Sunday, September 22, 2013
Adam Chodorow (Arizona State) has posted Charity with Chinese Characteristics, UCLA Pacific Basin Law Journal (forthcoming). Here is the abstract:
Over the past 30 years, scholars and activists have called on the Chinese government to ease the registration and oversight rules governing non-governmental organizations (NGOs) and to increase funding for such organizations by, among other things, broadening the charitable deduction. While China has made significant progress in this regard, the government continues to throw up roadblocks for NGOs, suggesting that it has not fully embraced this path.
This article considers the extent to which the justifications for a broad charitable deduction adduced in the West make sense in China. The goal is to develop a normative basis consistent with Chinese values and interests that Chinese authorities would find compelling and which might lead to additional efforts to develop China’s civil sector. This article also considers the extent to which China’s political and social culture may affect such efforts, concluding that, even if China were to adopt Western-style laws governing NGOs and provide for a broad charitable deduction, China’s culture would shape both how government officials implement the laws and how the Chinese people respond to them, leading to a system of charity, but one with Chinese characteristics.
Danshera Cords (Albany) has posted Charity Begins at Home? An Exploration of the Systemic Distortions Resulting from Post-Disaster Giving Incentives. Here is the abstract:
Looking back to the turn of the twenty-first century, there have been many major disasters, both here and abroad. These disasters all require significant private charitable assistance to provide for victims immediate needs and also see the area through cleanup and recovery.
This article reviews a number of past efforts to encourage charitable giving through temporary tax provisions. While these are well-meaning efforts on Congress’ part, temporary provisions have some significant disadvantages. First, they treat different victims with similar harm differently. Second, they are not enacted following each major disaster. Third, both equity and efficiency would be improved if disaster relief contributions were addressed in a single permanent provision with fixed triggers and established thresholds for incentivizing charitable giving for disaster relief.
This article concludes that a permanent approach should be adopted to improve the aid available to disaster victims. This would also reduce political infighting at the time a disaster has occurred. Ex ante any Congressional district could be hit by a major disaster, everyone should support a permanent solution.
Brian Galle (Boston College) has posted Social Enterprise: Who Needs It?, 54 Boston College Law Review (forthcoming 2013). Here is the abstract:
State statutes authorizing firms to pursue mixtures of profitable and socially-beneficial goals have proliferated in the past five years. In this invited response essay, I argue that for one large class of charitable goals the so-called “social enterprise” firm is often privately wasteful. While the hybrid form is a bit more sensible for firms that combine profit with simple, easily monitored social benefits, existing laws fail to protect stakeholders against opportunistic conversion of the firm to pure profit-seeking. Given these failings, I suggest that social enterprise’s legislative popularity can best be traced to a race to the bottom among states competing to siphon away federal tax dollars for local businesses. Not all hybrid forms inevitably are failures, however. For example, the convertible debt instruments proposed by Brakman Reiser and Dean -- the inspiration for this response -- offer a promising route forward for “cold glow” firms wishing to promise to clean up some easily-measured but harmful business practices.
The Congressional Research Service has issued a report on "501(c)(3)s and Campaign Activity: Analysis Under Tax and Campaign Finance Laws" (copy courtesy of the Election Law Blog). Here is the CRS-prepared summary of the report:
The political activities of Section 501(c)(3) organizations are often in the news, with allegations made that some groups engaged in impermissible activities. These groups are absolutely prohibited from participating in campaign activity under the Internal Revenue Code (IRC). On the other hand, they are permitted to engage in nonpartisan political activities (e.g., distributing voter guides and conducting get-out-the-vote drives) that do not support or oppose a candidate. Determining whether an activity violates the IRC prohibition depends on the facts and circumstances of each case, and the line between impermissible and permissible activities can sometimes be difficult to discern.
Due to the IRC prohibition, Section 501(c)(3) organizations generally are not permitted to engage in the types of activities regulated by the Federal Election Campaign Act (FECA). However, the activities regulated under the IRC and FECA are not necessarily identical. An organization must comply with any applicable FECA provisions if engaging in activities regulated by FECA (e.g., making an issue advocacy communication under the IRC that constitutes an electioneering communication under FECA).
A 2010 Supreme Court case, Citizens United v. FEC, has received considerable attention for invalidating several long-standing prohibitions in FECA on corporate and labor union campaign treasury spending. This case does not appear to significantly impact the political activities of Section 501(c)(3) organizations because they remain subject to the prohibition on such activity under the IRC.
This report examines the restrictions imposed on campaign activity by Section 501(c)(3) organizations under the tax and campaign finance laws. For a discussion limited to the ability of churches and other houses of worship to engage in campaign activity, see CRS Report RL34447, Churches and Campaign Activity: Analysis Under Tax and Campaign Finance Laws, by Erika K. Lunder and L. Paige Whitaker.
Friday, September 20, 2013
We are now at Day 134 according to Paul Caron, with the IRS mess still attracting congressional press releases and media headlines. Recent significant developments include:
A Memo: The House Committee on Oversight & Government Reform released a 19-page memo providing an interim unpdate on its investgation. The memo paints a picture of a political environment in which President Obama and other leader Democrats were publicly and repeatedly criticizing Tea Party and other conservative, nonprofit groups and calling on the IRS to scrutinize them. The IRS, not surprisingly, was well aware of the political sensitivity of the pending Tea Party and 501(c)(4) applications, which led it to subject those applications to both greater scrutiny and higher-level scrutiny, with the now well-documented selectivity problems that tended to disproportionately impact conservative organizations. What the memo does not mention, presumably because the Committee has not found it, is any evidence that White House officials or others outside of the IRS directed the actions of the IRS employees that have come under criticism.
A Chart: USA Today obtained an internal IRS "Political Advocacy Cases" chart dated November 16, 2011 that lists 162 groups with comments relating to the possible political and other activities that might disqualify the groups from tax-exempt status. Of the organizations listed, more than 80 percent were conservative according to the USA Today article, although some progressive groups are also included.
IRS Responses: Recent weeks have seen several IRS actions relating to this mess, including:
- Optional Expedited Process: Over the summer, the IRS announced an optional process under which 501(c)(4) applicants with no private inurement issues and applications pending for more than 120 days as of May 28, 2013, can self-certify that their social welfare spending and time is 60% or more of their total spending and time (and political campaign intervention spendind and time is less than 40%) and by doing so receive a favorable determination within two weeks of doing so.
- Priority Guidance Plan: The IRS also provided in its 2013-14 Priority Guidance Plan that one priority will be "Guidance under §501(c)(4) relating to measurement of an organization's primary activity and whether it is operated primarily for the promotion of social welfare, including guidance relating to political campaign intervention."
- Suspension of Political Activity Audits: In testimony earlier this week before the House Subcommittee on Oversight, Acting IRS Commissioner Daniel Werfel announced that the IRS has suspended all examinations involving possible political campaign activity pending a review of the Exempt Organizations exmination function processes and procedures. He also noted that 29 such exams had been opened during the 2013 fiscal year.
501(c)(6)s: 501(c)(4)s may be old news. A Politico article reported that in November 2011 the Koch brothers helped establish Freedom Partners, a section 501(c)(6) organization with approximately 200 donors who each pay at least $100,000 in annual dues. Freedom Partners distributed the funds its raised - $256 million in its first year of existence of which $236 million went out the door as grants - to a network of conservative groups such as the Center to Protect Patient Rights, Americans for Prosperity, and The 60 Plus Association. As others have noted (Tax Notes Today article, subscription required), a 501(c)(6) has several advantages over a 501(c)(4), including being able to advance business interests instead of social welfare, not being covered by intermediate sanctions under section 4958, possibly also avoiding the public benefit doctrine, and not being subject to state attorney general jurisdiction over charitable organizations. At the same time, donors to 501(c)(6)s are, like donors to 501(c)(4)s, not subject to public disclosure.
Thursday, September 19, 2013
My thanks to Evelyn Brody for bringing the South Carolina Supreme Court's decision in Wilson v. Dallas to my attention. The case arose out of a dispute involving the Estate of James Brown, his alleged spouse, and several of his adult children. James Brown provided in his will and an irrevocable trust that the bulk of his estate should go into a newly created charitable trust, but the individuals involved sought to set aside those directions and instead have the estate divided pursuant to the applicable laws of intestate succession. The then South Carolina Attorney General become involved and directed negotiations that ultimately led to a settlement under which approximately half of the estate went to a charitable trust to be governed by an AG-appointed trustee, and the other half would go to the challenging individuals. The court-appointed personal representatives of the estate and trustees of the irrevocable trust challenged the settlement (and their removal in the wake of the circuit court's approval of the settlement).
While there are many interesting aspects of the decision, the most significant is the Supreme Court's criticism of the AG's role in shaping the settlement that the court ultimately found was not just and reasonable. I will let the court's speak for itself:
- "In our view, the evidence does not support the finding that the compromise was just and reasonable. The compromise orchestrated by the AG in this case destroys the estate plan Brown had established in favor of an arrangement overseen virtually exclusively by the AG. The result is to take a large portion of Brown's estate that Brown had designated for charity and to turn over these amounts to the family members and purported family members who were, under the plain terms of Brown's will, given either limited devises or excluded."
- "We find the compromise proposed here is fundamentally flawed because the entire proposal is based on an unprecedented misdirection of the AG's authority in estate cases."
- "The AG undoubtedly has the authority to intervene to protect the public interest of a charitable trust. However, the AG has no authority to become completely entrenched in an action that began here as one to set aside a will and for statutory shares, direct the settlement negotiations, and then fashion a settlement that discards Brown's will and his 2000 Irrevocable Trust and replaces them with new trusts, only to give himself sole authority to select the managing trustee. By so doing, the AG has effectively obtained control over the bulk of Brown's assets and has given his office unprecedented authority to oversee the affairs of the parties that has not heretofor been recognized in our jurisprudence."
- "As the enforcer of charitable trusts, we believe the AG's efforts would have been better served in attempting to make a cursory evaluation of the claims rather than directing a compromise which ultimately resulted in the AG obtaining virtual control over Brown's estate. Based on all the circumstances, we do not believe the effect of the compromise is just and reasonable, and we cannot condone its approval."
- "The settlement provisions allowing the AG to select the trustee, and his continued influence over the trust overreaches his statutory authority, as there is no provision allowing an AG to become involved in the day-to-day operations of a trust. Moreover, the AG's primary job is the enforcement of charitable trusts, and in this case, the compromise dismantles the existing charitable trusts, to great ill effect on Brown's estate plan, rather than enforces it."
The Supreme Court concluded by remanding the case to the circuit court to appoint fiduciaries to implement the original directions provided for in the will and irrevocable trust.
Oregon Tax Court Issues Split Property Tax Exemption Decisions for Substance Abuse Treatment Facilities
On August 30th, the Oregon Tax Court issued two opinions that reached opposite results regarding whether a particular substance abuse treatment facility qualified for exemption from property tax. In each case the key question was whether the facility met the "gift or giving" requirement for exemption under applicable case law.
In Hazelden Foundation v. Yamhill County Assessor, the court concluded the facility did not qualify for exemption. It held that the "gift or giving" requirement incorporated a "doors are open to rich and poor alike" element, and that the Hazelden Foundation failed to satisfy this element. More specifically, the court found that the Foundation limited financial assistance to patients unable to afford the Foundation's normal, relatively high fees and refused to accept payment from Medicare or Medicaid , suggesting "that taxpayer's services are specifically targeted at the more affluent segments of our society."
In contrast, in Serenity Lane Inc. v. Lane County Assessor, the court concluded that the facility did qualify for exemption. While the court found that the record was somewhat mixed on whether Serenity Lane met the gift or giving requirement, the combination of the facility's acceptance of patients on Medicaid, its charging of below market rates for its detox services and certain other services, the offering of scholarships to some financial needy patients, and its internship program led the court to conclude that the facility did satisfy that requirement.
These decisions underline the fact-sensitive nature of such property tax exemption inquiries, and high litigation costs for both sides of litigating these disputes. Given the current pressures on both nonprofit budgets and state and local treasuries, such disputes are unlikely to become any less frequent, however.
I previously blogged about the downfall of the once $140 million per year Angel Food Ministries. According to U.S. Attorney Michael Moore, the heart of the problem was the greed of its founders, who pled guilty to using the charity's funds and other assets for personal gain in violation of federal fraud and money laundering statutes. Under a plea agreement, founder Joe Wingo and his son Andrew Wingo each received seven-year prison sentences, while Joe Wingo's wife and ministry co-founder Linda Wingo received five years of probation after pleading guilty to concealing a felony. A federal district court also ordered the defendants to pay almost $4 million in restitution and fines.
Wednesday, September 18, 2013
As readers of this blog know, two lawsuits challenging the preferential federal tax law treatment of churches and ministers and brought by the Freedom from Religion Foundation survived motions to dismiss on standing grounds . A year ago, the U.S. District Court for the Western District of Wisconsin found FFRF had standing to challenge the income tax exemption for parsonages and pastor housing allowances provided by Internal Revenue Code section 107. About a month ago, the same court concluded FFRF had standing to challenge the IRS's alleged lack of enforcement of the section 501(c)(3) political campaign intervention prohibition as against churches.
Finally, about four weeks ago the same court rejected the government's motion to dismiss FFRF's complaint challenging the exemption for churches from having to file an annual information return (the Form 990) with the IRS. Relying heavily on its decision in the first case it considered, the court found that FFRF alleged a sufficient injury in fact because it is not able to claim such an exemption since it does not qualify as a church. FFRF also challenged the exemption of churches from the exemption application (Form 1023) requirement applicable to other groups seeking recognition of their section 501(c)(3) status, but the court questioned whether FFRF and the other plaintiff in the case had a future injury in fact that would justify the injunctive relief they were seeking given that both groups had already filed their applications and paid their application fees. It therefore asked the plaintiffs to demonstrate why their second claim should not be dismissed.
As John Colombo detailed in his previous post about the second case, and for the reasons Johnny Rex Buckles described in this space more generally and I also discussed with respect to Establishment Clause claims, this trio of decisions appears inconsistent with long-standing precedents relating to standing in the tax area. The judge in all three cases also has previously been reversed on a standing issue relating to an Establishment Clause challenge to the National Day of Prayer brought by FFRF. In that case the district court found the statute requiring that the President proclaim a National Day of Prayer each year to be a violation of the Establishment Clause, but the U.S. Court of Appeals for the Seventh Circuit concluded FFRF and the other plaintiffs lacked standing to bring the case (Freedom from Religion Foundation v. Obama, 651 F.3d 803 (7th Cir. 2011)).
A similar fate for the trio of tax cases therefore seems likely as well. Before the cases get to the appellate court, however, there may be some interesting information uncovered in discovery. While the housing allowance and Form 990 cases appear to turn solely on the statutory provisions and so should not require much if any factual discovery, the lack of enforcement case would appear to require discovery regarding the extent to which the IRS has enforced the political campaign intervention prohibition as against churches and non-churches in recent years. While there is some anecdotal information available regarding such enforcement efforts, since the quiet end of the IRS's Political Activity Compliance Initaitive after the 2008 election season (and perhaps earlier - the IRS never issued a report for that election season) there has not been more comprehensive information available regarding enforcement in this area. While not FFRF's primary aim, the discovery in their lawsuit may reveal a lot about the frequency and results of that enforcement.
In Department of Texas v. Texas Lottery Commission, a panel of the U.S. Court of Appeals for the Fifth Circuit confirmed its earlier decision that upheld as constitutional a Texas statute allowing charitable organizations to raise money by holding bingo games but conditioned on the money so raised only be used for the organizations' charitable purpose and not for certain types of political advocacy, including lobbying. While the result is perhaps not surprising, the decision is interesting in a couple of respects.
First, in rejecting a standing argument by the defendants, the court concluded that political advocacy such as lobbying is not inherently inconsistent with serving a charitable purpose. While it noted that federal tax law limits the amount of political advocacy by some nonprofit organizations, it did not find that those limits supported the argument such advocacy was inherently inconsistent with federal tax exemption. This is definitely the right conclusion, but it is a relief to see the court clearly state this is the case in the face of the defendants' argument to the contrary.
Second, the decision required the court to discuss the application of the unconstitutional conditions doctrine to a speech-related restriction on nonprofit organizations in the wake of Citizens United. There has been some speculation that Citizens United may have undermined earlier decisions finding such restrictions to be constitutional if tied to a government subsidy, although most commentators have rejected such views. See, e.g., Paul Weitzel, Protecting Speech from the Heart: How Citizens United Strikes Down Political Speech Restrictions on Churches and Charities, 16 Texas Review of Law & Politics 155 (2011). The court flatly rejected this argument, concluding that Regan v. Taxation with Representation and Rust v. Sullivan remain good law and distinguishing Citizens United on the grounds that (1) Citizens United did not involve a government subsidy to which the speech restriction at issue was tied and (2) Citizens United involved an outright ban on a specific type of political speech as opposed to a limit on using certain (government subsidized) funds for such speech.
Third and finally, unlike the panel's original decision the new, substituted decision drew a dissent. Chief Judge Carl Stewart concluded that the speech restriction was in fact an unconstitutional condition. His point of disagreement was that in his view permitting charities to raise money by holding bingo games did not constitute a "subsidy" in that no funds from the public fisc went to the charities who held such games. Absent a subsidy, he concluded that TWR and Rust were not applicable and so, under Citizens United, the Commission had the burden of identifying a sufficiently compelling reason for the speech restriction, which it failed to do.
Tuesday, September 17, 2013
ARNOVA's annual conference, titled Recession, Renewal Revoluation? Nonprofit and Voluntary Action in an Age of Turbulence, will be held in Hartford, CT on November 21-23. As usually, there are an enormous number of sessions to choose among, including 19 programs in the Public Policy & Law track alone. Sessions that looked to be of particular interest to legal scholars include:
- Defining Our Boundaries by the Legal Definition: Implications for a Changing World of Research and Practice
- Regulatory Waves: Understanding and Predicting Local, National and International Intervention Policies in the Nonprofit Sector
For those of you not attending ARNOVA's annual conference this year, DePaul and Northern Illinois are sponsoring The Future of NGO Studies Conference in Chicago on November 19-20. While the full list of presenters is too long to reproduce here (see the Sessions list), for the Tuesday evening plenary discussion the panelists will be:
- Erica Bornstein, University of Wisconsin-Milwaukee (Anthropology)
- Inderpal Grewal, Yale University (Women's, Gender, and Sexuality Studies)
- David Lewis, London School of Economics (Social Policy)
- Steven Sampson, Lund University (Anthropology)
- Aradhana Sharma, Wesleyan University (Antrhopology)
- Cleta Mitchell of Foley & Lardner
- Marcus Owens of Caplin & Drysdale
- John Pomeranz of Harmon, Curran, Spielberg & Eisenberg
Given their public comments to date, I expect the presenters will not have identical views regarding either what happened or what should be done. The Institute's William Schambra will moderate.
Sunday, September 15, 2013
About two weeks ago, George Prentice of the Boise Weekly posted an article discussing a couple situations where the Idaho Tax Commission has strictly enforced the state’s six percent sales tax. The article explained the commission demanded that a twelve year old boy pay the six percent sales tax on his earnings from the roadside stand he set up to sell raspberries grown on his father’s farm. The commission also stopped by a local fundraiser event to make sure that the people who made purchases at the charity auction were paying Idaho’s six percent sale tax.
The little boy was saving for a small pit bike and the fundraiser was for a woman who was injured in attack at a local Boise mall.
What are the similarities, if any, between the Idaho Tax Commission methods of enforcing the state’s sales tax in these situations and the IRS’ treatment of nonprofits? What are the differences? Is there something troublesome about strictly enforcing a sales tax in either or both of these situations? Could the IRS adopt a similar approach to regulate nonprofit tax-exemption?
Earlier this week, the IRS revoked the tax-exempt status of an Oklahoma nonprofit group, Turn Tulsa Pink. The organization is “the fundraising arm” of Breast Impression, a local Tulsa § 501(c)(3) nonprofit that assists patients battling breast cancer.
Turn Tulsa Pink’s problems started back in May after the IRS revoked Breast Impressions tax-exempt status for failing to file a Form 990 for three consecutive years. Breast Impressions’ executive director said the reason the organization failed to file the proper forms was “due to an administrative oversight.” The executive director went on to explain that after learning about the error the organization immediately sent the IRS all of the required information, a retroactive reinstatement request, and the necessary fees.
The Form 990 is the IRS’ principle reporting document and accountability tool. All federally tax-exempt organizations, except for churches, are required to file the Form 990.
What are the reasons for excluding churches from filing a Form 990? Is it fair that other charities risk losing their tax-exempt status for failing to do the same thing churches are excused from doing? What are the arguments that Turn Tulsa Pink should or should not be required to file a Form 990?
Several months ago, a California committee approved legislation that would revoke tax-exempt status of nonprofit organizations that fail to “embrace homosexuality.” Senate Bill 323 prevents “an organization that is a public charity youth organization that discriminates on the basis of gender identity, race, sexual orientation, nationally, religion, or religious affiliating” from enjoying exemption from California state taxes.
To keep their tax-exempt status, youth organizations must subscribe to provisions, coined “gender identity” and “sexual orientation” guidelines. The organizations named in the legislation include Little League, Boy Scouts, YMCA, and YWCA.
Opponents of the legislation argue that the proposed law is a “blatant use of extortion” and holds “nonprofit groups financially hostage” and tramples individual organizations’ First Amendment rights.
Are the opponents correct? What issues are there with “public charity youth organizations” failing to embrace homosexuality while enjoying First Amendment protection and state tax-exemption?
Wednesday, September 11, 2013
Last week, the Suffolk City Council voted to no longer accept local property tax-exemption applications from non-profit organizations. Members of the council voted after a two-year study showed that the exemption was costing the city money. Suffolk’s Chief of Staff also explained that many of the nonprofit organizations applying for the exemption were actually able to afford the tax bill.
This is not the first time a city has complained that local property tax-exemptions for nonprofit organizations drain the city’s budget. However, unlike Suffolk, many cities have refrained from refusing to accept tax-exempt applications entirely.
One Suffolk councilman feels the city’s decision is too restrictive. He argued that the city could have contained the number of nonprofits enjoying the exemption by carefully scrutinizing the organizations on a case-by-case basis and by reserving the exemption for those nonprofits with the most need.
The council’s decision raises a few interesting questions. Should it matter that some nonprofit organizations applying for the exemption could “afford the tax bill?” Why weren’t the applications for tax-exemption previously scrutinized on a case-by-case basis? What justifications support the argument that the exemption should be reserved for nonprofits with the most need?
Lately, debates regarding the NFL’s tax-exempt status are not uncommon. While the NFL has successfully defended its tax-exempt status as a § 501(c)(6) organization, many people still believe that the advantages of eliminating the NFL’s exemption sufficiently outweigh the disadvantages. In fact, some people argue that there are no real disadvantages of eliminating the NFL’s tax-exemption and that the NFL should follow the MLB’s lead and voluntarily give up its tax-exempt status.
Acknowledging that one goal of tax policy is economic efficiency, it is particularly interesting that § 501(c)(6) explicity lists “professional football leagues.” What it is about exempting “professional football leagues” that furthers the goal of economic efficiency? What arguments support the claim that there are no disadvantages of eliminating the NFL’s tax-exemption?
Friday, August 30, 2013
Mitchell v. Commissioner Revisited – 170(h) Requires Perpetuation of Conservation Easement Itself, Not Just Conservation Purposes
In Mitchell v. Commissioner, T.C. Memo. 2013-204 (Mitchell II), the Tax Court denied the taxpayer’s motion for reconsideration and supplemented its opinion in Mitchell v. Commissioner, 138 T.C. No 16 (2012) (Mitchell I). In Mitchell I, the court sustained the IRS's disallowance of a charitable income tax deduction claimed with regard to a conservation easement donation because the taxpayer failed to satisfy the mortgage subordination requirement of Treasury Regulation § 1.170A-14(g)(2).
To be eligible for a deduction under IRC § 170(h) for the donation of a conservation easement, the easement must, among other things, be “granted in perpetuity” and its conservation purpose must be “protected in perpetuity.” IRC § 170(h)(2)(C), (h)(5)(A).
To satisfy the "protected in perpetuity" requirement:
(1) the easement must be granted to an “eligible donee” as defined in Treasury Regulation § 1.170A-14(c)(1) (i.e., a qualified organization that has “a commitment to protect the conservation purposes of the donation” and “the resources to enforce the restrictions”),
(2) the easement must prohibit the donee from transferring the easement, whether or not for consideration, except for transfers to other eligible donees that agree to continue to carry out the conservation purposes of the easement as provided in Treasury Regulation § 1.170A-14(c)(2),
(3) the easement must not permit “inconsistent uses” as specified in Treasury Regulation § 1.170A-14(e) (i.e., uses that would injure or destroy significant conservation interests), and
(4) the various “enforceable in perpetuity” requirements of Treasury Regulation § 1.170A-14(g) must be satisfied, namely
- the general enforceable in perpetuity requirement ((g)(1)),
- the mortgage subordination requirement ((g)(2)),
- the mining restrictions requirement ((g)(4)),
- the baseline documentation requirement ((g)(5)(i)),
- the donee notice, access, and enforcement rights requirements (g)(5)(ii)), and
- the extinguishment and division of proceeds requirements ((g)(6)(i) and (ii)).
See Treas. Reg. § 1.170A-14(e)(1); S. Rep. No. 96-1007, 1980-2 C.B. 599 (explaining the protected in perpetuity requirement). Each of these requirements plays an important role in ensuring that the conservation purpose of a tax-deductible easement will be "protected in perpetuity" as Congress intended.
Treasury Regulation § 1.170A1-4(g)(2) – the mortgage subordination requirement – provides that, in the case of a contribution made after February 13, 1986, of an interest in property that is subject to a mortgage, no deduction is permitted unless the lender subordinates its rights in the property “to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.” In Mitchell I, a partnership of which the taxpayer was a partner donated a conservation easement but did not obtain a subordination agreement from the lender holding an outstanding mortgage on the subject property until two years after the date of the gift. The Tax Court sustained the IRS's disallowance of the taxpayer's claimed deduction for the donation, finding that "the regulation requires that a subordination agreement be in place at the time of the gift.” The court explained that, had the partnership defaulted on the mortgage before the date of the subordination, the lender could have instituted foreclosure proceedings and eliminated the conservation easement. Accordingly, the conservation easement was not protected in perpetuity at the time of the gift as is required by IRC § 170(h).
In Mitchell I the taxpayer argued that the conservation purpose of the easement had been protected in perpetuity at the time of the gift even without a subordination agreement because the probability that the partnership would have defaulted on the mortgage was so remote as to be negligible. The Tax Court rejected that argument, holding that a taxpayer cannot avoid meeting the strict requirement of the subordination regulation by making a showing that the possibility of foreclosure is so remote as to be negligible. The court explained that “[t]he requirements of the subordination regulation are strict requirements that may not be avoided by use of the so-remote-as-to-be-negligible standard” of Treasury Regulation § 1.170A-14(g)(3).
In Mitchell II, the taxpayer argued that the First Circuit’s decision in Kaufman v. Commissioner, 687 F.3d 21 (1st Cir. 2012) (Kaufman III), was an intervening change in the law that required the Tax Court to reconsider its opinion in Mitchell I. The Tax Court disagreed, explaining that not only is Kaufman III not binding in Mitchell, Kaufman III addressed legal issues different from the one present in Mitchell. Kaufman III, explained the court, "addressed the proper interpretation of the proceeds regulation and, in particular, the breadth of the donee organization’s entitlement to proceeds from the sale, exchange, or involuntary conversion of property following the judicial extinguishment of a [conservation easement].” Mitchell, on the other hand, addressed interpretation of the mortgage subordination regulation.
The Tax Court also rejected all three of the taxpayer’s specific arguments in Mitchell II.
- The taxpayer argued that the partnership's financial ability to discharge the mortgage at any time before the date on which the lender agreed to the subordination “was the functional equivalent of a subordination.” The Tax Court summarily dismissed that argument, explaining “There is no functional subordination contemplated in [Treasury Regulation § 1.170A-14(g)(2)], nor do we intend to create such a rule.”
- The taxpayer argued that the Tax Court had held in Carpenter v. Commissioner, T.C. Memo 2012-1, that Treasury Regulation 1.170A-14(g)(6) "merely creates a safe harbor,” and given the opinions in Kaufman III and Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir., June 21, 2011), “the entire regulation could and should be read as a safe harbor.” The Tax Court explained that it had rejected a similar argument in Carpenter v. Commissioner, T.C. Memo. 2013-172 (Carpenter II), and reiterated that the specific provisions of Treasury Regulation § 1.170A-14(g), including paragraph (g)(6) and (g)(2) "are mandatory and may not be ignored." For a discussion of Carpenter II, see Carpenter v. Commissioner Revisited: Federally-Deductible Conservation Easements Must be Extinguishable Only in a Judicial Proceeding.
- The taxpayer further argued that the court should "draw a general rule" with respect to the in-perpetuity requirement of IRC § 170(h)(5)(A) and Treasury Regulation § 1.170A-14(g) from the analysis in Kaufman III. In particular, the taxpayer argued that “The regulation emphasizes perpetuating an easement’s purpose as opposed to the conservation easement itself. The proceeds are protected which is the goal of the law.” The Tax Court rejected that argument, stating “Nowhere in Kaufman III did the Court of Appeals for the First Circuit state a general rule that protecting the proceeds from an extinguishment of a conservation easement would satisfy the in-perpetuity requirements of section § 1.170A-14(g) ... generally.”
The Tax Court has distinguished the holdings in Kaufman III and Simmons in three cases, Belk v. Commissioner, T.C. Memo. 2013-154, Carpenter II, and Mitchell. This was appropriate. Among other things, Kaufman III and Simmons did not address the specific statutory or regulatory requirements at issue in Belk, Carpenter, or Mitchell, and the holdings in Kaufman III and Simmons were based on the specifics facts of those facade easement donation cases. For a discussion of this latter point, see Belk v. Commissioner - Tax Court Reaffirms its Holding that “Floating” Conservation Easements Are Not Deductible
Thursday, August 29, 2013
Back in March, the City of Pittsburgh decided to file suit to have the University of Pittsburgh Medical Center's state property-tax exemption revoked. I'm not an expert in Pennsylvania law, so I've refrained from commenting on the merits of this effort. But I am an expert in tax-exemption under Internal Revenue Code Section 501(c)(3), and in reviewing the background of this particular dispute, an interesting point popped up: UPMC may not qualify for exemption under even the generous community benefit standard adopted by the IRS in Rev. Rul. 69-545.
First, some background for those not steeped in the law of hospital tax exemption under Internal Revenue Code 501(c)(3). Essentially from the beginning of the income tax until 1969, the IRS took the position that hospitals were tax exempt only when they provided substantial free care for the poor. This view was set forth in Rev. Rul. 56-185, which held that nonprofit hospitals would be exempt when operated to the extent of their financial capability to provide free or below-cost services for those who could not afford to pay.
In 1969, the IRS changed its position, and adopted what most now refer to as the "community benefit" standard for exemption of nonprofit hospitals in Rev. Rul. 69-545. In this ruling, the IRS held that providing health care services for the general benefit of the community was a charitable purpose, even if a segment of the population (uninsured poor) was excluded "provided that the class is not so small that its relief is not of benefit to the community." The ruling then found that "Hospital A" was exempt under this test, because it had a community board, an "open" medical staff (admitting privileges granted to all who met standards of competency) and most importantly for purposes of this blog post, "By operating an emergency room open to all persons and by providing hospital care for all those persons in the community able to pay the cost thereof either directly or through third party reimbursement, Hospital A is promoting the health of a class of persons that is broad enough to benefit the community." (Emphasis added). Thus the third and fourth criteria for exemption were an "open" emergency room, where all patients were treated without regard to ability to pay and treatment of all patients with third-party insurance (including insurance provided by government, such as Medicare and Medicaid).
So what does all this have to do with UPMC? One of the issues at the heart of Pittsburgh's dispute with UPMC revolves around UPMC's decision to "freeze out" people who signed up for insurance with a competing health provider. Essentially, UPMC is locked in a battle with competitor Highmark over access by patients with Highmark's health insurance to UPMC facilities. UPMC decided not to permit Highmark customers "in network" access to UPMC, meaning that these facilities would be far more expensive to patients with Highmark insurance than patients who insure via UPMC's own captive insurance company. The Chair of UPMC's Board of Directors has been remarkably candid about this, even penning an explanation in a guest column in The Pittsburg Post-Gazette.
So here's the question. If an exempt charitable hospital adopts policies that intentionally discriminate (economically) against patients with "third party reimbursement" designed essentially to force patients with "other" insurance to use "other" facilities, then is that hospital "providing hospital care for all those persons in the community able to pay the cost thereof either directly or through third party reimbursement"? UPMC's policy arguably is purposefully exclusionary, and such an exclusionary policy could be read as inconsistent with the test adopted in Rev. Rul. 69-545. (I realize there is a counter-argument here: that argument is that Highmark's patients would still be able to access UPMC's services as "out of network" patients. Hence, no one is being excluded from UPMC; it's just going to cost Highmark patients a whole lot more. But "any fool knows" what is going on here: UPMC is adopting a purposefully discriminatory stance to punish a competitor). My own view on this is simple: "charitable" hospitals ought not be permitted to discriminate economically with respect to its geographic patient base. This kind of behavior is what we would expect of cut-throat for-profit businesses . . . but perhaps that's exactly what UPMC and other nonprofit hospitals have become.