Thursday, February 6, 2014
Both the Boston Globe and the Wall Street Journal report that a dispute in Massachusetts over a $172.87 property tax bill could undermine tax exemption for millions of acres held by land trusts nationwide. At immediate stake is the tax status of 120 acres of woodland owned by the New England Forestry Foundation. The bigger issue is whether merely preserving land for public use is sufficiently in the public interest to justify exempting them from property tax under applicable state and local laws, or whether instead some level of actively encouraging public use or otherwise providing public benefit is also required. Both property tax assessors for cash-strapped jurisdictions and nonprofit land trusts are closingly following the case. The Massachusetts Supreme Judicial Court heard arguments last month, and similar cases are working their way through the courts in a number of other states.
Over two years ago we noted that the Pearson Foundation, the charitable arm of major educational publisher Pearson, had allegedly paid for international trips by state education commissioners whose states did business with Pearson. The NY Times recently reported that the Foundation has now had to pay $7.7 million to resolve an inquiry by New York Attorney General Eric Schneiderman into whether the Foundation had been inappropriately aiding its for-profit counterpart. The funds will primarily go to 100Kin10, an effort to train more teachers in high-demand subject areas. The Foundation also agreed to program and governance changes to reduce its ties to Pearson.
According to the AG's press release, the inquiry focused not only on the international trips but also on whether the Foundation had been developing course materials aligned to the Common Core that Pearson then intended to sell commercially. After the inquiry began, the Foundation sold the partially developed courses to Pearson for $15.1 million. For its part, the Foundation's press release states that the Foundation fully cooperated with the investigation and always acted with the best intentions and in compliance with the law, but recognized that "there were times when the governance of the Foundation and its relationship with Pearson could have been clearer and more transparent."
The Economist reports that Britain's mutually owned, not-for-profit banks are increasingly converting to shareholder owned, for-profit institutions or collapsing. These "building societies," which dominated the residential mortgage market in the 1970s, have suffered from a variety of ailments, including poor management, high-risk lending, and a push for demutualization. Interestingly, the Economist appears to regret this development, noting the continuing success of Nationwide Building Society and commenting that "The model is worth preserving. Mutuals have tended to offer better customer service; on average, they generate fewer complaints than other lenders. The fate of British mutuals notwithstanding, studies by the Bundesbank and the IMF suggest that, overall, mutual banks are more stable than their more commercial counterparts."
Wednesday, February 5, 2014
In Private Letter Ruling 201405018 (Jan. 31, 2014), the IRS ruled that the tax-exempt status of an organization formed for the purpose of accepting, holding, and enforcing conservation easements and to convince owners of hunting land to make conservation easement donations should be revoked. The IRS determined that the organization was not operated exclusively for tax-exempt charitable purposes and, instead, operated as a conduit for its President, a CPA, to help his clients obtain sizable charitable deductions on their tax returns.
The IRS noted the following factors, among others, in support of its ruling.
Organization Was Vehicle for Enrichment of President’s Clients. The three transactions the organization had entered into were with entities connected to the President and his accounting practice (i.e., the President prepared the annual tax returns for one or more of the partners of the donating entities). This showed that the President’s intent and goals were not environmental or conservation, but rather that he used the organization as a vehicle for the enrichment of his clients, and this ran counter to the requirements in IRC § 501(c)(3) with regard to private benefit.
President Lacked Appropriate Knowledge, Training, and Experience. The President did not possess the knowledge, training, or experience to make educated decisions about whether a conservation easement serves a conservation purpose under IRC § 170(h)(4)(A). The President did not review one of the conservation easement deeds prior to signing and was unaware of the extensive rights retained by the donor until the IRS agent brought it to his attention (retained rights included the right to have two burrow [sic] pits, not to exceed two acres each, to be used for providing fill material for road repair on the property; the right to engage in not-for-profit and for-profit agricultural, farming, and aquacultural activities; the right to use agrichemicals to accomplish agricultural and residential activities permitted by the easement; and the right to extract minerals, gases, oil, and other hydrocarbons provided that the property is restored back to its natural state). In another transaction, the President failed to secure a conservation easement as intended, and instead received fee title to the land. This demonstrated the President’s lack of experience, knowledge, and willingness to act as a proper fiduciary for the organization. While the President represented that he had read a few articles and conducted some research on how an organization that accepts conservation easements should perform, his lack of knowledge and experience were strong indicators that the organization did not possess the “commitment” required under Treasury Regulation § 1.170A- 14(c) and was not operated for a charitable purpose.
Noncompliant BDRs and Monitoring and Inspection Reports. The President prepared all of the baseline documentation reports (BDRs) and monitoring and inspection reports, to the extent they existed. The President had no specialized training or general training in any area relating to the environment and did not possess “any specialized experience that would qualify him to perform these studies and inspections.”
The one-page BDRs for the three transactions the organization had entered into consisted of the barest of facts and were not substantiated by pictures, analysis, or expert opinion. There was no description of flora or fauna and each report contained a generic statement that referenced the natural characteristic of the land. The President stated that the BDRs were in accordance with Treasury Regulation § 1.170A-14(g)(5) because the regulation uses the word “may” instead of “shall” regarding what should be contained in a BDR. However, the President’s reliance on performing the bare minimum was an indication that the organization does not pursue conservation as a primary goal. The lack of detail in the BDRs also indicated that the organization does not possess the “commitment” required under Treasury Regulation § 1.170A-14(c).
The monitoring and inspection reports were even less descriptive than the BDRs. The inspection reports for one conservation easement contained one or two handwritten sentences that stated that no changes were noted. For another easement, the inspection reports were available but did not indicate what was done by the President in the way of ensuring compliance. For example, one report was extremely brief and stated “Walked by property. OK.” For the other property, there were no inspection or monitoring reports. After several months of inquiring as to the report whereabouts, the President wrote: “there are no written inspection reports. I often go by this property when riding my bicycle, but never made notes about it. The important thing is nothing has been disturbed.” This statement reflects that monitoring for compliance was not and is not a top priority for the President. This lack of vital documentation also demonstrates that the organization does not possess the commitment necessary for accepting, holding, and monitoring conservation easements.
Neither the BDRs nor the inspection reports conformed to the requirements in the Treasury Regulations. The documents did not in any way provide the information the organization would need to enforce the conservation easements. The documents and the lack of substantial information contained therein show that the main concern of the President was not the protection of open space or natural habitats, but the amount of deductions he could claim for his clients. BDRs and annual inspection reports that do not contain more descriptive information as to the type, quality, or full description of the land as well as the boundaries (i) do not meet the requirements of Treasury Regulation § 1.170(A)-14(g)(5) and (ii) are indicators of an organization that is not operating for conservation or environmental purposes.
Organization is Not Run as a § 501(c)(3) Charitable Organization. A number of factors indicated the organization is not run as a § 501(c)(3) charitable organization. There were no financial records beyond what was contained in bank statements. There were no solicitations to the general public for support, and no receipts, expense vouchers, or balance sheets prepared at year end. Considering the fact that the President was a CPA and an expert in this field, this situation was disturbing at best, and at worst demonstrated that the President had not been working in the best interests of the organization.
The fact that the organization had received only two conservation easements and one land transfer in four plus years showed that the commitment to perform as a conservation organization as described in the Treasury Regulations was not present. There were no educational events developed and sponsored by the organization, and the organization did not appear to hold itself out to the public as a charitable conservation organization, except through word-of-mouth and the President’s clients.
The organization was not operated in accordance with it Bylaws. There were no meetings of officers or board members and no elections. There were no internal controls and only the bare minimum with regard to records and recordkeeping. In essence, the President had sole control and was operating his own business under his own terms.
President’ lack of expertise in the area of conservation easements and the lack of detail in the BDRs and inspection reports showed that the organization does not have clear established criteria for accepting easements, nor adequate procedures in place for enforcing the easements. There was no one associated with the organization that had any formal education, training, or expertise in conservation matters and it is not known whether the appraisers that appraised the donated easements had qualifications in valuing conservation easements. The Organization's monitoring activities (such as they were) could not further a charitable purpose because there was no knowledge as to whether the easements the organization accepted served a conservation purpose. Moreover, there was no evidence that the organization possessed sufficient resources to enforce the easement restrictions in instances where a donor were to use an underlying property contrary to a conservation purpose.
Organization Was Not Operated Exclusively for an Exempt Purpose. The organization does not meet the requirements set forth in Treasury Regulation § 1.501(c)(3)-l(c)( 1). More than an insubstantial part of its activities consisted of the acceptance of conservation easements or property transfers for which there was not proper documentation, and the organization failed to establish that acceptance of the easements furthered an exempt purpose. In short, the organization failed to operate for a charitable conservation purpose.
The Organization also failed to meet the requirements set forth in Treasury Regulation § 1.501(c)(3)- l(d)(l)(ii) because it serves the private interests of the President and his clients. The presence of a single substantial non-exempt purpose precludes exemption under IRC § 501(c)(3). The organization exists not to serve the greater good of the general public, but rather to fit the needs of the President’s clients to have sizable deductions on their tax returns.
Organization Failed Public Support Test. The President calculated the public support percentage under IRC §§ 509(a)(1) and 509(a)(2) incorrectly. He failed to take into account that all monies received came from substantial contributors, which by definition are disqualified persons. When properly calculated, public support under both IRC §§ 509(a)(1) and 509(a)(2) was zero. As such, the organization cannot be considered publicly supported and, if revocation of exempt status is not pursued, reclassification to a private foundation should occur.
* * * * *
A Private Letter Ruling is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. A PLR may not be relied on as precedent by other taxpayers or IRS personnel. PLRs are generally made public after all information has been removed that could identify the taxpayer to whom it was issued. See Understanding IRS Guidance – A Brief Primer.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
An Illinois Appellate Court recently affirmed the grant of summary judgment in favor of the Attorney General against Maxwell Manor, a charitable nonprofit corporation that operated a nursing home, and several of its directors and officers. The decision, People v. Manor, 2013 IL App. (1st) 113132-U, provides a case study of failure to comply with state law duties, including not only fiduciary duties but also registration and annual report requirements. The heart of the case was the decision by Executive Director JoeAnn McClandon to cause Maxwell Manor and the family partnership that owned the nursing home's building and land to jointly sell the nursing home to a third party for $13,500,000, followed by not only a failure to report the sale to the Attorney General but also a decision by Ms. McClandon to write a check to herself for $2 million, allegedly in repayment of previous personal loans she had made to Maxwell Manor. The court's opinion details the repeated failures under state law, including not reporting the alleged personal loans to Ms. McClandon on the required annual reports, the failure to report the sale or to file the required annual reports for the years after the sale occurred, and the failure to properly account for the $2 million transferred to Ms. McClandon. Not surprisingly, the court affirmed a $2 million judgment against Ms. McClandon, and also the removal of Ms. McClandon and two directors and officers, the dissolution of Maxwell Manor, and the distribution of the organization's remaining assets pursuant to cy pres.
While such situations are fortunately relatively rare, what is rarer still is having such a detailed account of the relevant facts and circumstances and a definitive court ruling laying out both the legal violations and the sanctions imposed. I think I may have found one of my fact patterns for the next time I teach Not-for-Profit Organizations.
NY Trial Court Orders Property Tax Exemption for Drug Policy Alliance HQ Despite Alleged "Advocacy" Focus
A New York court has granted the Drug Policy Alliance's petition for real estate property tax exemption for its New York City headquarters, rejecting the previous denial by the New York City Department of Finance, which had been affirmed by the New York City Tax Commission. In Drug Policy Alliance v. New York City Tax Comm'n, NY Slip Op 33273 (U), the court rejected the city agencies' argument that the Alliance's alleged primary focus on legislative and policy change disqualified it from exemption as an "exclusively" educational organization. The court noted that the Alliance already enjoyed exempt status under federal (501(c)(3)), state, and city authorities, a fact the Commission failed to mention in its decision, and that similar organizations had been granted exemption under a liberal interpretation of the relevant regulation. Given these conclusions, the court declined to reach the Alliance's constitutional claims that the denial was based on the content of the Alliance's public advocacy, which relates to reducing the harms of both drug use and drug prohibition.
While not a surprising result, this dispute indicates the continuing struggle many otherwise tax-exempt organizations face in convincing local authorities that the term "educational" as generally used in both federal and state law is broad enough to encompass public education and advocacy, including with respect to controversial issues. Kudos to the New York Civil Liberties Union Foundation, the Asian American Legal Defense Fund, and the Lawyers Alliance for New York for supporting the Alliance in this case through amicus briefs.
Tuesday, February 4, 2014
In Revenue Procedure 2014-11, the IRS revised the procedures that organizations should use to apply for reinstatement of their tax-exempt status if they have lost that status because of a failure to file required information returns three years in a row. The IRS has also provided a summary of the new procedures, which includes a process by which smaller organizations that were only required to file the Form 990-EZ or Form 990-N and that submit a new application for recognition of exemption within 15 months will not need to have reasonable cause for the failure to file and will also avoid any late filing penalties. Other, more demanding processes are available for groups required to file Form 990 or Form 990-PF and for groups seeking retroative reinstatement more than 15 months after their automatic revocation. As always, groups can instead simply seek prospective reinstatement by filing the required application.
As part of the continuing guidance under Internal Revenue Code section 501(r), the IRS in Notice 2014-3 has proposed a revenue procedure that allows hospitals to retain their tax-exempt status for failures under that section as long as such failures were not willful or egregious and the hospital corrects and disclosures the failures as provided in the proposed revenue procedure. Correction must be promptly made after discovery of the failure at issue, must be reasonable and appropriate, and must retore each affected person to the extent reasonably feasible. Correction may also need to include establishing or modifying practices and procedures to prevent future failures. A hospital makes the required disclosure on Schedule H of its Form 990 for the year in which the failure is discovered.
In Notice 2014-4, the IRS provided guidance regarding how a Type III supporting organization can qualify as functionally integrated (the more favorable classification for this type of supporting organization under a variety of applicable tax rules) by supporting a governmental supported organization. More specifically, the notice provides that until final regulations are published or two or so years have passed (whichever occurs earlier), a Type III supporting organization will be treated as functionally integrated if it:
(1) Supports at least one supported organization that is a governmental entity to which the supporting organization is responsive within the meaning of § 1.509(a)–4(i)(3); and
(2) Engages in activities for or on behalf of the governmental supported organization described in paragraph (1) that perform the functions of, or carry out the purposes of, that governmental supported organization and that, but for the involvement of the supporting organization, would normally be engaged in by the governmental supported organization itself.
This guidance once again highlights the complexity of the supporting organization rules, which are also illustrated by the now out-dated flow chart provided above that the IRS prepared before the 2006 amendment of the relavent statutory provisions.
Wednesday, January 29, 2014
Writing in today's Chronicle of Philanthropy, Alex Daniels reports that the nonprofit community is praising President Obama's pitch in last night's State of the Union address seeking to get foundations more involved in supporting education for young children and increased economic opportunities for young African-American men.
However, nonprofit leaders are maintaining that charities cannot be expected to solve those problems alone. Rather, they claim, Congress must follow through with increased spending in those areas.
Diana Aviv, president of Independent Sector (a national nonprofit asociation), stated: "The sector's capacity and resources are dwarfed by the might of the federal government. The best we can do is fill in the gaps."
According to Ms. Aviv, the president's push for an increased minimum wage, pay equality for women, and early-childhood education should be welcomed by nonprofit groups that work in those causes.
The Chronicle's report continues:
In the speech, Obama called for foundations’ assistance to work on a plan to “help more young men of color facing tough odds stay on track and reach their full potential.”
The W.K. Kellogg Foundation welcomed that focus and said it was working with 25 community foundations in Mississippi to promote help young black men complete their education and find jobs.
Mr. Obama also said he would convene a coalition of philanthropists, elected officials, and business leaders to develop strategies to improve early-childhood education.
The prospect of such a coalition was “pretty exciting,” according to Kris Perry, executive director at the First Five Years Fund, which supports pre-kindergarten education, but she said she needed to learn more about how it would work.
Ms. Perry noted that it was the second straight year Obama has pushed for a greater emphasis on the subject in his State of the Union address. Last year, his call for increased funding for programs like Head Start that provide schooling for young children fell victim to across-the-board budget cuts that reduced the program’s budget by 5.3 percent.
“Even though there was a commitment on [Obama’s] part, the government came to a grinding halt,” Ms. Perry said.
Ms. Perry is confident that President Obama’s emphasis on early-childhood education can result in additional funding, even in an era of tight budgets and political gridlock.
“Early-childhood education is on the top, top, top of everybody’s must-do policy list,” she said. “It’s a wonderful opportunity for the parties to come together and agree on something.”
I agree with the nonprofit leaders. While the nonprofits will play their part, Congress must step up to the plate and provide more funding for these initiatives.
Both the Detroit Free Press and the Detroit News are reporting that the W.K. Kellogg Foundation on Tuesday committed $40 million to a philanthropic fund to help resolve Detroit's bankruptcy. Kellogg thus joins nine other national and local foundations in the unprecedented municipal rescue effort.
Kellog's pledge is the third-largest to the now-$370 million fund aimed at shrinking Detroit's multibillion-dollar pension liability and shileding masterpieces at the Detroit Institute of Arts from possible sale to satisfy creditors. The Ford and Kresge foundations have promised $125 million and $100 million, respectively.
Tuesday, January 28, 2014
With tonight's State of the Union address just a few hours away, nonprofit organizations are wondering what news -- good or bad -- they will receive from President Obama. Writing in today's Nonprofit Quarterly, Rick Cohen reviews the already-delivered State of State speeches of 2014 and ponders whether "these state addresses presage anything that nonprofits might hear in President Obama's State of the Union."
Meanwhile, the Miami Herald is reporting that the nonprofit group, One Miami, is organizing a watch party for the president's address. The event will be attended by nonprofit groups in South Florida. The groups are hoping President Obama will address immigration reform and the minimum wage in his speech. They also hope to find out what the president will propose to deal with the nation's growing income gap.
The California Historical Society is accepting nominations for the 2014 California Historical Society Book Award.
According to today's Philanthropy News Digest, the Society will award a cash prize of $5,000
to a book-length manuscript that makes an important contribution to California historical scholarship and adheres to high scholarly standards while being lively and engaging to general readers. In addition to conventional works of historical scholarship, other works eligible for consideration include biographies, collections of letters or essays, photographic or artistic studies, creative nonfiction, and other ways of informing the mind and engaging the imagination in an understanding of California’s past.
The winning manuscript will be published in both print and e-book format, and the society will pay for an awards ceremony, promotion, and an author’s tour.
Eligibility and application guidelines are available at the California Historical Society Website.
Tuesday, January 14, 2014
Several blogs, including Paul Caron's Tax Prof Blog, reported earlier in January about Cornell professor William A. Jacobsen filing a complaint with the IRS challenging the tax-exempt status of the American Studies Association for its decision to join a boycott of certain Israeli academic organizations. You can read all about Professor Jacobsen's rationale and his complaint at his own blog, Legal Insurrection.
While ASA's boycott action is not in accord with my own beliefs regarding academic exchange, I also think Prof. Jacobsen's complaint is going nowhere. The complaint appears to rest on two grounds. The first is that ASA's boycott is not an "educational activity" and therefore violates the organizational and operational tests for exemption. The second is that the boycott essentially violates the "public policy" limitation on exemption created by the Bob Jones University case.
Neither argument, in my view, should be sustained. As to the first, even if one believes that the boycott action by ASA is not "educational," the law is quite clear that a charitable organization can engage in some ("insubstantial") amount of non-charitable activity. See Treasury Regs. 1.501(c)(3)-1(c)(1). Of course, we could argue about whether ASA's action is "insubstantial" - this is a word that the IRS has failed to define over the 50+ years it has been part of the regulations - but ASA continues to carry on a very real and substantial charitable program apart from its boycott action. The boycott is hardly the "only" thing ASA does, or arguably even a very large part of it; a visit to the ASA web site will show that the organization carries on a very active program of academic conferences and exchange.
Second, it is not nearly as clear as Professor Jacobsen seems to believe that the boycott itself is not an "educational" activity within the meaning of the IRS regulations. The regs. state that "educational" involves both "training of the individual" and "The instruction of the public on subjects useful to the individual and beneficial to the community." Regs. 1.501(c)(3)-1(d)(3). The latter phrase encompasses all sorts of activities designed to inform the population; a planetarium, a zoo, a symphony orchestra - all are organizations that are "educational" because they provide useful information to the public. The boycott by ASA, whether you agree with it or not, arguably is bringing information to the public about the treatment of Palestinians by Israel; it is a technique to shed light on certain information. Boycotts have long been used "to get a point across." Do we really want the IRS to make value judgments regarding when boycotts are "good" and therefore educational and when they are "bad" and therefore not educational? I sure don't. Boycotts serve an information-dissemination purpose. In my view, that is "educational" even if I find the purpose distasteful, stupid, or both.
Professor Jacobsen's second argument is that the boycott violates the "public policy" limitation on exemption by violating U.S. public policy against boycotting Israel and by violating public policy against discrimination on the basis of national origin. This, too, is unlikely. In the Bob Jones University case (461 U.S. 574), the Supreme Court found that discrimination on the basis of race, even if not illegal, was nevertheless a violation of such a fundamental public policy that it should result in revocation of exemption. Much has been written about the scope of Bob Jones - including excellent analyses by fellow blog contributors David Brennan and Johnny Rex Buckles - but suffice it to say that the IRS has never expanded the holding of Bob Jones beyond the proposition that discrimination against a minority class on the basis of race in the educational context is grounds for revoking exemption. Not gender discrimination; not religious discrimination; not sexual orientation discrimination; not national origin discrimination; not a public policy against boycotting Israel; not a host of other things. Again, we all can legitimately argue about what the scope of the public policy limitation ought to be, but under current IRS doctrine, the ASA boycott simply isn't a public policy violation. And I very seriously doubt that the IRS will take this opportunity to dramatically expand its reading of Bob Jones.
So I'm going to go out on a limb here and make a prediction: Professor Jacobsen's complaint has had its 15 minutes of fame and you won't be hearing any more about it, at least not from the IRS.
And for the record, I think the ASA's boycott is really dumb.
Sunday, January 12, 2014
On January 6, 2014, the Massachusetts Supreme Judicial Court heard arguments in an appeal from a Massachusetts Appellate Tax Board opinion upholding a town’s refusal to exempt from property taxation forestland that the New England Forestry Foundation (NEFF) owns in fee. NEFF is a charitable organization whose mission is to “conserve New England’s working forests through conservation and ecologically sound management of privately owned forestlands.” The property at issue is a 120-acre parcel of forestland, bordered on two sides by state forest, on which NEFF conducts sustainable forestry practices. Between 2000 and 2009, NEFF collected about $24,000 from the sale of timber products from the property.
NEFF contends that its ownership and management of the property provides many benefits to the general public, including recreational and scenic opportunities (the property is open to the public), improved water and air quality, protection of habitat for a variety of wildlife, and education of private landowners and the public regarding sustainable forestry practices.
The town contends that NEFF’s dominant purpose with respect to the land is forestry, and that any educational activities it provides are minimal and, at best, ancillary to that dominant purpose. The town also contends that NEFF has done little to encourage public use of the land, alleging a lack of sufficient signage alerting the public to the property’s availability for public use, NEFF’s failure to disseminate information about the parcel to the public on any wide scale, and the public’s limited access to the property because the property is situated at the end of a dirt road that appears to be a private driveway.
In its January 2013 opinion in New England Forestry Foundation v. Board of Assessors of the Town of Hawley, the Massachusetts Appellate Tax Board ruled that NEFF failed to meet its burden of proving that it occupied and used the subject property in furtherance of a traditional or an otherwise accepted charitable purpose within the meaning of the state statute governing property tax exemptions. The Board dismissed NEFF’s argument that the property should be exempt because it provides an environmental benefit in the form of preservation of a habitat for diverse species. Citing to a tax exemption case decided in 1966, the Board noted that
while the preservation of nature may be a laudable goal, "simply keeping land open and allowing its natural habitat to flourish is not sufficiently charitable. Appellant must demonstrate 'an active appropriation to the immediate uses of the charitable cause for which the owner was organized.'"
The Board also noted that “[T]he absence of public access to land has consistently proven fatal to a landowner’s claim of charitable exemption.”
The Appellate Tax Board’s reliance on a 1966 court opinion for the proposition that “simply keeping land open and allowing its natural habitat to flourish is not sufficiently charitable” was misplaced. What constitutes a valid charitable purpose evolves over time as the needs of society change, new discoveries are made, and the conditions, characters, and needs of different communities evolve. In the almost 50 years since the 1966 decision was handed down there have been significant advances in our understanding of ecological processes and environmental science. We now recognize that many public benefits in the form of ecosystem services flow from protecting land in its undeveloped state, including the maintenance of biodiversity, the purification of air and water, the mitigation of floods and droughts, the detoxification and decomposition of wastes, the generation and renewal of soil and soil fertility, the pollination of crops and natural vegetation, and the dispersal of seeds and translocation of nutrients. Accordingly, it is not surprising that § 28 of the Restatement (Third) of Trusts, published in 2003, specifically recognizes the promotion of “environmental quality” as a valid charitable purpose that falls within the intentionally broad and evolving category of “purposes beneficial to the community.”
Moreover, providing public access to conserved lands could in some cases be detrimental to the protection of important conservation values, such as habitat for sensitive species. Providing public access also involves costs to the charitable organization owning the land, as it generally entails the maintenance of liability insurance as well as trail maintenance, maintenance of appropriate signage, monitoring, waste management and clean up, and repairs for vandalism. Domestic dogs and off-road vehicles can be particularly vexing problems, as they can negatively impact both the protection of conservation values and public enjoyment and safety.
A 2013 opinion of the New Mexico Court of Appeals reflects an understanding of the evolving definition of charitable purposes and the varied public benefits that can be provided through the conservation of land. In Pecos River Open Spaces v. County of San Miguel, the New Mexico Court of Appeals held that a 60-acre parcel of conservation land owned by a charitable conservation organization was “used for…charitable purposes” and therefore properly exempt from property taxation. The court explained that “there can be little question that conservation of land in its natural and undeveloped state generally benefits the public” and “the way conservation [of land] benefits the public is through maintaining the Property for the public's benefit in its natural, pristine state without any particular human activities or construction.” The court noted, however, that not every parcel of conserved land is “inherently suitable to be classified as substantially beneficial to the public, and thus charitable”—rather, a case-by-case analysis of the public benefits provided is required. The court found that conservation of the 60-acre parcel at issue provided substantial benefits to the public because of the land’s location near the Pecos River, its natural and undisturbed quality, and its contribution to environmental preservation and the beautification of San Miguel County and the State. “This use,” said the court, “provides a benefit of real worth and importance to the public.”
Whether the Massachusetts Supreme Judicial Court will follow the lead of the New Mexico Court of Appeals in considering whether conserved lands are being used for a charitable purpose is uncertain. However, in light of our current understanding of the many public benefits that can flow from conserved lands, as well as the economic and environmental costs that can be associated with providing public access to such lands, conditioning property tax exempion of conserved lands on public access would seem not only inappropriate but also unwise. A more nuanced approach is called for—one that takes into account the variety of public benefits that we now know can flow from the conservation of land.
Court filings in the case, including five amicus briefs, can be found here.
Boston Globe coverage of the case can be found here.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Thursday, December 26, 2013
With a big red floppy hat tip to the TaxProf Blog, this Forbes article brings tax geekiness to admirable new heights, as a tax lawyer tries to distract her children on Christmas Eve with a discussion of St. Nick's Form 1040-NR. Do read the whole thing, but for our purposes here on the Nonprofit Prof Blog, here's the fun part:
The kids are pretty sure – and I agree – that Santa doesn’t intend to operate as a for profit business. But he likely doesn’t meet the criteria to be tax exempt under section 501(c)(3) of the Internal Revenue Code. By default, that would make his venture for profit for purposes of IRS (whether he wants to make money or not) and therefore, taxable.
Even if Santa’s toy distribution scheme were to be classed as a non-profit, there may be other unrelated trade or business income… As noted earlier, my house isn’t sure where Santa gets his money. Clearly, he isn’t paid for his services though my kids question the value of cookies and milk left out for him (that is, as my seven year old noted, a LOT of cookies). Since we’ve seen a lot of Santa merchandise in stores, we’ve worked out that we think he gets some licensing revenue for his own image and also for Rudolph – kind of like Pixar does for Lightning McQueen and Buzz Lightyear. That income would be taxable to the extent that it’s not offset with expenses. So, assuming all of this, what’s deductible?
So here's my question, would Santa's operations qualify for Section 501(c)(3) status? I mean, clearly he could structure his licensing revenue as a royalty exempt from UBIT and even drop it into a for profit sub if need be. I don't really see an inurement or a private benefit issue - surely, all good kids in the world constitute a charitable class. He's not been lobbying as far as I know, so barring a big political endorsement, I'm not seeing the issue. So does Santa just need good nonprofit counsel?
Merry Christmas (a day late) to all who celebrate, and a joyous New Year to all.
Friday, December 13, 2013
With the end of the year looming, many Americans find themselves deliberating over which charity they should write a check to. Why? For at least some people who actually believe this to be true, the reason is often the charitable tax deduction.
A December 2012 Marketplace article explained the “holiday season is the time when many Americans do their end of the year charitable giving. A third of American tax payers itemize deductions and 80 percent of those Americans take advantage of the charitable tax deduction.” The phenomenon that is end of the year giving and the benefits of the charitable tax deduction were revisited in a Marketplace article from earlier this week.
The recent article traces the genesis of the charitable tax deduction back to the Gilded Age, “a time when a small group of Americans were making very large amounts of money, and giving some of it away to start schools and museums and libraries and fund other causes they cared about.” The article provides that with the start of the First World War in 1917, U.S. Senator Henry French Hollis was worried Congress’ plans to finance the war by raising the top rate of the income tax from 15 percent to 77 in only a few years would have an adverse affect on philanthropy. Hollis worried the wealthy would stop donating because he believed people usually “’contribute to charities out of their surplus. After they've done everything else they want to do, after they've educated their children and traveled and spent their money on everything they really want or think they want, then, if they have something left over, they will contribute.’”
The article explains the research on the degree to which the charitable deduction has actually affected the amount of money people give every year is divided, but the goal of the deduction, to incentivize charitable giving, has always been clear.
Does the charitable tax deduction incentivize charitable giving? If so, to what extent has it been successful?
A few days ago in an article from the Wall Street Journal, former chairman of the Federal Election Committee Bradley A. Smith claimed the IRS’ recently proposed rules for dealing with the political activity of nonprofits “would plunge the agency deeper into political regulation.”
Clearly frustrated with the new rules, Smith argues the rules disturb over 50 years of settled law and practice because they limit the ability of certain tax-exempt 501(c)(4) nonprofits to conduct nonpartisan voter registration and voter education. Additionally, Smith notes the rules place restrictions on nonprofit public communication over any aspect of a president’s judicial nominees between February 2 and the national Election Day.
Smith asks why the IRS is regulating political activity at all and suggests it is because “many Democratic politicians and progressive activist think the new rules limiting political speech by nonprofits will benefit Democrats politically.”
Smith goes on to claim “these progressives” have propagated “three myths” about 501(c)(4) organizations to further that end:
- 501(c)(4)s are ‘charities,’ and doing political work abuses their charitable status;
- 501(c)(4)s must be operated ‘exclusively for the promotion of social welfare,’ not politics; and
- Political activities shouldn't get tax breaks.
Smith’s ultimate conclusion is that “to anyone concerned with public confidence in nonpartisan tax collection and preventing future IRS scandals, the solution is not more tax rules. It is for the IRS to get out of the business of regulating politics.”
Wednesday, December 11, 2013
In a Forbes article from earlier this week, the author calls into question the charitable purpose and tax-exempt status of prestigious schools like Harvard and Stanford. The author argues that the treatment of nonprofit organizations such as Harvard and Stanford is “problematic both practically—it costs the government billions of dollars in tax revenue every year—and philosophically, as it creates a paradigm that misunderstands the way many ‘nonprofit’ organizations operate and the role that for-profit corporations ought to play in society.” The author goes on to claim that the best solution is to “eliminate the very idea of the nonprofit sector.”
Essentially, the author claims it is incredibly easy for organizations to obtain tax-exempt status and that determining whether an organization is trying to make and distribute a profit as the basis for distinguishing between the private and voluntary sector is ineffective because nonprofits are also making and distributing profits.
What, if anything, would be the consequences of eliminating the idea of the nonprofit sector?
Saturday, December 7, 2013
Zhaohui Long (Sun Yat-Sen University) and Xiaoling Hu have posted Research on Tax Incentives for Charitable Donations of Non-Monetary Assetsby Chinese Corporations, 3 Journal of Chinese Tax and Policy 21 (2013). Here is the abstract:
Corporate donations form a substantial part of social charitable donations in China. Corporate non-monetary asset donations are important in this regard as they bring goods and materials to areas where they are desperately needed. However, the current scope and scale of corporate donations are narrow due to a lack of tax incentives. This paper will explain the incentive effects of the current tax regime by analyzing how asset donations are treated by Chinese taxation laws, from the perspective of macroeconomic policies and market demands. It particularly focuses on the relatively heavy tax burden and limited scope for tax exemptions on corporate asset donations in China. In light of this, we propose some pragmatic suggestions on incentivizing policies that are more suitable for China’s current situation, such as increasing the exemptions before tax and allowing exemptions to roll over to future years, developing incentive policies on indirect and property taxes, and establishing the mechanism for third-party price evaluation and equity donation regulation, etc