Wednesday, September 9, 2015
In addition to our previous post on fellow blogger Lloyd Hitoshi Mayer's opinion piece regarding John Oliver's segment on the tax exemption of churches, Edward Zelinsky (Cardozo) posted to the Oxford University Press Blog, John Oliver, Televangelists, and the Internal Revenue Service:
John Oliver’s sardonic spoof of televangelists raises important issues that deserve more than comic treatment. Oliver’s satire was aimed both at the televangelists themselves and at the IRS. In Oliver’s narrative, the IRS acquiesces to televangelists’ abuse by granting their churches tax-exempt status and failing to audit these churches. The law defines the term “church” vaguely. The IRS’s allegedly lackadaisical approach, Oliver tells us, permits televangelical preachers to live luxurious lives replete with private planes and tax-free cash, financed by naive and exploited believers.
An initial problem with this critique is that the IRS does not write the Internal Revenue Code. Congress writes the Code, and the American people elect Congress. As Peter Reilly of Forbes observes, in section 7611 of the Internal Revenue Code, Congress constrained the IRS’s ability to audit churches. Oliver criticizes the resulting low audit rate of churches without explaining who is responsible for this low audit rate—namely, Congress.
There are competing interpretations of section 7611. This provision of the Internal Revenue Code might be viewed as a plausible effort to minimize church-state entanglement by constraining the IRS’s ability to audit churches. Alternatively, Code section 7611 might be understood as Congress bending to political pressures from churches. Both narratives might contain part of the truth.
In any event, the low audit rate of churches, which Oliver blames on the IRS, is the responsibility of Congress. For better or worse, Congress has made it more difficult for the IRS to audit churches than to audit other persons and institutions in Code section 7611.
Another bête noire of Oliver’s critique is the private planes used by some televangelists. However, a minister’s personal use of a church-owned plane is taxable income to him, just as a corporate executive’s personal use of a company plane is taxable income to him.
More generally, churches pay more taxes than many people believe (including, apparently, John Oliver). For example, ministers pay self-employment taxes while churches pay FICA taxes on the salaries of their nonclerical employees. In many states, churches are subject to the sales tax, either as buyers or sellers and sometimes in both capacities.
Churches do not pay federal and state income taxes on their basic operations. However, neither do other nonprofit organizations such as colleges, universities, hospitals, and private foundations. It would be interesting for Oliver to compare the lifestyles of the individuals who lead these tax-exempt institutions with the life-styles of the church leaders of whom Oliver is so critical.
Interestingly, one phenomenon which troubles Oliver—small donors sending cash contributions to televangelical churches—is not problematic from a tax perspective. Oliver obviously disapproves of these donors and their responsiveness to televangelists’ appeals. However, small donors’ contributions are typically not tax deductible. Contributions to churches and other charitable institutions are deductible by the taxpayer only if the taxpayer itemizes personal deductions on his Form 1040. This occurs only among more affluent donors whose deductible outlays exceed their standard deduction for income tax purposes.
For 2015, a single taxpayer’s standard deduction is $6,300, while the standard deduction for a married couple filing jointly is $12,600. Thus, the modest donations cited by Oliver, while large relative to the donors’ low incomes, are generally not tax deductible because donors with limited incomes typically do not contribute enough to itemize their deductions. The real beneficiaries of the Internal Revenue Code’s charitable deduction are upper-middle class and wealthy taxpayers. These affluent taxpayers typically do not contribute to churches, but to such secular entities as universities and museums.
Finally, the legal issue of defining a church involves serious trade-offs that Oliver does not explore. Again, Congress, not the IRS, writes the tax law. Congress could, through the Internal Revenue Code, define “church” more restrictively to crack down on the kind of arrangements Oliver satirizes. However, a narrower definition of a “church” could also be used against nonconformist and unconventional religions—which, at times in our country’s history, would have included abolitionist churches, the Catholic Church, the Church of Latter Day Saints, and other now mainstream organizations. For that reason, as a society, we generally seek to minimize church-state entanglement, even though the resulting zone of religious autonomy can be exploited by the kind of ministers Oliver skewers.
Since at least Sinclair Lewis’s Elmer Gantry, evangelical preachers have been subject to the kind of criticism Oliver advances. The IRS, particularly in its handling of exempt organizations, is in many ways a troubled and poorly-managed agency. If we categorize Oliver’s skit as mere entertainment, it was, well, entertaining. However, Oliver evidently seeks to place himself in another tradition of American life, the tradition of Mark Twain, Ambrose Bierce, Will Rogers, and Mort Sahl. These humorists participated in important political discussions through their comedic commentary.
By the demanding standards of this tradition, Oliver’s satire of televangelists falls short.
[Hat tip: TaxProf Blog]
Friday, September 4, 2015
Fellow blogger Lloyd Hitoshi Mayer, Professor of Law at the University of Notre Dame School of Law, has posted an interesting, brief opinion piece, What John Oliver Got Wrong (and Right) About Churches and Taxes, on America: The National Catholic Review. He begins with the following:
One of the reasons I like “Last Week Tonight with John Oliver” is that it usually gets its law right. I was therefore looking forward to its piece on churches, especially since I had talked on background with Oliver’s staff and so knew it was coming. The piece was as funny as I expected, but unfortunately it also struck a few false legal notes that are worth clarifying.
Mayer critiques various aspects of the popular HBO show’s segment on churches, including its failure “to mention the long history of tax benefits for churches of all faiths,” but focuses on Oliver’s never having answered the question of why tax laws treat certain televangelists (the apparent object of Oliver’s scrutiny) “the same as other churches.” Says Mayer:
The answer is simple and yet is never mentioned in his piece—the Constitution’s Establishment Clause.
The First Amendment states “Congress shall make no law respecting an establishment of religion . . . .” This means neither Congress nor the IRS can choose among theologies. That is why the IRS has no choice but to recognize as religious any group that sincerely holds its beliefs and does not engage in illegal activities. Oliver sharply criticizes this standard, but what is the alternative? Do we want Congress or, horrors, IRS agents picking and choosing which theologies are “correct” and which are not? ….
This sincerely held belief standard is also not meaningless. With all due respect to Oliver’s attorney, his newly founded “church”—Our Lady of Perpetual Exemption—almost certainly would not survive IRS scrutiny. No one watching the piece could believe that there is a sincere religious belief at its heart, much less at the heart of its purported congregation of audience members. The IRS will probably leave it alone because ultimately any donations it receives will go to a bona fide charity (Doctors Without Borders).
Mayer concludes with the following words:
None of this is to defend the “prosperity Gospel” or the excesses of the televangelists that Oliver criticizes. But the government cannot and should not choose among theologies or treat churches differently because their members sincerely hold beliefs that are out of the mainstream or even ridiculous in the eyes of many. It is instead up to you and me and, yes, John Oliver to his credit, to bring the beliefs and practices of these ministries into the light so the harm they cause can be clearly seen by those who otherwise might be lured into giving to them.
William P. Marshall, the William Rand Kenan, Jr. Distinguished Professor of Law at the University of North Carolina School of Law, has posted Remembering the Values of Separatism and State Funding of Religious Organizations (Charitable Choice): To Aid is Not Necessarily to Protect on SSRN. Here is the abstract:
When we are thinking about whether we have moved beyond separatism, the non-constitutional implications of this observation are worth considering. Does the current turn in constitutional law towards a more deferential approach to aid to religion programs mean that the policy arguments against such programs also should be discounted? Or should we remember the values of separatism in making legislative choices? This essay concludes that the values of separatism should continue to inform legislative judgment. To aid religion is not always to protect it, and the protection of religion and religious freedom fostered by separatism should not be forgotten even as the constitutional barriers to state aid to religion continue to subside.
Part I of this essay introduces this topic by discussing the values of separatism in their relation to current legislative attempts to provide state monies to religious institutions that offer social services -- legislative initiatives that popularly have been entitled “charitable choice.” Part II canvasses the constitutional background surrounding charitable choice and concludes that such programs would likely be found constitutional. Accordingly, the question of whether such programs should be adopted is more a matter of legislative choice than of constitutional mandate. Part III then addresses the legislative calculus. It begins by discussing why support for aid to religious programs is popular in the current political climate. The essay suggests that much of the political impetus behind such programs stems from the belief shared by many of defenders of religion that excluding religious institutions from the class of potential government beneficiaries reflects an anti-religious animus that warrants correction. The section contends, however, that this perception that anti-aid equates to anti-religion is misguided. The separationist objections to charitable choice noted in Part I demonstrate that the anti-aid position may be based on pro-religion values. Aid to religion does not always benefit religion. Remembering the values of separatism means understanding that government support of religion may harm, as well as assist, the religious mission.
Thursday, September 3, 2015
Federico Cheever, Professor of Law and Director of the Environmental and Natural Resources Program, University of Denver Sturm College of Law, and Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law, have posted An Introduction to Conservation Easements in the United States: A Simple Concept and a Complicated Mosaic of Law on SSRN. Here is the abstract:
The idea of a conservation easement – restrictions on the development and use of land designed to protect the land’s conservation or historic values – can be relatively easily understood. More significant and more challenging is the complex body of state and federal laws that shapes the creation, funding, tax treatment, enforcement, modification, and termination of conservation easements.
The explosion in the number of conservation easements over the past four decades has made them one of the most popular land protection mechanisms in the United States. The National Conservation Easement Database estimates that the total number of acres encumbered by conservation easements exceeds 40 million.
Because conservation easements are both novel and ubiquitous, understanding how they actual[ly] work is essential for practicing lawyers, policymakers, land trust professionals, and students of conservation. This article provides a “quick tour” through some of the most important aspects of the developing mosaic of conservation easement law. It gives the reader a sense of the complex inter-jurisdictional dynamics that shape conservation transactions and disputes about conservation easements.
Professors of property law, environmental law, tax law, and environmental studies who wish to cover conservation easements in the context of a more general course can use the article to provide their students with a broad but comprehensive overview of the relevant legal and policy issues.
The Boston Globe reports that “Beth Israel Deaconess Medical Center and Lahey Health are negotiating a possible merger that would create a large health system to compete with the dominant Partners HealthCare.” The article describes Beth Israel Deaconess as “a large academic medical center affiliated with Harvard Medical School that has built its network by acquiring hospitals in Milton, Needham, and Plymouth,” and Lahey Health as a hospital system including “Lahey Hospital and Medical Center in Burlington, a teaching hospital affiliated with Tufts University School of Medicine … and community hospitals in Beverly, Gloucester, and Winchester.”
Legal considerations bear upon both the impetus for hospital consolidations and their consummation. The article explains as follows:
Hospital mergers in Massachusetts are reviewed by the Health Policy Commission, a state agency, which cannot block deals but can refer them to the attorney general.
The rekindling of merger talks shows the urgency both sides feel to grow to compete with Partners, the state’s biggest and richest health system. And in today’s shifting health care industry, many executives say a larger network of hospitals, doctors, and services is needed to successfully compete.
Hospital consolidation has accelerated around the country in recent years, spurred in part by the federal Affordable Care Act.
The law encourages providers to adopt new payment systems that reward them for keeping patients healthy, rather than rewarding doctors and hospitals for every patient visit, service, and procedure.
The article notes that the merger talks are in the “early stages” and that on two previous occasions Lahey and Beth Israel Deaconess attempted but failed to negotiate a merger to completion.
Wednesday, September 2, 2015
Judge Rules IRS Has Not Yet Established Reasonableness, Nor Has Plaintiff Yet Established Unreasonableness, of IRS Records Search in FOIA Dispute
United States District Judge Landya McCafferty of the District of New Hampshire has issued an order allowing a private citizens group to proceed in its Freedom of Information Act suit against the Internal Revenue Service. The order sets forth the posture of the case, the gist of which appears in the following excerpts:
In May of 2013, the Internal Revenue Service (“IRS”) became embroiled in a “targeting” scandal after it admitted that it had singled out politically conservative organizations by delaying and more closely scrutinizing their applications for tax-exempt status. In the wake of the scandal, Citizens for a Strong New Hampshire, Inc. (“Citizens”) filed a records request with the IRS pursuant to the Freedom of Information Act, 5 U.S.C. § 552 (“FOIA”). The request sought disclosure of correspondence between two New Hampshire politicians and certain high-ranking IRS officials. Now, Citizens has brought this lawsuit, accusing the IRS of conducting an inadequate search, unreasonably delaying its disclosure, and unlawfully withholding responsive documents. Both parties have filed motions seeking summary judgment. …
The Complaint suggests that the targeting by the IRS of conservative organizations was spurred, in part, by Democrats in Congress. For example, in 2012, New Hampshire Senator Jeanne Shaheen was among several Democratic senators to co-sign a letter to the commissioner of the IRS, urging the IRS to investigate tax-exempt organizations that might be abusing their exempt status by engaging in partisan political activity. In June of 2014, Citizens made a FOIA request to the IRS, seeking “[a]ny and all documents or records of email or correspondence to or from New Hampshire Senator  Jeanne Shaheen and Congresswoman Carol Shea-Porter  to or from [three high-ranking IRS officials] between the dates of January 1, 2009 and May 21, 2013.” See FOIA Request (doc. no. 1-1). One of the three named IRS officials was Lois Lerner who, at the time, served as the Director of the Exempt Organizations Unit, which oversaw applications for tax exemption. …
Citizens alleges that the correspondence that it sought would have been of interest to voters in advance of the 2014 election. Citizens has brought a claim against the IRS for violation of FOIA, alleging that the IRS: (1) conducted an inadequate search; (2) unduly delayed its disclosure such that Citizens could not disseminate the results of the search to voters in advance of the 2014 national election; and (3) unlawfully withheld the 51 pages of responsive but purportedly exempt documents. Citizens seeks an order requiring the IRS to disclose the remaining 51 pages, a declaratory judgment that the IRS violated FOIA, as well as an award of fees and costs. The IRS denies the allegations and argues that it is entitled to judgment as a matter of law. Both parties now seek summary judgment. [footnotes omitted]
Having conducted an in camera review of the documents that the IRS claimed were exempt from disclosure, Judge McCafferty concluded that the IRS properly withheld 51 pages of materials (the general nature of which she summarizes in the order). More interestingly, Judge McCafferty denied both parties’ motions for summary judgment on the reasonableness of the IRS’s records search. On the latter denials, Judge McCafferty summarized her findings as follows:
Put simply, there exist genuine issues of material fact as to whether the IRS conducted an adequate search, and the record does not entitle either party to summary judgment on this issue.
What does the order mean for the litigation? Judge McCafferty explains as follows:
[N]either party is entitled to summary judgment on the issue of the sufficiency of the search, leaving the potential for a most unusual occurrence: a FOIA trial. See Margaret B. Kwoka, The Freedom of Information Act Trial, 61 Am. U. L. Rev. 217, 257-58 (2011) (calculating that, between 1979 and 2008, less than 1% of FOIA cases went to trial, and further observing that “[i]n recent years, it is fair to say there have been essentially no FOIA trials”). The court will schedule a conference with the parties in order to discuss next steps. The parties should be prepared to discuss, among other topics, the scope and logistics of a trial, the need for discovery, and the prospects of settlement.
Other Coverage: Tax Notes Today (Electronic Cite: 2015 TNT 170-3).
Tuesday, September 1, 2015
In Anti-abortion Group Wins Case Against Obama, USA Today reports that United States District Court Judge Richard Leon of the District of Columbia has ruled that the “anti-abortion group March for Life does not have to offer insurance coverage for contraceptives under President Obama's health care law, marking the first time an exemption was granted for moral, rather than religious, reasons.” Although the Affordable Care Act generally requires employers to offer employees health insurance plans that include coverage for contraceptives, churches are exempted from the requirement, and other religiously oriented nonprofits have gradually obtained a similar accommodation (which some continue to litigate as insufficiently protective of their religious convictions).
The story reports why Judge Leon’s ruling is significant:
Leon ruled that the Obama administration, through the Department of Health and Human Services, already is going further than protecting religious beliefs through its exemptions. Rather, he said, it is "protecting a moral philosophy about the sanctity of human life" — a philosophy shared by many non-religious groups, particularly one "founded exclusively on pro-life principles."
"March for Life has been excised from the fold because it is not 'religious,'" Leon wrote. "This is nothing short of regulatory favoritism."
This decision is sure to spark a fire of commentary and additional analysis. Readers can expect more blog coverage of this fascinating legal development.
The Los Angeles Times reports that, according to an audit by the California Franchise Tax Board, Blue Shield of California, a large nonprofit insurer, increased executive compensation in 2012 by $24 million. The pay raise, says the story, is a 64% increase over the prior year’s level, and places Blue Shield’s compensation of approximately 60 senior company officers at $61 million for 2012 (compared to $37 million for 2011 and $39 million for 2010 and 2009).
The company did not report a number of details about precisely who received what and in what form, a decision that has led to speculation and criticism. The story explains as follows:
The health insurance giant won't say who got the money or why. But Blue Shield's former public policy director, Michael Johnson, who left this year and is now a company critic, said senior officials at the insurer told him that former Chief Executive Bruce Bodaken received about $20 million as part of his 2012 retirement package, on top of his annual pay.
Half a dozen other top executives also left the company near the end of 2012, which could have accounted for some of the spike in compensation. Some of this severance or retirement money may be paid out over time, extending beyond 2012.
The San Francisco insurer declined to confirm the total compensation for Bodaken, who was chairman and CEO from 2000 to 2012.
Why are the details of compensation still a mystery? According to the Times story, California law requires Blue Shield to file a report of compensation for its 10 most highly compensated employees. The company reportedly interprets the law to apply only to executives within the company’s employ at the time of filing the required report. Although the company insists that it has fully complied with the law, the state insurance commission appears to be concerned:
California Insurance Commissioner Dave Jones said the company's decision to exclude pay for Bodaken and other executives from its regulatory filing "raises very serious and troubling questions with regard to whether Blue Shield misled the Department of Insurance."
"We will be investigating this discovery by the L.A. Times and looking at all of our options," Jones said.
In Telemarketers Keep Dollars Raised for Charity, the Chicago Tribune examines the charitable fundraising operations of telemarketer Safety Publications Inc. (“Safety”). The main criticisms raised in the piece are summarized in the following excerpt:
Safety gave the nonprofits only about 15 cents of every dollar raised in those seven years [i.e., 2008-2014] and kept the rest for itself, a Tribune analysis of government records found. Many of those charities in turn spent their nickels on administrative overhead, leaving pennies for those in need, the records show.
Safety and a linked charity telemarketer also have employed at least 10 callers who served prison terms for bank robbery, forgery, child rape and other felonies since 2007, the Tribune found, despite Illinois' prohibition against using felons to raise charity money. The law is designed to ensure the trustworthiness of nonprofit solicitors.
For those interested in more details, the article delves into the history of the telemarketer and its founders, reports on their alleged hiring of convicted felons, and raises questions about whether Safety has properly reported its operations to the State of Illinois. More generally, the story offers a glimpse into the practices of professional telemarketers who contract with charities having trouble raising funds by themselves. One is left with a picture that is far from flattering.
Monday, August 31, 2015
As reported in the Pittsburgh Post-Gazette, Fox Chapel Presbyterian Church of Pittsburgh has a history of facilitating public policy initiatives centered on improving children’s health. It all reportedly began in the midst of the 1980s downturn in the steel industry:
When [a group of former steelworkers] … showed up at the Fox Chapel Presbyterian Church in the spring of 1984, the Rev. John Galloway stopped the service and invited them to address the congregation. Their stories that day were followed by emotional meetings with church and community leaders in which they described life without medical benefits for their children, according to church records.
Charlie LaVallee, longtime executive director of the Highmark Caring Foundation and former Highmark Blue Cross Blue Shield vice president, called Fox Chapel Presbyterian the “catalyst” for the program he helped develop into state law that later served as the model for the federal Children’s Health Insurance Program.
Today, reports the Post-Gazette, the church is donating space to the Pediatric Palliative Care Coalition, formed in 2012 to assist those caring for children with life-threatening illnesses, a group of patients typically underserved by existing entities, including hospices. Partnering with the coalition seems a natural fit for the church, which is reported to have raised $50,000 in the early 2000s, “much of it going to help palliative care at Children’s Hospital of Pittsburgh of UPMC.” The story explains that the coalition, which includes several regional hospitals, “is currently advocating for two bills in the General Assembly involving pediatric palliative care,” and focuses on “connecting families and medical providers” and “helping educate hospices about a provision in the Affordable Care Act that requires state Medicaid programs to cover both life-sustaining treatment and hospice for qualified children under 21.”
The activities of Fox Chapel Presbyterian Church serve as a helpful reminder of how nonprofits in general, and religious nonprofits in particular, serve a vital role in both the delivery of social services in this country and the shaping of the nation’s public policy. The story reports how the church listened to the voices of a segment of the population facing great needs that were not being met by either government or the nonprofit sector. The church has raised money to help meet these needs. The church has also donated physical space to aid the effort. And the church, by helping raise public awareness of a problem, has even contributed in some ways to the enactment of law and legislative proposals that have garnered broad support.
More broadly, Fox Chapel Presbyterian Church is yet another example in our country’s rich history of nonprofits, including churches, which take seriously their mission and their duty to advance their mission by exercising their rights to participate in the intersection of the private and public spheres. What this church is doing to help promote children’s health would likely garner the applause of most of us. Other efforts – such as promoting the health, and even the very lives, of children who have not yet made it out of their mothers’ bodies – would elicit a more varied response among the general population. But this is the nature of a pluralistic universe of actors in a civil society that includes nonprofit entities in all of their varied stripes. Let us not forget that, when we embrace, even support, the efforts of a nonprofit such as Fox Chapel Presbyterian Church, we are recognizing the right of every nonprofit to act similarly to advance its mission.
Tuesday, August 25, 2015
In a recent opinion, AHS Hospital Corp. v. Town of Morristown, 2015 WL 3956132, the Tax Court of New Jersey revoked the property tax exemption of a non-profit hospital. In a lengthy and wide-ranging opinion, the court surveyed the history of hospitals, finding it important that the modern hospital has changed greatly from the hospitals in existence at the time property tax exemptions were granted. The court noted that “Like their new for-profit competitors, today's non-profit hospitals have evolved into labyrinthine corporate structures, intertwined with both non-profit and for-profit subsidiaries and unaffiliated corporate entities. . . . Today's non-profit hospitals generate significant revenue and pay their professionals salaries that are competitive even by for-profit standards. Furthermore, private physicians and medical practices associated with non-profit hospitals earn and retain income generated on hospital property.” The court praised the quality of care provided by the hospital but said that it “must not succumb to emotion” in reaching its decision. In denying property tax exemption for much of the hospital property because of a for-profit use, the court observed that “If it is true that all non-profit hospitals operate like the Hospital in this case, as was the testimony here, then for purposes of the property tax exemption, modern non-profit hospitals are essentially legal fictions.” No doubt this issue will continue to reverberate in New Jersey and in many other states revisiting the policy behind property tax exemptions, for hospitals and other nonprofits. RC
Wednesday, August 19, 2015
Professor Victor Fleischer from the University of San Diego has an opinion piece in today's New York Times advocating an 8% annual required payout for university endowments over $100 million. Such a payout is more than the 5% amount required for private foundations under Section 4941, and well more than the payouts for medical research organizations and private operating foundations. In fact, it is more than the amount set as a rebuttable presumption of unreasonableness for endowment spending under Section 4(d) of UPMIFA, which is 7%.
Fleischer's concern was prompted by his research into investment manager compensation, which indicated that that private equity fund managers received more in payouts than students at at least five universities: Harvard, Yale, Texas, Stanford and Princeton. Much of this compensation was in the form of the dreaded carried interest, which is under scrutiny in numerous arenas, not just the nonprofit world.
It is an interesting proposition. I am somewhat dubious of an 8% payout, wondering whether that might have an adverse impact on the risk profile of endowments, which by all accounts already have fairly aggressive asset allocations (Fleischer says that endowments this size are returning over 8% already so it won't matter). I also wonder what rationale there is for subjecting only university endowments to such a rule, as it seems to me that there may be other exempt organizations of a similar size that might have a similar investment compensation issues (large foundations, for example, only pay 5%) that are not subject to such a high payout requirement. Finally, isn't the issue really the investment manager compensation, so mandating a payout isn't really reaching the root of the problem? But I may be picking around the edges on this. Would love to hear others thoughts.
Monday, August 17, 2015
The University of Iowa College of Law sent to us the following request for applications for tenure, tenure track, and clinical professors:
THE UNIVERSITY OF IOWA COLLEGE OF LAW anticipates hiring several tenured/tenure track faculty members and clinical faculty members (including a director for field placement program) over the coming year. Our goal is to find outstanding scholars and teachers who can extend the law school’s traditional strengths and intellectual breadth. We are interested in all persons of highacademic achievement and promise with outstanding credentials. Appointment and rank will be commensurate with qualifications and experience. Candidates should send resumes, references, and descriptions of areas of interest to: Faculty Appointments Committee, College of Law, The University of Iowa, Iowa City, Iowa 52242-1113.
THE UNIVERSITY OF IOWA is an equal opportunity/affirmative action employer. All qualified applicants are encouraged to apply and will receive consideration for employment free from discrimination on the basis of race, creed, color, national origin, age, sex, pregnancy, sexual orientation, gender identity, genetic information, religion, associational preference, status as a qualified individual with a disability, or status as a protected veteran.
Saturday, August 15, 2015
In Minnick v. Commissioner, _ F.3d _ (9th Cir. 2015), the 9th Circuit affirmed the Tax Court’s holding that, to be eligible for a charitable income tax deduction for the donation of a conservation easement, any outstanding mortgages on the underlying property must be subordinated to the rights of the holder of the easement at the time of the gift. The Minnicks did not obtain a subordination agreement until five years after the date of the gift.
In an unpublished opinion issued the same day, Minnick v. Commissioner, _ Fed. Appx. _, 2015 WL 4747103 (9th Cir. 2015), the 9th Circuit addressed the remaining issues in the case, holding for the IRS on each point.
The Minnicks argued that their failure to timely subordinate the mortgage should be excused for three reasons.
- So Remote As To Be Negligible. The Minnicks argued that Treasury Regulation § 1.170A-14(g)(3), which provides that a “deduction shall not be disallowed…merely because the interest which passes to…the donee organization may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible,” excused their noncompliance with the subordination requirement. The Minnicks appear to have argued that the possibility that they would default on the mortgage and the easement would be extinguished was “so remote as to be negligible.” The 9th Circuit rejected this argument, noting that the so-remote-as-to-be-negligible provision does not override Treasury Regulation § 1.170A-14(g)(2)’s mortgage subordination requirement. This is consistent with the 10th Circuit’s holding in Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. 2015).
- Intent. The Minnicks argued that their failure to obtain a timely subordination agreement should be excused because there was “verifiable evidence of original intent to enforce the easement in perpetuity” in the easement deed, which specifically stated that there were “no outstanding mortgages ... in the Property that have not been expressly subordinated to the Easement.” The 9th Circuit rejected this argument, explaining that, even if the statement in the deed evidenced an intent to subordinate, intent is irrelevant. A mortgage must be subordinated at the time of the gift.
- Cy Pres. The Minnicks argued that Idaho’s cy pres doctrine, which “restricted the Minnicks from abandoning or otherwise encumbering the easement,” adequately ensured that the easement would continue in perpetuity and, thus, the subordination requirement was satisfied. The 9th Circuit rejected this argument, noting that the “cy pres doctrine is inapplicable here because it has no effect on the ability of the bank holding the unsubordinated mortgage to extinguish the easement by foreclosure.” Cy pres would have no effect on the ability of the bank to extinguish the easement in such event because the easement had been granted to the land trust holder subject to the mortgage and, thus, the bank’s rights had priority over those of the holder and the public.
The Minnicks argued that they suffered prejudice because they lacked notice that subordination would be an issue at trial (the Tax Court had granted the IRS permission to file an amended answer on the morning of trial). The 9th Circuit dismissed this argument, explaining that the Minnicks were aware of and prepared to argue the subordination issue at trial.
The Minnicks argued that the Tax Court improperly imposed a 20% negligence penalty on them under IRC § 6662(a). The 9th Circuit rejected this argument as well, explaining that, even if the Minnicks’ ignorance of the subordination requirement was in good faith, they did not have reasonable cause for claiming a deduction because Mr. Minnick had a law degree, and reading the Treasury Regulations would have given him notice that subordination may have been required.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Thursday, August 13, 2015
As announced Wednesday in a blog post by the head of the White House Office of Faith-based and Neighborhood Partnerships, nine federal agencies are issuing notices of proposed rulemaking (NPRMs) that will codify recommendations made by an advisory council to the President on "strengthening the social service partnerships the government forms with nongovernmental providers, including strengthening the constitutional and legal footing of these partnerships." The blog post further provides the overall content of the NPRMs:
The proposed rules clarify the principle that organizations offering explicitly religious activities may not subsidize those activities with direct federal financial assistance and must separate such activities in time or location from programs supported with direct federal financial assistance. For example, if a faith-based provider offers a Bible study as well as a federally supported job training program, the Bible study must be privately funded and separated in time or location from the job training program.
The NPRMs also propose new protections for beneficiaries or prospective beneficiaries of social service programs that are supported by direct federal financial assistance. In the proposed rules, the agencies set forth a notice to beneficiaries and prospective beneficiaries that informs them of these protections. These notices would make it clear, for example, that beneficiaries may not be discriminated against on the basis of religion or religious belief or be required to participate in any religious activities and advises beneficiaries that they may request an alternative provider if they object to the religious character of their current provider.
At the same time, the NPRMs assure religious providers of their equal ability to compete for government funds and of continuing protections for their religious identity like the ability of providers to use religious terms in their organizational names and to include religious references in mission statements and in other organizational documents. The NPRMs also state that the standards in the proposed regulations apply to sub-awards as well as prime awards, and set forth definitions of “direct” and “indirect” federal financial assistance. These areas have been sources of confusion for some providers.
The NPRMs are to be issued by the federal departments of Agriculture, Education, Health and Human Services, Homeland Security, Housing and Urban Development, Justice, Labor and Veterans Affairs as well as the U.S. Agency for International Development, and will apply to a broad range of federal programs that have involved faith-based organizations for years. These federal agencies will be requesting interested parties to submit comments over the next 60 days, which will then be considered in issuing final regulations.
Pursuant to a notice published in the Federal Register on August 10, the IRS is seeking applicants for vacancies on the Advisory Committee on Tax Exempt and Government Entities (ACT). The vacancies, which will occur in June 2016, include: Two (2) Employee Plans; two (2) Exempt Organizations; one (1) Federal, State and Local Governments; and one (1) Indian Tribal Governments. The notice states that ""[t]o ensure appropriate balance of membership, final selection of qualified candidates will be determined based on experience, qualifications and other expertise."
The Supreme Court ruling on same-sex marriage has yielded a lot of commentary regarding its potential effect on tax-exempt, religious organizations, including religiously-affiliated educational organizations. The Washington Post article referenced below sets forth the IRS Commissioner's commitment to not change its stance and begin revoking the exemption of religiously-affiliated educational institutions that oppose the ruling. The second set of blog posts looks at the issue more broadly, generally making the argument that opposition from such educational and other religious institutions results in "vibrant" and essential pluralism.
After the Supreme Court’s decision on gay marriage, religious leaders feared that religious universities, nonprofits and other institutions could lose their tax-exempt status. IRS Commissioner John Koskinen has promised the Senate Judiciary Oversight Subcommittee that his agency would not go after the tax-exempt status of religious colleges and universities that oppose gay marriage.
During a hearing Wednesday conducted by the Senate Subcommittee on Oversight, Agency Action, Federal Rights and Federal Courts, Sen. Mike Lee (R-Utah) asked Koskinen whether the IRS would “not, in the absence of a directive by Congress or by the courts," take action to remove religious schools’ tax exemption.
“I can make that commitment,” Koskinen said, explaining that “we see no basis for changing our examination criteria as a result of this Supreme Court case.”
Koskinen discussed the potential for such schools’ tax exemption to go under scrutiny down the road. “If we ever did that, we would issue it for public comment. There would be no surprises,” Koskinen said. “The public would have plenty of notice and plenty of opportunity to comment, and that’s not going to happen in the next two and a half years.” [emphasis added]
PrawfsBlog, "Garnett et al. on Tax-Exempt Status and Religious (and Other) Organizations" by Paul Horwitz (Alabama)::
Should government insist that all private organizations comply with its own sense of the good? Most people, I think, still agree that the answer to this question is no. However strongly they feel that those public values are the right values, and however devoutly they may hope that all people and all groups come to share them and to act accordingly, they still believe for various reasons--not least a sense that the public-private distinction, however imperfect and vulnerable to critique, represents an important value of its own--that government should not and perhaps cannot rigorously or ruthlessly enforce what Nancy Rosenblum has called a "logic of congruence" between public and private organizations. ...
Our friend and fellow Prawfs writer Rick Garnett discusses that question in a new editorial co-written with John Inazu and Michael McConnell [see below]. The title, which I gather its writers did not choose and might not be completely comfortable with, is "How to Protect Endangered Religious Groups You Admire." They argue, in brief, that we should, at a minimum, be willing to protect religious non-profits that provide significant contributions to the public good despite their now heterodox views.
Read the whole thing. Feel free to disagree. I will add two points. I agree, in sensibility at least, with a point made by Marc DeGirolami in a recent post about the editorial: "We use the language of 'exemption' when we speak of the taxable status of nonprofits, but it would be better instead to think of their nontaxable status as marking a boundary of the government's power to tax." Reasonable disagreement is available about whether "power" is an apt word here, but for those who believe that whatever the extent of state power, it ought not lightly be exercised in a way that circumscribes civil society and a vibrant pluralism, the sensibility is right. Second, it ought not be only pluralists, and certainly not only social conservatives, who support these arguments. This is an argument that liberals ought to be taking seriously now, especially as progressive thought continues to drift in a more illiberal direction.
Christianity Today op-ed: How to Protect Endangered Religious Groups You Admire, by Richard W. Garnett (Notre Dame), John D. Inazu (Washington University) & Michael W. McConnell (Stanford):
Today, tens of thousands of religious organizations, and tens of millions of Americans, continue to believe and teach that the proper understanding of marriage is a union of one man and one woman. But they do far more than believe and teach this and other views.
They also give food, clothing, shelter, counsel, and comfort to millions of Americans in need. They offer some of the most important and desperately needed health, educational, and social services in the country. And they provide billions of dollars and thousands of full-time workers for international relief aid that serves vulnerable migrants, refugees, and persecuted minorities. The work of religious organizations has long been and continues to be central both to religious believers’ lives and to the welfare of others. Our communities—and, indeed, communities around the globe—would be much worse off without these organizations and their faith-informed good works.
Despite the crucial role that religious organizations and individuals have long played in our country, some voices now suggest that they and their work are somehow tainted because of their beliefs about marriage and sexuality. Some argue that the time has come to push religious believers out of the public square and confine them to the quiet, private realm of personal prayer and worship. This despite the Supreme Court's recent decision in Obergefell v. Hodges, which not only required states to legally recognize same-sex marriages but also said, “the First Amendment ensures that religious organizations and persons are given proper protection as they seek to teach the principles that are so fulfilling and so central to their lives and faiths.”
Nonetheless, because of their traditional views on human sexuality, religious organizations have already been threatened with heavy-handed government action. ...
[W]ithin days of the Court’s decision in Obergefell, New York Times columnist Mark Oppenheimer wrote that the government should eliminate tax-exempt status from “organizations that dissent from settled public policy on matters of race or sexuality.”
Mr. Oppenheimer failed to acknowledge that in a pluralistic and democratic society, government routinely recognizes the tax-exempt status of organizations that differ from “settled public policy.” For example, not that long ago, the Human Rights Campaign was tax-exempt when it differed from settled policy on matters of sexuality; the same is true of organizations, like the Sierra Club, who push for changes in environmental regulation, or anti-war groups, who oppose US military policy. One of the principal purposes of civil society organizations is to challenge “settled public policy.”
Moreover, the majority opinion in the 5-4 decision in Obergefell earlier this summer made clear that “Many who deem same-sex marriage to be wrong reach that conclusion based on decent and honorable religious or philosophical premises, and neither they nor their beliefs are disparaged here.” ...
Some members of Congress have now introduced the First Amendment Defense Act (FADA) in an effort to ensure that overheated rhetoric and political opportunism do not endanger the important work of faith-based organizations. The core of FADA would require the federal government to honor its longstanding commitments to treat all such organizations with an even hand. It would prevent federal officials from attempting to strip tax-exempt status, from denying equal access to federal facilities and entitlements, or from taking adverse actions related to licensing or accreditation. ... We think the best approach is to tailor FADA to the core area of concern: religious nonprofits. That focus would serve the cause of religious freedom by making it more likely that this important legislation can move forward.
[Hat tip: TaxProfBlog]
As reported by the Daily Tax Report, the NYC Bar Association has requested that the IRS issue a revenue ruling confirming the agency's stance in two 2014 private letter rulings that the exempt organization was not required to obtain a new exemption letter upon a change of domicile or in the case of certain conversions (See PLR 201446025; PLR 201426028).
The IRS has responded that the issue will likely be addressed through a guidance project.
Wednesday, August 12, 2015
Minnick v. Commissioner – 9th Circuit Affirms Tax Court, Mortgages Must Be Subordinated When Conservation Easement is Donated
In Minnick v. Commissioner, _ F.3d _ (9th Cir. 2015), the 9th Circuit Court of Appeals affirmed the Tax Court’s holding that, to be eligible for a deduction for the donation of a conservation easement under Internal Revenue Code § 170(h), any outstanding mortgages on the underlying property must be subordinated to the rights of the holder of the easement at the time of the gift. The 10th Circuit held the same in a similar case in January 2015: Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. 2015) (Mitchell III).
Citing to Mitchell III, the 9th Circuit explained that the plain language of Treasury Regulation § 1.170A–14(g)(2) (the “mortgage subordination” regulation) supports the Tax Court’s interpretation. The regulation specifies that “no deduction will be permitted … unless the mortgagee subordinates its rights in the property.” Strictly construed, said the 9th Circuit, that language makes clear that “subordination is a prerequisite to allowing a deduction.” Since there was no dispute that Minnick’s lender had not subordinated its rights in the subject property when Minnick donated the easement at issue (despite warranties in the easement deed to the contrary), under the plain meaning of the regulation no deduction is permitted.
The 9th Circuit further explained that, even if ambiguity arguably existed in the language of the regulation with respect to when subordination is required, that would not change the outcome. Under Auer v. Robbins, 519 U.S. 452 (1997), courts defer to the IRS’s reasonable interpretation of its own regulations and, said the 9th Circuit, the IRS’s interpretation is reasonable and not plainly erroneous or inconsistent with the regulation. The 9th Circuit quoted the analysis on this point in Mitchell III: “[b]ecause a conservation easement subject to a prior mortgage obligation is at risk of extinguishment upon foreclosure, requiring subordination at the time of the donation is consistent with the Code’s requirement that the conservation purpose be protected in perpetuity.” The 9th Circuit emphasized:
An easement can hardly be said to be protected ‘in perpetuity’ if it is subject to extinguishment at essentially any time by a mortgage holder who was not a party to, and indeed (as here) may not even have been aware of, the agreement between the Taxpayers and a [land] trust.
Mr. Minnick (a former member of the U.S. House of Representatives from Idaho) is suing his attorney for malpractice. The Idaho Supreme Court recently ruled that suit is not barred by the statute of limitations.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Friday, July 24, 2015
As previously blogged, the GAO Report to Congress (the full report is here) on the IRS processes for political activity referrals found significant deficiencies with respect to the initial allegations that triggered an audit. In some cases, no case files were found by the GAO. These deficiencies "increase the risk that EO could select exempt organizations for examination in an unfair manner - for example, based on an organization's religious, educational, political or other views." According to Bloomberg BNA, in the hearing before the Ways and Means Oversight Committee in which the GAO report was released, it was determined that for the past six years, "one person working alone at the IRS has been deciding which complaints about the political activities of exempt organizations should be followed up."
Following the above-referenced hearing, IRS Commissioner John Koskinen reported to Bloomberg BNA that final regulations on political campaign activities by exempt organizations will not be in place prior to the 2016 presidential election (see proposed regulations here). The regulations will likely not be effective until January 2017. See prior blog posts on the proposed regulations and political activity regulations generally (April 16, 2014; July 16, 2015).