Saturday, July 13, 2013
Several weeks ago, parents of two children attending a school in the Encinitas Union School district sued the district for allowing the implementation of a yoga program in their children’s school. The parents claimed, “the Ashtanga yoga classes being offered in place of more traditional physical education instruction indoctrinate the children.” Earlier this week, the judge disagreed with the parents and ruled in favor of the school district. The judge disagreed with the parents’ assertion that yoga is “inherently religious and a violation of church and state.”
All nine schools within the district participate in the yoga program. The yoga program is funded by a grant from the K.P. Jois Foundation—a 501(c)(3) that implements “the techniques of yoga, meditation and proper nutrition to create a positive lifestyle” as part of the school curriculum.
The school district argued that the program was implemented “to promote a healthy lifestyle for the students” and that there was a “conscious decision to remove some cultural context” of yoga. The district went as far as removing chanting from lessons after parents complained and changing the names of some of the yoga poses.
While “religious” is an enumerated 501(c)(3) purpose, there is no clear definition of “religious.” What is the best argument for claiming the yoga program has a religious purpose? What does the case law say? Is it sufficient that the organization implementing the program doesn't claim to have a religious purpose? If there is something inherently religious about yoga, does the school’s attempts to remove some of the cultural context of yoga make it an appropriate school program?
Friday, July 12, 2013
A member of Citizens for Responsibility and Ethics (CREW) filed a Form 211, Application for Award for Original Information to get to the bottom of what CREW deemed “self-dealing transactions” involving the James Madison Center for Free Speech (JMCFS), James Bopp Jr., and The Bopp Law Firm.
CREW alleges that Mr. Bopp, head of JMCFS, has “diverted nearly all of the non-profit funds to pay his own law firm” and those transactions “violate prohibitions on using charitable organization for private inurement and private benefit.” CREW’s addendum to the Form 211 claims that from 2006-2011, JMCFS’s total expenditures were $2,133,268 and $2,129,014 of that money was paid to the Bopp Law Firm.
The JMCFS was founded “to protect the First Amendment right of all citizens to free political expression in our democratic Republic.” Additionally, JMCFS asserts that its purpose is “to support litigation and public education activities in order to defend the rights of political expression and association by citizens and citizen groups as guaranteed by the First Amendment.” In addition to Mr. Bopp serving as the head of JMCFS, he has dedicated his law firm to providing legal assistance to people and organizations with principles like JMCFS.
What facts, if any, are indicative of private inurement and private benefit? Does CREW have enough to prove its case?
Oregon recently passed a state law that poses a significant threat to some of the state’s nonprofit organizations. The law targets nonprofit organizations that spend more than 70% of donations on management and fundraising in a three-year time frame.
The effect of the law is to eliminate state and local tax subsidies afforded to the “worst charities”—nonprofits that spend less than 30% of donations on the particular organization’s mission. Oregon is the first state in the United States to do this. The executive director of the Nonprofit Association of Oregon boasts, “We’re the first in the country, and we should be proud of that.”
Should other states fall in line with Oregon’s new law? What are the policy arguments in support and opposition of this law?
Thursday, July 11, 2013
Understanding the District Court’s rulings in Pesky v. United States, No. Civ. 1:10-186 WBS (July 8, 2013) (Pesky II), requires a bit of background.
On or around September 29, 1993, the Peskys and The Nature Conservancy (TNC) entered into a series of agreements relating to a certain parcel of property located in Ketchum, Idaho (the Ketchum Property), which was adjacent to property TNC owned (the Hemingway Property).
Pursuant to the Assignment Agreement, the Peskys paid $50,000 to TNC and agreed to limit the height of structures on the Ketchum Property to twenty-five feet and TNC (i) assigned an option to purchase the Ketchum Property for $1.6 million to the Peskys, (ii) agreed to grant the Peskys an easement over the Hemingway Property to provide access to the Ketchum Property, and (iii) agreed to support the Peskys’ application for driveway approval with the City of Ketchum and the County in which the properties were located.
Pursuant to the Pledge Agreement, the Peskys agreed to pay $400,000 to TNC for a new office building and convey to TNC at a later date all rights to develop or improve the Ketchum Property except for one single-family residence. The parties also agreed that the Pledge Agreement would be kept confidential.
The Peskys exercised the option and purchased the Ketchum Property for $1.6 million on the same day, September 29, 1993. A few months later, the Peskys marketed the property for a price between $6.5 and $9.5 million. They also requested the local planning commission's approval of the driveway over the Hemingway Property and TNC allegedly supported this request.
More than eight years later, around March 7, 2002, the Peskys granted TNC a conservation easement limiting development on the Ketchum Property to one single-family residence and a guest house. Five days later, the Peskys sold the Ketchum Property for approximately $6.9 million.
The Peskys claimed charitable income tax deductions for the $3 million appraised value of the conservation easement on their 2002, 2003 and 2004 tax returns. The IRS issued a notice of deficiency and the Pesky’s paid the assessments and brought suit in District Court seeking recovery of the assessments.
In Pesky v. United States, 2013 WL 97752 (D. Idaho, Jan. 7, 2013) (Pesky I), the District Court held that the government adequately pled a counterclaim for a civil fraud penalty under IRC § 6663 based on the Peskys’ allegedly fraudulently claimed charitable deduction for the conveyance of the easement. The court did not determine that the Peskys were liable for the fraud penalty; it decided only that the case could proceed on the merits.
In Pesky II, in an opinion authored by the same Judge who wrote the Pesky I opinion, the District Court addressed the fraud issue on its merits. The court explained that “fraud is intentional wrongdoing on the part of the taxpayer with the specific intent to avoid a tax known to be owing,” and that the government must prove fraud by clear and convincing evidence.
The government rested its fraud counterclaim on Mr. Pesky’s alleged role in failing to disclose or provide a copy of the Pledge Agreement to the IRS and City of Ketchum officials. The District Court found, however, that the primary actors regarding nondisclosure of the Pledge Agreement to the IRS were Mr. Pesky’s attorneys and those attorneys “had good faith reasons for their decisions, separate from any intent to conceal the Pledge Agreement from the IRS.” The court found similarly with regard to the decision to limit disclosure of the agreement to the City of Ketchum. Accordingly, even assuming Mr. Pesky had agreed with his attorneys’ decision regarding nondisclosure of the Pledge Agreement, the court could not conclude that a reasonable jury could find it “highly likely” that Mr. Pesky’s deduction was due to fraud. Because the government did not produce sufficient evidence to meet its heightened burden of showing fraud by clear and convincing evidence, the court granted Mr. Pesky’s motion for summary judgment on the fraud penalty issue.
In Pesky II the government also moved for summary judgment on a number of issues relating to whether Peskys are entitled to a deduction for the conveyance of the conservation easement.
Quid Pro Quo
The government first contended that the easement conveyance was part of a larger quid pro quo transaction between the Peskys and TNC and that the parties attempted to mask the nature of the transaction by (i) breaking it into multiple documents, (ii) keeping the Pledge Agreement secret, and (iii) recording the easement long after TNC had conferred the benefits of the Assignment Agreement on the Peskys.
The District Court found that, while the government had produced evidence that the conservation easement was part of a quid pro quo transaction, that evidence was not so convincing as to compel summary judgment in its favor. The court explained that, “[l]ooking to the external features of how the transaction was structured, there is a genuine issue of material fact as to whether the Peskys provided the Conservation Easement ‘without the receipt or expectation of receipt of adequate consideration.’” In other words, the court found that there was a genuine issue of material fact as to whether the Assignment Agreement and Pledge Agreement were separate transactions or one integrated transaction. Accordingly, the court denied both parties’ motions for summary judgment on this issue.
Contemporaneous Written Acknowledgement
The government next argued that Mr. Pesky failed to disclose the goods and services TNC had provided in consideration for the conservation easement in a contemporaneous written acknowledgment as required by IRC § 170(f)(8)(B)(ii). TNC had sent the Peskys a contemporaneous written acknowledgment in connection with the conservation easement conveyance stating that TNC “provided no goods or services in exchange for [the] gift.” The government did not object to the form or timing of this letter. Rather, the government’s “claim appear[ed] to rely on the court finding that a good or service was received in consideration for the Conservation Easement.”
Because the court determined that a genuine issue of material fact exists as to whether TNC provided any goods or services in exchange for the Conservation Easement (i.e., as to whether the Pledge Agreement was separate from the Assignment Agreement), the court denied the government’s motion for summary judgment on this issue.
The government also argued that the conservation easement was not appraised in accordance with the requirements of Treasury Regulation § 1.170A-13(c)(3)(ii) and, thus, the deductions should be disallowed. The court noted, however, that pursuant to IRC § 170(f)(11)(A)(ii)(II), a deduction will not be denied for failure to meet the regulatory requirements if it is shown that such failure "is due to reasonable cause and not to willful neglect.” The court determined that “whether the Peskys are excused from the requirements regarding submission of a qualified appraisal due to reasonable cause is a genuine issue of material fact.” Accordingly, the government’s motion for summary judgment on this ground was also denied.
While the issue of fraud was decided in Mr. Pesky’s favor, the other issues addressed in Pesky II may be decided on their merits in future litigation.
Tuesday, July 9, 2013
Earlier this week, an article from Miami Herald stated that a common theme among nonprofit board members and people pursued to serve as nonprofit board members is “the need for more education and information about what it takes to govern a nonprofit board.” The article suggested there are different issues that should be considered when addressing this particular educational need. The article listed the following seven issues:
1) The ways in which a nonprofit is different from a for-profit;
2) The key characteristics of a nonprofit;
3) What makes an organization a nonprofit;
4) Who owns a nonprofit;
5) Who controls a nonprofit;
6) What every nonprofit board member should know about serving; and
7) To whom is the nonprofit organization accountable?
The article gives a brief response to each issue. For example, the article explains that “what makes an organization a nonprofit” is that “[n]o person owns shares of the corporation or interest in its property” and it goes on to shed some light on the nondistribution constraint. Further, the article says every board member should know about the “serious fiduciary, legal and ethical responsibilities” involved.
While the article does not claim the list of seven issues to be an exhaustive one, is there anything missing from the list of issues presented? In other words, is there something else a currently serving or hopeful nonprofit board member should know to efficiently and effectively serve? Are any of the issues presented more significant than others?
Monday, July 8, 2013
Princeton, New Jersey residents have filed a lawsuit against Princeton University claiming that the school is not eligible for tax-exempt status due to the school’s income from royalties and commercial ventures.
Princeton University is one of the wealthiest schools in the United States. While the average school’s fiscal endowment is somewhere around $313.2 million, Princeton’s is $16.9 billion. Last year alone Princeton University made $127 million dollars from patent licensing profits. Additionally, the school “has distributed $118.5 million in royalty profits to faculty since 2005.”
The fact that residents who share their hometown with nonprofits are often angered by a particular nonprofit organization’s tax-exempt status is definitely not unheard of. There have been several occasions where communities experiencing financial hardship have turned to local tax-exempt nonprofits and have asked them to contribute in ways the tax code doesn't require.
Princeton residents pay “at least one-third more in taxes” because of the school’s tax exemption. While Princeton University did pay $7.7 million in taxes last year, if not for its tax-exempt status the school’s annual property tax bill would be $28 million. However, the school also made a $2.48 million voluntary contribution.
What are the best arguments for Princeton residents? For Princeton University?
Sunday, July 7, 2013
Bakija on Tax Policy and Philanthropy: A Primer on the Empirical Evidence for the U.S. and its Implications
Economist Jon Bakija, who frequently writes about the impact of tax policy on charitable giving, has recently posted Tax Policy and Philanthropy: A Primer on the Empirical Evidence for the U.S. and its Implications. In the paper, Bakija covers a number of topics that will likely interest readers of this blog. First, he explores a variety of data (such as changes in the percentage of income donated by various income groups over time in relation to tax rates, individual income tax panel data, and cross-state comparisons of charitable giving rates) and posits that upper-income taxpayers are more sensitive to tax incentives for charitable gifts than other taxpayers. Second, he nicely reviews several major studies by other economists that model the price elasticity of charitable giving. Using elasticity estimates from both his work and that of others, Bakija then estimates the impact of some of the current reform proposals, such as Obama's 28% cap (Bakija estimates the cap would decrease donations by $8-9 billion while reducing the tax cost of the charitable deduction by $10.1 billion).
What I found most interesting, however, was a very accessible discussion of optimal tax theory and the tax incentives for charitable giving. In particular, Bakija discusses a recent paper by Saez and Stantcheva about how various theories of distributive justice -- and not just utilitarianism -- could be conceptualized in an optimal tax model. Bakija then addresses both how their insights could be incorporated into an optimal tax framework for the charitable deduction and how estimated price elasticities for giving impact that framework.
Highly recommended for anyone interested in a primer on the economic work discussing the impact of tax policy on individual giving.
Miranda Perry Fleischer