Friday, November 26, 2010
The Boston Globe reports that partisan wrangling in the Senate is impeding legislation to correct “an error in the federal health care law that could cost Children's Hospital Boston and others like it millions of dollars in added drug costs.” All that is needed, says the story, is changing “just 47 words in the 1,880-page law,” a seemingly small task that is proving difficult “with Republicans fighting to repeal the health care bill rather than fix it and Democrats loath to acknowledge its flaws.” The story explains that congressional staff intended to allow children's hospitals continued access to the portion of a federal program that offers below-market prices on 347 specific medicines for rare, life-threatening conditions. But that language was accidentally altered. “Everybody on every side of the issue thinks it should be fixed.'' The problem is estimated to cost children's hospitals “about $100 million annually.”
Ellen P. Aprill, Professor of Law and and John E. Anderson Chair in Tax Law at Loyola Law School, Los Angeles, has posted Section 501(c)(4) Organizations, the Gift Tax, and Election Law Disclosure on SSRN. Here is a copy of the abstract:
Recent discussions of whether gifts to section 501(c)(4) organizations that engage in candidate-related activity are subject to the federal gift tax have failed to make clear an important distinction. This important distinction is whether the contributor is making the gift to the organization as a whole or making the gift for its candidate-related activities and, in particular, for its candidate-related advertisements. The distinction can matter not only for gift tax liability, but also for disclosure obligations under campaign finance laws.
Contributors of large sums close to an election are caught between the proverbially rock and hard place: the more that they position themselves to avoid gift tax liability, the more likely that they may become obliged to disclose their contributions under the campaign finance laws, and vice versa. As this short piece explains, if donors take the position that their gifts are for particular candidate-related activities rather than to the organization in support of its activities generally, they have a good argument that the gift tax does not apply, but a weaker argument for avoiding disclosure obligations under campaign finance laws. It is possible to have the best of both worlds, however, and a determination from the FEC this past spring makes it clear how best to achieve that outcome even for contributions used for mass media advertising close to an election.
Malick W. Ghachem, Associate Professor of Law at the University of Maine School of Law, has posted Of 'Scalpels' and 'Sledgehammers': Comparing British and American Approaches to Muslim Charities Since 9/11 on SSRN. Here is a copy of the abstract:
Several commentators have remarked that, since 9/11, Muslim charities have met with a softer and more flexible hand in the United Kingdom and continental Europe than in the United States. The American federal government has resorted to "sledgehammer" - style tools - wholesale freezing of assets, designation of entire entities as terrorist organizations, and aggressive criminal prosecutions - in its efforts to police Islamic philanthropy. By contrast, the Charity Commission in Britain has employed "scalpel" - like measures, such as the removal of individual trustees or temporary transfer of a charity’s management, that have generally spared British Muslim charities from American-style criminalization. The continental European states, for their part, have tended to gravitate more closely to the British than the American pole of this comparative dichotomy. The sweeping assertion of executive branch authority during the Bush administration only partly explains this difference. Contrasting traditions of religious liberty are also at stake. A First Amendment culture of “non-entanglement” has historically kept the federal government out of the business of administering religious institutions. In the U.K. and continental Europe, albeit to differing degrees, traditions of state involvement in religious institutions and functions (including the classic Christian function of providing charity) have permitted a more targeted and nuanced approach to the regulation of Muslim charities. Lacking the administrative and legal tools descended from those traditions, American policymakers have resorted to criminalization and its accessories as a path of first, rather than last, resort.
The Chronicle of Philanthropy has featured an interview, recorded on an audio file, of Emily Lam, a tax accountant in Washington, and Perry Wasserman, managing director of the lobbying firm 501(c) Strategies. They discuss various nonprofit legal issues, including the estate tax, direct incentives for charitable giving, and oversight of nonprofit hospitals, and how they are impacted by the recent congressional elections.
Thursday, November 25, 2010
Developers of Ground Zero Mosque and Community Center Seek Government Funding, Plan to Apply for Federal Income Tax Exemption
The New York Times reports that the directors of the planned community center and mosque close to the site of the 9/11 terrorist attacks have applied for approximately $5 million in grants from the Lower Manhattan Development Corporation (“LMDC”). The funds would be disbursed from a pool of $2 billion in federal financing that the LMDC administers. Park51, as the center is called, applied for financing for numerous purposes, including purchasing equipment, leasing or purchasing the building, obtaining art exhibitions, counseling victims of domestic abuse, assisting new immigrants and small-business owners, and training and counseling homeless veterans. Competing for LMDC funding are 255 groups. The New York Daily news additionally reports that Park 51 would not use the grant money to build the mosque, and that Park 51 “plans to apply for federal tax-exempt status as a not-for-profit corporation.”
Karen Donnelly (UMKC, J.D. 2010) has published Comment, Good Governance: Has the IRS Usurped the Business Judgment of Tax-Exempt Organizations in the Name of Transparency and Accountability?, 79 UMKC L. Rev. 163 (2010). The comment briefly (and selectively) overviews the charitable sector and state regulation thereof, notes the impetus for increasing scrutiny of the sector over the past decade (generally, and specifically by the IRS), and discusses (1) the new Form 990 information return that charities are required to file with the IRS, and (2) the likely effects of complying with the new form. The comment concludes as follows:
The negative implications of the IRS' new Form 990 far outweigh the benefits. Although the IRS claims that the new approach to nonprofit governance is not a "one size fits all" mandatory list of governance policies and programs, the practical application of the new form says otherwise. If charities feel compelled to check "yes" to whether they've adopted a conflict of interest policy, whistleblower policy, or document retention policy, many organizations, and particularly smaller and rural organizations, may hastily adopt boilerplate policies found on the Internet that do not fit their organizational structure, mission, or programs for fear of receiving a bad rating, bad reputation, and donor disapproval that could potentially result from the information going public.
Further, the prohibitive cost to complete the new Form 990 is also a major disadvantage to the IRS' intrusion into the states' sphere of governance regulation. In many cases, the IRS' new governance reforms are hurting charities more than they are helping. Charitable assets that could have been used to further an organization's exempt purpose are now going toward reporting expenses. The IRS may succeed in encouraging tax compliance, but it may also threaten the business judgment and financial viability of many effective charitable programs by "encouraging" them to wear a shoe that does not fit and costs way too much. A uniform system of regulatory law enforced by a new executive agency, staffed with the necessary resources to adequately oversee nonprofit governance practices, rather than proposing sweeping legislation in an already overregulated industry, may result in the most effective and efficient way to regulate the industry of good deeds.
(Hat Tip: TaxProf Blog)
As reported by the Financial Times (London) (registration required for access), Nicholas Ferguson, chairman of the Institute of Philanthropy, is urging governmental adoption of greater tax benefits for the wealthy in Great Britain in order to raise charitable donations to levels in the United States. Otherwise, he argues, governmental efforts to “fill funding gaps” with private donations will fail. Ferguson reportedly advocates the promotion of donor-advised funds and community foundations, the deductibility of donations of “important art works,” and the deductibility of annuities in which charities have a remainder interest.
Wednesday, November 24, 2010
As reported in Tax Notes Today, the IRS has recently ruled that a private foundation's grant program benefiting employees of the foundation's existing grantee organizations will not cause the foundation to make taxable expenditures under Code section 4945. The purpose of the grant program is to “promote activities that will provide personal and professional growth opportunities for employees of the Foundation's current grantee organizations in order to improve or enhance the capacity, skill, and talent of individuals who work in the nonprofit sector.” Grant recipients could, for example, attend national conferences, participate in workshops or enroll in professional development courses. The foundation represented that it will follow procedures to ensure proper use of grant funds.
Code Section 4945(d)(3) defines a "taxable expenditure" to include any amount paid by a private foundation as a grant to an individual for travel, study, or other similar purposes by such individual, unless the grant satisfies the requirements of Code section 4945(g). Under the latter section, section 4945(d)(3) does not apply to individual grants awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the IRS if the foundation demonstrates one of three conditions, the third of which is that the grant is grounded in a purpose “to achieve a specific objective, produce a report or similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee.” The IRS ruled that the grant program satisfied this condition. The ruling is noteworthy because it reflects a reasonably expansive interpretation of Code section 4945(g)(3).
Private Letter Ruling 201046018 is available electronically at 2010 TNT 224-21.
Data Released under Massachusetts Disclosure Law Governing Payments from Drug Companies to Health Care Providers
As reported in the Boston Globe, Massachusetts enacted a statute two years ago requiring any drug or medical device manufacturing company doing business in the state to report certain payments of $50 or more. The state has just published a comprehensive online database that reports payments that these companies have made to doctors, nurses, pharmacists, hospitals, and others in the health care industry. According to the story, “[t]he report lists $35.7 million in payments from hundreds of companies for the six months between July 1 and Dec. 31, 2009, for speaking, consulting, food, educational programs, marketing studies, and charitable donations.” Of this sum, physicians received $16.4 million. The database reflects payments from 283 companies. For more details about the law, visit the website of the Office of Health and Human Services.
The New York Times reports that the Vatican announced preparation of new guidelines to help bishops respond to sexual abuse by protecting children, cooperating with civil authorities and properly selecting future priests. Says the story,
The Vatican did not reveal details of the guidelines or when they would be published, but they appear to be one of the most decisive remedial measures it has taken to tackle a sexual abuse crisis that roared back last spring, challenging its moral authority and underscoring widespread confusion about its own rules for handling abuse.
For the full article, see Rachel Donadio, Vatican Preparing New Guidelines to Deal with Sexual Abuse.
Tuesday, November 23, 2010
As reported in Tax Notes Today, the IRS has determined that an organization primarily organized to operate a restaurant does not qualify for exemption under Code section 501(c)(3). The organization proposed to serve both members – whose payment of dues secured rights to buy food at a discount – and non-members, seat at least 1,000 patrons, and employ 100 people. The organization stated that it would also conduct charitable programs, including a tuition program, a job training program, a welfare to work program, and a homeless shelter program (among others). The IRS reasoned as follows in determining that the entity failed to qualify for exemption on grounds of its commercial nature and its conveyance of private benefit:
You are similar to the organization described in Rev. Rul. 73-127 [ruling that an organization operating a low-price retail grocery store in an impoverished area and using a portion of its earnings to train the unemployed did not qualify for federal income tax exemption] because the operation of the restaurant and the operation of the training and other charitable programs are two distinct purposes. Since the operation of the restaurant is the main part of your activities and is not a recognized charitable purpose, you are not organized and operated exclusively for charitable purposes. Your restaurant hours, prices, menu items and services are competitive to for-profit restaurants. Your restaurant is staffed by paid employees and trainees may be hired as your employees after their training. Your paid staff is mainly for the operation of the restaurant rather than for the training program or any charitable functions. Your restaurant operation is no different from those of for-profit restaurants; therefore, you are in competition with for-profit restaurants. Furthermore, you serve private benefits to your patron members and patron non-members by giving them discounts and tax deductibility benefits to lure them from your competitors.
Although the IRS surely reached the correct determination on the facts before it under existing case law, the last sentence from the excerpt appears to reflect a misunderstanding – by both the applicant and the IRS – of how the law applies to the facts set forth in the application. The applicant planned to inform members that “their meals are tax deductible on all menus, advertisements, brochures, consumer receipts and all marketing data,” and also that their dues would be tax-deductible. Further, although the applicant represented that its menu prices “are set consistent with market value and then discounted to fit a charitable organization,” it asserted that “the difference in the members and nonmember price of a meal, party, banquet, etc. is the charitable contribution for nonmember[s].” The applicant was clearly confused about the case law restrictions on the deductible portion of a quid pro quo contribution to charity; except in the case of modest benefits provided by a charity under limited circumstances (including certain benefits provided to dues-paying members), any charitable contribution deduction is generally limited to the excess of the transferred amount over the fair market value (not a discounted price) of what the transferor receives from the charity. Rather than correcting this misunderstanding of law, the determination letter erroneously assumes the reality of the asserted tax benefits (that’s bad enough), and then claims that they contribute to a finding of private benefit (even worse). To be sure, the organization may have planned to operate so as to confer unlawful private benefit, and the IRS properly recognizes this fact. But it could not have done so through making available a nonexistent charitable contributions deduction.
The determination letter is available electronically at 2010 TNT 224-19.
We previously blogged about concerns over Section 9006 of the Patient Protection and Affordable Care Act (the “Act”) and its application to nonprofits. The Act extends Form 1099 reporting requirements to payments representing the purchase price of goods bought from any vendor whose sales to the payor exceed $600 for the year. The Independent Sector reports that Senate Finance Committee Chairman Max Baucus and Senator Mike Johanns have each offered amendments to the FDA Food Safety Modernization Act (S. 510) that would repeal the expanded reporting requirements. The Senate could vote on the amendments as early as November 29.
The Independent Sector’s website lists other legislative proposals to alter the new reporting requirement. For the Independent Sector’s position on the new law as it applies to nonprofits, see this comment letter.
The St. Louis Post-Dispatch reports that legislation adopted by the Russian parliament on Friday allows every religious denomination to demand from the state the return of its belongings seized in the Bolshevik Revolution. The measure reportedly would be effective only upon the action of President Dmitry Medvedev. A total of 11,000 objects reportedly are affected by the new law, which “was amended several times following fierce protests by museum directors.” Although the legislation “received widespread support in parliament,” according to the story, Communist Party members objected to it because it would enable the Russian Orthodox Church to “own the most real estate in the country.”
Monday, November 22, 2010
The Church of Scientology has provided no small contribution (through its status as a litigant) to nonprofit and federal income tax law textbooks. Scientology is once again in the headlines on account of a lawsuit filed against a dentist, Dr. Rene Piedra. Reportedly basing his business model on Scientology philosophies, Piedra allegedly charged high fees and then donated very large sums generated from his dental practice to Scientology-related entities. According to an article in the St. Petersburg Times, from 2005 to 2008, court records show that the dentist’s practice “transferred $715,364 to several Scientology entities, including the church's spiritual headquarters in Clearwater.” The story continues:
Piedra's contributions helped land him in bankruptcy, owing $3.9 million to a long list of creditors. A lawsuit in Miami alleges that Scientology groups played a key role in his downfall. Bankruptcy trustee Barry Mukamal contends Piedra schemed "to defraud patients in order to transfer large sums of money" to the Church of Scientology and related groups. Involved, Mukamal alleges, were nine Scientology-related entities, three church members and a Pinellas County management training firm run by Scientologists. He sued them all, seeking to recover the thousands they got from Piedra. Scientology denies any involvement.
The Church of Scientology reportedly is expected to enter into a settlement agreement, pursuant to which it would pay “$350,000 to make the case go away for the Scientology defendants,” on the condition that “the judge bar Piedra's creditors or other parties to the suit from suing the Scientology entities.”
The New York Times reports that the cost-sharing and coordination-of-care measures in which health care industry participants are engaging in response to the new health care legislation are prompting concerns of anticompetitive behavior. The article explains,
[E]ight months into the new law, there is a growing frenzy of mergers involving hospitals, clinics, and doctor groups eager to share costs and savings and cash in on the incentives. They, in turn, have deployed a small army of lawyers and lobbyists to try to persuade the Obama administration to relax or waive older laws intended to thwart monopolies and to protect against shoddy care and fraudulent billing of patients or Medicare.
Some consumer advocates fear that the new law could reduce competition, raise health care costs, and create “incentives for doctors and hospitals to stint on care.” The article notes the difficult job facing regulators:
[Several governmental] agencies are writing regulations to govern the new entities, known as accountable care organizations. They face a delicate task: balancing the potential benefits of clinical cooperation with the need to enforce fraud, abuse, and antitrust laws.
“If accountable care organizations end up stifling rather than unleashing competition,’’ said Jon Leibowitz, Chairman of the Federal Trade Commission, “we will have let one of the great opportunities for health care reform slip away.’’
For the full story, see Robert Pear, Consumer Risks Feared as Health Law Spurs Mergers.
The Supreme Court of Virginia has denied a petition to terminate a charitable remainder unitrust (“CRUT”) through commuting (pre-paying) the unitrust interest in Ladysmith Rescue Squad, Inc. v. Newlin, 694 S.E.2d 604 (Va. 2010). Virginia law, like the Uniform Trust Code, permits judicial termination of a trust in order to further trust purposes “because of circumstances not anticipated by the settlor.” Here, the beneficiaries simply preferred to pocket their money now, rather than wait for it; the court viewed this desire a common sentiment that the settler easily could have anticipated. Further, the court gleaned a trust purpose of providing the unitrust beneficiaries an income stream insulated from the claims of creditors via spendthrift provisions – a purpose that commutation would frustrate.
The case is interesting not only because of its sensible holding, but also because it raises an interesting standing question. One of the charitable remainder beneficiaries (the Ladysmith Volunteer Rescue Squad) objected to the commutation. In an effort to preclude it from having standing, the trustees, the income beneficiaries, and the agreeable charitable remainder beneficiary petitioned first for a division of the trust into two trusts – one in which the agreeable charity would be the remainder beneficiary, and the other in which Ladysmith would be the remainder beneficiary – and secondly for termination of the first newly created trust. The court rejected the petitioners’ theory that this two-step scheme deprived Ladysmith of standing to protest the partial termination of the trust. Said the court,
The moving parties’ argument is circular. Ladysmith’s lack of standing is premised solely upon the validity of the circuit court’s order dividing the testamentary trust into two parts, which we hold to be erroneous for the reasons stated. Ladysmith retains standing to object to the common design ….
(Hat Tip: Wills, Trusts & Estates Prof Blog)