Washington Hotline – April 24, 2012

President and Vice President Release 2011 Tax Returns

Both President and Mrs. Obama and Vice President and Mrs. Biden have released their 2011 tax returns.

President and Mrs. Obama received income from his salary and book royalties.  They deducted $49,000 from book royalties for a simplified employee pension contribution, leaving them with an adjusted gross income of $789,674.

The President and Mrs. Obama itemized deductions and their charitable gifts totaled $172,130.  This is 21.8% of their adjusted gross income.

Their largest gift was $117,130 from book royalties to the Fisher House Foundation.  This charity assists children of soldiers killed or wounded in Iraq or Afghanistan.  Other gifts to the 40 listed charities included transfers to the Red Cross, the Boys and Girls Club, Habitat for Humanity, Sidwell Friends School and the United Negro College Fund.

Vice President and Mrs. Biden received both salary and a pension.  Their adjusted gross income was $379,035.  They also itemized deductions and reported charitable gifts of $5,540 or 1.5% of their adjusted gross income.

The 16 charities that were listed included the Diocese of Wilmington, Delaware, the Northern Virginia Community College Alumni Scholarship Fund and the World Food Program, USA.  Mrs. Biden is a member of the faculty at the Northern Virginia Community College.

IRS FAQ on Revocation and Reinstatement

Thousands of smaller charitable organizations have had their exempt status revoked for failure to file IRS Form 990-N.  Each charitable organization is required to file on the 15th day of the fifth month after the close of their fiscal or calendar year.  The filing may be Form 990, Form 990-EZ or for private foundations, Form 990-PF.  Charities with annual receipts of $50,000 or less, are permitted to file Form 990-N, the ePostcard method authorized by Congress and the IRS.

However, thousands of exempt organizations have not filed Form 990-N and failure to do so for three consecutive years results in automatic revocation of exempt status.

As a result of a flurry of questions by board members and staff of small charitable organizations, the IRS has posted a Frequently Asked Questions (FAQ) document on www.irs.gov.

The document is titled “Automatic Exemption Revocation for Non-Filing; Frequently Asked Questions.”  It covers four main topics.

1.  Automatic Revocation

Charities that have not filed a required Form 990-N for three consecutive years have had their exemption automatically revoked.  There are two exceptions.  Churches and integrated auxiliaries of churches are not required to file Form 990.  If an organization that is required to file can demonstrate that it has complied during one of the past three years, it should contact the IRS and provide proof of that filing.

2.  Effect of Revocation

If an organization has lost exempt status and is a corporation, it must file Form 1120, U.S. Corporation Income Tax Return.  This is due the 15th day of the third month after the end of a tax year, or March 15 for a calendar-year organization.  Alternatively, a trust is required to file IRS Form 1041, U.S. Income Tax Return for Estates and Trusts.  It is due by the 15th day of the fourth month, or April 15 for calendar-year organizations.

An organization with revoked exempt status is no longer a Sec. 501(c)(3) entity qualified to receive deductible contributions.  It will not be included in Publication 78, Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986.

Finally the organization will be liable for any excise tax, income tax or penalties that were applicable as of the date of revocation.

3.  Reinstatement

After your exempt status has been revoked, it will be necessary to apply for reinstatement by filing IRS Form 1023.  The appropriate user fee must be included with the application.  For the refiling, the organization must use the same employer identification number (EIN) that applied to the initial exempt status.

4. After Reinstatement as a Tax Exempt Organization

Following reinstatement as a tax exempt organization, the charity should make certain to file the appropriate IRS Form 990.  If it is a smaller organization with annual receipts of $50,000 or less, it may use Form 990-N, the ePostcard.  Otherwise, it should file Form 990-EZ or the full Form 990 by May 15 each year (for calendar year organizations).

Expanded Program-Related Investments for Private Foundations

On April 18, 2012, the IRS issued REG-144267-11 to expand the use of program-related investments for private foundations.  The proposed regulations are designed to enable private foundations to comply with the Sec. 4944(a) requirements that a private foundation not make a “jeopardizing investment.”  Previous regulations under that section discuss program investments that are permitted to assist economically disadvantaged individuals and deteriorated urban areas.  The expanded examples discuss activities in a foreign country, equity investments with potential high rates of return and credit enhancement arrangements.  These investments may be within the Reg. 53.4944-1(a)(2) “ordinary business care and prudence” standard for private foundations.

There are several specific examples that will be helpful to private foundations.  First, a private foundation could purchase shares of stock in a corporation that is developing a vaccine for poor people.  If this particular vaccine could improve healthcare in a manner that “significantly furthers” the exempt purpose of the private foundation, the investment would be permitted.

A second option could involve a below-market-rate loan.  If a public charity exists to support the arts, a low interest loan for new exhibition space could be a program-related investment for a private foundation.

Third, it may be helpful for a private foundation to provide funds for a loan or guarantee a loan.  For example, a child care organization may desire funds to construct a center to serve the needs of low-income persons.  A private foundation could transfer funds to a bank that are then loaned to the child care organization.  Alternatively, it could sign a guarantee agreement with the bank.  Both are permitted if there is a “significant advancement” of the exempt purposes of the private foundation through the actions of the charitable organization.

A fourth option could be an investment in a related business.  A private foundation that has an exempt purpose to improve the environment may purchase stock in a business that constructs recycling centers.  Even if there is a significant potential increase in value of the stock, a substantially related enterprise could be a permissible investment.

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