December 10, 2011
EOs & Political Activities: Just Can't Seem to Get Their Day in Court (9th Circuit & 11th Circuit)
In the past six months, two prominent cases involving tax-exempt organizations challenging the IRS with respect to political activities have quietly died, although at least one has a faint hope of revival. Together, they reinforce the impression that the IRS is carefully avoiding litigating close or even semi-close cases involving the limitations on political activities for tax-exempt organizations.
Last June, the U.S. Court of Appeals for the 9th Circuit rejected the appeal of Catholic Answers from a district court's dismissal of its tax refund suit for mootness. Catholic Answers was challenging the IRS' decision to revoke its tax-exempt status under IRC § 501(c)(3) on the grounds that the standard for what constitutes prohibited political campaign intervention for C3 groups is void for vagueness. Catholic Answers has filed a petition seeking certiorari with the Supreme Court, but I believe the chances of success for that petition are slim to none for the reasons stated here.
More recently, the Christian Coalition of Florida (remember them? so 1990s) lost its appeal to the U.S. Court of Appeals for the 11th Circuit challenging the dismissal of its tax refund suit for mootness after the IRS refunded the disputed taxes. The IRS had imposed those taxes based on the assertion that the organization did not qualify for IRC § 501(c)(4) because of excessive political activity. Here is the court's summary of the case:
Christian Coalition of Fla. (“CC-FL”) appeals the district court’s dismissal of its tax refund suit for mootness. Shortly after the litigation began, the Internal Revenue Service (“IRS”) refunded the disputed taxes in full. CC-FL claims, however, that a live controversy still exists because it is also seeking declaratory and injunctive relief in order to obtain a favorable determination of its tax-exempt status. CC-FL claims that the failure of the IRS to recognize CC-FL as a tax-exempt organization has collateral consequences that prevent the tax refund from rendering this case moot.
After thorough review, we AFFIRM the judgment of the district court. Filing a claim for a tax refund suit is not simply a procedural hurdle that, once leapt over, allows a party to seek other forward-looking relief against the IRS after the refund has been granted. Without a live refund claim, there is no way to distinguish this case from the kind of pre-enforcement suits that Congress, through the Anti-Injunction Act and the federal tax exemption to the Declaratory Judgment Act, has expressly forbidden taxpayers from bringing.
Fifth Circuit Affirms Criminal Convictions of Holy Land Foundation and Its Leaders
The U.S. Court of Appeals for the Fifth Circuit has affirmed the convictions of the Texas-based Holy Land Foundation for Relief and Development and five of its leaders for providing material aid and support to a designated terrorist organization, in this case Hamas. Here is the court's summary of the opinion:
In this consolidated case, we address the appeals of five individuals and one corporate defendant convicted of conspiracy and substantive offenses for providing material aid and support to a designated terrorist organization. The terrorist organization at issue is Hamas, which in 1995 was named a Specially
Designated Terrorist by Presidential Executive Order pursuant to authority granted by the International Emergency Economic Powers Act, 50 U.S.C. § 1701 et seq. Hamas was further designated as a Foreign Terrorist Organization in 1997, as contemplated by 18 U.S.C. § 2339B.
Although this case is related to terrorism, it does not involve charges of specific terrorist acts. Instead, it focuses on the defendants’ financial support for terrorism and a terrorist ideology. The defendants were charged with aiding Hamas by raising funds through the corporate entity Holy Land Foundation for Relief and Development, a Texas-based, pro-Palestinian charity that the Government charged was created for the sole purpose of acting as a financing arm for Hamas. Although the charged conspiracy began in 1995 when Hamas was first designated as a terrorist organization, the defendants’ connection to Hamas arose much earlier.
Established in the late 1980s, the Holy Land Foundation held itself out as the largest Muslim charitable organization in the United States. It raised millions of dollars over the course of its existence that were then funneled to Hamas through various charitable entities in the West Bank and Gaza. Although these entities performed some legitimate charitable functions, they were actually Hamas social institutions. By supporting such entities, the defendants facilitated Hamas’s activity by furthering its popularity among
Palestinians and by providing a funding resource. This, in turn, allowed Hamas to concentrate its efforts on violent activity. The trial, which followed an earlier mistrial and lasted approximately six weeks, produced a massive record on appeal. The Government produced voluminous evidence obtained from covert surveillance, searches, and testimony showing a web of complex relationships connecting the defendants to Hamas and its various sub-groups. The financial link between the Holy Land Foundation and Hamas was established at the Foundation’s genesis and continued until it was severed by the Government’s intervention in 2001. The defendants raise a host of issues challenging both their convictions and their sentences, including numerous errors that they claim deprived them of a fair trial. While no trial is perfect, this one included, we conclude from our review of the record, briefs, and oral argument, that the defendants were fairly convicted. For the reasons explained below, therefore, we AFFIRM the district court’s judgments of conviction of the individual defendants. We DISMISS the appeal of the Holy Land Foundation for Relief and Development.
Appeals Court Keeps Fisk University Sale of O'Keeffe Collection on Track
The Wall Street Journal reports that a state appeals court has affirmed a lower state court's decision to permit the partial sale by Fisk University of the art colleciton donated to it by Georgia O'Keefe and also concluded that the lower court lacked authority to require Fisk to set aside two-thirds of the sales proceeds, or $20 million, as an endowment to maintain the collection. As we previously blogged, the planned sale is of a 50 percent interest in the collection to Crystal Bridges Museum in Bentonville, Arkansas. The Tennessee Attorney General challenged the sale in an attempt to keep the collection in Nashville. The appeals court's decision, with one judge dissenting, does not fully resolve the terms of the sale, however, as the court left the door open for the lower court to require some type of dedicated source of support for the collection and also requires Fisk to explain how it will use the sale proceeds. Fisk received the collection subject to the condition it not be sold or broken up, but Fisk is now asserting that its financial situation is so dire it cannot afford to display or maintain the collection without some type of sale. A summary of the trial court's decision and its conclusion are reproduced below.
Summary of Previous Proceedings
After finding that cy pres relief was available to modify conditions imposed by donor of artwork which had been gifted to Fisk University, the trial court approved agreements whereby the Crystal Bridges Museum would purchase a fifty percent interest in the art for $30 million and would thereafter share in the display and maintenance of the artwork. The court conditioned approval of the agreements on the requirement that Fisk establish an endowment of $20 million from the proceeds of sale in furtherance of the donor’s intent to make the art available for the citizens of Nashville. The Attorney General of Tennessee appeals, contending that the trial court exceeded the scope of remand and that the court erred in determining that the agreement with the Crystal Bridges Museum most closely reflects the donor’s intent. Fisk seeks review of trial court’s requirement that it establish the endowment.
State Appeals Court Conclusion
For the foregoing reasons, we affirm the trial court’s approval of the Revised Sharing Agreement. We reverse the order requiring Fisk to establish an endowment of $20 million from the proceeds of sale and limiting the funds available to Fisk from the proceeds to $10 million. The case is remanded for further proceedings in accordance with this opinion.
December 9, 2011
Angel Food Ministry Founders Indicted by Feds
We previously blogged about the governance disputes and compensation issues at Angel Food Ministries. While the food-distributing charity quietly shut its doors several months ago, that has not ended the troubles for its founders. The Atlanta-Journal Constitution reports on the details of a federal indictment issued last week but the details of which just became public. According to the article, the charity's founders - Joe and Linda Wingo - diverted millions of dollars to support a lavish lifestyle, including a private jet, a classic car, and real estate purchases. Also named as defendants are Andy Wingo, the son of Joe and Linda, and Harry Michaels, a former employee. All four defendants are expected to plead not guilty.
Sandusky Fallout Continues: Former Charity Settles First Suit, Lays Off Staff; Peregrine on "Where Was the Board"
Second Mile, the youth charity founded by former Penn State Football coach Jerry Sandusky, is struggling to stay in operation in the midst of the hurricane that has hit it. To settle the first lawsuit filed against it, the group agreed not to shut down or shift its assets to another entity without court permission, according a Bloomberg report. Reuters reports that the charity is also laying off employees in the face of a sharp drop in donations.
At the same time, many are asking where the board of not only the charity but Penn State and, with respect to the separate scandal there, Syracuse University was in the midst of the events that now coming to light. As Michael Peregrine (McDermott Will & Emery) notes in a Chronicle of Philanthropy opinion, however, the role of boards is to oversee but not to micromanage. That oversight requires timely and accurate information, due attention from board members, and loyalty to the organization, but it "does not require them to search out illegal or improper activity unless board members see specific warning signs of trouble. Rather, they are expected to insist on a proper flow of information about possible misconduct and to act when they see reason to suspect things are going wrong." More of course must be known to determine whether the boards at issue here in fact fulfilled the duties they did have, by Peregrine is right to sound a note of caution about rushing to judgment.
Higher Education President Compensation Continues to Rise
The NY Times reports that presidents of private colleges and universities continue to see their compensation increase at a rate above inflation, with 36 presidents earning more than $1 million in 2009 as compared to 33 in the previous year. The data are from a Chronicle of Higher Education study that relied on information reported in the schools' IRS filings (Form 990). One interesting aspect of the study is an interactive chart that compares presidential salaries to professorial salaries, with most schools bunching in the two to five times range but a few in the eight times or more range.
December 8, 2011
Should Public Institutions Be Named After Private Donors?
A recent dispute in Miami highlights this issue. The NY Times reports that board members of the Miami Art Museum are split over whether the museum should be renamed the Jorge M. Pérez Art Museum of Miami-Dade County in recognition of a $35 million in cash and art from Mr. Pérez. Four board members felt so strongly about the issue that they resigned, others are threatening to rescind their contributions, and now the public is protesting the naming plan via email. According to a Miami-Herald article, the former President of the museum went so far as to take out a full-page newspaper ad opposing the plan. While speculation is rife regarding why this naming proposal has drawn such criticism when other public owned institutions have been re-named with hardly a ripple of concern, it may be a combination of the Occupy Wall Street movement's focus on the wealthy and the negative perception of real estate developers, such as Mr. Pérez, in the Miami-Dade area. That said, the dispute provides an opportunity to consider whether there should be any limits to the naming trend when it comes to public and, perhaps, nonprofit organizations. (I once joked with my wife that we should offer to name our next child MS Mayer if Microsoft would be willing to pay his or her college tuition; she was not amused.)
Forbes: "IRS Backs Off on Penalties Against Billionaire Leon Cooperman"
Forbes reports that billionaire hedge fund manager Leon G. Cooperman lost a $43 million claimed charitable contribution deduction but at least managed to avoid $5 million in related penalties. According to the article, the problem with the deduction was that it consisted of non-publicly traded securities (interests in a hedge fund) and was made to his family's private foundation. As readers of this blog well know - but Cooperman's advisers apparently did not - IRC § 170(e)(1)(B)(ii) generally reduces the amount of a deduction for such a contribution by any long-term capital gain included in the donated property's value when the recipient is a private nonoperating foundation. While there is no reduction even in this situation if the gifted property is stock for which market quotations are readily available, that exception was not available here. As a result, Cooperman had to pay nearly $14 million in additional taxes plus interest, but he managed to avoid penalties by successfully claiming reliance on his (presumably now former) advisers.
R. Madoff on DAFs
Ray D. Madoff (Boston College) has published It's Time to Reform Donor-Advised Funds in Tax Notes (subscription required) and written a related NY Times Op-Ed titled Tax Write-Off Now, Charity Later. Here is the summary of the Tax Notes article:
In this article, Madoff argues that the current law governing donor-advised funds provides too much of a benefit to donors and sponsoring organizations, without ensuring sufficient benefit to the charitable sector as a whole. Moreover, the current rules undermine the integrity of the tax system by implicating the government in a "wink and a nod" system that disproportionately benefits the wealthy. To remedy these problems, donor-advised funds should be subject to a seven-year payout requirement, and the rules should be revised to ensure that private foundations cannot satisfy their payout obligations simply by making transfers to a donor-advised fund.
DAFs: Treasury Reports, Grassley Criticizes
Report: Earlier this week, the Treasury Department issued its long-awaited Report to Congress on Supporting Organizations and Donor Advised Funds. Its answers to the specific questions raised by Congress are reproduced below.
Response: Senator Chuck Grassley (Iowa) wasted no time in criticizing the report, issuing a news release the next day titled Treasury Misses the Mark on Chance to Shut Down Charitable Loopholes. The release quotes Senator Grassley as saying "The study is disappointing and unresponsive. It doesn’t advance the ball in closing abusive loopholes. If anything, it gives abusive organizations cause for celebration. . . . [The] study discusses the status quo and pay-out rates as if there’s no cause for worry. Treasury apparently thinks Congress fixed problems with supporting organizations and donor-advised funds in 2006. In fact, Congress fixed a limited area and asked the IRS and Treasury to help us fix the rest. The study doesn’t offer any kind of road map about problems."
News Coverage: Chronicle of Philanthropy.
From the Treasury Report's Executive Summary:
[PPA = Pension Protection Act of 2006; SO = supporting organization; DAF = donor-advised fund]
• The PPA appears to have provided a legal structure to address abusive practices and accommodate innovations in the sector without creating undue additional burden or new opportunities for abuse.
• Although donors may prefer making gifts of appreciated property to SOs and DAFs, rather than to private foundations, in order to take a larger charitable contribution deduction, they may do so only if they are willing not only to part with control of the assets, but also to give the assets to organizations they do not control. Because contributions to DAF sponsoring organizations and SOs, like contributions to other public charities, are generally to organizations the donor doesn’t control, the deduction rules are appropriate.
• There may be a lag between when a donor contributes assets to a DAF sponsoring organization or an SO—and may claim a charitable contribution deduction—and when the donated assets are used for direct charitable activities. The issue of the lag between contribution and final use of assets is no different at DAF sponsoring organizations and SOs than it is for other public charities that may operate charitable funds or maintain endowments. Thus, it is appropriate that the contribution deduction rules faced by donors to SOs and DAF sponsoring organizations are the same as those applicable to donors to other public charities.
• Several provisions of the Code address issues related to donor benefit. A charitable deduction is disallowed to the extent that a donor receives benefits that are of more than insubstantial value in exchange for the contribution. In addition, an organization’s taxexempt status may be revoked if it operates to benefit private interests, such as those of its donors, or if it does not further a charitable purpose. Further, the Code contains deterrents in the form of excise taxes both on a donor who receives excess benefits from a public charity and on the charity’s managers if they knowingly approved the transaction conferring the benefit. The PPA also enacted new provisions in the form of taxes designed to deter SOs, DAF sponsoring organizations, and their donors from allowing donors to receive certain payments or any improper benefits from an SO or DAF.
• Compared to private foundations, the mean payout rates for Aggregate DAFs in tax year 2006 appear to be high for most categories of DAF sponsoring organizations.
• Current law disallows a charitable contribution deduction for a contribution to any charity that does not meet the standard of a completed gift, including in the case of a gift to a DAF or SO. However, as is the case with gifts to other charities, if all existing tax and other legal requirements are met, donations to a DAF or an SO may be completed gifts and become the property of the donee organization. Although donee organizations may feel an obligation to use donated funds in a manner preferred by the donor, especially when subsequent contributions may be desired, there is nothing unique about DAFs or SOs in this regard and, in fact, they have no legal obligation to follow the preference of the donor.
• As the effects of the PPA and the new regulations become clearer over time, Treasury looks forward to working with Congress to determine whether additional legislation or reporting is necessary.