Friday, March 4, 2016
IRS Scandal Update: Crossroad GPS Approval, Class Certification in One Case, Settlement of Another, and 501(c)(4) Notices
The biggest development coming out of the IRS scandal in recent months was the public revelation that in November 2015 the IRS approved the application by Crossroads GPS for recognition of exemption under Internal Revenue Code section 501(c)(4). This approval means the entire application file is available to the public, and Robert Maguire has very helpfully made all the documents available at OpenSecrets.org at the end of his analysis of them. Based on a quick review of these hundreds of pages of documents, here are several take-aways:
- Part V of the Protest (and Part VI of the Revised Protest) highlights the most constitutionally problematic aspect of the existing limit on political activity by section 501(c)(4) organizations (and also of the prohibition on such activity by section 501(c)(3) organizations) - the vagueness of the facts and circumstances approach for determining whether a given communication or other activity is actually political campaign intervention.
- Regardless of your views on the merits of the application and the final IRS decision regarding it, the legal writing and submissions by the attorneys representing Crossroads GPS provide a good example of professional but strong (and ultimately effective) advocacy based on an extensive factual record. This advocacy both focused on small but critical details - such as whether particular communications were in fact political campaign intervention - and larger legal issues such as the constitutional issue mentioned above.
- The application materials provide many examples of communications and other activities that may - or may not - cross the line into political campaign intervention. In addition, most and possibly all of the communications are helpfully summarized in charts submitted by Crossroads GPS that include the geographic area of distribution, whether the organization asserted that the communication was part of an ongoing series, and other facts that the IRS has identified as relevant.
- Taken as a whole, the documents provide a comprehensive illustration of the application for recognition of exemption process, including the initial application, IRS questions and detailed responses, proposed denial, protest, communications with IRS Appeals regarding the protest, and then finally the favorable determination letter. It also reveals several apparent procedural missteps on the part of the IRS that Crossroads GPS then used to strengthen its case for granting the application.
Media coverage: Politico; ProPublica; Washington Post. Not surprisingly, the IRS decision has generated both scathing criticism (see this NY Times editorial), as well as defenders (see this commentary by exempt organizations and constitutional law attorney Barnaby Zall).
In other news, the IRS lost a motion in one case related to the scandal but managed to settle another case. The loss came in NorCal Tea Party Patriots v. IRS, where a U.S. District Court certified a class consisting of various groups that allege they were subject to an improper level of scrutiny by the IRS during the exemption application process because of their political views. For an analysis of the decision, see this Forbes column by Peter J. Reilly. More positively for the IRS, Law360 reports that the IRS agreed with the Republican National Committee to dismiss a federal suit by the RNC against the Service involving a request for documents relating to the Service's treatment of exemption applications under section 501(c)(4). As part of the settlement, the IRS agreed to pay more than $20,000 in attorney's fees.
Finally, the IRS announced in Notice 2016-09 that the new notice required from certain section 501(c)(4) organizations based on a statutory change Congress made this past December will not be due until at least 60 days after Treasury and the IRS issue temporary regulations under new section 506. The Notice also clarifies that an organization seeking recognition from the IRS of its exemption under section 501(c)(4) will still need to apply for such recognition and, until further guidance is issued, organizations seeking such recognition should continue to use Form 1024. Such an application remains optional, however.
Thursday, March 3, 2016
IRS Changes to Advisory Committee, EO Audits, Form 990-N Filing, and Supporting Org Regs (latter only proposed)
Since the beginning of the year the IRS has proposed several minor but still significant changes to its practices relating to tax-exempt organizations:
- In January the IRS announced that because of structural changes within the TE/GE Division the Advisory Committee on Tax Exempt and Government Entities (ACT) will now focus on tax administration issues encountered across that Division and have, as of June 2016, a smaller membership of 15 as opposed to the current 21. ACT's new charter, effective as of last May, also changed the terms of members to a flat three years as opposed to the previous two years plus the option of a one-year extension.
- Bloomberg BNA Daily Tax Report reported (subscription required) yesterday that the IRS has issued an internal memorandum (TEGE-04-0216-0003) stating that the IRS will no longer modify an organization's exemption category when the organization is found to no longer qualify for exemption under its original exemption category. So, for example, if an organization originally recognized as exempt under section 501(c)(4) is found to no longer qualify for that status but could qualify for recognition of exemption under section 501(c)(7), the IRS will no longer modify its status to exemption under section 501(c)(7) but will instead simply revoke (or treat as revoked for declaratory judgment purposes) its status under section 501(c)(4). Such an organization may, however, apply or reapply for recognition of exemption under a new exemption category. The memorandum states this change is necessary because Congress has now made a declaratory judgment process available for all revoked exempt organizations, not just revoked 501(c)(3)s, and so all revocations must be treated the same. While not completely clear, this change appears to driven by a need to ensure all organizations that lose their recognition of exemption under a particular category have the option to seek declaratory judgment because modifying an organization's status to place it under a different category would, or at least could, prevent it from exercising its declaratory judgment rights.
- Effective as of the end of last month, the e-filing system for Form 990-N has moved to the IRS website. Filers will need to complete a one-time registration form when they first file on the IRS website. Previously the Urban Institute hosted the e-filing webpage for this form, but that webpage now sends readers to the new IRS webpage.
- Last month the IRS issued a set of proposed regulations for Type I and Type III Supporting Organizations. The preamble to the proposed regulations states "[t]hese proposed regulations focus primarily on the relationship test for Type III supporting organizations." Comments on the proposed regulations are due by May 19, 2016.
The IRS Statistics of Income Division has published Nonprofit Charitable Organizations and Donor-Advised Funds, 2012, reporting on selected data for Internal Revenue Code section 501(c)(3) organizations and donor-advised funds. Highlights from the tax year 2012 Form 990 and Form 990-EZ filings include the following:
- 279,405 501(c)(3)s reported an estimated $3.3 trillion in assets, $1.3 trillion in liabilities, $1.7 trillion in revenues, and $1.6 trillion in expenses, representing modest increases in all of these categories over amounts reported for tax year 2011
- 501(c)(3) with $10 million or more in assets represented only 8% of returns but reported 92% of total assets and 86% of total revenues
- donor-advised funds, which less than 1% of 501(c)(3)s sponsor (2,121 total), had a value of nearly $53 billion
- only 4% of 501(c)(3)s had donor-advised fund holdings over $100 million, but these organizations held over 80% of the total value of such funds and Fidelity Investments Charitable Gift Fund held $24 billion in such funds alone
Thursday, February 4, 2016
David Cay Johnston (Syracuse) published " Was Involvement of Private Foundation in Trump Event Illegal?" in the February 1st 1edition of TaxAnalysts:
Did Donald Trump violate the law January 28 by involving his private foundation in his campaign for the Republican presidential nomination?
Maybe -- and maybe not, according to three practitioners specializing in the nexus of tax and nonprofit law. But all agreed that Trump's actions put front and center why Congress needs to take a serious look at the growing connections between the charitable world and partisan politics, with a focus on what will make for sound policy.
Trump clearly used the charitable foundation under his control to further his campaign for the White House. But that may not be illegal.
Other politicians -- including the Clintons, the Kennedys, and the Rockefellers -- have or had foundations that they control. However, the politicians in those families did not hold campaign rallies to raise money for their charities while running for office.
Still, the existence of those foundations has sometimes led to controversy. The receipt of gifts to the Clinton Foundation, especially from foreign governments when Democratic presidential candidate Hillary Clinton was secretary of state, has drawn sharp rebuke from some Republicans and calls for an investigation.
(Hat tip: TaxProfBlog)
Wednesday, February 3, 2016
Kadir Nagac (Zirve University, Department of Economics) has posted "Religiosity and Tax Compliance" to SSRN:
The intention of this paper is to analyze religiosity as a factor that potentially affects tax compliance. Studies in the 90s have shown that the puzzle of tax compliance is "why so many individuals pay their taxes" and not "why people evade taxes". It has been noted that compliance cannot be explained entirely by the level of enforcement (Graetz and Wilde, 1985; Efflers, 1991). Countries set the levels of audit and penalty so low that most individuals would evade taxes, if they were rational, because it is unlikely that cheaters will be caught and penalized. Nevertheless, a high degree of compliance is observed. Therefore, studies that analyze a variety of factors other than detection and punishment are need. Religiosity can play an important role in determining one's tax compliance decision. I use religious adherence data from the American Religious Data Archive and reported income data from IRS to analyze independent effects of church adherence rates on tax compliance in the United States at the county-level. Tax compliance at the county-level is measured as discrepancy in reported income between IRS data and census data. Existing studies focus on effect of religiosity on tax fraud acceptability (tax morale), not the actual tax fraud or tax compliance behavior. To writer's knowledge, this study is the first study that analyzes the effect of religiosity on actual tax compliance behavior.
(Hat tip: TaxProfBlog)
As published in the Daily Tax Report, at the ABA Tax Section meeting last week, Andrew Morton, a partner at Handler Thayer LLP, opined that a good number of "high-profile charitable foundations" need substantially more oversight and legal assistance than they are currently receiving. He clarified that the neglect of these organizations is not malicious or deliberate: "Not because they are deliberately trying to manipulate the system, not because they're trying to do anything wrong, they just don't know. They don't get that a nonprofit is a corporation … it's a real thing. You have to take care of it.” He explained that most of the problems that arise with such celebrity-affiliated foundations are due to a lack of written policies, such as conflict-of-interest and whistle-blower situations, and the lack of reporting those policies on the foundations' annual Forms 990. In addition, these foundations are typically not aware of charitable registration requirements, which are governed by the states: “501(c)(3) is an adjective—not a noun. You don't have a 501(c)(3). You have a state nonprofit corporation, which has been conferred tax-exempt status from the federal government,” he explained. “There are 51 jurisdictions that require compliance for nonprofits. The federal government has their requirements, but every state has a different landscape.”
Thursday, January 7, 2016
IRS Withdraws Controversial Proposed Regulations on Reporting Donations and Donor Identity Information
Accounting Today reports that the Internal Revenue Service has withdrawn its proposed regulations permitting charitable donees to substantiate contributions of $250 or more by reporting them directly to the agency under section 170(f)(8)(D) of the Internal Revenue Code. The proposed regulations proved controversial because the optional method for reporting donations called for disclosing donors’ taxpayer identification numbers (which typically are their social security numbers). The notice of withdrawal is available here.
Additional Coverage: The Chronicle of Philanthropy
National Taxpayer Advocate Nina Olson has submitted her 2015 Annual Report to Congress, required by section 7803(c)(2)(B)(ii) of the Internal Revenue Code. One section of the report (see pages 36-44) scathingly criticizes the review of Forms 1023-EZ (or lack thereof) by the Internal Revenue Service. The following paragraph from the Executive Summary of the report details key findings:
TE/GE’s Exempt Organization (EO) function approves 95 percent of applications submitted on Form 1023-EZ. EO’s own pre-determination review program shows that EO approves applications much less frequently — 77 percent of the time — when it reviews documents or basic information from the applicants, rather than relying only on the attestations contained in the form. EO rejects some applications simply because the applicant was not eligible to use Form 1023-EZ, but the pre-determination review also showed that almost 20 percent of Form 1023-EZ applicants, despite their attestations to the contrary, did not qualify for exempt status as a matter of law. These results are consistent with TAS’s analysis of a representative sample of Form 1023-EZ applicants that obtained exempt status, which showed that 37 percent of the organizations in the sample did not satisfy the legal requirements for exempt status. Often, a deficiency in the applicant’s organizing documents that prevented qualification as an Internal Revenue Code § 501(c)(3) organization could have easily been corrected had the applicant been advised of it.
The report recommends revising Form 1023-EZ generally to require applicants to submit to the IRS their organizing documents, a description of their actual or contemplated activities, and relevant financial information. The report further urges the IRS to determine exempt status only after reviewing the application and the recommended supporting materials.
Additional Coverage: Tax Notes Today (Electronic Cite: 2016 TNT 4-6)
Wednesday, January 6, 2016
In Memorandum SBSE-04-1215-0085, the Small Business/Self-Employed Division of the IRS has determined that the church audit procedures set forth in section 7611 of the Internal Revenue Code apply to church employment tax inquiries. Under Code section 7611, the IRS may begin a church tax inquiry only by satisfying statutory “reasonable belief requirements” and “notice requirements.”
The former is satisfied “if an appropriate high-level Treasury official reasonably believes (on the basis of facts and circumstances recorded in writing) that the church … may not be exempt, by reason of its status as a church, from tax under section 501(a), or … may be carrying on an unrelated trade or business (within the meaning of section 513) or otherwise engaged in activities subject to taxation ….”
The latter is satisfied “if, before beginning such inquiry, the Secretary [of the Treasury] provides written notice to the church of the beginning of such inquiry.” The notice must explain “the concerns which gave rise to such inquiry,” “the general subject matter of such inquiry,” and “the applicable … administrative and constitutional provisions with respect to such inquiry (including the right to a conference with the Secretary before any examination of church records), and … provisions of this title which authorize such inquiry or which may be otherwise involved in such inquiry.”
Code section 7611 also restricts the scope of church examinations and limits the period for conducting them.
Prior to the guidance in the recent memorandum, IRS examiners were instructed that Code section 7611 audit procedures do not apply to employment tax inquiries. But now examiners are instructed as follows:
Examiners should not initiate any examinations on a church. If for some reason an employment tax examiner encounters a church employment tax issue, the examiner should immediately contact the Program Manager, Exam, Programs and Review (EPR) in TE/GE Exempt Organizations Examinations.
This new guidance is effective upon issuance (12/17/2015).
Friday, December 18, 2015
The almost certain to be approved omnibus spending bill and related tax bill illustrates in a nutshell the effects of the IRS scandal that blew up after it became known that the Service had subjected some conservative groups to greater scrutiny when they applied for tax-exempt status under Code section 501(c)(4).
No New 501(c)(4) Guidance. The provision garnering the most media attention in this area is Division E, Section 127 of the omnibus bill. It prohibits spending on guidance relating to section 501(c)(4) organizations and locks in "the standard and definitions" relating to that status "as in effect on January 1, 2010" (shortly before the Supreme Court's decision in Citizens United). While the provision only applies during the current fiscal year, which ends on September 30, 2016, it may kill any momentum such guidance had and so have more long-term effects. But if such guidance is only paused, a possible silver lining is that this delay ensures Treasury and the IRS will not issue it until after the end of the current presidential campaign.
Section 127 also does not address guidance for other types of section 501(c) organizations, including section 501(c)(5) labor unions and section 501(c)(6) chambers of commerce and trade associations. So in theory Treasury and the IRS could still issue guidance relating to the amount and definition of political activity for these entities. But given that such guidance could not be synced with guidance for section 501(c)(4) organizations until next fall at the earliest, it seems unlikely that they will pursue this course.
(The omnibus bill also bars spending by the SEC on guidance "regarding disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations" (Division O, Section 707) and on the Executive Branch of the President requesting "a determination with respect to the treatment of an organization described in section 501(c)" (Division E, Section 601(a)(2).)
Changed (Better?) IRS Procedures. The tax bill, which is also Division Q of the omnibus bill, contains several procedural changes that can be traced to the scandal:
Section 402. IRS employees prohibited from using personal email accounts for official business.
Section 403. If a person whose return or return information is improperly disclosed complains to Treasury regarding that disclosure, Treasury may inform that person about whether an investigation has been initiated, whether it is open or closed, whether any such investigation substantiated the improper disclosure by any individual, and whether any action has been taken with respect to that individual. (The provision also relates to other unlawful acts by federal employees with respect to the tax laws, as listed in Code section 7214.)
Section 404. Codifies the already available administrative appeal process relating to adverse determinations of tax-exempt status under section 501(c) and certain related determinations.
Section 405. New notification requirement for section 501(c)(4) organizations with a deadline for submitting the notice of 60 days after establishment of the organization. It applies both to entities organized after the bill's enactment and existing entities that have neither filed an application nor submitted an annual return or notice previously. There also is a provision allowing such an entity to "request" that it be treated as a section 501(c)(4) organization, in response to which Treasury (and so the IRS) "may issue a determination," and another provision allowing Treasury by regulation to require additional information supporting a new group's claimed 501(c)(4) status in their first annual return.
Section 406. Extending to all organizations seeking tax-exempt status under section 501(c) the existing declaratory judgment provision currently available to organizations seeking that status under section 501(c)(3).
Section 407. Adding to the list of "deadly sins" for IRS employees "performing, delaying, or failing to perform" any official action either for "personal gain or benefit or for a political purpose."
Section 408. Exempting from the gift tax transfers to any tax-exempt organization described section 501(c)(4), (5), or (6).
Other than the gift tax provision none of these appears problematic on its face, and the expansion of declaratory judgment option to all 501(c) is a welcome change. While the gift tax provision may draw some criticism, the reality is the IRS had already abandoned this fight (and I personally think this is the right call from a tax perspective, for reasons I plan to detail in an upcoming article). The one provision that may lead to some interesting questions and so require guidance is the new notice requirement, including how it relates to the existing (optional) application process for organizations seeking section 501(c)(4) status.
Frozen Budget for the IRS . The IRS budget continues to be frozen (and so losing ground once inflation is taken into account). More specifically, Division E provides the following, all of which are the same as for last fiscal year:
- Taxpayer Services: $2.16 billion
- Enforcement: $4.86 billion
- Operations Support: $3.64 billion
- Business Systems Modernization: $290 million
It also prohibits spending on targeting citizens for exercising their First Amendment rights and on targeting groups based on their ideological beliefs.
Bottom Line. The IRS continues to pay the price for the scandal in the form of congressional micromanagement and less funding. Any hopes of significant IRS enforcement relating to tax-exempt organizations and political activity are therefore unlikely to come to fruition in the foreseeable future.
UPDATE: For more information, see the Joint Committee on Taxation Technical Explanation for the tax bill.
Tuesday, November 10, 2015
The National Philanthropic Trust released its 2015 Donor-Advised Fund Report on November 9th. NPT's report indicates that gifts to DAFs grew significantly in 2014, with assets held in DAF reaching a record level of $12.5 billion dollars. NPT further indicated that that the DAFs it studied also demonstrated an increase in grants, with $12.5 billion in assets given away at a payout rate of 21.9%. As discussed in this article in the Chronicle of Philanthropy, however, there is fundamental disagreement in the field on how to measure DAF payouts - the National Philanthropic Trust, Fidelity Charitable Trust and statisticians at the IRS all use different methodologies. Accordingly, we should all be wary about comparing apples to apples when looking at DAF payout rates.
Certainly, this report is good news for DAFs as it shows the popularly of DAFs as a giving vehicle; it may also have the unintended consequence of encouraging further (already heightened) scrutiny. The report is released at a time when serious discussion continues to occur regarding mandating minimum payouts for DAFs.
Correction: Thanks for the note in the comments, which indicated that total DAF assets according to the report were at $70.7 billion at the close of 2014. EWW
Monday, November 9, 2015
According to Nonprofit Quarterly, Los Angeles County has adopted new beneficial rules regarding payments to nonprofits that contract with the government to provide services, such as social service agencies.
Anyone who has worked with charities that contract with the government (or anyone else, for that matter) knows that it is often very difficult for a charity to be reimbursed for the indirect costs associated with programming, such as utilities. At the end of last year, the Office of Management and Budget recently issued a "super circular" addressing indirect cost reimbursement, clarifying issues regarding the applicability of these rules to all federally-funded grants and contracts, and reiterinat that it is not appropriate for governmental agencies to request waivers of these rights.
Of course OMB directives can only govern grants and contracts using federal funds - clearly, all federal contracts, but also state and local contracts to the extent they utilize federal funding. Strictly state-funded (or local-funded) grants, however, are not covered by the OMB guidelines. Thus, LA County's adoption of the standards is a big deal for local nonprofits, and hopefully sets a trend for other state and local jurisdictions.
H/t to Jennifer Chandler at the National Council of Nonprofits, which has been active in this area.
Thursday, September 24, 2015
In the third piece of guidance issued over the last seven days, the IRS issued proposed regulations under Section 170(f)(8) last week. On September 17, 2015, the IRS issued a notice of proposed rulemaking regarding the donee reporting exception to the contemporaneous written acknowledgement requirements for charitable contributions.
Code Section 170(f)(8) requires a taxpayer claiming a Section 170 charitable contribution deduction in excess of $250 to substantiate the contribution by a contemporaneous written acknowledgement received from the charity, which must include certain designated information and be provided in a timely manner (a.k.a, contemporaneously!). You all are familiar with the “thank you for your contribution – you have received no goods and services in consideration for your contribution” letter. That letter is designed to be the “contemporaneous written acknowledgement” or “CWA” required to be sent by the charity and retained by the donor for purposes of Section 170(f)(8) substantiation.
However, the statutory language of Section 170(f)(8) contains an exception to the general rule disallowing contributions that are not substantiated by a CWA. Under Section 170(f)(8)(D), a donor’s deduction will not be disallowed if the charity files a return (on a form and in a manner set forth in Treasury Regulations) that includes the information otherwise required to be disclosed on the CWA.
Even though this statutory language exists, the preamble indicates that the IRS purposely never issued regulations implementing the donee reporting provisions of Section 170(f)(8)(D). The “goods and services” letter methodology was working out well enough, and there had been no outcry for charity reporting. Apparently, the issue has arisen in a litigation context, however, with donors who had failed otherwise to use the CWA substantiation methodology trying to save their deductions with alternative documentation – specifically (according the preamble, anyway) by having the charity file an amended Form 990.
In the proposed regulations, the IRS states that Form 990 disclosure is not adequate for a CWA substitute under Section 170(f)(3)(D). Accordingly, the proposed form to be filed by the charity would set forth all of the information required on the CWA, the name and address of the charity, and the name, address, and tax ID of the donee. The charity must send a copy of this new form to the IRS and to the donor (unlike the CWA, which just goes to the donor). In each case, must be provided by February 28th of the year following the year of contribution - which is earlier than the CWA, which is generally due by April 15th of the following year (unless the donor files his or her tax return earlier).
It's not obvious to me when a charity would elect to do this in lieu of the existing CWA letter - did the IRS make it purposefully difficult so that no charity would use it? In each case, the charity still needs to mail something to the donor – in the donee reporting case, the charity must also send the form to the IRS and sent earlier than the due date of the Form 990, so there really isn't any cost savings. As a practical matter, it seems to me that these regulations do very little other than place a road block in front of individuals trying to litigate their way around a substantiation foot fault.
If you are interested, comments are due by December 16, 2015.
Wednesday, September 23, 2015
Good morning all! I just got an alert in my mailbox that Treasury has issued final regulations on equivalency determinations - you may all recall the proposed regulations that were issued in 2012.
I'm in the process of printing out the final regs and comparing them to the proposed regs, so I'll update the post later today. Bloomberg BNA's blurb on it says that the final regulations "incorporate the thrust of" the 2012 rules. I'll try to get some links up as soon as I can find them in a non-subscription database, although I know you can get them in both Bloomberg BNA and Tax Analyst already if you have access. Citation is T.D. 9740, RIN 1545-BL23.
Update at 6:30 p.m., 9/23/2015
I've not gotten all the way through the final regs to give you all a complete summary, but I wanted to mention a few highlights from the preamble:
- It appears that the Regulations expand the definition of "qualified tax practitioner" for purposes of who can make equivalency determinations that can be relied upon in good faith.
- The Regulations appear to scale back the ability of a charity to rely on a good faith affidavit as the sole means of making an equivalency determination. Briefly, it appears that you can rely on the information in good faith, but there needs to be an additional showing that the evaluation of the data and the equivalency determination based on that data occurred in a manner that demonstrates a knowledge of US tax law. In theory, anyway, there are more qualified tax practitioners (including folks that may be in house at the foundation) to help with such a determination, so it shouldn't (in theory again) be a significant bar to international grant making.
- Some clarification on how long you can rely on written advice, which looks like (a) so long as there is no change in the law or otherwise for most things, except (b) two years for public charity determinations based on financials.
- It looks like there may be limited opportunity to share equivalency determinations, but it can't be foundation to foundation - it may be that the first foundation has to authorize the release of that information to a second foundation from its qualified tax practitioner because only there would there be reasonable reliance. So not quite the equivalency determination banking that the sector wanted, but it may be a step in that direction.
- Looks like donor advised funds can use these rules, at least for now, for purposes of compliance with Section 4966(d)(4).
Monday, September 21, 2015
Last week, the IRS issued Notice 2015-62 discussing the tax treatment of an investment made for charitable purposes that does not otherwise qualify for status as a “program-related investment” under Code Section 4944(c). If you are reading this blog, you probably know that Code Section 4944 imposes a prudent investor-type rule on private foundations by imposing an excise tax on investments that jeopardize a private foundation’s charitable purposes. There is an exception to this general rule under Code Section 4944(c) for program-related investments (PRIs). For an otherwise charitably-motivated investment to qualify as a program-related investment, however, no significant purpose of the investment can be the production of income or the appreciation of property (among other things...).
The news is awash with discussions of socially-responsible investing, impact investing, mission-related investing and the like - however, none of these types of investing are tax concepts. Rather, they are ways that a foundation (or other endowment-type entity) can approach investing in a manner that considers charitable outcomes. Such categories of investments do not necessarily qualify as "program-related investments." Rather, PRIs are a thing, as my students would say - a specific term of art used in the tax code for which an investment must specifically qualify. As indicated above, in order to qualify as a PRI, no significant purpose of the investment can be for the production of income or appreciation of property. Of course, many investments view charitable outcomes as one of many bottom line results, along side of the potential for profit. Such charitably-inclined investments may fall into one or more of the categories of social investing, but they are not PRIs.
Notice 2015-62 clarifies the manner in which the prudent investor standard of Code Section 4944 treats the accomplishment of charitable purposes as a relevant factor when evaluating an investment that is NOT a PRI. For many years, there was some question as to whether fiduciary standards would allow a foundation to settle for a lesser yield in order to accomplish other charitable goals – for example, universities divesting in South Africa companies during the apartheid era, the Catholic Church not investing in contraception or land mine manufacturers, or affirmative investments in emerging green energy technologies. (For more discussion on this topic, see this very awesome article by the very awesome Susan Gary: It is Prudent to Be Responsible? The Legal Rules for Charities that Engage in Socially Responsible Investing and Mission Investing).
With the adoption of UPMIFA in 2006 by NCCUSL and UPMIFA’s subsequent adoption in almost all jurisdictions (what's up with that, Pennsylvania?), it became clear that most jurisdictions would allow for the consideration of charitable goals as an appropriate factor in evaluating an investment, so long as the overall determination was reasonable. Notice 2015-62 adopts a similar standard for Section 4944, stating that “foundation managers may consider all relevant facts and circumstances, including the relationship between a particular investment and the foundation’s charitable purpose.”
This Notice is certainly good news for private foundations involved in socially-responsible, mission-related, or impact investing. Of course, the Notice does not solve all of a private foundation’s worries in this area. A private foundation must still comply with Code Section 4944’s overall requirement that foundation managers exercise ordinary business care and prudence in selecting investments. For state law purposes, UPMIFA does not necessarily cover every type of charitable organization; therefore a foundation needs to determine whether or not a different state investment standard might apply. And of course, for excise tax purposes, only a program-related investment will be treated as a qualifying distribution for purposes of Code Section 4942.
Thursday, September 17, 2015
NPR reports that the “American Red Cross is facing new criticism today as government investigators and a congressman call for independent oversight over the long-venerated charity.” NPR explains that Representative Bennie Thompson has introduced a bill called the American Red Cross Sunshine Act on the heels of the release of a report by the United States Government Accountability Office (“GAO”) that examined the charity’s operations. The GAO report, says NPR, “finds oversight of the charity lacking and recommends that Congress find a way to fill the gap.”
The “Conclusions” section of the GAO report states as follows:
The nation’s disaster response system relies to a significant extent on the nonprofit sector, which harnesses the public’s generosity to provide funding for disaster response and recovery efforts. This approach can support the nation’s efforts to assist disaster victims, but it also has limited accountability for disaster assistance. The Red Cross, the organization most responsible for providing shelter and other mass care services to disaster victims, exemplifies this tension. It has been designated by law as an instrumentality of the United States and has a critical, formalized role in coordinating and providing disaster response services across the nation. At the same time it remains a nonprofit organization that generally makes its own decisions about what services to provide. This reliance on an independent organization can be effective if government and the donating public have confidence that [the] Red Cross is providing the services that are most needed in an effective and efficient manner. Further, in disasters in which the federal government is involved, the extent and effectiveness of the Red Cross’s activities could have a direct impact on the nature and scope of the federal government’s activities.
With regard to oversight, while the Red Cross has some internal evaluation processes in place, such as after action reviews and surveys of state emergency managers and other stakeholders, Red Cross officials told us that the results of their internal evaluations are typically not made available to the general public. The absence of regular, external evaluations of its disaster services that are publicly disseminated could affect the confidence of both the donating public and the federal agencies that rely on the Red Cross. This is especially true in light of questions raised by the federal government and others in recent years about the organization’s performance in disasters. Given the Red Cross’s status as an instrumentality of the United States and the critical responsibilities assigned to it by its federal charter and by federal policies, the federal government has a clear stake and role in ensuring that proper oversight takes place.
In a section entitled “Matters for Congressional Consideration,” the GAO report further recommends legislative action:
To maintain governmental and public confidence in the Red Cross, Congress should consider establishing a federal mechanism for conducting regular, external, independent, and publicly disseminated evaluations of the Red Cross’s disaster assistance services in domestic disasters in which the federal government provides leadership or support. This mechanism might involve annual evaluations of whether the services achieved their objectives or of their impact on disaster victims. This evaluation could be performed, for example, by a federal agency such as DHS, by an IG office such as the DHS IG, or by a private research firm under contract to a federal agency.
The American Red Cross Sunshine Act, according to its preface, would “enhance oversight of the American National Red Cross by the Government Accountability Office and Inspectors General at the Departments of Homeland Security, Treasury, and State,” and would require the Department of Homeland Security to conduct a pilot program with the charity to research and develop mechanisms to improve the charity’s preparedness and response capabilities through social media.
Additional Coverage: The Chronicle of Philanthropy
Thursday, August 13, 2015
As announced Wednesday in a blog post by the head of the White House Office of Faith-based and Neighborhood Partnerships, nine federal agencies are issuing notices of proposed rulemaking (NPRMs) that will codify recommendations made by an advisory council to the President on "strengthening the social service partnerships the government forms with nongovernmental providers, including strengthening the constitutional and legal footing of these partnerships." The blog post further provides the overall content of the NPRMs:
The proposed rules clarify the principle that organizations offering explicitly religious activities may not subsidize those activities with direct federal financial assistance and must separate such activities in time or location from programs supported with direct federal financial assistance. For example, if a faith-based provider offers a Bible study as well as a federally supported job training program, the Bible study must be privately funded and separated in time or location from the job training program.
The NPRMs also propose new protections for beneficiaries or prospective beneficiaries of social service programs that are supported by direct federal financial assistance. In the proposed rules, the agencies set forth a notice to beneficiaries and prospective beneficiaries that informs them of these protections. These notices would make it clear, for example, that beneficiaries may not be discriminated against on the basis of religion or religious belief or be required to participate in any religious activities and advises beneficiaries that they may request an alternative provider if they object to the religious character of their current provider.
At the same time, the NPRMs assure religious providers of their equal ability to compete for government funds and of continuing protections for their religious identity like the ability of providers to use religious terms in their organizational names and to include religious references in mission statements and in other organizational documents. The NPRMs also state that the standards in the proposed regulations apply to sub-awards as well as prime awards, and set forth definitions of “direct” and “indirect” federal financial assistance. These areas have been sources of confusion for some providers.
The NPRMs are to be issued by the federal departments of Agriculture, Education, Health and Human Services, Homeland Security, Housing and Urban Development, Justice, Labor and Veterans Affairs as well as the U.S. Agency for International Development, and will apply to a broad range of federal programs that have involved faith-based organizations for years. These federal agencies will be requesting interested parties to submit comments over the next 60 days, which will then be considered in issuing final regulations.
Pursuant to a notice published in the Federal Register on August 10, the IRS is seeking applicants for vacancies on the Advisory Committee on Tax Exempt and Government Entities (ACT). The vacancies, which will occur in June 2016, include: Two (2) Employee Plans; two (2) Exempt Organizations; one (1) Federal, State and Local Governments; and one (1) Indian Tribal Governments. The notice states that ""[t]o ensure appropriate balance of membership, final selection of qualified candidates will be determined based on experience, qualifications and other expertise."
The Supreme Court ruling on same-sex marriage has yielded a lot of commentary regarding its potential effect on tax-exempt, religious organizations, including religiously-affiliated educational organizations. The Washington Post article referenced below sets forth the IRS Commissioner's commitment to not change its stance and begin revoking the exemption of religiously-affiliated educational institutions that oppose the ruling. The second set of blog posts looks at the issue more broadly, generally making the argument that opposition from such educational and other religious institutions results in "vibrant" and essential pluralism.
After the Supreme Court’s decision on gay marriage, religious leaders feared that religious universities, nonprofits and other institutions could lose their tax-exempt status. IRS Commissioner John Koskinen has promised the Senate Judiciary Oversight Subcommittee that his agency would not go after the tax-exempt status of religious colleges and universities that oppose gay marriage.
During a hearing Wednesday conducted by the Senate Subcommittee on Oversight, Agency Action, Federal Rights and Federal Courts, Sen. Mike Lee (R-Utah) asked Koskinen whether the IRS would “not, in the absence of a directive by Congress or by the courts," take action to remove religious schools’ tax exemption.
“I can make that commitment,” Koskinen said, explaining that “we see no basis for changing our examination criteria as a result of this Supreme Court case.”
Koskinen discussed the potential for such schools’ tax exemption to go under scrutiny down the road. “If we ever did that, we would issue it for public comment. There would be no surprises,” Koskinen said. “The public would have plenty of notice and plenty of opportunity to comment, and that’s not going to happen in the next two and a half years.” [emphasis added]
PrawfsBlog, "Garnett et al. on Tax-Exempt Status and Religious (and Other) Organizations" by Paul Horwitz (Alabama)::
Should government insist that all private organizations comply with its own sense of the good? Most people, I think, still agree that the answer to this question is no. However strongly they feel that those public values are the right values, and however devoutly they may hope that all people and all groups come to share them and to act accordingly, they still believe for various reasons--not least a sense that the public-private distinction, however imperfect and vulnerable to critique, represents an important value of its own--that government should not and perhaps cannot rigorously or ruthlessly enforce what Nancy Rosenblum has called a "logic of congruence" between public and private organizations. ...
Our friend and fellow Prawfs writer Rick Garnett discusses that question in a new editorial co-written with John Inazu and Michael McConnell [see below]. The title, which I gather its writers did not choose and might not be completely comfortable with, is "How to Protect Endangered Religious Groups You Admire." They argue, in brief, that we should, at a minimum, be willing to protect religious non-profits that provide significant contributions to the public good despite their now heterodox views.
Read the whole thing. Feel free to disagree. I will add two points. I agree, in sensibility at least, with a point made by Marc DeGirolami in a recent post about the editorial: "We use the language of 'exemption' when we speak of the taxable status of nonprofits, but it would be better instead to think of their nontaxable status as marking a boundary of the government's power to tax." Reasonable disagreement is available about whether "power" is an apt word here, but for those who believe that whatever the extent of state power, it ought not lightly be exercised in a way that circumscribes civil society and a vibrant pluralism, the sensibility is right. Second, it ought not be only pluralists, and certainly not only social conservatives, who support these arguments. This is an argument that liberals ought to be taking seriously now, especially as progressive thought continues to drift in a more illiberal direction.
Christianity Today op-ed: How to Protect Endangered Religious Groups You Admire, by Richard W. Garnett (Notre Dame), John D. Inazu (Washington University) & Michael W. McConnell (Stanford):
Today, tens of thousands of religious organizations, and tens of millions of Americans, continue to believe and teach that the proper understanding of marriage is a union of one man and one woman. But they do far more than believe and teach this and other views.
They also give food, clothing, shelter, counsel, and comfort to millions of Americans in need. They offer some of the most important and desperately needed health, educational, and social services in the country. And they provide billions of dollars and thousands of full-time workers for international relief aid that serves vulnerable migrants, refugees, and persecuted minorities. The work of religious organizations has long been and continues to be central both to religious believers’ lives and to the welfare of others. Our communities—and, indeed, communities around the globe—would be much worse off without these organizations and their faith-informed good works.
Despite the crucial role that religious organizations and individuals have long played in our country, some voices now suggest that they and their work are somehow tainted because of their beliefs about marriage and sexuality. Some argue that the time has come to push religious believers out of the public square and confine them to the quiet, private realm of personal prayer and worship. This despite the Supreme Court's recent decision in Obergefell v. Hodges, which not only required states to legally recognize same-sex marriages but also said, “the First Amendment ensures that religious organizations and persons are given proper protection as they seek to teach the principles that are so fulfilling and so central to their lives and faiths.”
Nonetheless, because of their traditional views on human sexuality, religious organizations have already been threatened with heavy-handed government action. ...
[W]ithin days of the Court’s decision in Obergefell, New York Times columnist Mark Oppenheimer wrote that the government should eliminate tax-exempt status from “organizations that dissent from settled public policy on matters of race or sexuality.”
Mr. Oppenheimer failed to acknowledge that in a pluralistic and democratic society, government routinely recognizes the tax-exempt status of organizations that differ from “settled public policy.” For example, not that long ago, the Human Rights Campaign was tax-exempt when it differed from settled policy on matters of sexuality; the same is true of organizations, like the Sierra Club, who push for changes in environmental regulation, or anti-war groups, who oppose US military policy. One of the principal purposes of civil society organizations is to challenge “settled public policy.”
Moreover, the majority opinion in the 5-4 decision in Obergefell earlier this summer made clear that “Many who deem same-sex marriage to be wrong reach that conclusion based on decent and honorable religious or philosophical premises, and neither they nor their beliefs are disparaged here.” ...
Some members of Congress have now introduced the First Amendment Defense Act (FADA) in an effort to ensure that overheated rhetoric and political opportunism do not endanger the important work of faith-based organizations. The core of FADA would require the federal government to honor its longstanding commitments to treat all such organizations with an even hand. It would prevent federal officials from attempting to strip tax-exempt status, from denying equal access to federal facilities and entitlements, or from taking adverse actions related to licensing or accreditation. ... We think the best approach is to tailor FADA to the core area of concern: religious nonprofits. That focus would serve the cause of religious freedom by making it more likely that this important legislation can move forward.
[Hat tip: TaxProfBlog]
As reported by the Daily Tax Report, the NYC Bar Association has requested that the IRS issue a revenue ruling confirming the agency's stance in two 2014 private letter rulings that the exempt organization was not required to obtain a new exemption letter upon a change of domicile or in the case of certain conversions (See PLR 201446025; PLR 201426028).
The IRS has responded that the issue will likely be addressed through a guidance project.