Other Developments

• Date: 01 April 2020
• DOI: http://doi.org/10.1002/npc.30717
• Published date: 01 April 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

April 2020 7

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

on self-dealers — the initial tax (IRC § 4941(a)) and the

additional tax (IRC § 4941(b)). The first tax has a rate

of 10 percent; the second a rate of 200 percent. There

are also taxes on foundation managers where there is

knowing participation (the scienter requirement). That,

however, is hardly the end of the matter. As Aprill points

out, the foundation self-dealing tax subjects the entire

amount of a self-dealing transaction to excise tax. Also,

by statute, the initial self-dealing tax cannot be abated

by the IRS (IRC § 4962(b)). Then, there is the correction

feature, by which the self-dealer is required to pay the

amount involved to the foundation (IRC § 4941(e)(3)).

Practicing with the self-dealing rules for the 50

years they have been in effect, I have always regarded

this statutory scheme as, in effect, regulating behavior.

That is why many, including the IRS on occasion, refer

to these rules as prohibiting self-dealing. Aprill refers to

the “intended in terrorem effect” of IRC § 4941 and the

rule’s “paralyzing terror.”

Aprill observes that the self-dealing taxes “have

the Pigouvian impulse to protect the public from harm

by imposing an excise tax.” She, however, posits three

reasons why the self-dealing taxes are not Pigouvian in

nature. One, the additional tax rate of 200 percent is not

“small.” Two, the initial tax subjects the entire amount

involved in a self-dealing transaction to tax, “even if the

transaction benefits the foundation,” so that the requi-

site “social costs” are not involved. Third, a Pigouvian

tax assumes uniform social costs across all individuals

and firms; she wonders whether “differences between

large and small foundations, between corporate and

family foundations, local and national foundations, old

and new foundations, etc. should shape the applicable

excise tax rules.”

These, of course, are valid points. But I see in my

practice consistent patterns of behavior: transactions or

arrangements avoided because of fear of the self-deal-

ing rules and transactions occurring in ignorance of the

rules. Thus, perhaps like many taxes, the self-dealing

ones are not having a sweepingly perfect effect. Yet, tak-

ing the five elements of this tax regime collectively into

account, this package of tax rules looks like a “Pigouvian

tax” from here.

Now, the caveat. Aprill makes a good case for

the proposition that the self-dealing sanctions do not

entail taxes to begin with, being rather mere penalties.

[12.4(a)] ◆

CATCHING UP

The following items could not be included in last

month’s issue, due to space constraints.

• A battle over dot-org is brewing. The Internet Society

is a nonprofit organization that helps develop internet

policy. It controls the .org domain through the Public

Interest Registry. The society is contemplating selling

the management of .org to a private equity firm (for

more than $1 billion) to develop an endowment. But,

according to the January 8 New York Times, the pro-

posed sale is meeting with a “fierce backlash,” with

critics arguing that a “less commercial corner of the

internet should not be controlled by a profit-driven

private equity firm, as a matter of both principle and

practice.” A nonprofit corporation has been formed,

the Cooperative Corporation of .ORG Registrants, to

assume management of .org.

• Final regulations in explanation of the Opportunity

Zone program were issued on December 19, 2019

(T.D. 9889). The essence of this program is summa-

rized in the December 2018 issue. In a statement,

Treasury Secretary Steven Mnuchin said: “Oppor-

tunity zones are helping to revitalize communities

and create jobs for hardworking Americans. These

regulations provide clarity and certainty for investors,

which will enhance the flow of capital to new and

expanding businesses, and create sustained eco-

nomic growth in communities that have been left

behind.” [17.7 (2020 Cum. Supp.)]

• The IRS corrected its press release concerning the

new e-filing rules summarized in the February 2020

issue, beginning on p. 6. On p. 7 of that issue, left

column, first complete paragraph, the second and

third sentences should read: “For tax years ending

before July 31, 2021, the IRS will accept either paper

or electronic filing of Form 990-EZ. For tax years end-

ing July 31, 2021, and later, Forms 990-EZ must be

filed electronically.” [28.2, 28.7, 28.9] ◆

OTHER DEVELOPMENTS

• The US Supreme Court, on January 22, heard argu-

ments in the case styled Espinoza v. Montana Depart-

ment of Revenue (referenced in last month’s issue). This

litigation involves the constitutionality of so-called

Blaine Amendments (which exist in 37 states).

• The Court, on January 21, declined to expedite its

review of the case involving the continuing constitu-

tionality of the Patient Protection and Affordable Care

Act (State of Texas et al. v. United States (summarized

most recently in last month’s issue); petitions to that

end were filed by the House of Representatives (U.S.

House of Representatives v. Texas) and a coalition

of states (California et al. v. Texas). The US Court of

Appeals, on January 29, denied a rehearing of State

of Texas et al. v. United States by a vote of 8–6.

• The IRS issued a technical advice memorandum,

dated October 9, 2019, and released on January 10,

holding that the game of standard flash does not

qualify as a bingo game (IRC § 513(f)) and that the