Sunday, November 19, 2017

Aprill on the Tax Consequences of Legal Defense Funds

AprillEllen P. Aprill (Loyola-Los Angeles) has written a short piece on the Tax Consequences of Legal Defense Funds. From the article:

LDF trusts raise questions as to tax treatment of the trust,  whether the trust can take advantage of special rules applicable to political organizations, whether contributions to the LFD trusts can be deemed gifts excluded from the official’s income, whether donors to LDF trusts are subject to gift tax liability,  whether the government official must report amounts distributed from the fund for legal expenses as income, and the extent to which deductions are available to the government officials for amounts expended from the trust on his or her behalf.

Lloyd Mayer

November 19, 2017 in Current Affairs, Federal – Executive, Publications – Articles | Permalink | Comments (0)

Saturday, November 18, 2017

My Last (?) Post About the Section 501(c)(4) Application Controversy

Form 1024[UPDATED 11/21/17 to add NY Times report of amount paid in one settlement.] Recent months have seen a flurry of developments indicating that this controversy is finally winding down.

First, two months ago the U.S. Department of Justice announced that it would not reopen the criminal investigation of former IRS Exempt Organizations Director Lois Lerner, to howls of fury from her critics in Congress.

Then the Treasury Inspector General for Tax Administration released a new report that found a number of left-leaning organizations that had applied for section tax-exempt status had also had their applications subject to additional review and/or been subject to unnecessary questions. The report did not undermine TIGTA's previous finding that the IRS had used inappropriate criteria to identify applications for additional scrutiny, or that many right-leaning organizations had been selected as a result of that criteria, but it muddied the waters regarding how politically biased the application process actually was and provided further support for the argument that the problems with that process likely reflected incompetence more than malevolent intent. (More coverage: Washington Post.)

Late last month the U.S. Department of Justice announced the settlement of two pending lawsuits relating to the controversy, including the one class action suit. According to a report by a CNN, the settlements did not involve the payment of any monetary damages but included an apology from the IRS. The NY Times later reported, however, that one of the settlements involved a seven-figure payment, although the exact amount and other details were not available.  The two settled cases (assuming court approval of the settlement in the class action case) are NorCal Tea Party Patriots v. IRS (the class action) and Linchpins of Liberty v. United States. (More coverage: Fox News, Washington Post.)  By my count there is still a pending lawsuit brought by True the Vote against the IRS, as well as Freedom Path's lawsuit against the IRS (set for trial in summer 2018), so this settlement is not quite the end of all litigation.

Finally, earlier this month IRS Commissioner John A. Koskinen reached the end of his 5-year term. Despite calls for his removal or even impeachment because of the IRS' handling of the controversy's investigation, President Trump chose not to ask him to step down and Congress did not take any steps to begin the impeachment process. The Administration has not nominated his successor, with Assistant Secretary for Tax Policy David Kautter currently serving as interim IRS Commissioner. Coverage: N.Y. Times.

Lloyd Mayer

 

November 18, 2017 in Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (1)

Friday, November 17, 2017

The Treasury/IRS To Do List (Priority Guidance Plan, TE/GE Workplan)

IRSLast month the Department of the Treasury and the IRS released their 2017-2018 Priority Guidance Plan, listing the projects they hope to complete by June 30, 2018. A little over a month earlier the IRS had released its Tax Exempt and Government FY 2018 Work Plan. Together these documents provide a roadmap for most if not all that we are likely to see from Treasury and IRS relating to tax-exempt organizations, other than urgent guidance growing out of either current events or the passage of tax reform or other tax legislation.

The Priority Guidance Plan lists the following items specifically relevant to tax-exempt nonprofit organizations that are still in process:

  • Updated revenue procedures on grantor and contributor reliance under sections 170 and 509, including updating to Revenue Procedure 2011-33 for EO Select Check.
  • Finalization of regulations (proposed 8/7/08) under section 170 relating to substantiation and reporting of charitable contributions.
  • Guidance under section 170(e)(3) regarding charitable contributions of inventory.
  • Guidance related to church plans.
  • Finalization of the regulations (proposed 2/19/16) relating to section 509(a)(3) supporting organizations.
  • Guidance under section 512 regarding methods of allocating expenses relating to dual use facilities.
  • Finalization of the regulations (proposed 2/6/14) under section 512 relating to computation of unrelated business taxable income for section 501(c)(9) employees' beneficiary associations.
  • Guidance under section 4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners.
  • Guidance regarding the excise taxes on donor advised funds and fund management.
  • Finalization of the regulations (proposed 3/15/11) under section 6104(c) relating to state requests for information relating to tax-exempt organizations.
  • Finalization of the regulations (proposed 8/5/09) under section 7611 relating to church tax inquiries and examinations.

The Plan also included what is now Revenue Procedure 2017-53, which updated Revenue Procedure 92-94 relating to equivalency determinations for foreign grantees under sections 4942 and 4945.

The Work Plan includes numerous projects for the 2017-2018 year, including:

  • Implementing revisions to Form 1023-EZ, including a required activity description and additional questions on gross receipts, asset thresholds, and foundation classification, as well as continuing pre-determination reviews of a statistical sample of Form 1023-EZ applications.
  • Enhancement of compliance efforts through certain emphases (supporting organizations, previous for-profit entities, and private benefit/private inurement indicators), data-driven approaches, and referrals.

Lloyd Mayer

November 17, 2017 in Federal – Executive | Permalink | Comments (0)

Thursday, November 2, 2017

Increased IRS Review of Tax-Exempt Hospitals

As reported in the October 23rd edition of Tax Notes, IRS is now reviewing tax-exempt hospitals to ensure their compliance with the §501(r) regulations issued in 2015.  At the American Health Lawyers Association meeting on October 19th, a tax law specialist in the IRS Tax-Exempt and Government Entities Division Reviews conveyed that the IRS is uncovering compliance issues regarding the financial assistance policy (FAP) and community health needs assessment requirements. Agents also are inquiring as to whether patients eligible under the hospital's FAP are not excessively billed.  In addition, the tax law specialist reported non-contact reviews taking place in 2014 to 2016 resulted in several hundred examinations, most from the absence of required documents on the hospital's website.  The specialist also revealed that unrelated business income and excess benefit transactions were also sources for examinations.

(Hat tip:  Fred Stokeld at Tax Notes)

-Nicholas Mirkay

 

November 2, 2017 in Conferences, Federal – Executive | Permalink | Comments (0)

Thursday, August 17, 2017

Hate Groups & Tax Benefits

Img_1578Both Terri Helge and Joseph Mead previously reported in this space on the tax benefits that many organizations often identified as "hate groups" enjoy because of the broad and vague requirements for qualifying as an educational organization under Internal Revenue Code sections 501(c)(3) and 170(c)(2). Not surprisingly, the events in Charlottesville have led to a renewed discussion of this topic. Recent coverage includes a Business Insider story on this topic and a fascinating blog post by Sam Brunson (Loyola Chicago) on the conflict almost a hundred years ago between the IRS and the KKK (and from which the photo shown here is borrowed).

Lloyd Mayer

August 17, 2017 in Federal – Executive, In the News | Permalink | Comments (2)

Wednesday, August 16, 2017

The Achilles Heel of Charitable Contribution Deductions - Paperwork

Form 8283Over the summer, the United States Tax Court in RERI Holdings I, LLC v. Commissioner upheld the disallowance of a $33 million charitable contribution deduction because of the failure of RERI Holdings I, LLC to state on its required Form 8283 appraisal summary the "Donor's cost or other adjusted basis" for the property. The court further held that the failure could not be excused by substantial compliance because the omission "prevented the appraisal summary from achieving its intended purpose" of alerting the IRS of potential overvaluations of contributed property (and thereby deterring taxpayers from claiming excessive deductions). In this instance the omitted basis would have been approximately $3 million, or roughly one-tenth the value claimed for the contributed property.

While failures to substantiate charitable contributions adequately occur frequently in tax cases, they usually do not affect such large claimed deductions because presumably as the numbers get larger the care and expertise of the professionals involved becomes greater. There may have been more going on here, however. At least one commentator, Peter J. Reilly over at Forbes, concludes that the "brazeness of the charitable plan . . . revealed in the Tax Court RERI Holdings I decision is stunning" in an article titled Billionaire Stephen Ross And the Ten for One Charitable Deduction. Assuming the IRS took a similar view, it very well could have been looking for any possible flaw in the deduction that could be used to disallow it, and the substantiation omission provided a simple way to do so (as opposed to getting into a messy valuation dispute, although the court's opinion goes there anyway in order to determine if certain penalties applied).

No word yet on whether RERI Holdings I will appeal.

Lloyd Mayer

August 16, 2017 in Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (0)

Conservation Easements: Today's Biggest Charitable Contribution Deduction Loophole?

Download (1)How large is the potential for hard-to-detect and even harder-to-counter abuse when it comes to the federal income tax deduction for "qualified conservation contributions" under Internal Revenue Code section 170(h)? As Peter J. Reilly highlights at Forbes, the potential appears to be pretty large based on early responses to Notice 2017-10's addition of syndicated easements to the list of listed transactions that must be reported to the IRS. In a July 13, 2017 letter to Senator Ron Wyden, ranking member of the Senate Finance Committee, IRS Commissioner Koskinen reported that the 40 fully completed and processed reporting forms, out of 104 processed and 200 received to date, showed an aggregate charitable contribution deduction of over $217 million with preliminary calculations finding that the average deduction was nine times the amount of the investment in the transaction. Other coverage: Tax Analysts.

Such syndicated easements are only part of the conservation easement universe, but the continuing stream of federal court decisions rejecting in whole or in part deductions claimed for such easements highlight the broader issues with this deduction. For example, the U.S. Court of Appeals for the Eighth Circuit recently affirmed disallowance of a $16.4 million deduction for a failure to protect the conservation purpose in perpetuity (RP Golf v. Commissioner). Not all IRS challenges are necessarily successful, however; for example, the U.S. Court of Appeals for the Fifth Circuit recently reversed disallowance of $15.9 million in deductions, although the court remanded the case for consideration of additional reasons for disallowance asserted by the IRS (BC Ranch II, L.P. v. Commissioner).

Recent reports also highlight the broader concerns with such deductions. In May, Adam Looney of the Brookings Institute issued Charitable Contributions of Conservation Easements, listing general tax policy concerns that predated the recent surge in such contributions:

  • "Donations are concentrated in transactions that seem unrelated to conservation benefits," including with respect to type of transaction, geographic area, and donee organizations.
  • "A small handful of donee organizations are responsible for a disproportionate share of donations," with 25 organizations (as compared to 1,700 land trusts nationwide) receiving between 2010 and 2012 about half of all such contributions, measured by dollar value.
  • "Most organizations that receive donations of easements do not report them as gifts or revenues on their public tax returns," impeding transparency, public accountability, and IRS enforcement.
  • "Donations of 'partial interests' are difficult to administer," including with respect to determining the fair market value of the contribution for deduction purposes.

The report is also available through the Urban Institute & Brookings Institution Tax Policy Center.

Nancy McLaughlin (Utah) has also continued her excellent coverage of this topic. Here is the abstract for her latest article, Tax Deductible Conservation Easements and the Essential Perpetuity Requirements, Virginia Tax Review (forthcoming):

Property owners who make charitable gifts of perpetual conservation easements are eligible to claim federal charitable income tax deductions. Through this tax-incentive program the public is investing billions of dollars in easements encumbering millions of acres nationwide. In response to reports of abuse in the early 2000s, the Internal Revenue Service (Service) began auditing and litigating questionable easement donation transactions, and the resulting case law reveals significant failures to comply with the deduction’s requirements. Recently, the Service has come under fire for enforcing the deduction’s “perpetuity” requirements, which are intended to ensure that the easements will protect the subject properties’ conservation values in perpetuity and that the public’s investment in the easements will not be lost. Critics claim that the agency is improperly discouraging easement donations by denying deductions for technical foot faults, and some have called for a change to the law that would allow taxpayers to cure their failures to comply with the perpetuity requirements if they are discovered on audit. 

This Article illustrates that noncompliance with the perpetuity requirements should not be viewed as technical foot faults. To the contrary, compliance is essential to the integrity of the tax-incentive program and the easements subsidized through the program. In addition, allowing taxpayers to cure failures to comply with the perpetuity requirements if they are discovered on audit would significantly increase noncompliance and abuse and, given the reliance nationwide on deductible easements to accomplish conservation goals, risk fatally undermining an entire generation of conservation efforts. This Article recommends a more prudent approach: the Treasury’s issuance of guidance that would greatly facilitate compliance with the perpetuity requirements, reduce transaction costs for taxpayers, and significantly shore up the integrity of the program.

Lloyd Mayer

August 16, 2017 in Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (0)

Thursday, June 22, 2017

Crystal Ball Gazing: Tax Reform and Nonprofits

CongressNo one knows what is going to happen with tax reform, which means now is the perfect time to speculate wildly about how Congress may help or hurt tax-exempt nonprofits if and when it actually does something.

Tax Simplification: If Congress follows the President's lead and simplifies in part by sharply increasing the standard deduction, it will make the charitable contribution deduction irrelevant to an even greater proportion of U.S. households as the number of itemizers shrinks significantly. According to an Indiana University Lilly Family School of Philanthropy report, this change alone could reduce charitable giving by an estimated $11 million annually, and if combined with a lower top tax rate of 35% they could together reduce charitable giving by $13.1 billion. To put these figures in perspective, the most recent Giving USA report reported $282 billion in donations from individuals for 2016.

Non-Itemizer Deduction: One proposal to counter this effect is a charitable contribution deduction for non-itemizers, as long advocated for by Independent Sector among others. The Lilly Family School of Philanthropy report estimates that allowing non-itemizers to deduct their charitable contributions would more than offset the negative effect on contributions from the standard deduction increase and rate reduction proposals. That said, it is hard to see how this proposal could have much chance of success given both its revenue cost and the administrative and enforcement complexity it introduces, particularly in an era of reduced IRS examinations. For an analysis of some of these issues, see this October 2016 Urban Institute report.

The Ghost of Rep. Camp: While Dave Camp is not dead he is no longer in Congress, which you would think would limit his influence over current tax legislation. But he did something brilliant when he was driving the tax reform bus as Chair of the House Ways & Means Committee several year ago: he went through the laborious process of actually drafting legislative language and having the result analyzed and scored by the Joint Committee on Taxation. This means that both the specific language and revenue effects of each provision of the Tax Reform Act of 2014 is available to be pulled off the shelf and deployed immediately as part of any current tax reform legislation. As detailed on pages 535-598 of the JCT report, this includes numerous provisions relating to tax-exempt organizations, including a number of limitations on the existing charitable contribution deduction. Especially if some revenue raisers are needed to pay for other aspects of tax reform, I expect to see some of Rep. Camp's proposals reappear in current legislation.

The Charities Helping Americans Regularly Throughout the Year Act of 2017: Given the uncertainty about the content, timing, and even liklihood of major tax reform legislation, it is a good idea to have a backup plan. The CHARITY Act (I do not know where they got the "I" from) is a modest, bipartisan attempt to tweak the existing tax laws for tax-exempt charities. Its provisions include simplifying the private foundation investment tax under section 4940, making donor advised funds eligible for IRA rollover contributions, increasing the mileage rate applicable to personal vehicle use for volunteer charitable activities, creating an exception to the private foundation excess business holdings rules under section 4943 (can you say Newman's Own Foundation?), and an electronic return filing requirement for all tax-exempt nonprofits.

I look forward to months if not years of further crystal ball gazing on these topics.

Lloyd Mayer

 

June 22, 2017 in Federal – Executive, Federal – Legislative, In the News, Studies and Reports | Permalink | Comments (0)

Private Benefit: Plain Vanilla & Spicy Political

Donations for charityJournalists have a constant interest in charity private benefit stories, particularly ones with a political angle. And unfortunately they seem to be able to find them. Recent reports raising questions about plain vanilla (non-political) private benefit have focused on a variety of donors and charities, including New England Patriots' quarterback Tom Brady, the James G. Martin Memorial Trust in New Hampshire, and billionaire Patrick Soon-Shiong. But not surprisingly reporters have paid even greater attention to situations relating to politics and politicians, including ones involving the Eric Trump Foundation, Boston mayoral hopeful Tito Jackson, President Trump's chief strategist Stephen Bannon, and the Daily Caller News Foundation. These stories are distinct from ones relating to the use (and possible misuse) of charities for political purposes more generally, such as the recent article regarding the David Horwitz Freedom Center

I should emphasize that none of these situations have resulted so far in any apparent civil or criminal penalties, and in some instances the facts described may not cross any legal lines. Indeed, the only one of these situations that appears to have drawn government scrutiny so far is the one involving the Eric Trump Foundation, which New York Attorney General Eric Schneiderman has said his office is looking into.

The same cannot be said of three other situations that involve the possible misuse of charitable assets. One, relatively minor situation relates to the admitted access of the Missouri Governor's political campaign to a charity's donor list without apparently the charity's knowledge or permission. Two other situations are more serious in that they each involve hundreds of thousands of dollars. In March, a federal grand jury indicted former U.S. Representative Stephen Stockman and an aide on charges relating to the alleged theft of hundreds of thousands of dollars from conservative foundations to fund campaigns and pay for personal expenses. (More coverage: DOJ Press Release.) And last month a federal jury convicted former U.S. Representative Corrine Brown of raising hundreds of thousands of dollars for a scholarship charity, funds that she then used for her own personal and professional purposes. (More coverage: N.Y. Times.)

Lloyd Mayer

June 22, 2017 in Current Affairs, Federal – Executive, Federal – Judicial, Federal – Legislative, In the News, State – Executive | Permalink | Comments (0)

IRS Application Litigation Drags On, No Wrongdoing by FEC Employees, and No 501(c)(4) Guidance Soon

Form 1024The various lawsuits that grew out of the IRS exemption application controversy continue their slow grind with discovery ordered in the Linchpins of Liberty and True the Vote cases (which are before the same judge in the U.S. District Court for the District of Columbia), a protective order keeping the depositions of Lois Lerner and Holly Paz confidential in the class action NorCal Tea Party Patriots case in the U.S. District Court for the Southern District of Ohio, a court-ordered July 24th mediation conference in the same case, and an April 21st hearing on the motion for partial judgment pending in the Freedom Path case in the U.S. District Court for the Northern District of Texas, at which apparently nothing exciting happened as I could not find any media coverage of the hearing. In fact, as far as I can tell no one is paying any attention to these cases at this point except for the parties, their lawyers, a few minor conservative news outlets, and the Bloomberg BNA Daily Tax Report (the last two links are to stories by them (subscription required), and even they ignored the April 21st hearing).

In related news, the Federal Election Commission's inspector general's office recently concluded that FEC employees did not violate any rules when they communicated with the IRS about politically active groups. (More coverage: Bloomberg BNA (subscription required)). And Congress extended the various budget-related provisions it created in the wake of the controversy, including the prohibition on using any funds to issue guidance under section 501(c)(4) for the rest of the current fiscal year (so through September 30, 2017). Finally, the American Center for Law and Justice (which is representing the plaintiffs if some of the above lawsuits) announced that the Tri-Cities Tea Party received a favorable determination letter from the IRS under section 501(c)(4) seven years after filing its application.

Lloyd Mayer

June 22, 2017 in Federal – Executive, Federal – Judicial, Federal – Legislative, In the News | Permalink | Comments (0)

Wednesday, June 21, 2017

Feds In Action: Data, a Report, and the Occasional Indictment or Raid

IRSWhile the IRS is underfunded and Congress is deadlocked, this does not mean there is no action by the federal government with respect to tax-exempt nonprofit organizations. For starters, the IRS' continues to report data like clockwork, including the always informative Data Book. Highlights from the FY 2016 Data Book include the miniscule examination rate (only 2,956 annual returns examined, including Forms 990, 990-EZ, 990-N, 990-PF, 1041-A, 1120-POL, and 5227), continued strong closures of exemption applications (92,129 for the year, of which the IRS approved 86,406, disapproved 54, and had another 5,669 closed for other reasons, including withdrawals), and now almost 1.6 million organizations recognized as exempt under section 501(c).

The IRS Advisory Committee on Tax Exempt and Government Entities has also had its charter renewed for two more years, and released its sixteenth Report of Recommendations earlier this month. The Committee has been restructured in a way that many of its current members feel is not helpful, as they shared at length in the report. More specifically, the Committee is now divided into subgroups not based on functional areas but instead on subject areas, specifically FICA Replacement Plans, Online Accounts, and, ironically, Future of the ACT.

Finally, the IRS and other federal authorities continue to pursue the most egregious wrongdoing by actors at tax-exempt nonprofits, including criminally. Recent news reports include two major stories along these lines. One involves a federal indictment against a bank officer and her husband who are alleged to have transferred embezzled funds from Bank of America totalling $1.2 million to a variety of charities, possibly in exchange for return payments or other benefits from those charities, according to reports in the Atlanta Journal-Constitution and the Boston Globe. The other, separate situation involves a search by IRS and U.S. Postal Service investigators at the headquarters of televangelist Benny Hinn, as reported by the Dallas Morning News. No further public information is currently available regarding this investigation.

Lloyd Mayer

 

June 21, 2017 in Federal – Executive, In the News, Studies and Reports | Permalink | Comments (0)

Monday, May 8, 2017

President Trump's Executive Order on Johnson Amendment

It is rare to for nonprofit law to be in the federal spotlight as vividly as it was last week when President Trump signed an Executive Order on "Free Speech and Religious Liberty." Trump Section 2 of the EO addresses the Johnson Amendment (which prohibits partisan political activity by 501c3 nonprofits):

Sec. 2.  Respecting Religious and Political Speech.  All executive departments and agencies (agencies) shall, to the greatest extent practicable and to the extent permitted by law, respect and protect the freedom of persons and organizations to engage in religious and political speech.  In particular, the Secretary of the Treasury shall ensure, to the extent permitted by law, that the Department of the Treasury does not take any adverse action against any individual, house of worship, or other religious organization on the basis that such individual or organization speaks or has spoken about moral or political issues from a religious perspective, where speech of similar character has, consistent with law, not ordinarily been treated as participation or intervention in a political campaign on behalf of (or in opposition to) a candidate for public office by the Department of the Treasury.  As used in this section, the term "adverse action" means the imposition of any tax or tax penalty; the delay or denial of tax-exempt status; the disallowance of tax deductions for contributions made to entities exempted from taxation under section 501(c)(3) of title 26, United States Code; or any other action that makes unavailable or denies any tax deduction, exemption, credit, or benefit.

During the signing ceremony, President Trump explained

“Under this rule, if a pastor, priest or imam speaks about an issue of political or public importance, they are threatened with the loss of their tax-exempt status, a crippling financial punishment. Very, very unfair. But no longer... This financial threat against the faith community is over... So you’re now in a position where you can say what you want to say. And I know you’ll only say good and what’s in your heart. And that’s what we want."

Before the final text of the order was released, commentators raised numerous objections to the order that was anticipated: a broad commitment not to enforce the Johnson Amendment against religious groups. However, the text of the signed order says nothing concrete in terms of legal or policy. Indeed, the ACLU initially promised a lawsuit, but ultimately backtracked, concluding that the order "signing was an elaborate photo-op with no discernible policy outcome." Undeterred, the Freedom from Religion Foundation is going ahead with its planned lawsuit, reading between the lines of the EO to perceive a clear "stop enforcement" signal to the IRS.

 @josephwmead

May 8, 2017 in Current Affairs, Federal – Executive | Permalink | Comments (1)

Friday, March 17, 2017

McLaughlin: Conservation Easements and the Valuation Conundrum

McLaughlinThe final version of Conservation Easements and the Valuation Conundrum, 19 Florida Tax Review 225 (2016), written by Nancy McLaughlin (Utah) is now available. Here is the abstract:

For more than fifty years, taxpayers have been able to claim a federal charitable income tax deduction under Internal Revenue Code § 170(h) for the donation of a conservation easement or a façade easement. For just as long, the deduction has been subject to abuse, including valuation abuse. Dismayed by the expenditure of significant judicial and administrative resources to combat abuse in the easement donation context, the Treasury Department recently proposed reforms, including reforms to address valuation abuse. The reforms were proposed in somewhat of an analytical vacuum, however, because there has been no comprehensive analysis of the easement valuation case law. This article fills that void. It examines the easement valuation case law and discusses the most common methods by which taxpayers or, more precisely, their appraisers overvalue easements. It also proposes alternative reforms informed by the lessons learned from the case law. Concise summaries of the relevant facts and holdings of the cases are included in appendices.

Lloyd Mayer

March 17, 2017 in Federal – Executive, Federal – Judicial, Publications – Articles | Permalink | Comments (0)

Form 1023-EZ Problems - How Will the IRS Respond?

Form 1023-ezLast month the IRS made publicly available information from approved Forms 1023-EZ (Streamlined Application for Recognition of Exemption). As Terri Helge noted in this space, one question those data raised was whether hundreds of churches had used the form to obtain IRS recognition of their tax-exempt status under Internal Revenue Code section 501(c)(3), as a review of the names of successful applicants suggested. Such use would be problematic because churches are ineligible to use the streamlined application.

Yesterday the Chronicle of Philanthropy reported (subscription required) that "Some Charities Misuse IRS Short Registration Form, Chronicle Data Suggests." The article focuses in particular on the fact that some applicants quickly grew into million-dollar-plus organizations even though the streamlined application is only supposed to be used by charities that expect to have relatively modest financial resources.

Both these observations raise serious concerns about whether the attempt by the IRS to limit the use of the form to relatively small charities that do not raise any complicated legal issues is failing, with hundreds if not thousands of ineligible organizations obtaining a favorable IRS determination letter by using the streamlined form. These observations also further bolster earlier concerns raised by the National Taxpayer Advocate, who drew on the IRS' own determination that the approval rate for Form 1023-EZ users drops from 95 percent to 77 percent when the IRS reviewed documents or basic information of applicants. The question we are left with is how will the cash-strapped and politically battered IRS respond to these apparent shortcomings. No word from the IRS on the answer to this question yet.

Lloyd Mayer

March 17, 2017 in Federal – Executive, In the News | Permalink | Comments (0)

Thursday, March 16, 2017

Richard Spencer's White Nationalist Nonprofit Loses Tax-Exempt Status - For Failing to File Required Annual Returns

National Policy InstituteThe L.A. Times reports that the IRS has revoked the tax-exempt status of the National Policy Institute, a white nationalist group headed by Richard Spencer, effective as of May 15, 2016. The revocation was not because of either a failure to satisfy the methodology test applied to "educational" organizations under Revenue Procedure 86-43 or for alleged political campaign intervention during the 2016 election. Instead, it was for failing to file the last three IRS annual information returns due from the organization, a failing that Spencer blamed on an IRS misclassification that led to the public listing for the group indicating it was not required to file such returns. Assuming that the Institute challenges this revocation, it will be interesting to see how the IRS responds to this argument.

Lloyd Mayer

March 16, 2017 in Federal – Executive, In the News | Permalink | Comments (0)

Wednesday, March 15, 2017

Most Litigated Issue #8: Charitable Contribution Deductions

Taxpayer Advocate ServiceIn her Annual Report to Congress, National Taxpayer Advocate Nina Olson listed charitable contribution deductions under Internal Revenue Code section 170 as number eight on her list of ten Most Litigated Issues. The topics that led to the most disputes in the 26 decisions from the June 1, 2015 to May 31, 2016 twelve-month period that she reviewed were substantiation (12 cases), easements (9 cases), and valuation (5 cases), with some cases involving multiple issues. For summaries of all 26 decisions, see Appendix 3, Table 8 in the Appendices to Volume One of the report.

Lloyd Mayer

March 15, 2017 in Federal – Executive, Federal – Judicial | Permalink | Comments (0)

501(c)(4) Application Controversy - Litigation Grinds On, No Impeachment or Firing in Sight

IRSIn case we needed any reminders that litigation takes a long time, the past several months have seen a few minor developments in the litigation that grew out of the section 501(c)(4) application controversy that exploded in May 2013 (!). In no particular order:

  • The Supreme Court denied certiorari in True the Vote, Inc. v. Lois Lerner, et al., No. 16-613, and a related case, rejecting the plaintiffs' attempt to get the Bivens claims against Ms. Lerner and other IRS officials reinstated. The underlying case of True the Vote, Inc. v. IRS, et al. continues in the U.S. District Court for the District of Columbia as Civil Action No. 13-734, without the Bivens claims and so limited to injunctive and declaratory relief, along with the related case of Linchpins of Liberty v. United States, et al., Civil Action No. 13-777, in the same court. UPDATE: I should have noted in my original post that a case raising similar claims is also proceeding in the U.S. District Court for the Northern District of Texas (Freedom Path, Inc. v. Lerner, Civil Action No. 3:14-CV-1537-D), although there have been no major developments in that case since a decision last May on the government's motion to dismiss.
  • A class action lawsuit continues in the U.S. District Court for the Southern District of Ohio, NorCal Tea Party Patriots, et al. v. IRS, et al., Civil Action No. 13-341, after the judge in the case ruled late last year that the IRS had to continue processing the application of one of the class members (the Texas Patriots Tea Party).
  • Judicial Watch announced the IRS has discovered an additional 6,924 responsive documents relating to Judicial Watch's pending FOIA lawsuit against the IRS (U.S. District Court for the District of Columbia, Civil Action No. 15-220); it is not clear if these documents contain any new information, and the timetable for public disclosure of the documents is uncertain.

At the same time, Republican leaders in Congress have shown no appetite for pursuing impeachment of current IRS Commissioner John Koskinen even as conservative members argue for it and the Trump administration has quietly avoided demanding Koskinen's resignation even in the face of calls to fire him. For recent coverage, see The Hill and the Washington Post. It is hard not to imagine that the Commissioner is silently counting the days until his term ends in November, however. It will also be interesting to see who will be willing to replace him in the current political environment.

Lloyd Mayer

March 15, 2017 in Federal – Executive, Federal – Judicial, Federal – Legislative, In the News | Permalink | Comments (0)

Wednesday, February 22, 2017

Hundreds of Churches Appear to Receive Exemption Determinations Using Form 1023-EZ

Today, the IRS released complete publicly available data on the over 105,000 organizations that were approved for tax-exemption using the streamlined application process, Form 1023-EZ from its inception in July 2014 through December 2016.  From the IRS news release:

The data on IRS.gov is available in spreadsheet format and includes information for approved applications beginning in mid-2014, when the 1023-EZ form was introduced, through 2016. The information will be updated quarterly, starting with the first quarter of calendar year 2017. The IRS’s Tax Exempt and Government Entities division approved more than 105,000 applications for exemption submitted on the Form 1023-EZ from 2014 through 2016.

In reviewing the data for these organizations, I noted something odd -- there was an organization approved using the streamlined process which by its name appeared to be a church.  According to the Form 1023-EZ instructions and Form 1023-EZ eligibility worksheet, churches are not eligible to use Form 1023-EZ and instead must use Form 1023 to apply for a determination letter from the IRS.  In particular, the eligibility worksheet states that if the applicant answers "yes" to any question on the worksheet, the applicant is not eligible to use Form 1023-EZ.  Question 12 on the worksheet asks, "Are you a church . . .?"  Applicants using Form 1023-EZ must attest on the form that the applicant has completed the eligibility worksheet and is eligible to use the form. 

The Form 1023-EZ is filed electronically and is composed of several self-certifying statements made by the applicant to the effect that the applicant qualifies for tax-exempt status as an organization described in Section 501(c)(3).  No supporting documentation is required to be submitted with the application so that the IRS can verify the applicant's qualification for tax-exemption.  With over 105,000 organizations approved and no way to verify the information, I was not surprised that perhaps a few organizations not eligible to file slipped through the cracks. 

However, I was curious to see just how many churches incorrectly used Form 1023-EZ to obtain an IRS determination letter.  I conducted a search of the names of all of the organizations approved for exemption using Form 1023-EZ for the word "church" using the new searchable data released by the IRS.  I found 623 of the approved organizations had "church" in the name.  Upon closer review, not all of these organizations appeared to be churches.  Some appeared to be a separately organized ministry of a church or a church foundation or an organization in a town named "Churchville." But in my cursory review of the names of these 623 organizations, I would estimate that over 90% appeared to be churches.  Some of these organizations provided website addresses, and a visit to these website addresses confirmed these organizations operated as churches.  Even though churches are not eligible to file Form 1023-EZ, all of these organizations attested that they had completed the eligibility worksheet and were eligible to use Form 1023-EZ.

Churches are not required to file an application for exemption to be exempt as a church described in Section 501(c)(3).  However, many churches opt to apply for exemption so that the church can receive an IRS determination letter stating that the church qualifies for exemption.  The IRS determination letter serves as evidence to donors that the church is recognized as being tax-exempt and contributions made to the church qualify for the charitable contribution deduction. 

The churches that received an IRS determination letter using the Form 1023-EZ process may very well meet the requirements for exemption as a church described in Section 501(c)(3).  But the IRS decided that it wanted to take a closer look at the applicants claiming to be churches, and thus requires them to use the normal Form 1023 process.  By inappropriately using the Form 1023-EZ process, these churches have gotten the benefit of voluntarily applying for tax exemption - the IRS determination letter - without having to go through the scrutiny of the normal Form 1023 application process as the IRS requires.

Additionally, this information is but one example of the problems with the streamlined Form 1023-EZ process.  A quick review of the organization's name (for example "** Baptist Church" or "** Church of Christ") should have given one pause about whether the organization was eligible to use Form 1023-EZ.  This should have resulted in an inquiry to the organization about whether it planned to operate as a church, or one could have visited the organization's website provided on the form to see that the organization had regularly scheduled church services and appeared to operate as a church.  The organization then should have been directed to apply using Form 1023. All of these organizations attested that they were eligible to use Form 1023-EZ, but a quick independent verification of this attestation likely would have shown the attestation to be false in a significant number of cases.  This is one small example of the need to independently verify the applicant's statements made on the Form 1023-EZ, or organizations which do not meet the requirements for exemption or the eligibility requirements to use Form 1023-EZ will inappropriately be approved for exemption. 

For additional examples of the need for independent verification of the information provided on Form 1023-EZ, see the Taxpayer Advocate Service 2015 Report to Congress and the Taxpayer Advocate Service 2016 Report to Congress.

 

TLH

 

 

February 22, 2017 in Current Affairs, Federal – Executive | Permalink | Comments (1)

Friday, February 3, 2017

That's me in the corner/ that's me in the spotlight/ losing my religion*

...but gaining a tax deduction!

At the recent National Prayer Breakfast, President Trump stated:

It was the great Thomas Jefferson** who said, the God who gave us life, gave us liberty. Jefferson asked, can the liberties of a nation be secure when we have removed a conviction that these liberties are the gift of God. Among those freedoms is the right to worship according to our own beliefs. That is why I will get rid of and totally destroy the Johnson Amendment and allow our representatives of faith to speak freely and without fear of retribution. I will do that, remember.

Some may not know the term “the Johnson Amendment,” but I am guessing that most of the readers of this blog would be familiar with Code Section 501(c)(3)’s prohibition on election intervention (“and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”)   Famously, Lyndon Johnson was somewhat irritated by negative comments made by a tax-exempt organization (note: not a church… ) during his campaign for re-election to the Senate; thus the Johnson Amendment adding the prohibition on electioneering was born in 1954

Of course, “totally destroying” statutory provisions is traditionally the prerogative of Congress, so it remains to be seen whether this change will come to pass.   A bill repealing the Johnson Amendment is introduced regularly each legislative session and rarely makes any progress; query if the current political climate would give it more traction.   One wonders if the change takes the form of a repeal of the Section 501(c)(3) language (which would open electioneering to all c3s) or a special exception just for churches or religious organizations.   Finally, would such repeal include rules that mirror the income tax provisions that disallow deductions for membership dues allocable to lobbying?   If not, I suspect that a large number of political donors of all stripes will suddenly find religion right quick.

For further discussion of these issues, please see this piece by the most awesome Ellen Aprill in the Washington Post, who has probably forgotten more about the political and lobbying rules for nonprofits than I ever hope to know.

EWW

*With apologies to R.E.M.

**cough** This is me not commenting on the fact that Trump is quoting Thomas Jefferson, author of the First Amendment.  Of course, all political commentary (or non-commentary, as the case may be) is my own individually and should not be attributed to anyone else.  EWW

February 3, 2017 in Current Affairs, Federal – Executive, Federal – Legislative, In the News | Permalink | Comments (1)

Friday, November 18, 2016

FTC & NASCO Conference on Charitable Solicitations Announced for March 2017

The Federal Trade Commission & National Association of State Charities Officials announced earlier this week "Give & Take: Consumers, Contributions, and Charity", a conference exploring consumer protection issues and charitable solicitations will take place in Washington DC on March 21, 2017. Comments, research, original papers and participation are sought with submission deadline of February 17, 2017. Topics sought include: How Are Donor Solicitations Evolving in the Digital Age? What Do Donors Expect When They Contribute? What Information About Charities Do Donors Find Helpful? Discovering and Reporting Possible Deceptive Charitable Solicitations: When do Donors Act? How are Consumer Purchasing Choices Influenced by Promises of Charitable Support or Social Benefit? What are Best Practices in Terms of Charitable Solicitations, Information and Accuracy?

For more information, see https://www.ftc.gov/news-events/events-calendar/2017/03/give-take-consumers-contributions-charity?utm_source=govdelivery. 

Lloyd Mayer

November 18, 2016 in Conferences, Federal – Executive, State – Executive | Permalink | Comments (0)