CHICAGO - The Internal Revenue Service has made it faster and cheaper for nonprofit organizations to obtain assurances that new bond financings and other activities will not threaten their tax-exempt status. agency officials said late Wednesday.
The IRS also is considering liberalizing its controversial safe harbor standard on low income housing and providing alternative safe harbor standards that would assure a housing organization it qualifies for tax-exempt status, the agency officials said.
The officials - Debra Kaweeki, assistant branch chief for the technical section of the IRS' exempt organizations branch, and Lynn Kawecki, an IRS tax specialist - made their remarks at the National Association of Bond Lawyers' 18th annual Bond Attorney's workshop here.
Under the new procedures, Debra Kawecki said a nonprofit organization, for a $100 fee, can ask the IRS to confirm that the nonprofit's tax-exempt status will not be affected by a proposed bond financing or other activity.
The new procedures were outlined in a "Continuing Education Program' " training manual issued by the IRS last month. Under previous procedures, a nonprofit organization would have had to pay the IRS $1,800, and probably wait for months, for a private letter ruling confirming the nonprofit's tax-exempt status. The new procedures would provide a faster confirmation.
Debra Kawecki told the bond lawyers: "The idea [of the new procedures] is to get you in and out quickly.
"We really think that it's important that we, in the Service, not interfere with the bond market as much as possible," she said.
The new procedures. Debra Kawecki said later, were designed primarily for cases where the IRS has given an organization tax-exempt status but told the organization to request a confirmation of that status if it decides to use tax-exempt financing or take other actions. The new procedures could also be used by any nonprofit organization that has a question on whether any bond-related activity would affect its tax-exempt status, she said.
If an organization seeks confirmation of its tax-exempt status under the new procedures and the planned financing or other activity appears questionable, it might still have to request a private letter ruling, she said.
In a discussion of abusive situations, Debra Kawecki told the lawyers that the IRS is always concerned when a nonprofit organization either, is set up for one purpose and then does something entirely different, or when it appears to be the captive of a developer.
"Clearly, there are organizations that are formed and stuck in drawers. stuck in the drawers of underwriters' offices, in the drawers of lawyers' offices, to be there ready, able and willing when it comes time to do a deal." she said.
"We're suspicious of these, and we think you ought to be too," Debra Kawecki said.
In reviewing an application for tax-exemption or in an audit. the IRS typically will look at a nonprofit organization's board of directors and management contracts to try to determine who controls the organization, she said. If a management company, or manager, makes all the major decisions, can hire and fire, and sets prices, that raises a warning flag at the IRS because it suggests that the manager, not the nonprofit organization, is in Control, she said.
Lynn Kawecki told the lawyers that the IRS should not be expected to abandon, but will probably modify, the controversial safe harbor standard on low-income housing. The standard was sent to IRS district offices last fall and published in Notice 93-1 in January. The IRS also might provide housing organizations with alternative safe harbor standards, he said.
The IRS wrote the safe harbor standard in Notice 93-1 in an effort to clarify when housing projects would be deemed to be "relieving the poor and distressed" - one of several charitable activities that qualify an organization for tax-exempt status.
Under the safe harbor standard, housing will be considered to be relieving the poor and distressed if at least 75% of the units are made available to families earning 60% or less of an area's median income and the remaining 25% of the units are set aside for "persons at the lower end of the spectrum.'
Lynn Kawecki said that the IRS does not want to abandon this safe harbor standard because many organizations have used it and liked it.
However, he said, the IRS is likely to drop the requirement that 25% of the units be set aside for persons at the lower end of the economic spectrum.
"We're going to open that up, " he said, so projects can house families with more mixed income levels.
In addition, Lynn Kawecki said, the IRS is considering offering two other safe harbor standards that are more in line with current tax law requirements for residential rental housing. The alternative safe harbor standards would employ the same percentages of housing unit and income levels for such projects, but would add caps on them.
One alternative safe harbor standard would call for housing to either set aside, 20% of the units for families that earn 50% or less of area median income, or 40% of the units for families at or below 60% of area median income. In addition, the remaining units would have to be set aside for families at or below 80% of area median income.
Another alternative safe harbor standard under consideration calls for housing to meet the same 20%-50% or 40%-60% limits, with the remaining units capped at 100% of area median income. The housing also would have to provide social services or community benefits.
Lynn Kawecki emphasized that these are just proposals by the IRS staff and no decisions have been made on them.