Thursday, November 2, 2017
As reported in the October 23rd edition of Tax Notes, IRS is now reviewing tax-exempt hospitals to ensure their compliance with the §501(r) regulations issued in 2015. At the American Health Lawyers Association meeting on October 19th, a tax law specialist in the IRS Tax-Exempt and Government Entities Division Reviews conveyed that the IRS is uncovering compliance issues regarding the financial assistance policy (FAP) and community health needs assessment requirements. Agents also are inquiring as to whether patients eligible under the hospital's FAP are not excessively billed. In addition, the tax law specialist reported non-contact reviews taking place in 2014 to 2016 resulted in several hundred examinations, most from the absence of required documents on the hospital's website. The specialist also revealed that unrelated business income and excess benefit transactions were also sources for examinations.
(Hat tip: Fred Stokeld at Tax Notes)
Wednesday, October 11, 2017
When is criticism against your organization grounds for a defamation suit? In a handful of recent lawsuits filed in recent
months, groups designated as "hate groups" by the Southern Poverty Law Center have sued both SPLC (and, in one instance, charity-rater Guidestar which briefly used SPLC's designations until stopping due to pressure) for defamation. Under SPLC criteria, a hate group includes an organization that expresses "opposition to LGBT rights, often couched in rhetoric and harmful pseudoscience that demonizes LGBT people as threats to children, society and often public health." Evangelical christian groups take exception when they end up on SPLC's list.
Whether you agree with SPLC's methodology or find it flawed, SPLC discloses the rationale behind its hate group designations. Barring some yet-to-be-disclosed facts, the defamation suits against SPLC have very little chance of success... at least, in the courtroom. However, the litigation has provided the plaintiffs a good deal of press and the chance to make their case to the public at large.
Tuesday, October 10, 2017
Last week, the National Association of State Charities Officials held their annual conference on the impact of technology on charities regulation. It will be interesting to see if any new initiatives come out of this conference, but I hear a lot of interest in regulating crowdfunding and other forms of online charitable giving. To be sure, existing laws have not kept up with technology, new charitable behavior, or even constitutional law. Currently, some states regulate solicitation by telegraph but not social media or online platforms; as Hopkins & Kilpatrick (2013, p.74) note, states actively enforce laws that have been declared unconstitutional by the Supreme Court; and, as Fishman (2015) points out, most charitable registration forms sit unread and laws sit unenforced, imposing a compliance cost on charities without any clear law enforcement benefit. I hope before reflexively rushing into regulate a new area of charitable activity like crowdfunding, states pause to consider the costs of new regulations and look a bit harder at cleaning up what is already on the books.
Sean Hepburn Ferrer, who once chaired the Audrey Hepburn Children’s Fund, accused the charity of infringing trademark and other rights belonging to him and Luca Dotti, his half-brother....
In Thursday’s lawsuit, Ferrer said he resigned as chairman in 2012 amid disagreements over spending, but let the charity use his mother’s name, persona and legacy case-by-case.
He said he has granted no such rights since 2015 and that the charity’s subsequent infringements falsely suggest that he, Dotti or their mother endorsed them.
Monday, October 9, 2017
Philip T. Hackney (Louisiana State University Law Center) has posted his forthcoming article, Prop Up the Heavenly Chorus? Labor Unions, Tax Policy, and Political Voice Equality, St. John's Law Review, on SSRN. Below is the abstract of Professor Hackney's article:
Labor Unions are nonprofit organizations that provide laborers a voice before their employer and before governments. They are classic interest groups. United States federal tax policy exempts labor unions from the income tax, but effectively prohibits labor union members from deducting union dues from the individual income tax. Because these two policies directly impact the political voice of laborers, I consider primarily the value of political fairness in evaluating these tax policies rather than the typical tax critique of economic fairness or efficiency. I apply a model that presumes our democracy should aim for one person, one political voice. For the model, political voice means the ability of citizens to participate in setting and discussing the political agenda and to vote on any final decision. In a modern democratic state, citizens largely depend upon organized interest groups to fulfill this role of political voice. In the Article, I demonstrate that tax policy applicable to labor unions likely modestly harms political voice equality. We allow almost all nonprofit interest groups to obtain tax exemption whether they face collective action challenges or not. This subsidizes interests that would organize without government assistance and fails to provide much support to those politically weak interests. A more neutral treatment would be to end tax exemption for both business interests and labor interests. Additionally, although the case is weak, we could maintain tax exemption for labor interests alone in order to modestly correct a political voice inequality associated with labor. Finally, we should allow union members to deduct union dues above the line to offer parity with the treatment of a businessman’s dues.
Terri Lynn Helge (Texas A&M University School of Law) has published Rejecting Charity: Why the IRS Denies Tax Exemption to 501(C)(3) Applicants, 14 Pitt. Tax. Rev. 1 (2016).
New charitable organizations generally must file an application for exemption (Form 1023) and await approval from the Internal Revenue Service. Unfortunately, the criteria the Internal Revenue Service uses to evaluate applications has not always been transparent. If an application is approved, the Internal Revenue Service determination letter and the application for exemption are required to be made publicly available and can be requested from the Internal Revenue Service or the organization itself. Prior to 2004, in the case of denials, neither the application nor the Internal Revenue Service’s correspondence setting forth its rationale for the denial were made publicly available.
This project is the first of its kind. While others have commented on isolated denial letters, this study is the first to conduct a comprehensive analysis of the Internal Revenue Service denial letters issued from when they first became available in 2004 through January 31, 2017. In conducting this project, I examined 603 determination letters in which the Internal Revenue Service denied exemption to an applicant seeking recognition as charitable organizations described in Section 501(c)(3) of the Internal Revenue Code. This project looks in-depth at the basis on which the Internal Revenue Service denied exemption to these applicants.
To provide background for the basis of on which the Internal Revenue Service reviews exemption applications for charitable applicants, Part I of this article describes the requirements to obtain federal tax exemption as a charitable organization. In Part II of this article, I explain the methodology and the process by which I arrived at the data I present. Part III presents the data from my study and my analysis of the manner in which the Internal Revenue Service applies the five-part test for exemption in its review of the applicants who were denied exemption. The data pays particularly close attention to the evidence used by the Internal Revenue Service to support its denial of tax-exempt status. In Part IV of this article, I discuss the implications of my findings on the streamlined application process implemented by the Internal Revenue Service in July 2014. My data identifies concerns with the streamlined exemption process, and I suggest revisions that should be considered to the streamlined exemption process to make it more reliable.
David Herzig (Valpraiso School of Law) and Samuel D. Brunson (Loyola University Chicago School of Law) have posted their forthcoming article, Let Profits Be (Non) Profits, Wake Forest Law Review, on SSRN. Below is the abstract of their article:
In this article, we take a step back and ask whether the Supreme Court’s application of the fundamental public policy rule as espoused in the Bob Jones case is the normatively correct position. In our analysis, we conclude that using fundamental public policy as a filter in granting tax exemption gets both tax and public policy wrong. Our conclusion is informed by the history of the role played by public charities espousing minority views. We believe that a legitimate space in society should exist and populated by nonprofits to both espouse popular and unpopular minority views. But it is also informed by tax policy: applying the fundamental public policy rule to qualification for tax exemption misunderstand how exemption fits into the corporate income tax. Ultimately we conclude that homogeneity of viewpoint is normatively detrimental to a robust society. Therefore, in order to allow nonconforming views, we propose that the proper sector to house those views is in an expansionist version of the nonprofit sector.
Eddy Hogg's (University of Kent, UK) new article is available at Nonprofit & Voluntary Sector Quarterly. From the abstract:
Funding for England and Wales’ Charity Commission has been cut by 48% between 2007 and 2016, affecting its ability to deliver its core regulatory functions. Conversations around what charity regulation should look like and how it should be funded have, therefore, gained momentum. These debates, however, are not limited to England and Wales, and in this article, we contribute to them by exploring public attitudes to these questions, presenting the findings of four focus groups. We find that although public knowledge of charity regulation is low, people are, nonetheless, clear that charities should be regulated. There is no clear preferred method of funding a charity regulator and a significant amount of complexity and nuance in public attitudes. People trust charities, but this can be eroded if they do not have confidence in how they operate. A visibly effective regulator supporting and supported by charities is central to maintaining trust.
The Johnson Amendment--which prohibits 501c3 exempt organizations from engaging in partisan political activity--is under repeated attack this year. In mid-September, the U.S. House of Representatives approved an appropriations bill with a rider that prohibits the IRS from enforcing the Johnson Amendment against any "church" unless "the Commissioner of Internal Revenue consents to such determination" and the IRS provides notice to Congress. Two other bills would weaken the Johnson Amendment by allowing 501c3 nonprofits to engage in an insubstantial amount of politicking (similar to lobbying rules). An earlier Executive Order on the subject turned out to be legally meaningless.
Thousands of nonprofits joined the National Council of Nonprofits to call for keeping the Johnson Amendment as a needed tool to preserve the sector's nonpartisanship. Many faith groups have also opposed changes that might lead to politicizing houses of worship. Recently, National Association of State Charities Officials (NASCO) penned a letter, unsurprisingly favoring more regulation over less, and thus opposing any relaxation in federal tax law.
It's surprisingly difficult to find dispassionate, non-hyperbolic views about the Johnson Amendment and the consequences of its reform-- particularly more modest amendments such as the proposal to allow incidental political activity. I take a closer look at some of the arguments below the fold:
Saturday, October 7, 2017
Forbes' contributing author Peter Reilly: "It's deja vu all over again in the United States District Court For The Western District of Wisconsin as Judge Barbara Crabb rules that Code Section 107(2) - the parsonage exclusion- is unconstitutional." Read the interesting piece here.
Sam Brunson (Loyola - Chicago) discusses implications of the ruling for religious institutions at By Common Consent.
Friday, September 15, 2017
As the use of donor advised funds grows, so does the legal attention to donor advised funds. All of this attention started in (what seems like forever ago…) 2006, with the passage of the Pension Protection Act. Since that time, we have seen the PPA-mandated Treasury study released in 2011, as well as a Congressional Research Service study on DAFs in 2012. In addition, the National Philanthropic Trust releases an annual DAF report, the 2016 version of which can be found here. Information and opinions abound, and yet, we still wait patiently for regulations under the donor advised fund excise taxes passed in 2006. I’m quite certain those regulations will be arriving Soon.™
In the latest installment in the DAF oversight drama, Congress may now be considering mandatory payouts from DAFs as part of a larger tax reform effort. Earlier this summer, Professors Ray Madoff of Boston College and Roger Colinvaux of Catholic University wrote to the Senate Finance committee to suggest a number of DAF reforms, including a mandatory payout proposal for DAFS (the Madoff/Colinvaux letter can be found here).
This week, the DAFs responded. In their own letter to Senate Finance, a number of DAF sponsors set out the arguments in opposition to a mandatory DAF payout. WealthMangement.com has a good summary of the DAF executive letter here, although I admit I can’t yet find a copy of the letter itself (if anyone has it ... please share if you can!)
Personally, I think that the term “DAF” covers such a wide variety of accounts that a mandatory proposal might be harmful for some and yet not enough regulation for others. But that’s another blog post, or maybe an article ….
Thursday, September 14, 2017
- Nonprofit compensation has gone up over the last year, returning to pre-recession levels; and
- A gender gap persists in nonprofit compensation (not that that is particularly shocking to anyone in the sector, but it is nice to have some evidence to that effect)
Tuesday, September 12, 2017
The abstract from SSRN:
The Trump Administration plans for aggressive enforcement of immigration laws have caused many houses of worship and other religious organizations to consider whether their beliefs call upon them to grant refuge or so-called sanctuary to undocumented immigrants. This brief essay considers whether these organizations would risk their tax-exempt status were they to do so. It reviews relevant judicial and IRS guidance. It concludes that IRS action to revoke exemption is unlikely, but that any house of worship or other religious organization deciding to act in this way should know that such a decision is not without some risk
Sunday, September 10, 2017
By: Emily Chen
In this article, Emily Chen, highlights main points from her interview with Tony Martignetti. She starts off talking about the Internal Revenue Code Section 501(c)(3) Prohibition on Electioneering. She explains that nonprofit organizations are barred from making contributions to candidates running for election. They first talk about the consequences of nonprofits breaking these rules. “The penalty for violating this prohibition is revocation of tax-exempt status. The IRS does however have the option to impose intermediate sanctions; the intermediate sanctions are excise on taxes on the political expenditure with an initial 10% on the organization and a 2.5% on an organizational manager who knowingly approved the political expenditure.” To read more about the interview and how nonprofits are involved in politics click here: http://www.nonprofitlawblog.com/nonprofit-radio-your-nonprofit-in-politics/
Saturday, September 9, 2017
National Council of Nonprofits
This article explores how nonprofits can get involved in politics if they remain nonpartisan, and do not endorse or oppose a candidate running for office. It starts off by explaining that nonprofits cannot participate in “political campaign activities” without losing their tax-exempt status. However, can participate in politics through voter registration and voter engagement activities, and lobbying, or legislative activities, while maintaining its tax-exempt status. The article then explains why lobbying is essential to nonprofit survival: lobbying prevents loss of nonprofit resources, sheds light on real issues in communities, and it expands access to important services. To learn more click here: https://www.councilofnonprofits.org/tools-resources/political-campaign-activities-risks-tax-exempt-status
Friday, September 8, 2017
Douglas M. Mancino
29 Tax’n Exempts 3
In this article, Douglas Mancino, explains the different types of conversions nonprofit companies go through to become for-profit organizations. He starts off the article by listing the reasons that nonprofits wish to convert to for-profit companies: “the need to access capital, have the ability to issue stock to public and private investors, enhance the corporation’s ability to diversify into otherwise taxable lines of business, provide a means whereby the corporation can offer stock options, enable the corporation to adopt an employee stock ownership plan, and to avoid the limiting effects of tax rules.” He then starts in on his explanation of the different type of conversions. He explains that there are four different types of conversions: (1) Conversion in place, (2) asset sales, (3) mergers, and (4) drop-down conversion. Unfortunately, the full article can only be accessed with a Westlaw account. If you want to learn more about the different types of conversions click here: http://lawschool.westlaw.com/shared/westlawRedirect.aspx?task=find&cite=29+tax%27n+of+exempts+3&appflag=67.12
Thursday, September 7, 2017
Employee, Volunteer, or Neither? Proposing a Tax-Based Exception to FLSA Wage Requirements for Nonprofit Interns After Glatt v. Fox Searchlight
By: Jane Pryjmak
92 Wash. L. Rev 1071
In Glatt v. Fox Searchlight, the second circuit ruled that for purposes of for-profit organizations, interns were employees if the employer received the “primary benefit” from the relationship. This means that for-profit organizations are required to pay interns a fair wage. The Fox Searchlight case did not address the issue of unpaid nonprofit internships. There is debate on whether nonprofits are or should be exempt from this definition. Some scholars believe that the second circuit’s logic extends to nonprofits resulting in them not being exempt for public policy reasons. In her article, Jane Pryjmak, argues that certain nonprofits should be exempt in regards to the internships depending on the nonprofit’s budget the role the play in society. She proposes three exceptions: “one for interns supporting exempt purpose activities; another for interns working at organizations classified as public charities; and the last for interns at small nonprofits, as determined by their annual tax filing.” To read more about her interesting proposal click here: https://digital.law.washington.edu/dspace-law/bitstream/handle/1773.1/1694/92WLR1071.pdf?sequence=1&isAllowed=y
Wednesday, September 6, 2017
What Qualifies a Nonprofit for Tax Exemption?
In an article on thebalance.com, Joanne Fritz explains what qualifications a nonprofit must have in order to reach 501c(3) status. She starts off her article by explaining that tax-exempt means that nonprofits do not pay most federal income taxes and some state taxes, as well as their donors getting a tax deduction when they donate to the nonprofit organizations. She then goes onto explain that there are 29 types of nonprofit organizations, each being exempt from different kinds of taxes. Then she explains the different tests an organization must pass to become a nonprofit organization. These tests include: (1) the organizational test, (2) the political test, or (3) the asset test. To learn more about what gives a nonprofit their tax-exempt status click here: https://www.thebalance.com/what-qualifies-a-nonprofit-for-tax-exemption-2501886
Tuesday, September 5, 2017
Michael Sanders has published Practical Issues Facing Nonprofits Structuring New Market Tax Credit Deal, 29 Tax'n Exempts (2017).
In this article, Michael Sanders explores a new solution to the lack of funding problem plaguing many nonprofit organizations today. These nonprofits have created a new business model by partnering with for-profit companies in order to raise their much-needed funds. Consequently, the IRS has updated its guidelines to govern these new partnerships. The nonprofit’s tax exemption status will not be in jeopardy as long as “they have sufficient control to ensure that the venture will further the nonprofit’s exempt purposes and there will be no impermissible private benefit or inurement.” One of the best examples of these joint ventures is the New Market Tax Credit program, where “for-profit investors subsidize development in distressed communities with high poverty or unemployment to generate economic growth and opportunity.” In return for their funding the for-profit organizations will receive a 39% tax credit. Read more about this exciting innovation at: https://www.blankrome.com/index.cfm?contentID=37&itemID=4320
Public Interests, Private Institutions? Public Policy Challenges to Tax-Free Universities
By: Wally Hilke and Amit Jain
127 Yale L.J. Forum 94
June 2, 2017
It is no secret that students believe college is too expensive, and many blame the high costs of university on their tax-exempt status. In 2008, Senator Charles Grassley, as well as other politicians from both sides, criticized universities for “hoarding assets at taxpayer expense.” Universities have responded to this criticism by arguing that constitutional provisions protect their assets and property from taxation. This article explores the tax-exempt status of universities and specifically considers Yale University’s exemptions, since legislators can tax certain property owned by Yale. The article ends with examples of cities and states who can benefit from a similar strategy. For more information on this topic see: http://www.yalelawjournal.org/pdf/HilkeandJain_fshkhikk.pdf