Monday, February 22, 2016
The Association for Research on Nonprofit Organizations and Voluntary Action (ARNOVA) and the Nonprofit Policy Forum have just published a special issue on nonprofit organizations and public policy. Here is the content:
Friday, February 19, 2016
The San Antonio City Council plans to privatize its Convention & Visitors Bureau by creating a new nonprofit to house the operations currently conducted by a governmental agency. The plan is that this restructuring will allow the CVB to increase its budget by leveraging additional funding sources from the private sector (including “corporate sponsors, memberships, partnerships and advertising dollars”), which would allow it to be more competitive in its spending relative to other Texas cities.
According to press reports, the Council has not yet finalized the structure of the governing board. Options include having representatives of the council and the mayor’s office sit on the board alongside representatives from the tourism and business community, and/or having board members voted upon by the city council. Although having publicly-appointed and publicly–affiliated board members running a nominal nonprofit is hardly unique to San Antonio, these public-private nonprofit hybrids don’t fit neatly into either public or nonprofit legal regimes. As a result, it is often unclear whether quasi-governmental organizations must comply with state public record laws, which vary from state to state. (See, for example, the Texas Supreme Court’s 2015 decision regarding the Greater Houston Partnership.)
Moreover, what are the specific fiduciary obligations of board members who are city council members, or who are appointed (and, in many cases, removable by) city councils or mayors? One easy answer might be that all nonprofit directors share identical fiduciary duties to the organization; however, expecting city councilmembers and their representatives to abandon their political perspectives may not be realistic, and arguably would run counter to the very purpose of structuring the board to include city councilmembers. One solution would be for the City to clarify these rules through the process of creating the organization.
PS I’m new to the blog, and thrilled to be joining such a great line-up. I’m in my second year of academia as an Assistant Professor at Cleveland State University, where I have the fortune of holding a joint appointment with the Cleveland-Marshall College of Law and with the nonprofit management and public administration programs at the Maxine Goodman Levin College of Urban Affairs. My research interests include legal issues of volunteering, questions of board governance, and Constitutional rights of nonprofits, with a particular attention to how legal rules change behavior of nonprofit actors. I also continue to practice law from time to time, advising nonprofits and litigating matters pro bono. I’m happy to be on the team.
Monday, February 15, 2016
In Palmer Ranch v. Comm’r, _ F.3d _ (11th Cir. 2016), the 11th Circuit held that the Tax Court’s valuation of a conservation easement in Palmer Ranch v. Comm'r, T.C. Memo 2014-79, was appropriate in some respects and inappropriate in others. Accordingly, the 11th Circuit affirmed the Tax Court’s decision in part and reversed and remanded in part. The opinion is entertaining, having been written with a certain flair by Judge Goldberg of the U.S. Court of International Trade, sitting by designation on a panel with two 11th Circuit judges.
As background, the 11th Circuit explained that:
- the value of a conservation easement for deduction purposes is generally equal to the difference between the fair market value of the subject property before the easement donation (the before-value) and the fair market value of the subject property after the easement donation (the after-value);
- a parcel’s before-value is based on the parcel’s highest and best use (HBU) before the easement’s conveyance, which is the “reasonable and probable use that supports the highest present value” or “the highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future”; and
- one method of valuing a parcel once its before-easement HBU is determined is through the use of the "comparable-sales method," which entails considering sales of similarly situated parcels.
In 2006, Palmer Ranch Holdings (a partnership) donated to Sarasota County, Florida, a conservation easement with regard to an 82.19-acre parcel of land located in the county (the B-10 parcel). Palmer Ranch made this “altruistic” donation after having failed in its attempt to rezone the B-10 parcel and the adjacent B-9 parcel for multifamily residential development. Palmer Ranch claimed a federal charitable income deduction of $23.9 million for the donation under IRC § 170(h) and the IRS objected, claiming that the easement had a value of only $6.9 million.
In Palmer Ranch v. Comm'r, T.C. Memo 2014-79, the Tax Court held that Palmer Ranch was entitled to a deduction of $19.9 million for the easement donation. While the Tax Court agreed with Palmer Ranch that the HBU of the B–10 parcel before the donation was a 360-mutlifamily unit development configured to protect the eagle’s nest and other environmentally sensitive areas on the parcel, it determined that the before-value of the B-10 parcel was just over $21 million, not just over $25 million as had been posited by Palmer Ranch.
Unhappy with the Tax Court’s reduction of its claimed deduction by almost $4 million, Palmer Ranch appealed to the 11th Circuit.
IRS’s Arguments on Appeal
On appeal, the IRS argued that the Tax Court had erred because (i) contrary to the Tax Court's finding, rezoning of the B-10 parcel to permit the hypothesized 360-unit development was not “reasonably probable,” (ii) the Tax Court failed to address whether the 360-unit development was “needed or likely to be needed in the reasonably near future,” and (ii) the Tax Court failed to consider that a willing buyer of the B-10 parcel would discount the price because of the failed rezoning history. The 11th Circuit disagreed.
(i) “Reasonably Probable” Rezoning
The 11th Circuit agreed with the Tax Court that, despite two failed rezoning attempts in the past, rezoning of the B-10 parcel to permit the hypothesized 360-unit development was “reasonably probable.” The 11th Circuit explained that, because the 360-unit development was configured to address the Board of County Commissioner’s previously expressed environmental concerns, the rezoning history suggested that the rezoning would be approved.
(ii) Development “Needed or Likely to be Needed in the Reasonably Near Future”
While the 11th Circuit agreed that the Tax Court had failed to address whether the hypothetical 360–unit development was “needed or likely to be needed in the reasonably near future,” it found that failure to be a harmless error under the circumstances.
The 11th Circuit first explained that the Tax Court had inappropriately confined its HBU analysis to consideration of whether the Board of County Commissioners would approve the rezoning; the Tax Court should have gone a step further and considered whether, assuming rezoning, a developer would perceive enough demand for the proposed 360 housing units to actually break ground. The 11th Circuit pointed to Esgar Corp. v. Comm’r, 744 F.3d 648 (10th Cir. 2014), in which the 10th Circuit held that, just because the properties at issue could be rezoned for gravel mining did not mean that gravel mining was the properties’ HBU. Determining a properties’ HBU also necessitates a look at market demand, and, at the time of the easement donations in Esgar, there was no demand for gravel from the properties and no evidence that this was likely to change in the reasonably foreseeable future.
The 11th Circuit then determined that the Tax Court’s failure to undertake a “market-demand inquiry” in Palmer Ranch was harmless because, at the time of the easement’s donation, the market for development of the type proposed for the B-10 parcel was “bullish.”
(iii) Discounting for the Costs, Time, and Risks Associated with Rezoning
The IRS argued that hypothetical buyers of the B-10 parcel would glean from the failed rezoning history a risk that the parcel could not be developed as proposed and would discount the purchase price accordingly. The 11th Circuit rejected this argument, explaining that “the test for highest and best use already bakes in some adjustment for development risk” and “from the vantage of 2006, there was substantially no risk that B–10 would not be developed [as proposed] in the near future.” “No risk,” said the court, “means no reason for a risk-based discount.”
The 11th Circuit's analysis of this point was incomplete. As explained in my forthcoming article, Conservation Easements and the Valuation Conundrum, even if it is determined that rezoning of a property is “reasonably probable,” appraisal sources indicate that under no circumstances should the property be valued as if it were already rezoned. The risk of being denied rezoning, or that an exaction or other condition may be placed on the rezoning, always exists and must be taken into account. In addition, the time delay and costs associated with the rezoning process must also be considered. Rezoning of the B-10 parcel would have involved a multi-step process: (i) a preapplication meeting with County staff, (ii) a neighborhood workshop, (iii) submitting of applications to the County for staff review, (iv) public hearings by the planning commission, (v) a public hearing by the Board of County Commissioners, and (vi) possible judicial review. Accordingly, even though the 11th Circuit concluded that the risk of being denied rezoning of the B-10 parcel was negligible (that such risk was “baked into” the test for HBU), the possibility that an exaction or other condition might have been placed on the rezoning, as well as the time delay and costs associated with the rezoning process should also have been considered. A willing buyer considering purchase of the B-10 parcel in its not-yet-rezoned state would have taken those factors into account and likely discounted the purchase price of the B-10 parcel as a result.
In addition, appraisal sources further instruct that finding true comparable sales in the reasonable-probability-of-rezoning context is difficult. Developers interested in purchasing property for development typically condition their purchases on procurement of the necessary rezoning approvals. If the approvals are not obtained, the sales generally do not take place. Accordingly, sales of properties that have sold for development generally do not represent the price at which the property would have sold if the purchaser had to procure rezoning after the date of closing. Instead, such sales represent the price of a property with the rezoning approval already in place. Although appraisers must often resort to using such sales as comparables, it is essential that they make appropriate adjustments to account for the risks, time delays, and costs inherent in the rezoning procurement process. That neither the Tax Court nor the 11th Circuit discussed this issue with regard to the comparables gives the reader less confidence in their conclusions regarding the before-value of the not-yet-rezoned B-10 parcel.
Palmer Ranch’s Arguments on Appeal
On appeal, Palmer Ranch argued that the Tax Court erred in reducing the B-10 parcel’s before-value from just over $25 million to just over $21 million. In particular, Palmer Ranch argued that (i) once the Tax Court had rejected the “lowball” HBU asserted by the IRS’s valuation expert in his appraisal, the court was bound to adopt Palmer Ranch’s expert’s valuation without entertaining any reduction, (ii) the Tax Court erred by “concoct[ing] sua sponte” a valuation method that was advanced by neither party and contrary to established comparable-sales appraisal principles, (iii) the Tax Court impermissibly ventured beyond the evidentiary record in its discussion of monthly appreciation rates, and (iv) the Tax Court erred “in finding that there was no appreciation throughout 2006” and, in any case, incorrectly calculated the amount of pre-2006 appreciation.
The 11th Circuit rejected Palmer Ranch’s first contention—that the Tax Court was bound to adopt Palmer Ranch's expert’s valuation once it had rejected the IRS expert’s lowball HBU. The 11th Circuit explained that, in deduction cases, the Tax Court is not bound to accept the taxpayer’s valuation in full merely because the IRS’s valuation is unsatisfactory. Rather, the Tax Court may determine its own valuation based on the whole of the evidentiary record and it is free to treat the work of the taxpayer’s expert as a starting point. The 11th Circuit further explained in a footnote:
To be as clear as the Sarasota sky, we do not hold that the tax court is obligated to use the comparable-sales method to value B–10 ... we recognize the tax court’s expertise in adjudicating tax disputes, and therefore will not lay down a hardline rule confining the tax court to the parties’ preferred appraisal method(s) in every case. The tax court has discretion to adopt a valuation method befitting the matter before it—even if the parties have not proposed that method.
The 11th Circuit, however, agreed with Palmer Ranch’s other contentions regarding errors made by the Tax Court. First, the 11th Circuit explained that the Tax Court’s $21 million before-value for the B-10 parcel
was premised on an old appraisal as modified by monthly appreciation rates, instead of on comparable sales.… Because the parties’ appraisers both used the comparable-sales method, and because the tax court neither voiced disapproval nor acknowledged (much less explained) its departure from the method, that departure was error. The tax court must at minimum explain why it departed from the comparable-sales method in valuing B–10.
The 11th Circuit then explained that, even if the Tax Court’s unexplained departure from the comparable-sales method was proper, the Tax Court still erred by relying on evidence outside the record to value B–10. In particular, in choosing a monthly appreciation rate the Tax Court relied upon an old appraisal report that was not in the evidentiary record. The 11th Circuit explained that a “trial judge may not ... undertake an independent mission of finding facts ‘outside the record of a bench trial over which he [presides].’” Lastly, the 11th Circuit found that the Tax Court seems to have erred in how it applied its chosen monthly appreciation rate (it may have made a mathematical error).
The 11th Circuit ultimately concluded that,
[o]n remand, …the tax court must either stick with the comparable-sales analysis or explain its departure. Whatever the tax court chooses to do, the court must keep its sights set strictly on the evidentiary record for purposes of selecting an appreciation rate, and ensure that it crunches the numbers correctly.
Contrary to some of the commentary on the case, the 11th Circuit did not find that Palmer Ranch’s asserted $25 million before-value for the B-10 parcel was correct. Rather, the court specifically noted that “[o]ur holding in no way precludes the tax court from valuing B-10 below” that amount, provided the valuation is based on the evidence.
A Final Issue—Enhancement
In addition to not addressing all of the factors that might have impacted the before-value of the B-10 parcel, another troubling aspect of Palmer Ranch is the seeming lack of analysis regarding whether the easement donation increased the value of Palmer Ranch’s other property. At the time of the donation of the easement, Palmer Ranch reportedly owned a 39-acre parcel “immediately to the north of” the B-10 parcel (the B-9 parcel). If the B-9 parcel was contiguous to the B-10 parcel, the deduction should have been equal to the difference between the fair market value of the entire contiguous parcel (B-9 and B-10) before and after the donation of the easement. See Treas. Reg. § 1.170A-14((h)(3)(i). If the B-9 parcel was not contiguous to the B-10 parcel, the deduction should have been reduced by the amount (if any) by which the donation of the easement increased the value of the B-9 parcel. See id. It is impossible to tell from the court opinions whether donating the easement on the B-10 parcel increased the value of the B-9 parcel. It certainly might have, since people are often willing to pay more to live adjacent to or near permanently protected open space. And if it did, the deduction should have been reduced accordingly.
In a February 22, 2016, Daily Business Review article discussing the case, the reporter notes that Hugh Culverhouse, Jr., who owns Palmer Ranch, is "finalizing a deal to sell the adjoining 38-acre parcel. Coming soon: 36 single-family homes with a view." This suggests that donating the easement on the B-10 parcel may indeed have increased the value of the B-9 parcel.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Saturday, February 13, 2016
I recently participated in the "Mega IP Fiesta" at VIT Law School, Chennai, India, where I gave a talk titled "Copyright & Cultural Production." It was my first visit to India, and all too brief! In any case, I had a wonderful experience at the conference, and greatly enjoyed meeting many Indian judges, law professors, lawyers, and law students. I also taught a 90 minute class, introducing about 100 first and second year Indian law students to United States copyright law. The students were remarkably attentive and asked surprisingly detailed questions. In particular, I was struck by their tendency to present me with very specific hypotheticals.
Fortuitously, the American Journal of Legal History had just released its "Editor's Choice Collection" of a dozen classic papers from its archive, including "Professor Kingsfield Goes to Delhi: American Academics, the Ford Foundation, and the Development of Legal Education in India" by Jayanth K. Krishnan. The article is also available on SSRN. Here is the abstract:
On January 26, 1950 the Constitution of India came into effect. Nearly two and one-half years after winning independence from Britain, India enacted one of the most detailed, rights-based constitutions ever seen in the history of the world. The passage of such a democratic constitution was inspirational - not just for a country that endured centuries' of both informal and formal colonial rule, but also for those in the West. Many American observers, in particular, looked upon with awe as this economically poor, yet fiercely independent nation sought to embrace political and legal principles that had long been valued within the United States. The Ford Foundation - one of the world's leading philanthropic institutions based in the U.S. - soon also became infatuated with the promise and overall idea of India. For Ford, India exhibited great potential: its political and military leaders opted for democracy rather than dictatorship; its first prime minister, Jawaharlal Nehru, was a dynamic, Western-educated figure committed to economic development and modernization; and it retained English as a main national language, thereby giving Americans, who so desired, a better opportunity to work more easily within the country. For these and as we shall see other reasons, the Ford Foundation began to take a serious interest in India.
One area that Ford especially focused on involved the development of legal education. Policymakers at Ford Headquarters in New York as well as at Ford's New Delhi office believed that for Indian democracy to succeed, the country needed to have well-established, rule-based institutions administered by those educated in the legal principles of equity, due process, and individual rights. These officials consulted with a number of Indian legal elites, several of whom had studied in the United States, and together these Americans and Indians concluded that law schools in India would be the ideal place to promote such legal principles. After all, having Indians educated in Western legal doctrine was critical for maintaining Weberian, democratic institutions; and the hope was that this in turn would lead to greater public respect for the rule of law.
Beginning in the 1950s, Ford thus began spending millions of dollars and decades of energy working with Indians to create strong schools of law. One of the first steps Ford took in its initiative was to hire a number of respected American law professors as consultants. These academics were charged with traveling to India, assessing the legal educational environment, and providing recommendations to both Ford and the government of India for how to improve the country's legal education system. Given that many of India's elite had routinely praised the American law school model, Ford worked under the reasonable assumption that U.S. academics would be in the best position to advise their Indian counterparts.
As I will discuss, however, this assumption proved at best to be questionable. To date, no work has presented the views of the academic consultants hired by Ford. For decades these reports were confidential and the consultants were equally reluctant to talk about their opinions. But perhaps because enough time has passed and Ford's involvement in this area has waned, I was granted access to all of Ford's documents on legal education in India. I also was able to interview key American scholars who served as advisors to Ford. In this study I trace the role American academics played in shaping Indian legal education. As I show, the belief held by both Ford and its Indian partners that the American law school model could successfully be exported to India soon came to be rejected by many of these U.S. professor-consultants. A consensus developed among these American academics that India's distinctive history, traditions, and legal profession - not to mention its economic struggles and political climate - would make it difficult for the American law school model to thrive in this environment. And to their surprise, these consultants found that Indian legal scholars, who were not affiliated with Ford, had their own innovative ideas on how to improve the country's legal education system.
I found that the article exceptionally interesting, both as an account of the gradual development of Indian legal education into the model I saw on my visit, and as a reflection on the role that United States charitable foundations played in those developments.
Brian L. Frye
The ABA Business Law Section is soliciting nominations for its 2016 Outstanding Nonprofit Lawyer Awards, in the following categories: Academic, Attorney (outside counsel), Nonprofit In-House Counsel, and Young Attorney (under 35 years old or in practice for less than 10 years). Nominations are due by March 14, 2016. The full announcement is below:
Seeking Nominations for the
2016 Outstanding Nonprofit Lawyer Awards
WASHINGTON, D.C.—February 8, 2016: The Committee on Nonprofit Organizations of the American Bar Association’s Business Law Section is calling for nominations for the “2016 Outstanding Nonprofit Lawyer Awards.” The Committee presents the Awards annually to outstanding lawyers in the categories of Academic, Attorney (outside counsel), Nonprofit In-House Counsel, and Young Attorney (under 35 years old or in practice for less than 10 years). The Committee will also bestow its Vanguard Award for lifetime commitment or achievement on a leading legal practitioner in the nonprofit field. Nominations are due by March 14, 2016.
For a nomination form, please go to the Nonprofit Lawyer Awards Subcommittee's webpage and scroll down to the bottom under "Nonprofit Lawyer Awards Documents," or you may request a form by contacting the Subcommittee’s chairman, William Klimon. You will also find a list of prior award recipients on the Subcommittee’s webpage. The Awards will be announced at the Business Law Section's Spring Meeting in April and the formal presentations will be made at the Business Law Section's Annual Meeting
Send nomination forms by March 14, 2016 to:
William M. Klimon
Caplin & Drysdale, Chartered
One Thomas Circle, N.W.
Washington, D.C. 20005-5894
(202) 429-3301 (fax)
Brian L. Frye
Thursday, February 4, 2016
David Cay Johnston (Syracuse) published " Was Involvement of Private Foundation in Trump Event Illegal?" in the February 1st 1edition of TaxAnalysts:
Did Donald Trump violate the law January 28 by involving his private foundation in his campaign for the Republican presidential nomination?
Maybe -- and maybe not, according to three practitioners specializing in the nexus of tax and nonprofit law. But all agreed that Trump's actions put front and center why Congress needs to take a serious look at the growing connections between the charitable world and partisan politics, with a focus on what will make for sound policy.
Trump clearly used the charitable foundation under his control to further his campaign for the White House. But that may not be illegal.
Other politicians -- including the Clintons, the Kennedys, and the Rockefellers -- have or had foundations that they control. However, the politicians in those families did not hold campaign rallies to raise money for their charities while running for office.
Still, the existence of those foundations has sometimes led to controversy. The receipt of gifts to the Clinton Foundation, especially from foreign governments when Democratic presidential candidate Hillary Clinton was secretary of state, has drawn sharp rebuke from some Republicans and calls for an investigation.
(Hat tip: TaxProfBlog)
Mecox v. U.S—District Court Denies Deduction for Façade Easement Donation; Deed Recorded in Wrong Year and Appraisal Untimely
In Mecox Partners LP v. U.S., _ F. Supp. _ (S.D.N.Y. 2016), the U.S. District Court in the Southern District of New York sustained the IRS’s complete disallowance of a $2.21 million deduction that Mecox claimed with regard to a façade easement donated to the National Architectural Trust (NAT). The court determined that the easement had not been contributed in the year for which Mecox claimed the deduction and the appraisal Mecox obtained to substantiate the deduction was untimely. The building subject to the façade easement is a certified historic structure located on Jane Street in New York’s Greenwich Village Historic District.
A representative of each of Mecox and NAT signed the façade easement in December 2004 and Mecox claimed a $2.21 million deduction for the donation on its 2004 partnership tax return. However, the easement was not recorded until November 17th, 2005, almost one year later. The IRS disallowed the claimed deduction in full, arguing that (i) the contribution was not made until 2005, the year in which the easement was recorded, and (ii) the appraisal was not timely because it was made more than 60 days before the date of the contribution in violation of Treasury Regulation § 1.170A-13(c)(3)(i). The District Court held for the IRS on both counts.
Contribution Not Made Until Easement Recorded
The District Court found that, as a matter of law, Mecox had not made a charitable contribution of the façade easement in 2004 because the easement was not effective until it was recorded in November 2005. The court first noted the fundamental principle that “[i]n a federal tax controversy, state law governs the taxpayer’s interest in the property while federal law determines the tax consequences of that interest.” The court then explained that, under New York law, an instrument purporting to create a conservation easement is not effective unless it is recorded. See N.Y. Envt'l Conservation Law § 49-0305(4) ("An instrument for the purpose of creating ... a conservation easement shall not be effective unless recorded"). The court further explained
although “[o]rdinarily, a contribution is made at the time delivery is effected,” ... the Deed of Easement had no legal effect when Mecox delivered it to the NAT in 2004. It was not until the Deed was recorded the following year that the Deed became effective, and the Easement was conveyed. Consequently, Mecox erred in taking a deduction for a qualified conservation contribution in 2004.
In support of this holding the District Court referenced two earlier cases involving façade easements donated to NAT with respect to New York properties: Zarlengo v. Comm’r and Rothman v. Comm’r. In each case, the Tax Court determined that the contribution date was the recordation date, not the date on which the easement was signed by the donor and NAT.
The District Court further explained in a footnote that:
Even if the Court were to accept that the contribution date of the Easement was the delivery date of the Deed, regardless of whether the Deed was effective at that point, the Easement still did not satisfy the Code’s definition of a “qualified conservation contribution” … until 2005. This is because a “qualified conservation contribution” must be made “exclusively for conservation purposes.” … This means that the contribution must be “protected in perpetuity,” … and thus “subject to legally enforceable restrictions,” …. But the Easement contribution was not even effective between the parties until it was recorded. Therefore, regardless of when the Easement is considered to have been contributed, the Easement did not meet the [Internal Revenue] Code’s substantive requirements of what constitutes a “qualified conservation contribution” until the Deed of Easement was recorded in 2005.
The District Court’s holding is consistent with the IRS’s position on recordation set forth in the Conservation Easement Audit Techniques Guide. The Guide instructs that the complete deed of conservation easement (including all exhibits or attachments, such as a description of the easement restrictions, diagrams, and lender agreements) must be recorded in the appropriate recordation office in the county where the property is located and, under state law, an easement is not enforceable in perpetuity before it is recorded. The Guide further instructs that the effective date of the gift is the recording date.
Mecox’s Alternative Arguments
Mecox argued in the alternative that, because the easement did not specifically reference the New York conservation easement enabling statute, that statute did not apply and the easement was a common law restrictive covenant that does not require recordation to be effective. The court dismissed that argument, finding that there was “no question” that the easement fell under the New York enabling statute’s definition of a conservation easement. The court explained that the deed repeatedly employed the term “conservation easement,” the deed satisfied the terms of the enabling statute, and the easement described in the deed “fits squarely” within the enabling statute’s definition of a conservation easement. The court noted that nothing in the New York enabling statute suggests that the statute must be explicitly referenced by name in order for the statute to apply. The court also was not aware of a single case in which a conservation easement that satisfied the terms of the enabling statute was interpreted as a common law restrictive covenant. The court concluded that the façade easement reflected “an unambiguous intent by the parties to create a conservation easement, as defined by [New York’s enabling statute]… and… Mecox’s after-the-fact, subjective claims to the contrary are immaterial."
Mecox also argued that, even if the New York conservation easement enabling statute applied to the façade easement, recordation was not required for the easement conveyance to be effective—i.e., recordation was required only for the easement to be effective against subsequent purchasers of the subject property. The court dismissed this argument as well, noting that such an interpretation was in direct contradiction to the plain text of the enabling statute, which states, without qualification, that (i) “a conservation easement shall be duly recorded” and (ii) an unrecorded conservation easement “shall not be effective.” See N.Y. Envt'l Conservation Law § 49-0305(4). The court explained that conservation easements in New York are subject to special rules, which include, among other things, the benefit of certain defenses not granted to common law easements and a requirement that the conveyance be recorded to be effective.
Even in states other than New York, the donor of a façade (or conservation) easement should see to it that the easement is recorded in the year in which the donor intends to claim the donation was made. Absent recordation of an easement, a purchaser of the subject property who records the purchase deed will generally take the property free of the easement. Thus, until recordation, the property generally will not be “subject to legally enforceable restrictions” as required by Treasury Regulation 1.170A-14(g)(1), and the conservation purpose of the contribution will not be “protected in perpetuity” as required by Internal Revenue Code § 170(h)(5)(A). See Zarlengo v. Comm’r. Cf. Gorra v. Comm’r (façade easement delivered to recorder’s office on December 28, 2006, but not recorded until January 18, 2007, was deemed recorded in 2006; under N.Y. Real Prop. Law § 317, delivery of the deed to the recorder’s office, with receipt acknowledged, constituted recordation, even though there was a delay in the actual recording until the following year because of a cover sheet error).
The date on which an easement contribution is deemed to have been made is also relevant for purposes of ensuring that the appraisal obtained to substantiate the deduction is timely.
To substantiate the value of a conservation easement for purposes of the federal charitable income deduction, the taxpayer must obtain a “qualified appraisal” of the easement prepared by a “qualified appraiser” no earlier than 60 days before the contribution date of the easement and no later than the extended due date of the tax return claiming the deduction. See Treasury Regulation § 1.170A-13(c)(3). In Mecox, the appraisal of the easement was dated June 13, 2005, and it stated that the value of the easement as of November 1, 2004, was $2.21 million. The court found that the appraisal was “conducted” on June 13, 2005, and the façade easement was not contributed until November 17, 2005, the date on which it was recorded (5 months later). Accordingly, the appraisal “took place” more than 60 days before the contribution date of the easement, and Mecox thus failed to satisfy the substantiation requirements for the deduction.
Mecox is yet another in a line of cases involving challenges to deductions claimed with regard to façade easements donated to NAT:
- Herman v. Comm'r
- 1982 East LLC v. Comm'r
- Dunlap v. Comm'r
- Rothman v. Comm'r
- Graev v. Comm'r
- Friedberg v. Comm'r
- Kaufman v. Comm'r
- Gorra v. Comm'r
- 61 York Acquisition v. Comm'r
- Chandler v. Comm'r
- Scheidelman v. Comm'r
- Zarlengo v. Comm'r
- Reisner v. Comm'r
NAT also was the subject of a 2011 Department of Justice lawsuit (discussed here) alleging that NAT was engaged in abusive practices. The suit settled with NAT denying the allegations but agreeing to a permanent injunction prohibiting it from engaging in the practices.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Wednesday, February 3, 2016
As reported by CBS News in its three-part investigation, The Wounded Warrior Project is being criticized for the amount it actually spends on projects that benefit veterans, for which the charity has raised nearly a billion dollars since 2003. As many as 40 former employees were interviewed by CBS News and roundly criticized the Project for wasteful spending practices and not living up to its mission of serving the needs of veterans. For example, since the current CEO took office in 2009, the Project's conferences and meetings expenditures increased from $1.7 million in 2010 to $26 million in 2014. Although the Project claims its spends 80% of their donations on veterans' programs, only 54% to 60% of such funds actually reach wounded service members after promotional items, advertising and shipping/postage costs are subtracted, according to CBS News. In 2014, the CEO was paid $496,415, which is not out of line with similarly-sized charities according to the news report. In addition, the charity has a large $248 million surplus, which CharityWatch, a charity evaluator, argues should be spent more on veterans programs. Because of these findings, Charity Navigator, another independent charity evaluator, placed the Project on its Watchlist.
The Project has objected to the findings, posting a statement to its website referring to CBSNews's "false news reports" and, according to the above news reports, is a vocal critic of charity evaluators like CharityWatch and Charity Navigator. According to The Washington Post, the Project has promised a "thorough financial and policy review."
Kadir Nagac (Zirve University, Department of Economics) has posted "Religiosity and Tax Compliance" to SSRN:
The intention of this paper is to analyze religiosity as a factor that potentially affects tax compliance. Studies in the 90s have shown that the puzzle of tax compliance is "why so many individuals pay their taxes" and not "why people evade taxes". It has been noted that compliance cannot be explained entirely by the level of enforcement (Graetz and Wilde, 1985; Efflers, 1991). Countries set the levels of audit and penalty so low that most individuals would evade taxes, if they were rational, because it is unlikely that cheaters will be caught and penalized. Nevertheless, a high degree of compliance is observed. Therefore, studies that analyze a variety of factors other than detection and punishment are need. Religiosity can play an important role in determining one's tax compliance decision. I use religious adherence data from the American Religious Data Archive and reported income data from IRS to analyze independent effects of church adherence rates on tax compliance in the United States at the county-level. Tax compliance at the county-level is measured as discrepancy in reported income between IRS data and census data. Existing studies focus on effect of religiosity on tax fraud acceptability (tax morale), not the actual tax fraud or tax compliance behavior. To writer's knowledge, this study is the first study that analyzes the effect of religiosity on actual tax compliance behavior.
(Hat tip: TaxProfBlog)
As published in the Daily Tax Report, at the ABA Tax Section meeting last week, Andrew Morton, a partner at Handler Thayer LLP, opined that a good number of "high-profile charitable foundations" need substantially more oversight and legal assistance than they are currently receiving. He clarified that the neglect of these organizations is not malicious or deliberate: "Not because they are deliberately trying to manipulate the system, not because they're trying to do anything wrong, they just don't know. They don't get that a nonprofit is a corporation … it's a real thing. You have to take care of it.” He explained that most of the problems that arise with such celebrity-affiliated foundations are due to a lack of written policies, such as conflict-of-interest and whistle-blower situations, and the lack of reporting those policies on the foundations' annual Forms 990. In addition, these foundations are typically not aware of charitable registration requirements, which are governed by the states: “501(c)(3) is an adjective—not a noun. You don't have a 501(c)(3). You have a state nonprofit corporation, which has been conferred tax-exempt status from the federal government,” he explained. “There are 51 jurisdictions that require compliance for nonprofits. The federal government has their requirements, but every state has a different landscape.”
John George Archer (Law Student, Mississippi) has posted "This SOX: Combating Public Charity Fraud with Sarbanes-Oxley" to SSRN:
In the wake of the corporate scandals of the Enron era, Congress delivered the Sarbanes-Oxley Act (SOX) to bolster confidence in our nation’s financial system. To save the system and protect the investing public from corporate abusers, Congress created a capable “toolkit” within SOX to fight fraud and enhance disclosure. Sarbanes-Oxley has been effective in stemming the tide of corporate malfeasance. Currently, only for-profit, publicly traded companies are subject to SOX. But corporate fraud does not stop at the door of the nonprofit world. Fraud within nonprofit corporations is a widespread problem, and nonprofits – particularly large public charities – share many similarities (the good and the bad) with their for-profit cousins. By drawing a parallel comparison between large public charities and publicly traded companies, this Article makes the case that the strong governance principles encapsulated by Sarbanes-Oxley should also be imposed on large public charities.
While others have either argued against applying SOX to nonprofits or have cautiously advocated this approach because of the diverse and varying missions of nonprofits, this article particularly singles out large public charities and demonstrates that SOX is an ideal regulator for this group. While state governments and the IRS both engage in nonprofit regulation, the current regime suffers from a lack of resources and enforcement measures to be truly effective. This is where SOX can help. So much of what Sarbanes-Oxley accomplishes is self-reporting and a governance structure that promotes independence and transparency. Because of this, Sarbanes-Oxley is considered best practices for large entities, and is voluntarily followed by many public charities.
Extending SOX would not be as large a leap as previously imagined. The parallel to large public charities is this: there is a disconnect between the stakeholders of a nonprofit and its directors and management. Within this gap lies the great potential for abuse and fraud. The economic impact of the nonprofit sector upon the American economy is no small thing, much less its social impact. To protect this vulnerable system and combat nonprofit abuse, this Article contends that Congress should take notice of the problem and address it using the same “toolkit” it already created when it addressed fraud among publicly traded companies.
(University of Richmond - School of Law) recently posted her forthcoming article, Publicity Rules For Public Trusts, Cardozo Arts & Entertainment L. J., Vol. 33, 2015 to SSRN. Below is an abstract of Professor Tait's article:
That museums are public trusts is a truism in academic discourse and industry discussion. What various commentators mean when they speak about museums as public trusts, however, is less clear. This Article untangles and analyzes the various meanings of “public trust” and how these meanings translate into regulatory systems. I propose that two predominant meanings - the public resource and trust law meanings - jointly constitute the definition of a public trust, and that each meaning has a consequent regulatory framework. These definitional and regulatory frameworks coexist without conflict in most contexts. In the context of deaccessioning, however, they collide.
Deaccessioning - the practice of a museum selling art from its collection - is highly contested because it is perceived to be a significant violation of the public trust, in all meanings of the term. Nonetheless, public resource and trust law rules treat deaccessioning quite differently. Public resource rules, exemplified by industry standards and state statutes, strictly prohibit the use of deaccessioning funds for any purposes other than to purchase new art. Trust law rules, on the other hand, work primarily to ensure that the terms of organizational charters, trust instruments, and gift agreements are met. One goal of this Article is to identify and describe the public resource and trust law frameworks. A second goal is to leverage the debate surrounding deaccessioning as a means for discussing how the two frameworks compete and why the trust law framework, enhanced by the addition of corporate governance principles and grounded in “publicity” values, is preferable.
Alyssa A. DiRusso (Samford University - Cumberland School of Law) recently published, Euthanizing Small Charities: The Threat of Small Trust Termination Statutes, 45 Cumberland L. Rev. 475 (2015). Below is the abstract of Professor DiRusso's article:
With the widespread adoption of the Uniform Trust Code, many American states are enacting statutes that grant a trustee full discretion to terminate a trust on the sole ground that it has too little money to justify administrative expenses. This Article argues that there are two key costs of terminating small charities: depleting democracy in philanthropy and shrinking diversity in charitable focus. To support these claims of harm to democracy and diversity in charity, the Article reviews empirical evidence mined from tax returns: first, on disparity between charitable goals of the well-funded trust and the less-so, and second, on diversity of focus in smaller versus larger charities. The analysis reveals that smaller charities do tend to have different substantive primary goals than larger charities and that smaller charities do demonstrate more variety in focus than larger charities. We therefore may threaten democratic and diverse charity when terminating small charitable trusts, and ought to be reluctant to put our smaller charities to sleep.
Sunday, January 17, 2016
Route 231, LLC v. Comm’r – 4th Circuit Affirms Allocation of 97% of Tax Credits Generated by Conservation Donations to 1% Partner Was Disguised Sale
In Route 231, LLC v. Comm'r, __ F.3d _ (4th Cir. 2016), the 4th Circuit affirmed that Tax Court’s holding that a partnership’s transfer to a 1% partner of 97% of state tax credits generated by donations of conservation easements and land was a taxable disguised sale under IRC § 707. The 1% partner had contributed $3.8 million to the partnership and the partnership had treated the transaction as a capital contribution followed by an allocation of tax credits to the 1% partner. As in Route 231, LLC v Comm'r, T.C. Memo. 2014-30, the 4th Circuit found Virginia Historic Tax Credit Fund 2001 LP v. Comm'r, 639 F.3d 129 (4th Cir. 2011), to be on point and noted that IRC § 707 “prevents use of the partnership provisions to render nontaxable what would in substance have been a taxable exchange if it had not been ‘run through’ the partnership.”
The 4th Circuit rejected the partnership’s attempt to distinguish Virginia Historic on the ground that Virginia Historic involved sham partnerships that ceased to exist as soon as the credits were transferred, while Route 231 was a valid partnership with economic substance and the 1% partner remained a bona fide partner in that partnership. The 4th Circuit found that argument “misse[d] the mark” because IRC § 707 “applies by its plain terms to designated transactions between otherwise valid ongoing partnerships and their legitimate partners.” In other words, the disguised sales rules look to the bona fides of a particular transaction rather than the status of the participants to that transaction.
The 4th Circuit also affirmed the Tax Court’s holding that the disguised sale occurred in 2005 and, thus, the partnership had to report the $3.8 million as income on its 2005 federal tax return. The partnership sought to treat the $3.8 million as reportable income in 2006 because the IRS had not sought to have the income included on the partnership’s 2006 tax return and any changes to that return were barred by the statute of limitations. The 4th Circuit found none of the partnership’s arguments on the applicable tax year to be meritorious. The court seemed to find particularly annoying that the partnership had made an affirmative representation on its 2005 federal tax return that it received the $3.8 million in 2005. In holding that the partnership was bound by its representation on its 2005 return, the court explained:
"'[T]he duty of consistency not only reflects basic fairness, but also shows a proper regard for the administration of justice and the dignity of the law. The law should not be such a[n] idiot that it cannot prevent a taxpayer from changing the historical facts from year to year in order to escape a fair share of the burdens of maintaining our government. Our tax system depends upon self assessment and honesty, rather than upon hiding of the pea or forgetful [equivocation].'" (citation omitted)
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Wednesday, January 13, 2016
Under legislation that has passed both the New Jersey House and Senate, nonprofit hospitals with certain for-profit operations would keep their property tax exemptions but would be required to pay their host municipality. The legislation requires a payment of $2.50 per day per bed or $250/day for satellite facilities. The legislation awaits Governor Christie’s signature, but it is not clear if he will sign. See the bill text here and here, and additional information from the New Jersey center on nonprofits here. This development follows a recent decision by the New Jersey tax court revoking property tax exemption for a non-profit hospital due to the many for-profit uses of the hospital’s property.
RC (hat tip, Evelyn Brody).
Sunday, January 10, 2016
The Legal Education Committee of the American College of Trust and Estate Counsel requests proposals for a $20,000 grant to host an academic symposium on trust and estate law during the 2017-18 academic year.
The ACTEC Foundation Symposium is intended to be the premier academic symposium on trust and estate law in the United States. The goals of the symposium are to stimulate development of scholarly work in trust and estate law, bridge the gap between the academic community and practitioners, provide opportunities for junior academics to present papers and interact with more senior academics, provide an opportunity for trust and estate professors to interact with each other, involve academics from other disciplines in discussions of trust and estate topics, and strengthen ACTEC’s image as the leading organization for trust and estate lawyers, both practitioners and academics.
The grant associated with this RFP is contingent on approval by the ACTEC Foundation.
RFPs are due by Monday, May 2, 2016, and will be considered by the Symposium Subcommittee of the Legal Education Committee at ACTEC’s Summer Meeting in Boston in June 2016. Please submit RFPs (RFP content and guidelines are set forth below) to Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law, and Co-Chair, ACTEC Legal Education Committee, email@example.com. Electronic submissions are welcomed (subject line of email should read “ACTEC Symposium RFP”)
I. RFP Content
The RFP should provide the following information.
A. Theme. The theme of the symposium should be related to trust and estate law, defined to include any topic related to the gratuitous transfer of property (e.g., probate law, trust law, elder law, transfer tax law). A broad theme permits a wide range of papers and is more likely to be successful. Past themes have included Trust Law in the 21st Century (Cardozo 2005); Inheritance Law in the 21st Century (UCLA 2008); Philanthropy Law in the 21st Century (Chicago-Kent 2009); The Uniform Probate Code: Remaking of American Succession Law (Michigan 2011); and The Role of Federal Law in Private Wealth Transfer (Vanderbilt 2014). The theme of the most recent symposium, which took place at Boston College Law School in October 2015, was The Centennial of the Estate Tax: Perspectives and Recommendations (articles will be published in the Boston College Law Review May 2016 symposium edition).
In connection with identifying a theme for the symposium, the RFP should indicate the types of topics that might be presented. Actual topics may depend, in part, on paper proposals but it will be helpful for the RFP to illustrate the scope of the theme.
B. Host Law School and Faculty Member(s). The proposal should identify the law school that will host the symposium and one or two faculty members at the host school who agree to manage the logistics of the symposium. The faculty member(s) proposing the symposium will need to make all the arrangements with the law school, the law review or journal, and the speakers.
C. Publication. Symposium papers must be published so the exchange of ideas can be shared beyond those who are able to attend the symposium. An important part of the RFP is a commitment, to the extent possible, from a law review at the host school to publish the papers as a symposium issue. The law review can be either the primary journal or a secondary journal at the host law school. The Legal Education Committee is aware of the difficulty of obtaining a commitment from a journal board to publish papers in an issue that will be managed by another board and is open to whatever strategies may work.
II. Guidelines for the Symposium
The Legal Education Committee has developed guidelines for the symposia and the host faculty should plan to follow these guidelines, with discretion with respect to details. Guidelines regarding various aspects of the symposia will be provided to the grant recipient, but the key items the proposed host should be aware of before submitting an RFP are set forth below.
A. Call for Papers. After the host law school is selected, the faculty member managing the symposium will issue a call for papers. The faculty member may want to secure commitments for papers from a few speakers first, and the call for papers need not be for all papers, but the call for papers should be used to determine a substantial number of the presenters. The Legal Education Committee can assist in circulating the call for papers, to help make the process as wide a call as possible.
The faculty member managing the symposium, in consultation with the Symposium Subcommittee (consisting of several members of the Legal Education Committee), will choose the presenters based, in general, on the following criteria:
Connection to the theme
Interesting, innovative research
Importance of research
Junior scholars/senior scholars/a mix
In addition to the papers, a luncheon speaker and commentators should be selected. These presenters may, but need not, come from the group that submitted paper proposals. Depending on the theme and the topics of the papers, it may be appropriate to ask one or two practitioners to be commentators or the luncheon speaker.
B. Budget. The budget for past symposia has provided the speakers and commentators with travel (ground transportation to and from airports, air travel or mileage for driving, and hotel for one or two nights, as needed by the speaker). Speakers have been invited to a dinner Thursday evening and on Friday breakfast and lunch are provided to all attendees. Speakers have not been reimbursed for other expenses, such as meals en route to the symposium. There are some additional costs for publicity and materials (ACTEC helps with production and distribution of publicity).
The Foundation will transfer the grant to the host school, and the host school will be responsible for managing the grant, paying expenses for the symposium, and filing a report with the Foundation after the symposium. In the past, the grant has been sufficient to cover all expenses.
Saturday, January 9, 2016
The first issue of 2016 of the National Council of Nonprofits’ Nonprofit Advocacy Matters previews legal and policy issues expected to take center stage in 2016. Key topics include the expanding efforts to impose PILOTs by local governments, challenges to state charity property tax exemptions, pressures created by state fiscal weakness, regulations threatening the independence of the nonprofit sector in various ways, and reform of government-nonprofit contracting and grant-making.
Friday, January 8, 2016
Don’t Let the Headlines Mislead You on the Reported Endorsement of Hillary Clinton by “Planned Parenthood”
Across the country this morning, millions awoke to news source headlines proclaiming that presidential hopeful Hillary Clinton is receiving the endorsement of “Planned Parenthood.” The prime exhibit is the headline for the story appearing in today’s New York Times. The print edition reads, “Planned Parenthood Gives First Primary Endorsement in Its 100 Years to Clinton,” and the online version of the Times story reads, “Planned Parenthood, in Its First Primary Endorsement, Backs Hillary Clinton.“ The story in the latter version opens with these words: “Planned Parenthood, which has become an ideological minefield in the 2016 presidential election, said Thursday that it would endorse Hillary Clinton — its first endorsement in a presidential primary in the nonprofit’s 100-year existence.” Stories in some other major news sources lead with similar language. See, for example, the stories published by ABC News and CNN.
Although its headline is also misleading, the story appearing in the Washington Post actually begins with what appears to be the accurate factual account: “The political arm of Planned Parenthood will endorse Hillary Clinton in New Hampshire on Sunday, a Clinton campaign official confirmed.” And therein lies the critical distinction. As the New York Times piece eventually reports, the endorsement is being “technically made through the nonprofit’s advocacy arm, the Planned Parenthood Action Fund.”
“Technically made,” indeed. As exempt organization lawyers are well aware, the identity of the entity that supports or opposes a United States presidential candidate matters greatly. Planned Parenthood Federation of America, Inc. – the health care service-provider at the center of recent controversies over whether it should receive federal funds in the wake of allegations that it has profited from transactions in fetal tissue – is a tax-exempt charitable organization described in section 501(c)(3) of the Internal Revenue Code. As such, to comply with the requirements for federal income tax exemption, Planned Parenthood must “not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” Planned Parenthood’s political affiliate is not bound by the section 501(c)(3) limitations.
The reporting of the Clinton endorsement highlights the degree to which, in the minds of many, including journalists, these rules are just “technical” distinctions. But the distinctions are of enormous importance. Consider the pastor of a local church who wants to express a political voice on politics. The pastor is free to do so in appropriate contexts, without having his viewpoint attributed to the legal entity which is the church. Cecile Richards may do the same, individually or on behalf of a political action organization, without having her statements attributed to the charity.
Of course, the reporting of the Clinton endorsement raises the issue that the Planned Parenthood brand is now being used to influence a presidential election, reportedly the first time it has ever been so employed during the primary election stage. The manner in which major media outlets are reporting the endorsement tends to magnify the impact of this brand on the endorsement itself. But a similar point may be made whenever a prominent personality associated with a tax-exempt charity endorses or opposes a candidate. Such a person is free under current law to identify herself by reference to her position with the charity, as long as she is not speaking on behalf of the charity. In each case, a charity’s reputational capital has to some extent been appropriated, either by referring to the charity’s name, or by using a similar-sounding name.
Thursday, January 7, 2016
IRS Withdraws Controversial Proposed Regulations on Reporting Donations and Donor Identity Information
Accounting Today reports that the Internal Revenue Service has withdrawn its proposed regulations permitting charitable donees to substantiate contributions of $250 or more by reporting them directly to the agency under section 170(f)(8)(D) of the Internal Revenue Code. The proposed regulations proved controversial because the optional method for reporting donations called for disclosing donors’ taxpayer identification numbers (which typically are their social security numbers). The notice of withdrawal is available here.
Additional Coverage: The Chronicle of Philanthropy
National Taxpayer Advocate Nina Olson has submitted her 2015 Annual Report to Congress, required by section 7803(c)(2)(B)(ii) of the Internal Revenue Code. One section of the report (see pages 36-44) scathingly criticizes the review of Forms 1023-EZ (or lack thereof) by the Internal Revenue Service. The following paragraph from the Executive Summary of the report details key findings:
TE/GE’s Exempt Organization (EO) function approves 95 percent of applications submitted on Form 1023-EZ. EO’s own pre-determination review program shows that EO approves applications much less frequently — 77 percent of the time — when it reviews documents or basic information from the applicants, rather than relying only on the attestations contained in the form. EO rejects some applications simply because the applicant was not eligible to use Form 1023-EZ, but the pre-determination review also showed that almost 20 percent of Form 1023-EZ applicants, despite their attestations to the contrary, did not qualify for exempt status as a matter of law. These results are consistent with TAS’s analysis of a representative sample of Form 1023-EZ applicants that obtained exempt status, which showed that 37 percent of the organizations in the sample did not satisfy the legal requirements for exempt status. Often, a deficiency in the applicant’s organizing documents that prevented qualification as an Internal Revenue Code § 501(c)(3) organization could have easily been corrected had the applicant been advised of it.
The report recommends revising Form 1023-EZ generally to require applicants to submit to the IRS their organizing documents, a description of their actual or contemplated activities, and relevant financial information. The report further urges the IRS to determine exempt status only after reviewing the application and the recommended supporting materials.
Additional Coverage: Tax Notes Today (Electronic Cite: 2016 TNT 4-6)