May 12, 2011
NC Law Review Call for Papers
The North Carolina Law Review is seeking submissions for its annual North Carolina Issue. It is particularly interested in receiving submissions on nonprofit law and related topics.
In its words, "the annual survey of North Carolina and Fourth Circuit Law embodies its commitment to support the practicing attorneys, lawmakers, and judges of North Carolina. The survey, published annually in the Review's sixth issue, contains scholarship authored by students, academics, and practitioners on topics in all subject areas directly impacting the North Carolina legal community. Drafts submitted for consideration must be received by July 31, 2001. Please send submissions to NCissue@unc.edu."
May 11, 2011
Draft Executive Order Would Expand Donors' Dislosures of Campaign Contributions to Exempts
The Daily Tax Report, among other sources, reports that a draft executive order from President Obama would require federal contractors to disclose their campaign contributions as a precondition to receiving a federal contract. The draft order, as currently written, requires "any entity bidding for a government contract to disclose political contributions to federal candidates or parties made within the past two years that, in aggregate, exceed $5,000," including "contributions made by the entity’s directors and officers as well as its affiliates and subsidiaries." The order would also compel disclosure of contributions to third parties, including §501(c)(6) trade associations and §501(c)(4) social welfare organizations, if the potential contractor reasonably expects that the donated funds will be used in support of or opposition to federal candidates, or for election-related communications (e.g., political advertising). The disclosed information would be retrievable via a searchable and downloadable government database. A condition to receipt of a federal contract will require its recipient to certify that they have disclosed the requisite information.
If the order is issued, it will be the first time that public disclosure of third-party contributions would occur.
ABA Tax Section Meetings - Roundup
The Daily Tax Report reports on the Treasury, IRS, and Congressional staff representatives' updates on exempt organizations at the ABA Tax Section meetings in Washington, DC at the end of last week.
Treasury attorney-adviser Ruth Madrigal provided updates on the guidance regarding program-related investments for private foundations under IRS §4944 (excise tax on jeopardy investments), stating that Treasury is considering "the double bottom line," "doing well by doing good," and "impact investing" as part of the guidance. Program-related investments are being considered as a vehicle for redirecting charitable donations into communities.
Guidance projects related to health care reform include the exemption of accountable care organizations and the provision of insurance thorugh exempt health care exchanges.
Remaining projects from the Pension Protection Act include Type III supporting organizations, §4943 excess business holding rules, and donor-advised funds.
Exempt Org-Related Legislation
A Senate Finance Committee staffer discussed proposed hearings on exempt organizations with respect to tax reform, including making permanent certain temporary provisions applying to exempts, a limitation on the amount of charitable donations a taxpayer can itemize, and a flat excise tax on private foundations (which is included in President Obama's 2012 proposed budget).
Joint Tax Committee tax legislative counsel, Gordon Clay, opined that the defintion of "charity" has been substantially broadened over the years, raising the question of whether "preferential treatment should be given to exempts that engage in the traditional helping the poor-type purposes." In addition, the commerciality doctrine (exempts with a direct taxable counterpart) continues to rear its ugly head, raising the viability of exemption for organizations plagued with that problem.
Reforming Donations of Partial Interests
Sarah B. Lawsky (UC-Irvine) has published "The Sum of Its Parts: Reforming Charitable Donations of Partial Interests," in 64 Tax L. Rev. 37 (2010). Here is an excerpt from the article's introduction:
This Essay begins with a tax puzzle, and not the type of tax puzzle that can be solved merely by following a twisting path of cross references and allusions through the Code. It is a deeper puzzle: Why does the Code permit someone who donates property to a charity to take a deduction for that donation, but deny a deduction to someone who donates a partial interest in that same property? For example, someone who donates a building to a charity may be permitted to take a deduction for the fair market value of the building. But if instead of donating the entire building, that person permits the charity to use the building rent-free for a year, he cannot take any deduction. This is a rule of great practical significance, denying as it does charitable deductions for, among other things, permitting a charity to use real estate, providing a charity with an interest-free loan, and granting a charity a license to use a patent.
The place to start when searching for a justification, or at least some justification, for a particular Code section is, of course, legislative history. But unfortunately, the only reason Congress gave for including the partial interest provision in the Code does not actually, on further investigation, provide a way to distinguish between partial interests and whole interests. Thus I will ruin this puzzle by revealing the answer up front: The provision denying a deduction for the charitable donation of partial interests is, I think, wrong. This rule is at best unnecessary and at worst inconsistent with other areas of tax law. NAM
The place to start when searching for a justification, or at least some justification, for a particular Code section is, of course, legislative history. But unfortunately, the only reason Congress gave for including the partial interest provision in the Code does not actually, on further investigation, provide a way to distinguish between partial interests and whole interests. Thus I will ruin this puzzle by revealing the answer up front: The provision denying a deduction for the charitable donation of partial interests is, I think, wrong. This rule is at best unnecessary and at worst inconsistent with other areas of tax law.
Is IRS Now Enforcing Gift Tax on Donations to 501(c)(4)s?
As previously blogged back in October 2010, Politico reports that IRS enforcement of gift tax rules could impact donors to 501(c)(4) organizations, including those that were used as political vehicles in recent elections. Ben Smith of Politico writes:
"It appears that the IRS Estate and Gift Tax team has also started paying attention to 501(c)(4) organizations," a Los Angeles tax lawyer who has followed the issue closely, Ofer Lion, wrote in a memo to clients today.
Gifts to other political organizations are not taxable under federal law, and lawyers informally say many donors do not typically pay the gift tax -- which may run as high as 35%, mirroring income tax rates -- for contributions to 501(c)4s.
The IRS focus would only apply to quite large donors: the first $13,000 annually are exempt. The rest of the contributions, however, reduce a donor's lifetime tax exemption, which stands currently at $5 million but stands to drop to $1 million in 2013, a fact which would mean a donor's heirs lose substantially more to estate taxes, including potentially a "clawback" of money that's already been given away back into the taxable estate.
Now the Republican donors who gave generously to Crossroads GPS and other groups last cycle may find themselves on the hook for substantial back taxes. And Democrats contemplating contributions to Priorities USA, the new pro-Obama c4, may face similar questions.
Lion quotes the 2011 Workplan of the IRS Exempt Organizations Division on the intensifying IRS interest: "[i]n recent years, our examination program has concentrated on section 501(c)(3) organizations. Beginning in FY 2011, we are increasing our focus on section 501(c)(4), (5) and (6) organizations."
Lion also forwarded to POLITICO a letter from the IRS to a client whose identity has been redacted:
"The Internal Revenue Service has received information that you donated cash to [REDACTED], an IRC Section 501(c)(4) organization," the agent wrote to a donor. "Donations to 501(c)(4) organizations are taxable gifts and your contribution in 2008 should have been reported on your 2008 Federal Gift Tax Return (Form 709)."
The question of whether these (c)4 gifts should actually be taxable could be subject to litigation. But the reason for the emergence of (c)4 gifts presents a bit of a trap for donors: If they go to court to fight for the right to avoid taxation on their anonymous gifts, they will compromise their anonymity. Alternately, they may be forced to pay a hefty premium to remain anonymous.
(Hat tip: TaxProf Blog)
At the ABA Tax Meetings in Washington, D.C. last week, IRS and Treasury exempt organizations' officials could not comment on whether there is a specific compliance initiative with respect to gift tax on donations to 501(c)(4) organizations.
As previously blogged in November 2010, Ellen Aprill (Loyola-L.A.) has written a memo for the Election Law Blog explaining how donations to section 501(c)(4) organizations to fund express advocacy or electioneering communications generally may avoid both the gift tax under federal tax law and public disclosure under federal election law.
Strain of Charity Care on Hospitals
Articles in Bloomberg Businessweek and the West Virginia Gazette detail the strain on hospitals of caring for the poor in two areas of the country. This is a story that has been duplicated around the country, with "safety net" hospitals closing in Florida, Georgia, Pennsylvania, and New York in the last several years.
The Businessweek article focuses on Illinois where two charitable hospitals that serve low-income persons in two different parts of the state (East St. Louis and Cook County/Chicago) are seeking the state's permission to close. Many similarly-situated hospitals are coping with increasing costs, budget cuts, and burgeoning numbers of uninsured persons seeking medical care. Even though all tax-exempt hospitals must satisfy the community benefit standard, which arguably entails some charity care, the Businessweek article reports that approximately 800 of the country's 5,000 hospitals shoulder most of the burden, typically located in low-income communities and serving uninsured and Medicaid patients. The amount of patients needing free medical care increased 23% since mid-2009. The East St. Louis hospital serves a community of 30,000, with a 15% unemployment rate and one-third of the residents below the national poverty line. The hospital has been bleeding $5 million a year for over a decade and has accrued over $6 million worth of safety violations. The Associated Press reported subsequently that Illinois Health Facilities and Services Review Board approved the closure of the East St. Louis hospital, but denied the closure of the Cook County facility.
The Gazette article reports that West Virginia hospitals expended more than $721 million on charity care and bad debt writeoffs in 2009, a figure that has doubled from a decade ago (in 1999, $286.8 million in "uncompensated care for residents without insurance or who were underinsured"). The West Virginia Hospital Association reported on the steady increase of uncompensated care in the last decade, including the decreased reimbursements from Medicaid and Medicare in 2009. The Association hopes that the amount of uncompensated care will "stabilize" in 2014, when more individuals are expected to be covered by some sort of insurance due to health care reform.
May 10, 2011
Continuing Hospitals' Tax Exemption
Jeremy J. Schirra (J.D. 2011, Case Western) has posted "A Veil of Tax Exemption?: A Proposal for the Continuation of Federal Tax-Exempt Status for 'Nonprofit' Hospitals" to SSRN. Here is an abstract:
Nonprofit, or tax-exempt, hospitals have been increasingly scrutinized in recent decades by the American public and government officials due to their tax exemption. A majority of this criticism stems from the notion that these hospitals are providing community benefits that are significantly less than the value of their tax exemption. It would be ill-conceived to simply cease the tax exemption extended to hospitals due to the potential dire repercussions. Rather than considering the cessation of hospital tax exemption, the standard by which tax-exempt hospitals qualify for their exempt status should be changed from the current community benefit standard to a measured community benefit standard. Adopting the measured community benefit standard described would improve the quality and quantity of benefits provided, increase public transparency as far as the amount and nature of community benefits procured, augment hospital autonomy, and incentivize hospitals to provide benefits in new ways.
Charity in the 21st Century
Roger Colinvaux (Catholic) has posted "Charity in the 21st Century: Trending Toward Decay" to SSRN. The following is an abstract of the article:
The Article argues that the federal tax law framework relating to charitable organizations is decaying. Through an overview of the historical development of the law relating to charity in the 20th century, the Article shows that the statutory law has passively accommodated significant growth of the charitable sector without demanding any rigor of the sector in the form of positive requirements or quantitative measures. This has led to growth without meaningful oversight – a recipe for problems. The Article then provides an overview of many of the scandals that engulfed the sector during the early 21st century and shows that the scandals not only seriously eroded the “halo” effect of charitable organizations and enabled passage of reform legislation, but also illustrate the consequences of unchecked growth. The Article then discusses the central features of current law that are under pressure in part because of this growth without oversight: the breadth of the charitable standard, a regulatory framework based on the distinction between public charity and private foundation, and a facts and circumstances and all-or-nothing approach to enforcement. The Article analyzes the legislation enacted between 2004-2006, and in 2010 (as part of health care reform), and finds that although these efforts were not comprehensive reform, the legislation nevertheless planted seeds indicative of a shifting legislative policy toward charity, one that favors more substantive distinctions among charities for exemption purposes, undermines the current basis for distinguishing among charities, and points toward brighter enforcement lines. The Article concludes that we are asking too much of current tax law, and suggests a new approach based on developing different standards for the charitable tax benefits in order to focus attention more directly on the tax system’s support for the charitable sector.