Friday, January 8, 2010
As we approach the week-end and the traditional days of worship -- Friday, Saturday or Sunday, based on your religious persuasion -- here is a story that raises several issues not limited to taxation of nonprofits.
USA Today reported earlier this week that about 150 inmates at Louisiana State Penitentiary have thus far earned Bachelor of Arts degrees from the New Orleans Baptist Theological Seminary, and another 100 are on track to graduate in the near future. The program, initiated by Burl Cain who became warden at the prison in 1995, is funded by the seminary, the Louisiana Baptist Convention and private donations. Cain views the program as one of "moral rehabilitation."
So, does the program raise a question regarding the separation of Church and State? Thus far, the ACLU is steering clear of the issue. What's your opinion?
Yesterday's Chronicle of Philanthropy reported that early indications suggest that December brought mixed results for charity fund raising.
While many nonprofit groups reported significant drops that could force them to cut even deeper into the services they provide, other charities are reporting that they did well in December, with some doing better than they had anticipated, thanks to an unusually large number of donors who waited to give until just before the clock turned to midnight on January 1.
According to The Chronicle,
Catholic Charities USA, the national office that represents local Catholic Charities affiliates, had expected to fall several million dollars short of its $7.1-million goal for the year. But giving rallied at the end of December: Donations grew 21 percent that month compared with the same time last year, and the number of donors grew by 30 percent. Catholic Charities USA has so far recorded $6.6-million for 2009 and is still processing gifts.
The Chronicle continues:
Scott Nichols, vice president of development and alumni relations at Boston University, where giving rose slightly this December compared with last, said donors are waiting longer to make gifts because of the economy’s volatility.
“People are so influenced by headlines and whether there will be a new short-term meltdown that will make them worry,” he said. “What used to be an October-November-December peak period became a November-December period, and it’s even been condensed now to the last two weeks of December.”
However, many charities noted disturbing signs: donors who could not fulfill their pledges, fewer unrestricted gifts, and loyal donors giving smaller amounts than before the recession.
Wednesday, January 6, 2010
Ok. I accept the friendly challenge. There is a pretty good, thought provoking op-ed piece in today's Rochester City Newspaper regarding the costs and benefits suffered and enjoyed, respectively, by municipalities largely populated by tax exempt institutions. As a matter of fact, municipalities do suffer costs and enjoy benefits when tax exempt organizations move in. Of course, as the gentleman from Illinois points out, municipalities also benefit from the presence of taxable entities. Implicit, too, in John Colombo's argument is that a city suffers no tax harm from the presence of a taxable entity. They get a benefit but suffer no costs, in other words. Therefore, presumably, local governments are better off if only taxable entities move in. I agree only for the sake of the argument. If we presume, as we should, that tax exemption is justified by the benefit derived by the organization's presence, we may question that argument. But not now. Simply put, local governments lose property tax revenue when a tax exempt organization moves in, a loss that would not occur if a taxable entity moved in instead. One would think "there goes the neighborhood" a common refrain at city hall when very highly endowed tax exempt entities like Carnegie Mellon University come looking for a new place to settle. But we know that is precisely not true. If CMU decided or even credibly threatened to move out, Pittsburgh City Hall would have an incredible hissy fit. It is safe to say that every city in America would welcome the presence of CMU and other wealthy job providers even knowing that CMU could legitimately assert the right to never pay a dime to the public fisc, at least not via the property tax. So there must be some credible evidence, as of yet not very well marshalled by tax exempt organizations, suggesting that wealthy universities and hospitals generate a quantifiable benefit that far outweighs the lost revenues and far exceed the benefit to be derived from them not being present at all. There is the rub. The fallacy, if I may call it that, in comparing CMU to Microsoft is that Microsoft is the wrong comparator. Cities have to compare the benefits of having the non-taxable but nevertheless job generating, event- and highly skilled, very intelligent population-attracting entity in its jurisdiction to having nothing at all, because it is never the case that a Microsoft or other taxable entity would or would have necessarily relocated to its jurisdiction but for the presence of the tax exempt entity. Unless we can definitively correlate the absence of any given taxble entity to the presence of a tax exempt entity, the fact that the city would raise more revenue from a comparably sized taxable entity assumes too much.
That CMU and other very wealthy tax exempt organizations might violate their fiduciary duty and charitable obligation by paying fat salaries or failing to make their goods and services available to a sufficient segment of the population without regard to ability to pay is a whole 'nother issue, I think. I don't think it addresses the question whether the city of Pittsburgh, for example, would be better off it it taxed CMU. We start with the presumption that the cost of tax exemption is outweighed by the benefit to be derived from the tax exempt's existence. Unless we want to require every charitable organization to quantify that presumption, and risk skewed results due to the inability to accurately quantify the value of education, research or health care, we should presume the cost benefit analysis favors charitable organizations as well as their local government hosts. Local governments presume as much when they welcome with open arms large charities knowing that they will pay no taxes. It just that those same tax exempt organizations become easy political targets when local government budgets get tight.
Tuesday, January 5, 2010
Yesterday's New York Times reported that Roman Catholic Bishop Leo Yao Liang, who spent 28 years in Chinese prisons during Mao’s rule for his refusal to renounce his allegiance to the Vatican, died on December 30 in Xiwanzi, a town in north China's Hebei Province. According to the Times, Bishop Yao was 87 and had been ill with a severe cold for about two weeks before his death.
After the Communist Party took power in China in 1949, it outlawed Catholicism. Accordingly, Bishop Yao's religious work came under heavy government scrutiny. In 1956, the government sent him to a labor camp; in 1958 he was sentenced to prison for life after refusing to abandon his allegiance to the Vatican.
Yet, Bishop Yao presided almost up to his death over daily open-air Masses that drew hundreds of worshipers, and Sunday Masses that often attracted a thousand people. The Chinese authorities forbade him to carry out his administrative duties as bishop but did not overtly interfere with his clerical activities.
The Times continues:
China’s government does not recognize the Roman Catholic Church or its bishops. Instead, it promotes a government-affiliated faith, the Patriotic Catholic Association. But millions of Chinese are believed to remain loyal to the Vatican and attend so-called underground churches like those that Bishop Yao led. There are reported to be 15,000 Catholic worshipers in Xiwanzi diocese, where he was secretly made an auxiliary bishop in 2002.
For years after his release from prison in 1984, Mr. Song said, Bishop Yao urged his parishioners to follow a course of quiet but steadfast opposition both to the Patriotic Catholic Association and to government restrictions on their right to worship. But after Pope Benedict XVI made improved relations between the Vatican and Beijing a priority, he said, Bishop Yao began working to repair relations with the government.
Bishop Yao's week-long funeral concludes with his burial today.
May he rest in peace.
OK. I just couldn't resist. Following up my post from last week, CNN now reports that a federal lawsuit filed in Arizona claims that a chain of yoga centers is in fact a "a totalistic, high-demand cult group" that "enshrines" its founder, IIchi Lee as an "absolute spiritual and temporal leader."
The February 2010 edition of Kiplinger's Personal Finance Magazine lists the Top 100 Best Values in Public Colleges and Universities for 2009-2010. The list is headed by the University of North Carolina at Chapel Hill for overall value and by Binghamton University (SUNY) for out-of-state value. According to Kiplinger's, notwithstanding current economic conditions, the institutions in the Top 100 "continue to deliver strong academics at reasonable prices, in many cases by offering the same or more financial aid as in previous years." Kiplinger's notes that although the economy may indeed be recovering,
the effects of the recession continue to buffet the nation’s public colleges and universities. State governments, coping with shrunken tax revenues and an overwhelming demand for services, have cut funding for higher education. Universities that once relied on the income from fat endowments have yet to recoup multimillion-dollar losses to their portfolios. Families continue to apply for financial aid in record numbers. Meanwhile, enrollment at state institutions has spiked as more students go public and more people overall seek college degrees.
That the institutions on the list could continue to deliver strong academics at reasonable prices is indeed commendable. Congratulations to them all!
Senate Health Care Bill Imposes New Community Benefit, indigent Care, Collection Requirements on Charitable Health Care
I'm surprised not much is being said just yet about Section 9007 of the Patient Protection and Affordable Care Act pending in the Senate. That provision would impose new requirements on hospitals seeking tax exemption under IRC 501(c)(3). But then again, I doubt that anybody has actually read the bill in even small increments yet. But the provision appears to take on all the complaints directed against nonprofit health care over the last ten or fifteen years. In fact, Section 9007 is a rather astonishing overhaul of tax exemption for hospitals. Whether the provision is effective remains to be seen. I have only had time to skim the provision, but it looks like the provision (1) gives teeth to the idea of community benefit, by making hospitals actually determine and report on what the community needs, (2) requires tax exempt hospitals to implement a financial assistance program for indigent patients, (3) limits the amount it charges to indigent patients, and (4) limits the collection activities tax exempt hospitals can engage in. All of these requirements are proposed in a new IRC 501(r), the opening paragraph of which reads:.
(r) Additional Requirements for Certain Hospitals-
`(1) IN GENERAL- A hospital organization to which this subsection applies shall not be treated as described in subsection (c)(3) unless the organization--
`(A) meets the community health needs assessment requirements described in paragraph (3),
`(B) meets the financial assistance policy requirements described in paragraph (4),
`(C) meets the requirements on charges described in paragraph (5), and
`(D) meets the billing and collection requirement described in paragraph (6).
Monday, January 4, 2010
An interesting article in yesterday's Sacremento Bee raises the question whether down-payment assistance activities still constitute a charitable activity for which tax exemption may be granted. As many of you may recall, we previously blogged on a provision in the 2009 Foreclosure Prevention Act that effectively shut down most down payment assistance nonprofits. Many people argued, and Congress agreed, that downpayment assistance contributed to meltdown in the real estate market by making it possible for people who could not afford to buy a home take the dive anyway only to later suffer a foreclosure. The IRS, too, ruled that down payment assistance programs, at least those that are seller-funded, are not charitable activities. The Sacremento Bee article describes one nonprofit, Nehemiah Corp, that continues to hold a tenuous grip on its nonprofit status, primarily by restructuring and arguing that it is engaged in economic and community development:
Profit is important to us, but we have a larger purpose," said Syphax, 46, who was paid $486,000 in 2008 through Nehemiah's for-profit real estate arm, ranking him among the region's highest paid nonprofit executives. "The bigger purpose is economic empowerment and transformative community development. The jury is still out on whether the Internal Revenue Service agrees . . .
Syphax said Nehemiah needs to produce profits to pay for its charitable programs. In several years of its Form 990 filings, Nehemiah reported to the IRS that it recycled much of the money it earned from downpayment assistance – more than $55 million – for purposes such as construction of affordable housing and grants to community groups.
Still, the group's spending on charitable grants and contributions in the fiscal year ending June 30, 2008, was relatively small – $267,992 – compared with its $13.6 million in revenue, nearly all of which came from down payment assistance.
As far as I can tell from just the article, Nehemiah is a nonprofit holding company whose claim to tax exemption is based on the fact that it uses the profits derived from its for-profit subsidiaries to fund down payment assistance to people who would otherwise not be able to afford to buy a home. The facts present an interesting case study with regard to creative lawyering in the tax exempt field. Does Nehemiah's placement of seller-funded portion of its activities in taxable subs provide immunity against a private benefit based attack on its tax exempt status. Revenue Ruling 2006-27 held that seller-funded downpayment assistance programs were not charitable. What to do? Nehemiah apparently decided that it should peel off its taxable activities into separate taxable corporations and thereby retain its tax exempt status for its other activities. My initial "feel" is that this works. It seems to me that so long as Nehemaih is really engaged in economic and community development, the placement of its apparently taxable activities in taxable subs makes immune from a challenge to its tax exempt status. The bigger question I have is "why?" What is the benefit that Nehemiah retains from taking this route rather than simply operating as a for-profit? And assuming there is some benefit to taking this route, what must Nehemiah do to ensure that the activities of its for profit subs do not taint Nehemiah's activities.