Wednesday, April 29, 2015
The Los Angeles Times reports that the City of Los Angeles has sued Gardens Regional Hospital & Medical Center for “repeatedly dumping patients … without appropriate treatment or discharge plans.” According to the Times, L.A. City Attorney Mike Feuer has sued several hospitals over the past two years on similar grounds, and he is currently investigating other facilities. One example cited by the story is Glendale Adventist Medical Center, which is reported to have “paid $700,000 last year to settle dumping allegations without admitting wrongdoing.”
As to the predicament facing hospitals, the story explains as follows:
Some hospitals maintain they are hamstrung by laws that stop them from confining all but the most severely psychotic homeless people. State law requires discharge planning, but hospitals say there is nowhere for homeless patients to go — especially those with mental conditions.
But Feuer maintains that several hospitals have agreed to proper protocols. The Times cites him as saying, “In each of the cases we've resolved with a medical care facility we've not had a single problem," and that "it is possible for a healthcare facility to adopt humane and decent treatment."
The National Football League has announced that it will no longer file as a tax-exempt entity, notwithstanding its long-standing status as an organization described in section 501(c)(6) of the Internal Revenue Code. As reported in Bloomberg, NFL Commissioner Roger Goodell characterized the decision as eliminating a “distraction.” The Bloomberg piece also opines on the calculus behind the tax-exemption audible:
The league’s decision pre-empts a move to revoke the tax break that had been led by former Senator Tom Coburn of Oklahoma. That effort has gained some momentum in recent years, but not enough to pass either the House or the Senate. The NFL’s action removes a point of leverage for Congress in its continuing inquiries into the league’s handling of concussions and domestic violence.
For the NFL, the costs of losing the tax break are minimal, an estimated $109 million over the next decade. There are benefits for the league, too, including the end of federal disclosure requirements that put Goodell’s salary and some other league information in the public domain.
The tax cost of the league’s foregoing federal income tax exemption is not precisely known. According to the Wall Street Journal,
The size of the NFL’s tax bill is unclear. In 2013, a report by Sen. Tom Coburn (R., Okla.) calling for the NFL and National Hockey League to give up their tax-exempt status estimated that such a move would generate $91 million annually for the federal government. But Congress’s Joint Committee on Taxation pegged the amount at just $109 million over the next 10 years.
As to the benefit of not disclosing salaries to Monday morning quarterbacks, the Washington Post makes an interesting observation:
[T]he NFL’s executives will gain cover from criticism over their paychecks. The league’s 2013 tax filing revealed that, besides Goodell’s $44 million, six other executives drew seven-figure salaries and 298 employees made $100,000 or more.
Tuesday, April 28, 2015
As reported in the Chronicle of Philanthropy and Reuters, the home ministry of the government of India has cancelled the registration of 8,975 nonprofit associations for failing to declare details of foreign donations that they have received over a three-year period. The action reportedly followed India’s suspension of the license of Greenpeace India and the government’s placement of the Ford Foundation on a watch list. According to Reuters, “Critics have argued that the government's decision to restrict the movement of foreign funding to local charities is an attempt to stifle the voices of those who oppose Prime Minister Narendra Modi's economic agenda.”
Charity Navigator has published a list of charitable nonprofits that are working to aid the victims of the tragic, enormous earthquake that struck Nepal about 50 miles from Kathmandu three days ago. According to Charity Navigator’s website, “the charities on our list have indicated that they plan to assist in the relief efforts in some way,” and they “have a 3 or 4 star Charity Navigator rating.” Donations to these charities also may be designated specifically for the relief of victims of the Nepal earthquake.
Monday, April 27, 2015
Accounting Today reports that the Financial Accounting Standards Board has issued a proposed accounting standards update that would modify how nonprofits must report information in their financial statements and notes thereto. Proposed changes address the reporting of restricted assets, results of operations, expenses by both nature and function, investment returns net of expenses, operating cash flows, and quantitative and qualitative information about liquidity.
The Clinton Foundation is obviously making headlines these days. I hardly know anything at this point begging for this nonprofit law professor’s comment. But for those who would like a sampling of stories from the past week’s news cycle, here is coverage from the Chicago Tribune, USA Today, the New York Times, and the Washington Post.
Tuesday, April 21, 2015
Thomas E. Rutledge, Member of Stoll Keenon Ogden, PLLC, has authored an article entitled “Who Will Watch the Watchers?: Derivative Actions in Nonprofit Corporations” on SSRN. Rutledge argues that derivative actions may be available within organizations such as LLCs and nonprofit corporations through the judiciary’s equitable powers. Here is the abstract:
Unlike the Kentucky statutes governing business corporations, limited partnerships and statutory trusts, both the Kentucky Limited Liability Company Act and the Kentucky Nonprofit Corporation Acts are silent as to the requirements for “derivative actions” brought on behalf of the LLC or corporation by a member or other constituent thereof. Some have suggested that this absence indicates that derivative actions do not exist in those organizational forms, positing, it would seem, that it is the statute governing derivative actions that gives rise to the actions. This assessment is incorrect, and, presumably, arises out of a misunderstanding of the basis for derivative actions. In fact, the derivative action is a question of equitable standing that was later, in certain contexts, reduced to statute. It does not follow, therefore, that there are not derivative actions in LLCs and nonprofit corporations consequent to the failure of the statute to provide for them. Rather, equity will provide the rules applicable when the organizational statute does not specify the rules governing derivative actions.
Wednesday, April 15, 2015
Happy Tax Day all - and a special happy statute of limitations day to all of those involved in the preparation of tax returns!
Sunday, April 12, 2015
In The Nature Conservancy v. Deep Creek Grazing Ass’n, No. DV 14-015 (Mont. 9th Jud. Dist. Ct., Teton County, Mar. 31, 2015), a Montana trial court held that the owner of ranchland subject to a conservation easement had violated the easement by constructing ponds and filling a wetland area without obtaining prior approval from The Nature Conservancy (TNC), which holds the easement on behalf of the public. The court ordered the landowner to promptly restore the property to its condition prior to the violations, but declined to order the landowner to pay TNC’s attorney fees.
In March 2008, TNC purchased the conservation easement from Deep Creek Grazing Association (Deep Creek) for $3.5 million. The easement encumbers approximately 11,365 acres in Teton County, Montana.
The easement limits Deep Creek’s right to develop the property. The easement also permits Deep Creek to use the property in ways consistent with the easement, but identifies certain “consistent uses” as being subject to TNC’s prior approval. In particular, the easement provides that "construction of ponds requires prior approval from [TNC]." The easement also expressly prohibits the filling of wetlands or riparian areas.
In November 2013, during a routine monitoring visit, a TNC scientist and land manager observed that seven ponds had been constructed on the property without TNC’s prior approval. TNC sent a Notice of Violation informing Deep Creek that the pond construction violated the easement and requesting restoration of the pond sites to their preexisting conditions within 30 days as required by the easement. Due to winter conditions, however, TNC stated its willingness to accept Deep Creek’s agreement to undertake the restoration activities as soon as conditions permitted, provided the work was completed no later than May 1, 2014.
In early January 2014, during another routine monitoring visit, the same TNC scientist and land manager observed that gravel fill had been placed in a wetland area on the property. TNC sent a second Notice of Violation to Deep Creek regarding the fill.
Shortly thereafter Deep Creek sent a letter to TNC acknowledging that it undertook the pond construction activities “without recognizing or remembering” the requirements of the easement. As of April 2014, however, Deep Creek had not corrected the violations and TNC filed suit.
The Court’s Holdings
The court held that Deep Creek had clearly violated the conservation easement by constructing seven ponds on the property without obtaining prior approval from TNC as required by the easement. Despite having earlier admitted that it had violated the easement by constructing the ponds, at trial Deep Creek claimed it had not violated the easement because, according to a report it obtained from a Professor at Montana State University, the ponds were not ponds but were instead “earthen berms.” The court dismissed this argument, noting that it did “not hold water.” The court explained that (i) Deep Creek had itself repeatedly referred to the ponds as ponds, (ii) Deep Creek had filed for water rights as stock reservoirs for the ponds, and (iii) the ponds appeared to be “ordinary livestock ponds common to Montana ranches; the fact they are dry on occasion does not mean they are not ponds or that there is a factual dispute over the term.” The court further noted that Deep Creek’s post hoc attempt to have an expert opine that the ponds were “earthen berms” was not credible in the face of Deep Creek’s repeated statements to the contrary.
The court also noted that the Professor’s statements that the ponds benefited stock and wildlife were not relevant. “It is not for this Court to assess whether the ponds are a benefit to stock and wildlife,” said the court. Rather, its task was “to interpret the plain language of the easement, which requires prior notification and approval by [TNC for pond construction]."
The Filling of the Wetland
The court also held that Deep Creek had violated the conservation easement by filing a riparian or wet area on the property with material excavated from a nearby location, an action that was prohibited in four different sections of the easement. TNC was able to prove that the fill was not present at the time of the easement’s conveyance through the “baseline report,” which established the condition of the property at the time of the easement’s conveyance.
Good Faith and Fair Dealing
Deep Creek asserted that TNC breached the covenant of good faith and fair dealing that comes with every contract, presumably because TNC would not agree after the fact to allow the ponds and the fill. The court dismissed this argument, noting that Deep Creek could not claim that TNC violated the covenant of good faith and fair dealing when it was Deep Creek’s breach of the easement that led to the litigation. “Deep Creek never asked permission for its actions, which it admits were wrong,” said the court, “[r]equesting permission after the fact is not the same and violates the terms of the easement.” The court also noted that any obligations TNC might have to consider Deep Creek’s requests to construct the ponds and place fill in the wetland “were never triggered” because Deep Creek never requested prior approval from TNC as required by the easement.
The court concluded that Deep Creek had surrendered some of its real property interests when it granted the conservation easement and it was not for the court to determine whether filling the wetland served a beneficial purpose as Deep Creek suggested. Rather, said the court, its task was “to apply the plain language of the easement to the undisputed facts” and, based on those facts, the court found that TNC was entitled to summary judgment regarding the easement violations. The court also noted, however, that “[i]f Deep Creek had requested permission prior to constructing the ponds or filling wetland areas, the results in this case would undoubtedly be different.”
Citing to both the terms of the easement and a recent easement enforcement case from Maryland, McClure v. Montgomery County Planning Board, 103 A.3d 1111 (Md. App. 2014), the court found that restoration of the property to its condition prior to the unauthorized activities was an appropriate remedy.
Although the easement allows TNC to undertake the restoration, the court noted that, “cognizant of Deep Creek’s ranching operations,” it would provide Deep Creek with an opportunity to undertake the restoration. The court ordered Deep Creek to, within 20 days of the court’s order, submit a restoration plan to TNC for TNC’s approval. The order also provides that, if Deep Creek fails to submit such a plan, or if the plan does not meet the requirements for prompt restoration of the property as provided in the easement, TNC can undertake the restoration and Deep Creek would be liable for the costs.
Deep Creek was not, however, required to pay TNC’s attorney fees. According to the court, the conservation easement allows for attorney fees to be awarded to TNC if TNC files an action to correct a violation of the easement, but each party must pay its own attorney fees if the Court finds that no “material” violation has occurred. The court noted that whether Deep Creek’s actions constituted “material” violations was a question of fact the court was not required to resolve. The court explained that Deep Creek did not follow proper procedures and give TNC advance notice of its actions. Accordingly, Deep Creek was required by the easement to return the property to its prior condition regardless of the whether the violations were material. “Under these circumstances” the court found it appropriate for Deep Creek to pay TNCs court costs, but for each party to pay its own attorney fees.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Monday, April 6, 2015
SWF Real Estate v. Comm'r—Special Allocation of Tax Credit Generated by Conservation Easement Donation was Disguised Sale, but Easement Valuation Largely Upheld
In SWF Real Estate, LLC v. Comm'r, T.C. Memo. 2015-63, the Tax Court held that a partnership’s transfer to a 1% partner of 92% of the state tax credit generated by the partnership’s charitable contribution of a conservation easement was a taxable disguised sale under IRC § 707. The court also determined, however, that the partnership had only minimally overstated the value of the easement for federal deduction purposes.
In May 2001, John L. Lewis IV purchased a 674.65 acre parcel in Albemarle County, Virginia (Sherwood Farms), through his wholly-owned S-corporation. The S-Corporation then contributed the farm to SWF Real Estate, LLC (SWF), in exchange for 100% of the membership interests in SWF.
Virginia is one of several states that encourages donations of conservation easements within its borders by giving donors transferable state income tax credits in an amount equal to a percentage of the value of the donated easements. The credits can be used to offset the donors' state income tax liability, dollar for dollar, for a period of years, and excess credits can be sold to other Virginia taxpayers to be used to offset their state income tax liabilities.
After retaining the services of a consultant and being told that the donation of a conservation easement on Sherwood Farm could generate a federal deduction of roughly $6.7 million and a state income tax credit of roughly $3.2 million, Mr. Lewis decided to donate an easement. He also contracted with a Virginia limited liability limited partnership (Virginia Conservation) to help him sell or “allocate” the excess state tax credit generated by the donation (i.e., the amount of credit in excess of what Mr. Lewis could use to offset his own state income tax liability). The Tax Court described Virginia Conservation’s business activities as including “the acquisition and syndication of Virginia tax credits.” The consultant was paid a fee of $356,759 for its services relating to the easement donation and credit transfer transaction.
In December 2005, SWF donated a conservation easement on Sherwood Farm to the Public Recreational Facilities Authority of Albemarle County, Virginia. SWF obtained an appraisal estimating the value of the easement to be $7,398,333 and reported that amount as a charitable contribution on its 2005 federal partnership return.
In the same month, Virginia Conservation contributed approximately $1.8 million to SWF in exchange for a 1% interest, leaving Mr. Lewis with a 99% interest in SWF owned through his S-Corporation. While SWF’s operating agreement allocated partnership profits, losses, and net cash flow to the two partners in proportion to their respective percentage interests, it also provided that most of the state income tax credit generated by the easement donation would be allocated to Virginia Conservation. SWF treated this transaction as a $1.8 million capital contribution by its 1% partner (Virginia Conservation) followed by an “allocation” of roughly 92% of the state tax credit to that partner.
In holding that the alleged capital contribution transaction was, in large part, a disguised sale, the Tax Court relied on the 4th Circuit’s decision in Virginia Historic Tax Credit Fund 2001 LP v. Comm'r, 639 F.3d 129 (4th Cir. 2011), which the Tax Court found to be “squarely on point.” The Tax Court also relied on its earlier decision in Route 231, LLC v. Comm'r, T.C. Memo. 2014-30, which involved a nearly identical transaction (the same 1% partner), and was also found to be a disguised sale.
In explaining its holding, the Tax Court 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 substance of a transaction governs rather than its form, and transfers made between a partnership and a partner within a two-year period are “presumed to be a sale…unless the facts and circumstances clearly establish that the transfers do not constitute a sale.”
In applying the tests under IRC § 707, the Tax Court determined, among other things, that Virginia Conservation would not have transferred money to SWF “but for” SWF’s corresponding transfer of a portion of the tax credit to Virginia Conservation. In addition, SWF’s transfer of a portion of the credit to Virginia Conservation was not dependent upon the entrepreneurial risks associated with SWF’s partnership operations. Rather, Virginia Conservation was promised a legally enforceable, fixed rate of return in the form of a portion of the tax credit in exchange for its alleged capital contribution and it was shielded from suffering any loss through an indemnity clause. There also was no indication that Virginia Conservation reviewed SWF’s financial records pertaining to its farming business and cattle breeding operation; Virginia Conservation was solely interested in the credit transaction.
The timing of SWF’s receipt of the proceeds from the disguised sale was also at issue. SWF argued that the proceeds should be treated as income received in 2006. The Tax Court disagreed, finding that the proceeds (which remained in escrow until 2006) were irrevocably set aside for SWF’s sole benefit in 2005 and only ministerial tasks remained before distribution. Accordingly, pursuant to the “economic benefit theory,” the proceeds were income to SWF in 2005.
Mr. Lewis purchased Sherwood Farm through his S-Corporation in May 2001 for $3.45 million. Four years and seven months later, in December of 2005, he donated an easement on the farm and claimed a federal charitable income tax deduction of $7,398,333 based on an appraisal that indicated that the farm had more than tripled in value to $11,446,233. The IRS challenged SWF's claimed value for the easement.
At trial, SWF and the IRS each offered the report and testimony of a valuation expert. After careful review, the Tax Court found the report and testimony of SWF’s expert to be more credible and reliable than those of the IRS’s expert. The court found the IRS expert’s report and testimony to be “burdened by multiple errors and inconsistencies.”
SWF’s expert at trial concluded that the value of the easement was $7,350,000, or the difference between (i) his estimated before-easement value of $10,460,000 and (ii) his estimated after-easement value of $3,040,000 and a $70,000 “enhancement adjustment.” The enhancement adjustment was the amount by which he estimated that a 65.9-acre parcel located near Sherwood Farm that Mr. Lewis also owned was enhanced in value as a result of the easement donation.
The Tax Court agreed with SWF's expert and concluded that the value of the easement was $7,350,000, or only $48,333 less than what SWF originally claimed. The Tax Court thus reduced SWF's originally claimed value by less than 1%.
Technically, the value of the easement based on SWF’s expert’s report was $7,420,000 (the difference between his estimated before and after easement values). Adjustments for enhancement to nearby noncontiguous parcels owned by the donor do not reduce the value of the easement—they reduce the amount of the deduction. See Treas. Reg. § 1.170A-14(h)(3)(i) (“If the granting of a perpetual conservation restriction…has the effect of increasing the value of any other [noncontiguous] property owned by the donor…, the amount of the deduction…shall be reduced by the amount of the increase in the value of the other property.”) (emphasis added).
The taxpayer has appealed the Tax Court’s holding in Route 231, LLC to the 4th Circuit. Whether SWF will do the same with regard to the disguised sale holding in this case remains to be seen.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Thursday, April 2, 2015
The Supreme Court of Pennsylvania has decided to consider an issue that could have far-reaching consequences for the way attorneys and charities interact. The issue before the court is whether an attorney who has reason to believe that charitable assets are being diverted to private individuals may inform the Attorney General. This issue deals with Rule 1.6 of the Rules of Professional Conduct, which permits breaching attorney-client confidentiality in very limited cases, e.g., to prevent death or serious bodily harm. Not surprisingly, a cloud of secrecy has surrounded the case since late last year, and the order permitting consideration of this issue was only made public in March. A recent article explores this case and its possible implications.
Interestingly, the petitioner’s argument is not based upon Rule 1.6 but rather on the idea that counsel has a fiduciary duty to report unlawful diversions of charitable assets to the Attorney General since the general public is affected. In addition, the petitioner claims that since the charity is a tax-exempt entity supported by the public, it has waived its rights under Rule 1.6. As pointed out in the article, Rule 1.13 is also relevant. Rule 1.13 details the steps an attorney may take within an organization before going outside of it. For example, an attorney may choose to report the matter to higher-ups within the organization. As noted, attorney-client confidentiality serves an important purpose in our society. Overall, we want to promote the seeking out of legal counsel when there is a problem, and this will not happen if potential clients are afraid their confidences will be shared. As noted above, limited, dire circumstances must exist for an attorney to breach attorney-client confidentiality.
At the same time, one must ask whether the attorney-charity relationship calls for a different rule, particularly in the case of public charities. After all, these charities are accountable to the public. Also, given the recent problems associated with IRS oversight and the growing number of charities, attorneys may provide a more helpful, rather than hurting, hand in the quest to monitor an ever-increasingly large number of organizations.
Tuesday, March 31, 2015
Earlier this month, the blog featured a piece on for-profit college conversions. Citing a recent New York Times article, the post noted that several for-profit colleges have decided to become nonprofits to escape certain governmental regulations and bad publicity. Interestingly, a third option is becoming apparent for colleges as reported in Inside Higher Education: becoming a benefit corporation. As you may know, a benefit corporation exists in the space between the for-profit and nonprofit sectors and focuses on achieving a double bottom line: profit and social impact. The first regionally accredited college to take the route of benefit corporation status is Alliant International University in California. Alliant was previously a California nonprofit accredited by the Western Association of Schools and Colleges (“WASC”). Last summer, WASC approved Alliant’s change of status. It is anticipated that other nonprofit institutions will follow suit due to the desire to participate in a new system of health sciences institutions known as Arist Education System. Arist Education System is headed up by University Ventures Fund and supported financially by Bertelsmann, the German media giant. Its purpose is to train health professionals who can work in collaborative teams, which is a new focus of a significant number of hospitals and health systems. It is envisioned that this goal will be accomplished through a focus on student outcomes, and Arist is convinced that such focus will be achieved if the social mission of universities is protected.
The benefit of the change to Alliant is that it may now solicit much needed private funding while still maintaining a public commitment to its mission and public purpose. As a California public benefit corporation, Alliant is required to remain accountable not only to board members and in terms of profit but also to the larger society and in terms of social good. In contrast to for-profit colleges that are changing to nonprofits, Alliance will actually face more regulation as a result of its change in status. As Alliant President Geoffrey Cox noted, by becoming a benefit corporation rather than a for-profit, colleges can preserve their unique missions and attract investors who are looking to leave their funds with them for the long-haul. Finally, I would add that benefit corporation status will keep accountability and transparency in the equation of measuring the performance of colleges in terms of both bottom lines.
Monday, March 30, 2015
As seen in a recent post here, the California Franchise Tax Board did not cite a reason for revoking Blue Shield’s state tax exemption. Many have speculated that its unusually large reserves and attendant issues were the main causes. Blue Shield has $4.2 billion in operating reserves, which is four times the amount Blue Cross and Blue Shield Association requires of its members. This raises two interesting questions (1) what should Blue Shield use the reserves for as a nonprofit and (2) should we penalize nonprofits for having large reserves?
According to the LA Times, public debate has centered on the call for Blue Shield to use its reserves to reduce premiums. Glenn Melnick, a healthcare economist and professor at USC, has noted that Blue Shield should aim to reduce its premiums to a level lower than that of for-profit companies. In thinking about the public purpose of nonprofits, one is perhaps disturbed if the cost of a nonprofit’s service is on par or more expensive than that of a for-profit. To reach this conclusion, one need only look to the recent actions of another big nonprofit in the same healthcare space in California. Kaiser Permanente dropped its rates this year while Blue Shield increased its rates. Albeit, as I posted in December, for-profits certainly would not mind nonprofits’ engaging in price gouging practices as they already feel threatened by the competitive or lower prices of nonprofits and are seeking legal redress. In the ideal world of consumers, Blue Shield would have lower premiums, and for-profit companies would feel increased pressure to lower the amount they charge as Melnick suggests. Instead, Blue Shield already has big plans for a large portion of its reserves, and those plans have nothing to do with passing along reduced rates to consumers. It is planning to use $1.2 billion of its reserves to acquire Care1st, a Medicaid managed-care plan.
At the same time, is it wrong for a nonprofit to have large reserves as a matter of course? A few years ago, The Chronicle of Philanthropy ran a series of posts on this topic. Rick Moyers argues against the stigmatism and penalties associated with nonprofits’ maintaining reserves. He explains that nonprofit directors and board members generally try to avoid having reserves because it makes their organization appear not to need additional funding. Given Blue Shield’s exemption loss, this issue is brought squarely into the legal arena. Historically, nonprofits have been cautioned informally against “accumulating funds that could be used for current program activities” under the US Better Business Bureau’s Wise Giving Alliance’ standards (which translates into not having reserves totaling more than three years of operating expenses). These standards are mentioned in my forthcoming article, which deals with how we can better measure the performance of charities with the end goal of establishing an efficient charitable market where donations are put to their most productive use. In terms of measuring the performance of for-profits, investors do not disfavor them if they decide against using all available funds to further their objectives. Perhaps what is underlying the uproar is that customers are not receiving a measurable benefit from Blue Shield’s decision.
Sunday, March 29, 2015
Sigma Alpha Epsilon’s problems seem to be getting bigger by the second. Most recently, an investigation into the events has discovered that the racist chant the chapter at the University of Oklahoma was caught singing was allegedly taught to some members during a national leadership cruise. Sigma Alpha Epsilon National Headquarters has acknowledged this, yet maintains that racism is not a part of the fraternity’s culture and is committed to eradicating it within its ranks. Upon seeing the racist chant, SAE’s national headquarters has revoked the University of Oklahoma chapter’s charter, set up an anonymous hotline by which members may report allegations of racist activity, and created a diversity chair.
In the fallout of SAE’s mea culpa, college social fraternities have come under a great deal of scrutiny. Some have even called for “racist fraternities” to lose tax-exempt status. To be sure, there is precedent for revoking tax-exempt status from an entity for having a policy of discrimination. In Bob Jones University v. United State, the Supreme Court upheld the IRS’s decision to revoke Bob Jones University's tax-exempt status for having a policy that was hostile to romantic interracial relationships. The Court stated “[i]t would be wholly incompatible with the concepts underlying tax exemption to grant tax-exempt status to racially discriminatory private educational entities. . . . Racially discriminatory educational institutions cannot be viewed as conferring a public benefit within the above 'charitable' concept or within the congressional intent underlying 501(c)(3).”
The Court’s ruling in Bob Jones University is clear: racial discrimination is against public policy and is permissible grounds for the IRS to revoke an organization’s tax-exempt status. However, what is unclear is how Bob Jones University is applicable to the fraternities in question. In Bob Jones University, the school had an explicit policy of discrimination; such is not the case for fraternities today. In fact, one may have a difficult time finding a fraternity with a policy of discriminating on the basis of race, or some other immutable trait recognized under federal law. Many fraternities, like SAE, have a very clear and comprehensive anti-discrimination policy. Any instance of racism in one of the numerous autonomous chapters would be sharply rebuked, and said to have been an isolated incident by its national headquarters.
One might say fraternities at the national level are becoming more progressive. A more cynical view might be that these fraternities have competent counsel familiar with Bob Jones University. In any event the Public Policy Doctrine may be pushed to its limit in these instances. Without demonstrating that a fraternity has an actual discriminatory policy, it is, at best, unclear whether a fraternity could have its tax-exempt status revoked based on the actions of one of its autonomous chapters.
Might there be a more effective approach under federal law in dealing with the problem of racism in fraternities? See, A. Brennen, Tax Expenditures Social Justice, and Civil Rights: Expanding the Scope of Civil Rights Laws to Apply to Tax-Exempt Charities, 2001 B.Y.U.L. Rev. 167.
According to an article in The LA Times, Blue Shield of California, the state’s third-largest health insurer, lost its state tax-exempt status—a benefit it has enjoyed since 1939. According to the article, Blue Shield California has received sharp criticism for high executive compensation, insurance rate hikes for consumers, and billions of dollars in financial reserves. Interestingly, the California Franchise Tax Board has not cited any reason for revoking its tax-exempt status and has declined to comment on the matter. Furthermore, the Franchise Tax Board is considering whether to require Blue shield to pay back taxes.
All one can do is speculate, but what justification might the state have for pulling Blue Shield’s exempt status? Is this a decision based in popular politics rather than law? How might Blue Cross want to approach a challenge to the Board’s decision?
South Carolina tax officials are in the process of investigating a sate nonprofit, Palmetto Kids. Palmetto Kids’ mission includes raising money to help families of children with disabilities pay for private school by awarding tuition grants to worthy recipients. The investigation stems from allegations that Palmetto Kids was soliciting donations, which qualify for state tax credits, in exchange for private school tuition grants. If there is, in fact, a quid pro quo between Palmetto Kids and some of its donors, the donors would be ineligible to receive the tax credits. Palmetto Kids has refused demands by state tax officials to disclose the names of grant recipients; according to a spokesperson for Palmetto Kids, the nonprofit is not at liberty to disclose the names of grant recipients—not even to state tax officials.
Does the fact that a grant recipient may also be a donor mean that the donor’s contribution is not a “gift”? Could better counseling have prevented this inquest by state tax officials? If so, what should Palmetto Kids have done? What should it do going forward? Read more here.
Saturday, March 28, 2015
According to an article in The Chronicle of Philanthropy, Congress is proposing changes in the tax code that could significantly affect nonprofits. Harold Hancock, tax counsel for the House Ways and Means Committee, says changes could include compensation caps for nonprofit executives, a requirement that donor-advised funds distribute their assets to charities within five years, and tighter limits on using the charitable tax deduction. The proposal that has generated the most criticism is the five year spend-down for donor-advised gifts.
What reasons would congress have for imposing such a requirement on donor-advised gifts? As a practical matter, how might the spend-down function? What effect might it have on charitable giving?
Sunday, March 22, 2015
- Pamela Wicker, Neil Longley, and Christoph Breuer, Revenue Volatility in German Nonprofit Sports Clubs
- Wei-Wen Chang, Chun-Mam Huang, and Yung-Cheng Kuo, Design of Employee Training in Taiwanese Nonprofits
- Joseph Lanfranchi and Mathieu Narcy, Female Overrepresentation in Public and Nonprofit Sector Jobs: Evidence From a French National Survey
- Tracey M. Coule, Nonprofit Governance and Accountability: Broadening the Theoretical Perspective
- Daniela Casale and Anna Baumann, Who Gives to International Causes? A Sociodemographic Analysis of U.S. Donors
- Alasdair C. Rutherford, Rising Wages in the Expanding U.K. Nonprofit Sector From 1997 to 2007
- Daniel W. Curtis, Van Evans, and Ram A. Cnaan, Charitable Practices of Latter-day Saints
- Stephan Grohs, Katrin Schneiders, and Rolf G. Heinze, Social Entrepreneurship Versus Intrapreneurship in the German Social Welfare State: A Study of Old-Age Care and Youth Welfare Services
- Steven Reesor Rempel and
- Christopher T. Burris,
- Personal Values as Predictors of Donor- Versus Recipient-Focused Organizational Helping Philosophies
- Patricia Tweet, Book Review: Nonprofit governance: Innovative perspectives and approaches by C. Cornforth and W. A. Brown (Eds.)
- Hans Peter Schmitz,
Book Review: Importing democracy: The role of NGOs in South Africa, Tajikistan, and Argentina by J. Fisher
- Susan M. Chambré, Book Review: Doctors without borders: Humanitarian quests, impossible dreams of Médicins Sans Frontières by R. C. Fox
David J. Herzig (Valparaiso) and Samuel D. Brunson (Loyola Chicago) have written the Slate article Subsidized Injustice: Racist Fraternities and Sororities Should Have Their Tax-Exempt Status Revoked. Drawing on the Supreme Court's 1983 decision in Bob Jones University v. United States, they make the following suggestion:
How can the tax law operate, then, to effect structural change? It can dangle the carrot of their tax exemption in front of them while, at the same time, threatening them with its loss if they do not eliminate discriminatory behavior. We would propose that the IRS begin sending letters to all Greek organizations putting them on notice that if they discriminate, their tax-exempt status will be revoked. They can retain their tax exemption if they demonstrate that they do not discriminate based on race. This provides Greek organizations with a choice. If they are willing to comply with the norms of society, then they can enjoy the benefit of their tax exemption. If they do not wish to conform, they can explicitly signal that desire by forgoing the public subsidy implicit in being exempt from taxation.
Mary Crossley (Pittsburgh) has posted Health and Taxes: Hospitals, Community Health and the IRS on SSRN. Here is the abstract:
The Affordable Care Act created new conditions of federal tax exemption for nonprofit hospitals, including a requirement that hospitals conduct a community health needs assessment (CHNA) every three years to identify significant health needs in their communities and then to develop and implement a strategy responding to those needs. As a result, hospitals must now do more than provide charity care to their patients in exchange for the benefits of tax exemption, and the CHNA requirement has the potential both to prompt a radical change in hospitals’ relationship to their communities and to enlist hospitals as meaningful contributors to community health improvement initiatives. Final regulations issued in December 2014 clarify hospitals’ obligations under the CHNA requirement, but could do more to facilitate hospitals’ engagement in collaborative community health projects. The IRS has a rich opportunity, while hospitals are still learning to conduct CHNAs, to develop guidance establishing clear but flexible expectations for how they assess and address community needs. This Article urges the IRS to seize that opportunity by refining its regulatory framework for the CHNA requirement to more robustly promote transparency, accountability, community engagement, and collaboration, while simultaneously leaving hospitals a good degree of flexibility. By promoting alignment between hospitals’ regulatory compliance activities and broader community health improvement initiatives, the IRS could play a meaningful role in efforts to reorient our system towards promoting health and not simply treating illness.