December 17, 2009
IRS Releases Governance Check Sheet to be Used by EO Exam Agents
The Internal Revenue Service recently released a Governance Check Sheet that its examination agents will use when examining charitable organizations other than private foundations, along with a Guide Sheet providing instructions on how to complete the Check Sheet. According to the IRS's webpage for tax-exempt organization governance issues, the Check Sheet "will be used by IRS’ Exempt Organizations Examination agents to capture data about governance practices and the related internal controls of organizations being examined. The data will be included in a long-term study to gain a better understanding of the intersection between governance practices and tax compliance." These materials supplement the governance training materials previously released by the IRS.
It will be interesting to see whether IRS agents understand and communicate to charities under examination that questions relating to the Check Sheet are for data collection purposes and do not (at least as of yet) represent federal tax law requirements. Among items listed on the Check Sheet are whether certain written documents exist (mission statement, conflict of interest policy, financial reports, independent accountant's report and management letter, document retention policy, and board minutes), whether compensation for board members and senior staff is set through a process that meets the intermediate sanctions (Internal Revenue Code section 4958) rebuttable presumption procedure, and how many family and outside business relationships exist among board members. The Check Sheet also includes a number of questions relating to board activities, including the number of board meetings and whether the board reviews financial reports, the independent accountant's report and management letter, and the charity's Form 990.
December 16, 2009
Former Detroit Mayor Kwame Kilpatrick May Face Intermediate Sanctions
According to a December 16, 2009 story in the Detroit News, the Kilpatrick Civic Fund and former Detroit mayor Kwame Kilpatrick are under investigation for improper use of the 501(c)(4)'s money to fund
"romantic getaways for [Kilpatrick] and his then-mistress his then-mistress; the services of at least two political consultants; a trip to a California resort for the mayor and his family; and more than $25,000 in Kilpatrick rent and moving expenses around the time the mayor was freed from the Wayne County Jail and headed for Texas.
If true, the case presents a rather obvious occasion for imposition of intermediate sanctions under IRC 4958. The case is so obvious it would not even make a good exam hypothetical. The (c)(4)'s board, by the way, is populated by the Mayor's sister Ayana, and his former mistresses sister, according to the report.
Hill Street Blues: Pittsburgh Set to Tax Tuition as End Run Around University Tax Exemptions
Local government's have often played hard ball with large tax exempt entites within their jurisdictions. Payments in Lieu of Taxes, or PILOTS, are often thinly disguised extortion payments extracted from tax exempt organizations, in my opinion. In essence, a city or county government will "suggest" that a university or hospital make a so called "voluntary" payment to the local government to help with municipal services. Usually implicit in the request is that if the PILOT is not made, the local government may challenge the college or university's tax exemption in court. Pennsylvania has been particularly aggressive in extracting taxes by another name from tax exempt organizations. Large tax exempt organizations in Pittsburgh have been equally vociferous in exposing what amounts to a protection racket. For example in The Hospital Council of Western Pennsylvania v. Pittsburgh, 949 F.2d 83 (W.D. PA, 1991) a group of nonprofits complained that:
the defendant governmental units had attempted and were attempting to "coerce" or "force" tax-exempt member hospitals to make payments in lieu of taxes by "indicating that those [hospitals] which [did] not agree to such payments and/or agreements 'in lieu of taxes' [would] have their tax exempt status challenged, [would] be likely to run into difficulties in [**3] obtaining zoning approvals, and [would] not be offered the opportunity to provide services to the taxing authority.
The City of Pittsburgh, home of my beloved yet beleagured Steelers, has stooped to a new low in my opinion. It recently asked local universities to pony up $5 million annually and if they didn't, the City would impose a 1 percent "tuition tax" on students attending one of the city's many tax exempt colleges and universities. PILOT extortion demands are usualy accompanied by negative PR designed to shame large local nonprofits into forking over the cash. For example, Pittsburgh Mayor Ravenstahl is quoted in the New York Times as stating:
“Our colleges and universities are giving less and less while they increase tuition and executive pay and expand their campuses, removing high-value land from the tax rolls. The cost to provide public safety and public works services continues to increase, but our revenue continues to decrease.”
Colleges, universities and large nonprofit hospitals are being far too passive in this debate, not realizing that what happens in Pittsburgh is unlikely to stay in Pittsburgh:
Pittsburgh’s plan to adopt the nation’s first tuition tax on college students was postponed Wednesday, with the mayor holding out hope that the city’s 10 colleges and universities will agree to provide economic help voluntarily.
For more on Pittsburgh's efforts to surreptitiously repeal state granted tax exemptions see this December 16, 2009 New York Times article.
December 15, 2009
'Tis the Season . . . For Charitable Solicitation Reports?
Piggy backing on the surge in appeals and charitable giving that occurs at the end of the year, at least four states have recently issued reports on paid fundraising targeting their residents. We previously blogged about the annual New York Attorney General's report "Pennies for Charity" issued last month. Now the Attorneys General of Massachusetts and Vermont, along with Washington's Secretary of State have issued similar reports. Not surprisingly, the reports highlight that fundraising involving paid or commercial fundraisers returns on average 42 percent or less to the participating charities, but they also note that the percentage going to charities varies enormously, ranging from over 90 percent to less than 10 percent. Interestingly, the Vermont AG's report provides some of the most detailed data, including breakdowns by types of fundraising methods used.
These and similar reports by other state officials raise several important questions, including:
* Is the amount of attention paid by state officials to the activities of paid fundraisers too much or too little as compared to resources devoted to other types of charity oversight?
* Does the information provided in these reports actually change donor behavior, particularly when contacted by a paid fundraiser?
* Do such reports draw too much attention to fundraising ratios as compared to other measures of a charity's worthiness (even though the reports are usually careful to note that fundraising ratios do not tell the whole story about a charity's merit)?
December 14, 2009
NYT: Charities Rise, Costing U.S. Billions in Tax Breaks
The New York Times recently reported that the IRS approves nearly all applications for recognition of tax-exempt status as a charitable organization under Internal Revenue Code section 501(c)(3), including some rather unusual groups. The article is based on a Stanford University study that looked at 2008 applications. What the article fails to note, however, is that over 30 percent of all applications are withdrawn, never completed, or not processed because of a lack of the required filing fee (a point the study notes both in footnote 7 and in its concluding points). My personal, anecdotal experience from nine years of practice is that most such applications are not pursued to completion because the IRS starts asking hard questions and the applicant realizes it faces an inevitable denial or must significantly change its planned activities to obtain IRS approval, resulting in an effective denial if not a formal one. Moreover, those applicants who pursue the process to completion often adjust their planned activities in response to IRS demands, which may in part explain the high (98 percent in 2008) approval rate for completed applications.