Saturday, September 17, 2011


A contentious law aimed at regulating Cambodia’s non-governmental sector has been sent back to the Ministry of Interior, following international concern that the draft as it stood could damage the country’s development, according to reports by Voice of America’s Khmer service.  The NGO law was approved in August by the Council of Ministers (reported in IJCSL-N for August), despite widespread disapproval from local and international organizations, who said provisions in the draft would make it hard for them to operate and could leave them vulnerable to arbitrary punitive action by government officials. Nouth Sa An, secretary of state for the Ministry of Interior, said the law would not go to the National Assembly as planned but has instead been sent back to the ministry for reconsideration, following international “reaction.”  Ministry officials will now “review and reconsider” the draft before sending it back a second time to the Council of Ministers for approval. Lam Chea, a legal counselor for the Council of Ministers, confirmed the decision.  The move was widely welcomed by members of Cambodian civil society, who had worried the law would stifle organizations critical of the government through excessive red tape or court action. Many also worried it would stymie the growth of small-scale associations at the grassroots.  For more information, see



September 17, 2011 in International | Permalink | Comments (0) | TrackBack (0)

Friday, September 16, 2011

Atkinson Posts Papers on SSRN

Rob E. Atkinson, Jr., Ruden, McClosky, Smith, Schuster & Russell Professor at the Florida State University College of Law, has recently posted four papers on SSRN.  Below I reproduce the title of each article, accompanied by its abstract:

The Future of Philanthropy: Questioning Today’s Orthodoxies, Re-Affirming Yesterday’s Foundations:

Philanthropy today has reached an impasse, in both theory and practice. This article maps a way beyond that impasse by taking us back to philanthropy’s core function and traditional values. The standard academic model sees philanthropy as subordinate and supplemental to our society’s other public sectors, the market and the state, and uses their metrics to measure its performance. Current law, best reflected in the federal income tax code, closely parallels that perspective. This article proposes to reverse the dominant theoretical perspective and reveal a radically different relationship among society’s three public sectors, the market, the state, and the philanthropic. Following both classical western philosophy and the West’s three Abrahamist faiths, this perspective places philanthropy first and measures everything, including our current economic and political systems, by a neo-classical philanthropic standard: the highest good of all humankind.

Philanthropy's Function: A Neo-Classical Reconsideration:

This essay lays the groundwork for a “new unified field theory” of philanthropy. That theory must have two complementary parts, an account of philanthropy’s core function and a measure of its performance, a metric for comparing philanthropic organizations both among themselves and with their counterparts in the for-profit, governmental, and household sectors. The essay first explains the need for such a measure, in both theory and practice. It then considers the critical shortcomings of today’s standard theory of philanthropy, which accounts for the philanthropic sector as subordinate and supplementary to our capitalist market economy and liberal democratic polity. Chief among the limits of standard theory is taking the ends of that economy and polity, satisfying aggregate consumer demand and majority voter preference, as given. After showing how this critical assumption begs the basic normative questions of classical political and ethical theory, this essay outlines a way of reconciling the two in a neo-classical theory of philanthropy. In that theory, the goal of both the market and the state, guided by philanthropy, would be to ensure all citizens the fullest possible development of their best abilities. That regime would require no one to agree with its goals and values, but it would give everyone every possible opportunity to be able to appreciate them.

Re-Focusing on Philanthropy: Revising and Re-Orienting the Standard Model:

This paper undertakes a detailed analysis of today’s standard theory of the philanthropic sector, in order to provide a new model that is both more accurate in its details and more comprehensive in its scope. The standard theory accounts for the philanthropic sector as subordinate and supplementary to our capitalist market economy and liberal democratic polity. That approach has two basic short-comings: Its explanation of both the state and philanthropy as adjuncts to the market fails to appreciate the ways in which all three sectors support and supplement each other. Even more basically, the standard model’s primary focus on the market ignores how the demands that we make on both the state and the market ultimately derive from value systems the philanthropic sector not only gives us, but also shapes us to accept. From this perspective, the philanthropic sector functions, not as an adjunct to the state and the market, under their standards of consumer demand and majority preference, but rather as both their foundation and their metric.

Tax Favors for Philanthropy: Should Our Republic Underwrite de Tocqueville's Democracy?:

Tax theorists have long debated the rationales for the federal income tax system’s favorable treatment of philanthropy. The debate has certainly become more sophisticated, but it has nonetheless failed to produce anything near full convergence of opinion. This article reviews that debate and reaches a paradoxical conclusion: Although the present system of exemption and deduction is perhaps impossible to justify in any other way, that system almost perfectly co-ordinates three basic features of American society: the populist and anti-statist sources of American philanthropy, the consumerist orientation of our form of market capitalism, and our tax system’s reliance on income as its principal revenue source.

To say that the Code’s treatment of philanthropy accommodates these three features well, however, is not to say that any of them is itself good; as an alternative to the current system’s fundamental populism and consumerism, this paper proposes a neo-classically republican view of the public good, grounded in the constitutional values of justice and general welfare. Philanthropy’s core function will be to promote those values. This, in turn, implies not only a very different tax treatment of philanthropy, but also a very different relationship between philanthropy and the state. The Code implicitly endorses the philanthropy of Jacksonian democracy and consumerist capitalism; the philanthropy of both Jefferson and Lincoln’s republicanism would look quite different (and much more like that of Plato’s Republic and Aristotle’s Ethics and Politics). It would better fit both the neo-classically republican elements of our constitutional culture and what Lincoln called “the better angels of our nature.”


September 16, 2011 | Permalink | Comments (0) | TrackBack (0)

Owley on Exacted Conservation Easements

Jessica Owley, Associate Professor at the University at Buffalo Law School, has recently posted The Enforceability of Exacted Conservation Easements on SSRN.  Here is the abstract:

The use of exacted conservation easements is widespread. Yet, the study of the implications of their use has been minimal. Conservation easements are nonpossessory interests in land restricting a landowner’s ability to use her land in an otherwise permissible way, with the goal of yielding a conservation benefit. Exacted conservation easements arise in permitting contexts where, in exchange for a government benefit, landowners either create conservation easements on their own property or arrange for conservation easements on other land.

To explore the concern associated with the enforceability of exacted conservation easements in a concrete way, this article examines exacted conservation easements in California, demonstrating that despite their frequent use in the state, their enforceability is uncertain. The three California statutes governing conservation easements limit the ability to exact conservation easements. California caselaw, although thin, indicates that courts may be willing to uphold exacted conservation easements even when they conflict with the state statutes. This examination of the California situation highlights California-specific concerns while providing a framework for examining exacted conservation easements in other states.

This article illustrates not only challenges of enforceability that arise with exacted conservation easements, but uncertainty in their fundamental validity and concerns about public accountability. This exploration illustrates that enforceability is not straightforward. This raises significant concerns about using exacted conservation easements to promote conservation goals, calling into question specifically the use of conservation easements as exactions.


September 16, 2011 | Permalink | Comments (0) | TrackBack (0)

McLaughlin on Conservation Easements and the Doctrine of Merger

Nancy McLaughlin, Robert W. Swenson Professor of Law and Associate Dean for Faculty Research and Development at the University of Utah S.J. Quinney College of Law, has recently posted Conservation Easements and the Doctrine of Merger on SSRN.  Here is the abstract:

Conservation easements raise a number of interesting legal issues, not the least of which is whether a conservation easement is automatically extinguished pursuant to the real property law doctrine of merger if its government or nonprofit holder acquires title to the encumbered land. This article explains that merger generally should not occur in such cases because the unity of ownership that is required for the doctrine to apply typically will not be present. This article also explains that extinguishing conservation easements that continue to provide significant benefits to the public through the doctrine of merger would be contrary to the conservation and historic preservation policies that underlie the state enabling statutes and the federal and state easement purchase and tax incentive programs.


September 16, 2011 | Permalink | Comments (0) | TrackBack (0)

Hoyt on Charitable Gifts by S Corporations and S Corporation Shareholders

Christopher R. Hoyt, Professor of Law at the University of Missouri-Kansas City School of Law, has recently posted on SSRN two related articles: Charitable Gifts by S Corporations: Opportunities and Challenges, 36 ACTEC L. J. 477 (2010); and Charitable Gifts by S Corporations and Their Shareholders: Two Worlds of Law Collide, 36 ACTEC L. J. 693 (2011).

Here is the abstract for Charitable Gifts by S Corporations:

This article examines the tax opportunities and tax hazards when a subchapter S corporation makes a charitable gift. The article demonstrates that usually the shareholders of an S corporation and the charity are both better off when an S corporation makes a charitable gift compared to having a shareholder make a charitable gift of S corporation stock. Either way, the income tax benefit will be on the S corporation shareholder’s personal income tax return. By having the S corporation make the gift, the parties avoid the “three bad things” that happen when a shareholder donates S corporation stock. The problems and solutions for a charitable gift of S corporation stock are analyzed in the companion article: Charitable Gifts by Subchapter S Corporations and Their Shareholders: Two Worlds of Law Collide, 36 ACTEC L.J. 693-768 (Spring 2011).

The opportunities include the ability to donate corporate property to a charitable remainder trust (CRT), a temporary enhanced income tax deduction for a gift of appreciated property (such as a conservation easement), the ability to avoid the Section 1374 built-in gains tax (even with a gift to a CRT), and the avoidance of the unrelated business income tax (UBIT).

The article also identifies hazards and ways to solve them. For example, an S corporation should avoid making a charitable gift to a charity while the charity is also a shareholder. It could be a prohibited “second class of stock.” Even a charitable gift to an unrelated charity can be a problem: a gift of a substantial portion of the corporation’s assets could be treated as a taxable corporate liquidation. Professor Hoyt identifies ways to reduce or even eliminate the potential tax liability triggered by such a large gift.

Here is the abstract for Charitable Gifts by S Corporations and Their Shareholders:

This comprehensive article analyzes the rules that apply to, and the tax planning strategies for, a charitable gift of S corporation stock. It describes the interaction of the laws governing S corporations and tax-exempt organizations and describes the best ways to solve the challenges posed by each set of laws. The article also addresses additional challenges that can occur when specific types of tax-exempt organizations own S corporation stock, notably private foundations, donor advised funds, supporting organizations and ESOPs.

From the perspective of both the donor and the charity, three “bad things" happen when S corporation stock is contributed to a charity: (1) the donor's income tax deduction is usually less than the stock’s appraised value; (2) the charity must pay the unrelated business income tax (UBIT) on its share of S corporation income; and (3) the charity must pay UBIT on its gain when it sells the stock. This is much harsher tax treatment than if the charity had received and sold an ownership interest in an identical closely-held business that had been organized as a C corporation, a limited liability company or a partnership. Professor Hoyt suggests specific legal reforms to make the tax treatment more consistent.

The article also identifies the best ways to structure a charitable gift under the existing laws, such as a donation to an intermediary charitable trust. In most cases, though, both the donor and the charity will be better off if the S corporation makes a charitable contribution of some of its assets compared to having a shareholder contribute S corporation stock.

Hat Tip: TaxProf Blog


September 16, 2011 | Permalink | Comments (0) | TrackBack (0)

Valentine on the Popular Meaning of Charity and the Charitable Contributions Deduction

In  A Lay Word for a Legal Term: How the Popular Definition of Charity Has Muddled the Perception of the Charitable Deduction, 89 Neb. L. Rev. (2010), Paul Valentine argues that lay conceptions of the meaning of "charity" impede critical analysis of the charitable contributions deduction authorized by section 170 of the Internal Revenue Code.  Here is a copy of the abstract:

In the United States there is a deeply held conviction “that taxpayers who donate to charity should generally not be subject to the same income tax liability as similarly situated taxpayers.” This innate sense about the Internal Revenue Code’s § 170, otherwise known as the charitable deduction, resonates with Americans’ sense of fairness and creates strong barriers to curtailing its function.

This same sense of fairness is tied to the perceived effects of the charitable deduction. Yet, how “charitable” is the charitable deduction, and how charitable do we expect it to be? This Article argues that the discrepancy between the popular meaning of the word “charitable” and the legal meaning has distorted both the perception of, and the political justifications for, the provision.

The charitable deduction’s definitional discrepancy is perhaps not immediately apparent, because often the legal and layperson’s definitions of the word are the same. However, on occasion, the legal and popular definitions vary. One such example is the difference between the Tax Code’s and layperson’s definition of the word “charitable.” Although the legal definition does cover direct relief of the poor, it also has a much wider mandate, including advancing religion, science and education, constructing public buildings, lessening neighborhood tensions, and other public benefit purposes. These types of causes may provide a service to society, but they are neither charitable under the popular meaning of the word nor would most individuals consider organizations that provide such services a charity.

This broad legal definition of “charitable” has created a misperception in the American psyche of where the benefits of the charitable deduction are allocated. The very use of the word “charitable” in the statutory language creates a powerful association in most non-lawyers that ties the deduction to churches and poverty relief organizations, when in reality this is only a small portion of the tax subsidy. Further, the emotive rhetoric used by politicians when attacking proposed amendments curtailing the charitable deduction is grossly out of sync with the primary beneficiaries of the provision.

This Article argues that that the definitional gap between the legal and lay definition of “charitable” impedes meaningful discussion of amendments to the charitable deduction. This has led to mistaken or underestimated assumptions about the allocation of the subsidy. A clearer understanding of where the § 170 subsidy is allocated would allow politicians and the public to more critically examine this tax expenditure. In light of this confusion, the Article proposes Congress should rename § 170 the “qualified donation deduction”—a term that would not create the same poverty relief associations as the charitable deduction misnomer.

This Article is structured as follows: Part II looks at how Congress and commentators justify the charitable contribution, examining the historical, theoretical and political justifications of the section. Part III examines the data associated with the charitable deduction and calculates the percentage of the charitable deduction expenditure that is allocated to direct poverty relief. Part IV proposes that Congress rename the charitable deduction to break the association between the charitable deduction and poverty relief. This section also addresses the main critiques of this proposal. Part V concludes.

The conclusion of the article is also worth reproducing in full:

A former chief economist at the U.S. Department of Labor stated that if any proposed amendments curtailing the charitable deduction passed, “the government would gain billions in tax revenue, but charities and others would lose. That would lessen the ability of charities to help the neediest . . . .” It is these types of misleading assertions that this Article hopes to address. The neediest receive only 8% in direct assistance from the charitable deduction. High-income individuals contribute less as a percentage of their total giving to direct assistance of poverty organizations than their middle- and-low-income counterparts. To continue justifying the 35% deduction for high-income individuals under the assumption that it protects the neediest is a fallacy, and to continue advertising it as such constitutes fraud. Renaming the charitable deduction to the qualified donation deduction makes this deception more difficult and allows the American public to decide, based on more informed information, where their tax dollars are spent.

Hat Tip: TaxProf Blog


September 16, 2011 | Permalink | Comments (0) | TrackBack (0)

Eisenberg on the Hershey School

In Hershey School Scandal Underscores Need for Watchful Governance, published in the Chronicle of Philanthropy, Pablo Eisenberg, senior fellow at the Center for Public & Nonprofit Leadership of the Georgetown Public Policy Institute, forcefully calls for more effective governmental oversight of the Milton Hershey School:

For two decades neither the Pennsylvania Attorney General’s Office nor the Internal Revenue Service has been willing to take serious action to remedy the abuses that have plagued one of the wealthiest nonprofits in America, the Milton Hershey School for poor children. 

It is one of the longest lingering scandals in the modern nonprofit world and one of the most glaring examples of the abuses of the public trust that can happen when regulators fail to keep a close eye on a charity’s governance.

Eisenberg summarizes various problems that have plagued school operations over several years, and takes particular aim at decisions made by the school’s managers, also members of the board governing the Hershey Trust.  Recognizing that the Pennsylvania Attorney General will soon announce findings of its investigation that might force the school to alter its operations, Eisenberg laments that the AG may do little more “than slap the organization’s wrist or impose modest fines.”  Says Eisenberg, “Odds are that the state will leave the Hershey School’s structure, governance, and practices essentially intact.”   Arguing that just the opposite is the proper response, Eisenberg opines:

If the attorney general, Linda Kelly, were serious, she would order that the board restructure itself to include a majority of members with expertise in education and child welfare and a real concern for the future of the school. She would also force the board’s chair, Mr. Zimmerman, to step down, along with his longtime cronies on the governance bodies.  …. And state regulators should impose tight restrictions on self-dealing, conflicts of interest, and compensation.

Eisenberg further asserts that the status quo “reflects a failure of both federal and state government oversight and enforcement.”  He continues:

Protect the Hersheys’ Children has asked the Internal Revenue Service to take action, charging that the attorney general’s office has spent years mostly looking the other way when it comes to abuses at the Hershey nonprofits.  …. If neither the Pennsylvania Attorney General’s Office nor the IRS is willing to demand that Hershey change its operations, then it will be up to the public to take action.


September 16, 2011 | Permalink | Comments (1) | TrackBack (0)

Thursday, September 15, 2011

Halperin: Is Income Tax Exemption for Charities a Subsidy?

Daniel I. Halperin, Stanley S. Surrey Professor of Law at the Harvard Law School, has recently published Is Income Tax Exemption for Charities a Subsidy?, 64 Tax L. Rev. 283 (2011), available on SSRN.  The following is the abstract of the paper:

Article considers whether income tax exemption for charities is consistent with normal income tax.  It finds that exemption for contributions is not special treatment and that exemption for income from sale of goods or performance of services related to the purpose of the charity is special treatment only if profits are used for expansion. It concludes that a subsidy for expansion can be justified. Most importantly the article finds that exemption for investment income is a subsidy. It concludes that exemption for such income depends on a value judgment as to whether public policy should favor less accumulation and more current spending by charities. It suggests that the exemption for investment income and the charitable deduction should be limited in certain circumstances.


September 15, 2011 | Permalink | Comments (0) | TrackBack (0)

Simplified Procedure Sought for Ensuring Tax-Compliant International Grant Making by Private Foundations

Tax Notes Today reports that Janne Gallagher of the Council on Foundations has requested a meeting with Treasury officials “to discuss equivalency determination information repositories for international grantmaking, the group's proposed amendments to Rev. Proc. 92-94, and final regulations on the redesigned annual exempt organization information return.” 

Rev. Proc. 92-94, 1992-2 C.B. 507, explains the legal background and purpose of the current administrative framework as follows:

Private foundations generally want their grants to foreign grantees to be treated as qualifying distributions for purposes of section 4942 of the Internal Revenue Code rather than as taxable expenditures for purposes of section 4945 of the Code. This treatment is assured if the foreign grantee has a ruling or determination letter classifying it as a public charity within the meaning of section 509 (a) (1), (2), or (3), or a private operating foundation under section 4942 (j) (3) of the Code. If a foreign grantee does not have such a ruling or determination letter, the Foundation Excise Tax Regulations set forth requirements that must be satisfied in order to assure that the grant will be considered a qualifying distribution.

In response to requests from private foundations, this revenue procedure provides a simplified procedure that private foundations (including nonexempt charitable trusts) may follow in making "reasonable judgments" and "good faith determinations" under sections 53.4945-6 (c)-(2) (ii), 53.4942 (a)-3 (a) (6) and 53.4945-5 (a) (5) of the Foundation Excise Tax Regulations. If the requirements of this revenue procedure are met, a grant to a foreign grantee will be treated as a grant to an organization that is described in section 501 (c) (3) or section 4947 (a) (1) of the Internal Revenue Code, and, that is either a public charity within the meaning of section 509 (a) (1), (2), or (3), or a private operating foundation under section 4942 (j) (3) of the Code.

In her letter addressed jointly to an attorney in the Office of Tax Policy and the head of the Tax Exempt and Government Entities Division, Ms. Gallagher writes of the need “to allow grantmakers to rely upon affidavits, documents, and equivalency determinations maintained by ‘equivalency determination information repositories’ (EDIRs).”  Expressing approval of the government’s decision to include an update to Revenue Procedure 92-94 in the most recent fiscal year's priority guidance plan, Ms. Gallagher reports that “I and others involved with the centralized repository project have continued to be approached by numerous grantmakers indicating the strong need for such a repository as a mechanism for simplifying and streamlining international grantmaking.”

The full text of the letter is available at 2011 TNT 178-41.  Tax Notes Today reports that Jean J. Lim, President of the Amgen Foundation, has written a similar letter, the text of which is available at 2011 TNT 178-38.


September 15, 2011 | Permalink | Comments (0) | TrackBack (0)

Recent Report on Nonprofit CEO Pay

In Growth Slows in Nonprofit CEO Pay, the Philanthropy Journal reports recent data on compensation paid to senior executives of nonprofit organizations.  From the first three paragraphs of the story:

The recession has taken a toll on nonprofit compensation, with median increases for CEOs growing at a slower pace, a new report says.

The 2011 GuideStar Nonprofit Compensation Report also finds a continuing gap in median compensation between male and female CEOs, although the gap has narrowed since 1999 for most nonprofits, and the percentage of female CEOs has increased for nonprofits of all sizes.
Based on GuideStar's database of digitized information from Form 990s for fiscal 2009 that roughly 88,000 nonprofits filed with the IRS, the report says median increases for compensation for incumbent CEOs generally grew 2 percent or less in 2009, compared to 4 percent or more in 2008.


September 15, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 14, 2011

Calvin Johnson on Payout by Charities Over 50 Years

Calvin H. Johnson, Andrews & Kurth Centennial Professor at the University of Texas School of Law, has just published his latest Shelf Project proposal, Payout by Charity Over 50 Years, 132 Tax Notes 1161 (Sept. 12, 2011).  The Summary of the proposal states as follows:

This proposal would require a section 501(c)(3) charitable organization to spend or distribute a gift, both as to principal and interest, over the 50 years following receipt of the gift. The goal of the rule is to increase the good that comes from charitable deductions and reduce the administrative burden. Within broad definitions of charity, the worthiness of a charity is defined more by process than by detailed substantive rules -- a donor can be presumed to be trying to do the most good with his money. The world changes over time, however, and after 50 years it is different. The 50-year payout requirement would strengthen the tie between the wisdom of the donor and the most pressing needs of the times.
The requirement would also diminish the problems from charitable boards that are accountable on substance to nobody but themselves. A board without competition, recent donations, or meaningful substantive accountability should lose its special claim to control the money over time. A charity with continuing support, however, would not go out of business. The accounting would treat the earliest gifts as given out first, so that an active charity with both new contributions and high expenditures would have long since distributed its old funds.

In introducing his reasons for recommending changes to current law, Professor Johnson cites the limited ability of donors to foresee the future, and (in his view) the lack of accountability of charitable boards and (again, in his view) their consequent inability to justify their own administrative expenses over time.  Mechanically, Professor Johnson explains his proposal as follows:

The charity should be required to use or distribute both its income and the corpus of the gift over the 50-year period. The same considerations that imply the 50-year period imply that earlier is better. The charity should not distribute everything all at once at the end of the 50-year period. A norm should be that the charity will pay out funds at least as fast as the annuity that will distribute all the gift over 50 years. Thus, a charity making a 5 percent return on its funds will meet its 50-year payout if it spends or distributes 5.48 percent of its funds every year. A charity should be allowed to save up its funds for a grand project like a library or cathedral, but if it falls behind the annuity schedule that would distribute everything evenly, then it should have prior IRS approval on a showing that the deferring payout (for as much as five years) would better service an identifiable project.

Hat Tip: TaxProf Blog


September 14, 2011 | Permalink | Comments (0) | TrackBack (0)

IRS Web Page on Disaster Relief

With tornadoes, hurricanes, wildfires, and other natural disasters ravaging the country, and indeed the world, in recent weeks and months, I thought it would be helpful to remind blog readers that numerous resources are available to educate donors, charities and victims about the tax implications of providing disaster relief.  The Internal Revenue Service has a web page providing links to numerous sources, including Publication 3833, Disaster Relief, Providing Assistance Through Charitable Organizations, and several professional educational publications. 


September 14, 2011 | Permalink | Comments (1) | TrackBack (0)

Charities React to Deduction Limitation Proposed in President’s American Jobs Act of 2011

Yesterday, we blogged about selected provisions of the American Jobs Act of 2011 proposed by President Obama.  One provision that we observed is section 401, which, in relevant part, would essentially limit the value of itemized deductions for high-income earners to the value that they would have were the high-income taxpayers in the 28 percent marginal income tax bracket.  In Jobs Bill Would Limit Charity Tax Breaks, the Chronicle of Philanthropy takes a critical view of this feature of the proposal:

President Obama’s proposed $447-billion jobs bill would be financed mainly by limiting the percentage of income wealthy donors could write off, including tax breaks for charitable gifts.

Mr. Obama, who today released the details of the plan he outlined to Congress last week, suggested limiting write-offs for itemized deductions to 28 percent. The nation’s most affluent people are currently allowed to write off 35 cents of every $1 they spend on charitable giving, housing, medical expenses, and other deductible items.

Of course, if (as provided by current law) the so-called Bush tax cuts do indeed expire with no further reduction in marginal income tax rates, and if the proposed itemized deduction limitation is enacted and remains in place, the tax-adjusted cost of charitable giving by wealthy donors would increase to an even greater degree than that illustrated in the above excerpt.  Nonprofit leaders are aware of the possible consequences, as the story continues:

The president, who has proposed similar changes to the charitable deduction several times throughout his presidency, has faced stiff opposition from nonprofit leaders. They say that limiting the value of the tax break would cause wealthy people to reduce their giving.

Today’s announcement quickly drew a similar outcry among nonprofit leaders, many of whom said the idea would force job cuts at charities just as the president is seeking to increase employment.

A competing view was offered by Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, who argued that charities should also contemplate the negative effects of sustained economic sluggishness on charitable giving.  Charities stand to gain more from a healthy economic recovery than they stand to lose from this proposal, according to Van de Water.  


September 14, 2011 | Permalink | Comments (0) | TrackBack (0)

Analysis of Nonprofits Forfeiting Federal Income Tax Exemption for Failure to File Annual Information Returns

The Urban Institute ("UI") recently published on its website Revoked: A Snapshot of  organizations that Lost Their Tax-Exempt Status -- a brief study of the 275,000 plus nonprofit organizations that have lost their federal income tax exemption on account of failing to file an information return with the Internal Revenue Service within the last three years. Based on its review of the Automatic Revocation of Exemption List released by the IRS on June 8, 2011, the UI provides in its study “a snapshot of the organizations that have lost their tax-exempt status and examine[s] these organizations by type, age, and location.”  The study concludes as follows:

While it may be tempting to attribute the failing of these organizations to the recession, it is more likely that these organizations have been out of operation for many years. In fact, more than a quarter of all organizations whose exempt status was revoked last appeared in the IRS Business Master File before 2007, and only 10 percent of organizations that lost their tax-exempt status filed a financial return (Form 990 or Form 990-EZ) during their lifespan.

Some organizations whose status has been revoked are likely still operating; only time will tell how many. IRS efforts to communicate the new requirements were extraordinary, with multiple mailings to addresses on file, public announcements on TV and the radio, pamphlets in libraries, and many public presentations. This coupled with the fact that the vast majority of these organizations have never filed an information return and many of them have not appeared in the IRS Business Master File for four years lead us to believe that most of these organizations are, in fact, defunct and have been for several years.

Losing tax-exempt status can be detrimental for an operating nonprofit. Everyone involved with small nonprofits should go to the Nonfiler Automatic Revocation List published by the IRS … to make certain that the organization has not lost its status. If an organization’s status has been revoked, taxes and donations made to the organization will no longer be tax deductible. Donations made to organizations before revocation remain tax deductible. To have tax-exempt status reinstated, organizations will need to reapply. The IRS announced transition relief for certain small tax-exempt organizations—those with annual gross receipts in 2010 of $50,000 or less—to regain their tax-exempt status retroactive to the date of revocation and pay a reduced application fee of $100 rather than the typical $400 or $850 fee. Full details are available on the IRS web site ….

The IRS News Release announcing the Automatic Revocation of Exemption List provides links to publications that explain how a nonprofit that has lost its exempt status can apply for reinstatement of exemption.


September 14, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 13, 2011

Nonprofits and the American Jobs Act of 2011 Proposed by President Obama

The White House has released the text of the American Jobs Act of 2011, as well as a section-by-section summary of the proposed legislation.  Reproduced below are a few provisions of the sectional summary that should interest the nonprofit sector:

Section 101 – Temporary Payroll Tax Cut for Employers, Employees, and the Self-Employed. This section extends and expands the existing temporary reduction in payroll taxes. For calendar year 2012, it: (a) further reduces the Old Age, Survivors and Disability Insurance (social security) portion of the payroll tax that was paid by employees during 2011 from 4.2 percent (reflecting the existing 2 percent temporary reduction from the permanent rate) to 3.1 percent; and (b) adds a new reduction in the portion of this tax that is paid by employers from 6.2 percent to 3.1 percent. The employer reduction applies to up to $5 million of wages that are paid by the employer. With limited exceptions, the reduction in amounts paid by employers is available to all employers, whether private businesses or tax-exempt organizations. The employer reduction is not available, however, to Federal, State and local government employers (other than State colleges and universities) or with respect to household workers. This section contains equivalent reductions for individuals subject to self-employment taxes. Transfers from general revenues are provided to protect the social security trust fund.
Section 102 – Temporary Tax Credit for Increased Payroll. For the last quarter of 2011 and for calendar year 2012, the proposal provides a payroll tax credit that fully offsets the employer social security tax that otherwise would apply to increases in wages from the corresponding period of the prior year. For example, if an employer paid wages subject to social security tax of $5 million in 2011 and $6 million in 2012, the credit to which the employer would be entitled would eliminate the employer’s portion of social security taxes on the $1 million of increased wages. The credit would be available on up to $50 million of an employer’s increased wages. Generally, the credit is available to all employers, whether private businesses or tax-exempt organizations, but would not be available to Federal, State and local government employers (other than State colleges and universities) or with respect to household workers. Transfers from general revenues are provided to protect the social security trust fund.

Section 201 – Returning Heroes and Wounded Warriors Work Opportunity Tax Credits. Under current law, employers that hire veterans who have been unemployed for at least 6 months and have a service-connected disability are eligible for a maximum tax credit of $4,800. This section increases the amount of that credit to $9,600. This section also creates two new hiring credits for veterans. The first is a credit of $2,400 for employers that hire veterans who have been unemployed for at least 4 weeks. The second is credit of $5,600 for veterans who have been unemployed for at least 6 months. Under this section, these credits are also available to tax-exempt entities and public universities. Finally, this section authorizes the Secretary of the treasury to provide alternative methods for certifying a veteran’s unemployed status.

Section 227 – Private Schools. This section allows certain private, nonprofit elementary or secondary schools to be eligible to receive program services for limited purposes, including meeting requirements of the Americans with Disabilities Act and the Rehabilitation Act.

Section 401 – 28 Percent Limitation on Certain Deductions And Exclusions. This section would limit the value of all itemized deductions and certain other tax expenditures for high-income taxpayers by limiting the tax value of otherwise allowable deductions and exclusions to 28 percent. No taxpayer with adjusted gross income under $250,000 for married couples filing jointly (or $200,000 for single taxpayers) would be subject to this limitation. The limitation would affect itemized deductions and certain other tax expenditures that would otherwise reduce taxable income in the 36 or 39.6 percent tax brackets. A similar limitation also would apply under the alternative minimum tax. This section would be effective for taxable years beginning on or after January 1, 2013.


September 13, 2011 | Permalink | Comments (0) | TrackBack (0)

Income from Governmental Employee Trust Ruled Non-taxable

In Private Letter Ruling 201136007 (May 16, 2011), 2011 PLR LEXIS 838 (released on September 9), the IRS ruled that the income of a governmental employee trust is excludable from gross income under section 115 of the Internal Revenue Code.  In this ruling, a governmental authority administered the water and wastewater utility of a city and county.  Both the city and the authority provided life insurance for their retired employees as part of their compensation package. The entities proposed to set up the trust to fund this post-employment benefit.  The trustees of the trust would consist of the members of the city’s investment committee (comprised of various government officials and other appointees).

In ruling that the income is excludible under Code section 115, the IRS reasoned that providing life insurance benefits to retired governmental employees and their beneficiaries constitutes the performance of an essential governmental function within the meaning of Code section 115.  Relying on Revenue Ruling 90-74, 1990-2 C.B. 34, and Revenue Ruling 77-261, 1977-2 C.B. 45, the private letter ruling states as follows:

The provision of life insurance benefits to retirees and their dependents satisfies the obligation of the Employer to provide those benefits as part of the employees' compensation; thus, the income of the Trust accrues to the benefit of the Employer, with the Authority and the City comprising the Employer being political subdivisions. No private interests participate in, or benefit from, the operation of the Trust, other than as providers of goods and services. Any amounts remaining in the Trust after all life insurance benefits, plus reasonable fees and expenses, have been paid shall in no event be paid to any entity other than a state, political subdivision, or section 115 entity. The benefit to retired employees of the Employer is incidental to the public benefit.


September 13, 2011 | Permalink | Comments (0) | TrackBack (0)

Monday, September 12, 2011

Pastors and Decision 2012: Here We Go Again, Only More So

The Los Angeles Times reports that the vocal involvement in the 2012 election by pastors of local churches is expected to increase well beyond that which typified the previous decade.  According to the story, many pastors who traditionally have preferred to remain largely silent in public with respect to political candidates are deciding to speak up.  The story offers the following explanation:

The passion for politics stems from a collision of historic forces, including heightened local organizing around the issues of abortion and gay marriage and a view of the country's debt as a moral crisis that violates biblical instruction. Another major factor: Both Texas Gov. Rick Perry and Bachmann, contenders for the GOP nomination, are openly appealing to evangelical Christian voters as they blast President Obama's leadership.

Perpetuating the heightened interest in political engagement by pastors, says the story, is “a growing web of well-financed organizations that offer seminars, online tools and a battery of lawyers.”  And unlike previous eras in which political activism was inspired by large-looming personalities of national religious figures, the current movement “springs from the grass roots — small and independent churches — and is fueled by emails and YouTube videos.” 

The prospect of political activism by religious leaders of course raises the list of legal issues familiar to nonprofit lawyers and scholars.  The Times reports that the usual players are staking their territory in the terms that we have come to expect:

As pastors speak out on political matters, they've drawn admonitions from groups such as Americans United for Separation of Church and State, which warns that such activism could jeopardize their churches' nonprofit status. But the religious leaders are bolstered by well-funded Christian legal organizations supporting their cause.

The most prominent — the Alliance Defense Fund, a group based in Scottsdale, Ariz., that spent $32 million in fiscal year 2010 — is challenging a 1954 tax code amendment that prohibits pastors, as leaders of tax-exempt organizations, from supporting or opposing candidates from the pulpit. The group sponsors Pulpit Freedom Sunday, in which it offers free legal representation to churches whose pastors preach about political candidates and are then audited by the Internal Revenue Service.

To be sure, snippets about the law – including the language appearing in the excerpt above – do little to inform pastors of just what political speech is and is not consistent with maintaining the federal income tax exemption of their churches.  Pastors are perfectly free to speak strictly for themselves, without using church resources and without purporting to speak for their churches, on political matters, even to the point of explicitly supporting and opposing individual candidates.  Doing so does not jeopardize the federal income tax exemption of their churches.  However, speaking in favor of (or in opposition to) political candidates does jeopardize the federal income tax exemption of a church if the speech is properly viewed as having been made by the church.  The IRS has long considered endorsements in a sermon to fall within the latter (i.e., tax-disfavored) category.  Links to videos on church websites can also present problems in many circumstances.

For additional information on the IRS’s position on permissible and impermissible political speech by pastors, see Publication 1828, Tax Guide for Churches and Religious Organizations.


September 12, 2011 | Permalink | Comments (1) | TrackBack (0)

Illinois Hospital Exemption Battle Advances; Professor John D. Colombo Quoted

We previously blogged about the Illinois Department of Revenue’s recent denial of property tax exemption to three Illinois hospitals that provided charity care at a level that was deemed insufficient to merit exemption.  In State Challenging Hospitals’ Tax Exemptions, the New York Times reports that an Illinois Department of Revenue spokesman said the agency was also reviewing parcels owned by 15 hospital systems.  Referring to the recent denial of exemption to three hospitals, the agency spokesperson not only cited the level of charity care provided, but also commented that each hospital had been operating as a “for profit” business, notwithstanding that “only charities are entitled to a tax exemption” under the Illinois Constitution.  The Times further reports that Illinois hospitals will lobby for legislation that grants tax exemptions to hospitals that demonstrate their production of community benefit in forms not limited to charity care – such as bearing the financial burden of patients’ unpaid debts, costs of medical care not covered by Medicare and Medicaid programs, direct costs that teaching hospitals pay to train doctors and conduct research, and costs of non-lucrative services (e.g., providing emergency care, trauma care, burn units and neonatal intensive care units).

Fellow blogger John D. Colombo, Albert E. Jenner, Jr. Professor of Law at the University of Illinois College of Law, is quoted in the article as follows:

Hospitals think they should get tax exemptions for merely what they do in the community. …  It’s problematic: The overall number that each of these hospitals is reporting is abysmally low. Given the state of the economy, one would expect the charity services going up.


September 12, 2011 | Permalink | Comments (0) | TrackBack (0)

Lessons from Parkland Hospital

A recent article in the Dallas Morning News (subscriber access required for full story) offers an unsettling reminder of the importance of good board governance of hospitals.  Parkland Memorial Hospital is a county hospital, but its recent public failures surely should be heeded by all hospitals and their boards, including those overseeing nonprofits. 

According to the Dallas Morning News, in an August report issued by the U.S. Centers for Medicare & Medicaid Services (“CMS”), the agency found that Parkland’s patients were in “immediate jeopardy” and cited Parkland for nine federal health-care violations, including failures in infection control and emergency care.  Further, reportedly on Friday, September 9, CMS said that its re-inspection of Parkland revealed continuing safety problems, and that Parkland would forfeit hundreds of millions of dollars in public funding unless it agreed to use outside consultants to improve conditions.  Moreover, the United States Justice Department reportedly has initiated a broad inquiry of Parkland.

What do these findings say about board governance?  The CMS reportedly found that Parkland's board had "failed to ensure that hospital policy was implemented," and that the board was ultimately responsible for patient care and safety.  This finding followed a recent reconstitution of the Parkland board in January, when county commissioners replaced five of the seven board members amid concerns of Parkland’s operations.  The board’s failures reportedly arose not from a refusal to act on information, but from being deprived of important information concerning hospital operations by senior management – long-serving chief executive Dr. Ron Anderson and his underlings.   Says the story:

Board members became increasingly alarmed that Anderson and his staff weren't acknowledging the problems, even in closed meetings. When they sought more information, Anderson warned them against micromanaging the hospital. Board members said he frequently told them in private, "If you don't trust my decisions, you need to replace me."

And, reports the story, that is just what the Parkland board unanimously decided to do.  A related story in the Dallas Morning News clarifies that Anderson will be offered a new position with Parkland, when his current contract expires at the end of the year.

What’s next?  According to a release posted on Parkland’s website, by September 30, Parkland and CMS will enter into a Systems Improvement Agreement to maintain Parkland’s participation in the Medicare and Medicaid programs and to address the problems identified in the recent CMS survey. 

Parkland’s story illustrates the need for nonprofit board members to actively oversee operations.  Although a board is normally entitled to rely on information provided by senior officers, board members must ensure that that they are indeed receiving necessary information, and they must take corrective action when they have reason to believe that they are not adequately informed.  Excessive deference to the decisions of a strong CEO – even one whose longstanding service, great vision, and beloved status has earned him or her widespread respect – is inconsistent with proper discharge of fiduciary duties owed by the governing board.  If the news accounts are accurate, the current board of Parkland, in place for a relatively brief period and forced to take strong action, appears to understand this legal principle.


September 12, 2011 | Permalink | Comments (0) | TrackBack (0)