Friday, February 22, 2013

When does Improper Political Activity Become a Crime?

When does improper campaign intervention become a crime?  At the least, there has to be an instance of campaign intervention.  But is that all?  According to a federal information to which the defendent is set to plead guilty, the answer is "yes" surprisingly.  A short but interesting story in yesterday's Wapo describes a federal information in which the crime is hard to find.  The crime, acccording to the indictment, is that a nonprofit insider in DC used nonprofit money to fund an inauguration party and, in doing so, "interfered with the proper administration of the tax laws."  The indictment states that the insider knowingly prepared fraudulent documents to obtain $110,000 to support a "political group" that was not an eligible recipient of the nonprofit's funds and, in doing so, criminally interfered with the operation of the Internal Revenue Laws.  The criminal interference, according to the brief information stems from the allegation that the insider (1) requested her chief of staff to prepare a grant request for the money, but to list the recipient as someone other than the Young Democrats, the organization hosting the Inauguration party, out of fear that a political organization was an ineligible recipient, (2) knew at the time of the grant application that the nonprofit's accountants would prepare a 990, and (3) knew, at the time of the grant application, that the 990 would be incorrect because the actual [political] use of the funds would not have been disclosed.  According to the report, the insider intends to plead guilty.  I am just not so sure about the wisdom of doing so, unless there is a deal for some sort of diversion.  It sounds like the U.S. Attorney is  really stretching to find a criminal allegation in this case.  First, the money was not going to be used to intervene in a campaign -- it was to be used for an inauguration party, the campaign having already been won.  Second, the allegation is built on too many suppositions -- the insider filed the grant application knowing that a 990 would later be filed, the acountants or auditors would prepare a 990 presumably asking no questions about ambiguous expenditures, and then eventually the 990 would in fact be filed incorrectly.  This seems a house of cards as far as criminal liability goes -- at least under the charge of interfering with the proper administration of the internal revenue laws.  If it were to stand, it seems to me, nearly all improper campaign interventions ought to constitute a crime as opposed to a violation of the condition of tax exemption.  The bottom cards are the least stable, by the way, since an inauguration party might not be a good use of charitable funds but hardly constitutes improper campaign intervention.  Another rickety card in this house is the assumption that the Young Democrats are necessarily an improper recipient, of a charitable grant (even if the insider was concerned that they might be).  What if they were conducting a voter registration drive or just . . . having a party to celebrate another successful violence-free political process?  I just wonder if the poor defendant in this case has received decent tax advice or, instead just simply hired some top flight but no less tax exemption-insensitive litigators.  There should be a motion to dismiss and, failing that, perhaps a trial, nevermind a guilty plea!  But then again, nobody asked me. 


February 22, 2013 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

California Bill Would Strip Boy Scouts and Other Youth Organizations of Tax Preferences On Account of Membership Policies Excluding Homosexuals

California State Senator Ricardo Lara has introduced a bill entitled the Youth Equality Act.  The Senator’s web page describes the bill (SB 323) as follows:

On the heels of the controversy surrounding the Boys Scouts of America’s policy to exclude members of the lesbian, gay, bisexual and transgender (LGBT) community as scouts or adult leaders, today State Senator Ricardo Lara (D-Long Beach) and Equality California announced the introduction of new legislation that would remove a state tax exemption for any youth group, including the Boy Scouts, that discriminate against members and leaders on the basis of sexual orientation or gender identity. Currently, organizations that discriminate on these grounds may still receive sales and corporate tax exemptions, a provision that is intended to encourage acting in the public interest.

Additional coverage of the bill and the uncertainties surrounding its enactment is available from CBS (San Francisco Bay area) and the San Diego Union-Tribune.  


February 22, 2013 | Permalink | Comments (0) | TrackBack (0)

Former Treasurer of Foundation Supporting UH Athletics Guilty of Fraud

Here's a sad tale of events all too close to my home.  In Ex-UH Booster Fund Treasurer Pleads Guilty to Fraud, the Houston Chronicle reports that Brian Bjork, once an investment counselor and associate of the late David Salinas of Ponzi scheme fame, has entered a plea of guilty in a federal wire fraud case in which he was alleged to have misappropriated $550,000 from the Houston Athletics Foundation.  The charity is described as “an independently administered booster fund for UH athletics.”  The Chronicle reports the details of the scam as follows:

Bjork, according to the plea agreement, opened a bank account in which he siphoned off money from current and former family members - in one case, a recent widow - allegedly for investment in Salinas' corporate bonds or pawn shops that Salinas owned, but actually for his own use. He also wrote fictitious account statements, prosecutors said.

Also, using his position as treasurer of the Houston Athletics Foundation ... Bjork deposited about $550,000 of HAF funds into the account, according to the prosecutors.

The story explains that evidence of the fraud was uncovered during the government’s investigation of Salinas – an investigation “which has resulted in claims of more than $50 million by creditors who purchased nonexistent corporate bonds from Salinas and his companies Select Asset Management and the J. David Group of Companies.”

For additional coverage of the story in the Boston Herald, see here.


February 22, 2013 | Permalink | Comments (0) | TrackBack (0)

Thursday, February 21, 2013

Additional Supporting Organization Regulations on Horizon

Yesterday, the District of Columbia Bar Taxation Section's Exempt Organizations Committee sponsored a program entitled “It's Pay Out Time for Supporting Organizations.”  (The event summary is available here; click on the program title and a pop-up appears.)  Tax Notes Today summarizes the remarks made at the program by officials with the Department of Treasury and the Internal Revenue Service. (See 2013 TNT 35-5.)  Reportedly, the government will be offering guidance to address issues not fully resolved in the recently issued regulations governing Type III supporting organizations (SOs).  It is anticipated that such future guidance will include clarification of the scope of the responsiveness test, which (among other things) requires a supported organization to “have a significant voice in the investment policies of the [SO], the timing of grants, the manner of making grants, and the selection of grant recipients by such [SO], and in otherwise directing the use of the income or assets of the [SO].”  Government officials also reportedly indicated that future guidance will address the types of distributions that non-functionally integrated Type III SOs can make in satisfying their payout requirements, as well as the definition of “control” for purposes of the rule of Internal Revenue Code section 509(f)(2) prohibiting Type I and Type III SOs from accepting contributions from donors who control their supported organizations.



February 21, 2013 | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 20, 2013

Challenge to Regulations under Code Section 501(c)(4) under Way

Tax Notes Today reports an intriguing development in the battle over the use – or abuse – of section 501(c)(4) organizations to support candidates for political office.  According to the story, available electronically at 2013 TNT 34-8, an unsuccessful Illinois candidate for a congressional seat and Citizens for Responsibility and Ethics in Washington (CREW) ) are suing the IRS over regulations interpreting section 501(c)(4) of the Internal Revenue Code to grant federal income tax exemption to entities "primarily engaged in promoting in some way the common good and general welfare of the people of the community."   The complaint alleges that the regulations are inconsistent with the language of Code section 501(c)(4), which exempts organizations “operated exclusively for the promotion of social welfare.”

This could become a noteworthy case – if a court concludes that the plaintiffs have standing.  The Tax Notes Today story cites fellow blogger (and University of Illinois Law Professor) John D. Colombo for his appropriately cautious words on the difficulty of establishing standing in tax cases like this one.  But if the plaintiffs jump the procedural hurdles, it will be interesting to see how much deference the regulation receives from the judiciary. Readers who follow the electioneering of tax-exempt entities are aware of the considerable latitude the current regulations are thought to provide social welfare organizations in participating in the political process.  It should be noted, however, that a court could interpret the language of the regulations to be more restrictive of pursuing non-exempt purposes – and therefore closer to the literal meaning of the statute – than is commonly assumed.

For additional coverage, see this story from The Hill and the CREW webpage discussing the suit and supplying a link to its complaint filed in the United States District Court for the District of Columbia.     


February 20, 2013 | Permalink | Comments (1) | TrackBack (0)

Catalina Island Conservancy Executive Reportedly under AG Scrutiny

In Allegations Made Against Catalina Conservancy Exec, the Los Angeles Times reports that the California state attorney general's office is investigating whether Ann Muscat, the executive director of the Santa Catalina Island Conservancy, has misappropriated the organization’s funds.  The story claims that the AG has received complaints about the operations of the Conservancy from “former officers of the nonprofit that manages nine-tenths of Santa Catalina Island.”  According to the Times, one complainant is Roy Rose, a major donor and former secretary of the board of directors who resigned “out of unhappiness with Muscat's stewardship” and now claims that

Muscat told him she "silenced" Mel Dinkel, the conservancy's treasurer and chief operating officer who resigned in May, with "hush money" in the form of a $100,000 "consulting agreement."

"She went on to say that she was working on securing such agreements for use in the future, acknowledging that there were other Judases in the organization…."

The press secretary for Attorney General Kamala D. Harris reportedly “would neither confirm nor deny that an investigation was underway.”


February 20, 2013 | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 19, 2013

House Bill Includes Religious Organizations as Recipients of Federal Assistance for Disaster Relief

In House Approves Storm Aid for Religious Institutions, the New York Times reports that the United States House of Representatives, by a vote of 354 to 72, has passed a bill approving “the use of federal money to rebuild churches and synagogues damaged by Hurricane Sandy, despite concern that such aid could violate the doctrine of separation of church and state.”  The bill now awaits consideration in the Senate.  According to the story, Senator Kirsten E. Gillibrand, Democrat of New York, has expressed support for the bill and “was working to secure its passage in the Senate.”  Observing that FEMA has generally refused to grant federal relief for rebuilding the physical facilities of houses of worship following natural disasters, the Times reports that FEMA lawyers raised numerous objections to the bill as a significant departure from current law.

But is the bill constitutional?  Opinions vary (imagine that!), says the story:

The Becket Fund for Religious Liberty, an advocacy group, said the bill was constitutional under Supreme Court precedents that allow houses of worship to receive “generally available benefits” like police and fire protection and sewer connections.

But Representative Jerrold Nadler of Manhattan, the senior Democrat on the House Judiciary Subcommittee on the Constitution, said: “This bill would direct federal taxpayer dollars to the reconstruction of houses of worship. The idea that taxpayer money can be used to build a religious sanctuary or an altar has consistently been held unconstitutional.”

The American Civil Liberties Union agreed, saying it was a bedrock principle of constitutional law that “taxpayer funds cannot go to construct, rebuild or repair buildings used for religious activities.”

One can ironically frame the constitutional issue raised by the bill in the language of contract law: may the federal government provide financial aid to religious organizations for an act of God?



February 19, 2013 | Permalink | Comments (0) | TrackBack (0)

Monday, February 18, 2013

Tax Notes Reports on Hearing on Charitable Contributions Deduction

We previously blogged about the House Ways and Means Committee Hearing on Tax Reform and Charitable Contributions, first here and then here.  This morning’s Tax Notes Today briefly covers testimony from several academics and nonprofit leaders at the hearing.  The piece focuses on testimony supporting the extension of the charitable contributions deduction (“CCD”) to non-itemizers whose charitable contributions exceed a statutory floor, and testimony critical of President Obama’s proposal to reduce the value of the CCD to high-income taxpayers to 28 percent. 

The electronic citation to the Tax Notes Today piece is 2013 TNT 32-5.   


February 18, 2013 | Permalink | Comments (0) | TrackBack (0)

Rutgers Law Dean Explains Nonprofit Law Firms’ Place in Addressing Problems in Legal Profession and Law Market

John J. Farmer, Jr., Dean of the Rutgers School of Law—Newark, has written an opinion editorial in the New York Times that suggests one way to help address several problems in the legal profession and market for legal services. The familiar problems that he cites include the weak job market for recent law school graduates, the high cost of legal education, and unmet needs for legal services by the middle class, many of whom are currently priced out of the market. Notes Farmer, “Legal education has not so much failed the profession as mirrored it,” by training students for a profession that offers services that are unaffordable to the masses “and at a cost that perpetuates the problem.” So what should we do, according to Farmer?

Let's scrap this system. We need, at its entry level, the equivalent of a medical residency. Law school graduates would practice for two years or so, under experienced supervision, at reduced hourly rates; repaying their debts could be suspended, as it is for medical residents.

Farmer envisions the hiring of recent law school graduates by law firms at lower compensation rates in the residency period, during which recent graduates gain valuable experience and clients benefit from lower fees. He also suggests a role for law schools through the use of nonprofit law firms/clinics:

Schools are already experimenting: Mine is about to start a postgraduate, nonprofit law clinic/firm staffed by recent graduates, under supervision, to represent lower-middle-class clients.


February 18, 2013 | Permalink | Comments (1) | TrackBack (0)

Façade Easement Appraiser Barred From Preparing Appraisal Reports and Ordered to Turn Over List of Clients

DOJ On February 12, 2013, the United States District Court for the Northern District of Ohio issued an Agreed Order of Permanent Injunction that, inter alia,

  • bars MAI-designated real estate appraiser Michael Ehrmann and the company he owns with his wife, Jefferson & Lee Appraisals Inc. (JLA), from preparing any kind of appraisal report or otherwise participating in the appraisal process for any property relating to federal taxes;
  • bars Ehrmann and JLA form providing expert testimony or expert support in any case in which they did not prepare the appraisal report valuing the donated conservation easement, except Ehrmann and JLA my continue their ongoing engagements for expert services in the cases in which they are already retained;
  • orders Ehrmann and JLA to provide a copy of the injunction to the Appraisal Institute’s Senior Manager for Ethics and Standards, the licensing office in any state in which they are licensed to appraise real estate, and all former and current clients who retained them since January 1, 2007, to appraise property for any federal tax purpose; and
  • orders Ehrmann and JLA to provide to counsel for the United States a list of clients for whom they prepared appraisal reports for tax purposes on or since November 1, 2009 (including each client’s address, phone number, e-mail address, and federal tax identification number).

In its complaint (discussed here), the Government alleged that Ehrmann repeatedly and continually made material and substantive errors and omissions, distorted data, and provided misinformation and unsupported personal opinions in his appraisals to significantly inflate the value of façade easements for federal deduction purposes. Ehrmann (who is 70 years old and has now retired) and JLA consented to the injunction without admitting the allegations against them. The injunction mandates that Ehrmann and JLA provide the list of their clients noted above to counsel for the United States within 45 days of February 12, 2013.

The Department of Justice issued a News Release regarding the injunction on February 13, 2012.


February 18, 2013 | Permalink | Comments (0) | TrackBack (0)