Thursday, April 11, 2024

Institute for Policy Studies Reports on Charity Reform Lobbying

Donoradvisedfundlobbying

From the IPS Report

The Institute for Policy Studies is out with a new report this week entitled "Who is Lobbying Against Common-Sense Charity Reform."  The report focuses especially on lobbying with respect to donor advised funds.  Here are the authors' concerns and call to action: 

Chasing the Charity Lobby  

We need common-sense charity reform to increase the flow of funds to nonprofits and discourage the warehousing of charitable dollars in intermediaries. For example, donor-advised funds, or DAFs, should have at least a minimal incentive to pay out funds. Unfortunately, however, those invested in maintaining the status quo have deep pockets, and spend a great deal of money to pressure legislators to block needed reforms.

Our charitable sector is becoming dominated by large legacy foundations and donor-advised funds while working nonprofit charities face greater fiscal austerity. An ever-larger share of charitable dollars — currently 41 percent of all individual giving — is diverted into these wealth warehousing vehicles, rather than going to nonprofits serving critical needs. And ultra-wealthy donors are increasingly able to use charitable gifts to opt out of paying their fair share in taxes to support the public infrastructure we all rely on.

Without intervention, wealthy philanthropists will continue to divert more and more charity dollars from operating nonprofits, and will rival state and local governments in their ability to shape public policy in their interest. This means less money going towards the issues the general public cares about, and more going towards the pet issues of major donors, all at the public’s expense. We urgently need to overhaul the rules governing philanthropy to discourage the warehousing of charitable wealth, to align tax incentives with the public interest, and to encourage broad-based giving across all segments of society.

But those that benefit from the current system — such as donor-advised fund sponsors, wealth advisors, and the funders of anti-tax organizations — continue to push against changes in charitable regulations. In this policy brief, we lay out what we know about the parties that are working against reform.

Here are the Key Findings:

  • As U.S. philanthropy becomes increasingly commandeered by ultra-high-net-worth donors, we see more examples of charitable abuses and self-dealing, along with growing public distrust in the charity system. And, in 2022, 41 percent of all individual donations went to private foundations and donor-advised funds, or DAFs — leading to concerns that these intermediaries are warehousing charitable funds.
  • Because of this, there is growing popular bipartisan support for charity reform — as evidenced by a recent Ipsos poll and an emerging Donor Revolt for Charity Reform.
  • Yet the DAF industry has spent millions lobbying to block even basic common-sense changes. For example, the Accelerating Charitable Efforts Act, or ACE Act, was introduced in 2021 with bipartisan support and proposed relatively modest reforms. But it failed to get traction thanks to aggressive lobbying both by organizations that manage DAFs and by industry advocacy groups that support them.
  • We estimate that since 2018, 21 for-profit firms and nonprofit organizations have spent a combined $11 million in lobbying efforts that included attempts to influence policy around DAFs one way or another.
  • An estimated $3 million of that total was spent to defeat the ACE Act. Much of the funding against the ACE Act came from large commercially-affiliated DAF sponsors such as Fidelity Charitable, Schwab, and Vanguard Charitable.
  • The organizations spending the most on lobbying include not only DAF sponsors but also umbrella groups that advocate for the DAF industry. The Community Foundation Awareness Initiative, or CFAI, a network representing community foundations around the country, spent an estimated $4 million between 2018 and 2023 on lobbying, including an estimated $900,000 spent on the ACE Act. The Council on Foundations and Philanthropy Roundtable, both of which are philanthropy advocacy groups, spent a combined $795,000 lobbying around charity reform, with an estimated $450,000 aimed at the ACE Act.

darryll k. jones

April 11, 2024 | Permalink | Comments (0)

Wednesday, April 10, 2024

Tenth Circuit Affirms Church Audit Procedures Don't Apply to Third Party Summons

God's Storehouse – Topeka

Last year we reported that a magistrate held that the Church Tax Audit Procedures did not apply to the Service's third party summons to obtain bank records pertaining to God's Storehouse Topeka Church.  The case revolves around the Service's inquiry into whether the Church violated 501(c)(3)'s prohibition against campaign intervention.  The Service issued a summons to a bank in pursuit of the Church's bank records.  Presumably, the Service wants to determine whether Church funds were spent in support of the pastor's successful campaign for a seat in the Kansas Senate.  A magistrate held that the Church Tax Audit Procedures under IRC 7611 did not apply to a third party subpoena issued under IRC 7609.  The District Court adopted the Magistrate's holding and the Tenth Circuit affirmed in a ruling released yesterday.

Richard Kloos, the pastor, successfully ran for the Kansas State Senate using signs highlighting his association with the Church. That and other circumstances precipitated the IRS investigation into whether the Church financially supported his campaign.  Here's a nice primer on Church tax audits.  Here are some of the facts from the Tenth Circuit's opinion in God's Storehouse Topeka Church v. United States:

Richard Kloos is a pastor at [God's Storehouse Church, Topeka] (GSH); GSH paid gross wages to both Klooses in 2019 and 2020. GSH’s tax forms demonstrate that, during that two-year period, it withheld employment taxes from the wages of other employees but did not withhold any taxes from the gross wages of the Klooses.  In November 2020, Richard Kloos was elected to the Kansas State Senate.

During his run, his campaign purchased yard signs that included the words “Founder of God’s Storehouse” below his name. The State of Kansas Governmental Ethics Commission vetted and preapproved those signs. According to Richard Kloos, GSH did not “create, purchase, display, distribute, or in any way contribute to any yard signs associated with” his campaign. Kloos further claims GSH did not “intervene in or support [his] campaign for Kansas Senate.”  In February 2021, IRS assigned Kesroy Henry to investigate whether it should initiate a church tax inquiry into GSH for the 2019 and 2020 tax years. In June, Henry issued a Notice of Church Tax Inquiry (“Inquiry Notice”) to GSH after he secured approval from the TE/GE Commissioner. The Inquiry Notice informed GSH of four concerns: (1) it potentially operated as a thrift store instead of a church, (2) it may have improperly intervened in a political campaign, (3) its coffee shop may incur liability for unrelated business income tax, and (4) the wage payments to the Klooses may incur liability for unpaid employment taxes. Although the Inquiry Notice also requested GSH’s responses to a series of questions, it did not request any documents. Nevertheless, GSH responded to the questions and provided copies of documents.

GSH’s responses and documents did not assuage Henry’s concerns about GSH’s tax-exempt status and potential tax liability. Accordingly, in September of 2021, he obtained approval from the TE/GE Commissioner to initiate a church tax examination. Henry then issued to GSH a Notice of Church Tax Examination (“Examination Notice”). The Examination Notice informed GSH about IRS’s continued concerns. It also described church records and activities Henry might need to examine and offered to conduct a pre-examination conference. The following month, GSH’s representative met with IRS personnel for the pre-examination conference. Because that conference did not resolve IRS’s concerns, IRS notified GSH it would move forward with an examination. Consistent with this determination, a few days later, Henry sent GSH a request for documents, including copies of its bank statements for a two-year period. GSH objected to producing those statements on the ground the request was overly broad. Although GSH did not provide the requested bank statements, it did provide an extensive list of documents.

In December 2021, IRS notified GSH it intended to contact third parties and informed GSH of its right to request a list of people IRS contacted. In February 2022, IRS issued a § 7609 third-party summons to Kaw Valley. IRS requested bank records for all accounts in GSH’s name for the period January 1, 2019, to December 31, 2020. IRS also served a copy of the summons on GSH.

darryll k. jones

April 10, 2024 | Permalink | Comments (0)

Virginia Governor Sends Daughters of Confederacy Tax Exemption Revocation Back to Legislature

The Controversial History Of The United Daughters Of The Confederacy

Earlier this year we reported that the Virginia legislature passed a bill revoking tax exemption for the United Daughters of the Confederacy, the Confederate Memorial Literary Society, and the Stonewall Jackson Memorial, Inc. Yesterday was the deadline for the Governor to sign, veto, or suggest amendments to the bill.  The Governor sent the bill back to the legislator with instructions to study the impact of the exemptions on government revenues:

3. That the Department of Taxation (the Department) shall study (i) exemptions to the state recordation tax and the effect of such exemptions on state government revenues and (ii) exemptions to real and personal property tax by classification or designation prior to and on July 1, 1971, and the effect of such exemptions on local government revenues. The Department shall submit a report to the Chairs of House Committee on Finance and the Senate Committee on Finance and Appropriations by November 1, 2024.

4. That the provisions of the first and second enactments of this act shall not become effective unless reenacted by the 2025 Session of the General Assembly.

The Washington Post reports that the Governor's action represents a "dodge" of the issue:

Confederate heritage. Youngkin dodged a couple of Confederate-related issues — one related to tax exemptions and the other to license plates — sending both topics to next year for further action and study.  One pair of identical bills — HB568 and SB517 — would strip away exemptions from state recordation taxes and real and personal property taxes for the United Daughters of the Confederacy, the Confederate Memorial Literary Society and the Stonewall Jackson Memorial Inc. A Virginia Beach high school student brought the issue to the General Assembly after her lawyer father discovered the obscure part of state law. The measures passed on largely party-line votes, with all Democrats in favor and most Republicans opposed.

Youngkin proposed amending the bills to require the state tax department to study local impact and the General Assembly to consider them again next year. Del. Alex Q. Askew (D-Virginia Beach), who sponsored the House version, called Youngkin’s action “unacceptable” on the site X. “This is about fairness & fiscal responsibility,” Askew wrote. “We shouldn’t delay aligning our code with our values & vision for the Commonwealth.”

Youngkin also proposed amending HB812, sponsored by Del. Candi Mundon King (D-Prince William), which would ban further issuance of state license plates commemorating the Sons of Confederate Veterans or Gen. Robert E. Lee. The governor wants the state to study whether to set a “sunset” or expiration period for all commemorative plates and for the General Assembly to revisit this bill next year. “I’m not surprised Governor Youngkin won’t stand up to Confederate sympathizers,” Mundon King posted on X.

darryll k. jones

 

April 10, 2024 | Permalink | Comments (0)

Tuesday, April 9, 2024

DAF Funding of Hate Groups and Anti-Government Organizations

Over 1,000 Hate Groups Are Now Active in United States, Civil Rights Group  Says - The New York Times

Helen Flannery and Brian Mittendorf posted a fascinating study concluding that donor advised funds are the largest "non-governmental" source of money for hate groups and anti-government organizations.  DAFs give to such organizations "at a rate 3.5 times that of other giving methods; in fact, we find that donor-advised funds account for more than one-quarter of all non-government giving received by these organizations."  So the rest of us subsidize hate.  And what's this about "non-government giving?" Is there government giving to hate groups?  Anyway, the study is about even more than that -- providing insight on DAF dark money generally.  Here is the abstract:

Donor-advised funds are a prominent and rapidly growing charitable giving vehicle. As intermediaries, they serve as a layer of separation between donors and grantees, a layer that provides a significant degree of donor anonymity. With this in mind, we examine whether donor-advised funds help facilitate giving to politically engaged charities — a type of giving that donors may particularly prefer not be publicized. We find that donor-advised fund sponsors distribute grants to politically engaged charities at a rate nearly 1.7 times that of other giving methods, with an even higher rate for national sponsors in particular. We further show that giving to politically engaged charities is greater when sponsoring organizations are more financially reliant on donor-advised funds, and when sponsors receive more funding from private foundations — this latter finding indicating that donor-advised funds are anonymizing political gifts from private foundations. In additional analyses, we find that donor-advised fund sponsors publicly promote anonymity at higher rates than do operating charities; however, sponsors that do more promotion do not give grants to politically engaged organizations at markedly different rates than less vocal sponsors. Finally, we find that donor-advised funds give grants to anti-government and hate groups — organizations at the extreme fringe of the political spectrum — at a rate 3.5 times that of other giving methods; in fact, we find that donor-advised funds account for more than one-quarter of all non-government giving received by these organizations. Collectively, our results suggest that donor-advised funds play a key role in the wider network of money in politics.

darryll k. jones

April 9, 2024 | Permalink | Comments (0)

Restoring Faith in the Determination Letter

Why are Senators targeting 501(c)(3) NIL collectives?

 

Yesterday, I blogged about the Service's denial of tax exempt status to an NIL collective.  I cited a news article in which Phil Hackney explained that the Service's grant of tax exemption to previous NIL organizations is hardly an endorsement or stamp of approval. Phil, formerly of IRS Chief Counsel's Office, noted that NILs that obtained favorable determination letters were very likely just beneficiaries of an overworked and underfunded TEGE division.  Coincidentally, in yesterday's Tax Notes (subscription required), Jeffrey Pennell and Alex Shang offer Proposals to Restore Faith in Exempt Organizations.  The proposal responds to the problem to which Phil alluded, though not that problem alone.  Here are introductory paragraphs:

This article is about the administrative process by which an organization’s exempt status is recognized and the oversight or review of those organizations after exempt status is approved. It contains a proposal that recognizes the difficulty with which the IRS performs these pre- and post-approval processes, and it acknowledges a nearly indisputable truth: that neither function is being performed effectively or efficiently.

This proposal has implications for federal, state, and local taxation. It consists of three separate but related elements: (1) that the pre- and post-approval processes be delegated to a separate agency, not the IRS; (2) that all EOs be required to report on their activity annually; and (3) that the exempt status of all currently exempt organizations be reconfirmed once. All three elements are meant to restore faith in the integrity of exempt status and to better ensure that exemptions are current and appropriate.

The proposal to move the determination process to a separate agency provides a possible solution to what Congress has always refused to do.  Provide adequate funding.  The authors propose that the agency be funded by user fees. TEGE would retain its other functions and remain subject to what the authors call "Congressional [funding] whims."  If determinations is all that would be done in the new determination's agency, the idea of user fees might be sustainable though the agency would need start-up and then a reserve fund for when times are slow.  The authors hope that reliance on user fees will avoid the delay in processing occasioned by underfunding.  

The idea of moving determinations out of the IRS is interesting for another reason.  It is based on the desire to create the "optic" that the determination process will be insulated from the politics that precipitated the infamous Tea Party scandal. They think it's the perceptions of "weaponization" that causes Congress to withhold needed funding.  I suppose its possible that a government agency can be so insulated that people think it mostly immune from politics.  The first example with nonpartisan hue I can think of is the Federal Reserve Board.  But there must be a few more.  Maybe the U.S. Patent and Trademark Office.  The authors seem to admit that although moving the determination process to a different agency might put TEGE "out of its misery," it probably won't entirely dissuade people from thinking that Presidents use the determination process for political advantage. 

Perhaps the optics could be strengthened by providing for an executive board the members of which are appointed by Ways and Means or Senate Finance, with exactly equal representation from both political parties. A pox on both their houses, I'd say. The board wouldn't make determinations, just provide bipartisan oversight. I have no idea whether the Constitutionalist would think that violates separation of powers, but splitting the members equally down the middle would probably not result in any sort of gridlock.  Surely, the vast majority of applications are -- yawn! -- devoid of politics or political opportunity.  Anyway, the article is a thoughtful conversation starter on an important topic.  

darryll k. jones

April 9, 2024 | Permalink | Comments (0)

Monday, April 8, 2024

Politics and Affiliated Nonprofit Organizations

Regan v. Taxation With Representation, 461 U.S. 540 (1983): Case Brief  Summary | Quimbee

From Quimbee

Lloyd Mayer has a new article coming out soon at the University of Chicago.  Here is the abstract:

Federal tax law treats separate nonprofit corporations as distinct legal entities for almost all purposes, in common with most other areas of law. With respect to political activity, this means that one nonprofit corporation's lobbying or election-related actions are generally not attributed to another nonprofit corporation. This is the case even if the two entities have overlapping or even identical boards of directors. It is also the case even if the two entities collaborate regarding their respective activities and share employees, facilities, outside vendors, and other resources, as long as the entities reasonably allocate the costs for those shared resources. In addition, long standing Supreme Court precedents strongly indicate that the First Amendment requires Congress and the IRS to permit this overlapping, collaboration, and sharing.

That lack of attribution is important because different types of nonprofit corporations receive different tax benefits and face different restrictions on their political activity under federal tax law. For example, a charitable nonprofit corporation that is tax-exempt under Internal Revenue Code section 501(c)(3) and eligible to receive tax deductible charitable contributions is limited with respect to lobbying and is prohibited from supporting or opposing candidates for elected public office. In contrast, a social welfare nonprofit corporation that is tax-exempt under Internal Revenue Code section 501(c)(4) but not eligible to receive tax deductible charitable contributions can engage in unlimited lobbying related to its social welfare purpose and can also support or oppose candidates as long as doing so is not its primary activity. And a political organization that is tax-exempt under Internal Revenue Code section 527, although only with respect to contributions received for political purposes, can engage entirely in supporting or opposing candidates. Yet a section 501(c)(3) organization, a section 501(c)(4) organization, and a section 527 organization can have overlapping boards, collaborate about their respective activities, and share resources, as long as they reasonably allocate their expenses and avoid spending directly on political activity that is limited or prohibited given their specific exemption category. There are therefore many groups of nonprofit organizations that consist of affiliated organizations with different federal tax categorizations but a common political purpose.

This lack of attribution is in tension with an aspect of federal election law and the election laws of many states. Under these election laws, if an individual or entity coordinates its activities with a candidate committee or political party, that activity is considered a contribution to the benefitted candidate or party. This result means that any spending on that activity is subject to existing source and amount limits on such contributions. In effect, the activity is attributed to the candidate or party because of the coordination even though the candidate or party does not legally control that activity. This is a common sense approach because if it did not exist it would be easy for individuals and other entities to evade contribution limits by engaging in activities not only designed to benefit a candidate or party but done at the specific request of that candidate or party. This reasoning also provides the basis for Supreme Court decisions concluding that this approach is constitutional under the First Amendment.

This essay explores the tension created by federal tax law's respect for separate entity status on one hand and the coordination rules of federal and state election law on the other hand. It also revisits whether, given this tension, the Supreme Court was correct to constitutionalize the former approach when it comes to tax-exempt nonprofits. I conclude that whether this difference is appropriate as a policy matter depends on the policy justification for the political activity limits on section 501(c)(3) charities. If the only such justification is to support the broader federal tax policy prohibiting the deduction of expenditures for political activities, then the lack of attribution is appropriate. If instead the justification is that political activity is inconsistent with status as a section 501(c)(3) charity for broader reasons, then there is a policy argument for attributing the political activity of noncharitable nonprofit corporations to closely affiliated charitable nonprofit corporations and so subjecting that activity to the section 501(c)(3) limits. I also conclude that this latter justification could provide a basis for revisiting the Supreme Court precedents that bar this attribution as a constitutional matter.

Sounds like a real head scratcher.

darryll k. jones

April 8, 2024 | Permalink | Comments (0)

NIL Collective Denied Tax Exemption, IRS Disavows Prior Rulings to the Contrary

What is an NIL collective? | Fan Arch

In Private Letter Ruling 202414007, released last Friday, the Service denied tax exempt status to an NIL collective for private benefit and operating for a substantial non-exempt purpose.  Elaine Waterhouse Wilson posted about NIL collectives just last week, a few days before the Service released the ruling.  The ruling makes a point of disavowing unspecified prior rulings that granted tax exempt status to similar collectives.  It also describes some interesting details providing food for thought.  For example, the ruling states that student-athletes sign "independent contractor" agreements with the organization.  In turn, the organization enters into "letters of understanding" with local charities by which student athletes promote the charity via personal appearances and social media posts. 

The treatment of student athletes as independent contractors vis-à-vis the collective caught my attention.  I kinda doubt that student athletes can free lance their services to other collectives.  Exclusive services to one organization does not automatically result in employee status, but it cuts against independent contractor status.  And I bet student athletes don't do anything other than show up and do exactly what they are told when they are told to do it. All by that single NIL collective. There are not enough facts to really analyze whether the collective should be treating the student athletes as employees subject to employment tax withholding and matching.  But the question seems worth exploring.  The Service seemed only to briefly question the characterization.  It implied that employee or independent contractor status would not change the outcome.  Here are some of the facts:  

You are a nonprofit organization incorporated in C on D. You were formed to engage student athletes at the college level to lend their Name, Image and Likeness (NIL) to other charitable organizations in the vicinity. This arrangement for student athletes is to monetize their NIL by matching the selected students with deals in which they are paid by you to promote local charitable organizations. The student athletes selected will make personal appearances and social media posts for the charity. Initially you will work with student athletes at the E. Your revised budget indicates approximately w percent of your gross receipts will be paid to student athletes for their services. You expect no more than x percent of your total gross receipts will be paid to student athletes utilizing their NIL.

. . . 

You assert that not only will student-athletes benefit monetarily from NIL opportunities by working with you, but also, the community will benefit as well. The proposed NIL approach to philanthropy will create relationships with charitable and educational organizations which will advance the economic interests of the charities and benefit education as well. You will bring together private donors, local businesses and fans with student athletes from the E. You will instill in student athletes the importance of humanitarian work and philanthropy as a part of education. This exempt purpose may be accomplished by creating an NIL platform with student athletes and other charities in the community. The student athletes will benefit monetarily from the NIL opportunity, and the community will also thrive through this philanthropic and educational approach to giving.

You plan to engage in direct contact with existing charitable and educational organizations, implementing "sports clinics targeted to community youth." You also stated that you plan on directly funding, in the future, charitable and educational initiatives maintained by other tax-exempt organizations in the community. Your funding will come from fans, alumni of the E and generous private donors. You anticipate direct advertisement to the students and the public will also be used but that has not yet been developed.

The ruling concludes that student athletes do not compose a charitable class, though the collective described college students generally as "poor and distressed."  The ruling states that student athletes' financial status has nothing to do with their engagement by the collective.  But don't students and college athletes compose a charitable class without regard to financial status anyway?  Schools give scholarships to rich smart kids all the time.  Why should hiring rich physically gifted kids be any different?  That's the only part of the analysis that is giving me pause.  I'm not sure it's necessary to say that student athletes do not compose a charitable class to deny exemption to collectives.  I think the assertion represents an analytical weakness, though not a fatal one because running a talent agency -- which is what NIL collectives are doing -- seems unrelated to the any charitable purpose.   

Another assertion caught my eye as well.  Some NIL contracts pay student athletes millions.  Perhaps in an effort to avoid unreasonable compensation issues the collective disavowed any notion that the student athletes perform services for the charities:

You stated that you do not pay student athletes for providing services for charities. You engage the student athletes to conduct activities which promote the mission of selected charities by utilizing the student athlete's NIL. These activities include social media posts and personal appearances on behalf of the charity. You state such activities are not services to the charities by you or the student athlete but are actions on behalf of the charity designed to expand the charity's visibility in the community. 

Finally, the ruling states that even if the Service granted tax exempt status to other NILs, it would not consider itself bound by those rulings.  Our man Phil Hackney offers thoughts on that topic in this Sportico article:

To the extent that a number of collectives have received 501(c)(3) determination, Hackney thinks that likely owes to administrative error. “If you got status, it just means you got it through an overwhelmed process,” Hackney said. Hackney notes that the IRS’s gutting in the wake of the 2010 Tea Party targeting scandal, when the agency, then under President Barack Obama’s administration, was found to have targeted conservative organizations seeking tax-exempt status. In May 2013, the Treasury Inspector General for Tax Administration released an audit report that found IRS officials had been “using inappropriate criteria to identify organizations” seeking 501(c)(3) status, which included their searching for applicants with “Tea Party” in their name. In the political fallout, conservatives successfully prevailed upon Congress to slash the IRS’s funding—cutting the budget of its Exempt Organizations division from $102 million in 2011 to $82 million in 2016, according to the Washington Post—all while the number of applications for tax-exempt status were growing by leaps and bounds. According to the IRS, it now receives more than 95,000 applications each year.

darryll k. jones

April 8, 2024 | Permalink | Comments (0)

Friday, April 5, 2024

The Regulation of Foreign Funding of Nonprofits in a Democracy

Beware of Accepting Foreign Donations! - NDM Advisors LLP

A new article from Nick Robinson, International Center for Not-For-Profit Law and Harvard:

Abstract

Governments around the world have increasingly regulated nonprofits' access to foreign funding. These regulations, which often take the form of registration requirements, are justified as needed to protect a country’s politics from undue foreign influence. Yet, they have also placed new burdens on nonprofits and been used by governments to discredit critics, creating significant new constraints on activism on issues from fighting climate change to protecting human rights. While authoritarian governments have been the most aggressive proponents of these restrictions, many democracies have also embraced variants of them, creating new uncertainty about how foreign funding of nonprofits should be regulated.

In this moment of global regulatory flux, this article argues for what it calls a democracy centered approach. It begins by surveying the quite different regulatory approaches to cross-border funding of nonprofits in the world’s three largest democracies or democratic blocs: the United States, India, and the European Union. It labels their current respective approaches: “ambiguous regulatory heavy-handedness”, “government controlled nonprofit nationalism”, and “rights-based regulatory liberalism.”

Drawing on these examples, the article examines justifications for restricting cross-border funding to nonprofits as well as justifications for more open regulation. Significantly, it finds that perhaps the strongest argument both for and against limitations on foreign funding is protecting a country’s democratic self-governance. It argues that this apparent contradiction is the result not only of competing considerations about what improves self-governance, but also competing understandings of the proper relationship between government and civil society in a democracy.

It then develops a novel framework for how democracies should approach the regulation of cross-border funding of nonprofits that rests on five key principles that should shape and limit any such regulation. The potential benefits of this approach have implications not just for the regulation of the cross-border funding of nonprofits, but also the broader regulation of foreign influence in civil society.

darryll k. jones

April 5, 2024 | Permalink | Comments (0)

Simple Tests for Religion and Religious Activity

Religion Symbols Images – Browse 2,000,552 Stock Photos, Vectors, and Video  | Adobe Stock

When last we checked, Safehouse, the one-time medical organization, had found religion. You might recall that Safehouse is a Philadelphia 501(c)(3) organization now asserting a religious right to operate an indoor place -- a safe injection site -- where addicts can use their DOC (drug of choice) under medical supervision.  The organization’s members are motivated by genuine shock, horror and concern for the hundreds who use drugs openly every day in Kensington, a Philly neighborhood that rivals or exceeds LA’s Skid Row in terms of hopelessness and despair. A place where people die slowly or suddenly from overdoses while cops and passers-by avert their eyes.  DOJ has stifled the effort citing a federal law prohibiting trap houses.  Safehouse’s reliance on religious freedom is a fourth quarter strategy. But more than 30 religious organizations filed briefs supporting Safehouse’s assertion that operating a safe consumption house is a religious activity forming the basis of its newly asserted religious tax exemption. 

Let’s call the argument a legal Hail Mary.   Not because those activities are implausibly religious, but only because of Safehouse's timing.  The assertions are very late, having been made only after Safehouse lost an earlier appeal during which those arguments were never made.  And anyway, most Hail Mary’s don’t work.  The gambit would have failed even it wasn't late.  Because a federal district court articulated simple tests by which to determine whether an organization is religious, and then another simple test to determine whether an activity is a religious one.  Who knew such simplicity existed?! Here is the test for whether a set of beliefs constitute religion: 

First, a religion addresses fundamental and ultimate questions having to do with deep and imponderable matters. Second, a religion is comprehensive in nature; it consists of a belief-system as opposed to an isolated teaching. Third, a religion often can be recognized by the presence of certain formal and external signs.

The mystery of life solved!  The court found that whatever Safehouse’s beliefs, those beliefs don’t constitute a religion. Here is the court’s test for whether an organization is engages in religious activity: 

(1) whether the entity operates for a profit, (2) whether it produces a secular product, (3) whether the entity's articles of incorporation or other pertinent documents state a religious purpose, (4) whether it is owned, affiliated with or financially supported by a formally religious entity such as a church or synagogue, (5) whether a formally religious entity participates in the management, for instance by having representatives on the board of trustees, (6) whether the entity holds itself out to the public as secular or sectarian, (7) whether the entity regularly includes prayer or other forms of worship in its activities, (8) whether it includes religious instruction in its curriculum, to the extent it is an educational institution, and (9) whether its membership is made up by coreligionists.

The court found that whatever Safehouse is trying to do, it is not engaged in a religious activity. The simple test proves it. All this time, tax exemption jurisprudence has struggled to come up with a definition of religion and religious activity and those definitions have been right under our noses.

darryll k. jones

April 5, 2024 | Permalink | Comments (0)

Thursday, April 4, 2024

Chevron Deference and Tax Benefits as Quid Pro Quo

Quid Pro Quo: What to Do When the Other Person Doesn't Get It

This summer the Supreme Court is expected to overturn the 40-year-old Chevron doctrine.  Yawn.  I’m part of the crowd that thinks the sky won’t fall whether it does or doesn’t.  Without having paid much attention, I might conclude that the push to overrule the doctrine is just another example of how we have turned into a society that embraces an extreme form of intellectual and moral relativism.  That only what I suits me and what I want is objectively true or morally correct.  And that analytics and expertise are nothing but tools of the deep state conspirators. 

Meanwhile, a federal district court in New York upheld Treasury Regulation 1.170A-1(h)(3)(i) against what might be labeled an anti-Chevron deference attack launched by New Jersey, New York, and Connecticut.  Without ever mentioning its impending demise, the Court in New_Jersey_v. Mnuchin concluded that the regulation reasonably interprets a statute that can be described as ambiguous, even if it might be susceptible to different interpretations.  And that as a result, the regulation is entitled to Chevron deference.

The regulation shuts down the “workaround” that some states condoned when Congress limited SALT deductions to $10,000.  Briefly put, those states provided a credit to taxpayers who made in-state charitable contributions. Contributions that were deductible on federal returns.  The SALT offset plus the federal deduction meant that taxpayers avoided in taxes what the SALT limitation effectively imposed.  I think.  Because I thought only the wealthiest of the wealthy could even take the charitable contribution deduction. 

The most interesting part of the discussion, one I haven’t quite wrapped my head around, is when the states argue that receipt of a tax benefit is not a “return benefit” thereby precluding a charitable contribution.  The Court addresses the argument because the states argue that the opposite conclusion is unreasonable and therefore should not be cloaked with Chevron deference. 

The regulation disallows the deduction based on the notion that a donor who receives a benefit from the charitable recipient does not actually make a contribution to the extent of the benefit’s fair market value.  So if I make a donation to a charity and I get tickets to a dinner, gala and a show, I have to reduce the amount of the deduction by the value of the shindig.  The catch with SALT credit is that the charity doesn’t provide the donor with a return benefit.  The state provides a tax benefit, yes, but so does the federal government when we make charitable contributions.  Taken to its logical extreme, according to the states, the federal tax benefit should also reduce the amount of contribution.  If it doesn’t, again according to the states, the SALT credit should also not preclude a charitable contribution deduction.  The argument actually has a sort of rubik’s cube logical appeal.  The Court rejected it anyway employing a slight of hand to conclude that the contribution was made to the “state and local tax credit program” rather than to a charity, motivated by a state and local tax credit. By that conception, the recipient provides a return benefit to the donor.    

Plaintiffs do not dispute the reasoning underlying the Government's quid pro quo assertion. They instead complain that the IRS "selectively treats certain tax incentives as a disqualifying 'benefit' but completely ignores other tax incentives." According to Plaintiffs, while federal deductions, state deductions, and state credits "may differ in specifics, the essential character of each incentive is the same: each provides a potential reduction of a donor's tax obligation to reduce the true cost of that contribution in order to encourage charitable giving."

According to Plaintiffs, if the federal charitable contribution deduction does not constitute a return benefit for a contribution, then a state or local tax benefit likewise cannot constitute a return benefit. (citing, inter alia, Browning v. Commissioner, 109 T.C. 303 , 325 (1997) ("None of the tax consequences enjoyed by [a charitable contribution] constitutes consideration."); McLennan v. United States, 24 Cl. Ct. 102 , 106 n.8 (1991) ("[A] donation of property for the exclusive purpose of receiving a tax deduction does not vitiate the charitable nature of the contribution."), aff'd, 994 F.2d 839 (Fed. Cir. 1993)) Plaintiffs further argue that "since tax credits do not represent [monetary] value for purposes of calculating gross income," state tax credits "logically do not constitute a 'return benefit' under Section 170 ." ( Id. at 33-34 (citing Randall v. Loftsgaarden, 478 U.S. 647 , 657 (1986) ("The 'receipt' of tax deductions or credits is not itself a taxable event, for the [taxpayer] has received no money or other 'income' within the meaning of the Internal Revenue Code ."))

The Government reads IRC §170 differently. If a taxpayer receives a state or local tax credit in return for contributions to a state or local tax credit program, the tax credit is not treated as the basis for a federal income tax deduction, but instead as a benefit received from the state or municipality in exchange for the contribution to its tax credit program. In determining whether a contribution is a "charitable contribution" or a "quid pro quo," the Second Circuit considers whether the benefit would "come from the recipient of the gift." Scheidelman v. Commissioner, 682 F.3d 189 , 200 (2d Cir. 2012); see also Hernandez, 490 U.S. at 690-91 (examining the "external features of a transaction," thereby "obviating the need for the IRS to conduct imprecise inquiries into the motivations of individual taxpayers"). For example, in Scheidelman , the court found that the charity did not give a donor any "goods or services, or benefit, or anything of value" in exchange for her cash donation, and therefore her donation "would not be a quid pro quo." Scheidelman, 682 F.3d at 200 (internal quotation marks omitted). The Second Circuit rejected the argument that a federal tax deduction is a return benefit, because the benefit "derive[d]" from the "deductibility of the gift on [the donor's] income taxes" would come from "elsewhere," and not from the charity. Id. Here, of course, the opposite is true: the benefit — i.e., the tax credit — came from the recipient of the taxpayer's contribution.

The Court concludes that it was reasonable for the IRS to find that "the [state or local tax] credit constitutes a return benefit" from the state or municipality "to the taxpayer," "or [a] quid pro quo . . . reduc[ing] the taxpayer's charitable contribution deduction."

I am ok with the result if only because I generally don't like workarounds without substantive difference.  I am just not sure if the outcome fits the “quid pro quo” rule if a federal tax benefit does not.

April 4, 2024 | Permalink | Comments (0)

American Enterprise Institute's Accidental Defense of Fearless Foundation

Black boxes' in Stanford Hospital operating rooms aid training and safety |  News Center | Stanford Medicine

American Enterprise Institute, no great champion of affirmative action or DEI,  has itself  hopelessly tied in knots trying to defend Fearless Fund’s quest to remediate racial and gender discrimination without admitting that Fearless Fun’s efforts don’t constitute discrimination. 

By striking down the Fearless contest, the courts could undermine the basic tenets of what the conservative Philanthropy Roundtable calls “philanthropic freedom”— grant makers’ discretion to decide what problems they want to address.  Quite simply, the Fearless Fund prize is awarded by a 501(c)(3) nonprofit foundation. As such, it should have the discretion to conduct its grant program as it chooses. . . .  would any grant program that had the effect of targeting Black people fall in the same category? What about Julius Rosenwald’s famous support for schools for rural Southern Black children during Jim Crow? Or a foundation that limited its higher education support to historically Black colleges and universities? Should philanthropy not have discretion — including the right to over-emphasize race in its decision making?

One doesn’t need to approve of the Fearless prize to accept the organization’s right to award it. Indeed, nothing would preclude the Alliance, or those who sympathize with its efforts, from criticizing Fearless — not in a court of law but in the court of public opinion. As in the college admissions case, a strong argument could be made that any disadvantaged Atlanta residents seeking to start their own businesses deserve help — and that race and disadvantage are not always synonymous.

AEI is after some other goal I think.  But it unknowingly admits an important distinction between injury and cure.  A person who makes an incision to treat a stabbing victim, isn’t the same as the person who stabbed the victim in the first place.  Fearless Fund is making incisions, alright.  But it ain’t stabbing nobody. 

darryll k. jones

April 4, 2024 | Permalink | Comments (0)

Wednesday, April 3, 2024

On Coercive Philanthropy and Aggressive Donors

John D. Rockefeller, left, with his son, circa 1915

John D. Rockefeller and son, from Is Big Philanthropy Compatible with Democracy 

HistPhil, which means "history of philanthropy," is a very useful and interesting blog that has been around for about ten years. I am only just now learning of it.  

Founded in 2015, HistPhil is a web publication on the history of the philanthropic and nonprofit sectors, with a particular emphasis on how history can shed light on contemporary philanthropic issues and practice. In founding and editing this blog, we hope to foster humanistically oriented discussion and debate on the sector and to bring together scholars, nonprofit practitioners, and philanthropists in common dialogue on the past, present, and future of philanthropy. For more on the vision and motivation behind HistPhil, please see the opening post. And if you would like to pitch a blog post idea, please feel free to contact us via email,

There is a fascinating conversation going on right now regarding something my Tax Notes article touched upon without awareness of some apt phrases used by the historians on that blog.  The conversation concerns donor anger and activism of the sort expressed by wealthy donors to Harvard, Penn, and other elite universities considered permissive in their response to alleged hate speech.  Permissive, and therefore complicit, according to the donors and even some in Congress.  The scholars set out to find historical antecedents for what they call "aggressive donors" engaging in "coercive philanthropy." In the opening round, John Thelin and Richard Trollinger describe the phenomenon before concluding "the aggressive alumnus as major donor and activist is a product of our own times. " 

Recent campus conflicts at elite American universities, The New York Times declared in a recent article, signal a “new politics of power” in which “wealthy donors expect money to buy a voice in university affairs.” Activist donors with their “new playbook” have used unrest on campus as an opportunity to advance a distinctive set of institutional reforms.  Their ambitious goal to change a university’s culture as well as its policies means that campus governance now goes beyond presidents and trustees to include philanthropists.  Specifically, these are prominent alumni who, as discontented donors, use both internal networks to engage with fellow alumni along with the added external leverage of using social media to orchestrate their plans and attract supporters. They made fortunes in such fields as high-tech and financial services. Their aggressive strategies resemble insider takeovers of business corporations transplanted to academic institutions. The most conspicuous of this new breed are Marc Rowan at the University of Pennsylvania and William A. Ackman at Harvard.

Another scholar offered this comment to the post:  

If John Thelin and Richard Trollinger had looked a little harder, they would have found earlier examples of donors behaving like Marc Rowan and William Ackman did recently. The most famous (or infamous) was Mrs. Leland Stanford, who played a strong role in Stanford University’s governance after her husband died. Her efforts not only contributed to the creation of the AAUP, but may even have led to her “murder,” as Richard White suggests in “Who Killed Jane Stanford?” Similarly, Andrew Carnegie’s grants to higher education aimed, at least in part, to incentivize colleges and universities to distance themselves from their religious roots, just as John D. Rockefeller’s support for medical schools sought to change how they educated doctors.

Closer to our own time (though now a half-century ago), David Packard, William E. Simon, John M. Olin and other business-philanthropy leaders urged donors to stop funding programs and scholars in higher education that opposed capitalism. And the principal monument to Herbert Hoover at Stanford University, the Hoover Institution, was long regarded by the school’s faculty as a controversial imposition that needed to be brought under tighter university control. Mr. Rowan and Mr. Ackman are following in their footsteps. But keeping in mind what may have happened to Mrs. Stanford, let’s hope they are watching their backs.

And then another scholar followed up with another post:

It may be more instructive to examine several prominent white women philanthropists for precedents of what Margaret Rossiter called “coercive philanthropy,” writing about Mary Elizabeth Garrett. In my book, Funding Feminism: Monied Women, Philanthropy, and the Women’s Movement 1870-1967, I explore the ways in which donors Garrett, Phoebe Apperson Hearst, Katharine Dexter McCormick and other women in the late nineteenth and early twentieth centuries U.S. wielded their giving to force universities to open their doors to women or to increase the number of women admitted by providing scholarships or erecting a women’s building or a dormitory. Garrett, the daughter of a former trustee of Johns Hopkins University (which was all-male at the time), Hearst, a member of the Board of Regents at the University of California, Berkeley, and McCormick, an alumna of Massachusetts Institute of Technology (MIT), were willing to make demands of the universities to which they gave large donations of approximately $350,000 to $5 million. 

Clearly, donors can be as aggressive and coercive -- in the legitimate way the historians are presumably using the words -- as they want to be.  And apparently there is historical precedent.  Charitable fiduciaries can concede or not but ultimately it must be their call.  Its all part of the fabric of civil society.  Its just that tax laws ought to be neutral in the treatment of donors and as long as only the wealthiest get the charitable contribution deduction, I don't think tax law is neutral.

darryll k. jones 

April 3, 2024 | Permalink | Comments (0)

Nonprofit Hospital Concierge Services and Tax Exemption Nondiscrimination Requirements

Concierge Practice - Right Decision for You and Your Patients? - Blog

Tax law is full of examples of tax benefits conditioned on nondiscrimination rules.  Not the sort of discrimination social science is most often concerned with.  Discrimination favoring "top hats" on the job, that sort of thing.  For example, otherwise nontaxable fringe benefits are taxed to highly compensated employees if they not offered generally to all other employees.  Qualified deferred comp plans are all about nondiscrimination rules.  That makes sense.  Its a simple enough axiom that fiscal policy should not intentionally or unnecessarily favor people based on wealth.  

Nondiscrimination rules in tax exempt jurisprudence are less explicitly stated, but present nevertheless in private benefit jurisprudence.  Its one reason why HMOs hardly qualify under 501(c)(3).  An exempt organization that caters especially to wealthy, or just paying people can't really be called a charity, can it?  But what if an exempt hospital complies with all the  community benefit bells and whistles while it also maintains a first class service department serving only its wealthy or paying patients? No waiting for appointments, immediate access to doctors 24-7, even ahead of sicker patients.  If you have ever sat with a sick and suffering child in the middle of the night at the emergency room you might know how great that sounds. 

But does that first class concierge service available only to high paying patients defeat the nonprofit hospital's claim to tax exemption?  If not that, should the revenues from its concierge service be taxed as unrelated business income?  Here is an interesting extract from a thought provoking article in Kaiser Family Foundation Health News:

Nonprofit hospitals created largely to serve the poor are adding concierge physician practices, charging patients annual membership fees of $2,000 or more for easier access to their doctors. It’s a trend that began decades ago with physician practices. Thousands of doctors have shifted to the concierge model, in which they can increase their income while decreasing their patient load.

Northwestern Medicine in Chicago, Penn Medicine in Philadelphia, University Hospitals in the Cleveland area, and Baptist Health in Miami are among the large hospital systems offering concierge physician services. The fees, which can exceed $4,000 a year, are in addition to copayments, deductibles, and other charges not paid by patients’ insurance plans.

Critics of concierge medicine say the practice exacerbates primary care shortages, ensuring access only for the affluent, while driving up health care costs. But for tax-exempt hospitals, the financial benefits can be twofold. Concierge fees provide new revenue directly and serve as a tool to help recruit and retain physicians. Those doctors then provide lucrative referrals of their well-heeled patients to the hospitals that employ them.

“Hospitals are attracted to physicians that offer concierge services because their patients do not come with bad debts or a need for charity care, and most of them have private insurance which pays the hospital very well,” said Gerard Anderson, a hospital finance expert at Johns Hopkins University.

Concierge physicians typically limit their practices to a few hundred patients, compared with a couple of thousand for a traditional primary care doctor, so they can promise immediate access and longer visits.

“Every time we see these models expand, we are contracting the availability of primary care doctors for the general population,” said Jewel Mullen, associate dean for health equity at the University of Texas-Austin’s Dell Medical School. The former Connecticut health commissioner said concierge doctors join large hospital systems because of the institutions’ reputations, while hospitals sign up concierge physicians to ensure referrals to specialists and inpatient care. “It helps hospitals secure a bigger piece of their market,” she said.

So on the one hand, hospital concierge service pretty obviously ain't charity care.  But on the other, hospitals that have them gain associations with physician practices serving fewer charity cases and resulting in higher hospital revenues necessary to cross-subsidize charity care.  My instinct is to "tsk-tsk" the practice but I am not so sure.  Even if the worst thing the law did was to tax the concierge revenue as unrelated business income -- that would be consistent with the approach under other nondiscrimination rules, taxing just the wealthy beneficiaries without taxing everybody else --  I'm not sure doing so would be optimal if the goal is to increase charity care in particular, and community benefit broadly defined.  We probably need to get some quantitative types on this to crunch some numbers about this thing.

darryll k. jones

April 3, 2024 | Permalink | Comments (0)

Tuesday, April 2, 2024

You Take High Road, I'll Take the Low Road - and Neither One is Reasonable

Earlier today, my co-blogger Darryll Jones scooped me posted about the recent Chronicle on Philanthropy article on private foundation salaries.  Executive comp is a topic that's a bit near and dear to my heart at the moment, as I just placed an article on the topic (look for "The Fallacies Behind the Excise Tax on 'Excessive' Charity Compensation"  in the Loyola University-Chicago Law Journal, Vol. 56, Issue 1, forthcoming!)  In that article, I'm in the odd position of advocating for the repeal of Code Section 4960, the excise tax on "excessive" compensation.  It's hard defending $1.0 million plus charity salaries, but I guess someone has to do it.

Actually, ultimately what I wanted to defend - and to this extent I think Darryll and I might be in agreement, at least in some part - is that high does not equal unreasonable.  And, its corollary, low doesn't equal reasonable, either.   Section 4960 reinforces the erroneous idea that $1.0 million is some kind of bright line test for what is excessive.   The reality is that $1.0 million is pretty arbitrary and not really related to regulating compensation at all, except to the extent it follows the competely failed model of the $1.0 million public company deduction limit in Section 162(m).

The real problem here is that we just can't get comfortable with the idea that sometimes high IS reasonable.   We can't seem to get over the troublesome notion that we've all bought into -  that people should be paid less for working for a charity.  "Donative labor theory" is pernious and forces charities to underpay, under hire, and under train, to the detriment of the sector.  Nonprofits that underpay and therefore have low expense ratios are rewarded and encouraged to keep cutting - just look at the atttention paid in the Chronicle article about expense to distribution ratios.    More regulators, more media coverage, and more donor anger isn't helpful when all it does is reinforce the notion that low overhead is unreservedly and objectively good - even if it means a complete erosion of nonprofit capacity.

Oh, and by the way, plenty of excessive compensation occurs at levels below $1.0 million.  I'd venture a guess that more actually happens at that lower level.  Institutions that pay high salaries at least have the infrastructure to put the rebuttable presumption window dressing on (or its 4941 analog, for private foundations) and pay for compensation surveys.   There is at least a nod to reasonablness on the high end, while the IRS' own studies show that there is a signficant lack of compliance with even the rebuttable presumption procedures across the sector.  In that study, the IRS fund that only about half of the organizations examined even attempted to meet all three prongs of the rebuttable presumption under Section 4958.  

The real problem, of course, is definiing reasonableness in terms of comparables when the entire market - nonprofit and for profit - feels off when we aren't sure what we are exactly buying with these compensation packages.   The problem is worse for nonprofits, where the ultimate measure of value - shareholder profits - isn't a thing.   So how do we measure successful administration in a meaningful way that isn't a percentage of distributions?

Frustratedly, eww

 

April 2, 2024 | Permalink | Comments (0)

We Need a Flat Fee Requirement for Nonprofit Fundraisers

The Service should issue a revenue ruling concluding that an organization that hires a fundraiser on a contingency or revenue sharing basis categorically engages in private benefit and thereby forfeits tax exemption.  Seriously, its about time we shut this scam down.  Its hurting the charitable sector.  Even the cops are getting ripped off now.  

Two weeks ago we posted about the FTC and ten states suing a women's cancer fighting organization because all but about 1% of $18 million raised by its fundraiser went to the fundraiser.  Well, out in Aurora Colorado, the local police association hired a fundraiser to solicit charitable donations with essentially the same result.  We all know how hard it is to say "no" when the cops or firefighters come calling for donations every year. Hell, it takes everything I got just to look straight ahead when they are standing at the intersection with their buckets or firefighter boots asking for donations. But at least in that case its the actual cops or firefighters putting the guilt trip on you, not some paid fundraiser.  Here is what the Aurora Sentinel reported about recent police charitable fundraising effort in that town:  

For Aurorans who get a call asking them to support the charitable work of the city’s unionized cops, opening their hearts and checkbooks is often an easy decision to make.  But donors are likely unaware that the vast majority of contributions solicited by phone for the Aurora Police Association Charitable Foundation don’t benefit the charity’s Shop-with-a-Cop events, scholarship fund or other community service programs.

Instead, the money is pocketed by an Arizona telemarketing firm — Outreach Marketing, LLC — which since 2016 has kept more than $2.08 million in donations with the foundation’s express permission out of about $2.86 million raised, according to state and federal financial filings reviewed by the Sentinel.  The APACF’s current contract with Outreach Marketing lets the telemarketer keep as much as 72 cents of every dollar pledged over the phone by community members. In past years, Outreach Marketing was allowed to keep up to 75 cents of every dollar raised.  Nonprofit finance experts described the contract as allowing the telemarketer to take advantage of the foundation’s donors.

And then after the news report, here is what the editors said:

It’s certain that few of those who gave to the win-win Shop With a Cop proposal knew, or even suspected, that if they agreed to tap their credit card for $100, the telemarketer donation collector company on the other end of the phone got to keep as much as $75 of the donation.  It’s scandalous, but not newly scandalous.  News reports about the outrageous “commissions” levied by telemarketing companies like Outreach Marketing LLC in collecting for Shop With a Cop and other similar programs across the nation aren’t new.

What’s discouraging is that the fleecing industry continues to prey on police departments and the public without resistance. There is virtually no limit of federal, state and local governments that should immediately work to rein in one of the nation’s most prolific and persistent scams in the country. Current and former members of Congress, current and former Colorado state lawmakers and a bevy of local elected officials have worked hard to limit the damage created by dangerous “payday loan” companies. They are commercial leeches that feed off the economic blood of the poor. They continue to persist by arguing they provide a needed service. 

First off, the U.S. Department of Justice and Congress must work together to closely investigate the practices of Outreach and other charity telemarketing firms. Congress must then regulate them to create transparency, equity and reason.

 I agree with the sentiment, but getting DOJ and the Congress involved is over thinking it.  The Service can shut this thing down right now.  Let the telemarketers sue.  

darryll k. jones

April 2, 2024 | Permalink | Comments (0)

When is Reasonable Compensation Unreasonable?

President of The Rockefeller Foundation Dr. Rajiv Shah speaks during a panel discussion at the Global Citizen NOW Summit, Thursday, April 27, 2023, in New York. (Mary Altaffer, AP)

Craig Kennedy always has interesting columns in the Chronicle of Philanthropy.  But his latest column has my scratching my head.  I'm not quite sure he understands that every expose needs a shocking poster child. This column is sorely lacking, if you ask me.  It implies a lack of checks and balances on the salaries of foundation presidents and calls for more reporting and oversight of foundation salaries. 

Kennedy notes that Rajiv Shah, pictured above and headlining the article as the highest paid foundation president, makes about $1.7 million a year as the President of the Rockefeller Foundation.  That's the foundation whose headquarters are located on the most expensive block of one of the most expensive cities in the world.  With that salary, I'd be surprised if the poor fella can even afford to live anywhere east of Newark.  The second highest paid foundation president is Mark Suzman, CEO of the Gates Foundation, whose salary was nearly as much.  Seattle isn't exactly cheap either. 

I just might have expected a revelation that foundations CEOs are really really living high on the hog.  It takes a lot more than $2 million dollars to ride around on even a little pig in New York or Seattle.  Here are some excerpts:

New York-based [foundation] executives were paid more than those in Michigan, Indiana, or even California. Size of the endowment was a factor but not determinative. Indeed, at nine of the 16 foundations, the president’s salaries were within $100,000 of the $1.1 million average. That suggests great attention to how much others are paid.  These are hefty paychecks by any measure, but they’re particularly notable for foundations, since much of a president’s salary counts toward the organization’s 5 percent distribution requirement. That’s one reason why Shah’s compensation raised eyebrows. Rockefeller has unusually high expenses, including program and salary costs, accounting for 45 percent of its charitable activity in 2022, compared with 18.5 percent at Ford and 8.9 percent at Hewlett.

Increased Oversight

Certainly, the Rockefeller board would argue that its high executive compensation and program expenses are justified. But if Rockefeller was a corporation or a typical nonprofit, regulators, investors, the media, and donors would insist on concrete justification for why the president’s compensation is higher than that of other foundation leaders.

Without this oversight, measuring a foundation CEO’s impact is difficult. Federal and state regulators haven’t delved into foundation compensation issues for many years. Few stakeholders, including current and potential grantees, are willing to risk losing funding by criticizing compensation or other management practices at major foundations. And aside from the Chronicle of Philanthropy, media coverage of foundation salaries in the last year was almost non-existent.  If there are egregious abuses in executive pay, some state attorneys general will take action. That’s what happened in the case of the Otto Bremer Trust, where one of its top executives was found to have engaged in self-dealing and to have received excessive compensation. However, it takes a lot to reach the attention of federal or state officials.

I italicized and red-lettered the part that really caught my attention.  Because as long as the Board is paying attention to compensation paid for "like services by like enterprises . . .  under like circumstances" what could possibly be the problem?  Honestly, I hate being that obnoxious know-it-all lawyer at the cocktail party.  It's hard enough being that guy at home.  But Kennedy even includes a chart sorta kinda working against his thesis:

Screenshot (55)

Maybe payouts are too low and shouldn't include salaries but I'm not getting the connection. 

Darryll k. jones

 

 

 
 

April 2, 2024 | Permalink | Comments (0)

Monday, April 1, 2024

Nonprofit NIL Collectives are All Over the Place - Literally and Figuratively...

I'm updating some of the prior reporting by my co-bloggers, Benjamin Leff and Darryll Jones, on the issue of the exempt status of nonprofit NIL collectives - see Darryl's posts here and here, and Benjamin's response here.   I'm going to shamelessly block quote Benjamin's description here:

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

With the Men's and Women's college basketball tournaments in full swing,  NIL collectives are again all over the place - literally, in the news.   A March 27 article in The New York Times has a full run down on the collectives of the men's Sweet Sixteen teams.  In it's breakdown, the Times noted that a number of these teams are nonprofit, or maybe are partially nonprofit, or maybe used to be nonprofit.   As I said in the title, they seem to be legally all over the place:

  • Illinois ICON Collective is "a nonprofit, which says it gives 90% of donations to athletes for performing charity work."
  • Alabama has "both a for-profit and nonprofit side."   The article then quotes a nonprofit board member on how it spends it funds, which the board member later walked back as      it appears to violate NCAA rules.   Oops. 
  • Clemson "used to have a large nonprofit collective" which is has now shut down.  The Times goes on to say that  the IRS' position that pay athletes isn't charity, noting that position is "a warning many collectives have seemed to ignore."
  • While it is unclear whether Purdue's collective is nonprofit, it has "lined up agreements with three Canadian charities" to work with its center, Zach Edey, who is Canadian.
  • Gonzaga and Arizona are fun:  "Gonzaga’s collective is run by the B.P.S. Foundation, a tax-exempt charity that puts donor money at the disposal of for-profit collectives, letting the for-profit entities determine how money is given out. (Arizona also has a collective run by the B.P.S. Foundation.)"

The BPS Foundation angle was new to me, so I tried to look up more information on their website, here,  which says about as close to absolutely nothing as you can while still having a Donate Now button.   Here's a great article/expose from January (quoting another Nonprofit Law Prof Blogger, Phil Hackney) on BPS Foundation, describing it as "[i]n effect... serve[ing] as a donor advised fund for college sports boosters..."  BPS is affiliated with Blueprint Sports and Entertainment, a for profit organization that receives "around" a 10% service fee from the Foundation.  According to that article, BPS Foundation's exemption is from July, 2022 - I note that the Chief Counsel Memorandum discussed above is from May, 2023. (As an aside, can we look at that commercially-related DAF ruling again... ?  I'm not sure the proposed regs cover it.  It's still bad.)

From The New York Times' brief rundown, it seems clear that colleges just don't know what to do with these things, although they seem loathe to give them up (kudos to Clemson on that, I guess).  I have to say that I'm in the Darryll Jones camp in that I can't see how most of these aren't private benefit violations (I can't define it but I know it when I see it - Justice Stewart, or something...).   Back in my practice days, anytime we had private benefit or unrelated income or lobbying approaching double digits, I'd worry about the exclusively test and start talking to clients about remedial action.   I can't think of any other precedent for allowing much over that amount in non-charitable stuff before exemption becomes an issue - there's no good reason why NIL Collectives should be any different.   

With madness, outside of March, eww

  

 

April 1, 2024 in Current Affairs, Federal – Executive, In the News, Sports | Permalink | Comments (0)

Nonprofit NIL Collectives are All Over the Place - Literally and Figuratively...

I'm updating some of the prior reporting by my co-bloggers, Benjamin Leff and Darryll Jones, on the issue of the exempt status of nonprofit NIL collectives - see Darryl's posts here and here, and Benjamin's response here.    I'm going to shamelessly block quote Benjamin's description here:

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

With th Men's and Women's college basketball tournaments in full swing,  NIL collectives are again all over the place - literally, in the news.   A March 27 article in The New York Times has a full run down on the collectives of the men's Sweet Sixteen teams.  In it's breakdown, the Times noted that a number of these teams are nonprofit, or maybe are partially nonprofit, or maybe used to be nonprofit.   As I said in the title, they seem to be legally all over the place:

  • Illinois ICON Collective is "a nonprofit, which says it gives 90% of donations to athletes for performing charity work."
  • Alabama has "both a for-profit and nonprofit side."   The article then quotes a nonprofit board member on how it spends it funds, which the board member later walked back as      it appears to violate NCAA rules.   Oops. 
  • Clemson "used to have a large nonprofit collective" which is has now shut down.  The Times goes on to say that  the IRS' position that pay athletes isn't charity, noting that position is "a warning many collectives have seemed to ignore."
  • While it is unclear whether Purdue's collective is nonprofit, it has "lined up agreements with three Canadian charities" to work with its center, Zach Edey, who is Canadian.
  • Gonzaga and Arizona are fun:  "Gonzaga’s collective is run by the B.P.S. Foundation, a tax-exempt charity that puts donor money at the disposal of for-profit collectives, letting the for-profit entities determine how money is given out. (Arizona also has a collective run by the B.P.S. Foundation.)"

The BPS Foundation angle was new to me, so I tried to look up more information on their website, here,  which says about as close to absolutely nothing as you can while still having a Donate Now button.   Here's a great article/expose from January (quoting another Nonprofit Law Prof Blogger, Phil Hackney) on BPS Foundation, describing it as "[i]n effect... serve[ing] as a donor advised fund for college sports boosters..."  BPS is affiliated with Blueprint Sports and Entertainment, a for profit organization that receives "around" a 10% service fee from the Foundation.  According to that article, BPS Foundation's exemption is from July, 2022 - I note that the Chief Counsel Memorandum discussed above is from May, 2023. (As an aside, can we look at that commercially-related DAF ruling again... ?  I'm not sure the proposed regs cover it.  It's still bad.)

From The New York Times' brief rundown, it seems clear that colleges just don't know what to do with these things, although they seem loathe to give them up (kudos to Clemson on that, I guess).  I have to say that I'm in the Darryll Jones camp in that I can't see how most of these aren't private benefit violations (I can't define it but I know it when I see it - Justice Stewart, or something...).   Back in my practice days, anytime we had private benefit or unrelated income or lobbying approaching double digits, I'd worry about the exclusively test and start talking to clients about remedial action.   I can't think of any other precedent for allowing much over that amount in non-charitable stuff before exemption becomes an issue - there's no good reason why NIL Collectives should be any different.   

With madness, outside of March, eww

  

 

April 1, 2024 in Current Affairs, Federal – Executive, In the News, Sports | Permalink | Comments (0)

Tax Court's Invalidation of Conservation Easement Regs Will Shut Down DAF Guidance Too

United States Tax Court

The Tax Court is demanding the Service end its war on conservation easements and, in the process of enforcing that demand, has essentially slammed the breaks on any new administrative guidance regarding a host of other issues.  Although it took almost 20 years for the Service to announce proposed regulations on donor advised funds, we might just expect another 20 years before those proposed regulations are finalized.  Maybe not 20 years, but it is reasonable to think that the DAF regulations will now sit for a couple more years while the Service sifts through the nearly 200 comments submitted. All to comply with the Tax Court’s bad law from bad facts. 

That’s because the Tax Court decided in Valley Park Ranch LLC v. Commissioner that it is arbitrary and capricious, and thus a violation of the APA, if the Service does not consider, and address in preambles, comments “that can be thought to challenge a fundamental premise underlying the proposed agency decision. Thus, an agency should respond to significant points and consider vital relevant comments.”  The Court did a whole 180, wholly reversing itself on the exact issue it decided only 4 years ago.  The Sixth Circuit affirmed that earlier decision though the Eleventh Circuit took the opposite approach.  But faced with the very same issue, the Tax Court now decided that the Service’s failure to address and state its response to 2 of the nearly 100 comments regarding the conservation easement regulations violated the APA and rendered the regulation invalid.  Remember, there were nearly 200 comments submitted in response to the proposed DAF regulations; the comments challenge and question everything. The Court did not, and indeed probably could not define “significant” comments that are “vital” or "relevant" or that address a “fundamental” premise.  It’s a silly unworkable standard that will henceforth require that the Service respond to all comments, lest it miss one later determined to be vital, fundamental, relevant, or significant.  Thank you sir, may I have another.

The decision must be the most bizarre opinion about the driest most boring topic ever known to tax and administrative law students in the whole history of legal jurisprudence.  Even so, the opinion is the judicial equivalent of pouring sugar in Treasury’s gas tank.  It will gum up everything by encouraging antagonistic commenters to pour as much sugar in administrative guidance gas tanks as possible.      

I was on a flight from California to Connecticut – efficiently harvesting cold and flu germs that flowered like DC cherry blossoms over the weekend – so I read the opinion thrice.  What might have motivated the Tax Court’s bizarre course reversal?  I think its that the Tax Court is just sick and tired of conservation easement cases.  Here is how the Tax Court described the Service’s antipathy in that earlier case decided just four years ago:

In recent years the Commissioner has attacked a popular form of charitable contribution--the donation of conservation easements. Many of these attacks are surgical strikes on what he believes are gross exaggerations of the value of particular easements. But he has also launched three sorties--all predicated on the requirement that such easements be "perpetual"--that he hopes will cause more widespread casualties:

  • an attack on the power of donor and donee to change the terms of the easement after its contribution;
  • an attack on the retained right of the donor to add improvements to the property described in the easement; and
  • an attack on a clause commonly found in easements, particularly in the southeastern part of the country, that divides between donor and donee future hypothetical proceeds from a future hypothetical extinguishment of the easement in a way that he claims violates one of his regulations.

Surgical strikes, sorties, mass casualties, and napalm in the morning!  And then here is a Freudian slip, of sorts, from Judge Buch’s concurrence, perhaps exposing the Court's real motivation. 

The Court, indeed the tax system at large, is currently faced with a flood of conservation easement cases. In 2022 it was reported that the Court had over 425 conservation easement cases. Aysha Bagchi, Tax Court Pondering Three Options for Ballooning Easement Docket, Daily Tax Rep. (BL) (Dec. 16, 2022). A year later that number ballooned to more than 750. See Armando Gomez & Roland Barral, It’s High Time to Clear Out the Tax Court’s Easement Backlog, 179 Tax Notes Fed. 251 (2023). And with the Commissioner’s recent commitment to challenging conservation easements, that number will continue to increase.  

Judge Buch goes on to complain that the Service has attacked conservation easements even for mere “foot faults.”  I might be reading too closely between the lines, but I bet the Tax Court has just about had enough of the conservation easement cases.  The problem of course is that its solution to that fatigue might only create more uncertainty and litigation.  

darryll k. jones

April 1, 2024 | Permalink | Comments (0)

Excess Business Holdings, Newman's Own, and Patagonia's Purpose Trust

Planning With Purpose: Non-Charitable Purpose Trusts - Evercore

An interesting piece in the Financial Times (a subscription might be required) last weekend made me question whether the excess business holding tax is a good or bad thing.  I still don't quite believe the rationale behind IRC 4943.  Here is a good overview, including a discussion of the Newman's Own exception.  Here is a brief excerpt from the Financial Times:

Capitalism is built on the profit motive. So charities are not obviously appropriate owners for businesses. But foundations, which typically have dual social and commercial goals, can be successful stewards. Denmark’s weight loss drugmaker Novo Nordisk is the best known example. Support from a foundation holding 77 per cent of its voting rights allowed it to invest in the then-unfashionable area of obesity research in the 1990s. It is now Europe’s most valuable company, having made its owner the world’s biggest charitable foundation.  

Foundation-owned firms’ financial results are comparable to those of their other corporate peers, according to research by Steen Thomsen of the Center for Corporate Governance at Copenhagen Business School. They are particularly prevalent in Denmark — think Maersk and Carlsberg. Elsewhere, examples include Sweden’s Wallenberg empire, India’s Tata conglomerate, the UK’s Associated British Foods, Switzerland’s Rolex and California’s Patagonia. The latter — created in 2022 — is a rare US example, as unfavourable 1969 tax rules were only lifted in 2018.

Of course, those "unfavourable 1969 tax rules" have not actually been lifted because the Newman's Own exception is very narrow.  Patagonia is effectively owned by the Patagonia Purpose Trust and might have been structured to meet the Newman's Own exception.  The Trust owns all of Patagonia's voting stock, while the nonvoting stock is owned by Holdfast, a 501(c)(4).  But it sounds as if the family owned business is still controlled by the family.  If that is true then it would not meet the "independence" requirement of IRC 4943(g).  Instead, Patagonia invented a workaround known as a "purpose trust."

I don't know much about such things, but here is an interesting article from Beck Groff and Susan Gary.  As near as I can tell so far, if the trust income is distributed annually to the (c)(4), instead of a private foundation, the donors can achieve the same result allowed under the Newman's Own exception without giving up control, as is required under IRC 4943. The upfront cost is that the gift to the (c)(4) generates no income tax deduction.  But it generates a huge gift tax deduction.  Dollars are dollars.  

I've just never understood why tax law prohibits a thing with its right hand that is allowed by its left hand, but only to those who can afford the expense of an obscure tax strategy. I might just be talking about the different burdens imposed on multi-millionaires that are not imposed on multi-billionaires.  Anyway, Holdfast, the 501(c)(4) is tax exempt and doesn't have to worry about the private foundation excise taxes on excess business holdings. And though the gift to the (c)(4) didn't generate an income tax deduction, it saved the donor about $700 million in transfer taxes. Meanwhile, the donor doesn't have to divest itself of control as required by the Newman's Own exception.  

darryll k. jones

April 1, 2024 | Permalink | Comments (0)