Wednesday, December 16, 2015

Why Are You Reading This? Star Wars, People!

In honor of Star Wars Day 2015, I'm linking to this article from the Tax Foundation, which clarifies that but for taxes, we wouldn't have the entire Star Wars series, thus proving what I tell my students... tax is, indeed, everywhere....


Linking two things I love, cosplay and charities (I'm a really big nerd) ... may I introduce you to one of my favorite things, the 501st Legion, helping a charity event near you (who said all Stormtroopers are on the Dark Side!)

Now, get in costume, get in line, and may the Force be with you!   


(and for the love of all that is the Light Side of the Force, no spoilers!)



December 16, 2015 in Current Affairs | Permalink | Comments (0)

Monday, December 14, 2015

Getting the Vapors Over the Chan-Zuckerberg Initiative LLC

There's been an awful lot of pearl clutching going on out there in the media about the Chan-Zuckerberg Initiative, now famously known to be organized as a Delaware Limited Liability Company (LLC - not limited liability corporation, media folks!   And yes, it makes a difference.)     The December 11th Chronicle on Philanthropy update, which I get in my email, had not one but TWO opinion pieces on it.  Personally, I don't quite get all the drama, but I have three working theories, none of which are mutually exclusive.    ( I do have to put one caveat out there  - my comments are based on the structure as I understand it from media reports, which may or may not be reliable.)

  1.  Tax Deduction?  We Don't Need No Stinkin' Tax Deduction.  So the first line of attack appears to be that it's all a big tax scam - they get the deduction but they give nothing to charity.   As far as I can tell, however (and sort of confirmed in a non-technical way by Zuckerberg himself) is that the LLC is, not surprisingly, not a tax-exempt entity.  As a result, the C-Zs won't get an income deduction for funding the LLC; an income tax charitable deduction might pass through to them if and when the LLC actually makes a contribution to a recognized, qualified charity.   Which makes it no different than any other for-profit business out there that makes contributions to charity - albeit with way more fanfare and more decimal places at stake.

So maybe all of it is just a fundamental misunderstanding of the tax implications of the LLC?   If the notion is that the tax-paying public has a right to certain expectation of a charitable endeavor as a condition of tax exemption, then that notion is misplaced here - at least with respect to the federal charitable income tax deduction and/or tax-exemption from the income tax.   I've seen some speculation that there may be some estate and gift planning going on here - but there is a great deal of speculation on that and even so, what makes that any different than any other wealthy person out there?   I've also seen reference to evading California income taxes - not sure on that one, but it seems unlikely from my rudimentary knowledge of the California income tax.   Would love to hear from anyone from CA with thoughts on that issue.

One set of taxes the Initiative is most certainly dodging is the private foundation excise taxes, which generally were designed to make sure that assets for which a charitable income tax deduction is granted are used for those charitable purposes.   It hardly seems surprising that the private foundation excise taxes don't apply to a for-profit entity, for which no charitable income tax deduction has been granted.

2.  Let The Eat Charitable Cake.    My second theory is a concern over philanthropic oligarchy - in the US, a concern that goes back (at least) to the creation of the first large private foundations during the Industrial Revolution era.      If you've read the legislative history to the private foundation excise taxes, one of the repeated themes is an anti-trust type concern (not surprising, I suppose) - the ultra wealthy concentrating and controlling wealth not only in the business sector, but in charitable vehicles as well.    I couldn't help but hear the echos of the Patman hearings and reports (which formed much of the basis for the passage of chapter 42) in the criticisms of C-Z.      Some also cite to Zuckerberg's recent and widely-criticized foray into donor controlled philanthropic experimentation in the form of the Newark school system.  In the Jacobin article linked at the beginning of this paragraph, the author notes, "People like Zuckerberg and Gates are unelected and unaccountable to anyone and face few, if any, repercussions for the negative consequences of their social experiments."   In my mind, these concerns undergird the suggestions of Pablo Eisenberg in his editorial in the Chronicle of Philanthropy, which suggests that the C-Z Initiative ought to make public reports, have an independent board, and champion issues of poverty.   As Eisenberg states, "The overwhelming majority of superwealthy donors who have signed the giving pledge do not give much, if any, of their money to fight poverty or help marginalized citizens, the neediest nonprofits, or advocacy organizations. Despite what they often claim, tech billionaires are not giving money that disrupts the status quo."

I'm struggling with the question of why?  If this is a private enterprise not subsidized by public funds through the charitable deduction, what standing do we have as a society to demand such things?   If the entity is not itself charitable as a legal matter, then... so what?     Which raises the final  question...

3.  Or Maybe, We Just Don't Know What Charity Is Any More...?     Fundamentally, I really think this is about our fundamental notions of charity as a society.   In the initial letter to his daughter announcing the pledge to the initiative, the C-Zs stated... 

As you begin the next generation of the Chan Zuckerberg family, we also begin the Chan Zuckerberg Initiative to join people across the world to advance human potential and promote equality for all children in the next generation. Our initial areas of focus will be personalized learning, curing disease, connecting people and building strong communities.
We will give 99% of our Facebook shares -- currently about $45 billion -- during our lives to advance this mission. We know this is a small contribution compared to all the resources and talents of those already working on these issues. But we want to do what we can, working alongside many others.
Education.   Advancement of Health.  Building Communities.   All things that clear fall within traditional notions of charity, both in common parlance and in a Statue of  Charitable Uses/Jackson v. Phillips/Section 501(c)(3) legal kind of way.   What's different, however, is the way that the C-Zs have chosen to go about achieving these otherwise laudable ends.      It shouldn't be surprising that Zuckerberg appears to want to pursue some serious impact investing, which would clearly be hampered by (although not necessarily prohibited by) the strictures of 501c3 and, if applicable, the private foundation excise taxes.   It does sort of turn traditional thinking on its head - do tax incentives encourage giving?  In this case, maybe the cost of those tax incentives actually discouraged giving, or at least traditional endowed grant-making giving?   To the extent that one of the benefits of the private foundation form (or even tax exempt charity, generally) was to create an environment where individual were free to experiment with solutions free from the bounds of shareholders, voters, or other stakeholders, maybe this is just a step back to these roots?
Or maybe the C-Z Initiative isn't charity at all.   Yes, it has social benefit as an end.    However, maybe it is just a private business enterprise and should simply be treated as such?  


December 14, 2015 in Current Affairs | Permalink | Comments (0)

Sunday, December 13, 2015

Keeping the Perpetual in Perpetual Conservation Easements

Keeping the Perpetual in Perpetual CEs copyVermont Law School Professors John Echeverria and Janet Milne have developed recommendations for protecting Vermont’s perpetual conservation easements (the project was supported by the Lintilhac Foundation).

In a VTDigger article, Echeverria and Milne explain: 

"Vermonters have invested a great deal of property, money, time and effort to create a network of conservation easements that protects a significant fraction of the state’s landscape. Virtually all of these easements were granted in 'perpetuity,' to place the lands off limits to development forever. Now the challenge facing Vermonters is to figure out how to ensure that these commitments to perpetual protection are upheld.

When a landowner places a conservation easement on her property, she does so to protect the particular conservation values of her specific parcel. When a land trust or a government agency accepts the conservation easement, it makes a legal commitment to uphold the easement restrictions on the property in perpetuity.

Absent rigorous safeguards, however, easement protections are at serious risk of erosion over time. Ownership of lands protected by easements will eventually pass from the original easement grantor to new owners. Legally, the easement restrictions will remain in place despite the changes in land ownership. But the new owners may lack the same level of commitment to conservation as the original land owner. Moreover, the new owners could profit from developing the land if the easements restrictions could be lifted. Inevitably, some future owners of lands subject to easements will press for modification or even termination of easement restrictions.

Several years ago some Vermont conservation groups proposed legislation that would have vested significant discretion in a new, politically appointed body, and in the groups themselves, to authorize amendment or termination of conservation easements. Under the proposal, an easement amendment or termination would have been allowed so long as the change served the larger cause of conservation, even if it resulted in destruction of the specific conservation values of the land originally placed under protection; thus, a conservation group could have moved an easement from one property to another or even from one town to another if it believed the transfer would be beneficial for the environment.

We and others criticized the proposed legislation as a breach of faith with easement donors that would ultimately undermine the cause of land conservation. A toxic mix of landowners with incentives to remove easement restrictions and liberal state policies allowing easement holders to modify easements would have undermined Vermont’s network of easement protections and defeated grantors’ legitimate expectations about easement perpetuity. It also ran afoul of federal tax rules governing donated easements. Ultimately, the groups that developed the legislative proposal withdrew their support for it. But all those involved in the debate recognized that Vermont needs some type of legislation governing the complicated issue of easement amendment and termination." Read more

Although the recommendations of Professors Echeverria and Milne focus on their home state of Vermont, the issues they highlight are of concern to us all. Ensuring the continued protection of the estimated 40 million acres now encumbered by conservation easements throughout the nation, as well as the billions of public dollars invested in the easements, should be a priority for policymakers and regulators at both the federal and state levels.

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

December 13, 2015 | Permalink | Comments (0)

Saturday, December 12, 2015

Legg v. Comm’r—Conservation Easement Donor Liable for Gross Valuation Misstatement Penalties

Legg copyIn Legg v. Commissioner, 145 T.C. No. 13 (Dec. 7, 2015), the Tax Court held that the IRS’s determination that a conservation easement donor was liable for 40% gross valuation misstatement penalties was proper. The court found that the IRS had satisfied the procedural requirements for imposition of the penalties.


In 2007, Brett and Cindy Legg donated a conservation easement on 80 acres to the Colorado Natural Land Trust. The Leggs asserted that the easement had a value of over $1.4 million and they claimed deductions for the donation over a four-year period.

The IRS challenged the deductions, arguing that the deduction requirements were not met and the value of the easement was zero. The IRS examiner’s report, which was sent to the Leggs, stated that the Leggs were liable for 20% accuracy-related penalties under IRC § 6662(a) or, alternatively, 40% gross valuation misstatement penalties under IRC § 6662(h). The report calculated the proposed penalties using the 20% rate and the examiner’s immediate supervisor signed the report in writing.

After issuance of the notice of deficiency, the IRS and the Leggs stipulated that (1) the value of the conservation easement was only $80,000, (2) the Legg’s reported $1.4 million value for the easement constituted a gross valuation misstatement (the value for the easement reported on their tax returns was more than two times, or 200%, of the amount determined to be the correct value), and (3) the Leggs could not invoke a reasonable cause defense against the gross valuation misstatement penalties (for returns claiming conservation easement deductions filed after August, 17, 2006, the gross valuation misstatement penalty is a strict liability penalty).

The Dispute

IRC § 6751(b)(1) requires that no penalty be assessed “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.” Prior law allowed the imposition of some penalties without supervisory approval. Congress enacted IRC § 6751 because it believed “that taxpayers are entitled to an explanation of the penalties imposed upon them” and “penalties should only be imposed where appropriate and not as a bargaining chip.”

The Leggs argued that the IRS examiner did not make an “initial determination” of the 40% penalties because the examination report calculated the penalties using the 20% rate. They further argued that the 20% calculation suggested that the IRS never considered imposing the 40% penalties and, thus, the examiner’s immediate supervisor could not have approved the 40% penalties in writing.

The Tax Court disagreed. It determined that even though the 40% penalties were posed as an alternative position in the examination report, the report made an “initial determination” that the Leggs were liable for the 40% penalties. The court explained that its conclusion was consistent with congressional intent. Congress enacted IRC § 6751(b) to ensure that taxpayers understand the penalties the IRS is imposing on them. The examination report sent to the Leggs clearly explained why the Leggs were liable for the 40% penalties; it applied IRC § 6662(h) and the relevant regulations to the specific facts and concluded that the Leggs were liable for the 40% penalties. Accordingly, the Leggs could not contend that they lacked an understanding of the penalties imposed upon them simply because the 40% penalties were posed as an alternative position.

In sum, because the IRS made an “initial determination” regarding the 40% penalties in the examination report and the report was approved, in writing, by the examiner’s immediate supervisor, the IRS satisfied the procedural requirements of IRC § 6751(b) and its determination of the 40% penalties was proper.

The Colorado Natural Land Trust was involved in abuse conservation easement transactions in Colorado.

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

December 12, 2015 | Permalink | Comments (0)

Friday, December 11, 2015

Atkinson v. Comm’r – Golf Course Conservation Easements Not Deductible

Atkinson Members Club copyIn Atkinson v. Commissioner, T.C. Memo. 2015-236, the Tax Court denied $7.88 million of deductions claimed with regard to the conveyance of conservation easements encumbering noncontiguous portions of land on and adjacent to golf courses located in a gated residential community. The court determined that the easements did not satisfy either the habitat or open space protection conservation purposes tests of IRC § 170(h). The court declined to impose penalties, however, finding that the taxpayers qualified for the reasonable cause exception.


St. James Plantation is a gated community consisting of residential areas, recreational facilities (including four golf courses), and undeveloped land. It was established in 1991 and covers 91% of the Town of St. James, which is west of Southport, North Carolina. The Plantation can be accessed only through three roads, each of which has a gated entrance with a staffed guardhouse. Drivers are obliged to stop at a gated entrance and state the purpose of their visit to obtain entry.

The Members Club and the Reserve Club (both limited liability companies) owned portions of the Plantation. In 2003, the Members Club conveyed a conservation easement covering approximately 79 acres in and around one of the Plantation golf courses to the North American Land Trust (NALT). The property subject to the easement consists of six noncontiguous tracts (i.e., fairways, greens, teeing grounds, ranges, roughs, ponds, and wetland areas), which range in size from 5 to 23 acres. Residential lots border most of the tracts, and a concrete golf cart path winds its way through the tracts. The tracts lie within the Cape Fear Arch, a large area that The Nature Conservancy (TNC) has identified as a biodiversity hotspot. 

The Members Club reserved significant rights in the 2003 easement. The golf course can be altered “in such manner as the owner determines to be appropriate” as long as “the best environmental practices then prevailing in the golf industry” are used. The 2003 easement allows for digging (filling, excavating, dredging, and removing topsoil) as necessary for maintaining sand traps and the cultivation of sod for use on the course. Cart paths may be relocated as long as relocation does not substantially increase the surface area of the paths. Rain shelters, rest stations, food concession stands, and other structures can be constructed as long as they do not exceed a total of 2,500 square feet. The Members Club can substantially increase the amount of surface area covered by the course if it obtains prior consent from NALT “and there is no material adverse effect on the conservation purposes.” The club can also cut and remove trees that are on or within 30 feet of the golf course to build a restroom, rain shelter, rest station, or food concession stand or if the club determines that removal is “appropriate for the proper maintenance of the golf course.” The club also has the right “to operate and manage” a golf course on the property and to maintain “turf grass and other vegetation … of the Golf Course in such manner as Owner determines to be appropriate,” including by applying pesticides and other chemicals. The Members Club claimed a deduction of just over $5.2 million for the conveyance of the 2003 easement.

In 2005, the Reserve Club conveyed a conservation easement covering approximately 91 acres in and around another of the Plantation golf courses to NALT. The property subject to the 2005 easement consists of three noncontiguous tracts of approximately 30 acres each. As with the 2003 easement, the tracts consist of fairways, greens, teeing grounds, ranges, roughs, ponds, and wetland areas; the tracts are bordered in part by residential lots; and a concrete golf cart path winds its way through the tracts. The tracts subject to the 2005 easement also lie within the Cape Fear Arch, and portions lie within an areas delineated as nationally significant by TNC and the North Carolina Natural Heritage Program. The terms of the 2005 easement are almost identical to those of the 2003 easement. The Reserve Club claimed a deduction of over $2.65 million for the conveyance of the 2005 easement.

The IRS challenged the deductions and the primary issue addressed by the Tax Court was whether the easements satisfied the habitat protection or open space conservation purposes tests.

Habitat Protection Conservation Purpose Test

To satisfy the habitat protection conservation purpose test a conservation easement must “protect a significant relatively natural habitat in which a fish, wildlife, or plant community, or similar ecosystem, normally lives.” Treas. Reg. § 1.170A-14(d)(3)(i). A “habitat” is an “area or environment where an organism or ecological community normally lives or occurs” or the “place where a person or thing is most likely to be found.” Glass v Comm'r. “Significant” habitats include, but are not limited to (i) habitats for rare, endangered, or threatened species of animal, fish, or plants and (ii) natural areas that are included in, or contribute to, the ecological viability of a local, state, or national park, nature preserve, wildlife refuge, wilderness area, or other similar conservation area. Treas. Reg. § 1.170A-14(d)(3)(ii).

Both the taxpayers and the IRS presented expert testimony to establish their respective positions regarding the habitat protection conservation purposes test. The IRS apparently learned from Glass v. Comm’r and Butler v. Comm’r that it is unlikely to win a habitat protection challenge unless it offers expert testimony on the issue.

The taxpayers argued that each of the subject properties had independent conservation significance and contributed to the ecological viability of  surrounding conservation areas. The IRS focused on the operation of the golf courses and argued that the rights retained in the easements negated any purported conservation purpose. Although the taxpayer generally has the burden of proving that an asserted deficiency is incorrect, the burden of proof on the habitat protection issue shifted to the IRS under IRC § 7491.

The 2003 Easement 

(i) Independent Conservation Significance

The taxpayers argued that the 2003 easement protects forests, ponds, and wetlands that provide a variety of habitats for plants and animals of environmental concern, and that the location of the easement within the Cape Fear Arch supported a finding that the subject property is “significant natural habitat.”

Longleaf Pine

The taxpayer’s expert testified that the most significant ecological feature on the subject property was the longleaf pine at the margins of the fairways (i.e., the “longleaf remnants” that purportedly were “protected by housing development on one side and fairways on the other”). The court found that the longleaf pine were not protected because the easement permitted cutting and removal of the trees. The court noted that, “[i]f the 2003 easement property were altered within the terms fully permitted in the 2003 easement deed, the conservation purpose would be significantly undermined.” The court also noted that the longleaf pines currently on the property were not the desired “old-growth” and were not maintained in a relatively natural state worthy of conservation.


The taxpayers contended that the subject property contained ponds that replicated natural habitat. The IRS argued that ponds could not provide a significant relatively "natural" habitat because the property did not contain any ponds before the development of the golf course. The court noted, however, that the Treasury Regulations specifically allow for the alteration of habitat so long as fish, wildlife, or plants continue to exist there in a relatively natural state, and it pointed to the example in the regulations, which provides that a “lake formed by a man-made dam or salt pond formed by a man-made dike” would meet the conservation purpose test “if the lake or pond were a natural feeding area for a wildlife community that included rare, endangered, or threatened native species.” The taxpayers argued that the unmanicured edges of the ponds created “transition zones that provide a relatively natural habitat for amphibians, reptiles and birds.” However, the court found that very few of the ponds had a natural edge and the few edges that existed were regularly sprayed with pesticides. Moreover, the IRS’s expert analyzed pond water samples and found reduced oxygen, increased salinity, and levels of nitrogen beyond EPA recommendations. He also testified that no fish or amphibians were evident in the ponds.

Land Areas

The taxpayers argued that the subject property, including the rough, fairways, greens, and tees, provides a relatively natural open space for foraging, migration, and feeding of animals such as the Eastern Fox Squirrel, southern flying squirrels, owls, coyotes, red foxes, raccoons and opossums. The IRS’s expert, however, testified that there are no natural fruits and seeds for foraging on the property, the property provides no cover, and animal migration is deterred by the residential development surrounding each of the noncontiguous tracts, the level of human activity, and the frequent watering. The expert concluded that, as with the ponds, the land areas provided poor habitat for plants and wildlife. 

The court distinguished Glass v. Comm’r, finding that the property subject to the 2003 easement did not provide the same level of habitat as in Glass. While the property in Glass was mostly undisturbed land, the property subject to the 2003 easement was not in a “natural undeveloped state.” The fairways, tee boxes, and greens were sodded or planted with nonnative grasses, and the transition areas (24% of the property) in which Venus Flytraps and Pitcher Plants were found represented “too insignificant a portion of the 2003 easement to lead [the court] to conclude that the whole 2003 easement property is a significant natural habitat.” In addition, while acknowledging that the regulations define significant habitat to include habitat for rare plants, the court noted that the species on the Glass property were threatened or endangered, while Pitcher Plants and Venus Flytraps were only rare and not “imperiled.”

The court also found that the use of pesticides and other chemicals in the operation of the golf course injured the ecosystem on the subject property and, thus, violated the “no inconsistent use” rule of Treas. Reg. § 1.170A-14(e)(2), which provides, in part, that “the preservation of … [land] would not [satisfy the conservation purpose test] if under the terms of the contribution a significant naturally occurring ecosystem could be injured or destroyed by the use of pesticides.” The court noted that, while the 2003 easement qualifies the property owner’s reserved rights—e.g., the easement allows the owner to modify the golf course “provided that no such activity shall have a material adverse effect on the Conservation Purpose”—the easement also allows the use of chemicals in the maintenance and operation of the golf course. Accordingly, the court found that the easement did not limit the use of pesticides and other chemicals that could destroy the conservation purpose and, in fact, it was undisputed that chemicals were used on roughly 63% of the subject property. The IRS’s expert testified that chemicals were used to promote the maintenance of nonnative flora without regard to the conservation purpose of the easement, and this was implicitly confirmed by one of the taxpayer’s witnesses, who testified that “the goal in irrigation and the use of pesticides, fungicides, and herbicides is to keep the golf course in good condition for playing golf.”

Ultimately the court concluded that wildlife and plants are not “most likely” to be found and do not “normally live” on the property subject to the 2003 easement.

(ii) Contributory Role

The taxpayers argued that the property subject to the 2003 easement met the habitat protection conservation purpose because “[s]ignificant habitats … include … natural areas which … contribute to, the ecological viability of a local, state, or national park, nature preserve, wildlife refuge, wilderness area, or other similar conservation area.” The Tax Court disagreed. Although the 2003 easement was designed, in part, to contribute to a wider set of easements conveyed to NALT with regard to the Plantation, the court determined that the property subject to the 2003 easement was not a “natural area” that “contributes to” the surrounding conserved areas. The court explained that the property did not qualify as a “natural” habitat because (i) a large portion of the property was planted with nonnative grass, (ii) the ponds did not exist in a relatively natural state, (iii) the native forests that remained on the property are at risk of removal pursuant to the terms of the easement deed; (iv) the property did not act as a “wildlife corridor” or “sink” for any species because there were no natural fruits and seeds for foraging, there was no cover from humans or predators, and there were barriers to animal migration such as the surrounding homes, human activity, and nightly watering, and (v) the taxpayers failed to identify any species using the subject property for nocturnal migration.

The taxpayers also argued that the condition of the subject property was irrelevant so long as it could act as a buffer to a nearby significant habitat. They relied on Treas. Reg. § 1.170A-14(f), Example (2), which provides:

A qualified conservation organization owns Greenacre in fee as a nature preserve. Greenacre contains a high quality example of a tall grass prairie ecosystem. Farmacre, an operating farm, adjoins Greenacre and is a compatible buffer to the nature preserve. Conversion of Farmacre to a more intense use, such as a housing development, would adversely affect the continued use of Greenacre as a nature preserve because of human traffic generated by the development. The owner of Farmacre donates an easement preventing any future development on Farmacre to the qualified conservation organization for conservation purposes. Normal agricultural uses will be allowed on Farmacre. Accordingly, the donation qualifies for a deduction under this section.

The Tax Court disagreed, finding that the property subject to the 2003 easement and Farmacre were distinguishable. The court pointed out that most of the property subject to the 2003 easement (roughly two-thirds) was surrounded by a row of houses overlooking the golf course and therefore could not serve as a “compatible buffer” to natural areas on the Plantation. In addition, the court agreed with the IRS’s expert that heavy human traffic on and around the golf course diminished its benefits as a “buffer,” and noted that Example (2) specifically alludes to increased human activity as a detriment to the continued preservation of Greenacre. The court concluded that, as a whole, the property subject to the 2003 easement did not “contribute” to any “conservation area” nearby.

(iii) Retained Rights

The Tax Court declined to decide whether operating a golf course is inherently inconsistent with the conservation purpose of protecting relatively natural habitat because the easement did not satisfy the threshold requirement of having a qualifying conservation purpose (i.e., it did not preserve a “relatively natural habitat”).

The 2005 Easement

The Tax Court found that the 2005 easement suffered from the same problems as the 2003 easement—it did not preserve a “relatively natural habitat.” The court also noted, somewhat sarcastically, that the IRS’s expert observed very little wildlife on the 2005 easement property; the only birds he saw were geese, which the Plantation attempts to “control,” i.e., eliminate from the 2005 easement property, using a border collie.  Atkinson geese copy

Open Space Conservation Purpose Test

A conservation easement will satisfy the open space conservation purpose test if preservation of the subject property is either (i) pursuant to a clearly delineated federal, state, or local governmental conservation policy and will yield a significant public benefit or (ii) for the scenic enjoyment of the general public and will yield a significant public benefit. The 2003 and 2005 easements did not satisfy either prong of this test.

With regard to the governmental conservation policy prong, although the baseline documentation for both easements listed several North Carolina laws, it did not include any explanation for how the subject properties contributed to the purposes stated in those laws. In addition, the taxpayers did not mention or provide any analysis of governmental conservation policies in their briefs, and the Tax Court thus deemed that argument abandoned.

The taxpayers also failed to establish that preservation of the subject properties was for the scenic enjoyment of the general public. Since the golf courses were in a guarded gated community and ringed by houses, the court found that the general public did not have visual access to the properties. The taxpayers argued that the general public had visual access because most of the population of the Town of St. James lived within the Plantation. The court did not deem the population of one town to constitute “the general public,” however, and dismissed that argument.

Atkinson is one of three recent cases in which the Tax Court has denied deductions for conservation easements conveyed to NALT. See Balsam Mountain v. Comm’r and Bosque Canyon Ranch v. Comm’r. NALT was also the donee of the conservation easement at issue in Kiva Dunes v. Comm’r, which inspired the Treasury to recommend eliminating the deduction with regard to golf course easements.

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

December 11, 2015 | Permalink | Comments (0)

Friday, December 4, 2015

Chan Zuckerberg LLC Discussion at the Business Law Prof Blog

Just wanted to jump in today to link this post (Back Off the Chan Zuckerbergs and Their Limited Liability Company (NOT Corporation)) from my WVU colleague Josh Fershee, who blogs at our sister site, the Business Law Prof Blog.   There is a lot of discussion (and misinformation) out there about the Chan Zuckerberg Charitable LLC structure, and I thought there were some interesting views over there from our business entity friends.

See you next week!  Happy finals!   EWW

December 4, 2015 in Current Affairs | Permalink | Comments (1)

Wednesday, December 2, 2015

Senate Finance Committee Questions Public Benefit of Private Art Museums

As reported by The New York Times, the Senate Finance Committee sent letters to eleven private museums created and operated by opened by private collectors, focusing on whether sufficient public benefit is present to justify such museums' federal tax-exempt status.  These letters were sent by chairman Senator Orrin Hatch (Utah) to galleries such as the Brant Foundation Art Study Center in Greenwich, Connecticut, Glenstone museum in Potomac, Maryland, the Rubell Family Collection in Miami, the Kreeger Museum in Washington, DC, and The Broad in Los Angeles, requesting additional information about visiting hours, donations, trustees, and valuations.  Senator Hatch commented that:  “Tax-exempt museums should focus on providing a public good and not the art of skirting around the tax code. While more information is needed to ensure compliance with the tax code, one thing is clear: Under the law, these organizations have a duty to promote the public interest, not those of well-off benefactors, plain and simple.”  The Senator's letter acknowledged the important role that charitable organizations play in our society, but questioned whether "some private foundations are operating museums that offer minimal benefit to the public while enabling donors to reap substantial tax advantages."

The New York Times article opined that the Hatch letters were sent after another of its articles published in January 2015 "examined the proliferation of tax-exempt private museums created by wealthy art collectors, sometimes in their own backyards.  Some of the galleries severely limit public access, closing their doors to outsiders for several months at a time, shunning signs and advertisements, and requiring visitors to make advance reservations."  According to the article, this inquiry was part of a broader effort to re-examine institutions, including private museums and universities, which have enjoyed tax-exempt status for many decades.

Nicholas Mirkay


December 2, 2015 in Federal – Legislative, In the News | Permalink | Comments (0)

Non-Profit Hospitals and the False Claims Act

Brian Mahany (Mahany Law) posted Non-Profit Hospitals and the False Claims Act to his firm's Due Diligence (Blog):

Expect to See More False Claims Act Whistleblower Cases Against "Non Profit" Hospitals
It shouldn't shock anyone that the highest settlements under the False Claims Act have been for profit entities. Specifically, big pharmaceutical companies, defense contractors and banks. Our record $16.65 billion case against Bank of America last year still reigns over the top spot but it wouldn't surprise us to see unrestrained corporate greed propel some other business into the top spot. What does surprise us is the number of non-profits that are racking up huge settlements.
Traditionally, non-profits are motivated by the public good. Their mission isn't to turn a profit. Theoretically, any excess income a non-profit makes ought to be plowed back into its primary mission. For example, a nonprofit hospital that has excessive cash should strive to provide more charity care or do more disease prevention work.
Although I have never worked in a hospital, I served on the board of the Family Violence Project, an organization of dedicated volunteers and salaried employees. No one took a job there hoping to get rich. Our employees were every bit as motivated as our volunteers. We tried to pay staff livable wages while at the same time serving all the needs in the community.
Most employees at nonprofits choose to work there because they believe in the organization's mission. For example, the curator of an art museum, although paid, probably is very passionate about art. I don't think the average executive at an insurance company is at passionate about insurance.
When it comes to healthcare, the line between for-profit and not-for-profit has become quite blurry. We don't often see False Claims Act cases involving nonprofits, even though many receive government funds and grants. The big exceptions, of course, are in the healthcare sector – non-profit clinics and hospitals.
Earlier today I read an article in the New York Post that claims the CEO of the non-profit North Shore LIJ Health System earned $10 million last year in total compensation. North Shore operates Lenox Hill Hospital in New York and other facilities too. Their revenues are $9.5 billion.
Huge salaries aren't reserved for big New York City hospitals. Even the heads of smaller hospitals are making big bucks. I know that when I left Maine in 2006 one non-profit hospital CEO was making just shy of $1 million. (The salaries of the for- profit hospital CEO's is even more ridiculous including the $26.4 million reportedly paid to Community Health Systems' Wayne Smith last year.)
Some hospitals try to operate both as a for-profit and a non-profit entity. How is that possible? It probably takes an army of good accountants and tax lawyers! Basically, where it is advantageous to be a for profit, those functions of the hospital will operate that way while other affiliates operate as not-for-profit.
When that happens, it is usually nothing more than a charade deigned to maximize government funds and donations while minimizing any taxes on the for-profit side.
The proliferation of these hybrid arrangements and the huge C- suite compensation packages has resulted in these organizations often running as corruptly as their for-profit counterparts.
Traditionally the Justice Department was reluctant to pursue False Claims Act cases against non-profits. The False Claims Act is a 19thcentury fraud statute that punishes companies that misuse public funds. Under the Act, wrongdoers are subject to triple damages and penalties of up to $11,000 for each false claim (invoice) submitted to the government. Whistleblowers who file their claims in federal court can collect up to 30% of whatever the government collects.
Prosecutors didn't want to pursue a False Claims Act charge because of the belief that any fine money would come from donors or would reduce the ability of the hospital to perform charity work. Today, that is but a myth.
In recent years it isn't unusual to see multimillion dollar settlements against non-profit hospitals and even state and local government operated facilities.
Fraud is fraud and taxpayers have the right to expect that their hard earned tax dollars be spent properly. Hopefully more whistleblowers will step forward and join last year's record number of folks who filed False Claims Act cases. (Last year was also a record for payments to whistleblowers, over $435 million!)


Nicholas Mirkay

December 2, 2015 in In the News, Weblogs | Permalink | Comments (0)

Collaboration Theory of the Charitable Nonprofit Corporation

Eric C. Chaffee (Toledo) has posted Collaboration Theory: A Theory of the Charitable Tax Exempt Nonprofit Corporation to SSRN: 

Legal scholarship regarding tax exempt nonprofit entities is meager at best. Although some excellent treatises, book chapters, and journal articles have been written, the body of scholarship relating to these entities is not nearly as healthy and robust as the scholarship relating to their for-profit companions. This is especially troubling considering that nonprofit entities help to improve our society in a myriad of different ways.

This Article seeks to fill a void in the existing scholarship by offering an essentialist theory for charitable tax exempt nonprofit corporations that helps to explain the essence of these entities. Beyond the purely academic metaphysical inquiry into what is a corporation, understanding the essential nature of these corporations is important because it helps to determine how they should interact with society, what rights they should have, and how they should be governed by the law. This discussion is especially timely because the recent opinions by the Supreme Court of the United States in Citizens United and Hobby Lobby have reinvigorated the debate over the essence of the corporation.

This Article breaks new ground by offering a new essentialist theory of the corporation, which shall be termed “collaboration theory.” The decades of debate over the essence of for-profit corporations has coalesced into three prevailing theories of the corporation, i.e., the artificial entity theory, the real entity theory, and the aggregate theory. The problem is that none of these prevailing theories fully answers the question of what is a corporation.

Collaboration theory suggests that charitable tax exempt nonprofit corporations are collaborations among the state governments, federal government, and individuals to promote the public good. Unlike the prevailing theories of the corporation, collaboration theory explains both how and why charitable tax exempt nonprofit corporations exist, which provides a fuller and more robust understanding of these corporations. Collaboration theory advances the existing scholarship by finally offering an essentialist theory for nonprofit corporations, and it shows remarkable promise for understanding the essential nature of for-profit corporations as well.

Nicholas Mirkay

December 2, 2015 in Publications – Articles | Permalink | Comments (0)

Trends in Private Land Conservation

Jessica Owley (SUNY-Buffalo) and Adena R. Rissman (Wisconsin):  Trends in Private Land Conservation: Increasing Complexity, Shifting Conservation Purposes and Allowable Private Land Uses, Land Use Policy 51, 76-84 (2016 Forthcoming):

The terrain of private-land conservation dealmaking is shifting. As the number of acres of private land protected for conservation increases, our understanding of what it means for a property to be "conserved" is shifting. We examined 269 conservation easements and conducted 73 interviews with land conservation organizations to investigate changes in private-land conservation in the United States. We hypothesized that since 2000, conservation easements have become more complex but less restrictive. Our analysis reveals shifts in what it means for private land to be "conserved." We found that conservation easements have indeed become more complex, with more purposes and terms after 2000 compared to conservation easements recorded before 2000. However, changes in restrictiveness of conservation easements varied by land use. Mining and waste dumping were less likely to be allowed after 2000, but new residences and structures were twice as likely to be allowed. We found a shift toward allowing some bounded timber harvest and grazing, and a decline in terms that entirely allow or prohibit these working land uses. Interviews revealed staff perceptions of reasons for these changes. Our analysis suggests that "used" landscapes are increasingly important for conservation but that conserving these properties stretches the limits of simple, perpetual policy tools and requires increasingly complex and contingent agreements.

Nicholas Mirkay

December 2, 2015 in Publications – Articles | Permalink | Comments (0)

Empirical Study of Modification & Termination of Conservation Easements

Gerald Korngold (New York Law School), Semida Munteanu (Lincoln Institute of Land Policy), and Lauren E. Smith (London Fischer LLP):  An Empirical Study of Modification and Termination of Conservation Easements: What the Data Suggest About Appropriate Legal Rules, NYU Environmental Law Journal, Vol. 24, No. 1 (2016):

The acquisition of conservation easements by nonprofit organizations (“NPOs”) over the past twenty-five years has revolutionized the preservation of American land. Recently, however, legislatures, courts, practitioners, and commentators have debated whether and how conservation easements should be modified and even terminated. The discussion has almost always been on a theoretical level without empirical grounding and has sometimes generated much heat but little light. The discussion has lacked the necessary empirical context to allow legislatures and courts to thoughtfully develop resolutions to these issues free from sloganeering and posturing.

This article provides and analyzes a previously uncollected dataset that offers guidance on the appropriate rules of law for conservation easement modification. It examines policy goals in light of the data to suggest various modification rules that would be more effective than current practice. The dataset represents a significant sample of easement modifications that have been made during a six year period (2008-2013) and indicates several findings: first, modifications have actually been taking place, despite claims that conservation easements are “perpetual,” apparently indicating that NPOs need flexibility in at least some areas; most of the changes have been “minor” and have been either conservation neutral or conservation positive, though one would expect pressure for more significant alterations over time due to shifts in the environment and human needs; there is a range of types and degree of modifications to this point, suggesting that there should be a spectrum of procedural and substantive requirements for the different varieties of modifications; and, a mandate for a stand-alone, state registry of conservation easements and modifications would allow for improved policymaking.

The article suggests that a doctrine that requires different procedures and substantive rules for various categories of modifications — a sliding scale — may yield the best, policy-based results. The work also identifies and analyzes existing doctrines — federal tax law, specific state statutes, charitable trust doctrine, standing rules, and director liability — that would need to be altered or clarified to adopt effective modification rules.

Nicholas Mirkay



December 2, 2015 in Publications – Articles | Permalink | Comments (0)

Exploring IRS Reach Under Public Policy Doctrine

Amy L. Moore (Belmont), Rife with Latent Power: Exploring the Reach of the IRS to Determine Tax-Exempt Status According to Public Policy Rationale in an Era of Judicial Deference, 56 S. Tex. L. Rev. 117  (2014):

Using the case of Bob Jones University v. United States as a springboard, this article contends that the IRS has the legal authority to revoke the 501(c)(3) tax-exempt statuses of any institution that the IRS deems to be in violation of public policy. The first step to such an expansion might be to apply to private, religious universities that practice discrimination in areas other than race (e.g. gender and sexual orientation). This article traces the background and analysis of the Supreme Court decision in Bob Jones and how the Court left the door open for the IRS to make other public policy decisions and also considers how judicial deference and Chevron analysis could facilitate the choices of the IRS to determine public policy and status of exemptions.

[Hat tip:  TaxProfBlog]

Nicholas Mirkay

December 2, 2015 in Publications – Articles | Permalink | Comments (0)

Wednesday, November 11, 2015

Thanks to Our Veterans

In honor of Veterans' Day, I am simply going to link to this CNBC post on its suggestions for the Top  Ten Charities for Veterans.   Of course, I have no doubt there are other worthy organizations out there - - feel free to mention yours in the comments.    In any event, thank you to all of our vets for your service and sacrifice.




November 11, 2015 in Current Affairs, In the News | Permalink | Comments (0)

Tuesday, November 10, 2015

The National Philanthropic Trust Report - All DAFs, All The Time!

The National Philanthropic Trust released its 2015 Donor-Advised Fund Report on November 9th.     NPT's report indicates that gifts to DAFs grew significantly in 2014, with assets held in DAF reaching a record level of $12.5 billion dollars.   NPT further indicated that that the DAFs it studied also demonstrated an increase in grants, with $12.5 billion in assets given away at a payout rate of 21.9%.   As discussed in this article in the Chronicle of Philanthropy, however, there is fundamental disagreement in the field on how to measure DAF payouts - the National Philanthropic Trust, Fidelity Charitable Trust and statisticians at the IRS all use different methodologies.   Accordingly, we should all be wary about comparing apples to apples when looking at DAF payout rates.  

Certainly, this report is good news for DAFs as it shows the popularly of DAFs as a giving vehicle; it may also have the unintended consequence of encouraging further (already heightened) scrutiny.   The report is released at a time when serious discussion continues to occur regarding mandating minimum payouts for DAFs.   




Correction:   Thanks for the note in the comments, which indicated that total DAF assets according to the report were at $70.7 billion at the close of 2014.  EWW

November 10, 2015 in Federal – Executive, In the News | Permalink | Comments (1)

Monday, November 9, 2015

LA County Leads the Way on Reimbursing Indirect Costs

According to Nonprofit Quarterly, Los Angeles County has adopted new beneficial rules regarding payments to nonprofits that contract with the government to provide services, such as social service agencies.

Anyone who has worked with charities that contract with the government (or anyone else, for that matter) knows that it is often very difficult for a charity to be reimbursed for the indirect costs associated with programming, such as utilities.  At the end of last year, the Office of Management and Budget recently issued a "super circular" addressing indirect cost reimbursement, clarifying issues regarding the applicability of these rules to all federally-funded grants and contracts, and reiterinat that it is not appropriate for governmental agencies to request waivers of these rights. 

Of course OMB directives can only govern grants and contracts using federal funds - clearly, all federal contracts, but also state and local contracts to the extent they utilize federal funding.   Strictly state-funded (or local-funded) grants, however, are not covered by the OMB guidelines.   Thus, LA County's adoption of the standards is a big deal for local nonprofits, and hopefully sets a trend for other state and local jurisdictions.

H/t to Jennifer Chandler at the National Council of Nonprofits, which has been active in this area.



November 9, 2015 in Federal – Executive, State – Executive | Permalink | Comments (0)

Monday, November 2, 2015

Donor Control And The Gift Economy

Professor Allison Tait of the University Of Richmond School of Law has authored an interesting and thoughtful paper entitled The Secret Economy of Charitable Giving. In it, Tait argues that judicial reforms which ultimately limit the level of donor control over charitable gift and trusts should be embraced and expanded. Tait suggests that such limitations are justified in light of the wide range of both tangible and intangible benefits that flow to donors as part of the “charitable gift economy.” You can read Tait’s paper it its entirety here.

November 2, 2015 | Permalink | Comments (0)

Wednesday, October 21, 2015

(Not So?) Charitable IP

It's no secret that certain charitable organizations aggressively assert intellectual property claims. For example, the Susan G. Komen "For the Cure" foundation is a notorious trademark bully, filing trademark oppositions and sending cease and desist letters to any charity that uses the phrase "for the cure," or even variations thereof. And charitable universities and colleges are no exception, often asserting aggressive trademark, copyright, and patent claims. As a theoretical matter, it's difficult to understand how those intellectual property claims benefit the public interest, in a fashion consistent with prevailing theories of charity law. Isn't the whole point of charities to solve market failures in public goods? How is that purpose efficiently advanced by making them more expensive? 

In any case, representatives of my employer, the University of Kentucky, appear to have truly jumped the shark on ridiculous intellectual property claims, by sending a cease and desist letter claiming exclusive rights to use the word "Kentucky." Apparently, Michael S. Hargis of the Lexington, KY law firm King & Schickli sent a cease and desist letter to Kentucky Mist Moonshine of Whitesburg, KY (home of Appalshop, of which I am a proud trustee!), opposing their trademark application and claiming that the University owns a trademark in the word "Kentucky." Hopefully, there is more to the story, because otherwise it seems that Mr. Hargis failed to read the Lanham Act, which explicitly provides, "No trademark by which the goods of the applicant may be distinguished from the goods of others shall be refused registration on the principal register on account of its nature unless it ... Consists of a mark which ... when used on or in connection with the goods of the applicant is primarily geographically descriptive of them." 15 U.S.C. § 1052(e)(2). In other words, if the "moonshine" was made in Kentucky, you can say so.

UPDATE: Thanks to Mr. Dorisio for pointing out in the comments that geographically descriptive marks can become "incontestable" under the Lanham Act after five years of uncontested use, and that the cease and desist letter only objects to registration of "Kentucky Mist Moonshine" under Class 25 or "clothing." While it is true that geographically descriptive marks can become incontestable, incontestability only goes to the validity of the mark, not its strength. Geographically descriptive marks are typically quite weak, especially when they are used by third parties. Incidentally, as the International Trademark Association has observed:

[I]nfringers often are not aware of the infirmities that may attend even an incontestable registration. As a result, the biggest benefit from claiming incontestability may be in providing the registrant with the ability to say so in a cease and desist or other objection letter. Stating that a registration is active, valid, in full force and effect and “incontestable” may scare the recipient of the letter into giving up on the thought of attacking the registration without ever even exploring any of the many grounds for cancellation that survive incontestability.

Hmm. In any case, a cursory search turned up 446 active trademarks containing the word "Kentucky," including quite a few in Class 25. Irrespective of the incontestability of the University of Kentucky's mark, the Kentucky Mist Moonshine trademark application, is surely a descriptive fair use. Again, as the International Trademark Association has observed:

Using a geographical name relating to the user’s business location, even if that name is the same as or similar to another’s mark, generally is considered fair use. Under the fair use exception, a user generally is permitted to use descriptive indications concerning the kind, quality, quantity, intended purpose, value, geographical origin, time of production of the goods or of rendering of the service, main raw materials, functions, weight, or other characteristics of the goods or services.

It strikes me as highly implausible that anyone could possibly be misled into believing that the University of Kentucky is the source of clothing bearing the mark "Kentucky Mist Moonshine," especially given the fact that the University of Kentucky is still a dry campus. Hopefully not for much longer. In any case, it is disheartening to see the representatives of a charitable organization aggressively asserting intellectual property rights in this fashion, regardless of their likelihood of success on the merits, which I believe to be zero in this chase.

I attach a copy of the cease and desist letter, for those interested. Download Letter 10-12-15

Brian L. Frye

October 21, 2015 | Permalink | Comments (3)

Tuesday, October 6, 2015

Reiser & Dean publish SE(c)(3): A Catalyst for Social Enterprise Crowdfunding

Dana Brakman Reiser (Brooklyn) and Steven A. Dean (Brooklyn) recently published SE(c)(3): A Catalyst for Social Enterprise Crowdfunding, 90 Ind. L.J. 1090 (2015).  Below is the abstract of their article:

The emerging consensus among scholars rejects the notion of tax breaks for social enterprises, concluding that such prizes will attract strategic claimants, ultimately doing more harm than good. The SE(c)(3) regime proposed by this Article offers entrepreneurs and investors committed to combining financial returns and social good with a means of broadcasting that shared resolve. Combining a measured tax benefit for mission-driven activities with a heightened burden on shareholder financial gains, the revenue-neutral SE(c)(3) regime would provide investors and funding platforms with a low-cost means of screening out “greenwashed” ventures.

Terri Lynn Helge

October 6, 2015 in Publications – Articles | Permalink | Comments (0)

Saturday, October 3, 2015

Intellectual Property & Charity Law

Intellectual property and charity law are typically considered distinct and unrelated bodies of law. But as I have observed, they are structurally similar, because both are intended to use indirect subsidies to solve market failures in public goods. The prevailing theory of intellectual property holds that it is justified because it solves market failures in innovation caused by free riding (and transaction costs) by giving inventors and authors certain exclusive rights in their discoveries and works of authorship. And the prevailing theory of charity law holds that the charitable contribution deduction is justified because it solves market failures in charitable goods caused by free riding (and transaction costs) by indirectly subsidizing charitable contributions. I believe this structural similarity suggests that intellectual property and charity law are complementary. Unsurprisingly, promoting innovation is typically considered a charitable purpose.

In any case, Mark Lemley recently published a controversial essay titled Faith-Based Intellectual Property, which argued that consequentialist and deontological theories of intellectual property are fundamentally incompatible. The tension between consequentialist and deontological moral theories will be familiar to nonprofit law scholars. For what it's worth, I recently posted an essay reflecting on Lemley's argument, suggesting that Lemley's article was controversial at least in part because it observed that consequentialist and deontological theories of intellectual property are not merely in tension, but fundamentally incompatible. My essay considers Lemley's argument in light of Isaiah Berlin's essay The Question of Machiavelli, and argues that the incompatibility of consequentialist and deontological theories of intellectual property can be resolved by adopting consequentialist public theories and deontological private theories.

Of course, this insight was largely informed by charity law, which is all about reconciling different values. I think there is a lot of opportunity for productive conversation between intellectual property and charity law scholars, given their common goals.

Brian L. Frye

October 3, 2015 | Permalink | Comments (0)

Thursday, October 1, 2015

CFP: University of Detroit Mercy Law Review Symposium on "The Past, Present, and Future of the City of Detroit"

The University of Detroit Mercy Law Review has posted a call for papers for its 100th Anniversary symposium on the past, present, and future of the City of Detroit. According to the call for papers:

Specific topics could include, but are not limited to:
    1. The Past
        o Civil rights and race relations
        o Labor law
        o Relationship between the City and the suburbs (or the rest of Michigan)
    2. The Present
        o The Impact of the Bankruptcy
        o Efforts to eradicate blight and abandoned buildings
        o Public Education in Detroit
    3. The Future
        o Impact of new developments on the future of Detroit
        o Relations between the City and the suburbs
        o The role of the law in developing new economic opportunities

I imagine that some of the suggested topics might appeals to readers of this blog, who might also have additional thoughts about the role of nonprofit institutions in the past, present, and future of Detroit.

The full call for papers for the University of Detroit Mercy Law Review Symposium is available here.

Brian L. Frye

October 1, 2015 | Permalink | Comments (0)