Thursday, May 22, 2014

California AG Scrutinizing San Diego Opera

The Los Angeles Times reports that California Attorney General Kamala Harris is examining the San Diego Opera, a tax-exempt section 501(c)(3) organization that has recently announced its intention to continue operating notwithstanding a prior decision to shut down.  Thus far, the AG has directed the opera company to produce certain records and retain all existing documents.  A spokesman for the opera is reported as saying that he could not elaborate on the nature of the AG’s request.

The story continues with an explanation of how the AG’s inquiry may have sprung to life:

Lorena Gonzalez, a state assemblywoman for District 80 in San Diego, said she'd reached out to the attorney general in mid-April with concerns about the way opera leaders handled the announcement that the opera would close.

She said there were questions about Ian Campbell, the opera's longtime general and artistic director, and whether he and other leaders had given an accurate portrait of the company's financial health when communicating with potential donors and government funding sources.

"There are questions about whether the company received taxpayer dollars based on false information," said Gonzalez.

However, a lawyer for Campbell disputed Gonzalez's concerns. "Ian was fairly consistent in representing accurate information to donors and especially internally within the company," said Gil Cabrera, a San Diego attorney.

According to the Times, Keith Fisher, the opera's COO, issued a statement that the opera welcomed "the opportunity to open our records to Kamala Harris' office, as doing so will assure the public of our promise of transparency and good governance."



May 22, 2014 in Current Affairs | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 21, 2014

The Future of the NCAA

The Christian Science Monitor is running a fairly interesting piece on the challenges facing a major charitable nonprofit – the National Collegiate Athletics Association.  Without revisiting the various arguments on whether the NCAA should remain exempt from federal income tax, the story briefly addresses some of the legal matters of relevance to the NCAA – including a couple of antitrust suits working their way through the courts, as well as the NLRB ruling that Northwestern University football players can unionize.  Perhaps of more interest is the story’s discussion of possible changes to NCAA rules.  Key excerpts follow:

The lawsuits and mounting pressure from Congress point to a long period of reform in which the NCAA is likely to be reshaped more deeply ….

Perhaps colleges will be allowed to offer more than scholarships to lure top prospects. Or top players will be able to cash in on their fame though image rights. Or perhaps major college football will be broken off from universities as a semi-independent entity with new rules. The unprecedented nature of the challenges facing the NCAA means it's virtually impossible to predict what might come next. But many analysts believe college football and basketball will be different, and perhaps significantly so. …

At the core of the reform campaign is the conviction among players that they are becoming employees without adequate compensation.

The article then briefly describes in broad brush various proposed NCAA reforms, some more sweeping than others.


May 21, 2014 in Current Affairs | Permalink | Comments (0) | TrackBack (0)

“One Fund” Scammer Receives Jail Time

CNN reports that a woman who attempted to defraud One Fund Boston, the charitable nonprofit created to aid victims of the Boston Marathon bombings, pleaded guilty Tuesday to collecting a fraudulent $480,000 claim filed with the charity.  Audrea Gause, a New Yorker, reportedly was sentenced to two and a half to three years in prison.  The story states that Gause submitted forged medical records in June 2013 indicating that she had suffered injuries in the bombings, but an investigation found that she was not a patient at Boston Medical Center on the day of the bombings or at Albany Medical Center at the times that she had previously claimed.  The money has been secured and will be returned to the charity. 

According to the Massachusetts Attorney General's office, two brothers are also awaiting trial for attempting to defraud the One Fund in a separate scam.


May 21, 2014 in Current Affairs | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 20, 2014

AALS Sections Call for Paper Proposals

I received the following call for paper proposals from our colleague and fellow blogger, Professor Lloyd Mayer, which I pass along:


AALS Section on Nonprofit and Philanthropy Law


AALS Section on Taxation (Co-Sponsor)


Call for Paper Proposals

2015 Annual Meeting Section Panel

Saturday, January 3, 2015, 10:30 a.m.–12:15 p.m.

IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable?


The Section on Nonprofit and Philanthropy Law is issuing a call for paper proposals for its session on IRS oversight of charitable and other tax-exempt nonprofit organizations. The panel, co-sponsored by the Section on Taxation, will be held on Saturday, January 3, 2015, from 10:30 a.m. to 12:15 p.m., at the 2015 Annual Meeting in Washington, DC. Proposed papers might address: the role of the IRS in overseeing specific aspects of tax-exempt nonprofit organizations, such as political activity or governance; the relative strengths and weaknesses of IRS oversight compared to oversight by other actors, including state attorneys general and private, self-regulating bodies; the effect of the late-1990s reorganization of the IRS on its ability to oversee tax-exempt nonprofit organizations; or the overlapping jurisdictions of the IRS with other federal agencies that oversee aspects of nonprofit organizations, such as the Federal Election Commission, the Federal Trade Commission, and the Department of Education.

Panelists will be a mix of presenters chosen through this call for paper proposals and solicited panelists with relevant expertise. Presenters will have the opportunity to publish their papers in the faculty-edited Pittsburgh Tax Review. To facilitate such publication, panelists will be expected to have a completed draft by the January 3, 2015 panel presentation and a final draft by February 28, 2015.

To submit your proposal, please email a short description (no more than 750 words) of your paper to Lloyd Hitoshi Mayer, Chair of the Section on Nonprofit and Philanthropy Law, at, and Miranda Fleischer, Chair of the Section on Taxation, at The deadline for proposals is Friday, August 15, 2014. The Executive Committees of the sponsoring sections will select the papers to be presented by mid-September. Please be aware that pursuant to AALS rules, only full-time faculty members of AALS members law schools are eligible to submit a paper proposal in response to a section’s call for papers. However, fellows from AALS member law schools are also eligible to submit a paper proposal if they include a CV with their proposal. Faculty at fee-paid law schools, international, visiting, and adjunct faculty members, graduate students, and non-law school faculty are not eligible to submit.

If you have any questions, please contact Lloyd Hitoshi Mayer at


May 20, 2014 in Conferences | Permalink | Comments (0) | TrackBack (0)

Most Recent Nonprofit Advocacy Matters

The National Council of Nonprofits has published its most recent edition of Nonprofit Advocacy Matters.  Coverage includes the following:

  1. Descriptions of, and links to, recent studies on government-nonprofit contracting issues, one by the Urban Institute and another by the National Council of Nonprofits;
  2. A brief critique of the Office of Personnel Management’s rule changes governing the Combined Federal Campaign, which will (it is argued) adversely affect federal workplace giving to nonprofits; and 
  3. A summary of a new California law requiring politically active, non-charitable nonprofits to disclose the names of their donors in some circumstances. The law reportedly requires IRC section 501(c)(4) organizations and IRC section 501(c)(6) trade associations to make public their donors’ names if the donee entity spends or contributes over $50,000/year (or $100,000/four-year period)  in electioneering in the state.  The names of those donors giving $1,000 or more for political activity in California must be disclosed.  According to the piece, the new law also requires committees raising at least $1 million on ballot measures to disclose the 10 most generous donors who donated at least $10,000.


May 20, 2014 in In the News | Permalink | Comments (0) | TrackBack (0)

Friday, May 16, 2014

Massachusetts Supreme Judicial Court Rules on Property Tax Exemption for Conservation Lands

NEFF Forest copy 2In New England Forestry Foundation v. Board of Assessors of Town of Hawley, SJC-11432 (May 15, 2014), the Massachusetts Supreme Judicial Court held that land owned in fee by a charitable conservation organization, the New England Forestry Foundation (NEFF), and open to the public was eligible for a property tax exemption. The court drew an important distinction between conservation lands to which the public is permitted access and those to which the public is denied access, and imposed a heightened burden in the latter case to qualify for the exemption.


NEFF’s mission is to provide “for the conservation and ecologically sound management of privately owned forestlands.” It accomplishes this mission by, among other things, educating landowners, foresters, forest product industries, and the general public about the benefits of forest stewardship; permanently protecting forests through gifts and acquisitions of land; actively managing lands as demonstration and educational forests; and supporting the development of forest policy and forest practices that encourage and sustain private ownership.

The property at issue is a 120-acre parcel of forested land, known as the “Hawley Forest,” which is bordered on two sides by a State forest. NEFF conducts sustainable forestry practices on the property and the property is open to the public.

NEFF applied for a full property tax exemption for the property under Massachusetts G. L. c. 59, § 5, Third (Clause Third), which exempts from taxation “real estate owned by … a charitable organization and occupied by it or its officers for the purposes for which it is organized.” The Board of Assessors of the Town of Hawley denied the application, and in a January 2013 opinion (discussed here), the Massachusetts Appellate Tax Board upheld that denial. NEFF appealed, and both NEFF and assessors filed applications for direct review by the Massachusetts Supreme Judicial Court.

The Two-Pronged Test

In holding that NEFF qualified for an exemption with regard to the Hawley Forest for the year at issue, the Massachusetts Supreme Judicial Court explained that qualification for an exemption under Clause Third requires satisfaction of a two-pronged test:

  1. the organization seeking the exemption must qualify as a “charitable organization” within the meaning of Clause Third, and
  2. the organization must occupy the property in furtherance of its charitable purposes.

The court found that NEFF satisfied both prongs of this test.

1. Charitable Organization Requirement

The court explained that neither an organization’s legal status as a charitable corporation nor its exemption from federal taxation under IRC § 501(c)(3) is sufficient to satisfy Clause Third’s “charitable organization” requirement. Rather, the organization must prove that “it is in fact so conducted that in actual operation it is a public charity.”

Citing to Jackson v. Phillips, 14 Allen 539, 556 (1867), the court explained that charity is

a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves in life, or by erecting or maintaining public buildings or works or by otherwise lessening the burdens of government.

The court then explained that the closer an organization’s dominant purposes and methods hew to these traditional charitable purposes, the more likely the organization is to qualify as a “charitable organization” under Clause Third.

The court found that NEFF’s purposes constituted traditional charitable purposes within the meaning of Clause Third and the Jackson v. Phillips definition of charity because NEFF’s programs and activities both (i) benefit an indefinite number of people and (ii) assist in lessening the burdens of government.

a. Benefiting an Indefinite Number of People

When the Massachusetts Appellate Tax Board denied NEFF’s application for a tax exemption, it dismissed NEFF’s argument that the Hawley Forest should be exempt because it provides an environmental benefit in the form of preservation of a habitat for diverse species. In support of its denial, the Board cited a 1966 tax exemption case, Assessors of Boston v. The Vincent Club, 351 Mass. 10, 14 (1966), in which the court stated

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 “the absence of public access to land has consistently proven fatal to a landowner’s claim of charitable exemption.”

Recognizing that times have changed in the almost 50 years since it decided Vincent Club, the court updated its view in NEFF v. Hawley. The court explained:

Historically, the “benefit” provided by land held as open space or in its natural state has been measured by the direct access of people to that land for such purposes as recreation, scenic views, or education…. However, as the science of conservation has advanced, it has become more apparent that properly preserved and managed conservation land can provide a tangible benefit to a community even if few people enter the land. For example, … conservation of large forested blocks of land [i]s an effective means of contributing to “ecosystem resilience” in the face of rising temperatures and more severe storms because forests naturally absorb carbon and other harmful emissions. Additionally, open space land naturally absorbs and helps dissipate stormwater runoff without the need for drainage systems that are required in paved and developed areas. Furthermore, forest land helps to clean the air by filtering particulates naturally, and it regulates and purifies the fresh water supply by stabilizing soils that store water over time and filter contaminants.

The court concluded that, “by holding land in its natural pristine condition and thereby protecting wildlife habitats, filtering the air and water supply, and absorbing carbon emissions, combined with engaging in sustainable harvests to ensure the longevity of the forest, NEFF engages in charitable activities of a type that may benefit the general public.”

The court also noted in a footnote that, for purposes of satisfying the “charitable organization” requirement of Clause Third, the Massachusetts Appellate Tax Board has required land conservation organizations to demonstrate that they “invite, encourage, and facilitate the entry of the public at large onto their lands.” The court rejected this test, emphasizing that public access is not required, provided the organization can demonstrate that it is not simply seeking to set aside land for its own private use or as a buffer around its members’ private property and, instead, is carrying out land conservation and environmental protection activities that benefit the public at large.

b. Lessening the Burdens of Government

With regard to whether NEFF’s activities lessen the burdens of government, the court explained that the Massachusetts constitution obligates the State to engage in conservation and environmental protection and NEFF assists the State in achieving its conservation policy goals. The court noted, among other things, that (i) the Hawley Forest, which is bordered on two sides by a State forest, extends a block of forested land preserved by the State, and this is important to the preservation of species that require a certain amount of continuous area to thrive and to the biodiversity of forest lands more generally, (ii) NEFF and other conservation organizations have been identified as essential partners in statewide conservation efforts, and (iii) the contribution that privately held forest land can make to improving air and water quality and mitigating the effects of erosion, rising temperatures, and other ecosystem disruptions assists the State by reducing the cost associated with safeguarding air and water supplies and responding to the effects of pollution. The court also cited a California case that acknowledges that property used exclusively as a nature preserve to protect native plants or animals may qualify as charitable because it lessens the government’s burden to preserve ecological communities and native flora and fauna.

2. The Occupancy Requirement

To qualify for the exemption, NEFF also had to show that it “occupied” the Hawley Forest in furtherance of its charitable purposes for the year at issue. To make sense of this requirement, the court looked to the purpose of Clause Third. The court explained that Clause Third recognizes the contribution a charity makes to the public either on, or through, its use of its property. Unlike a private landowner whose land ownership burdens the government by making use of a range of public services and benefits, the burden a charity’s ownership of land places on the government may be offset by its use of the land in a manner that benefits the public and lessens the burdens of government. Thus, explained the court, it is fair and proportional to tax privately held land while exempting a charitable organization’s land provided the organization uses the land in a manner that contributes to the community and reduces the burdens of government. In sum, the requirement that land be “occupied” for an organization’s charitable purposes is “best understood as the Legislature seeking to ensure that a charity’s land is not being held as a private landowner would hold it and, instead, is being held as an entity would hold it for the public good.”

The court went on to explain, however, that in the case of open space or conservation land, this inquiry is complicated by the fact that both private and charitable landowners may have an incentive to hold land in an undeveloped state (such as to benefit from lower property tax rates). Accordingly, in this context, a charitable organization must demonstrate that it occupies the land at issue in a manner less like a private landowner and more like an entity seeking to further the public good.

In NEFF’s case, the Massachusetts Appellate Tax Board approached this inquiry by focusing on the degree of public access NEFF encouraged and achieved at the Hawley Forest, and the Board concluded that NEFF’s promotion of public access was insufficient to demonstrate that it occupied the land for the benefit of the public. The court disagreed with this approach, explaining that Clause Third does not impose an affirmative duty to promote and facilitate public access on conservation lands. The court also acknowledged that, in certain circumstances, such as in the case of a particularly fragile habitat or ecosystem, a public access requirement could operate to thwart the very conservation objectives an organization is seeking to achieve. Accordingly, the court concluded that, in a case such as NEFF’s, where public access to the property is allowed but not necessary for the organization to achieve its charitable purposes, the promotion and achievement of public access is not required to demonstrate “occupancy” for purposes of the Clause Third exemption.

The court went on, however, to note that the right that is most central to the “bundle” of rights enjoyed by a private property owner is not the freedom from an obligation to invite visitors, but the affirmative right to exclude others from one’s property. Consequently, said the court, the appropriate inquiry (regarding whether property is being held as a private landowner would hold it or, instead, as an entity would hold it for the public good) begins with whether the entity takes affirmative steps to exclude the public from the land, such as through physical barriers, “no trespassing” signs, or actively patrolling the land. The court then stated:

If a charitable organization engages in such exclusion, the organization faces a heightened burden to show that such exclusion of the public is necessary to enable it to achieve its charitable purposes. Although an organization may succeed in meeting this burden, it may do so only by presenting compelling facts demonstrating that the exclusion of the public is necessary to achieve a public benefit through other activities carried out on, or through use of, the land, such as when conservation activities may pose a danger to public safety or where the ecosystem is so fragile that any human presence could undermine the organization’s conservation efforts. Such rationales may often be time-limited, such as during a timber harvest when trees are being felled or during the nesting period of a vulnerable species. Placing a high burden on organizations that actively exclude the general public from their lands helps to identify and exclude from exemption those land-conservation organizations that treat their land more as a private club or a buffer zone around the private property of organization insiders. However this requirement also acknowledges that in particular circumstances the exclusion of the public from the land may be necessary for a bona fide land-conservation organization to carry out its mission and therefore should not per se preclude an organization from otherwise demonstrating that it occupies the land.

Accordingly, a “charitable organization” within the meaning of Clause Third that affirmatively excludes the public from its conservation lands has to make a particularly convincing case that such exclusion is necessary to enable it to carry out its conservation mission.

NEFF did not fall into this category because it did not take active steps to exclude the public from the Hawley Forest during the tax year in question. Rather, it took steps to inform the public that the property was available for recreation. The court noted that, if NEFF’s only claimed charitable purpose were recreational or educational, it might have had to demonstrate more regular public use of the property to satisfy the occupancy requirement. However, since NEFF also used the Hawley Forest for sustainable forestry and environmental preservation purposes, the court found that it met its burden to show that it “occupied” the Hawley forest in furtherance of its charitable purposes within the meaning of Clause Third.

In sum, a land conservation organization that satisfies the “charitable organization” requirement must divide its conservation lands into two rough categories for purposes of determining satisfaction of the “occupancy” requirement.

  • Conservation land to which the public is permitted access. A conservation organization would appear to satisfy the occupancy requirement with respect to this land, and therefore be eligible for the exemption, even if it does not actively encourage or advertise public access, provided the organization uses the land for charitable purposes that can be accomplished without public access, such as sustainable forestry and environmental preservation. On the other hand, if the organization uses the land for recreational or educational purposes only, the organization would have to demonstrate more regular public use.
  • Conservation land to which the public is denied access. A conservation organization would appear to satisfy the occupancy requirement with respect to this land, and therefore be eligible for the exemption, only if the organization makes a particularly convincing case that exclusion of the public is necessary to enable it to achieve a public benefit through other activities carried out on the land. Moreover, such other activities may often be time-limited. For example, exclusion of the public may be necessary only during a timber harvest for safety reasons, or only during the nesting period of a vulnerable species to ensure the species is not disturbed during this critical period.

While the court recognized that many public benefits can flow from conserving land in its undeveloped state in addition to public access to the land, the court also was concerned about abuse. Accordingly, it held that land conservation organizations that want to claim a property tax exemption with regard to their conservation lands must make a compelling case of necessity if they want to affirmatively exclude the public from such lands. Not explored in the court's opinion is the extent to which the feared abuse—land-conservation organizations treating their lands as a private club or a buffer zone around the private property of organization insiders—is occuring. 

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law



May 16, 2014 | Permalink | Comments (2) | TrackBack (0)

Wednesday, May 14, 2014

Gates Foundation Gives Grant to Keep Vaccines Cool


The Bill and Melinda Gates Foundation is well known for its efforts to help eradicate diseases from the developing world.  But achieving this goal has in the past encountered a significant problem: eradicating diseases often requires immunization, which relies on keeping vials of vaccine cold until they can be administered.  The vials have to be kept at exactly the right temperature — too hot or too cold, and the vaccine could lose its effectiveness.   That is a significant problem for places that do not have consistent access to electricity.

The foundation may have found a solution: the Sure Chill Company in Wales has announced receipt of a $1.4 million grant from the Gates Foundation to develop a vaccine cooler that will help advance efforts to eliminate preventable diseases worldwide. 

The grant will enable the company to take the cooler from the proof-of-concept stage — which had been supported by a previous $100,000 grant from the foundation — to field trials over the next year in eastern and western Africa. The firm's technology harnesses a unique property of water to create a constantly chilled environment within the unit, enabling the cooler to operate for thirty-five days without power.

If the trials are successful, the development of these "super" coolers will represent a giant step in the eradication of diseases in the developing world. 



May 14, 2014 in Current Affairs, In the News, International | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 13, 2014

European Court of Justice Okays Data Scrubbing -- Impact on International Nonprofits Unclear

The Luxembourg-based European Court of Justice today ruled that Internet companies can be made to remove irrelevant or excessive personal information from search engine results.  In a case pitting privacy campaigners against Google, the European Union's highest court upheld the complaint of a Spanish man who objected to the fact that Google searches on his name threw up links to a 1998 newspaper article about the repossession of his home.

The case highlighted the struggle in cyberspace between free speech advocates and supporters of privacy rights who say people should have the "right to be forgotten" - meaning that they should be able to remove their digital traces from the Internet.

Here in the United States, today's NonProfit Times is pondering the ruling's impact on  international nonprofits.

In its ruling, the court reasoned that "An [I]nternet search engine operator is responsible for the processing that it carries out of personal data which appear on web pages published by third parties.  Thus," the court continued,

if, following a search made on the basis of a person's name, the list of results displays a link to a web page which contains information on the person in question, that data subject may approach the operator directly and, where the operator does not grant his request, bring the matter before the competent authorities in order to obtain, under certain conditions, the removal of that link from the list of results.

Moreover, the court ruled, the search engine operator is, "in certain circumstances, obliged to remove links to web pages that are published by third parties and contain information relating to a person from the list of results displayed following a search made on the basis of that person's name," even if "the publication in itself on those pages is lawful."

The Times notes that the impact of the decision on nonprofits is unclear.  For example, it is unclaer whether the decision, which is based on a 1995 data protection directive, will affect requests for deletion of donor histories in nonprofits' databases.  Fielding Yost, president and founder of database software producer Saturn Corporation in Cheverly, Maryland, stated: "Right now we don't know precisely what the law says.  we just know that Google lost.  We've never been faced [with a situation] where someone would say remove my donation history, unless they sent in a delete [request] from the charity.  I don't think we're in the same application that Google is.  Maybe it'll broaden and extend [to] that."

In the final analysis, Yost does not believe the law requires charities to scrub their donation history as Google must scrub links.

But Steven Shattuck, vice president for marketing at Bloomerang in Indianapolis, Indiana, believes the law will require nonprofits  to scrub donor records.  Said Shattuck: "Probably in Eurpoe, folks would have the right to be scrubbed.  It is the electronic idenitification of a person's personal records.  I think it sets a precedent, for sure."

The ruling's impact on international nonprofits will unfold as the days, weeks, and months go by. 


May 13, 2014 in Current Affairs, In the News, International | Permalink | Comments (0) | TrackBack (0)

Sunday, May 11, 2014

Palmer Ranch v. Commissioner—$19.9 million Conservation Easement Deduction Allowed Based on “Reasonably Probable” Rezoning

Palmer Ranch eagle nest copyIn Palmer Ranch Holdings, Ltd. v. Commissioner, T.C. Memo 2014-79, the Tax Court allowed a $19.9 million deduction for a partnership’s donation of a conservation easement, which represented a 95% diminution in the value of the property. The court found the partnership’s appraisal, which assumed the subject property could have been rezoned before the easement donation to allow higher density development, to be more persuasive.

The subject property is an 82.19-acre parcel located in Sarasota County, Florida, that includes upland developable acreage as well as wetlands, a wildlife corridor, and a bald eagle nest. The partnership donated the easement to the county in December of 2006 for the purpose of preserving the property for public use, conservation, and open space.

The IRS conceded that the easement constituted a qualified conservation contribution for purposes of IRC § 170(h), so the only issue before the Tax Court was the fair market value of the easement. The court explained that the fair market value of a conservation easement is generally equal to the difference between the fair market value of the subject property before the granting of the easement (the “before-value”) and the fair market value of the subject property after the granting of the easement (the “after-value”) and, in determining the property’s before-value, there must be taken into account not only the property's then-current use, but also its highest and best use. Quoting Olson v. United States, 292 U.S. 246, 255 (1934), the court noted that a property's highest and best use is “the highest and most profitable use for which it is adaptable and needed or likely to be needed in the reasonably near future.” The court explained that “[i]f different from the current use, a proposed highest and best use requires ‘closeness in time’ and ‘reasonable probability.’”


The IRS’s appraiser estimated the before-value of the Palmer Ranch property to be $7.7 million. This estimate was based on the property’s actual zoning classification on the date of the donation.

The partnership’s appraiser, on the other hand, estimated the property’s before-value to be $25.2 million. This estimate was based, in part, on the assumption that the property could be successfully rezoned. Although the property’s zoning classification in 2006 was for “residential estates,” which limited current development to 41 units (1 unit per 2 acres), a land planning and engineering firm hired by the partnership concluded that the property could have been rezoned to permit a 360-unit multifamily development, provided the denser development was concentrated (or clustered) on the developable portions of property and left the environmentally sensitive areas largely as open space.

At trial, the IRS argued that successful rezoning of the property at the time of the donation was not reasonably probable given four factors: (i) a failed rezoning history with respect to the property, (ii) environmental concerns, (iii) limited access to outside roads, and (iv) neighborhood opposition. The court examined each of those factors in turn and found for the partnership. The court determined that (i) nothing in the rezoning history foreclosed the possibility of a successful rezoning, (ii) the proposed rezoning would have protected the eagle nest and wetland areas, and given due consideration to the wildlife corridor, within which there were significant developable areas, and (iii) required road access for development on the subject property could have been provided through adjacent land owned by the partnership and through extension of a "stubbed out" residential street in an adjacent development. The court noted that the stubbed out road demonstrated a general expectation that future residents of the subject parcel would use the road to access their homes. The court also gave little credence to the IRS’s arguments that neighborhood opposition would have precluded the hypothetical development, despite the IRS’s pointing to the neighbors’ “fervor and organization” against proposed development of the subject property in 2004. The court refused to assume that neighbors would object to the rezoning or that the board of county commissioners would find merit to their objections.

The court ultimately determined that the before-value of the property was $21,005,278—it adjusted the partnership’s appraised value downward slightly to account for the softening of the real estate market in the area 2006.

The Olson Formula

It is not clear from the Tax Court’s opinion whether the partnership’s appraiser or the court took into account the costs, time, and risks associated with obtaining the rezoning approval in estimating the property’s before-value. Consideration of those factors would appear to be required under the Olson formula, which, stated in full, provides: “The highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future is to be considered, not necessarily as the measure of value, but to the full extent that the prospect of demand for such use affects the market value while the property is privately held” (emphasis added).

The court noted that the process to rezone and develop land would have involved the following steps:

  • a preapplication meeting with County staff,
  • a neighborhood workshop with adjacent property owners, 
  • submitting of applications to the County, which would be subject to staff review,
  • public hearings by a lay body (the planning commission), and
  • a public hearing by the board of county commissioners, wherein the commissioners would take final action.

In addition, even if the commissioners issued a final determination, the determination would still be subject to the circuit court's review. And for the subject property to receive rezoning approval, the applications would have to be consistent with the region’s master development order, the comprehensive plan, zoning regulations, and land development regulations.

Although obtaining approval of the rezoning may have been reasonably probable, a hypothetical willing buyer would have factored into the price he or she would be willing to pay the costs, time, and risks associated with the process outlined above. Whether this was taken into account in estimating the before-value of the hypothetically rezoned property is not clear.


The conservation easement limits use of the subject property to a nature park; recreational improvements, such as campgrounds, swimming pools, and athletic fields; and agricultural uses. The property is now used as a public park, a community garden, a conservation area, and preserved open space.

Given the use restrictions in the easement, the court determined that potential purchasers of the property would be limited to either a nonprofit organization or the State of Florida. The court also noted that this already shallow pool of purchasers is further reduced because any purchaser would also have to be willing to carry out any of the permitted uses subject to the easement's restrictions.

While both parties’ appraisers agreed that the conservation easement severely limits the marketability of the subject property and, thus, significantly reduced the property’s value, the IRS’s appraiser estimated a 90% diminution in value, while the partnership’s appraiser estimated a 95% diminution in value. After explaining that “reasonable minds may disagree when it comes to providing estimates such as these” and valuation is necessarily an approximation, the court ultimately adopted the partnership’s estimate. Accordingly, the court determined that the conservation easement had a value of $19,955,014 (i.e., a $21,005,278 before-value less a $1,050,264 after-value).

No Penalty

The Tax Court held that the partnership was not liable for an accuracy-related penalty because it acted with reasonable cause and in good faith (i.e., it relied in good faith on the advice of a qualified tax adviser) with regard to its claimed deduction for the easement donation.

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law

May 11, 2014 | Permalink | Comments (1) | TrackBack (0)

Friday, May 9, 2014

Bethke & Górski: Rethinking Social Ventures in Hong Kong

Jedrzej-gorskiDamian_bethkeDamian Alexander Bethke and Jędrzej Górski (both Chinese University of Hong Kong) have posted Rethinking Social Ventures in Hong Kong (Richmond Journal of Global Law and Business, Spring 2014).  Here is the abstract:

Hong Kong has experienced a significant transformation in its understanding of business, which concerns the phenomenon of social ventures that attempt to combine a make money and do good approach and to apply business skills to address social needs. Social ventures live a mystical existence, as they are fully ignored from a legal perspective despite the recent reform of laws on charitable activities. This causes problems as to their general understanding, which the authors try to address with their own typology, systematically characterizing social ventures. Then the authors examine the legal environment of social ventures in Hong Kong and identify the challenges they face. Hong Kong’s company law and related public/administrative law issues are considered. The answer searched for is: what is the appropriate legal vehicle for social ventures, and what are the practical legal questions when a social venture wants to structure its make money and do good business? As to the first problem, the legal non-existence of social ventures results in coupled privileges — meaning a system which favors traditional business forms such as for-profit and not-for-profit companies and discourages doing good approaches by social ventures. The authors identify instances where privileges crediting charitable activities are coupled with not-for-profit status, and propose solutions under which social ventures could be registered and have tax privileges efficiently assigned by a one-stop supervision body. As the second problem, the situation of social ventures abandoning their mission of doing good poses further challenges to the legal system, and the authors propose a regime under which business organizations can easily adopt or abandon a social mission based on a partial application of the cy-près doctrine. The authors come to the conclusion that the social venture sector bears immense potential for Hong Kong as well as for all of Asia. But in order to use this potential, Hong Kong has to show a more refined understanding and has to be open to a profound discussion.

Lloyd Mayer

May 9, 2014 in International, Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Prolanthropy: Managing Charities for Profit

ProlanthropyThe Chicago Tribune reports that the for-profit company Prolanthropy manages 21 nonprofits founded by professional athletes but may not have complied with at least some state registration requirements, both for itself and the charities that it manages.  The article quotes the company's owner as defending the charitable impact of the organizations it manages, which raised more than $4.2 million over the past three years, and the company's compliance with applicable laws.  The article also notes that the NFL Players Association is reviewing the company's activities.  The article further asserts that at least two of the company's clients publicly claimed section 501(c)(3) tax-exempt while their IRS applications were still pending.

Lloyd Mayer

May 9, 2014 in In the News | Permalink | Comments (0) | TrackBack (0)

NASCO Objects to Proposed Form 1023-EZ

Map_of_USA_with_state_names_2.svgThe National Association of  State Charity Officials has submitted comments to the Treasury Department objecting to the proposed IRS Form 1023-EZ.  The form would permit certain types of nonprofits with relatively low expected annual revenues and total assets to submit a streamlined application for recognition of exemption under IRC § 501(c)(3).  NASCO reiterated concerns expressed in the 2012 Report of Recommendations by the Advisory Committee on Tax Exempt and Government Entities (ACT), in which ACT recommended against the development of such form because it viewed any benefits from doing so as being "outweighed by the loss of educational value to the applying organization and the loss of effectiveness to the IRS."

Lloyd Mayer

May 9, 2014 in Federal – Executive, State – Executive | Permalink | Comments (0) | TrackBack (0)

House Finds Lois Lerner in Contempt of Congress

Lois LernerOn Wednesday by a vote of 224 to 187 (later updated to 231 to 187 according to press reports) the House of Representatives approved House Report 113-415, which included a resolution that Lois Lerner be found in contempt of Congress "for refusal to comply with a subpoena duly issued by the Committee on Oversight and Government Reform." Relatedly, the House also approved by a vote of 250 to 168 a resolution "[c]alling on Attorney General Eric H. Holder, Jr., to appoint a special counsel to investigate the targeting of conservative nonprofit groups by the Internal Revenue Service." Both votes have the effect of passing the ball to the Department of Justice, as pursuant to 2 U.S.C. § 194 and the House Report the contempt matter will be referred by the Speaker of the House to the U.S. Attorney for the District of Columbia (currently Ronald C. Machen Jr.). While 2 U.S.C. § 194 provides that the U.S. Attorney has  a "duty . . . to bring the matter before the grand jury for its action," it is not clear that this duty is absolute, especially where there may be constitutional grounds (i.e., Ms. Lerner's invocation of her Fifth Amendment right against self-incrimination) barring a conviction. The potential penalty for contempt of Congress under 2 U.S.C. § 192 is a fine of not less than $100 nor more than $1,000 and imprisonment of not less than one month and not more than twelve months. There may also be other ways for Congress to pursue Ms. Lerner given this contempt finding, although the House Report does not indicate that Congress will seek to pursue them.

Media coverage of these resolutions includes: Christian Science Monitor, New York Times, Washington Post, Washington Times; Wall Street Journal (subscription required).

Lloyd Mayer

May 9, 2014 in Federal – Legislative, In the News | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 7, 2014

Online Political Activity Training for Nonprofits

The Learn Foundation has several "short courses" regarding nonprofits and political activity available online for free.  Not quite sure when these courses were first posted but I found them while perusing through the Chronicle of Philanthropy.  The courses, taught by an avatar named Mya along with downloadable written materials prepared by "legal staff," include (1) Advocacy and Lobbying Rules For Private Foundations, (2) Electioneering Rules for Private Foundations and Public Charities, (3) Expenditure Responsibility Rules for Private Foundations and (4) Anti-bribery/Anti-corruption Rules for Private Foundations.  I have not "taken" the courses yet but they seem designed for regular folk who might find themselves serving as board members.  Here is some history behing the courses:

In 2010, legal staff at the David and Lucile Packard Foundation, Bill & Melinda Gates Foundation, The William and Flora Hewlett Foundation and Gordon and Betty Moore Foundation (collectively the "Foundations") joined together to develop a comprehensive training program on legal issues in grantmaking. The goal of this collaboration is to create online, web-based trainings to supplement existing in-person training programs. The Foundations identified a shared need for this type of instructional resource, and a common desire to collaboratively develop a training system that speaks to a variety of learning styles and organizational training needs.

As a result, the Foundations developed Learn Foundation Law, a free first-of-its-kind resource for private foundations (and others who are interested), to host e-trainings and tools related to the basic legal rules for private foundations. Most e-learnings developed by the Foundations take less than one hour to complete and feature a program officer named Maya who leads participants through each course. Participants can return to any training at any time for a refresher and click on individual modules to refer back to specific topics. In addition, other e-learnings developed by any one of the Foundations may also be hosted on this site.

The Foundations hope you find value in this site, as it is intended to be an ongoing project to benefit the field and support the outcomes we seek in the charitable communities served.


May 7, 2014 in Web/Tech | Permalink | Comments (0) | TrackBack (0)

When Is a Nonprofit Subject to Open Meeting Laws?

Open meetingNonprofits that accept government funding can sometimes unexpectedly find themselves subject to the open meeting laws that apply to public bodies.  Capital Area Legal Services Corporation (CALSC), a nonprofit corporation operating in Baton Rouge, Louisiana, faces this issue in litigation brought by a former Executive Director that has already generated two state trial court decisions and one previous state appellate court decision.  The latest chapter is Wayne v. Capital Area Legal Services Corporation, 2014 La. App. LEXIS 1148 (May 2, 2014), in which the appellate court concluded that CALSC is not a public body for purposes of the Louisiana Open Meeting Law under a recently revised interpretation of that statute by the Louisiana Supreme Court.  The appellate court found that the term "authorities" in the statue is limited to entities created by the government, and so the following facts led it to affirm the grant of summary judgment on this issue in favor of CALSC (footnote omitted):

We find that CALSC is not an "authority" for the purpose of the Open Meetings Law because it is not a creature of government.  It is undisputed that CALSC is a private, non-profit corporation that was incorporated in 1958 by the Baton Rouge Bar Association.  It is further undisputed that CALSC has never been sponsored by any governmental resolution,  nor has it been designated as an agency by any political subdivision.

The decision therefore sets a relatively high bar for parties seeking to assert that a nonprofit corporation would be subject to the Open Meeting Law in Louisiana.

Lloyd Mayer

May 7, 2014 in State – Judicial | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 6, 2014

Does Nepotism violate the Private Benefit Prohibition? The Case of International Relief and Development

The Washington Post published an interesting article Sunday perhaps exemplifying what we might label the "residual clause" of charitable tax exemption. The article describes a federally tax exempt nonprofit called International Relief and Development.  The organization undertook difficult projects in worn torn Iraq, in the process of which raking in lots of money with which it paid generous salaries and bonuses to its founders (husband and wife) and various family members.  It also served as a welcoming and lucrative job source for former executives of the federal agency from which it received most of its soaring gross revenue.  The article suggests that those well-paying jobs were offered as reward for all the grant money the employees directed to IRD while serving in the government.  The article describes the high salaries paid to various insiders, but it appears that the organization did its homework.  It hired compensation consultants who must have done all that is necessary for the organization to avail itself of the presumption of reasonableness.  And though the article points out that the insiders made more than top executives at some comparable organizations, it seems doubtful that those salaries are so far out of bounds as to constitute private inurement or excess benefit.  What seems bothersome is that the organization (1) paid generous salaries and bonuses to founders and family members, and (2) hired many of its other executives from the USAID, a federal agency from which the nonprofit received so many contracts that its gross revenues went from $1.2 million to over $706 million in little more than 5 years:

International Relief and Development increased its annual revenue from $1.2 million to $706 million, most of it from one corner of the federal government — the U.S. Agency for International Development. IRD has received more grants and cooperative agreements from USAID in recent years than any other nonprofit relief and development organization in the nation — $1.9 billion.  Along the way, the nonprofit rewarded its employees with generous salaries and millions in bonuses. Among the beneficiaries: the minister, Arthur B. Keys, and his wife, Jasna Basaric-Keys, who together earned $4.4 million in salary and bonuses between 2008 and 2012.

. . . .

The nonprofit organization, in turn, has hired at least 19 employees from USAID, the lead government agency for addressing poverty and supporting democracy worldwide. Several of them came directly from their desks at the agency to occupy important posts at the company.  Some of those employees, including the former acting administrator of USAID, received substantial pay raises by crossing the Potomac and joining IRD at its new offices in Arlington, Va., collecting hundreds of thousands of dollars in annual salaries, bonuses and other compensation.

One observer asserts, with indignation, that IRD was formed for the primary purpose of getting grants from USAID and passing along some of those grants to insiders in the form of salaries. The article's tone suggests that it just isn't right that such an organization would be entitled to tax exemption. 

In all, 38 IRD employees received more than $3.4 million in bonuses during the same period, according to the company’s tax filings.“This is not Wall Street,” said Doug White, an expert on nonprofit entities who teaches at Columbia University and reviewed IRD’s tax returns at the request of The Post. “This is an organization that is supposed to be helping people, not helping themselves.”

But who can object, and on what basis, if the organization embraces nepotism in the pursuit of its charitable goal but otherwise complies with the requirements in 501(C)(3)? 


By conceptualizing private benefit as a sort of "residual clause," I mean to say that we apply the doctrine to revoke or deny exemption even when the organization complies with the primary purpose requirement and violates no other explicit prohibition (inurement, excess benefit, intervention, substantial lobbying).  In other words, the organization dots all its i's and cross all its t's but still stinks so much that we want to deny exemption.  "It's just not right what they are doing with taxpayer subsidy!"  I don't know if IRD represents such an instance where indignation should result in the revocation of tax exemption.  Ultimately, though, the sentiment is all that applies when a charity is not paying too much to insiders or "disqualified persons," intervening in campaigns, or engaging in substantial lobbying.   It's just that in the accomplishment of its public benefit -- something that nobody denies -- the organization is unnecessarily lining the pockets of a nepotistic group or individual, even if that group or individual is providing quid pro quo.  Somebody has to benefit specifically if the public is to benefit generally.  In other words, we can't all benefit unless somebody benefits in particular.  But the specific benefit should not be directed towards any noncharitable beneficiary for nepotistic reasons.  If an organization otherwise pursues an undeniably charitable purpose and does not pay its insiders or disqualifiied persons unreasonable salaries, what can be done if we think it intolerable that family members and other benefactors are especially benefitting from the oranization's pursuit of its charitable goal?

Applying an intellectual and theoretical lable to what seems a visceral reaction first occured to me some years ago when I read (and since then have re-read many times) Judge Posner's penultimate sentiment in United Cancer Council.  You might recall that case wound its way through the federal judicial bureaucracy for ten plus years -- the government alleging private inurement (to the charity's exclusive fundraiser) and the taxpayer defending -- until Posner finally said the parties were arguing about the wrong theory and should, instead have been relying on the residuary effect of the private benefit doctrine Dean [of Illinois] Colombo talked about last week.  "If nothing else fits," Posner said, "use the private benefit doctrine as the utility player of charitable tax exemption:"

And maybe tax law has a role to play in assuring the prudent management of charities. Remember the IRS's alternative basis for yanking UCC's exemption? It is that as a result of the contract's terms, UCC was not really operated exclusively for charitable purposes, but rather for the private benefit of W&H as well. Suppose that UCC was so irresponsibly managed that it paid W&H twice as much for fundraising services as W&H would have been happy to accept for those services, so that of UCC's $26 million in fundraising expense $13 million was the equivalent of a gift to the fundraiser. Then it could be argued that UCC was in fact being operated to a significant degree for the private benefit of W&H, though not because it was the latter's creature. That then would be a route for using tax law to deal with the problem of improvident or extravagant expenditures by a charitable organization that do not, however, inure to the benefit of insiders.

I have often found the first sentence regarding tax law's role in assuring the "prudent management" of charities reassuring somehow.  Surely, we -- by that I mean the government because the government is us not them -- have a right to insist on the prudent management of entities we subsidize.  And so the private benefit doctrine ought to apply when a charitable organization engages in nepotism.  When its indirect benefit -- the particular benefit without which the public good could not be achieved -- is unnecessarily reserved for a particular noncharitable beneficiary, we can conclude that the organization is not operated for public good but private benefit.  In other words, private benefit is a doctrine that assures the proper management of a public trust.  That is why it may apply even when there is no excess benefit because the organization is not paying unreasonable compensation for goods or services. 

Nepotism, by the way, is antithetical to prudent managment because by definition it prevents an organization from getting the best provider of goods or services necessary to the accomplishment of the public good.  But nepotism, to one extent or another, is probably a fact of life in every business or nonprofit organization.  We should expect and tolerate some level, lest we construct a rule that would be so broad as to destroy every organization.  Perhaps that is the case with IRD.  The trick is in determining when enough is enough.  But that it is necessary to find that threshold only supports my conception of private benefit.  Whatever its purpose, it has always been applied (unlike private inurement or excess benefit) in a way that tolerates some minimal amount of variance.  A sort of "nobody is perfect" mantra for nonprofits.  I doubt that IRD meets that threshold based on the facts in the article. 





May 6, 2014 | Permalink | Comments (0) | TrackBack (0)

Has It Already Been a Year? The IRS, C4s, and Politics

IRSA year ago this week (or 362 days ago, according to Paul Caron) then IRS Exempt Organizations Division Director Lois Lerner apologized for the EO Division using criteria during the exemption application process that were "wrong," "incorrect," insensitive," and "inappropriate."  We all know what has followed since those comments at the May 2013 ABA Tax Section meeting.  Several recent developments are worth highlighting, however.

First, the IRS mess has become a political football disconnected from the facts of what actually happened.  This result is illustrated not only by the recent Committee on Oversight and Government Reform (Darrell Issa, Chairman) report and the recent Committee on Ways and Means (Dave Camp, Chairman) letter to Attorney General Eric Holder, both focusing on Ms. Lerner's alleged actions, but also by the often testy exchanges between members of the Ways and Means Committee as they debated the latter document in executive session a month ago before voting along party lines to refer the letter to the full House.  This is not to say the exchanges were not without their lighter moments (including during the related open session Chairman Camp telling the Ranking Minority Member Sandy Levin "Just chill out." and Levin responding "I am very chilled out.").  The contrasting views of the situation taken by the members on each side of aisle during the executive session illustrate how much political spin is now applied to accounts of this mess.  (And later today the House Committee on Rules (Pete Sessions, Chairman) plans to take up a resolution that Ms. Lerner be held in contempt of Congress and a resolution calling for the appointment of special counsel.)  (UPDATE:  The political spin continues with a new report from Ranking Member Elijah Cummings of the Committee on Oversight and Government Reform titled "No Evidence of White House Involvement or Political Motivation in IRS Screening of Tax-Exempt Applicants.")

Second, the issue of what information relating to tax-exempt organizations is and should be protected from public disclosure by obscure Internal Revenue Code section 6103 has become a hot topic.  ProPublica reports that the nonprofit Freedom Path recently sued the IRS over its alleged treatment by the agency, with the most viable claim likely relating to the IRS' mistaken release of the organization's pending exemption application to ProPublica in alleged violation of section 6103.  The Ways and Means letter discussed above also raises concerns under section 6103, asserting that Ms. Lerner may have risked violating this section by having confidential information  sent to her personal email account (although even the Wall Street Journal feels that claim is a bit of a stretch).  

Ironically, there are concerns that by making its letter and related exhibits public Ways and Means may itself have violated section 6103 (see Did Ways and Means' EO Data Dump Break the Law? in Tax Notes Today (subscription required)).  I think Ways and Means did not violate section 6103, essentially for the reasons stated in advice the Committee apparently received on this issue.  At the same time, I also think the public release of the exhibits creates  a dangerous precedent, especially since it was not done, as the advice recommended, in a collegial fashion as reflected by unanimous consent or vote.

Relatedly, George Yin (UVA) has proposed increasing the amount of information the IRS can release relating to tax-exempt organizations in order to both enhance public trust and help counter allegations of wrongdoing by the agency.  In Reforming (and Saving) the IRS by Respecting the Public's Right to Know, he argues for removing the protections of section 6103 for exemption applications and materials as soon as they are filed with the IRS and relaxing those protections for audit developments, closing agreements, and final determinations.  

Third and finally, this mess is sparking useful discussions regarding not only the appropriate role of the IRS and the federal tax laws with respect to political activity, but also with respect to oversight of tax-exempt organizations more generally.  While it is not clear if the proposed new section 501(c)(4) regulations relating to political activity will go anywhere (see earlier post on this blog by Darryll Jones), if there is any silver lining to this mess it is that it may lead to some constructive debates on the hard issues relating to IRS oversight of exempt organizations. 

Lloyd Mayer

May 6, 2014 in Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 30, 2014

Why the Northwestern Football Players Union Decision Isn't Going to Affect the Tax Treatment of Athletic Scholarships Any Time Soon

Though the press coverage of the decision by the NLRB hearing officer to permit Northwestern football players to unionize has quieted somewhat, I still get a number of phone calls every week from reporters asking whether this decision will affect the tax treatment of athletic scholarships.  My answer is "no."  Here's why I think this.

First, some background.  Section 117 of the Code provides an exclusion from gross income for "qualified scholarships" which essentially means scholarships that cover the cost of tuition, books and supplies.  Room and board is NOT included in this provision; hence scholarships for room and board already are included in gross income.  So room and board scholarships are already taxable.

With respect to the tuition/books/supplies scholarships, the argument that flows from the preliminary NLRB decision (it is being appealed to the full Board) is that by classifying the players as "employees" for purposes of the labor laws, scholarships will be taxable because they will be viewed as compensation for services rendered.  In fact, Section 117(c) contains an explicit provision that says that "scholarships" that are in reality compensation for services do not qualify for an exclusion from gross income.

This argument, however, misses several points.  First, in 1977, the IRS ruled that athletic scholarships qualified for the exclusion under 117 because the scholarship did not, in fact, represent compensation for services.  Rev. Rul. 77-263, 1977-2 C.B. 47.   The IRS decision was based upon the underlying structure and terms of the scholarship arrangement, NOT the status of the players as "students" vs. "employees."   The NLRB decision changes nothing about the underlying nature of the scholarship (the terms of athletic scholarships are set by NCAA rules); accordingly, there is no legal connection between the NLRB view of athletes as "employees" and the exclusion for athletic scholarships.  If the terms of the scholarship haven't changed materially, and the terms were the basis of the IRS's 1977 ruling, there is no reason for the IRS to revisit that ruling.

Second, the fact that one is an employee does not make one ineligible for a scholarship.  Indeed, section 117(d), which deals with "qualified tuition reductions" (a fancy name for a scholarship) explicitly contemplates that employees may be offered "tuition reductions" that are excluded from gross income.  In fact, colleges and universities routinely provide scholarships to employees: nearly all graduate research assistants and teaching assistants, many of whom are unionized, receive tuition waivers as part of their "package" with the university.  This package normally includes a (very small!) stipend.   The universities take the position that the stipend is compensation for services, and that the tuition waiver is an excludable "tuition reduction" under Section 117(d), a position that the IRS seems to be quite comfortable with.  In effect, the NLRB ruling that football players are "employees" places them in essentially the same position as grad RA's and TA's.  This analogy will be particularly apt when, as I think is inevitable, universities start paying stipends to the players in big-time sports.  But even now, one can argue that providing meals, training and room and board are the "compensation" elements of the athletic scholarship, and that the tuition/fee scholarship is just that - a scholarship, as it is with grad RA's and TA's.

Finally, there is no necessary connection between the tax law interpretation of a particular legal relationship and the interpretation of that relationship by other bodies of law.  Tax law is a specialized body of law unto itself.  For example, the definition of a "gift" under Section 102 of the Code is not dependent upon, or even related to, the common-law property definition of gift, as Justice Brennan specifically pointed out in the famous Duberstein case.  Similarly, the tax definition of "inheritance" is not dependent on state law definitions of "inheritance" - and so forth.  The fact that labor law might characterize a particular item as "compensation for services" does not control the tax definition of that item.

It is possible that the NLRB's action (again, if that action is upheld on appeal) might prompt the IRS to take an overall look at big-time college athletics and change its positions on many things in the athletic realm (including, for example, its long-standing position that athletics are not an unrelated business subject to taxation).  But I wouldn't hold my breath on this.  In the past, every time the IRS has taken tentative steps to tax certain items relating to college athletics, Congress has slapped the agency hard across the cheek.  Witness the sequence of events dealing with the IRS's private letter rulings that corporate bowl sponsorships were taxable advertising; Congress moved with almost lightning speed to enact a new corporate-sponsorship exclusion to the UBIT, Section 513(i).  Similarly, when the IRS took steps to tax payments for seating premiums by ruling that these items were not donations, Congress responded with Section 170(l) to provide that 80% of these payments were, in fact, deductible - allowing althetic boosters to deduct 80% of their payments for what are essentially "personal seat licenses" at athletic events.

So, is it possible that the NLRB action will influence the IRS to change its ruling on athletic scholarships?  Sure, it's possible - just as it is possible that the United States will mount a manned mission to Mars next year.  Just don't bet the house on it.  

John Colombo

April 30, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, April 28, 2014

Private Benefit Makes An Appearance in a State Property Tax Exemption Case

One of the most vexing doctrines in charitable tax exemption under Section 501(c)(3) of the Code is the "private benefit" doctrine.   Both Darryll Jones and I have written extensively about private benefit, but I still struggle to explain it to my students in my Exempt Organizations class.  The best I've been able to come up with is that "private benefit" refers to a situation in which a charity intentionally provides a benefit, usually (but not always) an economic benefit, to someone outside the charitable class under the guise of serving the charitable class, when in fact the service to the charitable class is secondary to the private benefit.  For example, an art gallery that acts as a sales agent for artists might argue that displaying art is for the educational benefit of the viewing public (the charitable class) when in reality it is all about selling the displayed art on behalf of participating artists (the "private benefit.")

I had not seen the private benefit doctrine used much (if any) in state property tax exemption cases - until now.  A recent decision by the Lane County (Oregon) Board of Commissioners to deny tax exemption to a gun club appears to invoke something very close to private benefit doctrine.   This story in The Register-Guard summarizes the case which involved a gun club that claimed exemption as a property “exclusively occupied or used as a public park or for public recreation,” under Oregon law.  The County Board, however, found that private members of the club received substantial benefits not available to the public, and that the club required its members also to be members of the NRA. According to the Board's legal counsel, “The result is that the NRA receives an indirect benefit that is derived from (the club’s) Lane County tax-exempt status.”   That statement is very close to the court's conclusion in the famous American Campaign Academy case, 92 T.C. 1053 (1989), where the court held that the "indirect" benefits to the Republican Party of forming a nonprofit school to train political operatives violated the private benefit doctrine, despite the fact that the school was open to all and graduates did not have to work on Republican campaigns (and at least some apparently did not do so).

I've never been a fan of American Campaign Academy, nor am I a fan of the amorphous balancing test that currently seems to be the rule for the federal private benefit doctrine.  Seeing it spread to the states in property tax exemption cases does not exactly fill me with joy, but perhaps the states will do better in defining the doctrine than the IRS has.

John Colombo

April 28, 2014 | Permalink | Comments (0) | TrackBack (0)

Sunday, April 27, 2014

Brewer: "Gift Horses, Choosy Beggars" (plus the BNA Portfolio on Social Enterprise)

Cass_BrewerCass Brewer (Georgia State) has posted Gift Horses, Choosy Beggars, and Other Reflections on the Role and Utility of Social Enterprise Law. Here is the abstract:

The U.S. law of social enterprise is growing rapidly. Since 2008, one-half of all U.S. states have modified their business law to establish special legal forms designed for social enterprise. Meanwhile, even with twenty-five states adopting special laws for social enterprise, the legal debate surrounding social enterprise continues. Rather than rehashing that debate, this essay sets forth the author’s personal perspective on the role and utility of social enterprise. The essay argues that, except in limited circumstances, social enterprise is superior to traditional philanthropy when it comes to solving longstanding humanitarian or environmental problems. U.S. business law thus should continue to evolve to facilitate social enterprise.

He also is a co-author (with Elizabeth Carrott Minnigh and Robert Wexler) for the just released BNA Tax Management Portfolio Social Enterprise by Non-Profits and Hybrid Organizations, No. 489-1st.

Lloyd Mayer

April 27, 2014 in Publications – Articles, Publications – Books | Permalink | Comments (0) | TrackBack (0)