Tax News & Views Tax Exempt Better Breakfast Roundup

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IRS Directed to Investigate Exempt Orgs for Ties to Violence - Wesley Elmore, Tax Notes ($):

In a national security memorandum signed September 25, the president directed Treasury, the State Department, the Department of Homeland Security, and the Justice Department to investigate what he called domestic terrorism and organized political violence.

Specifically, the memorandum directs the IRS commissioner to “take action to ensure that no tax-exempt entities are directly or indirectly financing political violence or domestic terrorism.”

...

And although the memo doesn’t mention any exempt organizations by name, The New York Times reported September 25 that the Justice Department had already instructed several U.S. attorney’s offices to draft plans to investigate the Open Society Foundations, a nonprofit organization founded by billionaire George Soros.

From the New York Times article:

The step came in an accelerated push by the Justice Department against Mr. Trump’s perceived enemies in recent days and weeks.

Over the weekend, the president urged Attorney General Pam Bondi to act quickly in seeking criminal charges against his longtime nemesis, the former F.B.I. director James B. Comey, and the New York attorney general, Letitia James, who has sued Mr. Trump and his businesses for hundreds of millions of dollars. Federal prosecutors in the Eastern District of Virginia secured an indictment against Mr. Comey on Thursday, and they are separately investigating Ms. James.

Mr. Trump has recently revisited his grievances against Mr. Soros, long a boogeyman for the right, in part because he has backed progressive causes. After the killing of the right-wing activist Charlie Kirk in Utah this month, the president threatened to use the levers of government to silence liberal protesters and donors to progressive groups, including Mr. Soros.

Tariffs Target Affordable Medicine, Furniture.

Trump to put import taxes on pharmaceutical drugs, kitchen cabinets, furniture and heavy trucks - Josh Boak, Associated Press:

President Donald Trump said Thursday that he will put import taxes of 100% on pharmaceutical drugs, 50% on kitchen cabinets and bathroom vanities, 30% on upholstered furniture and 25% on heavy trucks starting on Oct. 1.

...

While Trump did not provide a legal justification for the tariffs, he appeared to stretch the bounds of his role as commander-in-chief by stating on Truth Social that the taxes on imported kitchen cabinets and sofas were needed “for National Security and other reasons.”

U.S. Starts Process for Implementing EU Tariff Agreement - Alexander Peter, Tax Notes ($):

The United States has begun a partial rollback of its April 2 increases to tariffs on EU goods, applying its most favored nation tariff rates to certain imports, in line with the August 21 U.S.-EU framework agreement on trade.

In a September 25 notice (RIN 0625-XC058), the International Trade Administration under the U.S. Department of Commerce and the Office of the U.S. Trade Representative (USTR) announced steps to implement the U.S.-EU Framework on Reciprocal, Fair, and Balanced Trade (framework agreement) announced August 21. The notice follows President Trump’s Executive Order (EO) 14346 of September 5, in which the administration adjusted its approach to reciprocal tariffs in the wake of the framework agreement.

Tariffs and Farm Country

Trump says he'll use tariff revenue to bail out farmers - Grace Yarrow and Meredith Lee Hill, Politico:

President Donald Trump said Thursday that he will use tariff revenue to offer cash bailouts for farmers who are struggling with trade uncertainty and other economic headwinds.

“We’re going to take some of that tariff money that we made, we’re going to give it to our farmers, who are, for a little while, going to be hurt until the tariffs kick into their benefit,” Trump told reporters in the Oval Office. “So we’re going to make sure that our farmers are in great shape, because we’re taking in a lot of money.”

Trump’s farm bailout another flashpoint with Dems - Andrew Desiderio, John Bresnahan and Max Cohen, Punchbowl News:

President Donald Trump admitted Thursday that his tariffs have been hurting American farmers. His solution — a farm bailout using tariff revenues — requires congressional approval.

But Democrats are in no mood to help Trump mitigate the impacts of his trade war. The solution is even simpler, Democrats say: Drop the tariffs.

Lerner Symmetry Bites - Alex Tabarrok, Marginal Revolution:

A practically textbook example of Lerner Symmetry! In an earlier post, I highlighted Doug Irwin’s Three Simple Principles of Trade Policy. Principle One is Lerner Symmetry—a tax on imports is a tax on exports...

Thus, President Trump is having to subsidize farmers because farmers are exporters. Import tariffs make it harder for exporters to sell abroad. Using tariff revenue to subsidize the losses of exporters is a textbook illustration of Lerner Symmetry because the export losses flow directly from the tax on imports! The irony is that President Trump parades the subsidies as a victory while in fact they are simply damage control for a policy he created.

Financial Ruin? Why Losing IEEPA Tariff Revenue Won’t Change the Long-Term US Fiscal Trajectory - Alex Durante and Garrett Watson, Tax Policy Blog. "The administration argues that if the IEEPA tariffs are struck down, the resulting refunds and lost revenue from the IEEPA tariffs would “lead to financial ruin,” and threaten Social Security and Medicare. The truth is that the IEEPA tariff revenue does not substantially alter the federal government’s dire fiscal trajectory over the next 10 years or over the longer term."

Shutdown Only Days Away

Threat of Mass Firings Ups Ante in Shutdown Standoff - Alexander Rifaat, Cady Stanton, and Benjamin Valdez, Tax Notes ($):

In an undated memo obtained by Tax Notes, the OMB told federal agencies that if Congress fails to reach an agreement on a continuing resolution to fund the government by the September 30 deadline, they should use it as “an opportunity to consider” further reduction-in-force notices.

All federal employees involved in programs, projects, and activities that will have their discretionary spending lapse on October 1, have no other source of funding, and are “not consistent with the President’s priorities” would be subject to the potential wave of mass firings, according to the memo, first reported on by Politico.

The OMB said it has received lapse plans from many, but not all, agencies, and reminded agencies that lapse plans shouldn’t include the repurposing of funds and that any appropriations provided to them as part of the One Big Beautiful Bill Act (P.L. 119-21) should be “consistent with OMB-approved spend plans.”

Democrats dig in on shutdown after White House layoff threat -Jordain Carney and Nicholas Wu, Politico. "If the White House thought its threat to fire federal workers during a government shutdown would spark a Democratic retreat, so far, it’s not happening."

Shutdown Furloughs Likely to Be Light, IRS Watchers Say - Doug Sword, Tax Notes.

Former IRS officials speculate that the March 14 shutdown plan — which was more of a no-shutdown plan — might provide a strong hint that furloughs would be lighter than usual when the agency’s as-yet unpublished plans for handling a potential October 1 closing of the government are released.

The March 14 plan relied on what was then about $26 billion in multiyear funding from the IRA to assert that “normal IRS operations will continue” with zero furloughs in the event of a shutdown.

There is still about $22 billion of IRA-provided monies left earmarked for the IRS. Federal employees can be kept on the job during a shutdown if the cost is covered by funds outside the annual appropriations process. That would include multiyear appropriations such as the IRA funding.

Our Alex Parker will have much more on the shutdown showdown later today.

Tax Administration and OB3

Brain Drain at IRS Chief Counsel to Stymie GOP Tax Law Rollout - Erin Schilling and Erin Slowey, Bloomberg ($):

The brain drain means the office will have to prioritize guidance that’s most important to the administration’s agenda and leave other projects unfinished, former IRS officials said. The office also must enact the president’s deregulatory initiative by revoking guidance that is obsolete or deemed too burdensome for taxpayers.

“What it comes down to is prioritization,” said Michael Mundaca, assistant secretary for tax policy in the Obama Treasury Department. “The organization is going to have fewer people to get stuff done, so the stuff that gets done is high priority.”

Of the 17 divisions in the IRS Office of Chief Counsel, eight have managers who left this year, a Bloomberg Tax analysis shows. Four of the departures are in offices that handle guidance needed to implement the tax law.

Is There Really No Tax on Tips? - Debbie Jennings, National Taxpayers Union Foundation:

Workers with tip income need to be aware that they will still owe payroll taxes on their tip income. Payroll taxes are separate from federal individual income taxes and are levied at a flat rate of 7.65% paid by both the employer and the employee. For each share, 6.2% is dedicated to Social Security and 1.45% to Medicare. For employees’ purposes, reporting additional tip income to an employer will result in the employer withholding the 7.65% payroll tax on the reported tip income, as well other withholdings such as state unemployment tax.

Athletes Shut Out Pittsburgh

Pa. Justices Affirm Pittsburgh's 'Jock Tax' Is Unconstitutional - Jaqueline McCool, Law360 Tax Authority:

In the unanimous opinion authored by Justice David Wecht, the Supreme Court affirmed two lower court decisions that found the 3% facilities fee charged on the income of athletes and performers earned during the days the athletes spend in the city using city sports facilities is unconstitutional. The fee, which is popularly known as the jock tax, violates the state constitution's uniformity clause because it treats residents and nonresidents differently by only imposing the tax on nonresident athletes and performers.

The city argued repeatedly that the taxing scheme was uniform, because resident athletes and performers were subject to a 1% income tax and a 2% school district tax that only applies to residents.

Pittsburgh Sacked - Russ Fox, Taxable Talk. "Pittsburgh will need to repay a lot of athletes, and this is definitely going to put a strain on the Steel City’s finances."

Blogs and Bits

Crypto owners, get ready now for Form 1099-DA reporting - Kay Bell, Don't Mess With Taxes. "The new Form 1099-DA, Digital Asset Proceeds From Broker Transactions, will be sent by Feb. 17, 2026 to taxpayers who use brokers to facilitate such activity. As with all 1099 forms, the IRS will be copied."

The IRS is Making a Major Shift: Say Goodbye to Paper Checks - Ronald Marini, The Tax Times. "Taxpayers who still use checks, whether for refunds or sending payments, should begin preparing for this transition now. That means updating bank account information, learning how to use IRS electronic payment systems, and ensuring electronic deposit details are included with returns. Delays are possible for anyone who tries to use a paper check after the deadline, as the IRS will be unable to process them."

Tenth Circuit: Sale of Stock in Foreign Company Generated U.S.-Source Income - Parker Tax Pro Library. "The Tenth Circuit affirmed the Tax Court and held that all of the gain from a United States company's sale of a controlling interest in a Japanese company for $3.9 billion was U.S.-source income under Code Sec. 865 and therefore the taxpayer was not eligible to claim a $240 million foreign tax credit."

Corporate ‘Loans’: The Debt v. Equity IRS Challenge And Tax Nightmares - Virginia La Torre Jeker, US Tax Talk. "The tax consequences of being a creditor are far different from those of being a shareholder. If the IRS reclassifies an advance to a non-U.S. corporation as an equity interest, the taxpayer can face a cascade of reporting requirements and potentially ruinous tax regimes: mandatory information returns, the so-called PFIC rules that can turn distributions into ordinary income taxed at the top rate with compounded interest penalties, foreign‑account reporting obligations, and FATCA consequences."

Politician's Tax Court Defeat Has Lessons For Exempt Organizations

Constructive Receipt and Excess Benefits in Fumo v. Commissioner - Ed Zollars, Current Federal Tax Developments:

The petitioner, Vincent J. Fumo, was a powerful Pennsylvania state senator from 1978 to 2008. His tenure ended with a federal indictment, leading to a 2009 conviction on 137 counts, including mail fraud, wire fraud, obstruction of justice, and aiding in the filing of false tax returns in violation of I.R.C. § 7206(2). The primary victims of his fraudulent schemes were the Pennsylvania State Senate and Citizens Alliance for Better Neighborhoods (Citizens Alliance), a § 501(c)(3) organization he founded and controlled.

Following his conviction, the IRS initiated a civil examination, determining deficiencies for income tax for years 2001-2005 and excise tax under § 4958 for years 2002-2004. The IRS asserted that Mr. Fumo had extracted millions of dollars in unreported taxable benefits from both entities and was liable for the 75% civil fraud penalty under § 6663(a).

Section 4958 is a penalty tax on "disqualified persons" who take "excess benefits" from a tax-exempt organization. Tax Court Judge Lauber explains (some citations omitted):

An “applicable tax-exempt organization” is defined to include an organization described in section 501(c)(3) and exempt from tax under section 501(a). See §4958(e)(1). Citizens Alliance was an “applicable tax-exempt organization” during 2002-2004. A “disqualified person” is defined to include “any person who was, at any time during the 5-year period ending on the date of [the excess benefit] transaction, in a position to exercise substantial influence over the affairs of the organization.” §4958(f)(1)(A). We have held that petitioner was a “disqualified person” of Citizens Alliance at all relevant times.

As the statute makes clear, an excess benefit transaction may occur when a charity provides a benefit “directly or indirectly to or for the use of” any disqualified person. §4958(c)(1)(A). An excess benefit transaction may be accomplished indirectly when a charity confers a benefit on a disqualified person “through a controlled entity or an intermediary.” The same is true where a disqualified person derives an indirect benefit from the diversion of charitable funds to a third party.

Kim Hunwardsen, head of the Eide Bailly Exempt Organization Tax Services Practice, notes that the court imposed the penalty even though Mr. Fumo wasn't a formal official of the tax-exempt entity:

I think the key thing that hit me on this case was Fumo was never an officer or director of the nonprofit, but still was in a position to exercise substantial influence over the organization. It can be easy to focus just on those individuals who are clearly in that position via their official role and not be aware of informal influence.

There are also significant questions in my mind on who was “manning the ship” of the nonprofit letting him manipulate and use the funds for his purposes. However, it seems that there were too many interrelated persons involved.

The Tax Court opinion has more on the taxpayer's role in the exempt organization (my emphasis):

Petitioner himself was never an officer, director, trustee, or employee of Citizens Alliance or its subsidiaries. But he used his power and influence as SDAC chairman to obtain funding for the organization from a variety of public and private sources. During 1991-2004 he was instrumental in securing at least $15 million in public grants for Citizens Alliance and a comparable volume of funding from private sources.

During his criminal trial petitioner admitted that he “did have a significant role” in Citizens Alliance. While he “did not make all the decisions,” he “did make a lot of decisions on important topics.” As he explained: “I don't have a title or a job. Do I have influence? Yes.” When asked by his defense attorney to describe his relationship with Citizens Alliance, he stated: “I viewed it as my non-profit. I viewed it as my entity, my baby. Gave it birth and nursed it along, got involved more with strategy and ideas. You know, that's how we viewed it. And we ran it out of our office.” On cross-examination he testified similarly: “I created it. I helped it. I guided it. I gave it strategy. I gave it my time and effort. I raised money for it. If it weren't for me, it wouldn't exist.”

The largest item in the Tax Court's list of "economic benefits" subject to the 25% excise tax was polling paid on the taxpayer's behalf by the tax-exempt entity. The taxpayer argued that these shouldn't be subject to the tax:

According to petitioner, the political polling expenses merely “informed [him] on pivotal community decisions,” generating “political capital” of which “the ultimate beneficiaries . . . were his constituents.” Aside from the tools and consumer goods, petitioner insists, “there is no evidence that his personal wealth increased, by any measure, as a result of [Citizens Alliance’s] expenditures.”

The Tax Court didn't buy it. In addition to including these items in taxable income, the taxpayer had to also pay the 25% excise tax on them.

Tax exempt entities and their funders can draw valuable lessons from this case, even without federal corruption convictions. The tax law has important limits on what exempt organizations can do to further the personal interests of funders or other related persons, and exceeding those limits can be expensive for both the entity and the related parties.

What day is it?

Today is Better Breakfast Day. "Eating a healthy breakfast has never been more important." Whether sticky buns qualify as healthy, we will leave as an exercise for the reader.

Tax News & Views Tax Exempt Better Breakfast Roundup

Make a habit of sustained success.

Joe B. Kristan, CPA