October 22, 2011
Reduced Funding Sources Present Opportunity to Reduce Nonprofits' Duplication
As reported in the San Francisco Chronicle, the difficult economic times for state and local governments, in particular, as well as other funders is presenting some nonprofits with hard choices - either merge with another nonprofit with similar programs or cease to exist. The City of San Francisco, which spends approximately $500 million per year to fund local nonprofits that provide a variety of health and human services, is a prime example of how nonprofits must seek partnerships to survive in these times of decreased funding sources. The article illustrates that in many instances the combining of nonprofit agencies has lead to increased services and public impact. For instance there are presently 10 nonprofits that provide employment counseling services to the homeless. Some of these nonprofits receive over $100,000 for providing such services; others receive between $30,000 and $40,000. There is a strong argument that the aggregate funds could be better utilized if the various agencies combined to offer a single, comprehensive program.
October 21, 2011
IRS Guidance on Tax-Exempts Participating in Medicare Shared Savings Program
The Centers for Medicare & Medicaid Services has released final regulations describing the rules for the Medicare Shared Savings Program (Shared Savings Program) and accountable care organizations (ACOs).
On April 18, 2011, the IRS released Notice 2011-20, summarizing how it expects existing IRS guidance to apply to § 501(c)(3) organizations, such as charitable hospitals, participating in the Shared Savings Program through ACOs. The IRS released Fact Sheet 2011-11 confirming that Notice 2011-20 continues to reflect IRS expectations regarding the Shared Savings Program and ACOs, and providing additional information for charitable organizations that may wish to participate in the Shared Savings Program. For more information, see the CMS website.
October 20, 2011
Lipp & Crawford: "Donating to College Athletics: A Taxing Gesture of Kindness"
Bridget Crawford (Pace) and Troy Lipp (Pace) have posted on SSRN Donating to College Athletics: A Taxing Gesture of Kindness (Tax Notes 2011). Here is the abstract:
This article considers the tax consequences of a booster's contribution to a college athletics program, using the case study of financier Robert Burton's multi-million dollar contribution to the University of Connecticut football program. This article discusses the income and gift tax issues that arise in connection with gifts made in contemplation of corresponding benefits, as well as potential tax consequences if a donor subsequently withdraws a gift. Donors who expect a role in a team's affairs may face unfavorable tax consequences.
October 19, 2011
Should Solyndra's Failure Yield More Tax Reforms for Supporting Organizations?
As previously blogged (see here), the George Kaiser Family Foundation's (GKFF), a tax-exempt entity and the largest investor in the failed solar company, Solyndra, is garnering further scrutiny for its alleged lack of sufficient contributions to charitable activities. As detailed in a Washington Post article, the ever-vigilant watchdog on charities' activities, Senator Charles Grassley, wrote to Treasury Secretary Geithner and IRS Commissioner Shulman urging them to finalize rules that would prevent supporting organizations like GKFF from avoiding the mandatory payout rules imposed on private foundations. By establishing itself as a supporting organization for the Tulsa Community Foundation, GKFF is effectively circumventing private foundation rules to which it would otherwise be subject. In some recent years, according to the Post article, GKFF distributed as low as .2 percent of its assets to charitable activities.
As Senator Grassley stated at the Senate Finance Committee hearing yesterday, "[t]he recent Solyndra scandal highlights the need for further reforms. With Solyndra, the government didn’t just lose out on its investment through the $535 million loan guarantee [from the Energy Department]. It also lost out on the tremendous subsidy it provided the George Kaiser Family Foundation through the charitable contribution deduction.” As John Colombo stated in his prior blog entry on this issue, the lack of accountability that results from these type of supporting organization scenarios is problematic and should be eliminated.
The Future of the Charitable Contributions Deduction
As previously blogged (see here), the Senate Finance Committee held a hearing yesterday to discuss the future of the charitable contributions deduction. As reported by numerous news sources (see two articles, here and here), most of those who testified on behalf of charitable organizations argued that any floor or cap on the charitable contributions deduction would result in a significant decrease of charitable contributions, a potentially devastating result to the nation's charities. Frank Sammartino, a tax analyst at the Congressional Budget Office, conjectured that Obama's plan (limiting the deduction to 28% of high-income taxpayers' AGI) would likely reduce higher-income-taxpayers' contributions, but offered no hard estimates. The President's National Commission on Fiscal Responsibility and Reform (see its report here) has proposed a tax credit for charitable contributions exceeding 2% of a taxpayer's AGI.
Senator Max Baucus, Chair of the Senate Finance Committee, raised the common counterpoint - namely, that most taxpayers do not itemize their deductions and, therefore, do not accrue any tax benefits for their charitable contributions. The result, he opined, was that some charities receive larger amounts of contributions because they attract high-income taxpayers who achieve the largest tax reductions. "Let us encourage charitable giving in a way that is fair and efficient," he proferred before leaving the hearing.
In addition to potential reform of the charitable contributions deduction, other topics discussed at the hearing included the deduction for household goods and services, donations in support of the arts, and tax benefits provided to supporting organizations.
October 18, 2011
Charitable Giving Increases in 2011, but Still Behind Pre-Recession Giving
The Chronicle of Philanthropy reports that the charities that fundraise from predominantly private sources anticipate a median increase of 4.7 percent—namely, that half of the surveyed charities anticipate more and the other half anticipates less. It is an increase of 1.2 percent over last year's gains. Nevertheless, charities are still not fundraising at their pre-recession levels. Compared to 2007 figures (adjusted for inflation), the surveyed charities are still 8 percent below pre-recession fundraising amounts.
Two charities in the top 10 defied the trend—The Salvation Army (No. 2) experienced 5.1 percent growth in giving; the American Red Cross took in nearly 64 percent more, attributable primarily to Haiti-related donations..
October 17, 2011
Michigan "Blues" Conversion Sparks Controversy
A legislative effort to convert Blue Cross Blue Shield of Michigan, a nonprofit organization that controls 70% of Michigan's insurance market, into a for-profit insurance company is encountering strong opposition from the chair of the state's Senate Insurance Committee. The Detroit News reports that the 31-year-old statute granting the Blues' nonprofit status is up for review, which prompted the Governor to call for a "fresh look" and consideration of a for-profit conversion that could arguably stimulate competition, decrease rates, and improve overall access to health care. The company is opposed to the proposed conversion, arguing that "[a] nonprofit, community-governed Blue Cross allows the company to do more to improve health care quality and security for all the people of Michigan, rather than operate as a profit generator for stockholder owners."
This Michigan development is not a new nor unique one, as Blues have been converted in other states. As aptly raised by The Nonprofit Quarterly in its related article, a for-profit conversion customarily results in the creation of a charitable foundation - does this adequately account for the loss of charitable assets that results from such a conversion? Will there be any tangible effect from the Blues operating as a for-profit insurer, especially in light of the Affordable Care Act?
Senator Grassley - Still Focused on a Charity Care Standard and Hospital Executives' Compensation
In related articles on hospitals' tax exemptions appearing recently in the Des Moines Register, U.S. Senator Chuck Grassley adds to his track record of seeking greater accountability of tax-exempt nonprofits, specifically nonprofit hospitals. As one article highlights Grassley's efforts towards greater transparent reporting by tax-exempt hospitals, most of which was enacted as part of the Patient Protection & Affordable Care Act of 2010 (see prior posts here and here), it also reveals Grassley's apparently unabandoned effort to impose a definite charity care standard on such hospitals (see prior post here). Noting that tax-exempt charities classed as private foundations are subject to mandatory payout rules, the Senator opined that a similar rule could be imposed on hospitals, but declined to set the required level of such a payout requirement. Grassley does view Medicaid reimbursement shortfalls as one of the components of a hospital's charity care provisions. The article does point out that a set percentage of charity care would adversely affect smaller, more rural hospitals with varying amounts of uninsured and underinsured patients.
In another article, Senator Grassley discussed that his "skepticism" of nonprofit hospitals is only increased in light of reports detailing certain hospital executives' large compensation packages.
Illinois - The Fight Over Tax Exemption for Hospitals Continues
The Chicago Tribune reports on the continually evolving issue of a charity care prerequisite for hospitals' state property tax exemption. As previously blogged by John Colombo (see posts here and here), the Illinois Supreme Court determined in March 2010 that Provena Covenant Medical Center in Urbana did not meet the state law's definition of "charitable" necessary for real property tax exemption; specifically, that a hospital must provide some substantial amount of charity care in order to be granted an exemption. Relying on that Provena decision, in August 2011, the Illinois Department of Revenue revoked the property tax exemptions for three Illinois hospitals on the basis of too minimal amounts of charity care (see John's post on this development here). After these revocations, the Illinois Governor declared a moratorium until March 1, 2012 with respect to hospitals' tax exemption determinations. In the interim, the State and other stakeholders are supposed to reach a resolution.
Although the Provena decision adopted a charity care standard for hospital tax exemption, there are no bright-line rules on what constitutes charity care and how much should be conferred by a hospital to maintain its tax-exempt status. Hospitals are arguing that a definite charity care standard (say, 5% of the hospital's revenues) would be more burdensome on some hospitals than others. Hospitals are seeking legislation that would set clear and definable standards for tax exemption.
In light of these recent developments, local assessors are addressing the taxability of hospitals with varying approaches. Some are are assessing taxes on hospitals thereby leaving it to the State's Department of Revenue to determine if each hospital qualifies for tax exemption under standards hopefully reached prior to the lift of the moratorium next March. Other assessors are forgoing assessments of hospitals, but requesting that such hospitals file new applications for exemptions. Regardless of the approach adopted, the issue of whether to tax or not tax a hospital is certain to create an "administrative nightmare" for Illinois and its local governments. And, perhaps more importantly, will the feds use the eventual Illinois resolution as a basis for reexamining the federal income tax treatment of nonprofit hospitals?