Thursday, December 26, 2013
With a big red floppy hat tip to the TaxProf Blog, this Forbes article brings tax geekiness to admirable new heights, as a tax lawyer tries to distract her children on Christmas Eve with a discussion of St. Nick's Form 1040-NR. Do read the whole thing, but for our purposes here on the Nonprofit Prof Blog, here's the fun part:
The kids are pretty sure – and I agree – that Santa doesn’t intend to operate as a for profit business. But he likely doesn’t meet the criteria to be tax exempt under section 501(c)(3) of the Internal Revenue Code. By default, that would make his venture for profit for purposes of IRS (whether he wants to make money or not) and therefore, taxable.
Even if Santa’s toy distribution scheme were to be classed as a non-profit, there may be other unrelated trade or business income… As noted earlier, my house isn’t sure where Santa gets his money. Clearly, he isn’t paid for his services though my kids question the value of cookies and milk left out for him (that is, as my seven year old noted, a LOT of cookies). Since we’ve seen a lot of Santa merchandise in stores, we’ve worked out that we think he gets some licensing revenue for his own image and also for Rudolph – kind of like Pixar does for Lightning McQueen and Buzz Lightyear. That income would be taxable to the extent that it’s not offset with expenses. So, assuming all of this, what’s deductible?
So here's my question, would Santa's operations qualify for Section 501(c)(3) status? I mean, clearly he could structure his licensing revenue as a royalty exempt from UBIT and even drop it into a for profit sub if need be. I don't really see an inurement or a private benefit issue - surely, all good kids in the world constitute a charitable class. He's not been lobbying as far as I know, so barring a big political endorsement, I'm not seeing the issue. So does Santa just need good nonprofit counsel?
Merry Christmas (a day late) to all who celebrate, and a joyous New Year to all.
Friday, December 13, 2013
With the end of the year looming, many Americans find themselves deliberating over which charity they should write a check to. Why? For at least some people who actually believe this to be true, the reason is often the charitable tax deduction.
A December 2012 Marketplace article explained the “holiday season is the time when many Americans do their end of the year charitable giving. A third of American tax payers itemize deductions and 80 percent of those Americans take advantage of the charitable tax deduction.” The phenomenon that is end of the year giving and the benefits of the charitable tax deduction were revisited in a Marketplace article from earlier this week.
The recent article traces the genesis of the charitable tax deduction back to the Gilded Age, “a time when a small group of Americans were making very large amounts of money, and giving some of it away to start schools and museums and libraries and fund other causes they cared about.” The article provides that with the start of the First World War in 1917, U.S. Senator Henry French Hollis was worried Congress’ plans to finance the war by raising the top rate of the income tax from 15 percent to 77 in only a few years would have an adverse affect on philanthropy. Hollis worried the wealthy would stop donating because he believed people usually “’contribute to charities out of their surplus. After they've done everything else they want to do, after they've educated their children and traveled and spent their money on everything they really want or think they want, then, if they have something left over, they will contribute.’”
The article explains the research on the degree to which the charitable deduction has actually affected the amount of money people give every year is divided, but the goal of the deduction, to incentivize charitable giving, has always been clear.
Does the charitable tax deduction incentivize charitable giving? If so, to what extent has it been successful?
A few days ago in an article from the Wall Street Journal, former chairman of the Federal Election Committee Bradley A. Smith claimed the IRS’ recently proposed rules for dealing with the political activity of nonprofits “would plunge the agency deeper into political regulation.”
Clearly frustrated with the new rules, Smith argues the rules disturb over 50 years of settled law and practice because they limit the ability of certain tax-exempt 501(c)(4) nonprofits to conduct nonpartisan voter registration and voter education. Additionally, Smith notes the rules place restrictions on nonprofit public communication over any aspect of a president’s judicial nominees between February 2 and the national Election Day.
Smith asks why the IRS is regulating political activity at all and suggests it is because “many Democratic politicians and progressive activist think the new rules limiting political speech by nonprofits will benefit Democrats politically.”
Smith goes on to claim “these progressives” have propagated “three myths” about 501(c)(4) organizations to further that end:
- 501(c)(4)s are ‘charities,’ and doing political work abuses their charitable status;
- 501(c)(4)s must be operated ‘exclusively for the promotion of social welfare,’ not politics; and
- Political activities shouldn't get tax breaks.
Smith’s ultimate conclusion is that “to anyone concerned with public confidence in nonpartisan tax collection and preventing future IRS scandals, the solution is not more tax rules. It is for the IRS to get out of the business of regulating politics.”
Wednesday, December 11, 2013
In a Forbes article from earlier this week, the author calls into question the charitable purpose and tax-exempt status of prestigious schools like Harvard and Stanford. The author argues that the treatment of nonprofit organizations such as Harvard and Stanford is “problematic both practically—it costs the government billions of dollars in tax revenue every year—and philosophically, as it creates a paradigm that misunderstands the way many ‘nonprofit’ organizations operate and the role that for-profit corporations ought to play in society.” The author goes on to claim that the best solution is to “eliminate the very idea of the nonprofit sector.”
Essentially, the author claims it is incredibly easy for organizations to obtain tax-exempt status and that determining whether an organization is trying to make and distribute a profit as the basis for distinguishing between the private and voluntary sector is ineffective because nonprofits are also making and distributing profits.
What, if anything, would be the consequences of eliminating the idea of the nonprofit sector?
Saturday, December 7, 2013
Zhaohui Long (Sun Yat-Sen University) and Xiaoling Hu have posted Research on Tax Incentives for Charitable Donations of Non-Monetary Assetsby Chinese Corporations, 3 Journal of Chinese Tax and Policy 21 (2013). Here is the abstract:
Corporate donations form a substantial part of social charitable donations in China. Corporate non-monetary asset donations are important in this regard as they bring goods and materials to areas where they are desperately needed. However, the current scope and scale of corporate donations are narrow due to a lack of tax incentives. This paper will explain the incentive effects of the current tax regime by analyzing how asset donations are treated by Chinese taxation laws, from the perspective of macroeconomic policies and market demands. It particularly focuses on the relatively heavy tax burden and limited scope for tax exemptions on corporate asset donations in China. In light of this, we propose some pragmatic suggestions on incentivizing policies that are more suitable for China’s current situation, such as increasing the exemptions before tax and allowing exemptions to roll over to future years, developing incentive policies on indirect and property taxes, and establishing the mechanism for third-party price evaluation and equity donation regulation, etc
Martina Rechberger, Sandra Stoetzer, and Dennis Hilgers (all Johannes Kepler University Linz) have posted Designing New Ties: Public Governance by Outcome-Based Contracting in Austria. Here is the abstract:
Due to the growing relevance of output and outcome orientation in the public sector, contracts are becoming more important in public sector networks. Especially the core objects of cooperations between the public sector and non-profit organisations (NPOs) are to obtain a certain outcome, which is mainly due to fixed arrangements pointed out in contracts. What are the requirements for outcome-based contract design? How are outcome-based objectives implemented in contracts? What is the status of implementation of outcome-based contract management in Austria?
Friday, December 6, 2013
Philip Hackney (LSU) has posted No 'Fagin' School of Pickpockets Allowed - A Response to Professor Leff on Tax Planning for Marijuana Dealers, 99 Iowa Law Review Bulletin (forthcoming 2014). Here is the abstract:
Professor Benjamin Leff argues in a forthcoming article entitled Tax Planning for Marijuana Dealers that a tax-exempt social welfare organization described in Internal Revenue Code section 501(c)(4) may sell medical marijuana without putting its exempt status in jeopardy. He argues that (1) the “public policy” doctrine applicable to charitable organizations under section 501(c)(3) does not apply to social welfare organizations, and (2) a social welfare organization may consider “community” law and ignore federal law in considering whether its activity meets the idea of social welfare. I argue that Leff is wrong and that the public policy doctrine applicable to charitable organizations applies to social welfare organizations equally. Tax-exempt organizations derive exempt status primarily by supplying significant public benefits. Violating federal, state or local law causes public harm; thus, any tax-exempt organization, including a social welfare organization, may not violate established public policy as a substantial purpose. Additionally, the “community” requirement for social welfare organizations is to ensure the organization is dedicated to a public purpose rather than a private one. Violating any law, including federal, is more likely to ensure an organization is operating for a private rather than public purpose. Contrary to Leff’s claim therefore, this article argues that a social welfare organization may not sell medical marijuana and maintain its exempt status.
John Montague (Hogan Lovells) has published The Law and Financial Transparency in Churches: Reconsidering the Form 990 Exemption, 35 Cardozo Law Review 203 (2013). Here is the abstract:
Most tax-exempt organizations are required to file the IRS Form 990, an information return that is open to the public. The Form 990 is used by watchdogs and donors to learn detailed financial information about charities. However, churches are exempt from filing the Form 990 and need not disclose any financial information to the IRS, the public, or their donors. In December 2012, the Evangelical Council for Financial Accountability recommended to Senator Charles Grassley that Congress should preserve the exemption, despite recent financial scandals at churches.
Examining the legislative history, this Article argues that the primary function of the information return has become its utility to donors, and policymakers have recognized the role that public access can play in keeping nonprofits honest and efficient. Unfortunately, because churches do not have to be transparent or accountable, few of them are.
Using research and insights from sociology, this Article contends that because of their opacity and the unique nature of religious authority, churches are more likely to foster and shelter malfeasance. Churchgoers are unlikely to challenge leaders because doing so can endanger their position in the religious community, making it imperative that transparency be mandated by outside authorities. Ironically, increased transparency may actually be good for churches because, as studies suggest, it is likely to increase donations and because, by minimizing opportunities for financial improprieties, it may preserve the religious experience of churchgoers. In addition, transparency is consistent with the teaching of many Christian leaders and with the expressed preferences of a large portion of churchgoers.
Ross E. Davies has posted Preface 2013: The Capacity to be Taxed is the Capacity to Self-Destruct, Green Bag Almanac & Reader 1 (2013), detailing the automatic reovcation of the Green Bag Almanac & Reader's section 501(c)(3) tax-exempt status for failure to file annual returns and the saga of its attempt to reclaim that status. Here is the abstract:
This is the eighth Green Bag Almanac & Reader. This year is a special one, though, for reasons given after our customary salute to our diligent board and before our customary confessions of editorial error. There are two big problems with this Almanac. First, it is late — printed in September 2013, not in the winter of 2012-13, as it should have been. Second, it is relatively plain and boring — it lacks both the elaborate design and the voluminously numerous entertaining tidbits featured in previous Almanacs. (The exemplary legal writing is still excellent, of course, as are the annual reviews on pages 19-78 below.) Both problems are our own fault, because we screwed up the Green Bag, Inc.’s taxes. Permit me to explain. The Green Bag, Inc. — publisher not only of this Almanac but also of the Green Bag (a law journal) and several other publications, as well as producer of such works of scholarly artistry as the Supreme Court Sluggers trading cards and a series of bobbleheads of Supreme Court Justices — was a not-for-profit corporation blessed by the IRS with limited tax-exempt status under section 501(c)(3) of the federal internal revenue code. We received our 501(c)(3) determination in 1998, shortly after the company was formed. But in August 2010 we lost it. Like many not-for-profits, the Green Bag, Inc. had been stupidly failing to engage in the fairly simple process of filing the required tax forms. As a result, when the IRS launched its automatic revocation system in 2010, we were one of the roughly 275,000 not-for-profits whose tax exemptions were revoked. Since then, we have developed a deeper appreciation for the old adage about it being easier to get into trouble than to get out of it, as this preface illustrates.
Thursday, December 5, 2013
In a New York Times DealBook column, Andrew Ross Sorkin explores an interesting idea put forward by Lindsay Beck: is there a way to harness financial instruments to dramatically increasing funding resources for nonprofits. Ms. Beck, who has a Wharton M.B.A. and founded a successful charity that aided female cancer survivors with pregnancy, has pursued the idea with a number of investment banks. Based on the article, much work still has to be done to make it a reality and it is far from clear that the idea will prove to be a viable and successful one, but it and the other innovative financing ideas discussed in the column raise a host of intersting issues. For example, what bodies of laws govern such instructions - federal and state securities laws, state charitable soliciation laws, both? What remedies would aggrieved "investors" have? What monitoring would be required or advisable? Nevertheless, it is an interesting idea.
This story was a little while ago, but the Associated Press reported how the fact that church pension plans are exempt from many laws that normally regulate such plans has left many employees of church-affiliated entities, including hospitals, with little recourse when pension funds are severely underfunded. This exemption includes not being covered by federal Pension Benefit Guaranty Corporation and not being subject to the Employee Retirement Income Security Act, or ERISA. Based on the article, it appears this issue has been a particular problem at a number of Catholic-affiliated hospitals.
Wednesday, December 4, 2013
A federal District Court in Wisconsin has struck down the exclusion from gross income for vcertain housing allowances provided to "ministers of the Gospel" by Internal Revenue Code § 107 as a violation of the Establishment Clause. As previously discussed here, the same court is also considering challenges to the church exemption from Form 990 filing and the alleged lack of IRS enforcement against churches for violating the political campaign intervention the prohibition. As John Colombo has detailed in this space, the key question in all of these cases - including in the almost certain government appeal of the housing allowance decision - will be whether the plaintiffs have standing to even bring these claims. For reasons Professor Colombo details, it is unlikely that they do. As a commentator to the TaxProf Blog post on this story noted, the judge in the housing allowance case also previously ruled that the National Day of Prayer presidential proclamation was unconstitutional, only to have that case dismissed on appeal for lack of standing. Nevertheless, this case and the other challenges are currently still alive and proceeding, although news reports state the judge has stayed her decision on the housing allowance pending appeal.
The Green Bay Press Gazette reports that a review of 51 active or recently closed charities tied to Wisconsin athletes and professional teams revealed a mix of compliance and noncompliance with IRS filing requirements, a broad range of fundraising costs and revenues, and other issues. For example, six of the charities have lost their tax-exempt status for failing to file the required annual return (Form 990) and several charities reported less than two-thirds of revenues going toward charitable activities (as low as 18 percent in one case), although in some cases that low percentage may reflect an intentional plan to build up reserves for a particular, future charitable purpose. The charities ranged in size from several with over a million dollars in annual revenue to 16 active charities with less than $50,000 in annual revenue. As noted in the story and detailed in separate USA Today report, the most prominent set of concerns may belong to the LeRoy Butler Foundation, which is currently the subejct of an IRS and federal grand jury investigation apparently stemming from its multi-year failure to file IRS returns and payments of "appearance fees" and provision of other benefits to its namesake. Overall, these reports appear to reveal a broad range of typical charity successes and failures among this subset of charities.
The Tampa Bay Times reports that an Ohio jury has found John Donald Cody guilty of 23 counts of fraud, money laundering and theft relating to his role as head of the U.S. Navy Veterans Association. As previously detailed in this space, the Association was a sham charity that Cody ran under the stolen name of Bobby Thompson and used to raise over $100 million before being exposed in 2010 by the newspaper (then named the St. Petersburg Times). Sentencing is scheduled for mid-December. Prosecutors have already obtained a guilty plea from one other person involved in the scam, who is now serving five years in an Ohio prison, and they have stated they plan to indict the lawyer they alleged also helped.
Friday, November 29, 2013
For many Americans, Black Friday began last night -- or even yesterday, Thanksgiving day. And now the Holiday Season is upon us. It would do us well to note what Pope Francis, leader of the world's 1.2 billion Roman Catholics, had to say this week about the misplaced priorities of our capitalist world that worships money. The pontiff asked:
How can it be that it is not news when an elderly homeless person dies of exposure, but it is news when the stock market loses two points?
That's a good question! Pope Francis then supplied the answer:
Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. To sustain a lifestyle which excludes others, or to sustain enthusiasm for that selfish ideal, a globalization of indifference has developed.
I'll admit it: I've been closely following the release of the proposed new Treasury regulations governing political advocacy of 501(c)(4) organizations. Today's Washington Post asserts that the new rules bring both clarity and confusion to a broken system. The Post's article begins by acknowleding that the rules governing the political activities of nonprofit advocacy groups is "an area of the tax code that has been crying out for greater clarity." According to the newspaper, while the "proposed regulation unvieled Tuesday by the Treasury Department draws the boundaries clearly," they "instantly kicked off intense debate about whether the lines are in the right place."
According to the Post,
One phrase in the official notice summed up the imperfect nature of the exercise. The new rules, the department said, "may be both more restrictive and more permissive than the current approach."
Notwithstanding the apparent confusion, the Post acknowledges what we all know: the system was broken and needed to be fixed.
Earlier this week, we blogged about the proposed new political activity rules for tax-exempt organizations proposed by the U.S. Department of the Treasury and the Internal Revenue Service. The NonProfitTimes is reporting that the proposed rules are drawing sharp criticism from some members of the nonprofit sector.
As an initial matter, we note that the rules specifically target 501(c)(4) organizations and political lobbying and activism. However, the Times notes that the proposed rules can also apply to 501(c)(3) groups. For example, under the proposed regulations, activities that will be counted as political activity include voter registration drives, nonpartisan voter guides and events such as debates at which candidates appear. Section 501(c)(3) groups sometimes organize these activities.
Organizations classified as 501(c)(4) social welfare organizations are permitted to undertake political activity, so long as it does not constitute the group’s primary purpose. Nonpartisan activities such as voter registration drives currently are not counted against that threshold. The IRS uses a “facts and circumstances” determination on a case-by-case basis to decide whether a given group’s political activity is its primary purpose.
The facts and circumstances test [is] “all very specific to an organization,” according to Viveca Novak, editorial and communications director at the Center for Responsive Politics in Washington, D.C. “It is subjective and can be ambiguous. What the IRS is trying to do is just have some bright line rules.”
This does not satisfy some members of the nonprofit sector. The NonProfitTimes reports that some sector members have labeled the proposed rules "an attack on First Amendment free speech rights."
The report notes opposition from other sources:
Marcus Owens, the former director of the IRS Tax Exemption Division and now a lawyer at the Washington, D.C. firm Caplin and Drysdale, said, the proposed rule “eliminates some of the tax rule ambiguities and replaces them with election law ambiguities. There’s still a lot of uncertainty. There’s just different words describing that uncertainty.”
Owens believes the regulations go too far in restricting activities that, because of their nonpartisan nature, did not count as political acts. “It means that for groups like the League of Women Voters, which publishes voters’ guides, that won’t happen in all likelihood,” he said. “What we’ll be left with is biased guides from political groups. Instead of more objective presentation, the public is going to get bombarded with partisan communications.”
Some groups agree with Owens that the proposed regulations go too far, saying that they infringe on free speech. “These proposed new regulations put the First Amendment rights of Americans at even greater risk,” Jay Sekulow, chief counsel of the American Center for Law and Justice in Washington, D.C. said via a statement. “With this move, the Obama Administration opens a new front in its war against political dissent.”
Owens points out that some of the activities that the regulations call political activity, such as get-out-the-vote drives and issue communications, are permitted for 501(c)(3) charities and foundations, which are restricted entirely from political activity. “The Treasury has created a harsher rule,” he said. “They could have mimicked the standards private foundations have to adhere to but instead went with a shotgun approach that does a disservice to the public.”
Gary Bass, executive director of the Bauman Foundation in Washington, D.C., called the proposal “extremely troubling for those who believe in democratic practices.” He worries about the implications for 501(c)(3) groups: “If nonpartisan voter registration, get-out-the-vote, etc., are political for (c)4’s, how can they not be for (c)3’s?” he asked rhetorically.
Bass, like Owens, is critical of the proposal’s ambiguity. “Once again, nonprofits don’t know what they can do,” he said. “The first principle for a rule should be to encourage democratic practice while stifling abuses. This NPRM (notice of proposed rulemaking) abandons such a principle.”
Further, he said the proposed rules will have a chilling effect on foundation funding for nonpartisan civic engagement like voter registration. “Even if there is a legal pathway, it will scare the hell out of foundation legal counsel—and encourage foundations to stay out of this area of funding.”
Not all sector members are critical. The Times reports that unlike Owens and Bass,
Other groups are more optimistic about the proposal. “The proposal is good for no other reason than it gets the ball rolling on a critical issue,” said Craig Holman, Ph.D., a government affairs lobbyist with the Washington, D.C. group Public Citizen. “It admirably attempts to offer some clarity in what nonprofit groups can and cannot do and reduces the discretion of the IRS in evaluating activities of nonprofits. Overall, it is a positive step by the Treasury Department.”
Fred Wertheimer, president of Democracy 21 in Washington, D.C., agreed. “Democracy 21 applauds the action taken today by the Treasury Department and the Internal Revenue Service to initiate a rulemaking to address the inadequate rules that have been used by the IRS to determine 501(c)4 tax-exempt status,” said Wertheimer in a statement.
Once the regulations are published in the Federal Register, the public will have at least 60 days to comment.
Thursday, November 28, 2013
The NonProfitTimes is reporting that a recent study on charitable giving reveals that charitable giving increases significantly when the recipients are religiously-linked nonprofits. According to the Times:
Some 41 percent of all U.S. donations go to religious congregations. That number jumps to 73 percent when religiously-linked nonprofits such as Catholic Charities, the Salvation Army and Jewish federations are included. Those are some results from the Lilly Family School of Philanthropy at Indiana University study called “Connected to Give: Faith Communities.”
The study, carried out by the Lilly School in conjunction with Los Angeles, Calif. nonprofit research lab Jumpstart and GBA Strategies in Washington, D.C., is the third of six reports. It surveyed 4,862 American households of various religious traditions.
Four out of five Americans identify themselves with a particular religion. Of those, 65 percent give to congregations or charities. Of those who do not identify with a religion, 56 percent give. “The 9-point difference is due largely to contributions from (religiously) affiliated Americans to organizations with religious ties,” wrote the study’s authors.
“It’s like putting on 3-D glasses,” said one of the study’s authors, Shawn Landres, Ph.D., CEO and research director of Jumpstart, via a statement from the Lilly School. “In addition to looking at congregations, when we also look at the religious identity of the organization and the religious or spiritual orientation of the donor, it turns out that a majority of Americans contribute to organizations with religious ties and a majority of Americans cite religious commitments as key motivations for their giving.”
Almost two-thirds, or 63 percent, of Americans gave to congregations or charitable organizations in 2012, with a median gift of $660. Congregations saw the highest median gift at $375. The median gift to not religiously identified organizations (NRIOs) was greater than that of religiously identified organizations (RIOs), at $250 to $150.
“When it comes to religious identity and giving, demographic categories like income and age resist generalization,” wrote the report’s authors. While the report says that religious denomination alone does not affect giving, other factors help shape rates of giving among the denominations, according to the authors. Jews give at the highest rate to religious and charitable denominations, at 76 percent. Christians — black Protestants, Evangelical Protestants, mainline Protestants and Roman Catholics — all give at similar rates, between 61 percent and 68 percent. Those identifying as not religiously affiliated give at the lowest rate, 46 percent.
The study also examined people's motivation for giving. As reported by the NonProfitTimes, the study revealed that
More than half of Americans who give, or 55 percent, said that religion is an important or very important motivation for charitable giving. Other common motivations include believing they can make a change through giving (57 percent) and thinking they should help others who have less (55 percent).
What a heart-warming story. Happy Thanksgiving to all.