Friday, October 31, 2014
The IRS has designated the outbreak of the Ebola virus as a qualified disaster under section 139 of the Internal Revenue Code. In the past, most qualified disaster designations have been for weather related events, or terrorism. Query whether this is the first time a qualified disaster has been declared for an infectious disease.
The principal consequence of the designation is to provide that victims who receive certain types of payments to relieve burdens suffered because of Ebola do not have income as a result of the payment (to the extent not compensated for by insurance).
In addition, a qualified disaster designation has implications for spending by charitable organizations, particularly private foundations. For example, the IRS states that as a general matter corporate foundations “may choose” to provide assistance to employees of the corporate sponsor who are harmed by Ebola. This statement oversimplifies the issues involved, though IRS does note that “private foundations should exercise due diligence when providing disaster relief as set forth in Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations.”
The concerns are that employers will funnel aid to select employees through the corporate foundation. This could be an act of self-dealing, the aid might not be based strictly on an objective determination of need, and further, the aid program might not be designed to serve a broad or charitable class of beneficiaries and so may really be for private not public purposes. Accordingly, the IRS details the due diligence required to prevent against such possible abuses (see pages 20-22 of the Publication). Foundations and other charities (including donor-advised funds) getting involved in disaster relief would do well to look at this guidance.
Interestingly, the sensible if elaborate due diligence regime outlined in Publication 3833 is not based on the text of the Internal Revenue Code (section 139), which makes no mention of charities or private foundations. Rather, the law here comes directly from 2001 legislative history under the heading “Rules applicable to charitable organizations making disaster relief payments.” It is a noteworthy example of law arising from the penumbra of legislation. In effect, the IRS was told in the aftermath of 9/11 to relax its attitude to foundation provision of disaster relief, but to provide for essential prophylactics. This now survives as part of section 139 qualified disaster relief.
The IRS has also provided guidance (Notice 2014-68) on leave-based donation programs in connection with Ebola. Under such a program, an employee may forego sick or annual leave in exchange for the employer making payments to a charitable organization for the relief of Ebola victims. The guidance explains that the employee does not have income as a result, nor may the employee take a charitable deduction. To qualify, the employer must make the payment to the charity before January 1, 2016.
Wednesday, October 29, 2014
Last week, the National Center on Philanthropy and the Law at New York University held a conference titled “Regulation or Repression: Government Policing of Cross-Border Charity.” The agenda for the conference is available here and papers from the conference will be posted in due course. Papers from past conferences are available here. The NCPL website and annual conference papers are an excellent resource for scholars, practitioners, and policymakers.
In addition, the Urban Institute in Washington DC hosted a conference titled “Increasing Philanthropy through Policy and Practice.” The website describes the conference as follows:
"In the midst of recent attention to ways in which the charitable deduction might be pared, worries loom about how giving might decline. Join the Urban Institute’s Tax Policy and Charities project in examining the flip side of the issue, as we explore ways that existing incentives, along with new platforms and better practices, can be leveraged to encourage philanthropy. . . . Topics will include the proposal to extend the giving deadline for the charitable deduction to April 15 (as with individual retirement accounts), whether expanded use of donor-advised funds has encouraged greater giving, how new platforms for giving provide new opportunities, and nonprofit organizations’ efforts to improve their fundraising effectiveness."
The webcast is accessible here.
Sunday, October 26, 2014
The U.S. Trust, in conjunction with the University of Indiana Lilly Family School of Philanthropy published an interesting study this month. The study found a marked increase in charitable giving among high net worth donors for 2014. The study also concludes that the trend is projected to increase in the coming years. The biennial study found that 98.4% of high net worth households donated to charity—the highest it has been since the study began in 1996. The study also found that the amount each household pledged has increased by 28% from last year.
The study also tracks the reasons why donors give. The top cited reason was the belief that the donor’s gift can make a difference while only one-third cited favorable tax treatment as a determinative factor in giving. The study also tracked why donors stop giving. Some of the reasons cited were too frequent solicitations asking for inappropriate amounts, ineffectiveness of the organization, and change in organizational leadership. Read more on the article HERE.
How may this study help charities and nonprofits going forward?
The IRS secured a victory over the Tea Party in a ruling by the United States District Court for the District of Colombia in Linchpins of Liberty v. United States and True the Vote, Inc. v. IRS. The District Court found that the cases were now moot after the IRS ultimately approved the parties’ application for tax-exempt status.
The case began after a highly controversial scandal after the IRS delayed a number of applications for tax-exempt status as a 50(c)(3) or 501(c)(4). The IRS delayed applications based on, among other things, the applicants’ name. For example, the IRS flagged applications containing words such as ‘patriot,’ ‘freedom,’ and ‘liberty’ and gave them further review. The IRS’ rationale was that an influx of applications for 501(c)(3) and 501(c)(4) status, along with the dubious nature of many of the applicants’ dealings, caused significant backlogs. The result was a significant delay in processing applications.
Instead of litigating the case, the IRS ultimately granted tax-exempt status to most of the parties involved rendering the lawsuit moot. While this may be the end for now, this raises serious questions for the IRS going forward. What, if anything, may the IRS do to review the merits of 501(c)(3) and 501(c)(4) applications—especially those that appear suspect?
Thursday, October 23, 2014
This November, West Virginia voters will be deciding whether to amend to the state’s constitution. The proposed amendment is designed to benefit nonprofit organizations that are engaged in “adventure, educational or recreational activities for young people.” It’s no secret, however, that the sole purpose of the proposed amendment is to benefit the Boy Scouts of America.
Every four years, the Boy Scouts of America hosts its Jamboree retreat at its Summit Bechtel Reserve—a large outdoor activity park situated beside the New River Gorge in West Virginia. During the interim years, the Boy Scouts would like to rent the park to for-profit businesses. The revenue generated from the rental fees would go toward maintaining and improving the park. However, if the Boy Scouts go forward with renting out the park without the amendment, it would almost certainly lose its state tax-exempt status. The proposed amendment would ultimately allow the Boy Scouts to operate as a tax-exempt nonprofit organization while renting the park to businesses for a profit.
Is this sound tax policy? What about other nonprofits who would like to operate in a similar manner; what makes the Boy Scouts of America so special? Would allowing the Boy Scouts of America to operate in such a way be a boon on the state’s economy, or is the state forgoing a great deal of revenue that it would otherwise be entitled to? Read more HERE.
Houston Churches At Odds With City Government Over Equal Rights Ordinance: What Might The IRS Have To Say About It?
The City of Houston, Texas has found itself in the midst of a growing controversy. The controversy stems from the passage of a city ordinance aimed at protecting the rights of LGBT residents. In response to the ordinance, several Houston pastors spoke out against the ordnance and the city’s mayor—a member of the LGBT community herself. The pastors of these churches circulated petitions among their respective congregations in an effort to get a referendum of the ordinance on the ballot. The city attorney, however, held that the petition was invalid, and the pastors filed suit.
In connection with the lawsuit, the city attorney issued subpoenas to obtain the text of sermons from the plaintiff church pastors. The purported purpose of the subpoenas was to determine how the church congregations were instructed regarding the petition. You can read more on the story HERE
How might the IRS view the churches’ activism? As a 501(c)(3), churches are limited in the type and amount of lobbying they may engage in. What might the subpoenas reveal about churches dealings regarding the equal rights ordinance? Could the content of the pastors’ sermons be construed as endorsing or opposing a political candidate—an activity that is absolutely prohibited under 501(c)(3)?
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.
Please click below to read more.
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.