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.
- 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):
Wednesday, November 11, 2015
In honor of Veterans' Day, I am simply going to link to this CNBC post on its suggestions for the Top Ten Charities for Veterans. Of course, I have no doubt there are other worthy organizations out there - - feel free to mention yours in the comments. In any event, thank you to all of our vets for your service and sacrifice.
Tuesday, November 10, 2015
The National Philanthropic Trust released its 2015 Donor-Advised Fund Report on November 9th. NPT's report indicates that gifts to DAFs grew significantly in 2014, with assets held in DAF reaching a record level of $12.5 billion dollars. NPT further indicated that that the DAFs it studied also demonstrated an increase in grants, with $12.5 billion in assets given away at a payout rate of 21.9%. As discussed in this article in the Chronicle of Philanthropy, however, there is fundamental disagreement in the field on how to measure DAF payouts - the National Philanthropic Trust, Fidelity Charitable Trust and statisticians at the IRS all use different methodologies. Accordingly, we should all be wary about comparing apples to apples when looking at DAF payout rates.
Certainly, this report is good news for DAFs as it shows the popularly of DAFs as a giving vehicle; it may also have the unintended consequence of encouraging further (already heightened) scrutiny. The report is released at a time when serious discussion continues to occur regarding mandating minimum payouts for DAFs.
Correction: Thanks for the note in the comments, which indicated that total DAF assets according to the report were at $70.7 billion at the close of 2014. EWW
Monday, September 21, 2015
Last week, the IRS issued Notice 2015-62 discussing the tax treatment of an investment made for charitable purposes that does not otherwise qualify for status as a “program-related investment” under Code Section 4944(c). If you are reading this blog, you probably know that Code Section 4944 imposes a prudent investor-type rule on private foundations by imposing an excise tax on investments that jeopardize a private foundation’s charitable purposes. There is an exception to this general rule under Code Section 4944(c) for program-related investments (PRIs). For an otherwise charitably-motivated investment to qualify as a program-related investment, however, no significant purpose of the investment can be the production of income or the appreciation of property (among other things...).
The news is awash with discussions of socially-responsible investing, impact investing, mission-related investing and the like - however, none of these types of investing are tax concepts. Rather, they are ways that a foundation (or other endowment-type entity) can approach investing in a manner that considers charitable outcomes. Such categories of investments do not necessarily qualify as "program-related investments." Rather, PRIs are a thing, as my students would say - a specific term of art used in the tax code for which an investment must specifically qualify. As indicated above, in order to qualify as a PRI, no significant purpose of the investment can be for the production of income or appreciation of property. Of course, many investments view charitable outcomes as one of many bottom line results, along side of the potential for profit. Such charitably-inclined investments may fall into one or more of the categories of social investing, but they are not PRIs.
Notice 2015-62 clarifies the manner in which the prudent investor standard of Code Section 4944 treats the accomplishment of charitable purposes as a relevant factor when evaluating an investment that is NOT a PRI. For many years, there was some question as to whether fiduciary standards would allow a foundation to settle for a lesser yield in order to accomplish other charitable goals – for example, universities divesting in South Africa companies during the apartheid era, the Catholic Church not investing in contraception or land mine manufacturers, or affirmative investments in emerging green energy technologies. (For more discussion on this topic, see this very awesome article by the very awesome Susan Gary: It is Prudent to Be Responsible? The Legal Rules for Charities that Engage in Socially Responsible Investing and Mission Investing).
With the adoption of UPMIFA in 2006 by NCCUSL and UPMIFA’s subsequent adoption in almost all jurisdictions (what's up with that, Pennsylvania?), it became clear that most jurisdictions would allow for the consideration of charitable goals as an appropriate factor in evaluating an investment, so long as the overall determination was reasonable. Notice 2015-62 adopts a similar standard for Section 4944, stating that “foundation managers may consider all relevant facts and circumstances, including the relationship between a particular investment and the foundation’s charitable purpose.”
This Notice is certainly good news for private foundations involved in socially-responsible, mission-related, or impact investing. Of course, the Notice does not solve all of a private foundation’s worries in this area. A private foundation must still comply with Code Section 4944’s overall requirement that foundation managers exercise ordinary business care and prudence in selecting investments. For state law purposes, UPMIFA does not necessarily cover every type of charitable organization; therefore a foundation needs to determine whether or not a different state investment standard might apply. And of course, for excise tax purposes, only a program-related investment will be treated as a qualifying distribution for purposes of Code Section 4942.
Wednesday, September 9, 2015
In addition to our previous post on fellow blogger Lloyd Hitoshi Mayer's opinion piece regarding John Oliver's segment on the tax exemption of churches, Edward Zelinsky (Cardozo) posted to the Oxford University Press Blog, John Oliver, Televangelists, and the Internal Revenue Service:
John Oliver’s sardonic spoof of televangelists raises important issues that deserve more than comic treatment. Oliver’s satire was aimed both at the televangelists themselves and at the IRS. In Oliver’s narrative, the IRS acquiesces to televangelists’ abuse by granting their churches tax-exempt status and failing to audit these churches. The law defines the term “church” vaguely. The IRS’s allegedly lackadaisical approach, Oliver tells us, permits televangelical preachers to live luxurious lives replete with private planes and tax-free cash, financed by naive and exploited believers.
An initial problem with this critique is that the IRS does not write the Internal Revenue Code. Congress writes the Code, and the American people elect Congress. As Peter Reilly of Forbes observes, in section 7611 of the Internal Revenue Code, Congress constrained the IRS’s ability to audit churches. Oliver criticizes the resulting low audit rate of churches without explaining who is responsible for this low audit rate—namely, Congress.
There are competing interpretations of section 7611. This provision of the Internal Revenue Code might be viewed as a plausible effort to minimize church-state entanglement by constraining the IRS’s ability to audit churches. Alternatively, Code section 7611 might be understood as Congress bending to political pressures from churches. Both narratives might contain part of the truth.
In any event, the low audit rate of churches, which Oliver blames on the IRS, is the responsibility of Congress. For better or worse, Congress has made it more difficult for the IRS to audit churches than to audit other persons and institutions in Code section 7611.
Another bête noire of Oliver’s critique is the private planes used by some televangelists. However, a minister’s personal use of a church-owned plane is taxable income to him, just as a corporate executive’s personal use of a company plane is taxable income to him.
More generally, churches pay more taxes than many people believe (including, apparently, John Oliver). For example, ministers pay self-employment taxes while churches pay FICA taxes on the salaries of their nonclerical employees. In many states, churches are subject to the sales tax, either as buyers or sellers and sometimes in both capacities.
Churches do not pay federal and state income taxes on their basic operations. However, neither do other nonprofit organizations such as colleges, universities, hospitals, and private foundations. It would be interesting for Oliver to compare the lifestyles of the individuals who lead these tax-exempt institutions with the life-styles of the church leaders of whom Oliver is so critical.
Interestingly, one phenomenon which troubles Oliver—small donors sending cash contributions to televangelical churches—is not problematic from a tax perspective. Oliver obviously disapproves of these donors and their responsiveness to televangelists’ appeals. However, small donors’ contributions are typically not tax deductible. Contributions to churches and other charitable institutions are deductible by the taxpayer only if the taxpayer itemizes personal deductions on his Form 1040. This occurs only among more affluent donors whose deductible outlays exceed their standard deduction for income tax purposes.
For 2015, a single taxpayer’s standard deduction is $6,300, while the standard deduction for a married couple filing jointly is $12,600. Thus, the modest donations cited by Oliver, while large relative to the donors’ low incomes, are generally not tax deductible because donors with limited incomes typically do not contribute enough to itemize their deductions. The real beneficiaries of the Internal Revenue Code’s charitable deduction are upper-middle class and wealthy taxpayers. These affluent taxpayers typically do not contribute to churches, but to such secular entities as universities and museums.
Finally, the legal issue of defining a church involves serious trade-offs that Oliver does not explore. Again, Congress, not the IRS, writes the tax law. Congress could, through the Internal Revenue Code, define “church” more restrictively to crack down on the kind of arrangements Oliver satirizes. However, a narrower definition of a “church” could also be used against nonconformist and unconventional religions—which, at times in our country’s history, would have included abolitionist churches, the Catholic Church, the Church of Latter Day Saints, and other now mainstream organizations. For that reason, as a society, we generally seek to minimize church-state entanglement, even though the resulting zone of religious autonomy can be exploited by the kind of ministers Oliver skewers.
Since at least Sinclair Lewis’s Elmer Gantry, evangelical preachers have been subject to the kind of criticism Oliver advances. The IRS, particularly in its handling of exempt organizations, is in many ways a troubled and poorly-managed agency. If we categorize Oliver’s skit as mere entertainment, it was, well, entertaining. However, Oliver evidently seeks to place himself in another tradition of American life, the tradition of Mark Twain, Ambrose Bierce, Will Rogers, and Mort Sahl. These humorists participated in important political discussions through their comedic commentary.
By the demanding standards of this tradition, Oliver’s satire of televangelists falls short.
[Hat tip: TaxProf Blog]
Wednesday, August 19, 2015
Professor Victor Fleischer from the University of San Diego has an opinion piece in today's New York Times advocating an 8% annual required payout for university endowments over $100 million. Such a payout is more than the 5% amount required for private foundations under Section 4941, and well more than the payouts for medical research organizations and private operating foundations. In fact, it is more than the amount set as a rebuttable presumption of unreasonableness for endowment spending under Section 4(d) of UPMIFA, which is 7%.
Fleischer's concern was prompted by his research into investment manager compensation, which indicated that that private equity fund managers received more in payouts than students at at least five universities: Harvard, Yale, Texas, Stanford and Princeton. Much of this compensation was in the form of the dreaded carried interest, which is under scrutiny in numerous arenas, not just the nonprofit world.
It is an interesting proposition. I am somewhat dubious of an 8% payout, wondering whether that might have an adverse impact on the risk profile of endowments, which by all accounts already have fairly aggressive asset allocations (Fleischer says that endowments this size are returning over 8% already so it won't matter). I also wonder what rationale there is for subjecting only university endowments to such a rule, as it seems to me that there may be other exempt organizations of a similar size that might have a similar investment compensation issues (large foundations, for example, only pay 5%) that are not subject to such a high payout requirement. Finally, isn't the issue really the investment manager compensation, so mandating a payout isn't really reaching the root of the problem? But I may be picking around the edges on this. Would love to hear others thoughts.
Thursday, August 13, 2015
As announced Wednesday in a blog post by the head of the White House Office of Faith-based and Neighborhood Partnerships, nine federal agencies are issuing notices of proposed rulemaking (NPRMs) that will codify recommendations made by an advisory council to the President on "strengthening the social service partnerships the government forms with nongovernmental providers, including strengthening the constitutional and legal footing of these partnerships." The blog post further provides the overall content of the NPRMs:
The proposed rules clarify the principle that organizations offering explicitly religious activities may not subsidize those activities with direct federal financial assistance and must separate such activities in time or location from programs supported with direct federal financial assistance. For example, if a faith-based provider offers a Bible study as well as a federally supported job training program, the Bible study must be privately funded and separated in time or location from the job training program.
The NPRMs also propose new protections for beneficiaries or prospective beneficiaries of social service programs that are supported by direct federal financial assistance. In the proposed rules, the agencies set forth a notice to beneficiaries and prospective beneficiaries that informs them of these protections. These notices would make it clear, for example, that beneficiaries may not be discriminated against on the basis of religion or religious belief or be required to participate in any religious activities and advises beneficiaries that they may request an alternative provider if they object to the religious character of their current provider.
At the same time, the NPRMs assure religious providers of their equal ability to compete for government funds and of continuing protections for their religious identity like the ability of providers to use religious terms in their organizational names and to include religious references in mission statements and in other organizational documents. The NPRMs also state that the standards in the proposed regulations apply to sub-awards as well as prime awards, and set forth definitions of “direct” and “indirect” federal financial assistance. These areas have been sources of confusion for some providers.
The NPRMs are to be issued by the federal departments of Agriculture, Education, Health and Human Services, Homeland Security, Housing and Urban Development, Justice, Labor and Veterans Affairs as well as the U.S. Agency for International Development, and will apply to a broad range of federal programs that have involved faith-based organizations for years. These federal agencies will be requesting interested parties to submit comments over the next 60 days, which will then be considered in issuing final regulations.