Nonprofit Law Prof Blog

Follow Up: Section 501(c)(4) criminal issues

Just to follow up on my post from earlier this week, at this point there seem to be two leading contenders for the criminal issues involved in the Section 501(c)(4) investigation:

1.  Unauthorized disclosure and use of taxpayer information, specifically including the release of some information to ProPublica; and

2.  If today's hearing was any indication, some members seemed to be interested in pursuing whether IRS officials made full disclosures to Congress in prior hearings. 

EWW

 

The 501(c)(4) TIGTA Report: My Random Thoughts

I have now had the opportunity to go through the TIGTA report as well as listen to this morning’s Ways & Means hearing. Here are some random thoughts and questions on the matter:

1. The report refers to a “BOLO” list (“be on the look out”) of terms that would trigger an additional look. I note this from the report: “[b]ased on our review of other BOLO listing criteria, the use of organization names on the BOLO listing is not unique to potential political cases.” (TIGTA Report, page 6 (my references refer to the .pdf version on the website)). When I read that, the first thing that came to my mind was credit counseling organizations – and in fact, Steve Miller mentioned credit counseling organizations in this respect today. From what I can tell, I think we know that these were not the only terms on the BOLO list, but I don’t think we know what else is on there. Footnote 16 specifically states, “[w]e did not review the use of other named organizations on the BOLO listing to determine if their use was appropriate.”

2. The report’s primary problem with the use of these terms was that “the criteria [in the BOLO listing] focused narrowly on the names and policy positions of organizations instead of tax-exempt laws and Treasury Regulations. Criteria for selecting applications for the team of specialists should focus on the activities of the organizations and whether they fulfill the requirements of law. Using the names or policy positions of organizations is not an appropriate basis for identifying applications for review by the team of specialists.” (TIGTA Report, p. 7). The TIGTA report does NOT appear to say that the actual scrutiny given was inappropriate – in fact, if the same organizations had been selected for scrutiny using different criteria, that appears to have been appropriate in most cases. Of the 298 applications that were selected for special scrutiny, the Inspector General thought that there were no indicia of additional political activity for 91 (or 31%) of the cases (note that the IRS disagreed with this finding, by the way.) As far as I can tell, we don’t know how many of these 91 cases were “Tea Party”, “912,” or “Patriot” organizations.

3. I am amused and dismayed that suddenly people are worried about Form 1023/1024 processing delays at the IRS. Where have they been? This is new and unique to advocacy 501(c)(4)s, right? Of course it’s not – all of this who work in the nonprofit sector (including the IRS) have complained about Form 1023/1024 processing times for years. Steve Miller was pretty clear today – they simply don’t have the people. Not that I think the IRS hasn’t been entirely clear about this point that in the past. That being said, the TIGTA report does make the point that the cases selected for special scrutiny sat for significantly longer than average for “regular” cases, at least in part due to the fact that it took the Determinations Unit “more than 20 months (February, 2010 to November, 2011) to receive draft written guidance from the Technical Unit for processing potential political cases.” (TIGTA Report, p. 12). To me, this is one of the most troubling aspects of this issue - I am truly concerned about why it took so long to provide that type of guidance. (Side note: the IRS letter indicating that it would cease using resources to look at gift tax return issues with regard to contributions to Section 501(c)(4) organizations was issued on July 7, 2011).

4. The TIGTA report also is concerned that IRS agents have asked for inappropriate information, such as donor lists. I agree – this was probably not appropriate to request donor lists. But, again, this isn’t a new issue. One need only revisit the nonprofit sector’s concerns regarding the governance questions on the redesigned Form 990 to see that we’ve struggled with this problem for some time. In my view, it is yet another side effect of the long standing personnel and budget issues at the IRS. Along these lines, another disturbing (but unfortunately, not surprising) part of the report for me is the finding that the Determinations Unit was sufficiently confused about what constituted appropriate Section 501(c)(4) activity that the IRS had to provide employees with a two-day workshop on the topic – in May, 2012. (TIGTA, p. 14).

5. As I indicated below as I watched the hearings, I am troubled by the notion that follow up questions from the IRS are now burdensome and inappropriate. The organization is asking to be exempt from federal taxation – presumably, we want that status to go only to those organizations that are so qualified. Unnecessary does not equal burdensome. When necessary, a tax-exempt organization should have to shoulder some burden for the privilege of not paying taxes.

From the tenor of today’s hearing, I’m sure there will be more to follow on this issue. EWW

Happening Now: Ways & Means Hearing on CSPAN

Here's the link... it's still going.   I'll try to post the transcript when done. EWW

Update 1 - Just a quick thought as Rep. Earl Blumenauer of Oregon talks about staffing and Congress' role in this issue.   The real lesson to me in all of this is there is a consequence to the long term budget cuts and the attrition in personnel (hiring freeze/retirements, etc.) at the IRS.  I'll say it... it is infuriating to hear some of these folks be shocked ... *shocked I tell you*... that after what's happened with staffing at the IRS over the last 10-15 years that there would overworked staffers and issues with management at the IRS.   The IRS and the bar have been telling you this for years, Congress...

Update 2 - I'm really sort of shocked that Congress people are surprised that asking about a nonprofit's relationship with various individuals is somehow per se inappropriate.   And asking for board member resumes and copies of websites.  I'm not going to say that all of these requests were appropriate, however, the IRS does have to ask follow up questions, folks - follow up questions are not in and of themselves in burdensome.  

Update 3 - Again, my opinion only... this has turned into an anti-IRS free-for-all that, as a tax professional, is hard to watch.  I'm not going to say that the IRS is without fault but this is really troubling.

Update 4 - Apparently, CSPAN will replay the hearing in full tonight at 8 p.m. EST.

EWW

 

 

 

A Solution to the (c)(4) Problem: Get Rid of Them

As you all must know by now, either from prior posts on this blog or any of a million other sources, the IRS is in deep trouble for its handling of certain 501(c)(4) applications.  I’m not going to comment directly on what the IRS did or didn’t do in its administrative systems that resulted in the current mess.  But I do think it is time to comment on the root of all the trouble, which is the existence of 501(c)(4) itself.

Today in the NYT on-line "Room for Debate" feature, which you can view here, I proposed my solution: just get rid of 501(c)(4) (there are also very thoughtful contributions from Lloyd Mayer - who also posts on this blog, Ellen Aprill, Doug Mancino and Rosemary Fei).  But I was limited to 300 words in that format; here I have the freedom to flesh out my argument a bit more, so I’m going to take advantage.

The argument boils down to this: the administrative havoc created by the (c)(4) designation in conjuntion with the Citizens United case simply does not outweigh whatever marginal public benefit the (c)(4) designation produces.  Accordingly, we should repeal it.  

So let’s begin with some background.  Have you ever asked what the difference is between a "social welfare" organization under (c)(4) and a charity under (c)(3)?  My students in my Tax-exempt Organizations class do so every year.  And here is the convoluted, though ultimately simple, answer.

A 501(c)(4) organization is one that, according to IRS regulations, “is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.”  Now it should be fairly obvious that “bringing about civic betterments and social improvements” is a charitable purpose that would qualify an organization for tax-exemption under 501(c)(3), rather than 501(c)(4).  Indeed, “improving society” is a core rationale for the existence of charity.  So why do we have 501(c)(4) at all?  Why aren’t these organizations simply exempt under 501(c)(3)? 

The answer lies principally in two acute differences in the statutory language between 501(c)(3) and 501(c)(4).  501(c)(3) states that an organization qualifies for exemption under that section only if “no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation . . . and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”  In other words, 501(c)(3) organizations cannot engage in a “substantial” amount of lobbying, and cannot engage AT ALL in political campaign activity.  In contrast, 501(c)(4) contains no such limitations, and in fact the IRS’s view is that lobbying to advance social welfare is itself a social welfare purpose.  As a result, a (c)(4) can engage in an unlimited amount of lobbying, contrary to the (c)(3) limitation.  On the other hand, the regulations under (c)(4) confirm that political campaign activity is NOT a social welfare purpose; but note that (c)(4) does not have the absolute prohibition against political campaign activity that a (c)(3) does.  Accordingly, a (c)(4) also can engage in political campaign activity, as long as its primary purpose remains promotion of social welfare.  

So when you boil all this down, a 501(c)(4) is essentially an organization with a charitable purpose that either engages in too much lobbying or too much (i.e., ANY) political campaign activity to qualify as a 501(c)(3) organization. And that in turn leads to the ultimate question: why should we grant tax exemption to an organization that would qualify as a charity but essentially violates the limitations on political activity in 501(c)(3)? 

[Side note here: Ms. Fei and Mr. Mancino note that there are a few organizations that don’t engage in excessive lobbying but are (c)(4)’s because they don’t meet some other requirement of (c)(3) status, like the strict private benefit rule.  I’ll pen a longer response to that at some point, but my quick response is pretty much the same: even if that is true – and I think the IRS hasn’t been entirely clear on these points – it shouldn’t be.  Why give a tax break to organizations that don’t serve a broad enough charitable class or generate private benefits that would disqualify them from charitable status?]  

My answer is, we shouldn’t.  Part of the problem with answering questions like this is that we do not have any coherent theory for why we give “charities” tax exemption – or indeed, what a “charity” is for exemption purposes.  But most people agree that charities are organizations that provide a “public benefit” by offering services otherwise unavailable from the private market and which government either chooses not to provide or is affirmatively prohibited from providing (e.g., religion).  Different folks explain this differently - the economists talk about market failure; the political scientists and sociologists talk about “pluralism” and so forth.  But the general concept is the same: we can think of charities as organizations that are “gap fillers” – they fill the holes left by the private market and government.  Exemption is a partial government subsidy to help these organizations provide their services – partial, because the government can’t or won’t fully fund the activities of these organizations, but government can “help” by freeing them from tax payments (it also helps by permitting a tax deduction for charitable contributions to these organizations  and permitting them to issue tax-exempt bonds). 

If you buy this explanation (and admittedly not everyone does), then the (c)(4) essentially is filling a highly specialized niche – it’s a charity that lobbies too much, or engages in political campaign activity.  So my question is whether this is a kind of market failure (or pluralism or whatever) that justifies the partial government subsidy of tax exemption.  My answer is “no” – why should government subsidize organizations to lobby the government?  Do we really believe there is a serious market failure in lobbying?  That there is too little lobbying in the world?  So much so that the government should give a partial subsidy for lobbying?

But, you may respond, don’t (c)(4) organizations lobby on behalf of groups that otherwise have little voice in government?  Suppose that an organization’s primary purpose is to lobby for more government programs for the poor.  Surely that is something that is worth subsidizing, right?  I disagree.  Note that a charity exempt under 501(c)(3) and conducting some kind of active program for the poor can in fact engage in SOME lobbying – just not a “substantial amount” of lobbying.  I think one can make a good case that if you are concerned about “giving voice” to otherwise-disenfranchised groups, that voice is best expressed by groups that have active programs involving services to those disenfranchised, rather than organizations that do nothing but purport to represent those groups in legislation.  And if your primary activity is conducting a charitable program other than lobbying, you get exemption under 501(c)(3) AND you can lobby (some).  But even if you disagree with this argument, I come back to the following point: if we think too much lobbying (and ANY political campaign activity) is "bad" for a charity, what is the justification for creating a "charity lite" category that permits these things?

So my bottom line is this.  The (c)(4) designation doesn’t get us much public benefit that we couldn’t get with a (c)(3) that has an active program of service and lobbies on the side.  And yet as we have seen over the past two years, the (c)(4) presents virtually insoluble administrative problems of line-drawing regarding when political campaign activity is “primary” and between “issue advocacy” and lobbying (completely permitted) and “political campaign activity” (permitted as long as it is not the “primary purpose”).  Despite Ms. Fei and Mr. Mancino's pleas for better enforcement, I'm highly doubtful that the IRS will ever be able to adequately enforce these lines in the (c)(4) context.  They can't even enforce them in the (c)(3) context very well, where the backdrop is an absolute prohibition on political campaign activity coupled with a softer limit on lobbying.  So what would make anyone think there is some "magic formula" that will make these things enforceable in the (c)(4) context with even less-well-defined limits?

So my solution: get rid of the (c)(4).  It just isn’t worth the angst.

JDC

Your 501(c)(4)-gate daily update

First, thanks to Darryll for his insights last night - for the record, I whole heartedly agree.  Lost in this whole discussion is that there is a serious tax compliance issue that needs to be addressed.  As I read all of the news, I can only think of the Ways & Means hearings that were held a few months ago.  I distinctly remember how many pointed questions on Section 501(c)(4)s the committee asked the panel, even though it was really off topic.  I fear that the IRS has been simultaneously told to give guidance and yet do nothing (see also, gift taxes and Section 501(c)(4) contributions) that will mess up the status quo.  I do not envy the position of the folks at the IRS, may of whom I've had the pleasure of working with personally and know to be dedicated civil servants.

The two biggest updates from yesterday in 501(c)(4) gate:

• Yesterday, the Treasury Inspector General for Tax Administration released its report, entitled "Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review."   The link is here, but I will try to update my post below so it's one-stop shopping.   My hope is to provide a more comprehensive review of the IG's report tomorrow for you all.
• To some degree more shocking to me, AG Holder has indicated that a criminal investigation into the issue.   I know many of us are thinking - criminal, really?  On what basis?  The primary speculation at this point is release/misuse of confidential taxpayer information, but there may be other causes of action floating around.  I will try to collect those and do an additional update on that point as well.  

That's all for now... more to follow tomorrow (now that grading is over!) EWW 

Targeting Conservative (c)(4)'s and the Next IRS Watergate Scandal: Service Workers between a rock and a hard place.

The good thing about blogs is that you can always add some "op-ed."  Let me just add a little op-ed to Elaine's helpful post below.

A long time ago, a federal district court judge imposed sanctions on the Nixon Watergate imploding Whitehouse for what it viewed as improper political interference in process by which applications for exemptions were reviewed: 

A looming issue in this case has been whether political interference or intrusion has played a role in the Internal Revenue Service's consideration of the Plaintiff's exemption application. Should this specter prove to have substance, the complexion of this case changes. A showing of political influence renders the Service's ruling null and void. It is outside the law.

The Court is concerned not only with direct political intervention, but also with the creation of a political atmosphere generated by the White House in the Internal Revenue Service which may have affected the objectivity of those participating in the ruling in the Plaintiff's case. The inference of political intervention has been unmistakenly raised: (1) by the handwritten memo in the Plaintiff's file indicating "perhaps White House pressure"; (2) by John Dean's testimony before the Ervin Committee; (3) by the memoranda Mr. Dean submitted to the Ervin Committee; (4) by the testimony of Patrick J. Buchanan, White House Staff Member, before the same committee (September 27, 1973);(5) by the Deposition of Roy Kinsey, Assistant to Mr. Dean, (July 30, 1973, at 10-18); and (6) by the four documents submitted for in camera inspection. These indicia of political intervention, combined with the unusual and protracted processing of the Plaintiff's application, have triggered a warning signal requiring the Court to fully investigate the issue. Through its Discovery Orders, the Court has endeavored to obtain all the information necessary to make an informed evaluation of the issue. However, the time has come for the Court to make that evaluation, and the Court is without the requested materials to do so.

The Defendants have failed to comply with the Court's Order of July 6. Within the scope of the Order were all White House files plus the Treasury and the IRS files regarding tax-exempt organizations since Jan. 20, 1969, and certain tape recordings now before Judge Sirica.

Neither of the two searches of the White House files met the scope of the Order. The first was limited solely to materials in the White House files which mentioned the Plaintiff. In addition, Mr. Kehrli's affidavit regarding the first search of "all White House 872*872 files" was misleading. As his deposition indicates, he did not in fact search all of the White House files. He did not search the impounded files of Messrs. Colson, Ehrlichman, Haldeman, Dean or Caulfield.

The second time, the Defendants limited the search to documents, memoranda or writings in the White House central and special files which either related to or mentioned the Plaintiff or related to "White House interest in the tax-exempt status of left-wing activist organizations." Mr. Buzhardt's affidavit indicated that he conducted a complete search of the files which produced four documents which he submitted for in camera inspection.  Mr. Buzhardt's complete search, however, failed to produce the documents, memoranda, and writings relating to this issue which were specifically referred to by Mr. Dean and Mr. Buchanan in their Ervin Committee testimony and by Mr. Kinsey in his deposition.

Center on Corporate Responsbility, Inc. v. Shultz, 368 F. Supp. 863 (1973). What's old is new again.  Readers are no doubt well aware, by now, of the bruhaha over the controversy sorrounding the Service's admitted over-scrutinization of conservative 501(c)(4)'S.  As Center for Corporate Responsibitility indicates, these matters are not simply political fodder but can have impact on an organization's entitlement to exempt status.  It appears that heads will eventually roll for all of this, I' m sorry to say. 

I think the IRS workers and their leaders in The Service were caught in a trap not of their own making.  Ever since Citizens United, its been no secret that most (c)(4)'s are hardly organized for "social welfare" as that term is apparently intended in the regulations -- i.e., something other than political action.  On the one hand, the IRS has been faulted for not doing enough to make sure (c)(4)'s are not simply political action committees in disguise, but on the other they are faulted for looking more closely at (c)(4)'s that appear to have an exclusively political purpose.  And while it is certainly wrong to target just one side of the political spectrum, I am not sure that is what happened.  The press is on a virtual feeding frenzy but there is evidence that the Service simply looked for "political buzz words" in the title of the 'social welfare" organizations before deciding to give enhanced scrutiny to certain groups.  The fault lies in the disparate impact -- more conservative groups ended up being subjected to enhanced scrutiny than did liberal groups, if that is what happened.  Even the WSJ, hardly left leaning, admits that the Service personnel were looking for "political" labels, not just "conservative" labels in deciding whether to scrutinize applications from (c)(4)'s. If that be the case, then the only fault lies in whether the result was that conservative leaning groups were more often or more likely subjected to enheanced scrutiny because the Service looked for catch phrases more often used by conservative groups in identifying which (c)(4) applications to pull. In other words, the Service might be faulted only for having a limited vocabulary, not necessarily a political bias.  Hopefully the soon to be released Inspector General report will enlighten us all.  In the meantime, let's not get the lynch mob all riled up just yet. 

dkj 

501(c)(4)-Gate (We need a better name...)

With apologies for the latness of this post (I plead grading)... I wanted to at least give everyone a summary of where we are with 501(c)(4)-Gate.

As I am sure most of you know by now, the IRS has admitted to using the terms "Tea Party" and "Patriot" in trying to prioritize which Section 501(c)(4) applications to scrutinze.  We have a House Ways and Means hearing on Friday; I don't think a Senate Finance hearing has been set yet but Senator Hatch wants one; a IG report is in the works (a draft portion of which is linked below); and the late word on the street is that AG Holder may be involved soon enough.

For now, I'm just going to highlight some resources in one place and try to keep a master list of relevant documents:

• Lois Lerner's Remarks at the EO Tax Meeting (h/t Election Law Blog with imbedded h/t to EO Tax Journal)
• Baucus Comments, Senate Finance
• Ways and Means Hearing Announcement for this Friday (May 17, 2013)
• May 10 Press Briefing by Jay Carney
• Draft IG Report Appendix Per ABC News
• Treasury Inspector General for Tax Administration Report
• Statement of Secretary Lew on Resignation of IRS Acting Commissioner
• The NYTimes via TaxProf Blog: Should 501(c)(4)'s be eliminated

Paul Streckfus' EO Tax Journal has good coverage if you have a subscription.

If there is something else you'd like to see added to the list of resources, please let me know in the comments or via email.  I am trying to stay with primary sources and not with news articles, for now.

More to follow, no doubt.  EWW

Updated 5/17 to include more links.

The NFL, Again

A few months back I posted about the NFL's tax-exempt status, mostly as a critique of reporters who don't seem to even try to get their facts straight when discussing nonprofit organizations.  But the NFL is back in the news, propelled by Senator Tom Coburn's proposal to strip the NFL (along with the PGA and NHL) of their 501(c)(6) status, as outlined in this article on Think Progress.

While not as terrible as the NFL article I blogged about earlier, the Think Progress piece still makes fundamental errors.  First, it classifies the NFL as a "501(c)(6) charitable organization".  Wrong.  501(c)(6) organizations ARE NOT CHARITIES; that's what 501(c)(3) is all about.  The piece compounds its mistake later on by asserting that NFL teams deduct their dues as charitable donations.  Sigh.  Wrong again.  You can't take charitable donation deductions for dues to a (c)(6).  I'm pretty certain, however, that NFL teams take Section 162 business expense deductions for those expenses, which they would absolutely be entitled to continue doing even if the NFL was not tax-exempt.

It is true, of course, that if the NFL were stripped of exemption, those dues would be gross income to the NFL; but we don't tax corporations on gross income.  We tax them on their net income (more or less).  As I detailed in my earlier post, strip the NFL of exempt status and their are still plenty of ways for the NFL to avoid paying any taxes.  Just ask General Electric, which avoided paying income taxes for years despite healthy cash flows.  The Think Progress piece at least did note that "It’s unclear how much of a benefit ending the tax-exempt status of professional sports leagues would bring directly to taxpayers" and that Major League Baseball, which gave up its exempt status under 501(c)(6), claims exempt status essentially had no effect on their tax payments (which I'm inclined to believe, since, after all, they did give it up!).

And finally, there's the snarky "Further, the leagues hardly pay their executives as if they are non-profits." Here we go again: the myth that nonprofit CEO's ought be something just short of destitute because, well, after-all, they're NONPROFITS, right?  Well, maybe the folks at Think Progress ought to review the compensation levels of exempt hospital CEO's or University head football coaches. (There is a legitimate debate about compensation levels of executives of nonprofits, but that legitimate debate is hardly the point of the Think Progress comment).

Sigh. 

JDC

 

The "Carle Problem" (the property tax burden of tax-exempt hospitals)

I have posted before about Illinois' new law governing property-tax exemption for nonprofit hospitals, and some of the havoc this has caused for local school districts now having to repay property taxes to hospitals in their districts who are eligible for exemption under this new law (see posts here and here).  But what I haven't commented on much is the relative fairness or unfairness of a particular taxing jurisdiction losing property tax revenues for a charity that benefits regional (or even national) interests.

The issue was brought home to me (almost literally, since I live in this area) by the situation involving Carle Hospital and the city and schools of Urbana, IL.  As a result of the Illinois law, Urbana schools will lose approximately $3 million in property tax revenues; the city nearly a million more, and some other local government units will suffer as well, to the tune of about $6 million in lost revenue overall.  One story in our local paper estimated that 90% of the property Carle owns, all of which is now tax-exempt under the new Illinois law (much of it may have ended up being exempt under prior law, too - I'm not necessarily blaming the situation on the new Illinois exemption statute) is located in Urbana.  But Carle is a huge hospital complex, complete with the only regional Level 3 trauma center.  While I don't know specifically how far patients come for Carle's services, the hospital certainly serves patients from next-door Champaign, Savoy, Rantoul, St. Joseph, Mahomet, Monticello, and other surrounding communities, many of which do not have their own hospital.  Yet these communities do not absorb any of the lost property tax revenue from Carle's presence - it happens to be located in Urbana, not Champaign or Rantoul or Mahomet.

This issue, of course, isn't limited to nonprofit hospitals.  Universities are another example of exempt organizations that spread their benefits regionally or nationally, yet take huge amounts of potential property taxes out of the system.  Why, exactly, should Cambridge, Massachusetts, bear the tax-exemption burden for Harvard?  Harvard has an international student body and employees that come from the entire Boston metro area.  Yes, it is certainly the case that Harvard's presence in Cambridge helps that city to attract taxpaying residents and other businesses; but it also helps all the surrounding communities, and if we base exemption on an organization's charitable outputs, well, then Harvard's exemption is the result of its supplying the world with Harvard graduates.  It seems to me that ideally the world ought to contribute in some way to Cambridge's property tax loss.

I'm not going to tackle the world just yet, but I have been discussing the issue with one of my colleagues, Laurie Reynolds, who is an expert in state and local government law.  We think that at least when it comes to Carle Hospital, there ought to be some sort of mechanism that requires surrounding communities, which benefit from Carle's patient care services (including services for the uninsured poor, which is now the basis for property-tax exemption in Illinois), to "reimburse" their "fair share" to Urbana.  The mechanism actually wouldn't be that hard to construct; Carle knows where it's patients come from and one could use this information to get some kind of rough estimate of which communities surrounding Urbana benefit from Carle.  But the "fair share" concept is bugging me.

What is the "fair share"?  Since Illinois law now bases property tax exemption on free and discounted services (very broadly defined) to the poor, should "fair share" be based on how many poor patients are served from surrounding communities?  Or should one consider all patients, since Carle provides care to paying patients, too?  After all, the classic "community benefit" argument that supports income tax exemption at the federal level encompasses a baseline that hospitals provide care to all paying patients.

Or should we go down this road at all?  It is always possible to argue that there are charities in surrounding communities that Urbana residents benefit from, but Urbana doesn't lose the tax revenue.  The problem is that these charities tend to be small social service organizations: the Salvation Army, for example, or Goodwill.  These charities don't cause anything even approaching the magnitude of property tax loss that a large nonprofit hospital complex does (or Harvard University).

I'd appreciate any thoughts . . . 

JDC

 

IRS College and University Compliance Report: UBIT Increases by $90 Million

Late last month, the Service issued its Final Report of the Colleges and Universities Compliance Project.  The report is based on "the responses to Questionnaires the IRS sent to a sample of 400 colleges and universities and on the results of examinations of 34 colleges and universities.  Among the highlights:

 

1. Increases to unrelated business taxable income for 90% of colleges and universities examined totaling about $90 million; 
2. Over 180 changes to the amounts of UBTI reported by colleges and universities on Form 990-T; and
3. Disallowance of more than $170 million in losses and NOL's (i.e., losses reported in one year that are used to offset profits in other years) which could amount to more than $60 million in assessed taxes.

The IRS also determined that nearly 40% of colleges and universities examined had misclassified certain activities as exempt or otherwise not reportable on Form 990-T.  Fewer than 20 percent of these activities generated a loss.  The examinations resulted in the reclassficiation of nearly $4 million in income as unrelated, subjecting those activities to tax. 

Finally, the report notes that about 20% of private colleges and universities implemented procedures that would qualify them for the rebuttable presumption against engaging in an excess benefit transaction with respect to IRS 4958 (Intermediate Sanctions).  Those institutions not qualifying for the rebuttable presumption had the following problems:

 

1. Comparability data from institutions that were not similarly situated to the school relying on the data, based on at least one of the following factors:  location, endowment size, revenues, total net assets, number of students, and selectivity;
2. Compensation studies that neither documented the selection criteria for the schools included nor explained why those schools were deemed comparable to the school relying on the study.
3. Compensation surveys that did not specify whether amounts reported included only salary or included total other types of compensation, as required by section 4958.

The Executive Summary suggests that the IRS will focus on UBTI issues more closely, as those issues relate to Colleges and Universities:

The examinations of college and universities identified some significant issues with respect to both UBI and compensation that may well be present elsewhere across the tax-exempt sector. As a result, the IRS plans to look at UBI reporting more broadly, especially at recurring losses and the allocation of expenses, and to ensure, through education and examinations, that tax-exempt organizations are aware of the importance of using appropriate comparability data when setting compensation.

dkj

 

 

Disclosure of Corporate Donations

The New York Times reported yesterday that the Securities and Exchange Commission ("SEC") is considering proposing a rule that would require corporations to disclose their political spending. Over the past few months, the SEC has been flooded with calls for such disclosure in response to the large amount of corporate donations to tax-exempt groups that engaged in election-related activities during 2012.  Currently, neither the Federal Election Commission nor the IRS requires such groups to disclose their donors, with the result that public corporations tend to contribute to such groups in lieu of super PACs that are subject to disclosure rules. 

According to the Times, the proposal's supporters argue that "shareholders should be able to evaluate business executives' oversight of company resources and that SEC regulations already require disclosure of similar information, like executive compensation."  In contrast, opponents believe that such a regulation oversteps the SEC's authority and role, which, according to Rep. Scott Garrett, is "investor protection."  As the Times reports, the US Chamber of Commerce (which also opposes the proposal) "believes that funds expended by publicly traded companies for political and trade association engagement are immaterial to the company's bottom line." 

Views on the proposal follow party lines, with Democrats supporting it and Republicans opposing it. In fact, House Republicans have introduced legislation that would prevent the SEC from issuing such a rule.  Should the SEC move ahead, it seems a major battle looms. 

 

The Daily Show on the NCAA

Every spring, one of the liveliest discussions in my nonprofit law class concerns the tax status of the NCAA and college athletics.  (We cover the topic while discussing the UBIT).  After this year's discussion, a student sent me this clip of John Stewart taking on the NCAA.  Although the clip doesn't really address the NCAA's tax status, it does touch on relevant issues, such as commericialism and the treatment of student athletes.  I plan on adding it to my repertoire of in-class videa clips; there's nothing quite like John Stewart to pull students out of their post-lunch slump. 

Miranda Perry Fleischer

Social Enterprise Law Blog

A warm welcome to the Social Enterprise Law Blog! 

Law professors Cass Brewer (Georgia State), Deborah Burand (Michigan), Haskell Murray (Regent), Alicia Plerhoples (Georgetown), Dana Brakman Reiser (Brooklyn), and a handful of practicing attorneys have joined social enterprise lawyer Kyle Westaway (who is also Lecturer on Law at Harvard Law School) at his SocEntLaw blog.  The blog covers issues and events related to social entrepreneurship and social enterprise law.

Miranda Perry Fleischer

10,000 Fewer Nonprofits in 2012

Yesterday, the Internal Revenue Service (IRS) released its Data Book for 2012.  According to the publication, there were 10,000 fewer registered tax-exempt organizations in 2012 than in 2011.  The Book revealed that there were 1,484,818 501(c) organizations for the fiscal year ending in September 2012, compared with 1,494,882 in 2011 – a decrease of 10,064, or about 0.68 percent.

The Book contained some interesting statistics:

• In 2012, the IRS approved 52,615 organizations for tax-exempt status, out of 60,793 applications – an approval rate of 86.5 percent.  The overwhelming majority of applications came from 501(c)3 organizations -- classified as religious and charitable -- which numbered more than 1.081 million last year.  By comparison, there were 909,574 501(c)3’s in the 2002 Data Book – a difference of 170,546, or 18.75 percent.

• The number of tax-exempt organizations and nonexempt charitable trusts dropped by more than 13,000 (or 0.8 percent), from 1,629,149 in 2011 to 1,616,053 in 2012.  Nonexempt charitable trusts were down by 3,000, or 2.26 percent, to just less than 131,000.

• The number of 501(c)3 organizations climbed by 0.163 percent, or 1,761, from 1,080,130 in 2011 to 1,081,891 in 2012.  Among the 17 subsections within section 501(c), only two others saw an increase in their aggregate totals from 2011 to 2012:

•  
  • 501c(1) Corporations organized under an act of Congress, up from 216 to 449 – up 107 percent;
  • 501(c)19, War veterans’ organizations, up from 33,654 to 33,737 – up less than 0.25 percent.

• Almost three-quarters, or 74 percent, of the 60,793 tax-exempt applications filed last year were for 501(c)3 organizations. There were 148 applications disapproved among 501(c), and of those 123 (or 0.237 percent) were 501(c)3 applications. About 8,000 applications classified as “other” include applications that were withdrawn by the organization, were incomplete, or did not provide the required information.

• Of the 51,748 applications for 501(c)3 organizations, about 87 percent, or 45,029, were approved.

• Applications for the largest subsections, with a least 1,000 applications, were approved at a rate of 80 percent or better last year, including:

•  
  • 88.9 percent, 501(c)6, Business leagues, 1,886 applications
  • 83.7 percent, 501(c)4, Social welfare organizations, 2,774 applications
  • 81.7 percent, 501(c)7, Social and recreation clubs, 1,402 applications

• The largest subsections within 501(c) – those with at least 50,000 registered organizations – all saw a decrease in their numbers:

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  • - 4.66 percent, 501(c)8, Fraternal beneficiary societies (50,763)
  • - 4.35 percent, 501(c)4, Social welfare organizations (93,142)
  • -2.99 percent, 501(c)5, Labor and agricultural organizations (50,046)
  • - 1.61 percent, 501(c)6, Business leagues (69,198)
  • -1.58 percent, 501(c)7, Social and recreation clubs (56,880)

Last year, the IRS reported a decrease of 18 percent in the number of tax-exempt organizations, and a decline of 7 percent in the number of applications. Those declines were a result of the IRS revoking tax-exempt status of an estimated 385,000 organizations after they failed to file tax returns for three consecutive years, beginning in 2007.

VEJ

 

IRS Advises Lawmakers that Payments Received by Members of Charitable Class from Charitable Organization May Be Excludible Gifts

Tax Notes Today reports that the Internal Revenue Service’s Office of Associate Chief Counsel (Branch 5), in letters addressed to Senator Mark Udall, Congressman Ed Perlmutter, and Senator Michael F. Bennet, has advised that payments received by individuals from a charitable fund “may constitute gifts that are excludible from the recipients' gross income.”  According to the letters, a tax-exempt charitable foundation had created a fund to “provide a vehicle for donors to assist the victims and their families.”  The letter does not disclose precisely what event rendered the payees victims, but I can speculate that they were victims of a natural disaster.  The fund arose from donations from the public.  Citing the “test” for a gift under Duberstein v. Commissioner, 363 U.S. 278 (1960) (i.e., whether a payment proceeds from "detached and disinterested generosity"), the IRS explained that payments from the fund had been made “in response to the victims' and their families' needs and not out of any moral or legal duty that the Foundation or any particular donor may have had.”  Under such circumstances, noted the IRS, the payments “will be excludible from the recipients' gross income as gifts.”

I am intrigued that the letters focus not simply on the intent of the charitable foundation, but also on that of donors to the foundation.  If the “gift” is deemed to have been made to the victims by the foundation – meaning that the foundation is not a mere conduit – why does the intent of individual donors to the foundation matter for purposes of determining the tax consequences of transfers to the individual victims from the foundation?  If the foundation is not a mere conduit, the foundation is the "donor" of funds transferred to the victims.  As such, only the foundation's intent should be scrutinized under Duberstein.

The letters are available at 2013 TNT 71-22.

JRB

President Obama’s (Yet Again) Proposed Cap on the Tax Benefit of the Charitable Contributions Deduction

As in previous years, the proposed budget issued by the Obama administration would limit the full value of itemized deductions, including the charitable contributions deduction, to the 28% income tax bracket.  For coverage, see articles in Forbes, The Chronicle of Higher Education, The NonProfit Times, and Accounting Today.  A press release by The Alliance for Charitable Reform (ACR) features the following poignant criticism of the proposal as applied to charitable contributions:

“Each year – and sometimes more than once – the President has proposed cutting the charitable deduction, despite resounding opposition from the American public and Congress,” said Sandra Swirski, executive director of ACR.  “This year, the cut is even deeper.  With the January 1st tax hike, the gap between tax rates and the charitable deduction rate is wider than ever and that will translate into less giving.  Not only is this harmful to giving, which will cost charities across the country billions of dollars, but it is a dangerous precedent for the federal government to set.”

On a more promising note for nonprofits, and in a story that places a more positive spin on the proposal as a whole, the Chronicle of Philanthropy observes that the proposed budget would also increase spending for nonprofit programs in education and health care.

JRB

Judge Rules to Free Unused Federal Building Space for Nonprofits Serving the Homeless

In Judge: Agencies have been ‘hiding’ federal properties that could be used to house services for homeless, the Washington Post reports that Judge Royce Lamberth of the United States District Court for the District of Columbia recently found that the federal government has been underreporting the number of unused federal properties potentially available to groups serving the homeless, in violation of a federal law. Says the Post,

The ruling orders the General Services Administration and the Department of Housing and Urban Development to take additional steps to ensure agencies are following the law, including creating new training programs. …

The law in question is Title V of the McKinney-Vento Act, which requires federal agencies to list unused, surplus or underutilized properties in the Federal Register, and reach out to homeless services providers — nonprofits and state and local governments — that can apply to lease the properties at no charge. Under the law, providers are to get a 60-day period where they get right of first refusal to those properties. This is important because one of the greatest costs to running homeless services is real estate, and the law is meant to allow nonprofits to gain access to buildings they may not be able to afford on the open market.

The story further explains that the litigation producing Judge Lamberth’s ruling began in 1988, when the National Law Center for Homelessness and Poverty and other nonprofits sued several federal agencies.  A 1993 permanent injunction ordered the government to implement the relevant law and preserved the plaintiffs’ right “to bring the issue before a court again for enforcement if agencies were not complying with the law.”

For an overview of the Title V program, see here.

JRB

Senate Judiciary Committee Member Seeks Greater Justice Department Oversight of 501(c)(4)s

Sheldon Whitehouse (D-R.I.), chair of the Senate Judiciary Committee’s Crime and Terrorism Subcommittee, apparently wants the Justice Department to defer less to the IRS when deciding whether to investigate political campaign-related activity of social welfare organizations exempt from federal income tax under section 501(c)(4) of the Internal Revenue Code, according to a story in Tax Notes Today.  Whitehouse’s comments were offered at yesterday’s subcommittee hearing, “Current Issues in Campaign Finance Law Enforcement.”  Whitehouse reportedly expressed doubt that the question of whether an organization has falsely claimed to have made no expenditures for political campaign activity is characterized by tax law complexity.  He also voiced concern that 501(c)(4)s are being used in a manner that obscures the identities of ultimate contributors of funds destined for political action committees.  

The electronic citation to the story is 2013 TNT 69-6.

JRB

Russia Brings Charges Against Election Monitoring Nonprofit

In Russia Takes Legal Action against Election Monitors, the New York Times reports that Russia’s Justice Ministry has charged Golos, “Russia’s only independent election monitoring organization,” and its executive director with violating Russia’s controversial law that requires a nonprofit group to register as a “foreign agent” if it receives financing from abroad.  The law is described by the Times as “among the most provocative in a passel of Kremlin-supported legislation in recent months that was aimed at tightening restrictions and limiting foreign influence on nonprofit groups.”  According to the story, Golos was formed in 2000 with American support to monitor and comment on elections in Russia and other countries, and it “had a prominent role in drawing attention to fraud, including blatant ballot-stuffing and other crude measures, in the Russian parliamentary elections of December 2011.”  A conviction reportedly would cost Golos fines in excess of $15,000, and its executive director a fine of approximately $10,000.  An official with Golos is quoted as stating that the nonprofit has received no grants “from the moment the law on agents went into effect.”

The story presents the investigation against the backdrop of recent raids by Russian authorities on “some of the most prominent international organizations working here, including Amnesty International and Human Rights Watch,” as well as on “two of Germany’s most respected political foundations.”  The Times notes that Chancellor Angela Merkel of Germany recently has publicly criticized Russia’s treatment of nonprofits.

JRB

Article on Citizens United and the Internal Revenue Code

John L. Buckley, a professor in the graduate tax program at Georgetown University Law Center, and Dallas Woodrum, a Georgetown law student serving as executive articles editor for The Georgetown Law Journal, have published an article in Tax Notes discussing the use of tax-exempt organizations for political purposes following Supreme Court decisions on campaign finance.  They propose legislative reforms, including (1) removing the benefit currently enjoyed by Code section 527 organizations of the income tax exclusion for dues and contributions from a single source that exceed a specified amount; (2) eliminating the exclusion for capital contributions (and consideration in exchange for issued stock) received by corporations when they have been utilized to expend such funds for political purposes without disclosing the ultimate source of funds; (3) deeming political contributions to result in dividend income to corporate insiders who authorize political contributions in the absence of ex ante disclosure to, and authorization by, shareholders; and (4) providing more objective standards for determining whether issue advertising constitutes political campaign activity.  The electronic citation to the article is 2013 TNT 68-5.

JRB