Saturday, December 29, 2012
Earlier this month, ProPublica announced that it had received a copy from the IRS of the Form 1024 (Application for Recognition of Exemption) for claimed 501(c)(4) Crossroads GPS in response to a public-records request. While ProPublica focused primarily on the apparent disconnect between the planned activities listed on the application and the actual activities of Crossroads GPS, it also acknowledged that the IRS released the application despite the fact it is still pending. While the IRS on discovering this apparent error warned ProPublica that publishing unauthorized returns or return information was a felony, ProPublica decided to proceed with its story after concluding that its actions were not covered by the relevant statute and also furthered strong First Amendment interests. The ProPublica story is part of a series on the activities of Crossroads GPS and other nonprofit organizations during the 2012 election, with the most recent story focusing on the role of such groups in the Montana U.S. Senate race.
While not yet reported publicly, I have reliable information that attorneys for several other, conservative nonprofit organizations with pending applications have been contacted by the IRS and informed that the IRS released those applications as well. If correct, their release indicates a serious breakdown in the IRS Exempt Organizations Division's procedures for keeping pending applications confidential. There is nothing at this point, however, to indicate that the release or releases here were anything but accidental, especially since the applications will be publicly disclosable if and when the applications are granted. This situation therefore appears to be different on that score from the earlier reported release of the always confidential Schedule B to the Form 990, involving the National Organization for Marriage.
UPDATE: ProPublica has now reported on the IRS applications of five other "conservative dark money groups", including providing links in the article to copies of the applications (with certain financial information redacted).
Bloomberg raised this question last month when it published an article titled Tax-Exempt Firm Gets $600 Million Profit Flying First Class. The firm at issue is the Code section 501(c)(6) American Bureau of Shipping, which inspects ships and sets maritime standards around the world. The cited profits are over a seven-year period (2004 to 2010), during which time the organization's chief executive officer also received compensation totalling $21.7 million. According to Bloomberg, the firm is not alone - the article also cited such well-known groups as the National Football League and the National Hockey League as well as more obscure but highly profitable organizations such as the U.S. Polo Association, which collects royalties on annual retail sales of $1 billion. It also contrasted the US tax treatment of such entities with that of European authorities, who tax the European affiliate of the American Bureau of Shipping. Yet nothing in the article indicates that these organizations are not in compliance with the existing provisions and requirements of section 501(c)(6). Which raises the question - is it time to revisit the rules for non-charitable, tax-exempt organizations?
Hat tip: EO Tax Journal.
Steven H. Sholk has released the most recent update of his A Guide to Election Year Activities of Section 501(c)(3) Organizations. Weighing in at 271 pages, it provides a comprehensive overview of this complicated and fact-sensitive area.
Hat tip: Tax Prof Blog.
Friday, December 28, 2012
Alison Dunn (Newcastle) has posted Using the Wrong Policy Tools: Education, Charity, and Public Benefit, 39 J. L. & Soc'y 491 on SSRN. Here is the abstract:
A recent decision on the application of public benefit under the Charities Act 2006 sidestepped the political debate surrounding the charitable status of independent fee‐charging schools. The broader political context nevertheless underscores the legislative reforms, and this article questions whether the new statutory public benefit requirement has utility as a welfare policy tool in the field of education. It examines the public benefit requirement in charity law against the backdrop of government policy towards education and the broader political agenda for a mixed economy of welfare provision, and argues that the difficulties Labour faced in developing its education policies were replicated in the application of the post‐Act public benefit requirement to fee‐charging schools. As a result, achieving broader policy goals for widening educational opportunity through public benefit was almost impossible given the regulatory framework and the principles upon which charity law is founded.
The nonprofit starvation cycle is a debilitating trend of under-investment in organizational infrastructure that is fed by potentially misleading financial reporting and donor expectations of increasingly low overhead expenses. Since its original reporting in 2008, the phenomenon has been referenced several times, but seldom explored empirically; this study utilizes twenty-five years of nonprofit data to examine the existence, duration, and mechanics behind the nonprofit starvation cycle. Our results show a definite downward trend in overhead costs, reflecting a deep cut in administrative expenses partially offset by an increasing in fundraising expenses. The organization’s size is instrumental to its behavior, with a sharp rise in overhead occurring when revenues equal $100 thousand, but diminishing at $550 thousand. Finally, the brunt of the cuts have fallen on non-executive staff wages and professional fees, which heighten the concern of ill effects from a fixation on overhead cost reduction.
Over the past few years, jurisdictions across the country have enacted specialized organizational forms to house social enterprises. Social enterprises are entities dedicated to a blended mission of earning profits for owners and promoting social good. They are neither typical businesses, concentrated on the bottom line of profit, nor traditional charities, geared toward achieving some mission of good for society. Their founders instead see value in blending both goals. This article examines the latest specialized form to take shape: the flexible purpose corporation (FPC). After explaining the genesis of FPC enabling legislation, the article critiques its major provisions and compares them with relevant aspects of other specialized forms for social enterprise.
Ann Taylor Schwing has posted Perpetuity is Forever, Almost Always: Why it is Wrong to Promote Amendment and Termination of Perpetual Conservation Easements, 37 Harv. Env. L. Rev. (forthcoming), on SSRN. Here is the abstract:
This article is a response to Jessica Jay's, When Perpetual Is Not Forever: The Challenge of Changing Conditions, Amendment and Termination of Conservation Easements, 36 Harv. Envtl. L. Rev. 1 (2012). When Perpetual Is Not Forever suggests that government entities and land trusts accepting conservation easement donations are free to ignore both federal tax law requirements and the rules that govern administration of charities and the charitable gifts they solicit and accept when amending and terminating perpetual conservation easements. This article explains that, when a conservation easement donor makes a charitable gift of a conservation easement and elects to seek a federal income tax deduction, both the property owner and easement holder become subject to federal law governing the creation, monitoring, amendment, and extinguishment of the easement, as well as state laws that protect charitable gifts on behalf of the public. Accordingly, contrary to the representations made in When Perpetual Is Not Forever, neither property owners nor holders can elect to amend or terminate such perpetual easements pursuant to procedures that are inconsistent with such laws.
Brett Bloom has published a student comment titled The Rise of the Virtual Church: Is It Really a Church Under I.R.C. Section 170(b)(1)(A)(I)?, 6 Liberty U. L. Rev. 495 (available through Westlaw). Here is a summary of the article from its introduction:
This Note begins with a background discussion of tax exemption for religious organizations, including historical and constitutional concerns, along with a brief discussion of the rationale for tax-exempt organizations. This Note then discusses the distinctions between religious organizations and churches. Next, this Note presents the problem with the Service's and courts' application of their respective tests with respect to the Foundation of Human Understanding. Finally, this Note proposes (1) that the Service and courts abandon their respective tests for determining church status; and (2) that the United States Department of Treasury (the “Treasury”) provide guidance to the meaning of church through Treasury regulations.
One of my students, Brittany Brantley, has published Beyond Politics in the Pulpit: When Pastors Use Social Networks to Preach Politics, 38 J. Legis. 275 (available through Westlaw). Here is a summary of the article from it's introduction:
Part II of this note will provide an overview of the history of the political campaign prohibition. Part III will explain how churches have attempted to be completely exempt from the prohibition. Part IV will discuss the acts of Individuals of a section 501(c)(3) organization in their individual capacities. Part V will discuss how the development of the Internet has broadened the scope of the prohibition. It will also discuss how pastors use their websites and social media pages. Finally, Part VI will suggest some steps that the Internal Revenue Service and the Federal Election Commission can take to ensure that section 501(c)(3) organizations are aware of what constitutes a violation on social media pages.
- Femida Handy, Jeffrey L. Brudney,and Lucas C.P.M. Meijs, From the Editor's Desk
- James E. Austin and Maria May Seitanidi, Collaborative Value Creation: A Review of Partnering Between Nonprofits and Businesses. Part 2: Partnership Processes and Outcomes
- Amanda Moore McBride, Benjamin J. Lough, and Margaret Sherrard Sherraden, International Service and the Perceived Impacts on Volunteers
- Graham Dover and Thomas B. Lawrence, The Role of Power in Nonprofit Innovation
- Weiwei Lin and Gregg G. Van Ryzin, Web and Mail Surveys: An Experimental Comparison of Methods for Nonprofit Research
- Beth Gazley, Laura Littlepage, and Teresa A. Bennett, What About the Host Agency? Nonprofit Perspectives on Community-Based Student Learning and Volunteering
- Gregory D. Saxton, Jenn-Shyong Kuo, and Yi-Cheng Ho, The Determinants of Voluntary Financial Disclosure by Nonprofit Organizations
- Tim Vantilborgh, Jemima Bidee, Roland Pepermans, Jurgen Willems, Gert Huybrechts, and Marc Jegers, Volunteers’ Psychological Contracts: Extending Traditional Views
- Teck-Yong Eng, Chih-Yao Gordon Liu, and Yasmin Kaur Sekhon, The Role of Relationally Embedded Network Ties in Resource Acquisition of British Nonprofit Organizations
- Chris Cornforth, Nonprofit Governance Research: Limitations of the Focus on Boards and Suggestions for New Directions
- Chi-kan Richard Hung and Paul Ong, Sustainability of Asian-American Nonprofit Organizations in U.S. Metropolitan Areas
- Rebecca Nesbit, The Influence of Major Life Cycle Events on Volunteering
- Hans Peter Schmitz, Paloma Raggo, and Tosca Bruno-van Vijfeijken, Accountability of Transnational NGOs: Aspirations vs. Practice
- Simona Haivas, Joeri Hofmans, and Roland Pepermans, Self-Determination Theory as a Framework for Exploring the Impact of the Organizational Context on Volunteer Motivation: A Study of Romanian Volunteers
- Eric Bidet, Overcoming Labor Market Problems and Providing Social Services: Government and Civil Society Collaboration in South Korea
- Michael R. Sosin, Social Expectations, Constraints, and Their Effect on Nonprofit Strategies
- Christian Hopp, For Better or for Worse?—Nonprofit Experience and the Performance of Nascent Entrepreneurs
- Micheal L. Shier, Book Review: Handbook of Practical Program Evaluation
- Patsy Kraeger, Book Review: Advocacy Organizations and Collective Action
- Liz Fisher, Book Review: The Nature of the Nonprofit Sector and Understanding Nonprofit Organizations: Governance, Leadership, and Management
- Daniel Tinkelman, Book Review: Nonprofit Financial Management: A Practical Guide
- Eleanor W. Sacks, Book Review: Philanthropy in America: A History
- Barbara Levine, Book Review: High Ideals and Noble Intentions: Voluntary Sector-Government Relations in Canada
Thursday, December 27, 2012
The Treasury Department has released final and temporary regulations regarding the requirements to quality as a Type III ("operated in connection with") supporting organization. Changes from the proposed regulations include (1) adding back in the defined term "publicly supported organization," (2) clarifying which Form 990 such a supporting organization must provide to its supported organizations, (3) clarifying certain aspects of the requirements for being considered "functionally integrated," and, most significantly, (4) modifying the payout requirement for non-functionally integrated Type III supporting organizations to now require an annual distribution equal to the greater of 85% of adjusted net income or 3.5% of the fair market value of the supporting organization's non-exempt-use assets. The Treasury also stated it is still considering certain further changes, including providing a definition of "control" for purposes of the provision prohibiting the acceptance of gifts or contributions from a person who controls the governing body of a supporting organization, providing additional examples of how Type III supporting organizations can satisfy the responsiveness test, and whether program-related investments may count toward the payout requirement for non-functionally integrated Type III supporting organizations.
Last month Treasury released the Priority Guidance Plan for this fiscal year. Listed items for tax-exempt organizations are:
1. Revenue Procedures updating grantor and contributor reliance criteria under §§170 and 509.
2. Revenue Procedure to update Revenue Procedure 2011-33 for EO Select Check.
3. Regulations under §501(r) on requirement for community health needs assessments by charitable hospitals as added by §9007 of the ACA.
4. Final regulations under §§501(r) and 6033 on additional requirements for charitable hospitals as added by §9007 of the ACA. Proposed regulations were published on June 26, 2012.
5. Final regulations under §§509 and 4943 regarding the new requirements for supporting organizations (SOs) as added by §1241 of the Pension Protection Act of 2006. Proposed regulations were published on September 24, 2009.
6. Additional guidance on §509(a)(3) supporting organizations (SOs).
7. Additional guidance under §§4942 and 4945 regarding reliance standards for making equivalency determinations. PUBLISHED 09/24/12 in FR as REG-134974-12 (NPRM).
8. Final regulations under §4944 on program-related investments. Proposed regulations were published on April 19, 2012.
9. Regulations regarding the new excise taxes on donor advised funds and fund management under §4966 as added by §1231 of the Pension Protection Act of 2006.
10. Regulations under §6033 on group returns.
11. Revenue Procedure under §6033 to update and consolidate all non-regulatory exceptions from filing.
12. Final regulations under §6104(c). Proposed regulations were published on March 15, 2011.
13. Final regulations under §7611 relating to church tax inquiries and examinations. Proposed regulations were published on August 5, 2009.
Additional items that may be of interest to tax-exempt organizations include:
- Final regulations under §170 regarding charitable contributions. Proposed regulations were published on August 7, 2008.
- Notice under §170 regarding charitable contributions to disregarded entities. PUBLISHED 08/27/12 in IRB 2012-35 as NOT. 2012-52 (RELEASED 07/31/12).
- Guidance concerning adjustments to sample charitable remainder trust forms under § 664.
- Regulations under §1014 regarding uniform basis of charitable remainder trusts.
Wednesday, December 26, 2012
Catching up on some of the year's news and scholarship, I will start on the international front with a story from Australia. In 2012, Australia created the Australian Charites and Not-for-profits Commission and earlier this month the Commission opened its doors. Here is the Commission's description of its role:
Who we are
The Australian Charities and Not-for-profits Commission (ACNC) is the independent national regulator of charities. The ACNC has been set up to achieve the following objects:
- maintain, protect and enhance public trust and confidence in the sector through increased accountability and transparency
- support and sustain a robust, vibrant, independent and innovative not-for-profit sector
- promote the reduction of unnecessary regulatory obligations on the sector.
What we do
To achieve our objects, the ACNC:
- registers organisations as charities
- helps charities understand and meet their obligations through information, guidance, advice and other support
- maintains a free and searchable public register so that anyone can look up information about registered charities
- is working with state and territory governments (as well as individual federal, state and territory government agencies) to develop a 'report-once, use-often' reporting framework for charities.
The ACNC is established under section 105-5 of the ACNC Act. Our objects and functions are in section 105-15 of this Act.
ACNC is led by Commissioner Susan Pascoe AM, Assistant Commissioners David Locke and Murray Baird, and a strong leadership team. The ACNC Commissioner's position is established by section 110-5 of the ACNC Act.
Our relationship with other government agencies
The Australian Taxation Office (ATO) remains responsible for deciding eligibility for charity tax concessions and other Commonwealth exemptions and benefits.
There are also many other government agencies that regulate charities and other not-for-profits. For example, government agencies may provide grants and other funding. They may also regulate particular services provided by charities, such as aged care or education.