Welcome to CPA at Law, helping individuals and small businesses plan for the future and keep what they have.

This is the personal blog of Sterling Olander, a Certified Public Accountant and Utah-licensed attorney. For over seven years, I have assisted clients with estate planning and administration, tax mitigation, tax controversies, small business planning, asset protection, and nonprofit law.

I write about any legal, tax, or technological information that I find interesting or useful in serving my clients. All ideas expressed herein are my own and don't constitute legal or tax advice.

Utah Property Taxes and Amendment B

Like all states, Utah imposes a tax on real property but provides certain exemptions from taxation. Real property in Utah is exempt from taxation if it is owned, for example, by a nonprofit organization or by the state or a local government. Utah Code § 59-2-1101(3)(a).

In last Tuesday's election, Utahns rejected Constitutional Amendment B, which would have created a new tax exemption for real property not owned by a state or a local government but rather leased by the state or a local government from a private owner. While this amendment was presented as a way to simplify government in a revenue neutral manner, the reality is that property owners could have reasonably expected to experience a small property tax increase if the amendment had passed.

As I opined for KUTV 2News, "When a piece of real property is exempt from real property taxes, the neighboring real property owners necessarily subsidize the taxes that would otherwise have been collected in respect to the exempt real property. Because Amendment B creates a new category of real property that is exempt from property taxes, all else being equal, I would expect real property owners to experience a property tax increase to offset the decrease in property tax revenue."

Amendment B was also presented as not being a giveaway to property owners who lease to a government entity because the exemption was only to be available where the state or local government was responsible for paying the property taxes directly due to a triple net lease. However, it would seem that property owners would be able to charge higher rent knowing their tenant had an exemption from taxation.

Leases by a private owner to a charity or government entity have long raised these kinds of issues; as one court held over a century ago:
"[I]f the private owner of the land allows his land to be used for [exempt] purposes and charges no rent and derives no personal benefit from the land, the land is exempt from taxation, because the land is then devoted exclusively to such a use... For in such cases the owner contributes the use of his land to public or quasi-public use... and derives no gain or profit for himself...

But on the contrary, when the owner leases his land to the public for a public use... and applies the rents derived from the land to his own personal advantage, he contributes nothing to the public or to charity, he loses nothing by the use, he is not a benefactor to any one, but he stands before the law in exactly the same light as any one else who leases his land for any other purpose, and... his property is not exempt. State ex rel. Hammer v. MacGurn, 187 Mo. 238, 86 S.W. 138, (1905)
I believe that Utahns were right to reject Constitutional Amendment B.

Lobbying by a 501(c)(3) Organization

In my prior post, I provided an introduction to forming a 501(c)(3) organization. Such organizations must have charitable purposes and can not have a primary purpose of lobbying, or attempting to influence legislation. A 501(c)(3) organization classified as a private foundation is subject to excise taxes on all of its lobbying activities as well as political campaign activities under section 4945 of the Internal Revenue Code.

A 501(c)(3) organization classified as a public charity, however, may engage in some lobbying, but only to a limited extent. If a "substantial part" of a charity's activities includes attempting to influence legislation, it risks losing its 501(c)(3) status or not qualifying at the outset. The "substantial part" test is a facts-and-circumstances test; the IRS considers factors such as time and expenditures devoted to lobbying to determine whether the lobbying is substantial.

Because there is inherent uncertainty in any facts-and-circumstances test, a public charity that intends to engage in some lobbying has the option under 501(h) of the Internal Revenue Code to elect to be subject to a test that is based entirely on expenditures. Making this election is accomplished by filing IRS Form 5768. By so doing, a public charity can engage in lobbying by utilizing between 20% and 5.9% (depending on the organization's size, but in no case exceeding $1,000,000) of its exempt purpose expenditures on lobbying.

While the 501(h) election is not for every public charity (and some public charities such as churches are ineligible to make the election), this election can be a good option for charities that wish to devote a small part of their activities to influencing legislation.

Introduction to Forming a 501(c)(3)

While there are many different types of organizations that are exempt from federal income taxation, the best known is the 501(c)(3) organization. There are also many different types of 501(c)(3) organizations, which I summarized in a prior post. By default, a 501(c)(3) organization is a private nonoperating foundation unless it can qualify as a public charity by, for example, achieving certain levels of public support. Anyone can form a public charity, and many have chosen to do so in recent years.

The first step in establishing a 501(c)(3) organization is to create a legal entity under state law. While a trust and a limited liability company can be used, it usually makes the most sense to form a nonprofit corporation. Such an entity must have a charitable purpose that is recognized as such by the IRS; this link contains a description of the exempt purposes for which an organization can be organized and achieve 501(c)(3) status.
After the legal entity is formed, its directors need to appoint officers, adopt bylaws and a conflict of interest policy, and apply for an employer identification number. The next and most difficult step is completing IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and the accompanying exhibits. This step in particular is the one where it makes the most sense to work with an adviser who is familiar with nonprofit organizations because the IRS will scrutinize the exemption application.

Once the application for exemption is approved, the IRS will send a determination letter notifying the organization that it is exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code and that donors can make donations to the organization and take a federal tax deduction for such donations. A copy of Wikimedia Foundation's determination letter appears on the right.

A few final steps and ongoing requirements are worth noting. Prior to soliciting the public for donations, the organization will need to ensure that it has completed the charitable solicitation registration process that most states require. The organization will also need to file some version of IRS Form 990 each year; small charities can file the 990-N postcard version online. Finally, the organization will need to ensure that it keeps its corporate entity in good standing, typically by filing an annual report with the state.

Update to Utah Probate Code

An update to the Utah Uniform Probate Code, H.B. 402 Probate Code Amendments, is effective May 8, 2018. It makes changes relating to guardianships, conservatorships, and powers of appointment, but since I recently discussed the provisions relating to probate proceedings at an NBI seminar, that is the focus of this post.

As I wrote in April, since 2013 the Utah Code allows the appointment of a personal representative or special administrator beyond three years after a decedent’s death. Since that time, a number of amendments to the probate code have been enacted to clarify what is allowable in the case of an appointment of a personal representative more than three years after death, and H.B. 402 is no exception.

By way of background, a surviving spouse and/or minor children are generally entitled to a homestead allowance of $22,500; an exempt property allowance of $15,000 worth of household furniture, automobiles, furnishings, appliances, and personal effects; and a family allowance of up to $27,000 for their maintenance during the period of administration. Such allowances generally have priority over all unsecured claims against the estate.

H.B. 402 clarifies that the homestead allowance, exempt property allowance, family allowance, support allowance, elective share of a surviving spouse, and a claim other than for an expense of administration may not be presented against the estate, even though a personal representative was appointed, if the appointment occurred more than three years after death. While not a significant change, this amendment further clarifies the nature of such an appointment proceeding.

Important New Probate Law in Utah

Earlier this week, Utah S.B. 241, Chapter 443, "Medical Benefits Recovery Amendments," was signed into law. By way of background, the Utah Office of Recovery Services seeks reimbursement for Medicaid expenses the state has paid on behalf of an individual from that individual's estate after death in order to supplement medical assistance programs and limit tax burdens. This law is intended to improve the state's ability to recover medical assistance it has provided.

The law does this in part through the enactment of new section 75-3-104.5 of Utah's probate code, which is effective as of May 8, 2018.  This section requires a petitioner or personal representative to send copies of pleadings relating to any "action" under Chapter 3, Probate of Wills and Administration, to the Office of Recovery Services. Such pleadings must be sent by certified mail within 30 days after the filing of the action. Failure to do so "tolls all limitations concerning the state's presentation or enforcement of a lien or claim" under the estate and trust recovery statute. This new law applies to all actions involving a decedent who was 55 or older.

The address to which pleadings must be sent is:
Office of Recovery Services
Bureau of Medical Collections
PO Box 45025
Salt Lake City, UT 84145-0025

The law is notable for requiring all pleadings for all actions filed under Chapter 3 to be provided to the Office of Recovery Services, when presumably the only information really needed to protect the state's interests is the identifying information of the decedent. Furthermore, only certified mail is effective to avoid the tolling of the statute of limitations. It will be interesting to see if these provisions are relaxed in the near future.

Time Limit for Probating a Will in Utah

In Utah, except in rare circumstances, a will cannot be the subject of a probate proceeding more than three years after the death of the testator. Accordingly, because the "the presumption of intestacy is final" after three years, any devisee under a will who receives a devise that is greater then their statutory share as an heir will want to ensure that the will is probated within this timeframe.

Until a few years ago, no proceeding to appoint a personal representative of a decedent's estate could generally be commenced more than three years after the death of the decedent. However, this changed with Utah H.B. 327, Chapter 364 (2013) and Utah H.B. 265, Chapter 134 (2014).

H.B. 327 "allows the appointment of a personal representative or special administrator beyond three years after a decedent’s death when the will was not previously probated." Specifically, the statute providing for the three-year limit was changed as follows: "No informal probate or appointment proceeding or formal testacy or appointment proceeding... may be commenced more than three years after the decedent's death..."

The bill also added "appoint a personal representative or special administrator to administer the decedent's estate" to the list of things that the court expressly has continuing jurisdiction to do.

H.B. 265 "makes technical and clarifying changes." Specifically, it deleted the provision previously found in Utah Code 75-3-301 that required appointment applications to state that "three years or less have passed since the decedent's death", which before the change was inconsistent with the changes made by H.B. 327. This bill also clarified that a court has continuing jurisdiction to appoint a personal representative formally or informally, notwithstanding the three-year limit found in Utah Code 75-3-107(1).

These new laws are not well understood. The form for an application for appointment of a personal representative provided by the Utah courts contains the statement that "not more than three years have passed since the person died" even though the form is specific to intestacy. Moreover, some courts in Utah still reject applications for appointment just because more than three years have passed since the decedent's death. Hopefully this post helps provide clarity.

Alert: Fixing Problems with Online IRS EIN Applications

This post is an update to a prior post, with updated information about fixing rejected online EIN applications submitted on the IRS's website. Apparently, the IRS no longer allows entities to be the responsible party for an EIN application. According to the latest instructions for IRS Form SS-4, "Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity."

Previously, it was possible for an entity that had not obtained its EIN online to be the responsible party for a new entity's online EIN application. In recent months, I have become aware that many IRS online EIN applications are resulting in an error page that doesn't include a reference number. The cause of this error page could be identifying an entity as the responsible party. Unless you are a government entity, you'll need to list an individual with a social security number as the responsible party for all online IRS EIN applications. Thanks to Joel in New Jersey for bringing this to my attention.