Friday, October 17, 2014
A low-income housing cooperative that sought reconsideration of the IRS’s determination that it did not qualify as a 501(c)(3) received a final determination earlier this month that it indeed fail to meet the requirements of 501(c)(3). The IRS found that it did not operate exclusively for exempt purposes, did not meet the operational test, and possibly allowed its net earnings to inure to private individuals. The membership requirements of the housing cooperative appear to reflect the safe harbor provisions detailed in Revenue Procedure 96-32; however, the IRS’s ruling pointed out that the low income housing in question benefited the individuals who controlled the cooperative. This seems to have been the straw that broke the 501(c)(3) status’ back. One cannot help but ask whether the outcome would have been different if the housing cooperative simply had elected a board that was independent from those residing in the housing.
Thursday, October 16, 2014
An insightful Wall Street Journal commentary addresses the likely outcome for the IRA Charitable Rollover Provision. This provision allows taxpayers aged 70.5 and older to make deductible charitable contributions (up to $100,000) from their IRAs without having to include such charitable contributions in their income. In addition, the charitable contributions count against minimum IRA distribution requirements. The Wall Street Journal concludes that while Congress is likely to extend the provision this year, it is unlikely to do so before the November election. At the same time, it is possible that Congress will restore this break retroactively. The commentary provides a good balance of the implications should Congress choose to extend or not to extend.
Wednesday, October 15, 2014
A concept that I have introduced through scholarly writing and blogged about here is the need for a more efficient charitable market. In August, I commented upon a Vanguard Charitable study that found millennials are more likely to see their charitable giving as a form of investment and thus promote a culture of giving that demands more transparency and accountability, two hallmarks of a more efficient charitable market. A recent NPR broadcast that examined the work of Scott Harrison’s nonprofit, Charity: Water, confirmed just that.
In the segment, Harrison spoke about his dual purpose in forming Charity: Water. First, he wanted to provide clean water to the almost 800 million people globally who lack access to it by building wells. Second, he sought to make an example of how a nonprofit could do its work in a way that would resonate with the next generation of givers. He recounted his own experience of being hesitant to give to charities prior to starting Charity: Water, which stemmed from the absence of information on how a charity would use the funds. Today the nonprofit world is concerned with how approximately 80 millennials make their decisions about giving, and not surprisingly, it is different from the prior generation(s). As stated in my prior post, it is widely accepted that millennials want to view their “donation” as “investment,” and at least one commentator recommends that nonprofits refer to the latter. Another salient point is how technology intersects with millennial giving. Millennials value their time, and as a result, any form of technology that makes it easier for them to invest is preferable. Moreover, the Ice Bucket Challenge that swept through social networks over the summer shows that the desire of millennials to share the details of their lives extends to their giving. In response, Charity: Water is utilizing a birthday campaign where donors can ask their network to donate one dollar for each year celebrated, i.e., $25 dollars to celebrate a 25th birthday. Charity: Water is also placing sensors on its wells, so donors may interact with the impact of their investment in a novel manner. Charity: Water’s innovative approaches are proving successful. They have helped over 4 million more people in twenty-two countries gain access to clean water. Millennials and nonprofits like Charity: Water may just help move giving into the next century and towards a more efficient charitable market.
Tuesday, October 14, 2014
In PLR 201438032, the Service considered whether donations to a nonprofit public benefit corporation that engages in transactions of funds with its foreign subsidiary are tax deductible and whether such transactions would harm its 501(c)(3) status. The PLR confirms aspects of how a transaction between a 501(c)(3) and a wholly-owned foreign subsidiary should be structured to secure a favorable tax result. One question the IRS still has not resolved is whether a donation to a wholly-owned foreign single-member LLC is deductible. The nonprofit world will be waiting.
In the ruling, the subsidiary in question is a foreign nonprofit foundation whose activities, namely seeking to aid foreign orphanages, are carried out internationally. The governing board and governing officers are under the control of the public benefit corporation. The stated purpose of the subsidiary is to carry out the purposes and objectives of the public benefit corporation. In terms of board overlap, at least three of the five board members of the subsidiary are members of the public benefit corporation’s board. In terms of governance, it is clear that the public benefit corporation is involved in each area and ensures that the subsidiary complies with U.S. tax rules and regulations regarding tax-exempt entities, e.g., restrictions regarding private inurement and lobbying expenditures. The public benefit corporation also has the ability to expel members from the board of directors and to dissolve the subsidiary. Under the “Proposed Transaction,” the public benefit corporation may vote to transfer funds to the subsidiary. There are also mechanisms in place to ensure a type of expenditure responsibility-like accountability for the maintenance and use of funds. Finally, the public benefit corporation disallows earmarking, and its board maintains the requisite discretion and control over funds, i.e., does not have an obligation to transfer funds to the subsidiary.
Both of the public benefit corporation’s requested rulings were granted. First, the Proposed Transaction was deemed not to jeopardize the public benefit corporation’s tax-exempt status. Second, donations made to the public benefit corporation were deemed deductible under Code section 170(a). In reaching this ruling, Treasury stated that the Proposed Transaction is consistent with the anti-conduit rules of Rev. Ruling 63-252 and the discretion and control requirement of Rev. Ruling 66-79. Moreover, it looked to Revenue Ruling 68-49 which states that a 501(c)(3) organization does not jeopardize its tax-exempt status by contributing funds to non-501(c)(3) organizations as long as it can show the funds were used for 501(c)(3) purposes. Ultimately, Treasury found the public benefit corporation’s actions congruent with this ruling. In terms of the second ruling, Treasury found that since the public benefit corporation is an organization described in Section 170(c), contributions to it are deductible under Section 170(a).
Monday, October 13, 2014
As the Ebola threat looms, many observers are considering whether the responses of the U.S. government, the CDC, and the World Health Organization, inter alia, are appropriate. Similarly, nonprofit commentators are considering whether private donations of funds and resources from the U.S. are adequate. As one commentator reports, there have been several U.S. private foundations that have made large-scale contributions to the fight against Ebola; in addition, the experience of two U.S. Christian organizations operating in West Africa evinces that publicity helps generate more donations. The U.N. has estimated that $1 billion is necessary to effectively combat the Ebola virus.
A recent article in The Chronicle of Philanthropy has predicted that the first confirmed case of Ebola in the United States will lead to greater charitable donations to stop a further outbreak of Ebola abroad. Several U.S. private foundations have already made multi-million dollar gifts to combat a spread of the virus. The Bill & Melinda Gates Foundation has decided to contribute $50 million to U.N. agencies and other organizations. The Paul G. Allen Family Foundation donated $9 million to the CDC, $2.8 million to the American Red Cross, and $100,000 in the form of matching funds to Global Giving. The William and Flora Hewlett Foundation contributed $5 million to various international health organizations. Moreover, the U.S. government has provided numerous resources, including, inter alia, individuals to build treatment units and training for health-care providers. The USAID has expended over $100 million in an effort to quell the outbreak and is on record for the contribution of an additional $75 million.
At the same time, commentators have denounced U.S. donors as not donating enough. The Director of International Communications at the Red Cross has stated that the Ebola outbreak is not “top of mind as a place to donate” precisely because of the involvement of the U.S. government, the CDC, and the World Health Organization. Nevertheless, SIM USA, a Christian mission organization who had two health-care workers infected with Ebola in Liberia late in the summer, has received sizable donations to support its work in West Africa. SIM USA has seen an increase in volunteers, and although these actions are later than anticipated, they show promise for a mobilization of donors and volunteers to fight the deadly virus. Additionally, Samaritan’s Purse, also a Christian organization working in West Africa, experienced a 13% increase in cash contributions (when compared to last year’s donations) after one of its doctors was infected with Ebola and successfully treated at Emory University Hospital. (For more on Samaritan’s Purse, see JRB’s insightful post). Thus far, $4.4 million of its donations has been designated for fighting the Ebola outbreak. As the speculation about a U.S. outbreak grows, the public’s attention has become more focused on donating to assist with the global efforts already underway, e.g., see the following article on UK donations. For a complete list of non-governmental organizations responding to the Ebola outbreak, see here).
Thursday, October 2, 2014
h/t to our friends over at TaxProf Blog:
Benjamin M. Leff (American), Preventing Private Inurement in Tranched Social Enterprises, 41 Seton Hall L. Rev. ___ (2015):
Tuesday, September 30, 2014
Preliminary planning is underway for a group of donors to form a nonprofit organization that would own the U-T San Diego, according to the U-T itself. It looks like the newspaper would stay as a for-profit organizaton, and the nonprofit would own the equity of the for profit. Random thoughts:
- I'm not sure that such a structure would insulate the for profit from political and lobbying concerns. It's an interesting question, however - one they recognize as they state that the editorial policy would be "as inclusive and community-focused as possible. 'Almost by definition, if not be law, a nonprofit has to be nonpartisan.'" Hmmm.
- Could they make the media company an L3C? That would automatically read in the prohibition on lobbying and political activity.
- It looks like a handful of donors would fund the nonprofit. Query whether that means that they would be a private foundation or whether they tried to form as a supporting organization). Either way, they would have to deal with the excess business holdings rules - I would presume they would try to say that it is a functionally related business under Section 4943(d)(3)(A), and therefore, not a "business enterprise" covered by the rules.
- If a private foundation - presumably operating foundation status would be necessary to avoid mandatory distributions under Section 4942.
- Looks like they went ahead and started the Form 1023 process to get approval for the nonprofit, even though the actual transaction to purchase the media company hasn't been consummated.
Anyone have any details?
Monday, September 29, 2014
An article last week in the Washington Post (h/t Chronicle of Philanthropy) discussed a report by the Department of Health and Human Services that indicated that hospitals are experiencing significant declines in charity care and bad debt, thanks to expansions in Medicaid and a drop in the number of otherwise uninsured individuals due to the Affordable Care Act. The report projects $5.7 billion (that’s billion, with a “b”) in savings in uncompensated care costs in 2014.
The first thing that I thought was, “Wow, that’s a big number! Great news!” The second thing I thought was, “Gee, I wonder if that will change how we evaluate nonprofit hospitals.” What that might say about my mental state aside, it will be interesting to see how this structural change to the way we pay for health care works its way through the standards for tax exemption.
I note that the HHS report tracks “uncompensated care,” which it treats as the sum of bad debt and charity care. While the HHS report does indicate that there is a difference between “self-pay” patients and “charity care”, the report is quick to note that not all hospitals break down their reporting this way. (See HHS Report, FN 6). Of course, part of the raging debate is whether bad debt is charity care – the Catholic Hospital Association says it isn’t but not all hospitals agree.
Either way, under traditional formulations of the community benefit standard, charity care is not the be-all and end-all of for exempt status – it might not even be necessary. The recent trend, first evident in the Revised 990 Form’s Schedule H and then in the community assessment report requirements of the ACA, appears to lean toward wanting more discussion and disclosure of charity care as component of tax-exemption, even if that doesn’t appear anywhere formally quite yet. It will be interesting to see if a structural reduction in the need for charity care (however defined) changes that conversation.
Then, of course, there are the states. Having practiced in Illinois at the time of the Provena decision (good summary here), I’m particularly curious to see how that might play out. For those of you who weren’t following Provena, Illinois revoked the property tax exemption for a number of nonprofit hospitals, stating that the Illinois property tax charitable exemption provisions (some of which are in the state constitution) require actual charitable use (as in relieving- poverty-charitable-use) of the property. While denying that charitable use is a numbers game (that is, you need to show that there are enough charitable dollars spent to offset the property tax uncollected) – the court then engages in exactly that mathematical exercise.
I’ve moved from Illinois since Provena came down, but I understand there was a legislative fix (SB 2194 and SB 3261, passed in 2012), that partially codifies this math-based analysis. What happens if a hospital doesn’t meet its charity care dollars spent requirement because they are simply not necessary anymore due to ACA?
I might be going out on a limb here, but I’m guessing that Prof. Colombo might have a thought or two on this…
Friday, September 26, 2014
Reuters is reporting that over 120 Islamic scholars from around the world have issued an open letter denouncing Islamic State militants and refuting their religious arguments. Many of these scholars are themselves leading Muslim voices in their own countries.
The 22-page letter, written in Arabic and heavy with quotes from the Koran and other Islamic sources, strongly condemns the torture, murder and destruction Islamic State militants have committed in areas they control.
The Reuters report states in part:
"You have misinterpreted Islam into a religion of harshness, brutality, torture and murder," the letter said. "This is a great wrong and an offense to Islam, to Muslims and to the entire world."
[The letter's] originality lies in its use of Islamic theological arguments to refute statements made by self-declared Caliph Abu Bakr al-Baghdadi and his spokesman Abu Muhammad al-Adnani to justify their actions and attract more recruits to their cause.
The letter is addressed to al-Baghdadi and "the fighters and followers of the self-declared 'Islamic State'", but is also aimed at potential recruits and imams or others trying to dissuade young Muslims from going to join the fight.
Nihad Awad of the Council on American Islamic Relations (CAIR), which presented the letter in Washington on Wednesday, said he hoped potential fighters would read the document and see through the arguments of Islamic State recruiters.
"They have a twisted theology," he said in a video explaining the letter. "They have relied many times, to mobilize and recruit young people, on classic religious texts that have been misinterpreted and misunderstood."
Reuters describes the 126 signatories as "prominent" Sunni men from across the Muslim world -- from Indonesia to Morocco, and from other countries such as the United States, Britain, France and Belgium.
Among those who signed are "the current and former grand muftis of Egypt, Shawqi Allam and Ali Gomaa, former Bosnian grand mufti Mustafa Ceric, the Nigerian Sultan of Sokoto Muhammad Sa'ad Abubakar and Din Syamsuddin, head of the large Muhammadiyah organization in Indonesia. Eight scholars from Cairo's Al-Azhar University, the highest seat of Sunni learning, also put their names to the document."
The Philanthropy News Digest is reporting that the American Association of School Librarians, a division of the American Library Association, is accepting applications from school librarians for its AASL Innovative Reading Grant program.
One grant in the amount of $2,500 will be awarded in support of the planning and implementation of a unique and innovative program for children that motivates and encourages reading, especially among struggling readers.
Projects should promote the importance of reading and facilitate literacy development by supporting current reading research, practice, and policy. In addition, projects must be specifically designed for children (grades K-9) in the school library setting, encourage innovative ways to motivate and involve children in reading, and should demonstrate potential to improve student learning.
To be eligible, applicants must be a member of AASL. Grant recipients may be invited to write an article that delineates their reading incentive project and demonstrates their successes, trials, and recommendations so others may replicate the project.
Thursday, September 25, 2014
The NFL has garnered a great deal of unwanted attention lately. However, as of last week, things seem to have taken a turn for the worse. On September 18, a group of Democratic Senators introduced a bill that would ultimately revoke the NFL’s tax-exempt status under 501(c)(6) if the league continues to support the Washington Redskins name and logo.
Recently, the Redskins franchise has been under fire for its racially insensitive depiction of Native Americans, prompting the U. S. Patent Office to cancel the Redskins’ trademark protection. While this hasn’t been the first time the patent office has revoked the Redskin’s trademark, the serious prospect of Congress revoking the NFL’s tax-exempt status may be a first, and it raises some interesting questions about the league’s protection under 501(c)(6). Should the NFL—a powerful, high revenue generating American institution—continue to enjoy tax-exempt status? If not, what are some of the potential implications for taxpayers and other tax-exempt organizations? For the full article click the link below.
Wednesday, September 24, 2014
The Clinton Global Initiative, former President Bill Clinton's annual philanthrophy summit held in New York ends today. The summit opened on Sunday and has thus far heard from speakers include actor Matt Damon, representing the charity he co-founded, Water.org; Laurent Lamothe, Prime Minister of Haiti; and Judith Rodin, president of the Rockefeller Foundation.
Ever since it was established in 2005, the Clinton Global Initiative has drawn more than 180 world leaders and more than 2,900 commitments worth an estimated $103-billion. This year's announced pledges include:
- $280-million from BRAC International to help more than 2.7 million girls across eight countries to finish school and go on to careers;
- $100-million from Camfed to help girls in Sub-Saharan Africa complete secondary school;
- $50-million from Grameen America to support 7,000 female entrepreneurs in Harlem;
- $19-million from Discovery Communications and the United Kingdom’s Department for Internaitonal Development to improve learning for girls in Ghana, Kenya, and Nigeria;
- $16-million from Plan International to prevent and respond to gender-based violence at schools in Asia;
- $12-million from Room to Read to help an additional 15,000 girls in nine countries to finish secondary school and go on to college and careers;
- $6-million noncash support from Direct Relief, Last Mile Health, Wellbody Alliance, and Africare to airlift 100 tons of medical supplies to West Africa to combat the Ebola outbreak;
- $4-million from the FHI Foundation and FHI 360 to study how to improve international-development projects across different fields;
- $3.2-million from the Lumina Foundation and $3-million challenge grant from Cisco to the National Service Alliance for its Service Year program, which encourages young adults ages 18 to 28 to embark on community service for a year;
- $3-million from Comcast and NBCUniversal, Airbnb, Jonathan and Jeanne Lavine, and Josh and Anita Bekenstein to Be the Change for its ServiceNation campaign to encourage people to volunteer for a year.
March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well? (Part III)
(Note: This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. The previous installments can be found here and here (NLPB) and here and here (BLPB).)
In prior posts we talked about what a benefit corporation is and is not. In this post, we’ll cover whether the benefit corporation is really necessary at all.
Under the Delaware General Corporation Code § 101(b), “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes . . . .” Certainly there is nothing there that indicates a company must maximize profits or take risks or “monetize” anything. (Delaware law warrants inclusion in any discussion of corporate law because the state's law is so influential, even where it is not binding.)
Back in 2010, Josh Fershee wrote a post questioning the need for such legislation shortly after Maryland passed the first benefit corporation legislation:
I am not sure what think about this benefit corporation legislation. I can understand how expressly stating such public benefits goals might have value and provide both guidance and cover for a board of directors. However, I am skeptical it was necessary.
Not to overstate its binding effects today, but we learned from Dodge v. Ford that if you have a traditional corporation, formed under a traditional certificate of incorporation and bylaws, you are restricted in your ability to “share the wealth” with the general public for purposes of “philanthropic and altruistic” goals. But that doesn't mean current law doesn't permit such actions in any situation, does it?
The idea that a corporation could choose to adopt any of a wide range of corporate philosophies is supported by multiple concepts, such as director primacy in carrying out shareholder wealth maximization, the business judgment rule, and the mandate that directors be the ones to lead the entity. Is it not reasonable for a group of directors to determine that the best way to create a long-term and profitable business is to build customer loyalty to the company via reasonable prices, high wages to employees, generous giving to charity, and thoughtful environmental stewardship? Suppose that directors even stated in their certificate that the board of directors, in carrying out their duties, must consider the corporate purpose as part of exercising their business judgment.
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Monday, September 22, 2014
Puzzler: Respecting and Valuing an Interest in a Disregarded SMLLC for Charitable Deduction Purposes?
I thank Professor Cassady Brewer of Georgia State University College of Law for bringing this interesting case to our attention. Please read on...
In RERI Holdings I, LLC v. Comm’r, 143 T.C. No. 3 (2014), the Tax Court determined that a disregarded, single-member LLC interest should not be ignored for purposes of determining whether a taxpayer is entitled to a charitable contribution deduction. This decision has not received much attention, but it potentially has significant implications for charities and donors.
The taxpayer in RERI Holdings I, LLC contributed an interest in a disregarded SMLLC holding real property to the University of Michigan. The taxpayer claimed a charitable deduction of approximately $33 million in connection with the donation of the SMLLC interest. As required for tax purposes, the taxpayer obtained an appraisal substantiating the amount of its claimed deduction; however, the taxpayer’s appraisal was of the underlying real property held by the disregarded SMLLC, not the membership interest in the SMLLC itself. Because the interest in the SMLLC, not the underlying real property, was donated to the University of Michigan, the IRS argued in a motion for summary judgment that the taxpayer’s charitable deduction should be disallowed. In particular, the IRS argued that the deduction must be disallowed because the appraisal was of the wrong property and therefore failed the “qualified appraisal” requirements for charitable contributions of property.
Without much fanfare, Judge Halpern accepted the argument of the IRS that a charitable contribution of an interest in a disregarded SMLLC should be viewed differently than a charitable contribution of the underlying asset. Judge Halpern so held notwithstanding the fact that the SMLLC is otherwise ignored for federal income tax purposes. Judge Halpern’s opinion relies heavily on the Tax Court’s earlier decision in Pierre v. Comm’r, 133 T.C. 24 (2009), supplemented by 99 T.C.M. (CCH) 1436 (2010), that, for gift tax valuation purposes, a taxpayer’s gifts of membership interests in the taxpayer’s SMLLC are distinct from gifts of partial interests in the underlying property. Pierre arguably is distinguishable, though, from RERI Holdings I, LLC, because (i) Pierre is a gift (not income) tax case and (ii) the gifts in Pierre transformed the SMLLC into a multi-member LLC held by four trusts. This latter point of distinction, though, may not be significant as it appears the trusts were grantor trusts such that the taxpayer in Pierre remained the income tax owner of the SMLLC.
Despite the fact, however, that Judge Halpern agreed with the IRS’s view that an interest in a disregarded SMLLC should be respected for charitable contribution deduction purposes, all was not lost for the taxpayer in RERI Holdings I, LLC. Rather, perhaps to avoid so-easily granting summary judgment against the taxpayer and in favor of the IRS, Judge Halpern reasoned that there was an unresolved issue of material fact whether a valuation of the property held by the SMLLC rather than a valuation of the SMLLC interest itself nevertheless could “stand proxy” for the otherwise required qualified appraisal. The ultimate outcome of the case, therefore, remains to be seen.
The lesson for charities and donors: RERI Holdings I, LLC creates uncertainty with regard to the proper treatment of disregarded SMLLC interests for both charitable deduction and substantiation requirements. Given that uncertainty, donors to charitable organizations should transfer the underlying property itself to charity rather than transferring an interest in an SMLLC holding the property. If the property must be wrapped inside a disregarded LLC for liability protection or other reasons, then the donee charity should form the disregarded SMLLC to receive the contribution rather than receiving an interest in the property-holding SMLLC formed by the donor. Otherwise, due to the quirky way in which SMLLC membership interests apparently are valued for federal tax purposes, the donor inadvertently may be reducing the amount of his or her expected charitable contribution deduction. On the other hand, for estate and gift tax purposes, a donor presumably would rather transfer a membership interest in a disregarded SMLLC to a non-charitable donee in order to minimize the value of the transfer and thereby reducing potential estate and gift taxes.
My thanks again to Professor Brewer.
Saturday, September 20, 2014
A program called “Circles” takes an unconventional approach to relieving poverty. Circles works through personal support – people helping people – not direct financial aid. As profiled by NPR, in Circles, volunteers help families in poverty with advice and community assistance. Volunteers, called “allies,” provide moral support, technical know-how on things like how to manage finances and bureaucracy, and help with day-to-day struggles, like picking up a child from day care. The program is operative in 23 states.
Unlike the anti-poverty program discussed in yesterday’s post, the story on Circles does not contain the lament that donors often prefer supporting their alma mater instead of anti-poverty programs. Perhaps this is because Circles appears to have dedicated sponsors. Nevertheless, yesterdays' blog post suggested that it is worth exploring as part of tax reform ways to shift existing tax incentives to provide greater rewards for some charitable ends like poverty relief. But is something like this a good idea?
A key objection to preferring some charities over others on functional grounds is that it would undermine the pluralism of the charitable deduction, which (apart from preferring public charities to private foundations) remains facially neutral as to donor preferences. Taking this objection to its logical end, however, would lead either to a credit or a nonitemizer charitable deduction. This is because the current deduction fosters pluralism only with respect to those who actually take the charitable deduction, generally the wealthiest third of taxpayers. Thus converting the charitable deduction to a credit available to all taxpayers would advance pluralism generally by rewarding the charitable choices of all taxpayers, not just those who itemize.
But should a credit then be stratified to provide greater benefits for some charities? Now the pluralistic objection has more weight. One of the beauties of the charitable deduction is that it represents private choices regarding the relative worthiness of charities. The government takes a fairly light hand, making the barriers to entry into the charitable sector low. Donors can then decide which organizations to fund without tax policy nudges (unless the choice is a private foundation). If we had a system where some public charities are preferred, then the government would have to put a thumb on the scales and choose. This could be very difficult legally (to craft workable standards) and politically (as groups in favor could change with the political tides). This was the topic of a conference held at NYU’s Center on Philanthropy and the Law back in 2009. The general conclusion of many at the conference was that the government should not be in the business of choosing one charity over another. These are important objections.
Personally, I do not think the obstacles are insurmountable, and some scholars argue that the charitable deduction should be refashioned to better serve those in need. Regardless, if more distinctions are made among charities, they need not be drawn based solely on purpose (i.e., relieving the poor), but could be drawn based on other criteria, such as the operation of charitable programs versus grantmaking, or whether the charity accumulates assets. This is not to say drawing lines would be easy. Some lines might be unworkable. And making new distinctions among charities would be a departure from longstanding policy. Thus developing some consensus on who should be favored and why would be important to success.
Friday, September 19, 2014
There was an interesting piece this week in the New York Times by Nicolas Kristof and Sheryl WuDunn. They describe a program that funds nurse visits to low-income families to provide advice on child-rearing, and cite a RAND study which finds that "each dollar invested in nurse visits to low-income unmarried mothers produced $5.70 in benefits." Sounds good? Yes, but the program seriously lacks funds. The article concludes with a familiar lament, which ultimately is directed to donor preferences: “We wish more donors would endow not just professorships but also the jobs of nurses who visit at-risk parents; we wish tycoons would seek naming opportunities not only at concert halls and museum wings but also in nursery schools. We need advocates to push federal, state and local governments to invest in the first couple of years of life, to support parents during pregnancy and a child’s earliest years.”
One question that arises from the authors' lament relates to the charitable deduction, under which donor preferences among public charities are treated equally. The issue is whether tax policy should aim to direct donors more toward certain charitable ends rather than others. Or, in the frame of the article: should tax policy equate a naming opportunity at a concert hall with funding a successful anti-poverty program? Present law already favors gifts to public charities over private foundations. A question in the context of tax reform thus is whether a preference for one type of charity over another should be made more on functional grounds. If the charitable deduction were converted to a credit, it would be easier over time to tie the amount of the credit to the desired end of the subsidy, perhaps with a relative preference for certain charitable ends or programs. All charities that currently benefit from the deduction could continue to benefit, but the credit for giving to some would be greater than for giving to others. It is a controversial question, but tinkering with charitable tax incentives to direct donor preferences toward more pressing needs is worth serious consideration.
Wednesday, September 17, 2014
The Washington Post has an interesting article on the National Football League, listing the various ways in which the NFL has been supported by taxpayers at the federal and state level over the decades, including of course through tax-exempt status as a 501(c)(6) organization. The article makes the general point that subsidies that were initially thought desirable when the NFL was a fledgling organization are harder to justify today. The New York Times also recently conducted a debate about the NFL’s tax-exempt status.
Taking aside the case for or against the NFL, the Post article represents a larger point about tax benefits and the ongoing need for them that could be applied to other exempt organizations, including charitable exempts such as hospitals and colleges and universities. Tax exemption, eligibility to receive deductible contributions, tax-exempt financing all become perpetual tax benefits. Although the original case for a tax benefit might be strong, over time as organizations grow, the case might weaken. Yet because benefits are written into the tax code, it is hard to make appropriate adjustments.
The NFL has attracted scrutiny because of high compensation for its commissioner, the personal conduct of players, and their (modest) punishment. This fits a pattern where scandal forces us to take a closer look at tax expenditures. In the case of the NFL, adjustments have been proposed, initially by Senator Coburn, and now also by Senator Cantwell (who cites the NFL’s refusal to change the name of the Washington Redskins).
The question though is whether as part of tax reform we should seriously examine tax-exemption and other related tax benefits for other exempt organizations as well, without waiting for a scandal.
Side comment: In the case of the NFL, the tax benefits conveyed may not be not obvious from the label “exempt status.” In general, the benefits are that NFL member teams accelerate deductible expenses to the extent the NFL does not spend member dues currently. In addition, the deduction for member dues to the NFL can convert capital expenditures to current deductions to the extent the NFL uses monies to invest in capital projects. Loss of tax-exempt status as proposed by Senators Coburn and Cantwell would eliminate both benefits. Another approach would be to tax the investment income of the NFL, or even 501(c)(6) organizations more broadly.
Monday, September 15, 2014
On September 4, 2014, I attended an excellent conference on the valuation of conservation easements in Sioux Falls, SD, sponsored by the North Star Chapter of the Appraisal Institute. The conference featured five representatives from the IRS:
- Lou Garone, MAI, SRA, IRS Senior Appraiser (email@example.com)
- Anita Gill, Supervisory Attorney, IRS Office of Chief Counsel (firstname.lastname@example.org)
- Karin Gross, Supervisory Attorney, IRS Office of Chief Counsel (email@example.com)
- Frank Molinari, SRA, IRS Senior Appraiser (firstname.lastname@example.org)
- Stephen Whiteaker, IRS Director of Field Operations (email@example.com)
The purpose of the conference was to help appraisers develop a greater understanding of the relevant requirements and the IRS’s intent to actively review appraisals in the easement context.
Below are some highlights from the conference that should be of interest not only to appraisers, but also to conservation easement donors and their legal advisors.
Avoid Embarrassing Cross-Examination at Trial. The IRS representatives staged a mock trial in which one of the IRS Senior Appraisers played the role of the taxpayer’s appraiser. The appraiser was required to defend the conservation easement appraisal he had prepared for the taxpayer years earlier. The appraisal was not well done, and the appraiser’s discomfiture at having to admit, among other things, inconsistencies in the appraisal, lack of support for his conclusions, and that some of the appraisal did not represent his own work product (he used data from another appraiser without verifying it), was very instructive (the content of the appraisal and the cross-examination were based on actual tax court trial proceedings). The IRS representatives explained that, when the value of a conservation easement is challenged, the goal on cross-examination of the taxpayer’s appraiser is to show that the appraiser is incompetent.
- The appraiser was also challenged regarding his engagement letter, which stated that he agreed “to determine the loss in the value of the subject property due to the conservation easement.” The “lawyer” cross-examining the appraiser noted that this statement implied the appraiser was acting as an advocate for the taxpayer, rather than with impartiality, objectivity, and independence as ethical rules require; that, as provided in Treasury Regulation § 1.170A-14(h)(3)(ii), “there may be instances where the grant of a conservation restriction may have no material effect on the value of the property or may in fact serve to enhance, rather than reduce, the value of property”; and that, in accordance with the Ethics Rule in USPAP, “An appraiser must not accept an assignment that includes the reporting of predetermined opinions and conclusions.”
A Dip in The Hot Tub. Judges may employ a new technique known as the “hot tub” method for the presentation of evidence on valuation. Rather than (or in addition to) having the government’s valuation expert and the taxpayer’s valuation expert testify separately, and often with a considerable time lapse in between, the experts may be called upon to “take a dip in the hot tub” and offer their opinions concurrently in a dialogue with the judge. One commentator explains:
Under the [hot tub] method, the experts engage in a face-to-face discussion with each other and the trial judge about all relevant issues dealing with their expert opinions and the underlying bases for such opinions. No longer is the process a disjointed mess. One foreign jurist lauds [the method] for making it possible for judges to avoid ‘having to compare a witness giving evidence now with the half-remembered evidence of another expert given perhaps some weeks previously.’ Not only does the basic premise of concurrent evidence better assist the trier of fact in highlighting and reconciling competing evidence, it results in an effective medium for reducing partisan bias as well as the time and expense of litigation.
Michael R. Devitt, A Dip in the Hot Tub: Concurrent Evidence Techniques for Expert Witnesses in Tax Court Cases, 117 J. Tax’n 213 (Oct. 2012).
Tax Court Judge Laro employed this technique in Crimi v. Comm'r, T.C. Memo. 2013-51, involving a bargain sale of land. He explained:
An expert qualified to testify in a judicial proceeding owes a duty to the Court that transcends the duty to his or her client insofar as the expert must present his or her opinion, as well as the facts, data, and analysis on which he or she relied, neutrally and candidly…. Experts who breach their duty to the Court in order to advance their client's litigating position compromise their usefulness. We are mindful of the “cottage industry of experts who function primarily in the market for tax benefits”…and our concerns about the helpfulness of expert testimony in one recent case, and in these cases, led us to have the experts testify concurrently…. The concurrent testimony in these cases enabled us to more easily separate the reliable portions of the expert reports from the unreliable, and consequently, to expedite our decisionmaking process….
One of the IRS Senior Attorneys at the Sioux Falls conference explained that another Tax Court Judge had recently employed the hot tub method in a case involving a challenge to a deduction for a conservation easement donation (the opinion in that case has not yet been issued). She also cautioned that, if a Judge thinks an appraiser is acting as an advocate for the taxpayer, the court may throw out the expert’s report and testimony. See Boltar v. Comm'r, 136 T.C. 326 (2011). Judges, she said, take very seriously the fact that valuation experts should be independent and their role is to assist the court, not advocate for the client’s position.
Valuation Will Generally be an Issue in Litigation. Unless the IRS agrees with an appraisal, valuation will generally be raised as an issue in litigation even if substantiation of the deduction or satisfaction of the requirements of § 170(h) and the Treasury Regulations are also contested. This is because (i) the IRS may not be successful on substantiation or qualification grounds and contesting valuation provides them with a fallback position and (ii) as part of the Pension Protection Act of 2006, Congress expanded the circumstances under which penalties can be imposed for overvaluations.
Scope of Assignment. An appraiser may find him or herself having to defend a conservation easement appraisal in the context of an audit or litigation many years after the appraisal was prepared. This can be difficult and time consuming. Appraisers should define the scope of a conservation easement valuation assignment in the engagement letter and make it clear that, if the valuation is later challenged, defense of the appraisal would be a separate assignment for which the appraiser must be paid.
Red Flags. The following “red flags” in conservation easement appraisals may lead to greater scrutiny, audit, and litigation:
- Appraisal does not conform to generally accepted appraisal standards (USPAP).
- Appraisal does not comply with Internal Revenue Code and Treasury Regulation requirements.
- Appraisal relies on unconventional (not widely used or accepted) analysis.
- Analysis is not thorough or consistent with the conclusions reached.
- Conclusions are based on unsupported opinion versus facts, or on assumptions that are not reasonable or supported by the market. If the appraisal includes TMBs ("Trust me Baby" assertions) and LOFs ("Leaps of Faith") in lieu of good data and fully supported analysis, the appraiser loses all credibility.
- Highest and best use analysis is not preceded by market analysis.
- Failure to explain why potential comparable sales were not used; all comparables are adjusted in one direction; comparables are from outside the geographic area in which the subject property is located.
- Failure to include relevant information in report (e.g., failure to note that the property was listed for sale at a certain price and did not sell).
- Subdivision development analysis is based on assumptions that are not supported by the market or thoroughly explained (less than optimum comparable sales are better than a manufactured assumptions).
- Estimated value from subdivision development analysis is not consistent with comparable sales.
- Computational errors.
- Bad grammar.
- Bad writing.
Good Writing Is Crucial. The ability to communicate is a key element in meeting IRS expectations.
- A good appraisal is well-written, easy to follow, and holds the reader’s interest. It logically leads the reader from the presentation of the data to a reasonable, fact-based and market-supported conclusion.
- Consider the audience for the appraisal—it is not just the easement donor. Other users include the IRS and the court. If an IRS agent (who is not an appraiser) cannot understand the appraisal, he or she will send it to an IRS appraiser for scrutiny. Write the appraisal report to communicate the analysis and conclusions to the least sophisticated reader.
- Longer is not necessarily better—a clear, concise, fully-supported appraisal report that avoids excess verbiage and unnecessary jargon is best. If parts of a report are incomprehensible, IRS appraisers (all of whom have over 20 years of experience) will pull out the pencil sharpener and go to work.
- In the words of Albert Einstein: “If you can’t explain something simply, you don’t understand it well.” Or, in the words of a conference attendee from Arkansas: “Put the cookies on the low shelf where everyone can reach in and get em.’”
Fair Market Value. The definition of fair market value for charitable contribution purposes is:
the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Treas. Reg. §1.170A-1(c) (2).
In other words, fair market value is the price at which the taxpayer could realistically sell the land in its current state on the open market. This most basic of rules is sometimes lost in a flood of data, statistics, and assumptions, particularly when an appraiser relies on the subdivision development analysis. At the end of the day, the appraiser should ask him or herself: Could this property realistically be sold on the open market for the value I have estimated?
HBU. An appraiser cannot come to an accurate conclusion about highest and best use without doing a thorough market analysis. The foundation of all valuation considerations lies in the accurate and reasonable analysis of the market in which a property competes. Does the conclusion make sense? If you build it, will they come?
Conservation Purposes. The appraiser should examine the property, the baseline documentation, and the final version of the conservation easement deed. An appraiser cannot, for example, prepare an accurate appraisal without knowing that there are endangered species on a property, the presence of which will limit the property’s development under federal law. Similarly, an appraiser cannot prepare an accurate appraisal without knowing the final (as opposed to draft) terms of the easement.
Be Specific. Do not wax on about South Dakota if the property is located in Sioux Falls; focus on Sioux Falls.
Entire Contiguous Parcel and Enhancement Rules. Although both rules are set forth in Treasury Regulation § 1.170A-14(h)(3)(i), they are different and require different analyses.
- Entire Contiguous Parcel Rule. The regulation provides that “[t]he amount of the deduction in the case of a charitable contribution of a perpetual conservation restriction covering a portion of the contiguous property owned by a donor and the donor's family…is the difference between the fair market value of the entire contiguous parcel of property before and after the granting of the restriction.” This difference is the amount that should be reported as the “appraised fair market value” of the donated easement on the IRS Form 8283 (the “appraisal summary”) when this rule applies.
- IRS Chief Counsel Memorandum 201334039 provides in a footnote that “Whether the entire contiguous parcel is valued as one large property or as separate properties depends on the highest and best use (HBU) of the entire contiguous parcel.” One of the IRS Senior Appraisers explained that, if the entire contiguous parcel consists of multiple parcels and each has a unique HBU, the parcels should be valued separately. However, that does not mean the appraiser should simply add the values together to come up with the value of the entire contiguous parcel. The aggregate of the values might not be the same as what a willing buyer would pay a willing seller for the entire contiguous parcel. If the appraiser can show that the entire contiguous parcel could be sold for the aggregate of the values in short order (within a year), then the aggregate of the values is fair market value of the entire contiguous parcel. But if the entire contiguous parcel could not be sold in short order for the aggregate of the values, then the appraiser must apply an appropriate discount.
- Enhancement Rule. The regulation provides that “[i]f the granting of a perpetual conservation restriction…has the effect of increasing the value of any other property owned by the donor or a related person [i.e., property not captured by the entire contiguous parcel rule], the amount of the deduction for the conservation contribution shall be reduced by the amount of the increase in the value of the other property, whether or not such property is contiguous.” The IRS Senior Appraisers explained that estimating this “enhancement” is a separate step in the appraisal process. Moreover, enhancement does not affect the “appraised fair market value” of the easement that must be reported on the Form 8283 (see above). Rather, any enhancement should be explained in an attachment to the Form 8283. It is the taxpayer’s responsibility to then reduce the amount of the deduction claimed on his or her tax return by the estimated enhancement.
- What is Contiguous? There was a slight disagreement regarding how to determine whether properties are contiguous. One of the IRS Supervisory Attorneys indicated that state law controls. One of the IRS Senior Appraisers, on the other hand, said appraisers should use common sense. He said contiguity requires a case-by-case judgment call and the appraiser must be able to support his or her analysis. As examples, he said properties separated by a four-lane highway are not contiguous, but properties separated by a dirt path are.
- Family and Related Persons. For details on the definitions of “family” and “related person” see IRS Chief Counsel Memorandum 201334039.
Assuming Zoning Changes. If the appraiser is assuming that current zoning could be changed, the appraiser must consider the time it would take to make the change (delay), the costs associated with making the change, and the probability that the change would be made.
Quid Pro Quo. The burden of proof is on the taxpayer to show that the value of a conservation easement exceeds the value of any quid pro quo received in exchange. In Seventeen Seventy Sherman Street v. Comm'r, 2014-124, the Tax Court held that the taxpayer’s failure to identify and value all of the quid pro quo received in exchange for the donation of a façade easement was fatal to the deduction. Accordingly, the appraiser may have to value not only the conservation easement, but also the quid pro quo. If the taxpayer is a developer or it appears that the easement was conveyed in exchange for some sort of development approval or variance, the IRS representatives will look for quid pro quo.
Extinguishment. The only way to extinguish a tax-deductible easement is through condemnation or in a judicial proceeding in which it is established that an unexpected change in conditions surrounding the property has made continued use of the property for conservation purposes impossible or impracticable. See Treas. Reg. § 1.170A-14(g)(6); Carpenter v. Comm'r, T.C. Memo. 2013-172. Extinguishments should be very rare. This is important for appraisal purposes because the fact that an easement is intended to restrict the development and use of the property in perpetuity (i.e., until condemnation or a court finds impossibility or impracticality) will affect the value of the easement.
Bargain Sales. Sometimes a land trust or government entity will purchase a conservation easement for its fair market value based on an appraisal commissioned by that entity. The seller, however, may commission its own appraisal indicating that the purchase price was less than fair market value and attempt to claim a deduction for the “donation” component. In such an instance, the purchasing entity should not sign an IRS Form 8283 (in which it would have to represent that a charitable donation has been made), and the entity may be asked to provide the IRS with its appraisal. See, e.g., Headlands Reserve, LLC v. Ctr. for Natural Lands Mgmt., 523 F. Supp. 2d 1113 (C.D. Cal. Nov. 16, 2007).
Timeliness of Appraisal. A qualified appraisal must prepared (i) not earlier than 60 days before the date of the contribution of a conservation easement and (ii) not later than the due date (including extensions) of the return on which a deduction for the easement is first claimed. It is the IRS’s position that the date of the contribution of a conservation easement is the date on which the easement is recorded in the local land use records. Before that time, the easement is not “enforceable in perpetuity.” See Zarlengo v. Comm'r, T.C. Memo. 2014-161. Accordingly, if recordation of an easement is delayed, the appraiser may have to update the appraisal to fall within the 60-day window.
- It is best for the appraiser to make changes to (i.e., update) the existing appraisal and then sign and date the new updated appraisal. While addendums to the original report are sometimes used, an updated appraisal is easier to review and understand than an original report plus an addendum, and IRS representatives are sometimes provided with only the addendum, not the original report, which can slow down the review process.
- Simply changing the date on an appraisal is not sufficient to update the appraisal. The appraiser must, at a minimum, include a cover letter stating that he or she revisited the property and reviewed the appraisal and all relevant data to see if any of the data, analysis, or conclusions needed to be updated, and that he or she determined that no changes were necessary.
Appraiser’s Handbook. Suggested materials to be included in an appraiser’s “conservation easement handbook” include:
- Internal Revenue Code § 170(h) and § 170(f)(11).
- Treasury Regulation § 1.170A-13(c).
- Treasury Regulation § 1.170A-14.
- IRS Form 8283 and Instructions.
- IRS Publication 561, Determining the Value of Donated Property.
- IRS Publication 526, Charitable Contributions.
- IRS Notice 2006-96.
- Chief Counsel Memorandum 201334039.
Conservation Easement Valuation Cases. The IRS Senior Appraisers referenced the following cases as providing helpful insights regarding the valuation of easements.
- Trout Ranch v. Comm'r, 493 Fed. Appx. 944 (10th Cir. 2012) (unpublsihed), aff'g T.C. Memo. 2010-283
- Boltar v. Comm'r, 136 T.C. 326 (2011)
- Esgar Corp. v. Comm’r, 744 F.3d 648 (10th Cir. 2014), aff’g T.C. Memo. 2012-35
- Palmer Ranch v. Comm'r, T.C. Memo. 2014-79
- Schmidt v. Comm'r, T.C. Memo. 2014-159
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
The Tax Policy and Charities Project of the Urban Institute has released preliminary estimates of the impact of Chairman Dave Camp's tax reform plan on charitable giving. The overall estimate is that giving would decrease by 7 to 14 percent if the entire plan were adopted. The wide range is due to uncertainty about individual responsiveness to the tax incentive. The estimate is broken into four parts, taking into account: changes to the rate structure, the increase to the standard deduction, modifications to other itemized deductions, and direct reforms to the charitable deduction itself (e.g., the 2% of AGI floor and percentage limit changes). The estimate finds that the marginal tax benefit attributable to the charitable deduction would fall by nearly half, from about 23% to 12%.
Here is the abstract: This note estimates the effects of four groups of provisions from the Tax Reform Act of 2014 on individual charitable giving. The provisions of the tax reform plan, released earlier this year by House Ways and Means Committee Chairman Dave Camp (R-MI), are estimated to decrease individual giving by 7 to 14 percent.
Sunday, September 7, 2014
The American College of Trust and Estate Counsel and Boston College Law School are organizing the 6th Academic Symposium financially supported by the ACTEC Foundation. The symposium, The Centennial of the Estate Tax: Perspectives and Recommendations, will be held at Boston College Law School on Friday, October 2, 2015.
The symposium will examine the estate tax, which will have its 100th anniversary in 2016. Panels will address:
- whether it is it desirable to tax the gratuitous transfer of wealth during life or at death,
- whether methods other than an estate and gift tax could better address problems associated with wealth concentration, and
- what improvements could be made to the existing estate and gift tax system.
Michael Graetz, Columbia Alumni Professor of Tax Law at Columbia Law School and author of Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth (with Ian Shapiro) (Princeton University Press 2005), will be the symposium’s key-note speaker.
Papers presented at the symposium will consist of papers selected from this Call for Papers and papers from invited speakers. Symposium papers will be published in a Symposium Edition of the Boston College Law Review in May 2016. If you would like to be considered to be a presenter for one of the panels, please submit an abstract of your paper to James Repetti by email (Repetti@bc.edu) by December 1, 2014. Submissions that address domestic or international perspectives are welcomed, and submissions from new, as well as experienced, scholars are encouraged. The Boston College Law Review will notify individuals chosen to participate in the symposium by email no later than January 15, 2015.
Symposium speakers will be required to submit a draft of their papers by September 1, 2015. Symposium speakers will be reimbursed for their travel expenses (airfare and the cost of ground transportation and hotel) courtesy of an ACTEC Foundation grant. Speakers will also be invited to a Speakers’ Dinner on the evening of Thursday, October 1, and breakfast and lunch will be provided to both speakers and attendees on Friday, October 2, courtesy of the ACTEC Foundation grant.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law