Thursday, January 20, 2011
The Los Angeles Times reports today that "social welfare organizations" exempt under IRC 501(c)(4) are re-engaging the debate on ObamaCare. You may have seen the ad featuring former Governor MiKe Huckabee imploring viewers to give Congress a "spanking" by signing a petition aimed at repealing the new healthcare act.
The commercial (video clip) has run nonstop on cable television for several weeks, paid for by Repeal HealthCare Act, one of at least three nonprofit groups formed in recent months to campaign against the healthcare law. By designating themselves under tax law as 501c(4) social welfare groups, they can accept unlimited donations without identifying their contributors. Activists on the left are fighting back with their own social welfare groups. An organization called Americans United for Change, financed by labor unions and other undisclosed donors, this week began its own national ad campaign supporting the healthcare law.
I thought it was the case that political advertising could not be the raison d'etre of social welfare organizations; that they had to do something other than engage in lobbying to be exempt, though lobbying has never been entirely prohibited. The LA Times story quotes an unnamed expert as saying that social welfare organizations are safe as long as they devote at least 51% of their annual spending to non-political purposes. When I read that, I kinda new why the story does not attribute the quote to anybody. Really, I am more baffled by the whole notion of a "social welfare organization." What is that? I will at least go on record as saying that a social welfare organization, as best I can tell, is a charity that is not subject to the more stringent political activity prohibitions/limitations to which 501(c)(3)'s are subject and contributions to which are not deductible. But who really knows what a social welfare organization is?
The Nonprofit Quarterly chimes in today on Keiser University's conversion to nonprofit, 501(c)(3) status in a mildly skeptical opinion piece:
Why the switch? There's the nice spin for public consumption that the 57-year-old CEO wanted to ensure that the school would "remain a legacy of the Keiser family," which might not happen somehow if it stayed for-profit. But there is the more pragmatic economic explanation that is equally if not more compelling. Nonprofit status exempts the university from property taxes. It becomes eligible for donations and for tax-exempt bonds.
But also Keiser was among the leaders of the for-profit colleges' campaign against the U.S. Department of Education's proposed "gainful employment" regulation which would deprive for-profit colleges of federal money if too high a proportion of their students couldn't pay their federal student loans; apparently. As a nonprofit, Keiser University would be exempt from this regulation. The conversion would mean more subsidies for Keiser students, who would be eligible for a $2,425 annual grant to students attending nonprofit colleges compared to $945 for attending for-profit schools.
Making this more confusing is that Arthur and Belinda Keiser bought Everglades in 1998 (when it was American Flyers College), converted that 1,200-student school to nonprofit status, and structured it so that it purchased many of its administrative functions from the for-profit Keiser University.
Keiser says that this is all on the up and up, with no ulterior motives, but the executive director of the American Association of Collegiate Registrars and Admissions Officers queried, "Until now, the very purpose of this entity was to be a profit-maximizing firm. Now we're being told it has suddenly done a 180 degree turn and become a charity?" Is it all so easy simply to say, “Today we are a nonprofit?”—
I am not so sure it was property tax exemption that motivated the switch. Previous reports have indicted that Keiser doesn't own its own property. The real issues, obviously, will be in whether the Keiser family can make the transition from private owners to public fiduciaries of a public trust. In my experience, its often the founders who, years into a successful nonprofit venture, simply can't stop acting like owners entitled to reap the financial advantages resulting from the commercial success of their charitable dream. In this case, Mr. Keiser not only represented buyer and seller but continues to serve as chief insider for new, tax exempt Keiser. I'd say this is a case that requires careful and close monitoring by the advisors.
Wednesday, January 19, 2011
WSJ Says Tax Code Too Complex to be Constitutional, Uses private foundation provision as primary evidence
From the tax trivia department: In a SmartMoney column published yesterday, the Wall Street Journal used a few sentences from the charitable tax exemption provisions (specifically, IRC 509) to demonstrate the absurd complexity of the tax code:
The tax system has clearly gotten too complicated. The code itself holds about 3.8 million words, nearly five times as many as the King James Bible. There's also a much larger body of regulations, which carry the weight of law, written by the Internal Revenue Service, along with court precedents going back at least a century. Add to that the IRS's published opinions on its regulations. Even if someone could read all of it, the rules would be obsolete by the time he finished. There have been more than 4,400 changes to the tax code over the past decade, or more than one a day.
Can the tax system become too complicated to be constitutional? Consider the following two sentences from different sources:
1. "[A] statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application, violates the first essential of due process of law."
2. For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).
The first sentence comes from a 1926 Supreme Court decision that helped establish the right of citizens to known what laws mean. The second comes from the tax code.
Tuesday, January 18, 2011
Here is a recent transaction that would make for an interesting case study in a class or seminar on charitable tax exemption. According to the South Florida Business Journal, Arthur and Belinda Keiser recently sold Keiser University to Everglades College, Inc thereby converting to nonprofit, federally tax exempt status:
The Fort Lauderdale-based university was sold by Arthur and Belinda Keiser to Everglades College Inc., a nonprofit that owns Everglades University, a separately run institution. It is managed by a nine-member board, which Arthur Keiser recently stepped down from. Keiser said he would remain chancellor and CEO of Kesiser University for the foreseeable future. He called it a family planning situation. He did not disclose the amount he sold it for. “The institution has gotten very large in the last 35 years,” Keiser said. “We always looked at the institution as serving the community. Moving to nonprofit is a good way for us to have an exit strategy and ensure the legacy of the family and the legacy of the university.” It also exempts Keiser University from certain taxes and makes it eligible for federal grants, donations and tax-free bonds. All of its real estate is leased.
One wonders what sort of tax planning was undertaken to ensure that the buyer's presumed tax exempt status was not jeopardized by the transaction, particularly if the sellers can be considered disqualified persons by virtue of their service on the buyer's board. The transaction provokes discussion of the "first bite" rule, the five year rule pertaining to the definition of disqualified persons, and IRC 4958 in general among other issues. Can the buyer keep the selling price confidential? And what sort of planning has to go into the setting of Arther Keiser's salary as Chancellor and CEO of the newly nonprofit Keiser University? If he were receiving any sort of profit sharing from old Keiser, can new Keiser continue with the same arrangement without running afoul of the tax code?