July 2, 2010
Charitable Contributions Deduction under New York State Law Could Be Limited for High Income Taxpayers
The Chronicle of Philanthropy reports that a proposal to reduce the charitable contributions deduction allowed for individual donors who are “high earners” is facing resistance from nonprofits. Governor David Paterson and the state legislature have reportedly agreed on legislation that would permit New York taxpayers who earn more than $10-million annually (a pool of about 3,500 people) to deduct on their state income tax returns only 25 percent of their charitable contributions, rather than 50 percent as permitted by current law. The amendment reportedly could raise $100-million in revenue, according to the New York State Division of the Budget. But the state’s potential gain could be charities’ loss. Says the article:
“Many charities and nonprofits in New York City are outraged by this last-minute proposal to raise money, saying it would discourage many wealthy individuals and businesses from wanting to give, especially at a time when not-for-profits are reliant more than ever on charitable donations to survive the recession,” said the Human Services Council of New York City, in a statement.
Michael Stoller, executive director of the Human Services Council, added: “Any proposal that could possibly decrease private giving is going to be a disaster for all nonprofits in New York City and throughout the state. The state cannot balance the budget on the backs of those in need.”
The New York City Employment & Training Coalition urged organizations to contact lawmakers to plead that the charitable-contribution deduction for wealthy individuals be left alone.
“This affects your donors and their incentive to support your programs,” the coalition said. “Harsh state and city budget cuts already threaten our programs. Private donations are one of few ways to raise the revenue we need.”
Charity Endowments Up, Spending Down
The Chronicle of Philanthropy reports that charity endowments grew by an average of 21 percent in 2009, according to two studies by the Commonfund Institute, the research arm of Commonfund, a company in Wilton, Connecticut, that manages the investments of some 1,600 universities, foundations, and other nonprofits. Says the story:
More than 170 grant makers in one survey saw their investments increase by an average of 20.9 percent, compared with a 26-percent drop in 2008. In a separate study, 66 cultural, religious, and social-service groups recorded very similar returns in their endowments.
Endowment spending was apparently conservative, however:
Although assets began to rebound last year, many foundations and charities cut back further on giving and spending.
Fifty-five percent of community foundations, for example, said they gave less in 2009, while only 16 percent said they gave more. Among operating charities, 38 percent spent less and 20 percent spent more.
Other findings of the studies include the following:
Organizations saw very modest growth over a five-year period, an average of 3.6 percent for foundations and 4 percent for charities. Those returns were not enough to cover spending, inflation, and other costs, according to John S. Griswold, executive director of the Commonfund Institute.
Grant makers gave away an average of 5.9 percent of their assets last year, while operating charities spent an average of 4.9 percent.
One should not conclude from this study that all private foundation giving is down to the bare minimum required to avoid excise taxes, however. In a separate story, the Chronicle of Philanthropy reports that more than eight out of 10 small and midsize foundations spent more than the minimum distribution required by Code section 4942, according to a study by Foundation Source. See Small and Midsize Foundations Exceed Payout Requirements in 2009, Study Finds.
Campaigning by Teens Affiliated with Nonprofit Is Raising Questions in Georgia
The Atlanta Journal-Constitution reports that Republican gubernatorial candidate John Oxendine has paid $12,500 “for the door-knocking services of 150 teenagers” in the primary race this month. The Oxendine campaign reportedly paid the money to Gold Dome Consulting, a for-profit consulting firm owned by Public Service Commission candidate Tim Echols. The teens are also reported to be campaigning for Echols for free. Why are the kids knocking on doors in Georgia’s summer heat? The article states that they are there “at the request” of Echols, who founded TeenPact, a government leadership-training arm of the Family Resource Network, a nonprofit exempt from federal income tax as an organization described in section 501(c)(3) of the Internal Revenue Code. This is the same provision, of course, requiring as a condition of exemption that the entity “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.”
Echols reportedly maintains that, although the teens are TeenPact participants, they are not campaigning through TeenPact:
"The Oxendine campaign has hired my consulting firm, Gold Dome Consulting, to do a limited amount of grass-roots work," Echols said. "This includes dropping literature door to door. My team is dropping their [Oxendine's] literature and mine."
Echols said "most of the folks helping with the project are students, but this is not a TeenPact project. I have been paid a fee of $12,500, which will be on their [Oxendine's] disclosure this quarter.
"I have taken great precautions to ensure that no asset of TeenPact is used to aid any campaign, including my own. The IRS has strict rules that prohibit nonprofits from assisting campaigns, and I am in full compliance."
July 1, 2010
Burch Publishes Article on Funding for the Arts
Micah J. Burch (Senior Lecturer, University of Sydney - Faculty of Law) has published National Funding for the Arts and Internal Revenue Code § 501 (C)(3), 37 Fla. State Univ. L. Rev. 303 (2010). A copy of the abstract of the article posted on SSRN follows:
For the large number of U.S. arts organizations whose existence depends on private charitable donations, qualification for federal tax exemption under I.R.C. § 501(c)(3) is effectively a requirement for survival. The federal tax rules directly affect the vitality and direction of arts in the United States by determining which organizations qualify for exemption and life-giving tax deductible contributions. These tax rules are arguably the largest single component of U.S. national arts policy, but because they are tucked away in provisions of the federal tax code that do not even use the word “art,” they remain somewhat insulated from the otherwise vigorous public discourse regarding arts funding. § 501(c)(3) generally requires arts organizations to meet the definition of “educational” in order to qualify for tax exempt status. This is a problem because an exclusive focus on the demonstrably “educational” aspects of art undermines (or at least fails to address) the important democracy-enhancing justifications for publicly supporting art in the first place. In particular, the requirement that tax-exempt arts organizations meet the tax law’s definition of educational prevents the type of diversity - and subversiveness - that a successful arts policy should encourage and fosters the type of conservatism that renders direct support for the arts an incomplete policy. Part II of this Article discusses the justifications for public financial support for the arts and the two alternatives for delivering that support - directly (exemplified by the National Endowment for the Arts) and indirectly (as exemplified by the tax subsidy that is the subject of this Article). Part III examines the current interpretation of § 501(c)(3) as it applies to arts organizations and identifies its inadequacies in light of the reasons for publicly supporting art. Part IV recommends explicitly adding arts organizations to the list of those eligible for tax exempt status under § 501(c)(3). An explicit statutory identification of arts organizations as deserving of tax exempt status (by virtue of being artistic rather than educational) would better protect arts funding from changing political winds and free arts organizations to fulfill their role in our democracy - resisting the tyranny of the status quo and providing a counterbalance to headlong scientific and technological advancement. In this way, federal tax law can better do its part in implementing national arts policy.
What Canada Can Learn From U.S. in Combat against Charity Fraud
In Lessons for Canada in the American approach to telemarketing fraud against charities, published in LawNow, author Peter Broder shares his thoughts on curbing abuse in charitable fundraising and financial exploitation of charities’ names in Canada. The first few paragraphs of the article capture its essence:
Earlier this year, the U.S. Federal Trade Commission (FTC) won massive judgments against two different telemarketing groups for misrepresenting to donors the benefits to charities associated with their solicitations. Canadian officials would do well to take note of these successes.
One FTC case stemmed from the telemarketer suggesting, during solicitations, that he or she worked directly for the charities on whose behalf funds were being sought and that these groups received all proceeds of donations. In fact, only a small percentage of each gift went to the charity. The other action related to a cause-related marketing scheme, where goods were sold at a premium with a percentage of the proceeds purportedly going to charities or disabled individuals. The claim that charities or the disabled benefited was untrue.
The penalties imposed were staggering....
Under U.S. law, the FTC enjoys wide authority to move against consumer fraud and, more specifically, to enforce a prohibition on "unfair and deceptive practices" in commerce. In contrast, Canada's Competition Act focuses more on "false or misleading representations" usually related to products. In addition to this discrepancy, the constitutional authority given to the federal government differs in the two countries making it more difficult for Canadian regulators to seek civil penalties.
As well as the Competition Act, the Canadian legal framework also features a variety of provincial consumer protection laws, and in some provinces, statutes specifically governing fundraising practices. In the U.S., many states also have consumer protection legislation and often also have laws regulating fundraising.
But the kind of conduct attacked by the FTC frequently falls outside of what would be provincial jurisdiction, or is beyond the scope of current provincial statutes in Canada. Modern technology allows unscrupulous operators to set up in jurisdictions without strong legislation or with lax enforcement and conduct their business across borders to reach markets in other provinces. Like privacy, environmental, and securities legislation, a federal presence in this field is becoming essential for effective regulation. In part, this could entail playing a multi-jurisdictional, multi-agency co-role as is sometimes done by the FTC in the U.S. ...
Nonprofit in Prestigious Atlanta Community Seeks to Protect Exclusive Name
The Atlanta Journal-Constitution reports that the Buckhead Coalition, a nonprofit that promotes the interests of the upscale Buckhead region of Atlanta, is demanding that businesses that use "Buckhead" in their name but are not located in the 28-square-mile area drop the term. The coalition’s president, Sam Massell (formerly a mayor of Atlanta) says that 51 businesses have been identified through the AT&T "Real White Pages" Greater Atlanta Business directory for using the Buckhead name but operating beyond the community's boundaries. The nonprofit reportedly intends to mail letters Friday to owners of these companies and attempt to enforce the demand. The organization is relying on a recent amendment to the Fair Business Practices Act of 1975, which prohibits use of a business name if it misrepresents the geographic origin or location of the business.
June 30, 2010
Recent News on PILOTS
This blog has previously addressed the practice of soliciting payments in lieu of taxes (“PILOTS”) from nonprofits by revenue-strapped local governments. See, e.g., Massachusetts Municipalities Join Others Seeking PILOTs; Boston, Palo Alto Seek Nonprofit Payments and a "Church" in Illinois Fights Property Taxes; Anything Can be Tax Exempt: More on Pilots too; Debate on PILOTS, the sequel; More on PILOTS and Nonprofit Charities Paying Their Fair Share; Pittsburgh Mayor Reaches Deal with Nonprofits; Indiana Bill Would Impose PILOTS on Nonprofit Organizations.
The following are some recent stories concerning PILOTS.
From the Boston Globe: Here are the first two paragraphs of Boston University negotiating PILOT agreement with Brookline.
Boston University could pay Brookline almost $400,000 in lieu of taxes in the upcoming fiscal year in what town officials said Tuesday is the first agreement of its kind with the school.
Though the final details of the payment in lieu of taxes, or PILOT, program are still being ironed out, town and university officials said Tuesday they are confident they will be able to sign off on the agreement in early July.
And again from the Globe: Progress on BU Payment:
Talks are underway for the largest payment in lieu of taxes likely in Brookline, according to Stephen Cirillo, the town's finance director. He briefed selectmen Tuesday on the status of PILOT talks with Boston University, the town's largest taxpayer, and which also owns the highest value tax-exempt properties. The town and the university have agreed on a payment equivalent to 25 percent of the taxes that would otherwise be due on its holdings, Cirillo said, or roughly $380,000, starting with the fiscal year beginning July 1. Cirillo said that he and the university negotiators hope the eventual agreement will serve as a national model for such deals. Over the last few years, the town has negotiated PILOT agreements with several smaller nonprofit entities with tax-exempt property.
At a recent meeting of the Dallas City Council, ideas for raising revenue included the use of PILOTS. The Dallas Morning News reports as follows:
One idea was a program to try to get large non-profits who use city resources to voluntarily contribute to the city in lieu of taxes, which they are legally exempt from paying.
The practice, known as PILOT - Payment in Lieu of Taxes, is used by cities across the country, including Baltimore, Boston , Cambridge, Detroit, Indianapolis, Milwaukee, Minneapolis, New Haven, Palo Alto, Philadelphia , and Pittsburgh, according to city staffers.
"There are many different ways that they may charge the PILOT," said Jack Ireland of the city manager's office. "It may be based on a percentage of the taxable value, or it could be some negotiated rate to cover the cost of police and fire, or in some of the northern cities they use it to cover the cost of snow removal and the [sic] such."
Nearly 12,000 properties in Dallas valued at $10.7 billion have tax-exempt status, city officials say. They include cemeteries, charities, schools, hospitals and religious organizations. They also include about $1.2 billion worth of hospitals and medical buildings classified as charitable. Applying the city's property tax rate to the hospitals and medical buildings alone would generate $8.8 million in annual revenue, city officials noted.
Additionally, as noted on our sister TaxProf Blog, Town Wants Princeton to Increase Payments in Lieu of Taxes, Bloomberg reports that Princeton is facing pressure to increase its PILOTs. According to the story,
[t]he university would pay about $28 million in additional property taxes if all of its land were taxed, said Princeton Borough Councilman Kevin Wilkes. The college owns 43 percent of the borough’s assessed land value and 13 percent of adjoining Princeton Township’s, Wilkes said.
What does Princeton already contribute to the community? The Bloomberg story continues:
The university is already the largest taxpayer in Princeton Borough and Princeton Township, Durkee said. It paid $8.2 million last year in property taxes on housing for staff, faculty and some graduate students as well as for parking lots and other commercial facilities. It contributed an additional $1.6 million in sewer fees last year, according to the university….
The university doesn’t pay property taxes on academic, administrative and athletic facilities. Instead, it made a $1.2 million payment in 2009 in lieu of taxes, part of a six-year agreement that expires at the end of 2011.
Princeton University also pays $35,000 a year to support the First Aid & Rescue Squad and $100,000 a year for a staff position at the fire department, the university said. It gave $60,000 to the borough in 2008 to launch a free jitney service to the train station for residents, and community members can visit the art museum and children’s library on campus at no charge. The university helped restore the Garden Theatre, on Nassau Street bordering the college, in 2001. That same year, it gave a $500,000 gift to the school system for a new high school library.
The university employs about 5,300 people, and each year it helps generate more than $1 billion in economic activity, according to a 2008 college-issued report.
But, according to the rest of the story, Princeton’s PILOTS lag those of Harvard and Yale:
Harvard University, which has the largest university endowment in the U.S., made $4.14 million in voluntary payments in lieu of taxes in 2009 to Cambridge and Boston, the two cities where its campuses are located.
Yale University, which has the second-largest endowment in higher education in the U.S., increased its annual voluntary payment in lieu of taxes to its hometown, New Haven, Connecticut, to more than $7.5 million in 2009 from $5 million.
NYSBA Requests Guidance from IRS
Peter Blessing, Chair of the Tax Section of the New York State Bar Association, has submitted a letter on behalf of the section to the IRS requesting guidance on several issues during the 2010-2011 guidance plan year. The full letter is available on Tax Notes Today at 2010 TNT 125-24. The following matters for which guidance is requested pertain to exempt organizations:
(1) What constitutes a "functionally unrelated business" under Code section 4943;
(2) Guidance on private foundation issues for investors in Ponzi schemes (NYSBA Tax Section Report No. 1183); and
(3) Guidance concerning whether a disregarded entity owned by a charity is disregarded for all exempt organization purposes (e.g., is a donation to a domestic or foreign DE subsidiary of a US charity tax deductible?).
June 29, 2010
Esbeck Posts Paper on SSRN
Given the interest of the nonprofit sector in receiving federal funding allocated in the discretion of the Executive Branch, readers of this blog may find a brief essay by University of Missouri Law Professor Carl Esbeck of interest. An abstract of the paper, posted recently on SSRN, follows:
This essay plays off a critique by Professor Maya Manian of an article where I discussed the decision in Hein v. Freedom From Religion Foundation, Inc., 551 U.S. 587 (2007) (plurality opinion). While Professor Manian was concerned about how the result in Hein would lead to under enforcement of church-state separation, my article had utilized Hein, and more generally the law of taxpayer standing beginning with Flast v. Cohen (1968), to look beyond the question of aid to religion. Rather, I began by showing that the only cases in which the Court had announced a “generalized grievance” and thereby denied standing were when the cases alleged a structural violation of the Constitution as opposed to stating rights-based claims. Taxpayer claims allege a structural violation, thus they are dismissed as “generalized grievances”. Since Flast, however, the Court has made one exception: where the taxpayer claim concerns an appropriation said to violate the Establishment Clause. It follows that the Court is viewing the Establishment Clause as a structural restraint; namely, the separation of church and state is about keeping in right order these two centers of authority. That is why it can be said that the Establishment Clause is about policing the boundary between government and organized religion. The Court responded to that in Flast by making an exception to the rule against taxpayer standing. In Hein, the Roberts Court, by a vote of 7-2, continued to adhere to the presupposition that the Establishment Clause is structural in nature.
Dadush Posts Paper on SSRN
Sarah Dadush (Research Fellow, Institute for International Law and Justice, NYU School of Law) has posted on SSRN Profiting in (RED): The Need for Enhanced Transparency in Cause-Related Marketing. Here is the abstract:
As a case study of the privatization of development assistance, this paper examines the financing and public disclosure mechanisms underlying Product (RED), a marketing campaign designed to raise funds for the Global Fund to fight AIDS in Africa. The paper argues that many cause-related marketing programs operate in a non-transparent fashion that puts both consumer protection and consumer trust in philanthropy at risk. It suggests that charities regulation offers some useful tools for ensuring greater levels of transparency and accountability among programs like (RED). Specifically, the piece recommends that entities that cross the line from commerce into philanthropy should be subject to the same (or similar) regulations as are applicable to actors more commonly recognized as operating in the charities arena, such as professional fundraisers or commercial co-venturers.
McDonald Opinion’s Impact on the Nonprofit Sector
In yesterday’s decision of McDonald v. City of Chicago, the United States Supreme Court (in a 5-4 decision) held unconstitutional Chicago’s ban on handgun possession by private citizens. The opening paragraph of the Court’s opinion, most (but not all) portions of which garnered the support of five justices, summarizes the legal significance of the case as follows:
Two years ago, in District of Columbia v. Heller, 554 U. S. ___ (2008), we held that the Second Amendment protects the right to keep and bear arms for the purpose of self-defense, and we struck down a District of Columbia law that banned the possession of handguns in the home. The city of Chicago (City) and the village of Oak Park, a Chicago suburb, have laws that are similar to the District of Columbia’s, but Chicago and Oak Park argue that their laws are constitutional because the Second Amendment has no application to the States. We have previously held that most of the provisions of the Bill of Rights apply with full force to both the Federal Government and the States. Applying the standard that is well established in our case law, we hold that the Second Amendment right is fully applicable to the States.
A notable qualification of the scope of the opinion appears in the following excerpt:
We made it clear in Heller that our holding did not cast doubt on such longstanding regulatory measures as “prohibitions on the possession of firearms by felons and the mentally ill,” “laws forbidding the carrying of firearms in sensitive places such as schools and government buildings, or laws imposing conditions and qualifications on the commercial sale of arms.” Id., at – (slip op., at 54–55). We repeat those assurances here. Despite municipal respondents’ doomsday proclamations, incorporation does not imperil every law regulating firearms.
An interesting question is to what degree restrictions on hand gun possession on the premises of numerous types of nonprofits – not just schools, but also churches, hospitals, and homeless shelters, for example – would survive constitutional scrutiny. The question is already being mulled over in Georgia, as reported in an article appearing in the Atlanta Journal-Constitution.
June 28, 2010
Vietnam -- Article Published by Mark Sidel
Mark Sidel has published an interesting articleon the development of the laws and regulations affecting civil society organizations in Vietnam, a country that ICCSL has been following for several years. One worthwhile aspect of the paper is that it provides a means of comparing Vietnam and China as they continue on their quest to find ways to regulate civil society that are consistent with their political systems.
China Philanthropy Update
· New philanthropy research institute created. Wang Zhenyao, the head of China’s first philanthropic research institute, is calling on all Chinese billionaires to donate a million yuan a year to charity. Wang says multimillionaires should give a hundred thousand yuan annually. For the past two decades, Wang worked in the Ministry of Civil Affairs. He is famous in China for his efforts to help victims during the 2008 Sichuan Earthquake. He has also promoted care for orphans and asked the government for more money for the elderly. But Wang wants more than government support for China’s poor. He wants professional, sustainable, private philanthropy to grow. Now he has left the ministry to head the new Beijing Normal University One Foundation Philanthropy Research Institute full-time. While Wang has long been a firm believer in the importance of charity, one of his subordinates says that makes him “a rather lonely person” in official circles, according to a 21st Century Business Herald article. Charity is an emerging field in China, a sign of economic growth and a response to rising inequality. Traditionally, financial assistance came either from the state or from extended family networks. The Chinese government has long spoken of “serving the people” and “serving society.” However, China lags behind Western countries in private donations. The Chinese Civil Affairs Development Report shows that the Ministry received 6.86 billion yuan (just above $1 billion) in donations in 2009, reports a recent China News article.
· The China Charity Donation Information Center in partnership with Shanghai NPO Development Center completed its report on Diaspora Giving to China 2008-2009 as part of APPC’s Diaspora Philanthropy Grants. The grants provided seed money for specific research activities that lead to making operational databases that will map out the dynamic relationships being cultivated from the giving end to the receiving end. These grants were awarded to organizations in China, Pakistan, the Philippines and Bangladesh in July 2009 to conduct various database studies on Diaspora giving to home communities, as follow up work to APPC’s 2008 regional conference “Diaspora Giving: An Agent of Change in Asia Pacific Communities?”
Highlights of China Report on Diaspora Giving
· Between 1 January 2008 and 30 June 2009, 24 provinces and municipalities in Mainland China received Diaspora giving valued at RMB 6.7 million from Hong Kong, Macao, Taiwan and overseas Chinese around the world.
· Sichuan province received the most donations due to the Earthquake and snow disaster in early 2008, receiving 37% of the total Diaspora giving to China.
· Second biggest receiver was Beijing, receiving 19.6% of diaspora monies. The city of Beijing houses majority of national charity organization headquarters, such as the China Red Cross Society and China Charity Federation.
· Individuals compose the largest composition of givers followed by overseas Chinese groups and organizations and overseas Chinese enterprises.
· Diaspora funds received in this period were allocated to disaster relief, education, science and sports, poverty alleviation and development.
· Seeing the response of overseas Chinese, provincial and municipal governments passed related overseas donation regulations, which provide policy support and guarantees to further enhance the overseas Chinese donations’ impact.
Email to email@example.com for more information or the full report.
IRS Denies Tax Exemption under Code Section 501(c)(7) to Winemaking “Club” on Multiple Grounds
As reported by Tax Notes Today, at 2010 TNT 123-33, the IRS has determined that a winemaking organization purporting to operate as a club does not qualify for federal income tax exemption under section 501(c)(7) of the Internal Revenue Code because it is operated as a commercial business and its earnings inure to the private benefit of its founders. The ultimate determination is unsurprising on the facts, but one aspect of the IRS’s rationale is suspect.
By way of brief background, Code section 501(c)(7) exempts from federal income taxation clubs organized for pleasure, recreation, and other non-profitable purposes, substantially all of the activities of which are for these purposes, and no part of the net earnings of which inures to the benefit of any private shareholder. The United States Treasury regulations under this Code section state that a club which engages in business, such as making its social and recreational facilities available to the general public or selling real estate, timber, or other products, is not organized and operated for pleasure, recreation and other non-profitable purposes, and therefore is not exempt. Solicitation for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure, recreation, or social purposes.
The adverse determination letter issued by the IRS concludes that the “club” in question fails the test of the statute and regulations. It conducts commercial advertisements for public patronage of its wine making facility. Any person wishing to purchase the organization’s services and products automatically becomes one of its members upon payment of a large fee. Membership, however, confers no voting rights or any other of the privileges and responsibilities normally associated with membership in a genuine social club. For example, ostensible members could not vote for officers or directors, and their prospects of social commingling were limited and seemingly secondary to the commercial nature of the organization’s operations.
More troubling is the superficial reasoning of the IRS on the distinct issue of whether the “club” failed the test of exemption additionally on grounds of private inurement. The adverse determination letter states as follows, in relevant part:
You fail to meet the requirement of section 501(c)(7) of the Code that your earnings must not inure to the benefit of private individuals. You are completely controlled by your founders Mr. and Mrs. X, who are in the winemaking business or who have winemaking as their profession. Mr. and Mrs. X, acting as both landlord and tenant, rented their winemaking facility to you. The fact that Mr. and Mrs. X charged you rent based on the fair market value of their facility (which was only established almost a year after the date of the lease agreement) does not mean that they did not realize a financial gain from this transaction. On the contrary, a prudent landlord would expect to make a financial gain by leasing a facility at a monthly rent equivalent to its fair market value. Renting the facility to you, an entity that they completely controlled, also relieved Mr. and Mrs. X of the expense of marketing the facility to an unknown, unrelated tenant. Thus, the lease between the closely related parties produced prohibited inurement and this reason, standing alone, constitutes sufficient justification for denying your request for exemption from income tax under section 501(c)(7), independent of the other reasons described in this letter. . . .
Your plan to pay Mr. X as your wine steward or winemaker as soon as you are financially able to do so confirms that your earnings will inure to the benefit of your founders, Mr. and Mrs. X. You asserted that the annual salary that you will pay Mr. X will be reasonable in comparison to salaries paid by other employers for employees providing similar services. However, the inurement derives more from your hiring methodology than from the specific amount of the compensation. As stated above, Mr. and Mrs. X formed you and made all of your business decisions. Your plan (formulated by Mr. and Mrs. X) to hire Mr. X provides a valuable economic benefit to Mr. X even if his salary does not exceed what is reasonable for his services. At a minimum, this arrangement relieves Mr. X of the time, effort and expense of seeking employment from an unrelated employer. This second form of inurement, standing alone, provides sufficient justification for the proposed denial of exemption independent of the other reasons described in this letter. . . .
These sweeping statements in the determination letter reflect an understanding of “private inurement” that is more expansive than that supported by the weight of federal case law. Although exclusive financial arrangements with insiders and promotion of the financial interests of a founder can indeed produce private inurement, or confer an unlawful private benefit even in the absence of private inurement, the payment of reasonable compensation or market rent for necessary services and facilities does not, “standing alone, provide sufficient justification” for denying tax exemption. Under the reasoning of the determination letter, no social club – and, by analogy, no public charity – could pay reasonable compensation for services or market-rate consideration for goods and facilities provided by insiders. Such a view is inconsistent with judicial decisions and, in the case of public charities claiming exemption under section 501(c)(3), would largely render moot the excess benefit transactions excise tax (i.e., the so-called “intermediate sanctions” regime) of Code section 4958.
The Common Denominator between Voluntary Taxes and Charitable Giving
An interesting story in the Boston Globe discusses the potential viability of raising governmental revenues through voluntary taxes. The article, which quotes Yale law professor Ian Ayres and U.S.C. law professor Edward McCaffery, begins with the following fascinating statistics:
In tax year 2008, the Massachusetts Natural Heritage and Endangered Species Fund received $216,544 in taxpayer money to protect threatened species, such as the bald eagle and the marbled salamander. The state's Organ Transplant Fund received $117,654 to help patients who need new kidneys and hearts pay for medical care. And the Massachusetts AIDS Fund got $112,939 for research and education relating to the disease. The functions of these programs differ widely, but they all share one remarkable feature. The taxpayer dollars were not wrenched from the pockets of the Commonwealth's residents.
The gist of the article is that those who object to higher taxes would not necessarily decline to pay more taxes when asked to do so. According to the story, research conducted by economists at the University of Texas at Dallas suggests that many people would in fact voluntarily raise their tax bills if they are given the opportunity to do something that donors to charity have long done – direct the use of their transfers to some degree. When tax revenues are sought to support specific governmental projects, research reportedly shows that people are almost as likely to pay additional taxes to support such projects as they are to donate sums to charity. The research suggests that people do not necessarily object to paying more to government. Rather, they want some assurance that taxes will be spent for purposes that the taxpayers value. The obvious potential benefit of facilitating voluntary tax payments is enhanced funding of worthy public projects. The article also notes the possible negative effects of relying on voluntary taxes, such as enhancing the political influence of the wealthy and shifting responsibility for making allocations of public resources from governmental decision makers to private hands.
These concerns are, of course, familiar to scholars of tax law and charity law, because analogous points figure prominently in debates surrounding the charitable contributions deduction and tax expenditures.
Controversial Palin Speech Has Been Spoken
For those readers interested in following up on the story surrounding Sarah Palin’s speaking appearance at Cal State Stanislaus, previously blogged here, the Los Angeles Times reports that the June 25 event “grossed more than $450,000 in cash and in-kind donations, for a net cash total of $200,000.” A foundation official stated that a third of the net receipts will be used for scholarships, and the remainder will fund university programs. The event, sponsored by the nonprofit Cal State Stanislaus Foundation, reportedly triggered a lawsuit against the university by a watchdog group seeking disclosure of the Palin contract, and an inquiry into the foundation’s finances by California State Attorney General Jerry Brown.