Other Developments

• Date: 01 January 2018
• Published date: 01 January 2018
• DOI: http://doi.org/10.1002/npc.30423

Bruce R. Hopkins’ NONPROFIT COUNSEL

January 20188THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

PROPOSAL WOULD CODIFY

MINIMUM STANDARDS

OF DUE DILIGENCE FOR

INTERMEDIATE SANCTIONS

PURPOSES

The Senate Finance Committee tax reform bill would

introduce law providing that a transaction would not be

an excess benefit transaction if the applicable tax-exempt

organization establishes (1) that minimum standards of due

diligence were met with respect to the transaction or (2) to

the satisfaction of the IRS that “other reasonable proce-

dures” were used to ensure that an excess benefit was not

provided (proposed IRC § 4958(d)(3)(A)).

The elements of these minimum standards of due

diligence would be that (1) the transaction was approved

in advance by an authorized body of the organization

involved, composed entirely of individuals who did not

have a conflict of interest with respect to the transaction;

(2) this body obtained and relied on appropriate data as

to comparability prior to approval of the transaction; and

(3) the body adequately and concurrently documented

the basis for its approval of the transaction (proposed IRC

§ 4958(d)(3)(B)). As noted, these elements are essentially

identical to those in the current rebuttable presumption of

reasonableness.

The intermediate sanctions law would be further

amended with the admonition that meeting these mini-

mum standards or use of some other set of reasonable

procedures with respect to a transaction would not give

rise to a presumption of reasonableness and would not, by

itself, support a conclusion that an organization manager

did not act knowingly (for purposes of the existing excise

tax on management (IRC § 4958(a)(2)) or that the exempt

organization did not act willfully or without reasonable

cause (for purposes of the proposed 10 percent tax on the

organization (proposed IRC § 4958(a)(3)).

Thus, if this proposal is enacted, the existing standards

would be codified but the existing presumption would (to

the IRS’s delight) be lost. [21.9, 21.10] ◆

OTHER DEVELOPMENTS

◆In what must be the most heavily redacted document

ever issued by the IRS (even the Code section underlying

the exemption involved is zapped), IRS counsel ruled that

a trust, subject to the unrelated business rules, is engag-

ing in activities (redacted), with respect to partnerships

and debt-financed property, that are not substantially

related to the trust’s exempt purpose (Tech. Adv. Mem.

201741019). Counsel stated: “With respect to a partner-

ship in which an exempt organization is a member, the

trade or business operated by the partnership must be

substantially related to the exempt purpose of the organi-

zation in order for the exempt organization’s income from

the partnership that is attributable to the trade or business

of the partnership to be exempt from UBIT.” The rule is

the same in the unrelated debt-financed income context.

The trust did not show that the use of its debt-financed

properties is substantially related to achievement of its

exempt purposes. Thus, the trust’s income involved was

held subject to unrelated business income tax. [24.7, 24.9]

◆The New York Times, in its November 9 edition, con-

tained a rather snarky front-page article about blocker

corporations, which were pronounced a “loophole,” which

is not true. These corporations serve to deflect income

otherwise taxable to institutions such as colleges, univer-

sities, and private foundations, rendering it nontaxable

when passed along to them. The IRS has ruled favorably,

in the exempt organizations context, with respect to these

blockers (e.g., Priv. Ltr. Rul. 201430017, summarized in the

October 2014 issue). The article rails about “endowment

tax breaks,” referring presumably to tax exemption and

deductible charitable contributions.

Quote of the Month: The Senate’s tax reform bill

contains a proposed sense-of-the-Senate statement that

“politically motivated budget cuts (1) are counterproduc-

tive to deficit reduction, (2) diminish the ability of the

Internal Revenue Service to adequately serve taxpayers

and protect taxpayer information, (3) and reduce the

ability of the Internal Revenue Service to enforce the law”

(Act § 11075). That undoubtedly will induce lively discus-

sion in the House-Senate conference committee. ◆

Each article in the newsletter on a tax-exempt organizations law topic ends with a citation to the appropriate chapter(s) or

subchapter(s) in Hopkins, The Law of Tax-Exempt Organizations, Eleventh Edition (Wiley, 2017 cumulative supplement). This is done

to provide ready access to additional and background information concerning these articles. For example, underlying information

concerning the fourth article in this issue is available in Chapter 7 § 6, Chapter 28 § 3(b), and Chapter 31 § 3 of the book; thus,

the citation is referenced as [7.6, 28.3(b), 31.3]. Likewise, each article in the newsletter on a charitable giving law topic ends with

a citation to the appropriate chapter(s) or subchapter(s) in Hopkins, The Tax Law of Charitable Giving, Fifth Edition (Wiley, 2017

cumulative supplement).

This newsletter is a stand-alone publication. An inventory of articles in the newsletter since its inception in 1983, and a subject

matter index, as well as an index of the court opinions, IRS revenue rulings and procedures, IRS technical advice memoranda, and

IRS private letter rulings discussed in the newsletter, are available at www.brucerhopkinslaw.com. For those who have the books,

the newsletter also provides monthly updates. Both books are annually supplemented. Questions concerning nonprofit law devel-

opments in general may be sent to brucerhopkins@brucerhopkinslaw.com. Also, a comprehensive summary of nonprofit law is

available in the Bruce R. Hopkins Nonprofit Law Library, an e-book published by Wiley. Follow BRHopkins_NPLaw on Twitter.

The newsletter has a dedicated website. Please visit www.hopkinsnonprofitcounsel.com.