Monday, July 15, 2013
Affirming a trial court's grant of summary judgment, the U.S. Court of Appeals for the District of Columbia Circuit recently concluded that an organization seeking tax exemption under Internal Revenue Code § 501(c)(3) did not operate exclusively for charitable purposes because it operated for a substantial commercial purpose. In Family Trust of Massachusetts v. United States, decided June 28th, the named organization sought a declaratory judgement that it fell with section 501(c)(3). Family Trust of Massachusetts manages pooled account trusts that benefit individuals with disabilities without the assets in those trusts being counted for purposes of determining eligibility for certain government benefit programs.
After reviewing Family Trust's operations, the court concluded it operated in a commercial manner for several reasons. Those reasons included the fact that the organization consistently produced profits, apparently charged market rate fees, did not solicit charitable contributions to defray its costs, and did not use its accumulated funds to offset or waive trust management fees. The court also found that the Family Trust had a close relationship with its President's private law firm and marketed its services to affluent (and disabled) elder law clients who could afford both the minimum $25,000 deposit and $750 annual fee. The court therefore concluded that the Family Trust had a "pervasive commercial hue" that prevented it from qualifying for exemption under section 501(c)(3).
Monday, June 24, 2013
The IRS has issued its report on the (c)(4) "targeting" issue, available here. The report concludes that while there were "significant management and judgment failures," there is no evidence of intentional wrongdoing. The report indicates that senior IRS staff responsible for the determinations process have been replaced, and that the IRS will take a number of steps to insure similar situations do not recur.
Perhaps the most interesting part of the report is Appendix E, which provides an expedited review process for (c)(4) organizations whose applications for exempt status have been pending for more than 120 days. This process establishes a safe harbor presumption that the organization is engaged "primarily" in promoting social welfare if the organization certifies under penalties of perjury two items: The Appendix further defines relevant concepts as follows:
1. During each past tax year of the organization, during the current tax year, and during each future tax year in which the organization intends to rely on a determination letter issued under the optional expedited process, the organization has spent and anticipates that it will spend 60% or more of both the organization’s total expenditures and its total time (measured by employee and volunteer hours) on activities that promote the social welfare (within the meaning of Section 501(c)(4) and the regulations thereunder).
2. During each past tax year of the organization, during the current tax year, and during each future tax year in which the organization intends to rely on a determination letter issued under the optional expedited process, the organization has spent and anticipates that it will spend less than 40% of both the organization’s total expenditures and its total time (measured by employee and volunteer hours) on direct or indirect participation or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office (within the meaning of the regulations under Section 501(c)(4)).
The Appendix further defines relevant concepts as follows:
For purposes of these representations, activities that promote the social welfare do not include any expenditure incurred or time spent by the organization on--
- Any activity that benefits select individuals or organizations rather than the community as a whole;
- Direct or indirect participation or intervention in any political campaign on behalf of (or in oppositionto) any candidate for public office;
- Operating a social club for the benefit, pleasure, or recreation of the organization’s members; and
- Carrying on a business with the general public in a manner similar to organizations operated for profit.
For purposes of these representations, direct or indirect participation or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office (“candidate”) includes any expenditure incurred or time spent by the organization on:
- Any written (printed or electronic) or oral statement supporting (or opposing) the election or nomination of a candidate;
- Financial or other support provided to (or the solicitation of such support on behalf of) any candidate, political party, political committee, or Section 527 organization;
- Conducting a voter registration drive that selects potential voters to assist on the basis of their preference for a particular candidate or party;
- Conducting a “get-out-the-vote” drive that selects potential voters to assist on the basis of their preference for a particular candidate or (in the case of general elections) a particular party;
- Distributing material prepared by a candidate, political party, political committee, or Section 527 organization; and
- Preparing and distributing a voter guide that rates favorably or unfavorably one or more candidates.
In addition, solely for purposes of determining an organization’s eligibility under this optional expedited process, direct or indirect participation or intervention in any political campaign on behalf of (or in opposition to) any candidate includes any expenditure incurred or time spent by the organization on:
- Any public communication within 60 days prior to a general election or 30 days prior to a primary election that identifies a candidate in the election. For this purpose, “public communication” means a communication by means of any broadcast, cable, or satellite communication; newspaper, magazine, or other periodical (excluding any periodical distributed only to the organization’s dues paying members); outdoor advertising facility, mass mailing, or telephone bank to the general public; and communications placed for a fee on another person’s Internet website;
- Conducting an event at which only one candidate is, or candidates of only one party are, invited to speak; and
- Any grant to an organization described in Section 501(c) if the recipient of the grant engages in political campaign intervention.
Given my earlier post on the Bright Lines project, I find it particularly interesting that the IRS has defined the relevant standard by reference to BOTH expenditures AND employee/volunteer time. Hmmm . . . .
(Hat tip to Evelyn Brody)
Although some of the hubbub about 501(c)(4)'s and political activity has settled over the past couple of weeks, we shouldn't overlook the fact that the central fault leading to this mess was (and is) a set of un-administrable (and therefore unenforceable) rules regarding political campaign activity by exempt organizations.
In my back and forth with Rosemary Fei on 501(c)(4)'s, she mentioned that she was part of a group trying to provide better guidance on the line between prohibited political activity and permitted legislative lobbying or issue advocacy activity. This work is called The Bright Lines Project, and a full draft of their effort as of May, 2013, is available here.
In many ways, the project advances the IRS's own guidance on political activity by 501(c)(3) organizations published in Revenue Ruling 2007-41, but provides additional bright lines (pun unavoidable) on what is permitted and what isn't. It is a very thoughtful effort, modeled after the regulations on what constitutes lobbying expenditures under Section 4911 and the 501(h) election and fills some nagging holes in the IRS's guidance in Rev. Rul. 2007-41.
But I do think the project makes one mistake and ignores another very deep problem in this area. The one mistake is a sort of "pulpit speech" exception that is referred to as an exeption for "personal, oral remarks at official meetings." The project's explanation of this exeption is as follows:
Oral remarks made by anyone (other than a candidate) who is present in person at an official meeting of an organization held in a single room or location, so long as no announcement of the meeting refers to any candidate, party, election, or voting. This exception covers only oral remarks about candidates made by and to persons in attendance, not any other form of communication of those remarks, whether written, electronic, recorded, broadcast, or otherwise transmitted. A prominent disclaimer must be made to those attending, stating that such remarks are the speaker's personal opinion and are not made on behalf of the organization, and that the speaker is not advocating any of the actions set forth in Rule 3 [e.g., expressly calling for the election or defeat of a specific candidate or political party]
In it's examples, the Project notes that this rule would "permit a pastor to express his or her personal views on candidates from the pulpit. It would also allow parents at a PTA meeting, including officers, to express their views on candidates for school board. It would permit speeches, sermons, or discussions at any meeting of any tax-exempt organization to include expressions of opinion on those running for public office in upcoming elections, so long as such views were not made officially or on behalf of the organization."
My own view is that this exception is a huge mistake, because it will be exploited to the hilt by organizations intent on "having their say" about candidates. Face it - a Catholic priest, giving his "opinions" on candidates at Mass on the Sunday before the election will be viewed as an official church position, regardless how strong the "disclaimer" is that is attached to the remarks. We actually have a useful bright line on this kind of activity right now under Rev. Rul. 2007-41: you can't do it. The revenue ruling makes clear that speech such as this at an official function of an organization is prohibited, whether a disclaimer is attached or not. That seems to me to be an excellent bright line, and we should not replace it with an exploitable exception that is hardly a bright line.
The second major problem with the project is that it says nothing about the core problem that plagues 501(c)(4)'s (and 5's and 6's), which is "how much political activity is too much?" The project makes no attempt to set a bright line for when political activity becomes a "primary purpose" or otherwise address the "how much" issue.
This is a critical failing. The (c)(4) problem is as much (in my opinion, more) about how much political activity is permitted as it is in the dividing line between issue advocacy and campaign activity. Right now, we have nothing other than the vague notion that a (c)(4)'s "primary purpose" can't be political campaign activity - but there is no standard for judging "primary purpose."
So why not adopt a very clear bright line on this latter issue: the amount of political campaign activity permitted by (c)(4)'s, (5)'s and (6)'s is . . . zero. None. Absolute prohibition. Many of my colleagues believe there should be some "de minimis" amount of campaign activity permitted. I've heard things like "15%" thrown around, for example. But here's the problem: 15% OF WHAT? Of expenditures? Which expenditures? Of employee time? What if volunteers are used? Is the 15% per year or on a 4-year rolling average that we use elsewhere in 501(c)? If it's a 4-year average, that means an organization can "save up" for the presidential campaigns that happen every four years. Providing a de minimis exception is hardly a "bright line" in this area, unless one is going to couple it to a specific mathematical test like that provided in 501(h)/4911 for lobbying by 501(c)(3)'s. And anyone who's worked with that regime will tell you that it is incredibly complex, particularly when it comes to allocating expenditures (and I'd argue that the test doesn't account for volunteers or the fact that modern communication - e-mail and web sites - cost very little but have major communications impact). Do we REALLY want to go down that road? And if so, why? What is gained by such a rule other than complication and confusion? What part of "NONE" is so hard to understand or hard to comply with that we need an exception of some kind?
So I'll say it again. If we're really concerned about political campaign activity by (c)(4)'s, (5)'s and (6)'s, prohibit it; any organization that engages in political campaign activity in any amount that wants exemption should be subject to disclosure rules as Lloyd Mayer and others have argued - that is, shuffle them to 527 or some similar regime.
To actually solve the problems that led to the current mess, we need both bright line tests to distinguish between issue advocacy and political activity AND we need a bright line on how much activity is permitted. In the case of political campaign activity, "NONE" is a nice bright line that is mostly (not completely, I'll admit) incapable of exploitation . . .
[This represents a bit of change to my position, by the way - I'm actually OK with a 501(c)(4) category for organizations whose primary purpose is issue advocacy, including lobbying, IF such organization is prohibited from ANY campaign activity. It's probably a good thing to have such an organization that is also prohibited from receiving deductible contributions under 170 in order to avoid having (c)(3)'s used to end-run the 162(e) limits on the deductibility of lobbying expenses, and I'm also convinced there is a useful public benefit to issue advocacy.]
Wednesday, June 19, 2013
Just as a follow up to yesterday's post on the Oregon spendig requirement, I took a quick look again at the Form 990 (go to page 10) and its instructions regarding the allocation of program service expenses (go to pages 41 through 43). My personal favorite is the instruction on how to allocate indirect costs, which requires the charity to list everything as an administrative cost in column C (that being not a program service expense) and then to add a separate, self-created line under "Other" in which the charity is instructed to place a negative number in column C in order to allocate indirect costs to program service in B or to fundraising expenses in D. So that's clear as mud -- no chance of error there.
Also, take a look at the list of administrative expenses to be reported in column C and think about a smallish charity - one that does a full Form 990 but is still relatively small in terms of revenue and expense - for example, a small medical clinic. The list in the instructions includes the CEO and staff by default (unless directly involved in program service oversight) as well as "costs of board of directors' meetings; committee meetings, and staff meetings (unless they involve specific program services or fundraising activities); general legal services; accounting (including patient accounting and billing); general liability insurance; office management; auditing, human resources, and other centralized services; preparation, publication, and distribution of an annual report; and management of investments." I wouldn't be surprised if such a charity had issues, or at least is forced into taking a fairly aggressive position on indirect cost allocations.
When we think about fradulent charities, I don't think most of us think of these types of expenses.
Just a thought. EWW
Thursday, May 30, 2013
While hospitals continue to be criticized for failing to provide sufficient charity care and other benefits - criticism that is likely to only increase as more information about such activities becomes available because of section 501(r) - Congress, the IRS, and the media appear to have an increasing and skeptical interest in nonprofit colleges and universities. Recent developments include:
- IRS Colleges & University Tax Compliance Report: As previously reported, the report identified widespread underreporting of unrelated business taxable income, although the total amount involved for the 34 institutions examined was only $90 million, and various issues with compensation setting processes and reporting.
- House Oversight Subcommittee Hearing: In response to the above report (and lost once the the 501(c)(4) mess broke), this Ways and Means Subcommittee heard from Lois Lerner regarding the above report.
- Weekly Standard: Are Universities Above the Law?: A wide-ranging critique of college and university governance, citing recent disputes ranging from the Robertson Foundation's litigation with Princeton University's to the Association of Alumni of Dartmouth's litigation against their alma mater.
- Fiscal Times: Backroom Financial Dealings of a Top University: This article highlights the generous compensation and loan packages provided by NYU, which became national news with the nomination of former NYU administrator Jack Lew for Treasury Secretary.
All of this scrutiny comes at a time when many colleges and universities are facing increasing criticism for too high tuition, too generous compensation packages, and exploitation of student athletes. Of course such concerns are not new for nonprofit scholars, including co-blogger John Colombo, who in 1993 wrote Why is Harvard Tax Exempt? (And Other Mysteries of Tax Exemption for Private Educational Institutions), 36 Arizona Law Review 841, and more recently examined the tax treatment of college athletics. But we may be seeing an unprecedented level of scrutiny that will may ultimately shift the nonprofit governance and tax exemption standards for such institutions.
Tuesday, May 28, 2013
Having read most of the news coverage of the current situation and written about at least some of the issues at the heart of it, here is my two cents (including, with self-promotion apologies, links to my relevant articles):
Contrary to John Colombo's proposal posted earlier on this blog, I believe that tax exemption (but not deductibility of contributions) for what are now classified as 501(c)(4)s is appropriate, and that exemption is also appropriate for what are now classified as 527s. With respect to exemption, without a specific provision addressing the tax status of these groups a lot of uncertainty about their tax treatment would exist. The uncertainty arises because of issues such as whether the contributions and dues they receive are “gifts” under IRC § 102 and so not includible in gross income, especially since their lobbying and political campaign intervention expenditures are generally not deducible under IRC § 162(e). I also believe that most of these groups are formed (and contributed to) not for profit-making purposes but to pursue other goals, such as advancing a particular vision of the public good or to elect one or more candidates, and so exempting them from the corporate income tax is appropriate. Donations to such groups should not be deductible, both because of concerns regarding the influence of special interest groups (discussed in a recent article by Brian Galle and to some extent in my previous lobbying article) and because allowing deductiblity would permit easy avoidance of IRC § 162(e).
As a matter of cleaning up the tax laws, I like Ellen Aprill's idea of creating a new tax-exemption category for organizations that primarily lobby and expanding the 527 category to include any organization that engages in political campaign activities. I have not thought this idea all the way through yet, however. I have thought more about the possible constitutional issues raised by such a change (most recently flagged by Bob Bauer) and my conclusion is that the Supreme Court's Taxation with Representation decision is still relatively secure and would permit this kind of line drawing (for more details, see my post-Citizens United lobbying article; a recent article by Ellen Aprill also reaches this conclusion). Bauer is right to flag this issue, however, since it is a live one, especially if the Supreme Court's Citizens United decision turns out to be only a way station to an even stronger reading of the First Amendment in this context as opposed to a high water mark.
Finally, with respect to requiring disclosure of political activities, including of donors whose funds support such activities, I favor not placing such requirements in the tax laws to be administered by the IRS but instead in the election laws to be administered by the admittedly far from perfect FEC for the institutional choice reasons described in my 527 regulation article. As to what political activities should trigger disclosure (e.g., direct lobbying and grassroots lobbying as well as election-related political activity?) and what should have to be disclosed (e.g., donors above what dollar threshold?), I have written a couple of articles (here and here) that touch on these topics and am working on another article focusing specifically on what political activities, particular political activities such as grassroots lobbying and bundling that involve private-private interactions, should trigger disclosure (watch this space!).
Others have done a great job of reporting the numerous news stories covering the 501(c)(4) exemption application mess at the IRS (see especially TaxProf Blog, which has been providing a daily "IRS Scandal" update). So here I want to focus on commentary and opeds written by a number of thoughtful exempt organizations academics and practitioners:
- Ask the Experts: What to Make of the IRS "Tea Party" Scandal, CardHub (5/22/13): Provides lengthy quotes from Ellen Aprill, David Gamage, Philip Hackney, Thomas Kelley, Nicholas Mirkay, and yours truly.
- Ellen P. Aprill, IRS and Scrutiny: Reviewing Review, Roll Call (5/23/13): "Some media reports, however, imply that the IRS cannot and should not ask any questions of applicants for exemption, that any inquiry invades privacy and violates the First Amendment. That implication is wrong. An organization that seeks an IRS acknowledgment of its exempt status subjects itself to scrutiny — scrutiny designed to ensure that the group in fact qualifies for the benefit of tax exemption." See also Ellen Aprill, The TIGTA Report on the IRS Scandal: Questions About the IRS and About the Report, TaxProf Blog (5/15/13).
- Gary D. Bass & Elizabeth J. Kingsley, Nonprofits Need Better Guidance on Tax-Exempt Standards, Washington Post (5/23/13): "But we must not lose sight of the underlying problems that led to this situation: the lack of workable standards to determine what activity the Internal Revenue Service considers 'political' and how much of it a nonprofit group can do. . . . Much of this problem could be addressed by adopting objective, substantive criteria to define political intervention for nonprofit organizations."
- Roger Colinvaux, IRS Scandal Is About Donors, Not Tax, CNN (5/17/13): "Obviously, mistakes were made in how the IRS examined the groups, but what should not get lost amid the resulting hue and cry is that this is fundamentally about disclosure of donors, not tax-exempt status."
- Victor Fleischer, Congress's Role in the I.R.S. Focus on Conservative Groups, NY Times DealBook (5/13/13): "The reality is that this is a story of institutional incompetence. And Congress should share the blame." See also Victor Fleischer, A Dickensian Delay at the I.R.S., NY Times DealBook (5/16/13).
- Phillip Hackney, The TIGTA Report on the IRS Scandal: Be on the Lookout for False Partisan Witchunts, TaxProf Blog (5/15/13): "Nevertheless, other than the disclosure problems, this TIGTA review gives an accurate picture of an organization that I came to know and love when I worked there. Good people trying to do good work, but set for failure because provided poor clay in the Internal Revenue Code provisions on exempt organizations and too little staff and money to carry out the twin aims of accuracy and speed in molding that poor clay into a consistent good product."
- John Pomeranz, On the IRS Fiasco, Election Law Blog (5/11/13): "Looking beyond the immediate scandal, I believe that part of the reason it was possible for the IRS to treat these groups this way was the failure of Congress, the Treasury Department, and the IRS to adequately define what and how much political activity is permitted for tax-exempt organizations."
Friday, May 17, 2013
Just to follow up on my post from earlier this week, at this point there seem to be two leading contenders for the criminal issues involved in the Section 501(c)(4) investigation:
1. Unauthorized disclosure and use of taxpayer information, specifically including the release of some information to ProPublica; and
2. If today's hearing was any indication, some members seemed to be interested in pursuing whether IRS officials made full disclosures to Congress in prior hearings.
I have now had the opportunity to go through the TIGTA report as well as listen to this morning’s Ways & Means hearing. Here are some random thoughts and questions on the matter:
1. The report refers to a “BOLO” list (“be on the look out”) of terms that would trigger an additional look. I note this from the report: “[b]ased on our review of other BOLO listing criteria, the use of organization names on the BOLO listing is not unique to potential political cases.” (TIGTA Report, page 6 (my references refer to the .pdf version on the website)). When I read that, the first thing that came to my mind was credit counseling organizations – and in fact, Steve Miller mentioned credit counseling organizations in this respect today. From what I can tell, I think we know that these were not the only terms on the BOLO list, but I don’t think we know what else is on there. Footnote 16 specifically states, “[w]e did not review the use of other named organizations on the BOLO listing to determine if their use was appropriate.”
2. The report’s primary problem with the use of these terms was that “the criteria [in the BOLO listing] focused narrowly on the names and policy positions of organizations instead of tax-exempt laws and Treasury Regulations. Criteria for selecting applications for the team of specialists should focus on the activities of the organizations and whether they fulfill the requirements of law. Using the names or policy positions of organizations is not an appropriate basis for identifying applications for review by the team of specialists.” (TIGTA Report, p. 7). The TIGTA report does NOT appear to say that the actual scrutiny given was inappropriate – in fact, if the same organizations had been selected for scrutiny using different criteria, that appears to have been appropriate in most cases. Of the 298 applications that were selected for special scrutiny, the Inspector General thought that there were no indicia of additional political activity for 91 (or 31%) of the cases (note that the IRS disagreed with this finding, by the way.) As far as I can tell, we don’t know how many of these 91 cases were “Tea Party”, “912,” or “Patriot” organizations.
3. I am amused and dismayed that suddenly people are worried about Form 1023/1024 processing delays at the IRS. Where have they been? This is new and unique to advocacy 501(c)(4)s, right? Of course it’s not – all of this who work in the nonprofit sector (including the IRS) have complained about Form 1023/1024 processing times for years. Steve Miller was pretty clear today – they simply don’t have the people. Not that I think the IRS hasn’t been entirely clear about this point that in the past. That being said, the TIGTA report does make the point that the cases selected for special scrutiny sat for significantly longer than average for “regular” cases, at least in part due to the fact that it took the Determinations Unit “more than 20 months (February, 2010 to November, 2011) to receive draft written guidance from the Technical Unit for processing potential political cases.” (TIGTA Report, p. 12). To me, this is one of the most troubling aspects of this issue - I am truly concerned about why it took so long to provide that type of guidance. (Side note: the IRS letter indicating that it would cease using resources to look at gift tax return issues with regard to contributions to Section 501(c)(4) organizations was issued on July 7, 2011).
4. The TIGTA report also is concerned that IRS agents have asked for inappropriate information, such as donor lists. I agree – this was probably not appropriate to request donor lists. But, again, this isn’t a new issue. One need only revisit the nonprofit sector’s concerns regarding the governance questions on the redesigned Form 990 to see that we’ve struggled with this problem for some time. In my view, it is yet another side effect of the long standing personnel and budget issues at the IRS. Along these lines, another disturbing (but unfortunately, not surprising) part of the report for me is the finding that the Determinations Unit was sufficiently confused about what constituted appropriate Section 501(c)(4) activity that the IRS had to provide employees with a two-day workshop on the topic – in May, 2012. (TIGTA, p. 14).
5. As I indicated below as I watched the hearings, I am troubled by the notion that follow up questions from the IRS are now burdensome and inappropriate. The organization is asking to be exempt from federal taxation – presumably, we want that status to go only to those organizations that are so qualified. Unnecessary does not equal burdensome. When necessary, a tax-exempt organization should have to shoulder some burden for the privilege of not paying taxes.
From the tenor of today’s hearing, I’m sure there will be more to follow on this issue. EWW
Here's the link... it's still going. I'll try to post the transcript when done. EWW
Update 1 - Just a quick thought as Rep. Earl Blumenauer of Oregon talks about staffing and Congress' role in this issue. The real lesson to me in all of this is there is a consequence to the long term budget cuts and the attrition in personnel (hiring freeze/retirements, etc.) at the IRS. I'll say it... it is infuriating to hear some of these folks be shocked ... *shocked I tell you*... that after what's happened with staffing at the IRS over the last 10-15 years that there would overworked staffers and issues with management at the IRS. The IRS and the bar have been telling you this for years, Congress...
Update 2 - I'm really sort of shocked that Congress people are surprised that asking about a nonprofit's relationship with various individuals is somehow per se inappropriate. And asking for board member resumes and copies of websites. I'm not going to say that all of these requests were appropriate, however, the IRS does have to ask follow up questions, folks - follow up questions are not in and of themselves in burdensome.
Update 3 - Again, my opinion only... this has turned into an anti-IRS free-for-all that, as a tax professional, is hard to watch. I'm not going to say that the IRS is without fault but this is really troubling.
Update 4 - Apparently, CSPAN will replay the hearing in full tonight at 8 p.m. EST.
Wednesday, May 15, 2013
First, thanks to Darryll for his insights last night - for the record, I whole heartedly agree. Lost in this whole discussion is that there is a serious tax compliance issue that needs to be addressed. As I read all of the news, I can only think of the Ways & Means hearings that were held a few months ago. I distinctly remember how many pointed questions on Section 501(c)(4)s the committee asked the panel, even though it was really off topic. I fear that the IRS has been simultaneously told to give guidance and yet do nothing (see also, gift taxes and Section 501(c)(4) contributions) that will mess up the status quo. I do not envy the position of the folks at the IRS, may of whom I've had the pleasure of working with personally and know to be dedicated civil servants.
The two biggest updates from yesterday in 501(c)(4) gate:
Yesterday, the Treasury Inspector General for Tax Administration released its report, entitled "Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review." The link is here, but I will try to update my post below so it's one-stop shopping. My hope is to provide a more comprehensive review of the IG's report tomorrow for you all.
To some degree more shocking to me, AG Holder has indicated that a criminal investigation into the issue. I know many of us are thinking - criminal, really? On what basis? The primary speculation at this point is release/misuse of confidential taxpayer information, but there may be other causes of action floating around. I will try to collect those and do an additional update on that point as well.
That's all for now... more to follow tomorrow (now that grading is over!) EWW
Tuesday, May 14, 2013
Targeting Conservative (c)(4)'s and the Next IRS Watergate Scandal: Service Workers between a rock and a hard place.
The good thing about blogs is that you can always add some "op-ed." Let me just add a little op-ed to Elaine's helpful post below.
A long time ago, a federal district court judge imposed sanctions on the Nixon Watergate imploding Whitehouse for what it viewed as improper political interference in process by which applications for exemptions were reviewed:
A looming issue in this case has been whether political interference or intrusion has played a role in the Internal Revenue Service's consideration of the Plaintiff's exemption application. Should this specter prove to have substance, the complexion of this case changes. A showing of political influence renders the Service's ruling null and void. It is outside the law.
The Court is concerned not only with direct political intervention, but also with the creation of a political atmosphere generated by the White House in the Internal Revenue Service which may have affected the objectivity of those participating in the ruling in the Plaintiff's case. The inference of political intervention has been unmistakenly raised: (1) by the handwritten memo in the Plaintiff's file indicating "perhaps White House pressure"; (2) by John Dean's testimony before the Ervin Committee; (3) by the memoranda Mr. Dean submitted to the Ervin Committee; (4) by the testimony of Patrick J. Buchanan, White House Staff Member, before the same committee (September 27, 1973);(5) by the Deposition of Roy Kinsey, Assistant to Mr. Dean, (July 30, 1973, at 10-18); and (6) by the four documents submitted for in camera inspection. These indicia of political intervention, combined with the unusual and protracted processing of the Plaintiff's application, have triggered a warning signal requiring the Court to fully investigate the issue. Through its Discovery Orders, the Court has endeavored to obtain all the information necessary to make an informed evaluation of the issue. However, the time has come for the Court to make that evaluation, and the Court is without the requested materials to do so.
The Defendants have failed to comply with the Court's Order of July 6. Within the scope of the Order were all White House files plus the Treasury and the IRS files regarding tax-exempt organizations since Jan. 20, 1969, and certain tape recordings now before Judge Sirica.
Neither of the two searches of the White House files met the scope of the Order. The first was limited solely to materials in the White House files which mentioned the Plaintiff. In addition, Mr. Kehrli's affidavit regarding the first search of "all White House 872*872 files" was misleading. As his deposition indicates, he did not in fact search all of the White House files. He did not search the impounded files of Messrs. Colson, Ehrlichman, Haldeman, Dean or Caulfield.
The second time, the Defendants limited the search to documents, memoranda or writings in the White House central and special files which either related to or mentioned the Plaintiff or related to "White House interest in the tax-exempt status of left-wing activist organizations." Mr. Buzhardt's affidavit indicated that he conducted a complete search of the files which produced four documents which he submitted for in camera inspection. Mr. Buzhardt's complete search, however, failed to produce the documents, memoranda, and writings relating to this issue which were specifically referred to by Mr. Dean and Mr. Buchanan in their Ervin Committee testimony and by Mr. Kinsey in his deposition.
Center on Corporate Responsbility, Inc. v. Shultz, 368 F. Supp. 863 (1973). What's old is new again. Readers are no doubt well aware, by now, of the bruhaha over the controversy sorrounding the Service's admitted over-scrutinization of conservative 501(c)(4)'S. As Center for Corporate Responsibitility indicates, these matters are not simply political fodder but can have impact on an organization's entitlement to exempt status. It appears that heads will eventually roll for all of this, I' m sorry to say.
I think the IRS workers and their leaders in The Service were caught in a trap not of their own making. Ever since Citizens United, its been no secret that most (c)(4)'s are hardly organized for "social welfare" as that term is apparently intended in the regulations -- i.e., something other than political action. On the one hand, the IRS has been faulted for not doing enough to make sure (c)(4)'s are not simply political action committees in disguise, but on the other they are faulted for looking more closely at (c)(4)'s that appear to have an exclusively political purpose. And while it is certainly wrong to target just one side of the political spectrum, I am not sure that is what happened. The press is on a virtual feeding frenzy but there is evidence that the Service simply looked for "political buzz words" in the title of the 'social welfare" organizations before deciding to give enhanced scrutiny to certain groups. The fault lies in the disparate impact -- more conservative groups ended up being subjected to enhanced scrutiny than did liberal groups, if that is what happened. Even the WSJ, hardly left leaning, admits that the Service personnel were looking for "political" labels, not just "conservative" labels in deciding whether to scrutinize applications from (c)(4)'s. If that be the case, then the only fault lies in whether the result was that conservative leaning groups were more often or more likely subjected to enheanced scrutiny because the Service looked for catch phrases more often used by conservative groups in identifying which (c)(4) applications to pull. In other words, the Service might be faulted only for having a limited vocabulary, not necessarily a political bias. Hopefully the soon to be released Inspector General report will enlighten us all. In the meantime, let's not get the lynch mob all riled up just yet.
With apologies for the latness of this post (I plead grading)... I wanted to at least give everyone a summary of where we are with 501(c)(4)-Gate.
As I am sure most of you know by now, the IRS has admitted to using the terms "Tea Party" and "Patriot" in trying to prioritize which Section 501(c)(4) applications to scrutinze. We have a House Ways and Means hearing on Friday; I don't think a Senate Finance hearing has been set yet but Senator Hatch wants one; a IG report is in the works (a draft portion of which is linked below); and the late word on the street is that AG Holder may be involved soon enough.
For now, I'm just going to highlight some resources in one place and try to keep a master list of relevant documents:
- Lois Lerner's Remarks at the EO Tax Meeting (h/t Election Law Blog with imbedded h/t to EO Tax Journal)
- Baucus Comments, Senate Finance
- Ways and Means Hearing Announcement for this Friday (May 17, 2013)
- May 10 Press Briefing by Jay Carney
- Draft IG Report Appendix Per ABC News
- Treasury Inspector General for Tax Administration Report
- Statement of Secretary Lew on Resignation of IRS Acting Commissioner
- The NYTimes via TaxProf Blog: Should 501(c)(4)'s be eliminated
Paul Streckfus' EO Tax Journal has good coverage if you have a subscription.
If there is something else you'd like to see added to the list of resources, please let me know in the comments or via email. I am trying to stay with primary sources and not with news articles, for now.
More to follow, no doubt. EWW
Updated 5/17 to include more links.
Thursday, April 4, 2013
The IRS released yesterday the proposed regulations under Internal Revenue Code section 501(r)(3) relating to community health needs assessments by charitable hospitals that are tax-exempt under section 501(c)(3). Perhaps the most significant part of the proposed regulations is they provide guidance on the consequences for failing to meet one or more of the requirements of section 501(r), including but not limited to the assessments requirement. The proposed regulations provide that omissions or errors that are minor, inadvertent, and due to reasonable cause will not be considered such a failure as long as the hospital facility at issue corrects the omission or error promptly after discovery. The proposed regulations further provide that a failure will be excused if it was neither willful nor egregious and the hospital facility at issue both corrects and discloses the failure. Failures that are not excused will result in the hospital facility at issue being subject to corporate income tax, but the entire hospital organization will only have its tax-exempt status revoked after consideration of all the relevant facts and circumstances relating to the failure(s) and any past failures.
The proposed regulations follow two earlier IRS notices regarding these assessments (Notice 2010-39 and Notice 2011-52), both of which generated numerous comments, and join previously issued proposed regulations under sections 501(r)(4), (5), and (6).
The IRS has announced that it is asking more than 1,000 organizations that self-declare they are tax-exempt under sections 501(c)(4), (5), or (6) to complete a questionnaire regarding their characteristics and activities. Identified as a compliance check, the questionnaire asks for the reasons why the organization chose not to apply for tax-exempt status, when it began claiming tax-exempt status, and whether it sought outside professional advice regarding whether it qualified for exemption. The questionnaire also asks detailed questions regarding the percentage of revenue, expenses, and time spent on various activities, as well as specifically asking for detailed information regarding the amount of money and time spent by both volunteers and paid staff on political campaign intervention. Some questions appear redundant with the Form 990, such as questions relating to compensation, but many questions go into much greater detail than found on the Form 990.
It is clear that the IRS is trying to get a handle on the most common types of self-declared tax-exempt organizations. At the same time, the fact that it took this long for the IRS to even begin looking into such entities underlines the slow reaction speed that has been so frustrating for those who have called for the IRS to look into the political activities of tax-exempt organizations. Yet it is arguably unfair to expect the IRS, which is designed to audit situations well after the fact, to exhibit the level of responsiveness that politics demands (shameless self promotion - see my article regarding regulation of 527s for more on this point).
Tuesday, April 2, 2013
Christianity Today reports that the founders of Angel Food Ministries, once a high-flying $140 million annual budget distributor of discounted food via church networks, will be sentenced next month in federal court. We previously blogged about the indictment issued against those founders, as well as about various governance disputes and compensation issues. According to the news report and an earlier Atlanta-Journal Constitution article, the founding couple and their son pled guilty to various federal charges.
This situation is a textbook example of how an innovative, entrepreneurial, family controlled charity can go off the rails. We previously noted that the organization's co-founder and CEO defended the compensation and loans it provided to its senior management, its lack of an independent board, and its various conflicts of interest by citing its great success in helping those in need. Success does not, however, ensure compliance with the law and may in fact provide a justification for providing financial awards and practices that ultimately do not withstand legal scrutiny. Nonprofit leaders and scholars are of course familiar with the tensions that can develop between a visionary, risk-taking founder and more cautious independent board members, but this case is an object lesson in why eliminating this tension by not having an effective, independent board is a dangerous route to pursue.
Monday, March 18, 2013
Our most current installment, courtesy of the Senate Democrats in their 2014 Budget Proposal:
The Senate Budget calls for deficit reduction of $975 billion to be achieved by eliminating loopholes and cutting unfair and inefficient spending in the tax code for the wealthiest Americans and biggest corporations. It recognizes that the Finance Committee, which has jurisdiction over tax legislation, could generate this additional revenue through a variety of different methods.
One potential approach is an across‐the‐board limit on tax expenditures claimed by high‐income taxpayers (specifically, the top two percent of income earners). This could take the form of a limit on the rate at which itemized deductions and certain other tax preferences can reduce one’s tax liability, a limit on the value of tax preferences based on a certain percentage of a taxpayer’s income, or a specific dollar cap on the amount of allowable deductions. In assessing any such across‐the‐board limit, Congress should consider the extent to which each proposal would retain a marginal tax incentive to engage in the affected activities and investments.
Another potential approach by which Congress could increase tax fairness and reduce the deficit is by reforming the structure of particular tax expenditures. The Simpson‐Bowles illustrative tax reform plan, for example, proposed to convert certain itemized deductions into limited tax credits, which more equitably deliver tax benefits and, because only about one‐third of taxpayers itemize their deductions, are often better for targeting tax incentives at low‐income and middle class families. Reforms like these could also generate substantial new revenue for deficit reduction.
See Foundation for Growth: Restoring the Promise of American Opportunity, page 66 (emphasis added). As a reminder, the charitable deduction is an "itemized deduction." Therefore, the charitable deduction will be limited by any indiscriminate cap on itemized deductions, whether expressed as a percentage of income or a specific dollar cap. One could guess that the caution highlighted above in bold might have been aimed specifically at the chartiable deduction, although the mortgage interest deduction might lay a claim to such specific attention. The nonprofit sector may have the most about which to worry, as charitable contributions are voluntary and easy to eliminate out of one's personal budget, if a taxpayer choose not to spend above the allowable deduction cap.
Future installments to follow, no doubt.
Friday, February 22, 2013
When does improper campaign intervention become a crime? At the least, there has to be an instance of campaign intervention. But is that all? According to a federal information to which the defendent is set to plead guilty, the answer is "yes" surprisingly. A short but interesting story in yesterday's Wapo describes a federal information in which the crime is hard to find. The crime, acccording to the indictment, is that a nonprofit insider in DC used nonprofit money to fund an inauguration party and, in doing so, "interfered with the proper administration of the tax laws." The indictment states that the insider knowingly prepared fraudulent documents to obtain $110,000 to support a "political group" that was not an eligible recipient of the nonprofit's funds and, in doing so, criminally interfered with the operation of the Internal Revenue Laws. The criminal interference, according to the brief information stems from the allegation that the insider (1) requested her chief of staff to prepare a grant request for the money, but to list the recipient as someone other than the Young Democrats, the organization hosting the Inauguration party, out of fear that a political organization was an ineligible recipient, (2) knew at the time of the grant application that the nonprofit's accountants would prepare a 990, and (3) knew, at the time of the grant application, that the 990 would be incorrect because the actual [political] use of the funds would not have been disclosed. According to the report, the insider intends to plead guilty. I am just not so sure about the wisdom of doing so, unless there is a deal for some sort of diversion. It sounds like the U.S. Attorney is really stretching to find a criminal allegation in this case. First, the money was not going to be used to intervene in a campaign -- it was to be used for an inauguration party, the campaign having already been won. Second, the allegation is built on too many suppositions -- the insider filed the grant application knowing that a 990 would later be filed, the acountants or auditors would prepare a 990 presumably asking no questions about ambiguous expenditures, and then eventually the 990 would in fact be filed incorrectly. This seems a house of cards as far as criminal liability goes -- at least under the charge of interfering with the proper administration of the internal revenue laws. If it were to stand, it seems to me, nearly all improper campaign interventions ought to constitute a crime as opposed to a violation of the condition of tax exemption. The bottom cards are the least stable, by the way, since an inauguration party might not be a good use of charitable funds but hardly constitutes improper campaign intervention. Another rickety card in this house is the assumption that the Young Democrats are necessarily an improper recipient, of a charitable grant (even if the insider was concerned that they might be). What if they were conducting a voter registration drive or just . . . having a party to celebrate another successful violence-free political process? I just wonder if the poor defendant in this case has received decent tax advice or, instead just simply hired some top flight but no less tax exemption-insensitive litigators. There should be a motion to dismiss and, failing that, perhaps a trial, nevermind a guilty plea! But then again, nobody asked me.
Wednesday, February 13, 2013
The New York Times reports that in the wake of various measures deemed hostile to nonprofit groups working in Russia, Deputy Assistant Secretary of State Thomas Melia announced that the United States would no longer be part of a "civil society working group" created in 2009. The article reports the group, which the US and Russia created under the US-Russia Bilateral Presidential Commission, has not met in plenary session for many than a year. We have previously blogged about some of the actions that apparently contributed to the withdrawal, including requiring nonprofits receiving funding from outside of Russia to identify themsevles as foreign agents.