EOTJ-18-05-cover.qxp_Layout 1 8/14/18 9:14 AM Page 1 September/October 2018 “Tipping” to Private Foundation Status Constitutionality of Religion Code Sections Impermissible Private Benefit EOTJcoverads.qxp_Journal covers 8/16/18 11:48 AM Page 2 EOTJ-18-09-01-TOC.qxp_PTS-06-06-000-MH&TOC 8/16/18 11:51 AM Page 1 September/October 2018 Volume 30, No. 2 ARTICLES FROM PUBLIC CHARITY TO PRIVATE FOUNDATION: HOW TO HANDLE THE “TIPPING” PROBLEM 3 CHRISTOPHER M. HAMMOND RELIGIOUS ORGANIZATIONS— CONSTITUTIONALITY OF CODE PROVISIONS 17 BRUCE R. HOPKINS IDENTIFYING AND NAVIGATING IMPERMISSIBLE PRIVATE BENEFIT IN PRACTICE 26 JOHN TYLER, EDWARD DIENER, AND HILLARY BOUNDS TENANT IMPROVEMENT ALLOWANCES PAID TO EXEMPT ORGANIZATIONS 33 RICHARD A. NEWMAN THE DISAPPEARING 60% DEDUCTION— NEW CHARITABLE GIVING LIMITS ARE NOT AS GENEROUS AS THEY APPEAR 36 BRAD BEDINGFIELD AND NANCY DEMPZE THE “SIMPLE” PRIVATE FOUNDATION— CHANGING ONE LIFE AT A TIME 42 JOHN DEDON EOTJ-18-09-01-TOC.qxp_PTS-06-06-000-MH&TOC 8/16/18 11:51 AM Page 2 Editors-in-Chief Editorial Staff Joseph E. Lundy Sharon W. Nokes Managing Editor Schnader Harrison Segal & Lewis The Pew Charitable Trusts Daniel E. Feld, J.D. Philadelphia, PA Washington, DC [email protected] Director, International Board of Advisors Tax & Journals Robert Gallagher, J.D., CPA Ronald Aucutt Barbara L. Kirschten McGuire Woods, LLP Wilmer, Cutler & Pickering Desktop Artist McLean, VA Washington, DC Anthony Kibort Wendell R. Bird James J. Knicely Cover Design Bird & Loechl Knicely & Associates Christiane Bezerra Atlanta, GA Williamsburg, VA VP, Editorial, Milton Cerny Michael S. Kutzin Knowledge Solutions McGuireWoods LLP Goldfarb & Abrandt Nancy S. Hawkins, J.D. 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EOTJ-18-09-03-hammond.qxp_EOTJ_Article_template_v1.2 8/16/18 11:52 AM Page 3 FROM PUBLIC CHARITY TO PRIVATE FOUNDATION: HOW TO HANDLE THE “TIPPING” PROBLEM CHRISTOPHER M. HAMMOND Something is in the water. Whether the catalyst was The purposes of this article are to outline the Instances of a bull market, evolving charitable sentiment, an uptick warning signs for the ways through which tipping “tipping” from in the number of organizations operating through is more regularly occurring, detail the downsides public charity to private nonexempt forms of social enterprise, or a combi- for a public charity that tips, describe planning op- foundation status nation of a whole host of factors, instances of “tipping” portunities for public charities that proactively are increasing, into private foundation status are on the rise. More- recognize the potential for tipping, and suggest but problems over, even organizations that run through the unusual considerations for organizations that first discover arising from such grant analysis in the applicable year and reach a fa- the change in classification after a meaningful tipping can be reduced with vorable result may find themselves tipping in the period has elapsed. proper planning. wake of the generally-excluded contributions. When the threat is recognized, options are typ- ically available to mitigate the more adverse con- Setting the table: Public support sequences of tipping (or even the result of tipping Although perhaps over-simplified, it may be helpful itself). However, tipping is often not discovered to start with the general bifurcation that the world until Schedule A to the Form 990, Return of Or- of organizations that are tax-exempt via Section ganization Exempt From Income Tax, for the 501(c)(3)1 consists of: (1) private foundations, and problem tax year is prepared, which, in many in- (2) 501(c)(3) organizations other than private foun- stances, means that the organization first learns dations.2 When the practitioner dives into the latter, of the change in classification over ten months he is met with four general routes,3 with the emphasis after the tax year ends. To further complicate the in this case being on organizations that generally issue, tipping often affects smaller public charities receive sufficiently broad public support from con- that, while certainly attempting to do so, may not tributions from the general public (outside of ex- properly complete or be required to complete empt-function income).4 These are generally Schedule A, resulting in a discovery of the change referred to as “publicly supported public charities.” in classification in a tax year that is several years Publicly supported public charities depend on after the occurrence. mathematical tests for their classification. The first alternative test is purely mathematical, requiring CHRIS HAMMOND, Esq., is an Associate in the Columbus, Ohio of- that the total support that the organization normally fice of Dinsmore & Shohl LLP. receives from governmental units, contributions september/october 2019 taxation of exempts 3 EOTJ-18-09-03-hammond.qxp_EOTJ_Article_template_v1.2 8/16/18 11:52 AM Page 4 made directly or indirectly by the general public, and the denominator would be $25,000, resulting or a combination of these sources, equals at least in 100% public support and satisfaction of the 1 1 33 /3% of the total support normally received by 33 /3% test. the organization.5 The second alternative test con- Thus, the table is set: publicly supported public sists of a necessary, but insufficient, mathematical charities must satisfy a mathematical test, which component requiring the first alternative test to is subject to varying adjustments depending on the result in at least 10%, as well as a facts and circum- amounts/proportions of support and the usual/un- stances test to analyze whether the organization is usual nature of the support. in the nature of an organization that is publicly supported.6