Tuesday, April 8, 2014
A Case Study of Legislation vs. Regulation: Defining Political Campaign Intervention under Federal Tax Law
The rules that should govern political campaign intervention by social welfare organizations exempt from taxation under § 501(c)(4) of the Internal Revenue Code have been the subject of recent controversy. Long before all the attention, a group of dedicated and experienced experts on the topic, under the auspices of two well-known nonprofit groups, undertook the task of clarifying the rules regarding tax-exempt political activity. In light of the issues becoming national news, the group, known as the Bright Lines Project, also converted the regulatory proposal into legislative language. These two versions of the same rules — as a set of regulations and as a set of statutes — provide a natural laboratory to compare the administrative law implications of choosing between legislation and regulation to establish a set of tax rules. This Article undertakes that examination. It concludes that, if revenue rulings interpreting regulations are afforded deference under Auer v. Robbins and Bowles v. Seminole Rock & Sand Co., promulgating the initial definition of political campaign intervention as a set of regulations may well give the Internal Revenue Service greater power to police political campaign intervention by exempt organizations than would the enactment of detailed legislation. It recommends, however, that broad statutory guidance, followed by regulations, and then by revenue rulings strike the best balance between democratic concerns and administrative flexibility.
This article explores the impact of such a covenant on the characterization for tax purposes of expenditures to maintain the facade. In particular this article explores the following question: Given that the charitable easement holder owns a nonpossessory interest in the facade, which imposes on the charity an obligation to repair and maintain the facade and entitles it to benefit from increases in the value of the facade, is a donor's assumption of the charity's obligation to repair the facade an additional charitable contribution to the charity? If a donor gratuitously makes improvements to property owned outright by a charity, such improvements are deductible charitable contributions. Similarly, if a donor gives money to a charitable easement holder to enable it to maintain the property subject to the easement, such donations are deductible charitable contributions. This article goes one step further and asks whether a donor who assumes the cost of maintaining the charity's nonpossessory interest in the facade makes an indirect deductible charitable contribution to the charity when such repairs are made. Having done so, this article concludes that if the general rule imposes the obligation to repair the facade on the charitable easement on the easement holder, the covenant in which the donor assumes liability to repair the servient estate represents the donor's promise to make gifts in the future and that payments pursuant to such a promise constitute, to the extent of the charity's obligation to repair, additional indirect charitable contributions. This article also concludes that current law supports the allowance of a deduction for indirect, as well as direct, charitable contributions.
The article appeared in the Akron Tax Journal.
Tuesday, March 25, 2014
It is worthwhile, despite the incessant call for experiential learning, to think theoretically about Civil Society. Doing so helps us focus our debates on more immediate problems such as the workings of the charitable contribution deduction or the extent to which charity, social welfare, and politics may coexist. In the absence of deep theoretical thinking, our legislative and judicial statements pertaining to the nonprofit world degenerte into ad hoc tinkering resulting in pronouncements without purpose.
It just so happens that The Atlantic this week contains a concisely-written essay addressing the proper balance between civil society and the state. Mike Konczal argues that the idea of extremely limited government in a society where compassion for one another is instead exercised through a vibrant Independent Sector is but a myth. Shrinking government will not expand Civil Society. One should not dismiss the essay merely because of its partisan sounding title, The Conservative Myth of a Social Safety Net Built on Charity. The essay is actually more reasoned than dogmatic, and certainly worth twenty minutes. Citing Lester Salamon's work, Konczal argues that the State is the only vehicle by which people can provide a reliable safety net. The State should address "absolute poverty," and presumably health care and education, while Civil Society appropriately fills in more targeted "needs" and preferences. Limiting government will not result in a more vibrant civil society comprising a reliable safety net, he argues. This is because Civil Society is too often characterized by patterns that tend to reinforce the status quo (as opposed to efficiently addressing real needs), or if not that, the relatively whimsical or self-serving desires of those who fund civil society:
With this in mind, we can examine why voluntary efforts fail consistently. Despite the general under-theorizing of the voluntary sector, the scholar Lester Salamon in the 1980s did build a theory of “voluntary failures” to contrast with market and government failures. There are three parts to the theory that especially stand out in the wake of the Great Recession.
The first is what Salamon describes as philanthropic insufficiency. This occurs when the voluntary sector can’t generate enough resources to provide social insurance at a sufficient scale, which, as noted, is exactly what happened in 2008. There is also the problem here of geographic coverage. As Hoover discovered, charity will exist in some places more abundantly than in others; the government has the ability to provide a more universal baseline of coverage.
But it isn’t just about the business cycle. A second issue Salamon identified is philanthropic particularism. Private charity has a tendency to focus only on specific groups, particularly groups that are considered either “deserving” or similar in-groups. Indeed, in one telling, this is the entire point of private charity. The largest single category of charitable giving in the United States goes not to caring for the poor but for the sustenance of religious institutions (at 32 percent of donations). Using very generous assumptions, Indiana University’s Center for Philanthropy finds that only one-third of charitable giving actually goes to the poor. Almost by definition, there will be people who need access to social insurance who will be left out of such targeted giving.
The third element of voluntary failure relevant here is philanthropic paternalism. Instead of charity representing a purely spontaneous response by civil society, or a community of equals responding to issues in the commons, there is, in practice, a disproportionate amount of power that rests in the hands of those with the greatest resources. This narrow control of charitable resources, in turn, channels aid toward the interests and needs of those who already hold large amounts of power. Prime examples of this voluntary failure can be seen in the amount of charitable giving that goes to political advocacy, or to elite colleges in order to help secure admission for already privileged children, even as the needs of the truly desperate go unmet.
At a basic level, much of our elite charitable giving is about status signaling, especially in donations to elite cultural and educational institutions. And much of it is also about political mobilization to pursue objectives favorable to rich elites. As the judge Richard Posner once wrote, a charitable foundation “is a completely irresponsible institution, answerable to nobody” that closely resembles a hereditary monarchy. Why would we put our entire society’s ability to manage the deadly risks we face in the hands of such a creature?
The essay reminded me of Miranda Fliescher's point made last week regarding the proper structuring of the charitable contribution deduction (i.e., the law should encourage real relief of poverty rather than rewarding spending that might occur anyway as an expression of personal consumption preferences or status). In any event, it would be nice if we could more often discern a theoretical belief or assumption -- any assumption -- in our legal jurisprudence regarding nonprofit organizations.
Saturday, February 8, 2014
As noted by TaxProf Blog, David Cay Johnston (Syracuse) has written a piece in State Tax Notes that highlights the ability of certain high-income donors living in Arizona to combine Arizona tax credits with the federal charitable contribution deduction to actually make money by giving to charity. This is because each of the state tax credits reduce state income tax liability dollar-for-dollar, thereby allowing the taxes saved through the federal income tax deduction to be all profit. According to Johnston, a married couple in the top federal income tax bracket can make almost $1,300 off charitable contributions of just under $3,300, or almost a 40 percent return.
Brian Galle (Boston College) and David Walker (Boston University) have posted Sunshine, Stakeholders, and Executive Pay: A Regression-Discontinuity Approach on SSRN. Here is the abstract:
We evaluate the effect of highly salient disclosure of private college and university president compensation on subsequent donations using a quasi-experimental research design. Using a differences-in-discontinuities approach to compare institutions that are highlighted in the Chronicle of Higher Education’s annual "top 10" list of most highly-compensated presidents against similar others, we find that appearing on a top 10 list is associated with reduced average donations of approximately 4.5 million dollars in the first full fiscal year following disclosure, despite greater fundraising efforts at "top 10" schools. We also find some evidence that top 10 appearances slow the growth of compensation, while increasing fundraising and enrollment, in subsequent years. We interpret these results as consistent with the hypothesis that donors care about compensation and react negatively to high levels of pay, on average; but (absent highly-salient disclosures) are not fully informed about pay levels. Thus, while donors represent a potential source of monitoring and discipline with respect to executive pay in the nonprofit sector, significant agency problems remain. We discuss the implications of these findings for the regulation of nonprofits and for our broader understanding of the pay-setting process at for-profit as well as nonprofit organizations.
Alicia Plerhoples (Georgetown) has posted Delaware Public Benefit Corporations 90 Days Out: Who's Opting In? on SSRN. Here is the abstract:
The Delaware legislature recently shocked the sustainable business and social enterprise sector. On August 1, 2013, amendments to the Delaware General Corporation Law became effective, allowing entities to incorporate as a public benefit corporation, a new hybrid corporate form that requires managers to balance shareholders’ financial interests with the besat interests of stakeholders materially affected by the corporation’s conduct, and produce a public benefit. For a state that has long ruled U.S. corporate law and whose judiciary has frequently invoked shareholder primacy, the adoption of the public benefit corporation form has been hailed as a victory by sustainable business and social enterprise proponents. And yet, the significance of this victory in Delaware is premature. Information about the number and types of companies opting into the public benefit corporation form has been preliminary and speculative. This article fills that gap. In this article, I present original descriptive research on the 53 public benefit corporations that incorporated or converted in Delaware within the first three months of the amended corporate statute’s effectiveness. Based on publicly available documents and information, I analyze these first public benefit corporations with respect to the following characteristics: (1) year of incorporation as a proxy for corporate age, (2) industry, (3) charitable activities, (4) identified specific public benefit, and (5) adoption of model legislation options not required by the Delaware statute. My analysis returns the following results: 75% of public benefit corporations are likely new corporations in their early stages of operation; 32% of public benefit corporations provide professional services (e.g., consulting, legal, financial, architectural design), the technology, healthcare, and education sectors each represent 11% of public benefit corporations, 10% of public benefit corporations produce consumer retail products; approximately 40% of public benefit corporations could have alternatively incorporated as a charitable nonprofit exempt from federal income taxes. This article discusses these and other findings to assist in understanding the public benefit corporation and how it has been employed within the first three months of its adoption.
Matthew Rossman (Case Western Reserve University) has posted Evaluating Trickle Down Charity – A Solution for Determining When Economic Development Aimed at Revitalizing America's Cities and Regions is Really Charitable on SSNR (Brooklyn Law Review, forthcoming). Here is the abstract:
As our nation's philanthropic sector becomes more entrepreneurial, ambitious and influenced by the private sector, longstanding legal standards on what constitutes "charity" struggle to stay relevant. More and more often, organizations that seek classification by the Internal Revenue Service as a Section 501(c)(3) charity (and the substantial public subsidy that this status unlocks) are not the soup kitchens and homeless shelters of yesteryear, but highly sophisticated ventures which accomplish their missions in ways that are less obviously charitable. In no case is this more true than in the recent widespread emergence of nonprofit organizations whose primary activity is providing direct aid to for-profit businesses.
This Article examines this trend and coins the phrase “trickle down charity” to encapsulate the analytic challenge these organizations (which the article terms REDOs, short for “regional economic development organizations”) pose when they seek classification as a charity. REDOs hope that the privately-owned, profit-seeking ventures they aid will ultimately help those in need in the form of jobs and a flourishing economy. While influential and, in some cases, transformative to cities and regions in economic distress, REDOs turn the traditional charitable services delivery model on its head by advancing private interests first and betting that benefit to a charitable class will follow. By relying on standards designed for more conventional charities, current IRS scrutiny of this new model is outdated, inconsistent and mistimed. The most significant consequence of this imprecision is that the publicly funded subsidy American laws have created to incentivize charitable work may be misused to support organizations that are not really charitable while subtracting from the pool of funds available to those that clearly are.
To solve this problem, I propose that the IRS rely on the law of charity’s often overlooked and sometimes maligned “private benefit doctrine.” Specifically, this doctrine should inform new IRS procedures that (1) require all REDOs to make a more compelling demonstration of the nexus between their activities and the accomplishment of charitable purposes and (2) provide a system of ongoing accountability with respect to those claims. Enlivening, rather than ignoring, the private benefit doctrine in this way will not only address the problem of regulating REDOs but should also serve as a useful template for the IRS in examining other emerging forms of 21st century charity and, thus, in maintaining the overall integrity ofthe philanthropic 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, November 21, 2013
Maria Di Miceli has recently published Drive Your Own PILOT: Federal and State Constitutional Challenges to the Imposition of Payments in Lieu of Taxes on Tax-Exempt Entities, in the Tax Lawyer. Here is the abstract:
With the recession raging on, state and local governments continue to look for innovative ways to save money and slash state and local government programs. Despite providing a public good to states and municipalities, the nonprofit, tax-exempt sector is no exception to state and local government's purview. One of the methods used by governments is to levy ad hoc, coerced payments in lieu of taxes ("PILOTs") on tax-exempt organizations. Major cities such as Boston, Philadelphia, and Madison have taken a myriad of approaches and, thus far, nonprofits have generally been on the weak side of the bargaining table. But what state, local, and federal constitutional challenges might a nonprofit make against the imposition of a PILOT? And what is a PILOT anyway: a tax, fee, contract, penalty, or some combination? This Article will explore those and other areas in an attempt to help entities effectively drive their own PILOT.
Hat Tip: TaxProf Blog
Wednesday, November 20, 2013
Illinois Law Professor and fellow blogger John D. Colombo has recently posted the following papers on SSRN, listed by title and accompanying abstract.
Here is the first:
The IRS University Compliance Project Report on UBIT Issues: Roadmap for Enforcement ...Reform...or Repeal?
The recent completion of the IRS College and University Compliance Project again raises questions about the rationale for and purpose of the Unrelated Business Income Tax (UBIT). This paper addresses these questions in three main parts. Part I reviews existing UBIT law, particularly as it applies to colleges and universities. The second part is a short summary of the IRS findings on UBIT compliance. The final part then examines whether the UBIT should be reformed or even repealed. The paper concludes that while expansion of the UBIT to an all-inclusive commerciality tax (a proposal I have made in previous papers) is still my preferred solution, absent such reform, Congress should consider simply repealing the UBIT and relying on disclosure and non-tax incentives to control commercial activity by charities.
And the second:
Private Benefit: What Is It -- And What Do We Want It to Be?
Beginning with the landmark decision American Campaign Academy v. Commissioner in 1989, the Internal Revenue Service has used the “private benefit” doctrine as a primary tool to police the activities of charitable organizations exempt under Code Section 501(c)(3). Unfortunately, the doctrine literally has no doctrinal content. Unlike its sibling, the private inurement doctrine, the private benefit doctrine has no statutory basis in 501(c)(3). Though the IRS claims the doctrine flows from the 1959 Treasury Regulations, it is a claim that is questionable given the language used, and in any event, this interpretation of the regulations appears not to have been “discovered” until some at least a decade after the regulations were promulgated. This paper reviews the history and application of the private benefit doctrine, and suggests a specific normative test for application of the doctrine to situations involving a “failure to conserve” charitable assets.
And the third:
The Role of Redistribution to the Poor in Federal Tax Exemption for Charities
Over the past several years, many commentators have suggested that federal tax exemption for charities should be limited to organizations that help the poor – that is, organizations with a redistributive mission. This paper reviews and comments on three areas of existing federal exemption law where the redistribution view either already controls tax benefits or is being pushed by policy makers as a change to existing law: the push for a charity care standard for exempting nonprofit hospitals, the current university endowment debate, and a hodge-podge of rulings relating to what I will call “middle class charity” in which the IRS has denied exemption to nonprofit organizations providing services to the middle class (as opposed to the poor). Part I provides a brief introduction to the history of the redistribution concept in federal exemption under 501(c)(3) prior to the current regulations introduced in 1959. Part II then provides a summary of current law and proposals in the three areas described above (nonprofit hospitals, programs aimed at the middle class, and university endowments). Part III then turns to some analysis and observations. The main observations are (1) that the redistributive push in the areas identified by this paper is almost certainly bad policy and inconsistent with the IRS’s supposed adoption of the broad common-law view of charity in the 1959 regulations; (2) that the redistributive paradigm seems to pop up most in areas where the organizations in question carry on activities that look very similar to commercial enterprises – in other words, what we may be seeing is the use of the redistribution paradigm to help distinguish charitable services from ordinary for-profit business; (3) limiting the definition of charitable for tax exemption purposes to relief of the poor is inconsistent with the historical definition of charity; and (4) the effort to limit the scope of tax exemption/deductibility to redistribution to the poor is inconsistent with virtually all the theories proposed to explain tax exemption and essentially adopts one particular view of distributive justice that may not be appropriate in formulating tax benefits for charities. Until tax policy chooses an underlying rationale for charitable tax exemption, however, the inconsistencies in applying exemption are likely to continue.
Wednesday, November 6, 2013
David S. Miller (Cadwalader) has posted "Reforming the Taxation of Exempt Organizations and Their Patrons" to SSRN. The abstract provides:
The paper contemplates a radical reformation of our entire system for taxing exempt organizations and their patrons. First, all non-charitable exempt organizations that compete with taxable commercial businesses (such as fraternal benefit societies that provide insurance (section 501(c)(8)) and credit unions (501(c)(4))) would become taxable. Also, business leagues, chambers of commerce, and the Professional Golf Association and National Football League would be taxable but could operate as partnerships. Thus, section 501(c)(6) would be repealed.
Most other tax-exempt organizations would be reassigned into one of five categories, corresponding roughly to current section 501(c)(1) (U.S. governmental organizations), section 501(c)(3) (charitable), section 501(c)(4) (social welfare), section 501(c)(7) (social clubs, but stated more generally as mutual benefit organizations), and retirement plans.
The paper leaves section 501(c)(1) entirely intact, and largely leaves section 501(c)(3) alone, except that it proposes that certain very large public charities with “excessive endowments” be taxable on their investment income to the extent the income is not used directly for charitable purposes.
This paper also generally leaves section 501(c)(4) alone, except that any 501(c)(4) (or other tax-exempt organization) that engages in a significant amount of lobbying or campaigning would be taxable on all of its investment income.
The fourth catchall category – corresponding roughly to the tax treatment of social clubs ‒ would cover virtually all other tax-exempt organizations (other than retirement plans). Very generally, these organizations would not be subject to tax on donations or per capita membership dues, but would be taxable on investment income, fees charged to non-members, and fees charged to members disproportionately.
The paper proposes two significant changes to the treatment of donors. First, section 84 would be expanded to treat any donation of appreciated property to a tax-exempt organization as a sale of that property. Second, any donation to a tax-exempt organization that engages in significant lobbying or campaigning and does not disclose the name of the donor would be treated as a taxable gift by the donor (subject to the annual exclusion and lifetime exemption).
Finally, the paper proposes two measures of relief for tax-exempt organizations. First, the unrelated debt-financed income rules would be repealed. Second, limited amounts of political statements by the management of 501(c)(3) organizations (like election-time sermons) would not jeopardize the tax-exempt status of the organization.
Matthew J. Lindsay (Baltimore) has posted "Federalism and Phantom Economic Rights in NFIB v. Sebelius" to SSRN. The abstract provides:
Few predicted that the constitutional fate of the Patient Protection and Affordable Care Act would turn on Congress’ power to lay taxes. Yet in NFIB v. Sebelius, the Supreme Court upheld the centerpiece of the Act — the minimum coverage provision (MCP), commonly known as the “individual mandate” — as a tax. The surprising constitutional basis of the Court’s holding has deflected attention from what may prove to be the decision’s more constitutionally meaningful feature: that a majority of the Court agreed that Congress lacked authority under the Commerce Clause to penalize individuals who decline to purchase health insurance. Chief Justice Roberts and the four joint dissenters endorsed the novel limiting principle advanced by the Act’s challengers, distinguishing between economic “activity,” which Congress can regulate, and “inactivity,” which it cannot. Because the commerce power extends only to “existing commercial activity,” and because the uninsured were “inactive” in the market for health care, they reasoned, Congress lacked authority under the Commerce Clause to enact the MCP. Critically, supporters of the activity/inactivity distinction insisted that it was an intrinsic constraint on congressional authority anchored in the text of Article I and the structural principle of federalism, rather than an “affirmative” prohibition rooted in a constitutional liberty interest.
This Article argues that the neat dichotomy drawn by the Chief Justice and joint dissenters’ between intrinsic and rights-based constraints on legislative authority is false, and that it obscures both the underlying logic and broader implications of the activity/inactivity distinction as a constraint on congressional authority. In fact, that distinction is animated less by the constitutional enumeration of powers or federalism than a concern about individual liberty. Even in the absence of a formal constitutional “right” to serve as a doctrinal vehicle, the justices’ defense of economic liberty operates analogously to the substantive due process right to “liberty of contract” during the Lochner era — as a trigger for heightened scrutiny of legislative means and ends — through which the justices constricted the scope of the commerce power.
Current scholarship addressing the role of individual liberty in NFIB v. Sebelius tends to deploy Lochner as a convenient rhetorical touchstone, to lend an air of illicitness or subterfuge to the majority’s Commerce Clause analysis. I argue that the Lochner-era substantive due process cases are both more nuanced and more instructive than judges and many scholars have realized. They illustrate, in particular, that constraints on legislative authority that are rooted in individual liberty and constraints on legislative authority that are rooted in enumerated powers and federalism can and do operate in dynamic relationship to one another. Reading NFIB v. Sebelius through this historical lens better equips us to interrogate the role that economic liberty plays in the majority’s Commerce Clause analysis, and provides an important alternative analytical framework to the structure/rights dichotomy advanced by the Chief Justice and joint dissenters. The activity/inactivity distinction not only portends a constitutionally dim future for federal purchase mandates, but may also herald more far-reaching restrictions on congressional interference with individual liberty, in which individual sovereignty assumes a place alongside state sovereignty in the Court’s federalism.
Daniel C. Willingham (Husch Blackwell, St. Louis) has published "'Are You Ready for Some (Political) Football?' How Section 501(c)(3) Organizations Get Their Playing Time During Campaign Seasons," in 28 Akron Tax J. 83 (2013). The introduction to the article provides the following:
The purpose of this Article is to analyze the ways in which Section 501(c)(3) organizations take part in lobbying activities while still maintaining their tax-exempt status. This topic is crucial as we revisit these same issues at all levels of government every election season.
This Article examines the Tax Code, treasury regulations, revenue rulings, case law, and scholarly research. Its purpose is to provide a detailed analysis of the current law and how exempt organizations can apply it in practice. To achieve this goal, this Article is broken down into seven parts. Section II provides the statutory framework under which Section 501(c)(3) organizations operate. Sections III and IV examine the "substantial part" test and the Section 501(h) expenditure election, respectively. If an organization routinely fails both the "substantial part" test and the Section 501(h) test, then it should establish an affiliated Section 501(c)(4) organization, which is covered in Section V. Section VI attempts to tie all the rules together for the "substantial part" test, the Section 501(h) election, and the use of a Section 501(c)(4) affiliate. Section VI then provides a proposal on how Section 501(c)(3) charitable organizations advance their tax-exempt purposes through lobbying while still protecting their tax-exempt status during campaign seasons. Section VII offers some final thoughts on why the study of this area of the law is so important.
Wednesday, October 16, 2013
Grace Soyon Lee, Associate Professor at the University of Alabama School of law, has recently published “Mitigating the Effects of an Economic Downturn on Charitable Contributions: Facing the Problem and Contemplating Solutions,” 22 Cornell J. L. & Pub. Pol'y 589 (2013). Here is the abstract:
Hat Tip: TaxProf Blog
Charitable giving has been a foundation of American society almost since the nation began, but the issue of how such giving should be treated for tax purposes has been the subject of frequent debate. Scholars have proposed various theories explaining why the positive effects of this deduction on both donors and donees outweigh the negative impact on government coffers of this tax expenditure, although many still criticize certain features of the deduction in its current form. However, one area of this research that has previously been neglected is how the charitable sector is affected by changes to the economy at large. Contributions to charitable organizations tend to decline during an economic downturn, and such a decline may be catastrophic to the charitable sector. In particular, an economic downturn can affect charitable organizations in three different ways. First, some organizations may experience an increase in donations but simultaneously experience an increase in demand for their services. Other organizations may experience an increase in demand for their services without experiencing an accompanying increase in donations. Finally, some organizations may experience such a steep decline in donations that their very survival is put in jeopardy, regardless of whether the demand for their services increases. In order to meet the recessionary needs of all three types of organizations, the government should: 1) convert the current charitable deduction to a refundable credit that is available to all taxpayers; 2) provide a tax credit to employers who second their employers [sic] to work for charitable organizations; and 3) provide direct funding to those charities that can demonstrate dire financial need.
Thursday, October 3, 2013
Charities must serve public rather than private interests. Much of the enforcement effort in this area of the law tries to ensure that such organizations do not engage in impermissible self-dealing, that is, in providing unreasonable benefits to insiders. That is, limits on self-dealing are crucial to regulation of this section. Both state law and federal tax law include provisions designed to prevent such behavior. These laws, however, often exhibit inefficiencies and differences that impose unnecessary burden on organization seeking to comply with applicable law.
State law regulates both trusts and nonprofit corporations. If the organization is formed as a trust, the “no further inquiry rule” of common law applies. Under this rule, a trustee, whether of a charitable trust or a private trust, is per se liable so long as a beneficiary shows that the trustee had a personal interest in the transaction; harm to the trust is irrelevant. If the organization is formed as a corporation, nonprofit corporation statutes generally include requirements as to the procedures for board approval of self-dealing transactions, procedures that, in practice, are usually easy to meet.
Tax law supplies self-dealing rules for organizations exempt under section 501(c)(3) of the Internal Revenue Code. Under federal tax law, public charities must satisfy the so-called intermediate sanction rules, which impose excise taxes on transfers between the organization and an insider that confer an “excess benefit” on the insider. Private foundations, which are section 501(c)(3) organizations that, in general, receive their support from a single individual or corporate source or family group and make grants to other charitable organizations, face stricter rules than public charities regarding self-dealing. They face two-tier excise taxes that in practice prohibit transactions between the private foundation and certain specified insiders, even when the transaction would benefit the organization.
This article uses both the economic theory of deterrence and norms theory to argue for a change to both state law and federal tax law. Using the California nonprofit corporation statute and the availability of individual exemptions from the prohibited transactions rules of ERISA, it argues for advance approval procedures. Making state and federal self-dealing rules as similar as possible would best carry out the rules’ shared purpose. Reconciling these rules would aid nonprofit charitable organizations in adopting a set of operating procedures to ensure compliance with the various laws applicable to them. Similar rules would also render state and federal enforcement easier and more efficient.
Part I describes why self-dealing rules are so important in the nonprofit context. Part II details and evaluates the various self-dealing regimes in which nonprofit tax-exempt entities operate. Part III considers how these various approaches could be reconciled with use of administrative advance approval.
Wednesday, October 2, 2013
Michael J. DeBoer (Faulkner) has posted "Religious Hospitals and the Federal Community Benefit Standard - Counting Religious Purpose as a Tax-Exemption Factor for Hospitals" to SSRN. Here is the abstract:
This Article argues that the religious purpose of religious hospitals should be explicitly counted for purposes of determining tax exemption under federal corporate income tax law as well as state tax law. This argument is premised upon the special protections secured to religious institutions under federal and state constitutions, the history of tax exemptions extended to religious and charitable institutions, the separate enumeration of religious purpose as an exempt purpose in § 501(c)(3) of the Internal Revenue Code, and the important role of nonprofit organizations in American society.
This Article develops this argument in several steps. First, it traces some of the historical background regarding the tax exemption of nonprofit and religious hospitals in the United States, including the development of the community benefit standard. Second, it examines recent federal legislative and regulatory initiatives, including the Affordable Care Act, that have amplified the community benefit standard with additional requirements that hospitals must meet to qualify for and retain tax-exempt status under federal income tax law. Third, it offers a range of reasons that support counting the religious purpose of religious hospitals for determining tax-exempt status. Fourth, it sets forth a typology of nonprofit hospitals and offers two sets of proposals — the first suggesting revisions to federal income tax exemption law and regulation, and the second encouraging religious hospitals to make their religious purpose more evident in their organizations and operations.