Friday, July 24, 2015
As previously blogged, the GAO Report to Congress (the full report is here) on the IRS processes for political activity referrals found significant deficiencies with respect to the initial allegations that triggered an audit. In some cases, no case files were found by the GAO. These deficiencies "increase the risk that EO could select exempt organizations for examination in an unfair manner - for example, based on an organization's religious, educational, political or other views." According to Bloomberg BNA, in the hearing before the Ways and Means Oversight Committee in which the GAO report was released, it was determined that for the past six years, "one person working alone at the IRS has been deciding which complaints about the political activities of exempt organizations should be followed up."
Following the above-referenced hearing, IRS Commissioner John Koskinen reported to Bloomberg BNA that final regulations on political campaign activities by exempt organizations will not be in place prior to the 2016 presidential election (see proposed regulations here). The regulations will likely not be effective until January 2017. See prior blog posts on the proposed regulations and political activity regulations generally (April 16, 2014; July 16, 2015).
Monday, July 20, 2015
As reported by The New York Times, Representative Raúl R. Labrador, Republican of Idaho, and Senator Mike Lee, Republican of Utah, along with 130 sponsors, have proposed legislation, the First Amendment Defense Act, that would confer protections for tax-exempt organizations and individuals that object to the Supreme Court's recent gay-marriage ruling on religious or moral grounds. The Act specifically provides that the Federal government cannot take any "discriminatory action" against a person, "wholly or partially on the basis that such person believes in accordance with a religious belief or moral conviction that marriage is or should be recognized as the union of one man and one woman, or that sexual relations are properly reserved to such a marriage." The Act defines a "discriminatory action" to include (i) an action by the Federal government to "alter in any way the Federal tax treatment of, or cause any tax, penalty or payment to be assessed against, or deny, delay, or revoke an exemption from taxation under Section 501(a) of the Internal Revenue Code of 1986 of, any person" referred to above, or (ii) "disallow a deduction for Federal tax purposes of any charitable contribution to or by such person." The Act states that it should be broadly interpreted in favor of a 'broad protection of free exercise of religious beliefs and moral convictions, to the maximum extent permitted" by the Act and the U.S. Constitution.
The Times reports that a bill proposed by "moderates" would attached two pro-gay rights provisions: (i) the Employment Non-Discrimination Act, making illegal workplace discrimination based on sexual orientation, and (ii) an amendment to the Fair Housing Act to include protections on the basis of sexual orientation and gender identity.
The Act, if passed in its present form, would ostensibly address the concerns of churches and other religiously-affiliated organizations that their tax-exempt status could be revoked for discrimination in membership or employment or otherwise on the basis of sexual orientation, even if such organizations' actions are based on their core religious tenets. (See prior blog post here discussing these concerns).
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.
Thursday, May 14, 2015
The Treasury Inspector General for Tax Administration issued a new "Final Report" on the IRS handling of exemption applications involving political campaign intervention. Here are excerpts from the conclusions:
The IRS has taken significant actions to eliminate the selection of potential political cases based on names and policy positions, expedite processing of Internal Revenue Code (I.R.C.) Section (§) 501(c)(4) social welfare organization applications, and eliminate unnecessary information requests.
First, the IRS eliminated the use of Be On the organizations, if it becomes a permanent Look Out (BOLO) listings, . . . .
Second, the Exempt Organizations function completed processing for 149 of the 160 applications for tax-exempt status that, as of December 2012, had been open for lengthy periods. . . . .
The report further provides that in the absence of BOLO listings the IRS has created an "Emerging Issues Committee" to screen, review, and monitor emerging issues based on actual or planned activities of applicants, as opposed to names or policy positions. The report also provides of 149 closed applications, the IRS approved 107 (72%) and disapproved 7 (5%), while applicants either withdrew (8 or 5%) or failed to respond to requests for information (27 or 18%) the remaining applications. Of the 11 applications still open, six are in litigation and five have either proposed adverse determinations or are in Appeals. Reading between the lines, a Bloomberg article notes that these figures suggest that the IRS has sent Crossroads GPS a denial letter, since the Crossroads application is still outstanding and is not in litigation. As the Center for Responsive Politics notes, however, the statute of limitations might now bar collection of any taxes from Crossroads even if its application is ultimately denied. Additional Coverage: Forbes (Peter Reilly).
Relatedly, the NorCal Tea Party Patriots have convinced the federal judge overseeing their lawsuit against the IRS to require the IRS to identify the 298 groups that had submitted applications identified as potential political cases as of May 31, 2012 (mentioned on page 4 of the TIGTA Final Report) in order to facilitate class certification in that litigation. The Judge's order explains why she concluded Internal Revenue Code section 6103 does not prevent this limited discovery. Additional coverage: Forbes (Peter Reilly).
In other news, TIGTA managed to recover 6,400 emails to or from Lois Lerner from between 2004 and 2013, although it is unclear how many might be duplicates of the tens of thousands of emails previously recovered by the IRS and turned over to Congress. No final word from the congressional committees reviewing the emails regarding whether they add anything to the ongoing investigations, although initial indications are that there is little new in them. Coverage: CNN; Forbes (Kelly Phillips Erb); The Hill.
Finally, the House has passed a package of bills relating to the 501(c)(4) application mess, although their fate in the Senate (and on the President's desk) is uncertain. The most prominent is H.R. 1104, which would extend a gift tax exemption to 501(c)(4) social welfare organizations, 501(c)(5) labor, agricultural, and horticultural organizations, and 501(c)(6) trade associations and chambers of commerce. Currently donors to 501(c)(3) charities generally enjoy such a deduction (under Internal Revenue Code section 2522), and transfers to 527 political organizations are exempt from the gift tax (under section 2501(a)(4)). The other bills are H.R. 709 (termination for political targetting), H.R. 1026 (taxpayer privacy), H.R. 1058 (Taxpayer Bill of Rights), H.R. 1152 (use of personal email accounts prohibition), H.R. 1295 (self declaration process and declaratory judgment actions for 501(c)(4)s), and H.R. 1314 (right to appeal). Coverage: Forbes (Robert W. Wood); Politico.
Thursday, April 30, 2015
The Washington Post reports that the Fraternal Government Relations Coalition, which represents 100 fraternities and sororities collectively owning $3.2 billion in real estate, “is lobbying Congress this week to urge legislators to pass a bill that would allow charitable donations to fund up to $1 billion in housing construction for Greek-letter houses across the country.” The story reports that lobbyists justify the tax expenditure on grounds of safety, lowering costs of student housing, spurring small business jobs, and granting “tax parity between the colleges and the Greek houses that serve the same students.”
I did a little digging, and I am finding some curiosities with the Post’s legal analysis. The Post reports that the lobbyist group is urging adoption of the Collegiate Housing and Infrastructure Act, and that the “current bill, H.R. 1718, is sponsored by Rep. Pete Sessions (R-Tex.) and has 14 bipartisan sponsors.” The story further states that the bill would amend the Internal Revenue Code “to allow donations to Greek groups for student housing to be fully tax deductible.” But according to the text of H.R. 1718, the general rule of the proposed legislation simply states as follows:
For purposes of subsection (c)(3) and sections 170(c)(2)(B), 2055(a)(2), and 2522(a)(2), an organization shall not fail to be treated as organized and operated exclusively for charitable or educational purposes solely because such organization makes collegiate housing and infrastructure grants to an organization described in subsection (c)(7) which applies the grant to its collegiate housing property.
Thus, the bill in question would only indirectly do what the story says, insofar as a section 501(c)(3) entity receiving tax-deductible contributions could use donated funds to finance the construction or refurbishing of fraternity and sorority houses owned by those section 501(c)(7) entities.
The story also mysteriously states as follows:
Under current tax rules, just 30 percent of a single donation to a Greek organization for housing is considered tax deductible. The bill would permit as much as 100 percent of the donation to be deductible, which already is allowed for donors who give directly to universities and colleges.
I have no idea why the Post reports that “30 percent of a single donation to a Greek organization for housing is considered tax deductible” under current law. Fraternities and sororities are tax-exempt as section 501(c)(7) entities, not section 501(c)(3) entities qualifying for tax-deductible donations under Code section 170(c)(2).
But my main concern is not with the misleading technical analysis of the Post. I am quite skeptical that this proposed tax expenditure is justified. The IRS long ago issued a revenue ruling that supports the deductibility of charitable contributions to universities that use the donations to build housing owned by the universities and leased to fraternities and sororities. See Rev. Rul. 60-367, 1960-2 C.B. 73. Here are the key excerpts from the ruling:
A college might properly adopt as incident to its educational activities a program to assist in the housing of all its students by providing dormitories, by providing an information or rental office to obtain accommodations for its students in private homes, by exercising control over housing for its students, by purchasing or constructing, owning and operating houses for fraternity students, or by a combination of such activities. The furnishing of housing for fraternity members would not cease to be a college activity because the college participated in or undertook plans to have the whole or a part of the cost of a fraternity house defrayed by gifts from alumni of a particular fraternity. In order, however, for the gift to be deductible as a gift to the college, it must in reality be a gift to the college and must not be a gift to the fraternity by using the college as a conduit.
The effect of designation by a donor as to the fraternity house for which his gift is to be used must not be such that his gift is for the benefit of the fraternity rather than for the benefit of the college. Therefore, the college must, as the result of the gift, have the attributes of ownership in respect of the donated property, and its rights as an owner must not, as a condition of the gift, be limited by conditions or restrictions which in effect make a private group the beneficiary of the donated property. The making and acceptance of a gift on conditions which confer substantial rights on a private group are inconsistent with a gift wholly to the college. The college should, as an owner, be free to use the property acquired with the gift as its future policy suggests or requires.
I do not believe that the proposed bill is necessary to achieve the benefits claimed by the lobbyists. Construction and renovation of university-owned housing generates just as much economic boom as that associated with privately owned housing, and it is easier for a university to ensure that frat housing is safe and affordable if the university is in charge of it than if a frat is. Further, in light of recent nationally publicized events associated with Greek life, I would modestly suggest that policies promoting greater university control of fraternity and sorority housing are not necessarily a bad idea.
So here’s an alternative idea. Keep current law in place. Universities can welcome donations of existing Greek houses to the universities, which would then lease the houses back to the section 501(c)(7) entities on terms that ensure fair student housing prices and safe conditions. And if the fraternities violate anti-hazing or anti-discrimination policies of the universities, they have breached their leases and must find new safe, affordable housing.
Friday, January 30, 2015
As reported in the Daily Tax Report and as released in a statement from his office, Senator Grassley is requesting that a Missouri non-profit hospital, Mosaic Life in Care in St. Joseph, Missouri, explain its large number of lawsuits against low-income patients over treatment bills rather than providing such patients reasonable payment plans for their medical care. In a letter to the hospital, the Senator affirmed Mosaic's requirement to confer community as a condition to its tax-exempt status as well as meet other requirements under the law, including a financial assistance policy and constraints on billing and collection practices. In his statement, the Senator explained:
Non-profit hospitals are obligated under law to have a financial assistance policy and alert those who can’t afford care of any assistance they qualify to receive. Occasionally, a hospital seems to go out of its way to avoid helping the poorest patients. When these cases come up, the hospitals should explain their practices and how they comply with the spirit and the letter of the law. It’s a matter of accountability for the tax breaks they receive.
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)
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.