Friday, July 26, 2013
As reported in today’s State Tax Today (subscription required), New Jersey has recently passed legislation clarifying that charitable contributions are not relevant in determining the domicile of the donor under the New Jersey gross income tax. Portions of the statement accompanying the Act include the following:
This bill clarifies in the New Jersey gross income tax statutes that donors' contributions to charities are not a factor in determining where a person is domiciled under New Jersey gross income tax for the purpose of defining who is a resident taxpayer or nonresident taxpayer. This is the informal position taken by the New Jersey Division of Taxation since 2005 but this position has not since been officially communicated to taxpayers. Whether a person lives in Florida or Arizona, giving to charities in New Jersey, in and of itself, should not subject the person to New Jersey income tax as a New Jersey resident. …
Taxpayers now make contributions to local, regional, and national charities via modern financial and communication networks. …This bill recognizes these changes in patterns of giving and wishes to encourage contributions to charities, regardless of the locations of the charities, from both New Jersey residents and nonresidents. Although domicile is usually determined from all the evidence and circumstances, under this bill the Division of Taxation is formally instructed in statute to no longer consider a taxpayer's charitable contributions as relevant or applicable in determinations of domicile.
An article in The NonProfit Times discusses the likely effects of the City of Detroit’s filing for bankruptcy on local nonprofits. The article cites a number of nonprofit leaders who have been working in the Detroit area through these recent years of economic hardship. The general thrust of their comments is that local nonprofits have already made major adjustments to cope with the distressed economy, and that the mood is cautiously optimistic that they will continue to do so, even as the bankruptcy presents new challenges, and perhaps new opportunities.
Thursday, July 25, 2013
The Washington Times reports that House Republicans are considering “a major expansion of their investigation into the Internal Revenue Service’s targeting of conservatives” by looking into the government’s audits of nonprofits. Some leaders of organizations exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (i.e., charities) reportedly find the audits “fishy” because of the IRS’s basically contemporaneous special scrutiny of tea party groups seeking recognition of exemption under section 501(c)(4). The story says that charities audited for the first time during this period include the Billy Graham Evangelistic Association (the "BGEA"), the Clare Boothe Luce Policy Institute and the Family Research Council.
Readers, kindly indulge me as I express an earnest plea for maintaining a nonpartisan, legally informed perspective in this matter. And, if it makes any difference, please understand that this perspective comes from someone who personally has long admired the leadership of the BGEA for their moral integrity and historic commitment to proclaiming the Gospel.
It is entirely appropriate for the IRS to audit a section 501(c)(3) entity to determine whether it is operating within the constraints imposed by Code section 501(c)(3). In general terms, these constraints include a prohibition against political campaign intervention (such as publicly endorsing identified candidates for public office) and limitations on lobbying. We can debate whether the law should be relaxed – and I have argued elsewhere that it should (somewhat). But the IRS is charged with enforcing current law. If the IRS discovers that a charity has engaged in public discourse of proposed laws or canddiates – and the Washington Times reports that BGEA did so in an election year – it is hardly unreasonable for the government to audit the organization to establish whether its activities complied with the law. Indeed, it is not uncommon for watchdog groups to alert the IRS when they have evidence that an entity may have crossed the line. Further, because there are other requirements for tax exemption under Code section 501(c)(3) (e.g., the prohibition against private inurement), an audit should probe the organization’s compensation policies, other transactions with insiders, and other aspects of its internal affairs. Naturally, the audit will feel intrusive. It is. It must be intrusive to be effective. It will also be time-consuming.
I have no idea whether groups identified in the story were selected for audit for the wrong reasons. Nor am I arguing that looking into the matter further is pointless. But news that a handful of religious or politically conservative section 501(c)(3) organizations have been audited, particularly when they have made public statements about proposed laws or candidates in an election year, seems quite a bit different from allegations that section 501(c)(4) applications were systematically processed according to buzzwords that distinguished tea party groups from others.
Section 501(c)(3)s and section 501(c)(4)s are subject to very different constraints on political activity. I urge caution before greatly expanding the investigation and devoting more public resources to it if it appears that the section 501(c)(3) organizations in question were visibly active participants in the political process during an election year.
Hat tip: TaxProf Blog
The National Council of Nonprofits has issued the July 15 edition of Nonprofit Advocacy Matters. An outline of the contents of this issue follows:
- Tax Reform
- Sequestration Spotlight
- Federal Workforce Giving
- Charitable Giving Incentives: HI, ME, NC, OR
- Taxes, Fees, PILOTs: NJ, RI, TX
- Government-Nonprofit Contracting: CO, NY
- Parks Funding: NY
- Music Funding: NY
Advocacy in Action
Of the several stories of interest, one may foreshadow the continued viability of the charitable contributions deduction through federal income tax reform. The story reports that a handful of states have either enacted or proposed to enact caps on itemized deductions for state income tax purposes, but have not subjected the charitable contributions deduction to those caps. An exception is Maine, which has passed a budget limiting total itemized deductions (including the deduction for charitable gifts) to $27,500.
Wednesday, July 24, 2013
The Washington Post reports that “True the Vote,” a Houston-based voter watchdog group with tea party ties that has sued for determination of tax-exempt charitable status and damages for allegedly unlawful conduct by the IRS, has expanded its lawsuit in view of recent disclosures of the involvement of the IRS Office of Chief Counsel in the processing of applications for exemption by tea party groups. According to the story, the lawsuit now names as a defendant the IRS Chief Counsel, William Wilkins, and also adds “five senior IRS employees — four of whom were working at headquarters, one of whom was based in Cincinnati.” Further, the plaintiff’s complaint now alleges violations of the Administrative Procedure Act.
It is important to note that this entity is not among the many tea party groups seeking recognition of federal income tax exemption under Internal Revenue Code section 501(c)(4). Rather, this group has sought recognition of tax exemption as a section 501(c)(3) charitable and educational organization. Interested readers can view a copy of the entity’s first amended complaint here.
The organization appears to be on a mission to expose what it believes to be governmental misconduct spurred by the entity’s perceived tea party links, as both the amended complaint and the following excerpt from the Post suggest:
“This lawsuit is the only way to get all of the answers involving this national scandal,” True the Vote President Catherine Engelbrecht said in a statement. “Our goal is not a speedy settlement or a quiet Washington deal. We will sue, depose and expose every person who came near this illegal scheme to suppress voters’ First Amendment rights. The American people — not just True the Vote — deserve answers.”
Tuesday, July 23, 2013
The Chronicle of Philanthropy reports that a newly formed coalition of religious charities recently went to Washington to persuade U.S. Senators not to eliminate the charitable contributions deduction in the midst of proposing significant federal income tax reforms. The sense of urgency arises from a deadline imposed by Senators Max Baucus (Chairman, Senate Finance Committee) and Orrin Hatch (Ranking Member, Senate Finance Committee), who recently informed other lawmakers that the tax expenditures that will survive their efforts to reform the Internal Revenue Code must demonstrably “(1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.” The recently formed Faith and Giving Coalition made the case to lawmakers that the charitable contributions deduction meets that three-pronged standard. The gist of their case, says the story, is that “charities save the government money by providing social services.”
While many religious charities indeed provide valuable social services, I believe the broader religious community should think twice before making its case to Congress for the continuation of the charitable contributions deduction primarily on the grounds that religious entities provide social services that save the government money. The primary function of most religious charities is not to undertake activities that the state would provide in the absence of the religious entities. Indeed, their primary function is quite the opposite – to provide something that the state cannot provide because of the Establishment Clause. It does not follow, however, that either the charitable contributions deduction or federal income tax exemption is inappropriate because most religious charities do what the state cannot do. As I have written elsewhere, there are fairly strong arguments that federal income tax exemption is appropriate for charities, and a plausible (though less compelling) case for the charitable contributions deduction, apart from a desire to “subsidize” charitable donees through the tax system. This observation does not mean that government should ignore the general social services provided by charities, including religious ones. But it does imply that other policy factors are also relevant in determining how the charitable contributions deduction should fare in tax reform.
According to a recent piece in the Wall Street Journal (subscription required), a new type of nonprofit entity is being used to mobilize workers to form unions and support employees. The story explains that unions often support the formation of these “worker centers,” which build community support for organizing laborers by offering language classes, helping workers with wage claims, and even lobbying lawmakers on their behalf. Operated properly, they reportedly fall short of qualifying as "labor organizations" because they have no continuing bargaining relationship with employers, thereby freeing them from constraints imposed by national labor laws. According to the story, more than 200 worker centers now exist in the United States, and they have been effective in assisting immigrants, domestic workers, day laborers and taxi drivers.
Monday, July 22, 2013
As we have noted in other postings, Paul Caron’s TaxProf Blog is daily covering the controversy surrounding the IRS’s processing of applications for tax exemption filed by hopeful section 501(c)(4) entities, particularly what may well have been an unprecedented process reserved solely for tea party and similar groups. It is not always easy to see through the fog generated by partial facts, extensive spinning, and wishful thinking promulgated by observers speaking from all sides of the controversy. Moreover, the sheer volume of titles appearing in news sources can obfuscate what is most significant.
One piece of congressional testimony that does strike me as significant has emerged over the past few days. As reported in the online version of the Washington Post, IRS attorney Carter Hull testified that the chief counsel’s office for the Internal Revenue Service contributed to the development of the agency’s controversial guidelines for reviewing “tea party” cases. Hull reportedly testified that his superiors told him that the chief counsel’s office “would need to review some of the first applications the agency screened for additional scrutiny because of potential political activity.”
While the Post story notes that the Chief Counsel for the IRS, William Wilkins, was appointed to his position by President Obama, an article in the National Review Online points out that “the officials from the chief counsel’s office who participated in the August 2011 meeting operated far below him [i.e., Wilkins] in the chain of command.” These facts hardly point directly to the White House, or even to anyone appointed by the President. They are, however, a far cry from the initial narrative that assigned blame to relatively low-level exemption agents in Cincinnati. The latter article continues, “Why the chief counsel’s office became involved in the matter remains unclear, but witness testimony suggests it was [Lois] Lerner’s office that pushed to involve the agency’s top lawyers.”
As unpleasant as the continued coverage of this controversy may be for many, as anti-climactic as it may end up being for others, and as annoyingly partisan as the investigation has already become, I (for one) would still like to know exactly how the IRS settled upon its process of reviewing section 501(c)(4) applicants. There must be more than one lesson for tax and nonprofits lawyers – public and private – that one can mine from the true facts.
CNN reports that 26-year-old Audrea Gause of Troy, N.Y., was arrested on a Massachusetts fugitive warrant on charges of larceny. She reportedly received $480,000 from The One Fund Boston after claiming she suffered a traumatic brain injury from the recent Boston Marathon bombings. An investigation concluded that her claimed treatments for injuries were fabricated. Massachusetts Attorney General Martha Coakley is quoted as saying of Gause, "She was stealing money from the real victims of the Marathon bombing, and from the people who gave so generously to help them." And she may not be alone. Coakley further commented that the investigation is ongoing, and that others may be involved in Gause's allegedly fraudulent claims.
That cheats might set their sights on the Fund is obviously a function of its success in raising money. The story reports that The One Fund Boston has begun to distribute nearly $61 million of donations to 232 eligible claimants.