Tuesday, May 24, 2016
The new overtime regulations taking place on Dec. 1, 2016, will certainly effect labor decisions across the country. For the first time in twelve years, the threshold amount to determine if salaried workers are exempt from overtime pay will be raised from $23,660 per year, to $47,476 per year. Generally, an employer paid a salary under the new threshold will be required to be compensated for overtime worked, unless an exemption applies. In order to qualify for the new overtime payment rules, an employee must work for a covered enterprise, or be a particular worker who is covered.
If a non-profit meets the “enterprise coverage test,” all employees working for the organization are covered by the new regulations (unless an exemption applies). To be considered a covered enterprise, “an entity must have annual revenues, that is, volume of sales made or business done, of at least $500,000.” However, non-profits are not considered covered enterprises unless they engage in “ordinary commercial activities that result in sales made or business done” that exceeds $500,000. Ordinary commercial activities are those normally associated with operating a business, such as selling products or services. Charitable activities, however, such as providing food, shelter, or clothing, generally are not ordinary commercial activities.
To determine if a non-profit is a covered enterprise, only business purpose activities are considered. Income used to further the non-profit’s charitable activities is not factored into the $500,000 (e.g., membership fees and donations). Organizations can engage in both charitable acts, as well as business activities, and such organizations could potentially qualify as a covered enterprise.
Finally, the new regulations will automatically apply to some entities unless there is a specific exception. These entities include: “hospitals; institutions primarily engaged in the care of older adults and people with disabilities who reside on the premises; schools for children who are mentally or physically disabled or gifted; federal, state, and local governments; and preschools, elementary and secondary schools, and institutions of higher education.”
These regulations will certainly impact the way in which non-profits decide how to earn and spend revenue, attempting to have as much revenue as possible further its charitable activities to keep them below the $500,000 threshold. One thing is for sure, volunteers and donations will be crucial to a non-profits’ success.
For a detailed look at individual exemptions, please see the provided link.
Monday, May 23, 2016
A recent article on proposed Delaware legislation highlights the complexities and competing objectives lawmakers face when deciding if a nonprofit should be exempt from paying local property taxes. Here, the decision is whether or not to add the Milford Housing Development Corporation, EJB Inc., and Martha and Mary’s Place Inc., to the current list of 76 nonprofits in Delaware that currently enjoy being exempt from local property tax. These entities provide housing and/or drug treatment services to community members in need. While these organizations undoubtedly provide essential public services, granting these entities tax exempt status can have negative effects on other public services.
For example, the Milford Housing Development Corporation paid almost $30,000 in property taxes last year. To further add to the conundrum, almost all of those funds were appropriated to a local school district. In times of financial hardship, policy makers are faced with tough decisions and must balance different objectives in deciding where tax revenue should come from, and what that revenue should benefit. A thorough cost-benefit analysis must be undertaken to determine the full reach of granting an entity tax-exempt states, including both positive and negative effects. Granting an entity tax-exempt status, or deciding to appropriate tax funds to a particular area, almost inevitably means that another worthy entity will bear the cost.
Some municipalities try to alleviate this burden by requiring those entities that are designated tax-exempt to pay set fees to contribute back to the greater good. However, this can hinder the accomplishment of the entity’s purpose and cause due to a lack of funds.
Ultimately, it would take an army of professionals to make a “perfect” decision on who should be granted tax-exempt status, and who should bear the cost of that status. Even then, by the time a thorough analysis has been undertaken, the state or municipality will likely be facing different needs as a community. Policy makers must employ great foresight in making these tough appropriation decisions.
Saturday, May 14, 2016
The Wall Street Journal reports that the Bill, Hillary & Chelsea Clinton Foundation may have violated federal tax law by facilitating investment in the for-profit company Energy Pioneer Solutions Inc. According to the article, the Clinton Foundation claimed in September 2010 that it helped arrange a $2 million commitment from a private individual to the then new business. It also notes that some of the owners of the business have either Democratic political ties or, in one case, is a close friend of former President Bill Clinton. What the article fails to do, however, is explain in any detail how this situation constitutes "private benefit" in legal sense. This failure creates a false impression regarding what that term actually means and how it applies to the Clinton Foundation in this situation.
It should be noted initially that the Clinton Foundation, despite its name, is not a "private foundation" for federal tax purposes and therefore is not subject to the more restrictive rules applicable to private foundations. It is not a private foundation for the simple reason that it receives financial support from a broad range of sources. It is therefore only subject, like other public charities, to the relatively vague prohibitions against private inurement and private benefit.
The Wall Street Journal article correctly does not invoke the private inurement prohibition. That prohibition only applies to benefits provided to insiders of a charity. Nothing in the story indicates that was the case here, as the only party that benefitted was Energy Pioneer Solutions and its owners, none of whom were insiders of the Clinton Foundation or even family members of insiders. The article instead invokes the more amorphous private benefit limitation, that bars a charity from unduly benefitting any private party.
This is where a careful legal analysis was needed but is lacking. Based on the facts reported in the article, the situation described does not run afoul of the private benefit limitation for at least two reasons. First, the amount of benefit allegedly provided by the Clinton Foundation, as opposed to the private investors, was minimal and so does not rise to a level that constitutes a prohibited private benefit. The article does not assert that the Clinton Foundation provided any funds to Energy Pioneer Solutions, nor does it even explain what resources the Clinton Foundation expended (if any) to facilitate the investment by private individuals of their own funds in the for-profit company. Cases where the IRS has asserted a private benefit violation have usually involved a charity devoting essentially all of its efforts to benefitting a private party. For example, one often-cited case involved a charity that essentially served as a marketing arm for intellectual property owned by (and licensed from) a for-profit company (Est of Hawaii v. Commissioner, 71 T.C. 1067 (1979)). Another prominent case involved a charity that trained political campaign professionals, but only ones who then went on to work for a single political party's candidates and affiliates (American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989)).
Second, most charitable activities unavoidably provide private benefit. For example, schools provide a private benefit to all of their students as a necessary part of furthering an educational purpose. The key issue is therefore whether any private benefit here was in furtherance of, and therefore incidental to, the charitable purpose served. The facilitated investment was in a start-up company that focused on protecting the environment through its business activities. Even more restricted private foundations are permitted to invest, whether in the form of loans or equity stakes, in for-profit business that promote charitable purposes such as environmental protection if the primary purpose of the investment is to promote a charitable purpose and production of income or appreciation of property is not a significant purpose. And private foundations are even permitted to count such "program-related investments" as charitable spending that counts toward their annual minimum payout requirement. In this instance the Clinton Foundation only facilitated an investment by private parties in a company with a mission that matched the Clinton Foundation's charitable purposes and that likely needed the assistance to further its environmental protection goals given its start-up nature. Any private benefit to the company and its owners was therefore incidental to the furtherance of the Clinton Foundation's charitable purposes by arranging this investment and so permitted legally. The fact that Energy Pioneer Solutions has struggled financially, as detailed in the article, actually demonstrates the importance of the Clinton Foundation's efforts to help this (for-profit) environmental protection effort.
Finally, it should be noted that the article makes much of the fact that at least one advisor to former President Bill Clinton objected to the Clinton Foundation publicly touting its role in facilitating this investment, and that this role was eventually removed from a public database of such facilitations maintained by the foundation. There are at least two plausible explanations for these actions, neither of which indicates any violation of federal tax law. First, and as the article itself demonstrates, touting the investment risked vague allegations that something improper had occurred even though legally nothing had. Second, it actually is not clear from the article how much of a role the Clinton Foundation actually had in facilitating the investment; touting the foundation's publicly therefore might actually have been overstating the foundation's involvement. But neither a sensitivity to public perceptions nor perhaps a little undue boasting violates the law. The bottom line is that whatever public perception concerns the investment may raise, it does not raise any federal tax concerns for the Clinton Foundation based on the reported facts.
Thursday, May 12, 2016
For months now we have been bombarded with stories of the water crisis in Flint, Michigan. The press, politicians, legislators, residents of Flint, even Tax Law professors, have been expressing their opinions on who is to blame for the crisis. Some people have called for the Governor's resignation. The government -- federal and state -- eventually sprang into action by allocating funds to address the problems caused by the water crisis. Meanwhile, the people of Flint are waiting for the money to show up.
Yesterday's Christian Science Monitor brought some good news to the people of Flint: ten charitable organizations have pooled their resources to donate $125 million toward recovery efforts in Flint. Highlighting the fact that philanthropy has bested the government, the Monitor states:
Funds are about to flood into Flint, Mich. -- but they are not coming from the government.
The aid will support ongoing testing of lead levels as well as community groups, economic development, and other efforts to revive the largely black and low-income city. "This is the new normal, in terms of how philanthropy can really increase its impact and can be nimble while we wait for the state and federal government" to act, says La June Montgomery Tabron, CEO of the W.K. Kellogg Foundation, one of the participating grant makers.
The responses by the foundations give credence to what some observers see as a trend for philanthropy to step in when bureaucracy and partisanship bog down government's response in times of crisis. "It's great that we have charitable organizations that are willing to step up and try to help," said Charles Ballard, a Michigan State University economics professor. "But the only reason we're talking about this in the first place is that governments, most notably the state of Michigan, just dropped the ball in a huge way."
That's one man's opinion; what's yours?
Tuesday, May 10, 2016
Today's Philanthropy Digest is reporting that while the U.S. high school graduation rate rose to a record high 82.3 percent in 2014, the nation is not on track to reach the goal of achieving a 90 percent rate by 2020. That's according to an annual study from Civic Enterprises and the Everyone Graduates Center at John Hopkins University's School of Education.
Conducted in partnership with America's Promise Alliance and the Alliance for Excellent Education, the report from GradNation, 2016 Building a GradNation: Progress and Challenge in Raising High School Graduation Rates, found that while Iowa has achieved a 90 percent graduation rate and twenty other states are on track to do so by 2020, for the first time in four years the nation as a whole is not on track to meet the goal. According to the study, 2, 397 low-graduation-rate high schools -- defined under the Every Student Succeeds Act as those with at least a hundred students enrolled and an Adjusted Cohort Graduation Rate of 67 percent or lower -- enrolled a total of 1.2 million students nationwide, even as the number of large low-graduation-rate schools with at least three hundred students was halved from 2,000 to 1,000 between 2002 and 2014. In forty-one states, low-income students accounted for more than 40 percent of those enrolled in low-performing schools -- including twelve states where they made up more than 75 percent of the student body. African Americans and Latinos made up more than 40 percent of enrollment in low-graduation rate schools in fifteen and nine states, respectively.
The Digest continues:
The study also found that low-graduation-rate schools account for 7 percent of all district schools (and 41 percent of all low-graduation-rate schools), 30 percent of charter schools (26 percent), 57 percent of alternative schools (28 percent), and 87 percent of virtual schools (7 percent). The report recommends that policy makers set clear definitions and give graduation rates the weight they deserve in ESSA; require all states to report extended-year graduation rates in addition to four-year grad rates; create evidence-based plans to improve low-graduation-rate high schools; and ensure that alternative and virtual schools are included in state accountability and improvement systems.
"As the report points out, raising the graduation rate to 90 percent would require graduating an additional 285,000 students," said America's Promise Alliance president and CEO John Gomperts. "Putting it that way makes the goal appear that much more attainable. But to graduate this additional number of students equitably, the nation will have to focus on getting significantly more low-income students, students of color, students with disabilities, English-language learners, and homeless youth on track to earning a diploma. Persistence is key."
Needless to say, the government -- federal, state and local -- will have to allocate more tax dollars to education, to ensuring that the facilities and personnel are available to guide these students towards earning their graduation diplomas.
Friday, May 6, 2016
As has been covered in this space repeatedly (for example, with respect to Illinois and Maine), the combination of wealthy nonprofits, valuable real estate, and government budget pressures continues to lead to battles between those nonprofits and governments over property tax exemptions. New Jersey has become perhaps the most active battleground - NorthJersey.com reported last month that 26 of the state's 62 nonprofit hospitals are now embroiled in tax-court cases, building on a 2015 Tax Court of New Jersey ruling against Morristown Medical Center. While earlier this year New Jersey Governor Chris Christie announced an agreement to freeze property tax assessments for nonprofit hospitals for two years in order to give a to-be-formed Property Tax Exemption Study Commission time to review the issue, the legislature has yet to act on the legislation needed to implement this proposal. Additional coverage: NJ.com. The hospital battles join the ongoing lawsuit by individual residents of Princeton, N.J. against Princeton University that a state trial judge has refused to dismiss (a decision now upheld earlier this year by a state appellate court). For recent coverage of that suit, see Bloomberg and Fortune.
In related news, Gerard F. Anderson (John Hopkins) and Ge Bai (Washington & Lee) just published a study reporting that seven of the ten most profitable hospitals in the United States in 2013 were nonprofits. At the same time, they found more than half of the hospitals they studied (which included for-profit and public hospitals as well as nonprofits) incurred losses from patient care services and only 2.5 percent earned more than $2,475 per adjusted discharge. Here is the abstract for the study, which appears in HealthAffairs:
To identify the characteristics of the most profitable US hospitals, we examined the profitability of acute care hospitals in fiscal year 2013, measured as net income from patient care services per adjusted discharge. Based on Medicare Cost Reports and Final Rule Data, the median hospital lost $82 for each such discharge. Forty-five percent of hospitals were profitable, with 2.5 percent earning more than $2,475 per adjusted discharge. The ten most profitable hospitals, seven of which were nonprofit, each earned more than $163 million in total profits from patient care services. Hospitals with for-profit status, higher markups, system affiliation, or regional power, as well as those located in states with price regulation, tended to be more profitable than other hospitals. Hospitals that treated a higher proportion of Medicare patients, had higher expenditures per adjusted discharge, were located in counties with a high proportion of uninsured patients, or were located in states with a dominant insurer or greater health maintenance organization (HMO) penetration had lower profitability than hospitals that did not have these characteristics. These findings can inform policy reforms, while providing a baseline against which to measure the impact of any subsequent reforms.
Wednesday, May 4, 2016
- Late last month China adopted a new Law on the Management of Domestic Activities of Overseas Nongovernmental Organizations. According to a helpful summary prepared by Mark Sidel (Wisconsin) for Foreign Policy, the law shifts oversight of foreign NGOs to the Ministry of Public Security (MPS) by requiring such groups to register, be authorized by, and report to MPS and also to "find a Chinese partner organization [vetted in advance by MPS] to take responsibility for all of the foreign entity's work in China." This shift is significant because it places all such organizations under the direct jurisdiction of China's internal security apparatus. The Law also restricts the subject matter areas and, depending on the subject matter, geographic areas in which foreign NGOs can operate. The White House promptly raised concerns about the new law, even as foreign NGOs struggled to understand how it applies to them and their activities. Additional coverage: Boston Globe/AP; NY Times; The Guardian.
UPDATE: Economist coverage.
- Egypt has launched criminal investigations of human rights activists and the organizations with which they are associated based on allegations that they took foreign funding to try to destabilize the country. An Egyptian court is currently considering whether to freeze the bank accounts and other assets of the targeted individuals, an action that could be followed by formal criminal charges that carry up to 25 years in prison, according to a recent NPR Morning Edition story. Additional coverage: LA Times; NY Times; The Guardian.
- Russia recently outlawed the pro-democracy National Democratic Institute under a law that has been used against it and four other organizations with links to U.S. funders, according to the NY Times. The stated reason for the ban was that the group posed "a threat to the foundations of Russia's constitutional order and national security," a charge that both the group and the U.S. State Department rejected.
Tuesday, May 3, 2016
Targeting Religious Organization Tax Benefits, Religious Orgs Pushing Back, and the Scandal of the Month
A flurry of litigation targets the tax benefits enjoyed by religious organizations and their ministers, including the parsonage allowance exclusion and property tax exemptions. At the same time, religious organizations are pushing back on government regulation by challenging the IRS enforcement of the political campaign intervention prohibition. And of course news outlets are continually searching for possible behavior by religious groups and sometimes finding it.
In the courts, the Freedom From Religion Foundation has refiled its complaint challenging on Establishment Clause and Due Process Clause grounds the parsonage allowance exclusion provided to ministers by Internal Revenue Code section 107. In an attempt to remedy the standing issue that doomed its earlier challenge, FFRF's new complaint asserts that it provides a housing allowance to its officers but solely because they are not ministers that allowance is subject to federal income tax. It remains to be seen whether these changed facts are sufficient to overcome the general prohibition on taxpayer standing, although the Seventh Circuit's earlier decision on this issue indicates they may be.
At the same time, the Massachusetts Supreme Court has taken up the question of what counts as sufficiently "religious" use of real property to qualify that property for tax exemption. Areas of the property at issue include a maintenance shed, a coffee shop, conference rooms, a religious bookstore, and part of a forest preserve. A recent Atlantic article (hat tip: Above the Law) details the possible significant ramifications of the case, both in Massachusetts and nationally, given the increasing financial pressure on local tax assessors to narrowly interpret property tax exemptions. Additional Coverage: WBUR.
Religious organizations are not solely on the defensive, however. The Alliance Defending Freedom, not satisfied with its increasingly popular Pulpit Freedom Sunday challenge to the Internal Revenue Code section 501(c)(3) prohibition's application to churches and other religious organizations, has now filed a Freedom of Information Act lawsuit to force the IRS to disclose its rules for investigating churches. ADF is basing its lawsuit on the disclosure by the IRS, in response to a FFRF lawsuit, that it was actively enforcing the prohibition as against churches. For a discussion of the bind ADF and FFRF are putting the IRS in, see this Surly Subgroup blogpost by Sam Brunson.
Finally, religious organizations continue to be fruitful sources for news outlets looking for scandals. Most recently, the City Church of New Orleans was the subject of a story by WWLTV detailing an ongoing state criminal investigation. The allegations against the church include both ones that are sadly familiar - financial mismanagement and use of church resources to benefit the private business interests of church leaders - and ones that are less common - lying to collect federal education grants and film tax credits. It remains to be seen, of course, whether these allegations are shown to be accurate or not.
Monday, May 2, 2016
In both Congress and the federal courts battles continue over disclosure of information relating to tax-exempt organizations. In California, a federal district judge ruled that California Attorney General Kamala Harris cannot force Koch brothers-related IRC section 501(c)(3) Americans for Prosperity Foundation (AFP) to provide a copy of the substantial donor list it files with the IRS (Schedule B to Form 990). While the decision was on an as-applied challenge and so only directly affects AFP, it was somewhat surprising given the earlier Ninth Circuit decision upholding the state disclosure requirement against a facial challenge. Whether the latest decision survives the almost certain appeal remains to be seen, however. Coverage: L.A. Times; Washington Post.
Not satisfied with the limited protected provided by this decision, Congress is now moving to eliminate the Schedule B entirely. H.R. 5053 cleared the House Ways and Means Committee late last week on a party-line vote, according to the Wall Street Journal (quoting LSU Professor Philip Hackney). The bill's fate is unclear, however, as it has already attracted public opposition from various outside groups, the N.Y. Times editorial board, and the Ranking (Democratic) Member of the Committee, according to the EO Tax Journal. It probably does not help its chances that the President for Government & Public Affairs at Koch Companies Public Sector, LLC publicly urged passage of the legislation.
Finally, the Sixth Circuit recently moved the disclosure needle in the other direction with respect to applicants for recognition of exemption. In In re United States (United States v. NorCal Tea Party Patriots, et al.), the court resolved a discovery dispute by holding that the names, addresses, and taxpayer-identification numbers of applicants for tax-exempt status are not “return information” and so are not protected from discovery by IRC section 6103, even if their applications are pending, withdrawn, or denied. The only immediate effect of the decision is to allow the plaintiffs to identify possible class members in this class-action litigation arising out of the IRS Exempt Organizations Division selection of section 501(c)(4) applicants for additional scrutiny. But the larger ramification is that such information likely is now exposed to Freedom of Information Act requests that can be litigated in the Sixth Circuit, as section 6103 was the sole barrier to such requests. IRS Commissioner John Koskinen also suggested that some other types of IRS filings may also be exposed to public disclosure as a result of this decision. For those who may be interested in learning more about the ramifications of this case, I will be providing additional coverage in the "At Court" section of the ABA Tax Times' next issue. Additional coverage: Wall Street Journal.
Thursday, April 28, 2016
Prince will no doubt have many legacies - musical and otherwise. One can only hope that his philanthropic legacy will be one of them.
During his lifetime, Price quietly supported any number of charitable organizations, mostly in the areas of education, urban renewal and the environment. I, for one, did not know that he was once named one of PETA's sexiest vegetarians. The general consensus appeared to be that he would have supported at death many of the charitable organizations and causes he supported during his lifetime.
Sadly, it appears that the tragedy of Prince's early death may now be compounded by the fact that he may have died intestate. According to news reports, his sister filed a petition for administration without a will. This is likely to cause difficulties because Prince had no direct heirs or ancestors, leaving a number of siblings and half-siblings. In addition, his estate is likely made up a significant amount of difficult to manage and difficult to value intellectual property assets, including unpublished music. Of course, this also means that to the extent Prince intended to benefit charitable causes through his estate, those charities may be out of luck if bulk of his assets pass through intestate succession.
I hope that Prince's estate does not devolve into another sad case study for estate and charitable planners everywhere.
Wednesday, March 9, 2016
When does an alleged zoning violation justify automatic removal of a property's tax-exempt status? New York State Supreme Court --Appellate Division, Second Department, recently had the opportunity to review the issue.
In Community Assn., Inc. v. Town of Ramapo, 2016 NY Slip Op 01458, 2nd Dept 3-2-16, the Second Department, reversing the trial court, determined that an alleged violation, for which the property owner had never been cited, did not justify the automatic removal of the property's tax-exempt status. The property had been tax-exempt for years as low-income property. The court found that the alleged zoning violation -- that the property owner had more than two residential apartments -- was not incompatible with the tax-exempt use. Therefore, the court held, the alleged zoning violation could not justify automatic removal of the tax-exempt status. Said the court:
[E]ven assuming that a zoning violation had been sufficiently established, the defendants have failed to articulate why such a violation, under the particular circumstances presented, should result in loss of the plaintiff's tax exemption. Not all violations of law automatically result in the loss of a tax exemption ... . 'The concern of the taxing authority is not with the observance or non-observance by plaintiff of regulatory provisions relating to a specific building, but to the use to which the real property as an entity is or is intended to be devoted' ... . This is not a case in which the applicable zoning regulation is incompatible with the occupant's tax-exempt use ... . In such cases, the rationale for denying the tax exemption is simple and clear, as compliance with both the tax-exempt use and the zoning regulation is impossible. Here, by contrast, the tax-exempt use of providing residential housing to low-income tenants is consonant with the property's permitted use as a two-family dwelling. Under these circumstances, the defendants have failed to establish, prima facie, that the nature of the alleged violation (i.e., that the plaintiff had more than two residential apartments) can serve as a valid legal basis for denying the property tax exemption ...".
So to answer the question with which we started, When does a zoning violation justify automatic removal of a property's tax-exempt status? New York's Second Department is clear: When the applicable zoning regulation is incompatible with the property occupant's tax-exempt use.
Tuesday, March 8, 2016
The NonProfit Times is reporting that under a tax proposal put forth by Democratic presidential hopeful Hillary Clinton, the charitable deduction would be exempt from a 28-percent deduction cap and the estate tax exclusion would return to 2009 levels.
According to the Times:
The tax benefit from specified deductions and exclusions would be limited to 28 percent. The cap would apply to all itemized deductions except charitable contributions but would reduce the value of deductions and exclusions for taxpayers in the 33 percent and higher tax brackets.
The proposals also would permanently reduce the tax threshold for estate taxes to $3.5 million ($7 million for married couples) with no adjustment for inflation, increase the top tax rate to 45 percent, and set the lifetime gift tax exemption at $1 million. In 2015, the basic exclusion for the estate tax is $5.45 million and Clinton’s plan would return it back to 2009 levels.
Friday, March 4, 2016
IRS Scandal Update: Crossroad GPS Approval, Class Certification in One Case, Settlement of Another, and 501(c)(4) Notices
The biggest development coming out of the IRS scandal in recent months was the public revelation that in November 2015 the IRS approved the application by Crossroads GPS for recognition of exemption under Internal Revenue Code section 501(c)(4). This approval means the entire application file is available to the public, and Robert Maguire has very helpfully made all the documents available at OpenSecrets.org at the end of his analysis of them. Based on a quick review of these hundreds of pages of documents, here are several take-aways:
- Part V of the Protest (and Part VI of the Revised Protest) highlights the most constitutionally problematic aspect of the existing limit on political activity by section 501(c)(4) organizations (and also of the prohibition on such activity by section 501(c)(3) organizations) - the vagueness of the facts and circumstances approach for determining whether a given communication or other activity is actually political campaign intervention.
- Regardless of your views on the merits of the application and the final IRS decision regarding it, the legal writing and submissions by the attorneys representing Crossroads GPS provide a good example of professional but strong (and ultimately effective) advocacy based on an extensive factual record. This advocacy both focused on small but critical details - such as whether particular communications were in fact political campaign intervention - and larger legal issues such as the constitutional issue mentioned above.
- The application materials provide many examples of communications and other activities that may - or may not - cross the line into political campaign intervention. In addition, most and possibly all of the communications are helpfully summarized in charts submitted by Crossroads GPS that include the geographic area of distribution, whether the organization asserted that the communication was part of an ongoing series, and other facts that the IRS has identified as relevant.
- Taken as a whole, the documents provide a comprehensive illustration of the application for recognition of exemption process, including the initial application, IRS questions and detailed responses, proposed denial, protest, communications with IRS Appeals regarding the protest, and then finally the favorable determination letter. It also reveals several apparent procedural missteps on the part of the IRS that Crossroads GPS then used to strengthen its case for granting the application.
Media coverage: Politico; ProPublica; Washington Post. Not surprisingly, the IRS decision has generated both scathing criticism (see this NY Times editorial), as well as defenders (see this commentary by exempt organizations and constitutional law attorney Barnaby Zall).
In other news, the IRS lost a motion in one case related to the scandal but managed to settle another case. The loss came in NorCal Tea Party Patriots v. IRS, where a U.S. District Court certified a class consisting of various groups that allege they were subject to an improper level of scrutiny by the IRS during the exemption application process because of their political views. For an analysis of the decision, see this Forbes column by Peter J. Reilly. More positively for the IRS, Law360 reports that the IRS agreed with the Republican National Committee to dismiss a federal suit by the RNC against the Service involving a request for documents relating to the Service's treatment of exemption applications under section 501(c)(4). As part of the settlement, the IRS agreed to pay more than $20,000 in attorney's fees.
Finally, the IRS announced in Notice 2016-09 that the new notice required from certain section 501(c)(4) organizations based on a statutory change Congress made this past December will not be due until at least 60 days after Treasury and the IRS issue temporary regulations under new section 506. The Notice also clarifies that an organization seeking recognition from the IRS of its exemption under section 501(c)(4) will still need to apply for such recognition and, until further guidance is issued, organizations seeking such recognition should continue to use Form 1024. Such an application remains optional, however.
Social Enterprise Update: A New Model of Philanthropy and a Newspaper's Creative Use of a Public Benefit Corporation
The Christian Science Monitor recently published an article titled "Should Saving the World Be Profitable?" It highlights the different approach that many of today's philanthropists - Mark Zuckerberg, Bill Gates, Warren Buffett, for example - take to doing good as compared to past major philanthropists. The following quote in the article highlights this difference:
“Older practitioners of philanthropy were far more responsive to the needs and desires of the public, supporting projects that were controlled largely by local communities or even government,” writes Garry Jenkins, a professor at The Ohio State University Moritz College of Law who focuses on philanthropy and corporate governance, in an e-mail. “Today’s philanthrocapitalists are much more controlling, more directive, more confident that they have all the answers to the social problems.”
And just a month earlier The Washington Post reported that the owner of a major newspaper operation was transferring its ownership to a nonprofit. That operation included the Philadelphia Inquirer, which the article identifies as the third-oldest newspaper in the United States and the winner of 20 Pulitzer Prizes, and its related website. What made the transfer particularly interesting is that it used a public benefit corporation, which actually owns the newspaper operations (and remains a taxable entity) but now is owned by the tax-exempt nonprofit Institute for Journalism in New Media, which in turn is operated under the auspices of the Philadelphia Foundation. Additional coverage: NY Times.
Wednesday, March 2, 2016
HuffPost Politics reports that a number of significant donations to the charitable foundations associated with Hillary Clinton and Donald Trump may not have been true gifts to the foundations from the original payors but instead payments for services to the now candidates, followed by gifts by Clinton and Trump to the foundations. Quoting three of this blog's contributing editors (Alice Thomas, Roger Colinvaux, and Nick Mirkay), the article questions whether contributions made in exchange for speeches (Clinton), a Comedy Central appearance (Trump), and other appearances and meetings (Trump) should have instead been treated as income to Clinton and Trump and subsequent contributions by them, not the original payors, to the respective foundations. The author of the article is careful to note that "[n]one of this necessarily means that Trump or Clinton has bilked taxpayers out of revenue" but also says "[m]ore information from both candidates' camps would be helpful." This is particularly true given that the two foundations at issue - the Bill, Hillary and Chelsea Clinton Foundation and the Donald J. Trump Foundation - each have a close relationship with their respective namesakes and have benefitted them in various ways (although all of those benefits may be perfectly legal).
(Photo from original story (Clinton: Mark Makela/Getty Images; Trump: John Gurzinski/AFP/Getty Images).)
UPDATE: The first sentence of this post has been revised to clarify the tax issue raised by the payments.
Monday, February 22, 2016
If you've ever been involved in helping a charity comply with the various state solicitation registration requirements, then somewhere between swearing and tearing your hair out I'm sure you thought, "There has to be a better way!" Shake your fist at the sky in despair no more! It is with unbounded joy that I share part of a note I received from Bob Carlson of the Missouri Attorney's General Office, who has been actively involved for some time with NAAG and NASCO's efforts to develop a simplified filing process. And lo...
The Multistate Registration Filing Portal, Inc. has released our Request for Information (RFI) regarding a Single Internet Registration Portal. ... The RFI has been posted at http://mrfpinc.org/rfi/. We welcome all comments and look forward to robust response to the RFI. We also invite you to share it with anyone you believe may be interested.
The MRFP will host a conference call on March 15, 2016 from 3:00 p.m. – 4:30 p.m. EST to provide additional background information and answer questions from the public about the registration process. Dial-in: (800) 232-9745; PIN: 3232959. Charities, their registration services providers, and any other interested parties are welcome to participate. ...
The RFI will remain open until April 1, 2016.... Our one-page project summary is still available at http://mrfpinc.org/project-overview/
Seriously awesome work, Bob and everyone involved with this process. I am sure I speak for lots of folks when I say that we can't wait to see this become a reality!
Friday, February 19, 2016
The San Antonio City Council plans to privatize its Convention & Visitors Bureau by creating a new nonprofit to house the operations currently conducted by a governmental agency. The plan is that this restructuring will allow the CVB to increase its budget by leveraging additional funding sources from the private sector (including “corporate sponsors, memberships, partnerships and advertising dollars”), which would allow it to be more competitive in its spending relative to other Texas cities.
According to press reports, the Council has not yet finalized the structure of the governing board. Options include having representatives of the council and the mayor’s office sit on the board alongside representatives from the tourism and business community, and/or having board members voted upon by the city council. Although having publicly-appointed and publicly–affiliated board members running a nominal nonprofit is hardly unique to San Antonio, these public-private nonprofit hybrids don’t fit neatly into either public or nonprofit legal regimes. As a result, it is often unclear whether quasi-governmental organizations must comply with state public record laws, which vary from state to state. (See, for example, the Texas Supreme Court’s 2015 decision regarding the Greater Houston Partnership.)
Moreover, what are the specific fiduciary obligations of board members who are city council members, or who are appointed (and, in many cases, removable by) city councils or mayors? One easy answer might be that all nonprofit directors share identical fiduciary duties to the organization; however, expecting city councilmembers and their representatives to abandon their political perspectives may not be realistic, and arguably would run counter to the very purpose of structuring the board to include city councilmembers. One solution would be for the City to clarify these rules through the process of creating the organization.
PS I’m new to the blog, and thrilled to be joining such a great line-up. I’m in my second year of academia as an Assistant Professor at Cleveland State University, where I have the fortune of holding a joint appointment with the Cleveland-Marshall College of Law and with the nonprofit management and public administration programs at the Maxine Goodman Levin College of Urban Affairs. My research interests include legal issues of volunteering, questions of board governance, and Constitutional rights of nonprofits, with a particular attention to how legal rules change behavior of nonprofit actors. I also continue to practice law from time to time, advising nonprofits and litigating matters pro bono. I’m happy to be on the team.
Friday, December 18, 2015
The almost certain to be approved omnibus spending bill and related tax bill illustrates in a nutshell the effects of the IRS scandal that blew up after it became known that the Service had subjected some conservative groups to greater scrutiny when they applied for tax-exempt status under Code section 501(c)(4).
No New 501(c)(4) Guidance. The provision garnering the most media attention in this area is Division E, Section 127 of the omnibus bill. It prohibits spending on guidance relating to section 501(c)(4) organizations and locks in "the standard and definitions" relating to that status "as in effect on January 1, 2010" (shortly before the Supreme Court's decision in Citizens United). While the provision only applies during the current fiscal year, which ends on September 30, 2016, it may kill any momentum such guidance had and so have more long-term effects. But if such guidance is only paused, a possible silver lining is that this delay ensures Treasury and the IRS will not issue it until after the end of the current presidential campaign.
Section 127 also does not address guidance for other types of section 501(c) organizations, including section 501(c)(5) labor unions and section 501(c)(6) chambers of commerce and trade associations. So in theory Treasury and the IRS could still issue guidance relating to the amount and definition of political activity for these entities. But given that such guidance could not be synced with guidance for section 501(c)(4) organizations until next fall at the earliest, it seems unlikely that they will pursue this course.
(The omnibus bill also bars spending by the SEC on guidance "regarding disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations" (Division O, Section 707) and on the Executive Branch of the President requesting "a determination with respect to the treatment of an organization described in section 501(c)" (Division E, Section 601(a)(2).)
Changed (Better?) IRS Procedures. The tax bill, which is also Division Q of the omnibus bill, contains several procedural changes that can be traced to the scandal:
Section 402. IRS employees prohibited from using personal email accounts for official business.
Section 403. If a person whose return or return information is improperly disclosed complains to Treasury regarding that disclosure, Treasury may inform that person about whether an investigation has been initiated, whether it is open or closed, whether any such investigation substantiated the improper disclosure by any individual, and whether any action has been taken with respect to that individual. (The provision also relates to other unlawful acts by federal employees with respect to the tax laws, as listed in Code section 7214.)
Section 404. Codifies the already available administrative appeal process relating to adverse determinations of tax-exempt status under section 501(c) and certain related determinations.
Section 405. New notification requirement for section 501(c)(4) organizations with a deadline for submitting the notice of 60 days after establishment of the organization. It applies both to entities organized after the bill's enactment and existing entities that have neither filed an application nor submitted an annual return or notice previously. There also is a provision allowing such an entity to "request" that it be treated as a section 501(c)(4) organization, in response to which Treasury (and so the IRS) "may issue a determination," and another provision allowing Treasury by regulation to require additional information supporting a new group's claimed 501(c)(4) status in their first annual return.
Section 406. Extending to all organizations seeking tax-exempt status under section 501(c) the existing declaratory judgment provision currently available to organizations seeking that status under section 501(c)(3).
Section 407. Adding to the list of "deadly sins" for IRS employees "performing, delaying, or failing to perform" any official action either for "personal gain or benefit or for a political purpose."
Section 408. Exempting from the gift tax transfers to any tax-exempt organization described section 501(c)(4), (5), or (6).
Other than the gift tax provision none of these appears problematic on its face, and the expansion of declaratory judgment option to all 501(c) is a welcome change. While the gift tax provision may draw some criticism, the reality is the IRS had already abandoned this fight (and I personally think this is the right call from a tax perspective, for reasons I plan to detail in an upcoming article). The one provision that may lead to some interesting questions and so require guidance is the new notice requirement, including how it relates to the existing (optional) application process for organizations seeking section 501(c)(4) status.
Frozen Budget for the IRS . The IRS budget continues to be frozen (and so losing ground once inflation is taken into account). More specifically, Division E provides the following, all of which are the same as for last fiscal year:
- Taxpayer Services: $2.16 billion
- Enforcement: $4.86 billion
- Operations Support: $3.64 billion
- Business Systems Modernization: $290 million
It also prohibits spending on targeting citizens for exercising their First Amendment rights and on targeting groups based on their ideological beliefs.
Bottom Line. The IRS continues to pay the price for the scandal in the form of congressional micromanagement and less funding. Any hopes of significant IRS enforcement relating to tax-exempt organizations and political activity are therefore unlikely to come to fruition in the foreseeable future.
UPDATE: For more information, see the Joint Committee on Taxation Technical Explanation for the tax bill.
Wednesday, December 2, 2015
As reported by The New York Times, the Senate Finance Committee sent letters to eleven private museums created and operated by opened by private collectors, focusing on whether sufficient public benefit is present to justify such museums' federal tax-exempt status. These letters were sent by chairman Senator Orrin Hatch (Utah) to galleries such as the Brant Foundation Art Study Center in Greenwich, Connecticut, Glenstone museum in Potomac, Maryland, the Rubell Family Collection in Miami, the Kreeger Museum in Washington, DC, and The Broad in Los Angeles, requesting additional information about visiting hours, donations, trustees, and valuations. Senator Hatch commented that: “Tax-exempt museums should focus on providing a public good and not the art of skirting around the tax code. While more information is needed to ensure compliance with the tax code, one thing is clear: Under the law, these organizations have a duty to promote the public interest, not those of well-off benefactors, plain and simple.” The Senator's letter acknowledged the important role that charitable organizations play in our society, but questioned whether "some private foundations are operating museums that offer minimal benefit to the public while enabling donors to reap substantial tax advantages."
The New York Times article opined that the Hatch letters were sent after another of its articles published in January 2015 "examined the proliferation of tax-exempt private museums created by wealthy art collectors, sometimes in their own backyards. Some of the galleries severely limit public access, closing their doors to outsiders for several months at a time, shunning signs and advertisements, and requiring visitors to make advance reservations." According to the article, this inquiry was part of a broader effort to re-examine institutions, including private museums and universities, which have enjoyed tax-exempt status for many decades.
Brian Mahany (Mahany Law) posted Non-Profit Hospitals and the False Claims Act to his firm's Due Diligence (Blog):