Friday, September 15, 2017
As the use of donor advised funds grows, so does the legal attention to donor advised funds. All of this attention started in (what seems like forever ago…) 2006, with the passage of the Pension Protection Act. Since that time, we have seen the PPA-mandated Treasury study released in 2011, as well as a Congressional Research Service study on DAFs in 2012. In addition, the National Philanthropic Trust releases an annual DAF report, the 2016 version of which can be found here. Information and opinions abound, and yet, we still wait patiently for regulations under the donor advised fund excise taxes passed in 2006. I’m quite certain those regulations will be arriving Soon.™
In the latest installment in the DAF oversight drama, Congress may now be considering mandatory payouts from DAFs as part of a larger tax reform effort. Earlier this summer, Professors Ray Madoff of Boston College and Roger Colinvaux of Catholic University wrote to the Senate Finance committee to suggest a number of DAF reforms, including a mandatory payout proposal for DAFS (the Madoff/Colinvaux letter can be found here).
This week, the DAFs responded. In their own letter to Senate Finance, a number of DAF sponsors set out the arguments in opposition to a mandatory DAF payout. WealthMangement.com has a good summary of the DAF executive letter here, although I admit I can’t yet find a copy of the letter itself (if anyone has it ... please share if you can!)
Personally, I think that the term “DAF” covers such a wide variety of accounts that a mandatory proposal might be harmful for some and yet not enough regulation for others. But that’s another blog post, or maybe an article ….
Thursday, September 14, 2017
- Nonprofit compensation has gone up over the last year, returning to pre-recession levels; and
- A gender gap persists in nonprofit compensation (not that that is particularly shocking to anyone in the sector, but it is nice to have some evidence to that effect)
Tuesday, September 12, 2017
The abstract from SSRN:
The Trump Administration plans for aggressive enforcement of immigration laws have caused many houses of worship and other religious organizations to consider whether their beliefs call upon them to grant refuge or so-called sanctuary to undocumented immigrants. This brief essay considers whether these organizations would risk their tax-exempt status were they to do so. It reviews relevant judicial and IRS guidance. It concludes that IRS action to revoke exemption is unlikely, but that any house of worship or other religious organization deciding to act in this way should know that such a decision is not without some risk
Sunday, September 10, 2017
By: Emily Chen
In this article, Emily Chen, highlights main points from her interview with Tony Martignetti. She starts off talking about the Internal Revenue Code Section 501(c)(3) Prohibition on Electioneering. She explains that nonprofit organizations are barred from making contributions to candidates running for election. They first talk about the consequences of nonprofits breaking these rules. “The penalty for violating this prohibition is revocation of tax-exempt status. The IRS does however have the option to impose intermediate sanctions; the intermediate sanctions are excise on taxes on the political expenditure with an initial 10% on the organization and a 2.5% on an organizational manager who knowingly approved the political expenditure.” To read more about the interview and how nonprofits are involved in politics click here: http://www.nonprofitlawblog.com/nonprofit-radio-your-nonprofit-in-politics/
Saturday, September 9, 2017
National Council of Nonprofits
This article explores how nonprofits can get involved in politics if they remain nonpartisan, and do not endorse or oppose a candidate running for office. It starts off by explaining that nonprofits cannot participate in “political campaign activities” without losing their tax-exempt status. However, can participate in politics through voter registration and voter engagement activities, and lobbying, or legislative activities, while maintaining its tax-exempt status. The article then explains why lobbying is essential to nonprofit survival: lobbying prevents loss of nonprofit resources, sheds light on real issues in communities, and it expands access to important services. To learn more click here: https://www.councilofnonprofits.org/tools-resources/political-campaign-activities-risks-tax-exempt-status
Friday, September 8, 2017
Douglas M. Mancino
29 Tax’n Exempts 3
In this article, Douglas Mancino, explains the different types of conversions nonprofit companies go through to become for-profit organizations. He starts off the article by listing the reasons that nonprofits wish to convert to for-profit companies: “the need to access capital, have the ability to issue stock to public and private investors, enhance the corporation’s ability to diversify into otherwise taxable lines of business, provide a means whereby the corporation can offer stock options, enable the corporation to adopt an employee stock ownership plan, and to avoid the limiting effects of tax rules.” He then starts in on his explanation of the different type of conversions. He explains that there are four different types of conversions: (1) Conversion in place, (2) asset sales, (3) mergers, and (4) drop-down conversion. Unfortunately, the full article can only be accessed with a Westlaw account. If you want to learn more about the different types of conversions click here: http://lawschool.westlaw.com/shared/westlawRedirect.aspx?task=find&cite=29+tax%27n+of+exempts+3&appflag=67.12
Thursday, September 7, 2017
Employee, Volunteer, or Neither? Proposing a Tax-Based Exception to FLSA Wage Requirements for Nonprofit Interns After Glatt v. Fox Searchlight
By: Jane Pryjmak
92 Wash. L. Rev 1071
In Glatt v. Fox Searchlight, the second circuit ruled that for purposes of for-profit organizations, interns were employees if the employer received the “primary benefit” from the relationship. This means that for-profit organizations are required to pay interns a fair wage. The Fox Searchlight case did not address the issue of unpaid nonprofit internships. There is debate on whether nonprofits are or should be exempt from this definition. Some scholars believe that the second circuit’s logic extends to nonprofits resulting in them not being exempt for public policy reasons. In her article, Jane Pryjmak, argues that certain nonprofits should be exempt in regards to the internships depending on the nonprofit’s budget the role the play in society. She proposes three exceptions: “one for interns supporting exempt purpose activities; another for interns working at organizations classified as public charities; and the last for interns at small nonprofits, as determined by their annual tax filing.” To read more about her interesting proposal click here: https://digital.law.washington.edu/dspace-law/bitstream/handle/1773.1/1694/92WLR1071.pdf?sequence=1&isAllowed=y
Wednesday, September 6, 2017
What Qualifies a Nonprofit for Tax Exemption?
In an article on thebalance.com, Joanne Fritz explains what qualifications a nonprofit must have in order to reach 501c(3) status. She starts off her article by explaining that tax-exempt means that nonprofits do not pay most federal income taxes and some state taxes, as well as their donors getting a tax deduction when they donate to the nonprofit organizations. She then goes onto explain that there are 29 types of nonprofit organizations, each being exempt from different kinds of taxes. Then she explains the different tests an organization must pass to become a nonprofit organization. These tests include: (1) the organizational test, (2) the political test, or (3) the asset test. To learn more about what gives a nonprofit their tax-exempt status click here: https://www.thebalance.com/what-qualifies-a-nonprofit-for-tax-exemption-2501886
Tuesday, September 5, 2017
Michael Sanders has published Practical Issues Facing Nonprofits Structuring New Market Tax Credit Deal, 29 Tax'n Exempts (2017).
In this article, Michael Sanders explores a new solution to the lack of funding problem plaguing many nonprofit organizations today. These nonprofits have created a new business model by partnering with for-profit companies in order to raise their much-needed funds. Consequently, the IRS has updated its guidelines to govern these new partnerships. The nonprofit’s tax exemption status will not be in jeopardy as long as “they have sufficient control to ensure that the venture will further the nonprofit’s exempt purposes and there will be no impermissible private benefit or inurement.” One of the best examples of these joint ventures is the New Market Tax Credit program, where “for-profit investors subsidize development in distressed communities with high poverty or unemployment to generate economic growth and opportunity.” In return for their funding the for-profit organizations will receive a 39% tax credit. Read more about this exciting innovation at: https://www.blankrome.com/index.cfm?contentID=37&itemID=4320
Public Interests, Private Institutions? Public Policy Challenges to Tax-Free Universities
By: Wally Hilke and Amit Jain
127 Yale L.J. Forum 94
June 2, 2017
It is no secret that students believe college is too expensive, and many blame the high costs of university on their tax-exempt status. In 2008, Senator Charles Grassley, as well as other politicians from both sides, criticized universities for “hoarding assets at taxpayer expense.” Universities have responded to this criticism by arguing that constitutional provisions protect their assets and property from taxation. This article explores the tax-exempt status of universities and specifically considers Yale University’s exemptions, since legislators can tax certain property owned by Yale. The article ends with examples of cities and states who can benefit from a similar strategy. For more information on this topic see: http://www.yalelawjournal.org/pdf/HilkeandJain_fshkhikk.pdf
Friday, August 18, 2017
J. Michael Martin (Evangelical Council for Financial Accountability) has published Should the Government Be in the Business of Taxing Churches?, 29 Regent U. L. Rev. 309 (2017). Here are the first two paragraphs of the introduction (footnotes omitted):
Throughout our entire history as a nation, the United States has never imposed a federal income tax on churches. In spite of this longstanding policy for over two centuries and the principle it represents of the separate spheres of sovereignty of church and state in America, some critics have recently become more vocal in questioning the legitimacy of church tax-exempt status, based primarily on financial and constitutional concerns.
As a practical matter, the courts and Congress are the two institutions where the unbroken practice of church tax exemption could be placed at risk. As the dissenting Supreme Court justices observed in Obergefell v. Hodges, the newly interpreted constitutional right to samesex marriage in the courts could evolve to threaten tax exemptions and other freedoms heretofore enjoyed by religious organizations. Also, with one political party now controlling Congress and the White House after the 2016 elections, new legislation like comprehensive tax reform has its greatest chance of passage in decades. And as with any scenario involving tax reform, there is always the chance that churches and other types of corporations and entities could find their tax status changing under a new paradigm. In light of these developments, more people may be asking: “Why should churches continue to be tax-exempt?” As the title of this Article suggests, perhaps a more appropriate way to frame the inquiry might be: “Should the government be in the business of taxing churches?”
Herwig Schlunk (Vanderbilt) has published Why the Charitable Deduction for Gifts to Educational Endowments Should Be Repealed, 71 U. Miami L. Rev. 702 (2017). Here is the introduction (footnotes omitted):
The country’s collective patience for coddling private institutions of higher education is waning. At the local level, there is an effort afoot to challenge the tax-exempt status of Princeton University. At the state level, legislators in Massachusetts and Connecticut have suggested imposing taxes that would target Harvard University and Yale University. At the federal level, a number of proposals have been floated that would impact the tax treatment of universities and their endowments, including imposing an excise tax on endowment income.
In this paper, I will add my voice to the chorus of those who would change the rules of federal taxation as applied to institutions of higher education. But rather than focus on the taxation of such institutions directly, I will instead focus on the propriety of granting such institutions the ability to receive gifts that are tax-deductible by the donor. I argue that in the specific and limited context of gifts made to university endowments, an adequate defense for providing the tax preference of a charitable contribution deduction is lacking.
John Tyler (Ewing Marion Kauffman Foundation) has posted Essential Policy and Practice Considerations for Facilitating Social Enterprise: Commitment, Connections, Harm, and Accountability, forthcoming in J. Yockey & B. Means, eds., The Cambridge Handbook of Social Enterprise Law, on SSRN. Here is the abstract:
There are numerous opportunities for policy interventions to clarify, enable, or perhaps even inhibit social entrepreneurship. As one example, consider the emergence and expansive growth of available social business forms, particularly of the benefit corporation, which substantially modified traditional conceptions of fiduciary duties perhaps to the point of elimination. Other policy efforts or possibilities include financing mechanisms involving public money, tax favored treatment, exemptions from securities requirements, and affording bid procurement preferences on government contracts.
As an essential precursor to material policy concessions to social entrepreneurship, especially to the extent it or its enterprises compete with or seek to distinguish themselves from other market participants, several determinations must be made. These determinations have two key roles: (a) shaping whether to provide the relevant incentives or make the applicable concessions and, if so, (b) how far to go to ensure a reasonably commensurate relationship between benefits and burdens for enterprises, movements, and society.
Four essential sets of questions should shape, or in some cases even dictate, how those roles are defined. Beyond policy, these sets of questions have practical implications for those who invest in, operate, and interact with social ventures. Lack of mutual clarity about any or all of these risks longer term problems for the enterprises and those involved with them but more importantly for the social benefits being sought.
• What should the underlying commitment be to pursuing social results: devotion or does mere tolerance suffice?
• What should the relationship be between the effort dedicated to social returns and the actually realized result?
• What attention should be given to or require about social harms that might be associated with, connected to, or caused by actions taken in the pursuit of social good?
• What form(s) should accountability take and what consequences, if any, should be expected for failure – not just non-compliance but less than optimal outcomes?
Clarity on these matters can also help regulators and enforcement personnel as they evaluate whether/how to proceed with guidance or actions. Resolving ambiguities that exist could facilitate more and faster adoption of social business forms and other efforts to achieve worthy objectives of the social entrepreneurship movement.
In some ways, this analysis also involves bringing clarity and discipline to whether “impact” and “intent to have impact” are the same or even similar.
This year’s NASCO Conference will be held in Washington D.C. at the Westin Washington, D.C. City Center and will run from October 2 – 4. Monday’s session is open to the public and provides an opportunity for representatives of the nonprofit sector and members of the public to meet and participate in discussions with state regulators. Tuesday and Wednesday are for regulators only, providing significant opportunity for state charity regulators to discuss the latest topics and learn from each other.
The theme for this year’s conference is “The Impact of Technology on Charities Regulation.” The agenda for both the public day and the regulator only days will offer a mix of presentations by state regulators and speakers from the non-profit sector addressing this theme and other recent developments affecting state charitable regulation.
The session on Monday will include discussions on crowdfunding and improving communication between charities regulators and the charitable sector. We will conclude Tuesday’s regulator-only session with a networking social hour and dinner, followed by the NASCO business meeting. Finally, the regulator-only portion of the conference will wrap up on Wednesday morning with discussions on developing enforcement actions and multistate priorities for the coming year.
Politics: Facts & Circumstances Test Survives Constitutional Challenge; Donor Disclosure Decision & Debate
In a little noticed decision, but perhaps only because of the conclusion it reached, a federal district court in one of the cases arising out of the IRS application controversy rejected a constitutional challenge to the facts and circumstances test for political campaign activity embodied in Revenue Ruling 2004-6. In Freedom Path v. IRS (N.D.Tex. July 7, 2017), the court considered a motion for partial summary judgment asserting that the test was unconstitutionally vague in violation of both the Due Process Clause of the Fifth Amendment and the First Amendment, as well as being overbroad and promoting viewpoint discrimination in further violation of the First Amendment. The court found that the identification of eleven specific and objective, although non-exclusive, factors in the Revenue Ruling was sufficient to defeat the facial challenge to the ruling based on vagueness. With respect to the First Amendment claims, the court distinguished decisions in the campaign finance area on the grounds that the tax rules relate to what types of speech will be subsidized through the federal tax system, as opposed to banning, restraining, or punishing speech, and concluded that the ruling therefore surveyed First Amendment challenge.
The other currently hot constitutional and policy topic relating to politics and nonprofits is the extent to which the government can or should compel the disclosure of information relating to nonprofits involved in political activities or politically sensitive areas. There have two recent interesting developments in this area. First, in Matter of Evergreen Assn. v. Schneiderman (June 21, 2017), a state appellate court in New York limited the scope of a subpoena to a nonprofit organization on the grounds that it "infringed on the First Amendment right of the [nonprofit and its staff] to freedom of association, and was not sufficiently tailored to serve the compelling investigative purpose for which it was issued." The nonprofit at issue operates crisis pregnancy centers and the investigation related to the alleged unauthorized practice of medicine at those centers. The subpoena sought, among other information, a broad range of information relating to individuals and organizations associated with the nonprofit, including all of its staff; the court ordered that the subpoena be limited to information pertaining to the alleged unauthorized practice of medicine, with the trial court to conduct an in camera review of responsive documents to determine which ones satisfied this requirement.
Finally, there was an interesting addition to the ongoing debate about "dark money" and politically active nonprofits. Writing in the American Prospect, Nan Aron and Abby Levine of the Alliance for Justice argue against blanket disclosure of donors to politically active nonprofits such as social welfare organizations, instead supporting an approach that distinguishes between groups that "are funded by a small group of big donors and those that receive broad support from many people." Their arguments echo some of the more thoughtful supporters of campaign finance disclosure rules (see, for example, Richard Briffault (Columbia)), who recognize that the purported goals of such disclosure are not furthered by publicly identifying the many relatively small donors to candidates and political parties, so so such disclosure should be "rightsized" to target the information that is actually helpful to voters.
Thursday, August 17, 2017
Both Terri Helge and Joseph Mead previously reported in this space on the tax benefits that many organizations often identified as "hate groups" enjoy because of the broad and vague requirements for qualifying as an educational organization under Internal Revenue Code sections 501(c)(3) and 170(c)(2). Not surprisingly, the events in Charlottesville have led to a renewed discussion of this topic. Recent coverage includes a Business Insider story on this topic and a fascinating blog post by Sam Brunson (Loyola Chicago) on the conflict almost a hundred years ago between the IRS and the KKK (and from which the photo shown here is borrowed).
The N.Y. Times reports that the Cambodian Prime Minister has ordered U.S.-based Agape International Missions to end its operations in that country after it was featured in a CNN report on the sex trade there. As detailed in the story, the Prime Minister accused the NGO of possibly misleading CNN regarding the extent of the sex trade in Cambodia and thereby violating the terms of its operating agreement with the government. At this time it is not clear how Agape will respond or whether the Prime Minister's statements have in fact led to the expulsion of the group from that country.
Regardless of the details of this particular situation, there is a growing trend of foreign NGOs, domestic NGOs with foreign support, and sometimes domestic NGOs more generally being targeted for burdensome regulation or worse by the governments of many countries, as I have detailed in this space previously. These concerns have led Helmut K. Anheier (President of the Hertie School of Governance in Germany) to call on the G20 to address this issue in a recent G20 Policy Paper. Here is the abstract:
The roles of non-governmental or civil society organizations have become more complex, especially in the context of changing relationships with nation states and the international community. In many instances, state–civil society relations have worsened, leading experts to speak of a “shrinking space” for civil society nationally as well as internationally. The author proposes to initiate a process for the establishment of an independent high-level commission of eminent persons (i) to examine the changing policy environment for civil society organizations in many countries as well as internationally, (ii) to review the reasons behind the shrinking space civil society encounters in some parts of the world and its steady development in others, and (iii) to make concrete proposals for how the state and the international system on the one hand and civil society on the other hand can relate in productive ways in national and multilateral contexts.
Wednesday, August 16, 2017
Over the summer, the United States Tax Court in RERI Holdings I, LLC v. Commissioner upheld the disallowance of a $33 million charitable contribution deduction because of the failure of RERI Holdings I, LLC to state on its required Form 8283 appraisal summary the "Donor's cost or other adjusted basis" for the property. The court further held that the failure could not be excused by substantial compliance because the omission "prevented the appraisal summary from achieving its intended purpose" of alerting the IRS of potential overvaluations of contributed property (and thereby deterring taxpayers from claiming excessive deductions). In this instance the omitted basis would have been approximately $3 million, or roughly one-tenth the value claimed for the contributed property.
While failures to substantiate charitable contributions adequately occur frequently in tax cases, they usually do not affect such large claimed deductions because presumably as the numbers get larger the care and expertise of the professionals involved becomes greater. There may have been more going on here, however. At least one commentator, Peter J. Reilly over at Forbes, concludes that the "brazeness of the charitable plan . . . revealed in the Tax Court RERI Holdings I decision is stunning" in an article titled Billionaire Stephen Ross And the Ten for One Charitable Deduction. Assuming the IRS took a similar view, it very well could have been looking for any possible flaw in the deduction that could be used to disallow it, and the substantiation omission provided a simple way to do so (as opposed to getting into a messy valuation dispute, although the court's opinion goes there anyway in order to determine if certain penalties applied).
No word yet on whether RERI Holdings I will appeal.
How large is the potential for hard-to-detect and even harder-to-counter abuse when it comes to the federal income tax deduction for "qualified conservation contributions" under Internal Revenue Code section 170(h)? As Peter J. Reilly highlights at Forbes, the potential appears to be pretty large based on early responses to Notice 2017-10's addition of syndicated easements to the list of listed transactions that must be reported to the IRS. In a July 13, 2017 letter to Senator Ron Wyden, ranking member of the Senate Finance Committee, IRS Commissioner Koskinen reported that the 40 fully completed and processed reporting forms, out of 104 processed and 200 received to date, showed an aggregate charitable contribution deduction of over $217 million with preliminary calculations finding that the average deduction was nine times the amount of the investment in the transaction. Other coverage: Tax Analysts.
Such syndicated easements are only part of the conservation easement universe, but the continuing stream of federal court decisions rejecting in whole or in part deductions claimed for such easements highlight the broader issues with this deduction. For example, the U.S. Court of Appeals for the Eighth Circuit recently affirmed disallowance of a $16.4 million deduction for a failure to protect the conservation purpose in perpetuity (RP Golf v. Commissioner). Not all IRS challenges are necessarily successful, however; for example, the U.S. Court of Appeals for the Fifth Circuit recently reversed disallowance of $15.9 million in deductions, although the court remanded the case for consideration of additional reasons for disallowance asserted by the IRS (BC Ranch II, L.P. v. Commissioner).
Recent reports also highlight the broader concerns with such deductions. In May, Adam Looney of the Brookings Institute issued Charitable Contributions of Conservation Easements, listing general tax policy concerns that predated the recent surge in such contributions:
- "Donations are concentrated in transactions that seem unrelated to conservation benefits," including with respect to type of transaction, geographic area, and donee organizations.
- "A small handful of donee organizations are responsible for a disproportionate share of donations," with 25 organizations (as compared to 1,700 land trusts nationwide) receiving between 2010 and 2012 about half of all such contributions, measured by dollar value.
- "Most organizations that receive donations of easements do not report them as gifts or revenues on their public tax returns," impeding transparency, public accountability, and IRS enforcement.
- "Donations of 'partial interests' are difficult to administer," including with respect to determining the fair market value of the contribution for deduction purposes.
The report is also available through the Urban Institute & Brookings Institution Tax Policy Center.
Nancy McLaughlin (Utah) has also continued her excellent coverage of this topic. Here is the abstract for her latest article, Tax Deductible Conservation Easements and the Essential Perpetuity Requirements, Virginia Tax Review (forthcoming):
Property owners who make charitable gifts of perpetual conservation easements are eligible to claim federal charitable income tax deductions. Through this tax-incentive program the public is investing billions of dollars in easements encumbering millions of acres nationwide. In response to reports of abuse in the early 2000s, the Internal Revenue Service (Service) began auditing and litigating questionable easement donation transactions, and the resulting case law reveals significant failures to comply with the deduction’s requirements. Recently, the Service has come under fire for enforcing the deduction’s “perpetuity” requirements, which are intended to ensure that the easements will protect the subject properties’ conservation values in perpetuity and that the public’s investment in the easements will not be lost. Critics claim that the agency is improperly discouraging easement donations by denying deductions for technical foot faults, and some have called for a change to the law that would allow taxpayers to cure their failures to comply with the perpetuity requirements if they are discovered on audit.
This Article illustrates that noncompliance with the perpetuity requirements should not be viewed as technical foot faults. To the contrary, compliance is essential to the integrity of the tax-incentive program and the easements subsidized through the program. In addition, allowing taxpayers to cure failures to comply with the perpetuity requirements if they are discovered on audit would significantly increase noncompliance and abuse and, given the reliance nationwide on deductible easements to accomplish conservation goals, risk fatally undermining an entire generation of conservation efforts. This Article recommends a more prudent approach: the Treasury’s issuance of guidance that would greatly facilitate compliance with the perpetuity requirements, reduce transaction costs for taxpayers, and significantly shore up the integrity of the program.