Tuesday, October 22, 2013
With a hat tip to the TaxProf Blog, I simply must post regarding the most recent compelling and ground-breaking work done by the readers of Freakonomics. (Should H&R Block Hire Models to Increase Charitable Giving?) Freakonomics updated its readers on its fundraising campaign for Freakonomics Radio, as follows.
Your comments and e-mails were also a great window into a better understanding of what makes someone want to donate to a given cause or not. You pointed out incentives we overlooked, or overvalued, or undervalued. ... Here, for instance, is one my favorite comments, from a reader named Eric Kennedy:
[Y]ou forgot a primary reason why people donate to charity: to impress their attractive tax preparers. I’m not kidding. I’m very attractive and worked as a tax preparer for two years. I’ve seen this first-hand. I now find myself considering the impression I will make on my attractive tax preparer. The most effective way to boost nation-wide charitable giving, would be to staff H&R Block with models and encourage them to make comments about the size of people’s annual donation amounts.
I must agree with Mr. Kennedy's assessment, although I will neither confirm nor deny whether I have participated in the preparation of tax returns that contain significant charitable deductions...and that fact would, of course, have no bearing on my scholarly assessment of Mr. Kennedy’s observations in this regard.
Friday, October 18, 2013
The Miami New Times is reporting that Dr. Norman Block, a chairholder at the University of Miami’s Miller School of medicine, has brought a legal action against the school on the grounds that it has improperly disbursed funds from a $1 million endowment for prostate research. Says the story:
The $1 million at the heart of the dispute was given to UM in 1981 by L. Austin Weeks, a philanthropist who later died from prostate cancer. He left the money "to enhance the research being conducted at the University of Miami School of Medicine in the field of prostate cancer" and asked that it be used to support a chairholder and a research position, as well as help incorporate hormonal studies and increase an animal research colony.
Weeks recommended his own doctor — Block, a renowned urologist — as the first chairholder. Block has held that chair ever since and has used the gift to help UM become a leader in the field through innovative studies and hires ....
All of that fell apart in August, Block says. That's when — in addition to learning about the cuts to his own funding — he discovered the school had disbursed $441,723.24 from the endowment without his consent. (The suit doesn't specify where that money went.)
A spokesperson for the school reportedly offered no public statement about the litigation and explained that the school’s policy forbids commenting on “personnel matters.”
On Wednesday, October 23, 2013, ALI CLE is offering a webcast entitled “Advising Nonprofit Organizations: Complying with Limits on Compensation, Benefits, and Other Payments.” The promotional material describes the program as follows:
[T]oday’s nonprofit organizations are under heightened scrutiny by regulators to ensure compliance with federal and state laws. Excessive compensation and other benefits given to board members, trustees, officers, or key employees can trigger the private inurement prohibition, putting the nonprofit at risk for intermediate sanctions or even losing its tax-exempt status. As a lawyer for a charity or member of its board of directors, what are your responsibilities to ensure that its income and assets don’t unreasonably benefit an “insider”?
In Advising Nonprofit Organizations: Complying with Limits on Compensation, Benefits, and Other Payments, our faculty will explain what legal advisors to, and members of, a charity’s board of directors need to know to comply with IRS and state guidelines on excess benefit transactions, including reporting and governance issues.
The attorneys teaching the CLE are Willard L. Boyd, III of Nyemaster Goode, P.C. (Des Moines, Iowa) and Lisa A. Runquist (Northridge, California).
Thursday, October 17, 2013
The Chronicle of Philanthropy reports that New York’s Court of Appeals, the state’s highest court, heard oral arguments yesterday in a case in which the owner of a New York City hotel, the Carlton House Hotel in Queens, seeks damages from the Salvation Army to the tune of $200 million. The claim reportedly is that the building was damaged when the charity used it as a homeless shelter. According to the story, the property owner, a holding company, has already received $10 million as a lease termination fee from the city, which negotiated the lease. The Salvation Army argues that, under the lease, New York City’s Department of Homeless Services was “the exclusive source of funds” for the property’s use as a shelter. For additional coverage, see this entry posted on The Real Deal.
Tax Analysts’ State Tax Today reports on two advisory opinions involving nonprofits and New York’s mortgage recording tax.
In the first, a municipal urban renewal agency, also deemed a public benefit corporation by state law, contracted to sell real estate to a not-for-profit corporation and extend a purchase money loan to the buyer to facilitate its acquisition of the property. The agency will also hold a purchase money mortgage on the property. The general statute imposing a mortgage recording tax contains no exception expressly exempting entities such as the agency. Nonetheless, New York State’s Department of Taxation and Finance ruled that, because (1) the General Municipal Law provides that the property, income and operations of a municipal urban renewal agency are exempt from taxation; (2) this statutory exemption was enacted after the enactment of the general taxing statute; and (3) the exemption is specific as to municipal urban renewal agencies, the exemption statute takes precedence over the taxing statute. The ruling is available electronically at 2013 STT 201-20.
The second advisory opinion involves more complicated facts, and is probably more surprising in view of the economic realities of the series of contemplated transactions. Here, the issue was similar to that in the first opinion: whether a mortgage recorded by New York City Land Development Corporation ("LDC"), a not-for-profit local development corporation chartered under New York law, is exempt from New York’s mortgage recording tax. The petitioner proposed to lease real property from the LDC and then develop it with funds borrowed from banks. The bank loans will be secured by mortgages against petitioner's leasehold interest. The LDC initially will be a named mortgagee and will record the mortgages, but all of the rights under the mortgages will inure to the benefit of the banks. After recording the mortgages, the LDC will assign to the banks all of its mortgage interests. The general statute imposing a mortgage recording tax contains no exception expressly exempting entities such as the LDC. However, the New York Not-For-Profit Law exempts from taxation "[t]he income and operations” of a corporation incorporated thereunder. The New York Department of Taxation and Finance concluded that the earlier-enacted provisions of the mortgage recording taxing statute “must yield to the exemption provisions contained in the 1969 law creating not-for-profit local development corporations.” The tax, therefore, “does not apply where LDC as mortgagee records the LDC mortgage, nor does it apply to the recording of the eventual assignment of the Mortgage by LDC to Lenders.” The ruling is available electronically at 2013 STT 201-21.
Wednesday, October 16, 2013
Grace Soyon Lee, Associate Professor at the University of Alabama School of law, has recently published “Mitigating the Effects of an Economic Downturn on Charitable Contributions: Facing the Problem and Contemplating Solutions,” 22 Cornell J. L. & Pub. Pol'y 589 (2013). Here is the abstract:
Hat Tip: TaxProf Blog
Charitable giving has been a foundation of American society almost since the nation began, but the issue of how such giving should be treated for tax purposes has been the subject of frequent debate. Scholars have proposed various theories explaining why the positive effects of this deduction on both donors and donees outweigh the negative impact on government coffers of this tax expenditure, although many still criticize certain features of the deduction in its current form. However, one area of this research that has previously been neglected is how the charitable sector is affected by changes to the economy at large. Contributions to charitable organizations tend to decline during an economic downturn, and such a decline may be catastrophic to the charitable sector. In particular, an economic downturn can affect charitable organizations in three different ways. First, some organizations may experience an increase in donations but simultaneously experience an increase in demand for their services. Other organizations may experience an increase in demand for their services without experiencing an accompanying increase in donations. Finally, some organizations may experience such a steep decline in donations that their very survival is put in jeopardy, regardless of whether the demand for their services increases. In order to meet the recessionary needs of all three types of organizations, the government should: 1) convert the current charitable deduction to a refundable credit that is available to all taxpayers; 2) provide a tax credit to employers who second their employers [sic] to work for charitable organizations; and 3) provide direct funding to those charities that can demonstrate dire financial need.
The October 7 issue of the National Council of Nonprofits’ Nonprofit Advocacy Matters contains a number of stories that may interest readers. Here is a summary of the article titles in the issue:
Paying for Indirect Costs Essential to Success, New Report Finds
Long Federal Shutdown Means Greater Demands, Impact on Nonprofits
Dealing with the Federal Government Shutdown at the State Level
Nonprofits Prepare for 2014 State Tax Reform Discussions
Taxes, Fees, PILOTs
Illinois Implements Reforms that Benefit Nonprofits and Taxpayers
Denver Strengthens Partnership with Nonprofit Contractors
Additional State and Local Issues
Nonprofits Take to Advocacy to Avoid Another Round of Sequestration
“Business as Usual: A Tale of Two Sectors,” by Tim Delaney, Huffington Post, September 30, 2013.
“When Government Shuts Down, the Nonprofit Community Pays,” by Tim Delaney, Foundation Center, October 4, 2013.
“Charitable Giving Tied to State Tax Deduction Decisions,”analyzing the consequences of actions by legislatures to reconsider and largely to retain charitable giving incentives in Hawai’i, Kansas, Michigan, Missouri, North Carolina, and Vermont.
Tuesday, October 15, 2013
Evaluating the reasonableness of compensation paid by charities to their executive officers is, of course, essential to determine compliance with Internal Revenue Code section 501(c)(3)’s prohibition against private inurement of net earnings and to avoid excise taxes under Code section 4958 (in the case of public charities and section 501(c)(4) entities) and Code Section 4941 (in the case of private foundations). A helpful resource for evaluating executive compensation is Charity Navigator’s recently issued annual study of charity CEO pay, available here. Among the more interesting findings highlighted in the accompanying press release are these:
Modest raises are the norm since the recession: Salaries for the CEOs in this study increased modestly since the recession: just 0.8% from 2008 to 2009 and 1.5% from 2009 to 2010 and 2.5% from 2010 to 2011. These fairly small increases come after the 4.7% median increase charity CEOs received from 2007 to 2008.
Charity CEOs that aspire to have big salaries are more likely to succeed if they work at an Educational charity: The data shows that top pay at charities can vary greatly by mission with the heads of Educational charities earning as much as $90,000 more than those running Religious charities.
Geography influences the top executive's salary: CEO salaries at nonprofits reflect the regional variation in the cost of living. For example, CEOs at charities in the Northeast ($149,523) and Mid-Atlantic ($147,474), which include Boston, Washington D.C. and New York, tend to earn higher salaries, than those in the Mountain West ($108,893) and Midwest ($114,050), which include Milwaukee, Boise and Salt Lake City.
Notably, the study concludes by acknowledging “that the paychecks of some nonprofit executives are outrageously high,” but confirming “that those receiving excessive pay are in the minority.”JRB
Florida’s Sun Sentinel reports that the affordable Care Act (ACA) is expected to enable Florida nonprofits to better meet the needs of undocumented immigrants, albeit indirectly. US citizens among the working poor will now have expanded medical coverage, thereby freeing up nonprofits’ resources to improve service to the uninsured. What immigrants are, and are not, covered by the ACA directly? The article explains:
Pilloried in the political discourse as "illegals," undocumented immigrants were left off the table when the Affordable Care Act was drafted. Those with "eligible immigration status" and covered under the act, according to the Obamacare application, include visitors holding a student or work visa; immigrants afforded "temporary protection status;" members of a federally recognized Indian tribe born in Canada; and those applying for asylum.
But immigrants with "deferred action status" — those who came to the United States illegally as children but afforded prosecutorial discretion for deportation — are not covered. Neither are the millions of adults who also crossed the border illegally.
Although undocumented immigrants now receive, and will continue to receive, treatment in hospital emergency rooms, such services are costly. The enhanced ability of nonprofit healthcare clinics to offer preventive care should better serve patients and help reduce the strain on emergency room operations.JRB
Monday, October 14, 2013
The Chronicle of Philanthropy today is reporting the results of a nonscientific poll conducted by the Nonprofit Finance Fund on the effects of the partial government shutdown on the nonprofit sector. Of participating nonprofits that receive federal aid, 43 percent of 97 respondents report that their payments have been delayed, and 15 percent report that their payments have been halted. The remainder report either timely payments, or payments that are late, as usual. Further poll results are that 18 percent of respondents have ceased or reduced the scale of programs in response to the shutdown, and 5 percent have terminated or furloughed employees. Human-service and arts organizations reportedly comprise a slim majority of the poll to date.
In an interesting piece in the Los Angeles Times, art critic Christopher Knight writes that new information may shed additional light on the infamous relocation of the Barnes Foundation from suburban Merion to downtown Philadelphia. A new paperback edition of John Anderson's "Art Held Hostage: The Battle Over the Barnes Collection" – a comprehensive account of the struggle over the foundation – contains an epilogue that, according to Knight, shows that relocation may not have been necessary. Knight reads the epilogue to suggest that both a local politician (who was convicted in 2009 on 137 counts of political corruption) and local charitable foundations (including Pew Charitable Trusts) angled for the relocation notwithstanding that the California-based J. Paul Getty Trust was apparently interested in helping the Barnes Foundation continue to operate at its historic site. According to the article, “Anderson reports that Pew warned the Getty away from considering a full-scale rescue plan, ‘lest they be denounced as interlopers from afar.’" The story further indicates that the funding ultimately raised to relocate the Barnes collection greatly exceeded the funding that would have been sufficient to maintain operations in Merion.
Those who teach the Barnes Foundation case may want to pick up a copy of the new paperback edition of Anderson’s book just to review this epilogue.
Thursday, October 3, 2013
Charities must serve public rather than private interests. Much of the enforcement effort in this area of the law tries to ensure that such organizations do not engage in impermissible self-dealing, that is, in providing unreasonable benefits to insiders. That is, limits on self-dealing are crucial to regulation of this section. Both state law and federal tax law include provisions designed to prevent such behavior. These laws, however, often exhibit inefficiencies and differences that impose unnecessary burden on organization seeking to comply with applicable law.
State law regulates both trusts and nonprofit corporations. If the organization is formed as a trust, the “no further inquiry rule” of common law applies. Under this rule, a trustee, whether of a charitable trust or a private trust, is per se liable so long as a beneficiary shows that the trustee had a personal interest in the transaction; harm to the trust is irrelevant. If the organization is formed as a corporation, nonprofit corporation statutes generally include requirements as to the procedures for board approval of self-dealing transactions, procedures that, in practice, are usually easy to meet.
Tax law supplies self-dealing rules for organizations exempt under section 501(c)(3) of the Internal Revenue Code. Under federal tax law, public charities must satisfy the so-called intermediate sanction rules, which impose excise taxes on transfers between the organization and an insider that confer an “excess benefit” on the insider. Private foundations, which are section 501(c)(3) organizations that, in general, receive their support from a single individual or corporate source or family group and make grants to other charitable organizations, face stricter rules than public charities regarding self-dealing. They face two-tier excise taxes that in practice prohibit transactions between the private foundation and certain specified insiders, even when the transaction would benefit the organization.
This article uses both the economic theory of deterrence and norms theory to argue for a change to both state law and federal tax law. Using the California nonprofit corporation statute and the availability of individual exemptions from the prohibited transactions rules of ERISA, it argues for advance approval procedures. Making state and federal self-dealing rules as similar as possible would best carry out the rules’ shared purpose. Reconciling these rules would aid nonprofit charitable organizations in adopting a set of operating procedures to ensure compliance with the various laws applicable to them. Similar rules would also render state and federal enforcement easier and more efficient.
Part I describes why self-dealing rules are so important in the nonprofit context. Part II details and evaluates the various self-dealing regimes in which nonprofit tax-exempt entities operate. Part III considers how these various approaches could be reconciled with use of administrative advance approval.
Wednesday, October 2, 2013
Michael J. DeBoer (Faulkner) has posted "Religious Hospitals and the Federal Community Benefit Standard - Counting Religious Purpose as a Tax-Exemption Factor for Hospitals" to SSRN. Here is the abstract:
This Article argues that the religious purpose of religious hospitals should be explicitly counted for purposes of determining tax exemption under federal corporate income tax law as well as state tax law. This argument is premised upon the special protections secured to religious institutions under federal and state constitutions, the history of tax exemptions extended to religious and charitable institutions, the separate enumeration of religious purpose as an exempt purpose in § 501(c)(3) of the Internal Revenue Code, and the important role of nonprofit organizations in American society.
This Article develops this argument in several steps. First, it traces some of the historical background regarding the tax exemption of nonprofit and religious hospitals in the United States, including the development of the community benefit standard. Second, it examines recent federal legislative and regulatory initiatives, including the Affordable Care Act, that have amplified the community benefit standard with additional requirements that hospitals must meet to qualify for and retain tax-exempt status under federal income tax law. Third, it offers a range of reasons that support counting the religious purpose of religious hospitals for determining tax-exempt status. Fourth, it sets forth a typology of nonprofit hospitals and offers two sets of proposals — the first suggesting revisions to federal income tax exemption law and regulation, and the second encouraging religious hospitals to make their religious purpose more evident in their organizations and operations.
Jeremy M. Christiansen (Utah) posted "'The Word Person...Includes Corporations': Why the Religious Freedom Restoration Act Protects Both For- and Nonprofit Corporations" to SSRN. Here is the abstract:
In recent months, lawsuits challenging the Patient Protection and Affordable Care Act’s (“ACA”) requirement that providers of health insurance pay for contraceptives and abortifacient drugs have attracted attention from legal commentators, the news media, and even the Supreme Court. Plaintiffs argue that the contraception mandate violates the Religious Freedom Restoration Act (“RFRA”) by imposing a substantial burden on their religious exercise without meeting strict scrutiny requirements. Early circuit court decisions at the preliminary injunction phase foreshadowed a circuit split on the issue, with some siding with the plaintiffs, and others siding with the government. While this Note was going to print, the Tenth Circuit issued a complicated en banc decision in Hobby Lobby Stores, Inc. v. Sebelius, that reversed a lower court ruling in favor of the government. Although that case signaled a victory for the plaintiffs, the fractured nature of the decision only underscores the likelihood that this issue will ultimately land on the Supreme Court’s doorstep.
Hobby Lobby highlights a novel issue — whether for-profit corporations can seek exemptions from the ACA by invoking RFRA. This Note will consider the arguments put forward by the majority in Hobby Lobby, as well as those put forward by the dissenters. Moreover, this Note will address additional textual and contextual factors that courts have failed to consider, ultimately concluding that RFRA draws no distinction between for- and nonprofits. Policy arguments against allowing for-profits protection under RFRA are then considered. In the end, if courts will stay true to RFRA’s text and context, they will be led to two ultimate conclusions. First, for-profits are within RFRA’s auspices. And second, the sacrifice of conscience is not the cost of incorporation in America.
Susannah Camic Tahk (Wisconsin) has posted "Crossing the Tax Code's For-Profit/Nonprofit Border" to SSRN. Here is the abstract:
The federal tax code erects and enforces a firm border between for-profit and nonprofit organizations. Multiple provisions of the code monitor the boundaries of the tax-exempt, or nonprofit, sector to ensure that no nonprofit organization slips over the border to become a for-profit organization. Other code provisions restrict entry into the tax-exempt sector by for-profit organizations. Despite serious legal impediments, however, organizations on both sides of the boundary have increasingly found means by which they can cross the border. Arrangements such as corporate social responsibility, for-profit philanthropy, and social enterprise illustrate this recent trend. Through these arrangements, for-profit organizations are beginning to embrace social goals, while nonprofit organizations have started to use methods more traditionally associated with efficient business organizations. Research in organizational sociology provides tools by which to understand these new cross-border developments. This body of research has shown that organizational sectors, or fields, evolve according to well-understood patterns, whose significance tax scholars have overlooked. Then, federal tax law has failed to recognize and to make productive use of these organizational trends. This Article proposes that tax law should acknowledge the cross-sector movements of for-profit and nonprofit organizations, as well as the major advantages that these movements can produce. Tax law could then harness border-crossing activity to create social benefits. To achieve this result, federal tax law needs significantly to loosen the for-profit/nonprofit boundary. This change would enable the tax code to encourage cross-sector "collaborations" between for-profit and nonprofit organizations. This change to the tax law is one that Congress and the IRS could now accomplish through several basic measures. These measures would make it possible for federal tax law to realize the large potential for social good that lies at the changing for-profit/nonprofit border.
Daniel E. Chand (New Mexico State) has posted "Nonprofit Electioneering Post Citizens United: Has the System Become More 'Complex'? to SSRN. Here is the abstract:
Nonprofits face a complex web of congressional statutes and administrative rules designed to regulate their advocacy activities. As a result, most politically active nonprofits have formed “complex organization structures” of multiple tax-exempt statuses, which are intended to bolster an organization’s overall advocacy by allowing the group to delegate specific activities to different entities. Citizens United v. FEC (2010) and the subsequent rise of “super PACs” has further incentivized groups to develop these complex structures. This study describes the system of regulations governing nonprofits involved in elections and examines the electioneering activities of 50 of the most politically active nonprofits involved in the last four elections: 2006 through 2012. The findings show that groups – especially 501(c)(4) social welfare organizations – are relying less on their traditional PACs to make direct contributions to candidates and are, following Citizens, increasingly making independent expenditures directly from their 501(c) tax-exempt status and from loosely affiliated super PACs.
As reported by the Nonprofit Quarterly, nonprofit organizations have no choice but to contend with a potentially extended government shutdown and the loss of government funds. The article refers to guidance issued by the Office of Management and Budget (OMB), which issued a memorandum several weeks ago to all federal agencies entitled, “Planning for Agency Operations during a Potential Lapse in Appropriations.” In the memorandum, OMB advised federal agencies to update “their plans for operations in the absence of appropriations” and that “agency leaders should ensure that only those activities that are ‘excepted’ pursuant to applicable legal requirements would continue to be performed during a lapse in the appropriation for those activities.” As the article further states, one of the clear impacts of government shutdown for nonprofits are short-term financial decisions that could result in layoffs or furloughs.
Lois Lerner, the embattled former head of the IRS Exempt Organizations division, retired on Monday, September 23, 2013 after 30 years of civil service. As Politico stated in an article about Lerner's retirement: "Lois Lerner is the political piñata that Congress still loves to whack months after she awkwardly acknowledged that the IRS wrongly scrutinized conservative groups for years. Her sudden retirement on Monday after 12 years at the agency won’t change that."
The Huffington Post blog published an article yesterday entitled, "The IRS Scandal That Wasn't," providing an interesting historical and, of course, political recounting of the 501(c)(4) determination process with respect to politically-oriented organizations that led to Lerner's undoing. The article, however, makes a profound statement of caution in its conclusion: "Far more troubling is that the current brawl over the IRS may make the agency too gun shy to properly police tax-exempt groups."
Philip C. Blackman (Penn State) and Kirk J. Stark (UCLA) have posted "Too Good to Be True? How State Charitable Tax Credits Could Increase Federal Funding for California" to SSRN. Here is an abstract of the article:
An IRS chief counsel memorandum published in 2010 found that a taxpayer was permitted to claim a charitable contribution deduction for the full amount of a gift, even thought a substantial portion of the gift was effectively refunded to the taxpayer through a charitable state tax credit. In this article, Blackman and Stark explain that the IRS memorandum permits states to adopt charitable tax credits that effectively enable taxpayers to convert state taxes to charitable gifts — a strategy that would be attractive to alternative minimum taxpayers. Those state charitable tax credits (some with extraordinarily high credit percentages) appear to be on the rise, perhaps in part because they effectively enable a transfer of revenue from the federal government to the states. The authors believe the memorandum should be repudiated (as a matter of appropriate federal tax policy), but if it is not, states should consider taking advantage of it. The article discusses how the strategy applies in the case of proposed California legislation that would permit a 60 percent tax credit for contributions to a state fund designed to increase financial support for low- and middle-income students to pursue secondary education.
Sunday, September 29, 2013
Last Wednesday I blogged about Georgetown Law's finiancial boot camp. Today I write to report that Georgetown is not the only law school seeking to give its students a sense of the business world. The National Law Journal is reporting that "a growing number of law schools are borrowing a page from the MBA playbook and adding courses intended to give students a foundation in business, in addition to the law." The other schools profiled in the Journal report are Elon University School of Law, University of Pennsylvania Law School, Harvard Law School, University of Michigan Law School and University of Colorado Law School.
According to the Journal, the business courses now taught at these law schools are an outgrowth of the rising demand for law graduates to have some real-world legal experience. In the past, legal educators believed that law students could obtain this experience through clinics and externships. Not any more. Legal educators
...are now starting to take a broader view of what, exactly, prepares a student to practice law. They're realizing that basic business and management skills would prove useful whether the student ends up counseling corporate clients, goes solo or works in a small nonprofit.
I applaud the new trend. May it last well into the future.
I have enjoyed blogging this past week. Tomorrow, one of my colleagues will take over the blogging duties. I thank my recently-graduated former student, Ibukun Adepoju, for helping me spot stories for blogging. May she have peace of mind as she awaits the results of the July bar exam.