Best form for tax-exempt crowd-fund for whistleblower awards

[DSinOR]

I have an idea for a crowd-funded tax-exempt organization that would pay an award to a whistleblower employee of a gov agency.

I already run a tax-exempt 527 political org, so I have some reasonable experience.

The new org would be a new standalone entity. Not a PAC. Not affiliated with any other entity.

The new org receives individual public donations online. The max individual donation is limited to $20. Donations are received until a funding benchmark is met. Then the donation mechanism is disabled. The new org then sits on funds, waiting for a whistleblower to meet the criteria for earning the award. The funds would reside in an interest bearing account. The org would pay annual taxes on interest earned.

When a person met the whistleblower criteria, the org would pay the award, then spend a small amount on publicizing the event while also opening the fund to additional donations until the benchmark fund balance was again restored.

Anticipated fund balance goal = $1million. Intended whistleblower award = $250,000.

Basic questions:
1 - is this tax-exempt objective feasible in the context of collecting tax-exempt donations into a dedicated entity-only bank account?
2 - what forms of entity are capable of achieving the objectives? (For example, my PAC is a partnership that elected to be taxed as a corp, and it has no problems with IRS or Oregon annual filings. Can I do a non-profit whistleblower rewarder org in the same format?)

Other:
In the context of gift taxes, the org will never pay any whistleblower more than 1 award on 1 occasion. No repeat awards to same person.
It would be fun to offer a $250,00 award 'tax-free'.
IOW, we pay $250,000 to the whistleblower and we simultaneously file & pay to Dept of Treasury $70,800 or whatever to cover the entire tax burden associated with the gift, and we provide copies of filing to award recipient.
How could this be accomplished in the context of treating the award like a gift where the gift-giver also immediately pays tax due on the gift?
As a giver, would we be eligible for the $15,000 per annum deduction for each gift, thereby paying gift tax only on $235,000?

OR,
is there any possibility that a $250,000 whistleblower award paid to an individual,
by an entity that exists only for the purpose of collecting donations and using said donations to award public-service whistleblowers,
would be a tax-free award to the whistleblower? IOW - no tax due on the $250,000 because of the "public service" nature of the $250,000 gift?

Mostly I need a good starting point for federal purposes.
Once I have that, I can work out Oregon requirements pretty easily.

Thanks!

Dave
BTW - cool site. This is a great resource!

 

[Taxing Matters]

In order for the organization to qualify for tax exempt status under the Internal Revenue Code (IRC) it must be organized for one of the exempt purposes listed in Internal Revenue Code § 501(c). There is already a National Whistleblower Center that has been approved by the IRS for tax exempt status under IRC § 501(c)(3), which is the subsection that covers charitable, religious, and scientific organizations. As a result, it appears that advocating for and helping whistleblowers can qualify as a charitable organization under § 501(c)(3). Whether your particular organization could qualify is something you would want to discuss with a tax attorney who practices in the area of tax exempt organizations and go over the exact details of what you propose to do as the details matter. There are not enough details here for me to reach a conclusion on that. If you qualify under § 501(c)(3) then the donations made to your organization by the public to further the exempt purpose would be tax free to the organziation and would generally allow the donor to take a charitable contribution deduction on their individual income tax returns.

There is no gift tax issue here. First, there is no gift being made. What you are paying out is an award or prize, which would be includable as income to the whistleblower on his/her federal income tax return and likely on his/her state income tax return, too, if the person resides in a state with an income tax. If you want the organization pay the income tax such that the whisteblower nets $250,000 after tax, the amount you pay for the income tax of the whistleblower is also income to him/her too. In order to get the amount you need to give to the person to ensure that the after tax amount is the $250,000, there is a "gross up" formula that you use to do that, which I won't get into here. A tax lawyer or other tax professional familiar with the gross up concept can assist you with that. It is easier to make the award at $250,000 and let the person pay the income tax on that and leave it there. It's still a large benefit to the whistleblower and saves a whole lot of complication. Not doing the gross-up should not discourage anyone from whistleblowing to claim the award.

Second, even if there was a gift, the gift tax is not imposed on the donee (person getting the gift). It is imposed instead on the donor (person making the gift) and only when the donor is an individual. Corporations (including tax exempt organizations) are not subject to gift tax.

 

[HRZ]

As an aside. $1 million in an interest bearing account may be a hyper conservative way to hold the funds .

And I 'm not sure that to disable the donation mechanism makes sense nor that such a low individual cap makes sense .

Absent debate over UBIT , since when does an exempt entity pay income taxes on its endowment income ?

 

[DSinOR]

Thanks for the replies!

If the org succeeds, we'll find other low-risk instruments for holding funds. For a Sec 527 exempt org, interest earned on held donations is taxable. I will research whether same applies to 501 c. Other advice taken under consideration as well, thanks HRZ.

TM:
I guess IRS is currently deciding how to treat "income" to individuals who receive funds from GoFundMe (GFM) crowdfunding accounts. GFM is a 3rd party settlement entity. When amounts exceed $20,000 or donations exceed 200 in number, the settlement entity must issue a 1099-K to the funds recipient. How the recipient treats that 1099 when filing seems to determine whether IRS considers the gift to be taxable income.

I mention GFM because the financial dynamic of my proposed 501 c WhistleBlower Award org is similar.
We are crowd-funded and we award an incentive gift to whistleblowers.
Since we are a 501 c, there is no 1099 requirement.
It seems reasonable to portray the incentive gift as a gift, wherein donee is not taxed and a 501 c donor also would not be taxed on the gift amount.
I would be interested to hear other thoughts you might have on the matter.

Your advice re "gross up" vs keep-it-simple is well received, thx.

Lastly, since approval of 501 c applications usually takes 8 months or so, is it common for prospective new 'charities' to file an application and simultaneously commence operations, and then simply conduct operations as normal while waiting for 501 c approval? I can't find anything in the literature to suggest this is verboten.

Thanks!

 

[Taxing Matters]

It seems reasonable to portray the incentive gift as a gift, wherein donee is not taxed and a 501 c donor also would not be taxed on the gift amount.

It is not a gift. It is not given out of mere generosity; you are giving it as an incentive for the person doing something specific: they are getting the money for having provided information on wrongdoing in the agency. In short it is a reward for the whistleblowing act. It is no different than an organization giving cash in exchange for turning in information on a lost pet, a wanted criminal, etc. All those are reward situations. Rewards are taxable income. "Petitioner husband helped bring to light systematic fraud, causing the recovery of tens of millions of dollars. Those efforts are to be applauded and were rewarded. Rewards, however, are treated as ordinary income, and the qui tam award is subject to tax as such." Patrick v. Commissioner, 142 T.C. 124, 130 (2014), aff'd, 799 F.3d 885 (7th Cir. 2015)(bolding added).

Since we are a 501 c, there is no 1099 requirement.

Where are you getting that information from? Tax exempt entities are not exempt from all 1099 reporting requirements. You have to look at the particular type of payment involved to determine if the organization must file any 1099 or other reporting form.

Lastly, since approval of 501 c applications usually takes 8 months or so, is it common for prospective new 'charities' to file an application and simultaneously commence operations, and then simply conduct operations as normal while waiting for 501 c approval? I can't find anything in the literature to suggest this is verboten.

If you make the application at the same time you start up the operation and the application is approved, the approval will be retroactive the date the organization started. So you can indeed start while waiting for approval, but you need to get the application in promptly to ensure the approval will be retroactive to the beginning.

 

[DSinOR]

Thank you again TM. Very helpful. I appreciate your time!