Friday, January 10, 2020
The Treasury Inspector for Tax Administration issued a report on January 6, 2020 raising concerns that organizations are not properly filing notice with the IRS of their plans to operate as a section 501(c)(4) social welfare organization. TIGTA said as many as 9,774 organizations should have filed this notice but did not. The IRS disputes the problem is as significant as alleged by TIGTA, and generally did not believe it ought to pursue TIGTA's remedy of the IRS working with states to find out organizations that needed to file.
Congress promulgated new law in 2015 under section 506 of the Internal Revenue Code that requires a section 501(c)(4) organization to notify the IRS within 60 days after it has been established. Organizations must file a Form 8726 to give this notice.
A number of outlets have discussed this report so I don't want to spend much time on this. But it's hard to read these reports without thinking about TIGTA reports past. TIGTA tells IRS where it is failing. IRS admits to some, but disagrees with much, including some complex solutions that it could not possibly carry out. This is because the underlying failure has to do with a vastly underfunded IRS. The IRS must make terrible choices about where to utilize its resources. The budget simply does not allow it to operate at anywhere near an ideal level. TIGTA is an important organization, but it has blinders put on it that make it impossible for it to identify the true culprit - a Congress that will not provide the IRS the funds it needs to fairly enforce the tax laws.
Thursday, January 9, 2020
In a tax package agreed to on December 17, 2019, last year, Congress repealed a provision of the code widely known as the church parking tax. I wrote about it on Surly Sub Group when it was enacted in 2017 concerned about its massive probably unintended effect on nonprofits. It caused massive havoc in that world, and nonprofits, led by churches mounted a massive effort to get the provision repealed. It took two years, but they were successful.
Thus, even though the IRS spent significant time providing guidance on how to comply, and presumably large nonprofits around the country adjusted their parking situation dramatically, nonprofits and the IRS must now act as if none of that ever happened. Many nonprofits like universities and hospitals likely paid large 21% rate taxes on parking fringe benefits that they continued to provide to their employees.
What now? IRS needs to figure out how to expeditiously issue refunds.
Congress members just issued a letter to the IRS asking it to issue guidance as quickly as possible to let nonprofits know how to obtain these refunds.
Wednesday, January 8, 2020
Right before New Years day, Bill Gates issued some perhaps surprising end of the year reflections. Instead of focusing on the achievements he made with the Bill & Melinda Gates Foundation, he called for a need to raise taxes to manage increasing inequality.
His answer to the following question I think is important even for those, such as Gates, who clearly support charitable organizations as one solution to the world's ills. When considering why he does not just give more in taxes himself, he states: "The answer is that simply leaving it up to people to give more than the government asks for is not a scalable solution." In other words, he takes the position that voluntary organizations are not a solution to societal ills.
He still sees a role for philanthropy as a place for risk taking. He states: "managing high-risk projects that governments can’t take on and corporations won’t—for example, trying out new approaches to eradicating malaria, which is something our foundation is working on. If a government tries an idea for improving global health that fails, someone wasn’t doing their job."
Monday, January 6, 2020
The Section on Nonprofit and Philanthropy Law of the AALS hosted a panel at #AALS2020 on Sunday January 5 entitled Charitable Giving and the 1969 Act: 50 Years Later. Roger Colinvaux of the Catholic University of America, Columbus School of Law moderated the session. Professor Colinvaux provided an excellent synopsis of the Act and the historical milieu in which it took place. He also did a nice job of presenting the stakes involved then and now.
Dana Brakman Reiser of Brooklyn Law School presented her article in progress Charity Regulation in the Age of Impact. It considers the ways in which the 1969 Tax Reform Act hinders types of investing that Professor Brakman believes are natural fits for private foundations. She explores novel ways of modifying the Act in order to allow private foundations to make more mission related investments (MRIs) and program related investments (PRIs).
Khrista McCarden of Tulane University Law School presented her article in progress on Private Operating Foundation Reform & J. Paul Getty. She argues that private operating foundations that operate as art museums are too often providing little in the way of public benefits because they tend to systematically exclude lower income and minority populations. She also believes these private operating foundations are particularly subject to self-dealing abuses that neither the IRS nor states attorney general respond to in an appropriate way.
Finally, Ray D. Madoff, of Boston College Law School, presented her article in progress The Five Percent Fig Leaf examines some of what she perceives as the failure of the private foundation regime to ensure an appropriate payout amount of five percent from private foundations. She argues the allowance of three types of expenditures to count towards payout is too lenient: administrative expenses (that allow donor children to be paid well into the future for often little work), payments to donor advised funds, and PRIs.
There was active questioning and participation from the audience. These issues clearly resonate at a high level of society. These papers will be published in the Pittsburgh Tax Review in Spring 2020 along with two other papers by Ellen P. Aprill and James J. Fishman The five papers were presented at the University of Pittsburgh on November 1, 2020 as part of a symposium.
Next years AALS will be in San Francisco. I will be the chair this coming year and would be interested in any thoughts on panel ideas for next years session. The theme of the general conference is the Power of Words. Also very interested in highlighting new professors in the field. Would love to put together a new voices panel in addition to a regular panel.
Tuesday, December 31, 2019
Yesterday, I wrote that this week I would be blogging about the Mormon church's $100 billion endowment.
It's worth noting here that estimating the value of the Mormon church has been something of a parlor game for the last couple decades, at least. When I was in college, Time published a story estimating the church's wealth at $30 billion. A decade and a half later, Reuters estimated that the church owned real estate worth $35 billion and received roughly $6 billion annually in donations from members in the U.S. and Canada. And now, apparently, the church receives $7 billion in contributions annually and has an investment portfolio worth $100 billion.
So why all of the estimates? Because churches in the U.S. aren't required to file the financial disclosures that other tax-exempt organizations must file. Church finances and assets, then, can be a black box. (They don't have to be a black box--nothing in the tax law prevents churches from disclosing financial data, and some churches have chosen to be transparent. More on that in a minute.)
Monday, December 30, 2019
About two weeks ago, Religion Unplugged and the Washington Post simultaneously broke a story: the Church of Jesus Christ of Latter-day Saints (which going forward I'll refer to as the Mormon or the LDS church). In brief, they reported a whistleblower complain to the IRS saying that Ensign Peak Advisers, a tax-exempt supporting organization/integrated auxiliary of the Mormon church, was sitting on investment assets worth $100 billion. Moreover, during its 32-year existence, the whistleblower alleged, it had never made any charitable distributions, to the Mormon church or any other charitable institution.
As both someone who spends a lot of time researching and writing about the intersection of tax and religion AND as a practicing Mormon, that revelation ended up taking a lot of my time. It raises interesting and ambiguous legal questions, many of which I wrote about here.
Wednesday, December 11, 2019
James Fishman has posted The Private Foundation Rules at Fifty: How Did We Get Them and Do They Meet Current Needs? on SSRN with the following abstract:
From the earliest decades of the twentieth century private foundations were suspect organizations. They were criticized by the left as a device to allow the affluent to maintain control of their businesses without the burdens of paying income and estate taxes and to use their wealth through the foundation form to influence politics, policy and society. Those on the right charged that private foundations were used for radical political purposes such as voter registration drives and support of civil rights. There were elements of truth in both sides’ criticisms.
This article first examines the legislative process that resulted in a separate, more restrictive regulatory regime for private foundations than applied to public charities. It then discusses a contemporary flaw in foundation oversight of small foundations, those with assets under one million dollars, that are essentially unregulated because of the Internal Revenue Service’s lack of resources or interest. The article recommends legislation that may better assure these foundations are operating within the requirements of the law.
Commencing in 1916 Congress conducted several investigations of foundations. The article examines the developments that resulted in a separate, more restrictive rules for private foundations than applied to public charities. It discusses the 1965 Treasury Report that became a partial template for the private foundation legislation.
Public hostility to foundations was fomented by reports issued in the 1960s by a populist Texas Congressman, Wright Patman. A general movement for tax reform led to the 1969 hearings on private foundations that resulted in the rules and regulations that define private foundations today.
The 1969 Congressional hearings provided dramatic unexpected testimony, front page headlines and were influenced by the political atmosphere and exogenous events that became public at inopportune times such as the revelation that two sitting justices of the Supreme Court were on the payrolls of two private foundations, whose donors were of dubious respectability.
Though most of the resulting legislative strictures on private foundations had been proposed previously, the stringency of the regulatory regime was exacerbated by the political atmosphere and testimony from hearings and shocked the philanthropic community. After fifty years of experience, the Private Foundation Rules though complicated and burdensome, must be regarded as a success. They have been effective, and there have been few amendments to the original legislation. Perhaps more importantly, the legislation has eliminated the hostility that private foundations engendered in the past.
--Eric C. Chaffee
Wednesday, November 27, 2019
Loyola Law School (Los Angeles) will be hosting the 23rd Annual Western Conference on Tax-Exempt Organizations on December 5-6. Attendees will be able "to choose from more than 12 sessions on tax developments of critical importance to charities and other nonprofit organizations," with panelists including "officials from the U.S. Department of the Treasury and the IRS, plus a variety of prominent West Coast tax lawyers," and Professor and WCTEO founder Ellen Aprill.
In a significant set back for a former for-profit university, the U.S. Department of Education has decided that Grand Canyon University is not a nonprofit for the purposes of Title IV funding even though it has been recognized by the IRS as tax-exempt under Internal Revenue Code section 501(c)(3). The University had also (eventually) secured approval from its accreditor for the terms of its conversion from for-profit to nonprofit status, even given a continuing and extensive financial relationship with a for-profit company. The Department of Education found that relationship to be particularly troubling, concluding that the primary purpose of the relationship "was to drive shareholder value" for the for-profit "with GCU as its captive client - potentially in perpetuity." The University has responded with a detailed statement and a lengthy letter, signaling it plans to aggressively fight this adverse decision.
The past couple of months have been a busy time for reports, articles, and litigation relating to charitable contributions.
With respect to reports, three studies highlighted trends in charitable giving. The CAF World Giving Index 2019 reported that levels of individual giving in the world's wealthiest countries - particularly the United States, Canada, Ireland, the Netherlands, and the United Kingdom - have declined over the past ten years since the 2008 financial crisis. In the United States, the Center for Effective Philanthropy reports that declining support from small- and medium-gift givers means that charities that rely on the $428 billion (in 2018) in donations from individual donors are increasingly dependent on major donors. Finally, the National Philanthropic Trust reports that in 2018 grants from donor-advised funds totaled $23.42 billion, or roughly 5 percent of all individual giving, with $37.12 billion flowing into DAFs. (Hat tip for all three of these reports to the Philanthropic News Digest.)
With respect to articles, the Urban Institute/Brookings Institution Tax Policy Institute published a chartbook on Tax Incentives for Charitable Contributions that "explores the implications of current-law income tax incentives for charitable donations along with several alternatives for tax deductions that are more universally available." And Eric A. Kades (William & Mary Law School; pictured here) posted The Charitable Continuum, which argues that "[g]ranting a 100% deduction only for donations to the desperately poor, along with 50%, 25%, and 0% for gifts yielding progressively fewer efficiency, fairness, pluralism, and institutional competence benefits promises to deliver a socially more desirable charitable deduction."
With respect to litigation, taxpayers continue to fight (and generally lose) substantial charitable contribution deduction cases. In Presley v. Commissioner, the U.S. Court of Appeals for the 10th Circuit affirmed the Tax Court's denial of over $300,000 in claimed charitable contribution deductions based on several failures, including trying to deduct land improvement expenses in one tax year that were actually incurred in a different tax year, failure to separately list a donated mower as required on Form 8283, and failure to obtain a qualified appraisal for a donated house. In Coal Property Holdings, LLC v. Commissioner, the Tax Court denied a claimed $155.5 million conservation easement deduction on the grounds that the conservation purpose was not protecting in perpetuity, as required by statute, because the complicated transaction that created the easement meant "the charitable grantee was not absolutely entitled to a proportionate share of the proceeds in the event the property was sold following a judicial extinguishment of the easement." Finally, another conservation easement Tax Court case currently on appeal to the 11th Circuit (Pine Mountain Preserve, LLLP v. Commissioner) has attracted interest in the form of an amicus brief filed by a number of prominent academics and practitioners (including contributors to this blog Roger Colinvaux and Nancy A. McLaughlin (pictured)), as reported by Tax Analysts and Law360 (both of which require subscriptions). For the most recent summary of the many conservation easement cases, see Trying Times: Conservation Easements and Federal Tax Law (October 2019), by Nancy A. McLaughlin (Utah). The IRS also recently announced that it is increasing its enforcement actions relating to syndicated conservation easement transactions.
A federal district court struck down as unconstitutional a New York state ethics law that would have required the disclosure of donors to section 501(c)(3)s that contributed more than $2,500 to a 501(c)(4) that engages in lobbying and $1,000 or more donors to section 501(c)(4)s that spent more than $10,000 on grassroots lobbying. The law had been on hold during the three years the litigation was pending. Numerous nonprofit groups challenged the law, including Americans for Prosperity, Citizens Union (joined by its affiliated foundation), Citizens United, Lawyers Alliance for New York (joined by the Nonprofit Coordinating Committee of New York), and the New York Civil Liberties Union (joined by its affiliated foundation and the ACLU Foundation),. Coverage: Law.com; National Law Review; Times Union.
In other litigation news, a federal district court dismissed the lawsuit brought by Nonbelief Relief and supported by the Freedom from Religious Foundation challenging the exemption that churches enjoy from having to file the annual Form 990 series information return with the IRS. The grounds for the dismissal are not yet available, however, nor has the time begun to run on filing an appeal, as the court has yet to issue its final order or a memorandum opinion explaining its reasoning.
A previous post described the announcement by the now nonprofit Salt Lake Tribune that it had been formally recognized by the IRS as tax-exempt under Internal Revenue Code section 501(c)(3). Now at least two other news publications have announced plans to take the same path. The Chicago Reader, an alternative weekly paper founded in 1971, announced that it will be moving to a nonprofit model in 2020 (hat tip: Nonprofit Quarterly). And Fauquier Now reported that the weekly Fauquier Times will essentially be given to the section 501(c)(3) Piedmont Journalism Foundation, along with several other publications and their related websites.
Previous posts in this space discussed the fallout from Jeffrey Epstein's donations. But just over the past week there have been a flurry of other stories relating to both donors and donees.
At MIT, which was also caught up in the Epstein furor, the Boston Globe reports that the decision to name an auditorium after donor and energy company Shell has led to a backlash from both students and environmental activists. At the University of Pennsylvania, a plan to rename the law school to honor the $125 million gift from the W.P. Carey Foundation led to objections from alumni and students, Above the Law reports (hat tip: Nonprofit Quarterly; additional coverage: Law.com). In response, the dean announced that the law school will keep its short-form name as "Penn Law" until 2022, when it will change to "Penn Carey Law."
On the donee side, there were also several stories. Chick-Fil-A announced it would end contributions from its foundation to groups that have been criticized as anti-LGTBQ, instead limiting its 2020 donations to Covenant House International, Junior Achievement of America, and certain community food banks. This change triggered a backlash from conservatives, who issued a letter urging the company to continue its donations to The Salvation Army and the Fellowship of Christian Athletes.
Finally, two sponsors of donor-advised funds or DAFs have come under fire for recipients of their donations. Sludge reports that Fidelity Investments Charitable Gift Fund, the nation's largest charitable grantmaker (over $5 billion in 2018), in recent years distributed tens of thousands of dollars to the New Century Foundation, which is commonly described as a white supremacist group (hat tip: EO Tax Journal). On a more local level, the Charlotte Observer reports that the Foundation for the Carolinas (the sixth-largest community foundation in the United States, with $2.6 billion in assets) gave millions of dollars to prominent anti-immigration groups over the past ten years (hat tip: Nonprofit Quarterly; additional coverage: Charlotte Agenda). In both instances, the DAF sponsors appear to have only considered whether the recipients were recognized as charities by the IRS (under Internal Revenue Code section 501(c)(3)), which they are, and the Carolinas group explicitly said this was the case. But of course this begs the question of who actually controls the funds in reality.
The Miami Herald reports that the nonprofit Florida Coalition Against Domestic Violence is stonewalling a state audit that was triggered by an earlier report that the group's chief executive office was paid over $761,000 for the fiscal year that ended on June 30, 2017. While that amount might not seem high for those familiar with the top salaries at hospitals and universities, it raised eyebrows both because the group income consists almost entirely of more than $51 million in government funding (that it distributes to 42 domestic violence center) and because the compensation only reached that level after pay raises totaling over $313,000 during a two-year period. Again to the latest report, the nonprofit has refused to provide the Florida Department of Child and Families with basic financial and governance documents, leading to the Department suggesting that it will end its contracts with the organization. However, for now the existing contract extends to June 2020.
In other compensation news, AZCentral (part of the USA Today Network) reports that the Chief Executive Officer of nonprofit Valleywise Health earned a total of $25.5 million in 2017, including a one-time $17 million retirement plan payment. That means that even without taking into account this one-time payment, which came from a Supplemental Executive Retirement Plan or SERP and so presumably was earned over multiple years, that still leaves annual compensation of $8.5 million. Concern about his compensation led to a split board vote on raising his base salary, even though even with the approved increase that base salary is only $685,000 annually (with the rest of the compensation presumably reflecting bonuses and other incentives).
Tuesday, November 26, 2019
The University of Maryland Medical System is not the only charity scandal with developments this month. Here is a brief update on three other prominent ones:
- The Boston Globe reported additional, extensive details regarding the alleged purchase of Harvard University admissions through "donations" to a foundation established by the then fencing coach and other business transactions, in an echo of the Varsity Blues scandal. (Harvard dismissed the fencing coach earlier this year.)
- Journalist and writer Julie Roys reported that megachurch Harvest Bible Chapel has received a financial review from the law firm of Wagenmaker & Oberly that reveals "a massive corporate governance failure apparently developed over several years at HBC." The report traces the failure primarily to now former Senior Pastor James MacDonald, and says that he "appears to have extensively misused HBC's financial resources for improper financial benefit." In response, James MacDonald has asserted his innocence.
- Finally, the NRA is facing not only complaints from its past supporters but now a lawsuit from one of them, in addition to continuing government investigations.
Last week former Baltimore Mayor Catherine Pugh pled guilty to four counts of conspiracy and tax evasion relating to her self-published books series, Healthy Holly. Concerns arose about her sales of the books when it was reported that the University of Maryland Medical System had agreed to pay $500,000 to buy them when Mayor Pugh was on the UMMS board. Details of the federal charges brought against Mayor Pugh can be found in the DOJ press release announcing her indictment. The actual indictment is available here.
The Baltimore Sun has provided extensive, in-depth coverage of not only Mayor Pugh's dealings but also other apparent governance lapses at UMMS, including:
- Other transactions with board members.
- Disregard of term limits for board service.
- Complaints from state auditors that UMMS has "hindered" their investigation.
The scandal has led to the Maryland governor appointing 11 new members to the board, the resignation of four executives, and additional, state-imposed governance requirements, including public financial disclosures by board members.
Wednesday, November 20, 2019
There are many talks of interest upcoming at this year's ARNOVA (Association for Research on Nonprofit Organizations and Voluntary Action) annual conference this week, which is being held in San Diego. ARNOVA has long had an active and vibrant "Public Policy, Law, Regulation, and Advocacy” track, with leading international scholars of nonprofit law presenting. Here are a few of the sessions happening tomorrow (Thursday):
Public Policy Impacts on Nonprofits: Barriers, Mandates, Building Capacity to Engage, Chaired by Sasha Zarins (Lilly Family School of Philanthropy), 11 am.
Policy and Legal Constraints on Civil Society and Civic Space: China, Hungary, Israel and Turkey in Comparative Perspective, convened by Mark Sidel (Wisconsin), 2:15.
Closing or Changing Space? The Role of CSOs in Explaining Why Countries Change Laws Governing Civil Society, chaired by Anthony James DeMattee (Indiana), 4 pm
Tyler (Chief Executive Officer of Directory of Social Change) has this op-ed about the UK Charity Commission's urging charities to behave:
IT IS NOT THE JOB OF CHARITIES TO BEHAVE! (Yep, I’m a woman shouting!) Charities effect change by being disrupters, campaigners, advocates, activists. There wouldn’t be animal welfare laws without animal charities shouting; there wouldn’t be child protection laws without children’s charities getting angry; there wouldn’t be clean air legislation without health charities badgering politicians. So long as we’re not breaking any laws, it’s entirely up to us how we behave. And if we don’t get it right, we’ll be punished by our donors, supporters and beneficiaries. Their voices are way more important than those of a hectoring, ill-informed, populist, increasingly politicised commission. And we know them better than it does.
Saturday, November 9, 2019
On November 7, New York Supreme Court Judge Saliann Scarpulla ordered President Trump to pay $2 million in resitution to charity for his breach of his fiduciary duties as an officer and director of the Trump Foundation. The link attached to ordered above is the Judge's actual order. Since this is written up a lot in other places, like here by David Fahrenthold who has been the best chronicler of the Foundation, I only provide resources here for digging deeper into the case.
To fully comprehend what has happened to the Trump Foundation, President Trump, and his children, you have to read more than the order. They all entered into a series of stipulations with the NY AG Letitia James. The stipulations spell out a series of significant admissions of wrongdoing made by President Trump and his three children who sat on the board. The press release issued by the NY AG does a nice job of summarizing all that has taken place. I recommend reading all three.
If interested in seeing all of the evidence held by the NY AG you can go to the NY Supreme Court and search in the case index for the index number of the case (451130/2018). That should take you here, which if it works would save you the time of searching the case index. More information can be found from CREW who did a FOIA search that yielded the Form 4720s and checks filed by the Foundation with the IRS.
I have written about the matter on The Conversation here. In that piece I try to grapple with whether there are any situations in history that place this occurrence in proper historical context. If you get a chance to look at that, and have thoughts about the choice, let me know what you think.
Thursday, November 7, 2019
Pennsylvania bears watching on hospitals and tax exemption.
Pennsylvania's Northumberland County Board of Assessment just denied a request on October 30 for property tax exemption for some hospitals UPMC acquired a few years ago. UPMC, headquartered in Pittsburgh in the old US Steel building, bought Susquehanna’s Sunbury and Lock Haven hospitals from for-profit Quorum Health in 2016.
Apparently no specific reason was sited for the denial. From the article:
“There was testimony during the hearing that indicated that some parcels, or portions of the parcels, were utilized for purposes that likely are not exempt. UPMC felt all of the parcels were exempt,” Mr. Garrigan wrote in an email.
“When questioned by the Board, UPMC gave an indication as to the approximate breakdown of the parcels by use, but there was little documentary evidence provided at that time to backup these percentages.”
UPMC has 30 days to appeal.
The healthcare giant recently entered into a 10 year agreement with Highmark for Highmark to be allowed to use the UPMC provider network. This came on the heels of the Pennsylvania AG bringing a complaint sounding in state charitable nonprofit law to force UPMC to enter into such a relationship with Highmark.