News For Nonprofits

Excise tax to follow madoff ponzi scheme?

More than 150 private foundations invested with Bernard Madoff, and their losses have forced several charities to close. But the effects of this investment travesty could live on.

The IRS is looking into whether excise taxes apply to private foundations and their board members who placed up to 100% of their portfolio assets with Madoff. These taxes would be based upon the Internal Revenue Code provision that excise taxes can be assessed on a private foundation and its board for making investments that jeopardize the charitable purpose.

William Josephson, former head of New York State’s Charities Bureau, told the U.S. Senate Finance Committee that it would make public policy sense to apply to public charities some of the additional restraints that already are on private foundations. This pertains to activities such as self-dealing, excess business holdings and jeopardy investments.

Similar discussions have come up in the Senate Finance Committee in the past. And in light of the recent scandal, greater regulation of charitable organizations’ investments is likely. •

Selling taxable products

Does your charity sell products on an ongoing basis and, if so, does this create unrelated business income tax (UBIT) liability for your organization? As nonprofits increasingly search for extra revenue, this question becomes more relevant.

If the products you sell are created by the individuals that your organization serves, they generally are exempt from UBIT. For example, a nonprofit serves emotionally disabled children and, as part of their therapy, they create artwork that is sold. The sales proceeds aren’t taxable.

But if the product isn’t sold in substantially the same form as originally created, it could be subject to UBIT. For instance, if the artwork is used to make salable greeting cards, that income would be subject to the tax.

Generally, UBIT applies when the activity meets three conditions: 1) It’s a trade or business, 2) it’s regularly carried on, and 3) it doesn’t further the organization’s exempt purpose. •

Employment tax warning

As nonprofits face budget crunches, some are trying to save payroll taxes and benefits expenses by treating individuals as independent contractors rather than employees. In light of large federal budget deficits, the IRS is looking more closely at this area to ensure that earnings are not escaping income and payroll taxes through underreporting.

In her remarks at the 2009 Georgetown Law CLE “Representing & Managing Tax-Exempt Organizations” conference in April, IRS counsel Catherine Livingston reminded participants that nonprofits are still required to withhold employment tax on pay to employees. You’ll “hear more from the Service on this issue,” she warned. •