Friday, March 17, 2017
Last month the IRS made publicly available information from approved Forms 1023-EZ (Streamlined Application for Recognition of Exemption). As Terri Helge noted in this space, one question those data raised was whether hundreds of churches had used the form to obtain IRS recognition of their tax-exempt status under Internal Revenue Code section 501(c)(3), as a review of the names of successful applicants suggested. Such use would be problematic because churches are ineligible to use the streamlined application.
Yesterday the Chronicle of Philanthropy reported (subscription required) that "Some Charities Misuse IRS Short Registration Form, Chronicle Data Suggests." The article focuses in particular on the fact that some applicants quickly grew into million-dollar-plus organizations even though the streamlined application is only supposed to be used by charities that expect to have relatively modest financial resources.
Both these observations raise serious concerns about whether the attempt by the IRS to limit the use of the form to relatively small charities that do not raise any complicated legal issues is failing, with hundreds if not thousands of ineligible organizations obtaining a favorable IRS determination letter by using the streamlined form. These observations also further bolster earlier concerns raised by the National Taxpayer Advocate, who drew on the IRS' own determination that the approval rate for Form 1023-EZ users drops from 95 percent to 77 percent when the IRS reviewed documents or basic information of applicants. The question we are left with is how will the cash-strapped and politically battered IRS respond to these apparent shortcomings. No word from the IRS on the answer to this question yet.
Thursday, March 16, 2017
Richard Spencer's White Nationalist Nonprofit Loses Tax-Exempt Status - For Failing to File Required Annual Returns
The L.A. Times reports that the IRS has revoked the tax-exempt status of the National Policy Institute, a white nationalist group headed by Richard Spencer, effective as of May 15, 2016. The revocation was not because of either a failure to satisfy the methodology test applied to "educational" organizations under Revenue Procedure 86-43 or for alleged political campaign intervention during the 2016 election. Instead, it was for failing to file the last three IRS annual information returns due from the organization, a failing that Spencer blamed on an IRS misclassification that led to the public listing for the group indicating it was not required to file such returns. Assuming that the Institute challenges this revocation, it will be interesting to see how the IRS responds to this argument.
Recent events and news stories highlight the uncertain future of global philanthropy. On one hand, the Hudson Institute recently celebrated global philanthropy as it transferred its Index of Global Philanthropy and Remittances and its Index of Philanthropy Freedom to the Indiana University Lilly Family School of Philanthropy, and the Christian Science Monitor reported late last year that China is encouraging domestic philanthropy by its growing number of billionaires. On the other hand, various news outlets have reported on numerous countries cracking down on foreign charities and foreign-funded domestics charities, including:
- China, where the Wall Street Journal reported late last year that a new law "puts foreign nonprofits in limbo" (subscription required).
- Hungary, where the Budapest Beacon reported earlier this year that the government is attacking allegedly "fake civil organizations," including the Hungarian Helsinki Committee, the Hungarian Civil Liberties Union, and Transparency International.
- India, where the N.Y. Times reported last week that the child-sponsorship organization Compassion International is ending its support of 145,000 children in that country, joining more than 11,000 non-governmental organizations (NGOs) that have lost their licenses to accept foreign funds since 2014. According to an earlier L.A. Times story from earlier this year, those NGOs include a domestic charity that fought caste-based discrimination for decades. (The N.Y. Times also reported that U.S. officials are trying to resolve the Compassion International case through diplomatic channels.)
- Kenya, where a watchdog group reported late last year that government authorities froze the bank accounts of a U.S. NGO carrying out an electoral assistance program ahead of this year's general elections.
- Turkey, where the Washington Post reported last week on the shutting down of U.S.-based Mercy Corps that was delivering aid to Syria, and Voice of America reported that Western aid groups now fear a broader crackdown on their efforts.
Tomorrow I will do a post about my recent article addressing these trends and the limited legal options NGOs currently have for countering them.
Wednesday, March 15, 2017
In case we needed any reminders that litigation takes a long time, the past several months have seen a few minor developments in the litigation that grew out of the section 501(c)(4) application controversy that exploded in May 2013 (!). In no particular order:
- The Supreme Court denied certiorari in True the Vote, Inc. v. Lois Lerner, et al., No. 16-613, and a related case, rejecting the plaintiffs' attempt to get the Bivens claims against Ms. Lerner and other IRS officials reinstated. The underlying case of True the Vote, Inc. v. IRS, et al. continues in the U.S. District Court for the District of Columbia as Civil Action No. 13-734, without the Bivens claims and so limited to injunctive and declaratory relief, along with the related case of Linchpins of Liberty v. United States, et al., Civil Action No. 13-777, in the same court. UPDATE: I should have noted in my original post that a case raising similar claims is also proceeding in the U.S. District Court for the Northern District of Texas (Freedom Path, Inc. v. Lerner, Civil Action No. 3:14-CV-1537-D), although there have been no major developments in that case since a decision last May on the government's motion to dismiss.
- A class action lawsuit continues in the U.S. District Court for the Southern District of Ohio, NorCal Tea Party Patriots, et al. v. IRS, et al., Civil Action No. 13-341, after the judge in the case ruled late last year that the IRS had to continue processing the application of one of the class members (the Texas Patriots Tea Party).
- Judicial Watch announced the IRS has discovered an additional 6,924 responsive documents relating to Judicial Watch's pending FOIA lawsuit against the IRS (U.S. District Court for the District of Columbia, Civil Action No. 15-220); it is not clear if these documents contain any new information, and the timetable for public disclosure of the documents is uncertain.
At the same time, Republican leaders in Congress have shown no appetite for pursuing impeachment of current IRS Commissioner John Koskinen even as conservative members argue for it and the Trump administration has quietly avoided demanding Koskinen's resignation even in the face of calls to fire him. For recent coverage, see The Hill and the Washington Post. It is hard not to imagine that the Commissioner is silently counting the days until his term ends in November, however. It will also be interesting to see who will be willing to replace him in the current political environment.
Monday, March 13, 2017
Last year Congress began hammering away again at the topic of university and college endowments, sending letters to 56 private universities with endowments exceeding $1 billion about how they use that money (see, for example, this Washington Post story). Yet in in its current session the topic appears to have fallen off at the least the public legislative agenda. While this is likely in part because of the many other controversial items on that agenda, part of the explanation may also lie with the recent struggles universities and colleges have faced relating to their endowments. The most recent survey of endowment returns and spending showed both a negative return on average for the endowments at 805 institutions and increased spending for the year ended June 30, 2016, according to a Bloomberg story (see also this Washington Post story). These disappointing results in the face of increasing financial demands have led to the major restructuring of at least one endowment fund office, with Harvard University laying off half of its investment group's employees according to a Boston Globe report.
Affordable Care Act Repeal (and Replace?)
The effort to repeal (and replace?) the Affordable Care Act would almost certainly have major effects on nonprofit health care providers, particularly hospitals, as well as likely every nonprofit that provides health insurance or health care to its employees or beneficiaries. The Nonprofit Quarterly provides a good summary of the current version of the repeal and replace legislation, including its likely effect on nonprofits. The full text of the current bill is available here.
"Johnson Amendment" Repeal or Modification
OpEds and lobbying letters continue to proliferate even as it is unclear when legislation removing or modifying the political campaign intervention prohibition for charities will advance. Pending bills include:
- The Free Speech Fairness Act (H.R. 781 and S. 264), which would modify the prohibition so as not to apply to "any statement which (A) is made in the ordinary course of the organization's regular and customary activities in carrying out its exempt purpose, and (B) results in the organization incurring not more than de minimis incremental expenses."
- H.R. 172, which would remove the prohibition entirely but, in an apparent oversight, only from Internal Revenue Code section 501(c)(3) and so not from section 170(c)(2) and other sections relating to charitable contribution deductions.
The two House bills have been referred to the House Ways and Means Committee, while the Senate bill has been referred to the Senate Finance Committee.
Recently expressed views on the legislation including statements from Douglas Laycock (UVA), Edward Zelinsky (Cardozo), the Council on Foundations, a community letter campaign launched by the National Council of Nonprofits and others, a letter from 86, mostly progressive groups (including the National Council of Churches), and a published debate in U.S. News & World Report featuring Doug Bandow (Cato Institute), Alan Brownstein (U.C. Davis), Roger Colinvaux (Catholic University), Barry Lynn (Americans United for Separation of Church and State), and Matthew Schmalz (College of Holy Cross).
The year began with fears that tax reform could sharply limit the availability of the charitable contribution deduction through such measures as limits on itemized deductions and estate tax repeal (see, for example, this Forbes piece). There are, however some recent indications that Congress is moving away from measures that would limit the deduction for at least income tax purposes, and even considering expanding the income tax deduction in several ways (see, for example, this report from the Council on Foundations on recent comments by members of Congress). The Trump administration has yet to release its tax reform proposals, however, and tax reform generally is a moving target as this story from The Hill underlines.
Wednesday, March 1, 2017
Yesterday, a class action lawsuit was filed against PayPal, accusing the website of redirecting donations made through its "Giving Fund" portal.
The website invites users to donate to more than a million charities through their system, promising that 100% of the funds will go to the identified nonprofit. However, the complaint alleges, if the donee nonprofit does not have a registered account set up with PayPal (and many organizations don't), the money will never reach the intended organization, and instead be redistributed to other nonprofits.
The complaint asserts legal theories of theft, breach of fiduciary obligations, and violation of consumer protection laws.
Friday, February 3, 2017
...but gaining a tax deduction!
At the recent National Prayer Breakfast, President Trump stated:
It was the great Thomas Jefferson** who said, the God who gave us life, gave us liberty. Jefferson asked, can the liberties of a nation be secure when we have removed a conviction that these liberties are the gift of God. Among those freedoms is the right to worship according to our own beliefs. That is why I will get rid of and totally destroy the Johnson Amendment and allow our representatives of faith to speak freely and without fear of retribution. I will do that, remember.
Some may not know the term “the Johnson Amendment,” but I am guessing that most of the readers of this blog would be familiar with Code Section 501(c)(3)’s prohibition on election intervention (“and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”) Famously, Lyndon Johnson was somewhat irritated by negative comments made by a tax-exempt organization (note: not a church… ) during his campaign for re-election to the Senate; thus the Johnson Amendment adding the prohibition on electioneering was born in 1954
Of course, “totally destroying” statutory provisions is traditionally the prerogative of Congress, so it remains to be seen whether this change will come to pass. A bill repealing the Johnson Amendment is introduced regularly each legislative session and rarely makes any progress; query if the current political climate would give it more traction. One wonders if the change takes the form of a repeal of the Section 501(c)(3) language (which would open electioneering to all c3s) or a special exception just for churches or religious organizations. Finally, would such repeal include rules that mirror the income tax provisions that disallow deductions for membership dues allocable to lobbying? If not, I suspect that a large number of political donors of all stripes will suddenly find religion right quick.
For further discussion of these issues, please see this piece by the most awesome Ellen Aprill in the Washington Post, who has probably forgotten more about the political and lobbying rules for nonprofits than I ever hope to know.
*With apologies to R.E.M.
**cough** This is me not commenting on the fact that Trump is quoting Thomas Jefferson, author of the First Amendment. Of course, all political commentary (or non-commentary, as the case may be) is my own individually and should not be attributed to anyone else. EWW
Wednesday, January 25, 2017
The NonProfit Times reports that the new year and new administration brings uncertainty to the future of the H-1B visa program. “The H-1B visa is a non-immigrant visa that allows for-profit companies and nonprofits to employ people in graduate level fields that require expertise in areas such as science, technology, engineering and mathematics (STEM).”
The program is a vital way in which universities attract and retain the best and brightest minds across the globe. In 2016, 29,227 H-1B applications were approved for non-profits, with almost 27,000 of those being universities. Commentators are concerned that a change in the program could hinder both the quantity and quality of research in American universities.
While President Trump has not taken an official stance on the H-1B program, his insistence on immigration reform leaves the future of the program less than certain. Some of President Trump’s appointees have openly opposed H-1B visas, leading to further speculation of the program’s prospects.
Anita Drummond, a non-profit attorney, stated that the United States higher education sector “prides itself on being a global citizen, bringing together perspectives and the best of the best.” Hopefully the new administration can build on this pride, offering our students a place where they may thrive.
David A. Brennen
Tuesday, January 24, 2017
The Supreme Court of Illinois is hearing arguments to determine the constitutionality of a 2012 law which exempts not-for-profit hospitals from paying property taxes, as long as their charity provided is at least equal to their property tax liability.
Some Illinois municipalities believe the hospitals are in fact making a profit, and should be held accountable for their fair share of property taxes. These municipalities believe the exemption may only be constitutionally granted if the property is used exclusively for charitable purposes.
The hospitals under review, however, argue that under the constitution the “exclusive use for charitable purposes” standard may be met as long as the hospital is “made available to all who need it regardless of ability to pay.”
Clearly this ruling will carry important policy implications that will impact the landscape of the health care industry. 156 of Illinois’ approximately 200 hospitals carry a not-for-profit status. Further, a report furnished for this case indicates that 47 Chicago area non-profit hospitals received property tax exemptions worth $279 million.
David A. Brennen
Thursday, January 19, 2017
Haskell Murray, one of our co-conspirators over at the Business Law Prof Blog, recently wrote about a recent post by Rick Alexander, the head of Legal Policy at B Lab (of B Corp certification fame) on Benefit Corporations. Here's Prof. Murray's post:
Over at the Harvard Law School Forum on Corporate Governance and Financial Regulation, Rick Alexander has a post on benefit corporations. I plan to post some comments on Rick's post next week, when I have a bit more time, but for now, I will just bring our readers' attention to the post and include a small portion of his post below:
Benefit corporations dovetail with the movement to require corporations to act more sustainably. However, the sustainability movement often treats the symptom (irresponsible behavior), not the root cause—the focus on individual corporate financial performance. Proponents of corporate responsibility often emphasize “responsible” actions that increase share value, by protecting reputation or decreasing costs. Enlightened self-interest is an excellent idea, but it is not enough. As long as investment managers and corporate executives are rewarded for maximizing the share value of individual companies, they will have incentives to impose costs and risks on everyone else.
Personally, I would argue that part of the root cause is that corporate financial performance is not required to appropriate take into account societal externalities, such as pollution - the true root cause. Nothing is going to make a corporation be a good citizen if it doesn't want to do so, even if it could under a benefit corporation structure. But that's just me. I am really looking forward to Prof. Murray's thoughts, and will try to post them when I see them.
Friday, December 16, 2016
A new development in the NY bill (reported on yesterday) aimed at increasing transparency in 501(c)(3) and 501(c)(4) organizations has emerged. Citizens Union of New York has filed suit in federal court challenging the new law, claiming the regulations impede on their right of free speech. The group argues the law “’chills’ speech by forcing donors to choose between ‘exercising speech . . . and subjecting themselves to burdensome obligations and public disclosures.’” The organization further believes the disclosure requirements will dissuade donations, directly impacting their operations. Will other non-profits in New York feel the same?
David A. Brennen
Thursday, December 15, 2016
New York Governor Andrew Cuomo signed into law Bill No. A. 10742/S. 8160 in an effort to increase transparency between donations coming from 501(c)(3) organizations going to 501(c)(4) organizations.
Some of the upcoming changes for 501(c)(4) organizations include a dramatically decreased amount (decreasing from $50,000 to $15,000) of funds spent on lobbying that triggers a source of funding report, and added more details to be included in said report.
Among other things, 501(c)(3) organizations now must fill out detailed reports for gifts to 501(c)(4) organizations that are greater than $2,500.
A detailed memo from the Lawyers Alliance for New York outlines the implications for non-profit organizations and exactly what the new regulations are.
David A. Brennen
Wednesday, December 14, 2016
The Justice Department is investigating South Beach Missions of Oregon for allegedly fraudulently registering corporations as religions, entitling said corporations to 501(c)(3) status. The Justice Department believes that South Beach Missions is intentionally duping the federal government, and showing people how to set up phony churches in order to protect their assets from taxes. The government claims the organization has registered 126 active corporations, and 343 inactive ones, leading to “substantial” harm to the tax payer left footing the bill.
Unsurprisingly, South Beach Missions claims they have done no wrong, and believe they are acting within their First Amendment rights. Ted Landry, president of South Beach Missions, firmly believes he is helping people practice their legitimate religion. Mr. Landry believes the government has no place in defining what is and what is not religion, stating “you’re the only one who gets to figure it out.” South Beach Missions insists that they do not give out legal advice, despite the fact they circulate a 12-page booklet on the legality of corporations and churches.
There are obvious public policy concerns with people being able to establish pseudo-religions in the name of tax breaks. Further, unsuspecting churches registered by South Beach may face a crippling tax liability down the road if the government finds their church is not exempt, even if they were honestly practicing their religion. As obvious as the need to abate tax fraud is, so is the need for the government to allow for the freedom of religion, and adhere to Constitutional principles. It will be interesting to see how this is resolved.
David A. Brennen
Tuesday, December 13, 2016
A recent Bloomberg article by Colleen Murphy outlines some major potential changes impacting charitable giving that could come soon after President Elect Trump takes office.
The author believes alterations of charitable giving deductions could take place in the near future. Although there is no concrete plan or proposal, the House Ways and Means Committee “will develop options to ensure the tax code continues to encourage donations, while simplifying compliance and record-keeping and making the tax benefit effective and efficient.” Clearly, altering the amount one can claim as a tax deduction can significantly impact overall giving to 501(c)(3) organizations.
Another potential change is a cap of itemized deductions individuals may claim. President Elect Trump has proposed a ceiling of $100,000 for individuals and $200,000 for couples looking to subtract itemized deductions from their total tax bill. An expert claims that such a rule could diminish large-scale donations, some of which are vital to the existence of many tax-exempt organizations.
A third plausible change coming in the near-term is the overall lowered tax rates promised by President Elect Trump. Mr. Trump aims to reduce the current seven-bracket system to a three-bracket system, leading to a reduced tax burden for working and middle-class Americans. Experts are split on how this may impact charitable donations. Some believe that the reduced rate will lessen the impact of itemized deductions, disincentivizing individuals from making contributions. Another school of thought believe the reduced rates could increase donations, incentivizing individuals to “load up on deductions and decrease their tax burden.”
Finally, the author believes that some existing rules could be revamped over the next few years. Hadar Susskind, senior vice president of government relations at the Council on Foundations in Washington, stated that potential changes could include “Creating charitable giving accounts, simplifying the excise tax on private foundations and allowing the rollover of individual retirement accounts to donor-advised funds.”
Time will tell what the new year, and new administration, have in store for the nonprofit tax world.
David A. Brennen
Sunday, December 11, 2016
Legislation has been pre-filed in South Carolina by State Senator Tom Davis in an attempt to double a tax credit program that helps fund disabled students’ private education. The Legislation also plans to offer an additional $25 million in tax credits for the donors whose money would allow poor children to go to private school.
Senator Davis introduced the legislation in response to a South Carolina Supreme Court case where it was declared the state was not doing enough for poor, rural students and their schools. Davis believes making private schools a realistic option for many students is a step in the right direction.
The proposal would offer more tax credits to those who donate to a nonprofit that “makes private school tuition grants to students with disabilities or those who live in poverty.” These credits would allow the donor to reduce their state taxes by up to 60 percent.
South Carolina currently offers up to $10 million in tax credits for donations helping disabled students. The expansion would expand that offering to $25 million, and grant another $25 million specifically for impoverished students.
Whatever program the state ultimately adopts, hopefully it provides students with the quality education they both require and deserve.
David A. Brennen
Friday, November 18, 2016
TaxProf Blog: Pomona College May Have Violated 501(c)(3) Tax Status To Fund Anti-Trump Student Protesters
TaxProf Blog reports on this possibility at http://taxprof.typepad.com/taxprof_blog/2016/11/pomona-college-may-have-violated-501c3-tax-status-to-fund-anti-trump-student-protesters.html.
For the University's response to this allegation, see http://taxprof.typepad.com/taxprof_blog/2016/11/pomona-president-denies-wrongdoing-as-irs-complaint-filed-against-college-for-funding-anti-trump-stu.html.
My initial take is since the rally in question happened after the election, the University has a good argument that at that point Mr. Trump was no longer a candidate but instead President elect and so the activities they funded were not political campaign intervention. I realize that Mr. Trump may not technically be President elect until the votes of the electors are officially counted by Congress, but despite some calls for the electors chosen by the voters to abandon him that is not a realistic possibility. So while one can certainly criticize the University for appearing to take sides with respect to the newly elected President, its reported activities almost certainly did not cross the legal line provided by Internal Revenue Code section 501(c)(3).
Wednesday, November 16, 2016
Given the uncertainty regarding the plans of both President-elect Trump and the Republican-controlled Congress, I feel a bit like a sportswriter trying to rank college football teams before the season begins when I try to predict what the results of the 2016 election will be for the federal tax laws governing tax-exempt nonprofit organizations. With that caveat, here are my initial thoughts.
With respect to guidance from Treasury and the IRS, most of what appears in the most recent update of the 2016-2017 Priority Guidance Plan that is relevant to tax-exempt organizations (see especially pages 9-10 and, for section 170 guidance, page 14) appears non-controversial and so likely to eventually see the light of day. The one major exception is proposed regulations under section 501(c) relating to political campaign intervention, which project the Republican-controlled Congress has repeatedly suspended and likely will continue to block until the new administration gets around to killing it altogether. Another possible exception are the final regulations under section 7611 relating to church tax inquiries and examinations, although my guess is that Congress will instead simply focus on modifying or repealing the section 501(c)(3) prohibition on political campaign intervention, consistent with the campaign promises by then candidate Trump.
Speaking of Congress, university endowments likely will see continued congressional scrutiny especially in light of President-elect Trump's mentions of the issue during his campaign. Whether such scrutiny results in actual legislation remains to be seen, however. What should perhaps be of greater concern to all charitable nonprofit organizations is the possibility that the detailed tax reform plan developed by now-retired Ways and Means Committee Chairman Dave Camp may be looked to for inspiration, especially when seeking revenue-generating provisions that could help offset tax cuts elsewhere. For a detailed overview of the many proposed changes relevant to tax-exempt organizations, see the Joint Committee on Taxation Technical Explanation of those provisions. Also relevant of course are proposed changes to the charitable contribution deduction, which are concentrated in section 1403 of the draft legislation. And of course there will also likely be effects on charitable giving from any general reduction of marginal tax rates or other broad changes, such as modification or repeal of the estate & gift tax.
For consideration of likely ramifications of the election results for nonprofits beyond just changes to federal tax law provisions, here are some early predictions from others: Devin Thorpe, Forbes Contributor (collecting thoughts from various nonprofit leaders); National Council of Nonprofits; Mark Hrywna at The NonProfit Times.
Last month Princeton University announced that just days before trial was scheduled to begin it had settled the property tax exemption lawsuit brought by several local residents. As detailed in the announcement, Princeton committed to both pay millions of dollars to Princeton homeownersover six years through a tax credit and to also make over $1 million in contributions over three years to a local nonprofit to help economically disadvantaged residents obtain housing. The total cost to Princeton will be over $18 million.
While the settlement resolves Princeton's property tax exposure for recent years, it leaves open the possibility of suits challenging the university's property tax exemption at some point in the future. It also of course does not resolve the lawsuits currently pending against 35 nonprofit hospitals brought by local officials and challenging the hospitals' exemptions from property taxes, although at least two of those hospitals have already settled the claims against them. Legislation to try to resolve those suits has apparently stalled in the New Jresey Legislature.
Last month the Supreme Court of the United States denied certiorari to either the NCAA or the plaintiffs in O'Bannon v. NCAA. That decision left in place the decision by the U.S. Court of Appeals for the Ninth Circuit that found an antitrust injury to the plaintiffs from the NCAA's rules but rejected the portion of the district court's remedy that would have allowed student-athletes to receive cash payments that went beyond their full cost of attendance. Since the NCAA had already dropped its prohibition on members schools giving scholarships to student-athletes up to the full cost of attendance, the effect of the now final Ninth Circuit decision is to leave the current situation unchanged. That said, some commentators believe that the finding of an antitrust injury leaves the NCAA vulnerable to future antitrust challenges (see this ESPN story about the decision).