Wednesday, August 27, 2014
Yesterday the Department of the Treasury and the IRS issued the 2014-2015 Priority Guidance Plan. Included in the Exempt Organizations section of the list are numerous continuing projects, but also several new entries. The most notable new entry is "Proposed Regulations under 501(c) relating to political campaign intervention.", indicating that Treasury and the IRS plan to look at the political campaign intervention more broadly that just with respect to 501(c)(4) social welfare organizations.
Here is the full list:
1. Revenue Procedures updating grantor and contributor reliance criteria under §§170 and 509.
2. Revenue Procedure to update Revenue Procedure 2011-33 for EO Select Check.
3. Regulations under §§501(a), 501(c)(3), and 508 to allow the Commissioner to adopt a streamlined application process that eligible organizations may use to apply for recognition of tax-exempt status under §501(c)(3).
• PUBLISHED 07/02/14 in FR as TD 9674 (FINAL and TEMP) and REG-110948-14 (NPRM).
4. Revenue procedure setting forth procedures for issuing determination letters on exempt status under §501(c)(3) to eligible organizations that submit Form 1023-EZ.
• PUBLISHED 07/21/14 in IRB 2014-30 as REV. PROC. 2014-40 (RELEASED 07/01/2014).
5. Proposed regulations under §501(c) relating to political campaign intervention.
6. Final regulations on application for recognition of tax exemption as a qualified nonprofit health insurer under §501(c)(29) as added by §1322 of the ACA. Temporary and proposed regulations were published on February 7, 2012.
7. Final regulations under §§501(r) and 6033 on additional requirements for charitable hospitals as added by §9007 of the ACA. Proposed regulations were published on June 26, 2012 and April 5, 2013.
8. Additional guidance on §509(a)(3) supporting organizations.
9. Guidance under §512 regarding methods of allocating expenses relating to dual use facilities.
10. Guidance under §4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners.
11. Final regulations under §§4942 and 4945 on reliance standards for making good faith determinations. Proposed regulations were published on September 24, 2012.
12. Final regulations under §4944 on program-related investments and other related guidance. Proposed regulations were published on April 19, 2012.
13. Guidance regarding the excise taxes on donor advised funds and fund management.
14. Guidance under §6033 relating to the reporting of contributions.
15. Final regulations under §6104(c). Proposed regulations were published on March 15, 2011.
16. Final regulations under §7611 relating to church tax inquiries and examinations. Proposed regulations were published on August 5, 2009.
Tuesday, August 26, 2014
West Virginia is the latest jurisdiction to adopt benefit corporations – the text of our legislation can be found here. As with all benefit corporation legislation, the thrust of West Virginia’s statute is to provide a different standard of conduct for the directors of an otherwise for-profit corporation that holds itself out as being formed, at least in part, for a public benefit. (Current and pending state legislation for benefit corporations can be found here.)
As WVU Law has two members of the ProfBlog family in its ranks (Prof. Josh Fershee (on the Business Law Prof Blog) and Prof. Elaine Waterhouse Wilson (on the Nonprofit Law Prof Blog)), we combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. For those of you on the Business Prof blog, some of the information to come on the Business Judgment Rule may be old hat; similarly, the tax discussion for those on the Nonprofit Blog will probably not be earth-shaking. Hopefully, this series will address something you didn’t know from the other side of the discussion!
Part I: The Benefit Corporation: What It’s Not: Before going into the details of West Virginia’s legislation (which is similar to statutes in other jurisdictions), however, a little background and clarification is in order for those new to the social enterprise world. A benefit corporation is different than a B Corporation (or B Corp). B Lab, which states that it is a “501(c)(3) nonprofit” on its website, essentially evaluates business entities in order to brand them as “Certified B Corps.”
It wants to be the Good Housekeeping seal of approval for social enterprise organizations. In order to be a Certified B Corp, organizations must pass performance and legal requirements that demonstrate that it meets certain standards regarding “social and environmental performance, accountability, and transparency.” Thus, a business organized as a benefit corporation could seek certification by B Lab as a B Corp, but a business is not automatically a B Corp because it’s a state-sanctioned benefit corporation – nor is it necessary to be a benefit corporation to be certified by B Labs.
In fact, it’s not even necessary to be a corporation to be one of the 1000+ Certified B Corps by B Lab. As Haskell Murray has explained,
I have told a number of folks at B Lab that "certified B corporation" is an inappropriate name, given that they certify limited liability companies, among other entity types, but they do not seem bothered by that technicality. I am guessing my fellow blogger Professor Josh Fershee would share my concern. [He was right.]
A benefit corporation is similar to, although different from, the low-profit limited liability company (or L3C), which West Virginia has not yet adopted. (An interesting side note: North Carolina abolished its 2010 L3C law as of January 1, 2014.) The primary difference, of course, is that a benefit corporation is a corporation and an L3C is a limited liability company. As both the benefit corporation and the L3C are generally not going to be tax-exempt for federal income tax purposes, the state law distinction makes a pretty big difference to the IRS. The benefit corporation is presumably going to be taxed as a C Corporation, unless it qualifies and makes the election to be an S Corp (and there’s nothing in the legislation that leads us to believe that it couldn’t qualify as an S Corp as a matter of law). By contrast, the L3C, by default will be taxed as a partnership, although again we see nothing that would prevent it from checking the box to be treated as a C Corp (and even then making an S election). The choice of entity determination presumably would be made, in part, based upon the planning needs of the individual equity holders and the potential for venture capital or an IPO in the future (both very for-profit type considerations, by the way). The benefit corporation and the L3C also approach the issue of social enterprise in a very different way, which raises serious operational issues – but more on that later.
Finally, let’s be clear – a benefit corporation is not a nonprofit corporation. A benefit corporation is organized at least, in some part, to profit to its owners. The “nondistribution constraint” famously identified by Prof. Henry Hansmann (The Role of Nonprofit Enterprise, 89 Yale Law Journal 5 (1980), p. 835, 838 – JSTOR link here) as the hallmark of a nonprofit entity does not apply to the benefit corporation. Rather, the shareholders of a benefit corporation intend to get something out of the entity other than warm and fuzzy do-gooder feelings – and that something usually involves cash.
In the next installments:
Part II – The Benefit Corporation: What It Is.
Part III – So Why Bother? Isn’t the Business Judgment Rule Alive and Well?
Part IV – So Why Bother, Redux? Maybe It’s a Tax Thing?
Part V - Random Thoughts and Conclusions
EWW and JPF
The Oregonian reports that lawyers have filed a class-action lawsuit in state court against Regence BlueCross BlueShield, claiming that the (taxable) nonprofit is acting like a for-profit company. More specifically, the lawsuit asserts that Regence is accumulating excess funds to support large, executive salaries instead of using those funds to benefit its members. The lawsuit points specifically to a public-purpose clause in Regence's bylaws that it claims is violated by these practices. The article further reports that Regence has responded by stating that the claim is without merit and that it intends to aggressively defend itself against the allegations.
Maryland Environmental Trust (MET), one of the oldest and largest land trusts in the country, with the assistance of the Maryland Attorney General’s Office, recently settled a suit enforcing a conservation easement that protects a 31-acre parcel near the Chesapeake Bay. Created by statute in 1967, MET is affiliated with the Maryland Department of Natural Resources and is represented by the Maryland AG’s Office. The easement, among other things, prohibits timbering of the forestland on 13 of the 31 acres to protect the habitat of forest interior dwelling bird species, such as the scarlet tanager (pictured above). These birds, the populations of which are declining in Maryland, live in tall mature trees and need a closed forest canopy.
Mr. and Mrs. Hooper granted the conservation easement to MET in 1999. Five years later they sold the property to a new owner but moved only a short distance away. In early 2012, the Hoopers became aware that the new owner was timbering within the 13-acre restricted area. Deeply concerned, the Hoopers contacted MET and MET confirmed that over 200 mature large girth hardwood trees had been removed from the restricted area. The removal of large portions of the forest canopy had destroyed the bird habitat and permitted invasive Japanese stiltgrass to flourish on the property.
Representatives from MET and Maryland AG’s Office met with the new owner to attempt to resolve the issues, but MET eventually had to file suit against the new owner for both the timber violation and a dumping violation (the new owner had also buried debris from a demolished garage on the property in violation of the easement). MET asked the trial court to require a remediation plan developed by the Maryland Department of Natural Resources that would eradicate the invasive stiltgrass and, over time, reestablish the hardwood trees. The plan indicated that it would take at least 50 years to reestablish the tree canopy needed by the forest interior dwelling bird species. MET also sought the $24,000 the new owner had earned from the sale of the timber on the ground of unjust enrichment.
MET, the Maryland AG’s Office, and the new owner discussed a possible settlement until the eve of trial but were unable to come to agreement. The one-day trial took place in July 2014. MET entered numerous exhibits, including its investigation report; photos of the destruction in the timbered area; photos of the site of the dumping and burial of the garage debris; and resumes of expert witnesses from the Maryland Department of Natural Resources who were prepared to testify, including a forestry expert, an invasive plant ecologist, and the state zoologist. MET’s stewardship manager was also in the courtroom and prepared to testify about the damage to the property.
After MET entered its exhibits, the new owner, who had no expert witnesses, offered to sign MET’s settlement agreement. MET’s Director accepted the offer and the trial court judge’s order approving the settlement requires, at the new owner’s expense and within specified time periods: (i) implementation of the Maryland Department of Natural Resources’ recommended reforestation and stiltgrass eradication plans (at an estimated cost of close to $30,000) and (ii) removal of the buried debris. The new owner is also required to pay MET $7,500 for the unjust enrichment claim and a $1,000 penalty for any payment or deadline with which he fails to comply.
After settling with MET, the new owner, a former attorney, proceeded with his third party claim against the lumber company that had timbered the property. He claimed that it was the lumber company’s responsibility to determine which trees could be cut on the property. He also testified that, before purchasing the property he had spoken with Mr. Hooper about some of the easement restrictions and obtained title insurance, but he had not read the conservation easement in full. In fact, he testified that the first time he read the conservation easement was after MET contacted him about the timber violation. The trial court judge was unsympathetic, stating that the conservation easement, which had been properly recorded in the land records, "stood squarely in the way” of the new owner’s plans to timber the property and the new owner, not the lumber company, was responsible for determining whether the conservation easement prohibited timbering in the restricted area.
MET attributes its success in this case to a collaborative effort. Its stewardship staff carefully documented the conservation easement violations and assisted the Maryland AG’s Office in preparing and presenting the case. The Maryland AG’s Office brought the suit, developed trial strategy, and prepared for and presented at trial. Scientists from the Maryland Department of Natural Resources served as key expert witnesses and prepared the reforestation and stiltgrass eradication plans. Finally, the Hoopers—the donors of the easement—were observant neighbors and alerted MET to the timbering violation and other neighbors were prepared to testify as to the dumping violation.
The result in this case is consistent with the approach of § 8.5 of Restatement (Third) of Property: Servitudes, which provides that a “conservation servitude held by a governmental body or a conservation organization is enforceable by coercive remedies and other relief designed to give full effect to the purpose of the servitude.” The drafters of the Restatement explain:
There is a strong public interest in conservation servitudes. Statutes have been enacted to eliminate questions about their enforceability…; they are often purchased with public funds or money raised from the public; they are often subsidized with tax benefits and other governmental benefits. The resources protected by conservation servitudes provide important public benefits, but are often fragile and vulnerable to degradation or loss by actions of the holder of the servient estate....
To give full effect to the purposes of the servitude, it may be necessary to order maintenance and restoration of the protected property to the condition contemplated by the servitude. In appropriate cases, additional remedies may be needed to compensate the public for irreplaceable losses in the value of the property protected by the servitude and other damages flowing from violation of the servitude. Remedies should also be designed to deter servient owners from conduct that threatens the interests protected by the servitude. In addition to punitive damages, which may be awarded in appropriate cases, remedies may also include restitution and disgorgement.
Connecticut has a particularly progressive statute addressing damages for "encroachment" on open space land and land encumbered by a conservation easement. The statute authorizes a court to award, among other things, "damages of up to five times the cost of restoration."
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law (thanks to Kristen Maneval, Assistant Attorney General in the Maryland AG’s Office and Counsel to Maryland Environmental Trust, for her help with this description).
Monday, August 25, 2014
Ronald Chester (New England) has posted The Life and Death of the Ipswich Grammar School: Is Enduring Dead Hand Control Possible?, ACTEC Journal (forthcoming). Here is the abstract:
This article examines the reasons for the 360-year longevity of the Ipswich (Mass.) Grammar School trust, which was in force from 1652 to 2012, the longest-running charitable trust in American history. It concludes that the cornerstone of the trust’s longevity was the emphasis of its major donor, the Puritan William Paine, on open-handed contribution to the community, rather than dead hand control. A wealthy merchant and landowner and friend of Massachusetts Bay Colony Governor John Winthrop and his son, Paine imbued his commercial activities with a profound civic-mindedness.
A 1647 law required the establishment of a grammar school by any town within the Colony that had 100 families or more. The town of Ipswich, where Paine then resided, established a formal trust in 1652 to fund the school. Upon his death in 1660, Paine devised a unique parcel of land called Little Neck to the trust, whose trustees (“feoffees”) were the elders of Ipswich. The only restriction on Paine's gift of the land “forever” was that the property not be “sold or wasted.”
Although the trust was terminated by agreement of the feoffees and their tenants, and approved by the Massachusetts Attorney General and Courts, the author contends that it could easily have survived with Paine’s vision intact had the feoffees, many of whom were conflicted and inexperienced, been replaced by more professional trustees. The article compares and contrasts the Ipswich trust to the less successful 17th century Hopkins trust and to the modern Barnes Foundation trust in Pennsylvania. The Hopkins trust, which created the Cambridge (Mass.) Grammar School among other entities, spawned litigation lasting 135 years. The Barnes trust, founded in the early- and mid- 20th century and containing some of the most important art works in the world, likewise triggered much litigation, which may not be over, even today. The article concludes that “the longevity a donor’s charity achieves depends on the donor’s swallowing his or her ego and leaving the charitable vehicle open to change by the living.”
Erik Jensen (Case Western Reserve) has posted Taking the Student Out of Student Athlete: College Sports and the Unrelated Business Income Tax, Journal of Taxation of Investments (forthcoming). Here is the abstract:
A recent decision by a National Labor Relations Board regional director, concluding that football players at Northwestern University are employees for purposes of the National Labor Relations Act, could have spillover effects in tax law. This article considers whether severing the connection between participation in athletics and the educational function of a university — i.e., ending the pretense that athletes are student athletes — could lead to imposition of the unrelated business income tax (UBIT) on the net revenue of some intercollegiate teams at big-time athletic colleges.
On Friday the Wall Street Journal published online an article titled Tax-Smart Philanthropy Made Easy: Many Donors Should Consider a "Charitable Gift Trust" or "Donor Advised Fund". The article documents the continued growth of donor advised funds, with total assets reaching $26 billion as of June 30, 2014, with new contributions and grants for the 12 months before that date reaching $7.4 billion and $4.1 billion, respectively. The article also provides an interesting glimpse into the giving priorities of DAF donors, as the largest holder of DAFs - Fidelity Charitable - provided a breakdown by program area of where the $2.1 billion in grants it made in 2013 went. Over a third went to education, with the next biggest areas being religion (16%), "society benefit" (14%), and human services (10%). The article attributes the continued and indeed growing popularity of this vehicle to a bull market, increasing mergers and acquisitions, and the risk of future changes in the tax laws that make it particularly attractive to lock in a charitable contribution now while still being able to put off final decisions regarding where to give.
Over the summer the Freedom from Religion Foundation announced that it had agreed to the dismissal (without prejudice) of its lawsuit against the IRS alleging that the IRS had filaed to enforce against churches the prohibition on political campaign intervention. See previous post regarding the 2013 rejection of the IRS' motion to dismiss this case for more details. What is most dramatic about this development is the letter from the IRS to the DOJ attached to the Foundation's Memorandum in Support of Motion to Dismiss detailing the current audit activity relating to churches. Here is the substance of that letter:
1. Subsequent to the publication of proposed regulations on section 7611 of the Internal Revenue Code on August 5, 2009, the IRS has processed several cases involving churches using procedures designed to ensure that the protections afforded to churches by the Church Audit Procedures Act are adhered to in all enforcement interaction between the IRS and churches. The procedures require the reasonable belief determination under section 7611(a) to be made by the Commissioner, TEGE, either directly or as concurrence to the determination made by the Director, Exempt Organizations.
2. Our written procedures for our Dual Track process for information items (a.k.a. referrals) alleging violation of the political intervention prohibition of section 501(c)(3) require evaluation of the information item by our Review of Operations (“ROD”) unit and then the Political Activities Referral Committee (“PARC”). With regard to these referrals that concern violations by churches, the PARC has determined that as of June 23, 2014, 99 churches merit a high priority examination. Of these 99 churches, the number of churches alleged to have violated the prohibition during 2010 is 15, during 2011 is 18, during 2012 is 65, and during 2013 is one.
This comes after an apparent hiaitus in such activity, as detailed in a previous post. What is perhaps most surprising is that it has come without the finalization of the proposed regulations referenced in the above letter regarding exactly who, within the IRS, has sufficient authority to sign off on church tax inquiries and, if justified, church examinations.
Sunday, August 24, 2014
As reported in the Whidbey News-Times, one of two applicants for a recreational marijuana-based businesses on Whidbey Island, Washington, recently withdrew its application. The applicant, Salish Sea Industries (SSI), had proposed to build a 3,833-square-foot barn for the production and processing of marijuana but withdrew its land use permit because of conflicts with federal law.
A portion of the property at issue is encumbered by a conservation easement that was funded in part by the federal government. The executive director of the Whidbey Camano Land Trust, which holds the easement, notified SSI that the terms of the easement would not allow them to do something that is in violation of federal law. A spokesman for SSI explained that the entity withdrew its application because it did not wish to enter into a protracted legal battle with the federal government. While not all of SSI's property is encumbered by the easement, the marijuana production cannot take place on the unencumbered portion because the adjacent property is zoned rural residential and, per the Island County Code, marijuana-based businesses cannot operate in rural-residential areas.
Washington voters approved Initiative 502 in November 2012, legalizing recreational marijuana consumption and possession of up to one ounce. Under federal law, however, marijuana is still treated like every other controlled substance, such as cocaine and heroin.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Maine Supreme Judicial Court Holds that Conservation Lands Open to the Public are Exempt from Property Tax
In Francis Small Heritage Trust, Inc. v. Town of Limington, 2014 Me. 102 (Aug. 7, 2014), the Maine Supreme Judicial Court held that conservation lands owned in fee by a charitable conservation organization and open to public are eligible for a property tax exemption. The decision relies in part upon the recent similar holding of the Massachusetts Supreme Judicial Court in New England Forestry Foundation v. Board of Assessors of Town of Hawley, SJC-11432 (May 15, 2014). Both cases are examples of attempts by cash-strapped towns to limit the scope of the property tax exemption granted to charities.
Francis Small Heritage Trust (FSHT) is a charitable conservation organization, the mission of which is “to conserve natural resources and to provide free public access to those natural resources.” FSHT owns eleven contiguous parcels on and near Sawyer Mountain in the Town of Limington, Maine. Many of the parcels are protected by third-party, “forever-wild” conservation easements and a few are further protected by Department of Inland Fisheries and Wildlife easements.
FSHT’s properties are “used and operated as conserved wildlife habitat” and are open to the public 365 days a year. Local schools use the properties for field trips and environmental education, and the properties are open for hunting, fishing, hiking, cross-country skiing, and snowmobiling. FSHT has also engaged in other activities, such as sponsoring a Limington Boy Scout Troop, participating in a project with Maine Medical Center to research the risk of exposure to Lyme-disease-transmitting deer ticks, and conducting a workshop on invasive plants.
FSHT petitioned the Town of Limington for a charitable exemption from property taxes with respect to its properties. The Town denied the petition and FSHT appealed to the State Board of Property Tax Review. The Board sided with the Town, concluding that FSHT was not entitled to an exemption because “its activities are not restricted solely to benevolent and charitable purposes.” Among other things, the Board noted that FSHT’s Articles of Incorporation permitted the organization to engage in commercial activities such as farming and logging. FSHT appealed, and the trial court vacated the Board’s decision, finding that FSHT was entitled to the charitable exemption. The Town then appealed the trial court’s ruling.
The Two-Pronged Test
In holding that FSHT qualified for the charitable exemption with regard to its properties, the Maine Supreme Judicial Court explained that qualification for the exemption requires satisfaction of a two-pronged test under 36 M.R.S. § 652(1)(A), (C)(1):
- the organization claiming the exemption must be “organized and conducted exclusively for benevolent and charitable purposes,” and
- the property must be “owned and occupied or used solely for [the organization’s] own purposes.”
The Town did not argue that FSHT failed to satisfy the second prong of test. Accordingly, the court addressed only the first prong.
Organized and Conducted Exclusively for Charitable Purposes
The Legal Backdrop
In assessing whether FSHT is “organized and conducted exclusively for benevolent and charitable purposes” the Maine Supreme Judicial Court first discussed the “legal backdrop.”
Definition of "Charitable"
The court explained that an activity or purpose is “charitable” if it is
for the benefit of an indefinite number of persons, either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering, or constraint, by assisting them to establish themselves in life, or by erecting or maintaining public buildings or works or otherwise lessening the burdens of government.
This is the same definition of charitable quoted by the Massachusetts Supreme Judicial Court in NEFF v. Hawley.
The Quid Pro Quo Factor
The court explained that part of the rationale for granting an exemption to charitable institutions is that:
[a]ny institution which by its charitable activities relieves the government of part of [its] burden is conferring a pecuniary benefit upon the body politic, and in receiving exemption from taxation it is merely being given a “quid pro quo” for its services in providing something which otherwise the government would have to provide.
The court noted that providing opportunities for even “casual and limited group recreational and relaxation activities” can constitute a quid pro quo because it “provid[es] something that government would otherwise provide, through the government system of parks, public lands, and recreational facilities.”
The court acknowledged that it had not previously addressed whether land conservation constitutes a charitable purpose within the meaning of the tax-exemption statute. The court had, however, previously considered whether a wildlife refuge qualifies for exemption. In Holbrook Island Sanctuary v. Inhabitants of the Town of Brooksville, 161 Me. 476 (1965), a charitable organization sought an exemption for property that it operated as a wildlife sanctuary and to which the public was granted only very limited access. Only persons and organizations engaged in nature study were permitted in the sanctuary and they had to be accompanied by the sanctuary’s full-time warden. In addition, the sanctuary blocked off existing access roads on the property with the intention of permitting the roads to become overgrown and return to their natural state. The court concluded that the wildlife sanctuary was not “charitable,” because it was “nothing in substance more than a game preserve,” the purpose of which was “plainly to benefit wild animals”; it provided “no benefit to the community or to the public”; and it was contrary to public policy favoring state-regulated game management areas.
In FSHT v. Limington, amici urged the court to overrule or limit Holbrook, citing the following scholarly criticism of the decision:
[Holbrook ‘s] holding, that a benefit to wild animals did not equate to a benefit to the community and was therefore not charitable, might be assessed differently by a court with a modern awareness of the public benefits of ecosystem preservation.
The court chose to distinguish rather than overrule Holbrook. It explained that Holbrook was based on the absence of any benefit to the public from a game preserve operated in a manner that (i) heavily restricted public access and (ii) was contrary to public policy, and that neither rationale applied to FSHT’s properties. FSHT’s properties are freely open to the public 365 days a year and their operation is consistent with public policy as expressed by the Maine legislature in numerous statutes.
Other Appellate Court Decisions
The court explained that numerous appellate courts from other jurisdictions have held that “land conservation is a charitable purpose, at least when coupled with public access, or where conservation of the land otherwise confers a public benefit.” The court quoted NEFF v. Hawley, in which the Massachusetts Supreme Judicial Court of held that a nonprofit land conservation organization’s purposes were charitable because
the environmental benefits of holding land in its natural state ‘inure[d] to an indefinite number of people,’ and because the organization ‘lessen[ed] the burdens of government’ by ‘assist[ing] the State in achieving its conservation policy goals.’
The court also explained that the Maine legislature has “enunciated a strong public policy in favor of the protection and conservation of the natural resources and scenic beauty of Maine” and “recognized the important role played by conservation organizations in achieving these goals.”
Having discussed the legal backdrop, the court next considered whether FSHT is organized and conducted exclusively for charitable purposes. The court explained that FSHT’s purpose is to conserve natural resources for the benefit of the public; FSHT opens its properties to the public year-round, free of charge; and FSHT permits school field trips, hunting, fishing, hiking, cross-country skiing, and snowmobiling. The court agreed with the trial court that FSHT “essentially operates its properties in the manner of a state park.” In doing so, said the court, FSHT “assists the state in achieving its conservation goals…and “provid[es] something that government would otherwise provide, through the government system of parks, public lands, and recreational facilities” (i.e., FSHT lessens the burdens of the government). Accordingly, the court held that, under the circumstances of the case, FSHT was organized and conducted exclusively for charitable purposes within the meaning of Maine’s tax-exemption statute.
The court dismissed the Board’s argument that FSHT was not entitled to the charitable exemption because a special statute relating to the taxation of open space land “preempted” the charitable exemption with regard to such land. The court explained, citing in part to NEFF v. Hawley, that the open space taxation statute and the charitable exemption statute “are distinct in their scope and purpose,” and nothing in the language or legislative history of the open space taxation statute indicated in intent to preempt or otherwise displace the charitable exemption, the origins of which can be traced back to the 1800s.
The court also dismissed the Board’s argument that tax-exemption should be denied because FSHT’s Articles of Incorporation permitted it to engage in logging, farming, and other “compatible commercial activities” (i.e., that it was not organized or conducted "exclusively" for charitable purposes). The court first noted that the Articles of Incorporation provide that one of FST's purposes is to “protect” appropriate uses such as logging, farming and other compatible commercial activities (i.e., the Articles do not directly authorize or require such activities). There also was no evidence that FSHT had engaged in any purely commercial activities on the properties. Rather, the court found that FSHT’s plan to harvest trees as part of a sustainable forestry education program, with any revenue therefrom to be used by FSHT in accordance with its purposes, was consistent with the organization’s charitable purposes. The court also noted that, even if the Articles of Incorporation permitted FSHT to engage in nonexempt uses, “incidental, nonexempt use of property will not render the property ineligible for exemption.”
Compare In re Grandfather Mountain Stewardship Foundation, 2014 WL 4071200 (Ct. Appeals N.C. 2014), in which the Court of Appeals of North Carolina denied property tax exemptions to a charitable foundation with regard to three properties because the properties were not “wholly and exclusively used” for nonprofit educational or scientific purposes. Although The Nature Conservancy holds a conservation easement on the propertes and the foundation uses the properties for educational and scientific activities, the court found that the foundation also operates the properties to some extent as a for-profit tourist attraction, charging market-rate admission fees and generating more than $1 million annually from retail sales of items such as hiking equipment, souvenirs, and snacks.
In sum, in Maine, a nonprofit conservation organization’s lands that are used for conservation purposes and open to the public are eligible for a property tax exemption, even if the lands are or could be used for incidental nonexempt purposes. If the organization denies public access to its conservation lands, however, it would have to make the case that “conservation of the land otherwise confers a public benefit.” While the Maine Supreme Judicial Court did not indicate how that might be done, in NEFF v. Hawley the Massachusetts Supreme Judicial Court explained that the organization would have to present “compelling facts” demonstrating that exclusion of the public is necessary to enable the organization to achieve a public benefit through other activities carried out on the land. The court further explained that such “other activities” may often be time-limited—e.g., exclusion of the public may be necessary only during a timber harvest for safety reasons, or only during the nesting period of a vulnerable species to ensure the species is not disturbed.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Friday, August 22, 2014
Study Finds Increase in Charitable Donations by Puerto Rican Taxpayers after Charitable Contribution Deduction Limitations Were Removed
As reported by the Philanthropy News Digest, a recent analysis discloses that charitable gifts reported by taxpayers in Puerto Rico increased by about $5 million in the year following a change in the law that expanded the deductibility of charitable contributions. The change in giving patterns varied among income groups (predictably in part, but perhaps surprisingly in some respects). A summary follows:
The report … analyzed tax data from the Puerto Rico Treasury Department for 2011 — the first year that individual taxpayers in Puerto Rico were allowed to deduct 100 percent of their donations to nonprofits, up to a maximum of 50 percent of their adjusted gross income — and found that the number of people who claimed a charitable deduction jumped from 27,644 in 2010 to 47,004, or 4.6 percent of all tax filers, in 2011. Previously, Puerto Rican taxpayers were only allowed to claim a deduction of 33 percent on their charitable donations, or 100 percent of their donations in excess of 3 percent of their adjusted gross income.
The report also found that while the number of taxpayers claiming a charitable deduction increased across all income groups, the average amount claimed fell some 39 percent, with the total increasing 7 percent and 27 percent among individuals with an adjusted gross income of between $25,000 and $50,000 and more than $150,000, respectively, and falling among those with an adjusted gross income of between $100,000 and $150,000 (-8 percent), $75,000 and $100,000 (-2 percent), $50,000 and $75,000 (-1 percent), and less than $25,000 (-9 percent).
A copy of the full report is available here.
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.