Thursday, April 4, 2013
The IRS released yesterday the proposed regulations under Internal Revenue Code section 501(r)(3) relating to community health needs assessments by charitable hospitals that are tax-exempt under section 501(c)(3). Perhaps the most significant part of the proposed regulations is they provide guidance on the consequences for failing to meet one or more of the requirements of section 501(r), including but not limited to the assessments requirement. The proposed regulations provide that omissions or errors that are minor, inadvertent, and due to reasonable cause will not be considered such a failure as long as the hospital facility at issue corrects the omission or error promptly after discovery. The proposed regulations further provide that a failure will be excused if it was neither willful nor egregious and the hospital facility at issue both corrects and discloses the failure. Failures that are not excused will result in the hospital facility at issue being subject to corporate income tax, but the entire hospital organization will only have its tax-exempt status revoked after consideration of all the relevant facts and circumstances relating to the failure(s) and any past failures.
The proposed regulations follow two earlier IRS notices regarding these assessments (Notice 2010-39 and Notice 2011-52), both of which generated numerous comments, and join previously issued proposed regulations under sections 501(r)(4), (5), and (6).
The IRS has announced that it is asking more than 1,000 organizations that self-declare they are tax-exempt under sections 501(c)(4), (5), or (6) to complete a questionnaire regarding their characteristics and activities. Identified as a compliance check, the questionnaire asks for the reasons why the organization chose not to apply for tax-exempt status, when it began claiming tax-exempt status, and whether it sought outside professional advice regarding whether it qualified for exemption. The questionnaire also asks detailed questions regarding the percentage of revenue, expenses, and time spent on various activities, as well as specifically asking for detailed information regarding the amount of money and time spent by both volunteers and paid staff on political campaign intervention. Some questions appear redundant with the Form 990, such as questions relating to compensation, but many questions go into much greater detail than found on the Form 990.
It is clear that the IRS is trying to get a handle on the most common types of self-declared tax-exempt organizations. At the same time, the fact that it took this long for the IRS to even begin looking into such entities underlines the slow reaction speed that has been so frustrating for those who have called for the IRS to look into the political activities of tax-exempt organizations. Yet it is arguably unfair to expect the IRS, which is designed to audit situations well after the fact, to exhibit the level of responsiveness that politics demands (shameless self promotion - see my article regarding regulation of 527s for more on this point).
The Hudson Institute's Bradley Center for Philanthropy and Civic Renewal presents in Washington, DC on Tuesday, April 16th a lunchtime discussion on the charitable contribution deduction. Registration and further details available online. Here is the agenda:
Program and Panel
Registration, lunch buffet
Introduction by Bradley Center Director William Schambra
Stanley Katz, Professor of Public and International Affairs at Princeton University
Rob Reich, Associate Professor at Stanford University
Alex Reid, Counsel in Morgan Lewis’s Tax Practice
Wednesday, April 3, 2013
The NCAA is a § 501(c)(3) tax-exempt organization organized for the charitable purpose of fostering national amateur sports competition. Additionally, the NCAA asserts that it was founded “as a way to protect student-athletes.” The recent injury suffered by University of Louisville basketball player and NCAA student-athlete Kevin Ware, however, may alert people as to the NCAA’s potential shortcomings.
The NCAA does not require member institutions to provide guaranteed multi-year scholarships to student-athletes. While member institutions are free to do so on their own, many schools elect not to. This means that each year many NCAA student-athletes risk losing scholarship money. Further, if a student-athlete attending a school that has decided not to offer guaranteed a multi-year scholarship is injured, his/her athletic scholarship may be, and often is, revoked.
Following up on last week's post regarding documenting charitable contributions, I should note that Ellen Aprill (Loyola-LA) recently posted on SSRN Reforming the Charitable Contribution Substantiation Rules, forthcoming Florida Tax Review. As well as discussing the substantiation rules, the articles explains that the federal government, in enacting the rule of contemporaneous acknowledgement, apparently feared that taxpayers were deducting amounts that were not in fact charitable contributions, such as scrip or school tuition. The JCT therefore scored the contemporaneous acknowledgment provision as raising $469 million between 1994 and 1998. Here is the abstract:
In May 2012, the Tax Court issued two decisions denying income tax deductions for gifts to charitable organizations because they failed to meet the requirements for a qualified appraisal. These cases lit a firestorm of outrage in various circles, raising questions of how strictly substation rules should be applied. This article begins by reviewing two reasons why the charitable contribution substantiation rules applicable to the income tax merit consideration. First, the charitable contribution deduction is important for both its size and its distribution, and the substantiation rules work to safeguard its integrity. Second, in the case of the charitable contribution, unlike many other income tax provisions, the Treasury and the Internal Revenue Service cannot look to third parties with self-interested incentives that help ensure compliance. The substantiation rules substitute for third party corroboration. Part II of the paper sets out, as briefly as possible, the complicated regime regarding the substantiation of charitable contributions, including the legislative history and applicable regulations. Part III examines applicable case law. Review of legislation, regulations, and case law suggests strongly that we make an effort to reform the current scheme, and Part IV presents a number of possible reforms. These suggestions include inflation adjustments, regulatory changes, and making greater use of technology, with the government working with providers of computer software and those involved in texting of charitable donation. Finding approaches that appropriately balance the need to control overvaluation with the need to encourage legitimate charitable contributions is a difficult but important challenge.
ESPN reports that many of the 115 charities founded by high-profile athletes that it investigated had relatively few assets, engaged in little actual charitable work, lacked effective boards, or had relatively high administrative expenses. For example, only about a third of such charities had assets of $500,000 or more. Other charities appear to have gone inactive, sometimes without providing a clear accounting of the use of their remaining funds. Some charities appear to have had at least questionable expenses, including spending that bordered on providing a personal benefit to the founding athletes or their family and friends. The more common complaint, however, seems to be simply that even when launched with great fanfare most charities founded by athletes are mostly ignored by their founders and so fizzle.
The Urban Institute will be hosting in Washington, DC on Monday, April 15th a conference titled Charity and Government: Tax Reform and Beyond. Registration is required. The conference is co-sponsored by the Urban Institute's Center on Nonprofits and Philanthropy and the Alliance for Charitable Reform.
Here is the agenda and the presenters:
Session One: As an Independent Sector, Is Charity a Substitute, Complement, Adversary, or Something Else for Government?
Moderator: Eugene Tempel, Indiana University
Speakers: Adam Parachin, University of Western Ontario, Eugene Steuerle, Urban Institute, Joseph Thorndike, Tax Analysts, University of Virginia
Session Two: What Is the Definition of Charity, and Who Decides How to Define It?
Moderator: John Tyler, Kauffman Foundation
Speakers: Bradford Gray, Urban Institute, Daniel Halperin, Harvard Law School, Alex Reid, of counsel, Morgan Lewis, Marion Fremont-Smith, Hauser Center for Nonprofit Organizations, Harvard University
Session Three: Philanthropy’s Relationship to Current Policy Debate
Moderator: Elizabeth Boris, Urban Institute
Speakers: Arthur Brooks, American Enterprise Institute, Joanne Florino, Philanthropy Roundtable, William Galston, Brookings Institution, Pat Read, consultant
Tuesday, April 2, 2013
While incentives for charitable giving have been a topic of much debate in Washington, DC, this topic is also of interest to our neighbor to the north. In a detailed report, the Standing Committee on Finance for Canada's House of Commons considered the effectiveness of existing and proposed tax incentives for charitable giving based on evidence provided by numerous organizations and individuals and put forward a dozen recommendations for legislative and executive branch action. Those recommendations include eliminating or reducing the capital gains tax on charitable donations of certain property and exploring an enhanced tax credit for donors who increase their contributions over time, while at the same time promoting greater accountability and transparency in the charitable sector.
Christianity Today reports that the founders of Angel Food Ministries, once a high-flying $140 million annual budget distributor of discounted food via church networks, will be sentenced next month in federal court. We previously blogged about the indictment issued against those founders, as well as about various governance disputes and compensation issues. According to the news report and an earlier Atlanta-Journal Constitution article, the founding couple and their son pled guilty to various federal charges.
This situation is a textbook example of how an innovative, entrepreneurial, family controlled charity can go off the rails. We previously noted that the organization's co-founder and CEO defended the compensation and loans it provided to its senior management, its lack of an independent board, and its various conflicts of interest by citing its great success in helping those in need. Success does not, however, ensure compliance with the law and may in fact provide a justification for providing financial awards and practices that ultimately do not withstand legal scrutiny. Nonprofit leaders and scholars are of course familiar with the tensions that can develop between a visionary, risk-taking founder and more cautious independent board members, but this case is an object lesson in why eliminating this tension by not having an effective, independent board is a dangerous route to pursue.