Wednesday, December 4, 2013
A federal District Court in Wisconsin has struck down the exclusion from gross income for vcertain housing allowances provided to "ministers of the Gospel" by Internal Revenue Code § 107 as a violation of the Establishment Clause. As previously discussed here, the same court is also considering challenges to the church exemption from Form 990 filing and the alleged lack of IRS enforcement against churches for violating the political campaign intervention the prohibition. As John Colombo has detailed in this space, the key question in all of these cases - including in the almost certain government appeal of the housing allowance decision - will be whether the plaintiffs have standing to even bring these claims. For reasons Professor Colombo details, it is unlikely that they do. As a commentator to the TaxProf Blog post on this story noted, the judge in the housing allowance case also previously ruled that the National Day of Prayer presidential proclamation was unconstitutional, only to have that case dismissed on appeal for lack of standing. Nevertheless, this case and the other challenges are currently still alive and proceeding, although news reports state the judge has stayed her decision on the housing allowance pending appeal.
Wednesday, November 6, 2013
Matthew J. Lindsay (Baltimore) has posted "Federalism and Phantom Economic Rights in NFIB v. Sebelius" to SSRN. The abstract provides:
Few predicted that the constitutional fate of the Patient Protection and Affordable Care Act would turn on Congress’ power to lay taxes. Yet in NFIB v. Sebelius, the Supreme Court upheld the centerpiece of the Act — the minimum coverage provision (MCP), commonly known as the “individual mandate” — as a tax. The surprising constitutional basis of the Court’s holding has deflected attention from what may prove to be the decision’s more constitutionally meaningful feature: that a majority of the Court agreed that Congress lacked authority under the Commerce Clause to penalize individuals who decline to purchase health insurance. Chief Justice Roberts and the four joint dissenters endorsed the novel limiting principle advanced by the Act’s challengers, distinguishing between economic “activity,” which Congress can regulate, and “inactivity,” which it cannot. Because the commerce power extends only to “existing commercial activity,” and because the uninsured were “inactive” in the market for health care, they reasoned, Congress lacked authority under the Commerce Clause to enact the MCP. Critically, supporters of the activity/inactivity distinction insisted that it was an intrinsic constraint on congressional authority anchored in the text of Article I and the structural principle of federalism, rather than an “affirmative” prohibition rooted in a constitutional liberty interest.
This Article argues that the neat dichotomy drawn by the Chief Justice and joint dissenters’ between intrinsic and rights-based constraints on legislative authority is false, and that it obscures both the underlying logic and broader implications of the activity/inactivity distinction as a constraint on congressional authority. In fact, that distinction is animated less by the constitutional enumeration of powers or federalism than a concern about individual liberty. Even in the absence of a formal constitutional “right” to serve as a doctrinal vehicle, the justices’ defense of economic liberty operates analogously to the substantive due process right to “liberty of contract” during the Lochner era — as a trigger for heightened scrutiny of legislative means and ends — through which the justices constricted the scope of the commerce power.
Current scholarship addressing the role of individual liberty in NFIB v. Sebelius tends to deploy Lochner as a convenient rhetorical touchstone, to lend an air of illicitness or subterfuge to the majority’s Commerce Clause analysis. I argue that the Lochner-era substantive due process cases are both more nuanced and more instructive than judges and many scholars have realized. They illustrate, in particular, that constraints on legislative authority that are rooted in individual liberty and constraints on legislative authority that are rooted in enumerated powers and federalism can and do operate in dynamic relationship to one another. Reading NFIB v. Sebelius through this historical lens better equips us to interrogate the role that economic liberty plays in the majority’s Commerce Clause analysis, and provides an important alternative analytical framework to the structure/rights dichotomy advanced by the Chief Justice and joint dissenters. The activity/inactivity distinction not only portends a constitutionally dim future for federal purchase mandates, but may also herald more far-reaching restrictions on congressional interference with individual liberty, in which individual sovereignty assumes a place alongside state sovereignty in the Court’s federalism.
Thursday, September 19, 2013
I previously blogged about the downfall of the once $140 million per year Angel Food Ministries. According to U.S. Attorney Michael Moore, the heart of the problem was the greed of its founders, who pled guilty to using the charity's funds and other assets for personal gain in violation of federal fraud and money laundering statutes. Under a plea agreement, founder Joe Wingo and his son Andrew Wingo each received seven-year prison sentences, while Joe Wingo's wife and ministry co-founder Linda Wingo received five years of probation after pleading guilty to concealing a felony. A federal district court also ordered the defendants to pay almost $4 million in restitution and fines.
Wednesday, September 18, 2013
As readers of this blog know, two lawsuits challenging the preferential federal tax law treatment of churches and ministers and brought by the Freedom from Religion Foundation survived motions to dismiss on standing grounds . A year ago, the U.S. District Court for the Western District of Wisconsin found FFRF had standing to challenge the income tax exemption for parsonages and pastor housing allowances provided by Internal Revenue Code section 107. About a month ago, the same court concluded FFRF had standing to challenge the IRS's alleged lack of enforcement of the section 501(c)(3) political campaign intervention prohibition as against churches.
Finally, about four weeks ago the same court rejected the government's motion to dismiss FFRF's complaint challenging the exemption for churches from having to file an annual information return (the Form 990) with the IRS. Relying heavily on its decision in the first case it considered, the court found that FFRF alleged a sufficient injury in fact because it is not able to claim such an exemption since it does not qualify as a church. FFRF also challenged the exemption of churches from the exemption application (Form 1023) requirement applicable to other groups seeking recognition of their section 501(c)(3) status, but the court questioned whether FFRF and the other plaintiff in the case had a future injury in fact that would justify the injunctive relief they were seeking given that both groups had already filed their applications and paid their application fees. It therefore asked the plaintiffs to demonstrate why their second claim should not be dismissed.
As John Colombo detailed in his previous post about the second case, and for the reasons Johnny Rex Buckles described in this space more generally and I also discussed with respect to Establishment Clause claims, this trio of decisions appears inconsistent with long-standing precedents relating to standing in the tax area. The judge in all three cases also has previously been reversed on a standing issue relating to an Establishment Clause challenge to the National Day of Prayer brought by FFRF. In that case the district court found the statute requiring that the President proclaim a National Day of Prayer each year to be a violation of the Establishment Clause, but the U.S. Court of Appeals for the Seventh Circuit concluded FFRF and the other plaintiffs lacked standing to bring the case (Freedom from Religion Foundation v. Obama, 651 F.3d 803 (7th Cir. 2011)).
A similar fate for the trio of tax cases therefore seems likely as well. Before the cases get to the appellate court, however, there may be some interesting information uncovered in discovery. While the housing allowance and Form 990 cases appear to turn solely on the statutory provisions and so should not require much if any factual discovery, the lack of enforcement case would appear to require discovery regarding the extent to which the IRS has enforced the political campaign intervention prohibition as against churches and non-churches in recent years. While there is some anecdotal information available regarding such enforcement efforts, since the quiet end of the IRS's Political Activity Compliance Initaitive after the 2008 election season (and perhaps earlier - the IRS never issued a report for that election season) there has not been more comprehensive information available regarding enforcement in this area. While not FFRF's primary aim, the discovery in their lawsuit may reveal a lot about the frequency and results of that enforcement.
In Department of Texas v. Texas Lottery Commission, a panel of the U.S. Court of Appeals for the Fifth Circuit confirmed its earlier decision that upheld as constitutional a Texas statute allowing charitable organizations to raise money by holding bingo games but conditioned on the money so raised only be used for the organizations' charitable purpose and not for certain types of political advocacy, including lobbying. While the result is perhaps not surprising, the decision is interesting in a couple of respects.
First, in rejecting a standing argument by the defendants, the court concluded that political advocacy such as lobbying is not inherently inconsistent with serving a charitable purpose. While it noted that federal tax law limits the amount of political advocacy by some nonprofit organizations, it did not find that those limits supported the argument such advocacy was inherently inconsistent with federal tax exemption. This is definitely the right conclusion, but it is a relief to see the court clearly state this is the case in the face of the defendants' argument to the contrary.
Second, the decision required the court to discuss the application of the unconstitutional conditions doctrine to a speech-related restriction on nonprofit organizations in the wake of Citizens United. There has been some speculation that Citizens United may have undermined earlier decisions finding such restrictions to be constitutional if tied to a government subsidy, although most commentators have rejected such views. See, e.g., Paul Weitzel, Protecting Speech from the Heart: How Citizens United Strikes Down Political Speech Restrictions on Churches and Charities, 16 Texas Review of Law & Politics 155 (2011). The court flatly rejected this argument, concluding that Regan v. Taxation with Representation and Rust v. Sullivan remain good law and distinguishing Citizens United on the grounds that (1) Citizens United did not involve a government subsidy to which the speech restriction at issue was tied and (2) Citizens United involved an outright ban on a specific type of political speech as opposed to a limit on using certain (government subsidized) funds for such speech.
Third and finally, unlike the panel's original decision the new, substituted decision drew a dissent. Chief Judge Carl Stewart concluded that the speech restriction was in fact an unconstitutional condition. His point of disagreement was that in his view permitting charities to raise money by holding bingo games did not constitute a "subsidy" in that no funds from the public fisc went to the charities who held such games. Absent a subsidy, he concluded that TWR and Rust were not applicable and so, under Citizens United, the Commission had the burden of identifying a sufficiently compelling reason for the speech restriction, which it failed to do.
Friday, August 23, 2013
Once I put away the blogging about the Van Hollen v. IRS case, I started to tackle the pile of journals and magazines that the College of Law's circulation department dutifully sends me daily. And what did I see on the cover of the Virginia Tax Review, Volume 32, No. 4 (Spring 2013):
- Chevron's Conflict with the Administrative Procedures Act by Patrick J. Smith, a partner with Ivins, Phillips & Barker in Washington D.C.
Given the apparent issue in the Van Hollen case, this seems very timely - it's in the "to read over the weekend pile." Which weekend, of course, remains to be seen, but that has nothing to do with the article!
Following up on my post from yesterday, Chris Van Hollen (and Democaracy 21, Campaign Legal Center, and Public Citizen) did file suit yesterday against the IRS and Treasury. For those of you interested in reading the Complaint, it is in the District Court for D.C., Case 1:13-cv-01276. I retrieved my copy from Bloomberg BNA online; if anyone has a public link, let me know and I'll post it. A quick summary
1. It's a proceding under the Administrative Procedure Act (APA), 5 U.S.C. 702/703/704/706(1)/and 706(2)(A), "to compel agency action unlawfully withheld and unreasonably delayed, and to set aside agency action that is contrary to law."
2. Quote: "By redefining 'exclusively' as 'primarily' in violation of the clear terms of its governing statutes, the IRS permits tax-exempt social welfare organizations to engage in substantial electoral activities in contravention of the law and the court decisions interpreting it" (p. 2).
3. In answer to my question of yesterday, the Plaintiffs assert the following personal harms:
- Denial of information regarding election expenditures as Section 501(c)(4) organization do not need to disclose donors, and
- Candidates such as Van Hollen and their organizations must compete on unequal terms with tax-exempt organizations that are not subject to disclosure.
4. The Complaint specifically alledges that the IRS' recent 40% safe harbor pronoucements allows too much non-exempt political activity.
5. Quote: "Electoral campaign spending by section 501(c)(4) organizations soared after the U.S. Supreme Court's decisions in FEC v. Wisconsin Right to Life ... and Citizens United v. Federal Election Commission .. , which, respectively, narrowly construed and then invalidated federal laws prohibiting corporate electoral campaign expenditures. In the wake of those decisions, section 501(c)(4) organizations became the vehicles of choice for mobilizing anonymous contributions for political purposes." (p. 9, cites omitted).
6. For those interested, the paragraphs that follow the quote above give some signficant figures regarding Section 501(c)(4) spending since Citizens United - e.g., in the 2012 presidential election, approximately $310 million in electoral campaign spending was by non-disclosing groups including section 501(c)(4) and 501(c)(6) organizations. (p. 11).
7. The APA statutory standard of review is "arbitrary, capricious, and abuse of discretion, or not in accordance with law." (p. 19).
P.S. 8/26 Reader Russell Willis was kind enough to point me to the following link for the petition:
Thursday, August 22, 2013
The Washington Post reports that Chris Van Hollen (D-MD) is planning on filing suit against the IRS regarding the Section 501(c)(4) regulations that have been the spotlight as of late. Van Hollen, the ranking member of the House Budget Committee, will be the lead plaintiff in the suit, along with Democracy 21, The Campaign Legal Center, and Public Citizen. According to the Post, CREW has a similar suit pending.
If I understand the Post's article correctly**, the suit will focus on the validity of the IRS regulations under Section 501(c)(4). As we all probably know (ad nauseum) at this point, Section 501(c)(4) provides that an organization exempt under that section must be "operated exclusively for the promotion of social welfare" (emphasis added).
Treas. Reg. Section 1.501(c)(4)-1(a)(2) provides, "[a]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community" (emphasis added). As the promotion of social welfare does not include political campaign activity, it follows that an organization that is organized primarily for political campaign intervention purposes cannot meet the "exclusively" test of the statute.
I'm assuming that the lawsuit will take the position that it was an abuse of IRS discretion to issue regulations interpreting "exclusively" to mean "primarily" in the context of the amount of allowable non-social welfare activities. That raises a number of interesting issues:
For my civil procedure and con law friends, it's been a very long time since I've looked at standing issues. In the exemption context, of course, there is no taxpayer standing - but this isn't an exemption case. Is Van Hollen a plaintff because he is asserting that he personally has been injured by the enforcement of this rule (for example, because of the ability of opponents to get Crossroads funding or something?) Is there some other basis for standing?
For my admin law friends, what is our standard of review? Is this still straight up Chevron as a agency interpretation of statute with the force of law? Has any of that changed given recent Supreme Court action in this area (I am rapidly getting to the outer edge of my knowledge here). Does the fact that the IRS has recently come out with new 501(c)(4) review guidelines matter in the least?
Are we worried about collateral damage? The statutory language of Section 501(c)(3) also contains the word "exclusively." Treas. Reg. Section 1.501(c)(3)-1(c)(1) states, "[a]n organization will be regarded as 'operated exclusively' for one or more exempt purposes only if it engages primarily in activities which accomplish" one or more exempt purposes (emphasis added). It's always been interesting to me that in the Section 501(c)(4) context, some are willing to take the position that primarily means 51% , so you can push your political activities to 49% (of... something). In the Section 501(c)(3) context, I personally would be unwilling to tell a client that they can do that much non-exempt activity. Heck, I get queasy if a charity is in double digits percentage (of... anything) of non-exempt activity. But, technically, it is the same issue of statutory/regulatory construction.
This Section 501(c)(4) ambiguity could all be fixed by legislation, of course. Too bad none of the litigants has the ear of a Congressm.... um... wait....
(h/t Jonathan Adler via The Volokh Conspiracy Daily for pointing to this article)
** The Post article states, "Current law says the organizations must engage 'exclusively' in social welfare activities, but IRS tax code requires only that they are 'primarily engaged' in such purposes." Of course, the tax code is current law, the tax code does not belong to the IRS, and the primarily engaged test is in the Regs. So I'm assuming that's what the Post meant.
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).
Sunday, June 2, 2013
The United States District Court for the Northern District of Illinois has ruled that the ABA Retirement Funds did not qualify as a tax-exempt section 501(c)(6) organization for tax years 2000 to 2002 because its performs services for individuals rather than for the industry as a whole and because it is engaged in a business normally carried on for profit, either of which characteristic would disqualify it for such status. The court also found that the organization is not in the same general class a chamber of commerce or board of trade and was not an integral part of the ABA.
While the ruling only addresses the specific tax years at issue, a Forbes article published when the ABA Retirement Funds initially filed its refund lawsuit states that the organization filed an application for exemption in 2004 but the IRS rejected that application in 2005. According to this article, the exemption would have permitted the organization to avoid taxes on the marketing income its earns from promoting ABA-branded retirement plans. The organization apparently outsources the actual management of its retirement plans to various third-party vendors that collect the fees related to those plans.
Friday, May 31, 2013
The Supreme Court of the United States heard oral arguments last month in a case that raises a very important issue for the many tax-exempt nonprofit organizations that receive government funding in one form or another: when, if ever, can a government require that the recipient of government funding for a particular program adopt an explicit policy that would apply to all of the organization's activities whether government-funded or not? In Agency for International Development v. Alliance for Open Society International, Inc., the specific issue is "Whether the United States Leadership Against HIV/AIDS, Tuberculosis, and Malaria Act of 2003, 22 U.S.C. § 7631(f), which requires an organization to have a policy explicitly opposing prostitution and sex trafficking in order to receive federal funding to provide HIV and AIDS programs overseas, violates the First Amendment." The Second Circuit Court of Appeals panel that heard the case split 2-1, with the majority concluding that the requirement did violate the First Amendment. The case involves application of the much criticized "unconstitutional conditions" document, and the questioning at oral argument did not provide a clear indication of how the Court will resolve the case, according to veteran Supreme Court observer Lyle Denniston's analysis. The case is further complicated by the fact that Justice Kagen has recused herself, so there is the possibility of a 4-4 tie vote that has the effect of upholding the lower court decision but without clear guidance on this issue. A decision is expected by the end of June.
Thursday, January 24, 2013
For a number of years, I've espoused the view that we should expand the unrelated business income tax to a "commercial activity" tax - that is, a charity engaged in any commercial activity should pay taxes on any net revenues from that activity, whether or not the activity is "related" in some way to the organization's charitable purpose. See, e.g., John D. Colombo, Commercial Activity and Charitable Tax Exemption 44 WM. & MARY L. REV. 487 (2002). I've also opined that if we did this, we could grant tax exemption rather broadly to permit organizations with some legitimate charitable purpose the ability to get tax-deductible contributions for their charitable activities, while still fully taxing any commercial activity. I believe this would simplify current law and compliance. For example, museum gift shop revenues would be fully taxable, instead of having to parse whether specific sales were "related" or "unrelated" as is currently the case (e.g., an art museum gift shop can sell replicas of art, art books, "arty" postcards and the like without UBIT liability, but sales of science books or "I Love NY" coffee mugs are subject to the UBIT; see, e.g., Rev. Rul. 73-104). A charity that operates a pay garage would pay taxes on the garage revenues as a whole, without allocating between parking receipts that are "related" to charitable activities and those that are not. I readily admit there are still some interpretive issues (are museum admission charges "commercial" revenues?), but I think these issues would be fewer and easier to resolve than esoteric questions of "relatedness."
It appears that a recent decision by the Supreme Court of the Philippines interpreting its statutory law with respect to charities has more or less adopted my approach with respect to nonprofit hospitals (to be clear, they didn't do this because they read anything I wrote; still, this indicates my approach isn't completely crazy). In Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. No. 195909, September 26, 2012 (full opinion here; an excellent summary is available here), the Philippine Supreme Court held that Philippine law distinguished between a fully exempt "charitable" hospital or educational institution (whose activities must be exclusively charitable) and a private nonprofit hospital or educational institution engaged in some charitable and some commercial activity. With respect to the latter, the organization is required to pay income tax on their commercial revenues (albeit at a reduced rate as provided in Philippine law), but not required to pay tax on revenues resulting from charitable activities. In the context of the private nonprofit hospital at issue, the court held that revenues from paying patients would be taxable (again, at the reduced rate provided for by Philippine law), because these revenues were part of a for-profit business.
The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively” for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).
In other words, revenues from commercial (e.g., for-profit) activity (in this case, paying patients) are taxable, but the organization remains tax-exempt on its actual charitable activities. There is no "relatedness" test here as under our UBIT; the only question is whether an activity is for-profit (commercial).
While this decision obviously is the result of the sui generis statutory law in the Philippines, if it works there, I don't see any reason why it couldn't work here . . . the description of St. Luke's operations in the opinion sounds like a pretty typical nonprofit hospital here in the U.S. (We'll have to talk, though, about this preferential rate stuff . . .).
Thursday, October 4, 2012
Over 1,300 religious leaders are prepared to deliberately violate the section 501(c)(3) prohibition on political campaign activity this Sunday, October 7, 2012, by endorsing or opposing a political candidate for public office from their pulpits. Sponsored by the Alliance Defending Freedom, the purpose of Pulpit Freedom Sunday is to openly exercise their claimed First Amendment freedom of religious expression, which participants claim is violated by the "1954 Johnson Amendment" to section 501(c)(3). Since its origination in 2008, the Alliance has sought a test case that can be brought to the U.S. Supreme Court, with the desired result of the Johnson Amendment being declared unconsitutional as to churches.
However, the IRS is presently unable to adequately respond to participant churches hoping for the commencement of a legal battle over the statutory prohibition. As reported by the Daily Tax Report, the proposed regulations to the church tax inquiry rules under section 7611 have not yet been finalized to name the IRS official responsible to carry out the statutorily prescribed inquiry rules. The current proposed regulations would name the IRS Director of Exempt Organizations, a position currently held by Lois Lerner.
For additional perspectives and opinions on Pulpit Freedom Sunday, see the following:
Steve Siebold, "Pulpit Freedom Sunday - Should the Church be Tax-Exempt?" (Huffington Post's The Blog)
Meredith Bennett-Smith, "Pastors to Challenge IRS Ban on Political Speech with 'Pulpit Freedom Sunday'" (Huffington Post, containing Fox News video)
Wednesday, September 26, 2012
Christianity Today reports that the U.S. District Court for the Western District of Wisconsin has concluded that the Freedom from Religion Foundation (FFRF) has standing to challenge the income tax exemption for parsonages and pastor housing allowances provided by Internal Revenue Code section 107 because FFRF has altered its salary structure to provide housing allowances, but those allowances do not qualify for exemption since the recipients are not ministers. According to a FFRF press release about the decision, its lawsuit seeks a declaration that section 107 violates the First Amendment's Establishment Clause. The case, which is only the latest attack by FFRF on section 107, raises the interesting question of whether the Supreme Court's recent narrowing of the Establishment Clause exception to the general rule that taxpayers lack standing to challenge tax provisions benefiting others can be avoided by creating a fact pattern that is identical to the one required under the challenged provision except for the lack of a religious element. For example, could a non-religious nonprofit that functions in a manner very similar to a church challenge the exemption for churches from having to file annual information returns (the Form 990)? The outcome of this lawsuit could therefore have even larger ramfications than the possible end of the pastor housing allowance exemption.
(Hat tip: ECFA)
Correction: The original version of this post gave the Washington Ethical Society as an example of a non-religious nonprofit that appears to function in a manner very similar to a church. An astute reader brought to my attention that the Washington Ethical Society is in fact actually classified as a church by the IRS, so I have corrected the post by removing that reference. My thanks for the fact checking.
Federal Court Denies 501(c)(3) Tax-Exempt Status for "Family Trust" Because of Inurement and Commerciality
Earlier this week the U.S. District Court for the District of Columbia denied exemption under section 501(c)(3) for an entity that serves as the trustee for a trust benefiting over 300 disabled and elderly individuals. The court's conclusion with respect to private inurement is not surprising given the apparent failure of the organization to provide comparability data to support the amount of compensation paid to its founder. What is, however, somewhat troubling is the relatively thin factual findings the court makes with respect to its conclusion that the organization had a substantial non-exempt purpose under the commerciality doctrine, in part because two of the three factors relied upon the court - a reliance solely on fees and significant profits - are not uncommon among groups that routinely qualify for section 501(c)(3) status.
In Family Trust of Massachusetts, Inc. v. United States, the plaintiff organization had sought a declaratory judgment that it qualified for tax-exempt status under section 501(c)(3) after the IRS had not ruled on its exemption application within 270 days. As detailed in the opinion, the trust overseen by the organization permits disabled recipients of Supplemental Security Income, Medicaid, and other government benefits to benefit from assets, held by the trust, that normally would be in excess of federally allowed limits. The court found two fatal flaws with the activities of the Family Trust.
First the individual who founded and controlled the organization had received escalating compensation (increasing to $70,000 annually in 2009) as the net revenue from the assets controlled by the trust grew (reaching $362,524 in 2009), and the Family Trust failed to provide evidence that the amount received was reasonable in light of the services provided. More specifically, while the Family Trust asserted it had gathered comparable compensation data through informal contacts with similar organizations, it failed to provide any specific comparability data to the IRS as part of the application process.
Second, the court concluded that the Family Trust ran afoul of the commerciality doctrine because (1) it had relied solely on the fees it imposed on its members for its revenues, as opposed to contributions or other sources of income, (2) it had a significant profit margin (that correlated with the founder's increasing salary), and (3) the founder's dual role with the Family Trust and his elder law legal practice suggested that the availability of the trust was effectively a commercial product that enhanced the attractiveness of his legal practice to potential clients (some of whom also took advantage of the trust).
Wednesday, August 8, 2012
In Patel v. Commissioner, 138 T.C. No. 23, the full Tax Court rejected taxpayers' attempt to claim a charitable contribution deduction for the donation of their house for fire department training exercises. As is common in these cases, the taxpayers wanted the house destroyed so they could build a new one on the same piece of land. While the Seventh Circuit previously rejected a similar deduction, the Tax Court's reasoning for the denial was different. While the Seventh Circuit concluded that the net value of the "gift" was actually zero given that the training exercise saved the taxpayers $10,000 in demolition costs, the Tax Court in Patel concluded that the deduction failed because under the applicable state law a house is regarded a part of the land, and even if the house is considered separately from the land the taxpayers retained significant ownership interests in the house and only granted the fire department a "mere revocable license that does not vest any property interest in the fire department." As a result, the taxpayers only donated a partial interest in the property, which does not qualify for a deduction under Internal Revenue Code section 170(f)(3).
Thursday, June 14, 2012
Bad News for Political 501(c)(4)s: 4th Circuit Upholds "Major Purpose" Test for Political Committees
In a case with potentially major ramifications for politically active section 501(c)(4) organizations, the U.S. Court of Appeals for the Fourth Circuit has upheld the Federal Election Commission's "major purpose" test for determining whether an organization is a political committee or PAC and so subject to extensive disclosure requirements. As described in the opinion, under the major purpose test "the Commission
first considers a group’s political activities, such as spending on a particular electoral or issue-advocacy campaign, and then it evaluates an organization’s 'major purpose,' as revealed by that group’s public statements, fundraising appeals, government filings, and organizational documents" (citations omitted). The FEC's summary of the litigation details the challenge made in this case:
A group or association that crosses the $1,000 contribution or expenditure threshold will only be deemed a political committee if its "major purpose" is to engage in federal campaign activity. [The plaintiff] claims that the FEC set forth an enforcement policy regarding PAC status in a policy statement and that this enforcement policy is "based on an ad hoc, case-by-case, analysis of vague and impermissible factors applied to undefined facts derived through broad-ranging, intrusive, and burdensome investigations . . . that, in themselves, can often shut down an organization, without adequate bright lines to protect issue advocacy in this core First Amendment area." [The plaintiff] asks the court to find this "enforcement policy" unconstitutionally vague and overbroad and in excess of the FEC’s statutory authority.
In a unanimous opinion, the court concluded that the FEC's current major purpose test is "a sensible approach to determining whether an organization qualifies for PAC status. And more importantly the Commission's multi-factor major-purpose test is consistent with Supreme Court precedent and does not unlawfully deter protected speech." In doing so, the court chose to apply the less stringent "exacting scrutiny" standard instead of the "strict scrutiny" standard because, in the wake of Citizens United, political committee status only imposes disclosure and organizational requirements but no other restrictions. While the plaintiff here (The Real Truth About Abortion, Inc., formerly known as The Real Truth About Obama, Inc.) is a section 527 organization for federal tax purposes, the same test would apply to other types of politically active organizations, including section 501(c)(4) entities.
Hat Tip: Election Law Blog
Tuesday, June 12, 2012
I often tell my tax students that part of their job is to get the paperwork right. I now have a new illustration of the importance of doing so from the Tax Court's decision in Mohamed v. Commissioner. As the court details, there was no question regarding the contributions themselves and initially the dispute was solely over their value - which the court concluded may very well have been more than the claimed $18.5 million. The ultimately fatal problem, however, was the paperwork documenting the real estate contributions at issue. Specifically, the court found that the taxpayers failed to obtain a qualified appraisal before the due date of the relevant returns, which appraisal had to be from an appraiser other than the donor or taxpayer, and failed to attach an appraisal summary to those returns. Here the donor and taxpayer, who is a certified real-estate appraiser, had appraised the properties himself and, relying solely on the Form 8283 without consulting the instructions for that form, had failed to conform the statement he attached to the returns to the appraisal summary requirements. The taxpayers' attempts to challenge the validity of the regulations imposing these requirements and to claim "substantial compliance" with those requirements were unsuccessful. The court therefore regretfully denied the deductions, concluding:
We recognize that this result is harsh--a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions--all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions. But the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.
For news coverage of the decision, see the Wall Street Journal.
Thursday, May 31, 2012
The Washington Post reports that the U.S. Chamber of Commerce will change it communication strategy to avoid "electioneering communications" - broadcast, cable, or satellite ads that clearly identify a candidate, reach a significant number of relevant electorate, and are run within a certain timeframe before the relevant election - while embracing express advocacy, that is ads that expressly support or oppose candidates. The shift for the U.S. Chamber's planned $50 million of spending during the 2012 election cycle is driven by the recent federal district court decision in Van Hollen v. FEC, and the decision by the U.S. Court of Appeals for the District of Columbia Circuit not to stay the lower court decision pending appeal.
The lower court decision rejected a Federal Election Commission promulgated regulation limiting the public disclosure of contributors to organizations making electionering communications to contributors who made their contributions for the purpose of furthering electioneering communications. Instead, the court concluded the language of the relevant statute requires the public disclosure of all contributors (above a certain dollar threshold) to organizations that make electioneering communications, unless such organizations establish a separate segregated fund for making such communications and then all contributors (again, above a certain dollar threshold) to such a fund must be disclosed. The decision does not, however, reach the rules for disclosing contributors to organizations that engage in express advocacy, which apparently is the basis for the U.S. Chamber's shift. Other section 501(c) organizations are likely to follow suit, although many will probably avoid both electioneering communications and express advocacy altogether. For more information, see the FEC summary of the case. Law firm alerts regarding the decision are publicly available from Caplin & Drysdale (my former firm), Covington & Burling, Harmon, Curran, Spielberg & Eisenberg, and King & Spalding.
Wednesday, May 30, 2012
Over 40 Catholic organizations (including my employer, the University of Notre Dame) have filed coordinated lawsuits against the federal government challenging a regulation that would require the group health insurance sponsored by most employers to cover birth control and other services that are contrary to Catholic teaching. See Notre Dame press release, the Washington Post blog entry. One among the many interesting aspects of this dispute is the definition of a "religious employer," which is critical because group health plans sponsored by religious employers are exempt from the requirement. As noted in the background section of a recently released Proposed Rule that the federal government is hoping will resolve this dispute,
a religious employer is one that (1) has the inculcation of religious values as its purpose; (2) primarily employs persons who share its religious tenets; (3) primarily serves persons who share its religious tenets; and (4) is a non-profit organization described in section 6033(a)(1) and section 6033(a)(3)(A)(i) or (iii) of the Code.
Since the first three prongs of the definition are relatively vague (for example, what are the thresholds for "primarily employs" and "primarily serves"?), arguably the narrowest part of this definition is the fourth prong that refers to two of the mandatory exceptions from having to file the Form 990 annual return otherwise generally required for organizations exempt from tax under section 501(a). As the background section for the proposed rule elaborates, "[s]ection 6033(a)(3)(A)(i) and (iii) of the Code refers to churches, their integrated auxiliaries, and conventions or associations of churches, as well as to the exclusively religious activities of any religious order."
Churches, and conventions or associations of churches, are of course religious organizations under section 501(c)(3) but many clearly religious organizations do not qualify as churches (or conventions or associations of churches) for federal tax purposes because "church" for these purposes is limited to organizations that generally have in-person worship meetings and other characteristics common to the historical, Western understanding of a "church." See, e.g., the previous blog entry regarding the Foundation of Human Understanding case. The definition of intergrated auxillary is more complicated, but in general an intergregated auxillary must be both affiliated with a church or a convention or association of churches and, most critically, be "internally supported," which is not the case if an organization offers admissions, goods, services or facilities (e.g., educational or health care services) for sale to the general public and recevies more than 50 percent of its support from a combination of governmental sources, public soliciation of contributiosn, and receipts from such sales. See 26 C.F.R. 1.6033-2(h). It is this last point that places the University of Notre Dame and presumably the other plaintiffs in these lawsuits outside of this exception.
This dispute therefore highlights an increasingly important issue: assuming that for constitutional or policy reasons it is required or desirable to generally grant "religious" organizations exemptions from laws that would conflict with their religious beliefs, how broad should the definition of a "religious" organization be? Here the federal government has chosen a relatively narrow definition that was created for a different purpose (Form 990 filing exemptions), and at the end of the day it is the narrowness of this tax-based definition that has led to these lawsuits.