AICPA Requests Guidance on Use of PTCs • IRS Outlines Prohibited Behavior for Charities during Political Elections • IRS Warns Taxpayers against Frivolous Arguments • Tuition Prepayment by Donor Not Subject to Gift or GST Tax (Box)
 

Lesli S. Laffie, J.D., LL.M.

From the AICPA

• Should clearly state that a trust grantor or beneficiary is not prohibited from serving on a PTC’s distribution committee, as long as adequate safeguards are in place to prevent the grantor or beneficiary from participating in decisions that, acting as an individual trustee, would have caused the trust’s assets to be included in his or her estate.

• Should include a safe harbor that would apply as long as the PTC’s bylaws prohibit a grantor or current beneficiary from participating in any discretionary distributions with respect to any trust of which they are a grantor or beneficiary while serving on the distribution committee. If the bylaws were later amended to eliminate this prohibition, the safe harbor would no longer apply and the PTC owners and directors would be at risk.

• With the exception of control over discretionary distributions discussed, family members should be able to participate in ownership, as well as all other aspects of managing the PTC.

From the IRS

IRS Outlines Prohibited Behavior for Charities during Political Elections

Charities are prohibited from directly or indirectly participating (or intervening) in any political campaign, even a nonpartisan one. However, they may participate in certain activities that generally encourage people to vote or that educate them about political issues. Because many exempt organizations are uncertain about the extent to which they can discuss issues of importance during a campaign or interact with candidates for public office, the IRS has announced a political activities compliance initiative and released a fact sheet (FS-2006-17) to help charities understand the limits of their acceptable involvement.

The fact sheet explains “political campaign intervention” and discusses which activities are prohibited. It also discusses voter education and registration efforts, individual activities by organization leaders, candidate appearances, voter guides and the differences between issue advocacy and campaign intervention. It also includes examples of prohibited and acceptable scenarios for involvement by charities.

Political campaign intervention: Political campaign intervention includes any and all activities that favor or oppose one or more candidates for public office. The prohibition extends beyond endorsements, and includes public statements of position (verbal or written) in favor of or in opposition to any candidate, even if the materials are prepared by others. Even saying the charity does not care who is elected, as long as one candidate is not, is not acceptable.

Allowing a candidate to use an organization’s assets or facilities is also prohibited, if other candidates are not given an “equivalent opportunity.”

Voter education and registration: Voter education and registration activities are allowed, if carried out in a nonpartisan manner.

Individual activities by leaders: Free expression of political matters by leaders of exempt organizations is not restricted. However, they cannot make partisan comments in official organization publications or at official organization functions. To avoid potential attribution of comments to the organizations, leaders who write or speak in their individual capacities should indicate so.

Candidate appearances: An organization may invite political candidates to speak at its events, as long as the organization provides an “equal opportunity” to the candidates seeking the same office and no political fundraising occurs. Political candidates may be invited in their capacity as candidates or in their individual capacity (e.g., current or former office holder or expert in a nonpolitical field). Candidates may also appear without an invitation at events that are open to the public, such as concerts, lectures or worship services.

Issue advocacy: Exempt organizations may take positions on public policy issues. However, they must avoid any advocacy that functions as political campaign intervention. A communication is particularly at risk when it makes reference to candidates or voting in a specific upcoming election; nevertheless, the communication must still be considered in context before reaching any conclusions.

IRS Warns Taxpayers against Frivolous Arguments

In a news release (IR-2006-45, 3/16/06), the IRS renewed its warning against frivolous return filing arguments, and cautioned that it would pursue taxpayers, return preparers and promoters involved in filing returns based on these “groundless theories.”

The IRS has issued Notice 2006-31, which identified and included brief descriptions of 26 frivolous arguments; in addition, the notice identifies and explains the potential civil and criminal penalties for participation in, or promotion of, frivolous arguments.

The Service also issued five revenue rulings that discuss specific claims and arguments which the IRS will reject and penalize taxpayers for making:

• Use of the phrase “nunc pro tunc” on the face of a return has no legal effect. Writing or stamping this on invalid returns or invalid positions or documents will not validate them (Rev. Rul. 2006-17).

• That only Federal employees and residents of Washington, DC, or Federal territories or enclaves are subject to Federal tax (Rev. Rul. 2006-18).

• Federal tax liability cannot be avoided by attributing income to a purported trust and then claiming a deduction for a “fiduciary fee” in the same amount (Rev. Rul. 2006-19).

• Taxpayers cannot claim tax-exempt status based on a general “Native American Treaty” (Rev. Rul. 2006-20).

• The Paperwork Reduction Act of 1980 does not relieve taxpayers of the requirement of filing a Federal income tax return (Rev. Rul., 2006-21).

In addition to this guidance, the IRS will soon update its document, The Truth About Frivolous Arguments. Other information about frivolous tax positions is available at www.irs.gov.