Thursday, January 8, 2015
Mitchell v. Commissioner—10th Circuit Affirms Tax Court, Mortgages Must Be Subordinated When Conservation Easement is Donated
In Mitchell v. Commissioner, _ F.3d _ (10th Cir. 2015), the 10th Circuit Court of Appeals affirmed the Tax Court’s holding that, to be eligible for a deduction for the donation of a conservation easement under Internal Revenue Code § 170(h), any outstanding mortgages on the underlying property must be subordinated to the rights of the holder of the easement at the time of the gift.
In 2003, a partnership of which Ms. Mitchell was a partner donated a conservation easement with a claimed value of $504,000 to a land trust. The terms of the deed purported to transfer the easement to the land trust in perpetuity and in a manner necessary to satisfy the requirements of § 170(h). However, the partnership did not obtain a subordination agreement from the lender holding an outstanding mortgage on the subject property until almost two years following the date of the donation.
The IRS argued that the mortgage subordination requirement is a bright-line requirement that requires any existing mortgage to be subordinated to the rights of the holder of the easement, irrespective of the risk of foreclosure or any alternate safeguards. The IRS also asserted that subordination must occur at the time of the donation because, without subordination, the easement would be vulnerable to extinction upon foreclosure and, thus, the conservation purpose would not be protected in perpetuity as required under § 170(h). The 10th Circuit agreed with the IRS.
Delegation of Rulemaking and Deference to Commissioner
The 10th Circuit first explained that, although taxpayers are generally not permitted to deduct charitable contributions of partial interests in property, Congress made an exception to this rule for contributions of conservation easements—provided the contributions meet certain statutory requirements. One such requirement is that the conservation purpose of an easement must be “protected in perpetuity.” The 10th Circuit explained that, because the Code does not define the phrase “protected in perpetuity” or otherwise describe how a taxpayer may accomplish this statutory mandate, “Congress has tasked the Commissioner with promulgating rules to ensure that a conservation purpose be protected in perpetuity.” Acting pursuant to that authority, the Commissioner promulgated Treasury Regulation § 1.170A-14(g), which includes the mortgage subordination requirement.
Citing to the Supreme Court’s holding in Mayo Found. for Med. Educ. & Research v. United States, 131 S.Ct. 704, 711 (2011), the 10th Circuit noted that, because the Commissioner promulgated the regulations under § 170(h) pursuant to the authority granted to him by Congress, the regulations are binding on taxpayers unless they are “arbitrary and capricious in substance, or manifestly contrary to the statute.” In addition, “where Congress has delegated to the Commissioner the power to promulgate regulations for the enforcement of the Code, ‘[the court] must defer to his regulatory interpretations of the Code so long as they are reasonable.’”
The 10th Circuit explained that requiring existing mortgages to be subordinated to conservation easements prevents extinguishment of the easements in the event the landowners default on the mortgages. In this way, said the court, the mortgage subordination requirement is “reasonably related” to Congress’s mandate that the conservation purpose be protected in perpetuity. The 10th Circuit also rejected Ms. Mitchell’s claim that the mortgage subordination provision is arbitrary and capricious, and therefore unenforceable. Although declining to consider this argument because it was raised for the first time on appeal, the 10th Circuit noted that the argument would fail because the mortgage subordination provision is a reasonable exercise of the Commissioner’s authority to implement the statute.
The 10th Circuit then proceeded to reject each of Ms. Mitchell’s arguments as to why she should be entitled to a deduction despite her failure to obtain a subordination agreement at the time of the donation.
Subordination Must Be Timely
Ms. Mitchell argued that, since the mortgage subordination regulation contains no explicit timeframe for compliance, it should be interpreted to allow for subordination to occur at any time. The 10th Circuit rejected this argument as “foreclosed by the plain language of the regulations.” The court noted that the regulation “expressly provides that subordination is a prerequisite to allowing a deduction.” The regulation, explained the court, states that “no deduction will be permitted ... unless the mortgagee subordinates its rights in the property” (emphasis added by the court). Since in 2003, when the Mitchells requested a charitable deduction for the donation of the easement, the property was subject to an unsubordinated mortgage, Ms. Mitchell was not entitled to a deduction under the plain language of the regulation.
The 10th Circuit further noted that, even if it were to view the regulation as ambiguous with respect to timing, the result would be no different because the court must defer to the Commissioner’s reasonable interpretation on this point. The court explained that the Commissioner’s interpretation was not plainly erroneous or inconsistent with the mortgage subordination provision’s plain language. Moreover, there was no reason to suspect the Commissioner’s interpretation did not reflect the agency’s fair and considered judgment on the matter. Because a conservation easement subject to a prior mortgage obligation is at risk of extinguishment upon foreclosure, requiring subordination at the time of the donation is consistent with the requirement that the conservation purpose be protected in perpetuity.
Functional Subordination Not Sufficient
Ms. Mitchell argued that strict compliance with the mortgage subordination requirement was unnecessary because the easement deed allegedly contained sufficient safeguards to protect the conservation purpose in perpetuity. The 10th Circuit rejected this argument as inconsistent with the plain language of the mortgage subordination provision. The court pointed out that the regulation contains one narrow exception to the “unambiguous” subordination requirement—for donations occurring prior to 1986. In the case of a pre-1986 donation, a taxpayer may be entitled to a deduction without subordination if the taxpayer can demonstrate that the conservation purpose is otherwise protected in perpetuity. The negative implication of this express, time-limited exception, said the court, is that no alternative to subordination will suffice for post–1986 donations. The court thus declined to adopt a “functional” subordination rule for donations occurring after 1986.
Likelihood of Foreclosure Irrelevant
Ms. Mitchell further argued that strict compliance with the mortgage subordination requirement was unnecessary in her case because the risk of foreclosure was so remote as to be negligible (the partnership apparently paid its debts on time and had sufficient assets to satisfy in full the amounts due). She pointed to Treasury Regulation § 1.170A-14(g)(3), which provides that a deduction will not be disallowed merely because the interest that passes to the donee organization may be defeated by the happening of some future event, “if on the date of the gift it appears that the possibility that such . . . event will occur is so remote as to be negligible.” She argued that this provision acts as an exception to the mortgage subordination provision—i.e., that because the risk of foreclosure in her case was arguably so remote as to be negligible, failure to satisfy the mortgage subordination requirement should be forgiven.
The 10th Circuit rejected this argument, holding that the remote future event provision does not modify the mortgage subordination requirement. The court explained, among other things, that the remote future event provision cannot reasonably be interpreted to include the relatively unexceptional risk of foreclosure, which exists any time a taxpayer donates a conservation easement with respect to property subject to a mortgage. The court noted that the remote future event provision (i) contains a discrete example of what qualifies as a remote future event—a state statutory requirement that a use restriction must be rerecorded every 30 years to remain enforceable—and (ii) identifies the risk that sometime in the future the donee will neglect to rerecord as an example of the type of event that should not prevent a deduction. This example, said the court, is easily distinguishable from the risk of foreclosure. “The possibility that sometime in perpetuity—30, 60, 90, 120, or more years after the donation—the donee may neglect to renew the easement is considerably more remote than the risk of foreclosure under a mortgage obligation limited to a finite repayment period.” The risk of foreclosure, said the court, is simply too unlike the provision’s listed example for us to believe that the Commissioner intended the provision to cover it.
The 10th Circuit also explained that, even if it were to assume the remote future event provision could reasonably be interpreted to have general applicability to the mortgage subordination provision, the court would be required to enforce the terms of the specific subordination requirement to prevent that requirement from becoming meaningless. In promulgating the rules, explained the court, the Commissioner specifically considered the risk of mortgage foreclosure to be neither remote nor negligible, and therefore chose to target the accompanying risk of extinguishment of the conservation easement by strictly requiring mortgage subordination.
Finally, the 10th Circuit noted that, even if the regulations were unclear with respect to the interplay between the mortgage subordination and remote future event provisions, Ms. Mitchell would not prevail because the court is required to defer to the Commissioner’s interpretation to resolve any ambiguity unless it is “plainly erroneous or inconsistent with the regulations” or there is any other “reason to suspect the interpretation does not reflect the agency’s fair and considered judgment on the matter.” Rather than being plainly erroneous or inconsistent with the regulations, the 10th Circuit found the Commissioner’s interpretation—that the mortgage subordination provision is unmodified by the remote future event provision—to be consistent with the regulation’s plain meaning. In addition, the court found no reason to suspect that the Commissioner’s interpretation did not reflect the agency’s fair and considered judgment on the matter in question. “[I]t is reasonable,” said the court, “for the Commissioner to adopt an easily-applied subordination requirement over a case-by-case, fact-specific inquiry into the financial strength or credit history of each taxpayer.” In support of this holding, the court quoted the following passage from an article published by the author of this blog post:
The specific requirements in the Code and Treasury Regulations establish bright-line rules that promote efficient and equitable administration of the federal tax incentive program. If individual taxpayers could fail to comply with such requirements and claim that their donations are nonetheless deductible because the possibility of defeasance of the gift is so remote as to be negligible, the Service and the courts would be required to engage in an almost endless series of factual inquiries with regard to each individual conservation easement donation.
The 10th Circuit concluded that the mortgage subordination provision does not permit a charitable contribution deduction unless any existing mortgage has been subordinated, irrespective of the likelihood of foreclosure, and the subordination agreement must be in place at the time of the gift.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Tuesday, January 6, 2015
With the New Year just six days old, The Nonprofit Times has published its top five fundraising trends for 2015: conversion optimization, or improving donation flow to raise more money; the ability to engage with Millennials; donor retention and treating all donors as if they are major donors; online fundraising and mobile; and the ability to share stories in a very visual way.
The Times quotes Rich Dietz, senior product manager for digital fundraising for Abila Software in Austin, Texas, as saying that “2015 will be a big year and a transitional year for the nonprofit sector as business-minded tactics slowly gain ground and organizations think about increased growth versus simply being sustainable. Engagement strategies will reach new levels as Millennials continue to emerge in importance and nonprofits think about the best way to interact with their supporters.”
Dietz's predictions for 2015 fundraising include:
- Conversion Optimization: Organizations will begin to think about how to better convert existing website visitors versus simply attracting new visitors. This is a business practice that many small businesses have adopted recently and will work well for nonprofits. Conversion optimization revolves around measuring, testing and optimizing the donation flow to raise more money.
- Millennial Engagement: According to The Brookings Institute, Millennials will make up 75 percent of the workforce by 2025. As Millennials enter the workforce and have money to spend, organizations will need to put strategies in place to best engage this demographic. Many follow a different path to becoming a donor than is traditionally done and nonprofits will need to adapt to these differences.
- Donor Loyalty and Lifetime Value: Tracking donor engagement will be crucial. Organizations will spend more time analyzing characteristics and behaviors of all of their constituents — not just major donors — to better understand what drives their giving behavior. By tracking donor engagement, organizations will be able to further segment their appeals, personalize their outreach to donors, significantly increase donor loyalty, improve lifetime value, and treat all donors like major donors.
- Online and Mobile: Online and mobile have played an increasingly key role for organizations the past few years, and that will continue in 2015. Social will play a key role in the “attention economy,” and responsive design will be necessary to allow supporters to access an organization’s website at any time from any device. 2014 was the tipping point for more web traffic coming from mobile devices than desktop computers. According to Pew Research Center, more than 90 percent of all Americans own a cell phone.
- Storytelling Becomes Visual: Creating a narrative and sharing a story has always been important for nonprofits to successfully engage donors, but doing so in a visual way is becoming essential. Organizations will have to find creative and innovative ways to engage supporters in a world full of distractions, and visual components are key. Web posts with visuals drive up to 180 percent more engagement and research indicates people process visuals 60,000 times faster than text.
Vaughn E. James
Friday, January 2, 2015
At the AALS (American Association of Law Schools) meeting in Washington D.C., there will be a panel discussion titled IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable? The session is cosponsored by the Tax Section and the Nonprofit and Philanthropy Law Section and takes place Saturday, January 3rd from 10:30 am to 12:15 pm. Here is the description:
"The recent controversy over the Internal Revenue Service’s processing of applications by Tea Party and other groups for tax-exempt status highlights only one aspect of the unusual relationship between the federal tax agency and the nation’s nonprofit organizations. While the primary mission of the IRS is to collect revenue, its mission with respect to tax-exempt organizations is instead to ensure that such organizations comply with the requirements for obtaining and maintaining that status. This role has sometimes led the IRS into unfamiliar territory, not only with respect to political activity but also with respect to governance responsibilities and other topics not directly related to taxation. Our invited speakers and the speakers chosen through a call for papers will address whether the IRS oversight of charitable and other types of tax-exempt nonprofit organizations is working, either generally or with respect to specific activities or aspects of these organizations, and if it is not, whether it can be fixed or should be abandoned."
Marcus Owens will be moderating, and panelists include Ellen Aprill (Loyola-LA), Phil Hackney (LSU), Jim Fishman (Pace), Terri Helge (Texas A&M), Dan Tokaji (Ohio State), and Donald Tobin (Maryland).
This opinion article from the New York Times by Ron Haskins, a former policy advisor to President George W. Bush, offers useful insights into social policy and an “evidence-based” approach to funding. Haskin praises the Obama Administration’s efforts to identify and fund social programs that work – nurse visits to single mothers, K-12 education, pregnancy prevention, and others. He urges Congress not to cut these evidence-based initiatives, i.e., those “with rigorous evidence of success, as measured by scientifically designed evaluation” and urges that this approach “be a prerequisite for any program to get federal dollars.” Such an approach is laudatory for direct spending, but ironically, would apply awkwardly to tax expenditures like the charitable deduction, which relies on donors to assess evidence of success, and not the federal government. Indeed, this is both a virtue and vice of the charitable deduction. By awarding donor contributions with a deduction, the government essentially supports a broad array of organizations based not on the evidence but on donor choice. Compliance is not measured by programmatic effectiveness, but by meeting various organizational and operational requirements. But even here, enforcement is weak, as emphasized by the recent GAO report on exempt organization compliance.
The GAO recently released a report on exempt organization compliance, TAX-EXEMPT ORGANIZATIONS: Better Compliance Indicators and Data, and More Collaboration with State Regulators Would Strengthen Oversight of Charitable Organizations.
Here is the introduction:
"Charitable organizations play a major role in our economy and provide critical services and resources to families and individuals in need. Although charitable organizations vary considerably in size and purpose, in 2011 the largest number of organizations was in the human services sector, providing services such as employment and housing assistance. The highest concentration of assets was in the health and education sectors, which include hospitals and universities. In addition to being concentrated in a few sectors, a large proportion of all assets were controlled by a relatively small number of charitable organizations—less than 3 percent hold more than 80 percent of the assets. Over the past several years, as the Internal Revenue Service (IRS) budget has declined, the number of full-time equivalents (FTEs) within its Exempt Organizations (EO) division has fallen, leading to a steady decrease in the number of charitable organizations examined. In 2011, the examination rate was 0.81 percent; in 2013, it fell to 0.71 percent. This rate is lower than the exam rate for other types of taxpayers, such as individuals (1.0 percent) and corporations (1.4 percent). EO is grappling with several challenges that complicate oversight efforts. While EO has some compliance information, such as how often exams result in change of tax exempt status, it does not have quantitative measures of compliance for the charitable sector as a whole, for specific segments of the sector (such as universities and hospitals) or for particular aspects of noncompliance (such as personal inurement or political activity). Because EO does not have these measures and does not know the current level of compliance, it cannot set quantitative, results-oriented goals for increasing compliance or assess to what extent its actions are affecting compliance. Statutory requirements for safeguarding taxpayer data limit both IRS's ability to share data and state regulators' ability to use it. A lack of clarity about how state regulators are allowed to use IRS data to build cases against suspect charitable organizations further impedes regulators' ability to leverage IRS's examination work. The e-filing rate for tax-exempt organizations is significantly lower than for other taxpayers. This lower rate means there is less digitized data available for data analytics and higher labor costs for IRS. Expanded e-filing may result in more accurate and complete data becoming available in a timelier manner, which in turn, would allow IRS to more easily identify areas of noncompliance."
Tuesday, December 30, 2014
The IRS has made available as a pdf final regulations under section 501(r): “Additional Requirements for Charitable Hospitals: Community Health Needs Assessments for Charitable Hospitals; Requirement of a Section 4959 Excise Tax Return and Time for Filing the Return.” The document is available here.
An interesting recent article in the Washington Post discusses the differences between for-profit and non-profit hospice care. The article says that although “[i]n some cases, for-profit hospices provide service at levels comparable to nonprofits, . . the data analysis, based on hundreds of thousands of Medicare patient and hospice records from 2013, shows that the gap between the for-profits as a whole and nonprofits is striking and consistent, regardless of hospice size." The Post authors identify profit-motive as a reason for the inferior performance of for-profits, stating that: “Hospice operators have an economic incentive to provide less care because they get paid a flat daily fee from Medicare for each of their patients. That means that the fewer services they provide, the wider their profit margin.”
The key findings are that:
"Nonprofit hospices typically spent about $36 a day per patient on nursing visits; for-profit hospices spent $30 per day, or 17 percent less. The gap between for-profits and nonprofits remains whether the hospices are old or new.
Nonprofit hospices are much more likely to provide the more intense services — continuous nursing and inpatient care — required by patients whose symptoms are difficult to control. Nonprofits offered about 10 times as much of this per patient-day as did for-profits.
While hospices of both kinds usually dispatch a nurse to see a patient at some point during the last two days of life, for-profit hospices are more likely to fail in this regard, according to the analysis. A typical patient at a for-profit hospice is 22 percent less likely to have been visited by a nurse during this window than a patient at a nonprofit hospice, the numbers show, a sign that for-profit hospices may be less responsive during this critical time.
Patients at for-profit hospices are much more likely to drop out of hospice care than patients at nonprofit hospices."
One problem, according to the Post, is that “regulatory scrutiny of hospices has lagged behind those of other health-care institutions, though Congress has recently called for more frequent inspections. And without as much oversight, hospice operators can operate in ways that benefit shareholders more than patients."
One conclusion that could be drawn is that the nonprofit form, in the absence of other direct regulation, is an indicator to consumers of better service, at least in this context. By comparison, in the broader hospital context, the line between non profit and for profit hospitals is not as stark.
Monday, December 29, 2014
Note: A Manageable Solution with Meaningful Results: Illuminating IRS Enforcement of § 501(c)(3)'s Prohibition on Political Intervention
Julia D. Zwak, student at University of Minnesota Law School, published a student note entitled A Manageable Solution with Meaningful Results: Illuminating IRS Enforcement of § 501(c)(3)'s Prohibition on Political Intervention, 99 Minn. L. Rev. 381. The note explores the lack of clarity regarding the IRS’s enforcement of the prohibition on political intervention. Zwak explains that the lack of clarity has made it difficult for exempt organizations to accomplish their missions while remaining in compliance with the law. Specifically, under Revenue Ruling 2007-41, the IRS uses a facts and circumstances analysis in determining whether an organization has violated the political intervention prohibition. However, the Revenue Ruling gives no rationale in its conclusions, provides no specific set of circumstances that are deemed critical to the analysis, and it simply falls short of providing practical guidance to organizations.
According to Zwak, one solution would be for the IRS to publish reports specifying its application of the facts and circumstances in actual enforcement efforts of the prohibition.
Sunday, December 28, 2014
Former Director of the IRS Exempt Organizations Division, Marcus S. Owens has been
critical of the IRS’s treatment of filing requirements for exempt organization.
Recent data suggests significant growth in the nation’s nonprofit sector.
Despite this trend, according to Owens, the IRS has taken a very permissive
approach to the oversight of organizations filing for tax-exempt status—an
approach that he predicts could be problematic. Owens argues that the lack of
oversight is “setting the stage for a real scandal down the road.”
Proposed solutions include increasing funding for the Exempt Organizations Division, requiring nonprofits to file online, and compiling a more accessible online database. Will these solutions help ameliorate the problem? Is there even a problem in the first place? Read more here
Monday, December 22, 2014
In Register v. The Nature Conservancy, 2014 WL 6909042, Civil Action No. 5:13–77–DCR (Dec. 9, 2014), the U.S. District Court for the Eastern District of Kentucky held that Mr. Layton Register’s $1 million donation to The Nature Conservancy (TNC) constituted a restricted charitable gift, TNC was bound to abide by the gift restrictions or return the donation, but factual issues remained regarding whether TNC had complied with the restrictions.
Mr. Register was a long time supporter of TNC, having made over three hundred monetary donations to the organization (totaling $1,061,846) and having contributed “sweat equity” by physically assisting with certain projects. Mr. Register attended regular TNC events, served as a Trustee TNC’s Kentucky Chapter, and even received the volunteer of the year award.
TNC identified a 735-acre farm in Harrison County, Kentucky, known as Griffith Woods, as a “top acquisition property” because of its conservation values (it was described as the best and most intact example of a bur oak, blue ash savannah in the inner Bluegrass). TNC engaged in discussions with the owner of Griffith Woods regarding conservation options over several years. During this time, a biologist and employee of TNC—Dr. Julian Campbell—took Mr. Register and other supporters to visit the property. TNC planned to purchase Griffith Woods for roughly $2 to $2.5 million, but to retain only about 25-50% of the property after reselling portions to agencies that would partner with TNC in conserving the property and perhaps conservation buyers.
Mr. Register, who apparently was quite taken with Griffith Woods, told TNC he wished to focus on preserving and managing that particular property. In his notes about Griffith Woods, Dr. Campbell indicated that Mr. Register indicated his willingness to donate about half of the total funds needed for the purchase of Griffith Woods, and should some of Mr. Register’s gift be freed up by TNC’s resale of some of the property, Mr. Register was willing to have the money put toward an endowment for stewardship at the site. Dr. Campbell testified at deposition that he intended his notes to memorialize Mr. Register’s intent with respect to the $1 million donation and any funds obtained from TNC’s resales of the property attributable to his donation.
In May 2002, Mr. Register wrote a letter to the Director of TNC’s Kentucky Chapter stating:
I pledge to the Kentucky Chapter of The Nature Conservancy a stock gift equal to the amount of $1,000,000.00 that is to be used for land acquisition. My first preference is for the purchase being negotiated for Griffith Woods. If The Nature Conservancy is unsuccessful in its pursuit of Griffith Woods, the same amount will be made available for another site to be determined.
In September 2002, Mr. Register wrote to his financial advisor and TNC:
I’d like to make now a gift to the Kentucky Chapter of The Nature Conservancy. I would like the gift to be in the form of stocks adding up to the equivalent of $1 million. I would prefer that the stocks be sold and the proceeds go toward the establishment and management of a nature preserve in the Bluegrass region, e.g. Griffith Woods. If the Griffith Woods project falls through, I trust that KNC will put to use the funds in a manner that will further help protect areas in Kentucky with unique and diverse plants and animals.
The gifts of stock were made to TNC in three installments, each with a cover letter stating that the gifts were for the Griffith Woods project. TNC placed the proceeds from the sale of the stock into an account to fund the purchase of Griffith Woods and designated the account as “temporarily restricted.”
In late 2002 and early 2003, TNC purchased Griffith Woods using Mr. Register’s donation and funds from TNC’s worldwide office. TNC then sold Griffith Woods in two transactions. The first tract was sold to the University of Kentucky (UK) in 2004, and UK conveyed a conservation easement on the tract to a state entity. This sale had been contemplated at the time of Mr. Register’s gift. The partnership between TNC and UK did not work as planned, however, and in 2011 TNC sold its remaining interest in Griffith Woods to the Kentucky Department of Fish and Wildlife Resources (KDFWR). Although this portion of the property was not placed under a conservation easement TNC indicated that other use restrictions applied.
TNC used a portion of the sales proceeds to pay-off a debt on another land acquisition project and deposited the remainder in its general operating fund, a portion of which was intended to help fund stewardship activities at Griffith Woods. In November of 2012, TNC disclosed to Mr. Register that it was not using or planning to use any of the remaining proceeds from the sales of Griffith Woods for the management of that property.
Mr. Register maintained that it was his intent that the sales proceeds attributable to his donation would be used for the ongoing management of Griffith Woods. He filed suit against TNC alleging breach of contract, unjust enrichment, imposition of a constructive trust, fraud in the inducement, and constructive fraud.
The US District Court divided its opinion into seven separate holdings.
1. Donation Was A Restricted Gift
TNC argued that Mr. Register's 2002 letters did not suffice as written contracts and, thus, no contract existed. In the alternative, TNC argued that the gift was subject to enforcement according to the terms of Mr. Register’s September 2002 letter and, once the donation was used for the purchase of Griffith Woods and that property was protected, the purpose of the gift was satisfied and TNC had no further obligation to use the resale proceeds for the protection or management of Griffith Woods.
Mr. Register agreed that the parties did not enter into a written contract but he maintained that TNC was bound by an oral agreement to devote his $1 million donation to the purchase and, after resale, management of Griffith Woods.
The court held that Mr. Register had made a restricted gift to TNC and, while a precise written agreement was not present, it was not required.
The court found no evidence that Mr. Register intended to make a general (unrestricted) donation to TNC that it could use as it saw fit in furtherance of its charitable mission. It noted:
[Mr.] Register’s testimony, the writings between the parties, the testimony of the other individuals involved and the circumstances surrounding the donation…support the conclusion that Register’s donation was restricted to Griffith Woods as a matter of law. Because TNC accepted the donation knowing that it was to perform certain duties with respect to the donation, ‘its acceptance thereof and reliance thereon and promise to carry out the wishes of the donor supply the consideration.’
TNC argued that Mr. Register’s 2002 letters indicated that he merely preferred that the donated funds be used for Griffith Woods because he used “precatory” language—i.e., “like” and “prefer.” The court disagreed and found the letters to be consistent with Mr. Register’s intent to restrict his gift. While acknowledging that precatory words are presumptively not binding, the court explained that such words can impose a legal and enforceable obligation if the context indicates that the donor intended to impose such an obligation. The court found that Mr. Register’s letters “compelled the conclusion” that his use of “prefer” was mandatory rather than precatory because his letters dictated what was to occur if the Griffith Woods project did not materialize.
Other evidence indicating that Mr. Register intended his donation to be restricted to Griffith Woods included (i) the cover letters for the stock gifts to TNC, which contained language specifying that the funds were to be limited to Griffith Woods, (ii) testimony of TNC employees that, at the time the gift was made, they understood the gift was to be used for the purpose of Griffith Woods (i.e., restricted), and (iii) TNC’s initial designation of the funds as restricted and continued treatment of the funds as restricted for some time in their own internal processes.
The court concluded:
At the time the donation was made, no one appeared to believe that the funds were not restricted to Griffith Woods. Time has passed, and Register is now faced with a number of TNC employees who were not privy to the discussions at the time of his donation. Nonetheless, they are bound by the restrictions made by Register and accepted by TNC. The recipient of a conditional gift is “not at liberty to ignore or materially modify the expressed purpose underlying the donor’s decision to give.” … This is true even if the conditions at the time of the gift have materially changed, “making the fulfillment of the donor’s condition either impossible or highly impractical.” The Court is “not at liberty to relieve the parties from contractual obligations simply because these obligations later prove to be burdensome or unwise” (citations omitted).
2. Compliance With Restriction Unclear
While the court determined that Mr. Register’s donation was a restricted gift as a matter of law, it also held that material issues of fact remained regarding whether TNC had complied with the restrictions. On the one hand, Dr. Campbell and Mr. Register’s testimony indicated that Mr. Register had considered TNC’s possible resale of Griffith Woods and had intended to restrict TNC’s use of the resale proceeds attributable to his donation to the management of that property. On the other hand, certain other factors prevented the court from finding, as a matter of law, that Mr. Register intended his donation to continue to be restricted after the resale. In addition, the court noted that TNC’s management efforts at Griffith Woods included prescribed burning, cane restoration, and planting native species. Accordingly, whether TNC had fully complied with the gift restrictions was a matter for a jury to determine.
The court dismissed TNC’s attempts to minimize Dr. Campbell’s authority to bind TNC and to question Dr. Campbell's credibility due to his friendship with Mr. Register. The court explained that TNC became bound, not by Dr. Campbell’s representations to Mr. Register, but by TNC’s acceptance of the donation, which it knew to be restricted.
3. Reversion as Proper Remedy for Breach of Contract
The court determined that, should the jury find that TNC breached its contract with Mr. Register, then reversion would be the proper remedy under Kentucky law. On the other hand, if the jury were to find that the terms of the restricted gift had been met, there would be no breach and Mr. Register would not be entitled to recover his donation.
TNC contended that, should it be required to return the gift, there are genuine issues of material fact regarding the amount of the donation that had been used for Register’s intended purpose (and, thus, presumably was not recoverable).
TNC argued that Mr. Register was estopped from claiming breach of contract because he had acquiesced to TNC’s sale of a portion of Griffith Woods to KDFWR and to future management of the property by that entity. The court held that TNC’s argument failed because (i) TNC’s breach of the condition on the gift was not its sale of the property to KDFWR, but its use of the proceeds attributable to Mr. Register’s donation for purposes other than Griffith Woods, and (ii) the court found no evidence that TNC had disclosed its plans to use the proceeds for purposes other than Griffith Woods until after sale had already occurred.
5. Unjust Enrichment and Constructive Trust
The court dismissed Mr. Register’s claims for unjust enrichment and the imposition of a constructive trust. Under Kentucky law, the doctrine of unjust enrichment does not apply where there is an explicit contract and the court found that there was an explicit contract in this case. In addition, because constructive trusts are imposed as a remedy for unjust enrichment and the court found that unjust enrichment did not apply in this case, the court also dismissed the constructive trust claim.
6. Fraudulent Inducement
Mr. Register alleged that he was fraudulently induced to make his $1 million donation because TNC had no intention of continuing to be involved in the management of Griffith Woods after it was resold. The court held that Mr. Register could not prevail on this claim as a matter of law because he did not identify any specific material misstatement upon which he relied. The Court noted the high burden of proof required—clear and convincing evidence—for fraud claims.
7. Constructive Fraud
Mr. Register also argued that TNC owed a fiduciary duty to him and that its violation of that duty constituted constructive fraud. Mr. Register, however, was unable to point to any Kentucky case holding that a charitable organization has a fiduciary relationship with its donors. Moreover, the case Mr. Register cited in support of his argument—Adler v. Save, 74 A.3d 41 (Sup. Ct. N.J. App. Div. 2013)—stated only that the “analytical paradigm” outlined by the court was “consistent with the principles governing a fiduciary relationship” under New Jersey law, and the case did not address the theory of constructive fraud. Accordingly, the court declined to extend the doctrine of constructive fraud, which has not been “very favorably received” in Kentucky, to this case.
The parties have reportedly settled this case, and TNC notes the following regarding settlement:
The Nature Conservancy respects the court’s decisions with respect to the facts of this case. Although the court determined that a jury should decide the extent to which the Conservancy complied with the terms of the gift, TNC decided that a full refund of the disputed portion of the gift to this valuable donor in settlement of the dispute was most in keeping with TNC’s relationship with him and reflective of the fact that without his help Griffith Woods would not be protected the way it is today. The refunded amount represents funds that were initially used for other important conservation work in Kentucky, but were ultimately derived from the sales of Griffith Woods to TNC’s conservation partners. Mr. Register can take pride in his critical role in securing long-standing protection for this important habitat.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Friday, December 19, 2014
Nonprofits today are turning to creative collaboration to accomplish their goals. For-profits have long utilized various forms of collaboration to capture market share. With a foray into collaboration, nonprofits now must determine the extent to which collaboration will be legal versus non-legal. The Stanford Social Innovation Review recently featured an article entitled “Collaboration-palooza” that shows the four main types of collaboration nonprofits are using and where they fall along the spectrum of legal forms. The article also deals with the impediments to collaboration. Specifically, the article details the following three:
“Along with strong momentum across the collaboration spectrum, we found three inconsistencies between funders and nonprofit leaders that are creating barriers to collaboration done right.
1. Struggling to find philanthropic support A significant barrier is nonprofit leaders’ perceptions of low philanthropic support across the collaboration spectrum. Fewer than 20 percent of nonprofit leaders said they received support from their funders during the process, and more than 50 percent reported no support whatsoever for any form of collaboration. Leaders pointed to especially low levels of funder backing for sharing support functions, which are usually intended to lower operating costs and free up funds to expand programs. This foots with survey data from Grantmakers for Effective Organizations 2014 report Is Grantmaking Getting Smarter, which found that 53 percent of funders never or rarely funded collaborations and only two percent did so consistently. Yet, strikingly, the reason funders most frequently cited for failing to support collaborations was that their grantees didn’t ask. Further, they told us in follow-up interviews that they worried they would inject bias if they initiated the conversation. A program officer in Pennsylvania said, “We have to be careful. Whenever I speak up at a meeting, I get a proposal about the idea!” But the same funder told us that when grantees came forward with a plan to collaborate, he was eager to support it.
2. Difficult match-making A second barrier to collaboration lies in finding the right partners and negotiating respective roles. Nonprofits and foundations both cite defining relationships and roles as a top challenge to collaboration. But nonprofits rated finding the right partner as the biggest barrier, while foundations rated it the smallest one. In our study, helping nonprofits find partners was the most common way that funders supported collaboration, but they said they needed to tread cautiously: “I don’t feel comfortable recommending partners,” said a Chicago grantmaker. “In part I worry that nonprofits might take my word as dictate, but also I feel that they need to be committed enough to do their own homework.”
3. Unsuccessful joint programs A third challenge is the disparity between funder and CEO perceptions about which forms of collaboration fail more often. Funders see joint programming as the most successful form of collaboration. Nonprofit CEOs, on the other hand, found that the more integrated forms (shared support functions and mergers) were most likely to succeed and cited joint programs as having the highest failure rate (20 percent).”
If collaboration nonprofits are able to show overall better returns, i.e., social impact, the first barrier will be largely resolved. Donors could play a role in the second barrier if they have enough information about the social impact various charities are having. A push in the sector toward using legal forms, such as mergers, would assist with the overall success rate.
The full article is available here.
Wednesday, December 17, 2014
As nonprofits and for-profits increasingly compete in the same fields, several legal issues are emerging. Two of the main issues are the following: (1) UBIT and (2) for-profit attempts to limit the market nonprofits can attract. Nonprofit Quaterly featured an article highlighing this tension, which explored Alabama Dental Association's (ALDA's) opposition to the expansion of Sarrell Center, a nonprofit that provides dental treatment to poor children. ALDA has considered advancing state legislation to "control" the nonprofit, and Sarrell brought a suit against the University of Alabama at Birmingham when it announced its students were no longer available to volunteer at Sarrell clinics. Even the YMCA has been under attack from for-profit exercise clubs in Idaho. Ultimately the Board of Equalization decided to impose a 19% tax on YMCA profits. The issue has arisen in numerous areas, including day care centers, theaters, etc. The line between nonprofits and for-profits has been overlapping tremendously, and unfair competition appears to be an issue that will persist. Read more about this issue here.
In Belk v. Commissioner, No. 13-2161 (Dec. 16, 2014), the 4th Circuit affirmed a Tax Court ruling that a conservation easement that authorized the parties to agree to “substitutions” or “swaps” (i.e., to remove some or all of the original protected land from the easement in exchange for the protection of other land) was not eligible for a federal charitable income tax deduction because it was not “a restriction (granted in perpetuity) on the use which may be made of the real property” as required under § 170(h)(2)(C). The 4th Circuit agreed with the Tax Court that, to be eligible for a deduction under § 170(h), a donor must grant an easement with regard to a “single, immutable” or “defined and static” parcel.
The Belks purchased 410 acres near Charlotte, North Carolina, and developed a 402-lot residential community along with a 184-acre golf course (pictured above) on the land. In 2004, the Belks donated a conservation easement on the golf course to a land trust and claimed a deduction of $10.5 million.
The conservation easement authorizes the landowner to remove land from the easement in exchange for adding an equal or greater amount of contiguous land, provided that, in the opinion of the grantee:
- the substitute property is of the same or better ecological stability,
- the substitution shall have no adverse effect on the conservation purposes of the easement, and
- the fair market value of the “easement interest” on the substitute land will be at least equal to or greater than the fair market value of the “easement interest” encumbering the land to be removed.
This substitution provision, explained the 4th Circuit, permits the landowner “to swap land in and out of the Easement” with the agreement of the land trust.
In affirming the Tax Court’s holding that the Belks were not eligible for a federal deduction for the donation of the easement, the 4th Circuit first noted that the “Treasury Regulations offer a single -- and exceedingly narrow -- exception to the requirement that a conservation easement impose a perpetual use restriction”—i.e.:
[if a] subsequent unexpected change in the conditions surrounding the property . . . make[s] impossible or impractical the continued use of the property for conservation purposes, the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding and all of the donee’s proceeds . . . from a subsequent sale or exchange of the property are used by the donee organization in a manner consistent with the conservation purposes of the original contribution. Treas. Reg. § 1.170A-14(g)(6)(i) (emphasis added by the court).
“[A]bsent these ‘unexpected’ and extraordinary circumstances,” explained the 4th Circuit, “real property placed under easement must remain there in perpetuity in order for the donor of the easement to claim a charitable deduction.”
The 4th Circuit then proceeded to reject each of the Belks’ specific arguments.
Plain Language of the Code
The Belks argued that § 170(h) “requires only a restriction in perpetuity on some real property, rather than [on] the real property governed by the original easement." The 4th Circuit noted that the plain language of § 170(h) belies this contention. The court explained that § 170(h) expressly defines a “qualified property interest” to include “a restriction (granted in perpetuity) on the use which may be made of the real property” and placement of the article “the” before “real property” makes clear that a perpetual use restriction must attach to a defined parcel of real property rather than simply some or any (or interchangeable parcels of) real property.
The 4th Circuit further explained that, although the easement purports to restrict development rights in perpetuity for a defined parcel of land, upon satisfying the conditions in the substitution provision the taxpayers may remove land from that defined parcel and substitute other land. Accordingly, “while the restriction may be perpetual, the restriction on ‘the real property’ is not.” For this reason, the easement donation did not constitute a “qualified conservation contribution” under § 170(h) and the Belks were not entitled to claim a deduction for the contribution.
The 4th Circuit explained that permitting a deduction for the donation of the Belk easement would enable taxpayers to bypass several requirements critical to the statutory and regulatory schemes governing deductions for charitable contributions.
For example, permitting the Belks to change the boundaries of the easement would render “meaningless” the requirement that an easement donor obtain a qualified appraisal because the appraisal would no longer be an accurate reflection of the value of the easement, parts of which could be clawed back. “It matters not,” said the court, “that the Easement requires that the removed property be replaced with property of ‘equal or greater value,’ because the purpose of the appraisal requirement is to enable the Commissioner, not the donee or donor, to verify the value of a donation. The Easement’s substitution provision places the Belks beyond the reach of the Commissioner in this regard.”
Similarly, the baseline documentation requirement (i.e., the requirement that a conservation easement donor make available to the donee documentation sufficient to establish the condition of the property at the time of the donation) “would also be skirted if the borders of an easement could shift.” “Not only does this regulation confirm that a conservation easement must govern a defined and static parcel,” explained the court, “it also makes clear that holding otherwise would deprive donees of the ability to ensure protection of conservation interests by, for instance, examination of maps and photographs of ‘the protected property.’”
The 4th Circuit also rejected the Belks’ argument that the provision in the Treasury Regulations permitting a tax-deductible conservation easement to be extinguished “in one limited instance” (i.e., in a judicial proceeding upon a finding of impossibility or impracticality) “would be invalid” if the Tax Court’s holding were upheld. The court explained that the regulation permitting extinguishment by court order if an easement can no longer further its conservation purpose does nothing to undercut the correctness of the Tax Court’s holding that § 170(h) requires a donor to grant an easement with regard to “a single, immutable parcel” to qualify for a charitable deduction.
Simmons and Kaufman Distinguishable
The Belks argued that Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012) and Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011) support the notion that § 170(h) does not require that restrictions attach to a single, defined parcel. The 4th Circuit rejected that argument, explaining that these “out-of-circuit” cases:
plausibly stand only for the proposition that a donation will not be rendered ineligible simply because the donee reserves its right not to enforce the easement. They do not support the Belks’ view that the grant of a conservation easement qualifies for a charitable deduction even if the easement may be relocated. Indeed, as we have explained, such a holding would violate the plain meaning of § 170(h)(2)(C).
Federal Law Controls Eligibility for Deduction
The Belks argued that, because North Carolina law permits parties to amend an easement, the Tax Court’s logic would render all conservation easements in North Carolina ineligible for a deduction under § 170(h). The 4th Circuit found this argument “equally unpersuasive,” explaining:
whether state property and contract law permits a substitution in an easement is irrelevant to the question of whether federal tax law permits a charitable deduction for the donation of such an easement . . . § 170(h)(2)(C) requires that the gift of a conservation easement on a specific parcel of land be granted in perpetuity to qualify for a federal charitable deduction, notwithstanding the fact that state law may permit an easement to govern for some shorter period of time. Thus, an easement that, like the one at hand, grants a restriction for less than a perpetual term, may be a valid conveyance under state law, but is still ineligible for a charitable deduction under federal law.
Savings Clause Does not Save Deduction
The Belk conservation easement provides that substitutions become final when they are reflected in a formal recorded “amendment.” The easement also provides that the land trust cannot agree to any amendment that would result in the easement failing to qualify for a deduction under § 170(h). The Belks referred to this latter provision as a “savings clause.” They argued that if the 4th Circuit found that the substitution provision violated the requirements of § 170(h), the savings clause would operate to void the offending provision, thus rendering the easement eligible for the deduction. In other words, explained the 4th Circuit, the Belks argued that the savings clause would operate to negate a right clearly articulated in the easement (the right to substitute property), but only if triggered by an adverse determination by the court.
The 4th Circuit declined to give the savings clause that effect. Citing to Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944), the court explained that “the IRS and the courts have rejected ‘condition subsequent’ savings clauses, which revoke or alter a gift following an adverse determination by the IRS or a court.” The court further noted that the Belks were asking the court to employ the savings clause to rewrite the easement in response to the court’s holding and “[t]his we will not do.”
The 4th Circuit also rejected the Belks’ “last-ditch” argument—that the savings clause is designed “to accommodate evolving … interpretation of Section 170(h)”—explaining
the statutory language of § 170(h)(2)(C) has not “evolved” since the provision was enacted in 1980…. The simple truth is this: the Easement was never consistent with § 170(h), a fact that brings with it adverse tax consequences. The Belks cannot now simply reform the Easement because they do not wish to suffer those consequences.
The 4th Circuit concluded by noting:
were we to apply the savings clause as the Belks suggest, we would be providing an opinion sanctioning the very same “trifling with the judicial process” we condemned in Procter…. Moreover, providing such an opinion would dramatically hamper the Commissioner’s enforcement power. If every taxpayer could rely on a savings clause to void, after the fact, a disqualifying deduction (or credit), enforcement of the Internal Revenue Code would grind to a halt.
The 4th Circuit’s opinion in Belk complements Carpenter v. Commissioner, T.C. Memo. 2013-172, denying motion for reconsideration and supplementing T.C. Memo. 2012-1, in which the Tax Court held that conservation easements extinguishable by mutual agreement of the parties, even if only in the event of “impossibility,” were not eligible for the charitable deduction under § 170(h). Rather, extinguishment of a tax-deductible easement requires a judicial proceeding and there are no alternatives.
Finally, it is noteworthy that, while Belk involved a conservation easement encumbering a golf course (and golf course easements have been subject to much criticism), nothing in the 4th Circuit’s opinion turned on that fact.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Tuesday, December 16, 2014
Although charitable contributions traditionally have been perceived as a contract between the donor and the charity, donors who are displeased with how their funds have been used are asking for refunds according to a recent WSJ article. In fact, some courts are starting to recognize donors’ rights over gifts after they have been given. This highlights the need for greater transparency and accountability in terms of charitable giving. The tools used in impact investing could prevent such drastic donor disappointment. It is really the result of the larger problem of uninformed giving. In an upcoming article, I examine how the tools used in impact investing can solve it. First, we must provide donors with a way to measure “return” on their investment, i.e., social impact. An impact investing tool that provides a standardized set of metrics for measuring social impact is the solution. However, not all charities merit review under this tool, and we must limit the group of charities that will undergo this review by conducting an initial qualitative analysis. Second, we must enable donors to select charities based upon a comparison of their level of social impact. The current rating system used in impact investing will achieve this end in the charitable sector as well. The article proposes a system for evaluating and rating charities by applying the tools of impact investing in order to establish what I have termed an efficient charitable market. It shows the end result will enable U.S. charitable investors to make even smarter decisions that dramatically better our world. In terms of a side note, it will also help prevent donors from seeking refunds.
Monday, December 15, 2014
A few days ago, the Aspen Institute issued a report entitled The Bottom Line: Investing for Impact on Economic Mobility in the US. The report shows how impact investing is increasing economic mobility for low-income families. The report is another example of how the nonprofit sector may have serious lessons to learn from the impact investing sector.
The report is available here.
Friday, December 5, 2014
After a nod to private property rights, in McClure v. Montgomery County Planning Board, _ A.3d _ 2014, Maryland’s intermediate appellate court held that the owner of a subdivision lot subject to a forest conservation easement was bound by, and the local planning board had the authority to impose sanctions for violation of the easement.
In May of 2000, Mr. McClure purchased a 5.21-acre lot in the Fairhill subdivision in Montgomery County, Maryland. The lot was subject to a forest conservation easement that the developer had granted to obtain the County’s approval of the subdivision. The easement was recorded in the County's land records in March 1998.
After purchasing the lot, the court noted that Mr. McClure
did what many Marylanders do with land and constructed a house. He also built a deck, mowed his lawn, and even grazed horses. Seeking to fully embrace an agrarian lifestyle, in May 2005, he sought to build a barn and a fence and received permits to that effect.
Mr. McClure also then proceeded to violate the conservation easement. In 2012, the local planning board found Mr. McClure liable for a civil penalty of just over $100,000 and mandated that he take certain corrective actions, including the planting of trees, the posting of signs indicating the easement’s boundaries, and the removal of impervious surfaces. Mr. McClure sought judicial review, and the trial court held that the Mr. McClure was bound by, and the planning board had the authority to enforce the easement.
On appeal, the Maryland intermediate appellate court’s opinion opened with the following, which did not appear to bode well for the planning board or the conservation easement:
Few cases inflame such deep passions as a dispute involving individual property rights. The belief that fundamental concepts of liberty entailed strong property rights informed and influenced the Founders as they undertook the epochal task of drafting our Constitution. . . . Infringers of these cherished rights should beware for “nothing is better calculated to arouse the evil passions of men than a wanton and unredressed invasion of their ... property rights.
But the appellate court then went on to affirm the trial court’s holdings, rejecting each of Mr. McClure’s arguments.
- Mr. McClure argued that he was not bound by the conservation easement because it was not properly indexed in the local land records. The court disagreed, explaining that the validity of a properly recorded instrument is not affected by non-compliance with the indexing statute, which relates only to how the clerk is to organize enforceable interests.
- Mr. McClure argued that he was not bound by the conservation easement because he did not receive actual or constructive notice of the easement. The court again disagreed. The deed Mr. McClure received contained only a generic statement that the lot was subject to easements of record—it did not contain a specific reference to the conservation easement. Nonetheless, the court found that Mr. McClure had actual notice of the conservation easement because he signed several documents at the time of the lot’s purchase that specifically referenced the easement, including the contract of sale, which included a diagram of the easement. The court also found that Mr. McClure had constructive notice of the conservation easement because the easement was properly recorded and a diligent title search would have uncovered its existence. The court concluded
Although Mr. McClure wishes to play the ostrich and secrete away his head from the signatures on his deed and contract of sale, he will find no solace in the sands. An easement binds any person who acquires title to land with actual or constructive notice of that easement.
- Mr. McClure further argued that the planning board’s order was invalid because the board failed to require the developer to re-plat the subdivision to denote the conservation easement after it was granted. The court disagreed, finding that the County’s subdivision rules did not impose a re-platting requirement.
- Finally, Mr. McClure argued that the planning board did not have the authority to issue sanctions and order corrective actions for conservation easement violations. The court also rejected this argument, finding that the board had such authority by statute and that the board’s decision to hold Mr. McClure liable for his easement violations was not arbitrary and capricious and was supported by substantial evidence.
Sunday, November 30, 2014
In Reisner v. Comm’r, T.C. Memo. 2014-230, the Tax Court held that there is no reasonable cause exception to the gross valuation misstatement penalty for façade easement donation deductions claimed on returns filed after July 25, 2006, even if the deductions are carried forward from a donation made before that date.
Reisner involved a façade easement donated to the National Architectural Trust in 2004 with regard to a townhouse in Brooklyn, New York. On their 2004 joint federal income tax return, the taxpayers claimed a $190,000 federal charitable income tax deduction with regard to the donation. Because of percentage limitations, the taxpayers claimed a deduction of only approximately $80,000 for 2004, and carryover deductions of approximately $86,000 and $24,000 for 2005 and 2006, respectively.
At trial, the parties stipulated that (i) the façade easement had zero value and the IRS properly disallowed the claimed deductions, (ii) the taxpayers had made gross valuation misstatements on their 2004, 2005, and 2006 returns as a result of overvaluing the easement, and (iii) the taxpayers were not liable for the gross valuation misstatement penalty for the deductions claimed on their 2004 and 2005 returns because they satisfied the reasonable cause exception in effect before the Pension Protection Act of 2006 (PPA) made changes to the penalty provisions.
The sole issue at trial was whether the taxpayers were liable for the gross valuation misstatement penalty for the carryover deduction they claimed on their 2006 return, which was filed on April 16, 2007. The Tax Court held that they were, explaining that, in the case of façade easement donation deductions, the PPA eliminated the reasonable cause exception with regard to gross valuation misstatements made on “returns filed after July, 25, 2006.”
The taxpayers argued that imposing the penalty on them for claiming a carryover deduction in 2006 for a donation made in 2004 was not a required construction of the statute, was contrary to congressional intent, and constituted a retroactive imposition of a penalty on conduct that occurred before the effective date of the changes in the penalty provisions. The Tax Court dismissed all three arguments, explaining:
unlike the changes the PPA made to the qualification requirements for façade easement donations, which are effective for “contributions made after July, 25, 2006,” the provision eliminating the reasonable cause exception for gross valuation misstatements is effective for “returns filed after July 25, 2006;”
interpreting the PPA as eliminating the reasonable cause exception for carryover deductions claimed on returns filed after the July 25, 2006, effective date is consistent with the operation of longstanding regulations governing the application of the gross valuation misstatement penalty; and
- the court's holding does not represent retroactive application of the new penalty provisions because taxpayers “reaffirm” their gross valuation misstatements when they file returns after July 25, 2006, and they have the option of not doing so.
For a similar ruling regarding the gross valuation misstatement penalty in the facade easment donation context, see Chandler v. Comm’r, 142 T.C. No. 16 (2014). For charitable contributions of conservation easements encumbering land, the strict liability penalty for gross valuation misstatments applies to returns filed after August 17, 2006. See id. at note 5.
Saturday, November 29, 2014
Last month I had the opportunity to attend the NYU National Center on Philanthropy and the Law's Annual Conference. The conference was titled Regulation or Repression: Government Policing of Cross-Border Charity and provided an eye-opening overview of restritions imposed by many countries on foreign funding of charities and other NGOs. What made the conference particularly timely was the fact that only a month earlier a prominent member of Congress had publicly attacked foreign donations to think tanks - in the United States. This concern led to a bipartisan legislative proposal to require disclosure of foreign funding from scholars who testify on Capital Hill. The timing was particularly ironic, as at almost the same time the Economist ran two articles raising concerns about autocratic and illiberal governments placing limits on such funding: Donors: Keep Out and Uncivil Society. That said, whatever concerns charities and other nonprofits may have in the United States (including members of Congress criticizing them for accepting foreign donations), they pale in comparison to the concerns that the legal restrictions on both funding and activities raise for NGOs in many other parts of the world.
Oonagh B. Breen (University College Dublin) has posted Long Day's Journey: The Charities Act 2009 and Recent Developments in Irish Charity Law, Charity Law and Practice Review (forthcoming). Here is the abstract:
It is now twelve years since the Irish Government committed in its Agreed Programme for Government to the introduction of a modern statutory framework for the regulation of Irish charities. Twelve years on, in 2014, the promise of reform to ensure “greater accountability and to protect against abuse of charitable status and fraud . . . [and increased] transparency in the sector has never been more necessary and yet still remains to be delivered. Despite the passage of the Charities Act 2009, its non-implementation has created a regulatory void into which allegations of charity maladministration and misfeasance have filled the public consciousness.
In his seminal work on the formation of public policy, John Kingdon provides a persuasive theory to explain the opening, operation and outcomes of so-called ‘policy windows.’ According to Kingdon, at any given time, a ‘problem stream’ exists representing all the issues that are wrong in a given system. Running (often) parallel to the problem stream will be a ‘solution stream’ containing all of those suggested fixes to make a system work better. It is only when there is a convergence of those two streams within a third ‘political stream’ that policy change occurs. The nature of the political stream within which this convergence occurs can take many forms. In the words of Kingdon, it can comprise “public mood, pressure group campaigns, election results, partisan or ideological distributions in Congress and changes of administration.” The collision of problem and solution streams within this political stream results in the temporary opening of a policy window, allowing policy change to occur. The form of such resultant change may be shaped further by coincidental influences or agenda issues hovering in the vicinity of the window which attach themselves to the coat tails of the newly minted policy outcome. This conception of the policymaking process is useful, providing as it does some insight into how certain policy solutions come to be expectations or have other unintended consequences.
In an Irish context, Kingdon’s framework provides a useful lens through which to analyse the ‘fits and starts’ approach to charity law reform. Against the backdrop of the recent revelations concerning the Central Remedial Clinic and the Rehab Group charities and the catalytic effect of these scandals on the Irish charity sector and charity regulation more generally, this article reviews the current progress in the implementation of the Charities Act 2009, recent moves towards the establishment of the long awaited Charities Regulatory Authority and the prospects and challenges for better charity governance ahead.
Part I of this article reviews the existing Irish ‘problem’ and ‘solution’ streams in the context of charity regulation and outlines the political catalysts that are now instrumental in driving reform. Part II outlines the pending changes to be introduced over the coming months and the implementation challenges that will face the new Charities Regulator. Part III attempts to align the recent shortfalls in charity governance with the forthcoming statutory requirements and assesses whether the policy changes that the public are so desperately seeking will be delivered by the much anticipated commencement of the Charities Act 2009.
Kathryn Chan (University of Victoria) has posted The Co-Optation of Charitable Resources by Threatened Welfare States, 40 Queen's Law Journal (forthcoming 2015). Here is the abstract:
This paper addresses the emerging issue of the governmental co-optation of charitable resources, considering to what extent modern pressures associated with the retrenchment of welfare states are undermining the charitable sector’s traditional independence from government. It pursues this goal by advancing a theoretical contrast between ‘independent’ and ‘co-opted’ charities, and by identifying and contrasting certain legal and institutional mechanisms that either encourage or limit the co-optation ofcharitable resources by governments in England and in Canada.
The paper proceeds in the following way. I begin by advancing an argument in support of the value of an “independent” charitable sector, and the perils of allowing a nation’s charitable resources to be co-opted by the state. I proceed from this argument to articulate two indicia of a “co-opted” charity, relating these indicia to an important body of Anglo-Commonwealth law on the functional public law-private law divide and thus to debates over whether charities should bear human rights obligations and the other special responsibilities of the state. In part four, I distinguish three broad categories of co-optation that are applicable to charities: definitional (or existential) co-optation, managerial co-optation, and contractual (or fiscal) co-optation. I then examine several modern phenomena that tend towards the co-optation ofcharitable resources by government: the exertion of government influence over the legal definition of charity, the creation of statutory charities that are controlled by government or directed towards its purposes, and the exertion of influence over the administration of charitable resources through the negotiation of funding agreements or the appointment of government authority trustees. I consider how, in their response to each of these phenomena, English and Canadian laws and institutions either assist or obstruct government efforts to make charities comply with particular public welfare goals. I conclude that English law does far more than Canadian law to prevent charities from coming to function as agents of government policy, and may thus be regarded as a source of ideas on how Canada might manifest a stronger political commitment to the charitable sector’s independence.