Bench & Bar

JAN 2018

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17 BENCH & BAR | ABOUT THE AUTHOR THEODORE T. MYRE, JR. is the co-chair of Wyatt Tarrant & Combs LLP's Health Care Service Team. He concentrates his practice in the areas of health care, nonprofit organizations, tax- ation and general business law. CHECK OUT THE KENTUCKY BAR ASSOCIATION ON TWITTER! ENDNOTES 1. Such as e National Children's Oral Health Foundation and Healthy Smiles, Healthy Children (not to mention Save the Tigers). 2. Section 4958 applies to Section 501(c)(3) nonprivate foundations, Section 501(c)(4) organizations, and Section 501(c)(29) organi- zations. Code Section 4958(e). 3. 26 U.S.C. 4958 (1996). 4. e expansion of the annual informational return (the Form 990) coupled with the requirement that these returns must be made available to the public has enhanced the me- dia's and the public's ability to scrutinize the past activities of charitable organizations. 5. See, for example, the IRS closing agree- ment, published on October 13, 1994, with Hermann Hospital, a 560-bed tertiary-care hospital located at the Texas Medical Center, Houston, Texas, relating to its physician recruitment and retention practices for FY89 through FY92. 6. Note that there need be no causative connec- tion between these two requirements. To be penalized, it is not necessary to prove that the individual exercised his or her influence to obtain the excess benefit. 7. 26 CFR 53.4958-3. 8. In a manner, this has changed in the case of compensation. e Senate Finance Commit- tee mark-up would have imposed a ten percent (10%) penalty on the exempt organization unless the participation of the organization was not willful and was due to reasonable cause, but that provision disappeared stage right, not making the final act. TAX CUTS AND JOBS ACT Scheduled for Markup by the SENATE COMMITTEE ON FINANCE on November 13, 2017, Prepared by the Staff of the JOINT COMMITTEE ON TAXATION November 9, 2017 (the "Senate Finance Proposal"). e final Act, however, imposes a 21% excise tax on compen- sation in excess of $1,000,000 paid to any of a tax-exempt organization's five highest compensated employees. e tax is imposed on the organization rather than the employee. Among other effects, the new legislation will make it costlier for major universities to pay head coaches. TAX CUT AND JOBS ACT, Public Law No. 115-97 (2017). 9. Other than present an excess benefit bene- ficiary with an offer that cannot be refused (see main text), the law does not, as it cannot, enforce restoration of the excess to the charity. e power to require such restoration generally falls within the province of the state Attorney General and in certain cases may also be a remedy that the organization itself could pursue, were it so inclined and if Section 4958 didn't have its back. 10. 26 U.S.C. 4958 (1996). 11. Others, such as another charitable organi- zation or certain non-highly compensated employees (not otherwise deemed disqualified persons), are specifically excluded from this status. 26 CFR 53.4958-3(d)(1) and (3). e Senate Finance Proposal would have added athletic coaches and investment advisors to this list, but that provisions did not survive cut day. 12. Code Section 4958(f )(1)(A) defines the term to include "any person…in a position to exer- cise substantial influence over the affairs of the organization." While 26 CFR 53.4958-3(c) provides that voting members of the governing body, presidents, chief executive officers or chief operating officers, and treasurers and chief financial officers are automatically deemed to fall within the description, 26 CFR 53.4958-3(e) sets forth a number of facts and circumstances that can have a bearing on the determination, including whether an individual is a "substantial contributor," or "has or shares authority to control or determine a substantial portion of the organization's capital expenditures, operating budgets, or compensation for employees," or "manages a discrete segment or activity of the organiza- tion that represents a substantial portion of the activities, assets, income, or expenses of the organization." 13. In other words, if a board member's term expires on December 31, 2017, he or she (in- cluding his or her attributees) will continue to be covered by these rules through December 31, 2022. 14. Attributed family members include the dis- qualified person's spouse, brothers and sisters (and their spouses), children, grand-children and great grand-children (including their spouses) and ancestors. 26 CFR 53.4958- 3(b)(1). 15. Generally speaking, entities that are more than thirty-five percent (35%) controlled by disqualified persons are themselves considered disqualified persons. 26 CFR 53.4958-3(b)(2). 16. A nonprivate foundation's Forms 990 are publicly available pursuant to Section 6104(b) of the Code and are also usually accessible on Guidestar.org. 17. e redesigned form has been described as "a significant, complex, and extraordinary document. It is, in many ways, a work of art, in that it captures the requirements of a large amount of statutory law, much of it recently enacted," and has also been credited with creating new law. e New Form 990, Law Policy and Preparation. Hopkins, Anning, Gross and Schenkelberg, John Wiley & Sons (2009), p. xxi and p. 5. ere is no doubt that the Form 990 has now become the IRS's primary enforcement tool in the exempt organization arena. 18. Transactions with "interested persons" must be reported on Schedule L to the Form 990. While slightly broader, the definition of "interested persons" in Schedule L includes all disqualified persons. 19. See Part I of Schedule J to IRS Form 990. Section 501(c)(3) hospitals can attest to the rigors of Schedule H. 20. See Form 990, Part IV, questions 25a and 25b. 21. Although sometimes it might feel like an au- dit. One of the difficulties with the Form 990 is that everything that is reported usually has already happened. Preparing the return may turn up problems that might have been han- dled differently had they been identified in the first place. at's why it is often prudent for an attorney who is involved at the front end of a transaction or compensation arrangement to understand if and how it will be reflected on the Form 990. 22. e Senate Finance Proposal sought to eliminate this presumption and instead make its standards relevant in avoiding the proposed ten percent entity-level tax. Both went down in flames. 23. First announced in the IRS 2004 EO CPE Text. 24. Some of the other items identified in Schedule Part I of Schedule J could similarly lead to automatic excess benefits if not reported correctly by the organization. 25. Code Section 4958(a)(2) and Code Section 4958(f )(2). See also 26 CFR 53.4958-1(c) (2). e tax is ten percent (10%) of the excess benefit, unless the individual's participation is not willful and is due to reasonable cause. In other words, the organization manager excise tax is not a no-fault tax and should generally be avoidable if the director or officer meets fiduciary duty standards under KRS 273.215 and KRS 273.227. e organization manager tax is capped at $25,000, in the aggregate, for each excess benefit transaction. 26. Avoiding this risk by abstaining doesn't work. "Participation" includes silence. 26 CFR 53.4958-1(c)(3). 27. 188 T.C. 379 (2002), rev'd, 456 F. 3d 444 (5th Cir. 2006).

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