Monday, January 14, 2013
Jessica Owley (SUNY-Buffalo) has posted The Future of the Past: Historic Preservation Easements (Zoning Law & Practice Report, Nov. 2012) to SSRN. Here is the abstract:
This brief article summarizes recent case law related to historic preservation easements. As historic preservation easements and other conservation easements age, the number of legal disputes involving them has grown. Challenges to historic conservation easements generally arise in the tax court because many of them are donations. The IRS is taking a close looks at conservation easements generally, appearing to focus particularly on façade easements.
Most states (and the IRS) require historic preservation easements to be perpetual. Courts are beginning to scrutinize what perpetuity means and are looking closely at easement language regarding mortgage subordination, condemnation, and extinguishment. This move by the IRS should indicate to landowners, land trusts, and funders that historic preservation easements should be carefully written to comply with all state and federal regulations with an eye to ensuring their long-term viability. Additionally, the IRS and courts have been particularly concerned with the accuracy of appraisals, which reach millions of dollars. Appraisals need to delineate their method and basis for calculation. The IRS’ scrutiny, however, has been tougher than the courts’. While the Tax Court has often sided with the IRS (on issues of perpetuity, particularly), the circuit courts seem to err in favor of upholding conservation easements and allowing deductions.
Brian D. Galle (Boston College) and David I. Walker (Boston University) have posted Does Stakeholder Outrage Constrain Executive Compensaton: Evidence from University President Pay to SSRN. Here is the abstract:
We analyze the determinants of the compensation of private college and university presidents from 1999 through 2007. We find that the fraction of institutional revenue derived from current donations is negatively associated with compensation and that presidents of religiously-affiliated institutions receive lower levels of compensation. Looking at the determinants of contributions, we find a negative association between presidential pay and subsequent donations. We interpret these results as consistent with the hypotheses that donors to nonprofits are sensitive to executive pay and that stakeholder outrage plays a role in constraining that pay. 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.
Reid K. Weisbord (Rutgers-Newark) has posted Charitable Insolvency and Corporate Governance in Bankruptcy Reorganization to SSRN. Here is the abstract:
Poor corporate governance is pervasive in the charitable nonprofit sector and, in numerous cases, mismanagement and abuse have led to the financial distress or failure of charitable nonprofit firms. The rich literature on nonprofit law has considered the need for better corporate governance and enforcement of fiduciary duties, but the scholarship has yet to address the implications of financial distress and insolvency on corporate governance. This Article fills that void and argues that, when a charity encounters financial distress and approaches the point of insolvency, features of nonprofit and bankruptcy law tend to exacerbate rather than ameliorate the corporate governance problem. In particular, charitable insiders who breach their fiduciary duties are in a better position to entrench themselves and avoid termination than their for-profit counterparts. In the for-profit sector, three constraints tend to regulate corporate governance by helping oust fiduciaries responsible for financial distress: (1) bank monitoring of commercial loan covenants; (2) absolute priority and the transfer of ownership in bankruptcy; and (3) involuntary bankruptcy proceedings. In the nonprofit sector, however, those constraints are either less effective or do not apply. As a result, blameworthy charitable fiduciaries are better able to entrench themselves and, absent new leadership, financially distressed charities are less likely to achieve a full and sustainable financial recovery. This Article suggests that the law might better protect the public interest in charitable assets from waste and abuse by presumptively appointing bankruptcy examiners in all Chapter 11 reorganization proceedings involving substantial charitable assets. Once appointed, bankruptcy examiners would be tasked with identifying the cause of insolvency and individuals responsible for the charity’s financial distress.
Robert Wolf (Wisconsin-La Crosse, Finance Dept.) has posted Religious Giving as a Guide to the Principles of Good Taxation (Journal of Accounting, Ethics, and Public Policy, 2012) to SSRN. Here is the abstract:
The principles of good taxation are a set of guiding values necessary for any responsible state to consider in constructing their tax policy. The principles are derived from various philosophical and economic discussions including but not limited to the role of the state, ownership of natural resources, the optimal size of the state, the emphasis on individual versus community rights, and what is reasonable. Adam Smith (1776) initiated the discussion on the principles of good taxation including equality, certainty, convenience and economy. Others have expanded and articulated the principles to include reasonable and neutral. Curran (2001), Hamill (2006), and others have considered the principles of good taxation from a religious viewpoint. Along different lines, Croteau (2005) develops the principles of giving for a religious institution. As religious institutions rely on giving in a similar manner that states rely on taxes, it is useful to review the principles of good taxation in comparison to the principles of giving. This research finds strong consistency between the principles of good taxation and the principles of giving. Additionally, the principles of giving make a strong argument for elevating the importance of effective allocation of tax revenues as a principle of tax collections.
Our contributing editor, Nancy A. McLaughlin (Utah), has posted Extinguishing and Amending Tax-Deductible Conservation Easements: Protecting the Federal Investment after Carpenter, Simmons, and Kaufman (Florida Tax Review, 2012) to SSRN. Here is the abstract:
Taxpayers are investing billions of dollars in conservation easements intended to permanently protect unique or otherwise significant land areas or structures through the federal charitable income tax deduction available to easement donors under Internal Revenue Code § 170(h). Astounding amounts of governmental and judicial resources are also being expended to ensure that the easements are not overvalued, that they satisfy elaborate conservation purposes and other threshold requirements, and that the donations are properly substantiated. This enormous up-front investment will be for naught, however, if the purportedly permanent protections prove to be ephemeral because government and nonprofit holders are able to release, sell, swap, or otherwise extinguish the easements in disregard of the restriction on transfer, extinguishment, division of proceeds, and other perpetuity-related requirements in § 170(h) and the Treasury Regulations. The Tax Court’s holding in Carpenter v. Commissioner was an important victory for the IRS and the public because it provides some key guidance regarding compliance with § 170(h)’s perpetuity-related requirements. However, Carpenter has also engendered some confusion and speculation, and recent Circuit Court decisions have compounded the problem by undermining the IRS’s efforts to enforce the perpetuity-related requirements. This article examines these cases against the backdrop of the legislative history of § 170(h), state law, and public policy. It concludes that clear federal rules regarding the transfer, amendment, and extinguishment of tax-deductible conservation easements are needed because, without such rules, the purportedly perpetual protections will erode over time and the enormous public investment in the easements and the conservation values they are intended to protect for the benefit of future generations will be lost.
The raison d’être for the low-profit limited liability company (“L3C”) is to encourage program-related investments (“PRIs”) by private foundations. PRIs are special types of investments that can be both charitable and profitable. PRIs have been embraced by knowledgeable scholars, practitioners, foundation managers, and even the U.S. Treasury Department. Further, the L3C and PRIs are associated with the growing “social enterprise” movement. The L3C thus would seem to be in the right place at the right time and should have the full support of the charitable sector, practitioners, and lawmakers.
Yet, after a fast start, adoption of L3C legislation across the U.S. has stalled. In fact, several states recently have considered L3C legislation and have either rejected it outright or deferred its passage indefinitely. Many highly-regarded scholars and practitioners adamantly oppose the L3C, even though those scholars and practitioners generally endorse PRIs. This slow pattern of adoption and strong opposition to the L3C contrasts sharply with the rapidly increasing acceptance of another type of “social enterprise” entity, the benefit corporation.
Why is L3C legislation languishing? Because the L3C suffers from the following fundamental defects: (i) except in name, the L3C is indistinguishable from a regular LLC; (ii) without any type of statutory enforcement mechanism, the L3C lacks accountability and transparency; and (ii) because the L3C promises more than it can deliver absent new federal legislation, the L3C fails of its essential purpose of encouraging PRIs. Given these defects, the L3C’s opponents maintain that the L3C is a well-intentioned but nonetheless failed experiment that should be abandoned.
This article argues that even though the L3C in its current form is defective, the L3C should not be abandoned. Instead, the L3C can be a viable tool for tax-exempt organizations and PRIs if the current statutory framework is strengthened and improved. With the foregoing premise in mind, this article proposes seven relatively simple but impactful changes that would strengthen and improve the L3C statutory framework. If the L3C becomes more than just a brand, then perhaps the L3C can fulfill its raison d’être.
Saturday, December 29, 2012
Steven H. Sholk has released the most recent update of his A Guide to Election Year Activities of Section 501(c)(3) Organizations. Weighing in at 271 pages, it provides a comprehensive overview of this complicated and fact-sensitive area.
Hat tip: Tax Prof Blog.
Friday, December 28, 2012
Alison Dunn (Newcastle) has posted Using the Wrong Policy Tools: Education, Charity, and Public Benefit, 39 J. L. & Soc'y 491 on SSRN. Here is the abstract:
A recent decision on the application of public benefit under the Charities Act 2006 sidestepped the political debate surrounding the charitable status of independent fee‐charging schools. The broader political context nevertheless underscores the legislative reforms, and this article questions whether the new statutory public benefit requirement has utility as a welfare policy tool in the field of education. It examines the public benefit requirement in charity law against the backdrop of government policy towards education and the broader political agenda for a mixed economy of welfare provision, and argues that the difficulties Labour faced in developing its education policies were replicated in the application of the post‐Act public benefit requirement to fee‐charging schools. As a result, achieving broader policy goals for widening educational opportunity through public benefit was almost impossible given the regulatory framework and the principles upon which charity law is founded.
The nonprofit starvation cycle is a debilitating trend of under-investment in organizational infrastructure that is fed by potentially misleading financial reporting and donor expectations of increasingly low overhead expenses. Since its original reporting in 2008, the phenomenon has been referenced several times, but seldom explored empirically; this study utilizes twenty-five years of nonprofit data to examine the existence, duration, and mechanics behind the nonprofit starvation cycle. Our results show a definite downward trend in overhead costs, reflecting a deep cut in administrative expenses partially offset by an increasing in fundraising expenses. The organization’s size is instrumental to its behavior, with a sharp rise in overhead occurring when revenues equal $100 thousand, but diminishing at $550 thousand. Finally, the brunt of the cuts have fallen on non-executive staff wages and professional fees, which heighten the concern of ill effects from a fixation on overhead cost reduction.
Over the past few years, jurisdictions across the country have enacted specialized organizational forms to house social enterprises. Social enterprises are entities dedicated to a blended mission of earning profits for owners and promoting social good. They are neither typical businesses, concentrated on the bottom line of profit, nor traditional charities, geared toward achieving some mission of good for society. Their founders instead see value in blending both goals. This article examines the latest specialized form to take shape: the flexible purpose corporation (FPC). After explaining the genesis of FPC enabling legislation, the article critiques its major provisions and compares them with relevant aspects of other specialized forms for social enterprise.
Ann Taylor Schwing has posted Perpetuity is Forever, Almost Always: Why it is Wrong to Promote Amendment and Termination of Perpetual Conservation Easements, 37 Harv. Env. L. Rev. (forthcoming), on SSRN. Here is the abstract:
This article is a response to Jessica Jay's, When Perpetual Is Not Forever: The Challenge of Changing Conditions, Amendment and Termination of Conservation Easements, 36 Harv. Envtl. L. Rev. 1 (2012). When Perpetual Is Not Forever suggests that government entities and land trusts accepting conservation easement donations are free to ignore both federal tax law requirements and the rules that govern administration of charities and the charitable gifts they solicit and accept when amending and terminating perpetual conservation easements. This article explains that, when a conservation easement donor makes a charitable gift of a conservation easement and elects to seek a federal income tax deduction, both the property owner and easement holder become subject to federal law governing the creation, monitoring, amendment, and extinguishment of the easement, as well as state laws that protect charitable gifts on behalf of the public. Accordingly, contrary to the representations made in When Perpetual Is Not Forever, neither property owners nor holders can elect to amend or terminate such perpetual easements pursuant to procedures that are inconsistent with such laws.
Brett Bloom has published a student comment titled The Rise of the Virtual Church: Is It Really a Church Under I.R.C. Section 170(b)(1)(A)(I)?, 6 Liberty U. L. Rev. 495 (available through Westlaw). Here is a summary of the article from its introduction:
This Note begins with a background discussion of tax exemption for religious organizations, including historical and constitutional concerns, along with a brief discussion of the rationale for tax-exempt organizations. This Note then discusses the distinctions between religious organizations and churches. Next, this Note presents the problem with the Service's and courts' application of their respective tests with respect to the Foundation of Human Understanding. Finally, this Note proposes (1) that the Service and courts abandon their respective tests for determining church status; and (2) that the United States Department of Treasury (the “Treasury”) provide guidance to the meaning of church through Treasury regulations.
One of my students, Brittany Brantley, has published Beyond Politics in the Pulpit: When Pastors Use Social Networks to Preach Politics, 38 J. Legis. 275 (available through Westlaw). Here is a summary of the article from it's introduction:
Part II of this note will provide an overview of the history of the political campaign prohibition. Part III will explain how churches have attempted to be completely exempt from the prohibition. Part IV will discuss the acts of Individuals of a section 501(c)(3) organization in their individual capacities. Part V will discuss how the development of the Internet has broadened the scope of the prohibition. It will also discuss how pastors use their websites and social media pages. Finally, Part VI will suggest some steps that the Internal Revenue Service and the Federal Election Commission can take to ensure that section 501(c)(3) organizations are aware of what constitutes a violation on social media pages.
- Femida Handy, Jeffrey L. Brudney,and Lucas C.P.M. Meijs, From the Editor's Desk
- James E. Austin and Maria May Seitanidi, Collaborative Value Creation: A Review of Partnering Between Nonprofits and Businesses. Part 2: Partnership Processes and Outcomes
- Amanda Moore McBride, Benjamin J. Lough, and Margaret Sherrard Sherraden, International Service and the Perceived Impacts on Volunteers
- Graham Dover and Thomas B. Lawrence, The Role of Power in Nonprofit Innovation
- Weiwei Lin and Gregg G. Van Ryzin, Web and Mail Surveys: An Experimental Comparison of Methods for Nonprofit Research
- Beth Gazley, Laura Littlepage, and Teresa A. Bennett, What About the Host Agency? Nonprofit Perspectives on Community-Based Student Learning and Volunteering
- Gregory D. Saxton, Jenn-Shyong Kuo, and Yi-Cheng Ho, The Determinants of Voluntary Financial Disclosure by Nonprofit Organizations
- Tim Vantilborgh, Jemima Bidee, Roland Pepermans, Jurgen Willems, Gert Huybrechts, and Marc Jegers, Volunteers’ Psychological Contracts: Extending Traditional Views
- Teck-Yong Eng, Chih-Yao Gordon Liu, and Yasmin Kaur Sekhon, The Role of Relationally Embedded Network Ties in Resource Acquisition of British Nonprofit Organizations
- Chris Cornforth, Nonprofit Governance Research: Limitations of the Focus on Boards and Suggestions for New Directions
- Chi-kan Richard Hung and Paul Ong, Sustainability of Asian-American Nonprofit Organizations in U.S. Metropolitan Areas
- Rebecca Nesbit, The Influence of Major Life Cycle Events on Volunteering
- Hans Peter Schmitz, Paloma Raggo, and Tosca Bruno-van Vijfeijken, Accountability of Transnational NGOs: Aspirations vs. Practice
- Simona Haivas, Joeri Hofmans, and Roland Pepermans, Self-Determination Theory as a Framework for Exploring the Impact of the Organizational Context on Volunteer Motivation: A Study of Romanian Volunteers
- Eric Bidet, Overcoming Labor Market Problems and Providing Social Services: Government and Civil Society Collaboration in South Korea
- Michael R. Sosin, Social Expectations, Constraints, and Their Effect on Nonprofit Strategies
- Christian Hopp, For Better or for Worse?—Nonprofit Experience and the Performance of Nascent Entrepreneurs
- Micheal L. Shier, Book Review: Handbook of Practical Program Evaluation
- Patsy Kraeger, Book Review: Advocacy Organizations and Collective Action
- Liz Fisher, Book Review: The Nature of the Nonprofit Sector and Understanding Nonprofit Organizations: Governance, Leadership, and Management
- Daniel Tinkelman, Book Review: Nonprofit Financial Management: A Practical Guide
- Eleanor W. Sacks, Book Review: Philanthropy in America: A History
- Barbara Levine, Book Review: High Ideals and Noble Intentions: Voluntary Sector-Government Relations in Canada
Thursday, December 13, 2012
This paper examines the structure of the charitable contribution deduction for donations of cash and appreciated property. It suggests that non-itemizing taxpayers are the donors who have the most “skin in the game” for charitable contributions in terms of personal sacrifice. The paper recommends renewed emphasis on service contributions for non-itemizing donors and for the charitable organizations to which those non-itemizers tend to contribute. Promoting service, rather than money or property, contributions helps maximize the tax subsidy of the charitable contributions. From the perspective of efficient tax planning for low and moderate income taxpayers, the tradition of volunteerism in United States is compelling. Yet, despite the ability to get more “bang for the buck” from service contributions, many charitable organizations that used to rely on volunteers for support increasingly have shifted their operations to reliance on paid staff. This trend toward paid staff may stem from an effort to empower professional volunteers by giving them paid positions or may represent poor marketing of the value and accompanying tax benefits of charitable work.
Linda Sugin (Fordham) has posted to SSRN "The Great and Might Tax Law: How the Roberts Court has Reduced Constitutional Scrutiny of Taxes and Tax Expenditures." The abstract provides:
Taxation is the Supreme Court’s new darling. In its last two terms, the Court has endowed the tax law with legal superpowers, giving it the astonishing ability to elude constitutional limits. The justices have sent Congress and state legislatures a strong signal that they may use their tax laws as a means to aggressively enact public objectives unrelated to the traditional revenue-raising function of taxation. They have made clear that the Court will uphold policies administered through the tax law even where those same policies would be unconstitutional if administered as either direct regulation or appropriated spending.
In National Federation of Independent Business v. Sebelius, the newly muscular tax law saved Obamacare from near death at the hands of the Commerce Clause. The case confirmed the broad reach of the taxing power under the Constitution, and showed the current high Court’s willingness to treat regulatory legislation as taxation, even where Congress declined to call the legislation a “tax.” The cliffhanger ending to the Obamacare challenge may have been made possible by a much-less publicized -- but more legally radical -- case from the previous term; in Arizona Christian Schools v. Winn, which involved tax benefits for religious schools, the Court adopted a novel judicial approach to targeted tax benefits. In that case, the Court rejected the widely accepted treatment of tax expenditures as government spending administered through the tax law, and instead treated them as simple tax cuts. It thereby allowed tax benefits that are functionally equivalent to direct government spending to bypass the constitutional scrutiny that both taxes and direct spending would receive. Tax benefits are now beyond the reach of the Bill of Rights, which prohibits government action from treading on individual rights.
The consequences of this new judicial strategy are profound, raising the troubling question: Is there any justiciable limit to the great and mighty tax law? Both these cases aggravate a growing tension between economic and legal analysis of taxation, widening the gap between these two central approaches to tax law. The Court transformed tax expenditures from state action subject to constitutional limits into nonreviewable private spending by individuals. This development reduces the protection that the Constitution provides to individuals, undermines tax reform efforts and fiscal responsibility, jeopardizes established legal doctrine, and encourages less transparent and less equitable government.
Catherine Fisk (UC-Irvine) and Erwin Chemerinsky (UC-Irvine) published "Political Speech and Association Rights after Knox v. Seiu Local 1000" in volume 98 of the Cornell Law Review (2013). The SSRN abstract of the article provides:
In Citizens United, Boy Scouts of America v. Dale, and other recent cases, the Supreme Court has given organizations a newly-robust First Amendment right to use the entity’s money in ways that stakeholders within the organization may find anathema and to discriminate against employees and members in order to advance the expressive interest of the entity. Yet, in Knox v. SEIU Local 1000 in 2012, the Court held that a labor union violates the First Amendment rights of dissenters if it levies a special assessment for political speech without first having dissenters opt in. The Court’s jurisprudence on associational speech lacks any theory of when and why an organization’s speech violates the rights of dissenters. Nor does it consider what kinds of internal organizational governance mechanisms are necessary to ensure a fair allocation of speech protections between those who wish the organization to promote one message and those who wish it to promote another. Moreover, the majority in Knox casts First Amendment doubt on the validity of the entire concept of collective bargaining by a union elected by a majority to represent all employees in a bargaining unit of government employees. As ballot measures in various states have been enacted or are pending limiting the rights of unions to raise and spend money on politics in the name of protecting dissident employees, a principled approach to the free speech rights of unions, corporations, and other associations is ever more needed.
In this article we offer an approach to reconciling the First Amendment expressive interests of organizations with the expressive interests of dissenting stakeholders within them. We suggest an approach to resolving the inconsistency between Citizens United, the union-dues cases, and the Court’s other compelled speech and associational speech jurisprudence. Contrary to the prevailing wisdom, we suggest not that shareholders be given the opt out (or opt in) rights of dissenting union employees but instead that unions be given the same broad speech rights as corporations to use dues and fees paid by all employees on political activity.
Nicholas P. Cafardi (Duquesne) has published Saving the Preachers: The Tax Code's Prohibition on Church Electioneering in 50 Duqesne University Law Review 503 (2012). Here is a brief abstract of the article on SSRN:
Churches, like other 501(c)(3) organizations are subject to a prohibition on electioneering. This prohibition has survived decades of constitutional challenges because the tax exemption that 501(c)(3) organizations enjoy is a privilege and not a right. This article examines the claim of churches that they have a right to intervene in elections contrary to existing IRS regulations based on the free exercise clause and the Religious Freedom Restoration Act, and finds such claims wanting.
The article explains that tax exemption and the ability to attract tax deductible gifts are a form of government and taxpayer subsidy. This subsidy exists for 501(c)(3) organizations because Congress believes that their charitable activities promote the public welfare and are worthy of subsidy. On the other hand, Congress did not wish to subsidize the political activities of tax exempt organizations, hence the prohibition. The rules prohibiting electioneering are rather lenient and very rarely have churches lost their exemption. Finally this article explains that this prohibition on electioneering has been very beneficial because it has helped maintain the separation of church and state that is fundamental to our nation.
Monday, November 12, 2012
With h/t to our friends at the TaxProf Blog:
Preservation Easements in an Uncertain Regulatory Future
Jess R. Phelps (Historic New England), Preserving Preservation Easements?: Preservation Easements in an Uncertain Regulatory Future, 91 Neb. L. Rev. 121 (2012):
While federal tax deductions are an important tool for organizations operating easement programs, recent IRS enforcement activity has called the future of this incentive into question--at least as currently constituted. Even if these incentives continue, the presence of continued regulatory uncertainty will make federally subsidized easements less viable unless enforcement activity decreases or easement-holding organizations begin to change how they protect privately-owned homes. However, these challenges provide easement-holding organizations a chance to step back and evaluate their accomplishments of the past thirty years. Many significant structures have been protected, but preservation easements lag far behind in numbers, impact, and public awareness when compared to land conservation efforts. The public has yet to fully “buy in” to the concept of preservation easements and are suspicious of efforts to provide funds to protect private residences.
For this perception to change, easement-holding organizations need to fundamentally re-evaluate the role they play within the preservation movement and determine whether a larger role is possible. There are a variety of ways that easement-holding organizations can shift their thinking and practices to expand the benefit provided through their programs. Similarly, there are clear alternatives to securing the preservation of significant historic resources via reliance on the federal tax incentives. In the end, the efforts of easement-holding organizations to respond to these challenges and reimagine the possibilities of preservation easements will go a long way toward fulfilling SPNEA's original vision of obtaining control of the most significant historic properties and “let[ting] them to tenants under wise restrictions.” Perhaps more importantly, these efforts can also expand upon this vision to protect the underlying stories and preserve a more meaningful spectrum of our collective architectural heritage.
Our contributing editor Nancy A. McLaughlin (Utah) and Stephen J. Small (Law Office of Stephen J. Small) have posted Trying Times: Important Lessons to Be Learned from Recent Federal Tax Cases. Here is the abstract:
This outline was prepared for a panel discussion on recent case law developments in the conservation easement donation context that took place at the Land Trust Alliance national conference in Salt Lake City, Utah, in early October 2012. The four panelists were Nancy A. McLaughlin, Robert W. Swenson Professor of Law at the University of Utah SJ Quinney College of Law; Stephen J. Small, national expert on conservation easement donation transactions and one of the principal drafters of the Treasury Regulations interpreting Internal Revenue Code § 170(h); Karin Gross, Supervisory Attorney, IRS Office of Chief Counsel; and Marc L. Caine, Senior Counsel, IRS Office of Chief Counsel.