Over the past year, GKG Law has witnessed successful results for clients that are good reminders that non-profit organizations and associations should continually re-evaluate their tax positions and be cognizant of potential errors by the IRS.

Successfully Challenging Outdated UBI Determinations

In June 2018, a non-profit association (the “Association”) received a refund of nearly $2 million in taxes paid on revenue that the IRS improperly deemed to be Unrelated Business Income (“UBI”).  This turn of events occurred after the Association initially questioned whether the amount of its UBI was substantial enough to jeopardize its tax-exempt status.  In analyzing this issue, the Association’s legal counsel determined that an earlier IRS determination regarding the Association’s income was incorrect and that the organization was entitled to a large refund.

Over 30 years ago, the Association was examined by the IRS and received a determination that the income derived from administering certain purchasing programs for its members was taxable as UBI.  In the decades since that examination, the Association paid annual taxes on all revenue derived from those programs never questioning the IRS position.

Upon seeking guidance about its exempt status, the Association was surprised to learn that the prior IRS determination was incorrect and that the income was not UBI.  On the advice of counsel, the Association filed amended returns seeking refunds for all taxes paid in each open year.  Once filed, the IRS examined the Association’s returns before approving a refund of all taxes paid in prior years.  In addition to the $2 million refund, the IRS now recognizes that these programs are related to the Association’s exempt mission, negating the erroneous determination and saving the Association hundreds of thousands in taxes each year going forward.

Successfully Challenging Inconsistent UBI Determinations

GKG Law also oversaw the reversal of a proposed adverse IRS determination which reflected regional inconsistencies with respect to the ruling.  On the advice of Counsel, the association requested a technical advice memorandum from the IRS national office which provided an official and binding IRS position regarding the law in respect to this tax issue.  This resulted in saving the association almost $400,000 in proposed taxes and penalties while avoiding the risk and expense associated with litigation.

What Could These Results Mean for You?

These successful results are a reminder to all associations that adverse IRS determinations relating to programs and activities deemed to be unrelated, should be reevaluated over time.  Circumstances and IRS positions change, and those activities may no longer be the type of activities characterized as unrelated trade or business activities.  This is especially true in circumstances where the IRS is issuing uneven determinations to similar organizations.

Further information on this topic can be found here https://www.gkglaw.com/publications/503-recent-successes-challenging-irs-ubi-determinations-showcase-importance-of.

The District of Columbia Office of Tax and Revenue (“OTR”) has become aggressive in challenging Taxpayer’s self-determinations that they are Qualified High Technology Companies (“QHTCs”) and thus exempt from the District of Columbia’s corporate franchise tax.  GKG Law recently represented a Taxpayer who received a Notice of Proposed Assessment of Tax Deficiency (“Proposed Assessment”) against it, pursuant to which the OTR was seeking approximately a million dollars in corporate franchise taxes over the life of the exemption.  In our experience, a vigorous defense of such assessments is necessary to prevail in reversing such an assessment.

In 2001, the District of Columbia enacted the “New E-Conomy Transformation Act,” D.C. Law 13-256, D.C. Code §47-1818.01 et seq. (2001) (the “Act”).  The Act, which is designed to make the District of Columbia an attractive location for high technology companies, grants certain high technology companies a five-year exemption from the District of Columbia’s corporate franchise tax.  In order to qualify for the exemption, a company must, among other things, derive at least 51% of its gross revenues from specified high technology activities.  These activities include internet-related marketing and promotion services, and the development of internet-related application and digital content.

GKG Law recently handled a case in which, as outlined in the Proposed Assessment, the OTR determined that the Taxpayer was not a QHTC because it had not established that its internet-related service and sales were performed with regard to the internet and not simply over the internet.  The OTR also challenged whether the Taxpayer derived 51% of its income from specified high technology activities.  GKG Law filed a Protest of the Proposed Assessment with the Office of Administrative Hearings (OAH) in which it asserted that the Taxpayer was a QHTC based upon the fact that the Taxpayer was not merely placing advertising on its website but instead was deriving revenue from its own high technology activities, which included designing, developing and operating internet-based services.  GKG Law also argued that the Taxpayer’s revenue was primarily derived from the high technology specified activities. 

Addressing these types of tax assessments requires not only tax expertise, but also a willingness to aggressively challenge OTR’s positions.  Please contact us if you would like to discuss these or similar tax issues you may have.  Brendan Collins may be reached by telephone at 202.342.6793 or by email at bcollins@gkglaw.com.  Chris Younger may be reached by telephone at 202.342.5295 or by email at cyounger@gkglaw.com.

Recently, GKG Law successfully assisted two clients with navigating challenges to adverse Unrelated Business Income (“UBI”) determinations made by the Internal Revenue Service (“IRS”).  Combined, these saved our clients’ almost $2.4 million in taxes in 2018 alone.  The first resulted in a nearly $2 million tax refund and future tax savings of hundreds of thousands of dollars in each future tax year, and the second resulted in the IRS overruling a proposed tax deficiency of approximately $400,000. 

Successfully Challenging Outdated UBI Determinations

The first successful result occurred in May 2018 when GKG Law’s non-profit organization client (the “Organization”) received notification from the IRS that it would receive a refund of nearly $2 million in taxes paid on income that the IRS improperly deemed to be UBI.  This result came after the Organization initially questioned whether its UBI was substantial enough to jeopardize its exempt status and sought counsel from GKG Law’s tax law experts who immediately recognized the Organization’s income was incorrectly characterized as UBI and that it was entitled to a refund.

The initial IRS determination was made more than 30 years ago, after an examination determined that the Organization’s income derived from administering certain purchasing programs for its members was UBI subject to federal income tax.  In each year since, the Organization paid tax on all its net revenue derived from the purchasing programs, regularly exceeding $1 million.  Under the guidance of members of GKG Law’s Association Practice Group, the Organization filed amended returns seeking refunds for taxes paid in all open years.  Subsequently, the IRS opened an examination which resulted in the approval of the full amount of the refund request for each tax year. The IRS now recognizes these programs as related to the Organization’s tax exempt mission, solidifying its status and saving hundreds of thousands of dollars in taxes each year going forward.

Successfully Challenging Inconsistent UBI Determinations

The second successful result also occurred in May 2018, when a GKG Law non-profit association client (the “Association”) received a no change letter from the IRS Appeals Division, overturning a prior proposed determination of a substantial tax deficiency issued by the IRS Examinations Division.  During an examination of the Association’s operations, the IRS determined that the Association received more than $800,000 of UBI from the sale of journal advertising space during the tax years examined and that all such income should be reported as taxable UBI in future tax returns.  Following word that the IRS Appeals Division intended to uphold the proposed determination, the Association sought the expertise of GKG Law’s tax attorneys and hired the firm to assist the Association’s tax counsel in achieving a favorable resolution to the dispute.
 
The IRS determined that under an agreement with an independent publisher, which gave the publisher exclusive control of and right to retain all income from advertising sales, the Association had too much control over the substantive content of its journal to characterize any portion of the advertising income as a non-taxable royalty.  As such, the IRS attributed a portion of the publisher’s advertising income to the Association as UBI and proposed the assessment of tax on that amount.
 
Instead of seeking to resolve the matter though litigation against the IRS, GKG Law recognized regional inconsistencies in IRS rulings on this issue and recommended that the Association request a technical advice memorandum (“TAM”) from the IRS national office to determine whether the IRS could attribute taxable UBI to the Association in this situation.  This TAM would provide an official and binding IRS position regarding the application of the law in respect to this issue and the Association.  Upon consideration of the TAM, the IRS national office ruled that advertising income earned by the publisher could not be attributed to the Association as UBI.  Subsequently the IRS appeals office was required to overturn the position taken in its examination and, as a result, the Association was not required to pay tax on the proposed amount of UBI, approximately $800,000, or on the amount of such income received in future years, approximately $200,000 per year.

What Could These Results Mean for You?

GKG’s recent successes are good reminders that organizations should occasionally reevaluate their programs and activities previously deemed to be unrelated, even activities which the IRS has determined to be unrelated.  Circumstances and IRS positions change, and those activities may no longer be characterized as unrelated trades or business activities.  These outcomes also highlight that organizations need to be aware of IRS enforcement efforts in their industry and should not merely accept the IRS position in an examination.  This is especially true in circumstances where the IRS is issuing uneven determinations to similar organizations.  As a rule, organizations should be cognizant of potential administrative remedies to disputes with the IRS before accepting the inevitability of an IRS determination or seeking a judicial remedy through litigation.