Monday, February 26, 2018
Merryn Somerset Webb penned an op-ed in The Financial Times entitled The charitable giving model is an undemocratic use of funds. Focused on the UK, the piece proposes that "99 per cent of the organisations with charitable status in the UK should have it removed." Instead, tax subsidies would apply to a limited number of official charities that would be tightly regulated. Read the entire piece at: https://www.ft.com/content/1093fcec-187a-11e8-9376-4a6390addb44
Sunday, February 25, 2018
On Friday, the New York Times Editorial Board penned an opinion piece entitled, "When Charity Workers Turn Predatory." It concludes:
the Oxfam scandal has sounded an alarm across the entire nongovernmental aid profession that it must heed if it is to retain the public trust on which it depends. There must be zero tolerance for misuse of power by staff members in the field and swift and transparent action against any appearance of abuse.
Read the entire thing (paywall) at: https://www.nytimes.com/2018/02/23/opinion/when-charity-workers-turn-predatory.html
Friday, February 23, 2018
Ellen Aprill (Loyola-LA) previously pointed out that there is an apparent glitch in the newly enacted excise tax on compensation over $1 million dollars for tax-exempt organization employees, in that new section 4960 does not appear to apply to public universities even though the public and maybe Congress thought that it would. Now Bloomberg Law reports that a Joint Committee on Taxation official has stated that a correction is needed to make it clear that public universities are within the ambit of this excise tax. More specifically, she said that the provision "requires a statutory technical correction" to resolve this issue. Whether such a correction will be forthcoming, or indeed any corrections to the recent tax reform legislation, remains to be seen.
Monday, February 19, 2018
- According to NPR, the General Counsel and Chief International Officer of the American Red Cross resigned in the wake of a report from ProPublica that several years ago ARC had forced a senior official to resign amid sexual harassment and assault allegations but still provided a positive review of his performance to another nonprofit interested in hiring him.
- Doctors Without Borders (Medecins Sans Frontieres) announced that in 2017 it had dealt with 24 cases of alleged sexual harassment, resulting in the dismissal of 19 people, in an attempt to distinguish itself from the Oxfam and the scandal enveloping that organization (see below), according to Reuters.
- The CEO of the Humane Society of the United States resigned in the wake of sexual harassment allegations, after fighting the allegations for weeks and even though a majority of the organization's board voted to immediately end an investigation into his behavior, according to the N.Y. Times. Additional coverage: NPR.
- The Times of London reported that in 2011 Oxfam International covered up the use of prostitutes by senior aid workers in Haiti. Trying to get ahead of the growing scandal, Oxfam has promised to appoint an independent commission to investigate claims of sexual exploitation, according to The Guardian.
- The Presidents Club, a prominent United Kingdom charity that raised money from the British elite to fund grants to other charitable organizations, closed after The Guardian conducted an undercover investigation that revealed alleged groping and sexual harassment at the charity's most recent men-only fundraising dinner. Additional coverage: CNN.
In a Monkey Cage column in today's Washington Post, Nives Dolsak, Sirindah (Christianna) Parr, and Aseem Prakash, all at the University of Washington at Seattle, argue the presumption of virtue for nonprofits often leads to regulators and stakeholders neglecting issues of accountability and governance. (UPDATE: For a contrary perspective, see this Nonprofit Quarterly column by Ruth McCambridge and Steve Dubb.) At the same time, even the above examples illustrate everything from an apparently robust response to allegations of sexual harassment in the case of Doctors Without Borders to the alleged creation of an environment that encouraged such harassment in the case of the Presidents Club. What appears inescapable, however, is that nonprofits, like for-profits, have to invest in developing procedures to properly handle such complaints and deal with alleged harassers.
Thursday, February 15, 2018
Section 41110 of the Bipartisan Budget Act of 2018 includes the so-called Newman’s Own provision – an amendment to Code Section 4943 (the private foundation excise tax on excess business holdings) that would allow a private foundation to own a significant stake in an operating business under certain circumstances. By all reports, the foundation that owns Newman’s Own is subject to Code Section 4943, and would need to liquidate its holdings in the company in short order without legislative changes to Code Section 4943.
As you may know, Code Section 4943 provides that a private foundation may not own an “excess” holding in a operating business. Very generally, the excess holding for an operating business in corporate form is equity having 20% of the corporation's voting power reduced by the voting power held by “disqualified persons” – typically, substantial contributors, foundation managers, and their family and related entities under Code Section 4946. If a foundation holds an excess business holding by gift or inheritance (e.g., Paul Newman dies and leaves all his stock to his foundation), the foundation has five years to dispose of the excess holding. If the foundation could demonstrate that it could not dispose of the holding despite its efforts during that five year period, the Service could grant a discretionary additional five years.
New Code Section 4943(g) would allow a private foundation to hold 100% of the voting stock of an operating business if it acquires those interests by gift, it receives the net operating income of from the business annually, and the business and the foundation are operated independently, as determined by certain board composition rules. Presumably, this would allow Paul Newman's foundation to continue to own Newman's Own and receive the proceeds from operation.
I am not going in to the details of the actual language of the statute (yet…) – there are some questionably drafted provisions (shocking…) that raise some issue I’m still thinking about. No worries, I’m here all week.
That being said, I am troubled by this provision as a general matter. First, the idea of changing statutes for specific taxpayers, no matter how well-intentioned and deserving (I love the salsa….), is always distasteful to me. Now, I’m not so naïve that I don't know that it happens all the time (I’m looking at you, motorsports facilities and the Orange Bowl and race horses…) but it doesn’t mean it’s good practice and one that should be lauded.
More to the substance, however, this new provision really flies in the face of the whole purpose of Code Section 4943. If you read the legislative history (which I have and have helpfully summarized for you here: (shameless plug): Better Late Than Never: Incorporating LLCs Into Section 4943)), you find that the original intent behind Code Section 4943 was not really about prohibiting self-dealing. After all, Code Section 4941 (the self-dealing prohibition) was passed at the same time. Code Section 4943 is about focus: is the foundation focusing on its charitable endeavors, or it is spending a more than insubstantial amount of its time running a business? It is, to some degree, understandable that the foundation would pay close attention to the primary source of its income. That being said, the source of the private foundation’s exemption is its charitable program, and if that program suffers in the shadows of operation of a substantial business subsidiary, what is the point of exemption? Do we still believe that the destination of income test is not a thing? In my mind, none of the requirements of new Code Section 4943(g) address this concern directly.
I suspect my discomfort will grow as my estate planner hat takes over, but in the meanwhile, pass the tortilla chips.
P.S. I know “It’s In There” was Prego – you try making a pithy headline involving tax and pasta sauce.
Wednesday, February 14, 2018
Fershee: The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy
My friend and colleague Josh Fershee recently posted this piece on SSRN, which is cross blogged at the Business Law Prof Blog under the screaming headline, “These Reasons Social Benefit Entities Hurt Business and Philanthropy Will Blow Your Mind!!!!!” Okay - I added the exclamation points. And the bold. Alas, there are no cat pictures or bad high school year book photos of celebrities, but there is an important discussion about impact of the existence of social enterprise entities on traditional for profit businesses engaged in social activity. The abstract:
The emergence of social enterprise enabling statutes and the demise of director primacy run the risk of derailing large-scale socially responsible business decisions. This could have the parallel impacts of limiting business leader creativity and risk taking. In addition to reducing socially responsible business activities, this could also serve to limit economic growth. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, all to the detriment of employees, society, and, yes, shareholders.
The potential harm from social benefit entities and eroding director primacy is not inevitable, and the challenges are not insurmountable. This essay is designed to highlight and explain these risks with the hope that identifying and explaining the risks will help courts avoid them. This essay first discusses the role and purpose of limited liability entities and explains the foundational concept of director primacy and the risks associated with eroding that norm. Next, the essay describes the emergence of social benefit entities and describes how the mere existence of such entities can serve to further erode director primacy and limit business leader discretion, leading to lost social benefit and reduced profit making. Finally, the essay makes a recommendation about how courts can help avoid these harms.
Tuesday, February 13, 2018
I’m scrolling through the Bipartisan Budget Act of 2018 (the “BBA”)(P.L. No. 15-123 signed on February 9, 2018 – enrolled bill from Thomas.gov here) in my leisure time. It appears that there are two provisions that directly impact exempt organizations, as follows:
- Section 41109 of the BBA clarifies the application of the investment income excise tax for private colleges and universities. As you may recall, Section 13701 of the legislation formerly known as the Tax Cuts and Jobs Act (TCJA) added new Section 4968, which imposes an excise tax on the investment income of certain private colleges and universities. This new excise tax only applies to private colleges and universities that have at least 500 students, more than 50% of which are located in the U.S. The BBA clarifies that this refers to “tuition paying” students only – but of course, it didn't actually give us a statutory definition of “tuition paying.” Full tuition? External scholarship? Internal scholarship? Tuition waiver? Work study? Have fun with the counting, university admin types.
- Section 41110 of the BBA contains the Newman’s Own provisions by adding Code Section 4943(g) (h/t to Evelyn Brody for the CT Mirror article). These provisions were originally in the TCJA but were struck by the Senate Parliamentarian for having insufficient budget impact. I will have more to say about Section 4943(g) in another post.
Unless I missed it (let me know if I did!), absent from the BBA are the following: (1) the Johnson Amendment provisions that were also struck from the TCJA by the Senate Parliamentarian, and (2) the technical fix to the exempt organization excess compensation excise tax found in new Code Section 4960 that would actually make it applicable public universities - as apparently was originally intended but, as discussed by Professor Ellen Aprill, there was a significant drafting fail. (I heard a rumor that someone from the IRS agreed at the ABA Tax meeting that the technical fix was, in fact, necessary - can anyone confirm?) If only there were a process by which Congress could talk to experts like Ellen before it finalized draft legislation…
Saturday, December 30, 2017
The end of 2017 brought significant new tax legislation. Although the Johnson Amendment remained intact, the increase in the standard deduction means that fewer people will itemize deductions, which, in turn, effectively eliminates the value of the charitable deduction for many US taxpayers. The Washington Post article "Charities fear tax bill could turn philanthropy into a pursuit only for the rich" catalogs worries by major nonprofits' leaders that donations will drop and the shift will be towards wealthier donors. On his blog, Alan Cantor warns that "An earthquake just hit the nation," and the tax changes will reduce the funds to the sector and increase the power of the wealthiest at the very time when nonprofits will face greater demands. The Wall Street Journal editorial board, however, was unimpressed, publishing a sharp critique entitled "Uncharitable Charities:"
These nonprofits want to keep millions of Americans filing more complicated tax forms and paying higher tax rates. They also sell Americans short by assuming that most donate mainly because of the tax break, rather than because they believe in a cause or want to share their blessings with others. How little they respect their donors.
How will the nonprofit sector fare in 2018?
Saturday, November 18, 2017
First, two months ago the U.S. Department of Justice announced that it would not reopen the criminal investigation of former IRS Exempt Organizations Director Lois Lerner, to howls of fury from her critics in Congress.
Then the Treasury Inspector General for Tax Administration released a new report that found a number of left-leaning organizations that had applied for section tax-exempt status had also had their applications subject to additional review and/or been subject to unnecessary questions. The report did not undermine TIGTA's previous finding that the IRS had used inappropriate criteria to identify applications for additional scrutiny, or that many right-leaning organizations had been selected as a result of that criteria, but it muddied the waters regarding how politically biased the application process actually was and provided further support for the argument that the problems with that process likely reflected incompetence more than malevolent intent. (More coverage: Washington Post.)
Late last month the U.S. Department of Justice announced the settlement of two pending lawsuits relating to the controversy, including the one class action suit. According to a report by a CNN, the settlements did not involve the payment of any monetary damages but included an apology from the IRS. The NY Times later reported, however, that one of the settlements involved a seven-figure payment, although the exact amount and other details were not available. The two settled cases (assuming court approval of the settlement in the class action case) are NorCal Tea Party Patriots v. IRS (the class action) and Linchpins of Liberty v. United States. (More coverage: Fox News, Washington Post.) By my count there is still a pending lawsuit brought by True the Vote against the IRS, as well as Freedom Path's lawsuit against the IRS (set for trial in summer 2018), so this settlement is not quite the end of all litigation.
Finally, earlier this month IRS Commissioner John A. Koskinen reached the end of his 5-year term. Despite calls for his removal or even impeachment because of the IRS' handling of the controversy's investigation, President Trump chose not to ask him to step down and Congress did not take any steps to begin the impeachment process. The Administration has not nominated his successor, with Assistant Secretary for Tax Policy David Kautter currently serving as interim IRS Commissioner. Coverage: N.Y. Times.
Officials from Illinois, New York, and other states announced earlier this month that approximately two dozen states have acted to dissolve VietNow National Headquarters, Inc., an Illinois nonprofit corporation. The grounds for the action against the section 501(c)(19) veterans organization was deceptive telemarketing solicitations that mislead potential donors regarding the use of donated funds, including the fact that less than five percent of such funds actually went to charitable programs. If the name looks familiar, it is because this is the organization involved in the 2003 (yes, 2003) Supreme Court of the United States case brought by Illinois against for-profit telemarketers for alleged fraud.
More specifically, the settlement agreement includes provisions requiring VietNow to dissolve and certain of its officers and directors not to ever work for or serve in a fiduciary position with any charitable organization, as well as provision for division of VietNow's few remaining assets. The agreement also notes that a total of 27 states had "expressed interest in VietNow's solicitation activities in their respective states," although only 21 states signed the agreement (and two more states entered into separate agreements with similar terms).
Thursday, November 16, 2017
The Tax Reform Moving Target: The Shrinking Charitable Contribution Deduction (+ Slamming Rich (Private) Universities)
Given the uncertainty regarding whether Congress will enact tax reform, much less what will be in it, trying to analyze how it could affect charities and other tax-exempt nonprofits is probably a lost cause. But there are at least two aspects of the current proposals that are worth consideration, if only because they likely will resurface even if Congress does not enact them this time around.
Overall Changes Will Shrink the Charitable Contribution Deduction: Despite all the uncertainty, certain overall changes have remained constant: sharply increasing the standard deduction, lowering tax rates for at least some taxpayers, and reducing or repealing the estate tax. All of these changes will reduce or eliminate the importance of the charitable contribution deduction for many taxpayers and so reduce the incentives for charitable giving. How much? No one knows for sure, although the Indiana University Lilly Family School of Philanthropy made some estimates last May and the Tax Policy Center of the Urban Institute and Brookings Institution has made a more recent reduced giving estimate of between $12 billion and $20 billion in 2018 giving based on the House bill).
Today's Bad Guys: Rich (Private) Universities: Several provisions that provide modest revenues are targeted at wealthy colleges and universities, including a small investment income tax on large (relative to student population) endowments. In addition, several more general provisions would hit colleges and universities particularly hard, including the elimination of tax-exempt bonds as a source of financing for tax-exempt charities, an excise tax on compensation over $1 million paid by tax-exempt entities, and the repeal of many education-related tax benefits. It appears, however, that some of these provisions do not reach public colleges and universities, specifically the endowment investment income tax and the tax-exempt bond financing provisions. If not rectified, these differences would give public colleges and universities an advantage over their private counterparts, although how significant and advantage is unclear. For more, see the National Association of College and University Business Officers (NACUBO)'s website summarizing and raising concerns about these and other education-related tax reform provisions.
Friday, September 15, 2017
As the use of donor advised funds grows, so does the legal attention to donor advised funds. All of this attention started in (what seems like forever ago…) 2006, with the passage of the Pension Protection Act. Since that time, we have seen the PPA-mandated Treasury study released in 2011, as well as a Congressional Research Service study on DAFs in 2012. In addition, the National Philanthropic Trust releases an annual DAF report, the 2016 version of which can be found here. Information and opinions abound, and yet, we still wait patiently for regulations under the donor advised fund excise taxes passed in 2006. I’m quite certain those regulations will be arriving Soon.™
In the latest installment in the DAF oversight drama, Congress may now be considering mandatory payouts from DAFs as part of a larger tax reform effort. Earlier this summer, Professors Ray Madoff of Boston College and Roger Colinvaux of Catholic University wrote to the Senate Finance committee to suggest a number of DAF reforms, including a mandatory payout proposal for DAFS (the Madoff/Colinvaux letter can be found here).
This week, the DAFs responded. In their own letter to Senate Finance, a number of DAF sponsors set out the arguments in opposition to a mandatory DAF payout. WealthMangement.com has a good summary of the DAF executive letter here, although I admit I can’t yet find a copy of the letter itself (if anyone has it ... please share if you can!)
Personally, I think that the term “DAF” covers such a wide variety of accounts that a mandatory proposal might be harmful for some and yet not enough regulation for others. But that’s another blog post, or maybe an article ….
Thursday, September 14, 2017
- Nonprofit compensation has gone up over the last year, returning to pre-recession levels; and
- A gender gap persists in nonprofit compensation (not that that is particularly shocking to anyone in the sector, but it is nice to have some evidence to that effect)
Friday, August 18, 2017
Politics: Facts & Circumstances Test Survives Constitutional Challenge; Donor Disclosure Decision & Debate
In a little noticed decision, but perhaps only because of the conclusion it reached, a federal district court in one of the cases arising out of the IRS application controversy rejected a constitutional challenge to the facts and circumstances test for political campaign activity embodied in Revenue Ruling 2004-6. In Freedom Path v. IRS (N.D.Tex. July 7, 2017), the court considered a motion for partial summary judgment asserting that the test was unconstitutionally vague in violation of both the Due Process Clause of the Fifth Amendment and the First Amendment, as well as being overbroad and promoting viewpoint discrimination in further violation of the First Amendment. The court found that the identification of eleven specific and objective, although non-exclusive, factors in the Revenue Ruling was sufficient to defeat the facial challenge to the ruling based on vagueness. With respect to the First Amendment claims, the court distinguished decisions in the campaign finance area on the grounds that the tax rules relate to what types of speech will be subsidized through the federal tax system, as opposed to banning, restraining, or punishing speech, and concluded that the ruling therefore surveyed First Amendment challenge.
The other currently hot constitutional and policy topic relating to politics and nonprofits is the extent to which the government can or should compel the disclosure of information relating to nonprofits involved in political activities or politically sensitive areas. There have two recent interesting developments in this area. First, in Matter of Evergreen Assn. v. Schneiderman (June 21, 2017), a state appellate court in New York limited the scope of a subpoena to a nonprofit organization on the grounds that it "infringed on the First Amendment right of the [nonprofit and its staff] to freedom of association, and was not sufficiently tailored to serve the compelling investigative purpose for which it was issued." The nonprofit at issue operates crisis pregnancy centers and the investigation related to the alleged unauthorized practice of medicine at those centers. The subpoena sought, among other information, a broad range of information relating to individuals and organizations associated with the nonprofit, including all of its staff; the court ordered that the subpoena be limited to information pertaining to the alleged unauthorized practice of medicine, with the trial court to conduct an in camera review of responsive documents to determine which ones satisfied this requirement.
Finally, there was an interesting addition to the ongoing debate about "dark money" and politically active nonprofits. Writing in the American Prospect, Nan Aron and Abby Levine of the Alliance for Justice argue against blanket disclosure of donors to politically active nonprofits such as social welfare organizations, instead supporting an approach that distinguishes between groups that "are funded by a small group of big donors and those that receive broad support from many people." Their arguments echo some of the more thoughtful supporters of campaign finance disclosure rules (see, for example, Richard Briffault (Columbia)), who recognize that the purported goals of such disclosure are not furthered by publicly identifying the many relatively small donors to candidates and political parties, so so such disclosure should be "rightsized" to target the information that is actually helpful to voters.
Thursday, August 17, 2017
Both Terri Helge and Joseph Mead previously reported in this space on the tax benefits that many organizations often identified as "hate groups" enjoy because of the broad and vague requirements for qualifying as an educational organization under Internal Revenue Code sections 501(c)(3) and 170(c)(2). Not surprisingly, the events in Charlottesville have led to a renewed discussion of this topic. Recent coverage includes a Business Insider story on this topic and a fascinating blog post by Sam Brunson (Loyola Chicago) on the conflict almost a hundred years ago between the IRS and the KKK (and from which the photo shown here is borrowed).
The N.Y. Times reports that the Cambodian Prime Minister has ordered U.S.-based Agape International Missions to end its operations in that country after it was featured in a CNN report on the sex trade there. As detailed in the story, the Prime Minister accused the NGO of possibly misleading CNN regarding the extent of the sex trade in Cambodia and thereby violating the terms of its operating agreement with the government. At this time it is not clear how Agape will respond or whether the Prime Minister's statements have in fact led to the expulsion of the group from that country.
Regardless of the details of this particular situation, there is a growing trend of foreign NGOs, domestic NGOs with foreign support, and sometimes domestic NGOs more generally being targeted for burdensome regulation or worse by the governments of many countries, as I have detailed in this space previously. These concerns have led Helmut K. Anheier (President of the Hertie School of Governance in Germany) to call on the G20 to address this issue in a recent G20 Policy Paper. Here is the abstract:
The roles of non-governmental or civil society organizations have become more complex, especially in the context of changing relationships with nation states and the international community. In many instances, state–civil society relations have worsened, leading experts to speak of a “shrinking space” for civil society nationally as well as internationally. The author proposes to initiate a process for the establishment of an independent high-level commission of eminent persons (i) to examine the changing policy environment for civil society organizations in many countries as well as internationally, (ii) to review the reasons behind the shrinking space civil society encounters in some parts of the world and its steady development in others, and (iii) to make concrete proposals for how the state and the international system on the one hand and civil society on the other hand can relate in productive ways in national and multilateral contexts.
Wednesday, August 16, 2017
Over the summer, the United States Tax Court in RERI Holdings I, LLC v. Commissioner upheld the disallowance of a $33 million charitable contribution deduction because of the failure of RERI Holdings I, LLC to state on its required Form 8283 appraisal summary the "Donor's cost or other adjusted basis" for the property. The court further held that the failure could not be excused by substantial compliance because the omission "prevented the appraisal summary from achieving its intended purpose" of alerting the IRS of potential overvaluations of contributed property (and thereby deterring taxpayers from claiming excessive deductions). In this instance the omitted basis would have been approximately $3 million, or roughly one-tenth the value claimed for the contributed property.
While failures to substantiate charitable contributions adequately occur frequently in tax cases, they usually do not affect such large claimed deductions because presumably as the numbers get larger the care and expertise of the professionals involved becomes greater. There may have been more going on here, however. At least one commentator, Peter J. Reilly over at Forbes, concludes that the "brazeness of the charitable plan . . . revealed in the Tax Court RERI Holdings I decision is stunning" in an article titled Billionaire Stephen Ross And the Ten for One Charitable Deduction. Assuming the IRS took a similar view, it very well could have been looking for any possible flaw in the deduction that could be used to disallow it, and the substantiation omission provided a simple way to do so (as opposed to getting into a messy valuation dispute, although the court's opinion goes there anyway in order to determine if certain penalties applied).
No word yet on whether RERI Holdings I will appeal.
How large is the potential for hard-to-detect and even harder-to-counter abuse when it comes to the federal income tax deduction for "qualified conservation contributions" under Internal Revenue Code section 170(h)? As Peter J. Reilly highlights at Forbes, the potential appears to be pretty large based on early responses to Notice 2017-10's addition of syndicated easements to the list of listed transactions that must be reported to the IRS. In a July 13, 2017 letter to Senator Ron Wyden, ranking member of the Senate Finance Committee, IRS Commissioner Koskinen reported that the 40 fully completed and processed reporting forms, out of 104 processed and 200 received to date, showed an aggregate charitable contribution deduction of over $217 million with preliminary calculations finding that the average deduction was nine times the amount of the investment in the transaction. Other coverage: Tax Analysts.
Such syndicated easements are only part of the conservation easement universe, but the continuing stream of federal court decisions rejecting in whole or in part deductions claimed for such easements highlight the broader issues with this deduction. For example, the U.S. Court of Appeals for the Eighth Circuit recently affirmed disallowance of a $16.4 million deduction for a failure to protect the conservation purpose in perpetuity (RP Golf v. Commissioner). Not all IRS challenges are necessarily successful, however; for example, the U.S. Court of Appeals for the Fifth Circuit recently reversed disallowance of $15.9 million in deductions, although the court remanded the case for consideration of additional reasons for disallowance asserted by the IRS (BC Ranch II, L.P. v. Commissioner).
Recent reports also highlight the broader concerns with such deductions. In May, Adam Looney of the Brookings Institute issued Charitable Contributions of Conservation Easements, listing general tax policy concerns that predated the recent surge in such contributions:
- "Donations are concentrated in transactions that seem unrelated to conservation benefits," including with respect to type of transaction, geographic area, and donee organizations.
- "A small handful of donee organizations are responsible for a disproportionate share of donations," with 25 organizations (as compared to 1,700 land trusts nationwide) receiving between 2010 and 2012 about half of all such contributions, measured by dollar value.
- "Most organizations that receive donations of easements do not report them as gifts or revenues on their public tax returns," impeding transparency, public accountability, and IRS enforcement.
- "Donations of 'partial interests' are difficult to administer," including with respect to determining the fair market value of the contribution for deduction purposes.
The report is also available through the Urban Institute & Brookings Institution Tax Policy Center.
Nancy McLaughlin (Utah) has also continued her excellent coverage of this topic. Here is the abstract for her latest article, Tax Deductible Conservation Easements and the Essential Perpetuity Requirements, Virginia Tax Review (forthcoming):
Property owners who make charitable gifts of perpetual conservation easements are eligible to claim federal charitable income tax deductions. Through this tax-incentive program the public is investing billions of dollars in easements encumbering millions of acres nationwide. In response to reports of abuse in the early 2000s, the Internal Revenue Service (Service) began auditing and litigating questionable easement donation transactions, and the resulting case law reveals significant failures to comply with the deduction’s requirements. Recently, the Service has come under fire for enforcing the deduction’s “perpetuity” requirements, which are intended to ensure that the easements will protect the subject properties’ conservation values in perpetuity and that the public’s investment in the easements will not be lost. Critics claim that the agency is improperly discouraging easement donations by denying deductions for technical foot faults, and some have called for a change to the law that would allow taxpayers to cure their failures to comply with the perpetuity requirements if they are discovered on audit.
This Article illustrates that noncompliance with the perpetuity requirements should not be viewed as technical foot faults. To the contrary, compliance is essential to the integrity of the tax-incentive program and the easements subsidized through the program. In addition, allowing taxpayers to cure failures to comply with the perpetuity requirements if they are discovered on audit would significantly increase noncompliance and abuse and, given the reliance nationwide on deductible easements to accomplish conservation goals, risk fatally undermining an entire generation of conservation efforts. This Article recommends a more prudent approach: the Treasury’s issuance of guidance that would greatly facilitate compliance with the perpetuity requirements, reduce transaction costs for taxpayers, and significantly shore up the integrity of the program.
Friday, June 23, 2017
This may be because I have been writing in this area (shameless plug), but there seem to be numerous recent stories about various countries increasing the legal restrictions on nonprofits and especially nonprofits with foreign connections. Here are several examples:
In India, the government refused a license to receive foreign funds to Compassion International, a Christian child sponsorship group, forcing the nonprofit to abandon its services to 145,000 children in India after 48 years in the country. If this had been an isolated incident the government's concerns about proselytization might have been plausible, but the N.Y. Times noted that Compassion was only the most recent of 11,000 nonprofits that had similarly lost such licenses since 2014.
In Turkey, the government revoked the registration of Mercy Corps, forcing that nonprofit to abandon its efforts based on Turkey to aid Syrian refugees, according to reports from the Washington Post and other news outlets.
In Hungary, the government enacted laws to require nongovernmental organizations that receive foreign financing to publicly identify themselves and their donors in what some observers believed was an attempt to shut down nonprofits supported by George Soros, including the Central European University, as reported by the N.Y. Times.
In perhaps the most dramatic action, the President of Egypt signed a new law that imposes restrictions on all domestic nongovernmental organizations, regardless of their sources of funding, by making their work subject to approval by a new regulatory body that may be a front for interference by the country's security agencies, also as reported by the N.Y. Times.
Unfortunately there appear to be few viable ways for affected nonprofits to counter these new rules in most of the countries involved, as detailed in my forthcoming article linked to above.
Thursday, June 22, 2017
No one knows what is going to happen with tax reform, which means now is the perfect time to speculate wildly about how Congress may help or hurt tax-exempt nonprofits if and when it actually does something.
Tax Simplification: If Congress follows the President's lead and simplifies in part by sharply increasing the standard deduction, it will make the charitable contribution deduction irrelevant to an even greater proportion of U.S. households as the number of itemizers shrinks significantly. According to an Indiana University Lilly Family School of Philanthropy report, this change alone could reduce charitable giving by an estimated $11 million annually, and if combined with a lower top tax rate of 35% they could together reduce charitable giving by $13.1 billion. To put these figures in perspective, the most recent Giving USA report reported $282 billion in donations from individuals for 2016.
Non-Itemizer Deduction: One proposal to counter this effect is a charitable contribution deduction for non-itemizers, as long advocated for by Independent Sector among others. The Lilly Family School of Philanthropy report estimates that allowing non-itemizers to deduct their charitable contributions would more than offset the negative effect on contributions from the standard deduction increase and rate reduction proposals. That said, it is hard to see how this proposal could have much chance of success given both its revenue cost and the administrative and enforcement complexity it introduces, particularly in an era of reduced IRS examinations. For an analysis of some of these issues, see this October 2016 Urban Institute report.
The Ghost of Rep. Camp: While Dave Camp is not dead he is no longer in Congress, which you would think would limit his influence over current tax legislation. But he did something brilliant when he was driving the tax reform bus as Chair of the House Ways & Means Committee several year ago: he went through the laborious process of actually drafting legislative language and having the result analyzed and scored by the Joint Committee on Taxation. This means that both the specific language and revenue effects of each provision of the Tax Reform Act of 2014 is available to be pulled off the shelf and deployed immediately as part of any current tax reform legislation. As detailed on pages 535-598 of the JCT report, this includes numerous provisions relating to tax-exempt organizations, including a number of limitations on the existing charitable contribution deduction. Especially if some revenue raisers are needed to pay for other aspects of tax reform, I expect to see some of Rep. Camp's proposals reappear in current legislation.
The Charities Helping Americans Regularly Throughout the Year Act of 2017: Given the uncertainty about the content, timing, and even liklihood of major tax reform legislation, it is a good idea to have a backup plan. The CHARITY Act (I do not know where they got the "I" from) is a modest, bipartisan attempt to tweak the existing tax laws for tax-exempt charities. Its provisions include simplifying the private foundation investment tax under section 4940, making donor advised funds eligible for IRA rollover contributions, increasing the mileage rate applicable to personal vehicle use for volunteer charitable activities, creating an exception to the private foundation excess business holdings rules under section 4943 (can you say Newman's Own Foundation?), and an electronic return filing requirement for all tax-exempt nonprofits.
I look forward to months if not years of further crystal ball gazing on these topics.