Legal developments from 2019 affecting the nonprofit sector

What a year! As we close out 2019 and usher in 2020, here's an overview of some of the key occurrences and legal developments of the year of significance to the nonprofit sector.

Repeal of Fringe Benefits UBIT Rule

I'll start with some good news that snuck in right at the end of the year -- the repeal of Internal Revenue Code Section 512(a)(7). Section 512(a)(7), more commonly referred to as the "Parking Tax" or the "Church Tax"), was added by the Tax Cuts and Jobs Act and took effect at the beginning of 2018. Under the new Section, the unrelated business taxable income of a subject exempt organization was increased by certain amounts paid or incurred by the organization to provide qualified transportation fringe benefits or on-premises athletic facilities to its employees. Qualified transportation fringe benefits included transit passes, transportation provided between an employee's home and work in a commuter highway vehicle, and any qualified parking, which is parking provided to an employee on or near the work premises or near another location from which the employee commutes to work.

Not at all surprisingly, the new requirement led to much confusion, particularly as it subjected numerous exempt organizations that hadn't otherwise ever earned any unrelated business income to the unrelated business income tax (UBIT). The Treasury Department issues some interim guidance at the end of 2018 and provided relief from penalties for some organizations. However, the pushback continued, and on Dec. 20, 2019, funding legislation that included a repeal of Section 512(a)(7) retroactive to its date of enactment was signed into law. Organizations that reported and paid a tax under the Section should confer with their tax advisor as to whether a refund may be available.

New California Attorney General Registry Forms

The California attorney general's Registry of Charitable Trusts has issued new versions of several existing forms, and a brand new form, that will need to be used by nonprofits and professional fundraises subject to registration effective Feb. 1, 2020. The initial registration, Form CT-1, will soon require that additional information, including any fictitious business names of the registrant and any prior enforcement actions against it, be disclosed. The annual registration renewal, Form RRF-1, will also soon require that registered organizations report any noncash donations received during the reporting period.

The Registry has also introduced a brand new form, Form CT-TR-1, which has been in the making for several years. As I've previously written in this column, the Form RRF-1 currently is required to be accompanied by the Form 990, 990 EZ, or 990-PF filed by the reporting organization with the IRS for the respective year. However, organizations that file the Form 990-N (which is generally available to smaller exempt organizations with annual gross receipts that are normally $50,000 or less) do not report detailed financial information on those returns. The new Form CT-TR-1 will require such organizations to provide a reporting of certain financial data that does not appear on the 990-N and will be required to be filed along with the Form RRF-1.

Schedule B Drama

2019 saw a continuation of the ping pong game between the IRS and Treasury Department and several states regarding Schedule B to the Form 990 series. In 2018, the IRS and Treasury Department announced that exempt organizations other than 501(c)(3)s were relieved from the requirement of including personally-identifiable information about their donors in Schedule B. Montana Governor Stephen Bullock and the Montana Department of Revenue promptly filed a lawsuit against the IRS and Treasury, which the State of New Jersey later joined, claiming that the new procedure unlawfully interfered with the state's ability to gather data that it requires to administer its tax laws and was promulgated in violation of the Administrative Procedure Act.

In July of 2019, the judge presiding over the case agreed with the states that the IRS failed to observe the required rulemaking procedures under the Administrative Procedure Act and issued a decision overturning the new rules set forth in Revenue Procedure 2018-38. In Sept., in response to the Court's decision and to no one's surprise, the IRS issued proposed regulations that would officially incorporate the exemptions from donor disclosure requirements set forth in the earlier Revenue Procedure. At the same time, the IRS also issued Notice 2019-47, providing relief from penalties for exempt organizations, other than 501(c)(3)s, that fail to include donor names and addresses in their Schedule B of the Form 990 or 990-EZ for a taxable year ending after December 31, 2018 and on or before July 30, 2019.

Not to be outdone, and likely in anticipation of such a move, New Jersey moved forward in May with the adoption of a new rule requiring 501(c)(4) social welfare organizations subject to reporting with the New Jersey Division of Consumer Affairs Charities Registration Section to identify donors who gave $5,000 or more to such organizations in their filings with the Section. The new New Jersey rule is intended to ensure that such donor information is captured, even if the IRS will no longer be collecting it. It will be interesting to see if other states follow suit in the coming year.

Mandatory Electronic Filing of Annual Returns

On July 1, the Taxpayer First Act (H.R. 3151) was signed into law, requiring all tax-exempt organizations that are required to file an annual information return with the IRS to do so electronically. Under the new law, electronic filing will be required for all returns covering 2020 for organizations on a calendar year, which returns will be due May 15, 2021 unless an extension is obtained. For organizations on a fiscal year, the electronic filing requirement will apply to all returns covering tax years beginning on or after July 2, 2019, which are due the fifteenth day of the fifth month after the end of the fiscal year unless the organization obtains an extension.

The new law also requires the IRS to disclose information returns that are electronically filed to the public as soon as is practicable in machine-readable format, so that the data can be more easily processed and shared.

Worker Classification Changes

As has been much discussed and fretted over by many California nonprofits, California's worker classification rules changed significantly on Jan. 1, 2020. In September of 2019, Gov. Gavin Newsom signed into law Assembly Bill 5, codifying the worker classification test set forth in the California Supreme Court decision in Dynamex Operations West v. Superior Court, issued in April 2018.

The more stringent test set forth in Assembly Bill 5, referred to as the "ABC Test," provides that all workers are by default considered to be employees, unless the employer can demonstrate that three factors are met. The three factors are that the worker: (A) is free from control and direction by the hiring entity in performing the work, both based on the terms of the contract and in reality; (B) performs work that is outside the usual course of the hiring entity's business; and (C) is customarily engaged in an independently established trade, occupation, or business of the same general nature as the work being performed for the hiring entity. A worker may only properly be classified as an independent contractor if all three of these factors are true.

Any California nonprofit that hasn't yet done so would be well-advised to review its current and planned worker classifications to ensure compliance. It is also widely anticipated that this new law in California could be the harbinger of what is to come in other states, and it may be wise for nonprofits located outside of California to begin considering the impact of such a potential change, as well.

Trump Foundation Abuses

Finally, 2019 saw some closure to the lawsuit filed by the Office of the Attorney General for the State of New York against the Donald J. Trump Foundation ("Trump Foundation") and its directors (including Trump and his three oldest children). As part of the resolution of the case, the Trump Foundation was required to dissolve and to transfer its remaining assets to a group of eight different charities. In a rare instance of Donald Trump being held accountable for his actions, he was also personally required to pay $2 million a piece to each of the eight charities, to reimburse the Trump Foundation $11,525 for sports paraphernalia and champagne purchased at a charity event, and to agree to a set of 19 admissions acknowledging his personal misuse of Trump Foundation funds (who then characteristically immediately turned to Twitter to trash the settlement, deny any wrongdoing, and describe his mandated payments as "donat[ions]" he was "happy" to make).

In announcing Trump's payments to the charities and the disbursement of the Trump Foundation's remaining funds, N.Y. attorney general Letitia James released the following statement on Dec. 10, 2019: "Not only has the Trump Foundation shut down for its misconduct, but the president has been forced to pay $2 million for misusing charitable funds for his own political gain. Charities are not a means to an end, which is why these damages speak to the president's abuse of power and represent a victory for not-for-profits that follow the law. Funds have finally gone where they deserve -- to eight credible charities. My office will continue to fight for accountability because no one is above the law -- not a businessman, not a candidate for office, and not even the president of the United States."

Here's to a happy, peaceful, and positively impactful 2020! 