Friday, December 14, 2012
As reported by the Dayton Daily News, the Internal Revenue Service determined that a nonprofit organization affiliated with the Tea Party, Ohio Liberty Council, is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. In a statement issued by the organization, its president opined that “our victory today will pave the way for other liberty groups around the nation to replicate our success’’
Meanwhile, as reported by the Washington Post, Crossroads GPS, the nonprofit organization formed by Karl Rove, is similarly seeking a 501(c)(4) tax-exempt status based on its primary activity of "public education."
[Hat tip on Ohio Liberty Council: Tax Prof Blog]
As reported by the Nonprofit Quarterly, a Maine court is set hear a case where the town of Hebron is arguing that the nonprofit boarding school, Hebron Academy, owes property taxes on income-generating uses of its facilities (i.e., rentals to outside groups for events). The argument ultimately comes down to an extent issue, with the town arguing that there is too much non-school use of the Academy's ice rink and other facilities, resulting in them becoming "taxable venues." Interestingly, Maine's incoming Attorney General has filed a brief supporting the Academy.
The case could provide a persuasive bright-line threshold for when commercial use of nonprofit property rises to a level exceeding "incidental," and thus becomes taxable.
[See a more extensive article in the Portland Press Herald]
Thursday, December 13, 2012
This paper examines the structure of the charitable contribution deduction for donations of cash and appreciated property. It suggests that non-itemizing taxpayers are the donors who have the most “skin in the game” for charitable contributions in terms of personal sacrifice. The paper recommends renewed emphasis on service contributions for non-itemizing donors and for the charitable organizations to which those non-itemizers tend to contribute. Promoting service, rather than money or property, contributions helps maximize the tax subsidy of the charitable contributions. From the perspective of efficient tax planning for low and moderate income taxpayers, the tradition of volunteerism in United States is compelling. Yet, despite the ability to get more “bang for the buck” from service contributions, many charitable organizations that used to rely on volunteers for support increasingly have shifted their operations to reliance on paid staff. This trend toward paid staff may stem from an effort to empower professional volunteers by giving them paid positions or may represent poor marketing of the value and accompanying tax benefits of charitable work.
Linda Sugin (Fordham) has posted to SSRN "The Great and Might Tax Law: How the Roberts Court has Reduced Constitutional Scrutiny of Taxes and Tax Expenditures." The abstract provides:
Taxation is the Supreme Court’s new darling. In its last two terms, the Court has endowed the tax law with legal superpowers, giving it the astonishing ability to elude constitutional limits. The justices have sent Congress and state legislatures a strong signal that they may use their tax laws as a means to aggressively enact public objectives unrelated to the traditional revenue-raising function of taxation. They have made clear that the Court will uphold policies administered through the tax law even where those same policies would be unconstitutional if administered as either direct regulation or appropriated spending.
In National Federation of Independent Business v. Sebelius, the newly muscular tax law saved Obamacare from near death at the hands of the Commerce Clause. The case confirmed the broad reach of the taxing power under the Constitution, and showed the current high Court’s willingness to treat regulatory legislation as taxation, even where Congress declined to call the legislation a “tax.” The cliffhanger ending to the Obamacare challenge may have been made possible by a much-less publicized -- but more legally radical -- case from the previous term; in Arizona Christian Schools v. Winn, which involved tax benefits for religious schools, the Court adopted a novel judicial approach to targeted tax benefits. In that case, the Court rejected the widely accepted treatment of tax expenditures as government spending administered through the tax law, and instead treated them as simple tax cuts. It thereby allowed tax benefits that are functionally equivalent to direct government spending to bypass the constitutional scrutiny that both taxes and direct spending would receive. Tax benefits are now beyond the reach of the Bill of Rights, which prohibits government action from treading on individual rights.
The consequences of this new judicial strategy are profound, raising the troubling question: Is there any justiciable limit to the great and mighty tax law? Both these cases aggravate a growing tension between economic and legal analysis of taxation, widening the gap between these two central approaches to tax law. The Court transformed tax expenditures from state action subject to constitutional limits into nonreviewable private spending by individuals. This development reduces the protection that the Constitution provides to individuals, undermines tax reform efforts and fiscal responsibility, jeopardizes established legal doctrine, and encourages less transparent and less equitable government.
Catherine Fisk (UC-Irvine) and Erwin Chemerinsky (UC-Irvine) published "Political Speech and Association Rights after Knox v. Seiu Local 1000" in volume 98 of the Cornell Law Review (2013). The SSRN abstract of the article provides:
In Citizens United, Boy Scouts of America v. Dale, and other recent cases, the Supreme Court has given organizations a newly-robust First Amendment right to use the entity’s money in ways that stakeholders within the organization may find anathema and to discriminate against employees and members in order to advance the expressive interest of the entity. Yet, in Knox v. SEIU Local 1000 in 2012, the Court held that a labor union violates the First Amendment rights of dissenters if it levies a special assessment for political speech without first having dissenters opt in. The Court’s jurisprudence on associational speech lacks any theory of when and why an organization’s speech violates the rights of dissenters. Nor does it consider what kinds of internal organizational governance mechanisms are necessary to ensure a fair allocation of speech protections between those who wish the organization to promote one message and those who wish it to promote another. Moreover, the majority in Knox casts First Amendment doubt on the validity of the entire concept of collective bargaining by a union elected by a majority to represent all employees in a bargaining unit of government employees. As ballot measures in various states have been enacted or are pending limiting the rights of unions to raise and spend money on politics in the name of protecting dissident employees, a principled approach to the free speech rights of unions, corporations, and other associations is ever more needed.
In this article we offer an approach to reconciling the First Amendment expressive interests of organizations with the expressive interests of dissenting stakeholders within them. We suggest an approach to resolving the inconsistency between Citizens United, the union-dues cases, and the Court’s other compelled speech and associational speech jurisprudence. Contrary to the prevailing wisdom, we suggest not that shareholders be given the opt out (or opt in) rights of dissenting union employees but instead that unions be given the same broad speech rights as corporations to use dues and fees paid by all employees on political activity.
As reported by the Nonprofit Quarterly, the founder and former board president of a New York City nonprofit, Educational Housing Services, that provided affordable housing to students entered into to a $5.5 million settlement with the New York Attorney General Eric Schneiderman, ending an investigation involving "stunning" board negligence according to the AG. The article summarizes the board's poor stewardship:
According to the attorney general’s findings, the board breached its duties of loyalty and care between the years of 2003 and 2009 by contracting with Student Services, Inc. (SSI), a corporation founded and controlled by Scott [founder] and his wife which he says charged Educational Housing millions of dollars for intermediating cable, phone and Internet services for the building at a large mark-up. The attorney general’s office asserts that SSI provided no meaningful benefit and sees the situation as a case of civil fraud that was approved by the board of directors. Therefore it is not pursuing criminal charges against Scott but it is tapping the personal assets of Scott, the organization, and the trustees.
“We have no tolerance for officers and directors who treat a nonprofit organization as a vehicle for personal enrichment,” Schneiderman said in a statement. The AG’s findings state that board members received salaries simply for being trustees and that some had well-compensated consulting contracts that provided “little value” to EHS. As a result of the settlement, which includes no admission of any wrongdoing whatsoever, the five board members must pay $1 million from their own personal funds and they have resigned and been forever banned from sitting on the board of any New York charity. Scott has also resigned and is required to make restitution of $2.5 million personally, while Scott and SSI will jointly waive their rights to an additional $2 million expected under the EHS-SSI agreement, and the board will pay $1 million.
[For follow-up discussion on board oversight of conflict transactions, see Price of Board Inaction: $5.5-Million for One Charity (The Chronicle of Philanthropy)]
The Wall Street Journal reports that the New York Attorney General's office has issued proposed regulations that would require most tax-exempt organizations registered in New York, including 501(c)(4)s, to disclose/report their annual spending on "electioneering activities" at the state and local level. Under state law, any nonprofit that receives $25,000 in annual New York-sourced donations must register with the AG's charities bureau. Under the regulations, reportable activities would include "advertisements or communications calling for the election or defeat of a candidate, ballot question or party, or those that depict or clearly identify them within 180 days of an election."
The Fiscal Cliff is topping the headlines these days. A part of that discussion involves potentially severe reductions in certain deductions, like the charitable contributions deduction, in order to eliminate or minimize rate increases. At the front of the debate is the White House, two Presidential advisors of which recently posted a blog entry entitled "Why Taking Tax Rates Off the Table Threatens Non-Profits and Charitable Giving." Here is a small abstract from that blog entry:
But what is clear is that proposals that take tax rates off the table would threaten donations to universities, non-profit hospitals, social services providers, arts and cultural institutions and other nonprofit organizations. This is because – to make the math work – these proposals rely on hundreds of billions of dollars of revenue that would result from drastically cutting or eliminating the charitable deduction as we now know it.
Currently, the tax code encourages gifts to charity by allowing taxpayers to claim itemized deductions for charitable giving. But – as a new report by the National Economic Council (NEC) shows, the most prominent dollar cap proposals would effectively eliminate the charitable deduction for up to 13 million households and for as much as 60 percent of currently deductible giving.
Using Congressional Budget Office assumptions, the NEC estimates that a $50,000 cap would reduce charitable giving by about $150 billion over 10 years, while a $25,000 cap would reduce giving by about $200 billion. Even a $25,000 cap that applied only to high-income households would reduce giving by at least $10 billion per year. As the report discusses, a cap could impact nonprofit organizations in every sector and in every state.
In a recent article in the Tulsa World, the newspaper reported that last week approximately 225 nonprofit representatives travelled to Washington "warning elected officials that tampering with the charitable tax deduction would limit or even eliminate their ability to serve those in need." A similar article was published by The Oregonian, titled "Oregon charities give good reasons for dodging fiscal cliff."
As reported by the Chronicle of Philanthropy, the Independent Sector published a 2-page advertisement in Politico, directed to President Obama and Congress and President Obama, entitled “Don’t push charities over the fiscal cliff.” Another large nonprofit association, the American Hospital Association, sent a letter to Senate Majority Leader Harry Reid urging him to preserve the charitable contributions deduction.
The Wall Street Journal reported that the lingering uncertainty around the negotiations between President Obama and Congress is resulting in donors making contributions to "charitable-gift funds" (i.e., donor-advised funds) prior to the end of the year, allowing them to take a deduction in 2012 but delay giving decisions until a later time. Specifically, fear surrounding Congress's potential cuts or caps on charitable contributions for 2013 is leading to urgency to take advantage of deductions under current law.
Nicholas P. Cafardi (Duquesne) has published Saving the Preachers: The Tax Code's Prohibition on Church Electioneering in 50 Duqesne University Law Review 503 (2012). Here is a brief abstract of the article on SSRN:
Churches, like other 501(c)(3) organizations are subject to a prohibition on electioneering. This prohibition has survived decades of constitutional challenges because the tax exemption that 501(c)(3) organizations enjoy is a privilege and not a right. This article examines the claim of churches that they have a right to intervene in elections contrary to existing IRS regulations based on the free exercise clause and the Religious Freedom Restoration Act, and finds such claims wanting.
The article explains that tax exemption and the ability to attract tax deductible gifts are a form of government and taxpayer subsidy. This subsidy exists for 501(c)(3) organizations because Congress believes that their charitable activities promote the public welfare and are worthy of subsidy. On the other hand, Congress did not wish to subsidize the political activities of tax exempt organizations, hence the prohibition. The rules prohibiting electioneering are rather lenient and very rarely have churches lost their exemption. Finally this article explains that this prohibition on electioneering has been very beneficial because it has helped maintain the separation of church and state that is fundamental to our nation.