Saturday, February 18, 2012
Several years ago the IRS suffered a major defeat when the Tax Court blessed a $28.6 million charitable income tax deduction for the donation of a conservation easement encumbering the Kiva Dunes golf course, which is located on the gulf coast in Baldwin County, Alabama. Kiva Dunes Conservation, LLC v. Comm’r, T.C. Memo. 2009-145. After trial in the Tax Court, the IRS conceded that the donation of the easement constituted a qualified conservation contribution eligible for a charitable deduction under IRC § 170(h). Accordingly, the Tax Court’s opinion focused solely on the question of the value of the easement and, thus, the amount of the deduction.
The case involved a classic “battle of the experts” and the Tax Court found the easement donor’s valuation expert to be more credible and persuasive than the IRS’s expert. The court ultimately accepted the before and after values asserted by the donor’s expert, with modest adjustments, and concluded that the conservation easement had a value of $28.6 million, which was very close to the donor’s claimed value of $30.5 million.
Following the Tax Court’s decision in Kiva Dunes, IRS representatives indicated informally that no one should look to the case as a green light for golf course easements and the agency intended to continue to litigate such cases. Another way to deal with the problem, of course, is to seek legislative change. Accordingly, it perhaps should come as no surprise to see elimination of the charitable deduction for contributions of conservation easements on golf courses included in the Obama administration’s fiscal 2013 revenue proposals. In its “green book” explanation of those proposals, which was released on February 13, 2012, the Treasury Department explains:
A deduction is generally available for charitable contributions of cash and property. This deduction is limited -- or disallowed entirely -- for certain types of hard-to-value property. In general, no charitable deduction is allowed for a contribution of a partial interest in property. An exception to this rule provides that a donor may deduct the value of a conservation easement (a partial interest) that is donated to a qualified charitable organization exclusively for conservation purposes. The value of the deduction for any contribution that produces a return benefit to the donor must be reduced by the value of the benefit received.
Reasons for Change
Recent court decisions have upheld large deductions taken for contributions of easements preserving recreational amenities, including golf courses, surrounded by upscale, private home sites. These contributions have raised concerns both that the deduction amounts claimed for such easements (often by the developers of the private home sites) are excessive, and also that the conservation easement deduction is not narrowly tailored to promote only bona fide conservation activities, as opposed to the private interests of donors. These concerns are particularly strong in the case of the deduction for contributions of easements on golf courses. The benefit of an easement on a private golf course, especially one that is part of a luxury housing development, may accrue to a limited number of users such as members of the course club or the owners of the surrounding homes, not the general public, and the construction and operation of the course may even result in environmental degradation. Easements on golf courses are particularly susceptible to overvaluation, as private interests often profit from the contribution of the easement. Because of the difficulty determining both the value of the easement and the value of the return benefits provided to the donor -- including indirect benefits, such as the increase in the value of home sites surrounding the golf course -- it is difficult and costly for the IRS to challenge inflated golf course easement deductions. Thus, to promote the kinds of public benefits intended by the charitable deduction provision and to prevent abuses, no charitable deduction should be allowed for contributions of easements on golf courses.
The proposal would amend the charitable contribution deduction provision to prohibit a deduction for any contribution of property that is, or is intended to be, used as a golf course.
The proposal would be effective as of the date of enactment.
Friday, February 17, 2012
The IRS released its “Dirty Dozen” tax scams, notifying taxpayers of schemes they should be aware of during the tax season. One of the scams for 2012 involves "Abuse of Charitable Organizations and Deductions:"
IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets –– including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.
Brad A. Greenberg (J.D. 2012, UCLA) has posted, "A Public Press? Evaluating the Viability of Government Subsidies for the Newspaper Industry," to SSRN. Here is the abstract of the article:
The press plays a crucial role in American democratic society and, despite the availability of information from online news organizations and new media outlets, remains the primary contributor of new content to the marketplace of information and ideas - integral in setting the agenda for public discourse, connecting readers with their communities, reducing the costs of citizen oversight on elected officials and producing investigative and local news reports. But the press’s role is increasingly threatened by unprecedented struggles in newspaper economics that have sparked massive reductions in editorial operations. The strong public interest in preserving the newspaper industry should compel Congress to stabilize the press. Journalists, politicians and legal scholars have discussed many possible solutions.
This Comment focuses on the viability of direct and indirect government subsidies, evaluating the practical and constitutional questions raised by two potential public subsidy programs - direct funding from government patronage and indirect support by facilitating newspaper conversion to nonprofit status - and whether such programs could be administered without jeopardizing the Fourth Estate’s independence. This Comment concludes that, if Congress chooses subsidies as a vehicle for stabilizing the press, the best program would be one combining direct funding and tax-based incentives into a hybrid similar to that utilized by public radio.
Wednesday, February 15, 2012
In what will undoubtedly make a great teaching example with respect to the legal right of donors and their successors to enforce gifts, The Washington Post reports on a dispute between the Ray Charles Foundation and the Albany State University in Georgia. The Foundation is requesting that the University return $3 million in donations ($1 million in 2001 and $2 million in 2002) made purportedly to build a performing arts center. The University contends that the gift was unrestricted and that the school is still fundraising to build the center, the cost of which is estimated to total at least $23 million. The $1 million donation is still held by the University in an account, but the $2 million gift was distributed to 125 students selected to be "Ray Charles Presidential Scholars."
As reported in the Post article, a letter from the University's legal counsel to the Foundation states that “When Mr. Charles made the two separate gifts to the University, he did so without restrictions. The University does believe that a Fine Arts Building named after Mr. Charles, with a theatre named in honor of Mr. Charles’ mother, Mrs. Aretha Robinson, is one of the ways to do ‘the right thing.’ The University has been working tirelessly towards that goal.”
Although I try to only blog on issues that "legally" affect nonprofits or at the very least have some legal aspect to them, I was nevertheless moved by a recent article in the Boston Globe, "Missouri tragedy inspires career shifts toward public aid." As a former Missouri resident and firm believer in the impact that people can have through collaboration and commitment (via nonprofits), I thought this article was a great example of why most of us contributing to, and reading, this blog teach and work in the area of nonprofits. The article discusses how young professionals, witnessing firsthand the destruction of their community, abandon their professions and jobs and join nonprofits to dedicate themselves to their town's and its citizens' long-term recovery.
A recent Chronicle of Philanthropy article, "Nonprofits Oppose Obama Plan on Limiting Charity Write-Offs," details the nonprofit sector's reaction to the President's 2013 budget proposing limitations on the charitable contributions deduction for wealthier Americans, as previously blogged herein. Diana Aviv, chief executive of Independent Sector, is among the nonprofit leaders criticizing the proposal due to their belief that it will ultimately reduce charitable contributions, thereby negatively affecting the fiscal health of nonprofit organizations. Although the 2013 budget also contains a proposal to increase the estate tax rate from 35% to 45% and reduce the lifetime exemption to $3.5 million, which arguably will induce donors to make lifetime donations that will reduce the assets that will be subject to this higher rate of tax, nonprofits are nevertheless concerned that the deduction limitations on charitable contributions will result in less charitable giving.
Tuesday, February 14, 2012
From today's Los Angeles Times comes this story about a fiscal sponsorship organization going under - it will be interesting to watch this saga unfold as the California AG takes a look at what occurred. To be sure, a properly-run fiscal sponsorship organization (such as the Tides Foundation) can be a good and useful thing and a welcome alternative to the proliferation of small and probably unsustainable charities. Too many times, in my experience anyway, the sponsored projects don't really understand the terms of the agreement - that in a properly structured sponsorship, it really isn't their money and the agency does have oversight responsibility and control. If it's not properly structured (that is, it was a fiscal agency or some other ... thing), then it wasn't really accomplishing the goals for which it was set up in the first place. The scary thing, of course, is that there is no such term "fiscal agency" or "fiscal sponsorship" anywhere in the tax code, nor as far as I know in any state staute (I think Washington was considering legislation at one point, although I don't know what happened to that). And yet, for something that is really so undefined, fiscal sponsorships and/or agencies are everywhere and commonly used - appropriately and inappropriately. I really think that this is an area ripe for some study and some educational outreach to the nonprofit sector.
Monday, February 13, 2012
The Chronicle of Philanthropy reports that the President's recently released 2013 budget proposes limiting the itemized deduction for contributions to eligible charities to 28% for married couples filing jointly with combined incomes of $250,000 or greater, and for single taxpayers with incomes of $200,000 or more. The proposal reportedly helps reduce the budget deficit by $584 billion over 10 years. As previously blogged, this proposal has been considered recently by Congress, including as part of the 2012 budget.
The 2013 budget also contains the often-phrased "Buffett rule," whereby households with greater than $1 million in annual income would pay at least 30 percent of their income in federal income taxes. The Chronicle opines that this could "dampen" the amounts that wealthier Americans donate to charities annually. However, an earlier Chronicle article highlighted the President's "pledge" to restructure the Internal Revenue Code in a manner that would not "disadvantage individuals who make large charitable contributions."
The New York Times reports on a recent study showing that New York's charity care system has significant problems that are not being acknowledged nor addressed by the state government. The complicated system, which is partially financed by an 8.95% surcharge on hospital bills, is criticized by some patient advocates as ineffective in improving patient access and care. The study found that some hospitals failed to provide patients with elibility information on discounted care as required by NY state law, did not provide patients with financial aid applications, and made impermissible demands for unnecessary documents. While providing limited to no financial aid and utilizing aggressive bill collection practices (including liens against patients' homes), hospitals continued to collect, without questions or audits, from the state charity care pool that distributes more than $1 billion a year. Patient advocates and hospital administrators are reportedly being assembled to overhaul a better system.