House Advances Tax Legislation: Implications for Tax-Exempt Organizations

As passed by the House, the Bill reflects significant changes from the version reported by the House and Ways and Means Committee (Committee version) covered in our previous alert.

The Bill now moves to the US Senate for consideration. Further changes are likely to occur in the Senate, and the revised version of the legislation would then need to be approved by the House before sending it to the president’s desk.

The Bill does not include the following provisions included in the Committee version:

• Unrelated Business Taxable Income From Name and Logo Royalties: The Bill does not include the proposed modification to the royalty exception for unrelated business taxable income that would exclude income derived from any sale or licensing of a tax-exempt organization’s name and logo.
• Termination of Tax-Exempt Status for Terrorist Supporting Organizations: The Bill does not include the proposed modification to Section 501(p) of the Internal Revenue Code, which would have added a definition of “terrorist supporting organizations” to Section 501(p) and provided the Secretary of the Treasury with the authority to designate an organization as a terrorist supporting organization without consulting with the Secretary of State and the Attorney General.

The Bill modifies the Committee version in several key respects:

• Excise Tax on Net Investment Income of Private Foundations: Like the Committee version, the Bill replaces the flat 1.39% excise tax rate with a four-tiered structure based on the foundation’s total assets:

  • Foundations with assets below $50 million: 1.39%.
    • Foundations with assets between $50 million and $250 million: 2.78%.
    • Foundations with assets between $250 million and $5 billion: 5%.
    • Foundations with assets above $5 billion: 10%.

  However, Section 112022 of the Bill expands the Committee version’s aggregation rules for purposes of the private foundation excise tax not only to include the assets of certain related organizations in determining the applicable rate of tax, but also to include the net investment income of those related organizations to determine the net investment income subject to the tax.

  A related organization for these purposes is any organization that controls or is controlled by the private foundation or is controlled by one or more persons that also control the private foundation. As drafted in the Bill, this provision would include any related organization regardless of its tax status. It excludes, however, assets and net investment income from related organizations that are not controlled by the private foundation if the assets and investment income are not intended or available for the use or benefit of the private foundation. When assets are “not intended or available for the use or benefit of the private foundation” is not defined.

• Executive Compensation Excise Tax: Like the Committee version, Section 112020 of the Bill expands the application of the excess compensation excise tax to include any employee or former employee of the organization regardless of whether they are (or were) one of the five highest compensated employees and regardless of whether they are (or were) an employee of an “applicable tax-exempt organization.” However, the Bill modifies the definition of “covered employee” for purposes of the executive compensation excise tax to exclude related persons or government entities.

The Bill retains the following provisions from the Committee version without further modification:

• Section 112023 (Certain purchases of employee-owned stock disregarded for purposes of foundation tax on excess business holdings).
• Section 112024 (Unrelated business taxable income increased by amount of certain fringe benefit expenses for which deduction is disallowed).
• Section 112025 (Exclusive of research income limited to publicly available research).
• Section 112021 (Modification of excise tax on investment income of certain private colleges and universities).
• Section 110112 (Reinstatement of partial deduction for charitable contributions of individuals who do not elect to itemize).
• Section 112027 (1% floor on deduction of charitable contributions made by corporations).

ArentFox Schiff’s Nonprofits and Associations and Government Relations practices are closely monitoring the proposed tax legislation. For additional guidance, please contact your AFS attorney or any of the authors of this alert.