Sunday, March 22, 2015
- Pamela Wicker, Neil Longley, and Christoph Breuer, Revenue Volatility in German Nonprofit Sports Clubs
- Wei-Wen Chang, Chun-Mam Huang, and Yung-Cheng Kuo, Design of Employee Training in Taiwanese Nonprofits
- Joseph Lanfranchi and Mathieu Narcy, Female Overrepresentation in Public and Nonprofit Sector Jobs: Evidence From a French National Survey
- Tracey M. Coule, Nonprofit Governance and Accountability: Broadening the Theoretical Perspective
- Daniela Casale and Anna Baumann, Who Gives to International Causes? A Sociodemographic Analysis of U.S. Donors
- Alasdair C. Rutherford, Rising Wages in the Expanding U.K. Nonprofit Sector From 1997 to 2007
- Daniel W. Curtis, Van Evans, and Ram A. Cnaan, Charitable Practices of Latter-day Saints
- Stephan Grohs, Katrin Schneiders, and Rolf G. Heinze, Social Entrepreneurship Versus Intrapreneurship in the German Social Welfare State: A Study of Old-Age Care and Youth Welfare Services
- Steven Reesor Rempel and
- Christopher T. Burris,
- Personal Values as Predictors of Donor- Versus Recipient-Focused Organizational Helping Philosophies
- Patricia Tweet, Book Review: Nonprofit governance: Innovative perspectives and approaches by C. Cornforth and W. A. Brown (Eds.)
- Hans Peter Schmitz,
Book Review: Importing democracy: The role of NGOs in South Africa, Tajikistan, and Argentina by J. Fisher
- Susan M. Chambré, Book Review: Doctors without borders: Humanitarian quests, impossible dreams of Médicins Sans Frontières by R. C. Fox
David J. Herzig (Valparaiso) and Samuel D. Brunson (Loyola Chicago) have written the Slate article Subsidized Injustice: Racist Fraternities and Sororities Should Have Their Tax-Exempt Status Revoked. Drawing on the Supreme Court's 1983 decision in Bob Jones University v. United States, they make the following suggestion:
How can the tax law operate, then, to effect structural change? It can dangle the carrot of their tax exemption in front of them while, at the same time, threatening them with its loss if they do not eliminate discriminatory behavior. We would propose that the IRS begin sending letters to all Greek organizations putting them on notice that if they discriminate, their tax-exempt status will be revoked. They can retain their tax exemption if they demonstrate that they do not discriminate based on race. This provides Greek organizations with a choice. If they are willing to comply with the norms of society, then they can enjoy the benefit of their tax exemption. If they do not wish to conform, they can explicitly signal that desire by forgoing the public subsidy implicit in being exempt from taxation.
Mary Crossley (Pittsburgh) has posted Health and Taxes: Hospitals, Community Health and the IRS on SSRN. Here is the abstract:
The Affordable Care Act created new conditions of federal tax exemption for nonprofit hospitals, including a requirement that hospitals conduct a community health needs assessment (CHNA) every three years to identify significant health needs in their communities and then to develop and implement a strategy responding to those needs. As a result, hospitals must now do more than provide charity care to their patients in exchange for the benefits of tax exemption, and the CHNA requirement has the potential both to prompt a radical change in hospitals’ relationship to their communities and to enlist hospitals as meaningful contributors to community health improvement initiatives. Final regulations issued in December 2014 clarify hospitals’ obligations under the CHNA requirement, but could do more to facilitate hospitals’ engagement in collaborative community health projects. The IRS has a rich opportunity, while hospitals are still learning to conduct CHNAs, to develop guidance establishing clear but flexible expectations for how they assess and address community needs. This Article urges the IRS to seize that opportunity by refining its regulatory framework for the CHNA requirement to more robustly promote transparency, accountability, community engagement, and collaboration, while simultaneously leaving hospitals a good degree of flexibility. By promoting alignment between hospitals’ regulatory compliance activities and broader community health improvement initiatives, the IRS could play a meaningful role in efforts to reorient our system towards promoting health and not simply treating illness.
Saturday, March 21, 2015
The Urban Institute's National Center for Charitable Statistics reported last month that its e-filing systems had been compromised by apparent hackers. The Center's website provides the following Security Alert:
Unauthorized parties have gained access to the Form 990 Online and e-Postcard Systems. If you are a user of either of these sites, we encourage you to reset your password immediately. Please click here for details and answers to Frequently Asked Questions.
e-Postcard users (if you file Form 990-N) please click here to reset your password.
Form 990 Online users click here to reset your password.
If you have not changed your password since the unauthorized access, the system will require you to change it when you log in.
According to a report in The Hill, improper access appears to have been limited to usernames, passwords, IP addresses, and other account data for nonprofits, with no evidence that the tax filings made through this system were compromised. The system does not have more sensitive data, such as Social Security numbers or credit card information, so no such data was at risk. The system is, however, used by between 600,000 and 700,000 organizations.
The Boston Globe reports that the almost 50-year old Center on Wealth and Philanthropy at Boston College will close with the retirement of its long-time director Paul Schervish and associate director John Havens. The exact closure date will depend on the pace of current research projects, but could come as early as this summer. According to the Center's website, the Center's research has focused on "the relation between economic wherewithal and philanthropy, the motivations for charitable involvement, and the underlying meaning and practice of care."
The Boston Globe reports that Gordon College's planned sale of a number of rare books in order to finance the preservation of the rest of the collection has run into a buzz saw of criticism, in part because it appears the original donor conditioned the gift on the collection remaining together. While the original gift bequest has apparently been lost, later documents indicate and the recollection of the donor's descendants confirm this condition on the gift. On its website, the College provides more details about the controversy and indicates it is still planning to go ahead with the sale. Given that the donor's heirs likely lack standing to challenge the planned sale, it remains to be seen whether the Non-Profit Organizations/Public Charities Division of the Massachusetts Attorney General's office chooses to get involved.
Thursday, March 19, 2015
The Los Angeles Times reports that a proposed plan for a for-profit company to buy six struggling nonprofit hospitals has collapsed. As detailed in the article, the buyer, Prime Healthcare Services, is blaming California Attorney General Kamala Harris for imposing "impossible" conditions on the purchase, while the AG claims the buyer previously indicated it was fine with the conditions. Those conditions on the proposed $843 million sale included requiring the buyer to keep five of the hospitals open for at least 10 years, maintaining the same level of charity care as before the purchase, and apparently numerous other requirements described in a 78-page document. Regardless of whom is to blame, the Daughters of Charity Health System that owns the hospitals is now saying "[e]very option is on the table, including bankruptcy" given that the System is losing $10 million per month. Before the deal collapsed the System filed a lawsuit against a major union and a private equity firm for allegedly interfering in the sale agreement, according to the San Francisco Business Times.
As often reported here, an increasing number of states and localities are challenging the property and other tax exemptions of nonprofits within their jurisdictions. Some of the most notable recent developments have been in Maine, where the governor's budget proposal includes a tax on "large" nonprofit organizations in the state, and Pennsylvania, where a state constitutional amendment that would shift control over the standard for exemption to the state legislature is working its way through the amendment process. Along these lines, the Stateline news project of the Pew Charitable Trusts recently published a article titled "Should Nonprofits Have to Pay Taxes?" that provides an overview of recent developments in this area. Besides discussing the the situations in Maine and Pennsylvania, it also discusses developments in Ohio, Vermont, and New York, as well as providing a chart showing the number of federally tax-exempt nonprofits in each state and their assets. Of course those assets include both assets on which the owning nonprofit does pay tax (because no available exemption applies) and also assets that are not subject to property or similar state and local taxes regardless of what type of entity owns them (e.g., investment assets).
The Los Angeles Times has just published two articles highlighting the State of California Franchise Tax Board's decision to revoke the state tax exemption previously enjoyed by Blue Shield of California seven months ago, but to only announce the fact by including the huge health insurer's legal name (California Physicians Service) in a thousand plus page document on its website listing hundreds of organizations that had also lost their exemption. Here are links to the articles:
The articles report that the revocation came after a lengthy audit, and that Blue Shield is protesting the decision. On the line are tens of millions in state taxes annually. The articles also summarize past criticisms of Blue Shield with respect to executive compensation, multi-billion dollar reserves, increasing premiums, and an alleged failure to serve the state's poorest residents. Blue Shield for its part points to capping its profits at 2% of annual revenues, hundreds of millions give to its charitable foundation over the past decade, and hundreds of millions give back to customers and consumer groups in recent years. It also has reiterated its intention to remain a California mutual benefit nonprofit corporation.
Wednesday, March 18, 2015
WalletHub is calling on the public to vote for the Best Tax Blogs of 2015 from among the 50 finalists chosen by its editors, including the Nonprofit Tax Prof Blog. If you find this blog informative or otherwise helpful, we urge you to go to the voting website and vote for this blog (as well for other tax blogs you enjoy).
Mueller: An Argument for Continued Use of Standards to Evaluate the Campaign Activities of 501(c)(4) Organizations
Jennifer Mueller (American) has published "Defending Nuance in an Era of Tea Party Politics: An Argument for the Continued Use of Standards to Evaluate the Campaign Activities of 501(c)(4) Organizations," 22 George Mason Law Review 103 (2014). The following excerpt is from the introduction (citations omitted):
As this Article shows below, many of these premises are true: this is a complex area of law, and under the current system the agency’s final determination is, at the margins, unpredictable. When it comes to both tax and campaign finance, there will always be individuals seeking to circumvent the law. And certainly the public should be concerned for the robustness of the entire system. But all of these considerations counsel for retaining, with some modifications, the IRS’s standards-based approach to policing the campaign intervention line. They certainly do not support the contention that bright-line rules will markedly improve compliance or reduce the level of political participation by newly formed social welfare groups. Moreover, notwithstanding the political appeal of anti-IRS rhetoric, constraining the agency’s discretion in these cases will help no one but private actors looking for loopholes.
This Article reaches this conclusion through two independent lines of analysis. The first is largely theoretical. It examines the characteristics of rules—where the content of a legal command is provided ex ante—and standards—where the exact contours are determined as applied to a concrete set of facts ex post—as set out in legal scholarship over the last several decades. Following the lead of Professor Ellen Aprill, who recently conducted a similar inquiry with regard to 501(c)(3) charitable organizations but reached a different conclusion, this Article relies on the comprehensive framework set out by Professor Louis Kaplow in his article “Rules Versus Standards: An Economic Analysis.”
The second line of analysis is based on the observed effects of brightline rules in the parallel regime of campaign finance law. Campaign finance is an obvious choice for comparison for several reasons. First, many of the concerns and considerations set forth above, including complexity and circumvention, apply with equal force in the campaign finance arena. Second, it is a natural foil: the Federal Election Campaign Act (“FECA”) is increasingly administered through bright-line rules. Finally, many of those calling for reform of Section 501(c)(4) are motivated by concerns about the evasion of existing campaign finance laws, so there is a practical appeal to testing the hypothesis that rules in this area would be more effective.
501(c)(4) Update: Handful of Applications Still Pending, Do Lost Emails = A Crime?, and (Another) Court Dismisses Claims Against Lerner
IRC Section 501(c)(4) Applications: The IRS reported that as of last month it had closed 138 or 95% of the 145 organizations that had applied for recognition of exemption under section 501(c)(4) and were eligible for optional expedited processing because the only issues their applications raised were possible involvement in political campaign intervention or providing private benefit to a political party. The optional expedited process results in a favorable determination letter if the applicant represents that it devotes (1) 60 percent or more of both spending and time to activities that promote social welfare and (2) 40 percent or less of both spending and time to political campaign intervention. Of the 106 favorable determination letters issued by the IRS, 43 were the result of applicants choosing this process. Nevertheless a handful of such applications are still pending, including the application for Crossroads GPS and also several much smaller "mom-and-pop outfits," according to Politico.
Lost Emails: Politico also reports that in response to questioning from members of Congress a representative of the Treasury Inspector General for Tax Administration told a congressional Committee that TIGTA's ongoing search for IRS emails has revealed "potential criminal activity" in that the IRS failed to initially disclose some backup tapes and that other tapes were erased. The TIGTA representatives emphasized, however, that the investigation was still ongoing and it was too soon to determine if the actions were purposeful or the result of ill intent. A video of the full hearing is available here.
Federal Court Dismisses Claims Against Lerner: In a decision issued late last month, the U.S. District Court for the Northern District of Texas (Dallas Division) dismissed claims brought by Freedom Path, Inc. against Lois Lerner without prejudice for lack of personal jurisdiction. The claims arose out of the IRS's alleged mishandling of Freedom Path's application for recognition of exemption under IRC section 501(c)(4). The court found that the group's allegations did not demonstrate sufficient contacts with the state of Texas to grant the court personal jurisdiction over Lerner. The court also rejected several of the group's claims against the IRS and unnamed federal officials, including claims that challenged the constitutionality of two revenue rulings relating to political activity (2004-6 and 2007-41), finding the group had not pled sufficient facts to establish standing to challenge those rulings, and two other claims (for other deficiencies). The court did, however, give the group 28 days to file an amended complaint although it felt that the defects in some of the dismissed claims appeared to be incurable.
Tuesday, March 17, 2015
Third Circuit Affirms Multi-Million Damage Awards for Breach of Fiduciary Duties and Deepening Insolvency
Earlier this year, the U.S. Court of Appeals for the Third Circuit affirmed (for the most part) a multi-million jury damages award against the former officers and directors of the Lemington Home for the Aged. The Home entered bankruptcy in 2005, and the Bankruptcy Court later that same year granted the request of the Committee of Unsecured Creditors to file suit against the former Chief Executive Officer, the former Chief Financial Officer, and the former directors of the Home. After trial, a jury concluded that the two former officers had breached their duties of both care and loyalty, that the former directors had breached their duty of care, and that all of the defendants had deepened the insolvency of the Home by concealing the board's decision to close the Home and so defrauded the Home's creditors. The court therefore affirmed an award of $2,250,000 in compensatory damages against all but two of the defendants (jointly and severally) and punitive damages against the former CEO and CFO in the amounts of $1 million and #$750,000, respectively, rejecting only the award of $350,000 in punitive damages against five of the former directors.
The appellate court found that facts supporting the jury's verdict include repeated failures to comply with applicable federal and state regulations, the failure of the CEO to work full-time at the Home despite collecting her full salary and a state law requiring that she be full-time, and the failure of the CFO to provide a representative of a major creditor with basic financial information, to keep a general ledger for almost a year, and to bill Medicare for $500,000 owed. The court also found that the directors had failed to remove the CEO and CFO despite being aware of many of their failings, and the Home's failings, in part through independent reports documenting those failings.
This case therefore presents a rare but unfortunately actual case study in how officers and directors can fail to fulfill their fiduciary duties, and the liabilities they can incur as a result.
The City of Mercer Island, a suburb of Seattle, sought to prohibit solicitation activities between 7:00 p.m. and 10:00 a.m. The nonprofit United States Mission Corporation (doing business as United States Mission) objected because it desired to have the participants in its transition program for homeless people solicit contributions on weekday evenings until 8:00 p.m. The dispute eventually made its way to the U.S. District Court for the Western District of Washington, which has now granted a preliminary injunction to United States Mission barring enforcement of the 7:00 p.m. curfew on solicitation. The court concluded that the ordinance as written was content-based because it only reaches individuals or organizations that ask for donations or contributions, but not non-commercial organizations that do not ask for funds, and so is subject to strict scrutiny review under the First Amendment. Given that there were other, less restrictive ways to address the City's concerns regarding possible crime and protecting residential privacy, the court found a substantial likelihood that United States Mission would succeed on the merits and also that the other requirements for granting a preliminary injunction had been met.
The case demonstrates the difficult line that not only states, which presumably have relatively deep legal resources on which to draw, but also localities that may lack ready access to First Amendment legal counsel, have to walk to ensure that their attempts to regulate charitable solicitation efforts do not run afoul of the Constitution. Ironically, the ordinance at issue in the case was a newly-enacted one, adopted to replace an earlier ordinance that had been enjoined since 2001, presumably also on First Amendment grounds. Maybe the third try will be the charm.
Additional coverage: Mercer Island Reporter.
Monday, March 16, 2015
Tax Analysts reports (subscription required) that the IRS has deciding to stop automatically providing the media with copies of favorable determination letters issued in response to applications for recognition of exemption because of the changes in the structure and geographic location of the IRS Exempt Organizations Division and related IRS Office of Chief Counsel functions. Practitioners quoted in the article expressed disappointment with this decision. While the media and other members of the public can still request such letters by submitting Form 4506-A for each organization for which the letter is sought, practitioners noted the burden doing so imposes and the usually lengthy delay in the IRS response to such requests.
Additional coverage: Forbes (contributor opinion).
UPDATE: To clarify, the letters were previously provided by the IRS National Office and so were limited to the relatively few letters issued by that office, as opposed to the Cincinnati office that issues the vast majority of determination letters. That said, the National Office tended to handle the most difficult - and interesting - cases. According to later comments from the IRS, the change is apparently driven by the fact that the National Office will no longer be issuing determination letters.
The issuance of a new, streamlined Form 1023-EZ has caused a major shift in the exemption application world of the IRS. The IRS reported last week that it has received 20,103 such forms, or approximately half of all applications for recognition of exemption under Internal Revenue Code section 501(c)(3) since the IRS introduced the Form 1023-EZ. The IRS also reported that using streamlined procedures based on the Form 1023-EZ - that is, resolving open issues by asking applicants to attest to certain facts as opposed to requesting documents or narrative statements - it has reduced the backlog of all applications that had been pending for more than 270 days by 91 percent (from 54,564 in April 2014 to 4,791 in September 2014). The GAO previously also reported that the IRS closed 117,000 cases in fiscal year 2014, more than double the closure rate for the previous fiscal year. Not everyone is happy with the new form - see previous posts reporting concerns expressed by the National Association of State Charity Officials and the National Taxpayer Advocate, plus having a shortened form was not part of the recommendations promulgated by the IRS Advisory Committee on Tax Exempt and Government Entities when it looked at the application process.
UPDATE: New memo dated March 12, 2015 regarding the streamlined application process that replaces the previously linked to February 27, 2015 memo.
Last week the IRS issued Revenue Procedure 2015-21, which provides "guidance regarding correction and disclosure procedures for hospital organizations to follow so that certain failures to meet the requirements of § 501(r) of the Internal Revenue Code will be excused for purposes of § 501(r)(1) and 501(r)(2)(B)." Failures that are not willful or egregious may generally be resolved without financial penalty if they are both (1) corrected in a timely fashion, including restoring affecting individuals to the position they would have been in absent the failure and ensuring appropriate safeguards to prevent future failures, and (2) disclosed on the next Form 990 filed by the organization. If the IRS has contacted the hospital organization concerning an examination, the organization must have already corrected or be in the process of correcting the failure and must have disclosed the failure on its annual information return for the year in which the failure was discovered (if the due date, including extensions, for that return has passed).
The IRS has issued both final regulations and Revenue Procedure 2015-17 providing the final procedures for issuing determination letters and rulings relating to exemption under Internal Revenue Code section 501(c)(29). Paragraph 29 is the latest addition to section 501(c); it provides a federal income tax exemption for qualified nonprofit health insurance issuers (QNHIIs), also known as CO-OP health insurance insurers, that under the Affordable Care Act receive a loan or grant under the federal Consumer Operated and Oriented Plan Program. The CO-OP Program is designed to foster the creation of these new nonprofits to offer competitive health plans. These health care co-ops have had mixed success, as NPR reported earlier this year that the second largest one in the country recently collapsed.
Additional coverage: Squire Patton Boggs Alert.
Friday, March 13, 2015
Balsam Mountain v. Commissioner—Conservation Easement Authorizing Limited Swaps Not Deductible Under § 170(h)
In Balsam Mountain v. Commissioner, T.C. Memo. 2015-43, that Tax Court held that a conservation easement that authorized the parties, for a period of up to 5 years, to remove up to 5% of the land from the easement in exchange for protecting a similar amount of contiguous land was not eligible for a deduction under IRC § 170(h). Citing to the 4th Circuit’s recent decision in Belk v. Commissioner, 774 F.3d 221 (4th Cir. 2014), the Tax Court explained that the easement did not qualify as a “restriction (granted in perpetuity) on the real property” as required by 170(h)(2)(C).
In 2003, Balsam Mountain Investments, LLC (BMI), granted a conservation easement on 22-acres in North Carolina to the North American Land Trust (NALT). BMI reserved the right in the easement to, for five years following the donation, make alterations to the boundaries of the area protected by the easement, subject to the following conditions:
- the total amount of land protected by the easement could not be reduced,
- land added to the easement had to be contiguous to the originally protected land,
- land added to the easement had to, in NALT’s reasonable judgment, make an equal or greater contribution to the easement’s conservation purpose,
- the “location and reconfiguration of a boundary” could not, in NALT’s judgment, result in any material adverse effect on the easement’s conservation purposes, and
- no more than 5% of the originally protected land could be removed from the easement as a result of such alterations.
In Belk, the 4th Circuit affirmed the Tax Court’s holding that a conservation easement was not “a restriction (granted in perpetuity) on the use which may be made of the real property” as required by § 170(h)(2)(C) because the easement permitted the grantor and grantee to swap land in and out of the easement, subject to the approval of the grantee and certain other conditions. The 4th Circuit explained that, to be eligible for a deduction, an easement must protect, in perpetuity, a “defined and static” (or in the Tax Court’s words, “identifiable, specific”) parcel of real property. Based on Belk, the Tax Court held that the Balsam easement, which authorized the grantor to change the property subject to the easement, was not a “a restriction (granted in perpetuity) on the use which may be made of the real property” and, thus, was not eligible for a deduction.
BMI argued that Belk was distinguishable because the Belk easement allowed for the substitution of all of the land originally protected by the easement, while the Balsam easement allowed for the substitution of only 5% of the originally protected land. The Tax Court was not persuaded. While the court agreed that the Belk and Balsam easements were different, it said “the difference does not matter.” For five years following the donation, BMI, with the approval of NALT, could change the boundaries of the area protected by the easement. Accordingly, the easement was not an interest in an identifiable, specific piece of real property and, thus, was not deductible. Finding no genuine dispute as to any material fact, the court granted the IRS’s motion for summary judgment on the issue.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Thursday, March 12, 2015
The Chronicle of Philanthropy is reporting that ten individuals using technology to improve the world will be honored tonight at the Dewey Winburne Community Service Awards at the South by Southwest (SXSW) Interactive Conference. The awards honor the late Dewey Wineburne, a co-founder of SXSW Interactive, who had deep interests in education and technology.
According to the Chronicle:
This year’s honorees, selected by a panel of previous winners who live in Austin, represent five countries and a range of interests, including literacy, economic opportunity, and journalism. Each will receive $1,000 for the charity of their choice.
Among the honorees are:
- Rebecca McDonald of Australia who, after seeing footage of the 2010 earthquake in Haiti, quit her job in Australia and moved with her husband to the Caribbean country where she founded Library for All, an online digital library accessible using tablets distributed to schools across Haiti. Books are carefully selected to be culturally relevant and language-appropriate, with most written in French or Creole. The organization pays local publishers for texts and asks larger companies, which do not usually sell books to Haiti, to donate books.
- Jukay Hsu, a native of Queens, New York, who founded Coalition for Queens, a nonprofit designed, according to Mr. Hsu, to foster "a more inclusive tech ecosystem" and "pioneer a pathway from poverty to the middle class." The organization's keystone program, Access Code, trains people — many of them immigrants — to create mobile applications and prepare for entry-level developer jobs. So far, the average income of participants going into the program has been $26,000, while their average income after completion is $73,000.
- Libby Powell, of London, England, who has used her training as a journalist to found Radar, a communications-rights organization that trains citizen reporters and promotes the stories they tell through social media and other ways online. Based in the United Kingdom, the staff offers editorial guidance to local correspondents who report from the field. The group has generated coverage about elections and Ebola in Sierra Leone and slavery in India and is working on new projects that give voice to people living with dementia and those who are homeless. Created with money raised through the crowdfunding site Indiegogo, Radar works to raise awareness among the public, policy makers, and service providers about issues affecting marginalized groups. The organization has helped place articles in The Guardian and the BBC.
- Tembinkosi Qondela, of Cape Town, South Africa, who founded Whizz ICT Centre, an organization that seeks to facilitate the use of information communication technology (ICT) tools for development efforts of the community in Khayelitsha, one of the largest and poorest areas of Cape Town, South Africa. Mr. Qondela observed that marginalization of poor people in the use of ICT and the lack of access to information perpetuates the inequalities and poverty that face most young South Africans. Whizz ICT runs a center which gives young people access to computer training, other ICT related services and training in a range of income generating skills. To date Whizz ICT has provided training to over 1000 youth.
The names and brief profiles of the other six honorees are available on SXSW's website. We congratulate them all.