Tuesday, March 25, 2014
Today's Philanthropy News Digest is reporting that three Foundations have over the last three days issued new Requests for Proposals (RFPs):
The National Art Education Foundation, the philanthropic arm of the National Art Education Association (NAEA), is seeking applications for its 2014 Art Educator grants. Through the grant program, the Foundation will award grants of up to $10,000 to NAEA members for programs that support classroom-based art education. Only NAEA members are eligible to receive the awards. The deadline for submitting an application is October 1, 2014.
Meanwhile, the Chicago-based Harpo Foundation is inviting applications for its 2014 Emerging Artist Fellowship. Under this program, one emerging artist will receive a one-month residency at the Santa Fe Art Institute in Santa Fe, New Mexico. The application deadline is July 5, 2014.
Finally, the Vilcek Foundation is inviting applications for the 2015 Vilcek Prize for Creative Promise in Fashion. This program will actually award three prizes of $50,000 each to young, foreign born fashion professionals living and working in the United States who demonstrate outstanding early achievement. The foundation encourages designers, stylists, make-up/hair artists, image makers (including fashion photography, film, animation, and illustration), curators, and writers to apply. The application deadline is June 10, 2014.
It is worthwhile, despite the incessant call for experiential learning, to think theoretically about Civil Society. Doing so helps us focus our debates on more immediate problems such as the workings of the charitable contribution deduction or the extent to which charity, social welfare, and politics may coexist. In the absence of deep theoretical thinking, our legislative and judicial statements pertaining to the nonprofit world degenerte into ad hoc tinkering resulting in pronouncements without purpose.
It just so happens that The Atlantic this week contains a concisely-written essay addressing the proper balance between civil society and the state. Mike Konczal argues that the idea of extremely limited government in a society where compassion for one another is instead exercised through a vibrant Independent Sector is but a myth. Shrinking government will not expand Civil Society. One should not dismiss the essay merely because of its partisan sounding title, The Conservative Myth of a Social Safety Net Built on Charity. The essay is actually more reasoned than dogmatic, and certainly worth twenty minutes. Citing Lester Salamon's work, Konczal argues that the State is the only vehicle by which people can provide a reliable safety net. The State should address "absolute poverty," and presumably health care and education, while Civil Society appropriately fills in more targeted "needs" and preferences. Limiting government will not result in a more vibrant civil society comprising a reliable safety net, he argues. This is because Civil Society is too often characterized by patterns that tend to reinforce the status quo (as opposed to efficiently addressing real needs), or if not that, the relatively whimsical or self-serving desires of those who fund civil society:
With this in mind, we can examine why voluntary efforts fail consistently. Despite the general under-theorizing of the voluntary sector, the scholar Lester Salamon in the 1980s did build a theory of “voluntary failures” to contrast with market and government failures. There are three parts to the theory that especially stand out in the wake of the Great Recession.
The first is what Salamon describes as philanthropic insufficiency. This occurs when the voluntary sector can’t generate enough resources to provide social insurance at a sufficient scale, which, as noted, is exactly what happened in 2008. There is also the problem here of geographic coverage. As Hoover discovered, charity will exist in some places more abundantly than in others; the government has the ability to provide a more universal baseline of coverage.
But it isn’t just about the business cycle. A second issue Salamon identified is philanthropic particularism. Private charity has a tendency to focus only on specific groups, particularly groups that are considered either “deserving” or similar in-groups. Indeed, in one telling, this is the entire point of private charity. The largest single category of charitable giving in the United States goes not to caring for the poor but for the sustenance of religious institutions (at 32 percent of donations). Using very generous assumptions, Indiana University’s Center for Philanthropy finds that only one-third of charitable giving actually goes to the poor. Almost by definition, there will be people who need access to social insurance who will be left out of such targeted giving.
The third element of voluntary failure relevant here is philanthropic paternalism. Instead of charity representing a purely spontaneous response by civil society, or a community of equals responding to issues in the commons, there is, in practice, a disproportionate amount of power that rests in the hands of those with the greatest resources. This narrow control of charitable resources, in turn, channels aid toward the interests and needs of those who already hold large amounts of power. Prime examples of this voluntary failure can be seen in the amount of charitable giving that goes to political advocacy, or to elite colleges in order to help secure admission for already privileged children, even as the needs of the truly desperate go unmet.
At a basic level, much of our elite charitable giving is about status signaling, especially in donations to elite cultural and educational institutions. And much of it is also about political mobilization to pursue objectives favorable to rich elites. As the judge Richard Posner once wrote, a charitable foundation “is a completely irresponsible institution, answerable to nobody” that closely resembles a hereditary monarchy. Why would we put our entire society’s ability to manage the deadly risks we face in the hands of such a creature?
The essay reminded me of Miranda Fliescher's point made last week regarding the proper structuring of the charitable contribution deduction (i.e., the law should encourage real relief of poverty rather than rewarding spending that might occur anyway as an expression of personal consumption preferences or status). In any event, it would be nice if we could more often discern a theoretical belief or assumption -- any assumption -- in our legal jurisprudence regarding nonprofit organizations.
Monday, March 24, 2014
In PLR 201412018 released March 21, 2014, the Service reiterated and unfortuntely continued its longstanding antipathy to granting (c)(3) status to HMOs. I will never understand the logic behind that antipathy. It is doing more harm than good. The basic reasoning is this: An organization that delivers health care to paying subscribers, directly or indirectly, does not confer a public benefit because it benefits its subscibers. The Service maintains this point even if the organization maintains a program whereby those unable to pay the subscription price can become members. Logically, membership, and especially membership combined with a subsidy for the poor who can't afford the membership fee, should lead to the exact opposite result. The membership characteristic of HMOs increases health care for everyone and thereby benefits the community.
The letter ruling concisely describes the three primary cases (Sound Health, IHC, Geisinger) comprising HMO/(c)(3) jurisprudence. That jurisprudence holds that a membership requirement is inherently inconsistent with health care charitable tax exemption. Presumably, a staff model HMO that provided health care services without requiring membership would be able to achieve charitable tax exempt status. The existence of a membership requirement-- no matter how large and accessibe the club -- turns what would be "public benefit" into "private benefit." The problem is that whatever benefit HMOs convey results ecisely from the membership requirement. The membership requirement is the sine qua non of HMOs. It allows an insurer to herd large groups of consumers with aggregate bargaining power. Membership means that subscribers will consume health care services only within network, giving the network itself bargaining power. That bargaining power is, in turn, wielded in a manner that holds costs down presumably resulting in more health care for everyone. This is all very simplified, I'm sure, but the point is that without a membership requirement there is no point to HMO's and their beneficial effect. To deny tax exempt status to HMO's based on the membership requirement is really to conclude that HMO's can never be tax exempt even though it is through HMO's that health care costs are better controlled and health care is rendered more accessible to everyone, including the poor. Hasn't the market proven this?
Ultimately, it is the membership requirement that increases the amount of health care to the community. The organization in Sound Health, by the way, was really just a hospital that also engaged in HMO activities as an insubstantial part of its activities. The court called it a "staff model HMO," meaning that it had doctors and other health care service providers on staff who provided health care to patients even if they were not part of the club. It is the hospital analog to the physician who makes house call. It calls to mind Rockwellian memories but is ultimately inefficient in the sense that it can never provide the most health care for the most people. The old way is too expensive and results in less health care to the community. The contract model HMO -- an insurer that brokers health services by connecting member/patients with health care service providers -- will ultimately provide more health care for more people. Tax exemption jurisprudence has the matter bass ackwards to the extent it affirms the inefficient staff model HMO with no membership requirement but condemns the contract model HMO with a membership requirement. There is more commmunity benefit in the latter than the former.
What is apparently confusing the Service is the reality that you can't have public benefit without private gain. The prevailing jurisprudence condemns HMOs because a defined group of people (the members) benefit, hence the terminal appellation "private benefit." But this ignores the world in which nonprofit entites necessarily exist. In a capitalist world, indeed in the natural world, someone must benefit in particular if everyone is to benefit in general. You can't have public benefit without private gain. In colleges and universities, for example, faculty must be paid and individual students must graduate if the community -- the public -- is to benefit in general from the production and consumption of knowledge. Public benefit derives from private gain. Without private benefit there can be no public benefit.
The continued insistence that HMO's can only be granted tax exemption in the complete absence of private gain is therefore oxymoronic. If tax exemption jurisprudence is based on expanding the health care pie so the community receives more rather than less health care, that jurisprudence needs to get rid of the notion that a membership requirement is inherently inconsistent with 501(c)(3) jurispurdence.
Saturday, March 22, 2014
On March 19, 2014, the IRS issued a press release announcing that its Office of Professional Responsibility (OPR) had entered into a settlement agreement with a group of appraisers from the same firm accused of aiding in the understatement of federal tax liabilities by overvaluing facade easements for charitable donation purposes. In valuing the facade easements, the appraisers had applied a flat diminution percentage, generally 15%, to the fair market values of the underlying properties prior to the easement’s donation.
Under the settlement agreement, the appraisers admitted to violating relevant sections of Circular 230 related to due diligence and submitting accurate documents to the government. According to Karen L. Hawkins, Director of OPR:
“Appraisers need to understand that they are subject to Circular 230, and must exercise due diligence in the preparation of documents relating to federal tax matters. Taxpayers expect advice rendered with competence and diligence that goes beyond the mere mechanical application of a rule of thumb based on conjecture and unsupported conclusions.”
The appraisers agreed to a five-year suspension of valuing facade easements and undertaking any appraisal services that could subject them to penalties under the Internal Revenue Code. The appraisers also agreed to abide by all applicable provisions of Circular 230.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Esgar v. Commissioner—10th Circuit Affirms Tax Court: Conservation Easements Were Overvalued, Income From State Tax Credit Sales Was Short Term Capital Gain
In Esgar v. Commissioner, 2014 WL 889614 (10th Cir. 2014) (Esgar II), the 10th Circuit affirmed the Tax Court’s holdings in Esgar v. Commissioner, T.C. Memo. 2012-35 (Esgar I), and Tempel v. Commissioner, 136 T.C. 341 (2011).
Esgar I and Tempel
In December 2004, a partnership owning land in Prowers County, Colorado, a substantial portion of which was leased to a gravel mining company, conveyed approximately 163 of the non-leased acres to three of its partners. Each of the three partners (who were the taxpayers in Esgar) ended up owning approximately 54 acres, and each donated a conservation easement to a nonprofit organization. The taxpayers claimed charitable deductions for the donations on their 2004, 2005, and 2006 tax returns. The taxpayers also received transferable income tax credits from Colorado as a result of the donations and sold portions of those credits to third parties within two weeks. The taxpayers reported the proceeds from the credit sales as long-term capital gain, short-term capital gain, and ordinary income, respectively.
After an audit of the taxpayers’ income tax returns, the IRS determined that the conservation easements had no value and that the proceeds from the sales of the state tax credits should have been reported as ordinary income.
In Esgar I, the sole issue before the Tax Court was the value of the conservation easements. The parties disagreed over the highest and best use of the subject properties before the easements were donated; the taxpayers argued it was gravel mining, whereas the IRS argued it was agriculture. Both sides introduced reports and testimony from various experts and the Tax Court ultimately sided with the IRS. The Tax Court’s conclusion that agriculture was the properties’ highest and best use before the easements were donated was based, in part, on a finding that, although “it would have been physically possible to mine the properties in 2004 (or in the future),” there was no demand for such use “in the reasonably foreseeable future.” The Tax Court determined that each of the three conservation easements was worth approximately $49,000 (the IRS had asserted a $9,000 value for each easement at trial, and the taxpayers had asserted values of $570,500, $867,500, and $836,500, respectively).
In Tempel, the Tax Court held that the taxpayers’ state tax credits were zero-basis capital assets and, given the short holding periods, income from the sale of such credits was short-term capital gain. Several months later, the IRS released Chief Counsel Memorandum 201147024, which addresses the tax consequences of the sale of state tax credits to both the seller and the buyer.
Conservation Easement Valuation
In Esgar II, the taxpayers first argued that the Tax Court erred in Esgar I by placing the burden of proving the “before” value of the subject properties on them. They asserted that because the burden was not properly allocated, the IRS was allowed to prevail without presenting any objective evidence that agriculture was the properties’ highest and best use. They also argued that the Tax Court's decision was void of “factual evidence presented by the [IRS]” and instead supported “through negative presumptions of fact improperly inferred” against them.
The 10th Circuit rejected all of those arguments. It found that the rule shifting the burden of proof to the IRS was immaterial to the outcome of the case because there was no evidentiary tie—the Tax Court was justifiied in finding that the preponderance of the evidence favored the IRS. The 10th Circuit noted that the IRS’s position was supported by the expert testimony of a certified general appraiser who had appraised some 150 conservation easements, and much of the taxpayers’ own evidence undermined their position that gravel mining was the properties’ highest and best use. The 10th Circuit also noted that the Tax Court did not rely solely on the missing-evidence inference to find that already existing mines in Prowers County were sufficient to satisfy future increases in demand. Rather, that inference was just one of a number of factors indicating that gravel mining was not the properties’ highest and best use.
The taxpayers next argued that that the Tax Court erred by adopting the properties’ current use as its highest and best use rather than taking a “development-based approach.” The 10th Circuit also rejected this argument. It found that the Tax Court had applied the correct highest and best use standard by looking for the use that was “most reasonably probable in the reasonably near future,” and that the Tax Court did not clearly err by concluding that such use was agriculture.
The taxpayers’ final valuation-based argument was that eminent domain principles are wholly inapplicable when valuing conservation easements. The 10th Circuit also rejected this argument, holding that, in the context of determining a property's highest and best use, there is no material difference between conservation-easement valuation and just-compensation valuation.
Character of Income from State Tax Credit Sales
In Esgar II, the taxpayers argued that their state tax credits, which they held for only about two weeks, were nonetheless long-term capital assets because they held the underlying real properties for longer than one year, they relinquished development rights in those properties through the donation of the easements, and they received the tax credits because of the donations.
The 10th Circuit disagreed, noting that the Tax Court correctly concluded that the taxpayers had no property rights in the tax credits until the easement donations were complete and the credits were granted, and the credits never were, nor did they become, part of the taxpayers' real property rights. The 10th Circuit also agreed with the Tax Court that the taxpayers’ holding period in the credits began at the time the credits were granted and ended when taxpayers sold them, and since the taxpayers sold the credits in the same month in which they received them, the gains from the sale of the credits were short term capital gains.
The 10th Circuit also summarily rejected the argument that the transactions amounted to some sort of like-kind exchange of conservation easements for tax credits that might result in the “tacking” of holding periods. The court further noted that if these were like-kind exchanges it would negate the charitable nature of the taxpayers’ contributions.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Friday, March 21, 2014
When the Center for Responsibility and Ethics filed a petition seeking mandamus earlier this year, John Columbo predicted that the case would be dismissed for lack of standing. And in fact, late last month the U.S. District Court for the District of Columbia dismissed CREW v. Treasury for lack of standing. What CREW was seeking as a substantive matter wasn't so unreasonable though. It wanted the Treasury to enforce the provision in 501(c)(4) so that groups claiming exemption under that statute adhere to the requirement that they engage "exclusively" in activities that promote social welfare. The same could be asserted with regard to 501(c)(3)'s requirement that groups claiming exemption under that statute engage "exclusively" in charitable activities. In both instances, the Treasury and courts have stated that Congress did not really mean "only" or "solely" but "mostly" or "firstly." And we all know what mischief those concessions have wrought. It seemed reasonable long ago when we first learned that "exclusively" did not actually exclude every other thing. But we might have avoided a whole lot of mischief and consternation if we had just said "this, and only this." Everything from "UBIT" with regard to 501(c)(3) to "candidate-related political activity" with regard to (c)(4) might have been avoided. Having decided that "exclusively" does not mean "only," Treasury now has to determine how much of something else is too much and has asked for comment on that. To be precise -- and why would we not want to be precise -- defining "exclusively" as anything other than 100% is both incorrect and, regardless of how much of something else is allowed, entirely arbitrary. Once we decide that "exclusively" can mean anything less than 100%, we can logically make it mean anything. So Treasury's request for comments regarding the meaning of "exclusively" becomes just a popular vote. Why do we even want to indulge the legal fiction that exclusively does not mean "omitting everything else" or "allowing for nothing else"? In hindsight, it would probably be better to adhere to the dictionary meaning of "exclusively."
Thursday, March 20, 2014
Mountanos v. Commissioner Revisited – Conservation Easement Donor Not Permitted to Avoid Gross Valuation Misstatement
In Mountanos v. Commissioner, T.C. Memo. 2014-38 (Mountanos II), the Tax Court denied the taxpayer’s motions to reconsider, vacate, or revise its opinion in Mountanos v. Commissioner, T.C. Memo. 2013-138 (Mountanos I).
In Mountanos I, the Tax Court sustained the IRS’s disallowance of deductions claimed for the donation of a conservation easement encumbering 882 acres of undeveloped land in Lake County, California. As discussed in an earlier post, the court held that the taxpayer failed to prove that the highest and best use of the land changed as a result of the donation of the easement and, thus, failed to prove the easement had any value. The court also found that the taxpayer was liable for a gross valuation misstatement penalty under IRC § 6662(h).
In Mountanos II, the taxpayer asked the court to consider the alternative grounds on which the IRS had argued for disallowance of the deductions in Mountanos I—namely that the taxpayer failed to obtain a “contemporaneous written acknowledgment” from the donee as required under IRC § 170(f)(8) and failed to obtain a “qualified appraisal” as required under Treasury Regulation § 1.170A-13(c). The Tax Court did not address those alternative grounds in Mountanos I because it disallowed the deductions in their entirety on valuation grounds. Asking the court to consider the alternative grounds for disallowance in Mountanos II was, noted the court, “a calculated maneuver to avoid the accuracy-related penalty.”
In asking the Tax Court to consider the alternative grounds for disallowance in Mountanos II, the taxpayer relied on two cases in which the 9th Circuit Court of Appeals held that an overvaluation penalty may not be imposed when there is some other ground for disallowing a deduction. The IRS argued that those cases were distinguishable, and the Tax Court agreed. The court explained that the taxpayers in the 9th Circuit cases had stipulated that the deductions at issue were unlawful on grounds other than valuation, and the taxpayer in Mountanos had not so stipulated. The court noted in a footnote that the taxpayer in Mountanos was “attempting to take two bites at the same apple”—i.e., argue valuation and then later seek a redetermination on non-valuation grounds to avoid the gross valuation misstatement penalty. The court also noted in another footnote that the continuing viability of the line of cases on which the taxpayer relied is in question due to the U.S. Supreme Court’s recent opinion in United States v. Woods, 134 S. Ct. 557 (2013), which contains reasoning on the penalty issue that is in conflict with the reasoning in the 9th Circuit cases.
In Mountanos II the taxpayer further argued that the Tax Court should address the alternative disallowance grounds because it would save the court from having to revisit those issues if the case is appealed and the 9th Circuit remands the case. The Tax Court also dismissed this argument. The court explained that addressing the alternative disallowance grounds would have no impact on its disposition of the case as it had already resolved the case on valuation grounds. Resolving moot issues would be tantamount to rending an advisory opinion, which the court refused to do.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
In the spring of 2013, the University of Utah S.J. Quinney College of Law hosted a conference entitled Perpetual Conservation Easements: What Have We Learned and Where Should We Go From Here?
Videos from the conference can be viewed here and include presentations by:
- Karin Gross, Supervisory Attorney, IRS Office of Chief Counsel;
- Roger Colinvaux. Associate Professor, Catholic University Columbus School of Law, and former counsel for the Joint Committee on Taxation;
- Marion R. Fremont-Smith, Senior Research Fellow, Hauser Center for Nonprofit Organizations, Harvard University;
- Mark A. Pacella, Chief Deputy Attorney General, Charitable Trusts and Organizations Section, Pennsylvania Office of the Attorney General; and
- Terry M. Knowles, Assistant Director, Charitable Trusts Unit, Department of Attorney General of New Hampshire.
The Utah Law Review has published a conference edition featuring the following eight articles by speakers at the conference.
- Nancy A. McLaughlin (University of Utah), Perpetual Conservation Easements in the 21st Century: What Have We Learned and Where Should We Go From Here?, 2013 Utah L. Rev. 687
- Theodore S. Sims (Boston University), Qualified Conservation Restrictions: Recollections of and Reflections on the Origins of Section 170(h), 2013 Utah L. Rev. 727
- Roger Colinvaux (Catholic University), Conservation Easements: Design Flaws, Enforcement Challenges, and Reform, 2013 Utah L. Rev. 755
- K. King Burnett (Uniform Law Commissioner), The Uniform Conservation Easement Act: Reflections of a Member of the Drafting Committee, 2013 Utah L. Rev. 773
- Michael Allan Wolf (University of Florida), Conservation Easements and the "Term Creep" Problem, 2013 Utah L. Rev. 787
- Nancy A. McLaughlin (University of Utah) & Jeff Pidot (Former Chief of the Natural Resources Division, Maine Attorney General’s Office), Conservation Easement Enabling Statutes: Perspectives on Reform, 2013 Utah L. Rev. 811
- Melanie B. Leslie (Cardozo School of Law), Conservation Easements as Charitable Property: Fiduciary Duties and the Limits of Charitable Self-Regulation, 2013 Utah L. Rev. 849
- Terry M. Knowles (Assistant Director of Charitable Trusts, New Hampshire Attorney General's Office), Amending or Terminating Conservation Easements: The New Hampshire Experience, 2013 Utah L. Rev. 871
Miranda Perry Fleischer recently provided provocative food for thought regarding the efforts to reform the charitable contribution deduction. In this week's Tax Notes (2014 TNT 54-4) she argues that charitable reform should result in something that really adds to the incentives to assist the poor rather than our own favorite projects. She doesn't argue against the worth of a diverse civil society supportive of MOMA, Harvard and other places most often patronized by people of means. But she does argue that assisting the truly needy should be the central focus of the charitable contribution deduction:
A full discussion of the charitable deduction should also take into account who benefits -- not just who receives the tax benefits from claiming the deduction but who the ultimate charitable beneficiaries are. Once we recognize that most charitable giving, especially by the wealthy, does not assist the poor and disadvantaged, what should we do? First, we should stop using the poor as an excuse for not discussing reforms such as turning the deduction into a credit or instituting a rate cap or AGI floor. To truly evaluate these proposals, we need to recognize which institutions (education, arts, and health organizations) might suffer and determine whether any fiscal savings are worth potential drops in donations to those types of charities. They may not be, but that's a different question from talking about harm to the sector in general or harm to the poor from those proposals.
More ambitiously, we should grant larger tax benefits to contributions to organizations that provide basic needs to the poor. You want to help education? Let's provide more incentives for donations to a tutoring program in a low-income area than we do for donations to your kid's school (which you would probably do anyway). To that end, I propose that donations to organizations that provide basic services to the poor be treated more generously for tax purposes than other donations. Let's say that you donate $ 100 to a soup kitchen. If the deduction remains a deduction, perhaps you are treated as if you had donated $ 200 (thus triggering a government subsidy of $80 instead of $40). If an AGI floor is implemented, perhaps those contributions are not subject to the floor. If the deduction is changed to a credit of, say, 15 percent, maybe you would receive a 30 percent credit for those types of donations.
By emphasizing donations to organizations helping the neediest, we'd be putting our money where our mouths are when it comes to charitable giving. We routinely use charity for the poor not only as a justification for continuing the tax status quo but also to excuse less government aid to the poor. For example, the bipartisan letter to Baucus argued that if the deduction were reformed, "the government would be required to step in and fund those services now being provided through private generosity. Accordingly, preserving the charitable deduction is also prudent as a matter of broad fiscal policy." There are very valid reasons for wanting charity to do more, and government less, when helping the poor. Quite often, charities can find more efficient, more responsive, and more creative ways of assisting the poor than the government can. So let's structure the tax incentives for charitable giving to reflect these values. Perhaps it's an area in which Republicans and Democrats can find common ground.
I second that. But I bet it won't happen and I just want to comment on and dispense with the most likely counterargument. The big boys -- hospitals and universities -- in civil society would never stand for anything that might result in fewer contributions to their own, even if whatever it is increased the amount of charity to the poor. I don't condemn those who would rather contribute to the Museum of Modern Art any more than would Prof. Fleischer. But the arguments against favoring the poor above all else in IRC 170 [or 501(c)(3)] rely on or at least harken to common misinterpretations of Biblical passages: "Man does not live on bread alone," opponents might say while also adding, "the poor will always be with us." Math. 4:4 and Mark 14:7. Religious scholars pretty much agree that those passages are misused to the extent they are thought to elevate every other good thing to the same level as the relief of poverty. Tax policy makers should conclude likewise.
Wednesday, March 19, 2014
Obama signals veto of "Stop Targeting of Political Beliefs Act of 2014" and A short comment on the treatment of Lois
H.R. 3865 essentially prohibits Treasury from enacting any regulatory interpretations of 501(c)(4) and, by its legislatively suggested short title, is obviously designed to preclude Treasury from going forward with the proposed (c)(4) political activity regulations issued on November 29, 2013. The bill passed through the House on Feburary 26, 2014 and one day later the Obama administration signaled its intention to veto the bill:
STATEMENT OF ADMINISTRATION POLICY
H.R. 3865 - Temporary Prohibition on IRS from Modifying Tax-Exemption Requirements for Social Welfare Organizations
(Rep. Camp, R-Michigan, and 66 cosponsors)
The Administration strongly opposes H.R. 3865, which would prohibit the Department of the Treasury and the Internal Revenue Service (IRS) from clarifying the standards that organizations must satisfy to qualify for tax-exempt status. Under current law, organizations qualify as tax-exempt organizations “operated exclusively for the promotion of social welfare” if they are primarily engaged in promoting in some way the common good and general welfare of the people. The relevant Treasury and IRS rules have been in place since 1959 and are broadly recognized as unclear. The proposed legislation would prevent any revisions or clarifications to those rules. Thus, it could prevent the IRS from administering the tax code more effectively and from providing greater clarity to organizations seeking tax-exempt status.
H.R. 3865 would prevent Treasury and the IRS from issuing, for one year from the date of enactment, any generally applicable guidance relating to the standards for tax-exemption under section 501(c)(4) as a social welfare organization. In addition, H.R. 3865 would require the IRS to continue to use the standard and definitions in effect on January 1, 2010, to determine whether an organization qualifies for tax-exempt status under section 501(c)(4). The lack of clarity of these standards has resulted in confusion and difficulty administering the Code, as well as delays in the processing of applications for tax-exempt status. The Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, have recommended clarifying the current rules.
Consistent with these recommendations, Treasury and the IRS recently issued a notice of proposed rulemaking (NPRM) that provides guidance on the definition of candidate-related political activity for purposes of determining the “primary activity” of a social welfare organization and solicits public comment on a number of related issues. This NPRM is the first step in a standard rulemaking process intended to clarify the rules and to provide greater certainty for organizations seeking tax-exempt status. The notice and comment process allows for all concerned parties to provide input and comments before any changes to the rules are effected. Treasury and the IRS will carefully consider any and all such comments before issuing any further guidance, and they will follow standard agency rulemaking procedures.
For the reasons described above, the Administration strongly opposes the proposed legislation. If the President were presented with H.R. 3865, his senior advisors would recommend that he veto the bill.
The Senate version probably will not make it out of Finance but if it does it will obviously be dead on arrival. Yesterday House Leader Boehner said that Lois Lerner should be held in contempt for invoking her right to remain silent before the obviously biased House hearings I refuse to even link to. Others have gone even further and have stated that Ms. Lerner should be pursued criminally. Give me a break! I am not trying to use this blog as a platform to comment on, and thereby perpetuate political spectacle (oh, wait, I am commenting on the process aren't I?) but I do want to publicly say that what some in Congress and in certain media outlets are perpetrating against Ms. Lerner is nothing short of a "high tech lynching" or at least a burning at the stake back in Salem. I met her a few times at ABA tax conferences. She always smiled warmly and knew what she was talking about. I don't really know her. But anybody who ever had any interest in EO/EP knows that Ms. Lerner was a diligent servant of the people for a long long time. It is absolutely shameful how she is being treated. A travesty that she was forced to resign. And now nothing short of a witchhunt designed to wound a bigger fish than Ms. Lerner but at what must be considerable personal and financial costs to her all the same. Ms. Lerner is just the bait through which a very sharp hook has pierced and she has been left to languish in a putrid political cesspool. I hope she lands on her feet. She was good for tax exempt jurisprudence and if I could hire her to teach tax law I would.
Just in case you did not get the email, sent out today . . .
In 2013, the Charities Regulation and Oversight Project of the National State Attorneys General Program (“Charities Project”) hosted an unprecedented policy conference at Columbia Law School focused on state regulation and enforcement of the charitable sector. Entitled “The Future of State Charities Regulation”, the two-day conference featured the participation of more than half a dozen current and former attorneys general, dozens of assistant attorneys general from around the country, federal regulators and top academics and practitioners. The conference was made possible through the generous support of the Ford Foundation, the Charles Stewart Mott Foundation and the National Attorneys General Training and Research Institute.
The Charities Project is pleased to announce the publication, through Columbia University’s Academic Commons, of two dozen papers solicited for the conference addressing The Future of State Charities Regulation. This collection of state-focused articles is the first of its kind in the literature, addressing a panoply of topics at the intersection of state regulation and the charitable sector. These twenty-five articles are openly accessible and publicly searchable through Columbia University’s Academic Commons.
Contributors include Marcus Owens, Marion Fremont-Smith, Tim Delaney, Anthony Johnstone, Elizabeth Grant, Dana Brakman Reiser, David Spenard, John Tyler, Robert Wexler, Doug Mancino, Mark Chopko, William Marshall, Lloyd H. Mayer (one of our own), Karen Gano, Linda Sugin (one of our own again), Putnam Barber, James Fishman, Fran Hill, Rick Cohen, Hugh Jones, Robert Cooper, and George Jepsen. This promises to be a very useful effort. Thanks to all of the authors.
Tuesday, March 18, 2014
Technology will marginalize the market economy, invigorate the sharing economy and nonprofits will become the norm.
In The Rise of Anti-Capitalism, Jeremy Rifkin posits a fascinating world in which the "Internet of Things" renders private ownership -- and the capitalist marketplace reliant on private ownership -- obsolete. The resulting void is instead occupied by the sharing economy, characterized by the social commons devoid of private ownership and moderated [regulated or maintained is not acccurate] by Civil Society. He does not advocate as much as predict. He seems to say that access to information will eventually and inevitably transform our world into a cost-free society where anything can be had for practically nothing. At first blush it would seem that nonprofits too would be obsolete in a cost-free world. Exactly the opposite, according to Rifkin. But before I get to that, I have always thought of Civil Society as the vehicle by which morality is injected into the amorality of capitalism. Which is to say that capitalism presumes winners and losers. Many must be poor so that a few can be rich. Some must have absolutely nothing so that fewer still can have absolutely everything. In a perfect system, what is fair about that is that everybody has exactly the same chance to have everything, or at least something more than nothing. Nonprofits help ameliorate our guilt at having set up an imperfect system by which we know somebody will have nothing so that somebody else can have everything and presumably more can have something. Nevermind for the moment that nothing and something are relative rather than absolute. To have nothing or something in America, for example, might mean having something or everything, respectively, someplace else. Anyway, in Rifikin's zero cost world Civil Society would be indispensable, not obsolete. It will be Civil Society, essentially, that facilitates the allocation of resources in the main; for profits will be the exception, allocating resources only to the very conspicuous or peculiar consumer:
THE unresolved question is, how will this economy of the future function when millions of people can make and share goods and services nearly free? The answer lies in the civil society, which consists of nonprofit organizations that attend to the things in life we make and share as a community. In dollar terms, the world of nonprofits is a powerful force. Nonprofit revenues grew at a robust rate of 41 percent — after adjusting for inflation — from 2000 to 2010, more than doubling the growth of gross domestic product, which increased by 16.4 percent during the same period. In 2012, the nonprofit sector in the United States accounted for 5.5 percent of G.D.P.
What makes the social commons more relevant today is that we are constructing an Internet of Things infrastructure that optimizes collaboration, universal access and inclusion, all of which are critical to the creation of social capital and the ushering in of a sharing economy. The Internet of Things is a game-changing platform that enables an emerging collaborative commons to flourish alongside the capitalist market.
This collaborative rather than capitalistic approach is about shared access rather than private ownership. For example, 1.7 million people globally are members of car-sharing services. A recent survey found that the number of vehicles owned by car-sharing participants decreased by half after joining the service, with members preferring access over ownership. Millions of people are using social media sites, redistribution networks, rentals and cooperatives to share not only cars but also homes, clothes, tools, toys and other items at low or near zero marginal cost. The sharing economy had projected revenues of $3.5 billion in 2013.
Nowhere is the zero marginal cost phenomenon having more impact than the labor market, where workerless factories and offices, virtual retailing and automated logistics and transport networks are becoming more prevalent. Not surprisingly, the new employment opportunities lie in the collaborative commons in fields that tend to be nonprofit and strengthen social infrastructure — education, health care, aiding the poor, environmental restoration, child care and care for the elderly, the promotion of the arts and recreation. In the United States, the number of nonprofit organizations grew by approximately 25 percent between 2001 and 2011, from 1.3 million to 1.6 million, compared with profit-making enterprises, which grew by a mere one-half of 1 percent. In the United States, Canadaand Britain, employment in the nonprofit sector currently exceeds 10 percent of the work force.
The implications are staggering, especially with regard to the laws we implement to moderate our individual relationships with Civil Society. Currently, those laws are are patterned after laws by which we regulate private enterprise. Those laws are altered, clumsily in most instances, to the extent public rather than private benefit is the intended goal. In the sharing economy, the laws will need to have their own identity; they will need to be written first; law as the enforcer of private ownership second and as the exception to the norm. I need to think about this a little longer to really understand the implications. And by the way, I am not hawking Rifkin's book on which the essay is based. He makes a compelling case that as things become "free" civil society will dominnate (think about the demise of print media and the copyrighted music industry). I just wonder what this will really mean for how we write our laws.
Monday, March 17, 2014
I agree with Professor Mittendorf who, writing in the Chronicle of Philanthropy this week, argues that tax reform might actually increase charitable giving even if reform limits the charitable contribution deduction, and nonprofit stakeholders should not reflexively oppose every attempt to change the deduction:
It has now become a yearly ritual that members of Congress and White House officials offer proposals to limit or even eliminate charitable tax deductions. And, as a part of the ritual, nonprofit leaders spring up as fast as they can to protest that the changes will stifle charitable giving. Vikki Spruill, head of the Council on Foundations, captured the reaction of many in response to the latest round of proposals: “This is an 'if it ain’t broke, don’t fix it’ situation” she told The Chronicle. Perhaps I am overly optimistic, but it’s possible that tax reform could offer the potential to expand charitable giving, or at least not cause the decline that many fear.
Mittendorf offers a couple of reasonable-sounding suggestions, at the same time acknowledging that the devil is in the details. One person commenting on the opinion piece complained that nonprofits automatically oppose any form of tax reform impacting on the charitable contribution deduction while decrying other ills of society for which the tax code is blamed, wholly or partially. This sort of blind turf protection, it seems to me, paints nonprofits as no different than any other interest group.
One of these days I am going to finish my way too early draft on the theoretical implications arising from a nonprofit's "voluntary" agreement to make "payments in lieu of taxes." In short, I think the making of a PILOT, voluntary in name only, is the tax exempt analog to "statements against pecuniary interests" in evidentiary proceedings. PILOTS impliedly admit that property tax exemptions are unjustifiable in the first place and are usually only paid because the taxing authority is threatening to challenge property tax exemption. Why not accept the challenge? Probably because there is such a good chance that the property owner will lose, that's why.
I am moving at a snail's pace in my research but I wanted to pass along this interesting "PILOT Agreement" between the University of Iowa and its local city municipality. The news article from which I obtained the agreement raises some interesting issues, the most remarkable of which is that the University agreed to pay the PILOT in consideration for the land on which it would build a clinic. According to the article, the city would not sell the land unless the University agreed to what the parties are calling a PILOT. Is this even a PILOT or would first year contract [or tax] students think of this as more a part of the purchase price? Since the PILOT agreement has no ending date, the purchase price -- assuming the PILOT is actually part of the city's amount realized -- would be indefinite and perhaps even unknowable. Does it even matter? I guess it is a way to easier call something that looks like . . . well, a payment in the place of a tax not a tax (and therefore no admission that property tax exemption is unjustifiable in the first place!). Regardless, this circumstance demonstrates the problems with PILOTS, not only for the nonprofit making the admission, I mean "payment," but for the local governments extracting the PILOT. Its basically an ad hoc exercise of taxing power that seems violative of the equal protection clause. But that argument will have to await a later date, at least if it is to come from me. After all, the payment that takes the place of taxes is entirely voluntary so it can't be a disguised tax. Can it?
Our own Lloyd H. Mayer has weighed in with a proposed solution to the hot button issue for nonprofits. Here is the abstract to "Nonprofits, Speech, and Unconstitutional Conditions", forthcoming in the Connecticut Law Review.
This Article proposes a new constitutional framework for approaching the issue of speech-related conditions on government funding received by nonprofits and demonstrates the application of this framework by applying it to the disputes that have reached the Supreme Court in this area. It argues that speech rights are generally inalienable as against the government under the First Amendment, and therefore any abridgement of such rights by the government – whether direct or indirect – is subject to strict scrutiny. As a result, the government is not permitted to buy an organization’s speech (or silence) absent a compelling governmental interest in doing so and then only if the purchase is done in a manner that is narrowly tailored to serve that interest.
This Article’s approach contrasts with the current approach of the Court to this area, which in its various attempts to resolve disputes centering on such conditions has left courts, governments, and private parties understandably confused about the applicable constitutional standard. This confusion stems in large part from the Court’s tendency to subtly recharacterize its earlier decisions, which unnecessarily throws into doubt the reasoning and previously settled readings of those cases. Most recently, in Agency for International Development v. Alliance for Open Society International opinion, the Court both muddied the waters further and also moved away from the correct application of the unconstitutional conditions doctrine in this context. In that decision, the Court, without acknowledgement, shifted from its longstanding focus on whether the government funding was for government speech to instead focus on whether the speech affected by the condition was within or outside of the program funded by the government, thereby opening the door to significantly more burdensome limits on speech by recipients of government funding.
This framework also has two broader ramifications. First, it may prove useful for resolving constitutional disputes relating to other speech-related conditions, such as campaign finance limits tied to government funding or other government benefits. Second, it demonstrates that by drawing on the extensive unconstitutional conditions literature to create an approach customized to a particular constitutional context it may be possible to salvage the unconstitutional conditions doctrine even given its widely acknowledged incoherence. Salvaging the doctrine is particularly important in a world where government benefits both permeate almost every type of activity and are often accompanied by constitutionally suspect restrictions.
Sunday, March 16, 2014
In Wachter v. Commissioner, 142 T.C. No. 7 (March 11, 2014), the Tax Court held that North Dakota law, which limits the duration of easements created after July 1, 1977, to a maximum of 99 years, precludes conservation easement donors in the state from qualifying for a federal charitable income tax deduction under IRC § 170(h) because easements in North Dakota cannot be granted “in perpetuity.”
The Tax Court in Wachter reiterated the fundamental principle that, while state law determines the nature of property rights, it is federal law that determines the federal tax treatment of those rights. Wachter confirms that a state can render all conservation easement donations in the state ineligible for the various federal tax incentives offered to conservation easement donors by enacting laws that prevent conservation easements from complying with federal requirements.
In Wachter, the IRS argued that North Dakota’s law limiting the term of all real property easements to 99 years prevents conservation easements in the state from satisfying both:
(i) IRC § 170(h)(2)(C)’s requirement that a tax-deductible easement be “a restriction (granted in perpetuity) on the use which may be made of the real property” and
(ii) IRC § 170(h)(5)(A)’s requirement that the conservation purpose of a tax-deductible easement be protected in perpetuity.
The Tax Court noted that these are two separate and distinct perpetuity requirements, and the failure to satisfy either of them will prevent an easement from being deductible under IRC § 170(h). The court held that North Dakota law precludes conservation easements in the state from qualifying as granted “in perpetuity” under both of these subsections.
The taxpayers in Wachter argued that North Dakota’s 99-year limitation should be considered the equivalent of a remote future event that does not prevent an easement from being considered perpetual. They cited Treasury Regulation § 1.170A–14(g)(3), which provides, in part, that
A deduction shall not be disallowed … merely because the interest which passes to, or is vested in, the donee organization may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible.
This regulation merely restates a rule that applies to all charitable gifts (see Treasury Regulation § 1.170A-1(e)). The rule is intended to ensure that taxpayers are permitted to claim deductions for charitable gifts only if the donee (whether a government entity or charity) will actually receive and retain the gift for the benefit of the public. Thus, no deduction is allowed unless, on the date of the gift, the possibility that the donee’s interest would be “defeated” (i.e., that the property would be returned to the taxpayer and thereby removed from the charitable sector) is so remote as to be negligible.
The Tax Court in Wachter noted that the courts have construed the so-remote-as-to-be-negligible standard to mean:
'a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction' or 'a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance.'
The Tax Court explained that the term “remote” refers to the likelihood of the event that could defeat the donee’s interest in the gift. It then explained that the likelihood of the event in Wachter that could defeat the donee’s interest in the charitable gifts of the conservation easements – expiration of the easements after 99 years - was not “remote.” On the date of the donation of the easements, the court explained, it was not only possible, it was inevitable that the donee would be divested of its interests in the easements by operation of North Dakota law. Accordingly, the easements were not restrictions granted “in perpetuity” and, thus, were not deductible under IRC § 170(h).
The courts have held that the so-remote-as-to-be-negligible standard cannot be invoked to cure a taxpayer’s failure to comply with specific requirements in the Treasury Regulations interpreting IRC § 170(h), including the mortgage subordination requirement (§ 1.170A-14(g)(2)), the judicial proceeding to extinguish requirement (§ 1.170A-14(g)(6)(i)), and the division of proceeds upon extinguishment requirement (§ 1.170A-14(g)(6)(ii)). See, e.g., Mitchell v. Commissioner, T.C. Memo 2013-204. This makes sense. The specific requirements in IRC § 170(h) and the regulations establish bright-line rules that promote efficient and equitable administration of the federal tax incentive program. If individual taxpayers could fail to comply with those requirements and claim that their donations are nonetheless deductible because the possibility of defeat of the gift is so remote as to be negligible, the IRS and the courts would be required to engage in an almost endless series of probability assessments with regard to each individual conservation easement donation. By including specific requirements in IRC § 170(h) and the regulations, Congress and the Treasury Department presumably intended to avoid just such inquiries.
Accordingly, it appears that taxpayers can invoke the so-remote-as-to-be-negligible standard with regard to an event that could defeat a gift of a conservation easement only if the event is not the subject of a specific requirement in IRC § 170(h) and the Treasury Regulations. One such event, provided as an example in Treasury Regulation § 1.170A-14(g)(3), is forfeiture of a conservation easement as a result of the donee’s failure to rerecord the easement under the applicable state’s marketable title act. The Treasury presumably assumed that the prospect of such forfeitures was so remote as to be negligible given that donees have a fiduciary obligation to protect the charitable assets they hold on behalf of the public and not transfer such assets to private parties. Another such event might be a tax lien foreclosure that could terminate a conservation easement. If the probability of such a foreclosure is so remote as to be negligible at the time of a conservation easement's donation, it should not render the easement nonperpetual.
Thursday, March 13, 2014
Together pop star Lady Gaga and her mother Cynthia Germanotta co-founded and lead the Born This Way Foundation, a 501(c)(3) whose mission is “to foster a more accepting society, where differences are embraced and individuality is celebrated.” This week the organization has been scrutinized as its 2012 form 990 surfaced on the internet showing $2.66 million in revenue with $1.85 million of that amount going to operational expenses. Critics question how the Born This Way Foundation can really serve its mission if it has been spending the organization’s money in the following manner:
- $406,552 on legal expenses;
- $348,000 on event productions;
- $150,000 on philanthropic consulting;
- $77,923 on travel; and
- A single $5,000 grant.
In the organization’s defense, Lady Gaga’s mother explained, “First and foremost, we are an organization that conducts our charitable activity directly, and we fund our own work. We are not a grant-maker that funds the work of other charities, and were never intended to be.” Germanotta also explained that Lady Gaga used her own money to cover the organization’s start-up costs, and that Gaga “uses her celebrity to constantly advocate on behalf of tolerance, individualism, and kindness.”
Are Germanotta’s arguments persuasive? What else might you need to know, if anything, about the organization, it’s mission, and it’s spending?
New Hampshire nonprofits can breath a little easier now that the legislature has officially rejected a proposed bill that would have required the state’s largest nonprofit organizations to pay business enterprise taxes. The legislation would have “required nonprofits that earn more than $2 million in fees for service annually to pay the tax that is currently paid by businesses in the state with more than $150,000 in gross receipts.”
Currently, the business enterprise tax in New Hampshire is at 0.75%, but the bill would have “reduced that to 0.68% by including hospitals, universities, and other large nonprofits.”
David Hess (R-Hookset), the person who first introduced the bill, explained the bill targeted organizations “which receive a substantial amount of their revenue from ‘program service revenue.’” However, critics of the bill argued it would “put fragile nonprofits at too much risk” and it would “open the door to taxing nonprofits for earned revenue.”
Tuesday, March 11, 2014
Members of the Atlanta City Council will soon debate and vote on whether they should be able to donate taxpayer funds to nonprofit community organizations and charities. Critics take issue with the fact that the office budgets of Atlanta City Council members exceed $100,000 annually.
Should elected officials be permitted to use public dollars to contribute to and support charities? Why or why not? If so, should there be any limitations? Is there any other way for elected officials to support community charities without using taxpayer funds?
Last week the Chairman of the House Ways and Means Committee, Dave Camp, proposed a 2% floor on charitable deductions. The 2% floor means a taxpayer “would have to contribute at least 2% of their income to charity in order to claim a deduction.”
The proposal seems to be getting mixed reviews among those in the nonprofit world.
Steve Taylor, senior vice president of United Way Worldwide, explains, “[p]eople in America of all income levels donate to charity, and they donate what they can. This proposal is a proposal that would impact more people who are in the middle class.”
Jan Masaoka, CEO of the California Association of Nonprofits, claims the 2% floor could potentially encourage more charitable giving as some people near the floor give more money to reach the 2%.
With the charitable deduction costing the United States government about $44 billion a year, is a 2% floor an efficient reform proposal? How do arguments like Taylor’s and Masaoka’s affect the analysis?