Updates From The IRS

By Laura Kalick, JD, LLM in Tax

The following discusses a few recent issues that have been addressed by the IRS that tax-exempt organizations should be aware of.

Booster Club Dues and Non-Exempt Activity
An organization may conduct a fundraising campaign to raise funds for a particular activity that will be undertaken by the members; for example, a trip for children. One division of the IRS has indicated that if an individual makes a contribution that will be credited for the account of their child’s trip, and the amount in excess of the benefit received by the child was given with a charitable donative intent, that it may be possible to deduct the amount in excess as a charitable contribution.

This practice, however, raised some concerns with the IRS Director of Exempt Organizations, Ms. Lois Lerner, as to whether such practices could have an adverse effect on the exempt status of a 501(c)(3) organization because it was more than a mere incidental private benefit, but rather, was intentional and, if substantial, could threaten exempt status. She also indicated that such a practice could result in income to the individual who raised the funds. Finally, although not mentioned in the June 27, 2011 communication from the IRS, it is possible that crediting the account of individuals with the amounts that they raised could turn an activity into an unrelated trade or business if it is regularly carried on. Many organizations conduct fundraising activities on a regular basis (such as car washes with volunteers) and these activities are not deemed to be subject to unrelated trade or business income tax because of the so-called volunteer labor exception, i.e., substantially all the work is conducted by persons who are not compensated. If the volunteer gets a credit into his or her account for labor, then it may constitute compensation. These rules are complex and if an organization has any concerns, it should consult with its tax advisor.

Gift Tax Consequences of Contributions to IRC 501(c)(4) Social Welfare Organizations
We had previously reported that the IRS was considering imposing the gift tax on contributions to IRC Section 501(c)(4) social welfare organizations. This type of organization can engage in political activity as long as it is not their primary purpose. Although 501(c)(4) organizations must reveal their contributors to the IRS, this is not public information, whereas political organizations do have to make information about their donors public. The IRS has now indicated that it has closed the cases where it was investigating the imposition of the gift tax and will not pursue the matter further. However, Revenue Ruling 82-216 is still on its books and that ruling states, “The Service continues to maintain that gratuitous transfers to persons other than organizations described in section 527(e) of the Code are subject to the gift tax absent any specific statute to the contrary, even though the transfers may be motivated by a desire to advance the donor’s own social, political or charitable goals. “ It appears that further clarification may be necessary.

Schedule H of Form 990
On July 5, 2011, the IRS issued Announcement 2011-37 that provides that Part V, Section B (“Part V.B”) of Schedule H, Hospitals, of the 2010 Form 990, Return of Organization Exempt From Income Tax, will be optional for the 2010 tax year. The questions asked on Schedule H require information relating to the new IRC Section 501(r) tax-exempt hospital requirements enacted by the Patient Protection and Affordable Care Act in 2010.