Nonprofit Law Prof Blog

TIGTA Reports on Audit of IRS Political Activity Compliance Initiative

In 2004, the IRS launched its Political Activity Compliance Initiative or PACI targeting alleged political activity by section 501(c)(3) nonprofit organizations.  As detailed on the IRS website, such organizations are prohibited by federal tax law from engaging in any activities that support or oppose a candidate for elected public office.  While the IRS is not allowed to release information about specific audits, it did report the overall results of its efforts both in 2004 and in 2006.  In each year the program resulted in approximately 100 examinations, with approximately two-thirds of those examinations resulting in the IRS determining that a violation had occurred.  Most violations were, however, apparently minor and/or inadvertent, based on the fact that the IRS only issued warning letters in the vast majority of cases.

Apparently because PACI is now a regular IRS program and is ongoing for the current election year, the IRS Commissioner asked the Treasury Inspector General for Tax Administration (TIGTA) to review it.  In its just-released June 18, 2008 audit report (no. 2008-10-117), available on TIGTA's FY2008 audit report website, TIGTA reviewed its findings and recommendations, as well as the IRS' planned responses.  One of the most significant of these was TIGTA's conclusion that the IRS did not always meet its own timetables for reviewing referrals, which led to delays in contacting offending nonprofits.  TIGTA specifically urged that such contacts occur before the election at issue, so as to prevent continuing violations, although it is unclear that the IRS has the authority to begin an audit before an organization has filed its return for a given tax year in the absence of "flagrant" political activity (see Code sections 6852 and 7409, which provide special authority to assess tax and seek an injunction before the filing of the return for a year in the case of such activity).  The IRS in response agreed to start its 2008 effort earlier in the election cycle and train an additional 30 agents to be part of the program.  This response raises the issue of whether the IRS will be forced to ignore or at least delay actions in other areas, since overall IRS Exempt Organization Division staffing continues to remain flat.  To address TIGTA's concerns about creating a consistent understanding of what activities are prohibited, the IRS also promised to ensure that all employees involved in PACI receive the same training and also receive feedback regarding why particular referrals are not selected for examination.

The IRS' planned responses to this report indicates that 2008 will be at least as active a season for enforcement of the political activity prohibition as were 2004 and 2006.  It will therefore be an interesting year for political active exempt organizations for more reasons than just the presidential campaign.

LHM

Further Coverage of IRS Investigation Into Colorado Conservation Easements

The Denver Post has a follow-up story regarding the IRS involvement in an initially state-level investigation of conservation easement donations in Colorado, which we blogged about earlier this week.

LHM

Former Trustee Indicted for Alleged $6 Million Theft from Charity

The Chicago Tribune reports that the federal government has indicted Dr. Robert Weinstein for conspiring to steal millions from the Northshore Supporting Organization, a charity formed ostensibly to support the Rosalind Franklin University of Medicine and Science in North Chicago.  Dr. Weinstein served as a trustee of both organizations and allegedly worked with Stuart Levine, the government's star witness in its case against Illinois political fundraiser and insider Antoin "Tony" Rezko, to divert $6 million from the Supporting Organization using a Scandinavian accomplice, fake contributions to the University, and sealed promissory notes. 

According to the U.S. Attorney's press release and the indictment, Weinstein and Levine caused the Supporting Organization to transfer $3 million each to them in return for promissory notes that neither of them intended to repay.  They managed to buyback the notes for only $1 million through a complicated scheme involving the University, an intermediary, and sealed envelopes holding the notes but which the University was not permitted to open.  According to the indictment a third charity, identified only as IDDRS, was allegedly the original source of the $6 million ultimately diverted from the Supporting Organization, and Dr. Weinstein was the president and sole director of IDDRS. 

Weinstein and Levine also allegedly used their positions as University trustees to try to require a developer working with the University to pay 20 percent of the developer's net profits their designee, who was then to transfer some or all of that amount to them.  Finally, Weinstein is also charged with having lied to an FBI agent during the course of the Rezko investigation.  The specific federal charges against Dr. Weinstein are wire fraud, mail fraud and making false statements. 

The press release and the indictment are available through the U.S. Attorney's Chicago Press Room website. 

LHM

IRS Joins Colorado Conservation Easement Investigation

The Denver Rocky Mountain News reports that the Internal Revenue Service has accepted the invitation of the Colorado Division of Real Estate to join the Division's investigation of conservation easement transactions in Colorado.  The state's investigation arose because of a generous income tax credit program - up to $375,000 per easement - for landowners who agree to permanently prohibit development on their lands.  The credits can apparently be sold for cash.  The criteria for receiving the credit closely follow the federal tax law requirements for receiving a charitable contribution deduction based on a conservation easement.  The IRS is currently reviewing documents collected by the Division relating to the easements.

According to the article, the concerns arise because of possibly inflated appraisals of the value of the easements involved, as initially reported by the Rocky Mountain News in February.  Colorado Attorney General John Suthers has also opened up a criminal grand jury investigation.  Land trusts identified in the article as having received easements under review include Greenlands Reserve and Colorado Natural Land (formerly Noah Land Trust).  A spokesperson for Greenlands Reserve denied any wrongdoing.

The Denver Post has also published an article providing further details regarding the IRS investigation, including that "[o]f the more than 400 tax returns involving conservation easements that the IRS is investigating nationwide, 290 are in Colorado."

LHM

Indictment for Refusing to Testify About Islamic Charities

The Washington Post reports that the Justice Department filed an indictment in U.S. District Court in Alexandria, Virginia charging Sami al-Arian with two counts of criminal contempt for refusing to testify before a grand jury investigating Islamic charities in Northern Virginia.  Dr. al-Arian is a former University of South Florida professor who recently finished serving time in federal prison after pleading guilty to a single county of conspiracy relating to the Palestinian Islamic Jihad group.  He also had been jailed for a year on civil contempt charges relating to his previous refusals to testify.  Prosecutors are particularly interested in what he knows about the International Institute of Islamic Thought or IIIT, a Herndon, Virginia think tank that they believe is one of the key organizations in a Herndon-based network of Muslim charities and other entities that they began aggressively investigating shortly after 9/11.  IIIT denies any terrorist ties.  Dr. al-Arian is represented by George Washington University law professor Jonathan Turley, who has posted his criticisms of the indictment.

LHM

Automobile Donations to Charities that Use the Car - Not Really So Bad

Last month we blogged about a recently released IRS report that notes that while number of donations of automobiles to charities has decreased since the more restrictive rules were implemented in 2005 (by 60%), the dollar amount of these donations has dropped even more (by 80%).  As a result of the legal change that took effect in 2005, if the donors claims more than a $500 deduction the donor is limited to the actual sales price that the charity receives from the sale of the car.  Before 2005, donors could get fair market value.  Even after 2005, a donor can still get fair market value if the charity gives the car to a needy person, uses it itself, or renovates and sells the car.

Professor Linda Beale remarks on A Taxing Matter blog that "[t]he latter two exceptions don't appear reasonable--hard to see why the donor should get a bigger donation for cars that the charity uses or renovates and sells."  I was struck by this when I first read it and thought that maybe she's right.  But I recently discovered one "uses it itself" exception circumstance that seems quite reasonable - donating an auto to your local nonprofit (often volunteer) fire department.  I checked with my local fire department and they told me that they accept any vehicle (working or not) and destroy it in fire training exercises.  Seems pretty reasonable to me.  Are there other circumstances?

DAB

FHA Seeks To Shut Down Seller-Funded Down Payment Assistance Charities

In a bone-headed, blame the victim move that follows the IRS' bone-headed blame the victim approach, the FHA has stated its opposition to charities that provide down-payment assistance to home buyers, according to a WaPo Article.    According to a recent report, such programs typically work like this:

Say you want to buy a house, but you don't have the cash for a down payment. You sign up with a third-party intermediary, typically a tax-exempt charitable organization that advertises its specialty. The seller of the house sends a contribution to the organization roughly equal to the money you need. The intermediary pockets a fee of $400 to $600 and passes along the balance for the down payment.

Whatever happened to the free market and allowing the buyer to make her own decisions, rightly or wrongly, or is that just for rich people?  In his June 9, 2008 speech before the National Press Club, FHA Commissioner Brian Montgomery essentially blamed the housing market meltdown on downpayment assistance charities helping lower and middle income buyers get into starter homes:

Second, legislation must address the risks associated with down-payment assistance that comes from the seller or any other person or entity that stands to benefit from the transaction financially. The IRS, GAO and our own Inspector General have previously expressed concerns with these circular financing schemes. Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments. No private mortgage insurance companies back these loans. They now account for one third of our portfolio.  We are concerned about this business because the substantial losses affect FHA’s bottom line and FHA’s ability to serve American citizens who need access to prime-rate home loans. Given these concerns, we cannot just stand by – we must make our case again. So, today, I announce that we are reopening public comment on our proposed rule. Within hours, we will submit this rule to the Federal Register. It should be online at FHA.gov soon thereafter. The Department is eager to review all comments.

Bovine defecation!  The IRS has already, in another blame-the-victim move, since 2005 engaged in a serious and largely effective offensive against down payment assistance programs under the guise of the "public benefit" doctrine -- a doctrines the Service couldn't distinguish from a hole in its own backside.  THE IRS couldn't tell us what "improper public benefit" means as it relates to tax exemption if public benefit bit them in the butt!  Anyway, the FHA proposed rule seeking to shut down down payment assistance charities is publisheed at 73 Federal Register 33941 and comments are due by August 8 2008.  At least the notice of proposed regulation admits that at two courts have shot down this stupid proprosal.  The only thing the rule will do is prevent lower and middle income taxpayers from buying a home. 

Still, we can't have dangerous charities going around helping poor homebuyers get out of the rental trap, can we?  I guess once we get rid of these nefarious down-payment assistance charities the housing market will suddenly and miraculously right itself and fat cats speculating in houses, oil futures, and peddling adjustable rate mortgages can once again make their Bentley payments. 

dkj

IRS Exempt Organizations 2007 Databook Now Available

The IRS 2007 Databook is now available.  Tables 22 - 25 note that there are now 1.1 million 501(c)(3) organizations registered with the IRS, an increase of just under 7% from last year and a 73% increase over the past four years.

dkj

Congressman's Relatives Charged in 31 Count Indictment to Defraud Charities

  Three relatives of embattled U.S. Representative William Jefferson (D. La.) (shown above) were indicted yesterday in a 31 count indictment, according to the New Orleans Times Picayune.  According to a U.S. Attorney press release issued June 4, 2008:

BETTY JEFFERSON, age 70, an elected tax assessor in New Orleans, along with BETTY JEFFERSON'S brother, MOSE JEFFERSON, age 66, and her daughter, ANGELA COLEMAN, age 53, all residents of New Orleans, Louisiana, were charged via a 31 count-indictment by a Federal Grand Jury today with conspiracy to commit mail fraud; and federal program fraud; aggravated identity theft; substantive program fraud; and mail fraud, and conspiracy to commit money laundering, announced U. S. Attorney Jim Letten. Additionally, BETTY JEFFERSON was charged with four counts of tax evasion and MOSE JEFFERSON was charged with three counts of making false statements to federal investigators.

The indictment alleges that these defendants controlled numerous specified for-profit and non-profit companies, thereby obtaining control over federal and state grant funds for these non-profit companies by applying for charitable and educational grants designed to assist needy, at-risk and disadvantaged youth and other individuals in need of assistance. According to the indictment, the defendants would and did write checks out of the non-profit bank accounts payable to individuals who did not work for the grant programs, thereafter depositing those checks into their (the defendants) own personal checking accounts, or otherwise using the funds to pay for their personal expenses.

It is also alleged that the defendants funneled federal and state grant funds to themselves by writing checks on the non-profits' bank accounts, thereby transferring monies into their companies in false attempts to create the illusion that the payments were for legitimate business purposes.

Additionally, the indictment charges that MOSE JEFFERSON used grant funds to pay for work performed at his direction on properties owned by him, and which had no relation to the non-profit grantees.

Download the full indictment here. If the allegations are true, this has to be one of the worst nonprofit scandals in a long time, effecting some of the most vulnerable, beset upon people in America.  Many of the nonprofits were set up to encourage academic acheivement  for a disturbingly underserved population (many of whom lived on highway overpasses for weeks during Hurricane Katrina).  According to the Times-Picayune article:

The 47-page indictment, long even by federal standards, alleges a superficially complex but fundamentally simple scheme in which the three defendants founded nonprofits, solicited grant money for them, and then wrote checks to purported employees who never received the money. The proceeds of the checks made out to such "straw payees" -- who "did not work for the nonprofits, never received the checks or money, and were not aware that a payment had been issued to them," according to the indictment -- generally wound up in bank accounts controlled by one of the Jeffersons or Coleman, the indictment says.

Pathetic, and that ain't even the half of it.  Just makes me want to spit!

dkj

IRS Advisory Committee on Tax Exempt and Government Entities Announces Public Meeting and New Members

The IRS has announced the date of a public meeting of the Advisory Committee on Tax Exempt and Government Entities (ACT) and the names of new members of the committee.  The ACT will meet on June 11, 2008, at 11 a.m. at 1111 Constitution Ave. NW, Washington D.C., to present to the Internal Revenue Service recommendations on ways to improve operations regarding employee retirement plans, tax-exempt organizations, tax-exempt bonds and federal, state, local and Indian tribal governments.  The new members of ACT are:

Employee Plans

G. Daniel (Danny) Miller, Conner & Winter LLP, Washington.

Susan P. Serota, Pillsbury Winthrop Shaw Pittman LLP, New York

Exempt Organizations

Karin Kunstler Goldman, New York State Department of Law, New York

Jack B. Siegel, Charity Governance Consulting LLC, Chicago  (See Jack's blog here)

Government Entities:  Indian Tribal Governments

Joe Lennihan, Sutin Thayer & Brown, Sante Fe, N.M.

Government Entities:  Tax Exempt Bonds

Michael G. Bailey, Foley & Lardner LLP, Chicago

Government Entities:  Federal, State and Local Governments

Ruth Duquette, State of Michigan, Lansing, Mich.

Maryann Motza, State of Colorado, Denver

Due to limited seating and security requirements, members of the public interested in attending the public meeting should call Cynthia PhillipsGrady to confirm their attendance. She can be reached at 202-283-9954 (not a toll-free call). Attendees must have photo identification and are encouraged to arrive at least 30 minutes before the session begins. 

DAB

IRS Clears UCC of Tax Exempt Law Violation Charges

On May 21, 2008, the United Church of Christ announced on its website that the IRS has clear it of charges that it violated U.S. tax laws "when U.S. Sen. Barack Obama addressed the denomination's 50th anniversary General Synod in Hartford, Conn., in June 2007."  Here is an excerpt from the announcement:

The IRS determination outlined several steps taken by the UCC that indicated compliance with the law. The letter said the UCC's invitation to Obama came "well before he announced his candidacy and that [he] was invited to speak … in a non-candidate capacity, on how his personal faith intersected with his public life."

"You further established that the United Church of Christ had verbally communicated to those in attendance that Senator Obama was there as a member of the church and not as a candidate for office, that the audience should not attempt to engage in any political activities, and that the church's legal counsel had advised Senator Obama's campaign on the ground rules for the speech," the IRS determined.

To see the full announcement, see "Concluding its UCC inquiry, IRS offers complete vindication" on the UCC website.  For a copy of the IRS determination letter, go here.

Hat Tip to our sister blog TaxProf Blog for this lead.

DAB

IRS Seeks to Fill "Jurisdictional Gaps" in Charitable Exemption Law

On the heels of a recent speech in which TE/GE Commissioner Steve Miller speaks of "jurisdictional gaps" in IRS authority, the Chronicle of Philanthropy published an article describing a recent private letter ruling denying "tax exemption to an organization [because it] did not spend enough of its money on charitable programs."  Here is an excerpt from the article:

These state records also showed that the money that the organization reported spending on its charitable program during the year was less than one-half of 1 percent of its total revenue and about 3 percent of its total expenses.

Last year, the Tennessee Department of Commerce and Insurance said that the National Foundation of America had been running an insurance business without a licence. State authorities said that the organization promised consumers that its annuity product would entitle purchasers to significant tax benefits because of its federal status as a charity, even though it had not been approved as a charity by the IRS.

In its ruling, the IRS concluded that the organization did not qualify as a charity because it was organized and operated for the primary purpose of running a business. “You do not carry on a charitable program that is commensurate in scope with your financial resources,” the IRS said.

For the entire article, see "IRS Denies Tax-Exempt Status to Group That Spends Too Little Money on Charitable Programs," in the May 13, 2008, issue of the Chronicle of Philanthropy.  For the full text of the private letter ruling, go here.

DAB

Steve Miller, TE/GE Commissioner, Discusses "Jurisdictional Gaps" at the IRS

On April 24, 2008, Steve Miller, TE/GE Commissioner at the IRS, discussed something he refers to as "jurisdictional gaps" in federal tax charity law enforcement.  Sound like a great law review topic.  Is anyone writing on this topic?  Here is an excerpt from his speech:

But, back to the topic. Efficiency and effectiveness are not expressly within our jurisdiction. This is one of our jurisdictional gaps. But it is an issue of fundamental importance, and one that increasingly is attracting attention. Recently, there were Congressional hearings on veterans’ organizations. They were essentially about fundraising efficiency and compensation. It is an issue we cannot ignore if we are to faithfully administer the tax law.

I am not going to speak specifically about the veterans’ cases because that is not my point. My point is that the public and the Congress may and often do have an expectation that the Service can act when we see organizations spending 98 cents of every dollar on fundraising or compensation and 2 cents on services.

Now depending on the facts and just how egregious they are, such a situation may present issues of either private benefit or private inurement. But for the most part what we can do about efficiency and effectiveness is what we have been doing lately: pushing transparency so people can see for themselves just how efficient and effective an organization is, or is not. This means we need to give the public tools they can use to make apples-to-apples comparisons. As the public seeks a good "return" on its contribution dollar, we push for enhanced and meaningful transparency in the hope that market forces and the good sense of the public will bring about change.

We have taken a meaningful step in this direction with our work on the redesigned Form 990. One of our guiding principles was to create uniformity and transparency in reporting.

For the entire speech, see "Remarks of Steven T. Miller, Commissioner, Tax Exempt and Government Entities, Before the Georgetown Law Center Seminar on Representing and Managing Tax-Exempt Organizations, April 24, 2008," on the IRS website.

DAB

Comments on Proposed Instructions for New Form 990

The IRS continues to seek comments on its proposed instructions for the 2008 Form 990.  Here is a link to comments received thus far: http://www.irs.gov/charities/article/0,,id=181965,00.html

DAB

IRS Holds Phone Forum on Rules for TEO's During Election Year

On May 13, 2008, the IRS posted on its website an announcement about its upcoming phone forum for TEO's on issues to consider during an election year.  Here is the text of the announcement:

The IRS invites tax professionals and representatives of tax-exempt organizations to participate in a Phone Forum on Rules for Tax-Exempt Organizations During An Election Year.  The Forum is scheduled for June 9, 2008, and will be repeated June 10.  It will discuss the distinctions between political activity, lobbying and general advocacy, and which activities are permissible by 501(c)(3) charities, 501(c)(4) social welfare organizations, 501(c)(5) labor and agricultural/horticultural organizations, 501(c)(6) business leagues and trade associations, and 527 political organizations.  Registrants will have the opportunity to submit questions, in advance, to be answered during the sessions. Both forums are being offered at no charge to participants, although space is limited and will be reserved on a first-come, first-served basis. Organizations with multiple representatives interested in participating are encouraged to register as a group, rather than as individuals. June 9 session: The session on June 9 is scheduled for 10:00-11:00 a.m. (Eastern Daylight Savings Time). To attend the June 9 session, please register at AT&T Teleconference Services.  Please use this link .  The access code for this conference call is 949266. You will be assigned a Personal Identification Number (PIN) that should be used in order to join the conference.  You will need that PIN to enter this session on June 9. June 10 session: The session on June 10 is scheduled for 1:00-2:00 p.m. (Eastern Daylight Savings Time). To attend the June 10 session, please register at AT&T Teleconference Services.  Please use this link.  The access code for this conference call is 645219. You will be assigned a Personal Identification Number (PIN) that should be used in order to join the conference.  You will need that PIN to enter this session on June 10. Participants who have not previously used AT&T Teleconference Services will need to create a user profile, including username and password, in order to register. If you have any questions, please email us at: tege.eo.ceo@irs.gov. Date posted:  May 13, 2008

DAB

Federal Authorities Investigate MLK National Memorial Project Foundation for Questionable Bidding Practices

On May 15, 2008, the Atlanta Journal Constitution reported that the inspector general of the U.S. Department of Interior is investigating the bidding practices and other aspects of operations of the Martin Luther King Jr. National Memorial Foundation.  Here is an excerpt from the article:

Among those questioned in the inspector general probe were Atlanta painter Gilbert Young and his wife, Lea Winfrey-Young, leading critics of the memorial foundation.

Winfrey-Young said the couple gave federal investigators records they had collected since they formed the group "King Is Ours" to protest the hiring of Chinese sculptor Lei Yixin, whose works for the Chinese government have included a statue of the late leader Mao Zedong.

Winfrey-Young said her concerns grew about the outsourcing of the project after she was told the foundation had not put the project up for competitive bidding among American artists and had not contacted American granite companies for the stone.

For the entire article, see "Probe targets King memorial group: Finances, bidding practices the focus of federal investigation of project's foundation," in the May 15, 2008, issue of the AJC.

DAB

IRS Releases New Guidance on Public Inspection of Form 990T

On May 8, 2008, the IRS issued new guidance on public inspection of Form 990T's. Here is the IRS announcement of the new guidance in Notice 2008-49:

Public Inspection and Disclosure of Form 990-T

The IRS has provided interim guidance on the requirement that section 501(c)(3) organizations (charities) make available for public inspection Forms 990-T, Exempt Organization Business Income Tax Return. Notice 2008-49 provides as follows:

• Guidelines in Treas. Reg. § 301.6104(d)-1 and Notice 2007-45 for making annual returns available for inspection and copying generally continue to apply, except that a return covered by the guidelines includes an exact copy of a Form 990-T filed by a charity after August 17, 2006. The return also includes any schedules, attachments, and supporting documents that relate to the imposition of tax on the unrelated business income of the charity. Schedules, attachments and supporting documents that do not relate to the imposition of the unrelated business income tax do not have to be made available for inspection and copying.
• A charity must make Form 990-T available only for the three years beginning on the last day (including extensions) for filing the return.
• The IRS now must make Forms 990-T filed by charities publicly available; Announcement 2008-21 sets forth procedures for requesting Forms 990-T from the IRS.

The IRS and Treasury Department invite comments on implementation of the new public inspection requirement for Form 990-T, including what schedules or attachments should not be available for public inspection when attached to Form 990-T. See section 4 of Notice 2008-49 for additional information.

DAB

IRS Investigates Al Sharpton's Nonprofit, National Action Network

The New York Times reported on May 10, 2008, that the IRS is investigating Rev. Al Sharpton's nonprofit organization - National Action Network.  The article reports that Rev. Al Sharpton is "brush[ing] off" reports of the investigation.  Here is an excerpt from the article:

Now the U.S. attorney is investigating his nonprofit group, a probe that an undeterred Sharpton brushes off as the kind of annoyance that civil rights figures have come to expect from the government.

''Whatever retaliation they do on me, we never stop,'' he told the AP. ''I think that that is why they try to intimidate us.''

Over the past year, Sharpton's lawyers and the staff of his nonprofit group, the National Action Network, have been negotiating with the federal government over the size of his debt, which they dispute. The group has also been trying to pay off tens of thousands of dollars it owes for failing to properly maintain workers compensation and unemployment insurance.

According to National Action Network's website, Al Sharpton is the President of the 501(c)(4) organization that was founded in 1991, but formally incorporated in 1994.

For the entire article, see "Records show Sharpton owes overdue taxes, other penalties" in the May 10, 2008, issue of the New York Times.

DAB 

Updated Status of Cases Involving Lawyers for Islamic Charity Who Were Apparently Subject to Government Surveillance

A New York Times article from earlier this week relating to federal government monitoring of lawyers for persons suspected of financing terrorism cited the case of lawyers for an Islamic charity as involving the only physical evidence of such monitoring.  The article states that in August 2004 the government mistakenly provided lawyers for the Oregon offices of the Saudi Arabian charity Al-Haramain Islamic Foundation with a logbook of intercepted telephone calls between the lawyers in Washington, DC and clients in Saudi Arabia.  When the government realized its mistake, it demanded return of the logbook, which was stamped "top secret," and warned the lawyers that they could face prosecution if they disclosed its contents.  According to the article, this is believed to be the only case in which nongovernment lawyers may have seen physical evidence of the National Security Agency's warrantless wiretapping program.  The article also cites two senior Justice Department officials, speaking on the condition of anonymity, who said they knew of a handful of terrorism cases since 9/11 in which the government may have monitored attorney-client conversations.  Their understanding is that such conversations were not shared with front-line prosecutors, in order to avoid any violation of attorney-client privileged.

The U.S. Treasury Department designated the U.S. branch of the Al-Haramain Islamic Foundation as a terrorist-linked group in September 2004 based on evidence showing direct ties with Osama bin Laden and hidden transfers of funds to Chechnya.  Numerous other branches of the Foundation have received similar designations by the U.S., the United Nations, and Saudi Arabia.  A federal grand jury indicted the U.S. branch and two of its officers in 2005 on charges of conspiring to defraud the U.S. government , filing a false tax return, and related crimes arising out of the alleged transfer of a $150,000 donation from an Egyptian to Chechnya, according to a U.S. Department of Justice press release.  The false tax return charge relates to falsely reporting that the donation was used to purchase a building in Missouri.  It appears that the criminal case has yet to go to trial.

The U.S. branch of the Foundation is also involved in a civil proceeding arising out of the alleged intercepts.  It and two of its attorneys sued the federal government in 2006 based on the allegedly unconstitutional intercepts of the calls between the Foundation's director and its U.S. lawyers, according to a Washington Post article.  That lawsuit led to a U.S. Court of Appeals for the Ninth Circuit decision last fall regarding whether the state secrets privilege bars reliance by the plaintiffs on the accidentally disclosed logbook, which is essential to the plaintiffs' case.  The appellate court found that the privilege did apply, but remanded the case to a federal district court to determine whether the Foreign Intelligence Surveillance Act preempted the privilege.

LHM

IRS Plans to Continue Expansion into "Non-Tax" Oversight of Charities

The Chronicle of Philanthropy reports that Steven T. Miller, Commissioner of the IRS' Tax-exempt and Government Entities Division, stated at a recent conference that the IRS will continue to inquire about management and governance policies and also plans to be more aggressive in monitoring the efficiency and effectiveness of charitable organizations.  While acknowledging that both areas are not expressly within the IRS' jurisdiction, he cited congressional and public interest that at a minimum supports an IRS push for increased transparency and disclosure with respect to these issues by expanding the information sought on the Form 990 annual return.  This expanded scope is illustrated by many new questions on the revised Form 990 that will be effective for tax year 2008 (to be filed in 2009 and later years).  He also said the IRS plans to re-energize the application of the commensurate test to create a standard for spending by charitable organizations based on their resources, including assets such as endowments.

The IRS released written copies of Mr. Miller's comments on April 23rd and April 24th at the annual Georgetown University conference on tax-exempt organizations.  His April 23rd comments focused on governance, which he stated matters to the IRS because "a well-governed organization is more likely to be compliant, while poor governance can easily lead to trouble."  He noted that efforts to date have focused on disclosure on the Form 990, particularly with respect to board composition, but stated that future efforts will also extend to education about governance not only through education programs but also through both the initial determination process and the examination process.  With respect to the latter, the IRS also hopes to develop further data about the relationship of good governance practices and legal compliance.

In his April 24th comments, Mr. Miller reiterated the governance points he had made the day before but also discussed the IRS role in encouraging efficiency and effectiveness.  He stated that transparency and disclosure is the main IRS approach to this area currently, but also that the IRS is looking at the commensurate test as a legal standard that it can invoke in this area.  He noted that the IRS plans both to develop a program initiative focusing on the commensurate issue over the next 18 months and to consider this issue as part of its study of colleges and universities that it will begin later this year.

LHM

IRS to Offer Amnesty Program for Late Form 990 Filers

The Chronicle of Philanthropy reports the IRS plans to introduce an amnesty program later this year for tax-exempt organizations that otherwise could lose their exempt status for failing to file the required information return, the Form 990 or Form 990-EZ.  The article states that the program is a response to the new requirement, enacted as part of the Pension Protection Act of 2006, that revokes the tax-exempt status of any organization that fails the required return for three consecutive years.  This new requirement is codified at section 6033(j) of the Internal Revenue Code and is effective for returns for years beginning after 2006. 

The program will permit tax-exempt organizations to file their late forms without penalty upon the payment of a small fee based on their size.  Late filing penalties accumulate at a rate of $20 per day up to a maximum of $10,000 per return for smaller organizations, while organizations with annual gross receipts of more than $1 million face penalties of $100 per day up to $50,000 per return.  The IRS can abate the penalties if the organization has a reasonable cause for its failure to file. 

Jason Kall, manager of the IRS' Exempt Organizations Compliance Strategies and Critical Initiatives group, is cited in the article as saying that the key to the program's success will be informing tax-exempt organizations about their filing obligations and the new revocation rule.  The IRS found in a 2006 study that in almost one-quarter of the cases where an organization did not file a required return the person responsible for the organization's books and records was simply unaware of the filing obligation.

The article does not state whether the program will also extend to the Form 990-PF filed by private foundations and to the new Form 990-N electronic notice that must be filed by small tax-exempt organizations that fall at or below the $25,000 in annual gross receipts threshold for having to file Form 990 or Form 990-PF.  The latter notice is only required for tax years ending on or after December 31, 2007 and is further described on the IRS website.  The new revocation provision also applies to these filings, so hopefully the program will encompass them as well.

LHM

IRS Corrects Final Regulations on When Charity Status Will be Denied or Revoked

We previously blogged about the IRS' issuance last month of final regulations clarifying and providing examples of when revocation of tax-exempt status under section 501(c)(3) of the Internal Revenue Code is appropriate because of private inurement even when intermediate sanctions under Code section 4958 also apply.  The regulations also provided several examples of when an organization serves a private interest instead of a public interest and so provides a prohibited private benefit.  Yesterday the IRS issued the following corrections to three of the examples, one relating to private benefit and the other two to private inurement.  The full text of the corrections is provided below with the changed provisions show in bold and italics.  The most significant correction is the clarification that if a "principal," as opposed to the sole, activity of an organization serves private interests then the organization will not qualify for tax-exempt status under section 501(c)(3).  No guidance is provided, however, regarding how to measure whether a particular activity is a principal activity of an organization.

§ 1.501(c)(3)-1 [Amended]

Par. 2. Section 1.501(c)(3)-1 is amended as follows:

1. In paragraph (d)(1)(iii) Example 2. (ii), in the second sentence, the language "As a result, the sole activity of O serves the private interests of these artists." is removed and the language "As a result, the principal activity of O serves the private interests of these artists." is added in its place.

2. In paragraph (f)(2)(iv) Example 2. (iii), in the sixth sentence, the language "Beginning in Year 4, however, as O's exempt function activities grow, the size and scope of the excess benefit transactions that occurred in Year 3 become less and less significant as compared to the size and extent of O's regular and ongoing exempt function activities." is removed and the language "Beginning in Year 4, however, as O's exempt function activities grow, the size and scope of the excess benefit transactions that occurred in Year 3 become less and less significant as compared to the size and scope of O's regular and ongoing exempt function activities." is added in its place.

3. In paragraph (f)(2)(iv) Example 4. (iii), in the fourth sentence, the language "By adopting a conflicts of interest policy and significant new contract review procedures and by terminating C, O has implemented safeguards that are reasonably calculated to prevent future violations." is removed and the language "By adopting a conflicts of interest policy and new contract review procedures and by terminating C, O has implemented safeguards that are reasonably calculated to prevent future violations." is added in its place.

LHM

IRS Continues Program on Political Campaign Activity by Charities; Stresses Education and Enforcement

On April 17, 2008, the IRS issued a news release announcing the continuation of its Political Activities Compliance Initiative for the 2008 Campaign Season.  The Initiative involves both education and compliance.  The IRS seeks to educate 501(c)(3) organizations (i.e., charities and churches) about the federal statutory ban on political activity.

The News Release is reprinted below, including appropriate links for more information:

The Internal Revenue Service's Political Activities Compliance Initiative (PACI) will remain in effect for the 2008 election season. PACI seeks to educate section 501(c)(3) organizations such as charities and churches about the federal ban on political activity.

As in previous years, the 2008 IRS Effort will include both educational and compliance components. This year's initiative will include:

Letters to the national political party committees explaining the law's ban on political campaign activity by charities and churches.

A letter in the Federal Election Commission's monthly newsletter asking candidates to ensure that their contacts with charitable organizations do not inadvertently jeopardize the tax-exempt status of any organization.

A news release reminding charities and churches of the ban.

Reorganizing the IRS' Web site materials concerning the ban to make them more accessible to organizations, political candidates and parties, and the general public.

Examinations of organizations the IRS believes may be violating the ban.

Updated: April 18, 2008

This guidance is particularly important in the 2008 Election Season in light of recent attention given to church leaders and their comments, and the increasing activity of nonprofit organizations that takes on an extra political hue during this campaign season and the heightened scrutiny by all.

AMT

Department of Treasury and IRS Issue Notice Seeking Recommendations for the 2008-2009 Guidance Priority List

The Department of Treasury and Internal Revenue Service through Notice 2008-47 invite public comment on recommendations for items that should be included on the 2008-2009 Guidance Priority List. Below is an excerpt of the notice. The full notice can be viewed by clicking here, Notice 2008-47.

The Treasury Department's Office of Tax Policy and the Service use the Guidance Priority List each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The 2008-2009 Guidance Priority List will establish the guidance that the Treasury Department and the Service intend to issue from July 1, 2008, through June 30, 2009. The Treasury Department and the Service recognize the importance of public input to formulate a Guidance Priority List that focuses resources on guidance items that are most important to taxpayers and tax administration.

Published guidance plays an important role in increasing voluntary compliance by helping to clarify ambiguous areas of the tax law.

.  .  .

In reviewing recommendations and selecting projects for inclusion on the 2008-2009 Guidance Priority List, the Treasury Department and the Service will consider the following:

1. Whether the recommended guidance resolves significant issues relevant to many taxpayers;

2. Whether the guidance may be appropriate for enhanced public involvement through the process described in Notice 2007-17, 2007-12 I.R.B. 748;

3. Whether the recommended guidance promotes sound tax administration;

4. Whether the recommended guidance can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance;

5. Whether the Service can administer the recommended guidance on a uniform basis; and

6. Whether the recommended guidance reduces controversy and lessens the burden on taxpayers or the Service.

Taxpayers may submit recommendations for guidance at any time during the year.

Please submit recommendations by May 31, 2008, for possible inclusion on the original2008-2009 Guidance Priority List. The Treasury Department and the Service plan to update the 2008-2009 Guidance Priority List periodically to reflect additional guidance that the Treasury Department and the Service intend to publish during the plan year.

The periodic updates allow the Treasury Department and the Service to respond to the need for additional guidance that may arise during the plan year. Recommendations for guidance received after May 31, 2008, will be reviewed for inclusion in the next periodic update.

AMT

990 Instructions Posted

The IRS announced yesterday that it has posted draft Instructions to the new form 990.  The comment period is open until June 1, 2008. The IRS has prepared "highlights lists," available with the instructions, that identify items in the instructions about which the IRS would particularly like to receive comments.

The IRS says that the instructions contain a number of tools that should make the new 990 easier to understand and easier for an organization to complete:  a glossary, a sequencing list, a compensation table, and illustrative examples.  The IRS also hopes to promote more uniform reporting through the changes.

sng

Full Text of March 31 IRS Announcement Re: Public Disclosure of 990-T

Here is the full text of Annoucement 2008-21, to appear in the March 31, 2008 Internal Revenue Bulletin.  The announcement concerns the procedures by which to request a copy of an exempt organization's 990-T.

Announcement 2008-21

This document explains the procedures the public may use to request the inspection and copying of a section 501(c)(3) organization’s annual return reporting section 511 unrelated business income (Form 990-T). The Tax Technical Corrections Act of 2007, Pub. L. 110-172, H.R. 4839, provides that the Internal Revenue Service is required to make Forms 990-T that are filed by a section 501(c)(3) organization publicly available for inspection and copying pursuant to section 6104(b). This provision is effective for returns filed after August 17, 2006, the date of enactment of the Pension Protection Act of 2006, Pub. L. 109-280 (PPA). Form 4506-A, Request for Public Inspection or Copy of Exempt or Political Organization IRS Form, is used to request from the Internal Revenue Service a copy of an exempt or political organization’s return, report, or notice pursuant to section 6104(b). The Form 4506-A does not currently contain a check box for a Form 990-T, although the Internal Revenue Service is in the process of revising the Form 4506-A to include this provision. If you want to inspect or copy a Form 990-T that was filed after August 17, 2006, please mail or fax a copy of the Form 4506-A to the Internal Revenue Service following the instructions for that form. In line 7 of the Form 4506-A, however, please write in “Form 990-T”. Please be advised that a CD-ROM will not be available for Form 990-T returns.

The charges listed on Form 4506-A for copies will apply.  For further information, contact Melinda Williams at 202-283-9467 (not a toll-free number).

dkj

Final Regulations on Excess Benefit Transactions

Yesterday the Internal Revenue Service issued final regulations regarding excess benefit transactions.  Here is the summary:

SUMMARY: This document contains final regulations that clarify the substantive requirements for tax exemption under section 501(c)(3) of the Internal Revenue Code (Code). This document also contains provisions that clarify the relationship between the substantive requirements for tax exemption under section 501(c)(3) and the imposition of section 4958 excise taxes on excess benefit transactions. These regulations affect organizations described in section 501(c)(3) of the Code and organizations applying for exemption as organizations described in section 501(c)(3) of the Code.

I haven't had time to read them thoroughly yet but my quick read indicates that the regulations do not yet address revenue sharing arrangements.  Readers may recall that when Congress enacted IRC 4958, the Congress instructed Treasury to quickly issue regulations clarifying the circumstances under which revenue sharing arrangements constitute excess benefit transactions and, by implication, private inurement under 501(c)(3).  Treas. Reg. 53.4958 is still "reserved," unfortunately.  I also note that the regulations, at least as indicated by the title to yesterday's annoucement, continue the curious decision to conflate private inurement and private benefit.  Recall, too, that Congress indicated in legislative history that the 4958 excise taxes should usually be imposed in lieu of revocation as allowed under 501(c)(3).  The latest set of regulations describe the circumstances when the IRS will seek revocation in addition to excise taxes. 

For an in-depth discussion of private inurement, excess benefit and revenue sharing see my article, The Scintilla of Individual Profit:  In Search of Private Inurement and Excess Benefit.  For an in-depth discussion of private benefit, see John Columbo, In Search of Private Benefit.

dkj

Florida Professor Held In Prison Beyond His Sentence For Failure to Testify Against Muslim Charities

On March 22, 2008, the Washington Post reported that the Bush administration has threatened to keep Sami al-Arian (the University of South Florida professor who was jailed for terrorism related charges) behind bars after he completes his prison term if he fails to "testify before a grand jury investigating allegations that Muslim charities aided terrorism organizations."  Here is an excerpt from the article:

Arian, who taught computer engineering at the University of South Florida, said he is declining to testify against the charities because he thinks they were falsely charged, "and he doesn't want them to be persecuted the way he was," said Jonathan Turley, his attorney. As a result, Arian is to be held at the Northern Neck Regional Jail in Warsaw, Va., on civil contempt charges.

Arian started a hunger strike early this month to protest his subpoena, and he was recently transferred to a prison medical center in North Carolina after losing six pounds in 36 hours. He went on a previous hunger strike that lasted months.

Arian was at the center of one of the nation's highest profile terrorism cases, accused of conspiracy to commit racketeering and murder and to aid a terrorist group, the Palestinian Islamic Jihad, in 2003.

.....

Turley said his client's sentence should have ended a year ago. But a judge extended a civil contempt citation against Arian for refusing to testify before a grand jury investigating the charities.

For the entire story, see "Refusal Keeps Terrorism Convict in Prison: Former Professor Fights Attempts to Force His Testimony Against Muslim Charities" in the March 22, 2008, issue of the Washington Post.  For earlier blog posts about Muslim charities, see here and here.

DAB

GAO Report on Vehicle Donations to Charities

In February 2008, the General Accounting Office released a Report to House Ways and Means on vehicle donations by charities entitled "Selected Charities Reported Mixed Experiences after Changes in Vehicle Donation Donation Rules."  Here is an excerpt from the report:

Selected charities reported mixed experiences after the rules related to the amount taxpayers could claim as a deduction for donating a vehicle to a charity changed.5 We interviewed officials from 10 of the 65 charities we previously interviewed in 2003 who still operate a vehicle donation program. They reported varied experiences in the number of, quality of, and revenue from donated vehicles; some changes in their business operations; and mixed experiences with administering the changes in the rules. Some charities experienced a substantial decline in the number of vehicles donated from 2003 to 2006. For those same years, of the 10 charities covered in our in-depth interviews, 6 reported decreases in the number of vehicles donated, 3 reported increases, and 1 did not provide data. However, when comparing years 2005 to 2006, 4 of the 5 charities that reported using one of the exceptions to the gross proceeds of sale rule also reported an increase in the number of vehicles donated. Charity experiences with the quality of donated vehicles varied. Three of the 10 charities reported an increase in quality, 3 reported a decrease, and 4 reported no change.

In terms of vehicle donation revenue, officials from 6 of the 10 charities reported a decrease from 2003 to 2006, 3 reported an increase, and 1 did not provide data but reported that the rule changes had no effect on the number of vehicle donations or revenue. We did not find a consistent pattern when comparing the number of vehicles donated with the revenue from the vehicle donation program or the charity’s overall revenue. To deal with the decrease, some charities changed their fund-raising activities and some decreased services, such as reducing the number of hours services would be provided. Examples of changing business operations include using minimum bids at auctions, selling vehicles online, and selling vehicles directly to the public rather than to wholesalers. Finally, all 10 of the charities reported that they had experienced an increase in administrative burden because of the increase in reporting requirements, but the charities were able to accommodate the increase in paperwork.

For the entire report, see "VEHICLE DONATIONS: Selected Charities Reported Mixed Experiences after Changes in Vehicle Donation Rules" at the GAO website. (Hat Tip: TaxProf Blog)

DAB

IRS Seeks Nonprofits Help With Publicizing Availability of Economic Stimulus Payments to Low-Income Taxpayers

On March 12, 2008, the IRS announced that it is enlisting the help of charities and other non-profits to spread the word about the availability of economic stimulus payments to low-income taxpayers, especially those who do not ordinarily file federal income tax returns.  Here is the language from the IRS website:

The IRS is encouraging various partners and stakeholders such as charities, churches and governmental organizations to assist in efforts to reach out to those Americans who may be eligible for the 2008 economic stimulus payment but who normally have no requirement to file a tax return. People who receive certain Social Security, Veterans Affairs, Railroad Retirement or wages from earned income or combat pay may be eligible and not know it.

The IRS has created a special Web page for interested organizations: Economic Stimulus Payments: Marketing Products for Partners. This page contains one-page flyers that you can copy, the Package 1040A-3 (a 10-page booklet that contains everything certain people need to file a return today), Radio PSAs, Logos, etc. This page is part of the Economic Stimulus Payments Information Center on IRS.gov, which provides information on eligibility and other requirements. The IRS appreciates any assistance you can provide.

DAB

Exempt Organization Scams Makes IRS Dirty Dozen List

On March 13, 2008, the IRS issued its 2008 dirty dozen list of the most egregious tax schemes and scams.  Included on the list is "abuse of charitable organizations and deductions.  The IRS describes the issue like this:

The IRS continues to observe the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property.   In addition, IRS examiners are seeing an upturn in instances where taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations.

For the entire "dirty dozen list," go to the IRS website at www.irs.gov.

DAB

Exempt Employer's Tool Kit

The IRS has included on its website an "Exempt Employer's Tool Kit."  The tool kit includes a variety of documents that employers who are tax-exempt might need in order to comply with federal tax laws, including the following:

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Form	Discussion
SS-4, Application for Employer Identification Number (with instructions)	See Employer Identification Numbers, for an explanation of why tax-exempt organizations need EINs, and how to obtain them.
W-2, Wage and Tax Statement (with instructions)	This form must be issued to recipients of wages, and copies filed with the IRS.
W-3, Transmittal of Wage and Tax Statements (with instructions)	This form is used to transmit Forms W-2 to the IRS.
W-4, Employee's Withholding Allowance Certificate	This form must be furnished to each employee upon hiring, to determine correct withholding. An employee may submit a new certificate at any time.
W-9, Request for Taxpayer Identification Number and Certification (with instructions)	This form is furnished to a person who receives a payment from an organization, to verify the recipient's taxpayer identification number.