Saturday, April 21, 2012
Readers of this blog almost certainly are aware that Section 501(c)(3) contains a prohibition on charitable organizations "interven[ing] in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." The campaign intervention prohibition always seems to take center stage during the presidential campaign cycle, and it always seems that churches are at the center of this debate.
So here we go again. On April 14, Bishop Daniel Jenky of the Diocese of Peoria delivered a homily that would serve as an excellent exam question on these issues. The full text of the homily is available here, but the part of the homily most relevant to the legal question posed in the title to this post is as follows:
Remember that in past history other governments have tried to force Christians to huddle and hide only within the confines of their churches like the first disciples locked up in the Upper Room.
In the late 19th century, Bismarck waged his “Kulturkampf,” a Culture War, against the Roman Catholic Church, closing down every Catholic school and hospital, convent and monastery in Imperial Germany.
Clemenceau, nicknamed “the priest eater,” tried the same thing in France in the first decade of the 20th Century.
Hitler and Stalin, at their better moments, would just barely tolerate some churches remaining open, but would not tolerate any competition with the state in education, social services, and health care.
In clear violation of our First Amendment rights, Barack Obama – with his radical, pro abortion and extreme secularist agenda, now seems intent on following a similar path.
Now things have come to such a pass in America that this is a battle that we could lose, but before the awesome judgement seat of Almighty God this is not a war where any believing Catholic may remain neutral.
This fall, every practicing Catholic must vote, and must vote their Catholic consciences, or by the following fall our Catholic schools, our Catholic hospitals, our Catholic Newman Centers, all our public ministries -- only excepting our church buildings – could easily be shut down. Because no Catholic institution, under any circumstance, can ever cooperate with the instrinsic evil of killing innocent human life in the womb.
No Catholic ministry – and yes, Mr. President, for Catholics our schools and hospitals are ministries – can remain faithful to the Lordship of the Risen Christ and to his glorious Gospel of Life if they are forced to pay for abortions.
OK. So we know that Bishop Jenky feels that Barak Obama is waging war against the Catholic Church. But did the Bishop's homily violate the law? Some folks think so: The Rev. Barry Lynn, executive director of Americans United for Separation of Church and State, sent a complaint to the IRS alleging that the homily in fact violated the campaign intervention prohibition. Others believe the limitation itself is unconstitutional. Two of this blog's editors have written extensively on the constitutional aspect. See Johnny Rex Buckles, Does the Constitutional Norm of Separation of Church and State Justify the Denial of Tax Exemption to Churches that Engage in Partisan Political Speech?, 84 Ind. L.J. 447 (2009); Johnny Rex Buckles, Is the Ban on Participation in Political Campaigns by Charities Essential to their Vitality and Democracy? A Reply to Professor Tobin, 42 U. Rich. L. Rev. 1057 (2008); Lloyd Mayer, Politics at the Pulpit: Tax Benefits, Substantial Burdens, and Institutional Free Exercise, 89 B.U.L. Rev. 1137 (2009).
But I'm more interested for now in whether Jenky violated the rule as currently interpreted by the IRS. For this, we have to go to the current state of the law on the subject, IRS Revenue Ruling 2007-41 (available here). The relevant part of this ruling deals with differentiating "issue advocacy" (which is permitted) from campaign intervention, which is not. That part of the ruling states as follows:
Section 501(c)(3) organizations may take positions on public policy issues, including issues that divide candidates in an election for public office. However, section 501(c)(3) organizations must avoid any issue advocacy that functions as political campaign intervention. Even if a statement does not expressly tell an audience to vote for or against a specific candidate, an organization delivering the statement is at risk of violating the political campaign intervention prohibition if there is any message favoring or opposing a candidate. A statement can identify a candidate not only by stating the candidate’s name but also by other means such as showing a picture of the candidate, referring to political party affiliations, or other distinctive features of a candidate’s platform or biography. All the facts and circumstances need to be considered to determine if the advocacy is political campaign intervention. Key factors in determining whether a communication results in political campaign intervention include the following:
- Whether the statement expresses approval or disapproval for one or more candidates’ positions and/or actions;
- Whether the statement is delivered close in time to the election;
- Whether the statement makes reference to voting or an election;
- Whether the issue addressed in the communication has been raised as an issue distinguishing candidates for a given office;
- Whether the communication is part of an ongoing series of communications by the organization on the same issue that are made independent of the timing of any election; and
- Whether the timing of the communication and identification of the candidate are related to a non-electoral event such as a scheduled vote on specific legislation by an officeholder who also happens to be a candidate for public office. [NOTE: the numbers are supplied by me; these are bullets in the actual ruling, but I'll use the numbers in my analysis below]
A communication is particularly at risk of political campaign intervention when it makes reference to candidates or voting in a specific upcoming election.
So let's walk through the IRS factors. Did Bishop Jenky "express approval or disapproval for one or more candidates' positions" in his homily? I think undeniably so. Was the statement delivered "close in time" to an election? Fuzzy, but we clearly are in the 2012 election cycle, so I'd say yes to this as well. Does the statement "make reference to voting or an election"? You betcha, to paraphrase a past vice-presidential candidate. How about "whether the issue addressed in the communication has been raised as an issue distinguishing candidates for a given office"? Not quite as clear, but I think Romney and the rest of the now-defunct Republican presidential primary candidate field made their views on this point quite well-known. What about item 5? I'd say this might be the one factor that favors the Bishop: the leadership of the Catholic Church "went ballistic" on this issue before the campaign season really geared up. But 6 is clearly not true. So, my view is that Jenky violated five of the six factors identified by the IRS in Rev. Rul. 2007-41, and therefore violated the campaign prohibition rule. Since he clearly was acting in his capacity as a leader of the particular exempt organization at issue here (the Diocese of Peoria), my conclusion is that the IRS should indeed investigate this matter and should conclude a violation occurred. Your mileage may vary, as they say. And again, I'm not commenting on the constitutionality of the prohibition; I'm only noting that under the current state of the law as interpreted by Rev. Rul. 2007-41, Jenky blew it, and if the IRS wants any credibility on this subject, they need to carry through with an investigation and finding on the matter.
Thursday, April 19, 2012
In her remarks to the Georgetown University Law Center program on Representing and Managing Tax-Exempt Organizations, IRS Exempt Organizations Director Lois Lerner discussed the findings of an IRS study of its governance checksheet, which is comprised of a list of questions used by IRS agents to determine the governance practices of an exempt organization. In October 2009, IRS agents began completing the checksheet at the completion of every public charity examination. The result is over 1300 checksheets that were examined as part of the study.
The study's analysis found "a statistically significant correlation between questions related to some governance practices and tax compliance." The correlative questions are, in Lerner's words:
1. Organizations with a written mission statement are more likely to be compliant;
2. Organizations that always use comparability data when making compensation decisions are more likely to be compliant;
3. Organizations with procedures in place for the proper use of charitable assets are more likely to be compliant; and
4. Organizations where the 990 was reviewed by the entire board of directors are more likely to be compliant. This is an important point and one I'd like to highlight. It indicates that having your entire board engaged in what is being reported on the 990 is not only helpful, but it correlates to better compliance.
Lerner also stated that "[o]n the flip side, among the organizations we examined, we saw that those that said control was concentrated in one individual, or in a small, select group of individuals, were less likely to be tax compliant."
Diversion of Assets Initiative: Lerner also announced a new audit initiative focusing on tax-exempts that divert their assets for their own use or for uses not in furtherance of their charitable purposes. Lerner reported that approximately $170 million in assets were diverted in instances involving theft, embezzlement, or Ponzi schemes. With respect to 82 organizations, civil or criminal charges were brought against the responsible party. The charges were typically pursued by the organizations themselves or local authorities, not the IRS. The IRS compiled this information from Forms 990 as well as the internet and other publicly-available information.
(For additional discussion: Daily Tax Report)
In his new book, Finance and the Good Society (Princeton),Yale economist Robert Shiller specifically addresses societal philanthropy and the role of the nonprofit sector. In particular, he proposes the concept of "nonprofit stock." Here is the explanation is his Huffington Post blog entry entitled "Ten Ways Finance Can Be a Force for Good in Society:"
2. Create what I am calling, in my new book, participation nonprofits, nonprofits that might run schools or hospitals or the like, but that raise money by selling shares to the public. Such a firm pays dividends from its profits into a special account in the name of the shareholder. The shareholders get a charitable tax deduction for making the investment, but can use the dividends in the account only for further charitable contributions, including purchasing shares in participation nonprofits, or can spend them on themselves in some predefined emergency situations such as a medical crisis. With participation nonprofits, charitable giving will be more fun for the donors, for they could watch their money grow and feel their influence grow with it, if they invest wisely, fulfilling a natural human need for stimulation and appreciation. For example, the Wikipedia Foundation might have been even more successful if it had been set up as a participation nonprofit, and found some revenue opportunity associated with their mission. Instead of operating on a shoestring of the mere 75 employees it has today, I'll bet it would have received many billions in donations by now, which it probably could use for a much expanded social purpose.
(Hat tip: Nonprofit Quarterly)
As reported by the Daily Tax Report, at a Georgetown University Law Center program yesterday on Nonprofit Governance, Missouri Attorney General Bob Carlson provided simple advice - nonprofit boards can avoid potential legal liability for a breach of fidicuary duties if their reaction to such breach "is quick and shows immediate action." Carlson provided the example of a nonprofit executive director that failed to share financial information with the board of the directors, resulting in the board being completely unaware of the organization's near collapse. Upon learning of the dire financial status of the organization, the board immediately fired the executive director, installed an interim director, “and essentially righted the ship on the fly, so the organization did not go under.” Their prompt reaction, opined Carlson, prevented them from being sued. Carlson stated that he typically gives Board members the opportunity to correct a fiduciary problem, and only pursues lawsuits if there is not a sufficient response.
Along with IRS Exempt Organizations Director Lois Lerner, Carlson advised erring on the side of transparency, with both officials providing examples of items that nonprofits should considered posting to their websites: financial statements, executive compensation, and the minutes of meetings. He believes that more transparency ultimately leads to better fundraising ability, because donors often complain about their lack of knowledge with respect to the use of their donations. Both Carlson and Lerner agreed that recruiting and retaining "engaged" board members is essential to smooth operations and avoidance of trouble. In addition, board knowledge of its governance responsibilities leads to overall better decisionmaking.
NOTE: Lerner advised that the IRS will release the preliminary results of its study of governance on April 19, 2012.
As reported by the Daily Tax Report, the Internal Revenue Service issued proposed regulations on private foundations' program-related investments (PRIs). Under the proposed rules, more private foundations' investments will qualify as PRIs, thus avoiding the §4944 excise tax. Under §4944, a private foundation's investments may trigger the excise tax if they jeopardize the foundation's ability to implement its exempt purposes. Accordingly, the proposed regulations provide a broader range of investments that would not be considered as jeopardizing. The proposed regulations do not amend or modify the existing §53.4944-3(b) regulations, but add nine new examples that "illustrate that a wider range of investments qualify as PRIs."
In the explanation of the new rules, the IRS states the following:
[A] PRI may accomplish a variety of charitable purposes, such as advancing science, combatting environmental deterioration, and promoting the arts. Several examples also demonstrate that an investment that funds activities in one or more foreign countries, including investments that alleviate the impact of a natural disaster or that fund educational programs for poor individuals, may further the accomplishment of charitable purposes and qualify as a PRI. One example illustrates that the existence of a high potential rate of return on an investment does not, by itself, prevent the investment from qualifying as a PRI. Another example illustrates that a private foundation's acceptance of an equity position in conjunction with making a loan does not necessarily prevent the investment from qualifying as a PRI, and two examples illustrate that a private foundation's provision of credit enhancement can qualify as a PRI.
This week's "Room for Debate" tackles an issue controversial among nonprofit academics: whether wealthy universities such as Princeton, Harvard and Yale should continue to receive tax subsidies. More specifically, this week's debate asks participants to discuss whether "government [should] change its tax exemption policies for universities as a way of equalizing educational resources in America." The specific prompt for the New York Times's attention to this issue is a recent op-ed by Richard Vedder, a professor at Ohio University and director of the Center for College Affordability and Productivity. Vedder argues that the tax subsidies afforded affluent institutions like Princeton far exceed governmental assistance to smaller schools like the College of New Jersey, and that since wealthy and moderately affluent students comprise the bulk of attendees at the former, the tax subsidies constitute "a regressive social policy that many would argue is inconsistent with using higher education as a tool in promoting the American Dream." Interestingly, most of the commentators seem to disagree with Vedder's proposal, although most concede that inequality in access to higher education is a problem.
Wednesday, April 18, 2012
As reported by the Daily Tax Report, Fitch Ratings, a global rating agency, released a report entitled Illinois Property Tax Exemption Battle, in which the rating agency concluded that the Illinois Department of Revenue's current enforcement stance on the property tax exemptions of Illinois nonprofit hospitals is a "negative credit development" for certain of these hospitals. As previously blogged, Illinois Governor Quinn lifted a moratorium on nonprofit hospital exemption cases last month. Essentially, according to the report, a nonprofit hospital's loss of tax exemption, along with current operational challenges, could "negatively affect" the hospitals' creditworthiness. The report opines that certain "lower rated entities will have a limited ability to absorb an additional expense in the form of a property tax."
The report acknowledges that this tax-exemption challenge is not limited to Illinois, mentioning an Ohio nonprofit dialysis clinic [Dialysis Clinic, Inc. v. Levin, see previous blog] that, similar to Provena Covenant Medical Center in Illinois, lost its property tax exemption due to insufficient provision of charity care. The Ohio Supreme Court upheld revocation of the clinic's property tax exemption. The Court noted that the Ohio test for exemption was narrower than the “community benefit” test of federal law, but did not find that a minimum amount of charity care is required. Rather, in Ohio, an exemption is granted if services are provided “on a nonprofit basis to those in need, without regard to race, creed, or ability to pay.”
Whether the Fitch report will impact the ongoing Illinois debate on hospitals' property tax exemption is unclear. The spokesman for the Illinois Hospital Association is nevertheless "hopeful that a legislative solution can be enacted" in the upcoming General Assembly session.
Tuesday, April 17, 2012
Mark Sidel, Doyle-Bascom Professor of Law and Public Affairs at the University of Wisconsin, received the Outstanding Academic Award in the ABA Business Law Section's annual Outstanding Lawyer Awards for 2012 (see the University's announcement here). Sidel's research and writing focuses on the nonprofit sector and philanthropy, both domestic and international. He has previously served in program positions with the Ford Foundation in Beijing, Hanoi, Bangkok and New Delhi, focusing on philanthropy and the nonprofit sector, legal reform, and governance. In addition to academia, Mark serves in numerous capacities in the nonprofit community.
Monday, April 16, 2012
As reported by Rick Cohen in the Nonprofit Quarterly, Greg Colvin, of Adler & Colvin, has proposed "A Silver Bullet That Would End Secret Tax-Exempt Money in Elections." Essentially, Colvin concludes that a new Internal Revenue Code provisision should be enacted that would revoke the tax-exempt status of a tax-exempt organization that spends (in any given taxable year) more than the lesser of (i) $100,000, or (ii) 10% of its total expenditures on political campaign activities (i.e., participating or intervening in political campaigns for or against candidates for public office, including publishing or distributing materials for or against such candidates). The new provision would not apply to tax-exempt public charities, which would still be subject to the absolute prohibition on political campaign activities as set forth in §501(c)(3) of the Code.
The main targets of this new Code provision would be §501(c)(4) social welfare organizations and §501(c)(6) business leagues that are currently permitted to make political campaign expenditures or donate to Political Action Committees without having to disclose their donors to the public (unlike §527 organizations, for instance). Although these particular tax-exempt organizations are required to limit their political campaign activities to no more than half of their exempt program activities, there are fundamental difficulties in determining what amounts to one-half of an organization's program activities and what is political vs. non-political in nature. Colvin's proposal, in theory, eliminates the need to determine what constitutes one-half of an organization's activities and utilizes a potentially simpler quantatitve test.
Cohen is seeking responses regarding the merits of the proposal.
A recent flurry of articles (see here, here, and here) address the tax relief policy announced last month in U.K. that would limit a taxpayer's donations to £50,000 or a quarter of their income, whichever is larger. A U.K. Treasury spokesperson stated that the policy "was justified to stop very wealthy people arranging their finances to pay very little tax." The government is further asserting that the proposed ceiling will only affect donors, not charitable recipients. Philanthropists are cautioning that the government's proposed caps on charitable contributions would create a "funding crisis" for the country's charities and philanthropic efforts.
It appears that Prime Minister David Cameron is retreating from the proposed limitations. Nevertheless, the discussion is very similar to the one that has taken place in the United States with respect to President Obama's proposed limitations on the charitable contributions deduction for wealthier Americans, as previously blogged herein.