Exempt Organization Provisions Included in Proposed Senate Bill Differ from House Bill

Yesterday, the Senate released information on its tax reform bill. The Republican conference was briefed on the bill yesterday morning and a description of the chairman’s mark of the Tax Cuts and Jobs Act by the Joint Committee on Taxation was released last night. The Senate bill includes several significant differences from the House bill, including differences in the provisions that affect tax-exempt organizations.

Major provisions of the Senate bill that would affect tax-exempt organizations include:

• As with the House bill, the Senate bill would leave the charitable contribution deduction in place as an itemized deduction, and no “universal” or “above-the-line” deduction is included in the bill. In addition, the increase in the standard deduction, limitations on and repeal of several itemized deductions, and the increase in the estate tax exemption in the Senate bill are expected to reduce the incentive provided by the charitable contribution deduction. The Senate bill also retains the excise taxes on net investment income from private college and university endowments and on certain executive compensation paid by tax-exempt organizations, among other provisions affecting tax-exempt organizations included in the House bill.
• The Senate bill includes a number of significant changes to the intermediate sanctions rules under section 4958 (excise tax on excess benefit transactions):
  • The Senate bill would impose a 10% excise tax on the tax exempt organization (in addition to the existing taxes on disqualified persons and the organization’s managers), unless the organization establishes that the minimum standards of due diligence were met with respect to the transaction or that other reasonable procedures were used to ensure that no excess benefit was provided.
  • In addition, the Senate bill would eliminate the rebuttable presumption of reasonableness with respect to compensation arrangements and property transfers.
  • Under the proposal, the procedures that presently provide an organization with a presumption of reasonableness generally will establish instead that an organization has performed the minimum standards of due diligence. Consequently, such procedures would only avoid penalties on the organization and not on the disqualified person or organization managers.
  • The proposal eliminates the special rule that provides that an organization manager’s participation ordinarily is not “knowing” for purposes of the intermediate sanctions excise taxes if the manager relied on professional advice, rather such reliance is one of the factors to be considered.
  • The proposal modifies the definition of a disqualified person for purposes of the intermediate sanctions rules to include certain investment advisors and athletic coaches.
  • The proposal extends application of the section 4958 intermediate sanctions rules to tax-exempt organizations described in sections 501(c)(5) (labor and certain other organizations) and 501(c)(6) (business leagues and certain other organizations).
• The Senate bill includes a number of other provisions affecting tax-exempt organizations that were not in the House bill, including:
  • A provision that generally subjects any sale or licensing by an organization of any name or logo of the organization (including any trademark or copyright related to a name or logo), and the royalties derived from any such licensing, to the unrelated business income tax (UBIT) provisions.
  • A requirement that UBTI first be computed separately with respect to each separate unrelated trade or business so that deductions from one such trade or business generally will not be able to offset income from another trade or business.
  • A repeal of the tax-exempt status for professional football leagues as section 501(c)(6) organizations, and extends such exclusion to all professional sports leagues.
  • The original House bill included a repeal of the rules for deferred compensation for tax-exempt organization employees under sections 457(f), 457(b), and 457A with respect to services performed after December 31, 2017. This repeal was removed from the original House bill by amendment during the markup process. However, the Senate bill generally has retained this repeal from the original House bill. 
• The Senate bill also omits a number of provisions affecting tax-exempt organizations contained in the House bill, including:
  • A provision permitting 501(c)(3) organizations, including churches and certain related organizations, to make statements relating to political candidates in the ordinary course of exempt activities, provided the organization incurred only de minimis incremental expenses. 
  • A simplification of the current two-tier private foundation excise tax on investment income to be replaced by a flat 1.4% excise tax.
  • The termination of the tax preference for private activity bonds, including qualified 501(c)(3) bonds, tax credit bonds, and bonds used to finance professional sport stadiums.
  • The repeal of the controversial option in section 170(f)(8)(D) under which the IRS currently may allow donee organizations to report charitable contributions to the IRS instead of sending a contemporaneous acknowledgement to the donor.
  • A clarification that UBIT rules apply to “dual-status” organizations, which are also exempt under provisions of the code other than section 501.
  • Other changes to UBIT, including an inclusion of certain fringe benefits (qualified transportation, qualified parking, and on-premises athletic facilities) provided to employees of tax-exempt organizations in the computation of UBTI and narrowing of the UBIT exclusion for research income, limiting its application to income from research that is freely available to the public.
  • A limited exception to the excess business holding rules for private foundations that would be created for certain wholly-owned and independently operated businesses where all net operating income promptly is distributed for use in the foundation’s charitable purposes.
  • Additional reporting requirements for donor advised fund sponsoring organizations.
  • A provision providing that an organization that operates an art museum as a substantial activity will not qualify as a private operating foundation unless the museum is open during normal business hours to the public for at least 1,000 hours per year.
  • An adjustment for the amount deductible for use of a passenger automobile for charitable purposes from the current fixed 14 cents per mile, to an amount that reflects the current variable cost of operating an automobile (as is currently used to calculate the medical and moving expense deductions).