Saturday, September 19, 2020
First, in CREW v. FEC the U.S. Court of Appeals for the D.C. Circuit affirmed a district court decision that struck down the FEC's narrow interpretation of a statute relating to public disclosure of contributor information when the recipient organization makes independent expenditures, as defined by federal election law. The FEC had taken the position that the statute only required disclosure if a contribution was earmarked to support a particular independent expenditure. The court concluded that this position contradicted the plain terms of the statute, which at a minimum required disclosure if a contribution was made to generally support independent expenditures. However, the court did not resolve whether the statute could be interpreted by the FEC to only require disclosure of contributions with this general intent or instead required disclosure of all contributions (above a modest threshold set by the statute) given to an organization that makes independent expenditures. For further analysis, see the FEC summary. For coverage, see Politico. This ruling may be especially important as the use of so-called dark money increases on both sides of the aisle.
Second, the states of New Jersey and New York quietly ended their lawsuit against the Department of Treasury seeking documents relating to the Revenue Procedure (2018-38), which initially eliminated reporting of information about significant contributors to the IRS for tax-exempt organizations other than section 501(c)(3) and 527s. That Revenue Procedure was struck down by a federal district court and eventually replaced by regulations. According to Tax Notes, the parties filed a stipulation of voluntary dismissal that provides the states are satisfied Treasury and the IRS have produced the documents requested.
Third and finally, the Washington Post reports the FEC Chairman said during an interview earlier this week that a 2017 executive order freed churches to endorse political candidates. This was in the context of criticizing Catholic church leaders for admonishing priests who appear to do exactly that. He apparently acknowledged that the so-called Johnson Amendment, which prohibits section 501(c)(3) organizations, including churches, from supporting or opposing any candidate for elected office, is still good law, but asserted that it was unlikely to be enforced. Regardless of your views regarding the wisdom or even constitutionality of the Johnson Amendment, it is a bit shocking to hear a public official and lawyer say it is okay to break the law because it probably won't be enforced against you. (Not to mention the executive order he relies upon does not actually prohibit such enforcement.)
Friday, September 18, 2020
Today the IRS released the anticipated final regulations interpreting Internal Revenue Code section 4968. That section, which Congress passed in 2017, imposes a 1.4 percent excise tax on the net investment income of colleges, universities, and other applicable educational institutions that have assets equal to or exceeding $500,000 per student, not counting assets used directly in carrying out the institution's exempt purpose.
The final regulations include a number of important modifications based on comments received. Three important changes relate to what assets are treated as being used directly in carrying out an institution's exempt purpose. With respect to intangible assets, the final regulations provide that to the extent royalty income generated by those assets would be excluded from net investment income (see below) they will be considered as used directly for carrying out exempt purposes. With respect to the reasonable cash balance that is included in assets treated as being used directly to carry out exempt purposes, the IRS dropped the 1.5 percent safe harbor from the proposed regulations in favor of allowing any reasonable method to be used to determine the reasonable cash balance amount. The final regulations also provide that one such method would be to use three months of operating expenses allocable to program services. And with respect to assets held by a related organization, the final regulations now provide that those assets can qualify as used directly to further the institution's exempt purposes if either they further the institution's exempt purposes or the related organization is a section 501(c)(3) organization and the assets are used directly to further the related organization's exempt purpose.
The IRS also dropped the requirement that institutions calculate their net investment income based on the rules under section 4940(c). The final regulations instead provide section 4968-specific rules for making this calculation. While drawing heavily from the section 4940(c) rules, the section 4968-specific rules now generally exclude from net investment income student loan interest income, student housing rental income, certain faculty and staff housing rental income, and royalty income from faculty or student generated intangible assets. However, net investment income still includes income from trademarks on the institution's logo or name and from donated or sold intangible assets. Finally, the IRS modified the final regulations to exclude from net investment income both any appreciation in net value of donated property that occurred prior to the date of donation to the institution and any gain attributable to the sale or exchange of exempt use property to the extent that property is used for the exempt purpose.
Another significant change, at least for one college, is that the IRS decided a student should not be considered "tuition-paying" both if their tuition is fully covered by grants from the institution (as was the case in the proposed regulations) but also if their tuition is fully covered by a combination of institution grants and government grants, including Pell grants and other forms of Federal and state student financial aid. This important change may help Berea College avoid application of the excise tax, which Senator Majority Leader Mitch McConnell will appreciate, although grants from other, nongovernmental parties would still render a student tuition-paying.
The IRS also modified the definition of student to require being enrolled and attending a course for academic credit from the institution and being charged tuition at a a rate that is commensurate with the tuition rate charged to students enrolled for a degree. The proposed definition had limited the definition to persons enrolled in a degree, certification, or other program leading to a recognized educational credential. In addition, the IRS clarified that to determine whether a student is "located in the United States," meaning they resided in the United States for any portion of time during which they attended the institution, may be made by the institution using any reasonable method.
There were a number of other more technical modifications that in the interest of space I will not attempt to summarize here. Also, the IRS did reject some comments on the proposed regulations. This included rejected comments that asked that institutions under common control be aggregated for purposes of applying the $500,000 per student threshold and other changes relating to the definition of applicable educational institution. The IRS also rejected comments asking to expand the definition of "assets used directly in carrying out the institution's exempt purposes" by including assets "held for use" to carry out such purposes and asking to use the concept of functionally related business to determine if certain assets fell within this definition.
The Missing IRS: States (NRA, Bremer Trustees, Outreach Calling) and DOJ (We Build the Wall, Teva) Step Up
I do not have data to back this up, but my impression is that in the past it was common to see state authorities and, more rarely, U.S. Attorney offices working closely with the IRS when investigating the activities of a tax-exempt nonprofit organization. However, it appears that recently the IRS is almost always absent from such investigations.
State Investigations: The New York Attorney General's lawsuit against the National Rifle Association and the District of Columbia Attorney General's lawsuit against the NRA Foundation are prominent examples of this apparent trend. While the N.Y. AG cited among the NRA's alleged failures a lack of compliance with IRS requirements, there is no indication that she coordinated her investigation or the filing of the lawsuit with that agency. But these are not the only recent examples.
The Minnesota Attorney General has moved to replace the trustees of the Otto Bremer Trust, a charitable trust and private foundation that owns bank Bremer Financial Corp. The basis for this move is alleged violations of the duty of loyalty by the current trustees. Presumably such violations would also be of interest to the IRS, especially since at least some of them also allegedly constituted violations of the self-dealing prohibition, but there is no indication in the news reports of the AG's actions or the lengthy memorandum filed by the AG in court that the IRS is involved. (And if the IRS had been involved, you would hope they would have corrected the AG's repeated use of "IRS Code" in that memorandum.)
It is perhaps more typical to see the IRS absent when the actions of for-profit telemarketers are at issue, as the Federal Trade Commission tends to take the lead for the federal government in such matters. This is illustrated by the recent case brought by the FTC and several state attorneys general to shut down Outreach Calling, Inc. and several other companies for having "allegedly scammed consumers out of millions of dollars." It should be noted that the Center for Public Integrity highlighted the questionable activities of Outreach Calling and individuals associated with it more than two and a-half years ago. But the involvement of the FTC when matters within its jurisdiction arise only emphasizes the IRS absence in matters squarely implicating federal tax laws as well as state charity laws.
Department of Justice Investigations: The IRS also appears absent from two recent investigations by the Department of Justice. The most prominent one involves criminal charges against former senior advisor to President Trump Steve Bannon and others associated with an Internal Revenue Code section 501(c)(4) nonprofit We Build the Wall, Inc., formed to fund the building of a border wall between the United States and Mexico. The investigation was pursued by the U.S. Attorney's Office for for the Southern District of New York. While the allegations relate to alleged lies made to donors about the use of the funds raised, some of the actual uses of those funds - compensation and payment for personal expenses - may have tax ramifications for both the organization and the individuals involved. Yet there is no indication in the indictment or otherwise that the IRS is involved. This is despite the fact that the U.S. Postal Inspection Service was involved in the arrest of Bannon, presumably because one of the charges is mail fraud.
In a case a bit more removed from federal tax law, the Department of Justice's civil division has filed a False Claims Act complaint against two affiliated pharmaceutical companies, Teva Pharmaceutical USA Inc. and Teva Neuroscience Inc. relating to donations to charitable foundations. The allegations are that Teva used the foundations "as conduits to funnel kickbacks to Medicare patients." The announcement of the filing does not indicate any involvement by the IRS, including with respect to investigating the foundations involved. Coverage: Wall Street Journal. An earlier news story involving allegations of similar arrangements with other companies reported multi-million dollar payments to the federal government by the charities involved to resolve the claims against them, but again did not mention IRS involvement, nor did the DOJ announcement of that settlement.
Thursday, September 17, 2020
Congress Update: Syndicated Conservation Easements, NRA, and Proposed Expansions of Above-the-Line Donation Deduction
More Slamming of Syndicated Conservation Easements: As the IRS continues its court battles and settlement program relating to syndicated conservation easements, the Senate Finance Committee released a lengthy bipartisan report criticizing these transactions. The introduction includes this passage:
The syndicated conservation-easement transactions examined in this report appear to be nothing more than retail tax shelters that let taxpayers buy tax deductions at the end of any given year, depending on how much income those taxpayers would like to shelter from the IRS, with no economic risk. Although the various offerings differ in their specifics, the general outcome is the same: for every dollar a taxpayer pays to a promoter to become an "investor" (or a "partner" or a "member") in a syndicated conservation-easement transaction, he or she commonly purchases a little more than four dollars' worth of tax deductions. For most taxpayers involved, this ultimately means that for every dollar paid to tax-shelter promoters, the taxpayers saved two dollars in taxes they did not pay.
Calls for IRS to Investigate the NRA: In the wake of the New York Attorney General seeking dissolution of the National Rifle Association, Democratic members of the House Ways & Means Committee have called for the IRS to also investigate the section 501(c)(4) organization and its related, section 501(c)(3) foundation. Of course it remains to be seen whether the IRS will do so, regardless of who wins the November presidential election. Additional coverage: Mother Jones (including a link to the letter).
Universal Giving Pandemic Response Act: A bipartisan group of nine Senators are sponsoring S.4032, which would expand in two ways the temporary above-the-line deduction for charitable contributions included in the CARES Act and codified in Internal Revenue Code section 62(a)(22). One expansion would be the amount, increasing it to half of the taxpayers standard deduction up from $300; the 2020 standard deduction is $12,400 for single taxpayers and $24,800 for married taxpayers filing jointly. The other would be the time window for contributions, extending it back from January 1, 2020 (for calendar year taxpayers) to January 1, 2019, with amended returns permitted for taxpayers who did not itemize their deductions in 2019. However, passage appears highly unlikely, especially with the apparent failure of new coronavirus relief legislation.
DAF Donor Prevails: In Dickinson v. Commissioner, the Tax Court rejected an attempt by the IRS to recharacterize donations of appreciated stock in a privately-held company to a donor-advised fund followed by the redemption of that stock as a redemption of the stock from the donor followed by donations of the proceeds (resulting in taxable gain to the donors). The Tax Court granted summary judgment to the donor (and his spouse), and denied the government's motion for summary judgment, even though the donor and the board of directors of the privately-held company knew at the time the board authorized each donation that the DAF sponsoring organization (the Fidelity Investments Charitable Gift Fund) had procedures requiring the immediate liquidation of donated stock.
The court found that the uncontradicted evidence established that the donor had transferred all of his legal rights in the donated stock to the sponsoring organization. The court further held that the donor was not obligated to redeem the donated stock if the donations had not occurred, and also that the government did not allege that the donor had a right to redemption at the time of donation and so Revenue Ruling 78-197 was not applicable even if the court were to follow it. It therefore concluded that the form of the transaction controlled. For a detailed analysis of the case by Bryan Camp (Texas Tech School of Law), see this TaxProf Blog post.
Charitable Class Failure?: In The Korean-American Senior Mutual Association v. Commissioner, the Tax Court upheld the revocation of tax-exempt status under Internal Revenue Code section 501(c)(3) for failure to operate exclusively for exempt purposes. The organization (KASMA) offered paid memberships to anyone who was 55 to 90 years old residing in the New Your City area and in return paid a certain amount toward the member's funeral expenses when they died, along with a separate amount directly to the deceased's family according to a Korean tradition. Membership in the organization was not limited to Korean-Americans, despite its name.
The court concluded that while KASMA was formed to benefit the elderly, the elderly are not a recognized charitable class unless aid to them is designed for their special needs by, for example, providing goods or services at substantially below cost or without regard to an individual's ability to pay. Since KASMA only provided benefits to its dues-paying members, it did not satisfy this requirement or serve the distinct charitable class of the poor. This is an interesting analysis, since it would seem that the elderly (even limited to the NYC area) are an indefinite and large enough group to be considered a charitable class, so the lesson here is more along the lines that serving a charitable class by itself is not always sufficient to constitute operating to further a charitable purpose. The court also held that KASMA operated in a commercial manner and did not serve a public interest because it primarily benefited its members, and that the IRS was not equitably estopped from revoking KASMA's tax-exempt status because of the IRS' previous recognition of that status when KASMA first applied. The revocation was prospective from the date that the IRS Appeals Office issued a final adverse determination.
IRS Update: Draft Form 990-T, Form 990-PF, and Form 990 Schedules, More COVID-19 Accommodations, and Waiting on Final Regs
It appears that a combination of the pervasive coronavirus fatigue and pressing tax matters in others areas has slowed down the flow of new IRS developments for tax-exempt organizations. That said, here are some recent items:
- Draft Form 990-T and Form 990 Schedules: The IRS has released an early release draft of the 2020 Form 990-T and the draft Schedule A for that form. While there are not draft instructions available yet, it appears that each filer will need to complete a separate schedule A for each separate trade or business, given the siloing requirement of Internal Revenue Code section 512(a)(6). Hat tip: EO Tax Journal. I also noticed that there are now draft versions of the 2020 Form 990-PF (with instructions) and most if not all of the 2020 schedules for the Form 990 available on the IRS Draft Tax Forms webpage.
- COVID-19 Accommodations: While the extended deadlines for Form 990 and many other filings have now expired, the IRS has put in place other, less broad pandemic-related accommodations. For example, Notice 2020-56 extends the deadlines for tax-exempt hospitals to conduct community health needs assessments and implement strategies to meet those needs, as requried by IRC section 501(r). The IRS also continues to follow modified procedures relating to exams, including information document requests. And under Revenue Procedure 2020-29, the IRS is generally allowing the electronic submission of requests for letter rulings, closing agreements, and other documents.
- Anticipating Final Regs: The Office of Management and Budget last week completed its review of the IRC section 4968 investment income tax final regulations (see proposed regulations and comments), so public release of those regulations is imminent. No reports yet on the status of the IRC section 4960 compensation tax final regulations (see proposed regulations and comments). But if you are bored, you can always take a look at the final regulations under IRC section 170 relating to the SALT deduction limit, which school choice groups report will hurt their ability to use state tax credit programs to stimulate fundraising.
Thursday, September 10, 2020
When singer, actress, and animal welfare activist Doris Day (born Doris Mary Anne Kappelhoff) died in May 2019 at the age of 97, she left almost all of her estate to the Doris Day Animal Foundation. Accordingly, the proceeds of the sale of Ms. Day's Monterey, CA, home -- listed recently for $7.4 million -- will go to the Foundation. The house sits on nine acres and includes a kitchen that Ms. Day dedicated to just cooking for her dogs.
Word of Ms. Day's pampering of rescued animals is legendary. As I have already noted, she cooked for dogs in a kitchen specially built for them. In an article published last week, the Wall Street Journal quoted people familiar with the situation saying that at some point, Ms. Day had as many as 50 dogs on the property.
Ms. Day was well known for her animal rights work and fundraising for that cause. She founded the Doris Day Animal Foundation (DDAF) in 1978 as the Doris Day Pet Foundation with a mission to help animals and the people who love them. As a grant-giving charity, DDAF funds other 501(c)(3) organizations throughout the United States that directly care for and protect animals.
The NonProfit Times reports that Ms. Day formed the Doris Day Animal League (DDAL) in 1987. The League was a national, nonprofit citizens' lobbying organization whose overriding mission was to reduce the pain and suffering of animals through legislative initiatives, education, and programs to develop and enforce statutes and regulations protecting animals. In 1995, Ms. Day and DDAL founded Spay Day USA. It is now known as World Spay Day and is under the auspices of the Humane Society of the United States.
In 2007, DDAL merged with the Humane Society of the United States, and the Doris Day Pet Foundation evolved into the Doris Day Animal Foundation, with which Ms. Day was active until her death last year. The Foundation now stands to receive millions from Ms. Day's estate.
Now that's a heart-warming story -- not only for animal lovers but for all humanity.
Vaughn E. James
Organizations making pledges and commitments for social causes continue to be in the news. The latest to jump in: the Boston Celtics and Boston Celtics Shamrock Foundation have announced that the two organizations are making a ten-year, $25 million commitment to address racial injustice and inequities in the greater Boston area.
This commitment is itself part of a larger effort announced by the National Basketball Association in August. The Celtics' initiative will be termed The Boston Celtics United for Social Justice. According to today's Philanthropy News Digest, the initiative
includes $20 million in cash and $5 million in media and in-kind assets in support of both the NBA's efforts and local programs, with a focus on six areas identified by the organization in discussions with community leaders and players: equity in education, economic opportunity and empowerment, equity in health care, criminal justice and law enforcement, breaking down barriers and building bridges between communities, and voting and civic engagement.
The Digest continues:
Planned projects under the initiative include creating an early-education center for low-income families; providing pro bono services to minority-owned businesses; assisting juvenile offenders through workforce development and academic completion opportunities; expanding The Playbook Initiative, the team's bias-prevention curriculum; and promoting voter registration and the importance of voting.
In discussing the initiative, Celtics forward, Jaylen Brown, stated, "Our goal is to have a direct impact now. We don't need to pacify the situation with empty gestures. We need to hold ourselves, the Celtics organization, and the City of Boston accountable. Monetary commitment is a great first step, but we need to commit to this process by creating a balance of short- and long-term change. The time is now."
I fervently agree.
Vaughn E. James
Wednesday, September 9, 2020
Today's Philanthropy News Digest is reporting that as part of a four-year, $1 billion pledge announced in June to advance racial equality and economic opportunity, Bank of America has announced commitments totaling $300 million.
The commitments include support for initiatives across ninety-one U.S. and global markets in four areas: $25 million for jobs initiatives in Black and Latinx communities, $25 million in support of community outreach and initiatives, $50 million for direct equity investments to minority depository institutions (MDIs), and $200 million in proprietary equity investments in minority entrepreneurs, businesses, and funds.
According to the Digest,
The $25 million for jobs initiatives will support up-skilling and reskilling programs for African-American and Latinx students through partnerships with eleven community colleges and ten public historically black colleges and universities (HBCUs) and Hispanic-serving institutions (HSIs). Recipients include North Carolina A&T State University, Atlanta Technical College, Dallas College-El Centro Campus, and Arizona State University -- Downtown Phoenix. The $25 million in support of community outreach initiatives includes funding to address needs and provide personal protective equipment in underserved and minority communities disproportionately impacted by the current COVID-19 public health emergency. The $50 million for direct equity investments in MDIs -- which includes awards of capital to First Independence Corporation in Detroit, Liberty Financial Services, Inc. in New Orleans, and SCCB Financial Corp. (parent company of Optus Bank) in Columbia, South Carolina -- will provide support for small business lending, housing creation, neighborhood revitalization, and other banking activities. Details of the $200 million proprietary equity investments will be announced at a later date.
According to Bank of America CEO Brian Moynihan, "These initial investments will address access to jobs and support for small businesses by creating more pathways to employment in communities of color and more support for minority entrepreneurs."
Vaughn E. James
Friday, September 4, 2020
On September 4, 2002, the Pennsylvania Orphan's Court issued a temporary restraining order prohibiting the sale of some of the investments of Hershey School. Hershey School was founded 110 years ago by Milton and Catherine Hershey of Hershey Chocolate fame with a $60 Million trust. The endowment currently stands in excess of $12 Billion. The school provides free education and room and board to children of low-income families; the average family income of children enrolled at the school is $21,000.
As of 2002, the vast majority of the School's endowment was invested in stock in Hershey foods. In fact, the school controlled 77% of the food conglomerate's shares. In the interest of diversifying the investment, the board of directors of the School sought to sell a large portion of its stock in the Hershey Foods. The Pennsylvania Attorney General filed suit, seeking to stop the sale, pointing to "adverse economic and social impact against the public interest if a sale of Hershey Foods Corporation takes place, particularly in its effect on employees of the Corporation and the community of Derry Township."
On September 4, 2002, a judge enjoined the sale. The judge rejected the School's interest in diversifying its assets, concluding that the School did not have any legal obligation to diversify assets. The judge further rejected the School's argument that delay of the sale would cause significant harm. Finding that the Attorney General's asserted harm was significant, and the School did not justify a need for the sale, the sale should not take place while litigation proceeded.
The School filed an appeal, but in vain. The Commonwealth Court left the injunction in place, reasoning:
The Trust argues that the Attorney General has no authority to prevent an otherwise lawful disposition of trust assets under the guise of protecting the public. This underlying legal issue, while important, is not the focus of our review. Rather we must review the record to determine whether the trial court had the "apparently reasonable grounds" required to support its decision. A review of the record and Judge Morgan's opinion does not immediately convince us no apparently reasonable grounds exist to support the order as one that restores the status quo, prevents the immediate and irreparable harm that would result if the Trust proceeded with a sale of its controlling interest in Hershey Foods before the issues raised by the parties are resolved, and prevents a greater injury than what might result if the injunction were denied.
The sale did not go through, and the trustees of the School were removed. Evelyn Brody’s article covers this case and its implications in depth. As Professor Brody notes, local leaders were outraged with the sale, but thrilled with the Attorney General’s intervention. Among the best quotes from community leaders:
"I don't see why a town should be ruined so underprivileged kids can be privileged."
"Our cash cow is safe; we're feeling really great… But there's still a lot of interest in getting rid of the Hershey trustees for ever trying this in the first place."
Thursday, September 3, 2020
In response to the New York Attorney General's suit seeking dissolution against the National Rifle Association, David Cole (Legal Director, ACLU) penned a Wall Street Journal op-ed (paywall) entitled "NRA has a Right to Exist." At Volokh Conspiracy, Jonathan Adler (Case Western Reserve) agrees: "Cole is correct. If specific NRA officials have abused their positions they should be removed. If they committed crimes, they should be prosecuted. But the ability of the NRA's members to associate and pursue their political priorities should not be impaired due to the malfeasance of NRA officials."
Friday, August 28, 2020
A bill introduced on the floor of Congress June 22nd is attracting bipartisan approval and could signal a significant change in how taxpayers choose to do their deductions this year. The Universal Pandemic Response Act, proposed by republican senator James Lankford of Oklahoma, would increase the limit for above-the-line charitable deductions to one third of the standard deduction. Breaking the matter down to hard numbers, this piece of legislation would increase the charitable deduction from $300 to $4,133 for individual taxpayers and $8,267 for taxpayers filing jointly. This proposal would be a significant expansion on what has traditionally been a relatively small available deduction for taxpayers: perhaps cognizant of this, the law is set to have a short lifespan and would only extend to the end of this tax year, though it will also allow for amended 2019 tax returns with contributions made before July 15th. Though the bill originated from the right side of the Senate, the bill has gained bipartisan support as democratic senator Chris Coons of Delaware allied with senator Lankford to rally both political parties to pass the bill. With the global financial turmoil which has followed in the wake of the COVID epidemic Americans nonprofits stand to suffer as much as, if not more than, their for-profit counterparts. Perhaps the passage of this proposed legislation will incentivize American taxpayers to lend some more support to nonprofit organizations during this time of crisis.
To view the proposed law, see the following official link from Congress: https://www.congress.gov/bill/116th-congress/senate-bill/4032
By David A. Brennen, Professor of Law at the University of Kentucky
Thursday, August 27, 2020
In a tumultuous summer that saw the temporary closing down of the Internal Revenue Service, it is worthwhile to revisit important tax legislation from the prior summer in a time before the COVID epidemic turned the world upside down: namely the Taxpayer First Act. With the passage of this law, entities wishing to file tax exemption forms 990 and 8872 will soon be required to file those forms electronically, rather than on paper as has been historically accepted. While a number of measures have been put into place which will delay the enforceability of this act for nonprofits with asset values beneath certain totals, this law marks a noteworthy shift in tax-exempt organizations’ visibility to the public at large.
The reason for this lies in the fact that the act will require the IRS to make all electronically filed returns from tax-exempt organizations available to the public in the near (yet unspecified) future. With all returns now being electronic, persons wishing to investigate nonprofits will no longer have to endure the unwieldy process of submitting written requests to the IRS, which will in turn significantly speed up how rapidly the desired information can be accessed. Given the recent scandal of the New York Attorney General seeking to dissolve the National Rifle Association over allegations of extreme levels of fraud and misuse of organizational funds, it may well be a good idea to implement a law that will serve to make the financial status of nonprofit organizations increasingly transparent to their members as well as taxpayers at large.
For information regarding the act, see the following link on the IRS’ website: https://www.irs.gov/taxpayer-first-act#:~:text=Generally%2C%20the%20legislation%20aims%20to,and%20enhance%20its%20cyber%20security.
By David A. Brennen, Professor of Law at the University of Kentucky
Wednesday, August 26, 2020
The 11th Circuit recently ruled on a case which might prove relevant on a far larger scale. On July 7th this summer, Judge William Thomas held that the Opa-Locka Community Development Corporation’s (Opa-Locka) right of first refusal could be exercised against the attempted sale of Aswan Village, an affordable housing project that Opa-Locka financed as a nonprofit corporation. The controversy of the case revolved primarily around whether an affiliate of HallKeen Management, the owner of Aswan Village, triggered Opa-Locka’s right of first refusal and thus had to allow Opa-Locka to purchase the housing project at well-below fair market value by sending a letter to Opa-Locka indicating their intent to sell Aswan Village to a third party. Under IRC 42(i)(7) of the United States Code, a qualified nonprofit corporation such as Opa-Locka can automatically insert itself into the sale of an affordable housing project ahead of other interested buyers. The 11th Circuit held that, absent more specific language in Opa-Locka’s contract containing its right of first refusal for Aswan Village, HallKeen’s indication of its intent to sell via a letter was sufficient to trigger Opa-Locka’s right of first refusal.
The immediate case is interwoven into a far broader national tapestry: demand for affordable housing options is high, and the availability of that housing could come under threat as for-profit companies seek to capitalize on market values for these areas which have risen steadily higher. Whether the 11th Circuit’s stance strongly favoring nonprofit corporations’ defense of these low or fixed income housing areas will stand remains to be seen, as the firm representing HallKeen filed a motion in Miami-Dade circuit court at the end of July to have the order set aside.
For information on the case and its potential broader implications, see: https://www.prnewswire.com/news-releases/local-court-win-is-a-victory-for-affordable-housing-communities-nationwide-301091845.html
By David A. Brennen, Professor of Law at the University of Kentucky
Tuesday, August 25, 2020
On August 6th, New York attorney general Letitia James filed suit to dissolve the National Rifle Association, a powerful nonprofit quartered in New York. A 501(c)(4) tax-exempt organization, the NRA has stood for the protection of American second amendment rights since 1871: today, its leadership stands accused of seriously abusing organizational coffers and fraudulently concealing their actions. Attorney general James alleges in her complaint that the NRA at large instituted a culture of backroom dealing and illegal behavior which has resulted in the complete waste of millions of dollars in assets. As a tax-exempt charitable corporation, the NRA is required to use its resources to serve its members’ interests and advance its mission. James further asserts that the NRA’s internal policing mechanisms and boards routinely failed to put a stop to this illegal behavior, which is part of the reason why the attorney general now calls for complete dissolution of the organization.
In addition to attacking the organization at large, attorney general James lists in her complaint four individuals in the NRA’s leadership: the organization’s executive vice president, former treasurer/CFO, former chief of staff, and general counsel. James’ complaint includes an impressive amount of evidence indicating that these men channeled colossal sums of NRA resources into lavishing benefits on themselves and those closest to them. If successful, the attorney general’s suit will serve as a powerful reminder that no nonprofit organization, no matter how venerable its history may be, is above the fiduciary duties it owes to its members or its reporting duties to federal and state governments alike.
By David A. Brennen, Professor of Law at the University of Kentucky
For the attorney general's press release see:
The IRS hinted in June at further modifying an excise tax on highly-compensated employees of for-profit companies who also volunteer a portion of their time for nonprofit organizations. Section 4960, added to the Code in late 2017, imposed a significant tax on excess compensation to the five highest-paid officers of a nonprofit organization. Interpretation of this statute became the subject of debate in 2019 with the IRS’ release of 2019-04 I.R.B. 403 - a guidance on how to calculate taxes or liability under §4960. In that guidance, the IRS stated that the for-profit business employing an executive officer who also volunteers with or works for a tax-exempt business could be liable for the excise tax if the for-profit and tax-exempt businesses were deemed “related.” Following concerns voiced by commenters, the IRS proposed on June 11th of this year a possible exception to the definition of the five highest-paid employees of a tax-exempt organization. The §4960 exception applies if someone working with a tax-exempt organization works a number of hours no more than 10% of their total hours worked with related organizations that year and isn’t paid for their work with the tax-exempt organization. It appears that the IRS heeded industry concerns. Indeed, if for-profit companies don’t fear being held liable for an unexpected excise tax, then those for-profit companies will be more likely to allow their highly compensated employees’ dedicate spare time lending their valuable skills to tax-exempt organizations.
For the IRS' published proposal regarding this rule, see: https://www.federalregister.gov/documents/2020/06/11/2020-11859/tax-on-excess-tax-exempt-organization-executive-compensation
By David A. Brennen, Professor of Law at the University of Kentucky
Thursday, August 20, 2020
I posted a new article on SSRN today that will be published in the Pitt Tax Review soon. This is an introduction to the symposium Pitt Law hosted back in November 2019 before the Covidian times on the 1969 Tax Act and Charities. I will post the link to the issue as soon as it goes live. It includes contributions from Ellen Aprill, Jim Fishman, Dana Brakman Reiser, Ray Madoff, and Khrista McCarden.
"Fifty years ago, Congress enacted the Tax Reform Act of 1969 to regulate charitable activity of the rich. Congress constricted the influence of the wealthy on private foundations and hindered the abuse of dollars put into charitable solution through income tax rules. Concerned that the likes of the Mellons, the Rockefellers, and the Fords were putting substantial wealth into foundations for huge tax breaks while continuing to control those funds for their own private ends, Congress revamped the tax rules to force charitable foundations created and controlled by the wealthy to pay out charitable dollars annually and avoid self-dealing. Today, with concerns of similar misuse of philanthropic institutions to further wealthy interests, it is worthwhile to reconsider this significant legislation fifty years later.
Natural questions arise. What was the goal of Congress with respect to charity and with respect to tax? Did it accomplish these goals? Are those goals still relevant? What goals might suggest themselves today? Do we have the ability to modify the law to support those new goals? On November 1, 2019, the Pittsburgh Tax Review hosted a symposium to examine the 1969 Tax Act."
The conclusion is kind of the kicker:
"As I reflect on this symposium that took place in 2019 before the origination of COVID-19 and the racial justice revolution ignited by the killing of Mr. George Floyd in Minneapolis, I think about the great potential of well-democratically-harnessed philanthropy and seriously doubt that can be accomplished within the space of “private” philanthropy. I lean strongly
towards eliminating tax benefits for this private “philanthropy” by denying tax exempt status to those organizations that are not public charities.
Why do I say this? Fundamentally, I believe the effort of philanthropy should not be publicly supported if it is not collectively determined. To me, Professor McCarden makes the beginnings of a persuasive case that the values inculcated and supported through the private foundation system are likely predominately exclusive ones rather than public ones. I think that lack of a public nature should matter. Oddly, the private foundation tax architecture not only supports these wealthy exclusive preferences, but as Professor McCarden points out, it forces the private foundation to spend a lot of money every year into the future furthering those preferences of the wealthy. To be clear, the problem with this form of philanthropy is not that it might support abstruse interests such as senators complained about with respect to the Mellons, but that it works to provide significant and lasting governmental benefits to the private, perhaps well meaning interests, of people simply because they happen to be wealthy. The private foundation tax architecture provides this support, lifts these efforts up, in the name of supporting collective efforts, but they are far from collectively led.
I believe deeply in the power of a fiercely independent and courageous civil society that empowers the voices of all in our communities, particularly those voices that have been and continue to be disempowered. But, the private foundation tax architecture even at its best likely can never really support such a vision because it is defined privately. And, as Professor Aprill shows, the lack of IRS enforcement capability likely makes this architecture weak anyway and unlikely to be able to ever ensure such a democratically based vision. The private foundation community is imbued with some important social justice voices such as Darren Walker of the Ford Foundation and Elizabeth Alexander of the Mellon Foundation.
Still, I believe its predominate ethic is that of Carnegie from The Gospel of Wealth: that the wealthy man is the savior of the rest of us, both in terms of their ability to invest their dollars and to spend them in ways that improve all lives. I think that wrong and harmful. That vision is not just antithetical to democracy, but it is antithetical to racial, gender, sexual orientation, and social justice. Given this, I think we ought to eliminate tax benefits for the private foundation form."
Appreciate comments good and bad on this one.
By: Philip Hackney
Tuesday, August 18, 2020
A few weeks ago a federal grand jury indicted the Speaker of the House of Representatives of the State of Ohio, Larry Householder, along with 4 other individuals and a social welfare organization called Generation Now, exempt under section 501(c)(4) of the Internal Revenue Code, for engaging in a bribery scheme to pass legislation regarding nuclear energy that was worth about $1 billion. It involved approximately $60 million in bribes.
I was not blogging at the time, so writing this up after the announcement, but in my opinion this was a major indictment of the decision of the IRS to eliminate donor disclosure for dark money organizations like 501(c)(4) and (6) organizations. Disclosure of these dollars that the indictment alleges to be bribes could have very well alerted the IRS to a potentially problematic scheme. Additionally, there would have been the potential of asserting a false statement on the Form 990 filed by the social welfare organization.
The evidence is particularly indicative that unscrupulous folk may see dark money organizations as an easy method of laundering money now: "In March 2017, Householder began receiving quarterly $250,000 payments from the related-energy companies into the bank account of Generation Now. The defendants allegedly spent millions of the company’s dollars to support Householder’s political bid to become Speaker, to support House candidates they believed would back Householder, and for their own personal benefit. When asked how much money was in Generation Now, Clark said, “it’s unlimited.”"
In the Criminal Complaint, U.S. v. Matthew Borges, Case No. 1:20-MJ-00526 (July 16, 2020) on page 15 there is the following evidence: “Clark discussed with Householder, the use of a 501(c)(4), controlled by Householder, to receive payments: “what’s interesting is that there’s a newer solution that didn’t occur in, 13 years ago, is that they can give as much or more to the (c)(4) and nobody would ever know. So you don’t have to be afraid of anyone because there’s a mechanism to change it.”
This one is worth following and contemplating as we conceive of better policy to govern our nonprofit tax exempt sector.
By: Philip Hackney
Monday, August 17, 2020
On August 6, 2020, the New York Attorney General Letitia James filed a complaint against the NRA seeking restitution from officers and directors, removal of officers and directors, and the dissolution of the nonprofit organized in New York in 1871. While it looks like few think the suit for restitution and removal wrong, many are criticizing the AG for bringing the dissolution action.
I think she was right to bring the dissolution action, but I doubt a court will grant it, and I think that is all fine.
The AP provided a good rundown of the case and immediate reactions.
Last year when leadership in the NRA was in disarray and widely predicting that the misuse of the nonprofit by its officers and directors could lead to its dissolution, I wrote that this was highly unlikely:
"At the same time, I think it’s possible that the New York authorities investigating the group might remove officers and members of its 76-member board of directors. There is even a slight possibility, as NRA CEO Wayne LaPierre warned in a fundraising letter, that New York authorities could cause the NRA “to shut down forever.” But I doubt it."
Ruth Marcus has questioned the NY AG.
The NRA has filed a lawsuit challenging the AG action on many grounds including first amendment grounds, defamation, and procedural grounds trying to nullify the dissolution action. Asher Stoker has a nice tweet thread explaining why the procedural effort was unlikely to work. The NY AG amended its complaint to comply with the strict requirements of filing a dissolution.
The AG lays out the basis for dissolution on page 138-39 of the complaint:
- Under N-PCL § 112(a)(5), the Attorney General is authorized to maintain an action or special proceeding to dissolve a corporation under Article 11 (Judicial dissolution).
- Under N-PCL § 1101(a)(2), the Attorney General may bring an action seeking the dissolution of a charitable corporation when “the corporation has exceeded the authority conferred upon it by law, or … has carried on, conducted or transacted its business in a persistently fraudulent or illegal manner, or by the abuse of its powers contrary to public policy of the state has become liable to be dissolved.”
Here is the N-PCL.
Many question the AG's partiality because she is a Democrat and so vocally stated she would investigate the NRA during her campaign, and called it a terrorist organization.
I encourage everyone to read the complaint. When you read the allegations of a long running, substantial, and extensive fraud on the members of the NRA, I am left wondering when the AG may use the dissolution provision that is in New York nonprofit law, if she does not use it now.
Importantly, and I think interestingly for the process, the New York statute states that the AG “may” bring a dissolution action under these circumstances. But, the judge then still has to decide.
N-CPL 1109 tells the judge what to take into consideration. It says:
(a) In an action or special proceeding under this article if, in the court's discretion, it shall appear that the corporation should be dissolved, it shall make a judgment or final order dissolving the corporation.
(b) In making its decision, the court shall take into consideration the following criteria:
(1) In an action brought by the attorney-general, the interest of the public is of paramount importance.
(2) In a special proceeding brought by directors or members, the benefit to the members of a dissolution is of paramount importance.
(c) If the judgment or final order shall provide for a dissolution of the corporation, the court may, in its discretion, provide therein for the distribution of the property of the corporation to those entitled thereto according to their respective rights. Any property of the corporation described in subparagraph one of paragraph (c) of section 1002-a (Carrying out the plan of dissolution and distribution of assets) shall be distributed in accordance with that section.
It seems to me that the appropriate way for this process to play out is for the AG to bring the dissolution action. She should present the evidence for that claim. It may be that the power structure associated with what we consider the NRA today is so impossibly entangled with the wrongdoers that it would be impossible for the NRA to be reformed to actually further the mission of the NRA. If that is the case, dissolution is the answer. I am just skeptical that this is the answer.
Though I do not believe in the same ideological beliefs that the NRA seeks to further, I do believe a robust defense of the Second Amendment should be a part of American life. I think the large membership is entitled to an organization that honestly and fairly furthers that mission. I believe we are better off in a world where the folks that believe in that right have good representation. Because of that, I find it hard to believe it will be impossible to reform the entity with that substantial membership in mind. That said, I think it possible the AG could prove her case. I think she should be allowed the respect to bring that forward. I think we will be better for it, including especially those who are conservatives. AG James is insisting on a rule of law. We should all be grateful to her for that commitment.
I shared my general thoughts with BBC World Tonight on the day the complaint was filed. You can listen to those starting at about 27:45 in on this link.
Many have wondered whether the NRA can just move out of New York to avoid the problem. The NY AG has the direct answer by tweet. No.
It is also worth watching the DC AG complaint against the NRA Foundation.
If you want a deep and rich understanding of the matter of the NRA I highly recommend the Gangster Capitalism podcast on the NRA.
Thursday, August 6, 2020
Putnam Barber, Megan Farwell, and Brian D. Galle have posted Does Mandatory Disclosure Matter? The Case of Nonprofit Fundraising to SSRN. Here is the abstract:
Do small-dollar donors seek out potentially adverse information about organizations making fundraising appeals? Do they react when it is readily available? Do they draw negative inferences when critical information is not available? To answer these questions, we consider previously unexamined large-scale natural experiments involving US charitable organizations – tax-exempt organizations that file IRS Form 990.
Using standard difference-in-differences designs, we find that donors penalize organizations with high fundraising costs when there is mandatory disclosure or involuntary disclosure by a third-party reporter. Fundraising efficacy for lower fundraising cost organizations is greater when disclosed in these ways. The contrast with donors’ behavior when such information is not available suggests that they do not draw correct inferences when potentially consequential information is not disclosed. Disclose-on-request requirements, in contrast, apparently do not have any significant impact on donors’ or organizations’ behavior. We then sketch implications for the regulation of donations to charities and their modern cousins, such as crowdfunding and social enterprise organizations.
Samuel D. Brunson