Charitable giving soars in November and other nonprofit news

NONPROFIT NEWS

November brought an end to the 2016 elections, with results that have been tied to a dramatic surge in charitable giving to certain organizations and have raised concerns about the potential impact of the new administration's policies on the charitable contribution deduction and the nonprofit sector more broadly. A federal district court in Texas also issued an injunction that put on hold the implementation of new overtime rules that, although supported by many nonprofits as beneficial for many workers, also have many nonprofits concerned about the financial impact the law would have on their own operations. Finally, the IRS rolled out a few procedural developments in November regarding determination letters and requests for information that are worth noting.

Since the Election...

Many nonprofits, and particularly those focused on issues that played a central role in the presidential campaigns, have reported dramatic increases in charitable giving since the election early in the month. We also saw a particularly active Giving Tuesday event on the Tuesday after Thanksgiving, with donors contributing an estimated $168 million to nonprofits in more than 1.5 million total gifts in a single day.

Some donors may be giving to strengthen and empower those organizations they feel will serve to counter the impact of the policies of the Trump administration; others out of rage or sadness associated with a particularly acrimonious and contentious election, or as a form of peaceful and productive protest. Still others, however, may be motivated by a slightly different fear - the potential reduction in value of the charitable contribution deduction posed by Trump's tax plan.

Because Trump's tax plan proposes to reduce the highest tax rate for the largest earners, the value of the charitable contribution deduction for such taxpayers would decrease. This potential impact could be causing certain people in higher income brackets who planned to make charitable contributions over the next few years to frontload them by making larger contributions before the end of 2016.

One option for making such frontloaded contributions is to a donor-advised fund, which allows a donor to make a deductible contribution in one year, but to advise distributions to other charitable organizations from such donor-advised fund in future years. As I mentioned last month, a donor-advised fund sponsor organization raised the most money from private sources of any charity in 2015, and it will be interesting to see if contributions to donor-advised funds increase even more in 2016.

Update on New Overtime Rules

New overtime regulations announced in May 2016 by the U.S. Department of Labor were scheduled to take effect on Dec. 1. The rules would have increased the salary ceiling for employees qualified to receive overtime payments, resulting in significant pay increases for many workers in the U.S. The reactions to the new rules in the charitable sector were somewhat mixed - many organizations supported the new requirements as beneficial to workers, but many were also concerned about the financial implications of the rules with respect to their own operations and employees.

However, on Nov. 22, in connection with a multi-party litigation challenging the regulations, a federal district court judge in Texas issued a nationwide injunction halting implementation of the new rules. The Department of Labor filed an appeal of the injunction in the 5th U.S. Circuit Court of Appeals on Dec. 1 and the court has granted a request to hear the appeal on an expedited schedule.

Many organizations had already implemented staffing or compensation changes intended to account for the new regulations once they took effect. Although the injunction has placed the future of the new rules in limbo, organizations may, of course, voluntarily choose to comply with the requirements of the regulations or to modify compensation appropriately while we await the final word. It is also worth noting that the regulations, if ultimately implemented, may not have as significant of an effect on California nonprofits as on those in other states since the current salary ceiling in California for qualification for overtime compensation is already significantly higher than the current federal ceiling.

501(c)(3) Determination Letter Update

On Nov. 21, the IRS issued guidance regarding changes in the template determination letters issued to applicants for exemption under IRC Section 501(c)(3). As I've noted in previous columns, on July 1, 2014, the IRS released Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3). Until now, the determination letters sent to organizations applying for exemption using the short Form 1023-EZ utilized a different IRS template that was distinguishable from the determination letter issued to applicants using the long Form 1023. According to the IRS, this use of separate form letters was necessary to enable the IRS to appropriately track and report on data related to users of the short Form 1023-EZ.

However, the guidance issued in November stated that, because the IRS's processing systems have now been updated to enable tracking of which application an applicant has submitted, there is no longer a need to use separate template determination letters. Accordingly, the IRS will begin immediately to issue the same determination letter regardless of whether an applicant submits the Form 1023 or the Form 1023-EZ.

When the streamlined Form 1023-EZ was first proposed, many practitioners expressed fears that organizations not in fact described in Section 501(c)(3) would nonetheless receive recognition of exemption due to the extremely limited upfront review conducted by the IRS in connection with the 1023-EZ. The question was then posed whether individual donors and grantmakers would be entitled to rely on a determination based on a Form 1023-EZ to the same extent they could rely on a determination based on a substantially longer Form 1023.

The IRS placed these fears at rest in Rev. Proc. 2016-5, issued on Jan. 4, 2016. In that Revenue Procedure, the IRS stated "[w]hile the procedures for obtaining a determination letter by submitting a Form 1023 application may differ from those for obtaining a determination letter by submitting a Form 1023-EZ application, grantors and contributors may rely on both determination letters to the same extent." Nonetheless, some donors and grantors have considered the form of application used in making funding decisions.

It remains unclear whether the IRS will somehow make available information regarding which application a 501(c)(3) submitted, such as in the Exempt Organizations Business Master File or the Exempt Organizations Select Check database. The Form 1023 or 1023-EZ is, however, a publicly available document that a 501(c)(3) must make available upon request, should a donor or funder consider this distinction critical to its funding decision.

New IRS Information Document Request Management Process

Also on Nov. 21, the Tax Exempt and Government Entities (TE/GE) Division of the IRS issued new internal guidance for its agents regarding the process for requesting additional information during an examination of an organization. The new process will go into effect on Apr. 1, 2017.

Under the new process, whenever a return is selected for examination, IRS examiners will be required to reach out to the taxpayer at issue by mail first and then by telephone at least ten business days later. The examiners are expected to discuss the issues being examined and the items being requested, and to try to agree upon a response date with the taxpayer, prior to actually issuing the request.

The new process also requires the examiner to call the taxpayer upon receipt of a complete response. If the response is not received or is not complete, the examiner has the discretion to grant an initial extension of up to 15 business days, as well as a second extension of up to the same length with the manager's approval. If the requested information is not received by the end of the second extension, the enforcement process will be initiated.

The first step in the enforcement process is for a delinquency notice to be issued, setting a final date for the taxpayer to respond. If the taxpayer still fails to respond or the response is incomplete, the examiner will, in conjunction with the group manager and the Area Counsel, determine whether to proceed with a proposal of adjustment, a summons, or a proposal of revocation.

The new procedures seem intended to increase contact with and participation by the taxpayer during the information request process, to increase transparency, and reduce the burden on taxpayers.