Nonprofit Law Prof Blog

Residence or Church? Illinois Property Tax Exemption in Question

A village north of Chicago, Lake Bluff, is challenging the Illinois Dept. of Revenue finding that a mansion in the village had been converted to a church and was entitled to exemption from property taxes.  George Michael, the owner of the house, filed a request for exemption for the Armenian Church of Lake Bluff.  He included copies of church bulletins and other materials with the request.  Mr. Michael said that he began holding services at his house when his wife's physical disability made it impossible for her to travel to the church they had been attending.  The village argues that the use of the house is more consistent with a residence than a church.

The real estate tax break for the Michaels' home is worth $80,000.  In addition to challenging the exemption, the village has filed a suit seeking $115,000 in fines for failure to obtain permits to establish a church in a residential neighborhood.

See the story in the ChicagoTribune.com.  An earlier story notes that only a handful of close friends and family attend services, led by Mr. Michael who got a pastor's degree from an online religious site.  The Diocese of the Armenian Church of America in New York has no record of the Armenian Church of Lake Bluff.

sng

Further Coverage of IRS Investigation Into Colorado Conservation Easements

The Denver Post has a follow-up story regarding the IRS involvement in an initially state-level investigation of conservation easement donations in Colorado, which we blogged about earlier this week.

LHM

IRS Joins Colorado Conservation Easement Investigation

The Denver Rocky Mountain News reports that the Internal Revenue Service has accepted the invitation of the Colorado Division of Real Estate to join the Division's investigation of conservation easement transactions in Colorado.  The state's investigation arose because of a generous income tax credit program - up to $375,000 per easement - for landowners who agree to permanently prohibit development on their lands.  The credits can apparently be sold for cash.  The criteria for receiving the credit closely follow the federal tax law requirements for receiving a charitable contribution deduction based on a conservation easement.  The IRS is currently reviewing documents collected by the Division relating to the easements.

According to the article, the concerns arise because of possibly inflated appraisals of the value of the easements involved, as initially reported by the Rocky Mountain News in February.  Colorado Attorney General John Suthers has also opened up a criminal grand jury investigation.  Land trusts identified in the article as having received easements under review include Greenlands Reserve and Colorado Natural Land (formerly Noah Land Trust).  A spokesperson for Greenlands Reserve denied any wrongdoing.

The Denver Post has also published an article providing further details regarding the IRS investigation, including that "[o]f the more than 400 tax returns involving conservation easements that the IRS is investigating nationwide, 290 are in Colorado."

LHM

DC Sues BlueCross BlueShield Affiliate to Force Distribution of Profits

The Washington Post reports that the District of Columbia interim Attorney General has filed a lawsuit against CareFirst BlueCross BlueShield to force it to contribute at least $100 million to the local community.  The D.C. Council Committee on Public Services and Consumer Affairs also launched an investigation of CareFirst, including granting the Committee's chairman the authority to issue subpoenas.  As the article notes, CareFirst has had several previous run-ins with local and state governments, including over both executive compensation and a failed attempt to merge with a for-profit organization. 

The complaint, filed in the Superior Court of the District of Columbia, Civil Division, is against both CareFirst, Inc. and its subsidiary, Group Hospitalization and Medical Services, Inc. ("GHMSI"), which together do business as CareFirst BlueCross BlueShield in the District of Columbia.  Both organizations are nonprofits, although it does not appear from either the complaint or a Guidestar search that either organization is exempt from federal income tax.  GHMSI's federal charter states, however, that it is a "charitable and benevolent institution" according to the complaint.

The complaint alleges that CareFirst, Inc. took control of GHMSI in 1997 and since then has operated it as essentially a for-profit business, leading to a $754 million "surplus" at the end of 2007, which represented almost two-and-a-half times the total adjusted risk-based capital ratio recommended by the Blue Cross and Blue Shield Association.   The District of Columbia asserts that accumulating this, in its view, excessively large surplus is contrary to GHMSI's charter and is a breach of common law charitable trust principles that apply to GHMSI's assets.  The District is requesting that the court grant authority to both the Commissioner for the District's Department of Insurance Securities and Banking and a court-appointed Special Master to rehabilitate GHMSI and rededicate its operations and surplus to its charitable, public health mission.

LHM

Texas AG Sues Nonprofit and its Leaders for Alleged Misuse of Funds

The Dallas Morning News reports that the State of Texas has filed a lawsuit relating to alleged misuse of charitable funds.  According to the Attorney General Greg Abbott's press release, the suit is against People Against Drugs Affordable Housing, Inc., its founders, and three of its directors for alleged violations of the Texas Nonprofit Corporation Act.  The AG's complaint asserts that the charity's primary asset and source of revenue is an apartment complex it acquired in 1993 and that it operates in a manner indistinguishable from a for-profit business.  The complaint further alleges that the charity, under the sole direction of its founder and Executive Director Gene Christensen but with the knowledge of the three directors, used those revenues to (1) operate a NASCAR truck racing team, (2) pay Mr. Christensen annual compensation approaching $200,000 a year plus benefits in exchange for negligible services, and (3) pay for numerous personal expenses of Mr. Christensen, and (4) make no-interest loans to Mr. Christensen and to Mr. Christensen's election campaign for public office.  The AG is seeking the appointment of a temporary receiver for the charity and the replacement of all of its officers and directors.

While the accusations against People Against Drugs and its officers are sadly not unique in the charitable world, what is perhaps surprising is that the charity appears to have operated for almost 15 years "under the radar," thereby allowing the purported abuses to continue for many years.  Perhaps for this reason, the AG is seeking not only to have a receiver take control of the charity and to hold the primary beneficiary - the Executive Director - personally liable, but also, in a relatively unusual step, to hold the three directors personally liable as well.  It will be interesting to see, if the allegations are proven, whether the directors will in fact receive a penalty beyond removal and embarrassment.

LHM

California AG's Webpage as Resource on AG Investigations

In many states, though unfortunately not all, a strong charities section operates in the office of the Attorney General.  Assistant Attorneys General and others use their too-limited resources both to investigate charities and to help charities that may have slipped up get back on track.  Much of the work, and the resolution of the investigations, remains invisible.  Except in a few instances, incidents involving the enforcement of charitable rules rarely end up as reported cases.  That makes analyzing the way enforcement happens difficult for those of us who study it and for the lawyers who advise clients about the rules.

Although not a new resource, I thought it might be helpful to note that the California AG posts information about cases that have required AG involvement but end with a settlement and not a reported case.  The website provides a brief description of three cases currently, and includes links to some documents.

The AG investigated Noah's Wish, an organization created to help animals affected by disasters.  Under the settlement a substantial amount of the money Noah's Wish had raised was to be contributed to a fund based in New Orleans, to assist with rescuing and caring for animals affected by Hurricane Katrina.  The settlement agreement also required Noah's Wish to add board members, provide board training and exclude its founder from any further participation in the organization.  No date is provided in the description.  The information suggests failure to use contributed funds in a manner in keeping with the charitable purposes of the organization, and the amount raised by the organization, $8,000,000, was large enough to warrant AG involvement.

The second reported settlement involved the Red Cross.  In the settlement agreement posted on the website, the American Red Cross agreed to reform fundraising disclosure and executive compensation practices in California.  The investigation, begun in 2002, found the use of misleading solicitation practices following the Alpine-Viejas fire in 2001.  The investigation also determined that the funds received were not earmarked for disaster relief.  The AG further determined that the American Red Cross did not adequately monitor executive compensation in local chapters, leading to overpayment of an executive in one of the California chapters.

The third case involved an organization called Sensory Integration International.  The AG filed a civil complaint in this case after finding that substantial charitable assets had been diverted from the charitable purposes.  On  June 22, 2007 the AG obtained a preliminary injunction preventing further activities by the organization and preventing any further control by the directors and officers named in the complaint.  The description of the case does not explain what decisions were made about any charitable assets remaining in the organization.

These cases aren't "news", but I thought it would be helpful to point out this useful resource on on the California AG's website.  Posting creates adverse publicity for the charities, but the information about how the AG addresses misdeeds in the charitable sector is useful.

sng

State Board Blocks Charity Raffle for Being Too Large

The St. Paul Pioneer Press reports that the Minnesota Gambling Control Board has blocked a proposal by the CLIMB Theatre, a section 501(c)(3) nonprofit theater company, to raffle off a $1.4 million house.  The Theatre had asked the Board to waive the the normal $100,000 annual limit on amounts raised by a single charity through charitable raffles.  The Theatre had hope to raise a total of $900,000 by selling $20 raffle tickets, with $200,000 going to the Theatre and the remaining $700,000 going to a variety of other nonprofit groups.  The article further reports that the Minnesota legislature is considering legislation to eliminate the $100,000 limit and to instead limit individual prizes to no more than $50,000 each, and that at least some Board members felt it would have been inconsistent to approve the proposed raffle when the Board had already expressed support for the new $50,000 prize limit.

This report highlights the importance of such gambling activities for many nonprofits.  For example, it notes that more than 1400 Minnesota nonprofit organizations raise income from raffles, bingo, and pull-tabs, and it is likely that this reliance is mirrored in other states.  For example, I recently discovered the local South Bend, Indiana chapter of the Fraternal Order of Police raised more than $3 million in a single year from bingo, although after taking accounts its bingo-related costs of $2.9 million it only had net revenues of approximately $100,000, according to its most recent IRS Form 990.

LHM

California to Take Steps to Force Disclosure of Nonprofit "Taxable Expenditures" and Prevent Deductibility of Earmarked "Charitable Contributions"

Internal Revenue Code Section 4945 is one of the excise tax provisions applicable to private foundations.  It was enacted because Congress thought wealthy private foundations were "increasingly active in political and legislative activities" by way of well-funded junkets and the like, generating unintended charitable contribution deductions for polticial supporters.  It is also generally the case that charitable donations are generally not deductible if the donation is actually earmarked for a particular recipient, using the eligible entity as a funneling device.  Recently, the Los Angeles Times has raised similar concerns with regard to gifts by nonprofits to state agencies actually intended for use by a certain politician.  Under current California regulations, the identities of donors to nonprofits who make such gifts need not be disclosed, provided the agency gifts are not explicitly earmarked for any particular politician or individual.  In a July 2007 editorial, the Los Angeles Times complained that Governor Schwarzenegger and other influential politicians at the state and local level were skirting this requirement and that donors were getting undeserved charitable contribution deductions.

California's larger-than-life governor is unabashed about living large, but keeping him in luxury sometimes depends on the same taxpayer subsidies granted to hand-to-mouth charities.  Arnold Schwarzenegger, a millionaire many times over, bills much of his overseas travel to an obscure nonprofit group that can qualify its secret donors for full tax deductions, just as if they were giving to skid row shelters or the United Way. Whether journeying to China, Japan or last week's destinations -- Austria, England and France -- Schwarzenegger typically flies on top-of-the-line private jets like the plush Gulfstream models and has booked hotel suites that can run thousands of dollars a night.  Nonprofit watchdogs say using charitable write-offs to pay for sumptuous travel is an abuse of tax codes.

In today's editorial, the Los Angeles Times again points out that California nonprofits are being used to skirt campaign disclosure and charitable contribution deduction laws:

Politicians and their lawyers are often several brainstorms ahead of the law. They seek out loopholes in conflict-of-interest and fundraising regulations, then exploit them. Having done so -- having hidden from the public the identities of the special interests that fund their travel, or their entertainment budgets, or their other expenses -- they protest, truthfully enough, that they never broke any laws.  Gov. Arnold Schwarzenegger, for example, does nothing strictly illegal when he flies around the world using money funneled through a nonprofit corporation by -- well, we don't know. That's the point. And Assembly Speaker Fabian Nuñez broke no laws when he used political contributions to wine and dine his way across Europe, hosting guests with interests then-unknown to the public.  Yes, they obey the law -- but they are hardly on the up-and-up. So it's refreshing when one of our government watchdogs snaps its jaws, especially if that watchdog is someone as unlikely as Ross Johnson.

Of course, these sorts of expenditures would result in a federal excise tax on private foundations and would call a public charity's tax exemption into question under federal law.  Earmarked charitable donations would also not be deductible.  Today's L.A. Times editorial goes on to support a measure pending before California's Fair Political Practices Commission. The newly proposed regulation is designed to shut down the use of 501(c)(3)'s to shield the identities of political donors and will likely have the effect of preventing the deductibility of purported gifts to state agencies that everyone knows are actually earmarked for a certain politician.  Staff members to the FPPC have prepared a useful memorandum explaining the manipulation.  The IRS ought to take a look at the memorandum and the proposed regulations for adoption on the federal level (at least with respect to earmarked gifts to "public agencies" that result in a private benefit to a particular politician).

dkj

Ohio Asks Private Nonprofit Hospitals to "Justify" Their Tax Exemption

We recently blogged about Great Britain asking private schools to "justify" their tax exemptions.  It seems that Ohio is doing the same with its private hospitals.  Ohio.com announced on January 22, 2008, that the attorney general in that state is asking nonprofit tax exempt hospitals to "justify" their exemption.  Here is an excerpt from the story:

For the second time since 2006, Ohio's top law enforcer is seeking information on 174 Ohio hospitals that get tax breaks linked to their status as nonprofit, charitable organizations.

Attorney General Marc Dann, a Democrat elected in January, wants the institutions to justify their tax-exempt status and has launched an effort to collect detailed data on their operations, including how much they pay their executives, how they collect unpaid medical bills, how much charity care they provide, and what financial information they share with the public.

A similar effort by Dann's predecessor, Republican Jim Petro, was largely abandoned in 2006 amid criticism from leaders of hospitals and other nonprofit groups. The attorney general's office enforces laws governing nonprofit organizations.

For the entire story, go to "Ohio's top lawyer asks nonprofit hospitals to justify tax breaks" at Ohio.com

DAB

Differences in Uncompensated Care Provided by For-Profit and Nonprofit Hospitals Called "Insignificant"

In a report released yesterday, the California State Auditor found no significant difference between the amount of uncompensated care provided by nonprofit and for-profit hospitals.  The report concluded, however, that nonprofit hospitals provide other community benefits not provided by for-profit hospitals.  The report further concluded that it was difficult to quantify those other benefits because of the manner in which nonprofit and for-profit hospital financials are reported.  Here is an excerpt from the report's summaries:

Our review of tax-exempt hospitals revealed the following:

• About 223 of California's 344 hospitals are eligible for income and property tax exemptions because they are organized and operated for nonprofit purposes.
• Comparing financial data reported by nonprofit and for-profit hospitals indicated the uncompensated care provided by the two types of hospitals was not significantly different.
• Benefits provided to the community, which only nonprofit hospitals are required to report, differentiate nonprofit hospitals from for-profit hospitals, but the categories of services and the associated economic value are not consistently reported among nonprofit hospitals.
• The values of tax-exempt buildings and contents owned by nonprofit hospitals are frequently misreported by county assessors.
• Lacking more reliable data, we used the reported economic values of community benefits and tax-exempt property to estimate that reported community benefits of $656 million for 2005 were roughly 2.7 times the estimated $242 million in state corporation income taxes and property taxes not collected from nonprofit hospitals.
• The Franchise Tax Board, which administers state income tax exemptions, could better use available tools, such as annual filings and audits, to monitor the continuing eligibility of nonprofit hospitals for their tax exemption.

dkj

IRS Revokes Exemption - 3 Years After AG Dissolves Charity

Although the wheels of justice may grind slowly, sometimes justice does prevail.  In 2004 the California Attorney General discovered that money from the San Francisco Neighbors Resource Center was being used for a political campaign.  The charity had received a state grant of $492, 500 in 2001 to build a community center.  The SRFRC never built the center and instead funneled significant amounts of money to the campaign of California Secretary of State Kevin Shelley.  The AG determined that various amounts had been paid to several different people for "project management," consultant services," and "development fees."  The people who received the money had performed no services and within a short time before or after receiving the money, made donations in comparable amounts to Shelley's campaign.  After the AG began to investigate, the board agreed to dissolve, but even then the AG needed to push the board.  That push happened in 2004 (see petition by AG for court supervision of winding up and dissolution of SFNRC).  The IRS finally announced its revocation of the organizations's exempt status on November 30, 2007 (reported by Peter Panepento writing in Philanthropy.com).

sng