FOR LIVE PROGRAM ONLY Form 4720 Private Foundation Excise Tax Return: Reporting Taxable Violations THURSDAY, JULY 12, 2018, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at 1-800-926-7926 ext.1 (or 404-881-1141 ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Form 4720 Private Foundation Excise Tax Return: Reporting Taxable Violations THURSDAY, JULY 12, 2018 Jody Blazek, CPA, Partner Blazek & Vetterling, Houston jody.blazek@bvcpa.com Nancy E. McGlamery, Principal Adler & Colvin, San Francisco nmcglamery@adlercolvin.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Form 4720 Private Foundation Excise Tax Return: Reporting Taxable Violations Nancy McGlamery, Adler & Colvin Jody Blazek, Blazek & Vetterling July 12, 2018
Access to Forms Please have available throughout the webinar the Form 990-PF and Form 4720 provided to you as supplemental materials. We will refer to these Forms throughout the webinar. 6
The Law of 4941-4946 No self-dealing ( 4941) Annual mandatory distributions ( 4942) No excess business holdings ( 4943) No jeopardizing investments ( 4944) No taxable expenditures ( 4945) Definition of disqualified person (DP) ( 4946) 7
PF Disqualified Persons ( 4946) Substantial contributor to PF (>$5k/2% rule) 20% owner of substantial contributor PF s foundation managers Family member of any of above Entity in which any of above own >35% of voting power (corp), profits interest (partnership), or beneficial interest (trust) Certain government officials ( 4941 only) 8
Self-Dealing Transactions Direct or indirect: Sales, exchanges, leases Loans, extensions of credit Furnishing of goods, services, facilities Compensation or expense reimbursement Transfer to, use by/for benefit of, a DP of income or assets of a PF Payments of money, transfers of property to a government official 10
Self-Dealing: Flow of Benefits Private Foundation Generally Acceptable Generally Prohibited Disqualified Person 11
Self-Dealing Exceptions Sales, exchanges, leases: DP can provide use of property (i.e., office space) if free DP can donate property (i.e., free) PF may not assume DP mortgage Examples: DP leases office to PF at $1/yr rent. Self-dealing. DP leases office to PF at no charge. No self-dealing. PF leases office to DP at 2x FMV. Self-dealing. DP and PF separately lease contiguous office space from non-dp landlord at FMV. No self-dealing. 12
Self-Dealing Exceptions Loans or extensions of credit: DP may loan money to PF if: - Loan is free (i.e., without interest or fees) - $$ used exclusively for 501(c)(3) purposes PF may not loan money to DP, regardless of terms Examples: DP uses PF credit card for personal expenses and reimburses PF. Self-dealing. PF uses DP credit card, reimburses DP, and DP pays any interest/service fees. No self-dealing. 13
Self-Dealing Exceptions Furnishing of goods, services, facilities: DP provides free PF may provide to DP on basis no more favorable than to public (and public actually uses) PF may provide to foundation manager if: value is reasonable and facilities necessary for execution of manager s duties Examples: PF operates museum; DP pays same entry fee as public. No self-dealing. PF purchases table at grantee event. Tickets given to foundation manager, who brings her spouse. Self-dealing with respect to spouse s use of ticket. 14
Self-Dealing Exceptions Compensation or expense reimbursement: Okay for PF to provide to DP (other than gov t official): If for personal services that are Reasonable and necessary to carry out PF purposes, and Amount of compensation or reimbursement is not excessive Personal services is narrowly construed Examples: PF reimburses DP family office for investment services provided to PF. No self-dealing. PF reimburses DP family office for secretarial services provided to PF. Self-dealing. 15
Self-Dealing Exceptions More on personal services exception: Reasonable and necessary Document valid business reason for activity Determining that amount is not excessive Compensation surveys Document time spent Cross-reference in 4941 Regs to 1.162-7 4958 standards are instructive but not dispositive 16
Self-Dealing Exceptions Transactions between PF and corporate DP: Okay if pursuant to any Liquidation, merger, redemption, recapitalization, or Other corporate adjustment, organization, or reorganization, and All securities of same class as that held by PF are subject to same terms Such terms provide for receipt by PF of no less than FMV 17
Self-Dealing Exceptions Transfer to, use by/for benefit of, a DP of income or assets of a PF: Limited exception for benefits to DP that are incidental and tenuous Examples of incidental and tenuous benefits: Donor name recognition Benefit to DP is minor, indirect, and essentially unavoidable if PF is to engage in the public benefit activity in question DP benefits only in same way that general public benefits, without favoritism or other special treatment 18
Self-Dealing Exceptions Payments of money, transfers of property to a DP who is a government official: Long list of exceptions Transactions where DP status arises only as a result of the transaction Not self-dealing Example: Bargain sale by non-dp to PF causes seller to become a substantial contributor to PF. The bargain sale is not a self-dealing transaction. 19
Self-Dealing Taxes Initial 10% of amount involved on self-dealer, plus correction or return of funds required 5% on foundation managers who knowingly participated ($20k cap) Second-tier (if not corrected w/in taxable period ) 200% of amount involved on self-dealer 50% on foundation managers who refuse to agree to correction ($20k cap) Joint and several liability for all involved 20
Annual Mandatory Distributions Must distribute 5% of FMV of assets for preceding year What qualifies as a qualifying distribution (QD)? Grants to most public charities (different rule for operating foundations) Reasonable, necessary administrative expenses Payments for assets used in exempt purposes Professional fees for advice on program activity Controlled grants and grants to other PFs If grantee is controlled by PF or DPs to PF, grant is not a QD unless out of corpus rules are followed If grantee is a PF, out of corpus required for grant to be QD 21
Taxes on Failure to Distribute Initial 30% of undistributed income, plus failure must be corrected, which means disbursement(s) must be made equal to deficiency. Second-tier (if not corrected w/in taxable period ) 100% of amount involved 22
No Excess Business Holdings PF and DPs together can only own up to 20% of voting stock in a business Exceptions/extenuating circumstances: 2% de minimis rule (also count holdings of other PFs funded or controlled by DPs to the PF in question) PF and DPs can own up to 35% if IRS agrees that a third party effectively has control of business Functionally-related businesses 95% of gross income of business is passive 5-year period to dispose of gifts, bequests, etc. Independently-operated philanthropic businesses (i.e., Newman s Own exception) 23
Tax on Excess Business Holdings Initial 10% of value of excess holdings plus holdings creating excess must be disposed of. Imposed on last day of taxable year Calculated when EBH was greatest during that tax year Second-tier (if not corrected w/in taxable period ) 200% of value of excess holdings 24
Taxes on Jeopardizing Investments PF may not invest in manner that jeopardizes ability to carry out exempt purposes Portfolio approach Look at each investment, taking into account PF s portfolio as a whole Diversification helps Reliance on investment professionals helps Mission-related investments may be permitted 26
Taxes on Jeopardizing Investments Exception: Program Related Investments When primary purpose of investment is to accomplish one or more exempt purpose it may qualify as a PRI. Examples of PRIs number 19, including funding rehabilitation or child care facility in deteriorated neighborhood, LLC to teach poor farmers how to get a loan, and investment in business to recycle solid waste. 27
Taxes on Jeopardizing Investments Initial 10% of amount so invested, plus removal from jeopardy 10% on foundation managers who knowingly participated ($10k cap) Second-tier (if not corrected w/in taxable period ) 25% of amount so invested 5% on foundation managers who refuse to agree to removal of investment from jeopardy ($20k cap) 28
Taxes on Jeopardizing Investments Joint and several liability for foundation managers Regulations from 1972 prohibit types of investments now generally accepted as leveling risk, such as Straddles, puts and calls, commodities, oil & gas working interests, and selling short 29
Taxable Expenditures Not for charitable purposes Lobbying or electioneering Most voter registration drives Most grants to individuals For travel, study or other similar purposes Unless grantee selection process pre-approved by IRS Grants to entities that are not public charities Unless PF exercises expenditure responsibility (ER) Grant to certain supporting organizations Unless PF exercises ER Grants to foreign charities Unless PF exercises ER or grantee is foreign equivalent of U.S. public charity 30
Taxes on Taxable Expenditures Initial 20% of taxable expenditure plus correction 5% on foundation managers who knowingly agreed ($10k cap) Second-tier (if not corrected w/in taxable period ) 100% of taxable expenditure 50% on foundation managers who refuse to agree to correction ($20k cap) Joint and several liability for foundation managers 31
Abatement of Excise Taxes Does not apply to first-tier 4941 self-dealing 32
Abatement of Excise Taxes 4962 IRS has abatement discretion May request IRS abate first-tier tax (including interest) if: Taxable event was due to: Reasonable cause and Not to willful neglect, and Event was corrected within the correction period for such event. 33
Abatement of Excise Taxes Abatement requests need careful consideration IRS regularly examines by sending request for more information Recent experience yielded no abatement Study meaning of reasonable cause in view of Parks case (9 th Circuit Ct of Appeals, 12-15-17) Reliance on advice of legal counsel See IRS TAMs 201441012 and 201423035 34
Abatement of Excise Taxes If a foundation manager, after full disclosure of the factual situation to legal counsel, relies on the advice of such counsel expressed in a reasoned written legal opinion that an expenditure is not a taxable expenditure under section 4945, the manager will not incur liability for approving the expenditure. Parks Foundation v. CIR, No. 16-72572 (2017) 53.4945-1(a)(2)(vi) 35
Abatement of Excise Taxes The Court in Parks case ruled opinion of counsel was not reasoned, because counsel supplied cursory commentary without addressing his opinion to the facts and applicable law. Because counsel's messages did nothing more than express a conclusion, the legal opinion was not reasoned within the meaning of the regulation. (Parks Foundation, 2017) 36
Abatement of Excise Taxes Grantee s pending Form 1023 was not adequate proof of public charity status and could not be relied by grantor as reason for not exercising expenditure responsibility. (IRS Tech. Adv. Memo 201351027) Lack of knowledge that PF s founder held more than 20% of business stock was not adequate excuse for buying excess business holdings. (IRS Tech Adv. Memo 9424004) 37
Abatement of Excise Taxes To request abatement, IRS instructions suggest following legend be placed at top of first page of Form 4720: Request for Abatement Under Section 4962 38