Bench & Bar

JAN 2018

The Bench & Bar magazine is published to provide members of the KBA with information that will increase their knowledge of the law, improve the practice of law, and assist in improving the quality of legal services for the citizenry.

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| JANUARY/FEBRUARY 2018 12 and business tax cuts. In times like these, lawmakers look at any "off-the-shelf " solutions, such as the Camp Proposal. Among other proposals, then-Ways and Means Chairman Camp's 2014 proposal included a number of revenue-raising adjustments focused on tax-exempt organizations, like: • Increasing Form 990 filing penalties; • Repealing the tax-exempt status of various organi- zations, include all Type II and Type III supporting organizations; • Imposing excise taxes on donor-advised funds that fail to distribute contributions within five years; • Imposing excise taxes on excess tax-exempt organiza- tion executive compensation; and • Taxing investment income of private colleges and universities. Versions of the final two, the excise taxes on executive compen- sation and private college investment income, were included in the final version of the Tax Cuts and Jobs Act. 31 ese provisions are expected to generate revenues of $3.6 billion and $3.0 billion, respectively, over 2018-2027. e Camp Proposal would have modified a number of unrelated business income tax rules to raise revenue. Below, I include (in parenthesis), the Joint Committee on Taxation's then-estimate of how these proposed rules would have increased revenues from 2014 to 2023 and, where available, I include a second parenthetical with the current estimate from the Tax Cuts and Jobs Act for 2018-2027: • Making all entities currently exempt from tax under Section 501(a) subject to the UBIT rules, which includes certain State and local entities (like public pension plans) that are exempt under both Section 115(l) as government-sponsored entities and Section 501(a) ($0.1 billion) ($1.1 billion); • Taxing scientific research not made publicly available as unrelated trade or business income ($0.7 billion) ($0.7 billion); and • Eliminating the ability to offset unrelated business taxable income from one trade or business activity against losses from another trade or business activity ($3.2 billion). Many thought that the Camp Proposal's unrelated business income changes would be "in play." Indeed, the House-approved Tax Cuts and Jobs Act's language included the first two bulleted items, an extension of UBIT to Section 115 government-sponsored entities and the tax on scientific research, but neither proposal found its way into the final text. 32 e Senate-approved Tax Cuts and Jobs Act's language included only the third bulleted item which was included in the Tax Cuts and Jobs Act's final text. 33 Further, tax-exempt organizations would have borne the brunt of corporate integration rules if such rules were included in tax reform proposals. While absent from the House's proposed text, Senate Finance Committee Chairman Orrin Hatch (R-Utah) earlier in 2017 had renewed his interest in "corporate integration"—which would have established a single layer of tax at the corporate share- holder level by allowing businesses to deduct dividends paid. 34 Corporate integration is designed to "alleviate the double taxation" predicament with traditional business corporations, so-called "C corporations" because they are governed by subchapter C of the Internal Revenue Code. Integration offers many perceived bene- fits: it could equalize the treatment of debt- and equity-financed investments, lower the cost of capital, and move us closer to equally treating different business entity forms (e.g., LLCs, Partnerships, C and S corporations). ere are also some drawbacks, particularly for tax-exempt organizations. Under a dividend deduction system like the one Sen. Hatch envisioned, there might be no distinc- tion made between tax-exempt and taxable shareholders. If that occurred, then tax-exempt entities that held C corporation stock would have been taxed on their investments, reducing resources available to support their charitable activities. Charities were likely pleased that corporate integration was not included in the Tax Cuts and Jobs Act's final text. PARTING THOUGHTS Organizations operated for charitable, religious, educational and scientific purposes have enjoyed favorable federal income tax treat- ment since the War Revenue Act of 1917. 35 Although Ways and Means Chairman Brady said he wanted to "unlock" charitable giving through tax reform, 36 the Tax Cuts and Jobs Act will do more harm, than good, to charitable organizations. As our legislative chambers work to fix the Tax Cuts and Jobs Act's technical mistakes in 2018, the charitable sector might have one last opportunity to moderate its impact. Over the coming weeks and months there will be a great deal of uncertainty, complexity and dialogue to decipher these new rules. Without changes the Tax Cuts and Jobs Act will harm our philanthropic sector. Kentucky's nonprofit organizations must remain engaged in future tax discussions. ey can have their voices heard either directly or by working through organizations like the Kentucky Nonprofit Network, the Commonwealth's state-wide association of nonprofit organizations. If they do not find a seat at the bargaining table, then they will find themselves on the table. ABOUT THE AUTHOR MICHAEL N. FINE is a member of the Wyatt Tarrant & Combs LLP's Health Care Service Team. His practice spans the full range of non- profit and tax-exempt organization legal issues, advising public charities, private foundations, boards, and donors. Fine regularly assists clients with tax compliance and corporate planning matters including exec- utive compensation, intermediate sanctions, joint ventures, affiliation strategies, reorganizations, governance, charitable contributions, cap- tive insurance, and obtaining tax exemption from the IRS. Fine was recently selected as chair of the American Health Lawyers Associ- ation's Tax and Finance Practice Group. He received his A.B. from Washington University in St. Louis and his J.D. from the University of Pennsylvania Law School. Features: NONPROFIT LAWS & REGULATIONS

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