Saturday, June 1, 2013
California Bill Targeting Sexual Orientation Discrimination by Boy Scouts & Other Youth Groups Advances
According to a Sacramento CBS news report, the California Senate has mustered the two-thirds majority needed for tax increases to pass a bill that would strip state tax-exempt status from any youth group that dsicrminates on the basis of gender identity, race, sexual orientation, nationality, religion or religious affiliation. The bill, SB323, applies specifically to exemptions from the California's corporate income tax and sales and use tax, but with certain limitations.
Based on a reading of the bill and the Senate Committee report, the sales and use tax exemption loss applies to the otherwise availalbe exemption from having to collect and pay over to the government sales and use tax on sales by the organization if those sales are irregular or intermittent. While aimed at the Boy Scouts of America, which recently removed its bar on gay youth participating in the Scouts but left in place its bar on gay adult scout leaders, the loss of the sales and use tax exemption applies to any organization with the "primary purpose" of providing "a supervised program of competitive sports for youth, or to promote good citizenship in youth." The non-discrimination requirement also applies to any youth group sponsored or affiliated with a nonprofit private educational institution at the K through undergraduate level, "including but not limited to any student activity club, athletic group, or musical group." Finally, the bill applies the non-discrimination requirement to a number of specific organizations, including not only the Boy Scouts but also the Girl Scouts, the YMCA, the YWCA, 4-H Clubs, and many others.
The loss of corporate income tax exemption for failure to comply with the non-discrimination standard applies to any "public charity youth organization," which is defined as including but not limited to the specifically named organizations. If the bill becomes law, the California Franchise Tax Board will apparently be responsible for developing a more detailed definition.
The bill does not affect the ability of donors to the covered organizations to take a charitable contribution deduction. The bill now goes to the state Assembly for consideration, where a two-thirds majority vote is also needed for passage.
Additional coverage: Huffington Post.
Friday, May 31, 2013
The Supreme Court of the United States heard oral arguments last month in a case that raises a very important issue for the many tax-exempt nonprofit organizations that receive government funding in one form or another: when, if ever, can a government require that the recipient of government funding for a particular program adopt an explicit policy that would apply to all of the organization's activities whether government-funded or not? In Agency for International Development v. Alliance for Open Society International, Inc., the specific issue is "Whether the United States Leadership Against HIV/AIDS, Tuberculosis, and Malaria Act of 2003, 22 U.S.C. § 7631(f), which requires an organization to have a policy explicitly opposing prostitution and sex trafficking in order to receive federal funding to provide HIV and AIDS programs overseas, violates the First Amendment." The Second Circuit Court of Appeals panel that heard the case split 2-1, with the majority concluding that the requirement did violate the First Amendment. The case involves application of the much criticized "unconstitutional conditions" document, and the questioning at oral argument did not provide a clear indication of how the Court will resolve the case, according to veteran Supreme Court observer Lyle Denniston's analysis. The case is further complicated by the fact that Justice Kagen has recused herself, so there is the possibility of a 4-4 tie vote that has the effect of upholding the lower court decision but without clear guidance on this issue. A decision is expected by the end of June.
In addition to the 501(c)(4) exemption application bombshell, attendees at this month's ABA Tax Section meeting also learned about the serious bipartisan tax reform effort being led by House Ways & Means Committee Chairman Dave Camp (R-Michigan) and Senate Finance Committee Chairman Max Baucus (D-Montana). Because Representive Camp is approaching his term-limit as Ways and Means Chairman at the end of 2014 and Senator Baucus has already announced his retirement as of 2014, these two experienced members of Congress are somewhat insulated from the normal political pressures that might derail such an initiative. Their effort has already generated a series of "option papers" that are actually what they say they are - a discussion of possible tax reform options in a variety of areas without endorsement of or partisan sniping regarding any particular set of possible changes. It also has been the subject of 20 separate Ways and Means Committee hearings, as described on the Committee's Comprehensive Tax Reform website.
Tax reform has also been the focus of eleven Ways and Means Committee working groups, including one relating to Charitable/Exempt Organizations. For a detailed summary of both the present law in this area and the suggestions and comments received by this working group and the other working groups, see the Joint Committee on Taxation report issued earlier this month. The exempt organization sections can be found on pages 19-57 (present law) and 491-497 (suggestions and comments received). Here are the headings for the latter section, which covered the whole gamut of possible options:
1. The Charitable Deduction
General support for preservation of the charitable deduction or opposition to changes to
the charitable deduction
General support for reform of the charitable deduction
Charitable contributions of property
Other comments relating to the charitable deduction
2. Tax-Exempt Status
Public charity status and private foundation operating rules
Unrelated business income tax (“UBIT”)
Specific types of tax-exempt organizations
3. Reporting, Disclosure, or Tax Administration
4. Exclusion from Gross Income for Qualified Charitable Distributions fron an Individual Retireement Arrangement ("IRA")
5. Miscellaneous Comments Submitted by Indiana Tribal Governments
Having reviewed these materials and talked with some of the staffers at the ABA meeting, I actually am cautiously optimistic that tax reform is a possibility. What effect any reform will have on exempt organizations is impossible to predict at this point, but certainly significant changes to both the charitable contribution deduction and the requirements for tax exemption are on the table.
Thursday, May 30, 2013
Huffington Post reports that the conservative Koch brothers are launching a new organization to engage in political activities, but unlike previous such groups this one will be organized as a section 501(c)(6) tax-exempt business league. The new entity, named the Association for American Innovation, received IRS recognition of its 501(c)(6) status in 2012 according to guidestar.org, but no Form 990 is available yet on Guidestar. This development highlights the fact that while the focus of the media, campaign finance reform advocates, and a number of state officials and legislatures has primarily been on 501(c)(4) organizations and their ability to be involved in politics without disclosing their donors, both 501(c)(5) labor unions and 501(c)(6) business associations also enjoy this ability to combine (limited) political involvement with avoiding disclosure of their funding sources (unless election law disclosure rules apply). The Koch brothers are far from the first to realize this is the case, but their new effort is the most prominent example of not only taking advantage of existing 501(c)(5) and (c)(6) entities but actually creating a new entity within this space to exploit these shared characteristics.
While hospitals continue to be criticized for failing to provide sufficient charity care and other benefits - criticism that is likely to only increase as more information about such activities becomes available because of section 501(r) - Congress, the IRS, and the media appear to have an increasing and skeptical interest in nonprofit colleges and universities. Recent developments include:
- IRS Colleges & University Tax Compliance Report: As previously reported, the report identified widespread underreporting of unrelated business taxable income, although the total amount involved for the 34 institutions examined was only $90 million, and various issues with compensation setting processes and reporting.
- House Oversight Subcommittee Hearing: In response to the above report (and lost once the the 501(c)(4) mess broke), this Ways and Means Subcommittee heard from Lois Lerner regarding the above report.
- Weekly Standard: Are Universities Above the Law?: A wide-ranging critique of college and university governance, citing recent disputes ranging from the Robertson Foundation's litigation with Princeton University's to the Association of Alumni of Dartmouth's litigation against their alma mater.
- Fiscal Times: Backroom Financial Dealings of a Top University: This article highlights the generous compensation and loan packages provided by NYU, which became national news with the nomination of former NYU administrator Jack Lew for Treasury Secretary.
All of this scrutiny comes at a time when many colleges and universities are facing increasing criticism for too high tuition, too generous compensation packages, and exploitation of student athletes. Of course such concerns are not new for nonprofit scholars, including co-blogger John Colombo, who in 1993 wrote Why is Harvard Tax Exempt? (And Other Mysteries of Tax Exemption for Private Educational Institutions), 36 Arizona Law Review 841, and more recently examined the tax treatment of college athletics. But we may be seeing an unprecedented level of scrutiny that will may ultimately shift the nonprofit governance and tax exemption standards for such institutions.
In recognition of Memorial Day, Bob Dole authored a thoughtful Washington Post Opinion piece cautioning readers to be careful when giving to veterans' charities. While the content will not be surprising to anyone who practices or studies in the tax-exempt nonprofit organization area, the piece does a good job of identifying the common fundraising issues in this particular part of the charitable sector, the limits on the ability of the federal and state government to regulate charitable solicitations, and the role of both the state attorneys general and the media in exposing poorly run and fraudulent veterans charities. The subject of veterans charities has been a perennial one on this blog, with posts regarding investigations into groups including the Disabled Veterans National Foundation and the U.S. Navy Veterans Association, as well as more general congressional inquiries.
Wednesday, May 29, 2013
Pennsylvania Attorney General Kathleen G. Kane recently announced that her office had resolved an investigation into the administration of the Milton Hershey School and the Hershey Trust Company by entering into an agreement with the School and Trust that implements a variety of governance reforms for both entities. Attorney General Kane also noted that her office had not found any breach of fiduciary duty during its investigation. The agreed upon reforms included:
- Limiting overlapping board members between the School and Trust on one hand and the for-profit Hershey companies on the other hand.
- Reduced board compensation, new procedures for any future adjustment to such compensation, and a new, more restrictive policy for reimbursement of board member expenses.
- A strengthened Conflicts of Interest Policy.
- Required reports to the AG relating to compliance with the agreement, increased AG access to various materials, and advance notice to the AG for certain real estate transactions.
For previous posts about the concerns that led to this investigation, see Eisenberg on the Hershey School, Pressure Continues on Hershey Trust Board of Directors, and Milton Hershey School Trust - Excessive Trustee Compensation? It is far from clear that the report and agreement will satisfy those critical of how their respective boards have managed these charities - Pablo Eisenberg has already written a negative assessment of the investigation's resolution.
The NY Times reports that a new generation of philanthropists is increasingly seeking ways to have "flexibility, freedom and anonymity" in its giving. The article highlights the use by Laurene Powell Jobs, the widow of Steve Jobs, of a limited liability company (LLC) named Emerson Collective as the primary vehicle for her charitable activities. LLCs of course avoid the public reporting to which a more traditional vehicle such as a family private foundation is subject. Furthermore, LLCs owned by a single individual may be disregarded for federal income tax purposes, permitting the individual owner to take any permitted charitable contribution deductions. Finally, the article notes that an LLC may be used for more than charitable giving - if the owner believes her goals may be better accomplished through for-profit investments (for example, in an L3C or benefit corporation) or through political expenditures, the LLC may engage in those transactions as well.
Hat tip: Karla Simon
Tuesday, May 28, 2013
Having read most of the news coverage of the current situation and written about at least some of the issues at the heart of it, here is my two cents (including, with self-promotion apologies, links to my relevant articles):
Contrary to John Colombo's proposal posted earlier on this blog, I believe that tax exemption (but not deductibility of contributions) for what are now classified as 501(c)(4)s is appropriate, and that exemption is also appropriate for what are now classified as 527s. With respect to exemption, without a specific provision addressing the tax status of these groups a lot of uncertainty about their tax treatment would exist. The uncertainty arises because of issues such as whether the contributions and dues they receive are “gifts” under IRC § 102 and so not includible in gross income, especially since their lobbying and political campaign intervention expenditures are generally not deducible under IRC § 162(e). I also believe that most of these groups are formed (and contributed to) not for profit-making purposes but to pursue other goals, such as advancing a particular vision of the public good or to elect one or more candidates, and so exempting them from the corporate income tax is appropriate. Donations to such groups should not be deductible, both because of concerns regarding the influence of special interest groups (discussed in a recent article by Brian Galle and to some extent in my previous lobbying article) and because allowing deductiblity would permit easy avoidance of IRC § 162(e).
As a matter of cleaning up the tax laws, I like Ellen Aprill's idea of creating a new tax-exemption category for organizations that primarily lobby and expanding the 527 category to include any organization that engages in political campaign activities. I have not thought this idea all the way through yet, however. I have thought more about the possible constitutional issues raised by such a change (most recently flagged by Bob Bauer) and my conclusion is that the Supreme Court's Taxation with Representation decision is still relatively secure and would permit this kind of line drawing (for more details, see my post-Citizens United lobbying article; a recent article by Ellen Aprill also reaches this conclusion). Bauer is right to flag this issue, however, since it is a live one, especially if the Supreme Court's Citizens United decision turns out to be only a way station to an even stronger reading of the First Amendment in this context as opposed to a high water mark.
Finally, with respect to requiring disclosure of political activities, including of donors whose funds support such activities, I favor not placing such requirements in the tax laws to be administered by the IRS but instead in the election laws to be administered by the admittedly far from perfect FEC for the institutional choice reasons described in my 527 regulation article. As to what political activities should trigger disclosure (e.g., direct lobbying and grassroots lobbying as well as election-related political activity?) and what should have to be disclosed (e.g., donors above what dollar threshold?), I have written a couple of articles (here and here) that touch on these topics and am working on another article focusing specifically on what political activities, particular political activities such as grassroots lobbying and bundling that involve private-private interactions, should trigger disclosure (watch this space!).
Others have done a great job of reporting the numerous news stories covering the 501(c)(4) exemption application mess at the IRS (see especially TaxProf Blog, which has been providing a daily "IRS Scandal" update). So here I want to focus on commentary and opeds written by a number of thoughtful exempt organizations academics and practitioners:
- Ask the Experts: What to Make of the IRS "Tea Party" Scandal, CardHub (5/22/13): Provides lengthy quotes from Ellen Aprill, David Gamage, Philip Hackney, Thomas Kelley, Nicholas Mirkay, and yours truly.
- Ellen P. Aprill, IRS and Scrutiny: Reviewing Review, Roll Call (5/23/13): "Some media reports, however, imply that the IRS cannot and should not ask any questions of applicants for exemption, that any inquiry invades privacy and violates the First Amendment. That implication is wrong. An organization that seeks an IRS acknowledgment of its exempt status subjects itself to scrutiny — scrutiny designed to ensure that the group in fact qualifies for the benefit of tax exemption." See also Ellen Aprill, The TIGTA Report on the IRS Scandal: Questions About the IRS and About the Report, TaxProf Blog (5/15/13).
- Gary D. Bass & Elizabeth J. Kingsley, Nonprofits Need Better Guidance on Tax-Exempt Standards, Washington Post (5/23/13): "But we must not lose sight of the underlying problems that led to this situation: the lack of workable standards to determine what activity the Internal Revenue Service considers 'political' and how much of it a nonprofit group can do. . . . Much of this problem could be addressed by adopting objective, substantive criteria to define political intervention for nonprofit organizations."
- Roger Colinvaux, IRS Scandal Is About Donors, Not Tax, CNN (5/17/13): "Obviously, mistakes were made in how the IRS examined the groups, but what should not get lost amid the resulting hue and cry is that this is fundamentally about disclosure of donors, not tax-exempt status."
- Victor Fleischer, Congress's Role in the I.R.S. Focus on Conservative Groups, NY Times DealBook (5/13/13): "The reality is that this is a story of institutional incompetence. And Congress should share the blame." See also Victor Fleischer, A Dickensian Delay at the I.R.S., NY Times DealBook (5/16/13).
- Phillip Hackney, The TIGTA Report on the IRS Scandal: Be on the Lookout for False Partisan Witchunts, TaxProf Blog (5/15/13): "Nevertheless, other than the disclosure problems, this TIGTA review gives an accurate picture of an organization that I came to know and love when I worked there. Good people trying to do good work, but set for failure because provided poor clay in the Internal Revenue Code provisions on exempt organizations and too little staff and money to carry out the twin aims of accuracy and speed in molding that poor clay into a consistent good product."
- John Pomeranz, On the IRS Fiasco, Election Law Blog (5/11/13): "Looking beyond the immediate scandal, I believe that part of the reason it was possible for the IRS to treat these groups this way was the failure of Congress, the Treasury Department, and the IRS to adequately define what and how much political activity is permitted for tax-exempt organizations."