Thursday, September 24, 2015
In the third piece of guidance issued over the last seven days, the IRS issued proposed regulations under Section 170(f)(8) last week. On September 17, 2015, the IRS issued a notice of proposed rulemaking regarding the donee reporting exception to the contemporaneous written acknowledgement requirements for charitable contributions.
Code Section 170(f)(8) requires a taxpayer claiming a Section 170 charitable contribution deduction in excess of $250 to substantiate the contribution by a contemporaneous written acknowledgement received from the charity, which must include certain designated information and be provided in a timely manner (a.k.a, contemporaneously!). You all are familiar with the “thank you for your contribution – you have received no goods and services in consideration for your contribution” letter. That letter is designed to be the “contemporaneous written acknowledgement” or “CWA” required to be sent by the charity and retained by the donor for purposes of Section 170(f)(8) substantiation.
However, the statutory language of Section 170(f)(8) contains an exception to the general rule disallowing contributions that are not substantiated by a CWA. Under Section 170(f)(8)(D), a donor’s deduction will not be disallowed if the charity files a return (on a form and in a manner set forth in Treasury Regulations) that includes the information otherwise required to be disclosed on the CWA.
Even though this statutory language exists, the preamble indicates that the IRS purposely never issued regulations implementing the donee reporting provisions of Section 170(f)(8)(D). The “goods and services” letter methodology was working out well enough, and there had been no outcry for charity reporting. Apparently, the issue has arisen in a litigation context, however, with donors who had failed otherwise to use the CWA substantiation methodology trying to save their deductions with alternative documentation – specifically (according the preamble, anyway) by having the charity file an amended Form 990.
In the proposed regulations, the IRS states that Form 990 disclosure is not adequate for a CWA substitute under Section 170(f)(3)(D). Accordingly, the proposed form to be filed by the charity would set forth all of the information required on the CWA, the name and address of the charity, and the name, address, and tax ID of the donee. The charity must send a copy of this new form to the IRS and to the donor (unlike the CWA, which just goes to the donor). In each case, must be provided by February 28th of the year following the year of contribution - which is earlier than the CWA, which is generally due by April 15th of the following year (unless the donor files his or her tax return earlier).
It's not obvious to me when a charity would elect to do this in lieu of the existing CWA letter - did the IRS make it purposefully difficult so that no charity would use it? In each case, the charity still needs to mail something to the donor – in the donee reporting case, the charity must also send the form to the IRS and sent earlier than the due date of the Form 990, so there really isn't any cost savings. As a practical matter, it seems to me that these regulations do very little other than place a road block in front of individuals trying to litigate their way around a substantiation foot fault.
If you are interested, comments are due by December 16, 2015.
Wednesday, September 23, 2015
Good morning all! I just got an alert in my mailbox that Treasury has issued final regulations on equivalency determinations - you may all recall the proposed regulations that were issued in 2012.
I'm in the process of printing out the final regs and comparing them to the proposed regs, so I'll update the post later today. Bloomberg BNA's blurb on it says that the final regulations "incorporate the thrust of" the 2012 rules. I'll try to get some links up as soon as I can find them in a non-subscription database, although I know you can get them in both Bloomberg BNA and Tax Analyst already if you have access. Citation is T.D. 9740, RIN 1545-BL23.
Update at 6:30 p.m., 9/23/2015
I've not gotten all the way through the final regs to give you all a complete summary, but I wanted to mention a few highlights from the preamble:
- It appears that the Regulations expand the definition of "qualified tax practitioner" for purposes of who can make equivalency determinations that can be relied upon in good faith.
- The Regulations appear to scale back the ability of a charity to rely on a good faith affidavit as the sole means of making an equivalency determination. Briefly, it appears that you can rely on the information in good faith, but there needs to be an additional showing that the evaluation of the data and the equivalency determination based on that data occurred in a manner that demonstrates a knowledge of US tax law. In theory, anyway, there are more qualified tax practitioners (including folks that may be in house at the foundation) to help with such a determination, so it shouldn't (in theory again) be a significant bar to international grant making.
- Some clarification on how long you can rely on written advice, which looks like (a) so long as there is no change in the law or otherwise for most things, except (b) two years for public charity determinations based on financials.
- It looks like there may be limited opportunity to share equivalency determinations, but it can't be foundation to foundation - it may be that the first foundation has to authorize the release of that information to a second foundation from its qualified tax practitioner because only there would there be reasonable reliance. So not quite the equivalency determination banking that the sector wanted, but it may be a step in that direction.
- Looks like donor advised funds can use these rules, at least for now, for purposes of compliance with Section 4966(d)(4).
Monday, September 21, 2015
Last week, the IRS issued Notice 2015-62 discussing the tax treatment of an investment made for charitable purposes that does not otherwise qualify for status as a “program-related investment” under Code Section 4944(c). If you are reading this blog, you probably know that Code Section 4944 imposes a prudent investor-type rule on private foundations by imposing an excise tax on investments that jeopardize a private foundation’s charitable purposes. There is an exception to this general rule under Code Section 4944(c) for program-related investments (PRIs). For an otherwise charitably-motivated investment to qualify as a program-related investment, however, no significant purpose of the investment can be the production of income or the appreciation of property (among other things...).
The news is awash with discussions of socially-responsible investing, impact investing, mission-related investing and the like - however, none of these types of investing are tax concepts. Rather, they are ways that a foundation (or other endowment-type entity) can approach investing in a manner that considers charitable outcomes. Such categories of investments do not necessarily qualify as "program-related investments." Rather, PRIs are a thing, as my students would say - a specific term of art used in the tax code for which an investment must specifically qualify. As indicated above, in order to qualify as a PRI, no significant purpose of the investment can be for the production of income or appreciation of property. Of course, many investments view charitable outcomes as one of many bottom line results, along side of the potential for profit. Such charitably-inclined investments may fall into one or more of the categories of social investing, but they are not PRIs.
Notice 2015-62 clarifies the manner in which the prudent investor standard of Code Section 4944 treats the accomplishment of charitable purposes as a relevant factor when evaluating an investment that is NOT a PRI. For many years, there was some question as to whether fiduciary standards would allow a foundation to settle for a lesser yield in order to accomplish other charitable goals – for example, universities divesting in South Africa companies during the apartheid era, the Catholic Church not investing in contraception or land mine manufacturers, or affirmative investments in emerging green energy technologies. (For more discussion on this topic, see this very awesome article by the very awesome Susan Gary: It is Prudent to Be Responsible? The Legal Rules for Charities that Engage in Socially Responsible Investing and Mission Investing).
With the adoption of UPMIFA in 2006 by NCCUSL and UPMIFA’s subsequent adoption in almost all jurisdictions (what's up with that, Pennsylvania?), it became clear that most jurisdictions would allow for the consideration of charitable goals as an appropriate factor in evaluating an investment, so long as the overall determination was reasonable. Notice 2015-62 adopts a similar standard for Section 4944, stating that “foundation managers may consider all relevant facts and circumstances, including the relationship between a particular investment and the foundation’s charitable purpose.”
This Notice is certainly good news for private foundations involved in socially-responsible, mission-related, or impact investing. Of course, the Notice does not solve all of a private foundation’s worries in this area. A private foundation must still comply with Code Section 4944’s overall requirement that foundation managers exercise ordinary business care and prudence in selecting investments. For state law purposes, UPMIFA does not necessarily cover every type of charitable organization; therefore a foundation needs to determine whether or not a different state investment standard might apply. And of course, for excise tax purposes, only a program-related investment will be treated as a qualifying distribution for purposes of Code Section 4942.
Thursday, September 17, 2015
NPR reports that the “American Red Cross is facing new criticism today as government investigators and a congressman call for independent oversight over the long-venerated charity.” NPR explains that Representative Bennie Thompson has introduced a bill called the American Red Cross Sunshine Act on the heels of the release of a report by the United States Government Accountability Office (“GAO”) that examined the charity’s operations. The GAO report, says NPR, “finds oversight of the charity lacking and recommends that Congress find a way to fill the gap.”
The “Conclusions” section of the GAO report states as follows:
The nation’s disaster response system relies to a significant extent on the nonprofit sector, which harnesses the public’s generosity to provide funding for disaster response and recovery efforts. This approach can support the nation’s efforts to assist disaster victims, but it also has limited accountability for disaster assistance. The Red Cross, the organization most responsible for providing shelter and other mass care services to disaster victims, exemplifies this tension. It has been designated by law as an instrumentality of the United States and has a critical, formalized role in coordinating and providing disaster response services across the nation. At the same time it remains a nonprofit organization that generally makes its own decisions about what services to provide. This reliance on an independent organization can be effective if government and the donating public have confidence that [the] Red Cross is providing the services that are most needed in an effective and efficient manner. Further, in disasters in which the federal government is involved, the extent and effectiveness of the Red Cross’s activities could have a direct impact on the nature and scope of the federal government’s activities.
With regard to oversight, while the Red Cross has some internal evaluation processes in place, such as after action reviews and surveys of state emergency managers and other stakeholders, Red Cross officials told us that the results of their internal evaluations are typically not made available to the general public. The absence of regular, external evaluations of its disaster services that are publicly disseminated could affect the confidence of both the donating public and the federal agencies that rely on the Red Cross. This is especially true in light of questions raised by the federal government and others in recent years about the organization’s performance in disasters. Given the Red Cross’s status as an instrumentality of the United States and the critical responsibilities assigned to it by its federal charter and by federal policies, the federal government has a clear stake and role in ensuring that proper oversight takes place.
In a section entitled “Matters for Congressional Consideration,” the GAO report further recommends legislative action:
To maintain governmental and public confidence in the Red Cross, Congress should consider establishing a federal mechanism for conducting regular, external, independent, and publicly disseminated evaluations of the Red Cross’s disaster assistance services in domestic disasters in which the federal government provides leadership or support. This mechanism might involve annual evaluations of whether the services achieved their objectives or of their impact on disaster victims. This evaluation could be performed, for example, by a federal agency such as DHS, by an IG office such as the DHS IG, or by a private research firm under contract to a federal agency.
The American Red Cross Sunshine Act, according to its preface, would “enhance oversight of the American National Red Cross by the Government Accountability Office and Inspectors General at the Departments of Homeland Security, Treasury, and State,” and would require the Department of Homeland Security to conduct a pilot program with the charity to research and develop mechanisms to improve the charity’s preparedness and response capabilities through social media.
Additional Coverage: The Chronicle of Philanthropy
Thursday, August 13, 2015
As announced Wednesday in a blog post by the head of the White House Office of Faith-based and Neighborhood Partnerships, nine federal agencies are issuing notices of proposed rulemaking (NPRMs) that will codify recommendations made by an advisory council to the President on "strengthening the social service partnerships the government forms with nongovernmental providers, including strengthening the constitutional and legal footing of these partnerships." The blog post further provides the overall content of the NPRMs:
The proposed rules clarify the principle that organizations offering explicitly religious activities may not subsidize those activities with direct federal financial assistance and must separate such activities in time or location from programs supported with direct federal financial assistance. For example, if a faith-based provider offers a Bible study as well as a federally supported job training program, the Bible study must be privately funded and separated in time or location from the job training program.
The NPRMs also propose new protections for beneficiaries or prospective beneficiaries of social service programs that are supported by direct federal financial assistance. In the proposed rules, the agencies set forth a notice to beneficiaries and prospective beneficiaries that informs them of these protections. These notices would make it clear, for example, that beneficiaries may not be discriminated against on the basis of religion or religious belief or be required to participate in any religious activities and advises beneficiaries that they may request an alternative provider if they object to the religious character of their current provider.
At the same time, the NPRMs assure religious providers of their equal ability to compete for government funds and of continuing protections for their religious identity like the ability of providers to use religious terms in their organizational names and to include religious references in mission statements and in other organizational documents. The NPRMs also state that the standards in the proposed regulations apply to sub-awards as well as prime awards, and set forth definitions of “direct” and “indirect” federal financial assistance. These areas have been sources of confusion for some providers.
The NPRMs are to be issued by the federal departments of Agriculture, Education, Health and Human Services, Homeland Security, Housing and Urban Development, Justice, Labor and Veterans Affairs as well as the U.S. Agency for International Development, and will apply to a broad range of federal programs that have involved faith-based organizations for years. These federal agencies will be requesting interested parties to submit comments over the next 60 days, which will then be considered in issuing final regulations.
Pursuant to a notice published in the Federal Register on August 10, the IRS is seeking applicants for vacancies on the Advisory Committee on Tax Exempt and Government Entities (ACT). The vacancies, which will occur in June 2016, include: Two (2) Employee Plans; two (2) Exempt Organizations; one (1) Federal, State and Local Governments; and one (1) Indian Tribal Governments. The notice states that ""[t]o ensure appropriate balance of membership, final selection of qualified candidates will be determined based on experience, qualifications and other expertise."
The Supreme Court ruling on same-sex marriage has yielded a lot of commentary regarding its potential effect on tax-exempt, religious organizations, including religiously-affiliated educational organizations. The Washington Post article referenced below sets forth the IRS Commissioner's commitment to not change its stance and begin revoking the exemption of religiously-affiliated educational institutions that oppose the ruling. The second set of blog posts looks at the issue more broadly, generally making the argument that opposition from such educational and other religious institutions results in "vibrant" and essential pluralism.
After the Supreme Court’s decision on gay marriage, religious leaders feared that religious universities, nonprofits and other institutions could lose their tax-exempt status. IRS Commissioner John Koskinen has promised the Senate Judiciary Oversight Subcommittee that his agency would not go after the tax-exempt status of religious colleges and universities that oppose gay marriage.
During a hearing Wednesday conducted by the Senate Subcommittee on Oversight, Agency Action, Federal Rights and Federal Courts, Sen. Mike Lee (R-Utah) asked Koskinen whether the IRS would “not, in the absence of a directive by Congress or by the courts," take action to remove religious schools’ tax exemption.
“I can make that commitment,” Koskinen said, explaining that “we see no basis for changing our examination criteria as a result of this Supreme Court case.”
Koskinen discussed the potential for such schools’ tax exemption to go under scrutiny down the road. “If we ever did that, we would issue it for public comment. There would be no surprises,” Koskinen said. “The public would have plenty of notice and plenty of opportunity to comment, and that’s not going to happen in the next two and a half years.” [emphasis added]
PrawfsBlog, "Garnett et al. on Tax-Exempt Status and Religious (and Other) Organizations" by Paul Horwitz (Alabama)::
Should government insist that all private organizations comply with its own sense of the good? Most people, I think, still agree that the answer to this question is no. However strongly they feel that those public values are the right values, and however devoutly they may hope that all people and all groups come to share them and to act accordingly, they still believe for various reasons--not least a sense that the public-private distinction, however imperfect and vulnerable to critique, represents an important value of its own--that government should not and perhaps cannot rigorously or ruthlessly enforce what Nancy Rosenblum has called a "logic of congruence" between public and private organizations. ...
Our friend and fellow Prawfs writer Rick Garnett discusses that question in a new editorial co-written with John Inazu and Michael McConnell [see below]. The title, which I gather its writers did not choose and might not be completely comfortable with, is "How to Protect Endangered Religious Groups You Admire." They argue, in brief, that we should, at a minimum, be willing to protect religious non-profits that provide significant contributions to the public good despite their now heterodox views.
Read the whole thing. Feel free to disagree. I will add two points. I agree, in sensibility at least, with a point made by Marc DeGirolami in a recent post about the editorial: "We use the language of 'exemption' when we speak of the taxable status of nonprofits, but it would be better instead to think of their nontaxable status as marking a boundary of the government's power to tax." Reasonable disagreement is available about whether "power" is an apt word here, but for those who believe that whatever the extent of state power, it ought not lightly be exercised in a way that circumscribes civil society and a vibrant pluralism, the sensibility is right. Second, it ought not be only pluralists, and certainly not only social conservatives, who support these arguments. This is an argument that liberals ought to be taking seriously now, especially as progressive thought continues to drift in a more illiberal direction.
Christianity Today op-ed: How to Protect Endangered Religious Groups You Admire, by Richard W. Garnett (Notre Dame), John D. Inazu (Washington University) & Michael W. McConnell (Stanford):
Today, tens of thousands of religious organizations, and tens of millions of Americans, continue to believe and teach that the proper understanding of marriage is a union of one man and one woman. But they do far more than believe and teach this and other views.
They also give food, clothing, shelter, counsel, and comfort to millions of Americans in need. They offer some of the most important and desperately needed health, educational, and social services in the country. And they provide billions of dollars and thousands of full-time workers for international relief aid that serves vulnerable migrants, refugees, and persecuted minorities. The work of religious organizations has long been and continues to be central both to religious believers’ lives and to the welfare of others. Our communities—and, indeed, communities around the globe—would be much worse off without these organizations and their faith-informed good works.
Despite the crucial role that religious organizations and individuals have long played in our country, some voices now suggest that they and their work are somehow tainted because of their beliefs about marriage and sexuality. Some argue that the time has come to push religious believers out of the public square and confine them to the quiet, private realm of personal prayer and worship. This despite the Supreme Court's recent decision in Obergefell v. Hodges, which not only required states to legally recognize same-sex marriages but also said, “the First Amendment ensures that religious organizations and persons are given proper protection as they seek to teach the principles that are so fulfilling and so central to their lives and faiths.”
Nonetheless, because of their traditional views on human sexuality, religious organizations have already been threatened with heavy-handed government action. ...
[W]ithin days of the Court’s decision in Obergefell, New York Times columnist Mark Oppenheimer wrote that the government should eliminate tax-exempt status from “organizations that dissent from settled public policy on matters of race or sexuality.”
Mr. Oppenheimer failed to acknowledge that in a pluralistic and democratic society, government routinely recognizes the tax-exempt status of organizations that differ from “settled public policy.” For example, not that long ago, the Human Rights Campaign was tax-exempt when it differed from settled policy on matters of sexuality; the same is true of organizations, like the Sierra Club, who push for changes in environmental regulation, or anti-war groups, who oppose US military policy. One of the principal purposes of civil society organizations is to challenge “settled public policy.”
Moreover, the majority opinion in the 5-4 decision in Obergefell earlier this summer made clear that “Many who deem same-sex marriage to be wrong reach that conclusion based on decent and honorable religious or philosophical premises, and neither they nor their beliefs are disparaged here.” ...
Some members of Congress have now introduced the First Amendment Defense Act (FADA) in an effort to ensure that overheated rhetoric and political opportunism do not endanger the important work of faith-based organizations. The core of FADA would require the federal government to honor its longstanding commitments to treat all such organizations with an even hand. It would prevent federal officials from attempting to strip tax-exempt status, from denying equal access to federal facilities and entitlements, or from taking adverse actions related to licensing or accreditation. ... We think the best approach is to tailor FADA to the core area of concern: religious nonprofits. That focus would serve the cause of religious freedom by making it more likely that this important legislation can move forward.
[Hat tip: TaxProfBlog]
As reported by the Daily Tax Report, the NYC Bar Association has requested that the IRS issue a revenue ruling confirming the agency's stance in two 2014 private letter rulings that the exempt organization was not required to obtain a new exemption letter upon a change of domicile or in the case of certain conversions (See PLR 201446025; PLR 201426028).
The IRS has responded that the issue will likely be addressed through a guidance project.
Friday, July 24, 2015
As previously blogged, the GAO Report to Congress (the full report is here) on the IRS processes for political activity referrals found significant deficiencies with respect to the initial allegations that triggered an audit. In some cases, no case files were found by the GAO. These deficiencies "increase the risk that EO could select exempt organizations for examination in an unfair manner - for example, based on an organization's religious, educational, political or other views." According to Bloomberg BNA, in the hearing before the Ways and Means Oversight Committee in which the GAO report was released, it was determined that for the past six years, "one person working alone at the IRS has been deciding which complaints about the political activities of exempt organizations should be followed up."
Following the above-referenced hearing, IRS Commissioner John Koskinen reported to Bloomberg BNA that final regulations on political campaign activities by exempt organizations will not be in place prior to the 2016 presidential election (see proposed regulations here). The regulations will likely not be effective until January 2017. See prior blog posts on the proposed regulations and political activity regulations generally (April 16, 2014; July 16, 2015).
Thursday, July 23, 2015
IRS Issues Memorandum on Political Activities Referral Committee while determined to be "at risk" by GAO
On July 21, the IRS released a memorandum (TEGE-04-0715-0018) that defines the operation and composition of the Political Activities Referral Committee (PARC) that is charged with reviewing referrals for exempt organization audits. According to Bloomberg BNA, the memorandum was released in advance of a hearing where the Government Accountability Office has now issued a report finding that "poor oversight" places the IRS at risk that its agents could target exempt organizations for audits based on the organization's religious, educational or political views.
The memorandum describes the basic composition of a PARC:
Effective immediately, a PARC will consist of three IR-04 managers (OPM General Schedule (GS) grade 14 equivalent) who will be selected at random. All EO Examinations and Rulings & Agreements front-line IR-04 managers are eligible for selection to a PARC. The managers who are selected to serve on a PARC will receive appropriate training, and will serve on that committee as a collateral assignment for a period of two years. The inventory volume of political activities referrals received will determine the number of PARCs established and the time commitment required by the members of a PARC.
A PARC will review and recommend referrals for audit in an impartial and unbiased manner. A PARC must identify and document to the case file that the referral and associated publicly available records establish that an organization and any relevant persons associated with that organization may not be in compliance with Federal tax law. All PARC members will use the Reporting Compliance Case Management System (RCCMS) to document their activities and conclusions for the duration of their assignment to a PARC. In order for a referral considered by the PARC to be forwarded to an EO Examination group for audit consideration, two out of three PARC members must make that forwarding recommendation (majority rule).
(More on GAO Report: Washington Post, "Watchdog: IRS at risk for unfairly auditing political groups")
Monday, July 20, 2015
As reported by the Daily Tax Report, a tax law specialist in the IRS's Exempt Organizations office commented in a recent IRS webcast that social clubs must have individual, not corporate, members to qualify for tax-exempt status under Section 501(c)(7). In order to meet the social interaction and recreational purposes of 501(c)(7), individuals are necessary in that "corporate members are incapable of personal contact." If individuals hold memberships sponsored by corporations, the particular country club or sports club will still qualify for tax-exempts status.
As explained by the IRS, "substantially all" of a tax-exempt social club's income must come from dues, fees, assessments or other payments for typical social functions, or facilities that the club provides to its members. The IRS reiterated that this is a key consideration for tax-exempt status under 501(c)(7). The "substantially all" rule does permit a club to receive up to 35 percent of its gross receipts from non-member sources. Within that 35 percent rule, no more than 15 percent of the organization's gross receipts can be from the use of its facilities or services by nonmembers. If the "35-15 test" is not met, the IRS will examine all facts and circumstances to determine if a 501(c)(7) determination is proper.
Pursuant to a July 14, 2015 notice published in the Federal Register, the IRS is seeking comments concerning Form 990, Return of Organization Exempt from Income Tax under Section 501(c), 527, or 4947(a)(1) of the Internal Revenue Code. In the notice, the IRS specifically sought comments on:
- Schedule A (Form 990 or 990-EZ), Public Charity Status and Public Support, used to elicit special information from Section 501(c)(3) organizations; and
- Schedule B (Form 990, 990-EZ, or 990-PF), Schedule of Contributors, which is used by tax-exempt organizations to list contributors and allows the IRS to distinguish and make public disclosure of the contributors list within the requirements of Section 527.
The notice stated that comments should address: (i) whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (ii) the accuracy of the agency's estimate of the burden of the collection of information; (iii) ways to enhance the quality, utility, and clarity of the information to be collected; (iv) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and (v) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
Monday, July 6, 2015
In the wake of Obergefell, the Internet was a dangerous place to be as a tax lawyer. Oh, a nickel for all the posts that lamented the loss of tax-exempt status for churches that didn't perform same sex marriages forthwith! Of course, I was sure to correct them all right away, because you know, nothing on the internet can be wrong, right?
There's been a lot of coverage by the news media on this issue as we've had some more time to discuss the issues, as discussed previously here at the Nonprofit Tax Prof Blog. Here's the latest in the coverage from the Baltimore Sun, which discusses the tax exempt status of religiously-affiliated universities. The article hedges on the issue of tax-exempt status, but I think both sides of the tax argument can find some common ground in the discussion found there. Under a Bob Jones University analysis, I'm not sure that we are there yet - there being that discrimination on the basis of sexual orientation is so fundamentally against public policy as to cause loss of tax-exempt status. While Obergefell certain makes it a stronger case, I think we will need to see more from the other branches of government before we get to that level. That being said, I agree with the Sun article in the thought that even if we aren't there now, I think we may be within my lifetime.
I do think that it is important to point out that Bob Jones University specifically talked about racial discrimination in education as being the fundamental public policy at issue and that the case involved the tax-exempt status of a university, not a church. Note that this article only talks about colleges and universities - the question of the tax-exempt status of churches is much more complicated. I don't believe there there is a case that we know of that where a church lost its tax-exempt status on the basis of religious discrimination. Can any of my Tax Prof or Nonprofit Prof Blog colleagues think of any example?
Wednesday, June 24, 2015
Skadden, Arps Requests Guidance on Taxation of Retirement Payments to Providers of Pro Bono Legal Services
As reported in Tax Notes Today (subscription required), Skadden, Arps has written the Assistant Secretary (Tax Policy) in Treasury and the IRS Chief Counsel to request inclusion in the 2015-2016 Priority Guidance Plan of published guidance addressing the tax treatment of retirement payments to retired law firm partners who provide pro bono legal services to the poor and to charitable organizations that serve them. The following paragraph of the firm's letter explains the legal issue:
[T]he question is whether pro bono services provided by retired partners constitute "services with respect to [a] trade or business carried on by [the law firm] partnership," such that the retirement payments would no longer qualify for the exception to the definition of "net earnings from self-employment." Section 1402(a)(10(A) provides that if a retirement plan meets certain requirements, any payments made pursuant to that plan are excluded from a partner's net earnings from self-employment so long as, among other things, the partner "rendered no services with respect to any trade or business carried on by such partnership . . . during the taxable year of such partnership . . . in which such amounts were received." The issue raised by the Chief Judge's pro bono initiative focusing on retired partners is whether a retired partner who is currently receiving retirement payments that otherwise qualify for the Section 1402(a)(10(A) exclusion could be treated as "rendering services with respect to any trade or business" of the law firm partnership by taking on a pro bono legal representation that is connected to the law firm, whether it involves supervision of other law firm lawyers and staff, use of law firm resources (office space, computer and other equipment), and/or coverage under the law firm's malpractice insurance.
The letter argues that “uncertainty surrounding the tax treatment of the retirement payments presents a significant impediment to the retired partner's provision of pro bono services, thereby serving to discourage important pro bono work by retired law firm partners who would not otherwise be subject to self-employment tax on their retirement payments, but for their pro bono assistance to needy underserved individuals and communities.”
Electronic Citation: 2015 TNT 121-18
Tuesday, June 16, 2015
The Washington Post reported yesterday that a coalition of community groups filed a 22 page complaint against WalMart Foundation, essentially accusing the foundation of operating for private benefit rather than the public good: From the Post article:
More than a dozen community groups filed a complaint with the Internal Revenue Service Monday alleging that the Walmart Foundation violated its tax-exempt status by using charitable funds to advance the retailer’s entrance into urban markets including Washington. The 22-page complaint, addressed to IRS Commissioner John Koskinen, details the retailer’s marketing and lobbying activities as it sought approval to open stores in New York City, Boston, Chicago, Los Angeles and other cities. The groups allege that the foundation is completely controlled by the company and that it “appears to target its donations and influence its grantees primarily to assist WalMart to achieve those expansion goals, ultimately providing Walmart more than an incidental benefit. Walmart Foundation’s activities are impermissible under the Code.”
Walmart has been forced to defend itself against allegations that its multi-billion dollar foundation has been using tax-exempt funds to help the retail chain expand into urban areas. On Monday, more than a dozen community groups filed a complaint with the Internal Revenue Service alleging that the WalMart Foundation violated tax code by targeting its donations to cities where the big-box giant has faced opposition to its growth plans. Data analysis of tax returns by these local nonprofits shows an uptick to the tune of millions in donations from the WalMart Foundation to organizations in Boston, New York, Washington D.C., and Los Angeles as WalMart pursued store openings in these cities.
What I found most curious and -- from a purist's standpoint, I suppose -- most disconcerting is the complaint's imprecise sort of casual discussion of private inurement and private benefit. Granted, I have only skimmed the complaint thus far but it seems the complainers are really just sorta casting a wide net and hoping to catch violations that might be lurking rather than making a strong case to suggest any real violations they know to exists. Sometimes premature accusations made for the purpose of attention or sensationalism do more harm than good. I can't help but wonder if this is a case in point.
Wednesday, May 27, 2015
I have been thinking about the impact of yesterday's indictment of numerous FIFA officials on the various organizations' tax statuses, both here in the United States and abroad -- particularly under the tax laws of Switzerland. The FIFA matter would make for good class discussion, I think. According to a DOJ Press Release issued this morning:
A 47-count indictment was unsealed early this morning in federal court in Brooklyn, New York, charging 14 defendants with racketeering, wire fraud and money laundering conspiracies, among other offenses, in connection with the defendants’ participation in a 24-year scheme to enrich themselves through the corruption of international soccer. The guilty pleas of four individual defendants and two corporate defendants were also unsealed today.
The defendants charged in the indictment include high-ranking officials of the Fédération Internationale de Football Association (FIFA), the organization responsible for the regulation and promotion of soccer worldwide, as well as leading officials of other soccer governing bodies that operate under the FIFA umbrella. Jeffrey Webb and Jack Warner – the current and former presidents of CONCACAF, the continental confederation under FIFA headquartered in the United States – are among the soccer officials charged with racketeering and bribery offenses. The defendants also include U.S. and South American sports marketing executives who are alleged to have systematically paid and agreed to pay well over $150 million in bribes and kickbacks to obtain lucrative media and marketing rights to international soccer tournaments.
I did some preliminary checking and learned that FIFA is a complicated Swiss based international charitable organization comprising several other national and international nonprofit and tax exempt organizations, including the U.S. Soccer Foundation. It seems rather axiomatic that when executives -- insiders and disqualified persons, likely -- use the organization's venue selection and contracting processes to extract bribes, kickbacks, and other illicit payments from third parties, the organization is being operated for private benefit. I wonder, though, about the extent to which an umbrella organization's misdeeds can cause legal issues for one or more of its member organizations, such as the U.S. Soccer Foundation. And even if the bribes and kickbacks constitute or indicate private benefit, would the organizations subject to U.S. law be able to point to their other activities to support an argument that whatever private benefit existed was substantially outweighed by their good deeds and therefore not fatal to tax exemption? Anyway, the whole topic, along with all the exhibits and so forth available online would make for good discussion fodder in a class or seminar dealing with tax exemption in the international arena. The L.A. Times has some useful articles on the subject.
Thursday, May 21, 2015
FTC and All 50 States File 148 Page Complaint Alleging Massive Fraud by Cancer Charities, Collect More than $100 Million in Restitution
I have not yet even begun to read the alleged details yet, but two days ago the Federal Trade Commission and all 50 states of the Union plus the District of Columbia filed a nearly 150 page complaint against four cancer charities alleging fraud and what amounts to massive examples of private inurement and excess benefit transactions. What interested me most in the complaint were allegations pertaining to defendants' failure to "observe rudimentary corporate governance practices" used apparently to bolster the allegations of private benefit that run throughout the complaint. I am going to give it a more thorough read and talk more about that later. From the Press Release:
The Federal Trade Commission and 58 law enforcement partners from every state and the District of Columbia have charged four sham cancer charities and their operators with bilking more than $187 million from consumers. The defendants told donors their money would help cancer patients, including children and women suffering from breast cancer, but the overwhelming majority of donations benefitted only the perpetrators, their families and friends, and fundraisers. This is one of the largest actions brought to date by enforcers against charity fraud.Named in the federal court complaint are Cancer Fund of America, Inc. (CFA), Cancer Support Services Inc. (CSS), their president, James Reynolds, Sr., and their chief financial officer and CSS’s former president, Kyle Effler; Children’s Cancer Fund of America Inc. (CCFOA) and its president and executive director, Rose Perkins; and The Breast Cancer Society Inc. (BCS) and its executive director and former president, James Reynolds II.
CCFOA and Perkins, BCS, Reynolds II and Effler have agreed to settle the charges against them. Under the proposed settlement orders, Effler, Perkins and Reynolds II will be banned from fundraising, charity management, and oversight of charitable assets, and CCFOA and BCS will be dissolved. Litigation will continue against CFA, CSS and James Reynolds Sr.
. . . . . .
According to the complaint, the defendants used telemarketing calls, direct mail, websites, and materials distributed by the Combined Federal Campaign, which raises money from federal employees for non-profit organizations, to portray themselves as legitimate charities with substantial programs that provided direct support to cancer patients in the United States, such as providing patients with pain medication, transportation to chemotherapy, and hospice care. In fact, the complaint alleges that these claims were deceptive and that the charities “operated as personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation, with none of the financial and governance controls that any bona fide charity would have adopted.” According to the complaint, the defendants used the organizations for lucrative employment for family members and friends, and spent consumer donations on cars, trips, luxury cruises, college tuition, gym memberships, jet ski outings, sporting event and concert tickets, and dating site memberships. They hired professional fundraisers who often received 85 percent or more of every donation. The complaint alleges that, to hide their high administrative and fundraising costs from donors and regulators, the defendants falsely inflated their revenues by reporting in publicly filed financial documents more than $223 million in donated “gifts in kind” which they claimed to distribute to international recipients. In fact, the defendants were merely pass-through agents for such goods. By reporting the inflated “gift in kind” donations, the defendants created the illusion that they were larger and more efficient with donors’ dollars than they actually were. Thirty-five states alleged that the defendants filed false and misleading financial statements with state charities regulators. In addition, the FTC and 36 states charged CFA, CCFOA and BCS with providing professional fundraisers with deceptive fundraising materials. The FTC and the attorneys general also charged the defendants with violating the FTC’s Telemarketing Sales Rule (TSR), CFA, CCFOA and BCS with assisting and facilitating in TSR violations, and CSS with making deceptive charitable solicitations.
The Press Release contains links to the complaint the proposed final orders against two of the four malefactors as well as stipulated orders resulting in restitution in excess of $100,000,000.
Thursday, May 14, 2015
The Treasury Inspector General for Tax Administration issued a new "Final Report" on the IRS handling of exemption applications involving political campaign intervention. Here are excerpts from the conclusions:
The IRS has taken significant actions to eliminate the selection of potential political cases based on names and policy positions, expedite processing of Internal Revenue Code (I.R.C.) Section (§) 501(c)(4) social welfare organization applications, and eliminate unnecessary information requests.
First, the IRS eliminated the use of Be On the organizations, if it becomes a permanent Look Out (BOLO) listings, . . . .
Second, the Exempt Organizations function completed processing for 149 of the 160 applications for tax-exempt status that, as of December 2012, had been open for lengthy periods. . . . .
The report further provides that in the absence of BOLO listings the IRS has created an "Emerging Issues Committee" to screen, review, and monitor emerging issues based on actual or planned activities of applicants, as opposed to names or policy positions. The report also provides of 149 closed applications, the IRS approved 107 (72%) and disapproved 7 (5%), while applicants either withdrew (8 or 5%) or failed to respond to requests for information (27 or 18%) the remaining applications. Of the 11 applications still open, six are in litigation and five have either proposed adverse determinations or are in Appeals. Reading between the lines, a Bloomberg article notes that these figures suggest that the IRS has sent Crossroads GPS a denial letter, since the Crossroads application is still outstanding and is not in litigation. As the Center for Responsive Politics notes, however, the statute of limitations might now bar collection of any taxes from Crossroads even if its application is ultimately denied. Additional Coverage: Forbes (Peter Reilly).
Relatedly, the NorCal Tea Party Patriots have convinced the federal judge overseeing their lawsuit against the IRS to require the IRS to identify the 298 groups that had submitted applications identified as potential political cases as of May 31, 2012 (mentioned on page 4 of the TIGTA Final Report) in order to facilitate class certification in that litigation. The Judge's order explains why she concluded Internal Revenue Code section 6103 does not prevent this limited discovery. Additional coverage: Forbes (Peter Reilly).
In other news, TIGTA managed to recover 6,400 emails to or from Lois Lerner from between 2004 and 2013, although it is unclear how many might be duplicates of the tens of thousands of emails previously recovered by the IRS and turned over to Congress. No final word from the congressional committees reviewing the emails regarding whether they add anything to the ongoing investigations, although initial indications are that there is little new in them. Coverage: CNN; Forbes (Kelly Phillips Erb); The Hill.
Finally, the House has passed a package of bills relating to the 501(c)(4) application mess, although their fate in the Senate (and on the President's desk) is uncertain. The most prominent is H.R. 1104, which would extend a gift tax exemption to 501(c)(4) social welfare organizations, 501(c)(5) labor, agricultural, and horticultural organizations, and 501(c)(6) trade associations and chambers of commerce. Currently donors to 501(c)(3) charities generally enjoy such a deduction (under Internal Revenue Code section 2522), and transfers to 527 political organizations are exempt from the gift tax (under section 2501(a)(4)). The other bills are H.R. 709 (termination for political targetting), H.R. 1026 (taxpayer privacy), H.R. 1058 (Taxpayer Bill of Rights), H.R. 1152 (use of personal email accounts prohibition), H.R. 1295 (self declaration process and declaratory judgment actions for 501(c)(4)s), and H.R. 1314 (right to appeal). Coverage: Forbes (Robert W. Wood); Politico.
Wednesday, May 6, 2015
I was wondering what all the traffic gridlock was about when I got out of LaGuardia airport early Monday afternoon and tried to make my way to Poughkeepsie. fearing the worst, I tuned in to 1010 WINS to catch the traffic report. That was when I heard it: President Obama had been at Lehman College where he had announced the creation of a nonprofit called the My Brother's Keeper Alliance. The new organization is a spinoff of a White House initiative of the same name aimed at uplifting African American and Hispanic boys from preschool through high school.
In launching the new Charity, President Obama stated that the My Brother’s Keeper Alliance will "continue the work of opening doors for young people -- all our young people -- long after I've left office."
Reporting on the launch, TheNonProfitTimes reports that the President
told the audience at Lehman that the new organization has secured $80 million from companies such as Deloitte, News Corp and American Express. The group's star-studded executive team and advisor board will include former Secretary of State Gen. Colin Powell, Sen. Cory Booker (D-N.J.), basketball stars Alonzo Mourning and Shaquille O'Neal, and former Attorney General Eric Holder, among others.
The new organization will be led by former Deloitte CEO Joe Echevarria and might serve as a vehicle through which the president can influence policy after his second term is up. Speaking to reporters, White House Press Secretary Josh Ernest stated:
While I'm not in a position to describe the specific, detailed relationship between the president and this alliance that will continue after his presidency, I can tell you that this is an issue that the president intends to continue to be focused on long after he has left the Oval Office.
Meanwhile, Broderick Johnson, chair of the White House initiative, linked the My Brother's Keeper with the unrest in Baltimore following the death of Freddie Gray. Writing on the My Brother's Keeper initiative's website, Johnson stated:
For so many of us, the My Brother's Keeper initiative is deeply personal. As a proud son of Baltimore, this week's announcement comes at a time of unique and special resonance for me. As the country reflects on our shared responsibility to ensure that opportunity reaches every young person, I urge everyone to look at their own capacity to make a difference.
The My Brother's Keeper initiative was designed to focus federal resources towards closing the opportunity gap experienced by African American and Latino males. To that end, Johnson identified almost $1 million in funds from a number of federal agencies: the departments of Education and Health and Human Services announced $750 million in Preschool Development Grants for 18 states this past December, and the Department of Labor and the National Guard have programs that will together expend $100 million to improve career prospects for minorities.
Wednesday, March 18, 2015
501(c)(4) Update: Handful of Applications Still Pending, Do Lost Emails = A Crime?, and (Another) Court Dismisses Claims Against Lerner
IRC Section 501(c)(4) Applications: The IRS reported that as of last month it had closed 138 or 95% of the 145 organizations that had applied for recognition of exemption under section 501(c)(4) and were eligible for optional expedited processing because the only issues their applications raised were possible involvement in political campaign intervention or providing private benefit to a political party. The optional expedited process results in a favorable determination letter if the applicant represents that it devotes (1) 60 percent or more of both spending and time to activities that promote social welfare and (2) 40 percent or less of both spending and time to political campaign intervention. Of the 106 favorable determination letters issued by the IRS, 43 were the result of applicants choosing this process. Nevertheless a handful of such applications are still pending, including the application for Crossroads GPS and also several much smaller "mom-and-pop outfits," according to Politico.
Lost Emails: Politico also reports that in response to questioning from members of Congress a representative of the Treasury Inspector General for Tax Administration told a congressional Committee that TIGTA's ongoing search for IRS emails has revealed "potential criminal activity" in that the IRS failed to initially disclose some backup tapes and that other tapes were erased. The TIGTA representatives emphasized, however, that the investigation was still ongoing and it was too soon to determine if the actions were purposeful or the result of ill intent. A video of the full hearing is available here.
Federal Court Dismisses Claims Against Lerner: In a decision issued late last month, the U.S. District Court for the Northern District of Texas (Dallas Division) dismissed claims brought by Freedom Path, Inc. against Lois Lerner without prejudice for lack of personal jurisdiction. The claims arose out of the IRS's alleged mishandling of Freedom Path's application for recognition of exemption under IRC section 501(c)(4). The court found that the group's allegations did not demonstrate sufficient contacts with the state of Texas to grant the court personal jurisdiction over Lerner. The court also rejected several of the group's claims against the IRS and unnamed federal officials, including claims that challenged the constitutionality of two revenue rulings relating to political activity (2004-6 and 2007-41), finding the group had not pled sufficient facts to establish standing to challenge those rulings, and two other claims (for other deficiencies). The court did, however, give the group 28 days to file an amended complaint although it felt that the defects in some of the dismissed claims appeared to be incurable.