Tax Exemption Precluded in Part Because of Stiftung Principles

• Published date: 01 February 2020
• DOI: http://doi.org/10.1002/npc.30683
• Date: 01 February 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

4 February 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

Thus, amendments to the tax regulations are being

proposed to reflect this body of law. Under the proposal,

a person will be treated as receiving goods and services

in consideration for the person’s payment or transfer to a

charitable entity if, at the time of the payment or transfer,

the person receives or expects to receive goods or ser-

vices in return (proposed revised Reg. § 1.170A-1(h)(4)).

The proposed regulations do not amend the existing

regulations, which discuss the phrase in consideration

for for purposes of determining whether a person pro-

vides proper substantiation of the claimed charitable

deduction (Reg. § 1.170A-13(f)(6)). These regulations

detail the requirements of a contemporaneous written

acknowledgment, including a statement of whether the

donee organization has provided any goods or services

in consideration for any cash or other property trans-

ferred to the donee organization and a description and

good-faith estimate of the value of the goods or services.

The preamble notes that these substantiation provisions

only refer to written acknowledgments from donees and

do not address the application of quid pro quo principles

to benefits received from parties other than donees.

Treasury and the IRS requested comments on

whether guidance concerning substantiation and report-

ing of quid pro quo benefits provided or expected to be

provided by third parties, including state governments,

“would be beneficial to taxpayers in demonstrating that

they have given more than they received or expected

to receive and to the IRS in administering the proposed

regulation.” In addition, Treasury and the IRS requested

comments “regarding the manner by which donors,

donees, or third parties may report or provide substan-

tiation for the value or type of consideration received or

expected to be received from third parties.”

For “additional clarity,” the proposed regulation

amends the language in the existing regulations (Reg.

§ 1.170A-1(h)(2)(i)(B)) to clarify that the fair market

value of goods and services includes the value of goods

and services provided by parties other than the donee.

The proposal adds a definition of the phrase goods and

services that is the same as the definition in the existing

regulations (Reg. § 1.170A-13(f)(5)).

Business Expense Deduction Rules

The proposal will update the regulations (accompa-

nying IRC § 162) to reflect current law regarding applica-

tion of the business expense deduction rules to a person

that makes a payment or transfer to a charitable entity

for a business purpose.

Late last year, the IRS issued a revenue ruling provid-

ing a safe harbor for payments made by business entities

that are C corporations or specified pass-through entities

to or for the use of a charitable entity if the corporation

or entity receives or expects to receive state or local tax

credits in return (Rev. Rul. 2019-12) (summarized in the

September 2019 issue). This guidance provides a safe

harbor that allows a C corporation engaged in a business

to treat the portion of the payment that is equal to the

amount of the credit received or expected to receive as

meeting the requirements of an ordinary and necessary

business expense. It permits similar treatment for pass-

through entities under certain circumstances.

Treasury and the IRS decided that it is appropriate to

propose regulations (amendment of Reg. § 1.162-15(a))

to incorporate the safe harbors (and request comments

on them). The proposed regulations propose additional

revisions to more clearly reflect the current state of the law

regarding a person’s payment or transfer to a charitable

entity. Treasury and the IRS requested comments on

whether the safe harbors should be expanded to apply

to an individual who is carrying on a trade or business

or certain other income-producing activity (IRC § 212).

The proposed regulations propose additional revisions

to the existing rules (Reg. § 1.162-15(a)) to more clearly

reflect the current state of the law regarding a person’s

payment or transfer to a charitable organization. The

preamble to the proposed regulations states that “[i]f the

taxpayer’s payment or transfer bears a direct relationship

to its trade or business, and the payment is made with

a reasonable expectation of commensurate financial

return, the payment or transfer to the [charitable entity]

may constitute an allowable deduction as a trade or busi-

ness expense … rather than a charitable contribution.”

The preamble states that these proposed revisions are

consistent with existing case law, which hold that a pay-

ment to a charitable organization may have a dual char-

acter — part charitable contributions and part business

expense. That is, if a person makes a payment to a chari-

table entity “in an amount that exceeds the fair market

value of the benefit that the [person] receives or expects

to receive in return, and this excess amount is paid with

charitable intent, the [person] is allowed a charitable

contribution deduction … for this excess amount.”

Other Rules

The proposal will create safe harbors (under IRC §

162) to provide certainty with respect to the treatment

of payments made by businesses to a charitable entity.

Further, the proposal will provide a safe harbor (under

IRC § 164) for payments made to a charitable entity by

individuals who itemize deductions and receive or expect

to receive a state or local tax credit in return. [3.1] ◆

TAX EXEMPTION PRECLUDED

IN PART BECAUSE OF

STIFTUNG PRINCIPLES

The IRS denied recognition of tax exemption of a for-

eign charity because of violation of the organizational

and operational tests, in part because the principles