Sunday, November 19, 2017
Dana Brakman Reiser and Steven A. Dean (both Brooklyn) have written Social Enterprise Law: Trust, Public Benefit and Capital Markets. Here is an overview:
- Controversial thesis: law can make corporations better citizens and make it easier for start-ups to raise capital by preventing insiders from selling out a social mission for increased profit
- Timely analysis: explores potential impact of new crowdfunding rules and increasingly popular hybrid legal forms such as the benefit corporation on the ability of start-ups to raise capital
- Provocative solutions: several chapters show how corporate governance, contract and even tax law can be harnessed to balance public good against private greed
Edward A. Zelinsky (Cardozo) has written Taxing the Church: Religion, Exemptions, Entanglement,and the Constitution (Oxford University Press). Here is an overview:
- Explores the taxation and exemption of churches and other religious institutions, both empirically and normatively
- Reveals that churches and other religious institutions are treated diversely by the federal and state tax systems
- Focuses on church-state entanglements with respect to taxing or exempting churches and other sectarian entities
- Discusses improvements that can be made in legal and tax policy trade-offs, such as the protection of internal church communications and the expansion of the churches' sales tax liabilities
- A clear, balanced, and comprehensive treatment of the topic that is broadly accessible to tax policymakers, lawyers, nonlawyers, judges, tax specialists, and even those with no background in the subject
For a review, see Peter J. Reilly on Forbes.
Saturday, November 18, 2017
First, two months ago the U.S. Department of Justice announced that it would not reopen the criminal investigation of former IRS Exempt Organizations Director Lois Lerner, to howls of fury from her critics in Congress.
Then the Treasury Inspector General for Tax Administration released a new report that found a number of left-leaning organizations that had applied for section tax-exempt status had also had their applications subject to additional review and/or been subject to unnecessary questions. The report did not undermine TIGTA's previous finding that the IRS had used inappropriate criteria to identify applications for additional scrutiny, or that many right-leaning organizations had been selected as a result of that criteria, but it muddied the waters regarding how politically biased the application process actually was and provided further support for the argument that the problems with that process likely reflected incompetence more than malevolent intent. (More coverage: Washington Post.)
Late last month the U.S. Department of Justice announced the settlement of two pending lawsuits relating to the controversy, including the one class action suit. According to a report by a CNN, the settlements did not involve the payment of any monetary damages but included an apology from the IRS. The NY Times later reported, however, that one of the settlements involved a seven-figure payment, although the exact amount and other details were not available. The two settled cases (assuming court approval of the settlement in the class action case) are NorCal Tea Party Patriots v. IRS (the class action) and Linchpins of Liberty v. United States. (More coverage: Fox News, Washington Post.) By my count there is still a pending lawsuit brought by True the Vote against the IRS, as well as Freedom Path's lawsuit against the IRS (set for trial in summer 2018), so this settlement is not quite the end of all litigation.
Finally, earlier this month IRS Commissioner John A. Koskinen reached the end of his 5-year term. Despite calls for his removal or even impeachment because of the IRS' handling of the controversy's investigation, President Trump chose not to ask him to step down and Congress did not take any steps to begin the impeachment process. The Administration has not nominated his successor, with Assistant Secretary for Tax Policy David Kautter currently serving as interim IRS Commissioner. Coverage: N.Y. Times.
Officials from Illinois, New York, and other states announced earlier this month that approximately two dozen states have acted to dissolve VietNow National Headquarters, Inc., an Illinois nonprofit corporation. The grounds for the action against the section 501(c)(19) veterans organization was deceptive telemarketing solicitations that mislead potential donors regarding the use of donated funds, including the fact that less than five percent of such funds actually went to charitable programs. If the name looks familiar, it is because this is the organization involved in the 2003 (yes, 2003) Supreme Court of the United States case brought by Illinois against for-profit telemarketers for alleged fraud.
More specifically, the settlement agreement includes provisions requiring VietNow to dissolve and certain of its officers and directors not to ever work for or serve in a fiduciary position with any charitable organization, as well as provision for division of VietNow's few remaining assets. The agreement also notes that a total of 27 states had "expressed interest in VietNow's solicitation activities in their respective states," although only 21 states signed the agreement (and two more states entered into separate agreements with similar terms).
Friday, November 17, 2017
Last month the Department of the Treasury and the IRS released their 2017-2018 Priority Guidance Plan, listing the projects they hope to complete by June 30, 2018. A little over a month earlier the IRS had released its Tax Exempt and Government FY 2018 Work Plan. Together these documents provide a roadmap for most if not all that we are likely to see from Treasury and IRS relating to tax-exempt organizations, other than urgent guidance growing out of either current events or the passage of tax reform or other tax legislation.
The Priority Guidance Plan lists the following items specifically relevant to tax-exempt nonprofit organizations that are still in process:
- Updated revenue procedures on grantor and contributor reliance under sections 170 and 509, including updating to Revenue Procedure 2011-33 for EO Select Check.
- Finalization of regulations (proposed 8/7/08) under section 170 relating to substantiation and reporting of charitable contributions.
- Guidance under section 170(e)(3) regarding charitable contributions of inventory.
- Guidance related to church plans.
- Finalization of the regulations (proposed 2/19/16) relating to section 509(a)(3) supporting organizations.
- Guidance under section 512 regarding methods of allocating expenses relating to dual use facilities.
- Finalization of the regulations (proposed 2/6/14) under section 512 relating to computation of unrelated business taxable income for section 501(c)(9) employees' beneficiary associations.
- Guidance under section 4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners.
- Guidance regarding the excise taxes on donor advised funds and fund management.
- Finalization of the regulations (proposed 3/15/11) under section 6104(c) relating to state requests for information relating to tax-exempt organizations.
- Finalization of the regulations (proposed 8/5/09) under section 7611 relating to church tax inquiries and examinations.
The Plan also included what is now Revenue Procedure 2017-53, which updated Revenue Procedure 92-94 relating to equivalency determinations for foreign grantees under sections 4942 and 4945.
The Work Plan includes numerous projects for the 2017-2018 year, including:
- Implementing revisions to Form 1023-EZ, including a required activity description and additional questions on gross receipts, asset thresholds, and foundation classification, as well as continuing pre-determination reviews of a statistical sample of Form 1023-EZ applications.
- Continued movement of information from the Internal Revenue Manual to the Audit Technique Guides (ATGs) for Exempt Organizations webpage.
- Enhancement of compliance efforts through certain emphases (supporting organizations, previous for-profit entities, and private benefit/private inurement indicators), data-driven approaches, and referrals.
Thursday, November 16, 2017
The Tax Reform Moving Target: The Shrinking Charitable Contribution Deduction (+ Slamming Rich (Private) Universities)
Given the uncertainty regarding whether Congress will enact tax reform, much less what will be in it, trying to analyze how it could affect charities and other tax-exempt nonprofits is probably a lost cause. But there are at least two aspects of the current proposals that are worth consideration, if only because they likely will resurface even if Congress does not enact them this time around.
Overall Changes Will Shrink the Charitable Contribution Deduction: Despite all the uncertainty, certain overall changes have remained constant: sharply increasing the standard deduction, lowering tax rates for at least some taxpayers, and reducing or repealing the estate tax. All of these changes will reduce or eliminate the importance of the charitable contribution deduction for many taxpayers and so reduce the incentives for charitable giving. How much? No one knows for sure, although the Indiana University Lilly Family School of Philanthropy made some estimates last May and the Tax Policy Center of the Urban Institute and Brookings Institution has made a more recent reduced giving estimate of between $12 billion and $20 billion in 2018 giving based on the House bill).
Today's Bad Guys: Rich (Private) Universities: Several provisions that provide modest revenues are targeted at wealthy colleges and universities, including a small investment income tax on large (relative to student population) endowments. In addition, several more general provisions would hit colleges and universities particularly hard, including the elimination of tax-exempt bonds as a source of financing for tax-exempt charities, an excise tax on compensation over $1 million paid by tax-exempt entities, and the repeal of many education-related tax benefits. It appears, however, that some of these provisions do not reach public colleges and universities, specifically the endowment investment income tax and the tax-exempt bond financing provisions. If not rectified, these differences would give public colleges and universities an advantage over their private counterparts, although how significant and advantage is unclear. For more, see the National Association of College and University Business Officers (NACUBO)'s website summarizing and raising concerns about these and other education-related tax reform provisions.
Thursday, November 2, 2017
House Republicans' Tax Bill Preserves Charitable Contribution Deduction, But Will It Be Less Utilized?
According to The New York Times (here and here), Republicans in the House of Representatives release proposed legislation today that would institute some significant changes to the Internal Revenue Code. Although the tax bill preserves the charitable contribution deduction, significant changes to the standard deduction may result in even less taxpayers itemizing their deductions. The proposed tax bill nearly doubles the amount of the standard deduction and eliminates the personal exemption. Presently, approximately 30% of filing taxpayers elect to itemize their deductions. According to the Tax Policy Center, 84% of taxpayers who currently elect to itemize would take the standard deduction as proposed under this bill.
According to The Washington Post, the National Council of Nonprofits warned that charitable deductions will decrease under this legislation as many middle- and upper-middle-class taxpayers would likely not elect to itemize, thus losing any tax benefit of making charitable contributions. Republicans counter that assertion by concluding that such taxpayers should give more to charities due to decreased tax bills. Stay tuned for more response from the charitable sector as well as calculated effect of the proposed change on the charitable contribution deduction.
Picton, A. J. (2017). Egoism and the Return of Charitable Gifts. In R. Hickey, & H. Conway (Eds.), Modern Studies in Property Law (Vol. 9, pp. 175-194). Oxford: Hart.
The law assumes that all donors are altruistic, when they are not. It assumes that all donors care about the charitable ends to which they give their money, when they do not. In consequence of the law's misconception, judges sometimes proceed to return gifts without a sound legal rationale for doing so. It is argued that where gifts fail, the legal basis of return is that, in analogy with frustrated consumers who have paid for unobtainable goods, donors should get their money back. With reference to altruism and egoism as the concepts are understood in economic donative theory, it will be seen that this legal logic only bites in relation to individuals who genuinely care about the delivery of charitable outcomes. The paper applies warm glow theory, alongside more traditional understandings of economic altruism to the law of failed testamentary gifts.
An idiosyncratic array of international rules allows “consultants” to gain special access to international officials and lawmakers. Historically, many of these consultants were public-interest associations like Amnesty International. For this reason, the access rules have long been celebrated as a way to democratize international organizations, enhancing their legitimacy and that of the rules they produce. But focusing on the classic public-law virtues of democracy and legitimacy obscures an important fact: many of these international consultants are now industry and trade associations like the World Coal Association, whose principal purpose is to lobby for their corporate clients.
Lifting the veil on the corporate lobbyists challenges the conventional view, which I call “strong legitimacy optimism,” by bringing a set of longstanding critiques into focus: Consultant associations are not always representatives of the “global public” and consultation is not robust participation in governance. Moreover, the access rules both overregulate and underregulate access to lawmakers, producing a “medieval fair” of unaccountable associations that can obscure meaningful contributions. This critique is particularly salient in the context of business lobbying, where the access rules can shut out valuable business expertise, sacrifice transparency, or unnecessarily expose officials and lawmakers to capture.
This Article introduces a theory of international lobbying law. Reframing the access rules as lobbying regulation delivers explanatory and normative payoffs by focusing reformers on relevant actors and points of access, and promising regulatory tools. Specifically, two regulatory models emerge: One draws on the flawed but best-available registration and disclosure norms of domestic lobbying regulation. The other is a multi-stakeholder model pioneered by 21st century public-private partnership organizations. The Article develops an original typology to organize and identify features of the international access rules across diverse international organizations, thereby clarifying the regulatory tradeoffs that accompany each choice. Perhaps counterintuitively, reformers should likely eschew the most common middle-of-the-road access models — which are grounded in the flawed strong legitimacy optimist view — and instead choose among the two divergent regulatory models, with the choice driven by organizational mission.
Dana Brakman Reiser (Brooklyn) has posted "Disruptive Philanthropy: Zuckerberg, the Limited Liability Company, and the Millionaire Next Door" to SSRN. Here is the abstract:
Facebook founder Mark Zuckerberg and his wife, Dr. Priscilla Chan, announced they would give 99% of their net worth to – in their words – “advance[e] human potential and promot[e] equal opportunity.” To make good on this promise, however, they did not set up a traditional nonprofit, tax-exempt organization. Instead, they founded the Chan-Zuckerberg Initiative, a for-profit, limited liability company. The bulk of this Article provides the definitive explanation for this seemingly bizarre choice. Most importantly, the philanthropy LLC structure offers donors the flexibility to bolster charitable grantmaking with impact investment and political advocacy, free of the restrictions, penalties, and transparency requirements applied to tax-exempt vehicles. In addition, the LLC form provides donors complete control over the organizations they found, including an ability to reclaim donated assets that is absolutely prohibited in nonprofit forms. With careful planning, all of these advantages can be gained at relatively little tax cost. The philanthropy LLC is poised to spread far beyond Silicon Valley to the millionaire next door, a development with the potential to do both good and harm. In its concluding section, the Article explores how a turn to for-profit philanthropic vehicles can both unleash tremendous capital for solving society’s most challenging problems and magnify the influence of our most powerful elites.
As reported in the October 23rd edition of Tax Notes, IRS is now reviewing tax-exempt hospitals to ensure their compliance with the §501(r) regulations issued in 2015. At the American Health Lawyers Association meeting on October 19th, a tax law specialist in the IRS Tax-Exempt and Government Entities Division Reviews conveyed that the IRS is uncovering compliance issues regarding the financial assistance policy (FAP) and community health needs assessment requirements. Agents also are inquiring as to whether patients eligible under the hospital's FAP are not excessively billed. In addition, the tax law specialist reported non-contact reviews taking place in 2014 to 2016 resulted in several hundred examinations, most from the absence of required documents on the hospital's website. The specialist also revealed that unrelated business income and excess benefit transactions were also sources for examinations.
(Hat tip: Fred Stokeld at Tax Notes)
Wednesday, October 11, 2017
When is criticism against your organization grounds for a defamation suit? In a handful of recent lawsuits filed in recent
months, groups designated as "hate groups" by the Southern Poverty Law Center have sued both SPLC (and, in one instance, charity-rater Guidestar which briefly used SPLC's designations until stopping due to pressure) for defamation. Under SPLC criteria, a hate group includes an organization that expresses "opposition to LGBT rights, often couched in rhetoric and harmful pseudoscience that demonizes LGBT people as threats to children, society and often public health." Evangelical christian groups take exception when they end up on SPLC's list.
Whether you agree with SPLC's methodology or find it flawed, SPLC discloses the rationale behind its hate group designations. Barring some yet-to-be-disclosed facts, the defamation suits against SPLC have very little chance of success... at least, in the courtroom. However, the litigation has provided the plaintiffs a good deal of press and the chance to make their case to the public at large.
Tuesday, October 10, 2017
Last week, the National Association of State Charities Officials held their annual conference on the impact of technology on charities regulation. It will be interesting to see if any new initiatives come out of this conference, but I hear a lot of interest in regulating crowdfunding and other forms of online charitable giving. To be sure, existing laws have not kept up with technology, new charitable behavior, or even constitutional law. Currently, some states regulate solicitation by telegraph but not social media or online platforms; as Hopkins & Kilpatrick (2013, p.74) note, states actively enforce laws that have been declared unconstitutional by the Supreme Court; and, as Fishman (2015) points out, most charitable registration forms sit unread and laws sit unenforced, imposing a compliance cost on charities without any clear law enforcement benefit. I hope before reflexively rushing into regulate a new area of charitable activity like crowdfunding, states pause to consider the costs of new regulations and look a bit harder at cleaning up what is already on the books.
Sean Hepburn Ferrer, who once chaired the Audrey Hepburn Children’s Fund, accused the charity of infringing trademark and other rights belonging to him and Luca Dotti, his half-brother....
In Thursday’s lawsuit, Ferrer said he resigned as chairman in 2012 amid disagreements over spending, but let the charity use his mother’s name, persona and legacy case-by-case.
He said he has granted no such rights since 2015 and that the charity’s subsequent infringements falsely suggest that he, Dotti or their mother endorsed them.
Monday, October 9, 2017
Philip T. Hackney (Louisiana State University Law Center) has posted his forthcoming article, Prop Up the Heavenly Chorus? Labor Unions, Tax Policy, and Political Voice Equality, St. John's Law Review, on SSRN. Below is the abstract of Professor Hackney's article:
Labor Unions are nonprofit organizations that provide laborers a voice before their employer and before governments. They are classic interest groups. United States federal tax policy exempts labor unions from the income tax, but effectively prohibits labor union members from deducting union dues from the individual income tax. Because these two policies directly impact the political voice of laborers, I consider primarily the value of political fairness in evaluating these tax policies rather than the typical tax critique of economic fairness or efficiency. I apply a model that presumes our democracy should aim for one person, one political voice. For the model, political voice means the ability of citizens to participate in setting and discussing the political agenda and to vote on any final decision. In a modern democratic state, citizens largely depend upon organized interest groups to fulfill this role of political voice. In the Article, I demonstrate that tax policy applicable to labor unions likely modestly harms political voice equality. We allow almost all nonprofit interest groups to obtain tax exemption whether they face collective action challenges or not. This subsidizes interests that would organize without government assistance and fails to provide much support to those politically weak interests. A more neutral treatment would be to end tax exemption for both business interests and labor interests. Additionally, although the case is weak, we could maintain tax exemption for labor interests alone in order to modestly correct a political voice inequality associated with labor. Finally, we should allow union members to deduct union dues above the line to offer parity with the treatment of a businessman’s dues.
Terri Lynn Helge (Texas A&M University School of Law) has published Rejecting Charity: Why the IRS Denies Tax Exemption to 501(C)(3) Applicants, 14 Pitt. Tax. Rev. 1 (2016).
New charitable organizations generally must file an application for exemption (Form 1023) and await approval from the Internal Revenue Service. Unfortunately, the criteria the Internal Revenue Service uses to evaluate applications has not always been transparent. If an application is approved, the Internal Revenue Service determination letter and the application for exemption are required to be made publicly available and can be requested from the Internal Revenue Service or the organization itself. Prior to 2004, in the case of denials, neither the application nor the Internal Revenue Service’s correspondence setting forth its rationale for the denial were made publicly available.
This project is the first of its kind. While others have commented on isolated denial letters, this study is the first to conduct a comprehensive analysis of the Internal Revenue Service denial letters issued from when they first became available in 2004 through January 31, 2017. In conducting this project, I examined 603 determination letters in which the Internal Revenue Service denied exemption to an applicant seeking recognition as charitable organizations described in Section 501(c)(3) of the Internal Revenue Code. This project looks in-depth at the basis on which the Internal Revenue Service denied exemption to these applicants.
To provide background for the basis of on which the Internal Revenue Service reviews exemption applications for charitable applicants, Part I of this article describes the requirements to obtain federal tax exemption as a charitable organization. In Part II of this article, I explain the methodology and the process by which I arrived at the data I present. Part III presents the data from my study and my analysis of the manner in which the Internal Revenue Service applies the five-part test for exemption in its review of the applicants who were denied exemption. The data pays particularly close attention to the evidence used by the Internal Revenue Service to support its denial of tax-exempt status. In Part IV of this article, I discuss the implications of my findings on the streamlined application process implemented by the Internal Revenue Service in July 2014. My data identifies concerns with the streamlined exemption process, and I suggest revisions that should be considered to the streamlined exemption process to make it more reliable.
David Herzig (Valpraiso School of Law) and Samuel D. Brunson (Loyola University Chicago School of Law) have posted their forthcoming article, Let Profits Be (Non) Profits, Wake Forest Law Review, on SSRN. Below is the abstract of their article:
In this article, we take a step back and ask whether the Supreme Court’s application of the fundamental public policy rule as espoused in the Bob Jones case is the normatively correct position. In our analysis, we conclude that using fundamental public policy as a filter in granting tax exemption gets both tax and public policy wrong. Our conclusion is informed by the history of the role played by public charities espousing minority views. We believe that a legitimate space in society should exist and populated by nonprofits to both espouse popular and unpopular minority views. But it is also informed by tax policy: applying the fundamental public policy rule to qualification for tax exemption misunderstand how exemption fits into the corporate income tax. Ultimately we conclude that homogeneity of viewpoint is normatively detrimental to a robust society. Therefore, in order to allow nonconforming views, we propose that the proper sector to house those views is in an expansionist version of the nonprofit sector.
Eddy Hogg's (University of Kent, UK) new article is available at Nonprofit & Voluntary Sector Quarterly. From the abstract:
Funding for England and Wales’ Charity Commission has been cut by 48% between 2007 and 2016, affecting its ability to deliver its core regulatory functions. Conversations around what charity regulation should look like and how it should be funded have, therefore, gained momentum. These debates, however, are not limited to England and Wales, and in this article, we contribute to them by exploring public attitudes to these questions, presenting the findings of four focus groups. We find that although public knowledge of charity regulation is low, people are, nonetheless, clear that charities should be regulated. There is no clear preferred method of funding a charity regulator and a significant amount of complexity and nuance in public attitudes. People trust charities, but this can be eroded if they do not have confidence in how they operate. A visibly effective regulator supporting and supported by charities is central to maintaining trust.
The Johnson Amendment--which prohibits 501c3 exempt organizations from engaging in partisan political activity--is under repeated attack this year. In mid-September, the U.S. House of Representatives approved an appropriations bill with a rider that prohibits the IRS from enforcing the Johnson Amendment against any "church" unless "the Commissioner of Internal Revenue consents to such determination" and the IRS provides notice to Congress. Two other bills would weaken the Johnson Amendment by allowing 501c3 nonprofits to engage in an insubstantial amount of politicking (similar to lobbying rules). An earlier Executive Order on the subject turned out to be legally meaningless.
Thousands of nonprofits joined the National Council of Nonprofits to call for keeping the Johnson Amendment as a needed tool to preserve the sector's nonpartisanship. Many faith groups have also opposed changes that might lead to politicizing houses of worship. Recently, National Association of State Charities Officials (NASCO) penned a letter, unsurprisingly favoring more regulation over less, and thus opposing any relaxation in federal tax law.
It's surprisingly difficult to find dispassionate, non-hyperbolic views about the Johnson Amendment and the consequences of its reform-- particularly more modest amendments such as the proposal to allow incidental political activity. I take a closer look at some of the arguments below the fold:
Saturday, October 7, 2017
Forbes' contributing author Peter Reilly: "It's deja vu all over again in the United States District Court For The Western District of Wisconsin as Judge Barbara Crabb rules that Code Section 107(2) - the parsonage exclusion- is unconstitutional." Read the interesting piece here.
Sam Brunson (Loyola - Chicago) discusses implications of the ruling for religious institutions at By Common Consent.