Friday, January 23, 2015

Humane Society Sues Oklahoma AG For Alleged Political Attack

Humane-society-united-states-logo-60thThe Oklahoman reports that the Humane Society of the United States has sued Oklahoma Attorney General Scott Pruitt for allegedly slandering and persecuting the organization for political reasons under the guise of enforcing Oklahoma's charitable solicitation  laws.  The group and the AG released dueling statements, with the Humane Society claiming that the AG has engaged in a "nearly yearlong campaign of political harassment and public vilification" and the AG demanding that  the Humane Society disclose documents relating to its solicitation practices, which practices may be misleading.  Besides being the rare case of a well-funded and sympathetic charity challenging a state's regulation  of charitable fundraising, the litigation also will likely be interesting because the attorney representing the Humane Society is former Oklahoma Attorney General Drew Edmondson.  

Lloyd Mayer

January 23, 2015 | Permalink | Comments (1) | TrackBack (0)

Architecture for Humanity Abruptly Shuts Its Doors

DownloadThe San Francisco Chronicle reports that the ten-year old charity Architecture for Humanity closed its door at the start of this year.  A statement from the Board of Directors on the group's website states that the organization is filing for Chapter 7 bankruptcy, having laid off all of its staff as of January 1st and closed its physical office in San Francisco.  The closure apparently came as a shock to many, given that the group had at its peak more than 60 chapters and was the recipient of a number of prestigious awards.  Its 2012 IRS Form 990, for the year that ended June 30, 2013, reported over $12 million in income, almost all from contributions and grants.  Nevertheless, the article indicates that at the end it was a lack of funding that doomed the organization.

Lloyd Mayer

January 23, 2015 in In the News | Permalink | Comments (0) | TrackBack (0)

Thursday, January 22, 2015

IRS Chief Counsel Formally Takes Responsibility for Most EO Rulings

IRS Chief CounselCompleting a previously announced realignment, the IRS formally reassigned responsibility for most rulings relating to tax-exempt organizations to the Office of Associate Chief Counsel (Tax Exempt and Government Entities) ("TEGE Counsel") as of January 2, 2015.  In Announcement 2014-34, the IRS shifted responsibility away from the Tax Exempt and Government Entities Division of the IRS ("TE/GE") for revenue rulings, revenue procedures, technical advice, and  letter rulings relating to exempt organizations (other than certain letter rulings relating to employee plans that will remain with TE/GE).  With respect to exempt organizations, TE/GE will only retain responsibility for determination letters, including exemption determination letters and determination letters issued in response to an IRS Form 8940 (Request for Miscellaneous Determination). 

Lloyd Mayer

January 22, 2015 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 21, 2015

Will the Legacy of the 501(c)(4) Mess Be a Better IRS or Just a Smaller One?

IRSThe IRS "controversy" or "scandal" (depending on whom you are talking with) continues to generate significant ripples for the Service.  Here are some of the most notable recent developments:

National Taxpayer Advocate Recommendations:  In her 2014 Annual Report to Congress, Nina Olson called on Congress ot create an optional "safe harbor" election for section 501(c)(4) organizations that would give such organizations a numerical test they could use to ensure that their level of political campaign activity is permissible given their tax-exempt status (similar to the existing section 501(h) election for section 501(c)(3) organizations with respect to lobbying) (Legislative Recommendation #5).  Ms. Olson also recomended that Congress give groups seeking section 501(c)(4), (c)(5), or (c)(6) status the ability to seek a declaratory judgement in the same manner as groups seeking section 501(c)(3) status now enjoy, and that the IRS adopt administrative review procedures for groups that have had their tax-exempt status automatically revoked (Legislative Recommendation #12).  

IRS Modification of Section 501(c)(4) Expedited Application Process:  In a memo released just before Christmas, the Acting Director, EO, Rulings and Agreements provided revised and clarified previously issued procedures for applicants seeking recognition under section 501(c)(4) that are given the option of choosing an expedited application process.  The new procedures only apply to applicants that are given this option after the issue date (12/23/14) for the memo.  Applicants who were told they were eligible for this option before that date are subject to slightly different procedures (included as Appendix B to the memo).

Omnibus Spending Bill Again Limits (?) IRS:  As was the case a year ago in Public Law 113-76 (see "Cryptic Legislation" section of this post), Congress has once again included with the funding of the IRS the following limitations (Hat Tip: EO Journal):

SEC. 107. None of the funds made available under this Act may be used by the Internal Revenue Service to target citizens of the United States for exercising any right guaranteed under the First Amendment to the Constitution of the United States.

SEC. 108. None of the funds made available in this Act may be used by the Internal Revenue Service to target groups for regulatory scrutiny based on their ideological beliefs.

It is still unclear what exactly the effect, if any, of these provisions actually is.

House Oversight & Government Reform Committee Staff Report:  Released by outgoing Chairman Darrell Issa, the report, not surprisingly, slams the IRS and the Obama Administration, and also promises more fact-finding.

The Shrinking IRS:  As numerous news outlets have reported, the IRS faces a shrinking budget - likely at least in part because of the 501(c)(4) mess - even as the demand for its services from taxpayers continues to increase.  According to Taxpayer Advocate Nin Olson, the decline is 17.5 percent since 2010, taking inflation into account (see NPR).  IRS Commissioner John Koskinen has even said the agency might have to shut down for two days, with employees put on unpaid furlough (see The Hill).  For other examples of the flood of coverage, see Forbes, NBC News, the NY Times, and the Washington Post.

It is too soon to make a final call, but at least some positive changes may result - clarification of the standards for political activity by noncharitable 501(c) organizations and clearance of the exemption application backlog come to mind.  At the same time, the damage to the Service and the tax system seems greater - trading speed for accuracy in the application process, damaged morale among the remaining IRS employees and greater difficulty in recruiting future such employees, and a collapsing budget even as the tax law continues to become more complex.

Lloyd Mayer

January 21, 2015 in Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 20, 2015

WSJ: "Universities Push Harder Into Realm of Startups"

Notre-Dame-Innovation-ParkAs part of the continuing blurring of lines between nonprofits and for-profits, the Wall Street Journal reported last month on the increasing efforts by universities to be incubators for innovative startup companies that take advantage of university resources, including faculty expertise and intellectual property.   The article notes that according to the Association of University Technology Managers the number of new university and other research institution startups is approaching 1,000 a year.  At the same time, the article highlights the many obstacles that such startups face, many of which stem from the very university environment that also supports them.  These obstacles include faculty focused on research and publishing, not entrepreneurship, and limited access to markets and venture capitalists.  Nevertheless, in an era of flat tuition universities will undoubtedly continue to try to leverage their assets in new ways, including through such ventures.

Lloyd Mater

January 20, 2015 | Permalink | Comments (0) | TrackBack (0)

The Saga of Oral Roberts University

ORUA number of years ago we reported on the rescue of Oral Roberts University from looming bankruptcy by a generous (to the tune of $70 million) donor after the resignation of the University's President.  I recently came across a detailed account of the circumstances that led up to this dramatic event, published by This Land Press, an Oklahoma based media company.  While not focused on legal issues, the story provides some fascinating details regarding how the University's Board of Regents - populated by a whose who of televangelists - learned about and reacted to accusations that the University's President, who was also Oral Roberts' son, had received improper personal financial benefits from the institution.  It also provides a detailed - and contestable - narrative about the motivations that led Oral Roberts to found the University and other, even less successful nonprofit ventures, and to try to keep leadernship of the Universithy within his family.

Lloyd Mayer

January 20, 2015 in In the News | Permalink | Comments (0) | TrackBack (0)

Growing Trend of For-Profit Colleges Becoming Nonprofits?

GCUI recently was looking for some examples of nonprofit colleges and universities becoming for-profits and noticed what appears to an interesting trend - for-profit colleges and universities becoming nonprofits.  The most prominent example is Grand Canyon University (GCU), which informed shareholders late last year that it may buy them out and convert to a nonprofit college according to a Bloomberg News article.  GCU, which has both a physical campus in Arizona and a strong online presence, is currently worth over $2 billion (based on the market value of its publicy traded parent company).  Its stated reason for considering this change is the stigma associated with being a for-profit, which apparently affects its relationships not only with prospective students but also with other institutions of higher education and regulators.  For example, it claims that some schools have refused to play sports against them even though it is an NCAA Division I school.  One particularly interesting aspect of its history - it was a nonprofit until 2004, when financial struggles led it to become a for-profit entity, while still apparently maintaining its reputation as a strong Christian institution.

GCU is the most prominent example, but not the only one.  The Milwaukee-Wisconsin Journal Sentinal recently reported that Herzing University, described as a for-profit career college, has just completed a conversion to nonprofit status.  And a July 2014 Inside Higher Ed article noted four other for-profit to nonprofit conversions, although all of those involved relative small institutions that were closely held and so presumable were easier to convert.  According to the article, unidentified sources said another four such institutions were considering such a move.  The most common mechanism is for the institution to be sold to an existing nonprofit, with valuation and financing being the key issues in such a scenario.  And of course there are numerous accreditation, property ownership, and other other regulatory and legal issues to address.  Given this complexity, it is not surprising that according to a recent Arizona Republic article GCU officials only give themselves a 50 percent chance of successfully converting GCU to nonprofit status.  It also not surprising that the same article highlights how much GCU's current executives would take home (tens of millions of dollars) if the conversion happens.

Lloyd Mayer



January 20, 2015 in In the News | Permalink | Comments (0) | TrackBack (0)

Monday, January 19, 2015

Nebraska Supreme Court Finds Nonprofit's Records are Not Public Records Subject to Disclosure

Falls CityThe Nebraska Supreme Court last week faced the issue of whether records held by Falls City Economic Development and Growth Enterprise, Inc. (EDGE), a Nebraska nonproit corporation, were "public records" within the meaning of Nebraska's disclosure laws because of the relationship EDGE has with the City of Falls City, Nebraska and other governmental entities.  In a unanimous decision, the court concluded EDGE's records were not public records and so were not subject to disclosure, reversing a state trial court.  

Citing an earlier opinion as well as similar tests applied by courts in other states, the Nebraska Supreme court stated that records held by a private party are public records if: "(1) The public body, through a delegation of its authority to perform a government function, contracted with a private party to carry out the government function; (2) the private party prepared the records under the public body’s delegation of authority; (3) the public body was entitled to possess the materials to monitor the private party’s performance; and (4) the records are used to make a decision affecting public interest."  Finding that EDGE was not controlled by government officials, although two city officials served among the 21 voting members of EDGE's board of directors and another official served in a non-voting, ex-officio capacity, that the government funding provided to EDGE was under the control of its board, and that EDGE had separate financial records, separate offices, and separate employees from the governments with which it worked, the court concluded that EDGE was not the functional equivalent of a government agency and so its records were not public records subject to legally required disclosure.  If, as the court suggested, the test it applied represents a growing consensus among state courts regarding how to approach this issue, this decision likely has ramifications beyond the State of Nebraska.

Lloyd Mayer

January 19, 2015 in State – Judicial | Permalink | Comments (0) | TrackBack (0)

District Court Reverses Itself, Dismisses Case Challenging Church Form 990 Exemption

FFRFIn the wake of U.S. Court of Appeals for the Seventh Circuit dismissing on standing grounds a lawsuit challenging the minister housing allowance available under IRC section 107, the U.S. District for the Western District of Wisconsin revisited its 2013 decision finding standing to challenge the church exemption from having to file annual information returns (Form 990) with the IRS.  Following the Seventh Circuit's lead, the District Court concluded that the plaintiffs in the Form 990 case (one of which, the Freedom from Religion Foundation, is common to both cases) lacked standing because they had never sought and been denied an exemption from having to file Form 990 for themselves (as opposed to objecting to other organizations emjoying an exemption).  Indeed, the District Court noted that the plaintiffs stated in their complaint that they intended to continue to file the Form 990 and did not seek to amend their complaint in this regard even afer the defendant identified this issue in its motion to dismiss.  

Therefore while it appears the Seventh Circuit left open a way for plaintiffs to obtain standing in this case and similar cases - claim the exemption or tax benefit that churches enjoy and then file suit if and when the IRS denies that claim - it is not clear that at least the plaintiffs in this case are willing to make such a claim.  This path appears to still be available for others with similar concerns about the provision of such exemptions and benefits to churches to the exclusion of other types of nonprofits, however.

Lloyd Mayer

January 19, 2015 in Federal – Judicial, Religion | Permalink | Comments (0) | TrackBack (0)

Minnesota Supreme Court Upholds Right of Unincorporated Medical Staff to Sue Nonprofit Hospital

AveraIn 2012 the nonprofit Avera Marshall Regional Medical Center's board of directors unilaterally decided to repeal and replace the hospital's medical staff bylaws.  Two individual physicians and the Medical Staff as a whole objected, eventually filing a lawsuit against the hospital that reached the Minnesota Supreme Court on two important governance issues for nonprofit hospitals.  First, did the Medical Staff, as an unincorporated association, have the legal capacity to sue?  Second, did the medical staff bylaws constitute an enforceable contract between the hospital and the Medical Staff?  In a December 31, 2014 opinion, the Minnesota Supreme Court answered both questions in the affirmative.

With respect to the first question, the court acknowledged that the common law rule in Minnesota is that unincorporated associations are not legally distinct from their members and so do not have legal capacity to sue or be sued in their own right.  The court found, however, that the Minnesota legislature had overridden this rule when it enacted Minnesota Statute section 540.151, reading that statute as granting an unincorporated association that met the criteria described in the statute the capacity to sue and to be sued.  Those criteria are having two or more persons associate and act under a common name, criteria that the court found the hospital's "Medical Staff" satisfied.

With respect to the second question, the Minnesota Supreme Court concluded that even though the hospital had a legal obligation under Minnesota administrative rules and the hospital's corporate bylaws to adopt medical staff bylaws, both sides still provided consideration.  More specifically, the hospital granted privileges at the hospital in exchange for the prospective Medical Staff member agreeing to abide by the bylaws.  The court therefore concluded that there was a bargained-for exchange of promises and mutual consent to the exchange, creating an enforceable contract.  The court therefore remanded the case for consideration of the plaintiffs' claims that the repeal and and replacement of the medical staff bylaws violated the terms of that contract.

The result in this case, which may be significant to many hospitals, for-profit and nonprofit, was not a foregone conclusion as both the state trial court and the state appellate court had reached the opposite result on both questions.  Indeed, two members of the Minnesota Supreme Court dissented from the five justice majority's opinion.

Lloyd Mayer


January 19, 2015 in State – Judicial | Permalink | Comments (0) | TrackBack (0)

Thursday, January 15, 2015

Your Complicated Charitable Policy Issue *Here*

With a hat tip to the Chronicle of Philanthropy, see this note on these billboards springing up around the Boston area, sponsored by the Charity Defense Council.   The article notes that the head of the Charity Defense Council, Dan Pallota, is at the fore in the debate over the use of administrative costs as a measure of charitable outcomes.   Speaking of effectivenss... how effective is a billboard on I-90 on a complicated policy issue?   Anyone in the Boston area spot one?


Charity Defense Council Billboards

January 15, 2015 in In the News | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 13, 2015

I’m Shocked, SHOCKED, to Find that Art Collecting is Going on in Here!

Over the weekend, The New York Times published the next great exposé in the tax habits of the rich and famous, entitled Writing Off the Warhol Next Door: Art Collectors Gain Tax Benefits from Private Museums.   The article seems to be getting some play elsewhere, having been picked up by outlets like the Huffington Post and of course, that leader in Journalism, the Tax Prof Blog!   (Some of you may recall one of this article’s predecessors-in-kind at The Washington Post in 2005, Big-Game Hunting Brings Big Tax Breaks: Trophy Donations Raise Questions in Congress, which lead to the passage of Section 170(f)(15) – Special Rule for Taxidermy Property – effective for contributions made after 7/25/2006).

The article discusses the growing phenomenon of the “private museum.”  Although this term has no technical definition, the article uses it to refer to a collection of art that is given to a tax-exempt charitable organization controlled by the donor of the collection and located in close physical proximity to the donor.  This trend is arguably the offshoot of the enactment of Section 170(o) in 2006, which used to allow an individual to give only a fractional interest in a piece of art to a museum, and maintain possession of the art proportional to the fractional interest retained.

One problem that I have with the article is that it talks about collectors getting a tax subsidy for their investments in art.   At no time is it really made clear that in order for this to work from a tax perspective, the collector has probably given ownership of the art to the charity forever.  Thus, it is no longer the “collector’s investment”, and when the collector dies, that art (or the proceeds therefrom) remain in the public sphere in perpetuity.   The benefit is that he or she gets to go look at the art whenever they want to do so, as opposed to having to make an appointment on every other Tuesday at 1:43 p.m.

After culling through all the Sturm und Drang in the article, I think the article has three possible issues with the concept of the private museum, although I don’t think these arguments are made very clearly:

  1. Is collecting and preserving art, in and of itself, “charitable” in a tax-exempt context?
  2. Is it really the public educational component of the collection of art the thing that makes it tax-exempt?
  3. Assuming it is charitable activity in one manner or another, is the ease of access of the original donor so significant as to overwhelm the otherwise charitable benefit afforded by having the collection in the public sphere (in other words, private benefit and/or private inurement)?

I wish the article had been a little more methodical on the law, and a little less TMZ, but I guess that wouldn’t make a very interesting piece for anyone other than … well, those of us who regular the Nonprofit Tax Prof Blog!

Of course, one should always follow the Internet axiom “Never Read the Comments,” but the most disturbing part of the article is that portion of the comments that see the private museum as just another tax loophole for the wealthy, adding to a continuing stream of de-legitimization of the tax code and the IRS, but that’s another blog post…

(P.S. As a general marketing matter, one should never use the term “have your cake and eat it, too” publicly with respect to a tax planning matter unless you really are trying to flag down the IRS and/or Woodward & Bernstein.   Just a thought.)

(P.P.S. Special shout out to our own Lloyd Mayer, who is quoted in the NYT piece.)


January 13, 2015 | Permalink | Comments (0) | TrackBack (0)

Monday, January 12, 2015

More on the New Nonprofit Hospital Final Regs

As reported here on your faithful Nonprofit Law Prof Blog by Roger Colinvaux, the IRS issued final regulations under Section 501(r) on the requirements for nonprofit hospitals at the very end of last year.

Over the weekend, The New York Times did a report on these regulations, focusing on efforts to stop "aggressive tactics to collect payments from low-income patients."   To me, the most interesting part of the article isn't the summary of the regs with regard to collections - it's the quote (and accompanying picture) from Senator Grassley:  "Nonprofit hospitals and for-profit hospitals have often been indistinguishable... The rules make clear that tax-exempt hospitals have to earn their tax exemption."

It seems to me that Senator Grassley has been some what low key on charitable issues in the past few years - I'm guessing we will be hearing more from him with the resurgence of Republicans in Congress.

For other coverage of the final regulations:

- The Chronicle of Philanthropy

-briefly, at Independent Sector

-PriceWaterhouse Coopers

I'm happy to add any other links that people have found useful.




January 12, 2015 in Current Affairs, Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

Thursday, January 8, 2015

Mitchell v. Commissioner—10th Circuit Affirms Tax Court, Mortgages Must Be Subordinated When Conservation Easement is Donated

Mtichell II picture copyIn Mitchell v. Commissioner, _ F.3d _ (10th Cir. 2015), the 10th Circuit Court of Appeals affirmed the Tax Court’s holding that, to be eligible for a deduction for the donation of a conservation easement under Internal Revenue Code § 170(h), any outstanding mortgages on the underlying property must be subordinated to the rights of the holder of the easement at the time of the gift.

In 2003, a partnership of which Ms. Mitchell was a partner donated a conservation easement with a claimed value of $504,000 to a land trust. The terms of the deed purported to transfer the easement to the land trust in perpetuity and in a manner necessary to satisfy the requirements of § 170(h). However, the partnership did not obtain a subordination agreement from the lender holding an outstanding mortgage on the subject property until almost two years following the date of the donation.

The IRS argued that the mortgage subordination requirement is a bright-line requirement that requires any existing mortgage to be subordinated to the rights of the holder of the easement, irrespective of the risk of foreclosure or any alternate safeguards. The IRS also asserted that subordination must occur at the time of the donation because, without subordination, the easement would be vulnerable to extinction upon foreclosure and, thus, the conservation purpose would not be protected in perpetuity as required under § 170(h). The 10th Circuit agreed with the IRS.

Delegation of Rulemaking and Deference to Commissioner

The 10th Circuit first explained that, although taxpayers are generally not permitted to deduct charitable contributions of partial interests in property, Congress made an exception to this rule for contributions of conservation easements—provided the contributions meet certain statutory requirements. One such requirement is that the conservation purpose of an easement must be “protected in perpetuity.” The 10th Circuit explained that, because the Code does not define the phrase “protected in perpetuity” or otherwise describe how a taxpayer may accomplish this statutory mandate, “Congress has tasked the Commissioner with promulgating rules to ensure that a conservation purpose be protected in perpetuity.” Acting pursuant to that authority, the Commissioner promulgated Treasury Regulation § 1.170A-14(g), which includes the mortgage subordination requirement.

Citing to the Supreme Court’s holding in Mayo Found. for Med. Educ. & Research v. United States, 131 S.Ct. 704, 711 (2011), the 10th Circuit noted that, because the Commissioner promulgated the regulations under § 170(h) pursuant to the authority granted to him by Congress, the regulations are binding on taxpayers unless they are “arbitrary and capricious in substance, or manifestly contrary to the statute.” In addition, “where Congress has delegated to the Commissioner the power to promulgate regulations for the enforcement of the Code, ‘[the court] must defer to his regulatory interpretations of the Code so long as they are reasonable.’”

The 10th Circuit explained that requiring existing mortgages to be subordinated to conservation easements prevents extinguishment of the easements in the event the landowners default on the mortgages. In this way, said the court, the mortgage subordination requirement is “reasonably related” to Congress’s mandate that the conservation purpose be protected in perpetuity. The 10th Circuit also rejected Ms. Mitchell’s claim that the mortgage subordination provision is arbitrary and capricious, and therefore unenforceable. Although declining to consider this argument because it was raised for the first time on appeal, the 10th Circuit noted that the argument would fail because the mortgage subordination provision is a reasonable exercise of the Commissioner’s authority to implement the statute.

The 10th Circuit then proceeded to reject each of Ms. Mitchell’s arguments as to why she should be entitled to a deduction despite her failure to obtain a subordination agreement at the time of the donation.

Subordination Must Be Timely

Ms. Mitchell argued that, since the mortgage subordination regulation contains no explicit timeframe for compliance, it should be interpreted to allow for subordination to occur at any time. The 10th Circuit rejected this argument as “foreclosed by the plain language of the regulations.” The court noted that the regulation “expressly provides that subordination is a prerequisite to allowing a deduction.” The regulation, explained the court, states that “no deduction will be permitted ... unless the mortgagee subordinates its rights in the property” (emphasis added by the court). Since in 2003, when the Mitchells requested a charitable deduction for the donation of the easement, the property was subject to an unsubordinated mortgage, Ms. Mitchell was not entitled to a deduction under the plain language of the regulation.

The 10th Circuit further noted that, even if it were to view the regulation as ambiguous with respect to timing, the result would be no different because the court must defer to the Commissioner’s reasonable interpretation on this point. The court explained that the Commissioner’s interpretation was not plainly erroneous or inconsistent with the mortgage subordination provision’s plain language. Moreover, there was no reason to suspect the Commissioner’s interpretation did not reflect the agency’s fair and considered judgment on the matter. Because a conservation easement subject to a prior mortgage obligation is at risk of extinguishment upon foreclosure, requiring subordination at the time of the donation is consistent with the requirement that the conservation purpose be protected in perpetuity.

Functional Subordination Not Sufficient

Ms. Mitchell argued that strict compliance with the mortgage subordination requirement was unnecessary because the easement deed allegedly contained sufficient safeguards to protect the conservation purpose in perpetuity. The 10th Circuit rejected this argument as inconsistent with the plain language of the mortgage subordination provision. The court pointed out that the regulation contains one narrow exception to the “unambiguous” subordination requirement—for donations occurring prior to 1986. In the case of a pre-1986 donation, a taxpayer may be entitled to a deduction without subordination if the taxpayer can demonstrate that the conservation purpose is otherwise protected in perpetuity. The negative implication of this express, time-limited exception, said the court, is that no alternative to subordination will suffice for post–1986 donations. The court thus declined to adopt a “functional” subordination rule for donations occurring after 1986.

Likelihood of Foreclosure Irrelevant

Ms. Mitchell further argued that strict compliance with the mortgage subordination requirement was unnecessary in her case because the risk of foreclosure was so remote as to be negligible (the partnership apparently paid its debts on time and had sufficient assets to satisfy in full the amounts due). She pointed to Treasury Regulation § 1.170A-14(g)(3), which provides that a deduction will not be disallowed merely because the interest that passes to the donee organization may be defeated by the happening of some future event, “if on the date of the gift it appears that the possibility that such . . . event will occur is so remote as to be negligible.” She argued that this provision acts as an exception to the mortgage subordination provision—i.e., that because the risk of foreclosure in her case was arguably so remote as to be negligible, failure to satisfy the mortgage subordination requirement should be forgiven.

The 10th Circuit rejected this argument, holding that the remote future event provision does not modify the mortgage subordination requirement. The court explained, among other things, that the remote future event provision cannot reasonably be interpreted to include the relatively unexceptional risk of foreclosure, which exists any time a taxpayer donates a conservation easement with respect to property subject to a mortgage. The court noted that the remote future event provision (i) contains a discrete example of what qualifies as a remote future event—a state statutory requirement that a use restriction must be rerecorded every 30 years to remain enforceable—and (ii) identifies the risk that sometime in the future the donee will neglect to rerecord as an example of the type of event that should not prevent a deduction. This example, said the court, is easily distinguishable from the risk of foreclosure. “The possibility that sometime in perpetuity—30, 60, 90, 120, or more years after the donation—the donee may neglect to renew the easement is considerably more remote than the risk of foreclosure under a mortgage obligation limited to a finite repayment period.” The risk of foreclosure, said the court, is simply too unlike the provision’s listed example for us to believe that the Commissioner intended the provision to cover it.

The 10th Circuit also explained that, even if it were to assume the remote future event provision could reasonably be interpreted to have general applicability to the mortgage subordination provision, the court would be required to enforce the terms of the specific subordination requirement to prevent that requirement from becoming meaningless. In promulgating the rules, explained the court, the Commissioner specifically considered the risk of mortgage foreclosure to be neither remote nor negligible, and therefore chose to target the accompanying risk of extinguishment of the conservation easement by strictly requiring mortgage subordination.

Finally, the 10th Circuit noted that, even if the regulations were unclear with respect to the interplay between the mortgage subordination and remote future event provisions, Ms. Mitchell would not prevail because the court is required to defer to the Commissioner’s interpretation to resolve any ambiguity unless it is “plainly erroneous or inconsistent with the regulations” or there is any other “reason to suspect the interpretation does not reflect the agency’s fair and considered judgment on the matter.” Rather than being plainly erroneous or inconsistent with the regulations, the 10th Circuit found the Commissioner’s interpretation—that the mortgage subordination provision is unmodified by the remote future event provision—to be consistent with the regulation’s plain meaning. In addition, the court found no reason to suspect that the Commissioner’s interpretation did not reflect the agency’s fair and considered judgment on the matter in question. “[I]t is reasonable,” said the court, “for the Commissioner to adopt an easily-applied subordination requirement over a case-by-case, fact-specific inquiry into the financial strength or credit history of each taxpayer.” In support of this holding, the court quoted the following passage from an article published by the author of this blog post:

The specific requirements in the Code and Treasury Regulations establish bright-line rules that promote efficient and equitable administration of the federal tax incentive program. If individual taxpayers could fail to comply with such requirements and claim that their donations are nonetheless deductible because the possibility of defeasance of the gift is so remote as to be negligible, the Service and the courts would be required to engage in an almost endless series of factual inquiries with regard to each individual conservation easement donation.

The 10th Circuit concluded that the mortgage subordination provision does not permit a charitable contribution deduction unless any existing mortgage has been subordinated, irrespective of the likelihood of foreclosure, and the subordination agreement must be in place at the time of the gift.

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

January 8, 2015 | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 6, 2015

NonProfit Times: 5 Fundraising Predictions for 2015

With the New Year just six days old, The Nonprofit Times has published its top five fundraising trends for 2015: conversion optimization, or improving donation flow to raise more money; the ability to engage with Millennials; donor retention and treating all donors as if they are major donors; online fundraising and mobile; and the ability to share stories in a very visual way.

The Times quotes Rich Dietz, senior product manager for digital fundraising for Abila Software in Austin, Texas, as saying that “2015 will be a big year and a transitional year for the nonprofit sector as business-minded tactics slowly gain ground and organizations think about increased growth versus simply being sustainable.  Engagement strategies will reach new levels as Millennials continue to emerge in importance and nonprofits think about the best way to interact with their supporters.” 

Dietz's predictions for 2015 fundraising include:

  • Conversion Optimization: Organizations will begin to think about how to better convert existing website visitors versus simply attracting new visitors. This is a business practice that many small businesses have adopted recently and will work well for nonprofits. Conversion optimization revolves around measuring, testing and optimizing the donation flow to raise more money.
  • Millennial Engagement: According to The Brookings Institute, Millennials will make up 75 percent of the workforce by 2025. As Millennials enter the workforce and have money to spend, organizations will need to put strategies in place to best engage this demographic. Many follow a different path to becoming a donor than is traditionally done and nonprofits will need to adapt to these differences.
  • Donor Loyalty and Lifetime Value: Tracking donor engagement will be crucial. Organizations will spend more time analyzing characteristics and behaviors of all of their constituents — not just major donors — to better understand what drives their giving behavior. By tracking donor engagement, organizations will be able to further segment their appeals, personalize their outreach to donors, significantly increase donor loyalty, improve lifetime value, and treat all donors like major donors.
  • Online and Mobile: Online and mobile have played an increasingly key role for organizations the past few years, and that will continue in 2015. Social will play a key role in the “attention economy,” and responsive design will be necessary to allow supporters to access an organization’s website at any time from any device. 2014 was the tipping point for more web traffic coming from mobile devices than desktop computers. According to Pew Research Center, more than 90 percent of all Americans own a cell phone.
  • Storytelling Becomes Visual: Creating a narrative and sharing a story has always been important for nonprofits to successfully engage donors, but doing so in a visual way is becoming essential. Organizations will have to find creative and innovative ways to engage supporters in a world full of distractions, and visual components are key. Web posts with visuals drive up to 180 percent more engagement and research indicates people process visuals 60,000 times faster than text.


Vaughn E. James


January 6, 2015 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Friday, January 2, 2015

AALS Panel on Exempt Organization Regulation

At the AALS (American Association of Law Schools) meeting in Washington D.C., there will be a panel discussion titled IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable?  The session is cosponsored by the Tax Section and the Nonprofit and Philanthropy Law Section and takes place Saturday, January 3rd from 10:30 am to 12:15 pm. Here is the description:

"The recent controversy over the Internal Revenue Service’s processing of applications by Tea Party and other groups for tax-exempt status highlights only one aspect of the unusual relationship between the federal tax agency and the nation’s nonprofit organizations.  While the primary mission of the IRS is to collect revenue, its mission with respect to tax-exempt organizations is instead to ensure that such organizations comply with the requirements for obtaining and maintaining that status.  This role has sometimes led the IRS into unfamiliar territory, not only with respect to political activity but also with respect to governance responsibilities and other topics not directly related to taxation.  Our invited speakers and the speakers chosen through a call for papers will address whether the IRS oversight of charitable and other types of tax-exempt nonprofit organizations is working, either generally or with respect to specific activities or aspects of these organizations, and if it is not, whether it can be fixed or should be abandoned."

Marcus Owens will be moderating, and panelists include Ellen Aprill (Loyola-LA), Phil Hackney (LSU), Jim Fishman (Pace), Terri Helge (Texas A&M), Dan Tokaji (Ohio State), and Donald Tobin (Maryland). 

Roger Colinvaux

January 2, 2015 | Permalink | Comments (0) | TrackBack (0)

Evidence-Based Funding of Social Programs

This opinion article from the New York Times by Ron Haskins, a former policy advisor to President George W. Bush, offers useful insights into social policy and an “evidence-based” approach to funding. Haskin praises the Obama Administration’s efforts to identify and fund social programs that work – nurse visits to single mothers, K-12 education, pregnancy prevention, and others. He urges Congress not to cut these evidence-based initiatives, i.e., those “with rigorous evidence of success, as measured by scientifically designed evaluation” and urges that this approach “be a prerequisite for any program to get federal dollars.” Such an approach is laudatory for direct spending, but ironically, would apply awkwardly to tax expenditures like the charitable deduction, which relies on donors to assess evidence of success, and not the federal government. Indeed, this is both a virtue and vice of the charitable deduction. By awarding donor contributions with a deduction, the government essentially supports a broad array of organizations based not on the evidence but on donor choice. Compliance is not measured by programmatic effectiveness, but by meeting various organizational and operational requirements. But even here, enforcement is weak, as emphasized by the recent GAO report on exempt organization compliance.

Roger Colinvaux

January 2, 2015 | Permalink | Comments (0) | TrackBack (0)

GAO Releases Report on EO Compliance

The GAO recently released a report on exempt organization compliance, TAX-EXEMPT ORGANIZATIONS: Better Compliance Indicators and Data, and More Collaboration with State Regulators Would Strengthen Oversight of Charitable Organizations.

Here is the introduction: 

"Charitable organizations play a major role in our economy and provide critical services and resources to families and individuals in need. Although charitable organizations vary considerably in size and purpose, in 2011 the largest number of organizations was in the human services sector, providing services such as employment and housing assistance. The highest concentration of assets was in the health and education sectors, which include hospitals and universities. In addition to being concentrated in a few sectors, a large proportion of all assets were controlled by a relatively small number of charitable organizations—less than 3 percent hold more than 80 percent of the assets. Over the past several years, as the Internal Revenue Service (IRS) budget has declined, the number of full-time equivalents (FTEs) within its Exempt Organizations (EO) division has fallen, leading to a steady decrease in the number of charitable organizations examined. In 2011, the examination rate was 0.81 percent; in 2013, it fell to 0.71 percent. This rate is lower than the exam rate for other types of taxpayers, such as individuals (1.0 percent) and corporations (1.4 percent). EO is grappling with several challenges that complicate oversight efforts. While EO has some compliance information, such as how often exams result in change of tax exempt status, it does not have quantitative measures of compliance for the charitable sector as a whole, for specific segments of the sector (such as universities and hospitals) or for particular aspects of noncompliance (such as personal inurement or political activity). Because EO does not have these measures and does not know the current level of compliance, it cannot set quantitative, results-oriented goals for increasing compliance or assess to what extent its actions are affecting compliance. Statutory requirements for safeguarding taxpayer data limit both IRS's ability to share data and state regulators' ability to use it. A lack of clarity about how state regulators are allowed to use IRS data to build cases against suspect charitable organizations further impedes regulators' ability to leverage IRS's examination work. The e-filing rate for tax-exempt organizations is significantly lower than for other taxpayers. This lower rate means there is less digitized data available for data analytics and higher labor costs for IRS. Expanded e-filing may result in more accurate and complete data becoming available in a timelier manner, which in turn, would allow IRS to more easily identify areas of noncompliance."

Roger Colinvaux

January 2, 2015 | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 30, 2014

New Final Regulations for Charitable Hospitals

The IRS has made available as a pdf final regulations under section 501(r): “Additional Requirements for Charitable Hospitals: Community Health Needs Assessments for Charitable Hospitals; Requirement of a Section 4959 Excise Tax Return and Time for Filing the Return.” The document is available here.

Roger Colinvaux

December 30, 2014 | Permalink | Comments (0) | TrackBack (0)

Hospice Care: Non profit or for profit?

An interesting recent article in the Washington Post discusses the differences between for-profit and non-profit hospice care. The article says that although “[i]n some cases, for-profit hospices provide service at levels comparable to nonprofits, . . the data analysis, based on hundreds of thousands of Medicare patient and hospice records from 2013, shows that the gap between the for-profits as a whole and nonprofits is striking and consistent, regardless of hospice size." The Post authors identify profit-motive as a reason for the inferior performance of for-profits, stating that: “Hospice operators have an economic incentive to provide less care because they get paid a flat daily fee from Medicare for each of their patients. That means that the fewer services they provide, the wider their profit margin.” 

The key findings are that:

"Nonprofit hospices typically spent about $36 a day per patient on nursing visits; for-profit hospices spent $30 per day, or 17 percent less. The gap between for-profits and nonprofits remains whether the hospices are old or new.

Nonprofit hospices are much more likely to provide the more intense services — continuous nursing and inpatient care — required by patients whose symptoms are difficult to control. Nonprofits offered about 10 times as much of this per patient-day as did for-profits.

While hospices of both kinds usually dispatch a nurse to see a patient at some point during the last two days of life, for-profit hospices are more likely to fail in this regard, according to the analysis. A typical patient at a for-profit hospice is 22 percent less likely to have been visited by a nurse during this window than a patient at a nonprofit hospice, the numbers show, a sign that for-profit hospices may be less responsive during this critical time.

Patients at for-profit hospices are much more likely to drop out of hospice care than patients at nonprofit hospices."

One problem, according to the Post, is that “regulatory scrutiny of hospices has lagged behind those of other health-care institutions, though Congress has recently called for more frequent inspections. And without as much oversight, hospice operators can operate in ways that benefit shareholders more than patients." 

One conclusion that could be drawn is that the nonprofit form, in the absence of other direct regulation, is an indicator to consumers of better service, at least in this context. By comparison, in the broader hospital context, the line between non profit and for profit hospitals is not as stark.

Roger Colinvaux

December 30, 2014 | Permalink | Comments (0) | TrackBack (0)