Monday, January 19, 2015

District Court Reverses Itself, Dismisses Case Challenging Church Form 990 Exemption

FFRFIn the wake of U.S. Court of Appeals for the Seventh Circuit dismissing on standing grounds a lawsuit challenging the minister housing allowance available under IRC section 107, the U.S. District for the Western District of Wisconsin revisited its 2013 decision finding standing to challenge the church exemption from having to file annual information returns (Form 990) with the IRS.  Following the Seventh Circuit's lead, the District Court concluded that the plaintiffs in the Form 990 case (one of which, the Freedom from Religion Foundation, is common to both cases) lacked standing because they had never sought and been denied an exemption from having to file Form 990 for themselves (as opposed to objecting to other organizations emjoying an exemption).  Indeed, the District Court noted that the plaintiffs stated in their complaint that they intended to continue to file the Form 990 and did not seek to amend their complaint in this regard even afer the defendant identified this issue in its motion to dismiss.  

Therefore while it appears the Seventh Circuit left open a way for plaintiffs to obtain standing in this case and similar cases - claim the exemption or tax benefit that churches enjoy and then file suit if and when the IRS denies that claim - it is not clear that at least the plaintiffs in this case are willing to make such a claim.  This path appears to still be available for others with similar concerns about the provision of such exemptions and benefits to churches to the exclusion of other types of nonprofits, however.

Lloyd Mayer

January 19, 2015 in Federal – Judicial, Religion | Permalink | Comments (0) | TrackBack (0)

Minnesota Supreme Court Upholds Right of Unincorporated Medical Staff to Sue Nonprofit Hospital

AveraIn 2012 the nonprofit Avera Marshall Regional Medical Center's board of directors unilaterally decided to repeal and replace the hospital's medical staff bylaws.  Two individual physicians and the Medical Staff as a whole objected, eventually filing a lawsuit against the hospital that reached the Minnesota Supreme Court on two important governance issues for nonprofit hospitals.  First, did the Medical Staff, as an unincorporated association, have the legal capacity to sue?  Second, did the medical staff bylaws constitute an enforceable contract between the hospital and the Medical Staff?  In a December 31, 2014 opinion, the Minnesota Supreme Court answered both questions in the affirmative.

With respect to the first question, the court acknowledged that the common law rule in Minnesota is that unincorporated associations are not legally distinct from their members and so do not have legal capacity to sue or be sued in their own right.  The court found, however, that the Minnesota legislature had overridden this rule when it enacted Minnesota Statute section 540.151, reading that statute as granting an unincorporated association that met the criteria described in the statute the capacity to sue and to be sued.  Those criteria are having two or more persons associate and act under a common name, criteria that the court found the hospital's "Medical Staff" satisfied.

With respect to the second question, the Minnesota Supreme Court concluded that even though the hospital had a legal obligation under Minnesota administrative rules and the hospital's corporate bylaws to adopt medical staff bylaws, both sides still provided consideration.  More specifically, the hospital granted privileges at the hospital in exchange for the prospective Medical Staff member agreeing to abide by the bylaws.  The court therefore concluded that there was a bargained-for exchange of promises and mutual consent to the exchange, creating an enforceable contract.  The court therefore remanded the case for consideration of the plaintiffs' claims that the repeal and and replacement of the medical staff bylaws violated the terms of that contract.

The result in this case, which may be significant to many hospitals, for-profit and nonprofit, was not a foregone conclusion as both the state trial court and the state appellate court had reached the opposite result on both questions.  Indeed, two members of the Minnesota Supreme Court dissented from the five justice majority's opinion.

Lloyd Mayer


January 19, 2015 in State – Judicial | Permalink | Comments (0) | TrackBack (0)

Thursday, January 15, 2015

Your Complicated Charitable Policy Issue *Here*

With a hat tip to the Chronicle of Philanthropy, see this note on these billboards springing up around the Boston area, sponsored by the Charity Defense Council.   The article notes that the head of the Charity Defense Council, Dan Pallota, is at the fore in the debate over the use of administrative costs as a measure of charitable outcomes.   Speaking of effectivenss... how effective is a billboard on I-90 on a complicated policy issue?   Anyone in the Boston area spot one?


Charity Defense Council Billboards

January 15, 2015 in In the News | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 13, 2015

I’m Shocked, SHOCKED, to Find that Art Collecting is Going on in Here!

Over the weekend, The New York Times published the next great exposé in the tax habits of the rich and famous, entitled Writing Off the Warhol Next Door: Art Collectors Gain Tax Benefits from Private Museums.   The article seems to be getting some play elsewhere, having been picked up by outlets like the Huffington Post and of course, that leader in Journalism, the Tax Prof Blog!   (Some of you may recall one of this article’s predecessors-in-kind at The Washington Post in 2005, Big-Game Hunting Brings Big Tax Breaks: Trophy Donations Raise Questions in Congress, which lead to the passage of Section 170(f)(15) – Special Rule for Taxidermy Property – effective for contributions made after 7/25/2006).

The article discusses the growing phenomenon of the “private museum.”  Although this term has no technical definition, the article uses it to refer to a collection of art that is given to a tax-exempt charitable organization controlled by the donor of the collection and located in close physical proximity to the donor.  This trend is arguably the offshoot of the enactment of Section 170(o) in 2006, which used to allow an individual to give only a fractional interest in a piece of art to a museum, and maintain possession of the art proportional to the fractional interest retained.

One problem that I have with the article is that it talks about collectors getting a tax subsidy for their investments in art.   At no time is it really made clear that in order for this to work from a tax perspective, the collector has probably given ownership of the art to the charity forever.  Thus, it is no longer the “collector’s investment”, and when the collector dies, that art (or the proceeds therefrom) remain in the public sphere in perpetuity.   The benefit is that he or she gets to go look at the art whenever they want to do so, as opposed to having to make an appointment on every other Tuesday at 1:43 p.m.

After culling through all the Sturm und Drang in the article, I think the article has three possible issues with the concept of the private museum, although I don’t think these arguments are made very clearly:

  1. Is collecting and preserving art, in and of itself, “charitable” in a tax-exempt context?
  2. Is it really the public educational component of the collection of art the thing that makes it tax-exempt?
  3. Assuming it is charitable activity in one manner or another, is the ease of access of the original donor so significant as to overwhelm the otherwise charitable benefit afforded by having the collection in the public sphere (in other words, private benefit and/or private inurement)?

I wish the article had been a little more methodical on the law, and a little less TMZ, but I guess that wouldn’t make a very interesting piece for anyone other than … well, those of us who regular the Nonprofit Tax Prof Blog!

Of course, one should always follow the Internet axiom “Never Read the Comments,” but the most disturbing part of the article is that portion of the comments that see the private museum as just another tax loophole for the wealthy, adding to a continuing stream of de-legitimization of the tax code and the IRS, but that’s another blog post…

(P.S. As a general marketing matter, one should never use the term “have your cake and eat it, too” publicly with respect to a tax planning matter unless you really are trying to flag down the IRS and/or Woodward & Bernstein.   Just a thought.)

(P.P.S. Special shout out to our own Lloyd Mayer, who is quoted in the NYT piece.)


January 13, 2015 | Permalink | Comments (0) | TrackBack (0)

Monday, January 12, 2015

More on the New Nonprofit Hospital Final Regs

As reported here on your faithful Nonprofit Law Prof Blog by Roger Colinvaux, the IRS issued final regulations under Section 501(r) on the requirements for nonprofit hospitals at the very end of last year.

Over the weekend, The New York Times did a report on these regulations, focusing on efforts to stop "aggressive tactics to collect payments from low-income patients."   To me, the most interesting part of the article isn't the summary of the regs with regard to collections - it's the quote (and accompanying picture) from Senator Grassley:  "Nonprofit hospitals and for-profit hospitals have often been indistinguishable... The rules make clear that tax-exempt hospitals have to earn their tax exemption."

It seems to me that Senator Grassley has been some what low key on charitable issues in the past few years - I'm guessing we will be hearing more from him with the resurgence of Republicans in Congress.

For other coverage of the final regulations:

- The Chronicle of Philanthropy

-briefly, at Independent Sector

-PriceWaterhouse Coopers

I'm happy to add any other links that people have found useful.




January 12, 2015 in Current Affairs, Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

Thursday, January 8, 2015

Mitchell v. Commissioner—10th Circuit Affirms Tax Court, Mortgages Must Be Subordinated When Conservation Easement is Donated

Mtichell II picture copyIn Mitchell v. Commissioner, _ F.3d _ (10th Cir. 2015), the 10th Circuit Court of Appeals affirmed the Tax Court’s holding that, to be eligible for a deduction for the donation of a conservation easement under Internal Revenue Code § 170(h), any outstanding mortgages on the underlying property must be subordinated to the rights of the holder of the easement at the time of the gift.

In 2003, a partnership of which Ms. Mitchell was a partner donated a conservation easement with a claimed value of $504,000 to a land trust. The terms of the deed purported to transfer the easement to the land trust in perpetuity and in a manner necessary to satisfy the requirements of § 170(h). However, the partnership did not obtain a subordination agreement from the lender holding an outstanding mortgage on the subject property until almost two years following the date of the donation.

The IRS argued that the mortgage subordination requirement is a bright-line requirement that requires any existing mortgage to be subordinated to the rights of the holder of the easement, irrespective of the risk of foreclosure or any alternate safeguards. The IRS also asserted that subordination must occur at the time of the donation because, without subordination, the easement would be vulnerable to extinction upon foreclosure and, thus, the conservation purpose would not be protected in perpetuity as required under § 170(h). The 10th Circuit agreed with the IRS.

Delegation of Rulemaking and Deference to Commissioner

The 10th Circuit first explained that, although taxpayers are generally not permitted to deduct charitable contributions of partial interests in property, Congress made an exception to this rule for contributions of conservation easements—provided the contributions meet certain statutory requirements. One such requirement is that the conservation purpose of an easement must be “protected in perpetuity.” The 10th Circuit explained that, because the Code does not define the phrase “protected in perpetuity” or otherwise describe how a taxpayer may accomplish this statutory mandate, “Congress has tasked the Commissioner with promulgating rules to ensure that a conservation purpose be protected in perpetuity.” Acting pursuant to that authority, the Commissioner promulgated Treasury Regulation § 1.170A-14(g), which includes the mortgage subordination requirement.

Citing to the Supreme Court’s holding in Mayo Found. for Med. Educ. & Research v. United States, 131 S.Ct. 704, 711 (2011), the 10th Circuit noted that, because the Commissioner promulgated the regulations under § 170(h) pursuant to the authority granted to him by Congress, the regulations are binding on taxpayers unless they are “arbitrary and capricious in substance, or manifestly contrary to the statute.” In addition, “where Congress has delegated to the Commissioner the power to promulgate regulations for the enforcement of the Code, ‘[the court] must defer to his regulatory interpretations of the Code so long as they are reasonable.’”

The 10th Circuit explained that requiring existing mortgages to be subordinated to conservation easements prevents extinguishment of the easements in the event the landowners default on the mortgages. In this way, said the court, the mortgage subordination requirement is “reasonably related” to Congress’s mandate that the conservation purpose be protected in perpetuity. The 10th Circuit also rejected Ms. Mitchell’s claim that the mortgage subordination provision is arbitrary and capricious, and therefore unenforceable. Although declining to consider this argument because it was raised for the first time on appeal, the 10th Circuit noted that the argument would fail because the mortgage subordination provision is a reasonable exercise of the Commissioner’s authority to implement the statute.

The 10th Circuit then proceeded to reject each of Ms. Mitchell’s arguments as to why she should be entitled to a deduction despite her failure to obtain a subordination agreement at the time of the donation.

Subordination Must Be Timely

Ms. Mitchell argued that, since the mortgage subordination regulation contains no explicit timeframe for compliance, it should be interpreted to allow for subordination to occur at any time. The 10th Circuit rejected this argument as “foreclosed by the plain language of the regulations.” The court noted that the regulation “expressly provides that subordination is a prerequisite to allowing a deduction.” The regulation, explained the court, states that “no deduction will be permitted ... unless the mortgagee subordinates its rights in the property” (emphasis added by the court). Since in 2003, when the Mitchells requested a charitable deduction for the donation of the easement, the property was subject to an unsubordinated mortgage, Ms. Mitchell was not entitled to a deduction under the plain language of the regulation.

The 10th Circuit further noted that, even if it were to view the regulation as ambiguous with respect to timing, the result would be no different because the court must defer to the Commissioner’s reasonable interpretation on this point. The court explained that the Commissioner’s interpretation was not plainly erroneous or inconsistent with the mortgage subordination provision’s plain language. Moreover, there was no reason to suspect the Commissioner’s interpretation did not reflect the agency’s fair and considered judgment on the matter. Because a conservation easement subject to a prior mortgage obligation is at risk of extinguishment upon foreclosure, requiring subordination at the time of the donation is consistent with the requirement that the conservation purpose be protected in perpetuity.

Functional Subordination Not Sufficient

Ms. Mitchell argued that strict compliance with the mortgage subordination requirement was unnecessary because the easement deed allegedly contained sufficient safeguards to protect the conservation purpose in perpetuity. The 10th Circuit rejected this argument as inconsistent with the plain language of the mortgage subordination provision. The court pointed out that the regulation contains one narrow exception to the “unambiguous” subordination requirement—for donations occurring prior to 1986. In the case of a pre-1986 donation, a taxpayer may be entitled to a deduction without subordination if the taxpayer can demonstrate that the conservation purpose is otherwise protected in perpetuity. The negative implication of this express, time-limited exception, said the court, is that no alternative to subordination will suffice for post–1986 donations. The court thus declined to adopt a “functional” subordination rule for donations occurring after 1986.

Likelihood of Foreclosure Irrelevant

Ms. Mitchell further argued that strict compliance with the mortgage subordination requirement was unnecessary in her case because the risk of foreclosure was so remote as to be negligible (the partnership apparently paid its debts on time and had sufficient assets to satisfy in full the amounts due). She pointed to Treasury Regulation § 1.170A-14(g)(3), which provides that a deduction will not be disallowed merely because the interest that passes to the donee organization may be defeated by the happening of some future event, “if on the date of the gift it appears that the possibility that such . . . event will occur is so remote as to be negligible.” She argued that this provision acts as an exception to the mortgage subordination provision—i.e., that because the risk of foreclosure in her case was arguably so remote as to be negligible, failure to satisfy the mortgage subordination requirement should be forgiven.

The 10th Circuit rejected this argument, holding that the remote future event provision does not modify the mortgage subordination requirement. The court explained, among other things, that the remote future event provision cannot reasonably be interpreted to include the relatively unexceptional risk of foreclosure, which exists any time a taxpayer donates a conservation easement with respect to property subject to a mortgage. The court noted that the remote future event provision (i) contains a discrete example of what qualifies as a remote future event—a state statutory requirement that a use restriction must be rerecorded every 30 years to remain enforceable—and (ii) identifies the risk that sometime in the future the donee will neglect to rerecord as an example of the type of event that should not prevent a deduction. This example, said the court, is easily distinguishable from the risk of foreclosure. “The possibility that sometime in perpetuity—30, 60, 90, 120, or more years after the donation—the donee may neglect to renew the easement is considerably more remote than the risk of foreclosure under a mortgage obligation limited to a finite repayment period.” The risk of foreclosure, said the court, is simply too unlike the provision’s listed example for us to believe that the Commissioner intended the provision to cover it.

The 10th Circuit also explained that, even if it were to assume the remote future event provision could reasonably be interpreted to have general applicability to the mortgage subordination provision, the court would be required to enforce the terms of the specific subordination requirement to prevent that requirement from becoming meaningless. In promulgating the rules, explained the court, the Commissioner specifically considered the risk of mortgage foreclosure to be neither remote nor negligible, and therefore chose to target the accompanying risk of extinguishment of the conservation easement by strictly requiring mortgage subordination.

Finally, the 10th Circuit noted that, even if the regulations were unclear with respect to the interplay between the mortgage subordination and remote future event provisions, Ms. Mitchell would not prevail because the court is required to defer to the Commissioner’s interpretation to resolve any ambiguity unless it is “plainly erroneous or inconsistent with the regulations” or there is any other “reason to suspect the interpretation does not reflect the agency’s fair and considered judgment on the matter.” Rather than being plainly erroneous or inconsistent with the regulations, the 10th Circuit found the Commissioner’s interpretation—that the mortgage subordination provision is unmodified by the remote future event provision—to be consistent with the regulation’s plain meaning. In addition, the court found no reason to suspect that the Commissioner’s interpretation did not reflect the agency’s fair and considered judgment on the matter in question. “[I]t is reasonable,” said the court, “for the Commissioner to adopt an easily-applied subordination requirement over a case-by-case, fact-specific inquiry into the financial strength or credit history of each taxpayer.” In support of this holding, the court quoted the following passage from an article published by the author of this blog post:

The specific requirements in the Code and Treasury 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 such requirements and claim that their donations are nonetheless deductible because the possibility of defeasance of the gift is so remote as to be negligible, the Service and the courts would be required to engage in an almost endless series of factual inquiries with regard to each individual conservation easement donation.

The 10th Circuit concluded that the mortgage subordination provision does not permit a charitable contribution deduction unless any existing mortgage has been subordinated, irrespective of the likelihood of foreclosure, and the subordination agreement must be in place at the time of the gift.

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law

January 8, 2015 | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 6, 2015

NonProfit Times: 5 Fundraising Predictions for 2015

With the New Year just six days old, The Nonprofit Times has published its top five fundraising trends for 2015: conversion optimization, or improving donation flow to raise more money; the ability to engage with Millennials; donor retention and treating all donors as if they are major donors; online fundraising and mobile; and the ability to share stories in a very visual way.

The Times quotes Rich Dietz, senior product manager for digital fundraising for Abila Software in Austin, Texas, as saying that “2015 will be a big year and a transitional year for the nonprofit sector as business-minded tactics slowly gain ground and organizations think about increased growth versus simply being sustainable.  Engagement strategies will reach new levels as Millennials continue to emerge in importance and nonprofits think about the best way to interact with their supporters.” 

Dietz's predictions for 2015 fundraising include:

  • Conversion Optimization: Organizations will begin to think about how to better convert existing website visitors versus simply attracting new visitors. This is a business practice that many small businesses have adopted recently and will work well for nonprofits. Conversion optimization revolves around measuring, testing and optimizing the donation flow to raise more money.
  • Millennial Engagement: According to The Brookings Institute, Millennials will make up 75 percent of the workforce by 2025. As Millennials enter the workforce and have money to spend, organizations will need to put strategies in place to best engage this demographic. Many follow a different path to becoming a donor than is traditionally done and nonprofits will need to adapt to these differences.
  • Donor Loyalty and Lifetime Value: Tracking donor engagement will be crucial. Organizations will spend more time analyzing characteristics and behaviors of all of their constituents — not just major donors — to better understand what drives their giving behavior. By tracking donor engagement, organizations will be able to further segment their appeals, personalize their outreach to donors, significantly increase donor loyalty, improve lifetime value, and treat all donors like major donors.
  • Online and Mobile: Online and mobile have played an increasingly key role for organizations the past few years, and that will continue in 2015. Social will play a key role in the “attention economy,” and responsive design will be necessary to allow supporters to access an organization’s website at any time from any device. 2014 was the tipping point for more web traffic coming from mobile devices than desktop computers. According to Pew Research Center, more than 90 percent of all Americans own a cell phone.
  • Storytelling Becomes Visual: Creating a narrative and sharing a story has always been important for nonprofits to successfully engage donors, but doing so in a visual way is becoming essential. Organizations will have to find creative and innovative ways to engage supporters in a world full of distractions, and visual components are key. Web posts with visuals drive up to 180 percent more engagement and research indicates people process visuals 60,000 times faster than text.


Vaughn E. James


January 6, 2015 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Friday, January 2, 2015

AALS Panel on Exempt Organization Regulation

At the AALS (American Association of Law Schools) meeting in Washington D.C., there will be a panel discussion titled IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable?  The session is cosponsored by the Tax Section and the Nonprofit and Philanthropy Law Section and takes place Saturday, January 3rd from 10:30 am to 12:15 pm. Here is the description:

"The recent controversy over the Internal Revenue Service’s processing of applications by Tea Party and other groups for tax-exempt status highlights only one aspect of the unusual relationship between the federal tax agency and the nation’s nonprofit organizations.  While the primary mission of the IRS is to collect revenue, its mission with respect to tax-exempt organizations is instead to ensure that such organizations comply with the requirements for obtaining and maintaining that status.  This role has sometimes led the IRS into unfamiliar territory, not only with respect to political activity but also with respect to governance responsibilities and other topics not directly related to taxation.  Our invited speakers and the speakers chosen through a call for papers will address whether the IRS oversight of charitable and other types of tax-exempt nonprofit organizations is working, either generally or with respect to specific activities or aspects of these organizations, and if it is not, whether it can be fixed or should be abandoned."

Marcus Owens will be moderating, and panelists include Ellen Aprill (Loyola-LA), Phil Hackney (LSU), Jim Fishman (Pace), Terri Helge (Texas A&M), Dan Tokaji (Ohio State), and Donald Tobin (Maryland). 

Roger Colinvaux

January 2, 2015 | Permalink | Comments (0) | TrackBack (0)

Evidence-Based Funding of Social Programs

This opinion article from the New York Times by Ron Haskins, a former policy advisor to President George W. Bush, offers useful insights into social policy and an “evidence-based” approach to funding. Haskin praises the Obama Administration’s efforts to identify and fund social programs that work – nurse visits to single mothers, K-12 education, pregnancy prevention, and others. He urges Congress not to cut these evidence-based initiatives, i.e., those “with rigorous evidence of success, as measured by scientifically designed evaluation” and urges that this approach “be a prerequisite for any program to get federal dollars.” Such an approach is laudatory for direct spending, but ironically, would apply awkwardly to tax expenditures like the charitable deduction, which relies on donors to assess evidence of success, and not the federal government. Indeed, this is both a virtue and vice of the charitable deduction. By awarding donor contributions with a deduction, the government essentially supports a broad array of organizations based not on the evidence but on donor choice. Compliance is not measured by programmatic effectiveness, but by meeting various organizational and operational requirements. But even here, enforcement is weak, as emphasized by the recent GAO report on exempt organization compliance.

Roger Colinvaux

January 2, 2015 | Permalink | Comments (0) | TrackBack (0)

GAO Releases Report on EO Compliance

The GAO recently released a report on exempt organization compliance, TAX-EXEMPT ORGANIZATIONS: Better Compliance Indicators and Data, and More Collaboration with State Regulators Would Strengthen Oversight of Charitable Organizations.

Here is the introduction: 

"Charitable organizations play a major role in our economy and provide critical services and resources to families and individuals in need. Although charitable organizations vary considerably in size and purpose, in 2011 the largest number of organizations was in the human services sector, providing services such as employment and housing assistance. The highest concentration of assets was in the health and education sectors, which include hospitals and universities. In addition to being concentrated in a few sectors, a large proportion of all assets were controlled by a relatively small number of charitable organizations—less than 3 percent hold more than 80 percent of the assets. Over the past several years, as the Internal Revenue Service (IRS) budget has declined, the number of full-time equivalents (FTEs) within its Exempt Organizations (EO) division has fallen, leading to a steady decrease in the number of charitable organizations examined. In 2011, the examination rate was 0.81 percent; in 2013, it fell to 0.71 percent. This rate is lower than the exam rate for other types of taxpayers, such as individuals (1.0 percent) and corporations (1.4 percent). EO is grappling with several challenges that complicate oversight efforts. While EO has some compliance information, such as how often exams result in change of tax exempt status, it does not have quantitative measures of compliance for the charitable sector as a whole, for specific segments of the sector (such as universities and hospitals) or for particular aspects of noncompliance (such as personal inurement or political activity). Because EO does not have these measures and does not know the current level of compliance, it cannot set quantitative, results-oriented goals for increasing compliance or assess to what extent its actions are affecting compliance. Statutory requirements for safeguarding taxpayer data limit both IRS's ability to share data and state regulators' ability to use it. A lack of clarity about how state regulators are allowed to use IRS data to build cases against suspect charitable organizations further impedes regulators' ability to leverage IRS's examination work. The e-filing rate for tax-exempt organizations is significantly lower than for other taxpayers. This lower rate means there is less digitized data available for data analytics and higher labor costs for IRS. Expanded e-filing may result in more accurate and complete data becoming available in a timelier manner, which in turn, would allow IRS to more easily identify areas of noncompliance."

Roger Colinvaux

January 2, 2015 | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 30, 2014

New Final Regulations for Charitable Hospitals

The IRS has made available as a pdf final regulations under section 501(r): “Additional Requirements for Charitable Hospitals: Community Health Needs Assessments for Charitable Hospitals; Requirement of a Section 4959 Excise Tax Return and Time for Filing the Return.” The document is available here.

Roger Colinvaux

December 30, 2014 | Permalink | Comments (0) | TrackBack (0)

Hospice Care: Non profit or for profit?

An interesting recent article in the Washington Post discusses the differences between for-profit and non-profit hospice care. The article says that although “[i]n some cases, for-profit hospices provide service at levels comparable to nonprofits, . . the data analysis, based on hundreds of thousands of Medicare patient and hospice records from 2013, shows that the gap between the for-profits as a whole and nonprofits is striking and consistent, regardless of hospice size." The Post authors identify profit-motive as a reason for the inferior performance of for-profits, stating that: “Hospice operators have an economic incentive to provide less care because they get paid a flat daily fee from Medicare for each of their patients. That means that the fewer services they provide, the wider their profit margin.” 

The key findings are that:

"Nonprofit hospices typically spent about $36 a day per patient on nursing visits; for-profit hospices spent $30 per day, or 17 percent less. The gap between for-profits and nonprofits remains whether the hospices are old or new.

Nonprofit hospices are much more likely to provide the more intense services — continuous nursing and inpatient care — required by patients whose symptoms are difficult to control. Nonprofits offered about 10 times as much of this per patient-day as did for-profits.

While hospices of both kinds usually dispatch a nurse to see a patient at some point during the last two days of life, for-profit hospices are more likely to fail in this regard, according to the analysis. A typical patient at a for-profit hospice is 22 percent less likely to have been visited by a nurse during this window than a patient at a nonprofit hospice, the numbers show, a sign that for-profit hospices may be less responsive during this critical time.

Patients at for-profit hospices are much more likely to drop out of hospice care than patients at nonprofit hospices."

One problem, according to the Post, is that “regulatory scrutiny of hospices has lagged behind those of other health-care institutions, though Congress has recently called for more frequent inspections. And without as much oversight, hospice operators can operate in ways that benefit shareholders more than patients." 

One conclusion that could be drawn is that the nonprofit form, in the absence of other direct regulation, is an indicator to consumers of better service, at least in this context. By comparison, in the broader hospital context, the line between non profit and for profit hospitals is not as stark.

Roger Colinvaux

December 30, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, December 29, 2014

Note: A Manageable Solution with Meaningful Results: Illuminating IRS Enforcement of § 501(c)(3)'s Prohibition on Political Intervention

Julia D. Zwak, student at University of Minnesota Law School, published a student note entitled A Manageable Solution with Meaningful Results: Illuminating IRS Enforcement of § 501(c)(3)'s Prohibition on Political Intervention, 99 Minn. L. Rev. 381. The note explores the lack of clarity regarding the IRS’s enforcement of the prohibition on political intervention. Zwak explains that the lack of clarity has made it difficult for exempt organizations to accomplish their missions while remaining in compliance with the law.  Specifically, under Revenue Ruling 2007-41, the IRS uses a facts and circumstances analysis in determining whether an organization has violated the political intervention prohibition. However, the Revenue Ruling gives no rationale in its conclusions, provides no specific set of circumstances that are deemed critical to the analysis, and it simply falls short of providing practical guidance to organizations.

According to Zwak, one solution would be for the IRS to publish reports specifying its application of the facts and circumstances in actual enforcement efforts of the prohibition.


December 29, 2014 | Permalink | Comments (0) | TrackBack (0)

Sunday, December 28, 2014

Former Director Owens: Greater IRS Oversight Needed For Tax-Exempt Organizations

    Former Director of the IRS Exempt Organizations Division, Marcus S. Owens has been
critical of the IRS’s treatment of filing requirements for exempt organization.
Recent data suggests significant growth in the nation’s nonprofit sector.
Despite this trend, according to Owens, the IRS has taken a very permissive
approach to the oversight of organizations filing for tax-exempt status—an
approach that he predicts could be problematic. Owens argues that the lack of
oversight is “setting the stage for a real scandal down the road.”

    Proposed solutions include increasing funding for the Exempt Organizations Division, requiring nonprofits to file online, and compiling a more accessible online database. Will these solutions help ameliorate the problem? Is there even a problem in the first place? Read more here


December 28, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, December 22, 2014

Register v. The Nature Conservancy—$1 Million Donation Constituted a Restricted Charitable Gift

Register v TNC Griffith Woods copyIn Register v. The Nature Conservancy, 2014 WL 6909042, Civil Action No. 5:13–77–DCR (Dec. 9, 2014), the U.S. District Court for the Eastern District of Kentucky held that Mr. Layton Register’s $1 million donation to The Nature Conservancy (TNC) constituted a restricted charitable gift, TNC was bound to abide by the gift restrictions or return the donation, but factual issues remained regarding whether TNC had complied with the restrictions.


Mr. Register was a long time supporter of TNC, having made over three hundred monetary donations to the organization (totaling $1,061,846) and having contributed “sweat equity” by physically assisting with certain projects. Mr. Register attended regular TNC events, served as a Trustee TNC’s Kentucky Chapter, and even received the volunteer of the year award.

TNC identified a 735-acre farm in Harrison County, Kentucky, known as Griffith Woods, as a “top acquisition property” because of its conservation values (it was described as the best and most intact example of a bur oak, blue ash savannah in the inner Bluegrass). TNC engaged in discussions with the owner of Griffith Woods regarding conservation options over several years. During this time, a biologist and employee of TNC—Dr. Julian Campbell—took Mr. Register and other supporters to visit the property. TNC planned to purchase Griffith Woods for roughly $2 to $2.5 million, but to retain only about 25-50% of the property after reselling portions to agencies that would partner with TNC in conserving the property and perhaps conservation buyers.

Mr. Register, who apparently was quite taken with Griffith Woods, told TNC he wished to focus on preserving and managing that particular property. In his notes about Griffith Woods, Dr. Campbell indicated that Mr. Register indicated his willingness to donate about half of the total funds needed for the purchase of Griffith Woods, and should some of Mr. Register’s gift be freed up by TNC’s resale of some of the property, Mr. Register was willing to have the money put toward an endowment for stewardship at the site. Dr. Campbell testified at deposition that he intended his notes to memorialize Mr. Register’s intent with respect to the $1 million donation and any funds obtained from TNC’s resales of the property attributable to his donation.

In May 2002, Mr. Register wrote a letter to the Director of TNC’s Kentucky Chapter stating:

I pledge to the Kentucky Chapter of The Nature Conservancy a stock gift equal to the amount of $1,000,000.00 that is to be used for land acquisition. My first preference is for the purchase being negotiated for Griffith Woods. If The Nature Conservancy is unsuccessful in its pursuit of Griffith Woods, the same amount will be made available for another site to be determined.

In September 2002, Mr. Register wrote to his financial advisor and TNC:

I’d like to make now a gift to the Kentucky Chapter of The Nature Conservancy. I would like the gift to be in the form of stocks adding up to the equivalent of $1 million. I would prefer that the stocks be sold and the proceeds go toward the establishment and management of a nature preserve in the Bluegrass region, e.g. Griffith Woods. If the Griffith Woods project falls through, I trust that KNC will put to use the funds in a manner that will further help protect areas in Kentucky with unique and diverse plants and animals.

The gifts of stock were made to TNC in three installments, each with a cover letter stating that the gifts were for the Griffith Woods project. TNC placed the proceeds from the sale of the stock into an account to fund the purchase of Griffith Woods and designated the account as “temporarily restricted.”

In late 2002 and early 2003, TNC purchased Griffith Woods using Mr. Register’s donation and funds from TNC’s worldwide office. TNC then sold Griffith Woods in two transactions. The first tract was sold to the University of Kentucky (UK) in 2004, and UK conveyed a conservation easement on the tract to a state entity. This sale had been contemplated at the time of Mr. Register’s gift. The partnership between TNC and UK did not work as planned, however, and in 2011 TNC sold its remaining interest in Griffith Woods to the Kentucky Department of Fish and Wildlife Resources (KDFWR). Although this portion of the property was not placed under a conservation easement TNC indicated that other use restrictions applied.

TNC used a portion of the sales proceeds to pay-off a debt on another land acquisition project and deposited the remainder in its general operating fund, a portion of which was intended to help fund stewardship activities at Griffith Woods. In November of 2012, TNC disclosed to Mr. Register that it was not using or planning to use any of the remaining proceeds from the sales of Griffith Woods for the management of that property.

Mr. Register maintained that it was his intent that the sales proceeds attributable to his donation would be used for the ongoing management of Griffith Woods. He filed suit against TNC alleging breach of contract, unjust enrichment, imposition of a constructive trust, fraud in the inducement, and constructive fraud.

The US District Court divided its opinion into seven separate holdings.

1. Donation Was A Restricted Gift

TNC argued that Mr. Register's 2002 letters did not suffice as written contracts and, thus, no contract existed. In the alternative, TNC argued that the gift was subject to enforcement according to the terms of Mr. Register’s September 2002 letter and, once the donation was used for the purchase of Griffith Woods and that property was protected, the purpose of the gift was satisfied and TNC had no further obligation to use the resale proceeds for the protection or management of Griffith Woods.

Mr. Register agreed that the parties did not enter into a written contract but he maintained that TNC was bound by an oral agreement to devote his $1 million donation to the purchase and, after resale, management of Griffith Woods.

The court held that Mr. Register had made a restricted gift to TNC and, while a precise written agreement was not present, it was not required.

The court found no evidence that Mr. Register intended to make a general (unrestricted) donation to TNC that it could use as it saw fit in furtherance of its charitable mission. It noted:

[Mr.] Register’s testimony, the writings between the parties, the testimony of the other individuals involved and the circumstances surrounding the donation…support the conclusion that Register’s donation was restricted to Griffith Woods as a matter of law. Because TNC accepted the donation knowing that it was to perform certain duties with respect to the donation, ‘its acceptance thereof and reliance thereon and promise to carry out the wishes of the donor supply the consideration.’

TNC argued that Mr. Register’s 2002 letters indicated that he merely preferred that the donated funds be used for Griffith Woods because he used “precatory” language—i.e., “like” and “prefer.” The court disagreed and found the letters to be consistent with Mr. Register’s intent to restrict his gift. While acknowledging that precatory words are presumptively not binding, the court explained that such words can impose a legal and enforceable obligation if the context indicates that the donor intended to impose such an obligation. The court found that Mr. Register’s letters “compelled the conclusion” that his use of “prefer” was mandatory rather than precatory because his letters dictated what was to occur if the Griffith Woods project did not materialize.

Other evidence indicating that Mr. Register intended his donation to be restricted to Griffith Woods included (i) the cover letters for the stock gifts to TNC, which contained language specifying that the funds were to be limited to Griffith Woods, (ii) testimony of TNC employees that, at the time the gift was made, they understood the gift was to be used for the purpose of Griffith Woods (i.e., restricted), and (iii) TNC’s initial designation of the funds as restricted and continued treatment of the funds as restricted for some time in their own internal processes.

The court concluded:

At the time the donation was made, no one appeared to believe that the funds were not restricted to Griffith Woods. Time has passed, and Register is now faced with a number of TNC employees who were not privy to the discussions at the time of his donation. Nonetheless, they are bound by the restrictions made by Register and accepted by TNC. The recipient of a conditional gift is “not at liberty to ignore or materially modify the expressed purpose underlying the donor’s decision to give.” … This is true even if the conditions at the time of the gift have materially changed, “making the fulfillment of the donor’s condition either impossible or highly impractical.” The Court is “not at liberty to relieve the parties from contractual obligations simply because these obligations later prove to be burdensome or unwise” (citations omitted).

2. Compliance With Restriction Unclear

While the court determined that Mr. Register’s donation was a restricted gift as a matter of law, it also held that material issues of fact remained regarding whether TNC had complied with the restrictions. On the one hand, Dr. Campbell and Mr. Register’s testimony indicated that Mr. Register had considered TNC’s possible resale of Griffith Woods and had intended to restrict TNC’s use of the resale proceeds attributable to his donation to the management of that property. On the other hand, certain other factors prevented the court from finding, as a matter of law, that Mr. Register intended his donation to continue to be restricted after the resale. In addition, the court noted that TNC’s management efforts at Griffith Woods included prescribed burning, cane restoration, and planting native species. Accordingly, whether TNC had fully complied with the gift restrictions was a matter for a jury to determine.

The court dismissed TNC’s attempts to minimize Dr. Campbell’s authority to bind TNC and to question Dr. Campbell's credibility due to his friendship with Mr. Register. The court explained that TNC became bound, not by Dr. Campbell’s representations to Mr. Register, but by TNC’s acceptance of the donation, which it knew to be restricted.

3. Reversion as Proper Remedy for Breach of Contract

The court determined that, should the jury find that TNC breached its contract with Mr. Register, then reversion would be the proper remedy under Kentucky law. On the other hand, if the jury were to find that the terms of the restricted gift had been met, there would be no breach and Mr. Register would not be entitled to recover his donation.

TNC contended that, should it be required to return the gift, there are genuine issues of material fact regarding the amount of the donation that had been used for Register’s intended purpose (and, thus, presumably was not recoverable).

4. Estoppel

TNC argued that Mr. Register was estopped from claiming breach of contract because he had acquiesced to TNC’s sale of a portion of Griffith Woods to KDFWR and to future management of the property by that entity. The court held that TNC’s argument failed because (i) TNC’s breach of the condition on the gift was not its sale of the property to KDFWR, but its use of the proceeds attributable to Mr. Register’s donation for purposes other than Griffith Woods, and (ii) the court found no evidence that TNC had disclosed its plans to use the proceeds for purposes other than Griffith Woods until after sale had already occurred.

5. Unjust Enrichment and Constructive Trust

The court dismissed Mr. Register’s claims for unjust enrichment and the imposition of a constructive trust. Under Kentucky law, the doctrine of unjust enrichment does not apply where there is an explicit contract and the court found that there was an explicit contract in this case. In addition, because constructive trusts are imposed as a remedy for unjust enrichment and the court found that unjust enrichment did not apply in this case, the court also dismissed the constructive trust claim.

6. Fraudulent Inducement

Mr. Register alleged that he was fraudulently induced to make his $1 million donation because TNC had no intention of continuing to be involved in the management of Griffith Woods after it was resold. The court held that Mr. Register could not prevail on this claim as a matter of law because he did not identify any specific material misstatement upon which he relied. The Court noted the high burden of proof required—clear and convincing evidence—for fraud claims.

7. Constructive Fraud

Mr. Register also argued that TNC owed a fiduciary duty to him and that its violation of that duty constituted constructive fraud. Mr. Register, however, was unable to point to any Kentucky case holding that a charitable organization has a fiduciary relationship with its donors. Moreover, the case Mr. Register cited in support of his argument—Adler v. Save, 74 A.3d 41 (Sup. Ct. N.J. App. Div. 2013)—stated only that the “analytical paradigm” outlined by the court was “consistent with the principles governing a fiduciary relationship” under New Jersey law, and the case did not address the theory of constructive fraud. Accordingly, the court declined to extend the doctrine of constructive fraud, which has not been “very favorably received” in Kentucky, to this case.

Leaf copy

The parties have reportedly settled this case, and TNC notes the following regarding settlement:

The Nature Conservancy respects the court’s decisions with respect to the facts of this case. Although the court determined that a jury should decide the extent to which the Conservancy complied with the terms of the gift, TNC decided that a full refund of the disputed portion of the gift to this valuable donor in settlement of the dispute was most in keeping with TNC’s relationship with him and reflective of the fact that without his help Griffith Woods would not be protected the way it is today. The refunded amount represents funds that were initially used for other important conservation work in Kentucky, but were ultimately derived from the sales of Griffith Woods to TNC’s conservation partners. Mr. Register can take pride in his critical role in securing long-standing protection for this important habitat.

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law

December 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Friday, December 19, 2014

On the Road to Nonprofit Collaboration

        Nonprofits today are turning to creative collaboration to accomplish their goals. For-profits have long utilized various forms of collaboration to capture market share. With a foray into collaboration, nonprofits now must determine the extent to which collaboration will be legal versus non-legal. The Stanford Social Innovation Review recently featured an article entitled “Collaboration-palooza” that shows the four main types of collaboration nonprofits are using and where they fall along the spectrum of legal forms. The article also deals with the impediments to collaboration. Specifically, the article details the following three:

        “Along with strong momentum across the collaboration spectrum, we found three inconsistencies between funders and nonprofit leaders that are creating barriers to collaboration done right.

        1. Struggling to find philanthropic support A significant barrier is nonprofit leaders’ perceptions of low philanthropic support across the collaboration spectrum. Fewer than 20 percent of nonprofit leaders said they received support from their funders during the process, and more than 50 percent reported no support whatsoever for any form of collaboration. Leaders pointed to especially low levels of funder backing for sharing support functions, which are usually intended to lower operating costs and free up funds to expand programs. This foots with survey data from Grantmakers for Effective Organizations 2014 report Is Grantmaking Getting Smarter, which found that 53 percent of funders never or rarely funded collaborations and only two percent did so consistently. Yet, strikingly, the reason funders most frequently cited for failing to support collaborations was that their grantees didn’t ask. Further, they told us in follow-up interviews that they worried they would inject bias if they initiated the conversation. A program officer in Pennsylvania said, “We have to be careful. Whenever I speak up at a meeting, I get a proposal about the idea!” But the same funder told us that when grantees came forward with a plan to collaborate, he was eager to support it.

        2. Difficult match-making A second barrier to collaboration lies in finding the right partners and negotiating respective roles. Nonprofits and foundations both cite defining relationships and roles as a top challenge to collaboration. But nonprofits rated finding the right partner as the biggest barrier, while foundations rated it the smallest one. In our study, helping nonprofits find partners was the most common way that funders supported collaboration, but they said they needed to tread cautiously: “I don’t feel comfortable recommending partners,” said a Chicago grantmaker. “In part I worry that nonprofits might take my word as dictate, but also I feel that they need to be committed enough to do their own homework.”

        3. Unsuccessful joint programs A third challenge is the disparity between funder and CEO perceptions about which forms of collaboration fail more often. Funders see joint programming as the most successful form of collaboration. Nonprofit CEOs, on the other hand, found that the more integrated forms (shared support functions and mergers) were most likely to succeed and cited joint programs as having the highest failure rate (20 percent).”

If collaboration nonprofits are able to show overall better returns, i.e., social impact, the first barrier will be largely resolved.  Donors could play a role in the second barrier if they have enough information about the social impact various charities are having.  A push in the sector toward using legal forms, such as mergers, would assist with the overall success rate.

The full article is available here.


Khrista Johnson

December 19, 2014 in Current Affairs | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 17, 2014

Unfriendly Competition?: For-Profits and Nonprofits

    As nonprofits and for-profits increasingly compete in the same fields, several legal issues are emerging.  Two of the main issues are the following: (1) UBIT and (2) for-profit attempts to limit the market nonprofits can attract.  Nonprofit Quaterly featured an article highlighing this tension, which explored Alabama Dental Association's (ALDA's) opposition to the expansion of Sarrell Center, a nonprofit that provides dental treatment to poor children.  ALDA has considered advancing state legislation to "control" the nonprofit, and Sarrell brought a suit against the University of Alabama at Birmingham when it announced its students were no longer available to volunteer at Sarrell clinics.  Even the YMCA has been under attack from for-profit exercise clubs in Idaho.  Ultimately the Board of Equalization decided to impose a 19% tax on YMCA profits.  The issue has arisen in numerous areas, including day care centers, theaters, etc.  The line between nonprofits and for-profits has been overlapping tremendously, and unfair competition appears to be an issue that will persist.  Read more about this issue here.


Khrista Johnson

December 17, 2014 in Current Affairs | Permalink | Comments (0) | TrackBack (0)

Belk v. Commissioner—4th Circuit Confirms That Swappable Conservation Easements Are Not Deductible

Belk Golf Course copyIn Belk v. Commissioner, No. 13-2161 (Dec. 16, 2014), the 4th Circuit affirmed a Tax Court ruling that a conservation easement that authorized the parties to agree to “substitutions” or “swaps” (i.e., to remove some or all of the original protected land from the easement in exchange for the protection of other land) was not eligible for a federal charitable income tax deduction because it was not “a restriction (granted in perpetuity) on the use which may be made of the real property” as required under § 170(h)(2)(C). The 4th Circuit agreed with the Tax Court that, to be eligible for a deduction under § 170(h), a donor must grant an easement with regard to a “single, immutable” or “defined and static” parcel.


The Belks purchased 410 acres near Charlotte, North Carolina, and developed a 402-lot residential community along with a 184-acre golf course (pictured above) on the land. In 2004, the Belks donated a conservation easement on the golf course to a land trust and claimed a deduction of $10.5 million.

The conservation easement authorizes the landowner to remove land from the easement in exchange for adding an equal or greater amount of contiguous land, provided that, in the opinion of the grantee:

  • the substitute property is of the same or better ecological stability,
  • the substitution shall have no adverse effect on the conservation purposes of the easement, and
  • the fair market value of the “easement interest” on the substitute land will be at least equal to or greater than the fair market value of the “easement interest” encumbering the land to be removed.

This substitution provision, explained the 4th Circuit, permits the landowner “to swap land in and out of the Easement” with the agreement of the land trust.


In affirming the Tax Court’s holding that the Belks were not eligible for a federal deduction for the donation of the easement, the 4th Circuit first noted that the “Treasury Regulations offer a single -- and exceedingly narrow -- exception to the requirement that a conservation easement impose a perpetual use restriction”—i.e.:

[if a] subsequent unexpected change in the conditions surrounding the property . . . make[s] impossible or impractical the continued use of the property for conservation purposes, the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding and all of the donee’s proceeds . . . from a subsequent sale or exchange of the property are used by the donee organization in a manner consistent with the conservation purposes of the original contribution. Treas. Reg. § 1.170A-14(g)(6)(i) (emphasis added by the court).

“[A]bsent these ‘unexpected’ and extraordinary circumstances,” explained the 4th Circuit, “real property placed under easement must remain there in perpetuity in order for the donor of the easement to claim a charitable deduction.”

The 4th Circuit then proceeded to reject each of the Belks’ specific arguments.

Plain Language of the Code

The Belks argued that § 170(h) “requires only a restriction in perpetuity on some real property, rather than [on] the real property governed by the original easement." The 4th Circuit noted that the plain language of § 170(h) belies this contention. The court explained that § 170(h) expressly defines a “qualified property interest” to include “a restriction (granted in perpetuity) on the use which may be made of the real property” and placement of the article “the” before “real property” makes clear that a perpetual use restriction must attach to a defined parcel of real property rather than simply some or any (or interchangeable parcels of) real property.

The 4th Circuit further explained that, although the easement purports to restrict development rights in perpetuity for a defined parcel of land, upon satisfying the conditions in the substitution provision the taxpayers may remove land from that defined parcel and substitute other land. Accordingly, “while the restriction may be perpetual, the restriction on ‘the real property’ is not.” For this reason, the easement donation did not constitute a “qualified conservation contribution” under § 170(h) and the Belks were not entitled to claim a deduction for the contribution.

Critical Requirements

The 4th Circuit explained that permitting a deduction for the donation of the Belk easement would enable taxpayers to bypass several requirements critical to the statutory and regulatory schemes governing deductions for charitable contributions.

For example, permitting the Belks to change the boundaries of the easement would render “meaningless” the requirement that an easement donor obtain a qualified appraisal because the appraisal would no longer be an accurate reflection of the value of the easement, parts of which could be clawed back. “It matters not,” said the court, “that the Easement requires that the removed property be replaced with property of ‘equal or greater value,’ because the purpose of the appraisal requirement is to enable the Commissioner, not the donee or donor, to verify the value of a donation. The Easement’s substitution provision places the Belks beyond the reach of the Commissioner in this regard.”

Similarly, the baseline documentation requirement (i.e., the requirement that a conservation easement donor make available to the donee documentation sufficient to establish the condition of the property at the time of the donation) “would also be skirted if the borders of an easement could shift.” “Not only does this regulation confirm that a conservation easement must govern a defined and static parcel,” explained the court, “it also makes clear that holding otherwise would deprive donees of the ability to ensure protection of conservation interests by, for instance, examination of maps and photographs of ‘the protected property.’”

The 4th Circuit also rejected the Belks’ argument that the provision in the Treasury Regulations permitting a tax-deductible conservation easement to be extinguished “in one limited instance” (i.e., in a judicial proceeding upon a finding of impossibility or impracticality) “would be invalid” if the Tax Court’s holding were upheld. The court explained that the regulation permitting extinguishment by court order if an easement can no longer further its conservation purpose does nothing to undercut the correctness of the Tax Court’s holding that § 170(h) requires a donor to grant an easement with regard to “a single, immutable parcel” to qualify for a charitable deduction.

Simmons and Kaufman Distinguishable

The Belks argued that Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012) and Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011) support the notion that § 170(h) does not require that restrictions attach to a single, defined parcel. The 4th Circuit rejected that argument, explaining that these “out-of-circuit” cases:

plausibly stand only for the proposition that a donation will not be rendered ineligible simply because the donee reserves its right not to enforce the easement. They do not support the Belks’ view that the grant of a conservation easement qualifies for a charitable deduction even if the easement may be relocated. Indeed, as we have explained, such a holding would violate the plain meaning of § 170(h)(2)(C).

Federal Law Controls Eligibility for Deduction

The Belks argued that, because North Carolina law permits parties to amend an easement, the Tax Court’s logic would render all conservation easements in North Carolina ineligible for a deduction under § 170(h). The 4th Circuit found this argument “equally unpersuasive,” explaining:

whether state property and contract law permits a substitution in an easement is irrelevant to the question of whether federal tax law permits a charitable deduction for the donation of such an easement . . . § 170(h)(2)(C) requires that the gift of a conservation easement on a specific parcel of land be granted in perpetuity to qualify for a federal charitable deduction, notwithstanding the fact that state law may permit an easement to govern for some shorter period of time. Thus, an easement that, like the one at hand, grants a restriction for less than a perpetual term, may be a valid conveyance under state law, but is still ineligible for a charitable deduction under federal law.

Savings Clause Does not Save Deduction

The Belk conservation easement provides that substitutions become final when they are reflected in a formal recorded “amendment.” The easement also provides that the land trust cannot agree to any amendment that would result in the easement failing to qualify for a deduction under § 170(h). The Belks referred to this latter provision as a “savings clause.” They argued that if the 4th Circuit found that the substitution provision violated the requirements of § 170(h), the savings clause would operate to void the offending provision, thus rendering the easement eligible for the deduction. In other words, explained the 4th Circuit, the Belks argued that the savings clause would operate to negate a right clearly articulated in the easement (the right to substitute property), but only if triggered by an adverse determination by the court.

The 4th Circuit declined to give the savings clause that effect. Citing to Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944), the court explained that “the IRS and the courts have rejected ‘condition subsequent’ savings clauses, which revoke or alter a gift following an adverse determination by the IRS or a court.” The court further noted that the Belks were asking the court to employ the savings clause to rewrite the easement in response to the court’s holding and “[t]his we will not do.”

The 4th Circuit also rejected the Belks’ “last-ditch” argument—that the savings clause is designed “to accommodate evolving … interpretation of Section 170(h)”—explaining

the statutory language of § 170(h)(2)(C) has not “evolved” since the provision was enacted in 1980…. The simple truth is this: the Easement was never consistent with § 170(h), a fact that brings with it adverse tax consequences. The Belks cannot now simply reform the Easement because they do not wish to suffer those consequences.

The 4th Circuit concluded by noting:

were we to apply the savings clause as the Belks suggest, we would be providing an opinion sanctioning the very same “trifling with the judicial process” we condemned in Procter…. Moreover, providing such an opinion would dramatically hamper the Commissioner’s enforcement power. If every taxpayer could rely on a savings clause to void, after the fact, a disqualifying deduction (or credit), enforcement of the Internal Revenue Code would grind to a halt.

The 4th Circuit’s opinion in Belk complements Carpenter v. Commissioner, T.C. Memo. 2013-172, denying motion for reconsideration and supplementing T.C. Memo. 2012-1, in which the Tax Court held that conservation easements extinguishable by mutual agreement of the parties, even if only in the event of “impossibility,” were not eligible for the charitable deduction under § 170(h). Rather, extinguishment of a tax-deductible easement requires a judicial proceeding and there are no alternatives.

Finally, it is noteworthy that, while Belk involved a conservation easement encumbering a golf course (and golf course easements have been subject to much criticism), nothing in the 4th Circuit’s opinion turned on that fact.

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law

December 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 16, 2014

Donor Refund Policy?

        Although charitable contributions traditionally have been perceived as a contract between the donor and the charity, donors who are displeased with how their funds have been used are asking for refunds according to a recent WSJ article. In fact, some courts are starting to recognize donors’ rights over gifts after they have been given. This highlights the need for greater transparency and accountability in terms of charitable giving. The tools used in impact investing could prevent such drastic donor disappointment. It is really the result of the larger problem of uninformed giving. In an upcoming article, I examine how the tools used in impact investing can solve it. First, we must provide donors with a way to measure “return” on their investment, i.e., social impact. An impact investing tool that provides a standardized set of metrics for measuring social impact is the solution. However, not all charities merit review under this tool, and we must limit the group of charities that will undergo this review by conducting an initial qualitative analysis. Second, we must enable donors to select charities based upon a comparison of their level of social impact. The current rating system used in impact investing will achieve this end in the charitable sector as well. The article proposes a system for evaluating and rating charities by applying the tools of impact investing in order to establish what I have termed an efficient charitable market. It shows the end result will enable U.S. charitable investors to make even smarter decisions that dramatically better our world. In terms of a side note, it will also help prevent donors from seeking refunds.


Khrista Johnson

December 16, 2014 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Monday, December 15, 2014

New Report on the Impact of Impact Investing

A few days ago, the Aspen Institute issued a report entitled The Bottom Line: Investing for Impact on Economic Mobility in the US. The report shows how impact investing is increasing economic mobility for low-income families. The report is another example of how the nonprofit sector may have serious lessons to learn from the impact investing sector.
The report is available here.


Khrista Johnson

December 15, 2014 in Current Affairs | Permalink | Comments (0) | TrackBack (0)