Saturday, March 1, 2008

Another Blow to the Perpetual Student!

The Tax Court held that a taxpayer could not deduct the $33,000 cost of obtaining a Harvard M.B.A. as an educational expense under Reg. § 1.162-5. Foster v. Commissioner, T.C. Summ. Op. 2008-22 (2/28/08). The court concluded that her Harvard M.B.A. both (1) met the minimum education requirements of her position as Vice- President of Marketing at Reshreshment Brands (at an $117,500 annual salary) within the meaning of Reg. § 1.162-5(b)(2), and (2) qualified her for a new trade or business within the meaning of Reg. § 1.162-5(b)(3).

The court distinguished two cases in which taxpayers had been allowed to deduct M.B.A. expenses (Sherman v. Commissioner, T.C. Memo. 1977-301; Allemeier v. Commissioner, T.C. Memo. 2005-207) because Ms. Foster had an engineering background and the Harvard M.B.A. qualified her for marketing positions. The court also approved a § 6662(a) accuracy-related penalty.

The Tax Court suggested that Ms. Foster's decision to remain in California and not attend the trial in Boston may have contributed to her defeat on both issues:
This case was tried in Boston, Mass., pursuant to petitioner's designation. Petitioner's counsel presented the case at trial without petitioner's testimony and attempted to prove the case through various documents. The Court sustained respondent's authenticity and hearsay objections to most of the documents petitioner's counsel sought to introduce. As a result of her failure to testify, the Court is left with a limited record. It would have been most helpful if petitioner had provided an explanation of her duties before and after receiving the M.B.A.

More Unrelated Business Income for Charities in Economic Downturn

When the economy starts to hit the skids, as is currently happening, people tightent their belt, and superfluous spending such as charitable donations is heavily reduced. As a result, charities engage in more business activity to hold them over until donations flow again. That speculation seems to have been concerned by a recent article in the 2008 Winter Statistics of Income Bulletin. The article states that unrelated business income tax liability rose a whopping 66% from 2003 to 2004. The SOI articles are always very well written, by the way. Wouldn't it be nice if we all just flooded the EO Division with emails thanking them for their work. The abstract of the report indicats:

Tax-exempt organizations produced a total of $9.5 billion of gross unrelated business income (UBI) for 2004, nearly 13 percent more than the 2003 amount. After offsetting total gross UBI with $9.0 billion of total deductions, the resulting UBTI (less deficit) for 2004 was $0.5 billion. Positive UBTI amounted to $1.3 billion for 2004, a 65-percent increase over 2003, and the associated UBIT was $364.6 million. After adjusting UBIT with certain credits and other taxes, the total tax reported on Form 990‑T was $367.7 million.

Guidance on the 990 Postcard

On February 25, 2008, the IRS issued guidance on the Form 990-N, the "e-Postcard," filing requirement of small tax-exempt organizations (i.e., those with gross receipts annually of $25,000 or less). The Pension Protection Act of 2006 requires such organizations to file the e-Postcard starting in 2008 for tax years beginning with 2007. Small tax-exempt organizations are now required to make e-Postcard filings by the 15th day of the fifth month following the close of their tax year. The filing is made electronically only, and the public can view the e-filings on the IRS website. Prior to the new e-Postcard requirement, small tax-exempts were not required to file either Form 990 or 990-EZ. Small tax-exempts still do not have to file these forms. Also, while there is no immediate penalty for failing to file the e-Postcard, those nonprofits that fail to file the e-Postcard for three consecutive years will lose their tax-exempt status. The IRS will send a notice reminding organizations of the obligation to file but the ultimate responsibility rest with the tax-exempt organization. As a result, the IRS is urging everyone -- individuals, accountants, lawyers and volunteers -- to spread the word to local charities. Tax-exempts included on a group return and churches are not required to make this filing. On the other hand, larger tax-exempts with receipts of more than $25,000, private foundations and 509(a)(3) organizations are required to continue filing Form 990 or 990-EZ but are not required to also file the e-Postcard.

As a practical matter, tax-exempt organizations whose volunteers, staffs and directors change more frequently than other types of organizations must be vigilant. That would include updating the IRS on address changes as a matter of practice or protocol. The law requiring the e-Postcard balances the purposes of the act (i.e., giving potential donors more information and informing the public) with the fragile administrative realities of many small tax-exempt organizations. This balance was struck under the law in the following way -- the law does not impose late filing fees for filing late, and an organization's tax-exempt status will not be revoked for failing to file until after three consecutive years of failing to file the e-Postcard.

Additional information is available on the IRS Website

And we're Back!

After an excruciatingly long wait, the tax exempt entity law student blog is back and is moving forward. The hope for this blog in moving forward is that it will grow and encourage an open dialogue with the reader (hopefully readers … but lets not get ahead of ourselves here!) about the practice of law in the field of tax exempt entities, and how to move that practice into an area where there can be an influx of money to the tax exempt world, as well as an increase in corporate good will for those socially conscious entities that are interested in moving in that direction. So … welcome back!