Here are some of the highlights from 3 of the sessions at the ABA Exempt Organizations Committee meeting held on February 10, 2023 as part of the ABA 2023 Midyear Tax Meeting.
What’s New, IRS? Whoa-oa-oa-ah!
Representatives from the IRS and Treasury Department will discuss topics of current interest to exempt organizations practitioners
Climate Change Update
This panel will explore the current status of climate change, sustainability and related environmental activities as exempt-related activities under Code Section 501(c)(3). Among the topics to be discussed, the panel will explore the IRS’ recent rulings in this area, issues for grant makers and program and mission-related investment considerations.
- Some framing questions:
- Is there a disincentive to funders to fund climate change prevention activities based on a lack of recent IRS guidance on the charitability of such activities?
- Should the IRS presume that the activity of selling green energy credits is an unrelated business activity subject to UBIT?
- The IRS’s view on environmental protection and preservation purposes and activities has evolved over time
- Rev. Rul. 76-204: “It is generally recognized that efforts to preserve and protect the natural environment for the benefit of the public serve a charitable purpose,” and “only through preservation will future generations be guaranteed the ability to enjoy the natural environment.”
- PLR 200136026: Environmental investment fund with below market returns, specific environmental benefit objectives and investment guidelines, and no significant purpose of production of income (PLRs are non-precedential but may provide helpful insight)
- While not in official guidance, it appears that organizations engaged in climate change prevention activities are receiving favorable determinations of 501(c)(3) status
- Most recent denials of exempt status turn on the presence of too much commercial activity or private benefit, rather than the absence of an environmental charitable purpose
- The federal government has set climate change prevention activities among its priorities, but the charitability of providing solar panels to middle-income homes may be considered not charitable and the provision of a prohibited private benefit – this makes funding and pursuing such activities by charitable organizations problematic
- This creates an incentive for charitable organizations to seek multiple 501(c)(3) purposes to justify climate change prevention activities – e.g., protecting and preserving the natural environment AND relief of the poor AND advancing education and science
- The environmental preservation/climate change mitigation activities must yield both direct and significant environmental or other charitable benefits
- What is a direct benefit and why is this required? Isn’t this contrary to charitable activities that are experimental and not, until better substantiated, commercially viable? Might argue market failure as a rationale.
- At the end of the day, is this less about charitability and more about private benefit?
International Transactions: To Withhold or Not to Withhold, That is the Question
Withholding can be a trap for unwary U.S. funders of foreign charitable activities. Even funders who are cognizant of the basic requirements of Section 1441 may struggle to understand when those rules apply to their support of foreign activities, which exceptions may be available in their specific circumstances, and what reporting obligations may attach. This panel will review the current state of federal withholding rules relevant to U.S. philanthropy and explore techniques and common practices that U.S. funders are using to manage these obligations.
- U.S. imposes a flat 30% tax(unless reduced by treaty) on the U.S.-source income of non-U.S. taxpayers (other than income effectively connected to conduct of a U.S. trade or business)
- To facilitate collection of tax on non-U.S. taxpayers, withholding obligation falls on U.S. withholding agent (typically, last U.S. person who last handled the funds)
- Two threshold questions regarding withholding:
- 501(c)(3) grants:
- General rule: Grants sourced based on residence of grantor – IRC §863
- Regulations §1.863-1(d): Targeted grants from c3s grantors to non-U.S. grantees are not U.S.-source if funded activities take place entirely outside U.S.
- Other exemptions from witholding: certain international organizations like the World Bank; non-U.S. organizations that are recognized as exempt under 509(a)(1) by the IRS or has a written legal opinion from U.S. counsel that it is the foreign equivalent of a §501(c) organization; and non-U.S. persons claiming benefits under a U.S. tax treaty
- Not grants: scholarships, fellowship grants, grants, prizes, and awards (default – U.S.-source if made by a U.S. payor, but need to look at exceptions too)
- Documentation: depending on circumstances: Form W-9, W-8ECI, W-8EXP, W-8BEN, W-8BEN-E, 8283 – In general, the W-8 forms remain valid starting on the date the form is signed and ending on the last day of the 3rd succeeding calendar year, unless there is a change in circumstance making the information incorrect (under certain conditions, Forms W-8EXP and W-8BEN-E are not subject to “3-year” time limit)
- Are grants always FDAPI?
- Income that is excluded from gross income (as defined in IRC §61) under a provision of law is not treated as FDAPI – IRC §102 provides gross income does not include the value of property acquired by gift
- Some guidance on grants to individuals being excluded – e.g., Rev. Rul. 99-44, Rev. Rul, 2003-12, Rev. Rul. 2006-27
- PLR 200529004: Grant by private foundation to foreign nonprofit is a gift (non-precedential)
- Some grants are gifts, but in 2008, the IRS issued a no-ruling position on gifts (probably not reasonable to assume all grants are FDAPI)
- A gift is given with a “detached and disinterested generosity” (Duberstein) – practical considerations: this might be expressed contemporaneously in minutes and other internal documents, grant agreement (might bifurcate if part FDAPI and part not-sure)