Tax Lawyers' PGP EO Wishlist

• Published date: 01 October 2020
• Date: 01 October 2020
• DOI: http://doi.org/10.1002/npc.30774

Bruce R. Hopkins’ NONPROFIT COUNSEL

October 2020 3

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

Safe Harbors for Individuals

The final regulations provide that an individual who

itemizes deductions and who makes a payment to a

charitable entity in exchange for a state or local tax credit

may treat as a payment of state or local tax (for purposes

of IRC § 164) the portion of the payment for which a

charitable contribution deduction is or will be disallowed

under the general rule (Reg. § 1.164-3(j)(1)). (This general

rule (Reg. § 1.170A-1(h)(3)) came into being as part of

the final regulations concerning charitable deductions and

the SALT cap (summarized in the September 2019 issue).)

This treatment is allowed in the tax year in which the

payment is made, but only to the extent that the resulting

credit is applied pursuant to state or local law to offset

the individual’s state or local tax liability for the year or the

preceding tax year (id.). Any unused credit permitted to

be carried forward may be treated as a payment of state

or local tax in the tax year or years for which the carryo-

ver credit is applied in accordance with state or local law

(Reg. § 1.164-3(j)(2)). This safe harbor applies only to pay-

ments of cash and cash equivalents (Reg. § 1.164-3(j)(4)).

This regulation presumably supersedes Notice 2019-12.

Limitations on Deductibility

The preamble to these regulations makes an obvi-

ous observation: The rules are not intended to permit

taxpayers to avoid the cap on deductibility of state and

local taxes (IRC § 164(b)(6)). Consequently, the final

regulations provide that any payment treated as a state

or local tax pursuant to the safe harbor for individuals is

subject to the SALT deduction cap (Reg. § 1.164-3(j)(3)).

Moreover, the final regulations are not intended to

permit deductions of the same payments under more

than one provision. Thus, the final regulations provided

that an individual who deducts qualifying payments as

taxes may not also deduct the same payments on any

other basis (Reg. § 1.164-3(j)(5)). [3.1(c), 10.7]

Commentary: The first of these law changes, concern-

ing substitution of the business expense deduction for

the income tax charitable contribution deduction, means

that any payment (or transfer) to a charitable organi-

zation where there is an advertising benefit in return

can be deducted as a business expense. Thus, in these

circumstances, the percentage limitations on deducti-

bility (IRC §70(b)) and the substantiation rules (e.g., IRC

§ 170(f)(8)) do not apply. Several resulting questions

arise. One concerns the tax treatment by the charitable

recipient of these payments — are they to be recorded

as contributions or advertising revenue (if the latter, pre-

sumably, unrelated business income)? Another question

is the interrelationship with the corporate sponsorship

rules (IRC § 513(i)) — is the concept of advertising the

same in both contexts or broader in this setting? That is,

does a mere “acknowledgment” of a payment (or trans-

fer) by a recipient charity provide the basis for business

expense treatment? ◆

TAX LAWYERS’ PGP EO

WISHLIST

The Tax Section of the American Bar Association, on

July 23, submitted its comments as to the desired con-

tents of the 2020–2021 Treasury-IRS Priority Guidance

Plan. There are 13 recommendations in the field of the

law of tax-exempt organizations, ranked as to priority,

for inclusion in the plan:

• Final regulations concerning the requirement that

unrelated business taxable income be computed sep-

arately by exempt organizations with more than one

unrelated business (IRC § 512(a)(6)) (high priority).

The proposed regulations are summarized in the July

2020 issue.

• Final regulations regarding the payment of excess

compensation by exempt organizations (IRC § 4960)

(high priority). The proposed regulations are summa-

rized in the August 2020 issue.

• Final regulations concerning taxation of the net

investment income of certain colleges and universi-

ties (IRC § 4968) (high priority). The proposed regu-

lations are summarized in the September 2019 issue.

• Proposed regulations regarding the donor-advised

funds law (IRC §§ 4958, 4966, 4967) (high priority).

The Treasury-IRS notice in this regard is summarized

and discussed in the February and April 2018 issues.

• Guidance concerning the temporary above-the-line

charitable contribution deduction (IRC § 62(a)(22),

(f)) (high priority). This deduction is summarized in

the June 2020 issue.

• Guidance allowing public charities to treat grants

received in 2020 that are related to the COVID-19

pandemic as unusual grants (high priority).

• Guidance concerning political campaign intervention

by exempt organizations (IRC §§ 501(c), 527), in the

(unlikely) event that the statutory prohibition on such

guidance is removed (high priority).

• Revenue ruling regarding the qualification of an

equity investment in a limited liability company as a

program-related investment (IRC § 4944) (medium

priority).

• Guidance regarding a private foundation’s invest-

ment in a partnership in which disqualified persons

are also partners (IRC § 4941) (low priority).

• Regulations clarifying that, in certain circumstances,

Type I and Type II supporting organizations that des-

ignate their supported organizations by name are

permitted to make distributions to public charities

other than the designated ones (IRC § 509(a)(3))

(low priority).

• Guidance regarding the exception in the excess busi-

ness holdings law for philanthropic businesses (IRC §

4943(g)) (low priority). This provision is summarized

in the January 2018 issue.