Nonprofit Law Prof Blog

Eliminating Secretive Tax-Exempt Contributions to Political Campaigns

As reported by Rick Cohen in the Nonprofit Quarterly, Greg Colvin, of Adler & Colvin, has proposed "A Silver Bullet That Would End Secret Tax-Exempt Money in Elections."  Essentially, Colvin concludes that a new Internal Revenue Code provisision should be enacted that would revoke the tax-exempt status of a tax-exempt organization that spends (in any given taxable year) more than the lesser of (i) $100,000, or (ii) 10% of its total expenditures on political campaign activities (i.e., participating or intervening in political campaigns for or against candidates for public office, including publishing or distributing materials for or against such candidates).  The new provision would not apply to tax-exempt public charities, which would still be subject to the absolute prohibition on political campaign activities as set forth in §501(c)(3) of the Code. 

The main targets of this new Code provision would be §501(c)(4) social welfare organizations and §501(c)(6) business leagues that are currently permitted to make political campaign expenditures or donate to Political Action Committees without having to disclose their donors to the public (unlike §527 organizations, for instance).  Although these particular tax-exempt organizations are required to limit their political campaign activities to no more than half of their exempt program activities, there are fundamental difficulties in determining what amounts to one-half of an organization's program activities and what is political vs. non-political in nature.  Colvin's proposal, in theory, eliminates the need to determine what constitutes one-half of an organization's activities and utilizes a potentially simpler quantatitve test.

Cohen is seeking responses regarding the merits of the proposal.

NAM

The Other Shoe Drops - Republican Senators Urge IRS Not to Be Political When Examining 501(c)(4)s

Led by Senator Orrin Hatch (R-UT), the ranking member of the Senate Finance Committee, a dozen Republican Senators urged the IRS to ensure that its treatment of section 501(c)(4) organizations is both based in law and fair across the political spectrum.  Unlike the letter two days earlier from Democratic Senators on the same topic, which urged the IRS to make specific changes to its rules and practices relating to 501(c)(4)s, the Republican Senators instead asked the IRS to respond to specific questions relating to the exemption application process for 501(c)(4)s.  The questions are tied to the complaints by various Tea Party groups that the IRS has singled them out for unduly burdensome questions relating to their 501(c)(4) applications.

LHM

Democratic Senators Urge IRS to Change 501(c)(4) Rules

In a letter and related press release issued earlier this week, Senator Charles E. Schumer (D-NY) and six Democratic colleagues in the Senate urged the IRS to revise its rules and practices relating to section 501(c)(4) organizations.  More specifically, they proposed the following:

First, we urge the IRS to adopt a bright line test in applying its “primary purpose” regulation that is consistent with the Code’s 501(c)(4) exclusivity language. The IRS currently only requires that the purpose of these non-profits be “primarily” related to social welfare activities, without defining what “primarily” means. This standard should be spelled out more fully by the IRS.  Some have suggested 51 percent as an appropriate threshold for establishing that a nonprofit is adhering to its mission, but even this number would seem to allow for more political election activity than should be permitted under the law.  In the absence of clarity in the administration of section 501(c)(4), organizations are tempted to abuse its vagueness, or worse, to organize under section 501(c)(4) so that they may avail themselves of its advantages even though they are not legitimate social welfare organizations. If the IRS does not adopt a bright line test, or if it adopts one that is inconsistent with the Code’s exclusivity language, then we plan to pursue legislation codifying such a test.

Second, such organizations should be further obligated to document in their 990 IRS form the exact percentage of their undertakings dedicated to “social welfare.” Organizations should be required to “show their math” to demonstrate that political election activities and other statutorily limited or prohibited activities do not violate the “primary purpose” regulation.

Third, 501(c)(4) organizations should be required to state forthrightly to potential donors what percentage of a donation, if any, may be taken as a business expense deduction. As the New York Times reported in its March 7^tharticle, some of these organizations do not currently inform donors whether a contribution is tax deductible as a business expense at all.

LHM

More Coverage of IRS v. 501(c)(4)s

Dan Froomkin at Huffington Post has a detailed story regarding the ongoing dispute between the IRS and Tea Party groups and possibly other organizations claiming tax exemption under Internal Revenue Code section 501(c)(4).  As most readers of this blog know, the IRS concerns almost certainly center around whether these groups are engaging in more candidate-related activity than permitted under that section.  The story highlights the fact that loss of section 501(c)(4), and presumably classification as a section 527 organization instead, could lead to the donors to these groups losing their anonymity.  At the same time, a NY Times editorial applauds the IRS for questioning the claimed 501(c)(4) status, and Senate Democrats are reportedly pushing for even more action by the IRS.  To get a sense of how much money could potential flow through 501(c) organizations during 2012, see the Center for Responsive Politics figures for outside spending in 2010.

By the way, in case anyone wants to see examples of the actual letters that are generating this controversy here is the February 1, 2012 IRS Letter to the Waco Tea Party (courtesy of Fox News).  Similar letters to the Richmond Tea Party have also been posted on Scribd.

Previous Nonprofit Law Prof Blog Coverage:  501(c)(4) Battles Continue (3/6/12); NY Times Editorial - Curb 501(c)(4) Political Entities (1/2/12)

LHM

501(c)(4) Battles Continue

An AP story picked up by many newspapers (here it is in the Atlanta Journal-Constitution) notes that conservative groups, particularly tea-party affiliated ones, are complaining because the IRS isn't granting 501(c)(4) status fast enough.  "Intimidation,"  "Witch-hunt" cry the folks who haven't received IRS blessing for spending unlimited amounts of money on thinly-veiled political campaign ads.  "We're doing nothing more than what the average citizen does in getting involved," said Phil Rapp, executive director of the Richmond Tea Party in Virginia. "We're not supporting candidates; we are supporting what we see as the issues."  Yeah, right.  See JRB's prior post here for more on the (c)(4) controversy, and in particular, where a lot of this money is going (and by the way, it's not just the conservative side that's playing this game). This is as much about "average citizens" as "To Kill a Mockingbird" is about birds.

JDC

IRS's 2012 "Dirty Dozen" Tax Scams Includes Use of Charitable Organizations

The IRS released its “Dirty Dozen” tax scams, notifying taxpayers of schemes they should be aware of during the tax season.  One of the scams for 2012 involves "Abuse of Charitable Organizations and Deductions:" 

IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets –– including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.

NAM

Nonprofits Respond to Obama's 2013 Budget

A recent Chronicle of Philanthropy article, "Nonprofits Oppose Obama Plan on Limiting Charity Write-Offs," details the nonprofit sector's reaction to the President's 2013 budget proposing limitations on the charitable contributions deduction for wealthier Americans, as previously blogged herein.  Diana Aviv, chief executive of Independent Sector, is among the nonprofit leaders criticizing the proposal due to their belief that it will ultimately reduce charitable contributions, thereby negatively affecting the fiscal health of nonprofit organizations. Although the 2013 budget also contains a proposal to increase the estate tax rate from 35% to 45% and reduce the lifetime exemption to $3.5 million, which arguably will induce donors to make lifetime donations that will reduce the assets that will be subject to this higher rate of tax, nonprofits are nevertheless concerned that the deduction limitations on charitable contributions will result in less charitable giving.

NAM

Obama's 2013 Budget Calls for Limiting Charitable Contribution Deduction

The Chronicle of Philanthropy reports that the President's recently released 2013 budget proposes limiting the itemized deduction for contributions to eligible charities to 28% for married couples filing jointly with combined incomes of $250,000 or greater, and for single taxpayers with incomes of $200,000 or more.  The proposal reportedly helps reduce the budget deficit by $584 billion over 10 years.  As previously blogged, this proposal has been considered recently by Congress, including as part of the 2012 budget. 

The 2013 budget also contains the often-phrased "Buffett rule," whereby households with greater than $1 million in annual income would pay at least 30 percent of their income in federal income taxes.  The Chronicle opines that this could "dampen" the amounts that wealthier Americans donate to charities annually.  However, an earlier Chronicle article highlighted the President's "pledge" to restructure the Internal Revenue Code in a manner that would not "disadvantage individuals who make large charitable contributions."

NAM

Congressional Focus on AARP's Tax-Exempt Status Continues

As previously blogged, Chairman Charles Boustany (R-LA) of the House Subcommittee on Oversight asked Internal Revenue Service Commissioner Douglas Shulman to provide extensive information regarding IRS oversight of tax-exempt organizations.  Boustany announced last week that the House Oversight Committee will be focusing on the nonprofit sector's "modes of operation."  The Chairman's latest letter to the IRS, dated December 21, addresses AARP's Section 501(c)(4) tax-exempt status.  In particular, Boustany is concerned about AARP's relationship with HearUSA, Inc., a provider of hearing enhancement products, which raises additional questions about the nonprofit's product endorsements and royalty revenue.  Specifically, the Chairman questioned whether fees and royalties that AARP receives from other business contracts constitute unrelated business income, subject to the unrelated business income tax.  In a previous letter to the IRS Commissioner, Boustany stated that “AARP is not the only tax-exempt organization that more closely resembles a for-profit enterprise, rather than an organization formed for social welfare or public charity."  Boustany has stated that he is not targeting AARP, but rather is examining the entire nonprofit sector.

NAM

NY Times Editorial - Curb 501(c)(4) Political Entities

The New York Times published an editorial on December 28 entitled "Whose Welfare?" calling for greater IRS regulation of politically-centered 501(c)(4)s.  Here is a portion of that editorial:

When will the Internal Revenue Service crack down on the secret political money already flooding the 2012 campaign from partisan operatives ludicrously claiming to be “social welfare” activists under the tax law?

Offshoot groups created by partisan gurus — Karl Rove pioneered the practice — claim the 501(c)(4) status as do-gooders that allows them to keep the names of their donors secret, unlike traditional political operations. Democrats are hard at this secret megamoney race, too, with Obama campaign veterans politicking as the supposedly independent and socially minded Priorities USA.

The need for the I.R.S. to curb this abuse is vital, especially with the Federal Election Commission paralyzed by its Republican members.

The American Action Network run by veteran Republican campaigners spent 87 percent of its total $30 million on campaign-related expenditures last year, according to the watchdog groups Democracy 21 and the Campaign Legal Center. Mr. Rove’s Crossroads GPS and its affiliates are reportedly aiming to spend $240 million or more on their candidates in the presidential and Congressional races. . . .

(Hat tip:  TaxProf Blog)

NAM

IRS Issues Release on Year-End Giving; Expiration of IRA Rollover

The IRS issued IR 2011-118 reminding taxpayers of new charitable giving provisions that have taken effect in the last several years - rules for clothing and household items, substantiation rules for monetary gifts, and special contribution rules for individual retirement account (IRA) holders.  The provision offering IRA owners a tax-free transfer of up $100,000 to an eligible charity expires at the end of 2011.  This provision is available to taxpayers regardless of whether they itemize or take the standard deduction.  The IRA funds must be contributed directly by the IRA trustee to the eligible charity; because the transfer amount is not taxable under the IRA distribution rules, no deduction is available for the transfer.  Not all charitable organizations are eligible recipients; donor-advised funds and supporting organizations do not qualify.  The amount(s) transferred pursuant to this provision are counted in determining whether the IRA owner has met the required minimum distribution rules.

NAM

IRS, Halperin, and McLaughlin on Conservation Easements

The IRS also recently released its revised (as of 9/30/11) Conservation Easement Audit Technique Guide.  For other recent conservation easement developments and discussions, see Incentives for Conservation Easements: The Charitable Deduction or a Better Way (74 Law & Contemporary Problems 29 (2011)) by Daniel Halperin (Harvard) and Tax Court Protects Public Investment in Consevation Easements (Emerging Issues (forthcoming 2011)) by Nancy McLaughlin (Utah).  Here are the abstracts of those articles.

Halperin

Therefore, to give greater assurance that the public benefit of the gift will be consistent with the claimed deduction, the donee should be required to certify that it has selected the easement consistent with its mission and it has both the resources to manage and enforce the restriction and a commitment to do so. Moreover, it is inappropriate to measure the charitable deduction by the supposed loss in value to the donor from the imposition of the easement. The focus should be on actual benefit to charity. Therefore, eligibility for a charitable deduction for a conservation easement should be contingent on certification – by a public agency or, possibly, an IRS-accredited land trust – that the public benefit from the contribution is equivalent to the claimed deduction. 

In fact, the recent changes to various tax-expenditure programs – placing caps on the expenditures and requiring the participation of expert agencies – indicates that Congress is less enamored than it once was with open-ended tax expenditures administered solely by the Treasury Department. This suggests a cap on tax credits for the contribution of conservation easements. Even if the program is open-ended, Congress should mandate participation of an expert agency such as the Bureau of Land Management, which is more capable of evaluating the public value of an easement.

McLaughlin

In two recent decisions, the Tax Court held that the conservation purpose of a conservation easement will be "protected in perpetuity" as required by IRC § 170(h) only if the holder is given an absolute right to a share of post-extinguishment proceeds. This short article discusses the import of this holding, as well as the court's approach to penalties and the deductibility of required cash payments to the donee.

LHM

IRS and College UBIT

Bloomberg reports that more than 30 universities have had their treatment of possible unrelated trade or businesses reviewed by the IRS, including private schools such as Harvard and Notre Dame and public schools such as Purdue and the University of Texas at Austin.  Probably not coincidentially, I noticed in reviewing Notre Dame's latest Form 990-T as part of teaching Not-for-Profit Organizations this term that the amount and sources of unrelated business taxable income had increased significantly since I had last taught the class (did I mention how much I like having tenure?). 

 LHM

Angel Food Ministry Founders Indicted by Feds

We previously blogged about the governance disputes and compensation issues at Angel Food Ministries.  While the food-distributing charity quietly shut its doors several months ago, that has not ended the troubles for its founders.  The Atlanta-Journal Constitution reports on the details of a federal indictment issued last week but the details of which just became public.  According to the article, the charity's founders - Joe and Linda Wingo - diverted millions of dollars to support a lavish lifestyle, including a private jet, a classic car, and real estate purchases.  Also named as defendants are Andy Wingo, the son of Joe and Linda, and Harry Michaels, a former employee.  All four defendants are expected to plead not guilty.

LHM

Forbes: "IRS Backs Off on Penalties Against Billionaire Leon Cooperman"

Forbes reports that billionaire hedge fund manager Leon G. Cooperman lost a $43 million claimed charitable contribution deduction but at least managed to avoid $5 million in related penalties.  According to the article, the problem with the deduction was that it consisted of non-publicly traded securities (interests in a hedge fund) and was made to his family's private foundation.  As readers of this blog well know - but Cooperman's advisers apparently did not - IRC § 170(e)(1)(B)(ii) generally reduces the amount of a deduction for such a contribution by any long-term capital gain included in the donated property's value when the recipient is a private nonoperating foundation.  While there is no reduction even in this situation if the gifted property is stock for which market quotations are readily available, that exception was not available here.  As a result, Cooperman had to pay nearly $14 million in additional taxes plus interest, but he managed to avoid penalties by successfully claiming reliance on his (presumably now former) advisers.

LHM

DAFs: Treasury Reports, Grassley Criticizes

Report:  Earlier this week, the Treasury Department issued its long-awaited Report to Congress on Supporting Organizations and Donor Advised Funds.  Its answers to the specific questions raised by Congress are reproduced below. 

Response:  Senator Chuck Grassley (Iowa) wasted no time in criticizing the report, issuing a news release the next day titled Treasury Misses the Mark on Chance to Shut Down Charitable Loopholes.  The release quotes Senator Grassley as saying "The study is disappointing and unresponsive. It doesn’t advance the ball in closing abusive loopholes. If anything, it gives abusive organizations cause for celebration.  . . .  [The] study discusses the status quo and pay-out rates as if there’s no cause for worry.  Treasury apparently thinks Congress fixed problems with supporting organizations and donor-advised funds in 2006.  In fact, Congress fixed a limited area and asked the IRS and Treasury to help us fix the rest.  The study doesn’t offer any kind of road map about problems."

News Coverage:  Chronicle of Philanthropy.

LHM

 

From the Treasury Report's Executive Summary:

[PPA = Pension Protection Act of 2006; SO = supporting organization; DAF = donor-advised fund]

• The PPA appears to have provided a legal structure to address abusive practices and accommodate innovations in the sector without creating undue additional burden or new opportunities for abuse.

• Although donors may prefer making gifts of appreciated property to SOs and DAFs, rather than to private foundations, in order to take a larger charitable contribution deduction, they may do so only if they are willing not only to part with control of the assets, but also to give the assets to organizations they do not control. Because contributions to DAF sponsoring organizations and SOs, like contributions to other public charities, are generally to organizations the donor doesn’t control, the deduction rules are appropriate.

• There may be a lag between when a donor contributes assets to a DAF sponsoring organization or an SO—and may claim a charitable contribution deduction—and when the donated assets are used for direct charitable activities. The issue of the lag between contribution and final use of assets is no different at DAF sponsoring organizations and SOs than it is for other public charities that may operate charitable funds or maintain endowments. Thus, it is appropriate that the contribution deduction rules faced by donors to SOs and DAF sponsoring organizations are the same as those applicable to donors to other public charities.

• Several provisions of the Code address issues related to donor benefit. A charitable deduction is disallowed to the extent that a donor receives benefits that are of more than insubstantial value in exchange for the contribution. In addition, an organization’s taxexempt status may be revoked if it operates to benefit private interests, such as those of its donors, or if it does not further a charitable purpose. Further, the Code contains deterrents in the form of excise taxes both on a donor who receives excess benefits from a public charity and on the charity’s managers if they knowingly approved the transaction conferring the benefit. The PPA also enacted new provisions in the form of taxes designed to deter SOs, DAF sponsoring organizations, and their donors from allowing donors to receive certain payments or any improper benefits from an SO or DAF.

• Compared to private foundations, the mean payout rates for Aggregate DAFs in tax year 2006 appear to be high for most categories of DAF sponsoring organizations.

• Current law disallows a charitable contribution deduction for a contribution to any charity that does not meet the standard of a completed gift, including in the case of a gift to a DAF or SO. However, as is the case with gifts to other charities, if all existing tax and other legal requirements are met, donations to a DAF or an SO may be completed gifts and become the property of the donee organization. Although donee organizations may feel an obligation to use donated funds in a manner preferred by the donor, especially when subsequent contributions may be desired, there is nothing unique about DAFs or SOs in this regard and, in fact, they have no legal obligation to follow the preference of the donor.

• As the effects of the PPA and the new regulations become clearer over time, Treasury looks forward to working with Congress to determine whether additional legislation or reporting is necessary.

 

IRS Denies (c)(3) Status to Member Organization

A member organization argued that its members conducted volunteer activities and that the organization provided scholarships.  The IRS determined that the activities included more than an insubstantial part of the activities consisted of social and professional events that benefitted the members.  Even the scholarships were limited to members.  Thus, the private benefit to the members was not incidental to the exempt purposes of the organization.  PLR 201143020 provides an interesting (although not surprising) analysis of the findings that the organization conducted member activities that were more than an insubstantial part of the organization's activities.

Gerry Beyer's Trusts and Estates Blog provides a description and links to the PLR, so this posting is for those of you who don't already ready his terrific blog.

sng

 

 

 

 

 

 

IRS Guidance on Tax-Exempts Participating in Medicare Shared Savings Program

The Centers for Medicare & Medicaid Services has released final regulations describing the rules for the Medicare Shared Savings Program (Shared Savings Program) and accountable care organizations (ACOs).

On April 18, 2011, the IRS released Notice 2011-20, summarizing how it expects existing IRS guidance to apply to § 501(c)(3) organizations, such as charitable hospitals, participating in the Shared Savings Program through ACOs.  The IRS released Fact Sheet 2011-11 confirming that Notice 2011-20 continues to reflect IRS expectations regarding the Shared Savings Program and ACOs, and providing additional information for charitable organizations that may wish to participate in the Shared Savings Program. For more information, see the CMS website.

NAM

Should Solyndra's Failure Yield More Tax Reforms for Supporting Organizations?

As previously blogged (see here), the George Kaiser Family Foundation's (GKFF), a tax-exempt entity and the largest investor in the failed solar company, Solyndra, is garnering further scrutiny for its alleged lack of sufficient contributions to charitable activities.  As detailed in a Washington Post article, the ever-vigilant watchdog on charities' activities, Senator Charles Grassley, wrote to Treasury Secretary Geithner and IRS Commissioner Shulman urging them to finalize rules that would prevent supporting organizations like GKFF from avoiding the mandatory payout rules imposed on private foundations.  By establishing itself as a supporting organization for the Tulsa Community Foundation, GKFF is effectively circumventing private foundation rules to which it would otherwise be subject.  In some recent years, according to the Post article, GKFF distributed as low as .2 percent of its assets to charitable activities.

As Senator Grassley stated at the Senate Finance Committee hearing yesterday, "[t]he recent Solyndra scandal highlights the need for further reforms. With Solyndra, the government didn’t just lose out on its investment through the $535 million loan guarantee [from the Energy Department]. It also lost out on the tremendous subsidy it provided the George Kaiser Family Foundation through the charitable contribution deduction.”  As John Colombo stated in his prior blog entry on this issue, the lack of accountability that results from these type of supporting organization scenarios is problematic and should be eliminated.

NAM

The Future of the Charitable Contributions Deduction

As previously blogged (see here), the Senate Finance Committee held a hearing yesterday to discuss the future of the charitable contributions deduction.  As reported by numerous news sources (see two articles, here and here), most of those who testified on behalf of charitable organizations argued that any floor or cap on the charitable contributions deduction would result in a significant decrease of charitable contributions, a potentially devastating result to the nation's charities.  Frank Sammartino, a tax analyst at the Congressional Budget Office, conjectured that Obama's plan (limiting the deduction to 28% of high-income taxpayers' AGI) would likely reduce higher-income-taxpayers' contributions, but offered no hard estimates.  The President's National Commission on Fiscal Responsibility and Reform (see its report here) has proposed a tax credit for charitable contributions exceeding 2% of a taxpayer's AGI.

Senator Max Baucus, Chair of the Senate Finance Committee, raised the common counterpoint - namely, that most taxpayers do not itemize their deductions and, therefore, do not accrue any tax benefits for their charitable contributions.  The result, he opined, was that some charities receive larger amounts of contributions because they attract high-income taxpayers who achieve the largest tax reductions.  "Let us encourage charitable giving in a way that is fair and efficient," he proferred before leaving the hearing.

In addition to potential reform of the charitable contributions deduction, other topics discussed at the hearing included the deduction for household goods and services, donations in support of the arts, and tax benefits provided to supporting organizations. 

NAM