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.
Tuesday, June 9, 2015
You may have been following the FOIA lawsuit by Public.Resource.org, (a Section 501(c)(3) organization headed by Carl Malamud that is dedicated to open government) against the IRS. Public.Resource.org filed a FOIA request for information on the Sheet Metal and Air Conditional National Association (SMACNA) and its affiliated entities (the original complaint is here), but demanded that the IRS turn over the information in electronic format (not paper copy). The IRS resisted, arguing that it was administratively burdensome and that the paper copies were sufficient. In January of this year, however, the District Court ordered the IRS to turn over the electronic files of the requested Forms 990 within sixty days.
Sixty days came and went. Appeals happened. According to The Chronicle of Philanthropy, however, it looks like the IRS apparently finally released the SMACNA documents this week (the documents are here). Of greater interest (not that sheet metal isn’t interesting, … I guess… ) is the article’s report that the IRS is dropping its appeal. Given that Malamud wants the IRS to create a fully searchable database of all electronically filed Forms 990, I wonder what comes next? Will the IRS voluntarily comply with electronic file FOIA requests? In the process of responding to this law suit, did the IRS set up a procedure that could be replicated easily? Are they going the full database route – according to the article, it appears that discussions are underway. In the grand scheme of things, such a database would be very useful, but so would a great number of things administratively at the IRS. After all, the IRS has so many spare folks sitting around with nothing to do…
As an aside, I wondered why the sheet metal folks drew the ire of Public.Resource.org – the backstory appears to be that Public.Resource.org investigated and sued the SMACNA with regard to the association’s efforts to have its standards incorporated into state and local safety codes.
Monday, May 25, 2015
Earlier this month, we covered the 9th Circuit decision that denied the Center for Competitive Politics (CCP) an injunction that would have restricted California Attorney General Kamala Harris from requiring a list of donors who had contributed more than $5,000 in a year. See Lloyd Mayer's post.
Under current California law, nonprofit groups seeking donations from California are required to disclose donor names to the AG and to the IRS. The CCP and America for Prosperity have refused to surrender these lists asserting that their donors would be harassed. Harris has indicated that the lists would be kept confidential and used only for investigatory purposes.
As an update, the Supreme Court has denied an emergency appeal from the CCP. The CCP filed the appeal with Justice Kennedy, who denied it without prejudice. David Keating, President of the CCP, has stated that the center will continue injunction efforts in the event Harris attempts to collect donor information. Interesting, Justice Kennedy is a proponent of free speech and free spending in terms of politics, two aims the CCP promotes; however, he is also in favor of disclosure laws. This case raises important First Amendment questions for the sector. See LA Times.
Wednesday, May 13, 2015
The oral argument before the Supreme Court in Obergefell v. Hodges (the same-sex marriage case) included the following exchange between Justice Alito and Solicitor General Verrilli (on page 38 of the transcript):
JUSTICE ALITO: Well, in the Bob Jones [University v. United States, 461 U.S. 574 (1983)] case, the Court held that a college was not entitled to tax-exempt status if it opposed interracial marriage or interracial dating. So would the same apply to a university or college if it opposed same-sex marriage?
GENERAL VERRILLI: You know, I -- I don't think I can answer that question without knowing more specifics, but it's certainly going to be an issue. I -- I don't deny that. I don't deny that, Justice Alito. It is -- it is going to be an issue.
The possibility that the contrary to fundamental public policy limitation found by the Court in Bob Jones to be included in Internal Revenue Code section 501(c)(3) might prohibit 501(c)(3) organizations from engaging in discrimination based on sexual orientation had been raised before this argument, including by fellow blogger Nicholas Mikay (Creighton) in a 2007 article (where he concluded a statutory amendment prohibiting discrimination would provide a stronger legal basis for such a prohibition). This exchange highlights the fact that how the Supreme Court decides the same-sex marriage case could have strong ripple effects for tax-exempt organizations, even though the IRS has for more than 30 years been reluctant to apply Bob Jones beyond the context of racial discrimination and even though any supporters of LGBT rights will have difficulty establishing their standing to force the IRS' hand in this area.
In another court in DC, the government found itself on the defensive as a three-judge panel expressed shock that the Justice Department would even assert that the IRS' treatment of applications for recognition of exemption under section 501(c)(3) during the 270 days before such applicants gained the right to go to court (assuming no substantive interaction with the IRS during that period) could somehow escape scrutiny under the Constitution. During oral argument (large MP3 file) before the U.S. Court of Appeals for the D.C. Circuit in case involving the application of Z Street, judges repeatedly expressed skepticism that somehow the application process was shielded from constitutional requirements, including First Amendment concerns. Additional coverage: Wall Street Journal (opinion); see also previous blog post.
Finally, the U.S. Court of Appeals for the Sixth Circuit recently upheld a preliminary injunction barring the enforcement of a local ordinance that banned outdoor, unattended donation bins. The court found that plaintiff Planet Aid (a 501(c)(3) organization) had demonstrated a strong likelihood of success on the merits of its constitutional claim under the First Amendment, finding that the ordinance was a content-based regulation of speech because it only applied to outdoor receptacles with an express message relating to charitable solicitation and giving. As such, it is subject to strict scrutiny, and the court concluded that the ordinance likely would not survive such scrutiny given the weak relationship between the ban and the city's interest in aesthetics and preventing blight and the availability of other, lesser content-neutral restrictions that could further the same interest.
Earlier this month the U.S. Court of Appeals for the Ninth Circuit upheld a lower court's denial of a preliminary injunction against the California Attorney General. The injunction would have prevented the AG from requiring the section 501(c)(3) Center for Competitive Politics (CCP) to provide an unredacted copy of its Schedule B to IRS Form 990, which schedule identifies significant donors to the group. The AG had required the filing of the schedule as a condition of the group maintaining its registration with the state as a charity eligible to solicit contributions in California.
The court, applying exacting scrutiny, rejected what it characterized as CCP's facial challenge to the disclosure requirement, concluding that CCP had failed to either allege or produce evidence that the disclosure of their identities to the AG would cause these significant donors to "experience threats, harassment, or other potentially chilling conduct." Slip. Op. at 16. While the court noted that the AG planned to keep the donors' identities confidential and so not release them to the public, it also concluded that CCP had failed to provide evidence that even public disclosure would chill the First Amendment activities of its donors, so the potential for the AG to change her policy in this regard did not salvage CCP's claim. Slip Op. at 18 n.9. Finally, the court concluded that the Internal Revenue Code section 6104, to the extent it governs the ability of the Treasury Department to make information regarding tax-exempt organizations available to state officials, did not preempt the AG's disclosure requirement.
The decision has ramifications for both the pending lawsuit by the Americans for Prosperity Foundation (APF) challenging the same requirement and for the authority of AGs more generally to demand unredacted copies of Schedule B and other donor information. APF was initially more successful than CCP in its lawsuit, obtaining a preliminary injunction blocking the application of the requirement to it, but that victory may now be in doubt given this decision relating to CCP. As for other states, the court noted in a footnote the several states that already have similar requirements, and more states may seek to gather this information if this appellate court decision stands.
Additional Coverage: LA Times.
Wednesday, March 18, 2015
501(c)(4) Update: Handful of Applications Still Pending, Do Lost Emails = A Crime?, and (Another) Court Dismisses Claims Against Lerner
IRC Section 501(c)(4) Applications: The IRS reported that as of last month it had closed 138 or 95% of the 145 organizations that had applied for recognition of exemption under section 501(c)(4) and were eligible for optional expedited processing because the only issues their applications raised were possible involvement in political campaign intervention or providing private benefit to a political party. The optional expedited process results in a favorable determination letter if the applicant represents that it devotes (1) 60 percent or more of both spending and time to activities that promote social welfare and (2) 40 percent or less of both spending and time to political campaign intervention. Of the 106 favorable determination letters issued by the IRS, 43 were the result of applicants choosing this process. Nevertheless a handful of such applications are still pending, including the application for Crossroads GPS and also several much smaller "mom-and-pop outfits," according to Politico.
Lost Emails: Politico also reports that in response to questioning from members of Congress a representative of the Treasury Inspector General for Tax Administration told a congressional Committee that TIGTA's ongoing search for IRS emails has revealed "potential criminal activity" in that the IRS failed to initially disclose some backup tapes and that other tapes were erased. The TIGTA representatives emphasized, however, that the investigation was still ongoing and it was too soon to determine if the actions were purposeful or the result of ill intent. A video of the full hearing is available here.
Federal Court Dismisses Claims Against Lerner: In a decision issued late last month, the U.S. District Court for the Northern District of Texas (Dallas Division) dismissed claims brought by Freedom Path, Inc. against Lois Lerner without prejudice for lack of personal jurisdiction. The claims arose out of the IRS's alleged mishandling of Freedom Path's application for recognition of exemption under IRC section 501(c)(4). The court found that the group's allegations did not demonstrate sufficient contacts with the state of Texas to grant the court personal jurisdiction over Lerner. The court also rejected several of the group's claims against the IRS and unnamed federal officials, including claims that challenged the constitutionality of two revenue rulings relating to political activity (2004-6 and 2007-41), finding the group had not pled sufficient facts to establish standing to challenge those rulings, and two other claims (for other deficiencies). The court did, however, give the group 28 days to file an amended complaint although it felt that the defects in some of the dismissed claims appeared to be incurable.
Tuesday, March 17, 2015
Third Circuit Affirms Multi-Million Damage Awards for Breach of Fiduciary Duties and Deepening Insolvency
Earlier this year, the U.S. Court of Appeals for the Third Circuit affirmed (for the most part) a multi-million jury damages award against the former officers and directors of the Lemington Home for the Aged. The Home entered bankruptcy in 2005, and the Bankruptcy Court later that same year granted the request of the Committee of Unsecured Creditors to file suit against the former Chief Executive Officer, the former Chief Financial Officer, and the former directors of the Home. After trial, a jury concluded that the two former officers had breached their duties of both care and loyalty, that the former directors had breached their duty of care, and that all of the defendants had deepened the insolvency of the Home by concealing the board's decision to close the Home and so defrauded the Home's creditors. The court therefore affirmed an award of $2,250,000 in compensatory damages against all but two of the defendants (jointly and severally) and punitive damages against the former CEO and CFO in the amounts of $1 million and #$750,000, respectively, rejecting only the award of $350,000 in punitive damages against five of the former directors.
The appellate court found that facts supporting the jury's verdict include repeated failures to comply with applicable federal and state regulations, the failure of the CEO to work full-time at the Home despite collecting her full salary and a state law requiring that she be full-time, and the failure of the CFO to provide a representative of a major creditor with basic financial information, to keep a general ledger for almost a year, and to bill Medicare for $500,000 owed. The court also found that the directors had failed to remove the CEO and CFO despite being aware of many of their failings, and the Home's failings, in part through independent reports documenting those failings.
This case therefore presents a rare but unfortunately actual case study in how officers and directors can fail to fulfill their fiduciary duties, and the liabilities they can incur as a result.
The City of Mercer Island, a suburb of Seattle, sought to prohibit solicitation activities between 7:00 p.m. and 10:00 a.m. The nonprofit United States Mission Corporation (doing business as United States Mission) objected because it desired to have the participants in its transition program for homeless people solicit contributions on weekday evenings until 8:00 p.m. The dispute eventually made its way to the U.S. District Court for the Western District of Washington, which has now granted a preliminary injunction to United States Mission barring enforcement of the 7:00 p.m. curfew on solicitation. The court concluded that the ordinance as written was content-based because it only reaches individuals or organizations that ask for donations or contributions, but not non-commercial organizations that do not ask for funds, and so is subject to strict scrutiny review under the First Amendment. Given that there were other, less restrictive ways to address the City's concerns regarding possible crime and protecting residential privacy, the court found a substantial likelihood that United States Mission would succeed on the merits and also that the other requirements for granting a preliminary injunction had been met.
The case demonstrates the difficult line that not only states, which presumably have relatively deep legal resources on which to draw, but also localities that may lack ready access to First Amendment legal counsel, have to walk to ensure that their attempts to regulate charitable solicitation efforts do not run afoul of the Constitution. Ironically, the ordinance at issue in the case was a newly-enacted one, adopted to replace an earlier ordinance that had been enjoined since 2001, presumably also on First Amendment grounds. Maybe the third try will be the charm.
Additional coverage: Mercer Island Reporter.
Tuesday, February 3, 2015
In Lain v. Commissioner, T.C. Summary Opinion 2015-5 (Feb. 2, 2015), the United States Tax Court issued a summary opinion allowing partial deductions for medical and dental expenses, charitable contributions, and other expenses claimed by the taxpayers. As to their charitable contributions, the taxpayers claimed a deduction of $8,880, consisting of $5,730 by cash or check and $3,150 worth of clothing.
At trial, one of the taxpayer’s submitted a canceled check for $95 made payable to a local church, and he testified that he and his wife weekly donated $20 in cash to the church. The taxpayers, however, were unable to substantiate many of their expenses because their records were destroyed by water from a pipe that had burst.
Citing several cases, the Tax Court observed the principle that, when a taxpayer’s records suffer destruction on account of circumstances beyond the taxpayer’s control, she may substantiate her claimed expenses through reasonable reconstruction. Two paragraphs of the opinion set forth the Tax Court’s disposition of the claimed charitable contributions deduction:
Petitioners contend that they are entitled to a Schedule A charitable contribution deduction of $8,880. In general, section 170(a) allows a deduction for any charitable contribution by the taxpayer made within the taxable year. Charitable contribution deductions are subject to the recordkeeping requirements of section 1.170A-13(a), Income Tax Regs., for contributions of money, and section 1.170A-13(b), Income Tax Regs, for contributions of property other than money. Where the contribution is $250 or more, section 170(f)(8) requires the taxpayer to substantiate the claimed contribution with a written contemporaneous acknowledgment from the donee organization. If a taxpayer makes a charitable contribution of property other than money in excess of $500, the taxpayer must maintain written records showing the manner of acquisition of the property and the approximate date of acquisition. See sec. 1.170A-13(b)(3), Income Tax Regs.
At trial Mr. Lain submitted a canceled check for $95 payable to St. Timothy Catholic Church. In addition, he credibly testified that he placed $20 in cash “into the plate” when attending weekly church services. Mr. Lain also credibly testified that petitioners made some donations of property to qualified charitable organizations. On the basis of petitioners’ documentary evidence and Mr. Lain’s credible testimony, we find that petitioners contributed at least $1,095 in money (check and cash) to St. Timothy Catholic Church and at least $200 in property other than money to qualified charitable organizations. Consequently, we hold that petitioners are entitled to deduct $1,295 for charitable contributions for 2010. [footnote omitted]
I am perplexed by the allowance of a deduction for some of the cash placed in the offering plate. Although the opinion discusses section 170(f)(8) of the Internal Revenue Code (the “Code”), it does not mention Code section 170(f)(17), which provides as follows:
No deduction shall be allowed under subsection (a) for any contribution of a cash, check, or other monetary gift unless the donor maintains as a record of such contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.
This provision was added by the Pension Protection Act of 2006, so it governs the taxpayers’ year in question, notwithstanding that the Treasury regulations cited by the court do not reflect the statutory change. It is possible that the cash donated by the taxpayers was placed in an envelope that identified the taxpayers and allowed the church to authenticate the donations, and that the church sent acknowledgments to the taxpayers that were destroyed by the water leak. But such facts are never stated in the opinion. The facts described in the opinion read as though the taxpayers just placed cash directly in the plate. No deduction is available in such a case.
Of course, under Code section 7463(b), this summary opinion cannot be cited as precedent.
Monday, January 19, 2015
In the wake of U.S. Court of Appeals for the Seventh Circuit dismissing on standing grounds a lawsuit challenging the minister housing allowance available under IRC section 107, the U.S. District for the Western District of Wisconsin revisited its 2013 decision finding standing to challenge the church exemption from having to file annual information returns (Form 990) with the IRS. Following the Seventh Circuit's lead, the District Court concluded that the plaintiffs in the Form 990 case (one of which, the Freedom from Religion Foundation, is common to both cases) lacked standing because they had never sought and been denied an exemption from having to file Form 990 for themselves (as opposed to objecting to other organizations emjoying an exemption). Indeed, the District Court noted that the plaintiffs stated in their complaint that they intended to continue to file the Form 990 and did not seek to amend their complaint in this regard even afer the defendant identified this issue in its motion to dismiss.
Therefore while it appears the Seventh Circuit left open a way for plaintiffs to obtain standing in this case and similar cases - claim the exemption or tax benefit that churches enjoy and then file suit if and when the IRS denies that claim - it is not clear that at least the plaintiffs in this case are willing to make such a claim. This path appears to still be available for others with similar concerns about the provision of such exemptions and benefits to churches to the exclusion of other types of nonprofits, however.
Saturday, November 29, 2014
Update on Nonprofits & Politics: Aprill and Colinvaux Articles, AALS Program, IRS Controversy Developments & More
While perhaps the congressional attention to the now 18 months old and counting IRS controversy will decline as the focus shifts to governing (we hope) and 2016 (unavoidably), the bubbling pot that is now nonprofits and politics continues to boil. Here are some of the latest developments:
Ellen Aprill (Loyola-L.A.) has posted The Latest Installment of the Section 501(c)(4) Saga: The Section 527 Obstacle to Effective Section 501(c)(4) Regulations, and Roger Colinvaux (Catholic) has posted Political Activity Limits and Tax Exemption: A Gordian's Knot, Virginia Tax Review (forthcoming). (And, as noted by Paul Caron when I presented at Loyola-L.A., I am working on a draft article currently titled Taxing Politics, which I should hopefully be able to post early in the new year.)
At the 2015 AALS Annual Meeting, the Section on Nonprofit and Philanthropy Law and the Section on Taxation are co-sponsoring IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable? on Saturday, January 3rd, from 10:30 a.m. to 12:15 p.m. The topic grew out of the IRS controversy, although the panel's scope will be much broader. Marcus Owens (Caplin & Drysdale) will be moderating, and panelists include Ellen Aprill (Loyola-LA), Phil Hackney (LSU), Jim Fishman (Pace), Terri Helge (Texas A&M), Dan Tokaji (Ohio State), and Donald Tobin (Maryland).
In news relating directly to the IRS controversy, the staffs of the Senate Permanent Subcommittee on Investigations issued dueling reports, neither of which said much more than we have already heard (repeatedly) from both sides of the aisle. At the IRS, new TE/GE Commissioner Sunita Lough issued her annual Program Letter, emphasizing accountability and transparency as she continues to try to move the division beyond the controversy (referenced obliquely as "the challenges over the last year for the IRS and TE/GE specifically"). And to the annoyance of her critics, Lois Lerner gave an extensive interview to Politico.
And there is more:
- Pulpit Freedom Sunday 2014 launched on October 5th, to very limited media coverage, although there were a few stories right around election day about the over 1600 participating pastors and churches. See the stories in Politico, a Washington Post blog, and the Washington Times.
- On the election law/FEC side of things, there are lawsuits still pending that asset Crossroads GPS (Public Citzen v. FEC) and American Action Network and Americans for Job Security (CREW v. FEC) should have registered and reported as political commitees. (Hat tip: Paul Barton's article this past week in the BNA Daily Tax Report)
Monday, November 24, 2014
Earlier this month the U.S. Court of Appeals for the Seventh Circuit issued an opinion in Freedom from Religion Foundation v. Lew, the Foundation's constitutional challenge to the ministerial housing allowance exclusion from gross income provided by Internal Revenue Code section 107. A lower court had struck down the allowance, but the appellate court concluded the foundation and its two co-presidents lacked standing to pursue the challenge. In doing so, however, the court may have provided a road map for a future challenge to this provision.
The appellate court based its conclusion that the plaintiffs lacked standing on the simple fact that they had never been denied the allowance because they had never applied for it. While the plaintiffs argued it was enough that they were similarly situated to ministers who enjoyed this tax benefit except for the fact that they are not "ministers of the gospel" as that term is used in section 107 and also that applying for the benefit would be futile, the appellate court disagreed that these allegations were enough to demonstrate the particularized injury required for standing purposes. The solution of course is obvious - the plaintiffs should now seek to claim the exclusion provided by section 107. But the government's response is equally obvious, if the government does not want to litigate this case - choose not challenge their claim. The latter tactic could, however, open the door for all section 501(c)(3) nonprofits to seek to provide tax-free housing for their senior staff, a situation that likely the IRS (and Congress) would not tolerate if done a large scale. So the ministerial housing allowance challenge is likely only delayed, not eliminated, at least based on the Seventh Circuit's standing reasoning.
Monday, November 17, 2014
In an Associated Press story, the Tulsa World reports that the United States Court of Appeals for the District of Columbia Circuit has rejected a challenge by religious groups, including Priests For Life and the Roman Catholic Archbishop of Washington, to an accommodation devised by the Obama administration to enable the groups to avoid paying for contraception under the Affordable Care Act. The court concluded that the accommodation does not impose an unjustified substantial burden on religious exercise in violation of the Religious Freedom Restoration Act (“RFRA”).
The facts are likely familiar to most readers, and are summarized in the story as follows:
The Affordable Care Act requires that women covered by group health plans be able to acquire Food and Drug Administration-approved contraceptive methods at no additional cost. In response to an outcry from religious groups, the government devised the accommodation, but the groups continued to oppose the regulations.
To be eligible for the accommodation, a religious organization must certify to its insurance company that it opposes coverage for contraceptives and that it operates as a nonprofit religious organization.
The opinion succinctly captures the plaintiffs’ objection to the accommodation:
The contraceptive coverage opt-out mechanism substantially burdens Plaintiffs’ religious exercise, Plaintiffs contend, by failing to extricate them from providing, paying for, or facilitating access to contraception. In particular, they assert that the notice they submit in requesting accommodation is a “trigger” that activates substitute coverage, and that the government will “hijack” their health plans and use them as “conduits” for providing contraceptive coverage to their employees and students. Plaintiffs dispute that the government has any compelling interest in obliging them to give notice of their wish to take advantage of the accommodation. And they argue that the government has failed to show that the notice requirement is the least restrictive means of serving any such interest.
The court rejected the plaintiffs’ RFRA claim. Said the court:
We conclude that the challenged regulations do not impose a substantial burden on Plaintiffs’ religious exercise under RFRA. All plaintiffs must do to opt out is express what they believe and seek what they want via a letter or two-page form. That bit of paperwork is more straightforward and minimal than many that are staples of nonprofit organizations’ compliance with law in the modern administrative state. Religious nonprofits that opt out are excused from playing any role in the provision of contraceptive services, and they remain free to condemn contraception in the clearest terms. The ACA shifts to health insurers and administrators the obligation to pay for and provide contraceptive coverage for insured persons who would otherwise lose it as a result of the religious accommodation.
The court further concluded that, even if the law were deemed to substantially burden the plaintiffs’ exercise of religion, the regulation is supported by compelling governmental interests, and the accommodation “requires as little as it can from the objectors” while still serving those interests.
In the AP story, the Archdiocese of Washington is quoted as characterizing the decision as "very troubling and deeply flawed."
Monday, September 22, 2014
Puzzler: Respecting and Valuing an Interest in a Disregarded SMLLC for Charitable Deduction Purposes?
I thank Professor Cassady Brewer of Georgia State University College of Law for bringing this interesting case to our attention. Please read on...
In RERI Holdings I, LLC v. Comm’r, 143 T.C. No. 3 (2014), the Tax Court determined that a disregarded, single-member LLC interest should not be ignored for purposes of determining whether a taxpayer is entitled to a charitable contribution deduction. This decision has not received much attention, but it potentially has significant implications for charities and donors.
The taxpayer in RERI Holdings I, LLC contributed an interest in a disregarded SMLLC holding real property to the University of Michigan. The taxpayer claimed a charitable deduction of approximately $33 million in connection with the donation of the SMLLC interest. As required for tax purposes, the taxpayer obtained an appraisal substantiating the amount of its claimed deduction; however, the taxpayer’s appraisal was of the underlying real property held by the disregarded SMLLC, not the membership interest in the SMLLC itself. Because the interest in the SMLLC, not the underlying real property, was donated to the University of Michigan, the IRS argued in a motion for summary judgment that the taxpayer’s charitable deduction should be disallowed. In particular, the IRS argued that the deduction must be disallowed because the appraisal was of the wrong property and therefore failed the “qualified appraisal” requirements for charitable contributions of property.
Without much fanfare, Judge Halpern accepted the argument of the IRS that a charitable contribution of an interest in a disregarded SMLLC should be viewed differently than a charitable contribution of the underlying asset. Judge Halpern so held notwithstanding the fact that the SMLLC is otherwise ignored for federal income tax purposes. Judge Halpern’s opinion relies heavily on the Tax Court’s earlier decision in Pierre v. Comm’r, 133 T.C. 24 (2009), supplemented by 99 T.C.M. (CCH) 1436 (2010), that, for gift tax valuation purposes, a taxpayer’s gifts of membership interests in the taxpayer’s SMLLC are distinct from gifts of partial interests in the underlying property. Pierre arguably is distinguishable, though, from RERI Holdings I, LLC, because (i) Pierre is a gift (not income) tax case and (ii) the gifts in Pierre transformed the SMLLC into a multi-member LLC held by four trusts. This latter point of distinction, though, may not be significant as it appears the trusts were grantor trusts such that the taxpayer in Pierre remained the income tax owner of the SMLLC.
Despite the fact, however, that Judge Halpern agreed with the IRS’s view that an interest in a disregarded SMLLC should be respected for charitable contribution deduction purposes, all was not lost for the taxpayer in RERI Holdings I, LLC. Rather, perhaps to avoid so-easily granting summary judgment against the taxpayer and in favor of the IRS, Judge Halpern reasoned that there was an unresolved issue of material fact whether a valuation of the property held by the SMLLC rather than a valuation of the SMLLC interest itself nevertheless could “stand proxy” for the otherwise required qualified appraisal. The ultimate outcome of the case, therefore, remains to be seen.
The lesson for charities and donors: RERI Holdings I, LLC creates uncertainty with regard to the proper treatment of disregarded SMLLC interests for both charitable deduction and substantiation requirements. Given that uncertainty, donors to charitable organizations should transfer the underlying property itself to charity rather than transferring an interest in an SMLLC holding the property. If the property must be wrapped inside a disregarded LLC for liability protection or other reasons, then the donee charity should form the disregarded SMLLC to receive the contribution rather than receiving an interest in the property-holding SMLLC formed by the donor. Otherwise, due to the quirky way in which SMLLC membership interests apparently are valued for federal tax purposes, the donor inadvertently may be reducing the amount of his or her expected charitable contribution deduction. On the other hand, for estate and gift tax purposes, a donor presumably would rather transfer a membership interest in a disregarded SMLLC to a non-charitable donee in order to minimize the value of the transfer and thereby reducing potential estate and gift taxes.
My thanks again to Professor Brewer.
Tuesday, August 19, 2014
The Washington Post reports that D.C. Superior Court Judge Robert Okun has approved the proposal of the Trustees of the Corcoran Gallery of Art to transfer its college to George Washington University and the bulk of its art collection to the National Gallery of Art. The Corcoran Gallery is reported to be the oldest private art museum in the nation’s capital. The proposal was the focus of a cy pres proceeding, necessitated because of the severe financial difficulties facing the nonprofit.
As discussed in Judge Okun’s opinion granting the trustee’s petition, the trustees of the Corcoran Gallery argued that continuing its operations as a stand-alone charity was impossible or impracticable. Borrowing from contracts law, the court agreed that the continued operation of the gallery by itself was "impracticable." Of special interest is the Court’s interpretation of “impracticability” under the doctrine of cy pres:
The Court’s review of the cases discussed above leads to the conclusion that a party fails to establish impracticability in the cy pres context if it merely demonstrates that it would be inconvenient or difficult for the party to carry out the current terms and conditions of the trust. Rather, a party seeking cy pres relief can establish impracticability only if it demonstrates that it would be unreasonably difficult, and that it is not viable or feasible, to carry out the current terms and conditions of the trust.
For those interested in a brief history of major events surrounding the formation and operation of the Corcoran Gallery, see A Corcoran Gallery of Art Timeline, also published in the Washington Post.
Thursday, August 7, 2014
In an opinion remarkable only because it is so thoroughly boring, the 7th Circuit recently held that ABA Retirement Funds, an Illinois not-for-profit corporation, did not meet the requirements for exemption from tax under IRC 501(c)(6). ABA Retirement Funds v. USA. Actually, the opinion is boring because the claim to exemption is so obviously ridiculous. How anybody could have claimed tax exempt status for what amounts to an attorney retirment fund management company is beyond me, but ABARF did and spent a lot of money insisting that they be granted that exemption too. The district court opinion is much more instructive and includes a helpful note on the integral part doctrine. The 7th Circuit pretty much refers us to that opinion and then discusses one or two aspects of the case as though writing a concurrence to the lower court. Here is what seems like a pretty bright line test for business leagues, according to the district court:
Parsing this text, the regulation [1.501(c)(6)-1] requires that an organization meet the following criteria to constitute a "business league":
It is an organization:(1) of persons having a common business interest;
(2) whose purpose is to promote the common business interest;
(3) not organized for profit;
(4) that does not engage in a regular business of a kind ordinarily conducted for profit;
(5) whose activities are directed to the improvement of business conditions at one or more lines of a business as distinguished from the performance of particular services for individual persons; and
(6) of the same general class as a chamber of commerce or a board of trade. The regulation also states that if an organization is "engaged in furnishing information to prospective investors to enable them to make sound investments," its purpose is not "to promote [a] common business purpose" and therefore it does not constitute a business league.
All ABARF did, on the other hand, was sell stuff exclusively to attorneys. It would be as if the Ford dealer down the street insisted that it was a univesity because it sold cars only to universities.
There is one other instructive highlight, though. The District Court opinion rejects ABARF's belated insistence that the integral part doctrine entitles it to exemption because ABA could have sold and managed retirement plans without losing its tax exempt status. ABARF arguement that the ABA could have maintained the retirement management without losing its tax exemption, implyies that the integral part doctrine allows a back door way of achieving tax exemption for what would have been an unrelated business -- albeit one insubstantial enough not to jeopardize the parent's tax exempt status. The district court correctly rejected this attempted slight of hand by noting that an unrelated business is, by definition, not "integral" to a parent's tax exempt status (duh!). An integral activity, on the other hand -- e.g., providing laundry services to a single exempt hospital parent -- can be dropped into that hospital's subsidiary, and that sub be exempt under the integral part doctrine.
Friday, June 20, 2014
As reported by The Chronicle of Philanthropy, Public.Resource.Org ("PRO") filed a lawsuit seeks to compel the IRS to release Forms 990 in a format that can be read and, thus, searchable by computers. The IRS practice to date is to convert all filed 990s into images, which renders the content therein incapable of being searched. Organizations that provide access to exempt organizations' 990s, like GuideStar and Charity Navigator, must manually enter the data in order to make it accessible to the public. PRO seeks to end the IRS practice that makes such forms effectively useless to organizations wishing to search the filed returns for specific data or information. The IRS argues that current open-records laws do not require it to utilize any particular format in making the information public.
According to The Chronicle, on Wednesday, June 18, 2014, Judge William Orrick (U.S. District Court for Northern District of CA) "tentatively" denied the IRS's motion to dismiss the lawsuit, thus allowing the lawsuit to proceed.
Tuesday, June 10, 2014
What are the many implications for continued tax exemption for the NCAA arising from the current anti-trust and licensing litigation? I don't really know yet but I have on my "to-do" list the task of reading the 157 page complaint. PBS's Frontline has an online source from which readers can learn all there is to know so far regarding the litigation.
I would really have loved to be sitting in the courtroom for however long it takes to listen in on the testimony and arguments. My initial hunches concerning the implications for 501(c)(3) status range from questions regarding whether the NCAA's has a substantial non-exempt purpose to whether paying players for the use of their likenesses implicates the prohibitions on private inurement, excess benefit and/or private benefit. The only problem though with logically thinking about the implications is that tax exemption for the NCAA is so terribly unprincipled in the sense that everyone knows the whole thing is built on a fictional house of cards. That was proven -- if proof was ever really needed anymore -- when the Service dared to suggest that advertising revenue from things such as the "Frito Lay" Fiesta bowl ought to be taxable. And did you know that Nick Saban is now something like the sixth or seventh highest paid head coach in all of televised football, college and pro? He is making about $7 million a year and well worth it he is, considering the largess he helps bring to 'Bama. A lot of other college head coaches make or will make close to the same, I imagine. And yet the University of Alabama and the NCAA keep on running completely tax exempt with nary a batted eyebrow. "Run Forest run!"
Thursday, May 29, 2014
In American Atheists v. Shulman, the U.S. District Court for the Eastern Division of Kentucky rejected three atheist organizations' contentions that the IRS unconstitutionally discriminates against non-religious tax-exempt organizations. Specifically, the Atheists alleged that the IRS’s differing treatment of churches as opposed to other tax-exempt organiations was unconstitutionally. Specifically, the Atheists requested that the Court issue a judgment “[d]eclaring that all Tax Code provisions treating religious organizations and churches differently than other 501(c)(3) entities are unconstitutional violations" of the Equal Protection laws of the Fifth Amendment, the First Amendment and the Religious Test Clause of Article VI, §3 of the Constitution. The Atheists claimed "upon information and belief a number of atheist organizations have tried to obtain IRS classification as religious organizations or churches under §501(c)(3) or to otherwise obtain equal treatment,” and “most of those applications and attempts were rejected by the IRS." However, the Court found that the Atheists admitted in pleadings that they themselves had never sought recognition as a religious organization or church under §501(c)(3). The Atheists responded that they have not applied for exemption as a religious organization or a church because seeking such a classification would "violate their sincerely held belief."
Nevertheless, the Court found that the Atheists lacked the necessary standing to bring the suit, in part because they could have applied for religious designation. The Court concluded that the Atheists failed to establish any injury-in-fact and their assertion that they would fail to qualify as a church or religious organization was "mere speculation." To the contrary, stated the Court, "[a] review of case law establishes that the words ‘church,’ ‘religious organization,’ and ‘minister,’ do not necessarily require a theistic or deity-centered meaning."
Over 2 years ago, we blogged about a unique lawsuit being filed by Z Street, a pro-Israel nonprofit corporation, against the IRS. Specifically, Z Street alleged that the IRS's "Israel Special Policy” utilized in reviewing the organization's application for Section 501(c)(3) status violated the organization's First Amendment rights in that the IRS policy constituted viewpoint discrimination. Z Street requested an injunction compelling the IRS to disclose the policy and its parameters and usage, and to refrain from such use in evaluating the organization's exemption application.
In a May 27 decision, the U.S. District Court for the District of Columbia denied the IRS's motion to dismiss the organization's complaint on all 3 grounds. The IRS presented three legal arguments that the Court lacked subject-matter jurisdiction over the organization's constitutional claim. First, the IRS argued that the Anti-Injunction Act (“AIA”), 26 U.S.C. § 7421 (2013), precluded the Court from exercising jurisdiction. Second, it asserted that the Court could not grant the relief sought by the organization under the Declaratory Judgment Act (“DJA”), 28 U.S.C. § 2201 (2013). Finally, the IRS argued that Z Street's complaint was barred by the doctrine of sovereign immunity. In addition, the IRS asserted that Z Street failed to state a claim upon which relief can be granted because the organization has an adequate remedy at law (namely, 26 U.S.C. §7428), thereby foreclosing the equitable relief that it sought. Because the Court rejected the IRS's "core contention" that Z Street sought a determination on its eligibility for Section 501(c)(3) tax-exempt status, the Court rejected the IRS's assertions that the AIA, the DJA, or sovereign immunity barred the organization's request for equitable relief and that Z Street had an adequate remedy at law.
With respect to the remedies sought by Z Street, Judge Ketanji Brown specifically acknowledged:
In this regard, looking at the requested remedy as the D.C. Circuit requires, Z Street’s complaint requests only two things: (1) a declaration that the Israel Special Policy violates the First Amendment, and (2) an injunction that requires disclosure of information regarding the Israel Special Policy, bars the IRS from subjecting Z Street’s application for Section 501(c)(3) status to the Israel Special Policy, and that mandates that Z Street’s application be adjudicated “fairly” and “expeditiously.”
In the opinion's conclusion, Judge Brown opines:
Defendant [IRS] struggles mightily to transform a lawsuit that clearly challenges the constitutionality of the process that the IRS allegedly employs when it determines the tax-exempt status of certain organizations into a dispute over tax liability as a means of attempting to thwart this action's advancement,” Jackson said. “But the instant complaint, which in no way seeks an assessment of the taxes to be paid or even a determination of the Plaintiff's Section 501(c)(3) status, is not so easily deterred.
(Hat tip: Daily Tax Report)