Friday, December 5, 2014
After a nod to private property rights, in McClure v. Montgomery County Planning Board, _ A.3d _ 2014, Maryland’s intermediate appellate court held that the owner of a subdivision lot subject to a forest conservation easement was bound by, and the local planning board had the authority to impose sanctions for violation of the easement.
In May of 2000, Mr. McClure purchased a 5.21-acre lot in the Fairhill subdivision in Montgomery County, Maryland. The lot was subject to a forest conservation easement that the developer had granted to obtain the County’s approval of the subdivision. The easement was recorded in the County's land records in March 1998.
After purchasing the lot, the court noted that Mr. McClure
did what many Marylanders do with land and constructed a house. He also built a deck, mowed his lawn, and even grazed horses. Seeking to fully embrace an agrarian lifestyle, in May 2005, he sought to build a barn and a fence and received permits to that effect.
Mr. McClure also then proceeded to violate the conservation easement. In 2012, the local planning board found Mr. McClure liable for a civil penalty of just over $100,000 and mandated that he take certain corrective actions, including the planting of trees, the posting of signs indicating the easement’s boundaries, and the removal of impervious surfaces. Mr. McClure sought judicial review, and the trial court held that the Mr. McClure was bound by, and the planning board had the authority to enforce the easement.
On appeal, the Maryland intermediate appellate court’s opinion opened with the following, which did not appear to bode well for the planning board or the conservation easement:
Few cases inflame such deep passions as a dispute involving individual property rights. The belief that fundamental concepts of liberty entailed strong property rights informed and influenced the Founders as they undertook the epochal task of drafting our Constitution. . . . Infringers of these cherished rights should beware for “nothing is better calculated to arouse the evil passions of men than a wanton and unredressed invasion of their ... property rights.
But the appellate court then went on to affirm the trial court’s holdings, rejecting each of Mr. McClure’s arguments.
- Mr. McClure argued that he was not bound by the conservation easement because it was not properly indexed in the local land records. The court disagreed, explaining that the validity of a properly recorded instrument is not affected by non-compliance with the indexing statute, which relates only to how the clerk is to organize enforceable interests.
- Mr. McClure argued that he was not bound by the conservation easement because he did not receive actual or constructive notice of the easement. The court again disagreed. The deed Mr. McClure received contained only a generic statement that the lot was subject to easements of record—it did not contain a specific reference to the conservation easement. Nonetheless, the court found that Mr. McClure had actual notice of the conservation easement because he signed several documents at the time of the lot’s purchase that specifically referenced the easement, including the contract of sale, which included a diagram of the easement. The court also found that Mr. McClure had constructive notice of the conservation easement because the easement was properly recorded and a diligent title search would have uncovered its existence. The court concluded
Although Mr. McClure wishes to play the ostrich and secrete away his head from the signatures on his deed and contract of sale, he will find no solace in the sands. An easement binds any person who acquires title to land with actual or constructive notice of that easement.
- Mr. McClure further argued that the planning board’s order was invalid because the board failed to require the developer to re-plat the subdivision to denote the conservation easement after it was granted. The court disagreed, finding that the County’s subdivision rules did not impose a re-platting requirement.
- Finally, Mr. McClure argued that the planning board did not have the authority to issue sanctions and order corrective actions for conservation easement violations. The court also rejected this argument, finding that the board had such authority by statute and that the board’s decision to hold Mr. McClure liable for his easement violations was not arbitrary and capricious and was supported by substantial evidence.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Sunday, November 30, 2014
In Reisner v. Comm’r, T.C. Memo. 2014-230, the Tax Court held that there is no reasonable cause exception to the gross valuation misstatement penalty for façade easement donation deductions claimed on returns filed after July 25, 2006, even if the deductions are carried forward from a donation made before that date.
Reisner involved a façade easement donated to the National Architectural Trust in 2004 with regard to a townhouse in Brooklyn, New York. On their 2004 joint federal income tax return, the taxpayers claimed a $190,000 federal charitable income tax deduction with regard to the donation. Because of percentage limitations, the taxpayers claimed a deduction of only approximately $80,000 for 2004, and carryover deductions of approximately $86,000 and $24,000 for 2005 and 2006, respectively.
At trial, the parties stipulated that (i) the façade easement had zero value and the IRS properly disallowed the claimed deductions, (ii) the taxpayers had made gross valuation misstatements on their 2004, 2005, and 2006 returns as a result of overvaluing the easement, and (iii) the taxpayers were not liable for the gross valuation misstatement penalty for the deductions claimed on their 2004 and 2005 returns because they satisfied the reasonable cause exception in effect before the Pension Protection Act of 2006 (PPA) made changes to the penalty provisions.
The sole issue at trial was whether the taxpayers were liable for the gross valuation misstatement penalty for the carryover deduction they claimed on their 2006 return, which was filed on April 16, 2007. The Tax Court held that they were, explaining that, in the case of façade easement donation deductions, the PPA eliminated the reasonable cause exception with regard to gross valuation misstatements made on “returns filed after July, 25, 2006.”
The taxpayers argued that imposing the penalty on them for claiming a carryover deduction in 2006 for a donation made in 2004 was not a required construction of the statute, was contrary to congressional intent, and constituted a retroactive imposition of a penalty on conduct that occurred before the effective date of the changes in the penalty provisions. The Tax Court dismissed all three arguments, explaining:
unlike the changes the PPA made to the qualification requirements for façade easement donations, which are effective for “contributions made after July, 25, 2006,” the provision eliminating the reasonable cause exception for gross valuation misstatements is effective for “returns filed after July 25, 2006;”
interpreting the PPA as eliminating the reasonable cause exception for carryover deductions claimed on returns filed after the July 25, 2006, effective date is consistent with the operation of longstanding regulations governing the application of the gross valuation misstatement penalty; and
- the court's holding does not represent retroactive application of the new penalty provisions because taxpayers “reaffirm” their gross valuation misstatements when they file returns after July 25, 2006, and they have the option of not doing so.
For a similar ruling regarding the gross valuation misstatement penalty in the facade easment donation context, see Chandler v. Comm’r, 142 T.C. No. 16 (2014). For charitable contributions of conservation easements encumbering land, the strict liability penalty for gross valuation misstatments applies to returns filed after August 17, 2006. See id. at note 5.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Saturday, November 29, 2014
Last month I had the opportunity to attend the NYU National Center on Philanthropy and the Law's Annual Conference. The conference was titled Regulation or Repression: Government Policing of Cross-Border Charity and provided an eye-opening overview of restritions imposed by many countries on foreign funding of charities and other NGOs. What made the conference particularly timely was the fact that only a month earlier a prominent member of Congress had publicly attacked foreign donations to think tanks - in the United States. This concern led to a bipartisan legislative proposal to require disclosure of foreign funding from scholars who testify on Capital Hill. The timing was particularly ironic, as at almost the same time the Economist ran two articles raising concerns about autocratic and illiberal governments placing limits on such funding: Donors: Keep Out and Uncivil Society. That said, whatever concerns charities and other nonprofits may have in the United States (including members of Congress criticizing them for accepting foreign donations), they pale in comparison to the concerns that the legal restrictions on both funding and activities raise for NGOs in many other parts of the world.
Oonagh B. Breen (University College Dublin) has posted Long Day's Journey: The Charities Act 2009 and Recent Developments in Irish Charity Law, Charity Law and Practice Review (forthcoming). Here is the abstract:
It is now twelve years since the Irish Government committed in its Agreed Programme for Government to the introduction of a modern statutory framework for the regulation of Irish charities. Twelve years on, in 2014, the promise of reform to ensure “greater accountability and to protect against abuse of charitable status and fraud . . . [and increased] transparency in the sector has never been more necessary and yet still remains to be delivered. Despite the passage of the Charities Act 2009, its non-implementation has created a regulatory void into which allegations of charity maladministration and misfeasance have filled the public consciousness.
In his seminal work on the formation of public policy, John Kingdon provides a persuasive theory to explain the opening, operation and outcomes of so-called ‘policy windows.’ According to Kingdon, at any given time, a ‘problem stream’ exists representing all the issues that are wrong in a given system. Running (often) parallel to the problem stream will be a ‘solution stream’ containing all of those suggested fixes to make a system work better. It is only when there is a convergence of those two streams within a third ‘political stream’ that policy change occurs. The nature of the political stream within which this convergence occurs can take many forms. In the words of Kingdon, it can comprise “public mood, pressure group campaigns, election results, partisan or ideological distributions in Congress and changes of administration.” The collision of problem and solution streams within this political stream results in the temporary opening of a policy window, allowing policy change to occur. The form of such resultant change may be shaped further by coincidental influences or agenda issues hovering in the vicinity of the window which attach themselves to the coat tails of the newly minted policy outcome. This conception of the policymaking process is useful, providing as it does some insight into how certain policy solutions come to be expectations or have other unintended consequences.
In an Irish context, Kingdon’s framework provides a useful lens through which to analyse the ‘fits and starts’ approach to charity law reform. Against the backdrop of the recent revelations concerning the Central Remedial Clinic and the Rehab Group charities and the catalytic effect of these scandals on the Irish charity sector and charity regulation more generally, this article reviews the current progress in the implementation of the Charities Act 2009, recent moves towards the establishment of the long awaited Charities Regulatory Authority and the prospects and challenges for better charity governance ahead.
Part I of this article reviews the existing Irish ‘problem’ and ‘solution’ streams in the context of charity regulation and outlines the political catalysts that are now instrumental in driving reform. Part II outlines the pending changes to be introduced over the coming months and the implementation challenges that will face the new Charities Regulator. Part III attempts to align the recent shortfalls in charity governance with the forthcoming statutory requirements and assesses whether the policy changes that the public are so desperately seeking will be delivered by the much anticipated commencement of the Charities Act 2009.
Kathryn Chan (University of Victoria) has posted The Co-Optation of Charitable Resources by Threatened Welfare States, 40 Queen's Law Journal (forthcoming 2015). Here is the abstract:
This paper addresses the emerging issue of the governmental co-optation of charitable resources, considering to what extent modern pressures associated with the retrenchment of welfare states are undermining the charitable sector’s traditional independence from government. It pursues this goal by advancing a theoretical contrast between ‘independent’ and ‘co-opted’ charities, and by identifying and contrasting certain legal and institutional mechanisms that either encourage or limit the co-optation ofcharitable resources by governments in England and in Canada.
The paper proceeds in the following way. I begin by advancing an argument in support of the value of an “independent” charitable sector, and the perils of allowing a nation’s charitable resources to be co-opted by the state. I proceed from this argument to articulate two indicia of a “co-opted” charity, relating these indicia to an important body of Anglo-Commonwealth law on the functional public law-private law divide and thus to debates over whether charities should bear human rights obligations and the other special responsibilities of the state. In part four, I distinguish three broad categories of co-optation that are applicable to charities: definitional (or existential) co-optation, managerial co-optation, and contractual (or fiscal) co-optation. I then examine several modern phenomena that tend towards the co-optation ofcharitable resources by government: the exertion of government influence over the legal definition of charity, the creation of statutory charities that are controlled by government or directed towards its purposes, and the exertion of influence over the administration of charitable resources through the negotiation of funding agreements or the appointment of government authority trustees. I consider how, in their response to each of these phenomena, English and Canadian laws and institutions either assist or obstruct government efforts to make charities comply with particular public welfare goals. I conclude that English law does far more than Canadian law to prevent charities from coming to function as agents of government policy, and may thus be regarded as a source of ideas on how Canada might manifest a stronger political commitment to the charitable sector’s independence.
Lilian V. Faulhaber (Boston University) has published Charitable Giving, Tax Expenditures, and Direct Spending in the United States and the European Union, 39 Yale Journal of International Law 87 (2014). Here is the abstract:
This Article compares the ways in which the United States and the European Union limit the ability of state-level entities to subsidize their own residents, whether through direct subsidies or through tax expenditures. It uses four recent charitable giving cases decided by the European Court of Justice (ECJ) to illustrate the ECJ’s evolving tax expenditure jurisprudence and argues that, while this jurisprudence may suggest a new and promising model for fiscal federalism, it may also have negative social policy implications. It also points out that the court analyzes direct spending and tax expenditures under different rubrics despite their economic equivalence and does not provide a clear rule for distinguishing between the two, adding to the confusion of Member States and taxpayers. The Article then surveys the Supreme Court’s Dormant Commerce Clause jurisprudence, under which the Court analyzes discriminatory state spending provisions. The Article concludes that although both the Supreme Court and the ECJ prioritize formalism over economic equivalence, the Supreme Court’s approach to tax expenditures is more defensible than that of the ECJ due to the different federal structures of the two jurisdictions.
James Fishman (Pace) has posted What Went Wrong: Prudent Management of Endowment Funds and Imprudent Endowment Investing Policies, 40 Journal of College and University Law (forthcoming 2014). Here is the abstract:
Most colleges and universities of all sizes have an endowment, a fund that provides a stream of income and maintains the corpus of the fund in perpetuity. Organizations with large endowments, such as colleges, universities, and private foundations, all finance a significant part of their operations through the return received from the investment of this capital. This article examines the legal framework for endowment investing, endowment investing policies, their evolution to more sophisticated and riskier strategies, and the consequences evinced during the financial crisis of 2008 and beyond. It traces the approaches to endowment investing and chronicles the rise and, if not the fall, the challenges to modern portfolio management. It examines the impact of endowment losses on colleges and universities and their constituencies, as well as the problem of trustee deference to boards' investment committees. This article concludes that universities have learned little from the financial crisis and are more invested in illiquid, nontransparent assets than before the financial crisis. Finally, this article recommends the establishment of board level risk management committees to evaluate endowment investing policies.
Brian L. Frye (Kentucky) has published Solving Charity Failures, 93 Oregon Law Review 155 (2014). Here is the abstract:
“Crowdfunding” is a way of using the Internet to raise money by asking the public to contribute to a project. This Article argues that crowdfunding has succeeded, at least in part, because it makes charitable giving more efficient by solving certain “charity failures,” or inefficiencies created by the inability of the charitable contribution deduction to subsidize the charitable giving from low-income donors. The economic subsidy theory of the charitable contribution deduction explains that the deduction is justified because it solves market failures and government failures in charitable goods. According to this theory, free riding causes market failures in charitable goods, and majoritarianism causes government failures in charitable goods. The charitable contribution deduction solves these market and government failures by indirectly subsidizing charitable contributions, thereby compensating for free riding and avoiding majoritarianism. Crowdfunding is successful because it provides a technological solution to some of those charity failures. While the charitable contribution deduction causes charity failures because the deduction cannot subsidize contributions from low-income donors, crowdfunding can subsidize those contributions by offering rewards instead. As a result, crowdfunding should solve at least some of the charity failures caused by the deduction through providing an incentive for low-income donors to contribute. The remarkable success of crowdfunding suggests that the inefficiency associated with charity failures is quite large.
The article addresses a matter that could result in profound changes in the ability of the United States to ameliorate the most pressing humanitarian and global problems of our times. It provides the mechanics and addresses the solutions required to enable US donors to do more good. In an efficient market, capital ends up in its most productive use. In charitable giving, donations are not always allocated to their most effective use due in no small part to current cross-border giving laws impeding that result. The article sets forth the concept of an “efficient charitable market,” which is predicated upon unshackling the hands of the giver. The article proposes a system for implementing a new law that would allow US donors to make contributions to non-US charities.
Ryan S. Keller (Ph.D. candidate, Cambridge) has posted Beyond Homo Economicus: The Prosocial Brain & The Charitable Tax Deduction, Virginia Tax Review (forthcoming). Here is the abstract:
Charitable tax policy is at an impasse. Historically, citizens have overwhelmingly supported the charitable tax deduction as a means of fostering diversity, encouraging donations and supporting the nonprofit sector. Yet various policymakers and academics have increasingly disputed the deduction’s cogency and justifiability. In response, legal scholars and economists have offered various defenses and assessments of the deduction, but these have not convinced skeptics or placed the deduction on sufficiently solid theoretical and policy footing. The article adopts a novel approach by instead employing recent research in the neuroscience and psychology of prosocial behavior and charitable giving. Specifically, it identifies structural advantages specific to the deduction, rather than to charity or nonprofits more broadly. It then delineates key neural mechanisms and psychological functions that provide evidence linking dimensions of the deduction to distinct, previously neglected positive externalities. Amidst growing skepticism, developing a more capacious understanding of the deduction’s worth to society is essential. Indeed, failure to consider more robust, innovative analyses of the deduction compels authorities to craft policy without adequate information, and leaves the deduction and thus many philanthropic endeavors needlessly vulnerable.
The New York Times recently reported on the cumulation of the Lincoln Center's negotiations with the family of Avery Fisher to obtain the right to to rename what is currently known as Avery Fisher Hall after an as yet to be determined major donor wo will be sought as part of a major renovation capital campaign. What is particularly interesting about the story is that the Lincoln Center is "essentially paying" the family $15 million, which raises interesting tax issues and so has stimulated an interested discussion on the TaxProf list-serv. See also this TaxProf Blog post regarding a Forbes article on these issues.
More New York Times recent coverage relating to philanthropy can be found its special Giving supplement from earlier this month.
Update on Nonprofits & Politics: Aprill and Colinvaux Articles, AALS Program, IRS Controversy Developments & More
While perhaps the congressional attention to the now 18 months old and counting IRS controversy will decline as the focus shifts to governing (we hope) and 2016 (unavoidably), the bubbling pot that is now nonprofits and politics continues to boil. Here are some of the latest developments:
Ellen Aprill (Loyola-L.A.) has posted The Latest Installment of the Section 501(c)(4) Saga: The Section 527 Obstacle to Effective Section 501(c)(4) Regulations, and Roger Colinvaux (Catholic) has posted Political Activity Limits and Tax Exemption: A Gordian's Knot, Virginia Tax Review (forthcoming). (And, as noted by Paul Caron when I presented at Loyola-L.A., I am working on a draft article currently titled Taxing Politics, which I should hopefully be able to post early in the new year.)
At the 2015 AALS Annual Meeting, the Section on Nonprofit and Philanthropy Law and the Section on Taxation are co-sponsoring IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable? on Saturday, January 3rd, from 10:30 a.m. to 12:15 p.m. The topic grew out of the IRS controversy, although the panel's scope will be much broader. Marcus Owens (Caplin & Drysdale) will be moderating, and panelists include Ellen Aprill (Loyola-LA), Phil Hackney (LSU), Jim Fishman (Pace), Terri Helge (Texas A&M), Dan Tokaji (Ohio State), and Donald Tobin (Maryland).
In news relating directly to the IRS controversy, the staffs of the Senate Permanent Subcommittee on Investigations issued dueling reports, neither of which said much more than we have already heard (repeatedly) from both sides of the aisle. At the IRS, new TE/GE Commissioner Sunita Lough issued her annual Program Letter, emphasizing accountability and transparency as she continues to try to move the division beyond the controversy (referenced obliquely as "the challenges over the last year for the IRS and TE/GE specifically"). And to the annoyance of her critics, Lois Lerner gave an extensive interview to Politico.
And there is more:
- Pulpit Freedom Sunday 2014 launched on October 5th, to very limited media coverage, although there were a few stories right around election day about the over 1600 participating pastors and churches. See the stories in Politico, a Washington Post blog, and the Washington Times.
- On the election law/FEC side of things, there are lawsuits still pending that asset Crossroads GPS (Public Citzen v. FEC) and American Action Network and Americans for Job Security (CREW v. FEC) should have registered and reported as political commitees. (Hat tip: Paul Barton's article this past week in the BNA Daily Tax Report)
Tuesday, November 25, 2014
The scholarly discussion of social enterprise and hybrid legal entities shows no signs of abating. The most recent crop of articles includes the following four plus an entire issue of the Harvard Business Law Review.
Robert T. Esposito (NYU Fellow), Using a Canon to Kill a Fly: Charitable Soliciation Acts and Social Enterprise, NYU Journal of Law and Business (forthcoming)
The Harvard Business Law Review, Volume 4, Issue 2 (2014) - Benefit Corporations includes five articles relating to these hybrid entities, including one by Delaware Chief Justice Leo E. Strine, Jr.
Monday, November 24, 2014
Earlier this month the U.S. Court of Appeals for the Seventh Circuit issued an opinion in Freedom from Religion Foundation v. Lew, the Foundation's constitutional challenge to the ministerial housing allowance exclusion from gross income provided by Internal Revenue Code section 107. A lower court had struck down the allowance, but the appellate court concluded the foundation and its two co-presidents lacked standing to pursue the challenge. In doing so, however, the court may have provided a road map for a future challenge to this provision.
The appellate court based its conclusion that the plaintiffs lacked standing on the simple fact that they had never been denied the allowance because they had never applied for it. While the plaintiffs argued it was enough that they were similarly situated to ministers who enjoyed this tax benefit except for the fact that they are not "ministers of the gospel" as that term is used in section 107 and also that applying for the benefit would be futile, the appellate court disagreed that these allegations were enough to demonstrate the particularized injury required for standing purposes. The solution of course is obvious - the plaintiffs should now seek to claim the exclusion provided by section 107. But the government's response is equally obvious, if the government does not want to litigate this case - choose not challenge their claim. The latter tactic could, however, open the door for all section 501(c)(3) nonprofits to seek to provide tax-free housing for their senior staff, a situation that likely the IRS (and Congress) would not tolerate if done a large scale. So the ministerial housing allowance challenge is likely only delayed, not eliminated, at least based on the Seventh Circuit's standing reasoning.
Cass Brewer (Georgia State) provided the following analysis of two recent IRS private letter rulings that may indicate the IRS is rethinking whether a section 501(c)(3) tax-exempt nonprofit corporation that either changes its category of nonprofit corporation status in a single state or "redomesticates" by switching its state of incorporation has to reapply for recognition of its 501(c)(3) status.
Reconsideration of Reincorporation/Redomestication of 501(c)(3) Corporations?
Generally, if an IRC § 501(c)(3) organization changes its legal form (e.g., from a trust or unincorporated association to a nonprofit corporation), the new form of organization must reapply for tax-exempt status. See American New Covenant Church v. Commissioner, 74 T.C. 293 (1980)(unincorporated association becomes a nonprofit corporation); Rev. Rul. 77-469, 1977-2 C.B. 196 (same). Moreover, in Case 4 of Rev. Rul. 67-390, the IRS set forth its position that mere incorporation of an exempt corporation from one state to another requires a new exemption application. See Rev. Rul. 67-390, 1967-2 C.B. 179 (describing four distinct transactions—incorporation of an exempt trust, incorporation of an exempt association, reincorporation by Act of Congress, and reincorporation from one state to another—all requiring new applications for exempt status). The IRS’s restrictive position with respect to mere reincorporation transactions involving exempt corporations seems especially harsh, particularly when compared to the much more liberal approach taken for nonexempt corporations. See I.R.C. § 368(a)(1)(F) (allowing reincorporation from one state to another with no significant income tax effect whatsoever).
Two recent private letter rulings, however, perhaps indicate that the IRS is reconsidering its position. Specifically, in PLR 201426028 (June 27, 2014), the IRS held that a legislatively mandated, intrastate conversion from “public nonprofit corporation” status to “nonprofit corporation” status did not require an organization to reapply for exemption. Then, in PLR 201446025 (Aug. 20, 2014), the IRS went one step further to hold that a “redomestication” of an exempt corporation from one state to another did not require a new exemption application. The “redomestication” in PLR 201446025 was effectuated by filing a “Certificate of Conversion” in the original state and filing “Articles of Domestication” in the destination state. According to the private ruling, the “redomestication” was undertaken because the corporate law of the destination state offered more flexibility.
To reach these favorable holdings, the IRS distinguished American New Covenant Church, Rev. Rul. 77-469, and Case 4 of Rev. Rul. 67-390 primarily on two grounds. First, with respect to the exempt corporations involved in the private rulings, controlling state law and governing documents clearly provided that each corporation’s existence continued “uninterrupted” from its original incorporation and original exemption application. Second, each exempt corporation’s activities, assets, and obligations (including liabilities to the IRS) remained the same before and after the reorganization transactions.
The IRS further reasoned that the state to state “reincorporation” transaction described in Case 4 of Rev. Rul. 67-390 (which required a new exemption application) was fundamentally different from the state to state “redomestication” in PLR 201446025 (which did not require a new exemption application). Without providing details, the IRS stated that the “reincorporation” in Case 4 of Rev. Rul. 67-390 resulted in a new legal entity whereas the “redomestication” in PLR 201446025 did not. Yet, in the author’s experience with nonexempt corporations, reincorporations and redomestications are effectively identical (i.e., despite changing the state of incorporation the corporation’s existence continues uninterrupted and the corporation’s activities, assets, and obligations remain the same).
If in fact the IRS is reconsidering its position with respect to reorganization transactions involving exempt corporations, a published ruling clarifying Rev. Rul. 67-390 is critical. Otherwise, exempt corporations will be left wondering whether their reorganization transaction is a “reincorporation” demanding a new exemption application or a “redomestication” not requiring a new exemption application. In this regard it is worth noting that some states have fairly sophisticated “redomestication” statutes for nonprofit organizations (e.g., Indiana, Ind. Code Ann. §§ 23-17-31-1 through -6). Other states (e.g., Georgia, O.C.G.A. 14-3-101 through 1703) do not have such statues, relying instead on merger statutes to accomplish reorganization transactions across states. PLR 201446025 does not identify the states involved in the “redomestication” that was the subject of the private ruling. If, though, redomestication statutes are the key to avoiding a new exemption application after reorganizing an exempt corporation, this would be vitally important for tax advisors to know.
Georgia State University College of Law
Friday, November 21, 2014
The most recent issue of Nonprofit Advocacy Matters, published by the National Council of Nonprofits, is out. Stories include discussions of what is on the table in the lame duck session of Congress, the spending reduction pressures facing several state and local governments, statewide ballot measures and constitutional amendments that were passed by voters earlier this month and that affect nonprofits, and tax & fee proposals in Oregon and Hawaii of relevance to nonprofits.
In addition, in its “Worth Quoting” section, the issue highlights an interesting observation of Ann Goggins Gregory, COO of the Greater San Francisco Habitat for Humanity:
Overhead in the for-profit world—sales, general and administrative costs as a percentage of total sales—is 25% across all industries and 34% for service industries. The cruel irony of holding nonprofits to a much tougher standard is that donors often say that they do this because nonprofits ought to ‘run more efficiently, like a business.’ Most people don’t know the overhead of businesses because profitability matters more.
The point is rather thought-provoking, and prompts some questions. The following come quickly to mind: At what point does too much emphasis on reducing overhead lead to work environments that hinder the productivity of nonprofits’ employees? How much of for-profit firms’ overhead is better viewed as a form of disguised compensation to employees? Can we devise better metrics of social value produced by nonprofits and examine correlations between social output and overhead? Who receives the primary, direct benefit of various types of overhead? Is there a way to analyze whether nonprofits in certain fields should have higher overhead than others by studying differences in overhead incurred by for-profit firms in different industries?
In Private Letter Ruling 201446025 (Aug. 20, 2014), the Internal Revenue Service (“IRS”) ruled that a charitable nonprofit would maintain its tax-exempt status after changing it state of domicile by filing Articles of Domestication in the new state. The organization, originally incorporated under the laws of State 1, received a favorable determination of its exemption under Internal Revenue Code section 501(c)(3). It planned thereafter to file "Articles of Domestication" with State 2 and a Certificate of Conversion in State 1 in order to change its state of domicile. The organization sought assurance that it would continue to be recognized as tax-exempt without filing a new Form 1023 with the IRS.
According to the IRS, the conversion would not constitute “the creation of a new organization for purposes of I.R.C. § 508(a) and Treas. Reg. § 1.508-1 (a).” The IRS further concluded that the change of domicile “will not be considered a substantial change in [the entity’s] character, purposes, or methods of operation under Treas. Reg. § 1.501 (a)-(1)(a)(2) for purposes of reliance on [the organization’s] prior determination of exempt status.” Consequently, after the change in its state of domicile, the organization may “rely on the determination of tax exempt status” previously issued to it. However, amendments to the organization’s governing documents related to the change of domicile “should be reported on Form 990 as significant changes,” the IRS concluded.
The IRS also stated that its analysis “would be different if a new corporation were created in State 2” and the two entities were merged, or the old corporation transferred assets to the new corporation.
Tax Notes Today (see 2014 TNT 224-4) reports that practicing attorneys are viewing the ruling favorably.
Thursday, November 20, 2014
In As Sharpton Rose, So Did His Unpaid Taxes, the New York Times has presented quite a few details concerning the “more than $4.5 million in current state and federal tax liens against [Al Sharpton] and his for-profit businesses.” What is worthy of noting on this blog is what the story has to say about the nonprofit that Mr. Sharpton founded, the National Action Network, a section 501(c)(4) organization (according to the entity's donation webpage). This nonprofit, says the Times, “appears to have been sustained for years by not paying federal payroll taxes on its employees.” Here are some of the most troubling excerpts:
With the tax liability outstanding, Mr. Sharpton traveled first class and collected a sizable salary, the kind of practice by nonprofit groups that the United States Treasury’s inspector general for tax administration recently characterized as “abusive,” or “potentially criminal” if the failure to turn over or collect taxes is willful.
Mr. Sharpton and the National Action Network have repeatedly failed to pay travel agencies, hotels and landlords. He has leaned on the generosity of friends and sometimes even the organization, intermingling its finances with his own to cover his daughters’ private school tuition. …
Even though state law prohibits nonprofits from making loans to officers, Mr. Sharpton said National Action Network had also once lent him money to cover his daughters’ tuition. …
With the National Action Network’s finances always tenuous, that year it quietly paid $70,000 toward the judgment against one of Mr. Sharpton’s co-defendants in the case, Alton H. Maddox Jr., a lawyer who was suspended for refusing to cooperate with a grievance committee investigating his conduct in the Brawley case. Mr. Sharpton acknowledged the payment in an interview last week, saying the nonprofit’s board had supported the idea that Ms. Brawley deserved to be represented.
With Mr. Sharpton focused on the 2004 presidential race, National Action Network’s finances were reaching crisis levels, tax documents and other public records show. The group’s revenues totaled just over $1 million in 2004, about half of what they had been two years earlier. Nevertheless, it picked up expenses from Mr. Sharpton’s presidential bid: $181,115 in consulting and other costs that should have been charged to his campaign, the Federal Election Commission later found. …
In 2009, when the group still owed $1.1 million in overdue payroll taxes, Mr. Sharpton began collecting a salary of $250,000 from National Action Network. …
These excerpts raise issues that, if factually based and resolved against the nonprofit, could suggest grounds for revocation of its federal income tax exemption.
Mr. Sharpton is not taking the story passively. His response to the piece, also in the Times, appears here – along with rebuttals from the Times.
The Boston Globe reports that seven Harvard students (including some at the Harvard Law School) have filed a lawsuit in Suffolk County Superior Court against the president and fellows of Harvard College for its investment in stocks of companies that produce fossil fuels. The complaint – said to contain 167 pages of exhibits – reportedly alleges “mismanagement of charitable funds” and asserts a tort, “intentional investment in abnormally dangerous activities.” The story states that the 11-page complaint seeks a judicial order to compel divestment.
Relatedly, the law students filing the complaint have taken the opportunity to publicize their effort through an op-ed, also appearing in the Boston Globe. Among the more interesting remarks:
Our legal claims are simple. Harvard is a nonprofit educational institution, chartered in 1650, to promote “the advancement and education of youth.” By financially supporting the most dangerous industrial activities in the history of the planet, the Harvard Corporation is violating commitments under its charter as well as its charitable duty to operate in the public interest.
Our suit charges that the Harvard Corporation is breaching its duties under its charter by investing in fossil fuel companies. Our second count is a novel tort claim, intentional investment in abnormally dangerous activities, that is based in well-established legal principles regarding liability for promoting especially hazardous behavior.
I certainly appreciate that the filing of this lawsuit has given these students a springboard for publicizing their viewpoint. While I would benefit from a review of the complaint (which I do not have), just by reading the press reports, I believe the suit clearly faces obstacles, both procedural and substantive.
The most obvious procedural issue is whether the students have standing. Although some have argued for student standing to bring lawsuits alleging mismanagement by university fiduciaries, see, e.g., Sara Kusiak, Comment, The Case for A.U. (Accountable Universities): Enforcing University Administrator Fiduciary Duties Through Student Derivative Suits, 56 Am. U. L. Rev. 129 (2006), I am skeptical that a court would grant standing to the students in this case. For one thing, I doubt that they are harmed more particularly, in any material way, by Harvard’s investment policy than is the public at large – assuming that the public is harmed in the first place.
Even more important, it seems to me, is the difficulty of convincing a judge that the claims of the students have substantive merit. One could plausibly argue that an environmental organization is violating its mission by investing in fossil fuel company stocks solely for the prospect of earning profits. But Harvard? It is far from clear that Harvard’s investment policies are anti-educational. Of course, one could argue more broadly that all charities must operate in a manner consistent with the public interest by not violating public policy (remember Bob Jones in the tax-exemption qualification context?). However, could we really expect a court to conclude that buying oil company stocks is contrary to established public policy? Imagine the implications! (I say that with a modest chuckle, for “imagining the implications” may be precisely what is driving the legal action.)
And as for that “novel tort claim, intentional investment in abnormally dangerous activities” – I do not know what sanctions apply for raising frivolous claims in Massachusetts state courts, but if I were one of the plaintiffs, I would be concerned enough to research the issue thoroughly (if I had not yet done so) and prepare myself to drop that one from the complaint.
One final point. To doubt the legal merits of the students’ claims is not to deny the ability of charities, such as Harvard and its nonprofit affiliates, to engage in socially conscious investing. There is a major difference between (1) maintaining that charity fiduciaries are free to engage in socially conscious investing without violating their duties to the nonprofit corporation/its charitable purposes, and (2) asserting that charity managers violate their fiduciary duties by making investments that some consider contrary to socially conscious investing. The former respects the right of charity managers to exercise discretion on the matter. The latter can easily take the form of supplanting fiduciaries’ judgment with the judgment of others.
Those interested may wish to consult additional coverage in the New York Times.
Wednesday, November 19, 2014
In Former Controller of Medical Nonprofit Is Charged With Embezzling $1.8 Million, the New York Times reports that Karen Alameddine, who served as the controller of the New York-based Hereditary Disease Foundation from September 2005 through January 2014, has been charged with embezzling more than $1.8 million of the nonprofit’s funds. Further details appear in the story:
Federal prosecutors in Manhattan said in a criminal complaint unsealed on Tuesday that Ms. Alameddine began diverting money by disguising entries in the foundation’s accounting software “to make what in reality were transfers to her personal bank account appear as if they were wire or bank transfers” to grant recipients.
The government said Ms. Alameddine, who also went by Karen Dean, worked for the organization in recent years from her residence in Perris, Calif. The funds she diverted went into accounts she controlled with names like Abacus Accounting, Chez Cheval Ranch, Dean & Co. and Karen Dean Exports, the complaint said.
The alleged scheme reportedly came to light after Alameddine’s departure, when the foundation investigated a complaint from a grant recipient that he had not yet received his check from the foundation.