Tuesday, November 15, 2016
Matthew S. Erie (Oxford) has posted (on SSRN) Sharia, Charity, and Minjian Autonomy in Muslim China: Gift Giving in a Plural World, 43 American Ethnologist 311 (2016). Here is the abstract:
In Marcel Mauss's analysis, the gift exists in the context of a homogenous system of values. But in fact, different types of normative systems can inhabit the same social field. This is the case among Hui, the largest Muslim minority group in China, for whom the “freedom” of the gift resides in the giver's capacity to follow the rules underlying gifting, in this case, the rules of sharia. I call this capacity “minjian (unofficial, popular) autonomy.” Hui follow sharia in pursuit of a good life, but their practices are also informed by mainstream Han Chinese gift practices and by the anxieties of the security state. In their gifting practices, Hui thus endeavor to reconcile the demands of Islamic, postsocialist, and gift economies.
Monday, November 14, 2016
Benjamin W. Akins (Georgia Gwinnett College School of Business) has posted State of Confusion: A Non-Profit's Right to Withhold Information from State Regulators on SSRN. Here is the abstract:
A tempest is brewing, and the non-profit community is sounding an alarm. What started as a simple overlooked regulatory requirement has blossomed into a battlefield as Federal circuits from east to west are weighing the breadth of power state regulators may wield when dealing with charities. The trouble started when some states made the bold move to start enforcing their existing laws. More specifically, the Attorneys General in New York and California started requiring non-profits to disclose the identity of their donors before allowing solicitation activities to occur.
Initially, two organizations filed suit to enjoin the states from collecting their donor information. The charities argued that being compelled to disclose this information would result in a chilling effect, reasoning that donors would shy away from making contributions, which would cause the charities to lose support. Early on in the litigation, courts held that the states had every right to the charities’ donor information and denied injunctive relief.
Then a third organization joined the fray with a similar plan, but in the midst of a wending judicial path, a different course was forged. The organization was granted a full trial and walked away with a win on the merits. While this signaled a temporary change in fortunes for the affected charities, the inconsistent judicial results have left all parties with more uncertainty than when they began. Now, this nascent line of jurisprudence is muddled, and it is up to either the courts or Congress to bring resolution and consistency to this sensitive Constitutional issue.
Brian L. Frye (University of Kentucky), a contributing editor to this blog, has posted Art & the "Public Trust" in Municipal Bankruptcy, University of Detroit Mercy Law Review (forthcoming). Here is the abstract:
In 2013, the City of Detroit filed the largest municipal bankruptcy action in United States history, affecting about $20 billion in municipal debt. Unusually, Detroit owned its municipal art museum, the Detroit Institute of Arts (“DIA”) and all of the works of art in the DIA collection, which were potentially worth billions of dollars. Detroit’s creditors wanted Detroit to sell the DIA art in order to satisfy its debts. Key to the confirmation of Detroit’s plan of adjustment was the DIA settlement, under which Detroit agreed to sell the DIA art to the DIA corporation in exchange for $816 million over 20 years.
The bankruptcy court approved the DIA settlement as fair and in the best interests of the creditors because it found that Detroit could not, would not, and should not sell the DIA art. The bankruptcy court’s conclusion that Detroit could not sell the DIA art was wrong. It could and did sell the DIA art. But the bankruptcy court’s effective conclusion that Detroit was free to sell the DIA art on its own terms was correct.
The Detroit bankruptcy and DIA settlement suggest that art museums should be permitted and even encouraged to sell works of art in order to preserve the rest of their collections and continue operations. Professional standards that prohibit art museums from selling works of art for any purpose other than purchasing works of art are unjustified and should be abandoned.
Brian Galle (Georgetown) has posted Valuing the Right to Sue: An Empirical Examination of Nonprofit Agency Costs on SSRN. Here is the abstract:
Do stakeholder suits against managers reduce agency costs? I examine this question using a large panel of private foundation tax returns, together with hand-collected data on state-law variations in the right of donors to sue wayward nonprofit managers. In both difference-in-differences and triple-difference estimations, I find on average that standing to sue substantially increases donations and reduces the share of firm expenses devoted to administrative costs among private foundations. These outcomes are robust to other estimating strategies, such as propensity-score matching and regression adjustment with inverse probability weights. Coefficients are smaller and less precise among large operating charities. I argue that my results weigh in favor of expanded donor standing to sue, at least for foundations. My findings also suggest that the agency costs of philanthropic organizations are substantial, which has implications for, among other policy debates, tax policies that encourage perpetual-lived philanthropy.
Robert Shireman (The Century Foundation) has published Public and Nonprofit Higher Education as the Optimal Second-Best, 76 Public Administration Review 758 (2016). Here are the first two paragraphs:
A reporter who covers Wall Street recently asked me whether the for-profit college industry has hit bottom yet. She meant the stock price, but my mind went immediately to the predatory behavior—aggressive and misleading marketing and low-quality programs leading hundreds of thousands of students into crippling debt—that has plagued the industry. Those egregious practices were at their worst precisely when the stock prices of for-profit colleges were at their highest. And therein lies the market failure that burdens for-profit higher education: While in other industries consumer value and shareholder value can move in tandem, with products and services like education, the guiding light of the enterprise—the stock price—can lead to the worst outcomes for students.
Education exhibits a problem known as contract failure, in which the buyer cannot reliably evaluate the quality of the promised or provided product or service. As a consequence, profit maximization fails to produce optimal outcomes because the profit-seekers’ drive to overpromise and underdeliver is rewarded rather than punished by the market, causing other firms to emulate the bad behavior. The problem becomes particularly severe if the firms target the least sophisticated or most desperate customers, those who are least able to evaluate the quality of the service provided. Contract failure is common in enterprises with ambiguous goals like building character, developing critical thinking skills, or spiritual fulfillment, or in industries involving vulnerable populations like children (schools) and the elderly (nursing homes).
Kenya J.H. Smith (Arizona Summit) has published Charitable Choice: The Need for a Uniform Nonprofit Limited Liability Company Act (UNLLCA), 49 University of Michigan Journal of Law Reform 405 (2016). Here is the abstract:
Uniform laws serve an important role in our society, balancing state autonomy and the need to provide consistent solutions to common problems among the states. The Uniform Law Commission (ULC) is the preeminent authority that promulgates uniform laws. To date, the ULC has promulgated over 150 uniform and model acts. ULC tackles a wide array of issues, including child custody and protection, probate, electronic records, and commercial law. The ULC aims to “provide[ ] states with non-partisan, well-conceived and well-drafted legislation that brings clarity and stability to critical areas of state statutory law.”
Joannie Tremblay-Boire (Georgia State University Andrew Young School of Policy Studies), Aseem Prakash (University of Washington Political Science), and Mary Kay Gugerty (University of Washington Evans School of Public Policy & Governance) have published Regulation by Regulation: Monitoring and Sanctioning in Nonprofit Accountability Clubs, 76 Public Administration Review 712 (2016). Here is the abstract:
Nonprofits seek to enhance their reputation for responsible management by joining voluntary regulation mechanisms such as accountability clubs. Because external stakeholders cannot fully observe nonprofits’ compliance with club obligations, clubs incorporate mechanisms to monitor compliance and impose sanctions. Yet including monitoring and sanctioning mechanisms increases the cost of club membership for nonprofits. What factors account for the variation in the strength of monitoring and sanctioning mechanisms in voluntary accountability clubs? An analysis of 224 clubs suggests that stringent monitoring and sanctioning mechanisms are more likely in fund-raising-focused clubs, clubs that offer certification (as opposed to only outlining a code of conduct), and clubs with greater longevity. The macro context in which clubs function also shapes their institutional design: clubs in OECD countries and clubs with global membership are less likely to incorporate monitoring and sanctioning mechanisms than clubs in non-OECD countries and single-country clubs, respectively.
Lawrence Zelenak (Duke) has made available a draft article titled The Tax-Free Basis Step-Up at Death, the Charitable Deduction for Unrealized Appreciation, and the Persistence of Error. Here are the opening paragraphs:
As every student of the federal income tax well knows, two of the system’s most glaring conceptual errors are the tax-free step-up in basis at death and the deduction for unrealized appreciation in property donated to charity. The two errors are closely related in both character and history.
As for character, both permit taxpayers to claim benefits which should be conditioned on the recognition of income, despite the absence of any recognition event. A basis step-up at death would be appropriate if gains were taxed at death, and a deduction for the fair market value of an appreciated asset donated to charity would be appropriate if the donation triggered taxation of the appreciation. The provisions are errors because the income tax does not treat either transfers at death or transfers to charity as gain recognition events.
As for history, both mistakes originated very early in the development of the modern federal income tax, and in similar ways. In each case, Congress enacted a statutory provision so vague and general that it did not address the issue, and shortly after enactment the Treasury Department promulgated a regulation introducing the conceptual error. There was no apparent intent on the part of either Congress or Treasury to subsidize bequests of appreciated property, or to subsidize charitable donations of appreciated property more heavily than cash donations; the overly-generous rules resulted from the failure of Congress to consider the issues, and from errors of tax logic made by Treasury when it addressed the issues left open by Congress.
Hat Tip: TaxProf Blog.
Thursday, November 10, 2016
The Philanthropy 400 is the Chronicle of Philanthropy's annual ranking of charities based on private fundraising. This year, for the first time, the Fidelity Charitable Gift Fund was ranked first, bypassing the United Way, in private fundraising. According to the Chronicle, it marks "the first time an organization that primarily raises money for donor-advised funds has held the top spot." Author's aside: Given the growing popularity of DAFs, wouldn't it be super if we had some regs? Just sayin'...
I happened to teach DAFs this morning in my Nonprofits class, right after having done a fairly comprehensive unit on the private foundation excise taxes. It is only after one understands the complexity and burden of Chapter 42 (even after the 2006 PPA changes) can one appreciate the simplicity of the DAFs. We went through a sample DAF agreement from a well-known community foundation, reviewing the restrictions on distributions and the private cy pres power. Even with these limitations, my class seemed pretty convinced that as compared to a private foundation, the DAF is the way to go. Happily from a teaching perspective, they were able to identify the private benefit issue with the commercial providers pretty quickly, although I had few answers on why the IRS didn't originally see it as an issue and continue not to do so.
In any event, the Chronicle has a pro/con opinion section in front of its pay-only firewall, which can be found here (pro) by Howard Husock of the Manhattan Institute and here (con) by Ray Madoff of Boston College. Husock's article teases a forthcoming report by the Manhattan Foundation on donor advised fund fees and spending, which the Chronicle article says will be released this month, so more to come on that. While we wait, I think that Husock's answer to the private benefit issue is somewhat weak ("they have to be managed by someone, so why not Fidelity?' seems disingenous) but I do think that he does a better job addressing some of Prof. Madoff's DAF distribution issues.
You know what else would address some of these issues? Regulations. Just sayin'.
Wednesday, November 9, 2016
This is my week to blog. No matter whether you cheer the results of last night or despair over them, the campaign highlighted a deep divide in this country that goes beyond mere policy disagreement. The existence of that divide was evident (or at least, should have been evident) far earlier than 2:30 am EST last night.
I sat at my keyboard last night and the night before, preparing to write one thing, then preparing to write another thing, and ultimately staring at a relentlessly blank page, wordless. Not that I didn't have a ton to say, mind you - but it's not for here. Not for this blog, which is dedicated to the role of nonprofits and the rule of law. So I went looking today - looking for insight and cool reflection, for direction and structure, looking for a way to process that which divides us so we can, at the very least, talk to one another again. Is there a role that we, the nonprofit sector, can play in that process?
My search brought me to this 1988 article by Barbara Bucholtz entitled "Reflections on the Role of Nonprofit Associations in a Representative Democracy," published well before the tumult of this election cycle. In the introduction, Professor Bucholtz states as follows:
This article concludes that the nonprofit sector makes a significant, probably pivotal, contribution to the American form of representative democracy in at least three respects. First, the nonprofit sector teaches the skills of self-government. Second, it inculcates the habits of tolerance and civility. Finally, it mediates the space between the individual and the other two sectors of society, that is, the "public" or governmental sector and the "private" or "entrepreneurial" or "proprietary" sector. Thus, the nonprofit sector acts as a counterpoise against excessive displays of power emanating from the public or private sectors.
I do recommend the article in full (cite: Cornell Journal of Law and Public Policy, Vol 7, Iss. 2, Article 8, available both on SSRN and at the Cornell website ((linked above)). One might agree or disagree with the theories espoused therein, or take (or not take) the lessons from the Slovakian example described in the Article, but all of that is a bit beside the point at this immediate moment. For me, the article is a welcome reminder that what we do in the nonprofit sector is important, and will continue to be important as we try to bridge the divide that separates us over the coming months and years.
Wishing all of you peace and grace, EWW
Sunday, November 6, 2016
James Fishman (Pace) has the written the following commentary (posted with his permission) on recent news stories relating to charitable solicitation reporting issues involving the Bill, Hillary & Chelsea Clinton Foundation and the Donald J. Trump Foundation:
In a pallid imitation of David Farenthold’s work in the Washington Post on the Trump Foundation, a Scripps News investigation has reported that charity regulators in Mississippi cited the Clinton Foundation for three years beginning in 2001 for failure to register to solicit funds in that state, and the charity did not disclose those instances to some other states as required.
While the Clinton Foundation justifiably can be criticized for inattention to possible conflicts of interest as well as a lack of concern with good nonprofit governance norms, a failure to register in one state for several years followed by the Foundation’s failure to mention it some years later in other states’ annual filing forms are minor infractions equivalent to reporting someone was issued a traffic ticket for parking fifteen inches from the curb, instead of twelve as required by an ordinance.
Almost all of the states require registration in order for a charity to solicit funds. This is accompanied by a requirement of filing a financial report at the end of the year. The registration process is simplified in that almost forty states accept a unified filing statement, which means the charity has to fill out one form and can submit it to all states in which it will try to raise funds. This task is usually done by firms that specialize in fundraising registration and compliance services. The financial reports are likely prepared by the charity’s accountants, who may have no knowledge of the registration process. The charity may not know that a mistake was made in one state, and neither would the accountant. And, as the story indicates, the charity officials who sign the forms may rely on others to prepare them and so not catch inconsistencies between them.
Professor Linda Sugin of Fordham inspected the Trump Foundation’s 990-PF and wrote in a New York Times op-ed piece that there were misstatements made in answering questions whether the foundation engaged in any self-dealing or political activities. That form was likely prepared and filed by Mr. Trump’s accountants, who had little knowledge, like everyone else, of what the Foundation’s activities really were. (The Trump Foundation is registered as a private foundation. Despite its name the Clinton Foundation is a public charity.) So, as was likely the case here with the Clinton Foundation and its charitable solicitation filings, those reporting failures probably reflect more a lack of communication than intentional errors.
Failures of registration by charities to solicit funds are common as many small and new charities are unaware of the requirement. Even larger and more sophisticated charities often make mistakes when completing the many state forms; while a growing number of states accept the unified filing statement, many require additional, state-specific information. When such failures occur, the state’s attorney general or other responsible official will contact the charity, give a period of time to correct the failure, perhaps impose a minor fine, and that’s the end of the situation. Repeated violations may lead to somewhat larger fines, but absent evidence of fraud on the public or other substantive legal violations that is as far it usually goes, although on occasion an attorney general will order a charity to stop soliciting in their state until the filing failures are corrected.
The Trump Foundation, which failed to register anywhere, including its home state of New York, was ordered by New York Attorney General Eric Schneiderman to halt fundraising in New York until it registered, which it later promised to do. What was unique was that the failure to register was the subject of a press release, perhaps the first one ever issued for such an infraction. See Joseph Mead’s post in the Nonprofit Law Prof Blog. Whether the high profile nature of the Trump Foundation may have justified this step, unusual as it was, could certainly be debated.
Given the size and scope of the Clinton Foundation’s activities, not to speak of some legitimate issues for journalistic inquiry, are such inconsequential miscues worthy of the Scripps’ investigative reporters? One the many great things about the election finally taking place will be that the media can return to its normal stable of non-news stories. Kim Kardashian can’t wait.
Friday, October 28, 2016
Yale Daily News, the oldest student newspaper at Yale--and a separately organized 501(c)(3) tax-exempt organization--found itself under criticism for violating tax law when it endorsed Hillary Clinton for President. The Paper issued an opinion piece entitled "NEWS' VIEWS: Hillary Clinton LAW '73 for President," arguing:
We do not endorse Clinton solely because of the disqualifying flaws of her opponent, Donald Trump, whose campaign has disgusted and astonished our board. ... We endorse her because we, as young people, recognize this election is a turning point for our country. And the choice couldn’t be more clear. Voting for Clinton is our obligation to ourselves and to future generations.
The Yale Record--a student humor magazine--responded swiftly and hilariously:
The Yale Record believes both candidates to be equally un-endorsable, due to our faithful compliance with the tax code.
In particular, we do not endorse Hillary Clinton’s exemplary leadership during her 30 years in the public eye. We do not support her impressive commitment to serving and improving this country—a commitment to which she has dedicated her entire professional career. Because of unambiguous tax law, we do not encourage you to support the most qualified presidential candidate in modern American history, nor do we encourage all citizens to shatter the glass ceiling once and for all by electing Secretary Clinton on November 8.
The Yale Record has no opinion whatsoever on Dr. Jill Stein.
Wednesday, October 26, 2016
Rather than talk about news or scholarship, I want to pose a question about experiential approaches to teaching nonprofit law. What are some of the innovative teaching techniques that you have used or heard of in nonprofit law?
One program that I run is a policy advocacy course that puts a mix of law, MPA (public administration) and MNAL (nonprofit management) students to work as lobbyists seeking changes to state and local policies. The catch: students are not allowed to threaten litigation--they have to navigate political structures as a lobbyist (without any cash) would. Our named partner this semester is United Way of Greater Cleveland, but students work with a range of community based organizations on issues ranging from animal cruelty to policy responses to the Heroin crisis, to local nuisance laws that lead to the eviction of victims of domestic violence. The class has proven successful in accomplishing pedagogical goals, enhancing student career opportunities, and making a positive difference in the community.
More common courses/practices in experiential nonprofit law include:
- Board Fellows – several schools (including Cleveland State) run a program where students are placed as trustees on community boards in a non-voting capacity for an academic year
- Start-up Workshop – the number of requests for assistance for creating a new nonprofit can be overwhelming, and law schools might offer advice on filing creation documents and seeking federal tax-exempt status. (Although, for a lot of these requests, the best and most honest advice is that the requester might want to rethink creating a new nonprofit.)
- A Tax or Transactional Clinic -- assist nonprofits with a particular issue or transaction, e.g., Georgetown Law Clinic
- UVa's Nonprofit Clinic - provides a "legal health checkup" to nonprofit boards
Personally, I would like to see more interdisciplinary projects--students from law, business, social work, policy, etc.--to provide a deeper, richer analysis of an issue facing a nonprofit, while also giving students a more complete understanding of nonprofit practice (but disciplinary silos can be hard to break down.)
Other ideas? How else can we get students engaged in meaningful work in nonprofit law?
Thursday, October 13, 2016
Bloomberg reports that a new bill (H.R. 6195) has been introduced that would allow 501(c)(3) organizations to make statements about political campaigns, if the statements “are made in the ordinary course of carrying out its tax-exempt purpose.” Many believe this exemption is overly broad, creating issues with enforcement. Ms. Kinglsey, a Washington attorney, stated that “you’re creating a loophole for people to drive a truck through . . . .” A particular concern related to broadness comes with the lack of a definition of what exactly is an organization’s “regular and customary activities.” Under the bill, a 501(c)(3) organization could not hold a specific fundraiser for a candidate, but they could encourage their constituents to donate to political candidates.
To abate the possibility of an influx of financial donations, the bill states that organizations may not incur more than “de minimis incremental expenses” in the process of making a political statement.
Many church leaders believe they have a fundamental right to voice their political opinion. Erik W. Stanley, senior counsel at Alliance Defending Freedom, said “No tax exemption can be based on a requirement that a church or any other non-profit organization give up a constitutionally protected freedom, including free speech. With regard to churches, they can decide for themselves what they should or shouldn’t say from the pulpit.”
Will Congress view this proposal as a necessary expansion of speech, or as an overly difficult rule to enforce?
In, PBBM-Rose Hill v. Commissioner, Bench Op. (Oct. 7, 2016), the Tax Court sustained the IRS’s disallowance of a $15,160,000 deduction that a partnership claimed with regard to the donation of a conservation easement encumbering a golf course. The court determined that the easement had a value of only $100,000, the partnership failed to satisfy certain requirements in IRC § 170(h) and the accompanying Treasury Regulations, and the partnership was subject to a 40% gross valuation misstatement penalty.
A Tax Court judge is authorized to issue a Bench Opinion in a regular or S case when the judge is “satisfied as to the factual conclusions to be reached in the case and that the law to be applied thereto is clear.” To issue a Bench Opinion, the judge orally states the findings of fact and opinion in court during the trial session and a transcript reflecting the findings of fact and opinion is sent to the parties. Bench Opinions cannot be relied upon as precedent in other cases. See U.S. Tax Court Rules of Practice and Procedure, Rule 152 and Taxpayer Information: After Trial.
In 2002, PBBM-Rose Hill, Ltd., a partnership (PBBM), purchased a 241-acre, 27-hole golf course located in Beaufort County, South Carolina, from Rose Hill Country Club, Inc., for $2.4 million. The golf course was largely interspersed among the houses of a gated community.
PBBM ceased all business operations on the golf course in January 2006, and two months later filed a voluntary Chapter 11 bankruptcy petition.
On December 28, 2007, PBBM contributed a conservation easement to the North American Land Trust (NALT) with respect to 234 acres of the golf-course property (7 acres were excluded from the easement for golf course maintenance and clubhouse areas). Three days later, on December 31, 2007, PBBM sold the golf course to a subsidiary of the Rose Hill Plantation Property Owners Association (a homeowners association) for $2.3 million.
The IRS challenged the deduction claimed for the conservation easement donation on numerous grounds.
The IRS argued that that the donation failed to satisfy the “granted in perpetuity” and “protected in perpetuity” requirements of § 170(h)(2)(C) and § 170(h)(5)(A) because the gift was made without bankruptcy court approval and could have been voided by the bankruptcy trustee. The Tax Court determined that it was unclear whether the gift could have been voided given the facts. It also declined to reach the question of whether the possibility of avoidance caused the easement to fail to satisfy the perpetuity requirements because the easement failed to qualify for the deduction on other grounds.
The IRS argued that the donation failed to satisfy the “granted in perpetuity” and “protected in perpetuity” requirements because the rights reserved to the landowner in the easement allowed for inconsistent uses. Among other things, the easement reserved to the landowner the rights to alter the golf course, build twelve clay tennis courts, build a tennis pro shop, build two houses, create a driveway, create 6,000 square feet of parking areas, and build six-foot high fences.
The IRS presumably argued that the donation did not comply with Treasury Regulation § 1.170A-14(e) (the “no inconsistent use” regulation). This regulation provides, in part, that “a deduction will not be allowed if the contribution would accomplish one of the enumerated conservation purposes but would permit destruction of other significant conservation interests,” and “a use that is destructive of conservation interests will be permitted only if such use is necessary for the protection of the conservation interests that are the subject of the contribution.”
Rather than analyzing whether the retained rights caused the easement to violate the no inconsistent use regulation, the Tax Court stated that the easement permits the majority of the acreage to be used as a golf course; the reserved rights "do not impair the conservation purpose any more than the use of the property as a golf course, which is also permitted by the easement”; and, thus, the "reserved rights alone did not cause the easement to fall outside the definition of a qualified conservation contribution.” Unfortunately, this analysis does little to illuminate the parameters of the no inconsistent use regulation.
The IRS argued that the donation failed to comply with Treasury Regulation § 1.170A-14(g)(6), which requires that a tax-deductible easement be extinguishable only in a judicial proceeding, upon a finding of impossibility or impracticality, and with a payment of a minimum proportionate share of post-extinguishment proceeds to the holder to be used by the holder in a manner consistent with the conservation purposes of the original contribution.
The Tax Court agreed with the IRS on this point. The court first explained that this regulation “elaborates on the protected-in-perpetuity requirement of section 170(h)(5)(A) by setting forth substantive rules to safeguard the conservation purpose of a contribution.” It then noted that the clause included in PBBM’s easement to comply with the “proceeds” component of the regulation was written such that, in some circumstances, the holder would not receive a minimum proportionate share of post-extinguishment proceeds as is required. Accordingly, the easement did not meet the requirements of the regulation and PBBM was not entitled to a deduction for the donation. For a similar holding, see Carroll v. Commissioner.
Conservation Purposes Test
The IRS argued that the easement did not satisfy any of the conservation purposes tests set forth in § 170(h)(4)(A) and the Tax Court agreed.
Outdoor Recreation by the General Public. One conservation purpose for which a tax-deductible easement may be donated is “the preservation of land areas for outdoor recreation by...the general public.” IRC § 170(h)(4)(A)(i). Treasury Regulation § 1.170A-14(d)(2)(ii) provides that this conservation purpose test will not be met “unless the recreation...is for the substantial and regular use of the general public.”
The Tax Court found that the conservation easement failed to satisfy this test. The court noted that, although the easement required that the underlying property be open for substantial and regular use by the general public for outdoor recreation, and NALT could enforce this requirement in court (if it chose to do so), the easement also provided that it did not create any right of access by the public to the easement area. In addition, after the sale of the golf course to the homeowners association, (i) the association converted 9 holes of the golf course into a driving range and a park and operated the remaining 18 holes as a golf course, (ii) the entire area covered by the easement was accessible by car only by a single road and access was monitored by a guarded gatehouse owned and operated by the homeowners association, (iii) members of the public were allowed vehicular access to the property only if the occupants were in the area to play golf or tennis or eat at the clubhouse, and the restricted pass they received warned that any use of the pass for another purpose was not authorized and constituted trespassing, and (iv) a sign on the road to the park read: “Property owners, residents & guests only beyond this point.”
The Tax Court determined that “a significant portion of the property governed by the easement, the park, [was] relatively inaccessible to the public,” and the creation of a private park out of a substantial portion of the property demonstrated that the easement failed to preserve land for outdoor recreation by the general public.
Preservation of Open Space. A second conservation purpose for which a tax-deductible easement may be donated is the preservation of open space (including farmland and forest land) where such preservation is for the scenic enjoyment of the general public, or pursuant to a clearly delineated Federal, State, or local governmental conservation policy, and, in either case, will yield a significant public benefit. IRC § 170(h)(4)(A)(iii).
The Tax Court held that the easement did not preserve the property for the scenic enjoyment of the public. Only a small part of property was visible from off the property, the non-golfing general public was not allowed vehicular access to the golf course, and the general public was not allowed to drive to the park. Accordingly, the easement preserved open space mainly for the benefit of the owners of the houses abutting the golf course and the benefit to the public was not significant.
The Tax Court also held that the easement did not preserve open space pursuant to a clearly delineated governmental conservation policy. Although there were several potentially applicable governmental conservation policies, the court determined that the easement did not promote any of those policies because the land’s ecological value was low and it appeared that the homeowners association could impede (block) public access to walking trails on the property, the use of which by the public might have been compatible with a local “greenway plan.”
Habitat Protection. A third conservation purpose for which a tax-deductible easement may be donated is “the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem.” IRC § 170(h)(4)(A)(ii).
The Tax Court found that the easement also did not satisfy this conservation purpose test. The court noted that the IRS’s expert ecologist witness testified credibly that most of the bird species on the property are common backyard species; the wood stork, a threatened species, forages on the property but does not visit the area frequently compared to other areas of the county; most of the property is golf-course area; the diversity of species on the property is limited; the golf course is dominated by non-native grass species; the golf course requires continued application of fungicides and pesticides, resulting in pollution; the golf course is not conducive to wildlife; although alligators live on the protected property, this is a relatively unimportant species ecologically; the quality of the ponds on the property is similar to that of waterways in urban areas; and many of the trees on the property are in isolated patches or thin strips. The court also specifically rejected the proposition that the property was habitat for wood storks, noting that foraging activity did not convince the court that the property was habitat for the storks.
The Tax Court concluded that the donation did not satisfy any of the conservation purposes tests in § 170(h) and, thus, no deduction was allowable.
Form 8283 (Appraisal Summary)
The IRS argued that PBBM failed to attach a completed Form 8283 to its tax return as required by Treasury Regulation § 1.170A-13(c)(2)(i)(B). The court noted that the following items were missing from Section B, Part I of PBBM's Form 8283: a summary of the physical condition of the property, the date the property was acquired, how the property was acquired, the donor's cost, and the amount claimed as a deduction. However, the court agreed with PBBM that “it is unclear whether a taxpayer donating an intangible right should fill out Section B, Part I, and if so, how these blanks should be filled out for such a contribution.” The court also found that the missing information could be found in other parts of PBBM’s tax return and its attachments. Accordingly, the court held that PBBM substantially complied with the appraisal summary requirement.
The IRS argued that PBBM fail to obtain a qualified appraisal as required by IRC § 170(f)(11)(C) because the appraisal it submitted with its tax return was missing some of the required information. The Tax Court summarily disagreed, noting that it found that the appraisal contained all of the required information.
The appraisal that PBBM submitted with its tax return valued the easement at $15,610,000. PBBM hired the same appraiser to serve as its expert valuation witness at trial, and the appraiser testified at trial that the easement had a value of $13,380,000. In coming up with this figure, the appraiser assumed that the highest and best use of the property before the easement was for commercial and residential (multifamily and single family) use.
The IRS’s expert witness concluded that the easement had a value of only $100,000. He maintained that the highest and best use of the property before the easement was a golf course. He assumed that current zoning restrictions allowed the property to be used only for open space or recreational use, that it was highly unlikely the property could be rezoned for development, and that the owners of adjoining houses would likely oppose development.
The Tax Court agreed with the IRS’s expert. It found that it was uncertain that the owner of the property could have developed the property without permission of the county; it was uncertain that the county would have given its permission had such permission been required; the adjoining homeowners were opposed to development of the property; the opposition would have reduced the chance that the county would have permitted development had its permission been required; and the opposition would also have put economic pressure on the property owner to leave the property undeveloped. The court found that the uncertainties about the possibility of developing the property were so great that an owner would have been discouraged from pursuing development.
The Tax Court concluded that if PBBM had thought the property was worth roughly $15.6 million because of its development potential, it would not have sold the property to the homeowners association for $2.3 million. Although PBBM suggested that environmental concerns motivated it to give up over $13 million of value, the court was unconvinced. It concluded that PBBM donated the easement because it did not think that developing the property was feasible. This conclusion was further supported by the fact that PBBM had assured the bankruptcy court that selling the property for $2.3 million was in the best interests of the bankruptcy estate and the creditors.
The court held that PBBM was liable for the 40% strict liability gross valuation misstatement penalty because the value it reported on its tax return for the easement ($15,160,000) was more than 15 times (or 15,160%) of the court-determined correct value ($100,000). This penalty was applied to the underpayment of taxes resulting from PBBM’s reporting of a $15,610,000 deduction instead of a $100,000 deduction.
PBBM was found not liable for a 20% negligence penalty with regard to the underpayments resulting from the difference between a deduction of $100,000 and a deduction of $0 because PBBM qualified for the reasonable cause and good faith exception. The court explained that the possibility that the gift could have been voided by the bankruptcy trustee did not demonstrate that PBBM acted in bad faith; the proceeds clause was an imperfect, but good faith, attempt to satisfy the extinguishment regulation; and, although the easement did not satisfy any of the conservation purposes tests, BPPM appeared to have made a good faith attempt to meet the requirements of § 170(h).
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Tuesday, October 11, 2016
A recent article by Martin Levine highlights the struggle to define the line between providing education about issues and lobbying for specific legislative outcomes. The center of the controversy revolves around a complaint filed in 2012, when the Center for Media and Democracy and the Common Cause complained to the IRS that the American Legislative Exchange Council (ALEC) was incorrectly classified as a 501(c)(3) organization.
The ALEC characterizes itself as an organization “dedicated to advancing and promoting the Jeffersonian principles of limited government, free markets and federalism at the state level. ALEC accomplishes this mission by educating elected officials on making sound policy and providing them with a platform for collaboration with other elected officials and business leaders.”
The ALEC’s opponents, however, paint a different picture of the organization, claiming “the primary purpose of the organization is to provide a conduit for its corporate members and sponsors to lobby state legislators.”
As evidence of this lobbying, opponents of the ALEC point to a string of tax deductible donations from EXXON to the ALEC totaling over $1.7 million. The ALEC’s official position on climate change only leads to increased suspicions. According to the ALEC, there is no threat to the public from climate change or increased greenhouse gasses. In fact, the ALEC has stated that global warming is beneficial, claiming that “during the warming of the past 100 years global GDP has increased 18-fold, average life span has doubled, and per capita food supplies increased.”
While this information is certainly not determinative of foul play, it does provoke one to question the line between information providing and lobbying.
Monday, October 10, 2016
With the Election approaching, many are voicing their opinion on the Johnson Amendment, which denies 501(c)(3) organizations the ability to actively campaign or lobby for a political candidate. Currently, in addition to being unable to support a candidate for political office, nonprofit organizations are also unable to oppose political candidates.
Proponents of the rule fear that allowing nonprofits to advocate for candidates could create unhealthy political factions within their organizations and communities at large. A larger concern is that donations from these organizations would be tax deductible and could exacerbate the level of spending and the political power of large scale donors, heavily influencing electoral outcomes. A statement from the Americans United for Separation of Church and State exclaimed “If individual organizations came to be regarded as Democratic charities or Republican charities instead of the nonpartisan problem solvers that they are, it would diminish the public’s overall trust in the sector and thus limit the effectiveness of the nonprofit community.”
Opponents of the rule, like Republican Party Nominee Donald Trump, believe that organizations have a right to voice their opinion for leaders they believe would best represent them. In a speech to Christian leaders Trump stated “if you like somebody or want somebody to represent you, you should have the right to do it.” Opponents also believe freeing 501(c)(3) organizations from these regulations would increase voter participation and elevate levels of political debate.
It is unlikely that this debate will be solved in the near-term, and certainly not in time to impact the nearing election. However, a fundamental change to the Johnson Amendment could drastically change the way campaigns are ran and financed.
As noted last week, charities that solicit a significant amount of funds from residents of a state are required to register with the state’s attorney general, and provide some financial information. Complying with all of the nuances of the varied state requirements is burdensome, and many organizations fail to follow all of the rules.
Deciphering all of the state laws is hard enough; now add to this complexity the reality that the tens of thousands of cities, counties, and other local governments often can impose their own requirements in addition to those imposed by their states. For example, the City AND County of Los Angeles, for example, have a lengthy set of regulations for charitable solicitors that differ from those of the State of California.
Compliance with all of these city laws is expensive and enforcement spotty, but there are many dutiful organizations that spend tremendous energy on trying to comply, lest they be the next target of a suddenly-energetic Attorney General or City Solicitor.
Below the jump, I’ll profile the uniquely burdensome—and doubtlessly unconstitutional—set of charitable registration requirements that the City of Toledo, Ohio continues to implement.
Tuesday, October 4, 2016
New York AG issues Notice of Violation to Trump Foundation for Failing to Register before Soliciting Donations
Late last week (and widely reported yesterday), New York Attorney General Eric Schneiderman issued an order (with a press release) to the Trump Foundation directing it to cease soliciting donations until it complies with state registration requirements. New York is one of all but a handful of states require that charities planning to ask for donations in their state (under various circumstances) register with the state. Under these laws, charities are typically required to disclose some basic information about the charity, such as the percentage of raised funds that go to fundraising expenses, and the expenses charged by any professional fundraisers hired. For charities that raise funds from multiple states, registration can be an onerous burden, and there has long been a push to streamline multi-state registration to make compliance easier for nonprofits. Yet this is an unusual case, as I'll explain below the break.
Thursday, September 29, 2016
Shlomit Azgad-Tromer has posted The Virtuous Corporation: On Corporate Social Motivation and Law on SSRN with the following abstract:
Above and beyond their traditional financial roles, contemporary corporations are increasingly assuming a normative role, promoting social agendas. The myriad normative roles assumed by the corporation, from profit-centered corporate goodness, to environmental and human rights corporate agendas and to corporate philanthropy, comprise an emerging corporate social identity. This article asks what induces corporations to pursue social agendas and provides an initial taxonomy for corporate social motivation, showing that the incentives to normative corporate conduct are often rooted in the business purpose itself. Central policy challenges are discussed, outlining the promise and the peril of emerging corporate social identities.