Saturday, July 19, 2014
Unsurprisingly, the U.S. House passed charitable giving legislation, the “America Gives More Act,” on July 17 by a vote of 277-130. (For a summary of the bill’s contents, see prior blog post.) Broadly, the bill would encourage food donations, transfers from IRAs, conservation easement donations, extend the time to claim charitable deductions to April 15, and reduce the tax on private foundation investment income. According to the Joint Committee on Taxation, the legislation would cost taxpayers $16.2 billion over ten years.
Supporters of the bill (mostly Republicans) emphasized familiar themes. Charitable giving legislation is good because giving helps those in need (see, e.g., Chairman Camp's floor statement, Majority Whip McCarthy's statement) and because giving itself should be encouraged. The bill was also praised as a simplification (Statement of Representative Griffin) (though only one of the five provisions simplifies the Code).
Opponents of the bill (all Democrats, but one), though praiseworthy of charitable giving in general, cited in particular the failure to pay for the tax benefits and the resulting increase in the deficit. (Floor statement of Representative Levin, the White House.) The White House also objected that the giving incentives would benefit high-income taxpayers. One Democrat, Representative Lloyd Doggett, objected on substantive grounds, saying that the incentives for donations of food inventory encouraged donations of items with "no nutritional value, like Twinkies, candy, stale potato chips, and expired foods.” “We do not need a permanent tax break for Twinkies” he said. (Video of Mr. Doggett's commentary on the food proposal here.)
How to assess the legislation? Helping “the needy” certainly is a familiar rationale cited in support of charitable giving legislation. But it bears repeating that “the needy” is but one segment of the 501(c)(3) sector. (Additional commentary on who benefits from the charitable deduction here). Broad-based charitable giving incentives such as extending the filing deadline and encouraging more IRA transfers are not directed toward helping the needy. Thus, if this really is a goal of lawmakers, much more targeted legislation to benefit social safety net organizations would be more appropriate.
Further, it is hard to ignore the absence of offsets. When tax benefits like these are not paid for, the question should be whether the America Gives More Act is the best use of $16.2 billion dollars. It is ironic that about 64 percent of the Act’s cost comes from extending two provisions (the special rule for food donations and the exclusion for IRA distributions) that were allowed to expire in the Tax Reform Act, which undermines the argument that this legislation is an optimal use of tax dollars.
Other provisions have some merit, depending on the goal. Extending the time to claim donations to April 15 may be a cost effective way to get more dollars to 501(c)(3) organizations, assuming the IRS can administer the provision to protect against double deductions.
Streamlining the excise tax on private foundations will likely result in diverting dollars from the U.S. Treasury to foundation grantees – sort of an inter-501(c)(3) sector transfer. This may be desirable, depending on one's judgment about whether foundations or the government spends money more in the public interest. But the provision does not result in new charitable dollars and so is not a giving incentive.
The permanent extension and expansion of the special rules for deductions of conservation easements without any associated reforms is harder to understand, given the many administrative difficulties and abuses associated with this provision of the tax Code. (For commentary, see Halperin, McLaughlin, Colinvaux).
So although there may be merit in the margins to some provisions, as a whole, the case for the legislation without offsets is rather underwhelming. If there were offsets, then at least the trade-offs could be more directly assessed.
In short, although it is obvious that the America Gives More Act is not intended as a tax reform measure but rather reflects legislative business as usual, nonetheless it is disappointing to see more give-aways without much if any consideration of who should pay, and whether the give-aways are really worth it. But without an offset, there is little electoral cost to voting in favor of legislation, especially charitable giving legislation, which is always easy to frame, without much analysis, as helping those in need.
Wednesday, July 16, 2014
The Center for Public Integrity has released an investigative report about the IRS Tea Party targeting scandal, in which the CPI reviewed thousands of pages of documents and interviewed dozens of insiders. The report provides a good high-level overview of the scandal, and makes a few useful findings about the Exempt Organization function within the IRS. To many, the findings may come as no surprise, but bear repeating: over time the IRS has fewer employees to regulate a rapidly growing sector, the already low rate at which the IRS investigates exempt organizations is shrinking, the social welfare category (i.e., the one at the heart of the targeting scandal) is growing, and the IRS is increasingly timid – backing down to political pressure. Unfortunately, none of this makes for an effective overseer of a vital part of civil society.
Although the report is useful, some peripheral statements should be more closely considered if only because a number of misconceptions about the IRS targeting scandal continue inadvertently to be spread. One statement in the report is that “It wasnʼt until the Supreme Courtʼs Citizens United v. Federal Election Commission decision in 2010, however, that politically active nonprofits — social welfare groups as well as 501(c)(5) labor unions and 501(c)(6) trade groups — became a major force in political elections, all while receiving a de facto tax subsidy.” The implication from the “de facto tax subsidy” language is that political activity, when conducted after Citizens United by a noncharitable tax-exempt like a 501(c)(4), (5), or (6), gets an unwarranted subsidy and is abusive. But this is not really right. Political activity by a noncharitable exempt generally is not tax-advantaged relative to the same activity by a political organization (aka a “527”). Rather, political activity by a noncharitable exempt actually triggers a tax that is intended to make the tax treatment of political activity consistent across sections of the tax code. There is no abusive subsidy for political activity here.
Later, the report notes that “Social welfare and other nonprofit groups galloped into the post-Citizens United era with an inherent advantage over overtly political groups: They could hide the source of their funding, regardless of whether those sources were corporations, individuals or other special interests. And they're only required tell the FEC the names of donors who give money to help produce specific ads — something that rarely happens.” This point bears more than passing emphasis. The anonymity offered to donors by noncharitable exempt status, and not a tax subsidy, is the underlying legal issue at the heart of the targeting scandal post-Citizens United. In other words, the targeting scandal is not really about taxes at all, it is about donor disclosure or the lack thereof.
The report says that: “The tea party affair has directed attention away from what many IRS workers say is the much larger problem — regulating the activities of politically charged nonprofits.” and also that the IRS is “supposed to ensure 501(c) nonprofit organizations don't become more political than the law allows.” The broad meaning here is right: the targeting scandal has diverted attention from some real problems with the legal architecture. Also, the IRS does have a legitimate role to play when it comes to political activity and tax exemption. But these statements unintentionally play into another misconception about the IRS’s role when it comes to the political activity of noncharitable exempts and political organizations. In this context, the IRS does not really “regulate” political activity in the sense of deciding whether or not the activity is permitted. Rather, the IRS’s function is to classify organizations based on their purpose as measured by the quantum of their activities. This is an important distinction. The IRS does not regulate speech or activity as such; rather, the IRS, as charged by Congress, assesses organization purposes and activities and applies a tax label ((c)(4), 527, etc.). So political activity is relevant to tax classification, but it is not a question of permitting or prohibiting political activity.
The report also states that “Political ‘527 groups’ are tax exempt like 501(c)(4) groups, but unlike them, they must disclose their donors.” It should be noted that the point about disclosure is correct, but not the point about tax-exemption. Broadly, 527 groups are taxed on their investment income whereas 501(c)(4)s and other noncharitable exempts are not. So the tax treatment is not equivalent. But as noted earlier, if a noncharitable exempt engages in political activity, then a tax is triggered, which is intended to make the organizational tax treatment of political activity broadly uniform across exemption categories.
But none of this undermines the key thrust of the report's message -- that the regulatory environment of the IRS exempt organization function is in crisis and in need of constructive solutions.
Tuesday, July 15, 2014
The House of Representatives this week is likely to take up charitable giving legislation. Last week, the Rules Committee reported out H.R. 4619, which modifies and expands on a charitable giving bill of the same number marked up by the Ways and Means Committee on May 29. Committee Report here.
Renamed the “America Gives More Act of 2014,” H.R. 4619 combines several separate charitable giving measures. The charitable giving incentives of H.R. 4619 now are:
- Food Donations. Make the special enhanced deduction for charitable contributions of food inventory permanent and modify this enhanced deduction to: increase the percentage limitation from ten to fifteen percent for business taxpayers, provide for a special deemed basis rule for certain taxpayers, and permit fair market value of donated food to be determined disregarding the fact that there may not be a market for the food, among other special valuation rules. (This provision applies retroactively to restore this expired deduction.)
- IRA Distributions to Charity. Make permanent the exclusion for distributions from individual retirement arrangements to certain public charities. (This provision applies retroactively to restore this expired exclusion.)
- Conservation Easements. Make permanent the special percentage limitations and carryforwards for charitable donations of conservation easements, and extend such favorable treatment to contributions by certain Native Corporations, as defined under the Alaska Native Claims Settlement Act. (This provision applies retroactively to restore this expired deduction.)
- Extend Time to Claim. Generally allow taxpayers until the tax-filing deadline (April 15) to claim charitable deductions for the tax year.
- Reduce Foundation Excise Tax on Investment Income. Replace the two rates of tax on the investment income of private foundations with a single flat rate of one percent.
These provisions are broadly consistent with provisions in the “Tax Reform Act of 2014,” a discussion draft released by Ways and Means Committee Chairman Dave Camp in February, with some notable exceptions. For instance, the Tax Reform Act:
- Eliminates the special enhanced deduction for food inventory rather than retaining and expanding it.
- Does not include the IRA distribution exclusion, i.e., allows it to expire.
- Does not expand the special rules for donations of conservation easements to new donor categories, and provides for a modest reform that no deduction is allowed for easements relating to golf courses, a proposal also advocated by the Treasury Department (page 95).
Whether the differences between H.R. 4619 and the Tax Reform Act reflect a change in position (and a move away from reform) or reflect the fact that H.R. 4619 is not primarily a tax reform measure remain to be seen.
Saturday, July 5, 2014
There has been an enormous amount of academic, other commentator, and media coverage of the Supreme Court's recent decision in Burwell v. Hobby Lobby Stores. Included in the discussion has been much speculation about how the decision, involving a closely-held, family-owned, for-profit corporation, impacts ongoing litigation involving religious nonprofit corporations challenging whether the limited accommodation provided for them under the same rule (requiring coverage of contraceptive services) is sufficient under the federal Religious Freedom Restoration Act. Language in the majority opinion (slip op. p. 44) and in Justice Kennedy's concurring opinion (slip op. p. 3) seems to suggest although not hold that it is, but on Thursday the Court issued an injunction barring the federal government from requiring Wheaton College to use the form prescribed by the government to implement the accommodation, pending resolution of the College's appeal. The order generated a strong dissent from Justice Sotomayor (joined by Justice Ginsburg and Justice Kagan), who concluded the College had not stated a viable claim under RFRA. The dissent is unusual, especially given that the order on its face makes it clear that it "should not be construed as an expression of the Court's views on the merits."
My understanding of what is going on here is as follows. First, many religious nonprofits (my employer, the University of Notre Dame, included) are not flatly exempted from the requirement to cover contraceptive services. The existing flat exemption is limited to churches and, using terms familiar to nonprofit scholars and practiti0ners and indeed defined by reference to Internal Revenue Code § 6033, conventions or associations of churches, integrated auxiliaries of churches, and the exclusively religious activities of any religious order. Other religious nonprofits instead are accommodated by being given the opportunity to complete the above-mentioned form stating their objection to providing some or all of the required coverage. The effect of this form differs depending on whether the nonprofit otherwise would provide such coverage through a third-party insurer or through a third-party administrator because the nonprofit is self-insured.
The University of Notre Dame provides a good example of both of these situations and how they differ, particularly from the perspective of the nonprofit (and indeed Notre Dame is challenging the sufficiency of the accommodation in court). These facts are drawn from the Seventh Circuit's recent opinion adverse to Notre Dame, although it should be noted that many similarly situated religious nonprofits have won similar cases in the lower federal courts (pre-Hobby Lobby). For those students at Notre Dame who need health insurance, Notre Dame has a contract permitting students to purchase such insurance from an insurance company, Aetna. The effect of Notre Dame completing the above form (EBSA Form 700) is to tell Aetna Notre Dame (and its students) will not pay for such coverage, which effectively requires Aetna to do so because under the Affordable Care Act health insurance companies have to provide such coverage. So by completing the form, Notre Dame effectively shifts the cost of such coverage from itself (and its students) to Aetna.
For faculty and staff at Notre Dame who need health insurance, the situation is subtlely different. Notre Dame is self-insured, which means it pays for all covered health insurance (subject to a modest employee up-front contribution and co-pays) although it hires a third-party to administer this coverage (Meritain). The difference here is that Meritian is not a health insurer, so it is not obligated to provide coverage for contraceptive services even if Notre Dame refuses to do so absent an additional legal step. The additional legal step providing by the current accommodation is that Notre Dame's completion of the EBSA Form 700 triggers a new requirement that Meritain provide this coverage, accompanied by a right for Meritain to obtain reimbursement of at least 110 percent of its costs of doing so from the federal government. My understanding is that under Notre Dame's understanding of the theological concept of cooperating with evil, since the effect of Notre Dame completing the form is to trigger a new requirement that Meritain provide contraceptive coverage (albeit ultimatley paid for by the federal government), being required to complete the form is viewed by Notre Dame as a greater burden on its exercise of religion that exists when the coverage is provided by a third-party health insurer (although I assume Notre Dame is continuing to argue that the accommodation in that situation is also not sufficient under RFRA). As the Supreme Court majority noted in the Hobby Lobby decision (slip op. pp. 36-38), whether a particular act is sufficiently connected to the ultimate evil objected to make that act itself morally objectionable is itself a religious belief and so subject only to test of sincerity in the courts (which test I assume Notre Dame would have no trouble passing).
Bottom line, the Hobby Lobby decision does not clearly resolve the cases involving religious nopnrofits that are not flatly exempt from the contraceptives services coverage requirement but instead accommodated as described above. Furthermore, those religious noprofits that provide health coverage through self-insurance as opposed to a through a third-party insurer have a subtely stronger claim that the existing accommodation is not sufficient under RFRA. Whether the lower courts, and ultimatley the Supreme Court, believe this difference is determinative remains to be seen.
Friday, June 20, 2014
In the ongoing controversy involving the IRS EO division and its past director Lois Lerner, new revelations about lost emails (in the thousands) has reignited the wrath of Congress and the public. As reported in The New York Times, IRS informed Congress in a filing to the Senate Finance Committee last Friday that approximately two years of Lerner's emails (both sent and received) were lost in a 2011 computer crash. The IRS Commissioner is scheduled to be grilled by House committees next week on the lost emails. According to the Daily Tax Report, House Republicans notified the IRS Commissioner via a letter that they intend to question IT employees at the IRS about the lost emails.
As reported by The Minority Report (Blog), U.S. Representative Stockman (TX) has written to National Security Angency Director, Admiral Michael S. Rogers, requesting that the Agency "produce all metadata it has collected on all of Ms. Lerner's email accounts for the period between January 2009 and April 2011." Politico.com opined that since Lerner's crashed hard drive has been recycled, it is unlikely the lost emails will ever be found.
A Dallas Morning News editorial published yesterday calls for the Obama Administration to appoint a special counsel to independently investigate the entire IRS controversy, including the lost emails. Clearly, the IRS and its credibility will be continue to be embattled for the foreseeable future.
Thursday, May 29, 2014
As reported in Sunday's The New York Times, a trend among hospitals around the country is to reduce financial assistance to uninsured patients with the intent of forcing such patients to obtain coverage under the Affordable Care Act. The criticism is obvious - uninsured lower- and middle-income citizens without coverage will not take advantage of the ACA due to perceived, and perhaps actual, unaffordability and therefore forgoe health care all together. The push-and-pull for hospitals centers on the ACA's reduction of federal payments to hospitals that treat large number of uninsured patients (again, hoping to force such patients to seek coverage in online marketplaces) and the actual need to provide free or reduced-cost health care to those most in need of it.
The Times article illustrates hospitals' various policies to address this real problem:
In St. Louis, Barnes-Jewish Hospital has started charging co-payments to uninsured patients, no matter how poor they are. The Southern New Hampshire Medical Center in Nashua no longer provides free care for most uninsured patients who are above the federal poverty line — $11,670 for an individual. And in Burlington, Vt., Fletcher Allen Health Care has reduced financial aid for uninsured patients who earn between twice and four times the poverty level.
Continuing charity care for the uninsured, argues some health care providers, defeats the very purpose of the ACA. However, uninsured advocates argue that many uninsureds forgoe coverage under the ACA inaugural enrollment because the plans are expensive, even with government subsidies. Some argue that it is still a matter of message - encouraging people who now have access to coverage under the ACA to take advantage of the opportunity.
The article further states:
Many hospitals appear focused on reducing aid only for patients who earn between 200 percent and 400 percent of the poverty level, or between $23,340 and $46,680 for an individual. Many of those people presumably have jobs and would qualify for subsidized coverage under the new law.
The Times further reported that financial challenges for uninsureds are "particularly daunting" in the states that have not yet expanded their Medicaid programs, which currently totals over 24 states.
An issue not addressed by the Times Article is how these emerging charity care policies, to best comply with and take advantage of the new ACA reimbursement rules, will affect these tax-exempt hospitals' Form 990 Schedule H reporting? Has Congress and the IRS contemplated the changes to charity care numbers in light of the above-referenced ACA rules?
Friday, May 9, 2014
On Wednesday by a vote of 224 to 187 (later updated to 231 to 187 according to press reports) the House of Representatives approved House Report 113-415, which included a resolution that Lois Lerner be found in contempt of Congress "for refusal to comply with a subpoena duly issued by the Committee on Oversight and Government Reform." Relatedly, the House also approved by a vote of 250 to 168 a resolution "[c]alling on Attorney General Eric H. Holder, Jr., to appoint a special counsel to investigate the targeting of conservative nonprofit groups by the Internal Revenue Service." Both votes have the effect of passing the ball to the Department of Justice, as pursuant to 2 U.S.C. § 194 and the House Report the contempt matter will be referred by the Speaker of the House to the U.S. Attorney for the District of Columbia (currently Ronald C. Machen Jr.). While 2 U.S.C. § 194 provides that the U.S. Attorney has a "duty . . . to bring the matter before the grand jury for its action," it is not clear that this duty is absolute, especially where there may be constitutional grounds (i.e., Ms. Lerner's invocation of her Fifth Amendment right against self-incrimination) barring a conviction. The potential penalty for contempt of Congress under 2 U.S.C. § 192 is a fine of not less than $100 nor more than $1,000 and imprisonment of not less than one month and not more than twelve months. There may also be other ways for Congress to pursue Ms. Lerner given this contempt finding, although the House Report does not indicate that Congress will seek to pursue them.
Wednesday, April 16, 2014
Let's face it, any attempt at regulating political activity by grass roots organizations, charitable or otherwise, is bound to fail. Why? Because nobody has ever explained why engaging in political speech is not a public good, less deserving of subsidization than education, poverty relief, or any of the many other activities considered charitable or advantageous to the social welfare. What's wrong with political participation through grass roots organizations? Don't we want more political participation? Of course we do, but somewhere along the way somebody decided, without ever explaining why, that political engagement was neither charitable nor beneficial to the social welfare. And by the way, if the evil to be avoided is "capture" of the political process by those wealthy enough to pay to broadcast their speech to wider audiences, wouldn't subsidizing political speech through deductions, exemptions, credits, (maybe with a dramatic cliff so that those who don't need subsidization don't get it) reduce the advantage of money (even if only slightly)? Why in the world do we assume that one taxpayer should not subsidize another's participation in the political process, when we -- "we" are the government, the government is not "them" -- subsidize all sorts of activities about which there can be no unanimity of opinion. Remember, too, that we would not be subsidizing a particular viewpoint, just the act of participation. Just participation. Seems to me we are wasting an awful lot of time and money trying to stamp out something we don't even think is a bad thing. And that really is why the effort to regulate political speech subsidized by tax exempt dollars will inevitably fail. We don't even know why we think political activity is a bad thing. Something about Lyndon Johnson trying to put a political opponent out of business, right? I doubt anybody even thinks engaging in the political process is a bad thing. I'll even go one step further. Engaging in the political process, even as a staunch lunatic partisan, is probably consistent with most people's conception of "civic duty." So we should do away with the various prohibitions of and limitations on political activity via collectives. Then people can support whatever political cause they want through whatever non-governmental organization they want. I don't necessarily support your position just because I am willing to subsidize (if failing to tax really is a subsidy) your participation in the process. Look, the rich can talk to more people more often whether we limit nonprofits from engaging the political process or not. Limiting grassroots participation by denying tax exempt organizations for groups that do only exacerbates that advamtage.
But I digress. Every [law school] administrator knows that when everybody complains about something you have done, you either have it perfectly right or all wrong. Well, everybody is complaining about the proposed "candidate related activity" regulations. The Service apparently believes the complaints indicate it has the proposed regulations all wrong and apparently is going to start all over again with the effort to stamp out (that is really what we are trying to do, isn't it?) political speech by social welfare organizations. The Washington Post Blog reports:
The head of the Internal Revenue Service this week signaled that his agency will re-write proposed new limits on the political activities of nonprofit advocacy groups, quelling concerns from the left about overreach but failing to win over conservatives. Lawmakers and policy analysts on both sides of the political spectrum have voiced opposition to the draft guidelines, which would prohibit tax-exempt organizations from engaging in certain election-related activities including voter-registration and get-out-the-vote drives. Conservatives have argued that the proposals are part of an Obama administration plot to silence criticism from the right. Liberals have said the plans go too far and need reworking.
"Re-write" as in start all over again. Just one big waste of time and effort unless and until we agree on a fundamental theory explaining the motivations for the exercise in the first place.
Thursday, April 10, 2014
Most certainly not. But on page 31 (and appendix 15) of Darrell Issa's report, "Lois Lerner's Involvement in the IRS Targeting of Tax-Exempt Organizations," the staff authors cite an email exchange between Policy and EO regarding this Nonprofit Law Prof post as evidence of a "secret" plan to target conservative (c)(4) organizations. The email author describes the potential issuance of guidance on (c)(4) political activity "off-plan," meaning, of course, that the topic was not previously part of the yearly "to do" list the Service issues every year. Unremarkable, if one understands that executive branch departments frequently issue annual workplans, sometimes supplemented as the year progresses. Nevertheless, "information available to the Committee," says the report, conspiratorial music playing in the background, "indicates that Lerner played some role in the IRS's and the Treasury Department's secret "off-plan" work to regulate 501(c)(4) groups." Can't make this stuff up.
Wednesday, March 19, 2014
Obama signals veto of "Stop Targeting of Political Beliefs Act of 2014" and A short comment on the treatment of Lois
H.R. 3865 essentially prohibits Treasury from enacting any regulatory interpretations of 501(c)(4) and, by its legislatively suggested short title, is obviously designed to preclude Treasury from going forward with the proposed (c)(4) political activity regulations issued on November 29, 2013. The bill passed through the House on Feburary 26, 2014 and one day later the Obama administration signaled its intention to veto the bill:
STATEMENT OF ADMINISTRATION POLICY
H.R. 3865 - Temporary Prohibition on IRS from Modifying Tax-Exemption Requirements for Social Welfare Organizations
(Rep. Camp, R-Michigan, and 66 cosponsors)
The Administration strongly opposes H.R. 3865, which would prohibit the Department of the Treasury and the Internal Revenue Service (IRS) from clarifying the standards that organizations must satisfy to qualify for tax-exempt status. Under current law, organizations qualify as tax-exempt organizations “operated exclusively for the promotion of social welfare” if they are primarily engaged in promoting in some way the common good and general welfare of the people. The relevant Treasury and IRS rules have been in place since 1959 and are broadly recognized as unclear. The proposed legislation would prevent any revisions or clarifications to those rules. Thus, it could prevent the IRS from administering the tax code more effectively and from providing greater clarity to organizations seeking tax-exempt status.
H.R. 3865 would prevent Treasury and the IRS from issuing, for one year from the date of enactment, any generally applicable guidance relating to the standards for tax-exemption under section 501(c)(4) as a social welfare organization. In addition, H.R. 3865 would require the IRS to continue to use the standard and definitions in effect on January 1, 2010, to determine whether an organization qualifies for tax-exempt status under section 501(c)(4). The lack of clarity of these standards has resulted in confusion and difficulty administering the Code, as well as delays in the processing of applications for tax-exempt status. The Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, have recommended clarifying the current rules.
Consistent with these recommendations, Treasury and the IRS recently issued a notice of proposed rulemaking (NPRM) that provides guidance on the definition of candidate-related political activity for purposes of determining the “primary activity” of a social welfare organization and solicits public comment on a number of related issues. This NPRM is the first step in a standard rulemaking process intended to clarify the rules and to provide greater certainty for organizations seeking tax-exempt status. The notice and comment process allows for all concerned parties to provide input and comments before any changes to the rules are effected. Treasury and the IRS will carefully consider any and all such comments before issuing any further guidance, and they will follow standard agency rulemaking procedures.
For the reasons described above, the Administration strongly opposes the proposed legislation. If the President were presented with H.R. 3865, his senior advisors would recommend that he veto the bill.
The Senate version probably will not make it out of Finance but if it does it will obviously be dead on arrival. Yesterday House Leader Boehner said that Lois Lerner should be held in contempt for invoking her right to remain silent before the obviously biased House hearings I refuse to even link to. Others have gone even further and have stated that Ms. Lerner should be pursued criminally. Give me a break! I am not trying to use this blog as a platform to comment on, and thereby perpetuate political spectacle (oh, wait, I am commenting on the process aren't I?) but I do want to publicly say that what some in Congress and in certain media outlets are perpetrating against Ms. Lerner is nothing short of a "high tech lynching" or at least a burning at the stake back in Salem. I met her a few times at ABA tax conferences. She always smiled warmly and knew what she was talking about. I don't really know her. But anybody who ever had any interest in EO/EP knows that Ms. Lerner was a diligent servant of the people for a long long time. It is absolutely shameful how she is being treated. A travesty that she was forced to resign. And now nothing short of a witchhunt designed to wound a bigger fish than Ms. Lerner but at what must be considerable personal and financial costs to her all the same. Ms. Lerner is just the bait through which a very sharp hook has pierced and she has been left to languish in a putrid political cesspool. I hope she lands on her feet. She was good for tax exempt jurisprudence and if I could hire her to teach tax law I would.
Friday, February 7, 2014
According to TaxProf Blog we are now 274 days into the firestorm that erupted in the wake of Lois Lerner's acknowledgment last May that the IRS had used inappropriate criteria for selecting certain 501(c)(4) applications for additional scrutiny. The resulting controversy not only continues, but it has recently been renewed by another congressional hearing, controversial proposed regulations that are taking hits from both the left and the right, and cryptic legislation that may - or may not - change how and whether the IRS can enforce the existing limits on political activity by tax-exempt organizations.
House Economic Growth, Job Creation and Regulatory Affairs Subcommittee Hearing
Yesterday a subcommittee of the Committee on Oversight & Government Reform held a hearing where the witnesses uniformly blasted the executive branch's handling of the controversy. Their views were not a surprise, given they are all individuals who have been vocal in their criticism of how the Obama administration has handled this situation. The subcommittee also invited DOJ trial attorney Barbara Bosserman, who is leading the DOJ's investigation into this matter, to testify, but she chose not to do so. Despite its one-sided nature, the hearing illustrates that the continuing drumbeat of criticism is not fading away, and is unlikely to do so given . . .
Controversial Proposed Regulations
While I and others have commented that one likely consequences of this mess is that the IRS will be gun shy for some time, particularly when it comes to enforcing the limits on political activity by tax-exempt organizations, the Treasury Department as a whole cannot be criticized for a lack of boldness. The regulations it proposed in late November to redefine what would be considered political activity (or rather "candidate-related political activity") for 501(c)(4) organizations have already generated over 22,000 comments, and the deadline for submitting comments is not until the end of this month. While many comments have been supportive in part, most appear to give mixed reviews.
Some of the most detailed and thoughtful comments to date include the ACLU Comments and the Center for Competitive Politics Comments (which appear on a webpage also gathering some other comments, including ones focused on the paperwork burden imposed by the proposed regulations). Other groups working on commetns that likely will be worth the read are the ABA Tax Section, the Alliance for Justice, Independent Sector, and a coalition that is being spearheaded by Cleta Mitchell (Foley & Lardner) and John Pomeranz (Harmon, Curran, Spielberg & Eisenberg). The Bright Lines Project has also created a model comment that any organization or individual can customize and and then submit. Finally, Rep. Dave Camp has introduced legislation that woudl block finalization of the proposed regulations for a year.
Buried in the recently enacted omnibus spending bill were 68 words that may - or may not - change how and whether the IRS can enforce the current and future limits on political activity by tax-exempt organizations. As reported by Mother Jones, Public Law 113-76 included in the section relating to the Internal Revenue Service the following provisions:
SEC. 107. None of the funds made available under this Act may be used by the Internal Revenue Service to target citizens of the United States for exercising any right guaranteed under the First Amendment to the Constitution of the United States.
SEC. 108. None of the funds made available in this Act may be used by the Internal Revenue Service to target groups for regulatory scrutiny based on their ideological beliefs.
Given that the legislation did not repeal the limits on political activity found in section 501(c)(3) and the relevant charitable contribution provisions, nor did it explicitly address the current interpretation of section 501(c)(4) and other exemption provisions relating to political activity, to say the effect of these two provisions is unclear is to put it mildly. What is not unclear, however, is that these provision will provide an additional arrow for groups that challenge the IRS in court for denying exemption or examining them allegedly because of their political activity, so the courts will almost certainly need to resolve the actual effect of these provisions.
Tax Analysts recently forced the IRS to release thousands of pages of internal training materials for the exempt organizations determiniations unit. Included in the materials was a "Lesson Plan" on section 501(c)(4) organizations.
News outlets, and particularly the Washington Post, continue to publish accounts of how the Koch brothers created and funded a network of primarily tax-exempt organizations to further their political goals in previous election cycles. Recent articles include "Koch-Backed Political Coalition, Designed to Shield Donors, Raised $400 Million in 2012" and "A Rare Look Inside the Koch Brothers Political Empire".
There are a bevy of new leaders with in the Tax-Exempt/Government Entities Division at the IRS, including Sunita Lough (Commissioner, TE/GE), Donna Hansberry (Deputy Commissioner, TE/GE), Tammy Ripperda (Director, Exempt Organizations Division), and Robert Malone (Acting Director, Exempt Organizations Rulings & Agreements). They join continuing EO Division leaders Melaney Partner (Director, Exempt Organizations Customer Education & Outreach) and Nanette Downing (Director, Exempt Organizations Examinations).
Wednesday, November 6, 2013
According to the Nonprofit Quarterly, the Washington Post's recent investigative piece, "Inside the hidden world of thefts, scams and phantom purchases at the nation's nonprofits," has captured the attention of Senator Charles Grassley (R-IA), the ranking member of the Senate Judiciary Committee and a long-time overseer of tax-exempt organizations. The Post's article focused on the American Legacy Foundation and its less than full disclosure of what eventually amounted to a $3.4 million loss and a delayed call to investigators. The Post found that over a four year period more than 1,000 nonprofit organizations reported on their annual Forms 990 that they had discoverd a "significant diversion" of assets arising from "theft, investment fraud, embezzlement and other unauthorized uses of funds." As part of its investigative reporting, The Post, with the assistance of GuideStar, created a searchable database of nonprofits that have reported diversions. The Post article lists numerous other nonprofit organizations, comprising public charities, trade associations, veterans' associations, and other tax-exempts, that have had discovered diversions and misappropriations of funds totalling in the millions; a truly disturbing revelation.
As Nonprofit Quarterly reported, much more exploration on this topic is needed including, but not limited to, internal financial control difficulties, challenges for smaller organizations, the frontline capabilities of state attorneys general, and the effectiveness of actions taken by affected organizations. As NQ also concluded, Congress's review should include not only the source of these problems but also a focus on solutions.
As reported by the Daily Tax Report and Nonprofit Quarterly, the Citizens fpr Responsibility and Ethics in Washington (CREW) has requested that the IRS take notice of the use of 501(c)(6)s as the new tax-exempt vehicle for political campaign activity. CREW specifically targeted Freedom Partners, a nonprofit organization linked to the Koch brothers that fundraised and distributed between $235 and $250 million in the 2012 election cycle, asking the IRS to review the organization's use of its tax-exempt status to funnel anonymous donations to other organizations conveying a predominantly conservative political message. Organizations that are tax-exempt under section 501(c)(6) are typically business leagues or trade associations associated with a particular line of business or industry. According to its website, Freedom Partners states that it is a "501(c)(6) chamber of commerce that promotes the benefits of free markets and a free society." Both the Nonprofit Quarterly and CREW similarly opine that Freedom Partners seems to lack a "common business interest" other than ideological. CREW acknowledged the "vague" rules governing 501(c)(6) organizations, requesting that the IRS provide clarification on required and restricted activities.
Tuesday, October 15, 2013
Florida’s Sun Sentinel reports that the affordable Care Act (ACA) is expected to enable Florida nonprofits to better meet the needs of undocumented immigrants, albeit indirectly. US citizens among the working poor will now have expanded medical coverage, thereby freeing up nonprofits’ resources to improve service to the uninsured. What immigrants are, and are not, covered by the ACA directly? The article explains:
Pilloried in the political discourse as "illegals," undocumented immigrants were left off the table when the Affordable Care Act was drafted. Those with "eligible immigration status" and covered under the act, according to the Obamacare application, include visitors holding a student or work visa; immigrants afforded "temporary protection status;" members of a federally recognized Indian tribe born in Canada; and those applying for asylum.
But immigrants with "deferred action status" — those who came to the United States illegally as children but afforded prosecutorial discretion for deportation — are not covered. Neither are the millions of adults who also crossed the border illegally.
Although undocumented immigrants now receive, and will continue to receive, treatment in hospital emergency rooms, such services are costly. The enhanced ability of nonprofit healthcare clinics to offer preventive care should better serve patients and help reduce the strain on emergency room operations.JRB
Wednesday, October 2, 2013
As reported by the Nonprofit Quarterly, nonprofit organizations have no choice but to contend with a potentially extended government shutdown and the loss of government funds. The article refers to guidance issued by the Office of Management and Budget (OMB), which issued a memorandum several weeks ago to all federal agencies entitled, “Planning for Agency Operations during a Potential Lapse in Appropriations.” In the memorandum, OMB advised federal agencies to update “their plans for operations in the absence of appropriations” and that “agency leaders should ensure that only those activities that are ‘excepted’ pursuant to applicable legal requirements would continue to be performed during a lapse in the appropriation for those activities.” As the article further states, one of the clear impacts of government shutdown for nonprofits are short-term financial decisions that could result in layoffs or furloughs.
Friday, September 20, 2013
We are now at Day 134 according to Paul Caron, with the IRS mess still attracting congressional press releases and media headlines. Recent significant developments include:
A Memo: The House Committee on Oversight & Government Reform released a 19-page memo providing an interim unpdate on its investgation. The memo paints a picture of a political environment in which President Obama and other leader Democrats were publicly and repeatedly criticizing Tea Party and other conservative, nonprofit groups and calling on the IRS to scrutinize them. The IRS, not surprisingly, was well aware of the political sensitivity of the pending Tea Party and 501(c)(4) applications, which led it to subject those applications to both greater scrutiny and higher-level scrutiny, with the now well-documented selectivity problems that tended to disproportionately impact conservative organizations. What the memo does not mention, presumably because the Committee has not found it, is any evidence that White House officials or others outside of the IRS directed the actions of the IRS employees that have come under criticism.
A Chart: USA Today obtained an internal IRS "Political Advocacy Cases" chart dated November 16, 2011 that lists 162 groups with comments relating to the possible political and other activities that might disqualify the groups from tax-exempt status. Of the organizations listed, more than 80 percent were conservative according to the USA Today article, although some progressive groups are also included.
IRS Responses: Recent weeks have seen several IRS actions relating to this mess, including:
- Optional Expedited Process: Over the summer, the IRS announced an optional process under which 501(c)(4) applicants with no private inurement issues and applications pending for more than 120 days as of May 28, 2013, can self-certify that their social welfare spending and time is 60% or more of their total spending and time (and political campaign intervention spendind and time is less than 40%) and by doing so receive a favorable determination within two weeks of doing so.
- Priority Guidance Plan: The IRS also provided in its 2013-14 Priority Guidance Plan that one priority will be "Guidance under §501(c)(4) relating to measurement of an organization's primary activity and whether it is operated primarily for the promotion of social welfare, including guidance relating to political campaign intervention."
- Suspension of Political Activity Audits: In testimony earlier this week before the House Subcommittee on Oversight, Acting IRS Commissioner Daniel Werfel announced that the IRS has suspended all examinations involving possible political campaign activity pending a review of the Exempt Organizations exmination function processes and procedures. He also noted that 29 such exams had been opened during the 2013 fiscal year.
501(c)(6)s: 501(c)(4)s may be old news. A Politico article reported that in November 2011 the Koch brothers helped establish Freedom Partners, a section 501(c)(6) organization with approximately 200 donors who each pay at least $100,000 in annual dues. Freedom Partners distributed the funds its raised - $256 million in its first year of existence of which $236 million went out the door as grants - to a network of conservative groups such as the Center to Protect Patient Rights, Americans for Prosperity, and The 60 Plus Association. As others have noted (Tax Notes Today article, subscription required), a 501(c)(6) has several advantages over a 501(c)(4), including being able to advance business interests instead of social welfare, not being covered by intermediate sanctions under section 4958, possibly also avoiding the public benefit doctrine, and not being subject to state attorney general jurisdiction over charitable organizations. At the same time, donors to 501(c)(6)s are, like donors to 501(c)(4)s, not subject to public disclosure.
Friday, August 23, 2013
Following up on my post from yesterday, Chris Van Hollen (and Democaracy 21, Campaign Legal Center, and Public Citizen) did file suit yesterday against the IRS and Treasury. For those of you interested in reading the Complaint, it is in the District Court for D.C., Case 1:13-cv-01276. I retrieved my copy from Bloomberg BNA online; if anyone has a public link, let me know and I'll post it. A quick summary
1. It's a proceding under the Administrative Procedure Act (APA), 5 U.S.C. 702/703/704/706(1)/and 706(2)(A), "to compel agency action unlawfully withheld and unreasonably delayed, and to set aside agency action that is contrary to law."
2. Quote: "By redefining 'exclusively' as 'primarily' in violation of the clear terms of its governing statutes, the IRS permits tax-exempt social welfare organizations to engage in substantial electoral activities in contravention of the law and the court decisions interpreting it" (p. 2).
3. In answer to my question of yesterday, the Plaintiffs assert the following personal harms:
- Denial of information regarding election expenditures as Section 501(c)(4) organization do not need to disclose donors, and
- Candidates such as Van Hollen and their organizations must compete on unequal terms with tax-exempt organizations that are not subject to disclosure.
4. The Complaint specifically alledges that the IRS' recent 40% safe harbor pronoucements allows too much non-exempt political activity.
5. Quote: "Electoral campaign spending by section 501(c)(4) organizations soared after the U.S. Supreme Court's decisions in FEC v. Wisconsin Right to Life ... and Citizens United v. Federal Election Commission .. , which, respectively, narrowly construed and then invalidated federal laws prohibiting corporate electoral campaign expenditures. In the wake of those decisions, section 501(c)(4) organizations became the vehicles of choice for mobilizing anonymous contributions for political purposes." (p. 9, cites omitted).
6. For those interested, the paragraphs that follow the quote above give some signficant figures regarding Section 501(c)(4) spending since Citizens United - e.g., in the 2012 presidential election, approximately $310 million in electoral campaign spending was by non-disclosing groups including section 501(c)(4) and 501(c)(6) organizations. (p. 11).
7. The APA statutory standard of review is "arbitrary, capricious, and abuse of discretion, or not in accordance with law." (p. 19).
P.S. 8/26 Reader Russell Willis was kind enough to point me to the following link for the petition:
Thursday, August 22, 2013
The Washington Post reports that Chris Van Hollen (D-MD) is planning on filing suit against the IRS regarding the Section 501(c)(4) regulations that have been the spotlight as of late. Van Hollen, the ranking member of the House Budget Committee, will be the lead plaintiff in the suit, along with Democracy 21, The Campaign Legal Center, and Public Citizen. According to the Post, CREW has a similar suit pending.
If I understand the Post's article correctly**, the suit will focus on the validity of the IRS regulations under Section 501(c)(4). As we all probably know (ad nauseum) at this point, Section 501(c)(4) provides that an organization exempt under that section must be "operated exclusively for the promotion of social welfare" (emphasis added).
Treas. Reg. Section 1.501(c)(4)-1(a)(2) provides, "[a]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community" (emphasis added). As the promotion of social welfare does not include political campaign activity, it follows that an organization that is organized primarily for political campaign intervention purposes cannot meet the "exclusively" test of the statute.
I'm assuming that the lawsuit will take the position that it was an abuse of IRS discretion to issue regulations interpreting "exclusively" to mean "primarily" in the context of the amount of allowable non-social welfare activities. That raises a number of interesting issues:
For my civil procedure and con law friends, it's been a very long time since I've looked at standing issues. In the exemption context, of course, there is no taxpayer standing - but this isn't an exemption case. Is Van Hollen a plaintff because he is asserting that he personally has been injured by the enforcement of this rule (for example, because of the ability of opponents to get Crossroads funding or something?) Is there some other basis for standing?
For my admin law friends, what is our standard of review? Is this still straight up Chevron as a agency interpretation of statute with the force of law? Has any of that changed given recent Supreme Court action in this area (I am rapidly getting to the outer edge of my knowledge here). Does the fact that the IRS has recently come out with new 501(c)(4) review guidelines matter in the least?
Are we worried about collateral damage? The statutory language of Section 501(c)(3) also contains the word "exclusively." Treas. Reg. Section 1.501(c)(3)-1(c)(1) states, "[a]n organization will be regarded as 'operated exclusively' for one or more exempt purposes only if it engages primarily in activities which accomplish" one or more exempt purposes (emphasis added). It's always been interesting to me that in the Section 501(c)(4) context, some are willing to take the position that primarily means 51% , so you can push your political activities to 49% (of... something). In the Section 501(c)(3) context, I personally would be unwilling to tell a client that they can do that much non-exempt activity. Heck, I get queasy if a charity is in double digits percentage (of... anything) of non-exempt activity. But, technically, it is the same issue of statutory/regulatory construction.
This Section 501(c)(4) ambiguity could all be fixed by legislation, of course. Too bad none of the litigants has the ear of a Congressm.... um... wait....
(h/t Jonathan Adler via The Volokh Conspiracy Daily for pointing to this article)
** The Post article states, "Current law says the organizations must engage 'exclusively' in social welfare activities, but IRS tax code requires only that they are 'primarily engaged' in such purposes." Of course, the tax code is current law, the tax code does not belong to the IRS, and the primarily engaged test is in the Regs. So I'm assuming that's what the Post meant.
Wednesday, August 21, 2013
In the August 20th New York Times Online, Bruce Bartlett weighed in on the future of the chartiable deduction. For those of you not familiar with the name, Bruce Bartlett was a member of the administration for both Reagan and the elder Bush. He was known at one time as a strong supply-sider but has broken ranks with Republicans more recently on this issue. See his Wikipedia entry here.
In summary, his point is that the charitable deduction needs to be re-thought as it is generally provides a disproportionate benefit to higher income taxpayers. Higher income taxpayers have more disposable income to make signficant charitable gifts. In addition, the majority of low income taxpayers cannot itemize, and therefore cannot benefit directly from the deduction. Finally, the value of the deduction rises as the taxpayer's marginal tax rate goes toward the top of the scale. He appears to favor a capped credit in lieu of a deduction as a way to continue to reward and encourage generosity while making the benefit more equitable among taxapayers. He also posits that the cap on the credit could be "done in a way that raised net revenue to pay for rate reductions."
The credit idea has always been intriguing to me - it is what we have here in West Virginia on the state level, although it is somewhat unique in its structure. A few thoughts:
A credit does nothing for those that do not have a tax liability to offset. I wonder if he would support using the credit to offset the payroll tax liability, which is often more of a burden for lower income taxpayers than the income tax.
I am curious to know how the cap on the credit would be done in a way that raises revenue for rate deductions - and what rate deductions? Wouldn't the high income taxpayer benefit from such a re-shuffling, as they have their overall rate lowered and there overall tax burden reduced, while not having to giving anything to charity?
How would that compare to, for example, a $500 above-the-line deduction? We know that would be expensive, which is why it's been talked about but not enacted. If we reduced the availability of the below-the-line charitable deduction to pay for it, would that promote the fairness that Bartlett professes to want without the back door benefit of financing low overall marginal rates?
Bartlett seems to be unimpressed by the charitable sector's argument regarding the effect of cuts in the deduction on funding for the sector. If we think that part of the rationale for the deduction in the first place is to not just reward giving but to encourage it, we need to think seriously about that issue. Otherwise, we are again reducing marginal rates on the backs of folks who may be able to least afford it - in this case, our charities.
Friday, August 2, 2013
As reported by the Daily Tax Report and others, email exchanges between the Federal Election Commission and Lois Lerner, then Director of IRS Exempt Organizations Division, reveal that the IRS may have unlawfully shared confidential tax information with the FEC, according to a July 30th letter from two House Ways and Means Committee leaders. According to the letter, nine minutes after receiving the email, Lerner requested that IRS attorneys "accommodate the FEC request." The letter requests Acting IRS Commissioner Daniel Werfel to produce by August 14 all communications between the IRS and the FEC between 2008 and 2012, including specific communications to and from Lerner with respect to certain organizations: American Future Fund, American Issues Project, and Citizens for the Republic, or Avenger, Inc.