February 3, 2012
I'll Take Potpourri for $1,000, Alex
Happy Friday! To end the week, just a few notes on various items:
- This follow-up article on the collapse of Hull House highlights the government funding issue, as well as the crucial importance of strategic planning and strong board/staff relationships. One of the things I found most interesting is the discussion about the "corporate" culture of the board and how it didn't understand the nonprofit world. While in general it may be that many nonprofits could use some more discipline in their governance, can being "corporate" go too far?
- Legislation proposing the "Buffett Rule" was introduced today, containing special provisions for the chartiable deduction. I've not parsed my way through it entirely yet (a weekend project maybe...) but you can find the text of the legislation here.
- Some of you may have been following the decision of the Susan G. Koman Foundation to pull funding from Planned Parenthood for the stated reason that Planned Parenthood was under Federal investigation. It is currently subject to a request for information by a member of the oversight subcommittee of the House committee on Energy and Commerce - see the request for information here. Apparently, as of today, that decision may have been reversed, stating that Komen's grant due diligence criteria would only cover investigations that were criminal and not political (have fun defining that one...). Without getting into the sensitive topic of funding for women's heath, I do think this case merits a look at the procedural issue surrounding Congressional investigations and when does an inquiry constitute an investigation that should be problematic for grant due diligence purposes.
- Congrats to our own Susan Gary, who had an article pubished recently on the Model Protection of Charitable Assets Act in the Taxation of Exempts. (23 Taxation of Exempts No. 4, 26 (Jan/Feb. 2012) -sorry, no link as I believe its subscription only).
On a personal note, I've enjoyed my first week of blogging very much and am so grateful to be on board. Please do send me comments and thoughts on anything I've written (such as Hey, Elaine, is "nerd rage" really a verb?) as I'd love the feedback.
February 1, 2012
Facebook IPO Article Causes Tax Nerd Rage! Film at 11....
Whenever I see articles in the popular press on tax or charitable issues, I'm torn. On the one hand, I want to read them because it's important to know what the general public hears about such issues in order to able to advise about or teach them appropriately. On the other hand, the tax geek runs strong in me, so the technical errors one finds in such articles drive me absolutely bananas. And so, with great trepidation, I clicked the following link over my first cup of coffee of the morning:
The first few paragraphs were fine, until...
To lessen their tax burdens, the new Facebook millionaires could contribute some of their stock to a donor-advised fund, a type of public charity that serves as an umbrella giving vehicle. They could also set up a "charitable remainder trust," whereby a chunk of money goes to a charity after a specified time – like upon death – but the donor receives income or interest off the donated assets. In both cases, the donor can avoid capital gains tax and might also be eligible for an income tax deduction. (Emphasis added).
Really. REALLY? In search of an audience, I stormed into the living room and nerd raged at my unsuspecting husband, complete with indignant finger pointing, "HOW MANY TIMES do I have to tell people that CRTs do NOT allow you to avoid capital gains tax, only to defer paying it!" He blinked, and asked me if I needed more coffee. I wandered back to the computer, muttering something about the time value of money and retention of character of income.
I feel better now, though. EWW
January 31, 2012
So Does This Mean I Can Order That Book Now....?
The Wall Street Journal reports today that college and university endowments showed strong growth in FY 2011, according a study released by the National Association of College and University Business Officers (NACUBO) and the Commonfund, a leading investment advisor to endowments and other nonprofits. The article reports that "institutions' endowments returned an average of 19.2 percent for the 2011 fiscal year," up from 11.9 percent in 2010.
As always, the devil is in the details. There are some good breakdowns of this information in the tables that are available at the NACUBO website, which lead to some interesting observations and questions:
1. Compare the average and median investment returns found here with the table showing endowment growth here. The endowment growth table reflects not only investment returns, but also endowment withdrawals, fees, and additional gifts. In the case of the larger endowments, it appears that endowment growth is about the same as, and sometimes above, investment return. As you go down the list, it is clear that the smaller the endowment, the greater the difference between endowment growth and investment return. So I wondered to myself, "Self, does this mean that the smaller endowments are paying out more and/or having a harder time raising additional gifts to replenish the endowment?"
2. To answer my own question, I took a look at the table showing 2011 endowment spending rates, which appears to show that NOT to be the case. In fact, the smaller the endowment, the lower the spending rate. My gut (which cannot and absolutely should not be relied upon as precedent) is skeptical as to whether differences in replenishment fundraising could make up the difference between the larger endowments and the smaller endowments. By the way, no word as to whether or not these rates were affected by the adoption of UPMIFA, or how many would be "underwater" with respect to historic dollar value under UMIFA.
3. This table shows the 1, 3 and 5 year returns - and shows there to be about a 3% difference in rate of investment return between the largest and smallest endowments. At least part of the answer should be that the larger endowments are just getting better returns. (The press release notes that the spread between large and small endowment investment returns is actually more compressed than prior years, which is interesting). But why....?
4. Look at this! The largest endowments have an asset allocation of a whopping 60% (!!!!) in alternative investments, as opposed to only 10% for the smallest endowments. The smaller endowments have a signficant amount more allocated to cash and fixed income than the larger endowments, with only a 9% allocation to fixed income for the largest endowments. The question, of course, is how much does this differential in allocation affect overall investment return?
Now, I'm not an investment advisor nor did I sleep at a Holiday Inn last night, but all of this leads me to worry that some of the lessons of eons ago (like, you know, 2008) are lost already to some. Bad things happen when an endowment gets really illiquid yet keeps spending cash - just ask Harvard. The tables also tell a concerning tale of smaller endowments falling behind with investment returns and reducing spending to keep up with inflation and need, even though UPMIFA should have helped with that to some degree. I wonder if UPMIFA played a role in any of this? It will be interesting to see the analysis of the final report, which according to the NACUBO website, is available for purchase next month.
The Importance of an Accurate Contemporaneous Written Acknowledgment
Most everyone knows by now that, pursuant to IRC § 170(f)(8), charitable donors who make gifts of $250 or more must obtain a contemporaneous written acknowledgment (CWA) from the donee that states (i) the amount of the contribution, (ii) whether the donee provided any goods or services in consideration, and (iii) a description and good faith estimate of the value of any such goods or services. The Tax Court’s recent decision in Cohan v. Comm’r, T.C. Memo. 2012-8, emphasizes that the CWA must be complete and accurate. Cohan involved a purported bargain sale of rights of first refusal pertaining to property located on Martha’s Vineyard to a charity in exchange for some lots, leases, beach access rights, and other valuable consideration. The charity provided a CWA to the taxpayers in connection with the transaction, but the CWA did not reflect all of the consideration the charity provided to the taxpayers. The Tax Court sustained the IRS’s complete disallowance of the deductions claimed with respect to the donation component of the transaction because (i) the CWA did not include a description or good faith estimate of all of the consideration provided by the charity, (ii) the taxpayers' reliance on the CWA in calculating their deductions was not reasonable because they knew the CWA omitted certain items of consideration, (iii) and the CWA deficiencies could not be forgiven under the doctrine of substantial compliance because the information required to substantiate the contributions was not included anywhere else on the taxpayers’ income tax returns.
The Tax Court noted that the record strongly suggested that the parties made a conscious decision to exclude items of consideration from the CWA for purposes of calculating the amount of the bargain sale gift and to play the audit lottery. Quoting an earlier decision by the Ninth Circuit involving a similar issue, the court explained that the CWA requirement is important to the effective administration of our self-reporting tax system and “the Government depends upon the good faith and integrity of each potential taxpayer to disclose honestly all information relevant to tax liability.”
Cohan highlights a potentially troubling issue for charitable donors and donees because it will sometimes be unclear whether a donee’s actions in connection with a donation rise to the level of “goods or services” that need to be reflected on the CWA. For example, in Kaufman v. Comm’r, 136 T.C. No. 13, the IRS challenged deductions claimed with respect to the donation of a conservation easement and cash on a variety of grounds, including the donor’s “unquestioning and self-serving” reliance on CWAs that certified that the donee had provided no goods and services. The IRS argued that the CWAs “were erroneous and did not contain a good faith estimate of the value of the goods or services [the donee] provided” because the donee had accepted and processed the donor’s application, provided the donor with a form conservation easement agreement, undertaken to obtain approvals from the necessary government authorities, secured the lender agreement from the bank, given the donor’s husband basic tax advice, and provided the husband with a list of approved appraisers. The Tax Court sided with the donor on this issue, holding that the IRS failed to prove the monetary value, if any, of what the donor may have received from the donee, or that the donor “knew the items had value (if, indeed, they did) and, therefore, knew that the letters were inaccurate (if, indeed, they were).” But Cohan and Kaufman leave open the possibility that actions taken by a donee in connection with a donation may, in some circumstances, be deemed to rise to the level of “goods or services” that must be valued and reflected on the CWA, and failure to do so may result in a complete disallowance of the deduction.
January 30, 2012
Farewell, Hull House
I currently reside in Chicago, where we received bad news last week. Hull House, one of the most storied and respected social service agencies in the city (if not the nation) has closed its doors. At first, it appeared that Hull House would remain open for a while pending bankruptcy proceedings. According to the Chicago Tribune, however, Hull House did not have sufficient funds to operate beyond January and is now closed, leaving many Chicagoans without critical social services with virtually no notice. Most of the published reports that I found indicate that Hull House had become increasingly dependent upon government contracts, so it took a signficant hit when Illinois - like most states - slashed social service funding. Anecdotally within the Chicago philanthropic community, it is well known that Illinois is signficantly behind (sometimes, 6 to 8 months or longer) in funding those contracts that survived the budget cuts. This causes serious cash flow issues for many social service agencies, who must look to foundation funders and private donors for emergency cash or short term bridge loans. If an agency doesn't have a network of private funders to whom to turn in times of crisis, it will face the same sad end as the venerable Hull House. Alas, a thousand points of light cannot accomplish much if they are unable to pay their electric bill.