Monday, March 16, 2015
Tax Analysts reports (subscription required) that the IRS has deciding to stop automatically providing the media with copies of favorable determination letters issued in response to applications for recognition of exemption because of the changes in the structure and geographic location of the IRS Exempt Organizations Division and related IRS Office of Chief Counsel functions. Practitioners quoted in the article expressed disappointment with this decision. While the media and other members of the public can still request such letters by submitting Form 4506-A for each organization for which the letter is sought, practitioners noted the burden doing so imposes and the usually lengthy delay in the IRS response to such requests.
Additional coverage: Forbes (contributor opinion).
UPDATE: To clarify, the letters were previously provided by the IRS National Office and so were limited to the relatively few letters issued by that office, as opposed to the Cincinnati office that issues the vast majority of determination letters. That said, the National Office tended to handle the most difficult - and interesting - cases. According to later comments from the IRS, the change is apparently driven by the fact that the National Office will no longer be issuing determination letters.
The issuance of a new, streamlined Form 1023-EZ has caused a major shift in the exemption application world of the IRS. The IRS reported last week that it has received 20,103 such forms, or approximately half of all applications for recognition of exemption under Internal Revenue Code section 501(c)(3) since the IRS introduced the Form 1023-EZ. The IRS also reported that using streamlined procedures based on the Form 1023-EZ - that is, resolving open issues by asking applicants to attest to certain facts as opposed to requesting documents or narrative statements - it has reduced the backlog of all applications that had been pending for more than 270 days by 91 percent (from 54,564 in April 2014 to 4,791 in September 2014). The GAO previously also reported that the IRS closed 117,000 cases in fiscal year 2014, more than double the closure rate for the previous fiscal year. Not everyone is happy with the new form - see previous posts reporting concerns expressed by the National Association of State Charity Officials and the National Taxpayer Advocate, plus having a shortened form was not part of the recommendations promulgated by the IRS Advisory Committee on Tax Exempt and Government Entities when it looked at the application process.
UPDATE: New memo dated March 12, 2015 regarding the streamlined application process that replaces the previously linked to February 27, 2015 memo.
Last week the IRS issued Revenue Procedure 2015-21, which provides "guidance regarding correction and disclosure procedures for hospital organizations to follow so that certain failures to meet the requirements of § 501(r) of the Internal Revenue Code will be excused for purposes of § 501(r)(1) and 501(r)(2)(B)." Failures that are not willful or egregious may generally be resolved without financial penalty if they are both (1) corrected in a timely fashion, including restoring affecting individuals to the position they would have been in absent the failure and ensuring appropriate safeguards to prevent future failures, and (2) disclosed on the next Form 990 filed by the organization. If the IRS has contacted the hospital organization concerning an examination, the organization must have already corrected or be in the process of correcting the failure and must have disclosed the failure on its annual information return for the year in which the failure was discovered (if the due date, including extensions, for that return has passed).
The IRS has issued both final regulations and Revenue Procedure 2015-17 providing the final procedures for issuing determination letters and rulings relating to exemption under Internal Revenue Code section 501(c)(29). Paragraph 29 is the latest addition to section 501(c); it provides a federal income tax exemption for qualified nonprofit health insurance issuers (QNHIIs), also known as CO-OP health insurance insurers, that under the Affordable Care Act receive a loan or grant under the federal Consumer Operated and Oriented Plan Program. The CO-OP Program is designed to foster the creation of these new nonprofits to offer competitive health plans. These health care co-ops have had mixed success, as NPR reported earlier this year that the second largest one in the country recently collapsed.
Additional coverage: Squire Patton Boggs Alert.
Friday, March 13, 2015
Balsam Mountain v. Commissioner—Conservation Easement Authorizing Limited Swaps Not Deductible Under § 170(h)
In Balsam Mountain v. Commissioner, T.C. Memo. 2015-43, that Tax Court held that a conservation easement that authorized the parties, for a period of up to 5 years, to remove up to 5% of the land from the easement in exchange for protecting a similar amount of contiguous land was not eligible for a deduction under IRC § 170(h). Citing to the 4th Circuit’s recent decision in Belk v. Commissioner, 774 F.3d 221 (4th Cir. 2014), the Tax Court explained that the easement did not qualify as a “restriction (granted in perpetuity) on the real property” as required by 170(h)(2)(C).
In 2003, Balsam Mountain Investments, LLC (BMI), granted a conservation easement on 22-acres in North Carolina to the North American Land Trust (NALT). BMI reserved the right in the easement to, for five years following the donation, make alterations to the boundaries of the area protected by the easement, subject to the following conditions:
- the total amount of land protected by the easement could not be reduced,
- land added to the easement had to be contiguous to the originally protected land,
- land added to the easement had to, in NALT’s reasonable judgment, make an equal or greater contribution to the easement’s conservation purpose,
- the “location and reconfiguration of a boundary” could not, in NALT’s judgment, result in any material adverse effect on the easement’s conservation purposes, and
- no more than 5% of the originally protected land could be removed from the easement as a result of such alterations.
In Belk, the 4th Circuit affirmed the Tax Court’s holding that a conservation easement was not “a restriction (granted in perpetuity) on the use which may be made of the real property” as required by § 170(h)(2)(C) because the easement permitted the grantor and grantee to swap land in and out of the easement, subject to the approval of the grantee and certain other conditions. The 4th Circuit explained that, to be eligible for a deduction, an easement must protect, in perpetuity, a “defined and static” (or in the Tax Court’s words, “identifiable, specific”) parcel of real property. Based on Belk, the Tax Court held that the Balsam easement, which authorized the grantor to change the property subject to the easement, was not a “a restriction (granted in perpetuity) on the use which may be made of the real property” and, thus, was not eligible for a deduction.
BMI argued that Belk was distinguishable because the Belk easement allowed for the substitution of all of the land originally protected by the easement, while the Balsam easement allowed for the substitution of only 5% of the originally protected land. The Tax Court was not persuaded. While the court agreed that the Belk and Balsam easements were different, it said “the difference does not matter.” For five years following the donation, BMI, with the approval of NALT, could change the boundaries of the area protected by the easement. Accordingly, the easement was not an interest in an identifiable, specific piece of real property and, thus, was not deductible. Finding no genuine dispute as to any material fact, the court granted the IRS’s motion for summary judgment on the issue.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Thursday, March 12, 2015
The Chronicle of Philanthropy is reporting that ten individuals using technology to improve the world will be honored tonight at the Dewey Winburne Community Service Awards at the South by Southwest (SXSW) Interactive Conference. The awards honor the late Dewey Wineburne, a co-founder of SXSW Interactive, who had deep interests in education and technology.
According to the Chronicle:
This year’s honorees, selected by a panel of previous winners who live in Austin, represent five countries and a range of interests, including literacy, economic opportunity, and journalism. Each will receive $1,000 for the charity of their choice.
Among the honorees are:
- Rebecca McDonald of Australia who, after seeing footage of the 2010 earthquake in Haiti, quit her job in Australia and moved with her husband to the Caribbean country where she founded Library for All, an online digital library accessible using tablets distributed to schools across Haiti. Books are carefully selected to be culturally relevant and language-appropriate, with most written in French or Creole. The organization pays local publishers for texts and asks larger companies, which do not usually sell books to Haiti, to donate books.
- Jukay Hsu, a native of Queens, New York, who founded Coalition for Queens, a nonprofit designed, according to Mr. Hsu, to foster "a more inclusive tech ecosystem" and "pioneer a pathway from poverty to the middle class." The organization's keystone program, Access Code, trains people — many of them immigrants — to create mobile applications and prepare for entry-level developer jobs. So far, the average income of participants going into the program has been $26,000, while their average income after completion is $73,000.
- Libby Powell, of London, England, who has used her training as a journalist to found Radar, a communications-rights organization that trains citizen reporters and promotes the stories they tell through social media and other ways online. Based in the United Kingdom, the staff offers editorial guidance to local correspondents who report from the field. The group has generated coverage about elections and Ebola in Sierra Leone and slavery in India and is working on new projects that give voice to people living with dementia and those who are homeless. Created with money raised through the crowdfunding site Indiegogo, Radar works to raise awareness among the public, policy makers, and service providers about issues affecting marginalized groups. The organization has helped place articles in The Guardian and the BBC.
- Tembinkosi Qondela, of Cape Town, South Africa, who founded Whizz ICT Centre, an organization that seeks to facilitate the use of information communication technology (ICT) tools for development efforts of the community in Khayelitsha, one of the largest and poorest areas of Cape Town, South Africa. Mr. Qondela observed that marginalization of poor people in the use of ICT and the lack of access to information perpetuates the inequalities and poverty that face most young South Africans. Whizz ICT runs a center which gives young people access to computer training, other ICT related services and training in a range of income generating skills. To date Whizz ICT has provided training to over 1000 youth.
The names and brief profiles of the other six honorees are available on SXSW's website. We congratulate them all.
Wednesday, March 11, 2015
Study Finds Combination of Employment and Income Policies, New Tax Credit, Could Cut NYC Poverty Rate
I just came across this 116-page report commissioned by the Federation of Protestant Welfare Agencies, Catholic Charities of the Archdiocese of New York, and the UJA-Federation of New York titled How Much Could Policy Changes Reduce Poverty in New York City? The report was actually prepared by the Urban Institute. According to the report, a combination of employment and income policies, in-kind benefits, and a new tax credit could significantly reduce the poverty rate in New York City, where 20 percent of all residents currently live in poverty.
Giving a summary of the report, the Philanthropy News Digest states that
the report . . . analyzed the potential impact of a transitional jobs program, increased earnings supplements, a $15/hour minimum wage, increased Supplemental Nutritional Assistance Program benefits, more housing vouchers, guaranteed childcare subsidies, and a tax credit for non-working seniors and people with disabilities. Among the individual policy options, the study found the jobs program likely to be most effective (assuming that 50 percent of the unemployed living under the poverty line participate), reducing the poverty rate from 21.4 percent to an estimated 15.9 percent, followed by the tax credit for seniors and people with disabilities, a $15/hour minimum wage, and increased SNAP benefits.
The combined effect of multiple policy options, however, would be far greater, the report argues. Based on an analysis of three scenarios, the study found that even the least extensive combination — increased SNAP benefits, Earned Income Tax Credit, and childcare benefits; the tax credit for non-working seniors and people with disabilities; and 25 percent participation in the transitional jobs program at $9/hour but no change in the minimum wage or housing subsidies — would nearly halve the city's poverty rate to 12.1 percent. In the scenario with the most extensive combination of policy options, including 50 percent participation in the jobs program at a minimum wage of $15/hour, Paycheck Plus earning supplements, and housing vouchers for half the people on the waiting list, the poverty rate would fall by more than two-thirds, to 6.7 percent.
The study also found that the most effective individual policies, the jobs program and the tax credit, were the most expensive, and that total costs for the combination of policy options was estimated to range from $6.5 billion to $9.1 billion. While the costs are substantial, the report concludes, the analysis shows "that a package of policies can greatly reduce the number of people living in poverty," with potential long-term effects "that differ from those in the short run, especially if less near-term poverty helps more of today’s children avoid poverty in adulthood."
Monday, March 9, 2015
I have always found it troubling when people donate to charity but the donees receive a very small share of the donation. And yesterday's Orange County Register published a story about such a practice, a story that made me see, well, not orange, but red. According to the Register, in 2013, the for profit firms that raise money for charities collected $361.3 million from well-meaning Californians and pocketed $161.2 million, or 45.4 percent, of the take, this according to the latest figures from the Office of the Attorney General. Incidentally, those figures were better than those for 2012, when the for-profit firms pocketed 63 percent of the money raised in nonprofits' names.
California Attorney General Kamala Harris has bemoaned "the alarming extent to which charitable donations are often diverted to for-profit companies." However, Assemblywoman Jaqui Irwin, D-Thousand Oaks, noted that at least the trend seems to be going in the right direction (i.e., from 63 percent last year to 45.4 percent this year). Meanwhile, here's an interesting statistic: "generally speaking, charities with the words 'police' or 'firefighter' in their names kept less than one-third of what was raised on their behalf, with the overwhelming majority going to the for-profit fundraiser," reports the Register.
The Register continues:
In their defense, officials said some campaigns costing millions were strategic investments that will pay off far more than they cost, in future contributions.
Others, however, are run-of-the-mill, we-need-your-money-now-please affairs, where for-profit firms kept huge chunks of what donors believed would fund good works.
Charities often argue that it’s not really money out of their pockets, since professional fundraisers take a percentage of proceeds, or a pre-determined amount if a minimum is not met, said Sandra Miniutti, vice president of Charity Navigator, a nonprofit watchdog.
“However, from a donor’s perspective, that argument does not hold, since it is actually the donor’s money that is going to a professional fundraiser as opposed to the charity they thought they were supporting,” Miniutti said by email. “In large part, it is still professional companies taking advantage of the lack of education on the giving public’s part.”
And that’s why the Attorney General’s Office started gathering these numbers to begin with.
Well, I hope the Attorney General's Office can use these numbers to do something to change this sad situation.
OK; I'll admit it: my heart is breaking as I write this blog. I was Orange before I stepped foot on the SU campus, remained Orange while I was a student there, and am still Orange. And now my Orange pride has taken a hit. All weekend long I've been hanging my head in shame as the TV stations have kept repeating the news over and over: "The NCAA suspended Syracuse University basketball coach Jim Boeheim on Friday for nine Atlantic Coast Conference games and took away scholarships after a lengthy investigation of the school's athletic programs."
I've been trying to figure out just what happened. What did Boeheim and my alma mater do? I'll let Reuters tell the story:
Syracuse discovered and self-reported 10 violations, over an eight-year period dating to 2001, that primarily involved men’s basketball but also football, the NCAA Committee on Infractions said.
Those infractions included academic misconduct, extra benefits, failure to follow the school's drug testing policy and impermissible booster activity.
"Over the course of a decade, Syracuse University did not control and monitor its athletics programs," the committee said in a statement, "and its head men's basketball coach failed to monitor his program."
Boeheim's suspension will cover the first nine ACC games of the 2015-2016 season.
The National Collegiate Athletic Association's penalties include five years' probation, financial penalties, and a reduction of three men’s basketball scholarships per year through 2018-19.
Also Syracuse will vacate all wins in which ineligible men's basketball students played in 2004-05, 2005-06, 2006-07, 2010-11 and 2011-12 and all wins in which ineligible football students played in 2004-05, 2005-06 and 2006-07.
Boeheim, a Hall of Famer who has been the Syracuse head coach since 1976, won 135 games in those five seasons and 108 of those wins will be wiped out.
Say what? One hundred and eight wins erased? Treated like losses? How is that possible? Well, I guess the games are being forfeited after they were played and won! And in addition to that, Syracuse must return to the NCAA all money it received through the former Big East Conference for its appearances in the 2011, 2012 and 2013 NCAA Men's Basketball Tournament.
I'll be honest: I find these sanctions harsh -- and not only because Syracuse is my alma mater. These sanctions are saying to me, "Let us pretend that Syracuse did not play basketball in 2011, 2012 and 2013." That doesn't make much sense.
On the other hand, I find one sentence of the report of the NCAA Committee on Infractions troubling:
- Two staff members completed course work for an academically ineligible student "when the school was under investigation for other potential violations."
I have a problem with that. That was dishonest. It was wrong.
Not surprisingly, Chancellor Kent Syverud is not amused. According to the Chancellor, "Syracuse University did not and does not agree with all the conclusions reached by the NCAA, including some of the findings and penalties included in [the] report. However, we take the report and the issues it identifies very seriously, particularly those that involve academic integrity and the overall well-being of student-athletes."
There is much talk about an appeal by Boeheim and an appeal by Syracuse. I guess this is not over. Stayed tuned for the next installment.
Philanthropy News Digest reports that L'Oreal Paris has announced a Call for Nominations for the 2015 L'Oreal Paris Women of Worth awards, an annual program designed to honor women making a "beautiful difference" in the world through voluntarism.
According to the Digest,
Since 2006, the program, in partnership with Points of Light, has recognized eighty inspiring women who have selflessly devoted themselves to causes at the local and national level and motivated others to get involved. Past honorees have been involved in a range of important causes, from advocating for victims of childhood abuse and mentoring homeless children, to helping break the cycle of poverty and empowering teens with disabilities.
As regards the current Call for Nominations, the Digest states that this year, "ten women will be awarded $10,000 each and one woman will be named the national honoree and receive an additional $25,000 to further her charitable efforts. All ten honorees will be recognized in December at a star-studded awards ceremony hosted by L'Oreal Paris in New York."
Complete program guidelines, information about previous recipients, and nomination instructions are available at the Women of Worth website.
Friday, March 6, 2015
The Internal Revenue Service has issued a newly revised Publication 557, Tax-Exempt Status for Your Organization. The beginning “What’s New” section lists the following topics: IRS issues new interim guidance for supporting organizations and grantors; New guidance provides transition relief for employee health insurance expenses; Final regulations under section 501(r) issued in December 2014; Correction and disclosure procedures under section 501(r); New Form 1023EZ; Exempt Organizations Division Limited the Types of Cases that Are Referred to Exempt Organizations (“EO”) Technical, and Provided for Administrative Review of EO Technical Determinations; and Future developments.
The Chronicle of Philanthropy reports that proposed legislation in California would impose greater disclosure requirements on charity fundraisers. Explains the article:
California law requires "commercial fundraisers" to include a disclosure in charity solicitations whenever a portion of a donor’s charitable contributions will go to a for-profit company. However, some fundraisers have skirted that requirement by establishing their operations as "fundraising counsel" instead of "commercial fundraiser."
According to the story, the bill, sponsored by California Assembly member Jacqui Irwin and supported by California Attorney General Kamala Harris, would impose the transparency requirement on “all for-profit companies involved in fundraising for charities,” and would also lengthen to 10 years the statute of limitations applicable to particular offenses relating to "the exploitation of charitable assets." The article states that a recent attorney general’s report has found that “an average of 54.6 percent of funds raised through campaigns conducted by commercial fundraisers in the state in 2013 went to the charities.”
Thursday, March 5, 2015
Readers interested in a non-inflammatory piece on the Tea Party controversy should take a look at "Citizens United Spurs Social Welfare," published in Tax Notes Today (subscription required) and authored by Jasper L. Cummings, Jr. Jack is legal counsel in the Federal Tax Group of Alston & Bird and has an impressive record of legal service, including academic service as an acting assistant professor of tax at NYU and as a visiting professor of law at my home school, the University of Houston Law Center. In the article, Jack discusses the predictable rise in the use of social welfare organizations following Citizens United, and offers a measured perspective reflecting willingness to consider the best intentions of the Internal Revenue Service in regulating section 501(c)(4) entities in the wake of Citizens United.
In the piece, Jack presents a “short summary” of his article advancing the following points:
(1) To “expect an explosion of independent expenditures on federal elections after Citizens United” was reasonable.
(2) To expect that section 501(c)(4) entities “would receive a significant amount in additional contributions for such spending” was also reasonable.
(3) The new level of funding politically oriented 501(c)(4)s “could be so different in quantity that it would explain and justify a new look at the woefully inadequate published tax guidance for those organizations, and, in the meantime, at the administration of the tax law as it existed.”
(4) “We know now that the IRS did not carry out that new look in the right way,” but because of the “politically charged” nature of the relevant issues, “it is reasonably possible that the new look itself might have been a proper response to changing circumstances, as opposed to evidence of political bias.”
Electronic cite: 2015 TNT 43-10
Wednesday, March 4, 2015
The Los Angeles Times is running a piece that calls into question the creation and use of charitable nonprofits by political leaders to raise money funding activities that accomplish the leaders’ agendas. The focus of the article is the charity established by Los Angeles Mayor Eric Garcetti, the Mayor’s Fund for Los Angeles. There is no allegation that the fund is intervening in political campaigns or otherwise unlawfully influencing the political process. The concern is that big donors to the fund can obtain influence by supporting the Mayor’s pet projects. The story explains:
The contribution is one of dozens the Mayor's Fund has received, from companies with a stake in City Hall decisions and from charitable foundations, according to records reviewed by The Times. Modeled on similar nonprofits in New York and other cities, the fund provides a financial boost for civic programs — as diverse as environmental initiatives and summer jobs for thousands of inner-city kids — that might otherwise fall victim to city belt-tightening.
But the nonprofit, which took in about $5.2 million between its formation in June and last month, can also offer a discreet destination for special-interest money that is not subject to campaign finance restrictions. City law caps contributions by individuals or businesses at $1,300 per election for mayoral candidates. By contrast, the average donation to the Mayor's Fund has been $111,000.
According to the Times piece, “Garcetti's fund has benefited from donations of as much as $1 million from prominent charities as well as manufacturing, engineering, telecommunications, software and financial firms, or foundations linked to those companies.” The Times also reports that “some donors to the fund said they had enjoyed one-on-one meetings with the mayor and dinner receptions at his official residence.” The mayor, for his part, is reported to have insisted that “he keeps his distance from the organization's operations and that donors are dealt with by the nonprofit's staff.”
The Chicago Tribune reports that the Bernie Mac Foundation (“BMF”) has adopted numerous reforms to improve its governance following an audit by the Illinois Attorney General prompted by a journalistic probe by the Tribune. The need for change is perhaps best captured by the following fact reported by the Tribune: Only $152,000 of $900,000 worth of the BMF’s expenditures from 2009 to 2013 “went to charitable programs.”
The late comedian Bernie Mac created the BMF to combat sarcoidosis, a disease that afflicted Mac. After his death, the BMF’s board at one point reportedly dwindled to three people consisting of two family members and a long-time associate of Mac. The BMF received several hundred thousand dollars of charitable contributions after Mac’s death, but problems soon surfaced. According to the story, much of the donated money “ended up going to salaries and contracts that benefited board members, and the foundation fell far short of recognized benchmarks for charitable spending.”
But all of that now appears to have changed. The BMF is reported to have increased its board membership to eight people, giving the board “a range of community leaders and professionals.” The Tribune further reports:
[T]he Bernie Mac Foundation's charitable spending is expected to increase this year.
The organization also will stop contracting with two companies controlled by Mac's longtime associate, board Treasurer Edward Williams, according to new board member Manotti L. Jenkins, who is serving as a spokesman for the group. Several experts told the Tribune that the sums paid out to one of Williams' companies seemed large for the financial consulting and investment management services it was listed as providing.
In addition, says the piece, the BMF’s bylaws now prohibit board members from receiving salaries from the charity and from voting on transactions in which they are financially interested. Other reforms include (1) formalizing the BMF’s support of its primary charitable beneficiary, the Bernie Mac Sarcoidosis Translational Advanced Research (STAR) Center, established at the University of Illinois Hospital & Health Sciences System, and (2) requiring modest participation in fundraising by board members.
Tuesday, March 3, 2015
Readers of this blog are likely familiar with issues surrounding nonprofit hospital conversions. It appears that we may be witnessing a trend of conversions in the opposite direction (i.e., from for-profit to nonprofit form) in another field – education. In Some Owners of Private Colleges Turn a Tidy Profit by Going Nonprofit, the New York Times reports that recent governmental regulations and extensive negative publicity have led some for-profit colleges to opt for a solution quite distinct from going out of business. These schools have chosen to convert to nonprofit corporations. Apparently to illustrate the risk that for-profit culture may (or at least may be perceived to) carry through to the newly created nonprofit entities, the Times presents the case of Florida’s Keiser University. Says the Times:
In 2011, the Keiser family, the school’s founder and owner, sold it to a tiny nonprofit called Everglades College, which it had created. As president of Everglades, Arthur Keiser earned a salary of nearly $856,000, more than his counterpart at Harvard, according to the college’s 2012 tax return, the most recent publicly available. He is receiving payments and interest on more than $321 million he lent the tax-exempt nonprofit so that it could buy his university. And he has an ownership interest in properties that the college pays $14.6 million in rent for, as well as a stake in the charter airplane that the college’s managers fly in and the Holiday Inn where its employees stay, the returns show. A family member also has an ownership interest in the computer company the college uses.
The piece quotes fellow blogger Lloyd Mayer of the law school at the University of Notre Dame as observing the concern that newly formed nonprofit schools “may be providing an impermissible private benefit to their former owners.”
Dr. Arthur Keiser reportedly has dismissed the notion that the conversion of Keiser University raises concerns by stating that transitioning to the nonprofit form was long contemplated and by observing, “We disclosed everything. There’s nothing wrong with it.” However, not all appear convinced. According to the Times, former Education Department official Robert Shireman “filed a complaint with the Internal Revenue Service accusing Mr. Keiser and three board members of violating tax regulations and using the nonprofit ‘for personal gain.’” Keiser is reported to have responded to these allegations by stating that “all the financial arrangements ‘are at fair market value terms and conditions,’ and that the college adheres to ‘generally accepted auditing and accounting principles.’” Further, Dr. Keiser points out that the valuation of the college when sold was supported by “two independent auditors” and that he donated much of the value to the new school.
The Times reports that the structure of the Keiser University conversion is not atypical. Others are reported to have financed the purchase of for-profit colleges through a combination of loans and charitable contributions “to a closely affiliated nonprofit.” According to the story, the newly formed tax-exempt schools also may lease space from the original owners at hefty rents. The piece discusses conversions of Stevens-Henager, CollegeAmerica, California College (all owned by Carl B. Barney), Remington College and Herzing University, and a planned conversion of Grand Canyon University.
Monday, March 2, 2015
A small group of residents of the Town of Palisade, Colorado, recently gathered to protest the Board of Trustees' approval of two zoning ordinances that help pave the way for a couple to lease land in the town to grow medical and possibly retail marijuana. The couple has owned and operated a medical marijuana facility in the town for the past five years and plans to lease the land from a local peach farmer.
The residents objecting to the Board’s decision say it was hastily made without much public discussion or consideration of the ramifications to the town. One noted that Palisades is known for peaches, not pot.
The couple that intends to lease the land is reportedly still in the process of obtaining a conditional-use permit to grow marijuana on the site. State requirements for the growing operation reportedly include an investment in a $35,000 operating system and 24-hour surveillance video that state officials will have access to, storage of all equipment in a structure or an enclosed area, no advertising or identifying signs on the property, and the set-back of the cultivation area at least 50 feet from property lines. The couple reports that the one-acre growing operation will initially be started in greenhouses to help curb residents’ concerns.
The Mesa Land Trust holds a conservation easement on the land at issue. Those opposed to the marijuana growing operation say they do not believe marijuana should be grown on land that is conserved for agricultural uses. Those in favor of the operation say farmers should have the right to do whatever they want on their land.
The Mesa Land Trust has reportedly stated that conservation easements preserve land to be agriculturally productive, “including farming and orchard activities with the choice of crops being in the discretion of the grantor,” and that the land trust does not have the authority to tell landowners which crops they can and cannot grow.
- Controversy over Palisade pot growing site continues, KJCT8.com, March 2, 2015
- Palisade residents protest approval for outdoor marijuana grow, The Daily Sentinel, March 1, 2015
- Planning commission favors annexation request to grow peaches and possibly marijuana, Peach Town News, June 12, 2014
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
According to a recent article in the Boston Globe, “Northeastern University recently retroactively paid the city of Boston $886,000 to help cover the costs of municipal services after the school faced criticism for failing to give anything this past fiscal year.” The Globe further reports that the city had requested $2.5 million, and that the letter accompanying the lesser payment states that it “should not be construed as support or commitment to the PILOT formula, so much as it reflects our willingness to work with your administration to arrive at a financial number that properly reflects Northeastern’s relationships with the city.”
The story sets forth additional facts that provide context to the Boston PILOT program:
Fifteen of the 19 colleges [owning highly appraised property in Boston], including the city’s wealthiest universities, did not pay the amounts requested by the city during fiscal 2014.
The amounts the city requests are based on the total assessed value of tax-exempt properties owned by the nonprofits. Northeastern has been criticized sharply for failing to pay what the city requests despite its large size. The university owns about $1.3 billion worth of tax-exempt property in Boston, which is the third most of any college in the city.
Boston University owns $2 billion worth of tax-exempt property and last fiscal year paid the city about $6 million, about $500,000 less than the city requested. Harvard, while based in Cambridge, owns about $1.5 billion worth of tax-exempt property in Boston and paid the city $2.2 million, while the city requested about $4.3 million.
Northeastern, reports the Globe, already pays the city more than $2 million annually in property taxes, and has stated that it not only provides annual community benefits exceeding $28 million, but also has committed millions to improve a nearby city park.
The Boston Globe reports that Massachusetts lawmakers are hearing many proposals for expanding services that the commonwealth provides the elderly who need more help to enable them to live at home. A coalition of nonprofit entities are reportedly supporting various legislative initiatives that, proponents say, ultimately will save taxpayers money because they will reduce the time that older residents spend at expensive institutions, such as hospitals and nursing homes. Proposals include providing older people of moderate means assistance with grocery shopping and taking medicine, as well as teaching family members how to perform in-home nursing tasks. Laws governing the latter, says the story, have already been enacted in Oklahoma and New Jersey.
With the expanding costs of healthcare and the aging population of baby boomers (who must think not only of their current and future medical care needs, but also of their parents’ present health care requirements), a proliferation of similar proposals across the country would not be surprising.
Sunday, March 1, 2015
In Ranch O, LLC v. Colorado Cattlemen’s Agricultural Land Trust, 2015 WL 795050 (Colo. Ct. App. 2015) (unpublished), the Colorado Court of Appeals held that a conservation easement that mistakenly referenced an individual, as opposed to a limited liability company created by the individual, as the easement grantor was nonetheless valid. The Court of Appeals also affirmed the District Court’s reformation of the easement to reflect the limited liability company as grantor.
Mr. Walker conveyed certain ranch property to a limited liability company (LLC) of which he was the sole manager and 99% membership owner. Sometime later, Mr. Walker purported to donate a conservation easement on the ranch to the Colorado Cattlemen’s Agricultural Land Trust (land trust). The conservation easement deed was signed by both parties and recorded, but it incorrectly stated that Mr. Walker, rather than the LLC, was the easement grantor.
Thirteen years later, the LLC sold the real property, expressly subject to the conservation easement, to Ranch O. Ranch O reportedly paid a reduced price for the ranch that reflected the existence of the easement restrictions. Soon thereafter, however, Ranch O filed suit, arguing that the conservation easement was invalid and had no force and effect because the owner of the property (the LLC) had not created the easement.
Mr. Walker and the land trust were unaware of the error in the deed regarding the grantor’s identity until Ranch O brought it to their attention just before filing suit. At the time of the easement’s donation, the land trust had not obtained title insurance.
The District Court held that the conservation easement was valid and reformed the deed to reflect the LLC as the easement grantor. Ranch O appealed, and the Colorado Court of Appeals affirmed the District Court on a number of grounds.
Reformation Based on Mutual Mistake
The Colorado Court of Appeals first noted this general rule:
if a conveyance or encumbrance document fails to reflect that the conveyor is functioning in a fiduciary or representative capacity, and that person does not have a personal or independent interest in the subject property, the document is considered as having been executed in the fiduciary or representative capacity.
Although noting that this general rule “appears to be applicable here,” the Colorado Court of Appeals declined to decide the case on that basis because neither party had raised and the District Court did not address this general rule.
Instead, the Court of Appeals concluded, as did the District Court, that the parties to the conservation easement made a mutual mistake of fact and reformation was the appropriate remedy. The court explained, in part, that
[Mr.] Walker and the Land Trust clearly and unequivocally intended that the grantor of the conservation easement be the owner of the subject property. Accordingly, reformation did not insert a new term that was never in the parties’ minds, nor did it rewrite the parties’ agreement. Rather, the reformed Conservation Deed represented the true agreement of the parties and gave effect to their actual intentions.
The court rejected Ranch O’s argument that the mistake was not mutual because the land trust was ignorant of the LLC’s existence when it acquired the easement while Mr. Walker was not. The court explained that “parties can be mutually mistaken regarding a contracting party’s identity even when their mistakes on that issue are not identical.”
The court also rejected Ranch O’s argument that Colorado’s conservation easement enabling statute, which provides that a conservation easement “may only be created by the record owners of the … land,” precluded reformation because it required the land trust to confirm the property’s ownership before accepting the conservation easement. The court found no authority supporting the assertion that negligent failure of a party to know or discover facts precludes reformation for mutual mistake, and noted that reformation accomplishes the purpose of the enabling statute.
Reformation Did Not Violate Policies and Purposes Behind Race-Notice Statute
The Colorado Court of Appeals also disagreed with Ranch O’s contention that reformation of the conservation easement deed violated the policies and purposes behind Colorado’s race-notice statute. The court explained that the purpose of the race-notice statute is to protect purchasers of real property against the risk of prior secret conveyances and allow them to rely on title as it appears of record. The statute makes an exception, however, for unrecorded documents of which the parties have notice. Ranch O had actual notice of the conservation easement deed before it purchased the subject property—the deed to Ranch O advised, in bold type and all block capital letters, that the subject property was encumbered by the conservation easement and gave the easement deed’s recording date and reception number. Accordingly, the easement deed was valid against Ranch O pursuant to Colorado’s race-notice statute, and thus, reformation of the deed was not contrary to the purposes and policies of that statute.
The Colorado Court of Appeals acknowledged that, in certain circumstances, a bona fide purchaser of real property can defeat a claim for reformation—i.e., the equitable claim for reformation based on mutual mistake “is subject to the rights of good faith purchasers for value and other third parties who have similarly relied on the finality of a consensual transaction in which they have acquired an interest in property.” In this case, however, Ranch O acquired the property with actual knowledge of the easement, even though the instrument was defective, and it could not ignore an instrument of which it had actual notice. To hold otherwise, said the court, would run counter to the notion that reformation is an equitable remedy that should be available when fairness demands such relief. Reforming the deed, explained the court, effectuates the intent of the parties and does not prejudice Ranch O in any way, given Ranch O’s actual knowledge of the existence of the conservation easement.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law