November 19, 2010
U.S. Navy Veterans Association - An IRS Misstep?
As previously blogged, the U.S. Navy Veterans Association scandal continues to unfold. Today, the St. Petersburg Times reports that an IRS audit of the organization's Connecticut chapter occurred two years ago and apparently missed that the association's founder, Lt. Commander Bobby Thompson, used both a stolen identity and impersonation of a Navy commander to create the charitable organization and solicit over $27.6 million in reported 2009 donations alone. This summer, the IRS commenced a criminal investigation into the matter, raiding the home of an assistant. Records reveal that the IRS audit was not attended by any of the Connecticut chapter's officers, but only by Commander Thompson. Thompson and his attorneys met with the IRS in an office suit rented by the association in Washington, D.C., submitting the requested records. After a full-day review, the IRS issued a "no-action" determination. The Times article details the chronology of events from the organization's creation to the uncovering of its sham status.
November 18, 2010
New Executive Order Affects Religious Organizations
The Chronicle of Philanthropy reports that President Obama signed a new executive order on Wednesday that makes changes to rules governing religious organizations that receive federal funding for providing social services. The order implements recommendations made in the Spring by the President’s Advisory Council on Faith-Based and Neighborhood Partnerships. For example, faith-based organizations receiving federal funding must separate their religious activities from government-funded programs and refer recipients of services who "objects to the religious character" of that organization within a reasonable time to an alternative provider. However, the order states that faith-based organizations need not remove or alter "religious art, icons, scriptures, or other symbols" from their facilities used to administer a federally-funded program.
The executive order does not address whether religious organizations receiving federal financial assistance should be allowed to hire only people who subscribe to their faith and tenets. The order similarly does not require religious organization to create a separate entity, with tax-exempt status under Section 501(c)(3), to receive the federal funding, thereby arguably ensuring increased church-state separation and easier federal monitoring of the organization's use of federal funding. The latter issue divided the President's Advisory Council, some members of which believed that such a requirement would be too burdensome.
Deficit Plan Would Transform Charitable Contributions Regime
The Chronicle of Philanthropy and The New York Times report that the Bipartisan Policy Center's Debt Reduction Task Force issued a report yesterday containing recommendations that extend farther than the spending cuts and tax proposals recommended by President Obama's fiscal commission. Of particular importance to the nonprofit sector is a proposal to virtually eliminate the charitable contributions deduction and replace it will a 15% tax credit that would go directly to the charity, not the taxpayer, from the Internal Revenue Service. As the Task Force's report explains:
Because the credits are universal, taxpayers will not have to file a tax return to claim them; rather than be reimbursed directly to taxpayers, the credits will go to the [charitable] institutions. Qualifying charities will apply to the Internal Revenue Service (IRS) for a matching grant to supplement contributions from taxpayers, so that for every $85 the taxpayer gives, the charity will receive another $15.
The Task Force's report referred to the current itemized deductions regime as "perverse" because it provides the greatest benefit to higher-income taxpayers. The report further states that revamping the current charitable contributions deduction "will greatly increase the number of taxpayers who receive a subsidy for charitable donations but will reduce the subsidy rate for upper-middle-income and upper-income taxpayers who itemize."
November 16, 2010
More Social Media? - A New Website to Link Charities & Donors
We previously blogged about the Seattle Foundation's efforts to more fully engage both present and potential donors with web-based information that will aid them in making their charitable giving decisions. Based on a recent article in The Chronicle of Philanthropy, it appears that this approach is taking hold on a broader scale. With a November 30th debut, the website Jumo, founded by Chris Hughes (the co-founder of Facebook), will provide donors the information necessary to "discover and connect" with charities in which they may have an interest. On the flip side, charities will be provided additional opportunities to connect with numerous additional funders and supporters. Jumo's users will be able to vet and scrutinize the legitimacy of organizations that are featured on the website. As the article states, a Jumo follower "can flag any groups that don't conform to the community's culture, such as potential scammers or organizations that use inappropriate or offensive content." Jumo's primary sources of revenue will consist of donations from users and site sponsors.
Kerridge & Davis: The Future of Tax-Exempt Credit Counseling Organizations
Ronald D. Kerridge & Robert E. Davis (both partners at K&L Gates, Dallas) have published Tax-Exempt Credit Counseling Organizations and the Future of Debt-Settlement Services, 14 Tex. Rev. L. & Pol'y 343 (2010). The article's conclusion reads as follows:
[T]he provision of substantial debt-settlement services by credit counseling agencies that are currently exempt under § 501(c)(3) would likely place such organizations outside the exemption provided by § 501(c)(3). Few credit counseling agencies would be likely to risk their exempt status, and the freedom from FTC oversight that accompanies it, in order to begin providing significant amounts of debt-settlement services. If the FTC expands the Telemarketing Sales Rule in the ways set out in the Notice of Proposed Rulemaking, and if the advance fee ban then puts a large number of for-profit debt-settlement providers out of business, it appears likely that the significant demand for debt-settlement services among consumer debtors will go largely unmet.
(Hat tip: TaxProf Blog)
Current State & Local Developments Affecting Nonprofits
Georgia: The Savannah Morning News reports on a Georgia Supreme Court decision that favorably impacts Georgia nonprofits. The case involved the Nuci Phillips Memorial Foundation, Inc., a nonprofit organization whose mission is to provide mental health services to artists in the Athens area. The Foundation owns and operates a facility that offers a place for such artists to come and receive help for anxiety, depression, or other mental health issues. In addition, it rents out rehearsal space as well as space for parties and other receptions. The Foundation's initial application for property tax exemption was granted by the County Board of Equalization. the exemption was challenged by the local Board of Tax Assessors, affirmed the by trial court, and reversed by the Court of Appeals. The Court of Appeals found that the Foundation's rental activities prevented it from using its property "exclusively" in furtherance of its charitable activities as required by state statute. The Supreme Court provided clarity to "conflicting interpretations" of a confusing array of state tax exemption statutes addressing a nonprofit's rental activities. The Supreme Court ultimately concluded that "the primary purpose of the building is not to raise income but to provide services for those seeking mental health assistance." Accordingly, any income received from other rental activities is "incidental" to the property's primary charitable function as required by state law. If the Supreme Court had issued an unfavorable determination to Nuci, it would have likely resulted in a large amount of exemption revocations in the State.
Hawaii: As reported by the Star Advertiser and Nonprofit Quarterly, Honolulu City Council members are considering changing the current property taxation system applied to local nonprofits. Currently, regardless of the size of the nonprofit's land holdings, it pays a maximum of $300 in property tax to the City. As compared in the Star Advertiser article, Kamehameha Schools, a multibillion-dollar charitable trust, is currently the largest private landowner in Hawaii; it's property has an assessed value of more than $157 million. In comparison, a small nonprofit aikido organization owns less then a quarter-acre with an assessed value of approximately $800,000. Both nonprofits have an annual property tax of $300. Atlhough Honolulu is not the only municipality to employ a "one-size-fits-all approach," the cash-strapped city is considering revamping the current exemption program to better reflect the commensurate cost of city services provided to such disparately-sized properties. City leaders want to tred lightly on any tax changes to ensure that charities are still able to provide services to those in need.
Pennsylvania: As reported by the Philadelphia Inquirer, the state House of Representatives overrode Governor Rendell's veto of a school-code bill that would provide property tax exemptions to nonprofits that rent their properties to charter schools. Governor Rendell vetoed the bill because he believed that the tax break to nonprofit foundation landlords was unconstitutional in light of the state's "purely public charity" exemption standard as set forth in a statute enacted in 1997. In order for the House override to be effective, the state Senate would have to similarly vote.
November 15, 2010
Continuing Conflict Over the Social Innovation Fund
The Social Innovation Fund, according to The New York Times, is being audited by the inspector general with oversight of the Fund's administrator, the federal government's Corporation for National and Community Service. Specifically, the Fund's grant process is currently under scrutiny. The process was roundly criticized last summer when accountability concerns and potential conflicts of interest were raised, about which we blogged. According to an inspector general spokesman, the Corporation itself requested an audit. As part of the audit, experts that reviewed the grant applications will be interviewed.
As also reported this past summer by The New York Times, potential conflicts of interest arose when the Fund awarded a $5 million grant to New Profit Inc., a nonprofit organization with employment ties to the Fund's executive director, Paul Carttar. Similarly, a $4.2 million grant was awarded to the Local Initiatives Support Corporation, a foundation at which Patrick Covington, the official who oversees the Corporation for National and Community Service, was previously employed. As a result of the criticism of the lack of transparency surrounding these and other grants it awarded, the Fund eventually released more information about its grant process.
Donors Affected by Tax Law Uncertainty
The counterpart to a recent blog entry on charities dealing with uncertainty in tax law, USA Today reports that donors are facing similar uncertainty resulting in a potentially hurtful situation for charities. Because of Congress's failure to deal with expiring tax cuts and other tax breaks, the typically fruitful fourth quarter for charities may not occur this year. The article attributes potential donor reluctance to make tax-driven fourth quarter donations on several uncertain tax law changes: (i) Congress's potential extension of the tax-free $100,000 IRA rollover to charities that expired on December 31, 2009; (ii) the uncertainty of the federal estate tax; and (iii) the Bush tax cuts dilmena - whether tax rates will increase for individuals earning over $200,000 and couples earning over $250,000.
With respect to the estate tax, a Congressional Budget Office study postulated that a permanent estate tax repeal could decrease charitable contributions up to 12%. If individual income tax rates increase in 2011, it might result in higher-income taxpayers delaying charitable contributions until next year when such gifts would be more tax advantageous. Although charitable giving is not entirely based on reducing taxable income, tax law can affect timing, amount, and manner of gifts according to the Center on Philanthropy.
University Presidents' Compensation Continues to Grow
In a Boston Globe article, based on a Chronicle of Higher Education review of 2008 Forms 990, more than one in five presidents at 448 colleges and universities received $600,000 in compensation, with thirty receiving more than $1 million in total compensation in 2008. Although a majority of the compensation packages were executed prior to the full effect of the economic downturn, academic executives' compensation is expected to rise in the coming years due to the supply and demand of top talent. Because of IRS changes to the Form 990 requiring compensation data to be reported on a calendar year rather than fiscal year basis, a true comparison to prior years is not achievable because of overlap in the reporting.
The results of the Chronicle's survey trigger differing opinions. On one hand, the president of the National Association of Independent Colleges and Universities argues that the compensation packages are warranted because of the increased demands placed on college presidents. On the other hand, the president of the National Center for Public Policy and Higher Education contends that increased chief executive compensation and tuition diminishes "public confidence in higher education."
Today - National Philanthropy Day
According to the website of the Association of Fundraising Professionals, today, November 15, is the 25th annual National Philanthropy Day. Per the Association, today is a "special day set aside to recognize and pay tribute to the great contributions that philanthropy—and those people active in the philanthropic community—have made to our lives, our communities and our world." More than 125 communities and 50,000 people around the world are expected to participate in events and celebrations.