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.
Wednesday, July 17, 2013
The IRS 501(c)(4) application mess continues to percolate, although most media attention has moved elsewhere. For those who want all the details, Paul Caron continues his comprehensive coverage at TaxProf Blog (The IRS Scandal, Day 69). Here are some highlights:
Congressional Hearings Relating to the IRS (including non-501(c)(4) issues)
- House Committee on Oversight & Government Reform
- House Committee on Ways and Means
- Status of IRS' Review of Taxpayer Targeting Practices (June 27th)
- Organizations Targeted by IRS for Their Personal Beliefs (June 4th)
- IRS Targeting Conservative Groups (May 17th)
- House Subcommittee on Financial Services and General Government
- Oversight Hearing - Internal Revenue Service (June 3rd)
- Senate Committee on Finance
- Treasury Inspector General for Tax Administration, Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review (May 14th)
- Congressional Research Service, 501(c)(4)s and Campaign Activity: Analysis Under Tax and Campaign Finance Laws (May 17th)
- Internal Revenue Service, Charting a Path Forward at the IRS: Initial Assessment and Plan of Action (June 24th)
- National Taxpayer Advocate, Special Report to Congress: Political Activity and the Rights of Applicants for Tax-Exempt Status (June 30th)
No word at this point on whether the Department of Justice will eventually generate a report (or indictments) based on its investigation, announced by U.S. Attorney General Eric Holder (from about the 22:45 mark to the 25:30 mark) on May 14th, after President Barack Obama personally addressed the IRS situation on May 13th.
If there is any silver lining to this situation, it is the possibility that needed reform in this area may gain traction. As fellow blogger John Colombo has already noted (and critiqued), The Bright Lines Project has been quietly working for more than four years to revise the definition of political campaign intervention in the federal tax laws. In response to the IRS mess, it has now accelerated its public push for legislation and regulations to implement its proposals. This push has already drawn public opposition from a senior fellow at the Center for Competitive Politics, indicating that The Bright Lines Project may in fact have some hope of changing the legal landscape for politically active tax-exempt organizations. Stay tuned.
Tuesday, July 16, 2013
Even since NYU's executive compensation practices became an issue during the February confirmation hearing for now Treasury Secretary Jacob Lew (as reported by the Chronicle of Higher Education, among others), Senator Charles Grassley has been seeking additional information regarding those practices. The N.Y. Times now reports that Senator Grassley is unhappy with the limited information provided by NYU and the restrictions it has placed on access to some of that information. The practices that have drawn Senator Grassley's ire include loans both for principal homes and summer homes of top administrators and star faculty and sizable severance payments. Of course while Senator Grassley constantly asserts that such generous benefits are inconsistent with nonprofit and tax-exempt status, the legal standard is not public perception but instead whether the total compensation received by the relevant individuals is reasonable when compared to the value of the salaries and other benefits provided to comparable individuals by comparable institutions. It is also far from clear whether Senator Grassley, as a minority member in the Democratic-controlled Senate, has any leverage other than his bully pulpit to force NYU to provide any information at all.
Monday, June 24, 2013
Although some of the hubbub about 501(c)(4)'s and political activity has settled over the past couple of weeks, we shouldn't overlook the fact that the central fault leading to this mess was (and is) a set of un-administrable (and therefore unenforceable) rules regarding political campaign activity by exempt organizations.
In my back and forth with Rosemary Fei on 501(c)(4)'s, she mentioned that she was part of a group trying to provide better guidance on the line between prohibited political activity and permitted legislative lobbying or issue advocacy activity. This work is called The Bright Lines Project, and a full draft of their effort as of May, 2013, is available here.
In many ways, the project advances the IRS's own guidance on political activity by 501(c)(3) organizations published in Revenue Ruling 2007-41, but provides additional bright lines (pun unavoidable) on what is permitted and what isn't. It is a very thoughtful effort, modeled after the regulations on what constitutes lobbying expenditures under Section 4911 and the 501(h) election and fills some nagging holes in the IRS's guidance in Rev. Rul. 2007-41.
But I do think the project makes one mistake and ignores another very deep problem in this area. The one mistake is a sort of "pulpit speech" exception that is referred to as an exeption for "personal, oral remarks at official meetings." The project's explanation of this exeption is as follows:
Oral remarks made by anyone (other than a candidate) who is present in person at an official meeting of an organization held in a single room or location, so long as no announcement of the meeting refers to any candidate, party, election, or voting. This exception covers only oral remarks about candidates made by and to persons in attendance, not any other form of communication of those remarks, whether written, electronic, recorded, broadcast, or otherwise transmitted. A prominent disclaimer must be made to those attending, stating that such remarks are the speaker's personal opinion and are not made on behalf of the organization, and that the speaker is not advocating any of the actions set forth in Rule 3 [e.g., expressly calling for the election or defeat of a specific candidate or political party]
In it's examples, the Project notes that this rule would "permit a pastor to express his or her personal views on candidates from the pulpit. It would also allow parents at a PTA meeting, including officers, to express their views on candidates for school board. It would permit speeches, sermons, or discussions at any meeting of any tax-exempt organization to include expressions of opinion on those running for public office in upcoming elections, so long as such views were not made officially or on behalf of the organization."
My own view is that this exception is a huge mistake, because it will be exploited to the hilt by organizations intent on "having their say" about candidates. Face it - a Catholic priest, giving his "opinions" on candidates at Mass on the Sunday before the election will be viewed as an official church position, regardless how strong the "disclaimer" is that is attached to the remarks. We actually have a useful bright line on this kind of activity right now under Rev. Rul. 2007-41: you can't do it. The revenue ruling makes clear that speech such as this at an official function of an organization is prohibited, whether a disclaimer is attached or not. That seems to me to be an excellent bright line, and we should not replace it with an exploitable exception that is hardly a bright line.
The second major problem with the project is that it says nothing about the core problem that plagues 501(c)(4)'s (and 5's and 6's), which is "how much political activity is too much?" The project makes no attempt to set a bright line for when political activity becomes a "primary purpose" or otherwise address the "how much" issue.
This is a critical failing. The (c)(4) problem is as much (in my opinion, more) about how much political activity is permitted as it is in the dividing line between issue advocacy and campaign activity. Right now, we have nothing other than the vague notion that a (c)(4)'s "primary purpose" can't be political campaign activity - but there is no standard for judging "primary purpose."
So why not adopt a very clear bright line on this latter issue: the amount of political campaign activity permitted by (c)(4)'s, (5)'s and (6)'s is . . . zero. None. Absolute prohibition. Many of my colleagues believe there should be some "de minimis" amount of campaign activity permitted. I've heard things like "15%" thrown around, for example. But here's the problem: 15% OF WHAT? Of expenditures? Which expenditures? Of employee time? What if volunteers are used? Is the 15% per year or on a 4-year rolling average that we use elsewhere in 501(c)? If it's a 4-year average, that means an organization can "save up" for the presidential campaigns that happen every four years. Providing a de minimis exception is hardly a "bright line" in this area, unless one is going to couple it to a specific mathematical test like that provided in 501(h)/4911 for lobbying by 501(c)(3)'s. And anyone who's worked with that regime will tell you that it is incredibly complex, particularly when it comes to allocating expenditures (and I'd argue that the test doesn't account for volunteers or the fact that modern communication - e-mail and web sites - cost very little but have major communications impact). Do we REALLY want to go down that road? And if so, why? What is gained by such a rule other than complication and confusion? What part of "NONE" is so hard to understand or hard to comply with that we need an exception of some kind?
So I'll say it again. If we're really concerned about political campaign activity by (c)(4)'s, (5)'s and (6)'s, prohibit it; any organization that engages in political campaign activity in any amount that wants exemption should be subject to disclosure rules as Lloyd Mayer and others have argued - that is, shuffle them to 527 or some similar regime.
To actually solve the problems that led to the current mess, we need both bright line tests to distinguish between issue advocacy and political activity AND we need a bright line on how much activity is permitted. In the case of political campaign activity, "NONE" is a nice bright line that is mostly (not completely, I'll admit) incapable of exploitation . . .
[This represents a bit of change to my position, by the way - I'm actually OK with a 501(c)(4) category for organizations whose primary purpose is issue advocacy, including lobbying, IF such organization is prohibited from ANY campaign activity. It's probably a good thing to have such an organization that is also prohibited from receiving deductible contributions under 170 in order to avoid having (c)(3)'s used to end-run the 162(e) limits on the deductibility of lobbying expenses, and I'm also convinced there is a useful public benefit to issue advocacy.]
Friday, May 31, 2013
In addition to the 501(c)(4) exemption application bombshell, attendees at this month's ABA Tax Section meeting also learned about the serious bipartisan tax reform effort being led by House Ways & Means Committee Chairman Dave Camp (R-Michigan) and Senate Finance Committee Chairman Max Baucus (D-Montana). Because Representive Camp is approaching his term-limit as Ways and Means Chairman at the end of 2014 and Senator Baucus has already announced his retirement as of 2014, these two experienced members of Congress are somewhat insulated from the normal political pressures that might derail such an initiative. Their effort has already generated a series of "option papers" that are actually what they say they are - a discussion of possible tax reform options in a variety of areas without endorsement of or partisan sniping regarding any particular set of possible changes. It also has been the subject of 20 separate Ways and Means Committee hearings, as described on the Committee's Comprehensive Tax Reform website.
Tax reform has also been the focus of eleven Ways and Means Committee working groups, including one relating to Charitable/Exempt Organizations. For a detailed summary of both the present law in this area and the suggestions and comments received by this working group and the other working groups, see the Joint Committee on Taxation report issued earlier this month. The exempt organization sections can be found on pages 19-57 (present law) and 491-497 (suggestions and comments received). Here are the headings for the latter section, which covered the whole gamut of possible options:
1. The Charitable Deduction
General support for preservation of the charitable deduction or opposition to changes to
the charitable deduction
General support for reform of the charitable deduction
Charitable contributions of property
Other comments relating to the charitable deduction
2. Tax-Exempt Status
Public charity status and private foundation operating rules
Unrelated business income tax (“UBIT”)
Specific types of tax-exempt organizations
3. Reporting, Disclosure, or Tax Administration
4. Exclusion from Gross Income for Qualified Charitable Distributions fron an Individual Retireement Arrangement ("IRA")
5. Miscellaneous Comments Submitted by Indiana Tribal Governments
Having reviewed these materials and talked with some of the staffers at the ABA meeting, I actually am cautiously optimistic that tax reform is a possibility. What effect any reform will have on exempt organizations is impossible to predict at this point, but certainly significant changes to both the charitable contribution deduction and the requirements for tax exemption are on the table.
Thursday, May 30, 2013
While hospitals continue to be criticized for failing to provide sufficient charity care and other benefits - criticism that is likely to only increase as more information about such activities becomes available because of section 501(r) - Congress, the IRS, and the media appear to have an increasing and skeptical interest in nonprofit colleges and universities. Recent developments include:
- IRS Colleges & University Tax Compliance Report: As previously reported, the report identified widespread underreporting of unrelated business taxable income, although the total amount involved for the 34 institutions examined was only $90 million, and various issues with compensation setting processes and reporting.
- House Oversight Subcommittee Hearing: In response to the above report (and lost once the the 501(c)(4) mess broke), this Ways and Means Subcommittee heard from Lois Lerner regarding the above report.
- Weekly Standard: Are Universities Above the Law?: A wide-ranging critique of college and university governance, citing recent disputes ranging from the Robertson Foundation's litigation with Princeton University's to the Association of Alumni of Dartmouth's litigation against their alma mater.
- Fiscal Times: Backroom Financial Dealings of a Top University: This article highlights the generous compensation and loan packages provided by NYU, which became national news with the nomination of former NYU administrator Jack Lew for Treasury Secretary.
All of this scrutiny comes at a time when many colleges and universities are facing increasing criticism for too high tuition, too generous compensation packages, and exploitation of student athletes. Of course such concerns are not new for nonprofit scholars, including co-blogger John Colombo, who in 1993 wrote Why is Harvard Tax Exempt? (And Other Mysteries of Tax Exemption for Private Educational Institutions), 36 Arizona Law Review 841, and more recently examined the tax treatment of college athletics. But we may be seeing an unprecedented level of scrutiny that will may ultimately shift the nonprofit governance and tax exemption standards for such institutions.
Wednesday, March 20, 2013
From The Chronicle of Philanthropy comes a report on the Charitable Driving Tax Relief Act, filed in the House of Representatives last month. According to the report, the bill would increase the charitable volunteer per mile deduction rate of 14 cents per mile up to the rate for employee reimbursements, which is currently 56.5 cents per mile. The IRS' latest on standard mileage rates can be found here.
Accordingly to Thomas.gov, the bill is H.R. 1212, although the text of the legislation is not yet upload. I will keep checking back and provide a link when it is available.
Monday, March 18, 2013
Our most current installment, courtesy of the Senate Democrats in their 2014 Budget Proposal:
The Senate Budget calls for deficit reduction of $975 billion to be achieved by eliminating loopholes and cutting unfair and inefficient spending in the tax code for the wealthiest Americans and biggest corporations. It recognizes that the Finance Committee, which has jurisdiction over tax legislation, could generate this additional revenue through a variety of different methods.
One potential approach is an across‐the‐board limit on tax expenditures claimed by high‐income taxpayers (specifically, the top two percent of income earners). This could take the form of a limit on the rate at which itemized deductions and certain other tax preferences can reduce one’s tax liability, a limit on the value of tax preferences based on a certain percentage of a taxpayer’s income, or a specific dollar cap on the amount of allowable deductions. In assessing any such across‐the‐board limit, Congress should consider the extent to which each proposal would retain a marginal tax incentive to engage in the affected activities and investments.
Another potential approach by which Congress could increase tax fairness and reduce the deficit is by reforming the structure of particular tax expenditures. The Simpson‐Bowles illustrative tax reform plan, for example, proposed to convert certain itemized deductions into limited tax credits, which more equitably deliver tax benefits and, because only about one‐third of taxpayers itemize their deductions, are often better for targeting tax incentives at low‐income and middle class families. Reforms like these could also generate substantial new revenue for deficit reduction.
See Foundation for Growth: Restoring the Promise of American Opportunity, page 66 (emphasis added). As a reminder, the charitable deduction is an "itemized deduction." Therefore, the charitable deduction will be limited by any indiscriminate cap on itemized deductions, whether expressed as a percentage of income or a specific dollar cap. One could guess that the caution highlighted above in bold might have been aimed specifically at the chartiable deduction, although the mortgage interest deduction might lay a claim to such specific attention. The nonprofit sector may have the most about which to worry, as charitable contributions are voluntary and easy to eliminate out of one's personal budget, if a taxpayer choose not to spend above the allowable deduction cap.
Future installments to follow, no doubt.
Friday, February 15, 2013
You can now access the opening statement by Chairman Dave Camp and the uploaded testimony of the 40 or so witnesses on the Committee on Ways and Means Committee website. Video of the testimony is available on UStream in two, two-hour recordings. An initial press report from Reuters indicates that the charity leaders who testified were united in their support for preserving the existing tax incentives for charitable giving. While I have not had the opportunity to review all of the testimony, the witnesses who most supported modifying the deduction in a way that would reduce some tax benefits from charitable giving in the interest of making the deduction a more effective tool for encouraging such giving appear to have been Roger Colinvaux (Catholic University) and Gene Steuerle (Urban Institute).
Thursday, February 14, 2013
As I type this post, the House Ways and Means Committee has begun its hearing on Tax Reform and Charitable Contributions. Here is the (long) list of scheduled witnesses:
Mr. Eugene Steuerle, Fellow and Richard B. Fisher Chair, The Urban Institute, Washington, DC.
Mr. Kevin Murphy, President, the Council on Foundations, Arlington, VA.
Mr. David Wills, President, National Christian Foundation, Alpharetta, GA.
Mr. Brian Gallagher, President & CEO, United Way Worldwide, Alexandria, VA.
Mr. Roger Colinvaux, Professor, Catholic University DC Law School, Washington, DC.
Mr. Eugene Tempel, Dean of the Indiana University School of Philanthropy, Indianapolis, IN.
Ms. Jan Masaoka, CEO, California Association of Nonprofits, Sacramento, CA.
Mr. Mark Huddleston, President, University of New Hampshire, on behalf of the American Council on Education, Durham, NH.
Mr. Conrad Teitell, Chairman, Charitable Planning Group, on behalf of the American Council of Gift Annuities, Stanford, CT.
Mr. Jake Schrum, President, Southwestern University, on behalf of the Council for Advancement and Support of Education, Georgetown, TX.
Ms. Diana Aviv, President & CEO, Independent Sector, Washington, DC.
Mr. Vinsen Faris, Chairman of the Board of Directors, Meals on Wheels, Washington, DC.
Mr. Bill Rieth, President & CEO, United Way of Elkhart County, Elkhart, IN.
Ms. Jill Michal, President & CEO, United Way of Greater Philadelphia and Southern New Jersey, Philadelphia, PA.
Ms. Pamela King Sams, Executive Vice President for Development, Children’s National Medical Center, Washington, DC.
Ms. Nicole Busby, Executive Director, the National Association of Free and Charitable Clinics, Alexandria, VA.
Mr. Rand Wentworth, President, Land Trust Alliance, Washington, DC.
Ms. Kim Morgan, CEO, United Way of Western Connecticut, Danbury, CT.
Mr. Terry Mazany, President & CEO, The Chicago Community Trust, Chicago, IL.
Mr. Brent E. Christopher, President & CEO, Communities Foundation of Texas, Dallas, TX.
Ms. Leslie Osche, Executive Director, United Way of Butler County, Butler, PA.
Mr. William Daroff, Vice President for Public Policy, Jewish Federations of North America, Washington, DC.
Ms. Ruth Thomas, Vice President of Finance and Administration, SAT-7, Easton, MD.
Mr. John Ashmen, President, American Gospel Rescue Missions, Colorado Springs, CO.
Mr. John Berry, CEO & Executive Director, Society of St. Vincent de Paul Georgia, Atlanta, GA.
Mr. Larry Minnix, President & CEO, Leading Age, Washington, DC.
Mr. Scott Ferguson, President & CEO, United Way of Chattahoochee Valley, Columbus, GA.
Ms. LaKisha Bryant, CEO, United Way of Southwest Georgia, Albany, GA.
Mr. Mike King, President & CEO, Volunteers of America, Alexandria, VA.
Ms. Jimalita Tillman, Executive Director, Harold Washington Cultural Center, Chicago, IL.
Mr. Tim Delaney, President, National Council of Nonprofits, Washington, DC.
Mr. Bill Kitson, President & CEO, United Way of Greater Cleveland, Cleveland, OH.
Ms. Naomi Adler, President & CEO, United Way of Westchester and Putnam, White Planes, NY.
Ms. Cynthia Gordineer, President & CEO, United Way of Forsyth County, Winston-Salem, NC.
Ms. Karen Rathke, President & CEO, Heartland United Way, Grand Island, NE.
Mr. Earle I. Mack, Retired Ambassador of the United States to the Republic of Finland, Fort Lee, NJ.
Mr. Andrew Watt, President & CEO, Association of Fundraising Professionals, Arlington, VA.
Mr. John Palatiello, President, Business Coalition for Fair Competition, Reston, VA.
Mr. Tony Ross, President, United Way of Pennsylvania, Harrisburg, PA.
Mr. William Hanbury, CEO, United Way of the National Capital Area, Vienna, VA.
Ms. Lisa Ireland, Executive Director, United Way of Orleans County, Medina, NY.
Ms. Tory Irgang, Executive Director, United Way of Southern Chautauqua County, Jamestown, NY.