Thursday, June 22, 2017
Journalists have a constant interest in charity private benefit stories, particularly ones with a political angle. And unfortunately they seem to be able to find them. Recent reports raising questions about plain vanilla (non-political) private benefit have focused on a variety of donors and charities, including New England Patriots' quarterback Tom Brady, the James G. Martin Memorial Trust in New Hampshire, and billionaire Patrick Soon-Shiong. But not surprisingly reporters have paid even greater attention to situations relating to politics and politicians, including ones involving the Eric Trump Foundation, Boston mayoral hopeful Tito Jackson, President Trump's chief strategist Stephen Bannon, and the Daily Caller News Foundation. These stories are distinct from ones relating to the use (and possible misuse) of charities for political purposes more generally, such as the recent article regarding the David Horwitz Freedom Center.
I should emphasize that none of these situations have resulted so far in any apparent civil or criminal penalties, and in some instances the facts described may not cross any legal lines. Indeed, the only one of these situations that appears to have drawn government scrutiny so far is the one involving the Eric Trump Foundation, which New York Attorney General Eric Schneiderman has said his office is looking into.
The same cannot be said of three other situations that involve the possible misuse of charitable assets. One, relatively minor situation relates to the admitted access of the Missouri Governor's political campaign to a charity's donor list without apparently the charity's knowledge or permission. Two other situations are more serious in that they each involve hundreds of thousands of dollars. In March, a federal grand jury indicted former U.S. Representative Stephen Stockman and an aide on charges relating to the alleged theft of hundreds of thousands of dollars from conservative foundations to fund campaigns and pay for personal expenses. (More coverage: DOJ Press Release.) And last month a federal jury convicted former U.S. Representative Corrine Brown of raising hundreds of thousands of dollars for a scholarship charity, funds that she then used for her own personal and professional purposes. (More coverage: N.Y. Times.)
The various lawsuits that grew out of the IRS exemption application controversy continue their slow grind with discovery ordered in the Linchpins of Liberty and True the Vote cases (which are before the same judge in the U.S. District Court for the District of Columbia), a protective order keeping the depositions of Lois Lerner and Holly Paz confidential in the class action NorCal Tea Party Patriots case in the U.S. District Court for the Southern District of Ohio, a court-ordered July 24th mediation conference in the same case, and an April 21st hearing on the motion for partial judgment pending in the Freedom Path case in the U.S. District Court for the Northern District of Texas, at which apparently nothing exciting happened as I could not find any media coverage of the hearing. In fact, as far as I can tell no one is paying any attention to these cases at this point except for the parties, their lawyers, a few minor conservative news outlets, and the Bloomberg BNA Daily Tax Report (the last two links are to stories by them (subscription required), and even they ignored the April 21st hearing).
In related news, the Federal Election Commission's inspector general's office recently concluded that FEC employees did not violate any rules when they communicated with the IRS about politically active groups. (More coverage: Bloomberg BNA (subscription required)). And Congress extended the various budget-related provisions it created in the wake of the controversy, including the prohibition on using any funds to issue guidance under section 501(c)(4) for the rest of the current fiscal year (so through September 30, 2017). Finally, the American Center for Law and Justice (which is representing the plaintiffs if some of the above lawsuits) announced that the Tri-Cities Tea Party received a favorable determination letter from the IRS under section 501(c)(4) seven years after filing its application.
As anyone who has represented a house of worship knows, they are subject to many legal exceptions and special rules. One of the more obscure but also more important ones is the exemption of church benefit and pension plans from the incredibly complex requirements of the Employee Retirement Income Security Act of 1974 (ERISA). At issue in Advocate Health Care Network v. Stapleton was whether this statutory "church plan" exemption extends to pension plans offered by church-affiliated nonprofits that run hospitals and other healthcare facilities, as had been longstanding interpretation of the IRS, the Department of Labor, and the Pension Benefit Guaranty Corporation. The plaintiffs in these consolidated cases were current and former employees of the nonprofits who had successfully argued in the lower courts that the exemption is limited to plans established by churches and so the plans established by these church-affiliated nonprofits were subject to ERISA.
In a unanimous opinion (Justice Gorsuch not participating), the Supreme Court reversed the lower court decisions. Based on a careful reading of the statutory text, as well as consideration of the congressional intent with respect to the amendments to that text at issue in the case, the Court concluded that plans maintained by church-affiliated entities for their employees fell within the exemption, regardless of what type of entity had established the given plan. The case therefore resolved the uncertainty created by the lower court decisions in these consolidated cases, which had thrown the scope of the church plan exemption into doubt. While Justice Sotomayor wrote separately to highlight her concerns about the effect of the decision, she agreed with the Court's reading of the statute and so joined the Court's opinion in full. For more detailed coverage, see SCOTUSblog.
Tuesday, June 20, 2017
James Fishman (Pace) has posted Rethinking Riley: Applying Commensurate and Intermediate Scrutiny Standards to Judicial Evaluation of Charitable Solicitation Regulation. Here is the abstract:
In Riley v. National Federation of the Blind, 487 U.S. 781 (1988), the Supreme Court struck down as unduly burdensome and unconstitutional a North Carolina statute requiring professional fundraisers to disclose to those solicited the average percentage of gross receipts actually turned over to the charity for all charitable solicitations conducted in the state within the previous twelve months. The Court applied a strict scrutiny standard of review of the regulated speech, rather than a more deferential intermediate or rational standard of scrutiny. The Court’s reasoning was that the commercial speech elements of the charity’s message were inextricably intertwined with the fully protected educational portions. It also held North Carolina’s regulations governing application of the statute were not narrowly tailored to achieve the state’s valid interests in protecting charities and informing donors how money contributed was spent.
This article disagrees with Riley’s rationale that the educational elements in charitable solicitations are always so interwoven with commercial speech that a governmental regulation that impinges on a charity’s message should always be subject to strict judicial scrutiny review, and as a matter of course protected by the First Amendment. (Fraudulent solicitations do not receive constitutional protection.) The reality is that the educational component of many charitable solicitations is formulaic or an afterthought unconnected to the solicitation message. The article contends that if a charity’s costs of fundraising over several years exceeds eighty-five percent of the amount raised, and the actual amount that is used for the charity’s philanthropic mission is miniscule, should create a rebuttable presumption that the charitable program is not commensurate with the resources contributed to the organization. Absent certain exceptions, such organizations should lose their tax exempt status.
Judicial review of such revocations should be subject to a lesser, intermediate standard of scrutiny of review by the courts. There are both common law and federal tax precedents for using a commensurate standard in evaluating whether a charity serves a public purpose relative to its resources and abilities. This approach should pass constitutional muster, and will protect the public from deception and manipulation.
Wednesday, April 5, 2017
Nonprofit Quarterly reports on the trial of Jonathan Dunning, former CEO of Birmingham Health Care and Central Alabama Comprehensive Health. Mr. Dunning was indicted on 122 counts alleging that he shifted approximately $14 million of federal funds to outside businesses that he controlled.
The case has been postponed due to complexity, undoubtedly due to another nonprofit being added into the case. A credit union, that government officials claim was central to the scheme, had many Birmingham Health Care upper executives on its board of directors. The National Credit Union Administration claims that the credit union in question became “insolvent due to management operating the credit union in an unsafe and unsound manner including a serious conflict of interest with the credit union’s sponsor, a continuous lack of action by management to address issues, persistent non-compliance with established timelines for submitting reports, and problems with the credit union’s books and records.”
At issue, among other things, is whether Mr. Dunning committed conspiracy, bank fraud, and/or money laundering in his dual role of nonprofit CEO, and controller of private firms. Also, whether and to what extent the former CEO can be held liable for controlling his replacement to perpetuate the fraud. Allegedly, once the fraud was first being discovered, Mr. Dunning stepped down, but handpicked his successor and exercised complete control over him.
The original story covering this nonprofit mismanagement and conflicts of interest scheme can be read here.
David A. Brennen
Friday, March 17, 2017
Samuel D. Brunson (Loyola-Chicago) and David Herzig (Valparaiso) have posted A Diachronic Approach to Bob Jones: Religious Tax Exemptions after Obergefell, Indiana Law Journal (forthcoming). Here is the abstract:
In Bob Jones v. U.S., the Supreme Court held that an entity may lose its tax exemption if it violates a fundamental public policy, even where religious beliefs demand that violation. In that case, the Court held that racial discrimination violated fundamental public policy. Could the determination to exclude same-sex individuals from marriage or attending a college also be considered a violation of fundamental public policy? There is uncertainty in the answer. In the recent Obergefell v. Hodges case that legalized same-sex marriage, the Court asserted that LGBT individuals are entitled to “equal dignity in the eyes of the law.” Constitutional law scholars, such as Lawrence Tribe, are advocating that faith groups might lose their status, citing that this decision is the dawning of a new era of constitutional doctrine in which fundamental public policy will have a more broad application.
Regardless of whether Obergefell marks a shift in fundamental public policy, that shift will happen at some point. The problem is, under the current diachronic fundamental public policy regime, tax-exempt organizations have no way to know, ex ante, what will violate a fundamental public policy. We believe that the purpose of the fundamental public policy requirement is to discourage bad behavior in advance, rather than merely punish it after it occurs. As a result, we believe that the government should clearly delineate a manner for determining what constitutes a fundamental public policy. We suggest recommended three safe harbor regimes that would allow religiously-affiliated tax-exempt organizations to know what kinds of discrimination are incompatible with tax exemption. Tying the definition of fundamental public policy to strict scrutiny, to the Civil Rights Act, or to equal protection allow a tax-exempt entity to ensure compliance, ex post. In the end, though, we believe that the flexibility attendant to equal protection, mixed with the nimbleness that the Treasury Department would enjoy in crafting a blacklist of prohibited discrimination, would provide the best and most effective safe harbor regime.
The final version of Conservation Easements and the Valuation Conundrum, 19 Florida Tax Review 225 (2016), written by Nancy McLaughlin (Utah) is now available. Here is the abstract:
For more than fifty years, taxpayers have been able to claim a federal charitable income tax deduction under Internal Revenue Code § 170(h) for the donation of a conservation easement or a façade easement. For just as long, the deduction has been subject to abuse, including valuation abuse. Dismayed by the expenditure of significant judicial and administrative resources to combat abuse in the easement donation context, the Treasury Department recently proposed reforms, including reforms to address valuation abuse. The reforms were proposed in somewhat of an analytical vacuum, however, because there has been no comprehensive analysis of the easement valuation case law. This article fills that void. It examines the easement valuation case law and discusses the most common methods by which taxpayers or, more precisely, their appraisers overvalue easements. It also proposes alternative reforms informed by the lessons learned from the case law. Concise summaries of the relevant facts and holdings of the cases are included in appendices.
Thursday, March 16, 2017
Could the Courts Redefine What It Means for Charities and Other Tax-Exempt Organizations to Engage in Political Activity?
There are at least two pending cases that could redefine how federal tax law defines various types of political activity for charities and other tax-exempt organizations. First, the Freedom Path v. Lerner case in the Northern District of Texas arises out of the application controversy I discussed yesterday, but also includes a challenge to the "facts and circumstances" approach used by the IRS in Revenue Ruling 2004-6 to determine what activity constitutes political campaign intervention as applied to Freedom Path's activities. While that Revenue Ruling relates to non-charitable, tax-exempt organizations, the IRS uses a similar approach with respect to charities as illustrated by Revenue Ruling 2007-41. For the latest decision in this litigation, granting in part and denying in part the government's motion to dismiss, see this May 2016 U.S. District Court opinion.
The other case is Parks Foundation v. Commissioner, and the related case of Parks v. Commissioner, which are currently pending before the U.S. Court of Appeals for the Ninth Circuit. An issue at the heart of this case is how attempting to influence legislation (i.e., lobbying) is defined for purposes of the prohibition on private foundations engaging in such activity (and the related limit on lobbying by public charities). This case is notable because it has attracted an amicus brief in support of the appellants from the Alliance for Justice and the Council on Foundations, as well as attention from the James Madison Center for Free Speech, for which one of the the General Counsels is James Bopp, Jr. (who has brought many successful First Amendment cases challenging campaign finance restrictions, including Citizens United) . The Tax Court decision that is the subject of this appeal can be found here.
Of course neither case may lead to any seismic changes to the relevant definitions of political activity, but they both bear watching.
Wednesday, March 15, 2017
In her Annual Report to Congress, National Taxpayer Advocate Nina Olson listed charitable contribution deductions under Internal Revenue Code section 170 as number eight on her list of ten Most Litigated Issues. The topics that led to the most disputes in the 26 decisions from the June 1, 2015 to May 31, 2016 twelve-month period that she reviewed were substantiation (12 cases), easements (9 cases), and valuation (5 cases), with some cases involving multiple issues. For summaries of all 26 decisions, see Appendix 3, Table 8 in the Appendices to Volume One of the report.
In case we needed any reminders that litigation takes a long time, the past several months have seen a few minor developments in the litigation that grew out of the section 501(c)(4) application controversy that exploded in May 2013 (!). In no particular order:
- The Supreme Court denied certiorari in True the Vote, Inc. v. Lois Lerner, et al., No. 16-613, and a related case, rejecting the plaintiffs' attempt to get the Bivens claims against Ms. Lerner and other IRS officials reinstated. The underlying case of True the Vote, Inc. v. IRS, et al. continues in the U.S. District Court for the District of Columbia as Civil Action No. 13-734, without the Bivens claims and so limited to injunctive and declaratory relief, along with the related case of Linchpins of Liberty v. United States, et al., Civil Action No. 13-777, in the same court. UPDATE: I should have noted in my original post that a case raising similar claims is also proceeding in the U.S. District Court for the Northern District of Texas (Freedom Path, Inc. v. Lerner, Civil Action No. 3:14-CV-1537-D), although there have been no major developments in that case since a decision last May on the government's motion to dismiss.
- A class action lawsuit continues in the U.S. District Court for the Southern District of Ohio, NorCal Tea Party Patriots, et al. v. IRS, et al., Civil Action No. 13-341, after the judge in the case ruled late last year that the IRS had to continue processing the application of one of the class members (the Texas Patriots Tea Party).
- Judicial Watch announced the IRS has discovered an additional 6,924 responsive documents relating to Judicial Watch's pending FOIA lawsuit against the IRS (U.S. District Court for the District of Columbia, Civil Action No. 15-220); it is not clear if these documents contain any new information, and the timetable for public disclosure of the documents is uncertain.
At the same time, Republican leaders in Congress have shown no appetite for pursuing impeachment of current IRS Commissioner John Koskinen even as conservative members argue for it and the Trump administration has quietly avoided demanding Koskinen's resignation even in the face of calls to fire him. For recent coverage, see The Hill and the Washington Post. It is hard not to imagine that the Commissioner is silently counting the days until his term ends in November, however. It will also be interesting to see who will be willing to replace him in the current political environment.
Wednesday, January 11, 2017
Philanthropy Roundtable (represented by Morgan Lewis & Brockius) filed an amicus brief in the Supreme Court in support of a challenge to an aspect of McCain-Feingold/Bipartisan Campaign Reform Act that requires disclosure of certain large donors to 501(c)(3) nonprofits if the nonprofit engages in election-related speech. The brief argues that donors to 501(c)(3) organizations have an interest in anonymity for three principal reasons:
- Religious or moral reasons for not wanting to have one's charitable contributions made public
- Concerns about public abuse or even government retaliation, and
- Practical concerns about finding oneself placed on additional mailing lists
For more information about the case, see the FEC's litigation page. Among the plaintiff's arguments is that the government's interest in mandating disclosure of information on donors to 501(c)(3) organizations is less than to 501(c)(4) organizations, distinguishing Citizens United on that basis. Because this is a direct appeal from a three-judge district court panel under a special review provision, the usual certiorari procedures do not apply.
Hat tip Election Law Blog/Rick Hasen. Who else?
Wednesday, November 16, 2016
Last month the Supreme Court of the United States denied certiorari to either the NCAA or the plaintiffs in O'Bannon v. NCAA. That decision left in place the decision by the U.S. Court of Appeals for the Ninth Circuit that found an antitrust injury to the plaintiffs from the NCAA's rules but rejected the portion of the district court's remedy that would have allowed student-athletes to receive cash payments that went beyond their full cost of attendance. Since the NCAA had already dropped its prohibition on members schools giving scholarships to student-athletes up to the full cost of attendance, the effect of the now final Ninth Circuit decision is to leave the current situation unchanged. That said, some commentators believe that the finding of an antitrust injury leaves the NCAA vulnerable to future antitrust challenges (see this ESPN story about the decision).
Thursday, August 11, 2016
The "Tea Party" application controversy continues to take a toll on the IRS, even as the Service implements the congressionally enacted notice requirement for section 501(c)(4) social welfare organizations. First, the IRS suffered setbacks in two of the cases pending against it that grew out of the controversy:
- In Freedom Path, Inc. v. Lerner, the U.S. District Court for the Northern District of Texas rejected the government's motion to dismiss a First Amendment claim against the IRS, finding that the plaintiff's concerns regarding future curtailment of speech was sufficient to establish injury and that the case still presented a live controversy despite changes in the Service's processing of applications. Coverage: Bloomberg BNA Daily Tax Report.
- In True the Vote, Inc. v. IRS and Linchpins of Liberty v. United States, decided together although argued separately, the U.S. Court of Appeals for the District of Columbia Circuit reversed the lower court's dismissal of actions for injunctive and declaratory relief as against the government, concluding that those claims were not moot. (The appellate court did, however, affirm the lower court's dismissal of Bivens actions and statutory claims against individual government officials and the Service.) Coverage: Wall Street Journal. For blog posts discussing the opinion, see The Surly Subgroup (Philip Hackney) and The Volokh Conspiracy (Eugene Volokh).
Second, many Republicans in the House of Representatives continue to call for the impeachment of IRS Commissioner John Koskinen, not satisfied with his earlier censure by the House Oversight and Government Reform Committee on a party-line vote. (Coverage: The Hill; Politico; Roll Call.) Third, new documents relating to the controversy continue to trickle out from various sources, at a minimum providing an excuse to reassert claims against the Service and its (mostly now gone) officials. For example, see this Judicial Watch press release in the wake of it gaining access to approximately 300 pages of FBI documents relating to the FBI's investigation of the controversy.
And yet life still goes on, which in this instance means implementation of the new section 506 notice requirement for section 501(c)(4) organizations. That implementation has taken the form of Revenue Procedure 2016-41 and related final and temporary regulations (T.D. 9775). These documents detail how the notice requirement applies both to new section 501(c)(4) organizations formed after December 18, 2015 (the date of enactment for section 506) and to previously existing section 501(c)(4) organizations that had not yet either filed an application for recognition of exemption or an annual return. The required form is Form 8976, which can be submitted electronically here.
Wednesday, June 29, 2016
Dept of Labor: Volunteers who Provide a Benefit to Organization Are Employees, Must Be Paid Minimum Wage
A church encourages its parishioners to volunteer for a fundraiser. More than 100 individuals heed the call and volunteer their time: some a few hours, some much more. The Department of Labor then sues for violations of federal labor law for failing to pay the workers—who DOL considers “employees”—a minimum wage as required by the Federal Labor Standards Act (FLSA).
Sound unlikely? Well, this exact scenario is playing out in Ohio in the case of Perez v. Cathedral Buffet. Ernest Angley, of televangelism infamy, runs a church and a buffet restaurant. According to court papers, the restaurant is organized as a for-profit organization owned entirely by the church, although the restaurant does not make and has not made a profit. Parishioners volunteer for the buffet—sometimes sporadically, sometimes regularly. 105 of the would-be employees signed affidavits indicating that they did not receive any economic advantage from volunteering, and they volunteered for the sense of community the opportunity provided. Department of Labor has sued Cathedral Buffet and the Ernest Angley for years of failing to pay volunteers.
In response to the argument that the volunteers do not need to be paid a minimum wage, the Department of Labor has taken the following position:
But even if the volunteers did not expect compensation, they certainly did not work solely for their own purpose or pleasure, without immediate benefit to the Buffet. Former Church member Roadman declared that she felt pressure to volunteer. (Roadman Decl. ¶6.) And although the Employers claim the volunteers received a “sense of community” or “satisfaction,” the benefit to them was vastly outweighed by the benefit received by the Buffet. The Buffet actively sought out volunteers to help staff the Buffet, and Angley even admitted that the use of volunteers was a cost-saving measure. (Angley Dep. 35:7-36:11, 50:21-25.) And unlike in Portland Terminal, the Buffet’s workers are not being trained or otherwise working under the close scrutiny of paid employees.
The Buffet cannot rely on the goodwill of the Church members to provide labor that would otherwise be done by paid employees and be compensable under the Act. And the Buffet cannot pressure individuals into providing free labor, then shield itself from FLSA liability under the guise of the Church’s religious mission.
In other words, DOL’s legal position seems to be that an organization MUST pay minimum wage to volunteers as employees if it 1) asked the individual to volunteer and 2) it receives a benefit from those volunteers. If this is the standard, then a lot of organizations are in trouble. After all, a lot of organizations depend on appeals to religious or moral duty to convince people to volunteer. And while some charities likely tolerate volunteers even if they don’t add value, many organizations depend on volunteers to make their operations successful. (Earlier in the case, DOL took the position that it was impossible to "volunteer" for a for-profit enterprise, although its latest briefing appears to have abandoned this position, which had been rejected by several other courts.)
Can Labor’s position possibly be right? Well… probably not, but maybe:
Tuesday, May 3, 2016
Targeting Religious Organization Tax Benefits, Religious Orgs Pushing Back, and the Scandal of the Month
A flurry of litigation targets the tax benefits enjoyed by religious organizations and their ministers, including the parsonage allowance exclusion and property tax exemptions. At the same time, religious organizations are pushing back on government regulation by challenging the IRS enforcement of the political campaign intervention prohibition. And of course news outlets are continually searching for possible behavior by religious groups and sometimes finding it.
In the courts, the Freedom From Religion Foundation has refiled its complaint challenging on Establishment Clause and Due Process Clause grounds the parsonage allowance exclusion provided to ministers by Internal Revenue Code section 107. In an attempt to remedy the standing issue that doomed its earlier challenge, FFRF's new complaint asserts that it provides a housing allowance to its officers but solely because they are not ministers that allowance is subject to federal income tax. It remains to be seen whether these changed facts are sufficient to overcome the general prohibition on taxpayer standing, although the Seventh Circuit's earlier decision on this issue indicates they may be.
At the same time, the Massachusetts Supreme Court has taken up the question of what counts as sufficiently "religious" use of real property to qualify that property for tax exemption. Areas of the property at issue include a maintenance shed, a coffee shop, conference rooms, a religious bookstore, and part of a forest preserve. A recent Atlantic article (hat tip: Above the Law) details the possible significant ramifications of the case, both in Massachusetts and nationally, given the increasing financial pressure on local tax assessors to narrowly interpret property tax exemptions. Additional Coverage: WBUR.
Religious organizations are not solely on the defensive, however. The Alliance Defending Freedom, not satisfied with its increasingly popular Pulpit Freedom Sunday challenge to the Internal Revenue Code section 501(c)(3) prohibition's application to churches and other religious organizations, has now filed a Freedom of Information Act lawsuit to force the IRS to disclose its rules for investigating churches. ADF is basing its lawsuit on the disclosure by the IRS, in response to a FFRF lawsuit, that it was actively enforcing the prohibition as against churches. For a discussion of the bind ADF and FFRF are putting the IRS in, see this Surly Subgroup blogpost by Sam Brunson.
Finally, religious organizations continue to be fruitful sources for news outlets looking for scandals. Most recently, the City Church of New Orleans was the subject of a story by WWLTV detailing an ongoing state criminal investigation. The allegations against the church include both ones that are sadly familiar - financial mismanagement and use of church resources to benefit the private business interests of church leaders - and ones that are less common - lying to collect federal education grants and film tax credits. It remains to be seen, of course, whether these allegations are shown to be accurate or not.
Friday, March 4, 2016
IRS Scandal Update: Crossroad GPS Approval, Class Certification in One Case, Settlement of Another, and 501(c)(4) Notices
The biggest development coming out of the IRS scandal in recent months was the public revelation that in November 2015 the IRS approved the application by Crossroads GPS for recognition of exemption under Internal Revenue Code section 501(c)(4). This approval means the entire application file is available to the public, and Robert Maguire has very helpfully made all the documents available at OpenSecrets.org at the end of his analysis of them. Based on a quick review of these hundreds of pages of documents, here are several take-aways:
- Part V of the Protest (and Part VI of the Revised Protest) highlights the most constitutionally problematic aspect of the existing limit on political activity by section 501(c)(4) organizations (and also of the prohibition on such activity by section 501(c)(3) organizations) - the vagueness of the facts and circumstances approach for determining whether a given communication or other activity is actually political campaign intervention.
- Regardless of your views on the merits of the application and the final IRS decision regarding it, the legal writing and submissions by the attorneys representing Crossroads GPS provide a good example of professional but strong (and ultimately effective) advocacy based on an extensive factual record. This advocacy both focused on small but critical details - such as whether particular communications were in fact political campaign intervention - and larger legal issues such as the constitutional issue mentioned above.
- The application materials provide many examples of communications and other activities that may - or may not - cross the line into political campaign intervention. In addition, most and possibly all of the communications are helpfully summarized in charts submitted by Crossroads GPS that include the geographic area of distribution, whether the organization asserted that the communication was part of an ongoing series, and other facts that the IRS has identified as relevant.
- Taken as a whole, the documents provide a comprehensive illustration of the application for recognition of exemption process, including the initial application, IRS questions and detailed responses, proposed denial, protest, communications with IRS Appeals regarding the protest, and then finally the favorable determination letter. It also reveals several apparent procedural missteps on the part of the IRS that Crossroads GPS then used to strengthen its case for granting the application.
Media coverage: Politico; ProPublica; Washington Post. Not surprisingly, the IRS decision has generated both scathing criticism (see this NY Times editorial), as well as defenders (see this commentary by exempt organizations and constitutional law attorney Barnaby Zall).
In other news, the IRS lost a motion in one case related to the scandal but managed to settle another case. The loss came in NorCal Tea Party Patriots v. IRS, where a U.S. District Court certified a class consisting of various groups that allege they were subject to an improper level of scrutiny by the IRS during the exemption application process because of their political views. For an analysis of the decision, see this Forbes column by Peter J. Reilly. More positively for the IRS, Law360 reports that the IRS agreed with the Republican National Committee to dismiss a federal suit by the RNC against the Service involving a request for documents relating to the Service's treatment of exemption applications under section 501(c)(4). As part of the settlement, the IRS agreed to pay more than $20,000 in attorney's fees.
Finally, the IRS announced in Notice 2016-09 that the new notice required from certain section 501(c)(4) organizations based on a statutory change Congress made this past December will not be due until at least 60 days after Treasury and the IRS issue temporary regulations under new section 506. The Notice also clarifies that an organization seeking recognition from the IRS of its exemption under section 501(c)(4) will still need to apply for such recognition and, until further guidance is issued, organizations seeking such recognition should continue to use Form 1024. Such an application remains optional, however.
Friday, December 18, 2015
The almost certain to be approved omnibus spending bill and related tax bill illustrates in a nutshell the effects of the IRS scandal that blew up after it became known that the Service had subjected some conservative groups to greater scrutiny when they applied for tax-exempt status under Code section 501(c)(4).
No New 501(c)(4) Guidance. The provision garnering the most media attention in this area is Division E, Section 127 of the omnibus bill. It prohibits spending on guidance relating to section 501(c)(4) organizations and locks in "the standard and definitions" relating to that status "as in effect on January 1, 2010" (shortly before the Supreme Court's decision in Citizens United). While the provision only applies during the current fiscal year, which ends on September 30, 2016, it may kill any momentum such guidance had and so have more long-term effects. But if such guidance is only paused, a possible silver lining is that this delay ensures Treasury and the IRS will not issue it until after the end of the current presidential campaign.
Section 127 also does not address guidance for other types of section 501(c) organizations, including section 501(c)(5) labor unions and section 501(c)(6) chambers of commerce and trade associations. So in theory Treasury and the IRS could still issue guidance relating to the amount and definition of political activity for these entities. But given that such guidance could not be synced with guidance for section 501(c)(4) organizations until next fall at the earliest, it seems unlikely that they will pursue this course.
(The omnibus bill also bars spending by the SEC on guidance "regarding disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations" (Division O, Section 707) and on the Executive Branch of the President requesting "a determination with respect to the treatment of an organization described in section 501(c)" (Division E, Section 601(a)(2).)
Changed (Better?) IRS Procedures. The tax bill, which is also Division Q of the omnibus bill, contains several procedural changes that can be traced to the scandal:
Section 402. IRS employees prohibited from using personal email accounts for official business.
Section 403. If a person whose return or return information is improperly disclosed complains to Treasury regarding that disclosure, Treasury may inform that person about whether an investigation has been initiated, whether it is open or closed, whether any such investigation substantiated the improper disclosure by any individual, and whether any action has been taken with respect to that individual. (The provision also relates to other unlawful acts by federal employees with respect to the tax laws, as listed in Code section 7214.)
Section 404. Codifies the already available administrative appeal process relating to adverse determinations of tax-exempt status under section 501(c) and certain related determinations.
Section 405. New notification requirement for section 501(c)(4) organizations with a deadline for submitting the notice of 60 days after establishment of the organization. It applies both to entities organized after the bill's enactment and existing entities that have neither filed an application nor submitted an annual return or notice previously. There also is a provision allowing such an entity to "request" that it be treated as a section 501(c)(4) organization, in response to which Treasury (and so the IRS) "may issue a determination," and another provision allowing Treasury by regulation to require additional information supporting a new group's claimed 501(c)(4) status in their first annual return.
Section 406. Extending to all organizations seeking tax-exempt status under section 501(c) the existing declaratory judgment provision currently available to organizations seeking that status under section 501(c)(3).
Section 407. Adding to the list of "deadly sins" for IRS employees "performing, delaying, or failing to perform" any official action either for "personal gain or benefit or for a political purpose."
Section 408. Exempting from the gift tax transfers to any tax-exempt organization described section 501(c)(4), (5), or (6).
Other than the gift tax provision none of these appears problematic on its face, and the expansion of declaratory judgment option to all 501(c) is a welcome change. While the gift tax provision may draw some criticism, the reality is the IRS had already abandoned this fight (and I personally think this is the right call from a tax perspective, for reasons I plan to detail in an upcoming article). The one provision that may lead to some interesting questions and so require guidance is the new notice requirement, including how it relates to the existing (optional) application process for organizations seeking section 501(c)(4) status.
Frozen Budget for the IRS . The IRS budget continues to be frozen (and so losing ground once inflation is taken into account). More specifically, Division E provides the following, all of which are the same as for last fiscal year:
- Taxpayer Services: $2.16 billion
- Enforcement: $4.86 billion
- Operations Support: $3.64 billion
- Business Systems Modernization: $290 million
It also prohibits spending on targeting citizens for exercising their First Amendment rights and on targeting groups based on their ideological beliefs.
Bottom Line. The IRS continues to pay the price for the scandal in the form of congressional micromanagement and less funding. Any hopes of significant IRS enforcement relating to tax-exempt organizations and political activity are therefore unlikely to come to fruition in the foreseeable future.
UPDATE: For more information, see the Joint Committee on Taxation Technical Explanation for the tax bill.
Wednesday, September 2, 2015
Judge Rules IRS Has Not Yet Established Reasonableness, Nor Has Plaintiff Yet Established Unreasonableness, of IRS Records Search in FOIA Dispute
United States District Judge Landya McCafferty of the District of New Hampshire has issued an order allowing a private citizens group to proceed in its Freedom of Information Act suit against the Internal Revenue Service. The order sets forth the posture of the case, the gist of which appears in the following excerpts:
In May of 2013, the Internal Revenue Service (“IRS”) became embroiled in a “targeting” scandal after it admitted that it had singled out politically conservative organizations by delaying and more closely scrutinizing their applications for tax-exempt status. In the wake of the scandal, Citizens for a Strong New Hampshire, Inc. (“Citizens”) filed a records request with the IRS pursuant to the Freedom of Information Act, 5 U.S.C. § 552 (“FOIA”). The request sought disclosure of correspondence between two New Hampshire politicians and certain high-ranking IRS officials. Now, Citizens has brought this lawsuit, accusing the IRS of conducting an inadequate search, unreasonably delaying its disclosure, and unlawfully withholding responsive documents. Both parties have filed motions seeking summary judgment. …
The Complaint suggests that the targeting by the IRS of conservative organizations was spurred, in part, by Democrats in Congress. For example, in 2012, New Hampshire Senator Jeanne Shaheen was among several Democratic senators to co-sign a letter to the commissioner of the IRS, urging the IRS to investigate tax-exempt organizations that might be abusing their exempt status by engaging in partisan political activity. In June of 2014, Citizens made a FOIA request to the IRS, seeking “[a]ny and all documents or records of email or correspondence to or from New Hampshire Senator  Jeanne Shaheen and Congresswoman Carol Shea-Porter  to or from [three high-ranking IRS officials] between the dates of January 1, 2009 and May 21, 2013.” See FOIA Request (doc. no. 1-1). One of the three named IRS officials was Lois Lerner who, at the time, served as the Director of the Exempt Organizations Unit, which oversaw applications for tax exemption. …
Citizens alleges that the correspondence that it sought would have been of interest to voters in advance of the 2014 election. Citizens has brought a claim against the IRS for violation of FOIA, alleging that the IRS: (1) conducted an inadequate search; (2) unduly delayed its disclosure such that Citizens could not disseminate the results of the search to voters in advance of the 2014 national election; and (3) unlawfully withheld the 51 pages of responsive but purportedly exempt documents. Citizens seeks an order requiring the IRS to disclose the remaining 51 pages, a declaratory judgment that the IRS violated FOIA, as well as an award of fees and costs. The IRS denies the allegations and argues that it is entitled to judgment as a matter of law. Both parties now seek summary judgment. [footnotes omitted]
Having conducted an in camera review of the documents that the IRS claimed were exempt from disclosure, Judge McCafferty concluded that the IRS properly withheld 51 pages of materials (the general nature of which she summarizes in the order). More interestingly, Judge McCafferty denied both parties’ motions for summary judgment on the reasonableness of the IRS’s records search. On the latter denials, Judge McCafferty summarized her findings as follows:
Put simply, there exist genuine issues of material fact as to whether the IRS conducted an adequate search, and the record does not entitle either party to summary judgment on this issue.
What does the order mean for the litigation? Judge McCafferty explains as follows:
[N]either party is entitled to summary judgment on the issue of the sufficiency of the search, leaving the potential for a most unusual occurrence: a FOIA trial. See Margaret B. Kwoka, The Freedom of Information Act Trial, 61 Am. U. L. Rev. 217, 257-58 (2011) (calculating that, between 1979 and 2008, less than 1% of FOIA cases went to trial, and further observing that “[i]n recent years, it is fair to say there have been essentially no FOIA trials”). The court will schedule a conference with the parties in order to discuss next steps. The parties should be prepared to discuss, among other topics, the scope and logistics of a trial, the need for discovery, and the prospects of settlement.
Other Coverage: Tax Notes Today (Electronic Cite: 2015 TNT 170-3).
Monday, July 6, 2015
In the wake of Obergefell, the Internet was a dangerous place to be as a tax lawyer. Oh, a nickel for all the posts that lamented the loss of tax-exempt status for churches that didn't perform same sex marriages forthwith! Of course, I was sure to correct them all right away, because you know, nothing on the internet can be wrong, right?
There's been a lot of coverage by the news media on this issue as we've had some more time to discuss the issues, as discussed previously here at the Nonprofit Tax Prof Blog. Here's the latest in the coverage from the Baltimore Sun, which discusses the tax exempt status of religiously-affiliated universities. The article hedges on the issue of tax-exempt status, but I think both sides of the tax argument can find some common ground in the discussion found there. Under a Bob Jones University analysis, I'm not sure that we are there yet - there being that discrimination on the basis of sexual orientation is so fundamentally against public policy as to cause loss of tax-exempt status. While Obergefell certain makes it a stronger case, I think we will need to see more from the other branches of government before we get to that level. That being said, I agree with the Sun article in the thought that even if we aren't there now, I think we may be within my lifetime.
I do think that it is important to point out that Bob Jones University specifically talked about racial discrimination in education as being the fundamental public policy at issue and that the case involved the tax-exempt status of a university, not a church. Note that this article only talks about colleges and universities - the question of the tax-exempt status of churches is much more complicated. I don't believe there there is a case that we know of that where a church lost its tax-exempt status on the basis of religious discrimination. Can any of my Tax Prof or Nonprofit Prof Blog colleagues think of any example?
Thursday, June 25, 2015
The Supreme Court has issued its opinion in King v. Burwell today. In a majority opinion authored by Chief Justice John Roberts (and joined by Justices Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan), the Court interpreted the Affordable Care Act (ACA) to provide tax credits to those who enroll in an insurance plan through a federal exchange in a state that has not established its own exchange. The decision is of interest to the nonprofit health care sector for obvious reasons. The decision is also of interest to legal scholars because of its non-reliance on the interpretation of the ACA offered by the Internal Revenue Service, the agency charged with administering the tax credit, and its emphasis on purpose and context as tools of statutory interpretation. The remainder of this post discusses the opinion in more detail.
The Supreme Court majority opinion describes the precise issue as follows:
The issue in this case is whether the Act’s tax credits are available in States that have a Federal Exchange rather than a State Exchange. The Act initially provides that tax credits “shall be allowed” for any “applicable taxpayer.” 26 U. S. C. §36B(a). The Act then provides that the amount of the tax credit depends in part on whether the taxpayer has enrolled in an insurance plan through “an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act [hereinafter 42 U. S. C. §18031].” 26 U. S. C. §§36B(b)–(c) (emphasis added).
The IRS addressed the availability of tax credits by promulgating a rule that made them available on both State and Federal Exchanges. 77 Fed. Reg. 30378 (2012). As relevant here, the IRS Rule provides that a taxpayer is eligible for a tax credit if he enrolled in an insurance plan through “an Exchange,” 26 CFR §1.36B–2 (2013), which is defined as “an Exchange serving the individual market . . . regardless of whether the Exchange is established and operated by a State . . . or by HHS,” 45 CFR §155.20 (2014).
The plaintiffs in the case, residents of a state (Virginia) that did not establish its own exchange, did not want health insurance. They argued that the federal exchange operating in Virginia failed to qualify under the ACA as “an Exchange established by the State,” and therefore they were entitled to no tax credit for the purchase of insurance. Without the credits, now provided by Section 36B of the Internal Revenue Code, the plaintiffs’ cost of insurance would exceed eight percent of their income, and thus the ACA would exempt them from the ACA’s general mandatory coverage. Under the IRS’s interpretation of the ACA, however, the exchange operating in Virginia was a state exchange under the ACA, and thus the plaintiffs qualified for the credit and were not exempt from mandatory coverage. As the Court observed, “[t]he IRS Rule therefore requires petitioners to either buy health insurance they do not want, or make a payment to the IRS.”
The Court first declined to defer to the IRS’s interpretation of the statute. I reproduce the key language in full:
When analyzing an agency’s interpretation of a statute, we often apply the two-step framework announced in Chevron, 467 U. S. 837. Under that framework, we ask whether the statute is ambiguous and, if so, whether the agency’s interpretation is reasonable. Id., at 842–843. This approach “is premised on the theory that a statute’s ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps.” FDA v. Brown & Williamson Tobacco Corp., 529 U. S. 120, 159 (2000). “In extraordinary cases, however, there may be reason to hesitate before concluding that Congress has intended such an implicit delegation.” Ibid.
This is one of those cases. The tax credits are among the Act’s key reforms, involving billions of dollars in spending each year and affecting the price of health insurance for millions of people. Whether those credits are available on Federal Exchanges is thus a question of deep “economic and political significance” that is central to this statutory scheme; had Congress wished to assign that question to an agency, it surely would have done so expressly. Utility Air Regulatory Group v. EPA, 573 U. S. ___, ___ (2014) (slip op., at 19) (quoting Brown & Williamson, 529 U. S., at 160). It is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort. See Gonzales v. Oregon, 546 U. S. 243, 266–267 (2006). This is not a case for the IRS.
It is instead our task to determine the correct reading of Section 36B.
The Court then found that the phrase, “an Exchange established by the State under [42 U. S. C. §18031],” is ambiguous. Consequently, the Court concluded that it “must turn to the broader structure of the Act to determine the meaning of Section 36B.” The Court rejected the plaintiffs’ statutory interpretation “because it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid.” The Court further opined that the structure of Code section 36B supported its interpretation, for under the contrary view, “Congress made the viability of the entire Affordable Care Act turn on the ultimate ancillary provision: a sub-sub-sub section of the Tax Code.” The concluding substantive paragraph of the majority opinion summarizes the decision as follows:
Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter. Section 36B can fairly be read consistent with what we see as Congress’s plan, and that is the reading we adopt.