Wednesday, June 18, 2014
Donor Disclosure Law. On May 14, 2014, California Governor Jerry Brown signed into law S.B. 27, which requires large donations from nonprofits and other "multi-purpose" (MPOs) organizations to be disclosed beginning July 1. In addition, the California Fair Political Practices Commission is required to post the names of the top 10 contributors on its website. The bill's intended effect is to shed light on “dark money” in political campaigns and referendums by eliminating a now common practice of nonprofit and other organizations contributing significant dollars into such campaigns without disclosure of the original donors. According to the Los Angeles Times, the legislation was advanced after "conservative groups from Arizona poured $15 million into California in 2012 to fight Proposition 30, Gov. Jerry Brown's tax hike, and support an ultimately unsuccessful move to curb unions' political power."
Hospital Executive Pay Ballot Initiative. A ballot initiative to cap the executive compensation of nonprofit hospital executives failed to qualify for the November 2014 ballot. The Charitable Hospital Executive Compensation Act of 2014 would have instituted an annual compensation limit (including bonuses and other benefits) for such execs to the salary and expense account of the President of the United States (currently, $450,000). In addition, the 10 highest-paid executives and 5 largest severance packages would have been required to be publicly disclosed annually. According to the Los Angeles Times, the proposed ballot initiative was dropped by the SEIU-United Healthcare Workers West Union in a deal struck with the California Hospital Association and a majority of California's 430 hospitals.
On June 13, 2014, the IRS Exempt Organizations division released several intermal memoranda addressing the EO application process:
1. Appeals Office Consideration of EO Technical Unit Adverse Determinations. Memorandum TEGE-07-0514-0012 provides that when EO Technical issues a proposed adverse ruling, organizations now have the opportunity to request consideration of the adverse determination by the Appeals Office within 30 days from the date of the letter setting forth such adverse determination. Prior to this guidance, the EO Technical process was different - an organization that received an adverse determination from EO Technical did not have the right to request consideration by the Office of Appeals.
2. Retroactive Reinstatement & Pending Applications. Memorandum TEGE-07-0414-0010 provides that if an organization filed its Form 1023 appliction for exemption prior to the due date of filing its Form 990 or 990-PF, and the IRS later determines that the organization qualifies for tax exemption, the will be granted under usual procedures as long as it has filed a 990 within the past three years. If the organization has not done so and its tax exemption was automatically revoked, the IRS will now treat the application for exemption as a request for reinstatement. Because of IRS backlog in determinations, some organizations suffered a revoked exemption before the IRS could even process its application.
3. EO to Use Six Sigma to Streamline Application Process. Memorandum TEGE-07-0514-0014 provides that EO specialists will be treated on streamline processes evolving from Lean Six Sigma Organization (LSSO) concepts. This streamlining should aid in the IRS's efforts to effect "fair and efficient tax administration."
Tuesday, June 17, 2014
Munson: Fraud on the Faithful? Charitable Intentions of Religious Congregations' Members & Church Property Law
Valerie J. Munson (SIU Carbondale) has posted "Fraud on the Faithful? The Charitable Intentions of Members of Religious Congregations and the Peculiar Body of Law Governing Religious Property in the United States" to SSRN. Here is an abstract:
This article examines American church property law, past and present, and discusses its inconsistencies and ambiguities. It then suggests how state governments could play an important role in clarifying this area of the law and protecting the intentions and expectations of local church donors who may well be unaware that a general church organization (denomination) is the ultimate beneficiary of their donations. The article is unique in that it is written with a perspective that takes into account the real world contexts of church property disputes, in history and today. (The author was aided in this regard by historic Supreme Court documents that became available to scholars just this spring through a recent digitalization project.)
The article begins by placing the reader in the midst of a church property dispute as seen through the eyes of Sandra and John Cook, fictional characters whose experiences accurately reflect those of the author’s former clients. It then proceeds in three parts.
The first part is an overview of church property rights under American law and begins with a short discussion of the religious context in which this country was founded, the legal existence and power given religious organizations in the post-revolutionary period, and early concerns about the need to limit the power of church authorities over non-spiritual matters like possession and control of church property. It then discusses the three very different approaches used to resolve church property disputes by different states, at different times. The first is the “departure from doctrine” rule first announced in the Scottish case, Craigdaillie v. Aikman in 1813. That approach turns on a determination of which faction in a church property dispute most closely follows the religious tenets that existed at the time a local church was founded. The second approach is the “deference” approach which was first articulated by the Supreme Court in 1871 in Watson v. Jones, a case arising out of the civil war. Using that approach, if a court determines that a local church belonged to a general church organization having its own authoritative structure and means of deciding disputes, the court must defer to the decision of the highest judicatory of the general church organization as to which party is entitled to possession and control of church property. The third, and now most prevalent, approach is the “neutral principles” approach endorsed by the Supreme Court in 1979 in the case of Jones v. Wolf. Under that approach, a court may decide a church property dispute if it can do so without deciding any religious issue. That is, it can decide the dispute if it can do so by simply applying neutral principles of state property, contract, and trust law. The first part of the article concludes with a summary of how the state courts have applied the neutral principles approach in recent years, which has continued the ambiguity and inconsistency in this area of the law.
The second part of the article discusses the context in which individuals today decide to donate money to local churches. It looks at what historic case law provides by way of context as well as at current data on church affiliation practices in the United States.
The third, and final, part of the article suggests three ways in which state governments can assume a role in clarifying the area of church property law, a role they have been urged to assume by the Supreme Court for over forty years. The suggested state government actions would also protect the intentions and expectations of potential donors to local churches in a manner consistent with current public policy favoring financial transparency, especially full disclosure in charitable fundraising. One possible action is the amending of state charitable solicitation or church incorporation laws to require specific disclosure of any beneficial interest a general church organization holds in local church property. A second is through vigorous enforcement of existing state anti-fraud laws. A third is through vigorous enforcement of the public policy requirement for continued tax exemption.
The article concludes by bringing the discussion of church property law back to real people, like Sandra and John Cook, who are deeply affected by church property disputes, and suggesting that now is the time for state governments to step up and assume the role envisioned for them by the Supreme Court by acting to protect the intentions and expectations of those who give of their time and money to support local churches.
Luigi Butera (George Mason, Interdiscplinary Center for Economic Science) and Jeffrey Ryan Horn (George Mason, Economics Department) have posted "Good News, Bad News and Social Image: The Market for Charitable Giving" to SSRN. Here is an abstract:
Financial efficiency represents a desirable quality in charitable organizations. Yet, different theories of intrinsic and extrinsic preferences for charitable giving offer opposite predictions about donors’ reaction to this information. On one hand, learning that one’s charity is better than expected directly increases the marginal impact of giving, making donations non-decreasing in the quality of news. This behavior is consistent with warm-glow theory. On the other hand, higher efficiency has an indirect negative effect on giving, since now less money is needed to produce one unit of effective charitable good. Most notably, theories of pure altruism and guilt aversion predict this behavior. A similar tension arises for prestige motivated donors whenever information provides extrinsic incentives to give (e.g. information has a social signaling value). We model this simple framework and test it using a laboratory experiment. We show that when information about efficiency is private, giving is always non-decreasing in the quality of news. However, when the efficiency of donor’ charities is public information, this relationship breaks down: 34% of donors who respond to new information do so by reducing their giving when charities are better-than expected, and increasing it when are worse. We show that this result is driven by image-motivated donors, who treat the size of their gift and the efficiency of their chosen charities as substitutes in terms of social image payoffs.
In its 2014 Report of Recommendations, the IRS Advisory Committee on Tax Exempt and Government Entities specifically recommended:
The IRS Exempt Organizations Division should recommend that Chief Counsel and Treasury open a regulation project so that profits from a substantial commercial activity will not preclude exemption under I.R.C. § 501(c)(3) as long as an organization’s income and its financial resources are used commensurate in scope with its charitable program.
The advisory panel specifically explained:
The IRS should open a regulation project to: (1) formalize the commensurate test articulated in Rev. Rul. 64-182; and (2) to reject application of the commerciality test. Recent court cases and IRS rulings have been applying a "commerciality test" to determine: (1) when certain business activity conducted by a Section 501(c)(3) organization will preclude tax exemption; and (2) what constitutes unrelated business generating taxable income. Neither the tax law nor the implementing regulations provide support for a commerciality test.
The report ultimately concludes that the commerciality doctrine "is not only unsupported by the Internal Code or its implementing regulations, the doctrine is also inconsistent with the common law of charitable trusts," upon which current regulations are based (referring to §1.501(c)(3) -1(c)(1) and -1(e)(1) promulgated in 1959). The advisory panel concludes that the primary purpose test in the Regulations has basically been replaced with a commerciality test in the IRS's determination of an organization's extent of business activity.
The advisory panel also recommended IRS cooperation with the Chief Counsel's office and the Treasury Department to promulgate a comprehensive revenue ruling on various other unrelated business income issues including activities that will be considered related and unrelated; preparatory time spent on activities; and situations evolving from the IRS' college and university compliance project, such as facility rentals and dual-use properties.
Most practitioners would clearly find such guidance helpful as well as definitive IRS guidance reconciling the commensurate test with the regulatory primary purpose test and their interaction with the UBIT rules.
(See also: Daily Tax Report)
This article presents the case for repeal of the façade easement deduction. Proponents of this benefit argue that the deduction encourages historic preservation by reimbursing property owners for relinquishing their right to alter the façade of their property in a way inconsistent with that conservation goal; however, this article shows that there are many reasons to urge its repeal: the revenue loss, the small number of beneficiaries, the financial demographics of that group of beneficiaries; the dubious industries that are supported by the deduction; and the continual marked overvaluation and abuse despite Congressional, court, and administrative review and expense.
After the last major reform effort, the Pension Protection Act of 2006 (PPA), in 2009, only 94 taxpayers claimed the façade easement charitable deduction with an average return deduction of $477,225. While there may be a desire to retain a tax benefit with purported charitable aims, the long history of unbridled abuse even with repeated legislative and administrative response should make it clear that amending the façade easement deduction is an unending proposition. In today’s world, real estate is often subject to regulation that buyers and their neighbors accept in order to retain and increase a community’s property values. The very wealthiest of homeowners who purchase homes in historic districts willingly accept local restrictions on their property’s use. There is no evidence that façade easements significantly alter the behavior of property owners. It provides them with huge tax savings for doing what they would do anyway.
Tuesday, June 10, 2014
What are the many implications for continued tax exemption for the NCAA arising from the current anti-trust and licensing litigation? I don't really know yet but I have on my "to-do" list the task of reading the 157 page complaint. PBS's Frontline has an online source from which readers can learn all there is to know so far regarding the litigation.
I would really have loved to be sitting in the courtroom for however long it takes to listen in on the testimony and arguments. My initial hunches concerning the implications for 501(c)(3) status range from questions regarding whether the NCAA's has a substantial non-exempt purpose to whether paying players for the use of their likenesses implicates the prohibitions on private inurement, excess benefit and/or private benefit. The only problem though with logically thinking about the implications is that tax exemption for the NCAA is so terribly unprincipled in the sense that everyone knows the whole thing is built on a fictional house of cards. That was proven -- if proof was ever really needed anymore -- when the Service dared to suggest that advertising revenue from things such as the "Frito Lay" Fiesta bowl ought to be taxable. And did you know that Nick Saban is now something like the sixth or seventh highest paid head coach in all of televised football, college and pro? He is making about $7 million a year and well worth it he is, considering the largess he helps bring to 'Bama. A lot of other college head coaches make or will make close to the same, I imagine. And yet the University of Alabama and the NCAA keep on running completely tax exempt with nary a batted eyebrow. "Run Forest run!"
Monday, June 9, 2014
The early indicators regarding the effect of the Affordable Care Act on the demand for free health care are mixed, but seem to be trending towards decreasing that demand very quickly. If the trend continues, we should continue seeing a blending of nonprofit and investor owned hospitals. By that, I mean that the two types of hospitals will continue to morph into indistinguishable sides of the same coin. The law already allows for insiders of nonprofit hospitals to be compensated on the same scale applied to investor owned hospitals. And we already know that nonprofit hospitals are allowed -- nay, expected -- to apply the same business practices as investor owned hospitals. Just as direct government subsidy for health care and the influence of managed care policies have already erased the historical distinctions between "alms houses for the poor" and investor owned hospitals, Obamacare will further eliminate whatever distinctions still exist between nonprofit and for profit hospitals. When all is said and done, will the "nondistribution constraint" (which may exist as a hard and fast rule in theory more than reality) be enough to justify continued exemption for customer supported health care? I am not the first to make this observation, I'm sure, but as government continues to grow as the primary arbiter of health care -- I'm not saying whether this is a good thing or not -- in effect requiring all health care providers to serve the poor, tax exemption for health care seems less and less justifiable.
According to this recent NY Times editorial:
Some hospital systems have started tightening the requirements for charity care in efforts to push uninsured people into signing up for subsidized health plans on the insurance exchanges created by the reform law. In St. Louis, for example, Barnes-Jewish Hospital has started charging co-payments to uninsured patients no matter how poor they are. Those at or below the poverty level ($11,670 for an individual) are charged $100 for emergency care and $50 for an office visit. But some medical centers have seen their charity care costs decline. A report late last month in Kaiser Health News and USA Today said that Seattle’s largest “safety net” hospital, run by the University of Washington, saw its proportion of uninsured patients drop from 12 percent last year to a surprisingly low 2 percent this spring, putting the hospital on track to increase its revenue by $20 million this year from annual revenues of about $800 million.
The editorial links to this report by Kaiser, suggesting that the ACA has resulted in a marked decrease in uncompensated health care.
That’s one of the reasons the hospital industry was among the first groups to support President Barack Obama’s health plan,agreeing to Medicare and Medicaid funding cuts exceeding $150 billion over a decade in return for getting more paying patients to reduce their uncompensated care.
Many hospital executives were unnerved, therefore, when the Supreme Court ruled in 2012 that states could not be forced to implement the Medicaid expansion and nearly half of them have refused. As a result, hospitals in non-expansion states are undergoing the funding cuts without a corresponding reduction in uncompensated care.
Big Impact On Patients
In Seattle, Harborview had projected a $10 million gain in revenue this year because it would be able to recoup payments for services provided to the newly insured. Now, with a 10-percentage-point drop in uninsured patients in one year, the hospital system managed by the University of Washington is projecting a $20 million revenue increase on annual revenue of about $800 million, said Associate Administrator Elise Chayet.
Hospital officials say the biggest impact of the change is on patients themselves. Rather than having to rely on emergency rooms, newly insured patients can see primary care doctors and get diagnostic tests and prescription drugs, among other services.
Some safety-net hospitals say they started to see their numbers of uninsured patients dropping almost immediately after the Medicaid expansion took effect in January.
“We have seen a steady decline in our uninsured visits,” said Roxane Townsend, CEO of UAMS. “We did not anticipate this big a drop this quickly.”
About 80 percent of the system’s new Medicaid patients had previously been seen by the hospital as uninsured patients, she said. Their enrollment in coverage means the hospital is paid more for their care and is able to direct them to outpatient services and preventive care.
She said that UAMS has also seen a drop in ER visits by uninsured patients — from 6,000 visits in first three months of 2013 to about 4,000 visits in first three months of this year, calling the decline “significant.”
An even more comprehensive study published in Health Affairs confirms society's growing resolution of charity care and, without saying so, provides more reason to question the continuing tax exemption of nonprofit hospitals, which are no longer the exclusive providers of charity care:
The Affordable Care Act (ACA) is fundamentally reshaping the nation’s health care landscape, particularly in terms of how care is delivered to the low-income uninsured and how that care is financed. Chief among the ACA’s provisions is the expansion of eligibility for Medicaid, in which states can choose to cover people who have incomes of up to 138 percent of the federal poverty level. The ACA also provides subsidies for people with incomes below 400 percent of poverty to purchase health insurance and establishes health insurance exchanges, known as Marketplaces, through which people can obtain coverage. Over the next decade an estimated twenty-five million people will gain health insurance through the ACA.
Ideally, nonprofit ventures thrive and grow to eliminate a market failure problem. They should, perhaps, be subsidized only so long as the problem exists and only to the extent necessary to solve the problem. States, for example, are already in the process of a wholesale reconsideration of the necessity of property tax exemption for health care organizations. I should think too that income tax exemption for hospitals should be reconsidered.
Friday, June 6, 2014
With h/t to Paul Caron at the mother of all blogs, TaxProf Blog:
We investigate the effects of variations in the value of the charitable contribution deduction on nonprofit firm behavior, including exploring for the first time the effects of the tax-price of giving on fundraising and returns to fundraising. We find that a one-percent increase in tax subsidies drives a 1.7-percent increase in fundraising, and decreases average returns to fundraising by two percent. We also find that tax subsidies deliver less than a dollar of value, net of fundraising, for each dollar foregone by the government, and that program-related expenditures are largely unresponsive to subsidies, at least in the short run. We argue that these results may imply that the charitable contribution deduction is less effective than prior research has suggested. For example, we argue our results are consistent with the hypothesis that subsidies trigger a destructive arms’ race for donor funds. The modest elasticity of real charitable output to tax price implies that tax subsidies may simply crowd out other revenue sources, such that the efficacy of the subsidy depends on the relative efficiency of these alternative sources.
Thursday, June 5, 2014
As a follow up to yesterday’s post on the Walton Family Foundation, the New York Post reports (h/t Chronicle of Philanthropy) that more than half of the New York City Council has demanded that Walmart stop making charitable gifts to NYC nonprofits. According to the Post article, Walmart made $3.0 million in charitable gifts to nonprofits in the City, including hunger and job training programs and of course, charter schools. The Council sees this as trying to buy influence in the community in order to gain access to New York City markets. I’m sure there are a few people who have food now that didn’t before that really could care less about that.
Yesterday, Walmart was giving too little. Today, it’s giving too much. Huh.
EWW (Still wearing the flame retardant PJs)
Wednesday, June 4, 2014
This article in Forbes has been getting a good deal of play in the media. The article describes a report issued by the Walmart 1 Percent, a project of Making Change at Walmart backed by The United Food & Commercial Workers International Union. The report states that second generation of the Walton family has not been at all generous in supporting the Walton Family Foundation. According to the article, the first generation of the Walton family, Sam and Helen, were the initial creators of The Walton Family Foundation and accounted for the vast majority of the funding of the Foundation. In addition, a number of charitable lead trusts (a.k.a. “tax- avoiding trusts”) set up by parents, as well as their deceased son John, pay their lead interests to the Foundation.
Trust me, I’m no fan of the Waltons or Wal-Mart. I threw up in my mouth a little writing this. That being said, there are a number of things that trouble me about this report that have larger implications for charitable giving, generally.
1. The limits of disclosure. The premise of the report is that “if giving to the Walton Family Foundation is their [i.e., the second generation of Waltons] primary way of practicing charity, then the Waltons are hardly philanthropists.” The report does note that it believes that “it is reasonable to assume that the Walton Family Foundation is the primary vehicle through which the Waltons contribute to charity. However, to the extent that the Waltons make charitable contributions to entities other than the Walton Family Foundation the ﬁndings in this report will under-estimate their total charitable giving.”
I’m not sure why the authors believe that it is reasonable to assume that the WFF is the primary vehicle through which the Waltons contribute to charity. In my personal experience (subject to the caveat that the plural of anecdote is not data), the second generation in a family often does NOT support the parents’ private foundation. Quite to the contrary – those second generation family members often wish to strike out and establish themselves as philanthropists in their own right (or not at all). They will either choose not to make contributions (with the view that they already gave up part of their inheritance to charity) or make contributions in their own names to their own foundations and in furtherance of their own unbridled giving priorities and control.
The fact of the matter is that we simply don’t know the extent of the personal charitable giving of each family member. They may be giving to their own foundations or donor advised funds or supporting organizations or program direct giving, that may or may not have “Walton” in the name. The authors of the report can search the public records all they want – and the report discloses its methodology at the end – but much of this information is simply private, and we won’t know unless the Waltons tell us.
If the 2G Waltons want to claim to be philanthropists and hang their hat solely on the parents’ foundation, well … that’s an entirely different question (a.k.a., what does it mean to be a philanthropist?) On that note, they can put up or shut up, and I agree with this report only to that extent.
2. Tax “avoidance” trusts don’t count as giving. Look, I’m not naïve. (Mostly.) I’ve set up my fair share of charitable lead trusts and I know how they work. I know that the actuarial value of the lead interest going to charity for gift tax purposes bears no relation to the amount *actually* passing to the Foundation. And I know that there is always a transfer tax motive for setting up such a vehicle.
But does that mean we write off such things (and their cousins, the CRT and the gift annuity) as not being charitable?
I think lots of institutions that benefit from such planned giving vehicles would beg to differ. The fact of the matter is that any individual setting up such a trust knows that at least part of the assets in that trust will be going to charity. We can argue about whether the tax benefits to the donors derived from such trusts are not proportional to the amounts passing to charity. We can also argue whether the tax code should incentivize charitable giving by allowing income, estate and gift tax charitable deductions for such gifts in trust.
But let’s be clear. The current Code does allow such trusts. Congress does incentivize charitable giving through these techniques. And I’d bet dollars to doughnuts that the nonprofit community would be very upset if Congress wanted to do away with them – because they do result in real money going to charity. Maybe not as much as we’d like, but they do.
And while I’m at it … these aren’t loopholes in my understanding of the term. A loophole is an unintended tax break found when various parts of the Code don’t work together correctly (read: intentionally defective grantor trusts). CRTs and CLTs are very much in the Code intentionally – they are tax expenditures, not tax loopholes. Don’t like them? Change the Code, but don’t condemn people for taking advantage of legitimate tax strategies that are in the Code very much on purpose.
3. What is philanthropy, anyway? The 2G Waltons clearly have a world view, if one looks at the charitable giving they have done of which we have knowledge. I share pretty much nothing of that world view, personally. Does that mean that what they’ve done or funded isn’t charitable? Of course not - the question of whether or not I personally agree with the 2G Waltons’ giving priorities is irrelevant to whether or not it is charitable giving.
The notion of “charity” isn’t static – one need only to look to questions of race, religious, gender, and like restrictions in charitable gifts to know that standards change over time. I’m not going to say that the definition of charity is entirely open-ended. But we shouldn’t argue that the things that the Waltons support aren’t charitable just because they support things we might not like. You may not like the fact that Alice Walton gave millions to the Crystal Bridges Museum of American Art, but it doesn’t mean that the support of the arts isn’t “charitable.” You may not like the fact that the Waltons support the charter school movement, but that doesn’t meant that furthering educational innovation isn’t “charitable.”
If the shoe were on the other ideological foot, would you want to go down this definitional road?
Fundamentally, the report comes down to this quote:
“if they wanted to, the Waltons could be the most generous philanthropists in America, and probably the world.”
(Italics emphasis in the original). If you’re reading this blog, then you probably think that philanthropy is a pretty good thing and that we’d like people to be more generous. But nothing in our system of donor-driven philanthropy requires it - not of you, not of me, not of the Waltons. Full stop.
EWW (warily donning her flame-retardant pajamas....)
Friday, May 30, 2014
Johnny Rex Buckles (Houston) published "How Deep Are the Springs of Obedience Norms that Bind the Overseers of Charities?," in 62 Cath. U. L. Rev. 913 (2013). Here are some excerpts from the article's introduction:
This Article explores whether and how the exercise of discretion by charity fiduciaries in recasting a charity’s direction is, and should be, limited. Analyzing this basic issue raises additional, difficult inquiries: If the law does limit the ability of charity fiduciaries to determine the charitable paths of their entities, what standards govern the exercise of fiduciary discretion? To what extent does , and should, the law treat fiduciaries of charitable trusts dissimilarly from those who govern charitable nonprofit corporations? What role should governmental actors play in monitoring these decisions by charity managers? If governmental actors should assume some monitoring role, should their review of fiduciary decisions be ex ante or ex post? Which governmental actors should be involved? Can donors and other stakeholders sufficiently protect their interests absent a strong supervisory role by the government?
These questions are not simply esoteric enigmas deisgned to tickle the ears of legal scholars. . . . Moreover, these questions are especially timely, for the law of obedience norms governing fiduciaries of charitable corporations is unsettled and in great need of refinement. Even the law governing trustees of charitable trusts, which is comparatively stable and uniform, merits reassessment once the meaning and purposes of obedience norms are thoroughly examined.
To foster the development of the law governing charity fiduciaries, this Article presents a taxonomy of obedience norms,20 a doctrinal analysis of these norms, and a policy discussion to help answer these questions. Part I explains the fundamental nature of obedience norms and articulates and illustrates the various types of obedience norms. Parts II and III discuss legal authorities supporting or rejecting various obedience norms as applied to trustees of charitable trusts and directors of charitable nonprofit corporations, respectively. Part IV this Article evaluates the policy considerations that may justify one or more obedience norms. Finally, by presenting an analytical series of questions, Part V explains how the law should develop in imposing, and declining to impose, obedience norms on charity fiduciaries.
Thursday, May 29, 2014
Today's Law & Society Association Annual Meeting had a panel on Nonprofits and Taxation. Here are the papers presented:
Harry Ordower (St. Louis), Chair & Discussant))
- Samuel Brunson (Loyola-Chicago), Just Passing Through: Eliminating the Mutual Fund Distribution Requirement
- Ray Madoff (Boston College), Loophole or Lifeline: Closing the Gap Between the Rhetoric and the Reality of the Charitable Deduction: "The charitable deduction has long been criticized by tax scholars for providing disproportionate advantage to wealthy donors. However, current debates over the charitable deduction have produced push-back over this framing of the issue. Under the banner: -"it isn't a loophole, it's a lifeline" proponents of the charitable deduction have argued that the real beneficiaries of the charitable deduction are not donors, but instead are the poor who receive the ultimate benefits of the charitable dollars. Nonetheless, the current operation of the rule belies this characterization. This paper explores what the charitable deduction should look like if it's true focus is on recipients. "
- Leonel Pessôa (Universidade Nove de Julho), Taxation of Nonprofits: The Main Problems in Brazil: "The aim of this paper is to analyze the main problems in the taxation of the nonprofit organizations in Brazil and the impact of these problems on their activities. "
(Hat tip: TaxProfBlog)
As reported in Sunday's The New York Times, a trend among hospitals around the country is to reduce financial assistance to uninsured patients with the intent of forcing such patients to obtain coverage under the Affordable Care Act. The criticism is obvious - uninsured lower- and middle-income citizens without coverage will not take advantage of the ACA due to perceived, and perhaps actual, unaffordability and therefore forgoe health care all together. The push-and-pull for hospitals centers on the ACA's reduction of federal payments to hospitals that treat large number of uninsured patients (again, hoping to force such patients to seek coverage in online marketplaces) and the actual need to provide free or reduced-cost health care to those most in need of it.
The Times article illustrates hospitals' various policies to address this real problem:
In St. Louis, Barnes-Jewish Hospital has started charging co-payments to uninsured patients, no matter how poor they are. The Southern New Hampshire Medical Center in Nashua no longer provides free care for most uninsured patients who are above the federal poverty line — $11,670 for an individual. And in Burlington, Vt., Fletcher Allen Health Care has reduced financial aid for uninsured patients who earn between twice and four times the poverty level.
Continuing charity care for the uninsured, argues some health care providers, defeats the very purpose of the ACA. However, uninsured advocates argue that many uninsureds forgoe coverage under the ACA inaugural enrollment because the plans are expensive, even with government subsidies. Some argue that it is still a matter of message - encouraging people who now have access to coverage under the ACA to take advantage of the opportunity.
The article further states:
Many hospitals appear focused on reducing aid only for patients who earn between 200 percent and 400 percent of the poverty level, or between $23,340 and $46,680 for an individual. Many of those people presumably have jobs and would qualify for subsidized coverage under the new law.
The Times further reported that financial challenges for uninsureds are "particularly daunting" in the states that have not yet expanded their Medicaid programs, which currently totals over 24 states.
An issue not addressed by the Times Article is how these emerging charity care policies, to best comply with and take advantage of the new ACA reimbursement rules, will affect these tax-exempt hospitals' Form 990 Schedule H reporting? Has Congress and the IRS contemplated the changes to charity care numbers in light of the above-referenced ACA rules?
In American Atheists v. Shulman, the U.S. District Court for the Eastern Division of Kentucky rejected three atheist organizations' contentions that the IRS unconstitutionally discriminates against non-religious tax-exempt organizations. Specifically, the Atheists alleged that the IRS’s differing treatment of churches as opposed to other tax-exempt organiations was unconstitutionally. Specifically, the Atheists requested that the Court issue a judgment “[d]eclaring that all Tax Code provisions treating religious organizations and churches differently than other 501(c)(3) entities are unconstitutional violations" of the Equal Protection laws of the Fifth Amendment, the First Amendment and the Religious Test Clause of Article VI, §3 of the Constitution. The Atheists claimed "upon information and belief a number of atheist organizations have tried to obtain IRS classification as religious organizations or churches under §501(c)(3) or to otherwise obtain equal treatment,” and “most of those applications and attempts were rejected by the IRS." However, the Court found that the Atheists admitted in pleadings that they themselves had never sought recognition as a religious organization or church under §501(c)(3). The Atheists responded that they have not applied for exemption as a religious organization or a church because seeking such a classification would "violate their sincerely held belief."
Nevertheless, the Court found that the Atheists lacked the necessary standing to bring the suit, in part because they could have applied for religious designation. The Court concluded that the Atheists failed to establish any injury-in-fact and their assertion that they would fail to qualify as a church or religious organization was "mere speculation." To the contrary, stated the Court, "[a] review of case law establishes that the words ‘church,’ ‘religious organization,’ and ‘minister,’ do not necessarily require a theistic or deity-centered meaning."
Philip Hackney (LSU), has posted "Taxing the Unheavenly Chorus: Why Section 501(C)(6) Trade Associations Are Undeserving of Tax Exemption," to SSRN. It is forthcoming in 92 Denv. U. L. Rev. ___ (2014):
Our federal, state, and local governments provide a subsidy that enhances the political voice of business interests. This article discusses the federal subsidy for business interests provided through the Internal Revenue Code (“Code”) and argues why we should end that subsidy. Under the same section that provides exemption from income tax for charitable organizations, the Code also exempts nonprofit organizations classified as “business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues.” Theory supporting tax exemption states that we should subsidize nonprofit organizations that provide goods or services that are undersupplied by the market. A charitable organization that assists the poor is a classic example of a service undersupplied by the market. Business interest group services, however, are found in abundance. Data shows that there is a significant bias in the interest group system in favor of business interests and away from interests such as labor, the poor, and the environment. Tax-exemption at federal, state, and local levels likely fosters at least some of this bias in our democracy. Rather than enhancing a pluralistic society, as some argue is a prime benefit of our tax-exempt system, tax-exemption for business interest groups enhances the voice of the powerful and detracts from the voice of the weak. Thus, because business interests experience little in the way of market failure and tax-exemption for such groups likely leads to a bias in our democratic system I argue we should end exemption for nonprofit business interests.
(Hat tip: TaxProfBlog)
Over 2 years ago, we blogged about a unique lawsuit being filed by Z Street, a pro-Israel nonprofit corporation, against the IRS. Specifically, Z Street alleged that the IRS's "Israel Special Policy” utilized in reviewing the organization's application for Section 501(c)(3) status violated the organization's First Amendment rights in that the IRS policy constituted viewpoint discrimination. Z Street requested an injunction compelling the IRS to disclose the policy and its parameters and usage, and to refrain from such use in evaluating the organization's exemption application.
In a May 27 decision, the U.S. District Court for the District of Columbia denied the IRS's motion to dismiss the organization's complaint on all 3 grounds. The IRS presented three legal arguments that the Court lacked subject-matter jurisdiction over the organization's constitutional claim. First, the IRS argued that the Anti-Injunction Act (“AIA”), 26 U.S.C. § 7421 (2013), precluded the Court from exercising jurisdiction. Second, it asserted that the Court could not grant the relief sought by the organization under the Declaratory Judgment Act (“DJA”), 28 U.S.C. § 2201 (2013). Finally, the IRS argued that Z Street's complaint was barred by the doctrine of sovereign immunity. In addition, the IRS asserted that Z Street failed to state a claim upon which relief can be granted because the organization has an adequate remedy at law (namely, 26 U.S.C. §7428), thereby foreclosing the equitable relief that it sought. Because the Court rejected the IRS's "core contention" that Z Street sought a determination on its eligibility for Section 501(c)(3) tax-exempt status, the Court rejected the IRS's assertions that the AIA, the DJA, or sovereign immunity barred the organization's request for equitable relief and that Z Street had an adequate remedy at law.
With respect to the remedies sought by Z Street, Judge Ketanji Brown specifically acknowledged:
In this regard, looking at the requested remedy as the D.C. Circuit requires, Z Street’s complaint requests only two things: (1) a declaration that the Israel Special Policy violates the First Amendment, and (2) an injunction that requires disclosure of information regarding the Israel Special Policy, bars the IRS from subjecting Z Street’s application for Section 501(c)(3) status to the Israel Special Policy, and that mandates that Z Street’s application be adjudicated “fairly” and “expeditiously.”
In the opinion's conclusion, Judge Brown opines:
Defendant [IRS] struggles mightily to transform a lawsuit that clearly challenges the constitutionality of the process that the IRS allegedly employs when it determines the tax-exempt status of certain organizations into a dispute over tax liability as a means of attempting to thwart this action's advancement,” Jackson said. “But the instant complaint, which in no way seeks an assessment of the taxes to be paid or even a determination of the Plaintiff's Section 501(c)(3) status, is not so easily deterred.
(Hat tip: Daily Tax Report)
The IRS Tax-Exempt and Government Entities Advisory Committee will hold a public meeting on June 11, 2014 with respect to significant issues affecting such entities. Per the May 28th Federal Register notice, the meeting will be held from 9:30 to 11:30 a.m. in the main IRS building on 1111 Constitution Avenue., N.W. , Washington, D.C., Room 3313.
Issues to be addressed include:
- Preapproved and determination letter programs;
- Unrelated business income tax compliance of colleges and universities;
- Government employees and the Affordable Care Act;
- IRS tribal consultation and compliance audit improvements; and
- Tax-exempt bonds and increased reliance on the facts-and-circumstances test to analyze management contracts.
Saturday, May 24, 2014
A regional Blue Cross and Blue Shield parent company is the defendant in a lawsuit alleging inappropriate retention of profits and excessive executive compensation, reports the Chicago Tribune. Here are some of the reported details:
Health Care Service Corp., a nonprofit mutual insurance company that operates Blue Cross and Blue Shield plans in Illinois, Texas, Oklahoma, New Mexico and Montana, is accused of breaching its contracts with members by accumulating excess profits of about $4.9 billion. Instead of disbursing that money to its health insurance members either through a paid dividend, reduced prescription drug costs or lower premiums, the company paid out nearly $100 million in bonuses to its top 10 executives from 2011 to 2013, according to the suit.
The complaint was filed Monday by Babbitt Municipalities Inc., a Chicago-based benefits administration company that conducts business as Group Benefits Associates and works primarily with labor unions. It seeks certification as a class action that would include all policyholders in HCSC’s fully insured business, which totaled about 8.5 million members as of Dec. 31.
Friday, May 23, 2014
The Detroit Free Press reports that the Michigan House of Representatives, in a bipartisan 103-7 vote, has approved legislation to help lift the City of Detroit from bankruptcy. The main bill is reported to specify conditions to the $194.8 million the State of Michigan could give Detroit to ameliorate reductions in pension benefits and to preserve holdings at the Detroit Institute of Arts. The role of nonprofits in the bailout is explained as follows:
The state’s contribution is part of a so-called grand bargain that will be combined with $366 million pledged from charitable foundations and $100 million from the Detroit Institute of Arts. The money is designed to ease the cuts for pensioners and retirees and protect the artwork at the Detroit Institute of Art[s] from sale.