Part II:  Senate and House proposals

By Nancy Ortmeyer Kuhn, Chair of Jackson & Campbell’s Tax Group

The Joint Committee on Taxation released the Senate’s “Description of the Chairman’s Mark of the ‘Tax Cuts and Jobs Act’” on November 9, 2017.  The Ways and Means Committee of the U.S. House of Representatives previously released its long-awaited tax bill on November 2, 2017.  The House bill is also entitled Tax Cuts and Jobs Act, H.R. 1 (“TCJA”) Of interest to nonprofit organizations are the following provisions of both proposals:

• House Proposal: A tax exempt organization will pay a 20% excise tax on any executive compensation in excess of $1 million.  The excise tax applies only to the top five executives, and includes all remuneration and benefits, other than amounts that are excludable from the executive’s gross income such as donations to a qualified retirement plan.  (TCJA §3803)   This 20% excise tax applies to all organizations described under §501(a), along with political organizations exempt under §527, §115 state and local governmental entities, and farmers’ cooperatives.
  • Senate Proposal: Similar 20% excise tax, although this excise tax applies to any part of an excess parachute payment even if the payment is not over $1 million.
• House Proposal, as updated: The Johnson Amendment would be partially repealed, and all  section 501(c)(3) religious organizations and public charities would be free to express partisan political statements during the ordinary course of the religious organization’s activities, assuming its expenses in making those statements are de minimis.  (TCJA §5201)  Originally this provision only applied to religious organizations. The proposal has now been updated to include all section 501(c)(3) organizations.
  • Senate Proposal: No provision.  The Johnson Amendment would remain and religious organizations and other section 501(c)(3) charities would still be prohibited from engaging in any political activity.
• House Proposal: Private foundations would be subject to a 1.4% tax on net investment income, rather than the 1% or 2% investment tax under §4940. This is one of a very few provisions that would simplify current law. (TCJA §5101)  The 1.4% tax would also be collected from certain private colleges and universities on their net investment income.  (TCJA §5103)
  • Senate Proposal: Similar provision.
• House Proposal: Private foundations would be exempt from the excess business holding excise tax for any of its 100% subsidiaries (by voting stock) that annually distribute all net operating income to the private foundation. The foundations that are eligible for this exemption are limited to those that have independent executives and boards of directors.  Thus, the exemption would not apply to foundations where the majority of the members of the board of directors are substantial contributors or executives of the foundation.  (TCJA §5104)
  • Senate: No proposal
• House Proposal: Donor advised funds would be subject to additional reporting requirements regarding their policies on inactive donor advised funds as well as a requirement to report the average amount of grants made from their donor advised funds. (TCJA §5202)
  • Senate: No proposal
• House Proposal: The bill clarifies that the unrelated business income tax applies to all tax-exempt organizations recognized under §501(a), along with §115 state and local entities such as public pension plans. (TCJA §5001)
  • Senate: No proposal

• House Proposal: Any net income that a tax-exempt organization realizes from research would now be subject to the unrelated business income tax, unless the research is publicly available. (TCJA §5002) Previously, net income from research performed by colleges, universities, hospitals or performed for government entities was also generally exempt from UBIT regardless of whether the research was publicly available.
  • Senate: No proposal

• Senate Proposal: Sections 512 and 513 of the Internal Revenue Code would be amended to delete the exclusion from unrelated business income tax for royalties from the sale or license of a nonprofit’s name and/or logo.  This includes income from any trademark or copyright related to the name or logo. The net revenue from the royalty stream or sales income would be treated as an unrelated trade or business and subject to tax.
  • House: No proposal.

• Senate Proposal: An organization’s unrelated business income tax would be computed separately for each unrelated business. An organization would not be able to offset income from one unrelated business with the losses from another unrelated business.
  • House: No proposal.

• Senate Proposal: Section 501(c)(6) would be amended to exclude professional sports leagues as eligible for tax-exempt status. Thus, the Senate bill would repeal tax exempt status for professional sports leagues.
  • House: No proposal.

• Senate Proposal: The so-called “intermediate sanctions” excise tax provisions under section 4958 of the Internal Revenue Code would be substantially changed.  This excise tax is imposed on excess benefits received by “responsible persons” of certain tax-exempt organizations.  Also, the “rebuttable presumption of reasonableness” set forth in the Treasury Regulations would be eliminated and replaced with a due diligence standard.  The Senate is proposing a 10% excise tax on the organization if the initial section 4958 excise tax is imposed on a disqualified person.  The organization would have a “reasonable cause” defense to the imposition of the 10% tax.  The Senate’s proposal also eliminates certain protections for organization managers, making it more likely that an organization manager would also be personally liable for the excise tax.  The proposal adds investment advisors (in particular those advising donor advised funds) and athletic coaches of colleges and universities within the definition of “disqualified persons” subject to the intermediate sanctions excise taxes.
  • House: No proposal

• Senate Proposal: Section 170 of the Internal Revenue Code would be amended to disallow any charitable contribution deduction to the donor for contributions to colleges and universities that provide the donor with the right to purchase tickets and/or receive preferential seating at athletic events.
  • House: No proposal

Whether any of these provisions will be passed by Congress and signed into law as currently stated is unknown. The most controversial is the House’s proposal to partially repeal the Johnson Amendment. The House provision would allow a section 170 charitable deduction for contributions to religious and charitable organizations in exchange for political endorsements or other activities promoting the candidacy of an individual running for political office.  Donations to religious entities and charities are not only tax deductible to the donor, they are not disclosed to the public, and so this provision would expand the Supreme Court’s decision in Citizens United, allowing anonymous tax-deductible political donations. Thousands of charities and churches have expressed their opposition to this provision, fearing that their religious and charitable work would become susceptible to the political factions currently dividing the country, rather than be a respite from divisiveness.  The outcome is far from certain, and so stay tuned for additional updates.