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.
Tuesday, February 12, 2013
Monday, February 11, 2013
We previously blogged that while the charitable contribution deduction dodged a bullet (for the most part) in the fiscal cliff agreement, charities remain concerned that the deduction may be vulnerable in future budget and debt ceiling negotiations. What is worth also highlighting, however, is the extent to which charities benefited from the American Taxpayer Relief Act of 2012. While the Act reinstated the overall limitation on itemized deductions, it also extended several charitable giving incentives that had expired, specifically:
- The charitable IRA rollover provision;
- The enhanced charitable deduction for contributions of food inventory; and
- The basis adjustment to stock of S corporations making charitable contributions of property.
For more details about these provisions and the likely effect of other aspects of the Act on charitable giving see the report by the Tax Policy and Charities project of the Urban Institute.
Thursday, January 24, 2013
For a number of years, I've espoused the view that we should expand the unrelated business income tax to a "commercial activity" tax - that is, a charity engaged in any commercial activity should pay taxes on any net revenues from that activity, whether or not the activity is "related" in some way to the organization's charitable purpose. See, e.g., John D. Colombo, Commercial Activity and Charitable Tax Exemption 44 WM. & MARY L. REV. 487 (2002). I've also opined that if we did this, we could grant tax exemption rather broadly to permit organizations with some legitimate charitable purpose the ability to get tax-deductible contributions for their charitable activities, while still fully taxing any commercial activity. I believe this would simplify current law and compliance. For example, museum gift shop revenues would be fully taxable, instead of having to parse whether specific sales were "related" or "unrelated" as is currently the case (e.g., an art museum gift shop can sell replicas of art, art books, "arty" postcards and the like without UBIT liability, but sales of science books or "I Love NY" coffee mugs are subject to the UBIT; see, e.g., Rev. Rul. 73-104). A charity that operates a pay garage would pay taxes on the garage revenues as a whole, without allocating between parking receipts that are "related" to charitable activities and those that are not. I readily admit there are still some interpretive issues (are museum admission charges "commercial" revenues?), but I think these issues would be fewer and easier to resolve than esoteric questions of "relatedness."
It appears that a recent decision by the Supreme Court of the Philippines interpreting its statutory law with respect to charities has more or less adopted my approach with respect to nonprofit hospitals (to be clear, they didn't do this because they read anything I wrote; still, this indicates my approach isn't completely crazy). In Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. No. 195909, September 26, 2012 (full opinion here; an excellent summary is available here), the Philippine Supreme Court held that Philippine law distinguished between a fully exempt "charitable" hospital or educational institution (whose activities must be exclusively charitable) and a private nonprofit hospital or educational institution engaged in some charitable and some commercial activity. With respect to the latter, the organization is required to pay income tax on their commercial revenues (albeit at a reduced rate as provided in Philippine law), but not required to pay tax on revenues resulting from charitable activities. In the context of the private nonprofit hospital at issue, the court held that revenues from paying patients would be taxable (again, at the reduced rate provided for by Philippine law), because these revenues were part of a for-profit business.
The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively” for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).
In other words, revenues from commercial (e.g., for-profit) activity (in this case, paying patients) are taxable, but the organization remains tax-exempt on its actual charitable activities. There is no "relatedness" test here as under our UBIT; the only question is whether an activity is for-profit (commercial).
While this decision obviously is the result of the sui generis statutory law in the Philippines, if it works there, I don't see any reason why it couldn't work here . . . the description of St. Luke's operations in the opinion sounds like a pretty typical nonprofit hospital here in the U.S. (We'll have to talk, though, about this preferential rate stuff . . .).
Thursday, January 17, 2013
As reported by The Chronicle of Philanthropy and BNA Daily Tax Report, a recent Treasury Inspector General for Tax Administration report estimates that approximately 60% of of claimed noncash charitable contributions (e.g., cars, boats, artwork, real estate) are reported incorrectly with little to no IRS enforcement. The report further estimates that more than 273,000 taxpayers erroneously reported $3.8 billion in noncash contributions in taxable year 2010 (i.e., the proper paperwork and appraisals were not filed), resulting in potentially $1.1 billion in lost revenues to the federal government. The IRS disputes the amount of revenue loss.
One of the primary areas of concern centers on car/vehicle donations. Although taxpayers are generally allowed to deduct the fair market value of property donated to qualified charitable donees, there are further limitations on car donations. Specifically, a car donor must substantiate, and not deduct more than, the amount the charity received from selling the car for cash. The report concluded that the IRS is not effectively enforcing compliance with the reporting requirements for motor vehicle donations. Over 35,846 tax returns filed for 2011 claiming $77 million in charitable donations of cars failed to comply with reporting requirements.
Senator Charles Grassley (R-Iowa), who chaired the 2005 law changes requiring greater taxpayer substantiation of the value of donated items, criticized the Obama administration's push to raise taxes on higher-income taxpayers, while "giving a free pass to those claiming high-value deductions for donations of vehicles, art, or securities.”
Monday, January 14, 2013
In an article entitled "Charitable groups fear tax victory in 'fiscal cliff' deal will prove hollow," The Hill reports that, despite the preservation of the charitable contribution deduction in the recent American Taxpayer Relief Act of 2012, charitable organizations are still concerned about their future due to debt ceiling negotiations and other automatic spending cuts still to be addressed by Congress. The article discusses that charities should take heart in recent Tax Policy Center estimates that charitable giving will increase approximatley 1 percent in 2013 and the reenacted "Pease" limitation on itemized deductions should have "negligible effects on the tax incentive for charitable giving." Nevertheless, charities are concerned that the Obama Administration will continue to push for limits on deductions for wealthy taxpayers, thereby resulting in decreased charitable donations overall.
[See also, "Catholic Charities and Others Fretting over Tax Plight of the Wealthy" in Nonprofit Quarterly]
Tuesday, January 8, 2013
First, Happy New Year, All!
As a public service, I thought I'd provide for all of you a down-and-dirty summary of the provisions of H.R. 8 (a.k.a. The American Taxpayer Relief Act of 2012, or "How I Avoided the Fiscal Cliff Retroactively") that specifically affect charities. I realize that one could argue that most of the tax provisions in the legislation (such as the rate changes, estate tax exemption amounts, and the AMT patch) will impact charities or charitable giving in one way or another. I'm going to focus more narrowly on those provisions with a direct impact on charity, as follows:
H.R. 8 Section 101(b)(2) (page 4 of the GPO version of the bill, linked above) - The Pease Limitation. Amends I.R.C. Section 68 to reinstate and amend the so-called "Pease Limitation", which phases out the benefit of certain itemized deductions (including the charitable deduction) for higher income individuals ($250,000 individual AGI, $300,000 married filing jointly AGI for 2013).
- H.R. 8 Section 206 (GPO page 12) - Contributions for Conservation Purposes. Extends I.R.C. Section 170(b)(1)(E)(vi) and I.R.C. Section 170(b)(2)(B)(iii) until December 31, 2013. I.R.C. Section 170(b)(1)(E) contains the rules for contributions of Qualified Conservation Easements; I.R.C. Section 170(b)(2)(B) discusses the treatment of Qualified Conservation Easements by corporate farmers and ranchers.
H.R. 8 Section 208 (GPO page 12) - Charitable IRA Rollover (with Retroactivity!). The Charitable IRA rollover contained in I.R.C. Section 408(d)(8) was extended from December 31, 2011 to December 31, 2013. But wait, you say - what if I wanted to make a contribution from my IRA in 2012, which was in the history books by the time H.R. 8 actually passed? No worries for you if you act fast! Qualified charitable distributions made after December 31, 2012 and before February 1, 2013 shall be deemed to have been made on December 31, 2012.
- H.R. 8 Section 314 (GPO page 18) - Contributions of Food Inventory. The special rules for contributions of food inventory in I.R.C. Section 170(e)(3)(C) are extended from December 31, 2011 to December 31, 2013.
- H.R. 8 Section 319 (GPO page 19) - Payments to Controlling Exempt Parents. The special rule limiting the impact of I.R.C. Section 512(b)(13) to only those amounts in excess of what would be allowed under Section 482 is extended to December 13, 2013.
H.R. 8 Section 325 (GPO page 21) - S Corporation Basis Adjustments. The special rule contained in I.R.C. Section 1367(a)(2) regarding the adjustment of a shareholder's basis in S Corporation stock to reflect charitable contributions is extended to December 31, 2013.
There are bond financing provisions that might be of special interest to some nonprofits, and I'm certain that health care facilities will be interested in Title VI of the bill, which contains a number of Medicare and other changes. Other than those provisions, what did I miss?
Wednesday, January 2, 2013
With Congress having passed legislation to avert the fiscal cliff, Doug Donovan writes in today's Chronicle of Philanthropy that the deal could hurt charitable giving. According to Donovan, the legislation Congress passed yesterday "limits how much wealthy people can claim in deductions for charitable contributions and other spending when they itemize their tax returns." He also reveals that "throughout December nonprofits have been lobbying Congress and President Obama not to impose limits on tax savings really wealthy donors get when they make charitable contributions."
The Senate-crafted plan enacts limits that charities have opposed. It reinstates a provision eliminated in 2010 that reduces itemized deductions by 3 percent of the amount that household income exceeds $300,000. Write-offs grow more limited the more taxable income a person has and could reduce the value of deductions by up to 80 percent for the highest-income taxpayers, according to the Tax Policy Center.
The 2010 limits have long been opposed by charities. Independent Sector noted that the limit could reduce giving in its February analysis of the idea, which was included in President Obama’s 2013 budget proposal.
The organization, which represents about 600 nonprofits, also signed a letter this summer from the Charitable Giving Coalition to Sen. Harry Reid, the Senate majority leader, stating its opposition to the deduction limits.
The letter, signed by nearly 30 of the nation’s largest nonprofit organizations, said the limits would “result in fewer contributions flowing to America’s charities, which are now being asked to provide even more services to the most vulnerable among us.”
I am unsympatheitc to the cries of the Charitable Giving Coalition. I cannot understand why the organization's members believe that the only reason people give to nonprofits is to get a tax deduction! Also, whoever said that wealthy individuals give more per capita than their poorer fellow citizens?
Thursday, December 13, 2012
The Fiscal Cliff is topping the headlines these days. A part of that discussion involves potentially severe reductions in certain deductions, like the charitable contributions deduction, in order to eliminate or minimize rate increases. At the front of the debate is the White House, two Presidential advisors of which recently posted a blog entry entitled "Why Taking Tax Rates Off the Table Threatens Non-Profits and Charitable Giving." Here is a small abstract from that blog entry:
But what is clear is that proposals that take tax rates off the table would threaten donations to universities, non-profit hospitals, social services providers, arts and cultural institutions and other nonprofit organizations. This is because – to make the math work – these proposals rely on hundreds of billions of dollars of revenue that would result from drastically cutting or eliminating the charitable deduction as we now know it.
Currently, the tax code encourages gifts to charity by allowing taxpayers to claim itemized deductions for charitable giving. But – as a new report by the National Economic Council (NEC) shows, the most prominent dollar cap proposals would effectively eliminate the charitable deduction for up to 13 million households and for as much as 60 percent of currently deductible giving.
Using Congressional Budget Office assumptions, the NEC estimates that a $50,000 cap would reduce charitable giving by about $150 billion over 10 years, while a $25,000 cap would reduce giving by about $200 billion. Even a $25,000 cap that applied only to high-income households would reduce giving by at least $10 billion per year. As the report discusses, a cap could impact nonprofit organizations in every sector and in every state.
In a recent article in the Tulsa World, the newspaper reported that last week approximately 225 nonprofit representatives travelled to Washington "warning elected officials that tampering with the charitable tax deduction would limit or even eliminate their ability to serve those in need." A similar article was published by The Oregonian, titled "Oregon charities give good reasons for dodging fiscal cliff."
As reported by the Chronicle of Philanthropy, the Independent Sector published a 2-page advertisement in Politico, directed to President Obama and Congress and President Obama, entitled “Don’t push charities over the fiscal cliff.” Another large nonprofit association, the American Hospital Association, sent a letter to Senate Majority Leader Harry Reid urging him to preserve the charitable contributions deduction.
The Wall Street Journal reported that the lingering uncertainty around the negotiations between President Obama and Congress is resulting in donors making contributions to "charitable-gift funds" (i.e., donor-advised funds) prior to the end of the year, allowing them to take a deduction in 2012 but delay giving decisions until a later time. Specifically, fear surrounding Congress's potential cuts or caps on charitable contributions for 2013 is leading to urgency to take advantage of deductions under current law.