Friday, August 22, 2014
For Profit Law Schools: Campos on Florida Coastal School of Law and what it says about high cost nonprofit law schools
If you have not already heard about the huge ongoing gnashing of teeth regarding the legitimacy, or lack thereof, of for-profit law schools (nevermind the questioning of law schools themselves), you should take a look at Paul Campos' August 13th article in The Atlantic entitled "The Law School Scam". Campos has a follow-up post to the article -- commenting on Florida Coastal School of Law's rather transparent PR counter-offensive lead by a person named "Mia" -- on his own blog. The point relevant to this blog though regards the extent to which the profit motive necessarily, invariably or inevitably corrupts altruism in the managment of nominally nonprofit endeavors. One might surmise that in the absence of so much government subsidized profit -- even still today -- gushing from law schools, we might have far fewer law schools perpetuating the ever increasing bubble. I almost feel as though I am passing along some really juicy explosive gossip, except that the facts are verifiable even if his conclusions are arguable.
The Atlantic article begins with a discussion of an infamous incident in which a Dean candidate was asked to get the hell off campus right in the middle of his vision talk for too insightfully addressing the conflict between profit making and charity as it relates to the impact on law school admissions:
Florida Coastal is a for-profit law school, and in his presentation to its faculty, Frakt [the Dean candidate] had catalogued disturbing trends in the world of for-profit legal education. This world is one in which schools accredited by the American Bar Association admit large numbers of severely underqualified students; these students in turn take out hundreds of millions of dollars in loans annually, much of which they will never be able to repay. Eventually, federal taxpayers will be stuck with the tab, even as the schools themselves continue to reap enormous profits. There are only a small number of for-profit law schools nationwide. But a close look at them reveals that the perverse financial incentives under which they operate are merely extreme versions of those that afflict contemporary American higher education in general. And these broader systemic dysfunctions have potentially devastating consequences for a vast number of young people—and for higher education as a whole. Florida Coastal is one of three law schools owned by the InfiLaw System, a corporate entity created in 2004 by Sterling Partners, a Chicago-based private-equity firm. InfiLaw purchased Florida Coastal in 2004, and then established Arizona Summit Law School (originally known as Phoenix School of Law) in 2005 and Charlotte School of Law in 2006.
For the deeper questions provoked by the article, you just need to read the article. I'm probably way too biased to even present the highlights. But here is one salient point regarding mainstream [i.e., nonprofit] law schools that cannot be ignored:
What, after all, is the difference between the InfiLaw schools and Michigan’s Thomas M. Cooley, or Boston’s New England Law, or Chicago’s John Marshall, or San Diego’s Thomas Jefferson? All of these law schools feature student bodies with poor academic qualifications and terrible job prospects relative to their average debt. In recent years, as law-school applications have collapsed, all of these schools have, just like the InfiLaw schools, cut their already low admissions standards. And, like Florida Coastal, Arizona Summit, and Charlotte, all of these schools now have a very high percentage of students who, given their LSAT scores, are unlikely to ever pass the bar. Ultimately, what difference does it make that none of these schools produce profit in the technical (and taxable) sense, because they are organized as nonprofits? The only real difference between for-profit and nonprofit schools is that while for-profits are run for the benefit of their owners, nonprofits are run for the benefit of the most-powerful stakeholders within those institutions.
After describing the almost religious cult-like assumptions underlying American's blind subsidization of anything labled "higher education," including law school, Campos concludes, "these assumptions enabled InfiLaw’s lucrative foray into the world of for-profit education. But they have just as surely shaped the behavior of nonprofit colleges and universities." he might have added, "all at the expense of most students whose promissory notes finance colleges and universities."
Harvey Dale (NYU School of Law), along with Victoria Bjorklund, Jennifer I. Reynoso, and Jillian P. Diamant (all three affiliated with Simpson Thacher & Bartlett LLP), have posted to SSRN “Evolution, Not Revolution: A Legislative History of the New York Prudent Management of Institutional Funds Act,” 17 N.Y.U. J. Legis. & Pub. Pol’y 377 (2014). A pdf version of the article, made available by the publishing journal, is available here. The “roadmap” of the article, set forth in its introduction, follows:
Part I of this article examines the history of the laws that have addressed investment management and appropriation of charitable and not-for-profit assets. Part II provides an overview of the current uniform law as well as the version enacted in New York. Part III reviews the Act in detail, examining what types of organizations and funds come within the Act’s scope, assessing the evolution of the individual provisions, and, where relevant, discussing selected controversies and legislative drafting issues. Part IV reviews the Act’s impact on other New York Laws. Part V addresses the so-called internal affairs doctrine and related choice of law issues. Part VI examines the importance of uniformity of interpretation of law. Part VII considers selected financial accounting rules. Finally, Part VIII concludes the article with suggestions for further action—via technical corrections, substantive amendments, and regulatory guidance—that are recommended for clarification or correction of NYPMIFA’s current provisions.
Thursday, August 21, 2014
Samaritan’s Purse as Illustrative of the Benefits and Challenges of Government-Nonprofit Collaboration
The Washington Post has published a piece featuring Samaritan’s Purse – the charitable nonprofit making headline news for its role in helping save the lives of two front-line medical missionaries who contracted Ebola while serving in Liberia. The story describes the world-wide humanitarian relief provided by Samaritan’s Purse, its role in partnering with governmental and nonprofit agencies to address international public health crises, and the occasional controversies that have arisen from its faith-based mission or some of the opinions that its president, Franklin Graham, has expressed on contemporary issues.
As to its important role in promoting international public health, the story states the following:
… Smart Money magazine has named Samaritan’s Purse the most efficient religious charity numerous times, and the group maintains a reputation of being among the first to combat the worst public health crises around the world.
Given the remote and hard-to-reach areas they work in, there’s been many instances in the past where we’ve first heard of specific suspected clusters of illnesses through them,” Rima Khabbaz, the CDC’s deputy director for infectious diseases, said of NGOs such as Samaritan’s Purse. “They are no doubt very important partners in our global public health work. Not infrequently, [the] first unconfirmed reports reach the public health community through them.”
Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota, said in many parts of the world, groups such as Samaritan’s Purse and Doctors Without Borders “are the safety net for global health.” He added: “They are the ones in the areas of war and civil unrest.”
As to the “controversies” involving the organization itself, the story first cites criticism by the New York Times when SP communicated a religious message while assisting victims of an earthquake in El Salvador. Apparently the Times objected to such communications because SP had received $200,000 from USAID – though SP was later found not to have violated governmental guidelines. Another alleged controversy involved an effort by SP to distribute Arabic-language Bibles during the 1990-1991 gulf war through U.S. troops (presumably volunteers, although the story never says so) – a plan that reportedly “drew a sharp rebuke” from General Norman Schwarzkopf because it would have violated a US-Saudi agreement that there would be no proselytizing.
In my judgment, the story illustrates inevitable differences between the public and nonprofit sector. What SP does effectively by way of humanitarian relief depends on its faith – at numerous levels. SP assists the suffering because of theological commitments to meet both spiritual and physical needs. Indeed, a tenet of SP's Statement of Faith reads as follows:
We believe that human life is sacred from conception to its natural end; and that we must have concern for the physical and spiritual needs of our fellowmen. Psalm 139:13; Isaiah 49:1; Jeremiah 1:5; Matthew 22:37-39; Romans 12:20-21; Galatians 6:10.
SP’s faith-based mission takes it to isolated places many governmental agencies would otherwise overlook – places where not just spiritual needs, but also pressing medical and other physical needs, surface. SP’s vast network of volunteers and staff likely works with unusual dedication because of their commitment not just to a “cause,” but to a “Cause.”
Yet care must be taken when government partners with nonprofits – by both partners. A religious nonprofit must be careful not to use government resources in a manner inconsistent with valid secular objectives. And government must be careful not to try to transform the religious nonprofit into a neutral, nonsectarian agency. The public is right to demand that both hold up their obligations in such a partnership. On the whole, the story suggests that SP and public bodies that have worked with them generally follow the rules of the partnership.
Wednesday, August 20, 2014
The Chronicle of Higher Education is running a story on a recent report exhorting college boards of trustees to engage more actively in governance. The key details follow:
The report, “Governance for a New Era: A Blueprint for Higher Education Trustees,” was released on Tuesday by the American Council of Trustees and Alumni. It stemmed from a project led by Benno Schmidt, chairman of the City University of New York’s Board of Trustees and a former president of Yale University.
The document calls on trustees to rethink their leadership roles in light of colleges’ current challenges. Broadly, it asserts that trustees should take a strong role in areas such as defining an institution’s goals, protecting academic freedom, ensuring educational quality, and holding colleges accountable for their performance.
Interested readers may access the full report here.
Tax Notes Today (subscription required) reports that the Internal Revenue Service’s Tax-Exempt and Government Entities Division is progressing significantly in clearing its backlog of exempt organization applications that existed as of the beginning of the year. TE/GE Deputy Commissioner Donna Hansberry is quoted as saying that the IRS has now closed 97 percent of the 15 percent of exempt organization applications which, at the beginning of fiscal 2014, were more than one year old.
A major reason for the backlog serves as a helpful practical reminder to exempt organizations (especially small ones) and their advisors. Hansberry attributes the increase in applications since 2010 to the rule (enacted as part of the Pension Protection Act of 2006) that automatically revokes the exemption of an organization that fails to file an information return for three consecutive years.
Electronic citation: 2014 TNT 161-5
Tuesday, August 19, 2014
We previously blogged about the efforts of ProPublica to obtain from the American Red Cross (ARC) information about how the ARC has spent its $300 million-plus in donations that it received for humanitarian aid following Hurricane Sandy. The blog entry opines as follows:
Soliciting and expending funds in connection with major disasters can present some thorny legal issues (as several of us tax and nonprofit law scholars have discussed in our scholarship). In general, analyzing whether these issues pose a problem in any given case does require assessment of the type of information that ProPublica seeks. While privacy laws protecting individuals should certainly be observed, I would think the public interest better served by erring on the side of full disclosure.
Perhaps the ARC has come to appreciate this viewpoint. The Chronicle of Philanthropy reports that the ARC has sent a 108-page document disclosing that it “has used roughly three-quarters of the $312-million raised, with just under $130-million going to ‘financial assistance’ and $46-million dedicated to the deployment of staff and volunteers.” Additional details are available on ProPublica’s website.
The Washington Post reports that D.C. Superior Court Judge Robert Okun has approved the proposal of the Trustees of the Corcoran Gallery of Art to transfer its college to George Washington University and the bulk of its art collection to the National Gallery of Art. The Corcoran Gallery is reported to be the oldest private art museum in the nation’s capital. The proposal was the focus of a cy pres proceeding, necessitated because of the severe financial difficulties facing the nonprofit.
As discussed in Judge Okun’s opinion granting the trustee’s petition, the trustees of the Corcoran Gallery argued that continuing its operations as a stand-alone charity was impossible or impracticable. Borrowing from contracts law, the court agreed that the continued operation of the gallery by itself was "impracticable." Of special interest is the Court’s interpretation of “impracticability” under the doctrine of cy pres:
The Court’s review of the cases discussed above leads to the conclusion that a party fails to establish impracticability in the cy pres context if it merely demonstrates that it would be inconvenient or difficult for the party to carry out the current terms and conditions of the trust. Rather, a party seeking cy pres relief can establish impracticability only if it demonstrates that it would be unreasonably difficult, and that it is not viable or feasible, to carry out the current terms and conditions of the trust.
For those interested in a brief history of major events surrounding the formation and operation of the Corcoran Gallery, see A Corcoran Gallery of Art Timeline, also published in the Washington Post.
Monday, August 18, 2014
In Hospitals Reassess Charity as Obamacare Options Become Available, the Washington Post reports that “hospitals are rethinking their charity programs, with some scaling back help for those who could have signed up for coverage but didn’t.” The story cites concern “that offering free or discounted care to low-income, uninsured patients might dissuade them from getting government-subsidized coverage,” and notes the obvious financial interest that hospitals have in treating “more patients covered by insurance as the federal government makes big cuts in funding for uncompensated care.”
The story reveals the calculus facing hospital decision-makers:
Hospital executives say they are weighing many questions in evaluating whether to change their policies. Did people choose not to enroll, or were they unable to get through the new health insurance marketplaces during the open enrollment in the fall and spring? Did they know subsidized coverage is available? Could they afford insurance?
“That’s something hospitals have struggled with for decades: Is the patient unwilling to pay or unable to pay?” says Katherine Arbuckle, senior vice president and chief financial officer at Ascension Health based in St. Louis.
The story further reports that some hospitals, including those managed by two major chains, plan no major changes to their charity care policies under Obamacare.
In a recent opinion editorial in the Boston Globe, John E. Sununu, former Republican senator from New Hampshire, argues that the recent decision of O’Bannon v. NCAA sounds the death knell for the federal income tax exemption of universities with major athletics programs. In the O’Bannon case, a federal district judge ruled that the NCAA’s rules prohibiting student-athletes from receiving payments of a share of licensing fees for the use of their names and likenesses violates federal antitrust laws. Sununu opines that the “ultimate destination” of the O’Bannon case is “a date with the Internal Revenue Service.”
His argument appears to be simple initially: “If universities are going to compensate athletes for supporting multi-million dollar sports programs, the idea that these organizations are tax-exempt nonprofits becomes absurd.”
But then Sununu cites many other factors to support his conclusion that the “far bigger lie is that these major sports schools are nonprofit institutions.” He continues:
Today, at least a dozen schools generate $100 million per year from sports programs -- a figure that approaches 10 percent of the operating budget for powerhouses like Auburn and Louisville. Paying athletes strips away whatever pretense remains of that educational mission, at least for a significant portion of their student body and revenue base. As payments flow and revenues grow, the school administrators, NCAA officials, and IRS bureaucrats who have colluded to maintain that pretense will have little left to argue.
It’s especially hard to hide behind the educational mission when the highest paid employee at your school is a coach. Last year, 25 college football coaches took home more than $2.5 million each. At Alabama, Coach Nick Saban’s salary topped $5 million. The issue here is not whether they are worth it, or whether the schools are justified in paying that freight, but whether the business entity paying such rich contracts should operate tax-free.
The eye-popping numbers on ESPN’s recent deal for a Southeast Conference Sports Network lay bare the economics at stake. With $800 million in profits, each of the 14 schools can expect yearly distributions of roughly $50 million tax-free. … Paying coaches and athletes, selling tickets and television rights, licensing merchandise and fight-song ringtones. Sounds like a business to me.
Yes, in a non-technical, intuitive sense, it “sounds like a business.” But I am not nearly as quick as Sununu to jump to the conclusion that O’Bannon means that all universities with major sports programs are now doomed to lose federal income tax exemption.
First, it is doubtful that the payment of athletes for the use of their likenesses – which the O’Bannon court decision permits to be done, subject to an NCAA-imposed cap – is the decisive factor that should transform an institution from “educational” under the law to one that is not. An educational institution compensates those who perform services in the pursuit of the institution’s mission – including students. The bigger question is whether what athletic programs do is really properly characterized as educational or otherwise charitable. A modest payment for the use of a student-athlete’s likeness is probably not sufficient to tip the scales in one direction or another with respect to that larger question.
And although I, too, tend to be shocked at the amount of money some head coaches are paid and feel a sense of disbelief at what such compensation says about the priority that we, as a society, place upon sports, it is also true that large, tax-exempt charitable institutions of many types pay their top executives very well. My point is not that such compensation is normatively justifiable (although in many cases, it probably is). My point is simply that under current law, a very large salary is not necessarily inconsistent with a charitable institution’s income tax exemption. (And of course, if the athletics department were treated as a distinct, taxable entity, the payment of the coaches’ salaries would generally be fully deductible in computing the payor’s taxable income.)
Moreover, even if a school’s athletics program were properly viewed as an unrelated trade or business – a question that I do not intend to answer in this post – it does not follow that the university itself should lose federal income tax exemption because of its athletics program. The dollar value of these programs is indeed high. But the significance of these programs does not necessarily surpass that of the clearly educational operations of major universities. I am far from convinced that a major teaching and research institution fails the organizational and operational tests of the Treasury regulations just because it also operates a prominent national athletics program.
Thus, while I share many of the concerns of Mr. Sununu, I think that the O’Bannon case alone is unlikely to prompt a wave of revocations of university tax exemptions.
Saturday, August 16, 2014
When I first started out in practice, I was asked to compose a paper on behalf of the State Bar of California on whether contributions to wholly-owned single member LLCs are deductible under the check the box regulations. It appears that single member LLCs are once again in the forefront of the nonprofit sector. Social enterprises wholly-owned by family foundations, i.e., family owned social enterprises (“FOSEs”), are used in the business sector, and they have the potential to be used in the social sector. Mike Miesen’s article on this topic raises an interesting perspective:
"Owning a social enterprise (or creating a disregarded entity) allows a foundation to efficiently effect change using market mechanisms to sell a good or service, while using philanthropic resources to address market failures and advocate a cause. Critically, it is also a tax-free investment vehicle for the foundation, fulfills the foundation’s requirement to spend 5 percent of its endowment annually, and because [single member limited liability corporations] SMLLCs are autonomous legal entities, protects the foundation’s assets from any liability to which their investees expose them. We think this model could provide a more efficient option that conventional grant- and donation-based models.”
Thursday, August 14, 2014
According to findings of the Charities Aid Foundation (CAF), UK consumers want businesses to be more open and transparent about their philanthropy. See today’s Guardian article entitled “New Survey Shows FTSE 100 Companies Have Increased Charitable Giving.” Over half of the 2,000 British people CAF interviewed commented that they would be more likely to purchase a product if part of its price was donated to charity. In addition, those aged 18-24 increasingly express a desire to work for businesses that are ethical. Job seekers within this age range see working for a company that allows one “to give back” to be a major selling point.
As a result, UK businesses seeking to have a social impact are taking on more sustainable approaches, are re-thinking their purpose, and are marketing their products in the context of how they help solve social problems. Klara Kozlov, head of corporate clients at CAF, urges businesses to adopt a “framework for reporting their philanthropy activity and …. measur[ing] and report[ing] the impact of their giving.” She emphasizes that the public reporting of social impact is essential.
The impact investing sector in the US serves as a relevant model for these businesses. Like the nonprofit sector, the impact investing sector has social impact as goal, but it also has profit earning as an aim. In other words, it is a growing sector for those consumers and investors who are increasingly making their choices based upon their “personal, social, and environmental values”, and thus demand that businesses have a double bottom line: profit and social impact. In sum, a double bottom line means that a business will both earn a profit for investors and produce a benefit to society or social impact. (For more on impact investing, see “Impact Investing: The Power of Two Bottom Lines”). Since impact investors also expect a financial return, the sector has had to bring a level of rigor commensurate with the financial markets to bear upon the measurement of both elements of their return.
Wednesday, August 13, 2014
Earlier this week, I wrote about the need for donors to view their charitable giving as a form of investment. According to the results from a Vanguard Charitable study released earlier this month, Millennials are doing just that. See The NonProfit Times article "Millennials More Generous with Donor-Advised Funds." Millennials want to track the results of their giving and be involved in implementation associated with their donations. They are frequently turning to donor-advised funds ("DAFs") in this endeavor, including Mark Zuckerberg and his wife. (If you are interested in the overall DAF debate, see the Forbes article from earlier this year).
In “An Inside Look,” Vanguard Charitable looked at 15,330 donors over a 10-year period. These donors used Vanguard’s DAF to make their donations. Although Millennials comprised the smallest percentage of donors when compared to Baby Boomers and Traditionalists (those born before 1946), as a whole, they contributed more money on average. According to Vanguard Charitable, Millennials gave $9,065 compared to an average of $6,979 and $7,877 for Traditionalists and Baby Boomers, respectively.
At the same time, Millennials report that they are unsure of how to give outside of using DAFs. Clearly, Millennials want their charitable dollars to end up with those charities that will put them to their most productive use. Although the chief philanthropic officer at Vanguard Charitable has recommended that they hold board positions as a way to achieve this result, I would argue that charities themselves should assume responsibility for communicating to donors what their “return” or “social impact” is for a given investment. Donors should not want to give a substantial amount to a charity or to charities without understanding what the resulting social impact is. Millennials are creating a culture in their giving that will demand more transparency and accountability and that has the ability to re-shape the future of the nonprofit sector.
In Schmidt v. Commissioner, T.C. Memo. 2014-159, the Tax Court determined that the value of a conservation easement for purposes of a federal charitable income tax deduction under IRC § 170(h) was $1,152,445, as opposed to the $1.6 million value claimed by the taxpayer. The court also found that the taxpayers were not liable for penalties.
Schmidt involved the donation of a conservation easement on a 40-acre parcel located in El Paso County, Colorado, to the county. Mr. Schmidt purchased the subject property in 2000 and, with the help of a consultant, prepared preliminary zoning change and plan applications for the development of the subject property and an adjacent property. In the summer of 2003, however, Mr. Schmidt began constructing a personal residence on the subject property, donated the easement to the county, and terminated an agreement he had to purchase the adjacent property. Before the donation of the easement, the subject property could have been developed as a 13-lot subdivision either separately or in conjunction with the development of the adjacent property. After the donation of the easement, only one homesite was permitted on the subject property.
The Schmidts valued the conservation easement at $1.6 million and claimed portions of the deduction on their 2003, 04, 05, and 06 returns. The IRS challenged the deductions and the Tax Court considered both the value of the easement and the impostion of penalties.
Valuation of Easement
The parties agreed that both the subdivision development method and the comparable sales (or “market”) method were appropriate methods by which to value a property before the donation of an easement. However, the parties disagreed as to which of those methods was more appropriate in this case. The Schmidts’ valuation expert contended that the market method was inappropriate because there were insufficient comparables and the comparables used by the IRS’s valuation expert were inappropriate because they lacked the development entitlements that Mr. Schmidt had secured for the subject property. The IRS countered that comparables used by its expert were appropriate because Mr. Schmidt had not actually obtained any development entitlements when he granted the conservation easement. The Tax Court sided with the Schmidts, noting, in part, that
“[e]ven though the pending applications were nontransferable, the record establishes that the applicants had been able to address all relevant issues that could have prevented or delayed the granting of development entitlements for the subject property and that the proposed development of the subject property was consistent with the … Comprehensive Plan. Moreover, … much of the work [the development consultant] had done was transferable even if the applications themselves were not.”
Once it determined that the subdivision development method was the appropriate method by which to value the subject property before the conveyance of the easement, the Tax Court conducted a detailed review of each expert’s application of that method to the property. Because the court did not find either expert’s report to be complete and convincing, however, it drew its own conclusions based on its examination of the evidence. The court ultimately determined that the easement had a value of $1,152,445, or 72% of the $1.6 million value that had been claimed by the Schmidts.
As part of its valuation analysis, the Tax Court confusingly noted that “what the before and after method is trying to measure is the price that a hypothetical purchaser of a conservation easement would have to pay a hypothetical seller for the easement” (emphasis in original). This statement is odd given the description of the before and after method in Treasury Regulation § 1.170A-14(h)(3)(i). The regulations explain that, if there is no substantial record of market-place sales of comparable easements to use as a meaningful or valid comparison (which generally will be the case because easements are not bought and sold in the open market), then the fair market value of a conservation easement is equal to the difference between the fair market value of the subject property before the grant of the easement and the fair market value of the subject property after the grant of the easement, with fair market value defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” In other words, the before and after method is not trying to measure what a hypothetical purchaser would pay a hypothetical seller for the easement. Rather, it measures what a hypothetical purchaser would pay a hypothetical seller for the subject property immediately before and immediately after the donation of the easement, with the difference between those two amounts being the value of the easement.
In determining that the Schmidts were not liable for penalties, the Tax Court first explained that the amount the Schmidts had claimed on their 2003 return for the easement was less than 200% (and less than 150%) of the amount the court determined to be the correct amount. Accordingly, the Schmidts were not liable for a substantial valuation misstatement penalty for any of the years at issue.
The Schmidts also were not liable for a substantial understatement penalty because they had reasonable cause and acted in good faith with regard to any understatement. The court found that the Schmidts reasonably relied in good faith on the appraisal they obtained and the problems the court found with that appraisal did not call into question the reasonableness of their reliance. The IRS attempted to show unreasonableness and bad faith by, for example, pointing to the appraiser's handwritten notes, which contained estimates of value that were different than those found in his report. The court dismissed this, noting that such notes might have been a "preliminary, uninformed guess."
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Zarlengo v. Commissioner—Conservation Easement Overvalued and Not Protected In Perpetuity Until Recorded
Zarlengo v. Commissioner, T.C. Memo. 2014-161, involved a façade easement that Dr. Zarlengo and his ex-wife donated to the National Architectural Trust (NAT) effective in 2005. The Zarlengos had purchased the subject property—a four-story townhouse built in 1890 located on the Upper West Side of Manhattan—in 1975 and completely renovated the property using materials designed to preserve its historic character. The Zarlengos’ neighbors followed suit, and the New York City Landmarks Preservation Commission “took notice” and designated the neighborhood an historic district in 1985.
In the early 2000’s, the Zarlengos learned about the possibility of donating a façade easement to NAT from neighbors. Before meeting with NAT representatives, however, Dr. Zarlengo contacted his CPA to see if such a deduction would be legitimate. It was only after hearing back from the CPA that the deduction was, indeed, legitimate that Dr. Zarlengo and his ex-wife pursued the donation.
In 2004, the Zarlengos submitted an application to NAT regarding a proposed easement donation, NAT obtained the necessary approvals for the donation, the Zarengos obtained an appraisal from an appraiser recommended by NAT estimating that the easement had a value of $660,000 (11% of the townhouse’s estimated $6 million value before the donation), the Zarlengos and a NAT representative signed the easement deed, and NAT mailed the Zarlengos a letter thanking them for their donation. For reasons not explained in the Tax Court’s opinion, however, the easement deed was not recorded until January 26, 2005.
Meanwhile, the Zarlengos had listed the townhouse for sale through Mr. Pretsfelder, a real estate broker, at an asking price of $5.5 million. Mr. Pretsfelder believed that the asking price was too high and the townhouse eventually sold in 2007 for $4,650,500.
Dr. Zarlengo and his new wife filed a joint return for 2004 reporting a deduction of $330,000 for half the estimated value of the easement. Due to gross income limitations they claimed only a portion of the deduction on their 2004 return and carried the excess forward to subsequent returns. The only year at issue for Dr. Zarlengo and his new wife in Zarlengo was 2004, however, because the IRS apparently did not challenge the carryover deductions they claimed on later returns.
Dr. Zarlengo’s ex-wife also reported a deduction of $330,000 on her 2004 return, and she too was able to use only a part of that deduction in 2004 and carried the excess forward to subsequent returns. The only years at issue for her in Zarlengo were 2005-07 because the IRS apparently did not challenge the deduction she claimed on her 2004 return.
The Tax Court addressed numerous issues in assessing whether and the extent to which Dr. Zarlengo and his ex-wife were eligible for deductions with regard to the facade easement donation.
The IRS argued that the taxpayers were not entitled to deductions because the façade easement was neither (i) a “qualified real property interest” as defined in IRC § 170(h)(2)(C) (i.e., “a restriction (granted in perpetuity) on the use which may be made of the real property”) nor (ii) donated exclusively for conservation purposes as required under IRC § 170(h)(5) (i.e., the conservation purpose of the easement was not “protected in perpetuity”).
In analyzing these issues, the Tax Court first reiterated the well settled rule that, “[i]n a Federal tax controversy, State law controls the determination of a taxpayer’s interest in property while the tax consequences are determined under Federal law.” Accordingly, New York law governed when the taxpayers’ donation of the façade easement was regarded as complete, but Federal tax law determined the tax consequences. Because New York law provides that conservation easements in the state are not effective unless they are recorded, the façade easement was not effective until January 26, 2005—the date on which it was recorded.
The Tax Court then explained that, even assuming the easement had been legally enforceable by NAT against the taxpayers in 2004 because both parties signed the deed that year, the easement still would not have satisfied the perpetuity requirements in 2004 “because neither the use restriction nor the conservation purpose of the conservation easement was protected in perpetuity until January 26, 2005.” The court explained that, if a buyer had purchased the townhouse and recorded the purchase deed before January 26, 2005, the buyer would have taken the townhouse free and clear of the conservation easement. Moreover, the possibility that this could have occurred was not so remote as to be negligible.
Accordingly, the Tax Court determined that Dr. Zarlengo and his new wife were not entitled to a deduction for the donation of the facade easement on their 2004 return, which was the only year at issue for them in Zarlengo.
The result with regard to Dr. Zarlengo’s ex-wife was a bit different. The years at issue for her in Zarlengo were 2005-07 and those returns involved carryovers of the deduction she originally reported on her 2004 return. The Tax Court first held that, because the ex-wife would not have been entitled to the 2004 deduction for failure to satisfy the perpetuity requirements, it followed that she was not entitled to the carryover deductions for 2005-07. However, the IRS had acknowledged that the easement could be considered “made in perpetuity” in 2005 under IRC §§ 170(h)(2)(C) and (5)(A) because the easement was recorded in that year, and the Tax Court determined that “both the use restriction and the conservation purpose of the conservation easement were protected in perpetuity as of January 26, 2005.” The court also found that the ex-wife had satisfied the other requirements of § 170(h) (including the conservation purposes test) and the substantiation requirements. Accordingly, her tax liability for 2005, 06, and 07 could be redetermined assuming the donation had been made in 2005.
Conservation Purposes Test
The IRS argued the façade easement did not have a “conservation purpose” within the meaning of IRC § 170(h) because it did not preserve the townhouse in any way that local law did not. The Tax Court disagreed, noting that NAT, unlike New York City’s Landmarks Preservation Commission (LPC), actively monitors the properties encumbered by the easements it holds and NAT’s historic preservation standards were similar, but not identical to those applied by the LPC. The court determined that the facade easement provides the townhouse with an additional layer of protection over and above that provided by the LPC and, thus, the easement satisfied the historic preservation conservation purposes test.
The IRS argued that the taxpayers failed to satisfy a number of the qualified appraisal requirements in Treasury Regulation § 1.170A-13(c)(3). The Tax Court first explained that such requirements are directory rather than mandatory and, thus, require only substantial compliance. Quoting Bond v. Commissioner, 100 T.C. 32 (1993), the court explained that “the reporting requirements do not relate to the substance or essence of whether or not a charitable contribution was actually made.” Accordingly, rather than requiring strict compliance with the reporting requirements, the court said it considers whether the taxpayers “provided sufficient information to permit [the IRS] to evaluate their reported contributions, as intended by Congress.”
The Tax Court then proceeded to march through the various qualified appraisal requirements that the IRS argued the taxpayers failed to satisfy, finding that the taxpayers complied or substantially complied with all of the disputed requirements (e.g., the description of the appraised property requirement, the date of contribution requirement, and the requirement that each appraiser contributing to the appraisal satisfy all requirements, including signing the appraisal and appraisal summary).
Of particular note (and some confusion) is the Tax Court’s holding with regard to the timing of the appraisal report. Treasury Regulation § 1.170A-13(c)(3)(i) provides that a qualified appraisal is one prepared by a qualified appraiser “not earlier than 60 days prior to the date of the contribution.” In Zarlengo, the appraisal was dated August 24, 2004, and had an “effective date” of July 26, 2004 (i.e., the date on which the conservation easement was valued). However, the date of the contribution was January 26, 2005—the date on which the easement deed was recorded. Accordingly, the appraisal was prepared more than 60 days before the contribution date and, thus, was untimely. The court first explained that the timeliness requirement “does not relate to the essence of section 170,” and a taxpayer may substantially comply with the substantiation requirements notwithstanding a “premature appraisal.” Later in the opinion, though, the court confusingly stated that the ex-wife did not comply or substantially comply with the timeliness requirement in that the appraisal report was premature but, “as previously discussed, this requirement does not relate to the essence of section 170." Although its reasoning is unclear, the court ultimately concluded that the ex-wife satisfied the requirements to substantiate the conservation easement.
Valuation of Façade Easement
Each parties’ valuation expert employed the sales comparison approach to determine the value of the townhouse before the easement’s donation. The court criticized their analyses, noting that each expert “made adjustments designed to support his side’s litigating positions. Experts lose their usefulness and credibility when they merely become advocates for the position argued by a party.” The court found that the taxpayers’ expert computed unreasonably high “before” values, while the IRS’s expert computed an unreasonably low “before” value, and the true value of the townhouse lay somewhere in between. Based on the testimony of Mr. Pretsfelder, which the court found to be credible, the court determined that the “before value” of the townhouse was $4.5 million.
With regard to the value of the townhouse after the donation of the easement, the Tax Court found the taxpayers’ expert’s “paired sales analysis” to be conceptually sound but marred by flaws in its execution. The court also rejected the IRS’s expert’s summary conclusion that the easement had no value because it did not place any additional burdens on the property owner. The court noted, in part, that Mr. Pretsfelder had credibly testified that if two properties are identical in all respects, except for the fact that one of the properties is burdened by a conservation easement, the property without the easement will have a greater value. The court also noted that it did not find it particularly significant that the purchasers of the townhouse had not reduced their offer after they became aware of the facade easement. The court explained that returning to the negotiating table could very well have jeopardized the parties’ carefully negotiated agreement, and it was “certainly plausible that the buyers did not want to risk the prospects of striking a new agreement.”
Based on its own analysis of the evidence, the Tax Court concluded that the easement reduced the $4.5 million value of the townhouse by 3.5%, or by $157,500. Accordingly, the ex-wife was entitled to a deduction in 2005 of $78,750 for her contribution of a half interest in the easement.
Before the enactment of the Pension Protection Act of 2006 (PPA), a substantial valuation misstatement (subject to a 20% penalty) existed if the value of property reported on a tax return was 200% or more of the amount determined to be the correct value. A gross valuation misstatement (subject to a 40% penalty) existed if the value reported was 400% or more of the amount determined to be the correct value. Taxpayers could avoid these penalties if they made a valuation misstatement in good faith and with reasonable cause.
The PPA lowered the threshold from 200% to 150% for a substantial valuation misstatement and from 400% to 200% for a gross valuation misstatement. The PPA also eliminated the reasonable cause exception for gross valuation misstatements of charitable deduction property, making that penalty a strict liability penalty. The PPA changes apply to returns involving façade easement donations filed after July 25, 2006.
The Tax Court found that Dr. Zarlengo was not liable for penalties for 2004, and his ex-wife was not liable for penalties for 2005 because they relied on the advice of a tax professional, which can establish reasonable cause and good faith. The court explained that the taxpayers were not financially sophisticated and neither had a background in tax, finance, or accounting. Moreover, when the ex-wife brought the idea of donating the facade easement to Dr. Zarlengo’s attention, he consulted with his CPA and the CPA, who had approximately 20 years of experience, concluded that the deduction was legitimate. The court found that the CPA was a competent accountant with sufficient expertise to justify the taxpayer’s reliance. The court also found that the taxpayers honestly believed that the easement was a completed gift in 2004 and, thus, they acted in good faith.
The result was different with regard to the ex-wife’s 2006 and 2007 returns because they were filed after July 25, 2006, when the reasonable cause and good faith exception was no longer available with respect to gross valuation misstatements. The Tax Court first noted that, in Chandler v. Commissioner, 142 T.C. No. 16 (2014), it held that the “plain language” of the PPA made the strict liability penalty applicable to all returns filed after July 25, 2006, regardless of whether they involve deductions carried over from donations made in earlier years. The court also noted that it did not consider whether the pre- or post-PPA percentage thresholds applied to the Chandlers' 2006 return because the Chandlers failed to prove the conservation easement they donated had any value and, thus, they made a gross valuation misstatement on their 2006 return regardless of which threshold applied. In Zarlengo, the Tax Court similarly did not need to decide whether the pre- or post PPA percentage thresholds applied to the ex-wife’s 2006 and 2007 returns because she also made a gross valuation misstatement regardless. The value she claimed on her 2004 return for her half interest in the easement and then "reaffirmed" in filing her 2006 and 2007 returns (i.e., $330,000) was greater than either 200% or 400% of the court’s determination of the correct value of her half interest in the easement (i.e., $78,750). Accordingly, the ex-wife was subject to the gross valuation misstatement strict liability penalty for 2006 and 2007 assuming the applicable dollar limitations for impostion of the penalty were satisfied.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Tuesday, August 12, 2014
Nonprofit evaluation is a key component of establishing an efficient charitable market. Without a way to measure social impact, both nonprofits and donors remain unaware of whether investment is being put to its most productive use. (Social impact may be thought of as what the charity has accomplished with a donation). As Stephen Goldberg has noted in his book Billions of Drops in Millions of Buckets, one of the reasons inefficiency exists in the charitable market is because funders currently cannot differentiate between effective and ineffective charities. The Stanford Social Innovation Review recently examined the need for a shift in nonprofit evaluation and the discourse surrounding it in “Measuring Social Impact: Lost in Translation,” and the ideas expressed hold valuable insights for the sector.
Most importantly, the authors contend that nonprofits need to set the agenda in terms of evaluation and should use a qualitative approach in addition to a quantitative one. They point out that if nonprofits do not shape the evaluation conversation, funders will do it for them. They note five specific items that nonprofits should “talk more about” in terms of evaluation. First, nonprofits should focus more on their purpose and their strategy for achieving it. As the authors advise, “[A]ll nonprofits should have a clearly defined theory for how they will create change that connects their strategies and programs to the results that they anticipate.” Second, nonprofits should spend more time discussing people. Funders often want nonprofit assessment to include quantitative assessments, e.g., the number of people indirectly affected. However, too much emphasis on quantitative analysis reduces a nonprofit’s impact to a series of numbers. The authors promote a more balanced approach that includes qualitative assessments as well: “Qualitative assessments that draw on conversations with people are often more consistent with how nonprofits operate, and they are also a methodologically valid form of evaluation.” Third, nonprofits would benefit from drawing attention to the big picture. In other words, evaluation should consider how a given nonprofit’s work fits within the collective transformation of an area. Fourth, nonprofits should not shy away from discussing their challenges. Their failures and lessons learned are beneficial in terms of collective learning. Accordingly, the authors urge nonprofits to highlight not only monitoring but also transparency as a goal in evaluation. Finally, nonprofits should encourage more learning. Currently, funders (who focus more on monitoring than learning) have a much louder voice in evaluation than beneficiaries and nonprofit workers who are directly involved and who may facilitate learning.
In terms of the discourse surrounding nonprofit evaluation, the authors caution that business, managerial, and scientific language is drowning out the nonprofit voice. This underscores the need for nonprofits to take charge of shaping evaluation. Too often terms such as “investment,” “returns,” “output,” and “outcomes” are used to discuss social impact, without regard to the five other areas identified. The Stanford team’s study of 400 individuals and organizations in the nonprofit sector revealed that the vocabulary of nonprofit evaluation typically falls within 3 cultural domains: (1) managerial, (2) scientific, and (3) associational, with managerial terms dominating the discourse. All of these domains hold valuable insights for the nonprofit sector; however, nonprofits themselves should be the ones to shape their evaluation and the discourse surrounding it.
Monday, August 11, 2014
A recent opinion piece in The Chronicle of Philanthropy urged the media to stop making a big deal over big donors. See "America's Press Needs to Stop Fawning Over Big Donors." According to Eisenberg, the danger is that the media praises a giver as good based upon how much he/she has given rather than upon what impact his/her dollars have had. The real danger is that the most urgent global problems of our times are not being addressed effectively despite the number of dollars donated annually. There is adequate funding but inadequate progress. The UN has stated, “Millions still live in extreme poverty, yet the world has enough money, resources, and technology to end poverty.” Donations of wealthy donors often end up in the hands of US and non-US charities, and no one is asking systematically what these charities are accomplishing.
Earlier this summer, I had a conversation with Eric Thurman, CEO of Geneva Global, a firm that provides research and grant management for philanthropists internationally, about who should be considered the best givers. He remarked that buying a lot of stock does not make one a great investor. If someone owns stock, they look to see how their stock is performing. In the nonprofit world, often the givers who have contributed the largest amounts are the most celebrated regardless of the social impact achieved from their donations. If donors treated their donations more like investments, progress could be made toward ameliorating some of the most pressing humanitarian and global problems of our times. (For more information on Thurman’s viewpoint, please see "Performance Philanthropy," Harv. Int’l Rev., Apr. 2006, at 18).
A problem with the charitable market is that funding does not flow toward effective charities and away from ineffective charities. In an efficient market, private sector investors use information available at the time of investment to receive returns; these returns generally do not exceed average market returns because the same information is available to all investors. Succinctly stated, it is difficult for an investor to beat the market. In the inefficient charitable market, the market is easily beaten; the donor simply gives to a charity that a reputable rating organization recommends. A donor will receive more measurable social impact for his/her buck in giving to a recommended charity versus a non-recommended one. However, pervasive questions still linger. How many donors are using a thorough rating organization? Are the rating organizations asking charities the right questions?
In a forthcoming series of articles, I have set forth the concept of an efficient charitable market or one where collective charitable investment ends up in the hands of charities that will put it to its most productive use. One of the reasons inefficiency exists in the charitable market is because donors currently cannot easily differentiate between effective and ineffective charities. Granted, it is no easy task to make this distinction, but it is possible. If this became a crucial question for charities and donors, perhaps the media would report on the good accomplished rather than on the number of dollars donated.
Restrictions on Political Activity as Government Turf Protection -- not because Charity is non-partisan!
Over on TaxProf you can get a daily rundown -- "Day X of the IRS Scandal" -- of the faux scandal regarding Lois Lerner and conservative social welfare organizations. The President's opponents assert that the government is using the restrictions on political activities to weaken his political opponents. Meanwhile, in Canada, the charitable sector is up in arms because the conservative Harper government has ordered the Revenue Agency to audit charitable organizations' political activity. Its funny how different contexts demonstrate the same ultimate truth. In this country, talking heads and bloggers are working feverishly to uncover an alleged secret government conspiracy to crack down on conservative social welfare organizations critical of government. In Canada, commentators allege that the government became indignant because some environmental charities opposed certain energy initiatives and, as a result, the government very explicitly and unabashedly ordered the tax agency to determine whether those charities were engaging in illegal political actifity. Charities are sometimes conceptualized as a "separate sovereign" often acting in competition with other sectors (business and government). Under this conception, government uses its tax laws to ensure its dominate role in the lives of citizens by strategically taxing that other sovereign when necessary to maintain government's superior role. Business may use its influence over government to get the government to enact laws -- the unrelated business income tax, for example, -- to help in business' competition with the charity. Thus, when private foundations were thought to control too much money and power, the government imposed a whole range of private foundation taxes. Likewise, restrictions on political activity are not imposed, necessarily, to protect charitable beneficiaries or in pursuit of some other notion of "good works." Rather restrictions on political activity are imposed to decrease the "Independent Sector's" willingness and ability to speak out against the government. If we admit this to be the real reason for restrictions on political activity, we might make progress with regard to whether the restrictions or bans should even exist. We ought to ask ourselves whether political intervention and activity bans are worth the costs and trouble of enforcment. Regardless, the American and Canadian experiences both help prove the underlying reason for political acitivity bans as well as the deleterious effects of indulging the bans. According to The Toronto Star:
The Conservative government has stepped up its scrutiny of the political activities of charities, adding money for more audits, and casting its net well beyond the environmental groups that have opposed its energy policies. Canada Revenue Agency, ordered in 2012 to audit political activities as a special project, now has also targeted charities focused on foreign aid, human rights, and even poverty. The tax agency has also been given a bigger budget — $5 million more through to 2017 — and is making the special project a permanent part of its work. With 52 political-activity audits currently underway, some stretching out two years and longer, charities say they’ve been left in limbo, nervous about speaking out on any issue lest they provoke a negative ruling from the taxman. And their legal bills are rising rapidly — in some cases adding $100,000 to already strained budgets — as they try to navigate often-complex demands from CRA auditors. “It’s nerve-racking,” said Leilani Farha, executive director of Canada Without Poverty, a small charity based in Ottawa that had to turn over internal emails and other documents to auditors looking for political activities. “We’ve been under audit for more than two years, and it just goes on and on, with no communication . . . It’s a huge drain on the resources of our organization.” The blitz began with the 2012 federal budget, shortly after several cabinet ministers — Joe Oliver, now finance minister, among them — labelled environmental groups as radicals and money launderers. The groups, able to attract donations by virtue of their charitable status, have sharply opposed the Harper government’s oilsands and pipelines policies. The government tightened rules and initially earmarked some $8 million over two years for CRA to create a special team of auditors to closely scrutinize the political activities of charities. A landmark policy statement from 2003 allows charities to spend up to 10 per cent of their resources on political activities, such as advocating changes in government policies. Partisan activity — endorsing a candidate or party — has always been forbidden and remains so.
The Independent Sector is not necessarily passive in this competition. Charities seek help from non-incumbents, for example in the competition with government. In Canada, a group of larger international charities are pushing back, complaining that the government is using strong arm tactics and that those tactics have created an environment of fear and uncertainty.
Some international aid charities are joining forces to challenge the Canada Revenue Agency’s increased scrutiny of the sector, saying onerous new demands are draining them of resources that are badly needed overseas. A dozen such groups conferred last week about a joint strategy to present to agency officials next month, a reversal from the last two years, when many charities refrained from speaking out for fear of aggravating the taxman. The new initiative is being quarterbacked by the Canadian Council for International Co-operation, representing some 70 groups who funnel charity dollars abroad to alleviate poverty and defend human rights. The move is a belated reaction to a wave of political-activity audits ordered by the Harper government in 2012, but which only began to hit the international aid sector in the second year after several environmental groups were swept up in the first round.
As the New Zealand Supreme Court implied last week, politics and charity are not mutually exclusive. Indeed, politics and charity are just the opposite. Governments only pretend the two are mutually exclusive to protect themselves from challenge.
Friday, August 8, 2014
My life as a military brat, particularly in Germany, taught me that the world does not begin and end on the shores of North America. So if you clicked on this post expecting to hear that the U.S. Supreme Court did us all a favor by eliminating the restrictions on political activities by charities, well . . . sorry about that. But in a throughly written, wonderfully informative and well-reasoned opinion regarding the meaning of "charity," and making references to the very same Statute of Charitable Uses, Pemsel, and ALI Restatment of Trust generally relied upon as the source of U.S. law on the topic, the New Zealand Supreme Court recently held that political activity, in and of itself, can be "charitable" and therefore is not presumptively precluded from the purposes for which tax exemption may be granted. Prior to Wednesday's decision, New Zealand law allowed for charitable tax exemption status only when an organization's political activity was "ancillary" or "subordinate" to a charitable purpose, implying that political activity itself is not charitable.
In Greenpeace of New Zealand Incorporated, (Aug. 6, 2014) the New England Supreme Court discussed the matter of political action -- including campaign intervention, I think (the Court is not entirely clear and the facts of the case relate to lobbying) -- stating:
We do not think the development of a standalone doctrine of exclusion of political purposes, a development comparatively recent and based on surprisingly little authority, has been necessary or beneficial . . . Even in the case of promotion of specific law reform, an absolute rule that promotion of legislation is never charitable is hard to justify. . . . A conclusion that a purpose is "political" or "advocacy" obscures proper focus on whether a purpose is charitable within the sense used by law. It is difficult to construct any adequate or principled theory to support blanket exclusion. . . . As well, a strict exclusion risks rigidity in an area of law which should be responsive to the way society works. it is likely to hinder the responsiveness of this area of law to the changing circumstances of society.
The High Court's press release can be found here and includes a history of the litigation and a discussion of the relatively brief dissenting opinion:
The Supreme Court by majority (comprising Elias CJ, McGrath and Glazebrook JJ) allowed the appeal against the Court of Appeal’s determination that a political purpose cannot be a charitable purpose.
The majority held that a political purpose exclusion should no longer be applied in New Zealand. They concluded that a blanket exclusion of political purposes is unnecessary and distracts from the underlying inquiry whether a purpose is of public benefit within the sense the law recognises as charitable.
They rejected the conclusion of the Court of Appeal that s 5(3) of the Charities Act enacts a political purpose exclusion with an exemption if political activities are no more than “ancillary”. Rather, s 5(3) provides an exemption for noncharitable activities if ancillary.
The minority (William Young and Arnold JJ) concluded that s 5(3) codifies the position that advocacy in support of a charitable purpose is non-charitable unless it is merely ancillary to that charitable purpose. They further took the view that the rule that political advocacy is not charitable is defensible not only on the basis of the authorities but also as a matter of policy and practicality and that there is accordingly no requirement to depart from the ordinary language approach to s 5(3).
The Court unanimously dismissed the appeal against the Court of Appeal’s determination that purposes or activities that are illegal or unlawful preclude charitable status. The Court held that an illegal purpose is disqualifying and that illegal activity may disqualify an entity from registration when it indicates a purpose which is not charitable even though such activity would not justify removal from the register of charities under the statute.
Thursday, August 7, 2014
In an opinion remarkable only because it is so thoroughly boring, the 7th Circuit recently held that ABA Retirement Funds, an Illinois not-for-profit corporation, did not meet the requirements for exemption from tax under IRC 501(c)(6). ABA Retirement Funds v. USA. Actually, the opinion is boring because the claim to exemption is so obviously ridiculous. How anybody could have claimed tax exempt status for what amounts to an attorney retirment fund management company is beyond me, but ABARF did and spent a lot of money insisting that they be granted that exemption too. The district court opinion is much more instructive and includes a helpful note on the integral part doctrine. The 7th Circuit pretty much refers us to that opinion and then discusses one or two aspects of the case as though writing a concurrence to the lower court. Here is what seems like a pretty bright line test for business leagues, according to the district court:
Parsing this text, the regulation [1.501(c)(6)-1] requires that an organization meet the following criteria to constitute a "business league":
It is an organization:(1) of persons having a common business interest;
(2) whose purpose is to promote the common business interest;
(3) not organized for profit;
(4) that does not engage in a regular business of a kind ordinarily conducted for profit;
(5) whose activities are directed to the improvement of business conditions at one or more lines of a business as distinguished from the performance of particular services for individual persons; and
(6) of the same general class as a chamber of commerce or a board of trade. The regulation also states that if an organization is "engaged in furnishing information to prospective investors to enable them to make sound investments," its purpose is not "to promote [a] common business purpose" and therefore it does not constitute a business league.
All ABARF did, on the other hand, was sell stuff exclusively to attorneys. It would be as if the Ford dealer down the street insisted that it was a univesity because it sold cars only to universities.
There is one other instructive highlight, though. The District Court opinion rejects ABARF's belated insistence that the integral part doctrine entitles it to exemption because ABA could have sold and managed retirement plans without losing its tax exempt status. ABARF arguement that the ABA could have maintained the retirement management without losing its tax exemption, implyies that the integral part doctrine allows a back door way of achieving tax exemption for what would have been an unrelated business -- albeit one insubstantial enough not to jeopardize the parent's tax exempt status. The district court correctly rejected this attempted slight of hand by noting that an unrelated business is, by definition, not "integral" to a parent's tax exempt status (duh!). An integral activity, on the other hand -- e.g., providing laundry services to a single exempt hospital parent -- can be dropped into that hospital's subsidiary, and that sub be exempt under the integral part doctrine.
Wednesday, August 6, 2014
As previously blogged, Professor Lloyd Mayer asked to remind all readers of this call for papers at the 2015 AALS Conference:
AALS Section on Nonprofit and Philanthropy Law
AALS Section on Taxation (Co-Sponsor)
Call for Paper Proposals
2015 Annual Meeting Section Panel
Saturday, January 3, 2015, 10:30 a.m.–12:15 p.m.
IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable?
The Section on Nonprofit and Philanthropy Law is issuing a call for paper proposals for its session on IRS oversight of charitable and other tax-exempt nonprofit organizations. The panel, co-sponsored by the Section on Taxation, will be held on Saturday, January 3, 2015, from 10:30 a.m. to 12:15 p.m., at the 2015 Annual Meeting in Washington, DC. Proposed papers might address: the role of the IRS in overseeing specific aspects of tax-exempt nonprofit organizations, such as political activity or governance; the relative strengths and weaknesses of IRS oversight compared to oversight by other actors, including state attorneys general and private, self-regulating bodies; the effect of the late-1990s reorganization of the IRS on its ability to oversee tax-exempt nonprofit organizations; or the overlapping jurisdictions of the IRS with other federal agencies that oversee aspects of nonprofit organizations, such as the Federal Election Commission, the Federal Trade Commission, and the Department of Education.
Panelists will be a mix of presenters chosen through this call for paper proposals and solicited panelists with relevant expertise. Presenters will have the opportunity to publish their papers in the faculty-edited Pittsburgh Tax Review. To facilitate such publication, panelists will be expected to have a completed draft by the January 3, 2015 panel presentation and a final draft by February 28, 2015.
To submit your proposal, please email a short description (no more than 750 words) of your paper to Lloyd Hitoshi Mayer, Chair of the Section on Nonprofit and Philanthropy Law, at email@example.com, and Miranda Fleischer, Chair of the Section on Taxation, at firstname.lastname@example.org. The deadline for proposals is Friday, August 15, 2014. The Executive Committees of the sponsoring sections will select the papers to be presented by mid-September. Please be aware that pursuant to AALS rules, only full-time faculty members of AALS members law schools are eligible to submit a paper proposal in response to a section’s call for papers. However, fellows from AALS member law schools are also eligible to submit a paper proposal if they include a CV with their proposal. Faculty at fee-paid law schools, international, visiting, and adjunct faculty members, graduate students, and non-law school faculty are not eligible to submit.
If you have any questions, please contact Lloyd Hitoshi Mayer at email@example.com.