Friday, December 19, 2014
Nonprofits today are turning to creative collaboration to accomplish their goals. For-profits have long utilized various forms of collaboration to capture market share. With a foray into collaboration, nonprofits now must determine the extent to which collaboration will be legal versus non-legal. The Stanford Social Innovation Review recently featured an article entitled “Collaboration-palooza” that shows the four main types of collaboration nonprofits are using and where they fall along the spectrum of legal forms. The article also deals with the impediments to collaboration. Specifically, the article details the following three:
“Along with strong momentum across the collaboration spectrum, we found three inconsistencies between funders and nonprofit leaders that are creating barriers to collaboration done right.
1. Struggling to find philanthropic support A significant barrier is nonprofit leaders’ perceptions of low philanthropic support across the collaboration spectrum. Fewer than 20 percent of nonprofit leaders said they received support from their funders during the process, and more than 50 percent reported no support whatsoever for any form of collaboration. Leaders pointed to especially low levels of funder backing for sharing support functions, which are usually intended to lower operating costs and free up funds to expand programs. This foots with survey data from Grantmakers for Effective Organizations 2014 report Is Grantmaking Getting Smarter, which found that 53 percent of funders never or rarely funded collaborations and only two percent did so consistently. Yet, strikingly, the reason funders most frequently cited for failing to support collaborations was that their grantees didn’t ask. Further, they told us in follow-up interviews that they worried they would inject bias if they initiated the conversation. A program officer in Pennsylvania said, “We have to be careful. Whenever I speak up at a meeting, I get a proposal about the idea!” But the same funder told us that when grantees came forward with a plan to collaborate, he was eager to support it.
2. Difficult match-making A second barrier to collaboration lies in finding the right partners and negotiating respective roles. Nonprofits and foundations both cite defining relationships and roles as a top challenge to collaboration. But nonprofits rated finding the right partner as the biggest barrier, while foundations rated it the smallest one. In our study, helping nonprofits find partners was the most common way that funders supported collaboration, but they said they needed to tread cautiously: “I don’t feel comfortable recommending partners,” said a Chicago grantmaker. “In part I worry that nonprofits might take my word as dictate, but also I feel that they need to be committed enough to do their own homework.”
3. Unsuccessful joint programs A third challenge is the disparity between funder and CEO perceptions about which forms of collaboration fail more often. Funders see joint programming as the most successful form of collaboration. Nonprofit CEOs, on the other hand, found that the more integrated forms (shared support functions and mergers) were most likely to succeed and cited joint programs as having the highest failure rate (20 percent).”
If collaboration nonprofits are able to show overall better returns, i.e., social impact, the first barrier will be largely resolved. Donors could play a role in the second barrier if they have enough information about the social impact various charities are having. A push in the sector toward using legal forms, such as mergers, would assist with the overall success rate.
The full article is available here.
Wednesday, December 17, 2014
As nonprofits and for-profits increasingly compete in the same fields, several legal issues are emerging. Two of the main issues are the following: (1) UBIT and (2) for-profit attempts to limit the market nonprofits can attract. Nonprofit Quaterly featured an article highlighing this tension, which explored Alabama Dental Association's (ALDA's) opposition to the expansion of Sarrell Center, a nonprofit that provides dental treatment to poor children. ALDA has considered advancing state legislation to "control" the nonprofit, and Sarrell brought a suit against the University of Alabama at Birmingham when it announced its students were no longer available to volunteer at Sarrell clinics. Even the YMCA has been under attack from for-profit exercise clubs in Idaho. Ultimately the Board of Equalization decided to impose a 19% tax on YMCA profits. The issue has arisen in numerous areas, including day care centers, theaters, etc. The line between nonprofits and for-profits has been overlapping tremendously, and unfair competition appears to be an issue that will persist. Read more about this issue here.
In Belk v. Commissioner, No. 13-2161 (Dec. 16, 2014), the 4th Circuit affirmed a Tax Court ruling that a conservation easement that authorized the parties to agree to “substitutions” or “swaps” (i.e., to remove some or all of the original protected land from the easement in exchange for the protection of other land) was not eligible for a federal charitable income tax deduction because it was not “a restriction (granted in perpetuity) on the use which may be made of the real property” as required under § 170(h)(2)(C). The 4th Circuit agreed with the Tax Court that, to be eligible for a deduction under § 170(h), a donor must grant an easement with regard to a “single, immutable” or “defined and static” parcel.
The Belks purchased 410 acres near Charlotte, North Carolina, and developed a 402-lot residential community along with a 184-acre golf course (pictured above) on the land. In 2004, the Belks donated a conservation easement on the golf course to a land trust and claimed a deduction of $10.5 million.
The conservation easement authorizes the landowner to remove land from the easement in exchange for adding an equal or greater amount of contiguous land, provided that, in the opinion of the grantee:
- the substitute property is of the same or better ecological stability,
- the substitution shall have no adverse effect on the conservation purposes of the easement, and
- the fair market value of the “easement interest” on the substitute land will be at least equal to or greater than the fair market value of the “easement interest” encumbering the land to be removed.
This substitution provision, explained the 4th Circuit, permits the landowner “to swap land in and out of the Easement” with the agreement of the land trust.
In affirming the Tax Court’s holding that the Belks were not eligible for a federal deduction for the donation of the easement, the 4th Circuit first noted that the “Treasury Regulations offer a single -- and exceedingly narrow -- exception to the requirement that a conservation easement impose a perpetual use restriction”—i.e.:
[if a] subsequent unexpected change in the conditions surrounding the property . . . make[s] impossible or impractical the continued use of the property for conservation purposes, the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding and all of the donee’s proceeds . . . from a subsequent sale or exchange of the property are used by the donee organization in a manner consistent with the conservation purposes of the original contribution. Treas. Reg. § 1.170A-14(g)(6)(i) (emphasis added by the court).
“[A]bsent these ‘unexpected’ and extraordinary circumstances,” explained the 4th Circuit, “real property placed under easement must remain there in perpetuity in order for the donor of the easement to claim a charitable deduction.”
The 4th Circuit then proceeded to reject each of the Belks’ specific arguments.
Plain Language of the Code
The Belks argued that § 170(h) “requires only a restriction in perpetuity on some real property, rather than [on] the real property governed by the original easement." The 4th Circuit noted that the plain language of § 170(h) belies this contention. The court explained that § 170(h) expressly defines a “qualified property interest” to include “a restriction (granted in perpetuity) on the use which may be made of the real property” and placement of the article “the” before “real property” makes clear that a perpetual use restriction must attach to a defined parcel of real property rather than simply some or any (or interchangeable parcels of) real property.
The 4th Circuit further explained that, although the easement purports to restrict development rights in perpetuity for a defined parcel of land, upon satisfying the conditions in the substitution provision the taxpayers may remove land from that defined parcel and substitute other land. Accordingly, “while the restriction may be perpetual, the restriction on ‘the real property’ is not.” For this reason, the easement donation did not constitute a “qualified conservation contribution” under § 170(h) and the Belks were not entitled to claim a deduction for the contribution.
The 4th Circuit explained that permitting a deduction for the donation of the Belk easement would enable taxpayers to bypass several requirements critical to the statutory and regulatory schemes governing deductions for charitable contributions.
For example, permitting the Belks to change the boundaries of the easement would render “meaningless” the requirement that an easement donor obtain a qualified appraisal because the appraisal would no longer be an accurate reflection of the value of the easement, parts of which could be clawed back. “It matters not,” said the court, “that the Easement requires that the removed property be replaced with property of ‘equal or greater value,’ because the purpose of the appraisal requirement is to enable the Commissioner, not the donee or donor, to verify the value of a donation. The Easement’s substitution provision places the Belks beyond the reach of the Commissioner in this regard.”
Similarly, the baseline documentation requirement (i.e., the requirement that a conservation easement donor make available to the donee documentation sufficient to establish the condition of the property at the time of the donation) “would also be skirted if the borders of an easement could shift.” “Not only does this regulation confirm that a conservation easement must govern a defined and static parcel,” explained the court, “it also makes clear that holding otherwise would deprive donees of the ability to ensure protection of conservation interests by, for instance, examination of maps and photographs of ‘the protected property.’”
The 4th Circuit also rejected the Belks’ argument that the provision in the Treasury Regulations permitting a tax-deductible conservation easement to be extinguished “in one limited instance” (i.e., in a judicial proceeding upon a finding of impossibility or impracticality) “would be invalid” if the Tax Court’s holding were upheld. The court explained that the regulation permitting extinguishment by court order if an easement can no longer further its conservation purpose does nothing to undercut the correctness of the Tax Court’s holding that § 170(h) requires a donor to grant an easement with regard to “a single, immutable parcel” to qualify for a charitable deduction.
Simmons and Kaufman Distinguishable
The Belks argued that Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012) and Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011) support the notion that § 170(h) does not require that restrictions attach to a single, defined parcel. The 4th Circuit rejected that argument, explaining that these “out-of-circuit” cases:
plausibly stand only for the proposition that a donation will not be rendered ineligible simply because the donee reserves its right not to enforce the easement. They do not support the Belks’ view that the grant of a conservation easement qualifies for a charitable deduction even if the easement may be relocated. Indeed, as we have explained, such a holding would violate the plain meaning of § 170(h)(2)(C).
Federal Law Controls Eligibility for Deduction
The Belks argued that, because North Carolina law permits parties to amend an easement, the Tax Court’s logic would render all conservation easements in North Carolina ineligible for a deduction under § 170(h). The 4th Circuit found this argument “equally unpersuasive,” explaining:
whether state property and contract law permits a substitution in an easement is irrelevant to the question of whether federal tax law permits a charitable deduction for the donation of such an easement . . . § 170(h)(2)(C) requires that the gift of a conservation easement on a specific parcel of land be granted in perpetuity to qualify for a federal charitable deduction, notwithstanding the fact that state law may permit an easement to govern for some shorter period of time. Thus, an easement that, like the one at hand, grants a restriction for less than a perpetual term, may be a valid conveyance under state law, but is still ineligible for a charitable deduction under federal law.
Savings Clause Does not Save Deduction
The Belk conservation easement provides that substitutions become final when they are reflected in a formal recorded “amendment.” The easement also provides that the land trust cannot agree to any amendment that would result in the easement failing to qualify for a deduction under § 170(h). The Belks referred to this latter provision as a “savings clause.” They argued that if the 4th Circuit found that the substitution provision violated the requirements of § 170(h), the savings clause would operate to void the offending provision, thus rendering the easement eligible for the deduction. In other words, explained the 4th Circuit, the Belks argued that the savings clause would operate to negate a right clearly articulated in the easement (the right to substitute property), but only if triggered by an adverse determination by the court.
The 4th Circuit declined to give the savings clause that effect. Citing to Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944), the court explained that “the IRS and the courts have rejected ‘condition subsequent’ savings clauses, which revoke or alter a gift following an adverse determination by the IRS or a court.” The court further noted that the Belks were asking the court to employ the savings clause to rewrite the easement in response to the court’s holding and “[t]his we will not do.”
The 4th Circuit also rejected the Belks’ “last-ditch” argument—that the savings clause is designed “to accommodate evolving … interpretation of Section 170(h)”—explaining
the statutory language of § 170(h)(2)(C) has not “evolved” since the provision was enacted in 1980…. The simple truth is this: the Easement was never consistent with § 170(h), a fact that brings with it adverse tax consequences. The Belks cannot now simply reform the Easement because they do not wish to suffer those consequences.
The 4th Circuit concluded by noting:
were we to apply the savings clause as the Belks suggest, we would be providing an opinion sanctioning the very same “trifling with the judicial process” we condemned in Procter…. Moreover, providing such an opinion would dramatically hamper the Commissioner’s enforcement power. If every taxpayer could rely on a savings clause to void, after the fact, a disqualifying deduction (or credit), enforcement of the Internal Revenue Code would grind to a halt.
The 4th Circuit’s opinion in Belk complements Carpenter v. Commissioner, T.C. Memo. 2013-172, denying motion for reconsideration and supplementing T.C. Memo. 2012-1, in which the Tax Court held that conservation easements extinguishable by mutual agreement of the parties, even if only in the event of “impossibility,” were not eligible for the charitable deduction under § 170(h). Rather, extinguishment of a tax-deductible easement requires a judicial proceeding and there are no alternatives.
Finally, it is noteworthy that, while Belk involved a conservation easement encumbering a golf course (and golf course easements have been subject to much criticism), nothing in the 4th Circuit’s opinion turned on that fact.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Tuesday, December 16, 2014
Although charitable contributions traditionally have been perceived as a contract between the donor and the charity, donors who are displeased with how their funds have been used are asking for refunds according to a recent WSJ article. In fact, some courts are starting to recognize donors’ rights over gifts after they have been given. This highlights the need for greater transparency and accountability in terms of charitable giving. The tools used in impact investing could prevent such drastic donor disappointment. It is really the result of the larger problem of uninformed giving. In an upcoming article, I examine how the tools used in impact investing can solve it. First, we must provide donors with a way to measure “return” on their investment, i.e., social impact. An impact investing tool that provides a standardized set of metrics for measuring social impact is the solution. However, not all charities merit review under this tool, and we must limit the group of charities that will undergo this review by conducting an initial qualitative analysis. Second, we must enable donors to select charities based upon a comparison of their level of social impact. The current rating system used in impact investing will achieve this end in the charitable sector as well. The article proposes a system for evaluating and rating charities by applying the tools of impact investing in order to establish what I have termed an efficient charitable market. It shows the end result will enable U.S. charitable investors to make even smarter decisions that dramatically better our world. In terms of a side note, it will also help prevent donors from seeking refunds.
Monday, December 15, 2014
A few days ago, the Aspen Institute issued a report entitled The Bottom Line: Investing for Impact on Economic Mobility in the US. The report shows how impact investing is increasing economic mobility for low-income families. The report is another example of how the nonprofit sector may have serious lessons to learn from the impact investing sector.
The report is available here.
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