Friday, July 6, 2012
The Chronicle of Philanthropy reports that the Pittsburgh City Council and a nonprofit coalition have agreed to a plan to generate $5.2-million to $5.4-million of payments in lieu of taxes over two years. Says the story:
About 40 nonprofit groups will contribute to the Pittsburgh Public Service Fund, which supplied a like amount to city coffers in in 2010-11. Some council members have called for a sharp increase in charities’ payments in lieu of property taxes, and the new measure included an amendment directing finance officials to determine how much the city spends on police, fire, and other services for tax-exempt entities.
The participating groups, many of them smaller charities, represent a small proportion of the city’s tax-exempt organizations. Nonprofits “are good partners, but they could be better partners,” Councilman Ricky Burgess, the panel’s finance chairman, said at Monday’s meeting.
According to the Chronicle, another PILOT plan is being considered by city council members in Memphis, where approximately 30 percent of the city’s property reportedly is held by nonprofit entities.
Garry Jenkins, Associate Dean for Academic Affairs and Associate Professor of Law at The Ohio State University Moritz College of Law, has posted on SSRN Nongovernmental Organizations and the Forces Against Them: Lessons from the Anti-NGO Movement. Here is the abstract:
This article examines the rise and growth of nongovernmental organizations and the anti-NGO movement that has sprung up to oppose it. In addition to describing the international anti-NGO campaigns, efforts, and critiques, the article also considers the emergent dynamics between large donor organizations and smaller, grant-receiving organizations that may legitimize and exacerbate the NGO criticisms. This consideration of philanthropic donor control, micro-management of charitable projects, and funder accountability highlights important lessons that may be gleaned from a deeper understanding of anti-NGO fears and criticisms. One important insight is that as funders attempt to exert control over grantmaking activities to enhance their own accountability, they may also unwittingly weaken the accountability and legitimacy claims of the NGOs they fund. Moreover, the analysis of this understudied trend in the sector offers strategies for the philanthropic sector to deal with issues of accountability, legitimacy, governance, and donor control in ways that support NGOs without emboldening their critics.
Gautam Jagannath, a student at Northeastern University School of Law, has posted on SSRN Using Nonprofits to Serve Charitable Goals of Social Businesses in the United States: Circumventing the Lack of Recognition of the Social Business Model in the Federal Tax Code. Here is the abstract:
This Article considers the possibility of reincorporating a social business as a tax-exempt nonprofit. An analysis of the costs and benefits is performed with an eye toward federal tax law. First, I discuss the potential problems with running a social business as an exempt nonprofit. There are federal regulations that get in the way of making this a savvy decision. Second, I posit that a social business can benefit from devising a parallel exempt organization with similar or identical charitable goals. There are a few ways to do this and I consider the pros and cons. Finally, I consider the practical hurdles that social businesses face by maintaining and operating tax-exempt organizations within the context of how social businesses have positive consequences for global development.
Ramzi Kassem, Associate Professor of Law at the City University of New York, has posted on SSRN From Altruists to Outlaws: The Criminalization of Traveling Islamic Volunteers. Here is the abstract:
The volunteerist dimension of Islamic philanthropy, although often overshadowed of late by its financial counterpart as a focal point of interest, was until recently an equally vibrant expression of transnational Muslim solidarity. The emblematic figures of the itinerant doctor, the aid worker, the preacher and the fighter featured prominently in the actual mobilization and associated narratives spurred by bloody conflicts in Muslim-majority lands such as Bosnia-Herzegovina, Chechnya, and Afghanistan. Along with the scrutiny and policing of Islamic charities and financial networks amplified by the so-called War on Terror came a heightened military and intelligence focus on traveling Muslims who volunteered in various capacities in distant and troubled regions. “Out of place” Muslims came to be regarded and treated as combatants by various governments. The aforementioned emblematic figures were conflated into one -- that of the fighter -- and were criminalized. This Article will begin to explore how that particular process of conflation, exclusion and criminalization occurred.
Thursday, July 5, 2012
As reported in the Chronicle of Philanthropy, Indiana University, which already offers a philanthropy doctoral program and houses The Center on Philanthropy, intends to create a brand new school devoted to the study of philanthropy:
Indiana University’s trustees voted last week to create a school of philanthropy, the first in the nation and a sign of both the growing amount of scholarship on the nonprofit world and intense demand to offer rigorous training to people who work at charitable institutions.
The university has already raised nearly 70 percent of its $100-million goal to endow the new school, said Eugene Tempel, who founded Indiana’s Center on Philanthropy, one of the first and biggest academic units created to study the field.
Leslie Lenkowsky, a professor of public affairs and philanthropic studies at Indiana University, said the decision to start a school was a profound development for nonprofits.
According to the university’s press release, the next step is to submit the proposal for consideration by the Indiana Commission for Higher Education. The press release also states that the new school will be located on the Indiana University-Purdue University Indianapolis campus.
As reported in Tax Notes Today (electronic citation: 2012 TNT 129-7), in the unpublished opinion of Asmark Inst. Inc. v. Comm’r (No. 11-1553), the United States Court of Appeals for the Sixth Circuit has affirmed a Tax Court decision upholding denial of federal income tax exemption to an organization ostensibly formed to help agribusiness firms comply with regulatory requirements. The following excerpt from the opinion summarizes the grounds for denying exemption:
[T]he Commissioner was entirely correct to highlight the fact that Appellant is the successor to a for-profit entity, because such a fact "weighs heavily against exemption." See B.S.W. Group, Inc., 70 T.C. at 358-59. Appellant's largely fee-based business plan and its competition within a for-profit market are also "strong evidence of the predominance of [Appellant's] nonexempt commercial purposes." Id. While Appellant is correct that fee-based, nonexempt activities, even those rising "somewhat beyond a de minimus level," do not preclude a finding of tax-exempt status, see Living Faith, Inc. v. Comm'r, 950 F.2d 365, 370 (7th Cir. 1991) (citing Treas. Reg. section 1.501(c)(3)-1(c)(1)) (other citations omitted), Appellant nevertheless bears the burden of proving that its primary purpose is a truly exempt one, as opposed to a "commercial venture organized for profit." B.S.W. Group, Inc., 70 T.C. at 358. Likewise, the burden rests on Appellant to prove that the profits derived from its fee-based services do not inure to the benefit of private individuals or shareholders. See Nationalist Movement, 37 F.3d at 220. Appellant has done neither.
Wednesday, July 4, 2012
We previously blogged about the Internal Revenue Service’s investigation of the Los Angeles-based Kabbalah Centre, known for its celebrity followers (including Madonna and Demi Moore). In Kabbalah Centre Case Taken up by Federal Authorities, Police Say, the Los Angeles Times reports that the Palos Verdes Estates Police Department, which had been conducting a criminal investigation of the management of the assets of a wealthy heiress (Susan Strong Davis) by her business manager, John E. Larkin, has handed over department files to federal agents. Larkin, described as a “close associate of center founders Karen and Philip Berg,” reportedly “helps oversee the Kabbalah Centre's money” in addition to managing the financial affairs of private clients such as Davis. The Times explains that Larkin
came under law enforcement scrutiny in April after a Times report about his handling of Davis' money. The heiress has spent at least $2.65 million in recent years building a home in Beverly Hills near the Kabbalah Centre despite suffering from what relatives describe as dementia.
Larkin sold her a lot he owned as a site for the home in 2009 for what real estate filings indicate was a $300,000 profit.
According to the story, a probate judge will soon review Larkin's management of Davis' family trust fund, which pays Larkin and another trustee $100,000 a year for investment oversight. Reportedly, Larkin consented to the making of millions of dollars in loans from the trust for the purchase of the Beverly Hills lot and construction of the Davis house “without disclosing to the probate court, which oversees the trust fund, that he had a personal stake in the project as the seller.” The story further says that Larkin’s lawyer declined to comment on the expanded federal focus “but insisted Larkin had done nothing wrong.”
In what I would place in the “You’ve got to be kidding me” category of developments involving high-profile charity litigation, a story carried in both the Philadelphia Inquirer and The New York Times reports that a group opposing the now completed relocation of the Barnes Foundation from a Philadelphia suburb to a downtown museum has petitioned a Pennsylvania court to reopen the case allowing the relocation. The basis for the petition is explained as follows by the NY Times:
The 2004 ruling by Stanley R. Ott of the Montgomery County Orphans' Court permitted the foundation, which had struggled financially, to go against the wishes of Albert C. Barnes, who built the collection and stipulated that no picture in it could be lent, sold or moved from the walls of the galleries that he built for it in Merion, Pa. Judge Ott said at the time that he considered the move "the only viable alternative" to save the Barnes from bankruptcy, but opponents argued that the foundation's troubles had been overstated.
In a new petition to the court on Monday, the Friends of the Barnes, which opposes the move, said the case should be reopened because the court was given inaccurate information about the foundation's financial health when it made its decision. The group cited a recent blog post by Kimberly Camp, the Barnes's president and chief executive officer from 1998 to 2005.
"Bankruptcy was not the reason we filed the petition to move the Foundation to the city," Ms. Camp wrote. "At the time the petition was filed, the Barnes Foundation had a cash surplus and we had no debt - none. But, saying so made the rescue so much more gallant."
Camp’s recent claims are being disputed, however. The Times article says that Ralph Wellington, attorney for the Barnes Foundation, informed the Philadelphia Inquirer
that everything Ms. Camp and other Barnes officials said in court at the time of the original decision was "completely true and accurate." The Barnes had no debt only because of stop-gap financing provided by several charitable foundations to keep it solvent, Mr. Wellington said, and the cash surplus it had could not be used for operations. "All of the financials were completely public and in the record," he added.
Tuesday, July 3, 2012
In Foreign-Funded Nonprofits in Russia Face New Hurdle, the New York times reports that a bill has been introduced in the Russian Parliament that would require nonprofit organizations that receive funding from sources outside of Russia to publicly declare themselves “foreign agents.” This term, says the story, “evokes cold war-era espionage and is likely to discredit the organizations’ work in the eyes of the public.” The story continues:
Lawmakers from United Russia, the governing party, have accelerated work on the bill and are scheduling the first of three readings on Friday. If passed, the bill would complement a new law penalizing Russians for taking part in unauthorized protests, which was rushed through Parliament at a similar pace last month.
The bill would also put new burdens on nonprofit groups with foreign financing that are judged to be involved in politics, including annual audits and unannounced checks for the use of “extremist speech” in published materials. Organizations could face fines of as much as 1 million rubles, or $30,000, for violations.
Rights activists have excoriated the proposal as an attempt to discredit their work, arguing that Russian donors are afraid to support organizations that criticize the government, which then leaves them dependent on foreign sources for money.
In Ford Heights Mayor's Taxpayer-funded Nonprofit under Investigation, the Chicago Tribune reports that “a south suburban mayor's taxpayer-funded nonprofit has been suspended from state and county grant programs over questions about its finances and accounting.” According to the story, the Illinois Attorney General's office is also now investigating the nonprofit, the Commission on Economic Opportunity (“CEO”). CEO is described as a “job-training nonprofit directed by Ford Heights Mayor Charles Griffin.” The story reports that CEO “has paid hundreds of thousands of dollars in salaries and cars to Griffin and other executives, and the board charged with watching the purse includes Griffin's family members and political supporters ....” One aspect of the investigation, reports the story, is focusing on money that CEO received through the Put Illinois to Work program, funded federally and later by the state, which allowed CEO to provide administrative services for 700 workers hired by various employers in 2010. Apparently, the latest scrutiny follows other inquiries into CEO’s finances. The story continues:
Illinois suspended CEO from one of its grant programs in November 2010 after finding "widespread deficiencies" with its financial management and accounting practices, said a spokeswoman for the Department of Commerce and Economic Opportunity. The nonprofit was suspended from Cook County's job-grant program last year after it failed to address questions about how money was spent, said Cook County Works director Karin Norington-Reaves.
Griffin reportedly has characterized the investigation as a political “witch hunt” and a “‘conspiracy’ to shutter minority-run jobs programs."
Monday, July 2, 2012
IRS Chief Counsel Issues Advice on Interaction Between Charitable Contribution Deduction and Alternative Minimum Tax Net Operating Loss Carryover
As reported in Tax Notes Today (electronic citation 2012 TNT 127-25), in advice from the Chief Counsel, the IRS has determined whether a corporate taxpayer's charitable contribution deduction may reduce the amount of alternative tax net operating loss (ATNOL) absorbed in a carryover year. The taxpayer in question had substantial ATNOL carryovers from Year 1, Year 2, and Year 3, and made charitable contributions in years 4 and 5. The issue presented was whether Taxpayer was entitled to take charitable contribution deductions into account in determining the amount of ATNOL absorbed in Year 5. The Chief Counsel concluded that it was.
By way of background, Code section 56(a)(4) requires that alternative minimum taxable income (AMTI) be computed by deducting the taxpayer's ATNOL, rather than the taxpayer's NOL. In general, Code section 56(d)(1)(A) limits the amount of ATNOL that may be deducted to the lesser of the ATNOL or 90 percent of AMTI determined without regard to the ATNOL deduction. Otherwise, the Code generally requires a taxpayer to compute its ATNOL in the same manner as it computes its NOL. Under Code section 172(b)(2), the amount of an NOL that is absorbed in a carryover or carryback year equals taxable income for that year determined with certain modifications (modified taxable income).
Also by way of background, Code section 170(b)(2) generally limits the amount of a corporation’s charitable contribution deduction to no more than 10 percent of the corporation's taxable income. The 10 percent limit on a corporation's charitable contribution deduction is computed by taking into account NOL carryovers. The Chief Counsel explains that modified taxable income, however,
is computed without deducting the NOL carryover to be absorbed. This means that more charitable contribution deductions may be allowable in computing modified taxable income than are allowable in computing taxable income. By reducing modified taxable income these additional charitable contribution deductions may result in less NOL being absorbed than the actual amount of NOL used to reduce positive taxable income. Thus, the additional charitable contribution deductions allowed in determining modified taxable income may increase the amount of NOL carryover to a subsequent taxable year thereby "freeing up" some of the NOL for future use.
These rules also apply to the absorption of ATNOL. The Chief Counsel then explains the problematic relationships between rules created by the statutory language:
The statutory language that imposes the 90 percent limit on the ATNOL deduction does not exclude the charitable contribution deduction from the measure of income on which the limitation is computed. Likewise, the statutory language that imposes the 10 percent limit on the charitable contribution deduction does not exclude any ATNOL deduction attributable to an ATNOL carryover from the measure of income on which that limitation is computed. Therefore, Taxpayer's 90 percent limit on its ATNOL deduction must be computed on a measure of income that includes the charitable contribution deduction, and Taxpayer's 10 percent limit on its charitable contribution deduction must be computed on a measure of income that includes the ATNOL carryover deduction. .... We agree that simultaneous linear equations may be used to determine the proper amount of each deduction.
The Chief Counsel advice then derives the simultaneous linear equations necessary to compute the amount of ATNOL and charitable contribution deductions absorbed in the relevant years.
An interesting editorial has appeared in the Houston Chronicle. In Historic Houston Deserves a Second Life, the Chronicle reports that a nonprofit organization has devised a plan to merge environmentalism, preservation of historic fixtures, commerce in such fixtures, and tax benefits. The process is described as follows:
It's called "deconstruction," and it works like this. The owner of a historic house (that is, 50 years or older) pays Historic Houston to disassemble the building. The vintage bits that can be reused - hardwood flooring, shutters, sinks, things like that - will be sold at a new Salvage Warehouse. Newer parts of the deconstructed house - say, a two-year-old high-end stovetop - will be sold elsewhere, with proceeds donated to Historic Houston. And most of what remains can be recycled.
The brilliant part? The deconstruction service will present the house's owner with receipts for charitable donations - donations that can save the owner thousands of dollars on their taxes.
Sound like a fool-proof plan? Not exactly, at least not without a caveat. Donors of houses are also apparently receiving a service – demolition services. Those services have value and must be taken into account in determining any net value of the charitable contribution. Market-value payments for demolition services would generally be non-deductible, and under-payments would likely result in a decrease in any otherwise-allowable charitable contribution deduction. I am reminded of cases disallowing claimed deductions for contributions of houses to fire departments (such as the recent Seventh Circuit decision in Rolfs v. Commissioner, blogged about here and on our sister TaxProf Blog). Of course, the value of the historic fixtures and other building components may surpass the value of an intact house donated on the condition that the structure be burned to the ground. Thus, although the contemplated series of events may indeed produce some tax benefits, they may not be quite as extensive as the casual reader of Chronicle might assume.