July 9, 2010
Two Sports-Related Charities - Stories of Excessive Executive Compensation and Mismanagement of Assets
Los Angeles: As reported in The New York Times, the Los Angeles Dodgers paid one of their senior executives more than $400,000 in compensation from the team's charity, Dodgers Dream Foundation, in 2007. The compensation accounted for one-fourth of the foundation's approximately $1.6 million budget that year. The team's senior vice president for public affairs received the compensation for what the charity's records describe as a full-time job at the Foundation, whose publicly-supported mission is to serve the educational and athletic needs of children. While receiving compensation from the Foundation, the senior VP also performed responsibilities for the team, including acting as a chief advisor to the team owner as well as the Dodgers’ chief negotiator with politicians and businesses. He was paid an additional undisclosed salary for his work outside the Foundation. The Times opined that the senior VP's compensation from the Foundation was more commensurate with that of an executive running a $100 million charitable organization.
Chicago: As reported in the Chicago Tribune, despite assurances made over four weeks ago, former Chicago Bear Chris Zorich has still not located the financial records delineating what happened to approximatley $864,000 once held by his presently inactive charity, The Christopher Zorich Foundation. In a previous article published in June, the Tribune reported that the Foundation was in "disarray," with Zorich unaware of the existence of the assets listed on the Foundation's 2002 tax return, reportedly the last one filed with the IRS. Apparently, the IRS filed a $10,000 lien in April against the Foundation. The Illinois Attorney General revoked the charity's registration in 2004, rendering the Foundation ineligible to solicit, receive or retain funds in Illinois. In a June 8 interview with the Tribune, Zorich reported that the charity ceased operations in 2008, not having accepted donations since 2005.
Church or Fraudulent Scam?
In a recent MSNBC story, the validity of the Syro Russian Orthodox Catholic Church as a "church" is under scrutiny. Questions are being raised about the true religious nature of the church, whether the self-proclaimed religious priests and archbishop were ever ordained, and the validity of diplomas being awarded by its affiliated university (formerly, the Notre Dame de Lafayette University of Colorado, whose assets were subsequently transferred to the Mercian Orthodox Catholic Church). A police detective in Duluth, Minnesota spent over a year investigating the church and its seminary then located in Minnesota (now in Ohio), documenting more than $40,000 in fraud alleged by five students. He presented his documented evidence to the Minnesota attorney general, the FBI, and the local prosecutor, all of which were reluctant to take on the case because it involved a church.
The article discusses the relatively non-evasive nature of income tax exemption law with respect to entities claiming to be bona fide churches, making it an area of potential abuse, as discussed by our fellow blogger and academic, Lloyd Mayer. In fact, it appears that the IRS did grant exempt status to this organization as a church. The article also reveals the slippery slope that law enforcement encounters when dealing with an entity claiming to be a church. At a minimum, it provides a fascinating case study and teaching opportunity for any nonprofit law professor.
IRS Seeks Comments on Impending Disclosure Requirements
As previously blogged, tax-exempt organizations are among 40 million entities that will be affected by new disclosure requirements as to payments made in the course of its operations beginning in 2012. Accordingly, in Notice 2010-51, the IRS is inviting public comments regarding guidance to be provided as to those new reporting requirements. Again, these new requirements imposed by the Patient Protection and Affordable Care Act of 2010 expand the existing information reporting requirements to apply to payments made to corporations and to include certain payments of gross proceeds and with respect to property.
July 8, 2010
Taxpayer Advocate: Tax-Exempt Organizations Subject to Onerous Reporting Requirements under the Health Care Act
In her mid-year report to Congress, Taxpayer Advocate Nina E. Olson raises concerns about new reporting requirements imposed on businesses and tax-exempt organizations beginning in 2012 by the Patient Protection and Affordable Care Act of 2010. Specifically, she questions the compliance benefits of the new requirements to the IRS in relation to the potentially onerous burdens imposed on small business and tax-exempts. The relevant portion of her report, as summarized on the IRS website, follows (emphasis added):
2. New Business and Tax-Exempt Organization Reporting Requirements.
The report expresses concern that a new reporting requirement contained in the Patient Protection and Affordable Care Act may impose significant compliance burdens on businesses, charities, and government agencies. Beginning in 2012, all businesses, tax-exempt organizations, and federal, state and local government entities will be required to issue Forms 1099 to vendors from whom they purchase goods totaling $600 or more during a calendar year. To meet this requirement, these businesses and entities will have to keep track of all purchases they make by vendor. For example, if a self-employed individual makes numerous small purchases from an office supply store during a calendar year that total at least $600, the individual must issue a Form 1099 to the vendor and the IRS showing the exact amount of total purchases. The provision will have broad reach. According to a TAS analysis of 2009 IRS data, about 40 million businesses and other entities will be subject to the new requirement, including roughly 26 million non-farm sole proprietorships, four million S corporations, two million C corporations, three million partnerships, two million farming businesses, one million charities and other tax-exempt organizations, and more than 100,000 government entities. All of these nearly 40 million businesses and other entities are subject to the new reporting requirement.
TAS has not yet reached any conclusions regarding the benefits and burdens of the requirement, but the report expresses concern that the burdens “may turn out to be disproportionate as compared with any resulting improvement in tax compliance.” During FY 2011, TAS will study the impact of the new reporting requirement more closely and, depending on what its study finds, may propose administrative or legislative recommendations to modify the provision or suggest that Congress consider less burdensome tax gap proposals, including a TAS proposal to require reporting of non-interest bearing bank accounts, to replace it.
Sperm Donor's Nonprofit Organization Not Tax-ExemptIn Free Fertility Foundation v. Commissioner (135 T.C. No. 2 (July 7. 2010)), the U.S. Tax Court concluded that a nonprofit organization, The Free Fertility Foundation, created to provide a donor's sperm without charge to women seeking to become pregnant through artificial insemination or in vitro fertilizaion did not qualify for tax-exempt status under section 501(c)(3) for the charitable purpose of promoting promoting health. Certain portions of Judge Foley's opinion follow:
The free provision of sperm may, under appropriate circumstances, be a charitable activity. Petitioner, however, does not qualify for tax exemption because the class of petitioner’s beneficiaries is not sufficiently large to benefit the community as a whole. ... the class of potential beneficiaries includes only the limited number of women who are interested in having one man-–Naylor–-be the biological father of their children and who survive the very subjective, and possibly arbitrary, selection process controlled by the Naylors. Over a 2-year period, petitioner received 819 inquiries and provided sperm to 24 women. In deciding who receives the sperm, petitioner has certain preferences that narrow the class of eligible recipients. It is not apparent what, if any, relationship some of these preferences have to the promotion of health. ...
While Naylor may believe that petitioner’s activities “make more of a positive difference to the world than all of the inventions and scientific discoveries that * * * [he] could ever create”, we are not convinced that the distribution of one man’s (i.e., Naylor’s) sperm to a small number of women, selected in the manner presented, promotes health or confers a public benefit.
(Hat tip: TaxProf Blog)
Should Corporations' Charitable Giving Be Disclosed?
In article entitled "The Democratization of Corporate Philanthropy" published in Forbes.com's "The CSR Blog," James Epstein-Reeves argues that corporations' nondisclosure of their charitable giving efforts is "absolutely necessary because of the sheer number of requests corporate giving officers receive." Epstein-Reeves, described by Forbes as "a Chicago-based expert on corporate social responsibility, philanthropy, and cause-marketing and the president of Do Well Do Good, LLC," defines "democratization" as the corporate trend of philanthropic contests such as Pepsi Refresh, Kohl’s Cares, and the Members Project. He opines that these contests in which people vote for charitable giving priorities place “the general public . . . in charge of dictating a company’s giving . . . by using social media.” Epstein-Reeves does correctly distinguish between the lack of required disclosure by corporations and the required disclosure (via Form 990-PFs) of corporate foundations' charitable giving.
In response to Epstein-Reeves' article, The Nonprofit Quarterly takes an opposing view: "So let’s get this straight. Giving 'the public' the ability to vote for the charitable distribution of a small amount of corporate largesse is democratization and so is keeping the philanthropic grantmaking of major corporations secret. Every grantmaker makes the argument for secrecy. Remember, private foundations argued against making their 990PFs open to public disclosure too."
Are Income Tax Preferences for Clergy Constitutional?
Michael L. Gompertz, a retired IRS attorney, has published Lawsuit Challenges Income Tax Preferences for Clergy in the July 5th edition of Tax Notes. Tax Notes' synopsis follows:
In this article, the author argues that sections 107 and 265(a)(6)(B) are unconstitutional because they are narrow tax preferences for clergy that violate the First Amendment's establishment clause. Taxpayers have standing to challenge these sections. In Freedom From Religion Foundation v. Geithner, a district court correctly denied the government's motion to dismiss taxpayers' claims that section 107 is unconstitutional, but incorrectly granted the motion to dismiss claims that section 265(a)(6)(B) is unconstitutional.
We previously blogged about the significance of the Freedom From Religion Foundation v. Geithner case.
July 7, 2010
Supreme Court: Universities Can Regulate Funded Groups' Membership
As reported by The Chronicle of Philanthropy, The U.S. Supreme Court's decision in Hastings Christian Fellowship v. Martinez handed down last week addressed the constitutionality of a public educational institution conditioning access to a school-funded student organization based on compliance with an "all-comers" policy. Like most colleges and universities, the Hastings College of Law at the University of California required all student organizations to obtain official recognition before they can receive the institution's support for their activities. Hastings referred to such an organization as a "Registered Student Organization" (RSO). An RSO provides a student group with several benefits, including the use of school funds, facilities, and channels of communication, as well as the school's name and logo. In exchange, any RSO must comply with the school's Nondiscrimination Policy, which mirrors California state law barring discrimination on a number of bases, including religion and sexual orientation. Hastings interprets this policy to mandate acceptance of all comers; namely, an RSO must permit any student to participate, become a member or seek leadership in the organization, regardless of that student's status or beliefs. Hasting's Nondiscrimination Policy was problematic for the Christian Legal Society, which mandates that its members sign a "statement of faith" adhering to the Society's theological views, including, as the Supreme Court noted, the belief that "sexual activity should not occur outside of marriage between a man and a woman." When seeking status as an RSO, the Society also requested an exemption from the school's nondiscrimination policy, alleging that such policy would violate its First Amendment right to freedom of association by forcing it to include members who do not share its fundamental views. Hastings refused to grant the exemption, leading to the lawsuit.
Writing for the 5-justice majority, Justice Ginsburg explained that the Hastings case was not simply about "expressive association" under the First Amendment, on which the Court ruled in Boys Scouts of America v. Dale (upholding the Boy Scouts right to refuse membership to a gay assistant scoutmaster). Rather, the Court held that this case was governed by the "limited public forum" doctrine, which permits colleges, universities and other institutions that receive government funds to restrict First Amendment rights provided they have a valid reason. As to Hastings, the Court found that it had valid reasons, including the encouragement of "tolerance, cooperation, and learning among students." In response to the Society's contention that the school's nondiscrimination policy discriminated against its tenets, the Court noted that the Hastings policy affected all student groups; specifically, that a Republican student organization must admit avowed Democrats, and likewise. Accordingly, the Court concluded that the Hastings policy draws no distinction between groups based on their message or perspective; its requirement that all student groups accept all comers is "textbook viewpoint neutral."
Congressional Ban on Earmarks Circumvented by Using a Nonprofit Entity
The New York Times reports that businesses are bypassing the House of Representatives announced ban on earmarks to for-profit companies by forming a nonprofit organization. The article describes an Ohio-based defense contractor that incorporated a nonprofit research center that specializes in work similar to that performed by the company and shares the company's address. The research center now has $10.4 million in new earmark requests from its local Congresswoman. Similarly scenarios are reported in California and New York. The article reports that there have been $150 million in earmarks recommended for nonprofits that will indirectly benefit for-profit companies around the country. Profit-making companies were identified for earmark elimination because their requests, typically buried in large budget bills by friends in Congress, are questioned more routinely than those requested by nonprofit groups, including charities, educational institutions, and local governments. Although some members of Congress are acknowledging that this use of nonprofits likely violates the spirit of the new earmark ban, they are leaving enforcement of the ban to Congressional committees.
July 6, 2010
Gulf Oil Spill Continues to Raise Issues Affecting Nonprofits and Donors
Nonprofits' Losses: An article in the Nonprofit Quarterly raises BP's responsibility for nonprofits' decreased funding due to the disastrous oil spill in the Gulf of Mexico. The funding crisis has arisen not due to a reduction of BP's charitable giving, but because local residents are not presently able to afford giving to local charities and churches. Because they rely heavily on the regular tithing of their members, churches in the affected areas of the Gulf region are suffering due to the evaporating income of their regular members. The article mentions the Anchor Assembly of God in Bayou la Batre, Alabama, which has filed a claim with BP of $50,000 to reimburse its congregation for the $12,000 loss in contributions over the past weeks and the $38,000 of anticipated losses in the next year. The church filed its claim on June 18th, but has not yet received a response from BP. According to the article, BP is not certain how to address "a claim based on charitable giving losses attributed to the economic devastation of the spill."
Donors Beware: As usual, a natural disaster is ripe for fraud, especially in the charitable sector. An article in The Bradenton Times (Florida) reports that the Florida Department of Agriculture and Consumer Services issued a “Consumer Alert” to raise awareness as to potential charitable giving fraud associated with the gulf oil crisis. Regardless of the method of solicitation, donors should consider two primary issues when considering a donation to a purported charity: (i) is the charity legitimate or a scam - do research to determine a charity's legitimate existence and tax-exempt status; and (ii) would my donation be better spent or used by another established charity? As linked above, the Florida government has set up both a helpline and website to assist donors in answering these questions.
Present-Day Public Policy Doctrine: Should Charitable Donations Continue to Fund West Bank Settlements?
The New York Times reports that during the last 10 years a minimum of 40 U.S.-based charities have remitted more than $200 million in tax-deductible contributions to Jewish settlements in the West Bank and East Jerusalem. Although a majority of the contributions have been funneled to schools, synagogues, and other public centers, some contributions have funded housing developments, guard dogs, bulletproof vests and other commodities needed to secure the settlements. At a minimum, the latter funding is in direct conflict with a succession of United States policy, continued by the Obama administration, opposing the settlements. Specifically, the United States consistently restricts Israel from using American government aid in the settlements. Although the IRS has announced that it is working on a publication to address domestic nonprofits and international activities, including consideration of additional questions on Schedule F of the Form 990, it has not announced any concentrated effort to address such charitable contributions made in direct conflict with United States foreign policy.
As discussed in a previous article on Forward.com, the primary issue raised in using charitable contributions to support West Bank settlements is the public policy doctrine announced by the U.S. Supreme Court in Bob Jones University: an institution seeking tax-exempt status "must serve a public purpose and not be contrary to established public policy." Of course, what constitutes "established public policy" is subject to much conjecture by legal scholars. In Bob Jones University, the Supreme Court found that racial discrimination in education violated a fundamental national public policy rooted in judicial decisions, legislation (Civil Rights Act), and executive orders. Does the U.S. policy on West Bank settlements meet that same threshold? Or, is the succession of past administrations' policy opposing West Bank settlements sufficient? Even if violation of established public policy is found, as Professor Ellen Aprill stated in the Forward.com article, the IRS would be "loath" to revoke the exemption of the domestic charities that have violated such policy. Regardless of IRS action or inaction, the continued domestic charity support of the West Bank settlements arguably poses a present-day test of the public policy doctrine.
July 5, 2010
States Looking to Reduce Charitable Contributions Deduction to Increase Revenue
As states continue to grapple with revenue shortfalls and other budgetary challenges, some are looking to reduce or cap individual taxpayers' deductions for charitable contributions.
Hawaii: Governor Linda Lingle vetoed a tax bill on Thursday, July 1, 2010 that would have placed a temproary cap on individual taxpayers' itemized deductions for state income tax purposes until the year 2016. Such a cap would have limited taxpayers' deductions for home mortgage interest, state taxes paid, unreimbursed job-related expenses, and charitable contributions. The Governor specifically noted that tax-exempt organizations' concern that the proposed cap would have affected their ability to raise funds. "It is a de facto tax increase that will adversely hurt certain individuals and businesses at a time when we should be encouraging investment and spending to recharge the economy," Lingle explained to Hawaii lawmakers in a separate letter.
New York: As previously blogged, Governor David Paterson and the state legislature appear to have agreed on a budget proposal that would restrict the charitable contributions deduction of approximately 3,500 New York taxpayers with more than $10 million in annual earnings to only 25 percent of their charitable contributions rather than the current 50 percent.
IRS Issues Final Rules on Tax-Exempts and Tax Shelters
As reported in today's Daily Tax Report, the Internal Revenue Service issued final regulations (T.D. 9492) regarding the involvement of tax-exempt organizations in prohibited tax shelters. As background, the Tax Increase Prevention and Reconciliation Act of 2005 created section 4965 of the Internal Revenue Code, which imposes excise taxes on tax-exempt organizations, including their managers, that participate in prohibited tax shelters. The proposed regulations issued in 2007 provided a three-part definition of the term "party to a prohibited tax shelter transaction," the second of which stated that a tax-exempt entity is a party to a prohibited tax shelter if it "enters into a listed transaction and reflects on its tax return . . . a reduction or elimination of its liability for federal employment, excise or unrelated business income taxes that is derived directly or indirectly from tax consequences or tax strategy described in the published guidance that lists the transaction." The final regulations eliminate this second definition, thereby acknowledging that a tax-exempt entity that enters into a transaction to reduce or eliminate its own tax liability generally will not be considered a party to a prohibited tax shelter. However, the third part of the definition set forth in the proposed regulations is retained in the final regulations, whereby the IRS and the Treasury Department may identify in published guidance specific transactions or circumstances in which a tax-exempt entity that enters into a transaction to reduce or eliminate its own tax liability will be treated as a party to a prohibited tax shelter transaction for purposes of section 4965.
The final regulations also modify the rules as to the timing of this disclosure. The taxable party in a tax shelter transaction must now make the disclosure within 60 days after the last to occur of (1) the date the person becomes a taxable party to the transaction, (2) the date the taxable party knows or has reason to know that the tax-exempt entity is a party to the transaction, or (3) July 6, 2010. The final regulations retain the exception for persons who do not know or have reason to know that a tax-exempt entity is a party to the transaction on or before the first date on which the transaction is required to be disclosed by the person under section 6011.