Monday, June 23, 2014
Today’s edition of Tax Analysts’ Tax Notes Today (subscription required) contains several entries relevant to exempt organization lawyers. One that especially interests me is Private Letter Ruling 201425016, which involves a country club exempt from federal income tax as an organization described in Section 501(c)(7) of the Internal Revenue Code (the “Code”). The country club proposed to sell a conservation easement to a city and use the sales proceeds to improve its golf course, purchase personal property, and renovate and expand its facilities. The Internal Revenue Service ruled that the sale would not jeopardize the organization’s exempt status, and that proceeds reinvested within three years after the closing of the sale of the conservation easement would not generate unrelated business taxable income because of Code section 512(a)(3)(D). Further, the capital improvements contemplated in the ruling request that are made in the year preceding closing will constitute other property purchased and used directly in the performance of an exempt function for purposes of Code section 512(a)(3)(D).
Electronic Citation: 2014 TNT 120-34
Friday, June 20, 2014
As reported by The Chronicle of Philanthropy, Public.Resource.Org ("PRO") filed a lawsuit seeks to compel the IRS to release Forms 990 in a format that can be read and, thus, searchable by computers. The IRS practice to date is to convert all filed 990s into images, which renders the content therein incapable of being searched. Organizations that provide access to exempt organizations' 990s, like GuideStar and Charity Navigator, must manually enter the data in order to make it accessible to the public. PRO seeks to end the IRS practice that makes such forms effectively useless to organizations wishing to search the filed returns for specific data or information. The IRS argues that current open-records laws do not require it to utilize any particular format in making the information public.
According to The Chronicle, on Wednesday, June 18, 2014, Judge William Orrick (U.S. District Court for Northern District of CA) "tentatively" denied the IRS's motion to dismiss the lawsuit, thus allowing the lawsuit to proceed.
In the ongoing controversy involving the IRS EO division and its past director Lois Lerner, new revelations about lost emails (in the thousands) has reignited the wrath of Congress and the public. As reported in The New York Times, IRS informed Congress in a filing to the Senate Finance Committee last Friday that approximately two years of Lerner's emails (both sent and received) were lost in a 2011 computer crash. The IRS Commissioner is scheduled to be grilled by House committees next week on the lost emails. According to the Daily Tax Report, House Republicans notified the IRS Commissioner via a letter that they intend to question IT employees at the IRS about the lost emails.
As reported by The Minority Report (Blog), U.S. Representative Stockman (TX) has written to National Security Angency Director, Admiral Michael S. Rogers, requesting that the Agency "produce all metadata it has collected on all of Ms. Lerner's email accounts for the period between January 2009 and April 2011." Politico.com opined that since Lerner's crashed hard drive has been recycled, it is unlikely the lost emails will ever be found.
A Dallas Morning News editorial published yesterday calls for the Obama Administration to appoint a special counsel to independently investigate the entire IRS controversy, including the lost emails. Clearly, the IRS and its credibility will be continue to be embattled for the foreseeable future.
Wednesday, June 18, 2014
On June 13, 2014, the IRS Exempt Organizations division released several intermal memoranda addressing the EO application process:
1. Appeals Office Consideration of EO Technical Unit Adverse Determinations. Memorandum TEGE-07-0514-0012 provides that when EO Technical issues a proposed adverse ruling, organizations now have the opportunity to request consideration of the adverse determination by the Appeals Office within 30 days from the date of the letter setting forth such adverse determination. Prior to this guidance, the EO Technical process was different - an organization that received an adverse determination from EO Technical did not have the right to request consideration by the Office of Appeals.
2. Retroactive Reinstatement & Pending Applications. Memorandum TEGE-07-0414-0010 provides that if an organization filed its Form 1023 appliction for exemption prior to the due date of filing its Form 990 or 990-PF, and the IRS later determines that the organization qualifies for tax exemption, the will be granted under usual procedures as long as it has filed a 990 within the past three years. If the organization has not done so and its tax exemption was automatically revoked, the IRS will now treat the application for exemption as a request for reinstatement. Because of IRS backlog in determinations, some organizations suffered a revoked exemption before the IRS could even process its application.
3. EO to Use Six Sigma to Streamline Application Process. Memorandum TEGE-07-0514-0014 provides that EO specialists will be treated on streamline processes evolving from Lean Six Sigma Organization (LSSO) concepts. This streamlining should aid in the IRS's efforts to effect "fair and efficient tax administration."
Tuesday, June 17, 2014
In its 2014 Report of Recommendations, the IRS Advisory Committee on Tax Exempt and Government Entities specifically recommended:
The IRS Exempt Organizations Division should recommend that Chief Counsel and Treasury open a regulation project so that profits from a substantial commercial activity will not preclude exemption under I.R.C. § 501(c)(3) as long as an organization’s income and its financial resources are used commensurate in scope with its charitable program.
The advisory panel specifically explained:
The IRS should open a regulation project to: (1) formalize the commensurate test articulated in Rev. Rul. 64-182; and (2) to reject application of the commerciality test. Recent court cases and IRS rulings have been applying a "commerciality test" to determine: (1) when certain business activity conducted by a Section 501(c)(3) organization will preclude tax exemption; and (2) what constitutes unrelated business generating taxable income. Neither the tax law nor the implementing regulations provide support for a commerciality test.
The report ultimately concludes that the commerciality doctrine "is not only unsupported by the Internal Code or its implementing regulations, the doctrine is also inconsistent with the common law of charitable trusts," upon which current regulations are based (referring to §1.501(c)(3) -1(c)(1) and -1(e)(1) promulgated in 1959). The advisory panel concludes that the primary purpose test in the Regulations has basically been replaced with a commerciality test in the IRS's determination of an organization's extent of business activity.
The advisory panel also recommended IRS cooperation with the Chief Counsel's office and the Treasury Department to promulgate a comprehensive revenue ruling on various other unrelated business income issues including activities that will be considered related and unrelated; preparatory time spent on activities; and situations evolving from the IRS' college and university compliance project, such as facility rentals and dual-use properties.
Most practitioners would clearly find such guidance helpful as well as definitive IRS guidance reconciling the commensurate test with the regulatory primary purpose test and their interaction with the UBIT rules.
(See also: Daily Tax Report)
Thursday, May 29, 2014
As reported in Sunday's The New York Times, a trend among hospitals around the country is to reduce financial assistance to uninsured patients with the intent of forcing such patients to obtain coverage under the Affordable Care Act. The criticism is obvious - uninsured lower- and middle-income citizens without coverage will not take advantage of the ACA due to perceived, and perhaps actual, unaffordability and therefore forgoe health care all together. The push-and-pull for hospitals centers on the ACA's reduction of federal payments to hospitals that treat large number of uninsured patients (again, hoping to force such patients to seek coverage in online marketplaces) and the actual need to provide free or reduced-cost health care to those most in need of it.
The Times article illustrates hospitals' various policies to address this real problem:
In St. Louis, Barnes-Jewish Hospital has started charging co-payments to uninsured patients, no matter how poor they are. The Southern New Hampshire Medical Center in Nashua no longer provides free care for most uninsured patients who are above the federal poverty line — $11,670 for an individual. And in Burlington, Vt., Fletcher Allen Health Care has reduced financial aid for uninsured patients who earn between twice and four times the poverty level.
Continuing charity care for the uninsured, argues some health care providers, defeats the very purpose of the ACA. However, uninsured advocates argue that many uninsureds forgoe coverage under the ACA inaugural enrollment because the plans are expensive, even with government subsidies. Some argue that it is still a matter of message - encouraging people who now have access to coverage under the ACA to take advantage of the opportunity.
The article further states:
Many hospitals appear focused on reducing aid only for patients who earn between 200 percent and 400 percent of the poverty level, or between $23,340 and $46,680 for an individual. Many of those people presumably have jobs and would qualify for subsidized coverage under the new law.
The Times further reported that financial challenges for uninsureds are "particularly daunting" in the states that have not yet expanded their Medicaid programs, which currently totals over 24 states.
An issue not addressed by the Times Article is how these emerging charity care policies, to best comply with and take advantage of the new ACA reimbursement rules, will affect these tax-exempt hospitals' Form 990 Schedule H reporting? Has Congress and the IRS contemplated the changes to charity care numbers in light of the above-referenced ACA rules?
In American Atheists v. Shulman, the U.S. District Court for the Eastern Division of Kentucky rejected three atheist organizations' contentions that the IRS unconstitutionally discriminates against non-religious tax-exempt organizations. Specifically, the Atheists alleged that the IRS’s differing treatment of churches as opposed to other tax-exempt organiations was unconstitutionally. Specifically, the Atheists requested that the Court issue a judgment “[d]eclaring that all Tax Code provisions treating religious organizations and churches differently than other 501(c)(3) entities are unconstitutional violations" of the Equal Protection laws of the Fifth Amendment, the First Amendment and the Religious Test Clause of Article VI, §3 of the Constitution. The Atheists claimed "upon information and belief a number of atheist organizations have tried to obtain IRS classification as religious organizations or churches under §501(c)(3) or to otherwise obtain equal treatment,” and “most of those applications and attempts were rejected by the IRS." However, the Court found that the Atheists admitted in pleadings that they themselves had never sought recognition as a religious organization or church under §501(c)(3). The Atheists responded that they have not applied for exemption as a religious organization or a church because seeking such a classification would "violate their sincerely held belief."
Nevertheless, the Court found that the Atheists lacked the necessary standing to bring the suit, in part because they could have applied for religious designation. The Court concluded that the Atheists failed to establish any injury-in-fact and their assertion that they would fail to qualify as a church or religious organization was "mere speculation." To the contrary, stated the Court, "[a] review of case law establishes that the words ‘church,’ ‘religious organization,’ and ‘minister,’ do not necessarily require a theistic or deity-centered meaning."
Over 2 years ago, we blogged about a unique lawsuit being filed by Z Street, a pro-Israel nonprofit corporation, against the IRS. Specifically, Z Street alleged that the IRS's "Israel Special Policy” utilized in reviewing the organization's application for Section 501(c)(3) status violated the organization's First Amendment rights in that the IRS policy constituted viewpoint discrimination. Z Street requested an injunction compelling the IRS to disclose the policy and its parameters and usage, and to refrain from such use in evaluating the organization's exemption application.
In a May 27 decision, the U.S. District Court for the District of Columbia denied the IRS's motion to dismiss the organization's complaint on all 3 grounds. The IRS presented three legal arguments that the Court lacked subject-matter jurisdiction over the organization's constitutional claim. First, the IRS argued that the Anti-Injunction Act (“AIA”), 26 U.S.C. § 7421 (2013), precluded the Court from exercising jurisdiction. Second, it asserted that the Court could not grant the relief sought by the organization under the Declaratory Judgment Act (“DJA”), 28 U.S.C. § 2201 (2013). Finally, the IRS argued that Z Street's complaint was barred by the doctrine of sovereign immunity. In addition, the IRS asserted that Z Street failed to state a claim upon which relief can be granted because the organization has an adequate remedy at law (namely, 26 U.S.C. §7428), thereby foreclosing the equitable relief that it sought. Because the Court rejected the IRS's "core contention" that Z Street sought a determination on its eligibility for Section 501(c)(3) tax-exempt status, the Court rejected the IRS's assertions that the AIA, the DJA, or sovereign immunity barred the organization's request for equitable relief and that Z Street had an adequate remedy at law.
With respect to the remedies sought by Z Street, Judge Ketanji Brown specifically acknowledged:
In this regard, looking at the requested remedy as the D.C. Circuit requires, Z Street’s complaint requests only two things: (1) a declaration that the Israel Special Policy violates the First Amendment, and (2) an injunction that requires disclosure of information regarding the Israel Special Policy, bars the IRS from subjecting Z Street’s application for Section 501(c)(3) status to the Israel Special Policy, and that mandates that Z Street’s application be adjudicated “fairly” and “expeditiously.”
In the opinion's conclusion, Judge Brown opines:
Defendant [IRS] struggles mightily to transform a lawsuit that clearly challenges the constitutionality of the process that the IRS allegedly employs when it determines the tax-exempt status of certain organizations into a dispute over tax liability as a means of attempting to thwart this action's advancement,” Jackson said. “But the instant complaint, which in no way seeks an assessment of the taxes to be paid or even a determination of the Plaintiff's Section 501(c)(3) status, is not so easily deterred.
(Hat tip: Daily Tax Report)
The IRS Tax-Exempt and Government Entities Advisory Committee will hold a public meeting on June 11, 2014 with respect to significant issues affecting such entities. Per the May 28th Federal Register notice, the meeting will be held from 9:30 to 11:30 a.m. in the main IRS building on 1111 Constitution Avenue., N.W. , Washington, D.C., Room 3313.
Issues to be addressed include:
- Preapproved and determination letter programs;
- Unrelated business income tax compliance of colleges and universities;
- Government employees and the Affordable Care Act;
- IRS tribal consultation and compliance audit improvements; and
- Tax-exempt bonds and increased reliance on the facts-and-circumstances test to analyze management contracts.
Friday, May 23, 2014
As reported in multiples news sources (e.g., the NY Times, Reuters, and Business Week), the IRS has announced that it will likely revise proposed regulations addressing the political activities of section 501(c)(4) entities. Here is the text of the official announcement from the IRS:
Last November, Treasury and the IRS proposed a new regulation governing political activity of section 501(c)(4) organizations. The proposal generated over 150,000 written comments — the most comments ever received by Treasury and IRS on a proposed tax regulation. Consistent with our standard rulemaking process, we intend to review those comments carefully, take into account public feedback, and consider any necessary changes. Consistent with what Commissioner Koskinen has previously stated, it is likely that we will make some changes to the proposed regulation in light of the comments we have received. Given the diversity of views expressed and the volume of substantive input, we have concluded that it would be more efficient and useful to hold a public hearing after we publish the revised proposed regulation. Treasury and the IRS remain committed to providing updated standards for tax-exemption that are fair, clear, and easier to administer.
Friday, May 9, 2014
The National Association of State Charity Officials has submitted comments to the Treasury Department objecting to the proposed IRS Form 1023-EZ. The form would permit certain types of nonprofits with relatively low expected annual revenues and total assets to submit a streamlined application for recognition of exemption under IRC § 501(c)(3). NASCO reiterated concerns expressed in the 2012 Report of Recommendations by the Advisory Committee on Tax Exempt and Government Entities (ACT), in which ACT recommended against the development of such form because it viewed any benefits from doing so as being "outweighed by the loss of educational value to the applying organization and the loss of effectiveness to the IRS."
Tuesday, May 6, 2014
A year ago this week (or 362 days ago, according to Paul Caron) then IRS Exempt Organizations Division Director Lois Lerner apologized for the EO Division using criteria during the exemption application process that were "wrong," "incorrect," insensitive," and "inappropriate." We all know what has followed since those comments at the May 2013 ABA Tax Section meeting. Several recent developments are worth highlighting, however.
First, the IRS mess has become a political football disconnected from the facts of what actually happened. This result is illustrated not only by the recent Committee on Oversight and Government Reform (Darrell Issa, Chairman) report and the recent Committee on Ways and Means (Dave Camp, Chairman) letter to Attorney General Eric Holder, both focusing on Ms. Lerner's alleged actions, but also by the often testy exchanges between members of the Ways and Means Committee as they debated the latter document in executive session a month ago before voting along party lines to refer the letter to the full House. This is not to say the exchanges were not without their lighter moments (including during the related open session Chairman Camp telling the Ranking Minority Member Sandy Levin "Just chill out." and Levin responding "I am very chilled out."). The contrasting views of the situation taken by the members on each side of aisle during the executive session illustrate how much political spin is now applied to accounts of this mess. (And later today the House Committee on Rules (Pete Sessions, Chairman) plans to take up a resolution that Ms. Lerner be held in contempt of Congress and a resolution calling for the appointment of special counsel.) (UPDATE: The political spin continues with a new report from Ranking Member Elijah Cummings of the Committee on Oversight and Government Reform titled "No Evidence of White House Involvement or Political Motivation in IRS Screening of Tax-Exempt Applicants.")
Second, the issue of what information relating to tax-exempt organizations is and should be protected from public disclosure by obscure Internal Revenue Code section 6103 has become a hot topic. ProPublica reports that the nonprofit Freedom Path recently sued the IRS over its alleged treatment by the agency, with the most viable claim likely relating to the IRS' mistaken release of the organization's pending exemption application to ProPublica in alleged violation of section 6103. The Ways and Means letter discussed above also raises concerns under section 6103, asserting that Ms. Lerner may have risked violating this section by having confidential information sent to her personal email account (although even the Wall Street Journal feels that claim is a bit of a stretch).
Ironically, there are concerns that by making its letter and related exhibits public Ways and Means may itself have violated section 6103 (see Did Ways and Means' EO Data Dump Break the Law? in Tax Notes Today (subscription required)). I think Ways and Means did not violate section 6103, essentially for the reasons stated in advice the Committee apparently received on this issue. At the same time, I also think the public release of the exhibits creates a dangerous precedent, especially since it was not done, as the advice recommended, in a collegial fashion as reflected by unanimous consent or vote.
Relatedly, George Yin (UVA) has proposed increasing the amount of information the IRS can release relating to tax-exempt organizations in order to both enhance public trust and help counter allegations of wrongdoing by the agency. In Reforming (and Saving) the IRS by Respecting the Public's Right to Know, he argues for removing the protections of section 6103 for exemption applications and materials as soon as they are filed with the IRS and relaxing those protections for audit developments, closing agreements, and final determinations.
Third and finally, this mess is sparking useful discussions regarding not only the appropriate role of the IRS and the federal tax laws with respect to political activity, but also with respect to oversight of tax-exempt organizations more generally. While it is not clear if the proposed new section 501(c)(4) regulations relating to political activity will go anywhere (see earlier post on this blog by Darryll Jones), if there is any silver lining to this mess it is that it may lead to some constructive debates on the hard issues relating to IRS oversight of exempt organizations.
Friday, April 25, 2014
Earlier this week the Treasury Department released its Third Quarter Update for the 2013-2014 Priority Guidance Plan. Here are the items listed in the Exempt Organizations section:
- Revenue Procedures updating grantor and contributor reliance criteria under §§170 and 509.
- Revenue Procedure to update Revenue Procedure 2011-33 for EO Select Check.
- Guidance under §501(c)(4) relating to measurement of an organization's primary activity and whether it is operated primarily for the promotion of social welfare, including guidance relating to political campaign intervention. PUBLISHED 11/29/13 in FR as REG-134417-13 (NPRM).
- Final regulations under §§501(r) and 6033 on additional requirements for charitable hospitals as added by §9007 of the ACA. Proposed regulations were published on June 26, 2012 and April 5, 2013.
- Additional guidance on §509(a)(3) supporting organizations (SOs). PUBLISHED 01/06/14 in IRB 2014-2 as NOT. 2014-4 (RELEASED 12/23/13).
- Guidance under §4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners.
- Final regulations under §4944 on program-related investments. Proposed regulations were published on April 19, 2012.
- Guidance regarding the new excise taxes on donor advised funds and fund management as added by §1231 of the Pension Protection Act of 2006.
- Regulations under §§6011 and 6071 regarding the return and filing requirements for the §4959 excise tax for community health needs assessments failures by charitable hospitals as added by §9007 of the ACA. PUBLISHED 08/15/13 in FR as TD 9629 (FINAL and TEMP).
- Guidance under §6033 on returns of exempt organizations. PUBLISHED 01/13/14 in IRB 2014-3 as REV. PROC. 2014-11 (RELEASED 01/02/14).
- Final regulations under §6104(c). Proposed regulations were published on March 15, 2011.
- Final regulations under §7611 relating to church tax inquiries and examinations. Proposed regulations were published on August 5, 2009.
- Notice under §501(r) containing a proposed revenue procedure that provides correction and disclosure procedures under which certain failures to meet the requirements of §501(r) will be excused for purposes of §501(r)(1) and 501(r)(2)(B). PUBLISHED 01/13/14 in IRB 2014-3 as NOT. 2014-2 (RELEASED 12/30/13).
- Notice under §501(r) confirming that tax-exempt hospital organizations can rely on proposed regulations under § 501(r) published on June 26, 2012, and April 5, 2013, pending the publication of final regulations or other applicable guidance. PUBLISHED 01/13/14 in IRB 2014-3 as NOT. 2014-3 (RELEASED 12/30/13).
- Revenue Procedure revoking Revenue Procedure 79–6 (which provided for the use of certain United States Department of Labor forms in place of certain portions of the Form 990) because it is no longer consistent with Form 990 filing requirements. PUBLISHED 03/10/14 in IRB 2014-11 as REV. PROC. 2014-22.
Items 13 to 15 are identified as "additional projects" that did not appear in the initial plan issued last August, and item 15 is new to this update.
Tuesday, April 22, 2014
An observant attorney noticed that Treasury and the IRS have submitted a short version of IRS Form 1023, the Application for Recognition of Exemption Under IRC § 501(c)(3), for review by the Office of Management and Budget under the Paperwork Reduction Act. The Form 1023-EZ would be a streamlined, two-page form that the IRS estimates approximately 17 percent of applicants could use instead of the current, much longer Form 1023 (see the supporting statement filed with OMB). The draft instructions for the new form state that the form would only be available to organizations that expect to be relatively small financially (no more than $200,000 in annual gross receipts and no more than $500,000 in total assets) and are not churches, schools, hospitals, supporting organizations, or a number of other rarer types of 501(c)(3) groups. This would appear to make the form available only for small organizations that do not qualify by virtue of their activities as public charities, that is small organizations that are either private foundations or publicly supported.
Interestingly, the National Taxpayer Advocate in her 2007 Annual Report to Congress (see item 6 on page II-3 of the Executive Summary) recommended a separate Form 1023-EZ for use by smaller organizations. The recommendation, however, would have only made the shorter form available to non-private foundations with annual gross receipts not normally more than $25,000. (See Volume I, Section Two, page 535 of the full report.)
Hat Tip: Charles ("Chip") Watkins
Tuesday, April 15, 2014
One of the few beneficial effects of the faux scandal regarding the IRS' treatment of 501(c)(4) entities is likely to be public access to lots of stuff that would otherwise not be accessible. Stuff that might be useful for someone teaching or writing about charities, social welfare organizations and political activity. For instance, you can find almost the entire case file pertaining to Americans for Responsible Leadership's application for tax exemption here. For those of us who are not in the trenches often enough (or maybe don't have a life!), this actually makes for interesting reading.
Friday, March 28, 2014
Try as I might, I can't satisfactorily articulate the logical nexus between the decision that D-one college football players are not really students just playing football after classes but instead full blown employees who go to class after work and the argument that D-one football teams are not just student groups furthering the educational misssion of a tax exempt organization but instead very big business. The only thing one has to do with the other is that there are legal fictions on both sides of the comparisons. As in "student athletes are to employment as D-one college football teams are to professional football leagues?" Another problem is that the NFL, too, is tax exempt. A bill was recently introduced in the House and the Senate to strip the NFL, MLB, and NHL of their exempt status. The bill has a snowball's chance so I won't even go back and find the link. But somehow when I read the opinion -- the campus lives of our Saturday afternoon heros makes interesting reading -- I got the feeling that that exposing the myth of the student athelete somehow also exposes the myth of amatuer [nonprofit and tax exempt] competition. I think the parties were cognizant of this issue. The football players' brief takes issue with the whole concept of amateurism and the notion that the concept requires that the players not be treated as employees. In fact, the brief explicitly accuses the University of just trying to protect its profits. Northwestern's brief takes the contrary view, arguing that D-one football is all about education and amateur athletics and therefore the students should not be treated as employees, lest the charitable goals be sacrificed. Northwestern stresses that college football is an "avocation" not a "vocation." I have only skimmed the briefs, actually, but neither side explicitly or directly addressed the fundamental problem -- the whole idea that we are purportedly dealing with charitable organizations pursuing something other than profit. Even the description of the lives of college football players calls to mind something other than amateur athletics:
The first week in August, the scholarship and walk-on players begin their football season with a month-long training camp, which is considered the most demanding part of the season. In training camp (and the remainder of the calendar year), the coaching staff prepares and provides the players with daily itineraries that detail which football-related activities they are required to attend and participate in. The itineraries likewise delineate when the players are to eat their meals and receive any necessary medical treatment. For example, the daily itinerary for the first day of training camp in 2012 shows that the athletic training room was open from 6:30 a.m. to 8:00 a.m. so the players could receive medical treatment and rehabilitate any lingering injuries. Because of the physical nature of football, many players were in the training room during these hours. At the same time, the players had breakfast made available to them at the N Club. From 8:00 a.m. to 8:30 a.m., any players who missed a summer workout (discussed below) or who were otherwise deemed unfit by the coaches were required to complete a fitness test. The players were then separated by position and required to attend position meetings from 8:30 am to 11:00 a.m. so that they could begin to install their plays and work on basic football fundamentals. The players were also required to watch film of their prior practices at this time. Following these meetings, the players had a walk-thru from 11:00 a.m. to 12:00 p.m. at which time they scripted and ran football plays. The players then had a one-hour lunch during which time they could go to the athletic training room, if they needed medical treatment. From 1:00 p.m. to 4:00 p.m., the players had additional meetings that they were required to attend. Afterwards, at 4:00 p.m., they practiced until team dinner, which was held from 6:30 p.m. to 8:00 p.m. at the N Club. The team then had additional position and team meetings for a couple of more hours. At 10:30 p.m., the players were expected to be in bed (“lights out”) since they had a full day of football activities and meetings throughout each day of training camp. After about a week of training camp on campus, the Employer’s football team made their annual trek to Kenosha, Wisconsin for the remainder of their training camp where the players continued to devote 50 to 60 hours per week on football related activities.
For a more direct discussion of the NCAA's status as a nonprofit, tax exempt organization fostering amatuer athletics, see this post providing a link to John Colombo's article on the topic.
Monday, March 24, 2014
In PLR 201412018 released March 21, 2014, the Service reiterated and unfortuntely continued its longstanding antipathy to granting (c)(3) status to HMOs. I will never understand the logic behind that antipathy. It is doing more harm than good. The basic reasoning is this: An organization that delivers health care to paying subscribers, directly or indirectly, does not confer a public benefit because it benefits its subscibers. The Service maintains this point even if the organization maintains a program whereby those unable to pay the subscription price can become members. Logically, membership, and especially membership combined with a subsidy for the poor who can't afford the membership fee, should lead to the exact opposite result. The membership characteristic of HMOs increases health care for everyone and thereby benefits the community.
The letter ruling concisely describes the three primary cases (Sound Health, IHC, Geisinger) comprising HMO/(c)(3) jurisprudence. That jurisprudence holds that a membership requirement is inherently inconsistent with health care charitable tax exemption. Presumably, a staff model HMO that provided health care services without requiring membership would be able to achieve charitable tax exempt status. The existence of a membership requirement-- no matter how large and accessibe the club -- turns what would be "public benefit" into "private benefit." The problem is that whatever benefit HMOs convey results ecisely from the membership requirement. The membership requirement is the sine qua non of HMOs. It allows an insurer to herd large groups of consumers with aggregate bargaining power. Membership means that subscribers will consume health care services only within network, giving the network itself bargaining power. That bargaining power is, in turn, wielded in a manner that holds costs down presumably resulting in more health care for everyone. This is all very simplified, I'm sure, but the point is that without a membership requirement there is no point to HMO's and their beneficial effect. To deny tax exempt status to HMO's based on the membership requirement is really to conclude that HMO's can never be tax exempt even though it is through HMO's that health care costs are better controlled and health care is rendered more accessible to everyone, including the poor. Hasn't the market proven this?
Ultimately, it is the membership requirement that increases the amount of health care to the community. The organization in Sound Health, by the way, was really just a hospital that also engaged in HMO activities as an insubstantial part of its activities. The court called it a "staff model HMO," meaning that it had doctors and other health care service providers on staff who provided health care to patients even if they were not part of the club. It is the hospital analog to the physician who makes house call. It calls to mind Rockwellian memories but is ultimately inefficient in the sense that it can never provide the most health care for the most people. The old way is too expensive and results in less health care to the community. The contract model HMO -- an insurer that brokers health services by connecting member/patients with health care service providers -- will ultimately provide more health care for more people. Tax exemption jurisprudence has the matter bass ackwards to the extent it affirms the inefficient staff model HMO with no membership requirement but condemns the contract model HMO with a membership requirement. There is more commmunity benefit in the latter than the former.
What is apparently confusing the Service is the reality that you can't have public benefit without private gain. The prevailing jurisprudence condemns HMOs because a defined group of people (the members) benefit, hence the terminal appellation "private benefit." But this ignores the world in which nonprofit entites necessarily exist. In a capitalist world, indeed in the natural world, someone must benefit in particular if everyone is to benefit in general. You can't have public benefit without private gain. In colleges and universities, for example, faculty must be paid and individual students must graduate if the community -- the public -- is to benefit in general from the production and consumption of knowledge. Public benefit derives from private gain. Without private benefit there can be no public benefit.
The continued insistence that HMO's can only be granted tax exemption in the complete absence of private gain is therefore oxymoronic. If tax exemption jurisprudence is based on expanding the health care pie so the community receives more rather than less health care, that jurisprudence needs to get rid of the notion that a membership requirement is inherently inconsistent with 501(c)(3) jurispurdence.
Saturday, February 8, 2014
The IRS issued proposed regulations relating to how much income 501(c)(9) voluntary employee beneficiary associations, 501(c)(17) supplemental employment benefit trusts, and 501(c)(20) group legal services organizations may set aside as exempt function income that is excluded from unrelated business taxable income and so exempt from the unrelated business income tax. While that exhausts my knowledge of the substance of the proposed regulations, what is striking is that the proposed regulations replace proposed regulations issued in 1986 to implement a 1984 statutory change. Affected groups have not been without guidance for all of this time - temporary regulations were issued in 1986 as well - but the fact that the guidance has yet to be finalized raises the question of what happened. Did the 1986 proposed regulation simply fall off someone's to do list? Did the employee taking the lead on these regulations retire? Of course, today the situation would have been more urgent because under 26 U.S.C. 7805(e), enacted in 1988, temporary regulations expire within three years after their date of issuance - but that provision did not apply retroactively to already issued temporary regulations.
Friday, February 7, 2014
According to TaxProf Blog we are now 274 days into the firestorm that erupted in the wake of Lois Lerner's acknowledgment last May that the IRS had used inappropriate criteria for selecting certain 501(c)(4) applications for additional scrutiny. The resulting controversy not only continues, but it has recently been renewed by another congressional hearing, controversial proposed regulations that are taking hits from both the left and the right, and cryptic legislation that may - or may not - change how and whether the IRS can enforce the existing limits on political activity by tax-exempt organizations.
House Economic Growth, Job Creation and Regulatory Affairs Subcommittee Hearing
Yesterday a subcommittee of the Committee on Oversight & Government Reform held a hearing where the witnesses uniformly blasted the executive branch's handling of the controversy. Their views were not a surprise, given they are all individuals who have been vocal in their criticism of how the Obama administration has handled this situation. The subcommittee also invited DOJ trial attorney Barbara Bosserman, who is leading the DOJ's investigation into this matter, to testify, but she chose not to do so. Despite its one-sided nature, the hearing illustrates that the continuing drumbeat of criticism is not fading away, and is unlikely to do so given . . .
Controversial Proposed Regulations
While I and others have commented that one likely consequences of this mess is that the IRS will be gun shy for some time, particularly when it comes to enforcing the limits on political activity by tax-exempt organizations, the Treasury Department as a whole cannot be criticized for a lack of boldness. The regulations it proposed in late November to redefine what would be considered political activity (or rather "candidate-related political activity") for 501(c)(4) organizations have already generated over 22,000 comments, and the deadline for submitting comments is not until the end of this month. While many comments have been supportive in part, most appear to give mixed reviews.
Some of the most detailed and thoughtful comments to date include the ACLU Comments and the Center for Competitive Politics Comments (which appear on a webpage also gathering some other comments, including ones focused on the paperwork burden imposed by the proposed regulations). Other groups working on commetns that likely will be worth the read are the ABA Tax Section, the Alliance for Justice, Independent Sector, and a coalition that is being spearheaded by Cleta Mitchell (Foley & Lardner) and John Pomeranz (Harmon, Curran, Spielberg & Eisenberg). The Bright Lines Project has also created a model comment that any organization or individual can customize and and then submit. Finally, Rep. Dave Camp has introduced legislation that woudl block finalization of the proposed regulations for a year.
Buried in the recently enacted omnibus spending bill were 68 words that may - or may not - change how and whether the IRS can enforce the current and future limits on political activity by tax-exempt organizations. As reported by Mother Jones, Public Law 113-76 included in the section relating to the Internal Revenue Service the following provisions:
SEC. 107. None of the funds made available under this Act may be used by the Internal Revenue Service to target citizens of the United States for exercising any right guaranteed under the First Amendment to the Constitution of the United States.
SEC. 108. None of the funds made available in this Act may be used by the Internal Revenue Service to target groups for regulatory scrutiny based on their ideological beliefs.
Given that the legislation did not repeal the limits on political activity found in section 501(c)(3) and the relevant charitable contribution provisions, nor did it explicitly address the current interpretation of section 501(c)(4) and other exemption provisions relating to political activity, to say the effect of these two provisions is unclear is to put it mildly. What is not unclear, however, is that these provision will provide an additional arrow for groups that challenge the IRS in court for denying exemption or examining them allegedly because of their political activity, so the courts will almost certainly need to resolve the actual effect of these provisions.
Tax Analysts recently forced the IRS to release thousands of pages of internal training materials for the exempt organizations determiniations unit. Included in the materials was a "Lesson Plan" on section 501(c)(4) organizations.
News outlets, and particularly the Washington Post, continue to publish accounts of how the Koch brothers created and funded a network of primarily tax-exempt organizations to further their political goals in previous election cycles. Recent articles include "Koch-Backed Political Coalition, Designed to Shield Donors, Raised $400 Million in 2012" and "A Rare Look Inside the Koch Brothers Political Empire".
There are a bevy of new leaders with in the Tax-Exempt/Government Entities Division at the IRS, including Sunita Lough (Commissioner, TE/GE), Donna Hansberry (Deputy Commissioner, TE/GE), Tammy Ripperda (Director, Exempt Organizations Division), and Robert Malone (Acting Director, Exempt Organizations Rulings & Agreements). They join continuing EO Division leaders Melaney Partner (Director, Exempt Organizations Customer Education & Outreach) and Nanette Downing (Director, Exempt Organizations Examinations).
Tuesday, February 4, 2014
In Revenue Procedure 2014-11, the IRS revised the procedures that organizations should use to apply for reinstatement of their tax-exempt status if they have lost that status because of a failure to file required information returns three years in a row. The IRS has also provided a summary of the new procedures, which includes a process by which smaller organizations that were only required to file the Form 990-EZ or Form 990-N and that submit a new application for recognition of exemption within 15 months will not need to have reasonable cause for the failure to file and will also avoid any late filing penalties. Other, more demanding processes are available for groups required to file Form 990 or Form 990-PF and for groups seeking retroative reinstatement more than 15 months after their automatic revocation. As always, groups can instead simply seek prospective reinstatement by filing the required application.