Friday, February 8, 2013
Earlier this week, the Maine Supreme Court addressed whether a private boarding school’s practice of renting some of its facilities for private use jeopardized the school’s tax-exempt status. The court held that it did not.
Maine law offers a property tax exemption for property "owned and occupied" or used by literary and scientific institutions "solely for their own purposes." The trial court believed the problem with the school in question was that, because the school rented the property out for private use, the property for which it was seeking tax exemption was not occupied solely for the school’s own purpose.
In upholding the school’s tax-exempt status, however, the court held that the school’s practice of renting the facilities for private use amounted to a "de minimis incidental use." Further, this use of the school’s facilities accounted only for about one percent of the school's operation budget and therefore did not interfere with its tax-exempt purpose.
This decision seems favorable to nonprofit organizations and educational instructions, but its opponents believe the court’s decision is at tension with the statute’s requirement that the property be used “solely” for the organizations own purpose.
The IRS Form 990 is a twelve-page document that requires most federally tax-exempt organizations to disclose their mission, programs, and financial information. If an organization required to complete a Form 990 fails to do so, the organization is at risk of losing their tax-exempt status.
Additionally, the list of organizations required to complete the form includes all private 501(c)(3) organizations. Recently, many nonprofit organizations have lost their tax-exempt status for failure to complete the form. However, absent on the lists of organizations required to complete the form are faith-based organizations such as churches.
The fact that the IRS excludes churches from completing the Form 990 has caused some of the required organizations to bring suit alleging the IRS is wrongfully engaging in preferential treatment of churches. Further, these organizations are asking that the court declare the exemptions void as a violation against the Establishment Clause of the United States Constitution.
Exempting churches from completing the Form 990 raises not only interesting constitutional questions, but also more basic fundamental questions as to the justification for exempting faith-based organizations in the first place.
Thursday, February 7, 2013
In the past few weeks, two individuals plead guilty to embezzling money from nonprofit organizations. One woman, the former treasurer of the Institute Volunteer Fire Department in West Virginia, plead guilty to embezzling $25,000 from the fire department, and an additional $33,000 from the West Virginia State University Alumni Association, for which she also served as treasurer. Similarly, the wife of the former executive director of Charleston’s Multicultural festival plead guilty in U.S. District Court to federal tax fraud after she admitted to embezzling over $300,000 from the organization. Both of these organizations rely heavily on public funding.
The misappropriation of public funds raises significant questions regarding whether nonprofit organizations and charities should be required by law to bond officers who handle public money. Advocates in favor of legally imposed bond requirements argue this sort of law would help the organizations get their money back when funds have been mishandled.
However, in many states, nonprofit organizations and charities are not required by law to bond officers who handle money. Still, some nonprofit organizations are taking a more proactive, preventative approach by including bond requirements in the organization’s bylaws.
On January 1st of this year, Congress passed a new tax law that places limitations on tax deductions for high earners. Under the new law, the limits on deductions reduce the value of all itemized deductions for individuals earning more than $250,000 and married couples earning more than $300,000.
Consequently, charities and nonprofit organizations fear the new limits will frustrate the charitable giving/donations on which they rely. However, experts do not believe the new limits will reduce charitable giving. Instead, experts believe the new law offers incentives for high earners facing the increase in tax rates to search for deductions. Sandra Swirski, executive director of the Alliance for Charitable Reform, explains the “charitable deduction incentive is different than any other deduction or credit in the tax code.” This is because charitable deductions encourage people to give away some of their income unlike other deductions and credits that encourage people to purchase things and write them off.
That the fears of the nonprofit organizations are at variance with the optimism of the experts poses interesting questions concerning the factors that may influence incentives for charitable giving. Do individuals donate for the tax benefits? Are individuals motivated by their own sense of altruism?
Wednesday, February 6, 2013
In Pollard v. Comm’r, T.C. Memo. 2013-38, the Tax Court sustained the IRS’s disallowance of a charitable income tax deduction claimed with respect to a conservation easement conveyed to Boulder County, Colorado in 2003. The court found that the grant of the easement had been part of a quid pro quo exchange and, thus, was not a charitable gift eligible for a deduction.
The taxpayer had purchased the 67.51-acre parcel in 1998 and, because it consisted of less than 70 acres, had to obtain approval from the county to increase the property’s building density. After public hearings, the Board of County Commissioners agreed to grant the taxpayer’s subdivision exemption request, which allowed the property to be split into two lots, in exchange for the taxpayer’s grant of a conservation easement with regard to the property to the county.
The Tax Court explained that, in ascertaining whether a conveyance was made with the expectation of any quid pro quo, courts examine the external features of the transaction, thus avoiding the need to conduct an imprecise inquiry into the motivations of individual taxpayers. If it is understood that the taxpayer would not have made the conveyance unless the taxpayer received a specific benefit in return, and if the taxpayer could not have received such benefit unless he made the conveyance, the transaction does not qualify for the § 170 charitable contribution deduction.
The taxpayer maintained that no quid pro quo arrangement existed, arguing, inter alia, that approval of his subdivision exemption request had been “virtually guaranteed,” that the Land Use Code sections governing his exemption request did not require the grant of a conservation easement, and that all documents relating to the grant of the easement referred to it as a “gift.” One of the county commissioners even wrote a letter to the taxpayer in 2008 (presumably because of the IRS audit) stating that, to the best of his recollection, he did not require the taxpayer to grant the easement in exchange for the subdivision exemption.
The Tax Court was unpersuaded. Based on its examination of the external features of the transaction the court found that the subdivision exemption request was far from being “virtually guaranteed” and, in fact, had little chance of being granted without the taxpayer’s promise to grant the easement. The evidence indicated, inter alia, that:
- the Board of County Commissioners had insisted at public hearings that the taxpayer grant a conservation easement to the county before they would grant the subdivision exemption;
- two of the commissioners acknowledged at one public hearing that the taxpayer would not be granting the easement gratuitously since he would be receiving an increase in building density beyond that allowed by the Land Use Code;
- the commissioners adopted a resolution approving the taxpayer’s subdivision exemption request, subject to certain conditions, one of which was the grant of the easement to the county;
- the Land Use Department wrote a letter to the taxpayer reminding him that he was required to grant the easement to the county; and
- no representative from the county signed the donee portion of the IRS Form 8283 (appraisal summary) that the taxpayer filed with his income tax return, nor did the taxpayer attached an explanation to that form explaining why it was impossible to obtain a signature from the donee.
The Tax Court also sustained the IRS’s imposition of a § 6662(a) accuracy-related penalty, finding that the taxpayer did not act with reasonable cause and in good faith in claiming a charitable deduction with regard to the easement conveyance. The evidence produced at trial, said the court, demonstrated that all of the parties involved understood that the easement was contributed for the express purpose of encouraging the county to grant the taxpayer a subdivision exemption, and it would be unreasonable for the court to believe that anyone involved in the transaction (i.e., the taxpayer, his advisers, or the county commissioners) believed that there was an unrequited contribution.
The Carolina Country Club is one of the most prestigious clubs in Raleigh, North Carolina. The club has been around for over 100 years and membership to join is by invitation only. While the Carolina Country Club’s most recent tax forms shows it generated nearly $13 million from dues and other resources, the club’s nonprofit status insulates it from paying corporate income tax.
The Internal Revenue Service tax code allows social clubs, including those that charge members thousands of dollars to join such as Carolina Country Club, to apply for tax-exempt status. Unlike traditional nonprofits, such as churches or charities, country clubs are not required to have a charitable purpose. However, the clubs still have to pay property and sales tax and tax on investment and nonmember income. Moreover, nonprofit status for organizations like Carolina Country Club imposes restrictions on advertising, paying dividends, and bookkeeping privacy. The real benefit these clubs receive is avoiding the corporate income tax.
Camp Announces Hearing on Tax Reform and Charitable Contributions
Tuesday, February 5, 2013
Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and Means, today announced that the Committee will hold a hearing to examine the itemized deduction for charitable contributions as part of the Committee’s work on comprehensive tax reform. The hearing will take place on Thursday, February 14, 2013, in Room 1100 of the Longworth House Office Building, beginning at 9:30 A.M.
Any individual or organization interested in providing oral testimony at this hearing with respect to the charitable contribution deduction should contact the Committee’s tax office to discuss the possibility of receiving an invitation, pursuant to the procedures set forth below. (See “Details for Submission of Request to Be Heard.”) In addition, anyone not scheduled to give oral testimony may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A list of invited witnesses will follow.
Section 170 of the Internal Revenue Code provides a deduction to the roughly one-third of taxpayers who itemize their deductions for charitable contributions. Taxpayers may contribute on a deductible basis to institutions such as churches, universities, hospitals, museums, and certain other tax-exempt organizations. Certain limits apply to the deduction, such as percentage-of-income limits and purposes for which contributions may be made, and the recently reinstated overall limitation on itemized deductions for taxpayers above certain income thresholds.
Proposals to limit the deduction for charitable contributions have appeared in recent years, in some cases as part of broader tax reform proposals that lower rates and in other cases for the purpose of raising taxes to fund specified levels of government spending. Examples of some of these restrictions include: limiting the tax rate against which contributions may be deducted; a dollar cap on total itemized deductions; a floor below which contributions may not be deducted; and the replacement of the deduction with a tax credit available regardless of whether the taxpayer itemizes. Different types of limitations could have varying effects on giving.
As part of the Committee’s ongoing commitment to pursue comprehensive tax reform in an open and transparent manner, the Committee is holding this hearing to allow stakeholders and members of the public the opportunity to share their perspectives on the deduction and on various proposals to modify it.
In announcing this hearing, Chairman Camp said, “Public charities and private foundations perform invaluable services for our society, especially during this time of economic slowdown and high unemployment. These organizations depend upon the goodwill of the American people – the most giving and charitable people in the world. Because of the critical role that charities play, the Committee must hear directly from the charitable community before considering any proposals as part of comprehensive tax reform that might impact their ability to obtain the resources they need to fulfill their missions.”
FOCUS OF THE HEARING:
The hearing will examine the itemized deduction for charitable contributions as part of the Committee’s work on comprehensive tax reform. It also will receive testimony from witnesses on previous proposals to modify the deduction and its value.
DETAILS FOR SUBMISSION OF REQUEST TO BE HEARD:
Requests to be heard at the hearing must be made to the Committee on Ways and Means either by telephone at (202) 225-5522 or by e-mail at email@example.com. Please include the phrase “charitable deduction” in the subject line of the message and submit the request no later than the close of business, Thursday, February 7, 2013. The request should include a brief summary or outline of the proposed testimony.
In view of the limited time available to hear witnesses, the Committee may not be able to accommodate all requests to be heard. Those persons and organizations not scheduled to give oral testimony are encouraged to submit written statements for the record of the hearing. All persons requesting to be heard, whether they are scheduled for oral testimony or not, will be notified as soon as possible after the deadline for submitting requests.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Any person(s) and/or organization(s) wishing to submit written comments for the hearing record must follow the appropriate link on the hearing page of the Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov, select “Hearings.” Select the hearing for which you would like to submit, and click on the link entitled, “Click here to provide a submission for the record.” Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close of business on Thursday, February 28, 2013. Finally, please note that due to the change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical problems, please call (202) 225-3625 or (202) 225-2610.
The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, but we reserve the right to format it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response to a request for written comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee.
1. All submissions and supplementary materials must be provided in Word format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official hearing record.
2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee.
3. All submissions must include a list of all clients, persons and/or organizations on whose behalf the witness appears. A supplemental sheet must accompany each submission listing the name, company, address, telephone, and fax numbers of each witness.dkj
Tuesday, February 5, 2013
Pennsylvania recently released a list of the lowest rated public schools in the state. Based on this list, eligible students across the state may now have the opportunity to attend a higher-achieving public or nonpublic school pursuant to Pennsylvania’s Opportunity Scholarship Tax Program. Eligible students are those enrolled in the lowest performing schools, or those living within the attendance boundary of a low-achieving school, and students belonging to families with incomes no more than $75,000 plus $12,000 for every dependant household member.
Pennsylvania law requires the Pennsylvania Department of Education to notify school districts of their low-achieving status by February 1. After the schools have been notified, the parents of the children attending those schools must also be notified of the school’s low-achieving status and must additionally be provided with information on how to apply for the opportunity scholarships.
Over $50 million in tax credits across Pennsylvania have enabled the Opportunity Scholarship Tax Program to fund scholarships capped at $8,500 for a student without a disability, and $15,000 for a student with a disability. However, because funding for the scholarships is contingent on businesses making contributions in exchange for tax credits, the available amount of local scholarship money is uncertain.
Monday, February 4, 2013
This story comes from a recent piece in the Los Angeles Times discussing the Obama administration’s proposal that employees of religiously affiliated employers get coverage for contraception through a separate, private insurance company free of cost.
The Affordable Care Act’s contraception mandate is the center of many lawsuits that challenge the law for imposing on religious freedom. Advocates of reproductive rights and religiously affiliated employers vehemently disagree on the appropriateness of the contraception mandate and the administration’s most recent proposal attempts to reconcile the concerns of both groups.
Under this new proposal, churches and other houses of worship are exempt from the contraception mandate as long as the institutions qualify as a tax-exempt religious employer. Hospitals, charities, and universities having religious affiliations primarily providing nonreligious services, on the other hand, do not receive exemption from the contraception mandate in the same way as churches and houses of worship. However, the proposal offers a system by which employers are sheltered from having to pay for the contraception coverage and from having to arrange contraception coverage for their employees.
Sunday, February 3, 2013
On January 30, 2013, the United States filed a complaint in the United States District Court for the Northern District of Ohio against Michael Ehrmann and the company he owns with his wife, Jefferson & Lee Appraisals, Inc. Accoding to the complaint, Mr. Ehrmann has appraised more than 90 conservation easements for purposes of the deduction under IRC § 170(h) and earned substantial fees for his appraisals, ranging up to $40,000 for a single appraisal.
The government's complaint alleges that, continually and repeatedly, Mr. Ehrmann’s appraisals, inter alia,
- are unreliable due to material and substantive errors and omissions, unsupported assumptions, and his failure to comply with generally accepted professional appraisal standards;
- substantially overstate the fair market value of the easements by hundreds of thousands, if not millions, of dollars;
- distort data and provide misinformation or unsupported personal opinions to achieve artificially high values that are often completely out of line with actual property values in the market area; and
- are riddled with problematic methodology and conclusions that lead to substantial valuation misstatements of the resulting charitable contribution deductions taken by his clients.
As one example, the complaint alleges that Mr. Ehrmann appraised a building in Grand Rapids, Michigan; acknowledged that the building had been purchased in 2006 for just over $3.5 million; stated that the relevant real estate market had not “exhibited a net change over the past several years;” but then determined that the property’s “before” value in 2009 was just over $26 million. The complaint further alleges that Mr. Ehrmann has attempted to obstruct IRS enforcement efforts by claiming not to have any work files for his appraisal reports, while professional standards require that an appraiser maintain such files. “This sort of abuse of a high-dollar charitable contribution deduction,” states the complaint, “inspires contempt for the system of honest, voluntary income tax reporting.”
The government has requested that Mr. Ehrmann and Jefferson & Lee Appraisals be permanently enjoined from preparing appraisal reports for any purpose relating to federal taxes and from providing expert testimony or any other appraisal support for taxpayers challenging a disallowed deduction of a donated conservation easement. The government has further requested that the defendants provide to counsel for the United States a list of clients (including each client’s address, phone number, e-mail address, and federal tax identification number) for whom they have prepared appraisal reports for tax purposes on or since November 1, 2009.
In their Answer, Mr. Ehrmann and Jefferson & Lee Appraisals state that Mr. Ehrmann, who is 70 years old and has now retired, has, throughout his long career:
- routinely drafted extremely lengthy and detailed reports to support his work in hundreds of appraisals;
- declined to perform appraisals for many prospective clients who have approached him because he concluded that they (1) had unrealistic expectations of benefits, (2) were unwilling to incur costs for proper architectural and cost documentation necessary to determine the true value of the easement, (3) appeared unwilling to agree to a permanent donation of the easement, or (4) could not identify an appropriate donee of the easement; and
- always acted with the utmost good faith and professionalism.
The defendant’s answer further alleges, inter alia, that:
- Mr. Ehrmann’s work has been an invaluable part of historic preservation efforts, in that numerous preservation projects would not have been financially viable without his accurate and well-documented appraisals; and
- his façade easement appraisals have been entirely reasonable, estimating losses for the donation of the easements highlighted in the Government’s complaint of approximately 25% of the values that would otherwise have been achievable if the buildings had been built out without preservation of the historic facades.