Monday, July 29, 2013

Tax Break for Corporate Sponsorship of Non-Profit Sports

Non-profit organizations like the Red Cross and the National Football League are normally exempt form US income taxes, but they must pay taxes on their income from certain commercial activities.  For example, a non-profit that runs a trade journal may be subject to tax on its advertising income.

In two memos from the early 1990s, the Internal Revenue Service concluded that two non-profit organizations that ran college football games should be taxed on sponsorship payments that they received from corporations.  The payments were not charitable gifts, but rather payments in exchange for "well positioned visual images" of the sponsors' names during the games.

Although the memos were heavily redacted, insiders knew that they were talking about the John Hancock Bowl, sponsored by the John Hancock Mutual Life Insurance Company, and the Mobil Cotton Bowl, for which the Mobil Oil corporation paid $1 million to display its logo prominently on the playing field, scoreboards, uniforms, paper cups, and all printed material.  Both Bowl games were organized by non-profit organizations.

The memos set off an incredible firestorm of lobbying from Big Nonprofit.  The IRS quickly retreated from its position with new regulations, and Congress finally resolved the matter in 1997 with new Internal Revenue Code section 513(i), which provides that non-profits are not taxed on receiving "qualified sponsorship payments."

Qualified sponsorship payments are sponsor payments for which the sponsor will not receive any substantial return benefit other than the use or acknowledgement of the sponsor's name. 

The non-profit cannot directly advertise the sponsor's products or services, other than showing the sponsor's name.  So the Mobil Oil corporation cannot sponsor a game advertisement for Mobil Oil gasoline, but it can have the non-profit advertise Mobil Oil generally.  The sponsor's products can be distributed or displayed at the event.  

Thursday, July 25, 2013

Dogwalking Is Subject to Sales Tax

In New York, sales of goods are often subject to the sales tax.  The sales tax is also imposed on certain types of services, one of which is "maintaining, servicing or repairing tangible personal property."

In the landmark advisory opinion TSB-A-00(35)S [pdf], the state Department of Taxation and Finance concluded that dog walking and pet sitting are subject to the New York sales tax.  Dogs and cats are tangible personal property, and the dog walking and pet sitting services are performed to maintain the dogs and cats.  The dog walker or pet sitter in New York City should charge 8.875% sales tax on top of the bill to the pet owner. 

In a blatant example of species discrimination, an exception provides that the sales tax does not apply to services for a guide dog, hearing dog, or service dog, but the tax does apply to therapy rabbits and monkey helpers

The sales tax for maintaining personal property , normally applicable to car mechanics and the like, is found in many states, so the dog walking sales tax potentially has nationwide reach. 

In contrast, young children are probably not considered tangible personal property, at least since the Civil War, so babysitters do not have to charge sales tax for maintaining the children.

Tuesday, July 23, 2013

Tax Break for Social Clubs that Discriminate Based on Religion

Fraternities and social clubs enjoy certain tax exemptions under section 501(c)(7) of the Internal Revenue Code, as "clubs organized for pleasure, recreation, and other nonprofitable purposes."  For example, the membership dues that they receive are not subject to federal income tax.

In 1976, Congress enacted section 501(i), which provided that social clubs could not qualify for tax-exempt status if they discriminated on the basis of race, color, or religion (though gender discrimination is okay).  This provision confirmed the results in the case of McGlotten v. Connally, where an African-American man successfully argued that the local Benevolent and Protective Order of Elks should not qualify for tax-exempt status because its admissions policy discriminated against non-whites.

But four years later in an act to "simplify certain provisions of the Internal Revenue Code," Congress added an exception to allow tax-exempt clubs to discriminate on the basis of religion.  The new exception applies retroactively from 1976.

Congress specifically mentioned that the exception would apply to the Knights of Columbus, the world's largest Catholic fraternal organization, which would continue to be tax-exempt.  its membership is limited to "practical" Catholic men age 18 and older, and "a practical Catholic is one who lives up to the Commandments of God and the Precepts of the Church."

Monday, July 22, 2013

Tax Break for the Freemasons But Not College Fraternities

Non-profit organizations are typically organized as section 501(c)(3) organizations, for religious or charitable purposes, or as section 501(c)(4) organizations, for social welfare.  But there are other categories of non-profit organizations.

Internal Revenue Code section 501(c)(10) provides an exemption from taxes for "Domestic fraternal societies, orders, or associations, operating under the lodge system— (A) the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and (B) which do not provide for the payment of life, sick, accident, or other benefits."

The exemption was created in 1969 to specifically cover the Masons.

In the 1970s, the Zeta Beta Tau national college fraternity, with around 80 chapters nationwide, claimed that they should also qualify for the tax-exemption under section 501(c)(10).  The fraternity already qualified for partial tax-exemption under the different section 501(c)(7), which applied to social clubs, but social clubs are subject to tax on their investment income.  The fraternity had $1,936 of investment income in 1971 that it claimed were tax-free because it was also a "domestic fraternal society" that operated under a lodge system.

Coincidentally, Zeta Beta Tau is the first Jewish fraternity in the United States. 

In the landmark case of Zeta Beta Tau Fraternity, Inc. v. Commissioner, the Tax Court concluded that the Zeta Beta Tau fraternity did not qualify under section 501(c)(10).

The court admitted that "clearly, like the Masons, Zeta Beta operates under the lodge system and its local chapters engage in some activities that concededly further the charitable and educational goals of the fraternity." The fraternity engaged in public service activities such as providing scholarships, leadership workshops, blood drives, "Easter Seal drives," and an annual dance marathon to raise funds for charity, besides the non-charitable activities of "football weekend" and daily meals at the frat house.

But the Tax Court noted that the real purpose of the Zeta Beta fraternity was to provide housing, board, and social activities for its undergraduate members, which was "fundamentally different from fraternal organizations such as the Masons."  Also, the legislative history demonstrated that section 501(c)(10) was supposed to cover the Masons, not college fraternities.

Thursday, July 18, 2013

Tax Break for Homemakers Saving for Retirement

On July 12, 2013, the United States Senate discovered that it had passed all legislation needed by the American people and it had some free time.  Accordingly, the Senate decided to pass the Kay Bailey Hutchison Spousal IRA Act unanimously.

The Kay Bailey Hutchison Spousal IRA Act says, in its entirety:
The heading of subsection (c) of section 219 of the Internal Revenue Code of 1986 is
amended by striking "Special Rules for Certain Married Individuals'' and inserting "Kay Bailey Hutchison Spousal IRA''.

In other words, the Act changed a heading of a tax code provision to honor former Senator Kay Bailey Hutchison, Republican Senator from Texas from 1993 to 2003, who is very much alive. 

The Joint Committee on Taxation conducted its research and dutifully concluded [PDF] that the "estimated revenue effect" of the legislation is zero. 

Internal Revenue Code section 219(c) is an interesting provision that was originally enacted in 1976, and substantially revised in 1996 due to the efforts of Ms. Hutchinson, governing contributions to Individual Retirement Accounts (IRA).  Normally, a taxpayer's IRA contribution is limited to his or her earned income for that year from wages and self-employment.  Congress believed "that this was unfair to a spouse who receives no compensation but performs valuable household work," so section 219(c) was amended to allow individuals to contribute to an IRA even if they do not have sufficient earned income, as long as their spouses have sufficient earned income.  

Such an IRA is called a "spousal IRA," though there is no difference between those IRAs and other IRAs. 

For example, assume the compensation incomes of H and W for a year are $700 and $50,000, H and W are married filing jointly, and the IRA contribution limit is $6,000 per person per year.  Section 219(c) allows H to contribute $6,000 to his spousal IRA, even though an unmarried H would be able to contribute only $700, up to his earned income.

The only other tax account named after a person is the Roth IRA, named after William Roth, the Senator from Delaware (1971 to 2001) who sponsored its legislation.

It is unclear whether future legislation will name the alimony tax provision (Internal Revenue Code section 71) after Newt Gingrich.

Monday, July 15, 2013

Tax Break for Making a Little Money with Foreign Currencies

Foreign currencies are treated like any other capital asset, and the currency holder generally recognizes capital gain or loss (in dollar terms) when he converts the foreign currency to dollars.  More importantly, if the foreign currency is used to buy something, the currency holder usually recognizes the unrealized gain or loss in the foreign currency at the time of purchase.

For example, let's say that an American traveler converts US$2 into 2 Canadian dollars.  A week later, when that 2 Canadian dollars is worth US$3, he buys a Coke for 2 Canadian dollars.  The American traveler has US$1 of taxable capital gain at the time of the Coke purchase, because he is treated as exchanging an asset purchased with US$2 for an asset worth US$3.  In contrast, if the Canadian dollar had depreciated, the American would have a capital loss, but the loss would be a personal loss not deductible for tax purposes.  

In order to simply matters a little bit, Internal Revenue Code section 988(e) provides an exception for personal transactions in foreign currencies after 1997.

The taxpayer does not have to recognize foreign currency gain if:
1. The gain is due to changes in exchange rates,
2. The transaction is a personal transaction (i.e., not a business or investment transaction, but transactions on a business trip are considered personal transactions), and
3. The gain is $200 or less.

The $200 limit is determined on a per transaction basis, not per year.  There is little guidance on what constitutes a separate transaction for this purpose.

If the $200 limit is exceeded, then the entire gain (including the first $200 of gain) is subject to US tax.  For example, if someone goes to Europe, converts $2,000 to 2,000 euros, spends half the euros, and converts the 1,000 euros left back to $1,300, that taxpayer might have to pay tax on the $300 of short-term capital gain in the transaction, though there would be zero tax if he converted only 600 euros to $780 at the same exchange rate.

Saturday, July 6, 2013

Not a Tax Loophole: California is Part of the United States

Los-Angeles-based Certified Public Accountant Anthony A. Tiongson discovered a sure-fire tax loophole for his Californian clients:

1. Californian residents earn foreign-source income, based on the fact that California is not part of the United States, and
2. Foreign earned income is not subject to US federal tax.*

While the above argument might have worked in certain parts of Texas, Mr. Tiongson was not able to convince the IRS that (the People's Republic of) California is actually a foreign country.  Accordingly, Mr. Tiongson was "disbarred" in 2013 from ever practicing before the IRS and he can no longer file federal tax returns [pdf].

Mr. Tiongson was popular enough to have filed returns for at least 52 California "foreign residents" from 1998 to 2002, but lately he has not received very good Yelp reviews.

The lesson for taxpayers is that they should only use legitimate tax loopholes as described on this blog, such as the ones for going on a business-related cruise and producing the renewable energy resource that is Indian coal.

*This part is also incorrect.  Foreign income of US citizens and residents are still generally subject to US tax, with some exceptions.

Monday, July 1, 2013

Proposed Tax Break for Broadway and Other Theater

The section 181 tax deduction for the entertainment industry is currently available only for movies and the first 44 episodes of TV shows produced in the United States.  It is not available for porn and other types of performance art.

United States Senator Charles E. Schumer (D-NY) knew a problem when he saw it, and he is proposing to extend the tax deduction to Broadway shows and other forms of live theater.

Mr. Schumer's main concern is that, just like the section 181 tax deduction has successfully stopped American movies and TV shows from being made in other countries, a similar tax deduction is necessary to prevent New York City's Broadway shows from moving to other countries.

Without the extended tax deduction, Broadway patrons in the future might discover that they can save some money, while obtaining nearly the same experience, by watching a telecast (or even time-delayed) production of Les Miserables made in Europe or Evita made in Argentina.  Thousands of stagehand jobs making $422,600 a year would be lost.

Mr. Schumer's proposed legislation is called the STAGE Act of 2013, which appears to be a clever acronym like the USA PATRIOT Act.  His press release unfortunately does not disclose what the acronym stands for.

Given Mr. Schumer's concern about keeping entertainment jobs and dollars in America, presumably he will also extend the tax break to pornography production, in order to prevent the off-shoring of that job-creating strategic American industry to Eastern Europe and South America.  The PORNOGRAPHIC ("Putting Our Resources (National) in Our Generous Research and Providing Hospitality Industry and Culture") Act of 2013 will undoubtedly receive a warm and welcomed reception.