other, unrelated regulations.”
The court concluded that the plaintiffs have “failed
to meet their burden of plausibly alleging or proffering
facts that, if accepted as true, would establish that they
have standing to sue.”
The plaintiffs sought to establish associational stand-
ing by “identifying an array of regulatory actions that,
they contend, the executive order will likely delay or
preclude and by arguing that their members will suffer
harm as a result.” But, the court held, the plaintiffs did
not identify particular members who will be harmed,
failed to allege facts sufficient to show that the relevant
agency would have issued the rule absent the executive
order, and failed plausibly to allege or otherwise show
that any delay of the regulatory action attributable to the
executive order will substantially increase the risk that
any of their members will be harmed or that any of their
members will face a substantial probability of harm once
such an increase in risk is taken into account.
The plaintiffs also contended that they have orga-
nizational standing to sue—that is, that they have
standing to sue in their own right. They alleged that the
executive order has a chilling effect on their missions to
encourage agencies to adopt regulations designed to
protect public health and safety, the environment, and
workers’ rights. That assertion also failed.
IRS CONJURES NEW BASIS
FOR REVOCATION: FAILURE
TO PAY EMPLOYMENT TAXES
A tax-exempt organization filed Forms W-2, reporting
it paid, during the period involved, wages to employees
and withheld federal employment taxes from those
wages. It did not, however, file federal employment tax
returns for the period. When contacted by the IRS, the
CEO of this organization told the revenue agent that the
organization did not have any employees.
The agent requested the organization to correct its
employment tax account at the IRS. The organization
never responded. It thus did not present any evidence to
prove that it does not have employees.
The IRS asserted the delinquency penalty for failure
to file the returns (IRC § 6651(a)(1)) and proceeded to
revoke this organization’s tax-exempt status (Priv. Ltr. Rul.
201809009).
FOREIGN FOUNDATION HELD
ABLE TO TREAT ASSETS
OF FOREIGN INVESTMENT
VEHICLE AS THOSE OF
DISREGARDED ENTITY, WITH
INCOME SUBJECT TO EXCISE
TAX
The IRS granted a foreign private foundation an
extension of time to file an entity classification election
on behalf of a disregarded entity, thereby causing the
entity’s income and assets to be exempt from federal
income tax but with the income subject to the private
foundation excise tax (Priv. Ltr. Rul. 201808010).
Facts
An organization (PF) is a tax-exempt entity in a coun-
try other than the United States. PF has a determination
letter that it is an exempt charitable organization under
US law, classified as a private foundation. PF annually
files an information return (Form 990-PF).
PF possesses a US investment portfolio that is held
through an investment vehicle in this country (F). PF is
the sole investor in F. The assets of F are managed by M,
a resident of this country. PF is the sole unit-holder in this
arrangement, with all earnings ultimately beneficially
owned by PF.
Intermediaries of M have been withholding US tax
on all US-source dividends paid to F. Thus, PF’s US stock
investments have been subject to tax, despite PF’s tax-
exempt status. PF represented to the IRS that it has been
relying on M to take appropriate steps to minimize its
taxes. PF did not realize that M was not taking PF’s US
tax exemption into account.
PF also represented that F is a foreign business entity
that is eligible to be disregarded as an entity separate
from its owner for federal income tax purposes. An
entity classification election (by means of Form 8832),
however, has not been filed.
Analysis
The IRS held that, if the entity classification elec-
tion is timely made, F will be treated as a disregarded
entity. The IRS further ruled that if F becomes a disre-
garded entity, F’s income and assets will be reported as
income and assets of PF, and the income will be exempt
from federal income tax. PF will include F’s income in
determining PF’s US source gross income subject to the
foreign private foundation 4 percent excise tax (IRC
4948(a)). [12.4]

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