July 27, 2012
More on Use of 501(c)(4)s in the Political Campaign Context - Disclosure Requirements, Need For Reform
As reported in The New York Times as well as other news sources (including the live blogging herein), the IRS announced in Congressional hearings on Wednesday that 50 political groups have obtained 501(c)(4) exemptions in 2010 and 2011.
In the Forth Worth Star-Telegram, an editorial entitled "IRS needs to strengthen tax code to uncover political nonprofits" criticizes the use of 501(c)(4)s for political campaign purposes, concluding: "Tax-exempt status is intended to promote the public good, not enable wealthy and powerful donors of any political stripe to wield influence without public scrutiny."
In the BNA Daily Tax Report on Wednesday, an article addressed the disclosure requirement with respect to 501(c)(4) donors. Although 501(c)(4)s are required to inform the IRS, but not the public, of the identity of donors, many organizations find ways around these full disclosure rules. The organization can list the donor as "anonymous" if it doesn't know where the money originated from and "can't easily find out," or client trust accounts are used (i.e., donors make contributions through law firms that transmits the money to the organization, with only the law firm's name disclosed). Cashier's checks and bank wire transfers are other means to keep donors anonymous and, thus, out of the IRS's purview. Another potential area for reform?
Colinvaux: The Conservation Easement Tax Expenditure
Roger Colinvaux (Catholic) has published "The Conservation Easement Tax Expenditure: In Search of Conservation Value," in the Columbia Journal of Environmental Law, Volume 37. The SSRN abstract provides:
Federal tax law has long provided a tax benefit for charitable contributions of easements for conservation purposes. A fundamental problem with this conservation easement tax expenditure is that the measure for the tax benefit – lost economic development value – is erroneous. Use of such an erroneous measure obscures the conservation benefits of the program by focusing attention and resources on divining a largely extraneous and unhelpful number. Further, to a considerable extent, the easement program is reflexively justified and understood based on this false measure, as if it represented the conservation value of the program. The Article argues that, in theory, the measure for the tax benefit should be changed to one that better approximates conservation value. This would help ensure that the program is efficient, in the sense that conservation benefits would exceed program costs.
However, the theory must account for the fact that conservation value is not, at least not yet, readily susceptible to quantification for tax purposes. Accordingly, the Article also argues that a second-best approach would be to change the measure of the tax benefit to a more objective number – the fair market value of the underlying fee interest – not only to provide greater certainty but more importantly to shift administrative and legal resources and attention to where it should be: on the conservation benefits of the program. Finally, the Article argues that serious consideration should be given to converting the deduction to a credit, both to make the tax benefit more equitable and also to provide greater flexibility, by more easily allowing for different levels of tax benefit to be provided based on satisfaction of conservation criteria, which could and should evolve over time to account for society’s changing needs. In any event, irrespective of the details, the conservation easement tax expenditure should be designed to promote a concept of conservation value – an affirmative value – that represents the best use of the land. The value of the tax expenditure should no longer be defined by what is lost, but rather by what is gained.
July 26, 2012
Halperin: A Better Way to Encourage Gifts of Conservation Easements
Daniel I. Halperin (Harvard) has published "A Better Way to Encourage Gifts of Conservation Easements" in The Shelf Project, Volume 136 (July 2012). The abstract posted to SSRN:
The author’s proposal would repeal the deduction for the appraised value of a conservation easement that is allowed by current law. Congress should consider replacing the subsidy with a program of direct grants or limited-budget tax credits administered by an expert agency. If the deduction is continued, eligible donees should be only large institutions with a large portfolio of easements and resources and motives to enforce the easement, there should be an excise tax on nonenforcement of the easement, and there should be another government agency other than the IRS involved in enforcement. The special higher allowances for the deduction of appreciated property allowed by current law should be repealed.
The proposal is offered as a part of the Shelf Project, a collaboration of tax professionals to develop proposals to raise revenue without a VAT or a rate increase. Shelf Project proposals raise revenue while making the tax system more efficient and reducing deadweight loss. Shelf projects follow the format of a congressional taxwriting committee report in explaining current law, what is wrong with it, and how to fix it.
Conservation Easements in the Forest Legacy Program
Jessica Owley (SUNY-Buffalo) and Stephen J. Tulowiecki (SUNY-Buffalo) have published "Who Should Protect the Forest?: Conservation Easements in the Forest Legacy Program" in the Public Land and Resources Law Review, Volume 33. The abstract of the article posted to SSRN:
Increasingly, governments are turning to nongovernemental actors to carry out environmental protection goals. This has been particularly prevalent in the realm of land conservation. Government programs often draw upon the power of nonprofit conservation organizations known as land trusts to monitor, manage, and enforce land protection goals. Reliance on land trusts has created both philosophical and practical conundrums. These concerns also stem in part from the chief land protection tool used by land trusts: conservation easements. This article examines these concerns by a close look at the role of land trusts and conservation easements in the Forest Legacy Program.
Administered by the U.S. Forest Service, the Forest Legacy Program seeks to slow conversion of private forestlands to nonforest uses. Conservation easements form a key element of the Program, but their use is complicated. In creating the Program, Congress seemed to both want to encourage the involvement of land trusts and to curb their reach. The Program draws upon the power of private organizations, and increasingly calls upon land trusts to carry out the duty of protecting forestlands and yet stops short of enabling these organizations to receive Program funds or to enforce conservation easements purchased with Program funds. Thus, in the FLP, Congress inches toward privatization of forestland conservation, but holds back. This stance is bewildering. If Congress was concerned with the involvement of land trusts in forestland conservation, it seems to give them too much power. If Congress wanted to encourage greater land trust involvement, it seems to stop too short.
Corporate Philanthropy and the Boundaries of the Firm
Frederick Bereskin (Univ. of Delaware-Finance), Terry L. Campbell II (Univ. of Delaware-Finance), and Po-Hsuan Hsu (Univ. of Hong Kong) have posted "Corporate Philanthropy and Expansive Innovation: Implications for the Boundaries of the Firm," to SSRN. The abstract of the article is as follows:
We examine the association between corporate giving and innovation, using a unique data set of both direct giving and foundation giving. We find that direct giving by firms is positively associated with both higher innovation quantity and quality and more collaborative and explorative innovation. This relation is robust to increased lags, tests for sample selection bias, and reverse causality, suggesting that direct giving helps firms expand their knowledge frontier. In contrast, our results do not hold for giving by corporate-sponsored foundations. Our findings provide broad evidence of the distinct motives by which firms choose between direct giving and giving through a corporate foundation and have implications for why firms prefer to avoid mandatory disclosure of direct giving. Our results support the hypothesis that firms can use direct philanthropy to pursue innovative strategies that expand the boundaries of the firm.
McLaughlin: Extinguishment of Perpetual Conservation Easements
Nancy A. McLaughlin (Utah) has published "Extinguishment of Perpetual Conservation Easements: Charting a Course after Carpenter," in the Florida Tax Review, Vol. 13. The SSRN abstract on the article is as follows:
In Carpenter v. Comm’r, T.C. Memo. 2012-1, the Tax Court addressed a key aspect of the requirement that the conservation purposes of tax-deductible conservation easements must be “protected in perpetuity” — the manner in which such easements may be permissibly extinguished. This is a critically important issue. Federal taxpayers are investing billions of dollars in conservation easements through the federal charitable income tax deduction under § 170(h), and this enormous investment will be for naught if the permanent protections prove to be ephemeral because the easements are later extinguished or otherwise not enforced. While Carpenter provides some helpful guidance, it also has created confusion and caused some to argue that the process for extinguishment set forth in the Treasury Regulations is optional, and that states, localities, and even holders are free to adopt their own extinguishment procedures. This article examines Carpenter. Among other things, it discusses the holding that the conservation easements at issue constitute restricted charitable gifts, and the critical importance of this status in ensuring that government and nonprofit holders will be legally bound to administer easements in accordance with their stated terms and purposes over the long term. It also explains that the Congress intended to subsidize the acquisition of perpetual conservation easements — or those that are extinguishable only upon frustration of their purposes — and that the provisions addressing extinguishment in the Treasury Regulations should not be considered optional. The article also recommends that Congress, the Treasury Department, and the IRS be proactive in addressing the issues of extinguishment as well as amendment of tax-deductible conservation easements. Without clear guidance on these issues, the purportedly perpetual protections will erode over time, and the enormous public investment in these instruments and the conservation values they are intended to protect in perpetuity will be lost.
July 25, 2012
Liveblogging the Ways & Means Subcommittee Hearing
As my fellow blogger Nicholas Mirkay noted earlier in the week, the second House Ways & Means Subcommittee on Oversight hearing on exempt organizations is scheduled for this morning at 9:30 EST. I'll be liveblogging the hearing in the comments to this post (see the fine print just below the post.) I have to manually enable the comments on Typepad, so there may be a little bit of a delay as they go up. I will also be doing this *live* so I'm going to beg your forgiveness for typos and such from the outset.
It is a fantastic line up this morning. Sometimes, it is easy to get cynical about who ends up on these panels but not today - the Subcommittee did its homework and got some great people, including Prof. John Colombo (who posts here, not that we are biased!), Prof. Donald Tobin (well known to all of us who teach tax), Thomas Hyatt of SNR Denton, and Eve Borenstein, Queen of the Form 990. I really think it will be an informative hearing. Here's a link to the official announcement.
If you are so inclined, you can watch this streaming here. As statements and such become public, I'll update this post to include links to them. So warm up your coffee and off we go... To the comments!
UPDATE: Hopefully, all of those comments came through for you all. Feel free to contact me if there were any issues. Here are some of the posted materials for the day:
By the way, in my comments I sometimes refer to the Comn'r as short hand - I mean Steve Miller, who is actually Deputy Commissioner for Sevices and Enforcment and used to be the head of TEO for the IRS.
SECOND UPDATE: Some of the later comments are not showing up when I hit comments on the front page (after the post where I indicate I have technical issues). They are, however, showing up in the dashboard for bloggers, so I will try to figure that all out. Please drop a comment if the last one you see from me is that I'm having technical issues, or if they go all the way to the end of the hearing.
July 24, 2012
Is IRS Rethinking 501(c)(4) Political Activity Rules?
As reported in today's Daily Tax Report, IRS EO Director, Lois Lerner, stated in a July 17th letter to an organization raising concerns about the political campaign activities of 501(c)(4) organizations:
The IRS is aware of the current public interest in this issue. These regulations have been in place since 1959. We will consider proposed changes in this area as we work with the IRS Office of Chief Counsel and the Treasury Department's Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance.
July 23, 2012
Boustany Calls Second Hearing on Tax-Exempts
Last Wednesday, House Ways and Means Oversight Subcommittee Chairman Charles Boustany (R-La.) announced that a second hearing on tax-exempt organizations (the first was held on May 16 as blogged herein) will be held on July 25, 2012. Per the Ways and Means Committee website:
The hearing will focus on organizational and compliance issues related to public charities, including the increased complexity of public charity organizational structures, the rules governing profit-generating activities giving rise to unrelated business income tax, and whether the newly redesigned Form 990 is promoting increased compliance and transparency.
In the announcement, Boustany makes the following oversight comment:
Given the size and scale of the operations of public charities, which in 2008 had over $2.5 trillion in assets, it is critical that the Subcommittee continue its review of the tax-exempt sector. Indeed, over the last two decades, the organizational structures of public charities have become increasingly complex, creating compliance and transparency issues. This hearing is an excellent opportunity for the Subcommittee to hear from the IRS and experts in the tax-exempt community. Their insight will allow the Subcommittee to better understand what is driving organizational complexity, and to learn about the new compliance efforts by the IRS and the UBIT rules.
No expert witnesses have yet been announced.
(Hat tip: Daily Tax Report)
**Update: Contributing editor Elaine Waterhouse Wilson will be live blogging on July 25th during the hearing.
Stanley: Revisiting the Constitutionality of the Johnson Amendment
Erik W. Stanley (Senior Legal Counsel, Alliance Defense Fund) has published: LBJ, the IRS, and Churches: The Unconstitutionality of the Johnson Amendment in Light of Recent Supreme Court Precedent, 24 Regent U. L. Rev. 237 (2012). The introduction to the article provides:
Part I of this Article examines the history of church tax exemption and demonstrates that exemption for churches is an unbroken practice with an extremely long historical pedigree. Thus it should not be lightly cast aside, and any threat to its existence should be taken seriously. Part I also traces the history of the restrictions on church tax exemption added by Congress in 1934 and 1954, including the history of the Johnson Amendment and the suspect circumstances surrounding its passage.
Part II analyzes the history of IRS enforcement of the Johnson Amendment, discussing the uneven and sporadic nature of that enforcement. The IRS’s vague and uneven enforcement scheme has resulted in a pervasive and palpable chill on the speech of pastors and churches as they have self-censored in order to avoid potential Johnson Amendment violations and the extreme consequences associated with such violations.
Part III builds on the prior two points and analyzes the Johnson Amendment in light of the recent Supreme Court cases of Citizens United v. FEC, Arizona Christian School Tuition Organization v. Winn, and Hosanna-Tabor Evangelical Lutheran Church & School v. EEOC. The Article concludes that these cases provide important indications that the Johnson Amendment is an unconstitutional violation of the Free Speech and Free Exercise Clauses of the First Amendment, and that it cannot be justified by reliance on tax subsidy theories of regulation.
It is not the goal of this Article to repeat the work of legal scholars who have analyzed the Johnson Amendment from various angles. The great weight of that legal scholarship leans decidedly in favor of the conclusion that the Johnson Amendment is unconstitutional as a violation of the First, Fifth, and Fourteenth Amendments of the United States Constitution as well as the Federal Religious Freedom Restoration Act. Rather, this Article offers a fresh look at the Johnson Amendment in light of recent Supreme Court precedent that has direct bearing on its constitutionality. This precedent—when viewed in light of the history of church tax exemptions, Congress’s adoption of the Johnson Amendment, and the IRS’s enforcement of the Johnson Amendment—demonstrates that the pastors who participated in Pulpit Freedom Sunday were justified in challenging the Johnson Amendment and should not have long to wait before it is declared unconstitutional or repealed.
(Hat tip: TaxProf Blog)