Nonprofit Law Prof Blog

Are There Exemption Issues with Law Schools Running Their Own Law Firms?

A hot topic in legal education recently has been the concept of law schools opening affiliated law firms as a way to "bridge the gap" from law school to practice.  For several links about the concept, visit Paul Caron's Tax Prof Blog and Johnny Buckles' prior post (along with the perceptive comment) here.

Would law schools opening law firms for students create tax exemption problems?  My view is "almost certainly not" though the issues depend in part on the exact structure involved. While I could probably write a book-length post about this, I'll try to simply highlight what I see as the key issues and a few thoughts.

First, I'll address a situation in which a law school operates a law firm as a part of the law school (e.g., the firm is not a separate legal entity).

The main question raised by this structure (a law school operating law firm as an "operating division" of the school itself) is whether the "commerciality" limitation somehow imperils the law school's tax exemption (this is probably only an issue if the law school is a private institution; state university law schools generally do not have to rely on Section 501(c)(3) for tax exemption; state universities are exempt either under Section 115 of the code as an "instrumentality" of state government or by simple constitutional principles of federalism; Ellen Aprill at Loyola Los Angeles has written the bible about this issue).

While the commerciality limitation is very complex, I have little doubt that it poses no trouble for law schools running law firms. Commercial activity raises essentially two issues for charities.  The first is whether the activity endangers their tax exemption.  The second is whether, if the activity is OK from an exemption standpoint, the activity will nevertheless be subject to tax under the Unrelated Business Income Tax (UBIT).  These issues are related, but not the same.

Let's concentrate on the exemption issue.  The regulations make clear that charities can engage in some activity that is not itself charitable.  The way the regulations put it is that a charity must engage "primarily" in activities that further its charitable purpose and cannot engage in more than an "insubstantial" amount of activities that are not "in furtherance of" a charitable purpose. See Treasury Regulations 1.501(c)(3)-1(c)(1).  

While there is some disagreement regarding what the phrase "in furtherance of" means in this regulation, the way I analyze these problems is by first classifying commercial activity as "related" or "unrelated" activity per the unrelated business income tax.  If a commercial activity is "related" under the UBIT, then it is no problem whatsoever for the charity, because the test for relatedness under the UBIT requires "functional" relatedness - that is, the commercial activity has to be closely connected to the charity carrying out its exempt purpose.  This test is not met simply because an activity provides an income source for the charity to spend on charitable works; the regulations state that to be related, there must be a "causal connection" between the activity and the charitable purpose.  Regs. 1.513-1(d)(2).  A commercial activity that meets this test for UBIT purposes is virtually certain to be an activity that is "in furtherance of" a charity's charitable purpose for purposes of Regs. 1.501(c)(3)-1(c)(1), and hence is not a problem.  In fact, Example 1 in the regulations, dealing with a performing arts school that charges admission for student performances, isn't far-removed from the law school law firm.

If an activity is unrelated, then in theory that activity can create exemption problems for the charity. This is where those of us that work in the area disagree; some people believe that an unrelated activity must be "insubstantial" (whatever that may mean) in order to avoid exemption problems.  I take a different view: I think that an unrelated activity can be "unlimited" in size as long as revenues from that activity are being used by the charity to expand charitable outputs.  See, e.g., John D. Colombo, Reforming Internal Revenue Code Provisions on Commercial Activity by Charities, 76 Fordham L. Rev. 667, 671-74 (2007).

But I don't think we get to that latter question here.  If law schools operate a law firm as part of the educational enterprise to bridge the gap between law school and practice, I have little doubt that the law firm would be viewed as "related" activity under the UBIT, and hence simply not a problem.  The law-school-operated-firm is pretty clearly advancing the educational mission of the law school; if an art museum can sell art reproductions in its museum store as a means of furthering its educational mission (see Rev. Rul. Rev. Rul. 73-104, 1973-1 C.B. 263), there really isn't much to argue about with the law-school law firm.  (Another relevant precedent is the "medical practice plan" used by some medical schools for their faculty to practice medicine as a means of both supplementing their salary and sharpening their practice skills; while the IRS at one time challenged exemption for these practice plans, the agency lost a series of cases and eventually gave up.  See, e.g., University of Massachusetts Medical School Group Practice Plan v. Comm'r, 74 T.C. 1299 (1980).  If a medical school can open a for-profit medical clinic for its faculty, I don't see a law school opening a law firm for its students/recent graduates as much of an issue).

So my conclusion is that a law-school operated law firm is a "related" activity under the UBIT, and therefore poses no commerciality problems to the law school's underlying exemption.  That conclusion also means that the revenues from the firm would not be taxed under the UBIT.

A more interesting question arises if the law firm is a separately-incorporated entity.  In this case, the issue would be whether this separate entity would qualify for a charitable tax exemption at all.  I personally find this a closer case.  The IRS's position is that separate corporate entities must "stand on their own" for exemption purposes - the law firm in this case would have to have its own charitable purpose.  One possibility, of course, is that the law firm would be exempt as an educational organization - after all, the purpose here is still an educational one: to give third-year students or recent graduates specific skills training as a bridge to private practice.  But the IRS takes a dim view of organizations claiming exemption when all they do is operate a for-profit business.  While a law firm whose primary purpose was to represent the poor would have an easy claim to exemption, the IRS's general view is that providing services to people who can pay for them, like the middle class, isn't a charitable purpose.  See Rev. Rul. 70-585, 1970-2 C.B. 115, Situation 4, where the IRS held that an organization whose purpose was to build affordable middle-class housing in an otherwise wealthy neighborhood was NOT a charitable purpose.  Even nonprofit hospitals must provide "something extra" beyond simply providing health services to paying patients to qualify for exemption.  See IHC Health Plans v. Comm'r, 325 F.3d 1188 (10th Cir. 2003).  So I'm not entirely sure that a separately-incorporated "bridge" law firm would get exemption.  It would be very interesting to see how the IRS would rule on such a creature.

But if the law school operates the firm as part of the law school legal entity, I just don't see much of a problem from an exemption perspective.  Perhaps some others would like to chime in via the comments section with their own analysis (the comments are moderated, so it might take a day or so for them to show up).

JDC

 

Charitable Deduction Under Fire (Part 78)

Our most current installment, courtesy of the Senate Democrats in their 2014 Budget Proposal:

The Senate Budget calls for deficit reduction of $975 billion to be achieved by eliminating loopholes and cutting unfair and inefficient spending in the tax code for the wealthiest Americans and biggest corporations. It recognizes that the Finance Committee, which has jurisdiction over tax legislation, could generate this additional revenue through a variety of different methods.

One potential approach is an across‐the‐board limit on tax expenditures claimed by high‐income taxpayers (specifically, the top two percent of income earners). This could take the form of a limit on the rate at which itemized deductions and certain other tax preferences can reduce one’s tax liability, a limit on the value of tax preferences based on a certain percentage of a taxpayer’s income, or a specific dollar cap on the amount of allowable deductions. In assessing any such across‐the‐board limit, Congress should consider the extent to which each proposal would retain a marginal tax incentive to engage in the affected activities and investments.

Another potential approach by which Congress could increase tax fairness and reduce the deficit is by reforming the structure of particular tax expenditures. The Simpson‐Bowles illustrative tax reform plan, for example, proposed to convert certain itemized deductions into limited tax credits, which more equitably deliver tax benefits and, because only about one‐third of taxpayers itemize their deductions, are often better for targeting tax incentives at low‐income and middle class families. Reforms like these could also generate substantial new revenue for deficit reduction.

See Foundation for Growth: Restoring the Promise of American Opportunity, page 66 (emphasis added).  As a reminder, the charitable deduction is an "itemized deduction."  Therefore, the charitable deduction will be limited by any indiscriminate cap on itemized deductions, whether expressed as a percentage of income or a specific dollar cap.   One could guess that the caution highlighted above in bold might have been aimed specifically at the chartiable deduction, although the mortgage interest deduction might lay a claim to such specific attention.  The nonprofit sector may have the most about which to worry, as charitable contributions are voluntary and easy to eliminate out of one's personal budget, if a taxpayer choose not to spend above the allowable deduction cap. 

Future installments to follow, no doubt.

EWW

 

Karla Simon's New Book on Civil Society in China

Professor Karla Simon's new book on Civil Society in China is now in print.  The book is available for a significant early bird discount of $60 by logging on to www.oup.com/us and using promo code 31590.

JDC

 

Arizona Taking Steps to Exempt "Fallow" Church Property

A couple of years ago one of my students, Brittany Viola (not the Olympic platform diver) wrote a note for the University of Illinois Law Review on the property tax status of "fallow" property owned by exempt organizations, particularly churches.  A PDF of that article is available here.  In the article, Ms. Viola discussed how various states, particularly in the Northeast, were attempting to tax "fallow" property - for example, shuttered Catholic schools or churches that had been closed by the local diocese (though this issue was by no means limited to property owned by the Catholic church).  The essence of the legal issue was the requirement of most state property tax exemption laws that the exempt property be "used" for an exempt purpose; arguably, fallow church property is not being "used" for religious purposes; it literally isn't being "used" at all, and hence potentially does not meet the requirements for exemption.

It appears that Arizona is in the midst of considering legislation that would protect this fallow property from taxation.  This article in the East Valley Tribune details legislation that was first proposed in the Arizona House that would permit religious organizations to buy undeveloped property and hold it subject to exemption (this original version of the legislation also apparently would have exempted other property owned by churches, but used for non-religious purposes, like student dormitories).  Word today is that a compromise version of this bill passed the Arizona House, and although it no longer protects things like student dormitories, it does apparently still provide for exemption of fallow land (I haven't been able to find a full-text version of the amended bill; I'll try to link it when I do).

I've written before about my view that churches ought not to be given the tax benefits accorded "charities." While some clearly do produce "public goods" in the form of helping the poor and disadvantaged, many are nothing more than clubs for believers.  The modern case for general tax exemptions for churches usually rests on the notion that taxing them would be unconstitutional (a violation of the federal free-exercise clause, or similar provisions in state constitutions).  I don't agree - and think that a neutral tax law applied to religious organizations would be upheld.  (The historical rationale for religious exemptions comes from the proposition that human beings could not (or should not) tax God; there are references in ancient Egyptian history and the Old Testament regarding the proposition that human beings did not have the authority to tax priests or temples.  I think we're sort of past the "if we tax churches, plagues of locusts will destroy the fields" theory.)  Social clubs do get federal income tax exemption under Section 501(c)(7), but clubs do not get the other major benefits of charitable tax exemption under 501(c)(3) (e.g., the ability to receive tax-deductible donations or to issue tax-exempt bonds), and states generally do not provide property tax exemptions for clubs.  So let's give churches the same tax benefits we give all social clubs and nothing more.

A colleague at another institution once floated the idea that churches ought to be taxed, but get an unlimited charitable deduction for actual charitable works, like expenditures for programs to help the poor.  That also sounds fine to me.  But the idea that we should be expanding exemption for churches to property that isn't even used for religious worship, particularly given the strains on local budgets, is in my view ludicrous.

JDC 

Illinois Schools Face Pain from Hospital Tax Exemption Law

It appears that one of the (perhaps unanticipated?) effects of the new Illinois law on hospital tax exemption is additional pain for strapped school districts in areas where hospitals previously had been denied exemption based upon the Illinois Supreme Court's ruling in the Provena-Covenant case.  This story posted on the WLS Radio (Chicago) web site notes that some school districts will have to refund millions of dollars collected over the past several years: Valley View School District, which covers Romeoville and Bolingbrook, will have to refund Adventist Bolingbrook Hospital between $4.5 million to $5 million and Plainfiled School District 202 apparently owes Naperville's Edwards Hospital $1 million.

 

I have a simple solution for all this: end tax exemption for nonprofit hospitals completely.  Over the years, I've admittedly supported nonprofit hospitals receiving tax exemption under certain specific conditions: for example, if they could prove that they provided services unavailable from for-profit competitors or served populations that otherwise were underserved.  But my recent reading of Steven Brill's magnum opus in Time Magazine about hospital bills has pretty much pushed me over the edge and confirmed my view that hospitals are big businesses, not charities.  Tax-exemption for nonprofit hospitals is an idea whose time was centered in the volunteer organizations of the late 1800's and early 1900's run by religious orders; that time has long since passed.

JDC 

 

A Refresher on Standing in Tax (Exemption) Cases

A couple of weeks ago, Johnny Buckles reported on the court case brought by Citizens for Responsibility and Ethics in Washington and David Gill against the IRS for what they believe is lax enforcement by the IRS of exempt status for 501(c)(4) organizations.  Johnny's post is here, and we've blogged so many times on (c)(4)'s generally that I won't even attempt a list (the search engine is your friend).

But the number of calls I've gotten from reporters who are taking this case seriously indicates that perhaps a short refresher on standing to sue in tax cases would be helpful (if nothing else, then I'll at least be able to refer reporters here!).  So here goes.

As all lawyers know, the general concept of standing to sue is a predicate to successfully bringing litigation.  In general, standing doctrine requires that the plaintiff in a case be able to allege "an injury in fact" - that is, that the defendant's conduct created a direct personal harm to the plaintiff.  The key here is the word "direct": individuals cannot generally sue the government because of some general grievance about government operations.  In tax cases, what this means is that one generally cannot sue taxing authorities over their treatment of some other taxpayer, even if one might argue that that treatment resulted in some diffuse injury to the plaintiff. I generally cannot complain that the IRS is treating someone else better than they should be, even if that better treatment arguably impacts me (e.g., I pay more in taxes) in some diffuse way.  Another way to look at this is that I cannot prove that my taxes would be impacted in any direct way by the treatment of another taxpayer.  My taxes aren't necessarily going to go down if the IRS "gets tough" with someone else; nor will they necessarily go up if the IRS lets someone else slide.  About as good a discussion of the general rules of taxpayer standing that I've read is in Kristen Hickman, How Did We Get Here Anyway?: Considering the Standing Question in DaimlerChrysler v. Cuno, 4 Georgetown Journal of Law & Public Policy 47 (2006).

One of the more famous cases dealing with standing in tax matters also happens to be a federal tax exemption case.  In Abortion Rights Mobilization v. U.S. Conference of Catholic Bishops, 885 F.2d 1020 (2d Cir. 1989), the court held that Abortion Rights Mobilization did not have standing to sue the IRS over its alleged non-enforcement of the political campaign activity limitation in Section 501(c)(3).  While the court did not rule out the possibility that taxpayers might have standing to challenge certain very narrow aspects of tax administration, it distinguished the Supreme Court's 1988 decision in Bowen v. Kendrick, 487 U.S. 589, where the court had permitted a taxpayer to challenge the grant of funds under the Adolescent Family Life Act as violating the Constitution: "Here, there is no nexus between plaintiffs' allegations and Congress' exercise of its taxing and spending power."

More recently, the Supreme Court in DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006) held that individual taxpayers did not have standing in federal court to challenge tax exemptions and other tax breaks given by the city of Toledo to DiamlerChrysler in order to entice them to locate a plant there. The Court reaffirmed the general federal taxpayer standing doctrine in Cuno, and applied the same concepts to the state taxpayers at issue in the case.

The addition by CREW of David Gill to the case likely is CREW's attempt to avoid the taxpayer standing doctrine.  Gill will argue that he personally suffered as a result of the IRS's lack of enforcement, because that lack of enforcement led to large campaign spending attacking his candidacy.  But CREW and Gill are going to have a very hard time showing that the campaign spending wouldn't have happend anyway; moreover, the Second Circuit in the Abortion Rights Mobilization case addressed the issue of "competitor" standing in a way that is going to be difficult for Gill to overcome: in rejecting "competitor" standing, the Second Circuit noted that Abortion Rights Mobilization had failed to undertake the same political activity as the Catholic Church and therefore in effect had refused to become a competitor.  Similarly, Gill could have formed his own 501(c)(4) organization to compete in his political campaign, but did not.  Gill isn't arguing that the IRS audited his own (c)(4) and found it wanting in circumstances where a competitor was let go (a set of facts that might provide standing for Gill).

As I've told all the reporters, I expect this case to be dismissed on standing grounds (if someone raises the issue; I assume they will).   We will see.

JDC

The IRS and Nonprofit Media: Towards Creating a More Informed Public

From the Council on Foundations Press Release regarding its March 4, 2013, 70 page report entitled, "The IRS and Nonprofit Media:  Towards Creating a More Informed Public". 

 

(Washington, D.C.) The Nonprofit Media Working Group, a nonpartisan group of foundation and nonprofit media leaders, today recommended that the IRS modernize its rules to remove obstacles in the way of nonprofit news outlets.The group, created by the Council on Foundations, released a  report, “The IRS and Nonprofit Media: Toward Creating a More Informed Public,” which states that the agency’s “antiquated” approach to granting tax-exempt status has undermined the creation of new media models. Although the IRS has a long history of approving the tax-exempt status of media organizations ranging from National Geographic to Pro Publica, in recent years it has become inconsistent and slower in its approvals.  “Over the last several decades, accountability reporting, especially at the local level, has contracted dramatically, with potentially grave consequences for communities, government accountability, and democracy,” said Steven Waldman, chair of the Nonprofit Media Working Group. “Nonprofit media provides an innovative solution to help fill this vacuum, but only if the IRS modernizes its approach.”

The Nonprofit Media Working Group was created by the Council on Foundations with a grant from the John S. and James L. Knight Foundation, following the recommendation by the Federal Communications Commission that a group of nonprofit tax and journalism expert convene on the topic. The new report highlights five key problems with the current IRS approach to granting nonprofit status:

1.  Applications for tax-exempt status are processed inconsistently and take too long.

2.  The IRS approach appears to undervalue journalism by sometimes not viewing it as “educational.”

3.  The IRS approach appears to inhibit the long-term sustainability of tax-exempt media organizations.

4.  Confusion may be inhibiting nonprofit entrepreneurs trying to address the information needs of communities.

5.  The IRS approach does not sufficiently recognize the changing nature of digital media.

Several of these problems stem from the IRS apparently relying on rules developed in the 1960s and 1970s. Under these rules, the IRS may deny tax-exempt status to nonprofits that gather or distribute news in a similar way to commercial outlets.  This approach, the group concluded, is no longer a sensible standard.  “There must be clear rules distinguishing nonprofit and commercial media but they should be logical rules,” continued Waldman.

Among the most significant recommendations:

• The IRS methodology for analyzing whether a media organization qualifies for exemption should not take into account irrelevant operational similarities to for-profits.

• Rather, the IRS should evaluate whether the media organization is engaged primarily in educational activities that provide a community benefit, as opposed to advancing private interests, and whether it is organized and managed as a nonprofit, tax-exempt organization.

• News and journalism do count as “educational” under the tax-exempt rules.

• The IRS should maintain the key structural requirements for being a tax-exempt media organization that properly distinguish it from commercial enterprise, such as: it cannot have shareholders or investors, it must have a governing board that is independent of private interests, and it cannot endorse candidates or lobby lawmakers.

“With the growing lack of accountability and investigative reporting, particularly in local communities, the Council convened a panel of experts to make recommendations on how the IRS can better facilitate the creation of new nonprofit media,” said Vikki Spruill, the Council’s president and CEO. “We strongly encourage the IRS to implement the recommendations made by the Nonprofit Media Working Group, as they will allow nonprofit media to fill the void in today’s reporting.”  Eric Newton, vice president of the Knight Foundation, said clearing up the IRS issues is important for efforts to improve local news. “The recession and the digital age combined to slash local news, leading to many new nonprofit media applications,” he said. “But the IRS fell back on industrial age standards and suddenly started delaying or denying requests strikingly similar to ones it had approved just months earlier. Applying 1970s rules to Web media makes about as much sense as telling spaceships they have to use the freeway.”

The Nonprofit Media Working Group includes: Chair Steven Waldman, journalist and former senior adviser to the FCC chairman; Clark Bell, Robert R. McCormick Foundation; Jim Bettinger, Stanford University; Kevin Davis, Investigative News Network; Cecilia Garcia, Benton Foundation; John Hood, John Locke Foundation; James T. Hamilton, Duke University; Joel Kramer, MinnPost; Juan Martinez, John S. and James L. Knight Foundation; Jeanne Pearlman, Pittsburgh Foundation; Calvin Sims, Ford Foundation; and Vince Stehle, Media Impact Funders.  Legal Counsel was provided by Marc Owens, former director of the IRS’s Exempt Organizations Division, and Sharon Nokes of Caplin & Drysdale.

The full report can be read at www.cof.org/nonprofitmedia.

dkj

Nonprofit Hospitals: "Community Benefit" Not Excessive Compensation is the Problem

In a provocative post on Economix today, Uwe Reinhardt casts nonprofit hospitals in the role of the true villians behind soaring healthcare costs and vicious billing practices riping apart the middle class:

Americans are shocked, just shocked. But what they should have known for years is that in most states, hospitals are free to squeeze uninsured middle- and upper-middle-class patients for every penny of savings or assets they and their families may have. That’s despite the fact that the economic turf of these hospitals – for the most part so-called nonprofit hospitals – is often protected by state Certificate of Need laws that bestow on them monopolistic power by keeping new potential competitors at bay . . . As George Bernard Shaw, whose works include “The Doctor’s Dilemma,” might have put it, that any lawmaker would grant hospitals monopolistic powers plus the freedom to price as they see fit is enough to make one despair of political humanity. . . . All manner of amazing behavior can hide under the pious label of “nonprofit.” A giant, inscrutable economic sector, in command of trillions of dollars in resources, nonprofits are governed by nonelected, self-perpetuating boards and virtually no effective accountability to any “owners” or the general public. By comparison, for-profit institutions are paragons of good corporate governance, transparency and accountability; I shall comment more on that in a future post. 

The posts goes on, painfully describing how the focus on "community benefit" and the sensationalism of hospital executive compensation has done nothing but obscure the real problem and thus the real solution. 

It should be possible to compensate hospital executives well without treating middle-class uninsured people like lemons to be squeezed fiscally. After all, as Mr. Brill shows, these so-called nonprofit hospitals typically have ample profits that would permit humane comportment in billing the uninsured while paying executives enough to retain them.

Read the post for Reinhardt's solution to the mess he lays at the feet of nonprofit hospitals.  All I can say is that economist may be no better at predicting economic outcomes than siesmologists are at predicting earthquakes, but the best of them sure are good at calling the rest of us stupid.

 

dkj

IRS Expands Voluntary Worker Classification Settlement Program

Here's something else about the IRS...

Earlier this week, the Internal Revenue Service announced that it has expanded its Voluntary Classification Settlement Program (VCSP), paving the way for more taxpayers to take advantage of this low-cost option for achieving certainty under the law by reclassifying their workers as employees for future tax periods.

According to the IRS, the agency is modifying several eligibility requirements, thus making it possible for many more interested employers, especially larger ones, to apply for this program.  Thus far, nearly 1,000 employers have applied for the VCSP, which provides partial relief from federal payroll taxes for eligible employers who are treating their workers or a class or group of workers as independent contractors or other nonemployees and now want to treat them as employees. Businesses, tax-exempt organizations and government entities may qualify.

Under the revamped program, employers under IRS audit, other than an employment tax audit, can qualify for the VCSP.  Furthermore, employers accepted into the program will no longer be subject to a special six-year statute of limitations rather than the usual three years that normally applies to payroll taxes.

VEJ

IRS to Post Updated List of Organizations That Lost Tax-Exempt Status

Today's Chronicle of Philanthropy is reporting that beginning in March, the Internal Revenue Service plans to start posting a more up-to-date list of organizations that have had their tax-exempt status automatically revoked for not filing proper paperwork.

In the past, the IRS has waited for six months after taking action to release the names of nonprofits that no longer hold charity status because they failed to file legally required documents for three consecutive years.  Going forward, however, the tax agency will release names a month after a group has lost its exemption.

In announcing the change, the IRS said: “Because of this change, the number of organizations added to the list in March 2013 will appear higher than in other months because it includes a catch-up period of about seven months.”

The Chronicle reports tax experts as saying that the change is good for potential donors who need to know if a group remains tax-exempt.  Donors cannot claim a charitable deduction for any gifts made to an organization after the date the IRS announces the revocation of its tax-exempt status.

VEJ

Target to Offer Education Grants

National retailer, Target, has announced a charitable initiative designed to bring arts and cultural experiences directly to K-12 children.  The company will be awarding grants of $2,000 for programs that enhance the classroom curricula by bringing the arts and cultural experiences to schools via in-school performances, artist-in-residency programs and workshops, among others. Programs must take place between September 2013 and August 2014.

Grants will be restricted to K-12 educational institutions and organizations with tax-exempt status under Section 501(c)(3) of the Internal Revenue Code.

Applications are accepted between March 1 and April 30 each year, with grant awards announced in September.

VEJ

$15 Million in Grants Aimed at Improving School Performance

Americorps has announced the availability of $15 million in grants for the nation’s most underperforming schools, this through a new program called Turnaround AmeriCorps.

According to Samantha Jo Warfield, acting press secretary of the Corporation for National and Community Service (CNCS), the $15 million -- from both CNCS and the U.S. Department of Education -- will fund nonprofits, civic organizations and local government entities working directly in the schools and utilizing AmeriCorps members.  Grant applications are due on April 23; funding announcements are expected in July.

The NonProfitTimes reports Warfield as saying: “What’s really great about this program is AmeriCorps members will be providing direct services within schools.  It’s an innovative way of tackling some of the pressing challenges facing our communities.”

The Times continues:

Warfield said the number and dollar amount of the grants depend on the number of applicants. There are no target start dates for programs yet. Likely programs include helping students with reading and math, helping them navigate college entry and financial aid applications, raising the graduation rate of the schools and working to improve non-academic success factors such as discipline, attendance rates and school safety.

“The list (of projects) runs the gamut of services and a lot of that will speak to the organizations that seek to apply,” said Warfield.

School Turnaround AmeriCorps will be a new program to which AmeriCorps members can apply, much like FEMA Corps, formed last year. Warfield said her CNCS’s focus at the moment is on ensuring a robust pool of AmeriCorps applicants. “A successful AmeriCorps member is going to be someone really passionate about education at any end of the spectrum, whether ensuring our youngest students are prepared with solid reading skills or helping to build pathways to college for first generation college goers,” said Warfield. “Because it’s a broader scope, there’s going to be something for everyone.”

The program is set up for 650 AmeriCorps members per year for three years. The project’s goal will depend upon the grant applications, but will fit “in line with some of the larger education goals,” said Warfield. “It will seek to increase educational achievement and high school graduation rates and increase college readiness,” she said. “We’ll be looking at all of those factors. Impact and success is demonstrated through grantee-specific performance outcomes.”

VEJ

When does Improper Political Activity Become a Crime?

When does improper campaign intervention become a crime?  At the least, there has to be an instance of campaign intervention.  But is that all?  According to a federal information to which the defendent is set to plead guilty, the answer is "yes" surprisingly.  A short but interesting story in yesterday's Wapo describes a federal information in which the crime is hard to find.  The crime, acccording to the indictment, is that a nonprofit insider in DC used nonprofit money to fund an inauguration party and, in doing so, "interfered with the proper administration of the tax laws."  The indictment states that the insider knowingly prepared fraudulent documents to obtain $110,000 to support a "political group" that was not an eligible recipient of the nonprofit's funds and, in doing so, criminally interfered with the operation of the Internal Revenue Laws.  The criminal interference, according to the brief information stems from the allegation that the insider (1) requested her chief of staff to prepare a grant request for the money, but to list the recipient as someone other than the Young Democrats, the organization hosting the Inauguration party, out of fear that a political organization was an ineligible recipient, (2) knew at the time of the grant application that the nonprofit's accountants would prepare a 990, and (3) knew, at the time of the grant application, that the 990 would be incorrect because the actual [political] use of the funds would not have been disclosed.  According to the report, the insider intends to plead guilty.  I am just not so sure about the wisdom of doing so, unless there is a deal for some sort of diversion.  It sounds like the U.S. Attorney is  really stretching to find a criminal allegation in this case.  First, the money was not going to be used to intervene in a campaign -- it was to be used for an inauguration party, the campaign having already been won.  Second, the allegation is built on too many suppositions -- the insider filed the grant application knowing that a 990 would later be filed, the acountants or auditors would prepare a 990 presumably asking no questions about ambiguous expenditures, and then eventually the 990 would in fact be filed incorrectly.  This seems a house of cards as far as criminal liability goes -- at least under the charge of interfering with the proper administration of the internal revenue laws.  If it were to stand, it seems to me, nearly all improper campaign interventions ought to constitute a crime as opposed to a violation of the condition of tax exemption.  The bottom cards are the least stable, by the way, since an inauguration party might not be a good use of charitable funds but hardly constitutes improper campaign intervention.  Another rickety card in this house is the assumption that the Young Democrats are necessarily an improper recipient, of a charitable grant (even if the insider was concerned that they might be).  What if they were conducting a voter registration drive or just . . . having a party to celebrate another successful violence-free political process?  I just wonder if the poor defendant in this case has received decent tax advice or, instead just simply hired some top flight but no less tax exemption-insensitive litigators.  There should be a motion to dismiss and, failing that, perhaps a trial, nevermind a guilty plea!  But then again, nobody asked me. 

dkj

California Bill Would Strip Boy Scouts and Other Youth Organizations of Tax Preferences On Account of Membership Policies Excluding Homosexuals

California State Senator Ricardo Lara has introduced a bill entitled the Youth Equality Act.  The Senator’s web page describes the bill (SB 323) as follows:

On the heels of the controversy surrounding the Boys Scouts of America’s policy to exclude members of the lesbian, gay, bisexual and transgender (LGBT) community as scouts or adult leaders, today State Senator Ricardo Lara (D-Long Beach) and Equality California announced the introduction of new legislation that would remove a state tax exemption for any youth group, including the Boy Scouts, that discriminate against members and leaders on the basis of sexual orientation or gender identity. Currently, organizations that discriminate on these grounds may still receive sales and corporate tax exemptions, a provision that is intended to encourage acting in the public interest.

Additional coverage of the bill and the uncertainties surrounding its enactment is available from CBS (San Francisco Bay area) and the San Diego Union-Tribune.  

 JRB

Former Treasurer of Foundation Supporting UH Athletics Guilty of Fraud

Here's a sad tale of events all too close to my home.  In Ex-UH Booster Fund Treasurer Pleads Guilty to Fraud, the Houston Chronicle reports that Brian Bjork, once an investment counselor and associate of the late David Salinas of Ponzi scheme fame, has entered a plea of guilty in a federal wire fraud case in which he was alleged to have misappropriated $550,000 from the Houston Athletics Foundation.  The charity is described as “an independently administered booster fund for UH athletics.”  The Chronicle reports the details of the scam as follows:

Bjork, according to the plea agreement, opened a bank account in which he siphoned off money from current and former family members - in one case, a recent widow - allegedly for investment in Salinas' corporate bonds or pawn shops that Salinas owned, but actually for his own use. He also wrote fictitious account statements, prosecutors said.

Also, using his position as treasurer of the Houston Athletics Foundation ... Bjork deposited about $550,000 of HAF funds into the account, according to the prosecutors.

The story explains that evidence of the fraud was uncovered during the government’s investigation of Salinas – an investigation “which has resulted in claims of more than $50 million by creditors who purchased nonexistent corporate bonds from Salinas and his companies Select Asset Management and the J. David Group of Companies.”

For additional coverage of the story in the Boston Herald, see here.

JRB

Additional Supporting Organization Regulations on Horizon

Yesterday, the District of Columbia Bar Taxation Section's Exempt Organizations Committee sponsored a program entitled “It's Pay Out Time for Supporting Organizations.”  (The event summary is available here; click on the program title and a pop-up appears.)  Tax Notes Today summarizes the remarks made at the program by officials with the Department of Treasury and the Internal Revenue Service. (See 2013 TNT 35-5.)  Reportedly, the government will be offering guidance to address issues not fully resolved in the recently issued regulations governing Type III supporting organizations (SOs).  It is anticipated that such future guidance will include clarification of the scope of the responsiveness test, which (among other things) requires a supported organization to “have a significant voice in the investment policies of the [SO], the timing of grants, the manner of making grants, and the selection of grant recipients by such [SO], and in otherwise directing the use of the income or assets of the [SO].”  Government officials also reportedly indicated that future guidance will address the types of distributions that non-functionally integrated Type III SOs can make in satisfying their payout requirements, as well as the definition of “control” for purposes of the rule of Internal Revenue Code section 509(f)(2) prohibiting Type I and Type III SOs from accepting contributions from donors who control their supported organizations.

 

JRB

Challenge to Regulations under Code Section 501(c)(4) under Way

Tax Notes Today reports an intriguing development in the battle over the use – or abuse – of section 501(c)(4) organizations to support candidates for political office.  According to the story, available electronically at 2013 TNT 34-8, an unsuccessful Illinois candidate for a congressional seat and Citizens for Responsibility and Ethics in Washington (CREW) ) are suing the IRS over regulations interpreting section 501(c)(4) of the Internal Revenue Code to grant federal income tax exemption to entities "primarily engaged in promoting in some way the common good and general welfare of the people of the community."   The complaint alleges that the regulations are inconsistent with the language of Code section 501(c)(4), which exempts organizations “operated exclusively for the promotion of social welfare.”

This could become a noteworthy case – if a court concludes that the plaintiffs have standing.  The Tax Notes Today story cites fellow blogger (and University of Illinois Law Professor) John D. Colombo for his appropriately cautious words on the difficulty of establishing standing in tax cases like this one.  But if the plaintiffs jump the procedural hurdles, it will be interesting to see how much deference the regulation receives from the judiciary. Readers who follow the electioneering of tax-exempt entities are aware of the considerable latitude the current regulations are thought to provide social welfare organizations in participating in the political process.  It should be noted, however, that a court could interpret the language of the regulations to be more restrictive of pursuing non-exempt purposes – and therefore closer to the literal meaning of the statute – than is commonly assumed.

For additional coverage, see this story from The Hill and the CREW webpage discussing the suit and supplying a link to its complaint filed in the United States District Court for the District of Columbia.     

JRB                   

Catalina Island Conservancy Executive Reportedly under AG Scrutiny

In Allegations Made Against Catalina Conservancy Exec, the Los Angeles Times reports that the California state attorney general's office is investigating whether Ann Muscat, the executive director of the Santa Catalina Island Conservancy, has misappropriated the organization’s funds.  The story claims that the AG has received complaints about the operations of the Conservancy from “former officers of the nonprofit that manages nine-tenths of Santa Catalina Island.”  According to the Times, one complainant is Roy Rose, a major donor and former secretary of the board of directors who resigned “out of unhappiness with Muscat's stewardship” and now claims that

Muscat told him she "silenced" Mel Dinkel, the conservancy's treasurer and chief operating officer who resigned in May, with "hush money" in the form of a $100,000 "consulting agreement."

"She went on to say that she was working on securing such agreements for use in the future, acknowledging that there were other Judases in the organization…."

The press secretary for Attorney General Kamala D. Harris reportedly “would neither confirm nor deny that an investigation was underway.”

JRB

House Bill Includes Religious Organizations as Recipients of Federal Assistance for Disaster Relief

In House Approves Storm Aid for Religious Institutions, the New York Times reports that the United States House of Representatives, by a vote of 354 to 72, has passed a bill approving “the use of federal money to rebuild churches and synagogues damaged by Hurricane Sandy, despite concern that such aid could violate the doctrine of separation of church and state.”  The bill now awaits consideration in the Senate.  According to the story, Senator Kirsten E. Gillibrand, Democrat of New York, has expressed support for the bill and “was working to secure its passage in the Senate.”  Observing that FEMA has generally refused to grant federal relief for rebuilding the physical facilities of houses of worship following natural disasters, the Times reports that FEMA lawyers raised numerous objections to the bill as a significant departure from current law.

But is the bill constitutional?  Opinions vary (imagine that!), says the story:

The Becket Fund for Religious Liberty, an advocacy group, said the bill was constitutional under Supreme Court precedents that allow houses of worship to receive “generally available benefits” like police and fire protection and sewer connections.

But Representative Jerrold Nadler of Manhattan, the senior Democrat on the House Judiciary Subcommittee on the Constitution, said: “This bill would direct federal taxpayer dollars to the reconstruction of houses of worship. The idea that taxpayer money can be used to build a religious sanctuary or an altar has consistently been held unconstitutional.”

The American Civil Liberties Union agreed, saying it was a bedrock principle of constitutional law that “taxpayer funds cannot go to construct, rebuild or repair buildings used for religious activities.”

One can ironically frame the constitutional issue raised by the bill in the language of contract law: may the federal government provide financial aid to religious organizations for an act of God?

 JRB

 

Tax Notes Reports on Hearing on Charitable Contributions Deduction

We previously blogged about the House Ways and Means Committee Hearing on Tax Reform and Charitable Contributions, first here and then here.  This morning’s Tax Notes Today briefly covers testimony from several academics and nonprofit leaders at the hearing.  The piece focuses on testimony supporting the extension of the charitable contributions deduction (“CCD”) to non-itemizers whose charitable contributions exceed a statutory floor, and testimony critical of President Obama’s proposal to reduce the value of the CCD to high-income taxpayers to 28 percent. 

The electronic citation to the Tax Notes Today piece is 2013 TNT 32-5.   

JRB