Friday, March 9, 2012
This week, both the Washington Post and the New York Times contain reports of the recent lawsuit filed against the libertarian Cato Institute by two of its board members, Charles and David Koch. The Post quotes Cato's President, Edward H. Crane, as alleging that the Koch brothers are trying to "turn the Cato Institute into some sort of auxiliary for the G.O.P." It futher reports that Robert A. Levy, the board's chairman, alleges that the Kochs would like Cato to provide "intellectual ammunition" for political advocacy groups such as Americans for Prosperity -- a move that Levy feels would destroy Cato's reputation for political impartiality by turning Cato into a mouthpiece for special interests. Although many members of the public equate libertarians and Republicans, those familiar with Cato and other libertarian organizations know that libertarians often support positions antithetical to the Republican party. The Post, for example, notes that Cato generally supports same-sex marriage and opposes much of the Patriot Act and drug criminalization. Mr. Levy's allegations, if true, are unsettling for those who wish Cato to retain its embrace of causes generally thought to be "liberal."
While the impartiality of think tanks and the use of their research by advocacy groups is one of the sexier issues raised by this dispute, nonprofit law nerds will also be intrigued by another. The lawsuit is made possible by Cato's unique governance structure. Although it has a sixteen-member board, quite a bit of power is wielded by a four-person shareholder group originally comprised of Cato's founders; these four seats can apparently be bought and sold. Charles and David Koch control two of these four seats and are trying to seize control of a third that was recently vacated by the death of a founder by alleging that they have an option to purchase the deceased's shares.
Wednesday, March 7, 2012
This story in the Hartford Business Journal on-line details the efforts of Hartford to implement a PILOT (payment in lieu of taxes) program, aimed at the largest nonprofits in the city. Like Boston, which has a PILOT program, Hartford has a number of very large nonprofits (mostly hospitals and universities) that are exempt from property taxes (although the state actually does reimburse the city some $40 million for its property). Like Boston, over half the property in Hartford is tax-exempt as the result of either state or private charity ownership. And like Boston, the revenue lost is huge - Hartford estimates that the value of exempt property is $3.6 billion (yes, that's "billion"). And like Boston, the charities complain that everything they do helps economic development - so they shouldn't have to pay taxes. Hmmm . . . Wonder if Microsoft enhances the economic development of Redmond, WA - and the last time I checked, Microsoft paid taxes . . .
Tuesday, March 6, 2012
An AP story picked up by many newspapers (here it is in the Atlanta Journal-Constitution) notes that conservative groups, particularly tea-party affiliated ones, are complaining because the IRS isn't granting 501(c)(4) status fast enough. "Intimidation," "Witch-hunt" cry the folks who haven't received IRS blessing for spending unlimited amounts of money on thinly-veiled political campaign ads. "We're doing nothing more than what the average citizen does in getting involved," said Phil Rapp, executive director of the Richmond Tea Party in Virginia. "We're not supporting candidates; we are supporting what we see as the issues." Yeah, right. See JRB's prior post here for more on the (c)(4) controversy, and in particular, where a lot of this money is going (and by the way, it's not just the conservative side that's playing this game). This is as much about "average citizens" as "To Kill a Mockingbird" is about birds.
Monday, March 5, 2012
In late August 2010, Lloyd Mayer blogged about Z Street, a pro-Israel nonprofit corporation, that had filed a complaint alleging that the IRS was delaying consideration of its application for recognition of section 501(c)(3) tax-exempt status because the Service was determining whether the group's activities contradict the current Administration's policies. The nonprofit asserted First Amendment free speech concerns. The U.S. District Court for the Eastern District of Pennsylvania recently determined that it lacked jurisdiction under IRC §7428, pertaining to declaratory judgments in suits related to the classification of organizations under Section 501(c)(3), and transferred the case to the U.S. District Court for the District of Columbia. In a footnote to its order, the Eastern Pennsylvania District Court agreed with the nonprofit's First Amendment assertions:
The Complaint states, inter alia, “Wherefore, Plaintiff seeks a Declaration that Defendant’s substance and application of the Israel Special Policy to any application for tax-exempt status constitutes discrimination among viewpoints and a violation of the Plaintiff’s right to freedom of speech as guaranteed by the First Amendment to the United States Constitution.” The Court shares Plaintiff’s view that this is a case about constitutionally valid process, and finds that 26 U.S.C. § 7428 is the statute which establishes Plaintiff’s right to challenge the IRS’s 501(c) classification process.
Z Street filed an amended complaint in December 2010, which sets forth additional information on the IRS process involved with respect to the organization's exemption application.
(Hat tip: TaxProf Blog)
The saga of tax exemption for nonprofit hospitals in Illinois continues. As previously noted in this blog (here), in the wake of the Illinois Supreme Court's Decision in the Provena case, last August the Illinois Department of Revenue denied tax exemption to three Illinois hospitals. Governor Quinn then issued a moratorium on exemption decisions by the Department to give the politicians a chance to work our a statutory solution to exemption issues, with a March 1, 2012 deadline (see previous blog post here). That deadline has now come and gone without agreement between the state and the Illinois Hospital Association regarding exemption standards, and as the Chicago Tribune reports, Governor Quinn has now lifted the moratorium - meaning the Department can now proceed with at least a dozen pending cases.
While talks between the state legislative leaders, the Governor and the IHA continue, this is going to get very messy very quickly. One suspects more tax exemption denials are coming, followed by more litigation.
Sunday, March 4, 2012
The IRS has been more focused in recent years on the perpetuity requirements of IRC § 170(h). In the recent case, Carpenter v. Comm’r, T.C. Memo. 2012-1, the Tax Court sustained the IRS’s disallowance of deductions for the donation of conservation easements that are extinguishable “by mutual written agreement of both parties” if circumstances arise in the future that render the purpose of the easement “impossible to accomplish.” The court held that conservation easements that are extinguishable by mutual agreement of the parties, even if subject to a standard, fail as a matter of law to comply with the requirement that the conservation purpose of a tax-deductible conservation easement be "protected in perpetuity" under IRC § 170(h)(5)(A).
The IRS made important revisions to the 2011 Form 990 instructions relating to conservation easements, some of which relate to the perpetuity requirements.
Modifications, Transfers, Releases, Terminations, or Extinguishments
Although organizations accepting conservation easement donations have been required to report on their conservation easement modification, transfer, release, termination, or extinguishment activities since 2006, the revised 2011 Form 990 Schedule D Instructions contain more detailed information regarding this reporting obligation. The revised instructions provide, in part, that “[u]se of a synonym for any of these terms does not avoid the application of the reporting requirement. For example, calling an action a ‘swap’ or a ‘boundary line adjustment’ does not mean the action is not also a modification, transfer, or extinguishment.” The revised instructions also provide that “[t]ax exemption may be undermined by the modification, transfer, release, extinguishment, or termination of an easement.”
Statement of Revenue
The 2011 Form 990 Instructions (on page 33) and the 2011 Form 990 Schedule D Instructions (on page 3) provide that an organization must report contributions of conservation easements in Part VIII of Form 990, Statement of Revenue, consistently with how it reports revenue from such contributions in its books, records, and financial statements. The IRS is not telling filers how they need to report on conservation easements. Rather, it is telling them only that they must be consistent in their reporting in their books and records and across the 990.
According to the Land Trust Alliance’s Guide to the Form 990, most land trusts value their easements at zero or assign a nominal value, such as $1, because a typical conservation easement provides the land trust with no affirmative rights except to monitor and enforce the easement and, thus, constitutes a liability. Some land trusts, however, record their easements at their appraised (“before and after”) value and book them as both income and expenses in the same year.