Tuesday, June 18, 2019
The Treasury Inspector General for Tax Administration (TIGTA) issued a report earlier this month detailing the steps the IRS and Chief Counsel have taken to implement new Internal Revenue Code section 4960. This section impose a 21 percent excise tax on applicable tax-exempt organizations that pay more than $1 million in compensation to any covered employee for taxable years beginning after December 31, 2017. (The excise tax also applies to any excess parachute payment paid to a covered employee.) The report is an interesting look into how much has to be done behind the scenes to implement a new Code section. For example, tax forms, instructions, and computer programming had to be updated, needed guidance had to be issued, and tax-exempt organizations, their advisors, and IRS employees had to be informed about the new provision. TIGTA estimated that a couple thousand employees of tax-exempt employees received wages over the $1 million threshold, and the IRS estimated that 2,700 organizations would be affected by the tax in tax year 2018.
TIGTA found that generally the IRS and Chief Counsel successfully completed the necessary implementation steps in a timely fashion. These steps included having available by December 31, 2018 a revised Form 4720 (including new Schedule N) and related instructions, a (slightly) revised Form 990 and Form 990-PF (and related instructions) so that each form now includes a line item identifying if the filing organization has to pay the tax, and proposed regulations and interim guidance. (Treasury and the IRS released the final regulations on April 9, 2019, which cover procedural issues relating to paying the tax; the interim guidance still applies for substantive issues.) However, the one gap that TIGTA found was the lack of a completed strategy to identify and address noncompliance after organizations file their returns, as required by the Government Accountability Office's Standards for Internal Control in the Federal Government (known as the Green Book).
Final SALT 170 Regulations Hold the Course; Notice Provides Safe Harbor for Taxpayers With SALT Below SALT Deduction Limit
The Treasury Department and IRS just issued the final regulations under Internal Revenue Code section 170 relating to the effect of state and local tax (SALT) credits on charitable contribution deductions (T.D. 9864). The final regulations generally track the proposed regulations, in that they require taxpayers to reduce the amount of their deduction by any SALT credits received or expected to be received because such credits constitute a return benefit to the taxpayer. They also retain an exception for credits that do not exceed 15 percent of the taxpayer's payment (or the fair market value of property transferred), and continue to not apply to SALT deductions unless the deduction exceeds the payment (or the fair market value of property contributed). While most of the over 7,700 comments supported finalizing the proposed regulations without change, some comments questioned various aspects of the proposed regulations, including the position that SALT credits are return benefits that should reduce the charitable contribution deduction in this instance, but for the most part Treasury and the IRS did not follow these critical comments. This included rejecting calls to push back the effective date of August 27, 2018 contained in the proposed regulations.
At the same time, the IRS issued Notice 2019-12. It states that Treasury and the IRS intend to issue a proposed regulation creating a safe harbor under Code section 164 that would allow certain taxpayers to treat as a SALT payment the disallowed portion of the charitable contribution deduction. This safe harbor would be available for taxpayers who itemize deductions for federal income tax purposes and have state and local tax liability under the $10,000 limit on SALT deductions. Those taxpayers would be permitted to deduct under section 164 the amount of SALT offset by the credits, until they reach the SALT deduction limit. This safe harbor join the Revenue Procedure 2019-12 safe harbor for business taxpayers who make business-related payments to charities or government entities and receive SALT credits in return; that safe harbor allows those taxpayers to still deduct the full amount of those payments as business expenses under Code section 162.
Previous Blog Coverage: Grewal on Why the Proposed Regulations May Be Doomed; Proposed Regulations Hearing; Rev. Proc. 2019-12.
Wednesday, June 12, 2019
The Independent Sector recently released research on the relationship between federal tax policy and individual charitable giving. The study attempts to quantify the lost individual charitable revenue from the 2017 tax changes, and the effect that these five new policies would have on charitable giving:
- Deduction identical to itemizers’ tax incentive;
- Deduction with a cap in which gifts over $4,000 or $8,000 do not receive an incentive;
- Deduction with a modified 1% floor, in which donors can deduct half the value of their gift if it is below 1% of their income and the full amount of the donation above 1%;
- Non-refundable 25% tax credit; and
- Enhanced deduction that provides additional incentives for low- and middle-income taxpayers
The study concludes that "all five policies could bring in more donor households and four of the five policies could bring in more charitable dollars than could be lost due to recent tax changes[, and f]our of the five tax policies could generate more giving than cost to the government."
Tuesday, June 11, 2019
University of Alabama returns $21.5 Million Gift, Citing Attempts to Improperly Influence Academic Decisions
On June 7, the University of Alabama voted to return more than $20 million in donations from Hugh Culverhouse, Jr. Culverhouse initially claimed that the refund was retaliation for his comments on Alabama's recent abortion legislation. In response, the University recently released emails from the donor in which he repeatedly cited his large donations as entitling him to influence administrative appointments, faculty hiring and firing, decisions about student admissions, and other issues. In one passage, he writes:
You seem to think the quid pro quo is I give you the largest sum and commitment in the school's history and you have no return consideration as your end of the transaction."Thanks for the money--Good-Bye."
Other places, he insults the dean of the law school, describes applicants for a chair position as "mediocre" and unacceptable, and demands free rein to wander the law school and attend classes without restriction.
Joe Patrice at Above the Law offers a different take, suggesting that the University's decision was simply because it had a philosophical disagreement about what constitutes quality education, implying that the law school has chosen a path towards mediocrity. Patrice suggests that the University "interpreted [everything Culverhouse wrote] through a sinister lens." Patrice concludes: "At least the school seemingly wasn’t trying to cut him out over his opposition to the Alabama abortion law. Too bad they were actually trying to kick him to the curb for other ill-considered reasons."
New HistPhil Post: "Fairbairn v. Fidelity: The Lawsuit That Reflects Rising Concerns About The DAF Boom"
The lawsuit features a philanthropic twist: the complaint centers not around how their own money was invested but rather around how the money they donated to charity was handled. This twist provides a window into the evolving and rapidly expanding use of once-niche giving vehicles – donor-advised funds – and in doing so highlights the philanthropic minefield they present.
Read the rest here.
Thursday, June 6, 2019
I had a substantive post I was going to write today about a recent PLR. It was going to be fascinating, and I was going to raise a question about why the IRS drafted the PLR the way it did.
And then I opened Twitter. And saw this:
New: Search the full text of nearly 3 million nonprofit IRS filings, including investments and grants given to other nonprofits.https://t.co/LyCBYe6evq— ProPublica (@propublica) June 6, 2019
And there went my productivity for the day.
I love GuideStar. I love the access it gives to tax-exempt organizations' 990s, and all the information I can get from that. The one thing that has always kind of annoyed me, though, was that the 990s weren't searchable. And that wasn't Guidestar's fault--it merely posted the 990s it received, which, I assume, the organizations didn't provide in an OCR manner.
But now, ProPublica has provided a searchable database of 990s, going back as far as 2011. (Full-text search is here; advanced search is here.) I don't know the best way to use the database, but I did do a search for "Loyola University Chicago" to see whose 990s we show up in. Turns out about 304 990s mention us. (I say about because the search isn't perfect: I couldn't find Loyola mentioned in the DePaul Schedule I that came up in the search.) A lot of the mentions are from private foundations, or from matching grants. There's even a mention in the 2010 Form 990 for the Charles Koch Foundation, though there the university is giving back about $1,200 in unused funds from a 2009 grant.
Samuel D. Brunson
Wednesday, June 5, 2019
About a week and a half ago, MacKenzie Bezos signed the Giving Pledge, promising to give away at least half of her almost $37 billion wealth either over the course of her life or in her will. With her signature, she's joined more than 200 other people, from around the world, in making this promise.
In the first instance, I think this commitment to philanthropy is tremendously laudable. She recognizes that she has a disproportionate share of assets, and that she has a moral obligation to share those assets with those who don't have her fortune:
We each come by the gifts we have to offer by an infinite series of influences and lucky breaks we can never fully understand. In addition to whatever assets life has nurtured in me, I have a disproportionate amount of money to share. My approach to philanthropy will continue to be thoughtful. It will take time and effort and care. But I won’t wait. And I will keep at it until the safe is empty.
Still, I have a couple questions. The first is, as a practical matter, how she'll give. After all, the bulk of her wealth is in Amazon stock. And she gave her ex-husband voting control over her Amazon stock. I don't know exactly what that looks like, but I imagine there are some limitations on her ability to liquidate (or donate) that stock.
The second is, how quickly will she give? Half of $37 billion is $18.5 billion. If she donates to a private foundation, she can only deduct up to 30% of her contribution base (which is, roughly, her adjusted gross income). If she gives directly to a public charity, she can still only deduct up to 50% of her contribution base (or 60% if she gives cash before 2026). In other words, to fully deduct her charitable contributions, she would have to earn at least roughly roughly $37 billion.
Now, it absolutely may be that she's not worried about fully deducting her contributions. (Facebook founder Zuckerberg and Priscilla Chan certainly don't seem to be.) Or maybe she'll wait until her death, when charitable donations are excluded from her estate, to fully make her contributions. (Of course, actuarial tables put her expected death about 34 years in the future, so that would be charity delayed.)
Which brings us, briefly, to yesterday's Chronicle of Philanthropy, which reports that the Giving Pledge has not, contrary to its original expectations, turbocharged charitable giving. While more than 200 people have signed, the vast majority of the wealthy have not. Nor has it inspired increased generosity by non-wealthy Americans. Charitable giving stood at about 2% of GDP before the introduction of the Giving Pledge, and it has continued there since.
That's not to say, of course, that Bezos's pledge is insincere, that she's not actually planning on giving away more than half her money, or that she won't do it during her lifetime. It is to say that, while the Giving Pledge is theoretically nice, though, if we want to increase charitable giving, or if we want to reduce income inequality, the Giving Pledge isn't the solution.
Samuel D. Brunson
Forbes Magazine has a short but interesting piece on how fund managers get an even bigger tax break when they use income from a carried interest to make a charitable contribution. Here is an excerpt:
Imagine a private equity investment fund with a standard “two and twenty” arrangement whereby the manager receives an annual fee equal to 2.0% of the capital plus a "carried interest" equal to 20% of the profits. Most funds—even those with mediocre overall results—usually have at least a few very successful investments into private companies that are later listed on the stock market. For the sake of illustration, let’s assume that the fund invested into a private company—call it “HomeRun” Inc.—that is later listed on the stock market at a valuation many multiples of the fund’s initial investment.
In this case, the manager would likely receive some of his (the vast majority of private equity partners are men) carried interest in HomeRun shares rather than cash. (In private equity speak, he would receive a “distribution” of HomeRun shares.) While the manager still pays tax (at the 20% capital gains rate) on the carried interest he receives in HomeRun shares, it is only due when he sells the shares. This leaves him the option of giving them away instead.
Let’s say it’s the 25th anniversary of his b-school graduation and he wants to give $1.0 million to his alma mater. Were he a normal, working person (e.g., a doctor), the $1.0 million gift would come out of his ordinary income with the associated charitable deduction offsetting the taxes he would otherwise have to pay. (Based on a top marginal federal tax rate of 37%, the deduction would reduce his taxes by $370,000 making the public a de facto 37% partner in his gift.) In order words, the public has agreed—through the tax code—not to tax him on the income he gives away.
The private equity manager can do much better. Instead of cash, he gives his alma mater $1.0 million in HomeRun shares. Because he gives the shares away without selling them, he never has to pay the 20% tax ($200,000) that would otherwise have been due. (His college doesn’t pay the tax either since it’s a nonprofit.) At this point, the private equity manager is no different from the doctor; he has made a gift without paying the tax (in his case, at 20%) making the public a de facto 20% partner in his gift. But here’s the rub: he also gets to claim the $1.0 million gift as a deduction against his income.
Assuming a federal rate of 37%, this deduction is worth a further $370,000 making the public a $570,000 de facto contributor to his $1.0 million gift. The public is a silent, unwitting, 57% partner in his giving. (This is just the federal analysis; the public contribution would likely be more after considering state-level taxes). Said another way, for every $1.00 he gives away, the public—through the tax code— waives the taxes and gives him a further $0.37 bonus.
This is not a theoretical exercise. Everyone who receives carried-interest in the form of low-basis stock knows how the math works and so do their financial advisors. In fact, much of the giving by wealthy people with carried interest income is likely made through gifts of stock.
I question whether the fund manager can avoid all tax by "giving the stock away" instead of selling it (the bold and italicized sentences in the quote above). I have not looked at the Subchapter K rules in awhile, and don't have time now, but it seems to me that donating the stock ought to constitute a recognition event. Still, even if the donation triggers tax, the fact that the stock is taxed at capital gains rates to the fund manager, and then used to offset ordinary income, to the extent of the stock's fair market value, is just insult to injury for the rest of us.
Darryll K. Jones
Tuesday, June 4, 2019
CALL FOR PAPERS
AALS SECTION ON NONPROFIT AND PHILANTHROPY LAW
SESSION 2020 ANNUAL MEETING
Nonprofits & Philanthropy
The AALS Section on Nonprofit and Philanthropy Law announces a call for papers to be presented as works-in-progress in our committee session at the 2020 AALS Annual Meeting in Washington DC from January 2-5, 2020. The panel will be held on Sunday, January 5th, 2020 from 10:30-12:00.
The Section seeks submissions on a variety of topics and methodological approaches related to Nonprofit and Philanthropy Law. We are especially interested in receiving submissions from new and junior academics or scholars who have not previously written in the field.
Eligibility: Scholars teaching at AALS member or nonmember fee-paid schools
Due Date: Friday, August 24, 2019
Form and Content of Submission: Submissions may range from early drafts to articles that have been submitted for publication, but not articles that will have already been published by January 6, 2020.
Submission Method: please submit papers electronically in Microsoft Word format to firstname.lastname@example.org "AALS Nonprofit and Philanthropy Law Submission" in the email subject line.
Submission Review: Papers will be selected for inclusion in the program after review by members of the AALS Nonprofit and Philanthropy Law.
Additional Information: Unfortunately, the section is not able to provide any funding to presenters, who will be responsible for their own expenses. If you have any questions, please contact Melanie Leslie at Leslie@yu.edu.
A couple months ago, I presented a work-in-progress on donor-advised funds to my colleagues at Loyola (a work-in-progress I hope to finish and post on SSRN soon). That evening, I got an email from one of those colleagues. It turned out that that same night, some donor-advised fund sponsored a bunch of the programming on WBEZ, our local NPR station, and the words donor-advised fund now meant something to my colleague.
Fast-forward to last Friday. A New York Times story popped up on my phone which, serendipitously, was about donor-advised funds. More specifically, it was about a lawsuit that, according to the Times, may cool donor enthusiasm for DAFs.
As a quick summary: commercial DAFs are essentially low-cost replacements for private foundations. They're often run by big mutual fund companies, which established a public charity. Donors donate to the charity, and the charity keeps their donations in separate accounts. The donor has given up ownership and control over the donation (and thus gets a deduction), but can advise the sponsoring organization about how to invest and distribute her donation.
And, as a legal matter, it's clear that the donor has given up the ownership and control. As a practical matter, though, I assume that donors have a lot of influence over their donations. If the sponsoring organization were to start going rogue, it's probably fair to assume that donors would be less excited to give their money to that particular sponsoring organization.
But, again, as a legal matter, the sponsoring organization, not the donor, has control. And that's where the lawsuit the Times mentions comes in. According to the Fairbairns' complaint, in 2017, they donated 1.93 million shares of Energous stock--which is publicly traded on the NASDAQ--to Fidelity Charitable. They wanted Fidelity to eventually distribute their donation to charities that combat Lyme disease.
The Fairbairns allege that Fidelity promised them four things to induce the donation:
- Fidelity would use state-of-the-art methods for liquidating large blocks of the stock;
- It wouldn't trade more than 10% of the daily trading volume of Energous shares;
- It would allow the Fairbairns to set a floor on the price it would accept; and
- It wouldn't start selling Energous shares until 2018.
Fidelity didn't do, well, any of those things. According to the complaint (which Fidelity admits is true), it sold all of the shares on December 29, 2017. The Fairbairns claim that the sale drove the value of the stock down by 30%. And why do they care?
The complaint gives two reasons:
It turns out, according to the complaint, that the 2017 changes to the tax law meant that the Fairbairns couldn't defer a sizeable tax hit any longer. Moreover, a couple days before the donation, the value of Energous stock jumped 39%. By making this donation, they managed to avoid paying taxes on the appreciation, and could, at the same time, offset their deferred income.
Now here's the thing about the lawsuit: by donating to Fidelity (rather than donating directly to their Lyme disease charity or donating to a private foundation), the Fairbairns had given up their legal right to control both the investment decisions and the distribution decisions. So instead, the complaint alleges that Fidelity misrepresented what they would do to induce the Fairnairns' investment, that it breached an enforceable agreement about how it would deal with their donation, that it was estopped from doing what it did, and that it was negligent in the manner it liquidated the stock.
Will this affect donors' willingness to provide charity through donor-advised funds? I honestly don't know. Frankly, investors should be aware that their right to advise is limited. On the other hand, large donors prefer to have control and, while a private foundation is more costly and provides a lower ceiling on deductibility, if they really want the control, perhaps they should give through foundations (or, heaven forbid, directly to active charities).
Samuel D. Brunson
Monday, June 3, 2019
I'm excited to be here! (Thanks to the Nonprofit Law Prof Blog folks for inviting me!)
Because I wasn't told any differently, I thought I'd take today to briefly introduce myself. I'll get to more substantive blogging tomorrow.
I've been teaching at Loyola University Chicago for a decade now. In addition to here, I do some tax blogging at the Surly Subgroup and some religious/Mormon/tax blogging at By Common Consent. I'm broadly interest in tax and nonprofit issues, and am really interested in questions of the taxation of religious stuff.
My outside-of-work time largely consists of two things: shuttling kids to (and sometimes participating in) an insane number of extracurricular activities and listening to jazz. (I'd like it to involve a little more saxophone playing, but you do what you can.) And both of these things implicate tax-exempt organizations and nonprofits, and may provide me with future blogging fodder.
For instance: today after work, I'll take a bus to pick my daughter up from school. Then we'll take the train to First Ascent. I'll climb and work out while she (and my other daughter) practice with their climbing teams. (Side note: did you know that competitive rock climbing was a thing? Me either, until my kids started doing it. But it'll be in the 2020 Olympics.) Competitive rock climbing is governed by USA Climbing, a 501(c)(3) organization.
I also coach my son's soccer team, through AYSO. (My sister is still incredulous, probably rightfully, since I quit soccer when I was 8. Still, I know more than my son and his cohort, and by coaching, I get to choose when we hold practice, which is kind of critical given my family's schedule.) Like USA Climbing, AYSO is a 501(c)(3) exempt organization.
It makes sense, of course: section 501(c)(3) explicitly allows an exemption for organizations that "foster national or international amateur sports competition." I'll admit, though, that I haven't yet carefully thought through this exemption. When I've thought about it, the two organizations that first come to mind are the NCAA and the US Olympic Committee. My suspicion is that both of these organizations are substantially different, though, from USA Climbing and AYSO. I'll be interested in casually exploring the amateur athletics exemption in future posts.
On the jazz front, I've recently become aware of Giant Step Arts, a nonprofit focused on presenting and recording live jazz. I know basically nothing about Giant Step Arts, though several of the projects it has recorded have made for great listening. I plan on looking at it, its mission, and its tax-exempt status (I think, assuming the linked organization is the same as the jazz nonprofit).
Until those posts, though, thanks for having me, and I look forward to my time on this blog!
Samuel D. Brunson
Friday, May 31, 2019
I saw the following tweet today (and yes, I really should get off Twitter ....) from Phil Buchanan about an article published today on Wired.com entitled "5 Mistakes MacKenzie Bezos and other Mega-Donors Should Avoid":
Phil Buchanan (@philxbuchanan)
You may remember Phil from my Wednesday post as the current President of The Center for Effective Philanthropy. First of all, I didn't realize that Jeff Bezos was getting divorced, but that being said, apparently his ex-wife took the Gates/Buffett Giving Pledge and as a result has scads of money to give to charity. Accordingly, Mr Buchanan has some helpful advice to give to Ms. Bezos as she contemplates her philanthropy. I won't give away all five (so that you'll read his article), but here's the first few:
1. "Thinking a single, quick-fix 'innovation' will solve complicated social problems
2. "Looking for one-size-fits-all performance measures"
Read the article for 3. 4 and 5. I personally would add two more mistakes, however:
6. Not funding overhead costs, and
7. Bribing your favorite nonprofit into mission creep.
If you've bee in the nonprofit grant-making world for even five minutes, then I don't need to explain 6. I recognize it isn't sexy to pay for employee health care coverage or the light bill, but work - even charity work - does not get done by sick people in the dark. Seven is related, however - all too often I've seen charities take on large projects that monopolize their time, assets, and people to the detriment of their core mission, including diverting resources to overhead to support donor vanity projects that can't be paid out of the grant funds.
What would you all add to the list?
Thursday, May 30, 2019
Yesterday's Jack Straw Fortnightly* contains some really good updates on recent events effecting exempt organizations. First, Jack provides some Paul Harvey-like "rest of the story" details on RERI Holdings I, LLC v. Commissioner, about which we recently posted. And in New York's ongoing efforts to discover the political motives behind the issuance of Revenue Procedure 2018-38, the newsletter reports that the Treasury Department apparently intends to comply with the Freedom of Information Act Request by which NY seeks all documents and papers leading to the issuance of the revenue procedure. In a letter to the Court, the NY Attorney General states:
Defendants have confirmed that active review efforts in response to the October 2018 Freedom of Information Act requests at issue in this action are ongoing. As additional searches are in progress, at this time the total volume of potentially responsive records is unknown and therefore Defendants cannot propose a production and briefing schedule at this time. The IRS currently advises that it will make additional rolling productions to the Plaintiffs beginning on or before Friday; June 21 and on that date will be in a position to propose a schedule for the completion for production. The Treasury Department will be in a position to propose a schedule for its own production by the same date. In light of these commitments~ and the fact that Defendants' FOIA productions will affect the scope of any motion practice in this action, Defendants respectfully request that the parties not be required to present a briefing schedule at this time but rather to provide a status update to the Court in thirty days.
The more interesting story regarding Revenue Procedure 2018-38 is that Montana and New Jersey have joined together in a suit directly challenging the legality of the Revenue Procedure:
On July 16, 2018, Defendants the Internal Revenue Service, the United States Department of the Treasury, and David Kautter, former Acting Commissioner of the Internal Revenue Service, announced that the IRS would no longer require reporting of substantial contributor information on the Schedule B for 501(c) organizations other than § 501(c)(3) groups. The change was made through a sub-regulatory document called a “Revenue Procedure”--specifically, Revenue Procedure 2018-38.2 Revenue Procedure 2018-38 amends a prior legislative rule-26 C.F.R. § 1.6033.2--and the Administrative Procedure Act (“APA”) requires agencies to notify the public and provide an opportunity for comment before amending a legislative rule. See 5 U.S.C. § 553(b). The IRS promulgated its new Revenue Procedure in violation of the APA without notice and without giving the public any opportunity to comment. Accordingly, because Defendants promulgated Revenue Procedure 2018-38 “without observance of procedure required by law,” under the APA, this Court must hold the revenue procedure unlawful and set it aside. 5 U.S.C. § 706(2)(D).
Darryll K. Jones
Hat Tip: Russ Willis
Wednesday, May 29, 2019
With summer here and the day-to-day craziness mostly (!) under control, I have the luxury of a few moments of just … thinking. It’s easy to get wrapped up in the text of the Code, the most recent case law, or the scandal du jour (I’m looking at you, NRA). But I rarely have the time to step back and take a wider scope on things.
At this particular moment, it is courtesy of Twitter, which seems somewhat antithetical to big thoughts (literally, given the word count), but one never knows from whence inspiration may come. In the matter of just a few days, a number of Twitter posts came across my feed that connect indirectly in my mind to a larger questions of the role of charity in a democracy.
Twitter post number 1. Nonprofit Quarterly posted an article on its website entitled “The Road Less Traveled: Establishing the Link between Nonprofit Governance and Democracy.”
This article discusses how best practices in nonprofit board governance increase the representation of the various communities served by a nonprofit. The failure to follow these best practices results in a “’democratic deficit’ in board governance- that is, an absence of democratic structures and processes.” Addressing the democratic deficit doesn’t just benefit the charity – it benefits our democracy writ large: “Wider constituent participation in nonprofit governance will not only help citizens develop civic skills and democratic values … .”
Twitter post number 2. The second Twitter post links to a Nonprofit Quarterly podcast that discusses “No White Saviors,” a movement that discusses the impact of race on hierarchy and power in the international charitable economic development space.
This links a Nonprofit Quarterly podcast that discusses “No White Saviors,” a movement that discusses the impact of race on hierarchy and power in the international charitable economic development space. “Those with power hav[e] the resources and capability to make decisions on what should the outcome should be for vulnerable populations.” Podcast at 6:42.
Twitter post number 3. The third post is an interview with Phil Buchanan of The Center for Effective Philanthropy, posted on vox.com, where he responds to criticism of that wealthy philanthropy is undemocratic (set for the more fully in his book, Giving Done Right).
In the interview, Buchanan is quoted as saying:
The structural critiques are important and they play out in our democratic politics. But in the meantime, here we are. We have significant wealth that’s been accumulated in this country. We have endowed private foundations that don’t even have a connection on the board to the original donor. These are institutions that are focused on a mission. They’re focused on the public good. I like working in the day to day, in the practical reality, where there are people with decision-making power to allocate these resources. I want to help them to do it effectively.
I think all of these pieces raise interesting views on the role of power and money and the role of the charitable sector in a democracy. At the end of the Buchanan interview, he specifically asks if we should be subsidizing all of this through the tax code, and specifically the Section 170 charitable deduction (spoiler alert: he says yes, and expand it to non-itemizers).
I’m more interested, however, in the Section 501(c)(3) implications on all of this. Since Section 501(c)(3) is the section that creates the boundaries between that which is charitable (at least, charitable in tax terms) and that which is not, does it make sense for those rules to play a role in policing this issue. One could view the 1969 passage of the private foundation excise taxes as the historical pre-cursor for this discussion, as at least part of the background of that legislation was to minimize the benefit to and the influence of the most wealthy through charitable vehicles. My thoughts aren’t fully formed on this, but I found it an interesting crossing of the Twitter streams in a very short 48 hour period. Any musings and other big thoughts are, of course, most welcome.
DOJ and IRS are on Different Sides Regarding Tax Exemption for "Safe Injection Sites." And DOJ Should Lose!
Late last year, the NY Times published an absolutely harrowing account of Kensington, described as a "Philadelphia neighborhood [that] is the largest open-air narcotics market for heroin on the East Coast." The description makes the worst bombed out war zones sound like paradises by comparison, with hopelessly addicted poor zombie souls urinating, defecating, shooting up, and scrounging [first for another hit, then maybe food from a dumpster or trash can] all over and around the playgrounds and working class homes of families who also cannot escape. In a Forbes article two days ago, Kelly Phillips Erb reports that the Service has approved tax exempt status for an organization called Safehouse. The Philadelphia Inquirer also reports on the grant of tax exempt status. I can't find the determination letter on the IRS website so if anybody can point me to it, I would appreciate seeing it. Safehouse does not hide its purpose and services:
What is Safehouse?
Safehouse is a privately funded, 501(c)(3) tax-exempt, Pennsylvania nonprofit corporation whose mission is to save lives by providing a range of overdose prevention services. The leaders and organizers of Safehouse are motivated by the Judeo-Christian beliefs ingrained in us from our religious schooling, our devout families and our practices of worship. At the core of our faith is the principle that preservation of human life overrides any other considerations. Safehouse is one element of a much-needed comprehensive plan to address a public health crisis. The organization seeks to open the first safe injection site in the U.S. providing a range of overdose preventions services, including safe consumption and observation rooms staffed by a medical staff prepared to administer overdose reversal if needed. Additional services would include on-site initiation of Medically Assisted Treatment (MAT), recovery counseling, education about substance use treatment, basic medical services, and referrals to support services such as housing, public benefits, and legal services. Safehouse is working with community partners to find suitable locations to deliver this unified range of services.
The "safe injection site" part of its mission is what caught the eye of DOJ (more on that below). Somehow, I don't think the Obama, Bush II, Bush I, or even the Reagan administrations would have fought this, but this is a nonprofit tax blog run by we pseudo-journalists so I will try not to be too biased. We all have them -- biases, I mean -- but at least I admit mine. Anyway, a safe injection site is a place where an addict can go to shoot up safely, monitored and prevented from overdosing, and thereafter (or before) offered extensive treatment, counseling, and intervention. I just know a little about tax. But it seems to me that prohibiting safe injection sites to combat drug addiction is like outlawing fire hydrants to prevent dogs from peeing outside. Addicts are going to addict and dogs are going to pee! Anyway, here is how Safehouse describes safe injection sites:
SAFE INJECTION SITES AND HARM REDUCTION
- What is harm reduction?
Harm reduction in substance use treatment is aimed at decreasing the negative consequences of substance use, and it includes elements of safer use, managed use, and medication-supported treatment plans. Harm reduction is designed to address the circumstances of the addiction in addition to the addiction itself, striving to minimize the harmful effects of addiction while recognizing that drug addiction cannot be completely eliminated. Current leading scholarship establishes that a demonstrably effective approach to combating substance use disorder is to encourage treatment while providing harm reduction.
- Do safe injection sites exist elsewhere?
Yes. The first government-authorized supervised consumption room opened more than 30 years ago in Switzerland. Today, more than 120 supervised consumption sites are operating in Europe, Australia, and Canada. The availability of overdose prevention services is increasing as research confirms the effectiveness and the advantages to the broader community. Currently, no such program exists in the United States.
- What is harm reduction?
The irony is that while Safehouse has been granted tax exempt status, DOJ is suing to shut it down. "Safehouse officials said gaining tax-exempt status lends the organization legitimacy from the federal government, even as another arm of the government is seeking to block it from opening. The nonprofit is facing a federal lawsuit from the Department of Justice." Safehouse's website points out though that DOJ is not [yet] seeking to seize property or throw anybody in jail. It just wants to outlaw a practice that nearly half the countries in Western Europe, in Canada, and in Australia already use to fight drug abuse. Those are some great guys and gals over there at DOJ but I wonder if they have read the NY Times article describing the human carnage -- epidemic is way too soft a word to describe what's going on. The complaint implicitly acknowledges Safehouse is on to something good, I think. It makes it sound like, "we been through drug crises before, this is nothing new, everybody stay calm and lets "just say no." It almost sounds like DOJ is ashamed at what its trying to do (my bias again, probably):
While our country is in the midst of an opioid epidemic, this is not the first time we have faced a drug crisis. From crack cocaine, to methamphetamine, to heroin and fentanyl, our country has faced the challenge and tragedy of drug addiction for many years. Congress and the President have sought to address the challenges of drug addiction, abuse, and diversion with the Controlled Substances Act ("CAS"), enacted in 1970 . . . The legislation's calculated Scheme includes the prohibition of certain conduct involving controlled substances. Most relevant to the suit at hand, the CSA provides that it is wholly unlawful to manage or control any place, regardless of compensation, for the purpose of unlawfully using a controlled substance. Defendant Safehouse seeks to disregard the law and override Congress' carefully balanced regulatory scheme by establishing, managing, and controlling sites in Philadelphia that will allow individuals to engage in the illicit use of controlled substances, namely, heroin and fentanyl. For purposes of this action, it does not matter that Safehouse claims good intentions in fighting the opioid epidemic.
Safehouse filed an astonishingly literary answer that more seriously describes the problem and makes a strong case that it is providing medical treatment, not violating a law enacted before big pharma ever dreamed of getting rich selling heroin that looks like aspirin. Safehouse, by the way, has an impressive group of lawyers working pro bono, apparently. I betcha more than one in three people reading this blog or in any other population sample knows someone or have been personally impacted by the opioid epidemic. I wouldn't be surprised either if, having learned of the IRS's actions, DOJ is already demanding that the exemption be revoked. The grant of tax exemption obviously undercuts the notion that safe injection sites are illegal or against "fundamental public policy." As for the latter rationale, we can probably safely conclude that there just is no public policy. Besides, the CSA was passed a long time before opioids were dumped on unsuspecting housewives, executives, would-be athletes, and active duty military men and women, and veterans. Sheeeesh! DOJ should get a grip! As the opioid crisis rages through every neighborhood in America -- urban, suburban, rural, mountains, rich, poor, white, brown, black, whatever -- we keep whistling right past the graveyard.
But I digress. I should talk about the illegality and public policy doctrines as they relate to tax exemption and why I think DOJ should lose this one. But I gotta grade some more papers now so I'll do that tomorrow. Feel free to provide some perspectives on that in the comments.
Darryll K. Jones
Tuesday, May 28, 2019
We previously discussed how a seemingly simple administrative omission (failure to include basis of donated property on Form 8283 (valuation of non-cash donation)) cost a taxpayer a $33 million charitable contribution deduction, plus a 40% gross valuation misstatement penalty. We speculated, based on the details of the transaction as described by the Tax Court, that the real reason for the result was that the taxpayer claimed a $33 million charitable contribution deduction for a donation worth only $3.3 million.
Last Friday, the Circuit Court of Appeals for the District of Columbia affirmed the Tax Court opinion denying the deduction and upholding a 40% valuation misstatement penalty. The entire case is probably a good example of just plain bad tax planning by the taxpayer, and very good pretrial work by DOJ Tax. Its always easy to criticize with the benefit of hindsight but there were red flags all over this transaction. Billionaire Miami Dolphins owner Stephen Ross made a $5 million charitable pledge to the University of Michigan. Through a series of transactions, he then transferred an interest in a "successor" LLC whose only asset was a future interest in improved property to the University of Michigan in satisfaction of the charitable pledge. Although he pledged a $5 million donation, he claimed a charitable contribution deduction of $33 million. That valuation amount was based on an appraisal made when the property was originally acquired by Ross through a different LLC, but the property was subject to a long term lease that significantly reduced its market value by the time it was donated. And while the donor claimed a $33 million donation, Big Blue sold the property for only $2 million two years later to one of Mr. Ross's business partners in the very same LLC that originally owned the property. In light of those smelly facts, the omission of the cost basis (which was $2.95 million at best) on Form 8283 seems intentional. The DC Circuit speculated that the Service would have questioned how the property appreciated to $33 million dollars in only two years if the basis had been included.
The facts are much more detailed but when boiled down to their essence, it looks like Ross pledged $5 million to Michigan, then sold property to a business partner for about that amount and donated the [$5 million] proceeds to Big Blue. Here is a fairly entertaining, easier to understand summary of the entire scheme. By using property instead of cash, perhaps Ross's advisers thought he would get away with inflating the value of the charitable contribution deduction to $33 million. He lost bigtime on that gamble. Pigs turn into hogs and hogs get slaughtered!
Darryll K. Jones
Friday, May 24, 2019
The Cost of Nonprofit Hospital Tax Exemption and The Value of Community Benefits in 2016 -- Lies and Statistics?
Ernst and Young conducted a study and prepared a report regarding tax-exempt hospitals. The study estimates that hospital tax exemption cost us $9 billion in 2016 while providing community benefit worth $95 billion for a net gain to the public of $84 billion. An earlier 2017 study contains similar conclusions regarding the cost and community benefits in 2013. Here is the press release announcing the May 2019 findings:
EY was commissioned by the American Hospital Association to analyze the federal revenue forgone due to the tax exemption of non-profit hospitals as well as the community benefits they provide. This study presents estimates for 2016, the most recent year for which community benefit information is available for non-profit hospitals based on Medicare hospital cost reports for approximately 3,000 non-profit general hospitals. The analysis does not account for other non-profit specialty hospitals, such as psychiatric or long-term acute care.
In 2016, the estimated tax revenue forgone due to the tax exempt status of non-profit hospitals is $9.0 billion. In comparison, the benefit tax-exempt hospitals provided to their communities, as reported on the Form 990 Schedule H, is estimated to be $95 billion, 11 times greater than the value of tax revenue forgone.
The analysis does not include the deductibility of charitable contributions to non-profit hospitals. If deductions to non-profit hospitals were no longer deductible but charitable donation provisions were otherwise unchanged, donors would likely shift their donations to other tax-exempt entities, including both those affiliated and unaffiliated with hospitals, resulting in a negligible net federal revenue impact.
The analysis does incorporate an estimate of the current state and local revenue forgone due to tax exemption. If federal tax exemption were restricted, the assumption is that state and local tax exemptions would also be restricted, thereby increasing state and local taxes on non-profit hospitals. As a result, a hospital’s federal corporate taxable income would be reduced by an amount equal to the increase in state and local taxes.
I don't think I would characterize the study as an "independent assessment." The value of the community benefit is derived from figures provided by the hospitals and they aren't exactly disinterested in the study's outcome. I'm not saying they are lies, I'm just saying . . .
Darryll K. Jones
Thursday, May 23, 2019
We have previously blogged about the sudden and increasing use of Form 13909 (Tax Exempt Organization Complaint (Referral)) to bring complaints from left or right leaning organizations against exempt organizations generally considered right or left leaning, respectively. We've blogged about complaints against the Southern Poverty Law Center and the NRA. The latest complaint, filed by the right leaning National Legal and Policy Center against the left leaning Center for Global Policy Solutions (CGPS), asserts that Maya Rockeymoore Cummings, wife of Representative Elijah Cummings (D-MD) and a principal fiduciary of CGPS, is the beneficiary of illegal private benefit and prohibited campaign intervention by CGPS. Here is a summary of the complaint from the Washington Examiner:
Rockeymoore runs two entities, a nonprofit group called the Center for Global Policy Solutions and a for-profit consulting firm called Global Policy Solutions, LLC, whose operations appear to have overlapped, according to the IRS complaint filed by watchdog group the National Legal and Policy Center on Monday. The complaint states that the arrangement may have been used to derive "illegal private benefit." Global Policy Solutions received more than $6.2 million in grants between 2013 and 2016, according to tax records. Several of the nonprofit group’s financial backers — which included Google, J.P Morgan, and Prudential — have business interests before the House Committee on Oversight and Government Reform. Cummings has served as Democratic chairman of the committee since January and previously served as ranking member. The largest contributor to the nonprofit organization was the Robert Wood Johnson Foundation, a company that is regulated by Cummings’ committee. The foundation, which gave a total of $5.5 million to Rockeymoore’s consulting firm and $5.2 million to her nonprofit group, ceased supporting her groups in 2017 . . . The complaint asked the IRS to investigate the “shared leadership,” “integrated operations,” and “shared address and physical facilities” of her two companies. Rockeymoore’s nonprofit and the LLC have mutual clients, donors and projects, and were located at the same address and share a phone number. According to its website, the Center for Global Policy Solutions is a nonprofit group that seeks to “create healthier communities, strengthen Social Security, and close racial wealth disparities." The for-profit consulting firm, Global Policy Solutions LLC, describes itself as “a social change strategy firm dedicated to making policy work for people and their environments.” The complaint states that they “appear to operate almost as a single entity, allowing for an illegal private benefit for Maya Rockeymoore Cummings and her husband."
Today, the Washington Post published a story in which Maya Rockeymoore Cummings and Representative Elijah Cummings pushed back against the complaint:
“It appears a conservative front group and a news outlet . . . are pushing a hit piece filled with faulty research, lies and innuendo in an attempt to tarnish my personal reputation, professional work and public service as well as that of my spouse,” Rockeymoore Cummings said in a statement, calling the effort a “distasteful attempt to intimidate my family into silence at such a pivotal moment in our nation’s history.” Cummings echoed his wife’s remarks in a statement of his own, dismissing the claims as “a fabricated distraction from the important work being done on behalf of Americans, such as lowering the skyrocketing prices of prescription drugs.”
The indications of improper private benefit and campaign intervention, according to the complaint include:
- Shared leadership between CGPS and GPS, LLC
- Integrated operations of CGPS and GPS, LLC
- Shared address and physical facilities
- Lack of physical facilities despite million-dollar government contract
- Website URLs, linked websites and similar design
The complaint seems obviously politically motivated -- Rep. Cummings is leading the House efforts to get at President Trump's tax returns and is a leading proponent, according to some, of impeaching the President. His wife is Chairperson of the Maryland Democratic Party and a former candidate for Governor of Maryland. Even so, the complaint makes a prima facie case (that is, it states facts which, if true support a finding of private benefit), it seems to me. I wonder how the Service is dealing with all of these complaints. After what the folks at TaxProf Blog called the "IRS Scandal" every single day for nearly 5 years, I gotta think the Service is probably not assigning anybody to seriously delve into any of the culture war complaints.
Darryll K. Jones
Our own Lloyd Hitoshi Mayer recently posted "When Soft Law Meets Hard Politics: Taming the Wild West of Nonprofit Political Involvement." Here is the abstract:
Beginning in the 1990s and continuing to today, many of the legal and psychological barriers to nonprofits becoming involved in electoral politics have fallen. At the same time, political divisions have sharpened, causing candidates, political parties, and their supporters to scramble ever more aggressively for any possible edge in winner-take-all political contests. In the face of these developments, many nonprofits have violated the remaining legal rules applicable to their political activity with little fear of negative consequences, especially given vague rules and a paucity of enforcement resources. Such violations include underreporting of political activity in government filings, fly-by-night organizations that exist only for one election cycle in order to avoid penalties, and even organized campaigns that encourage nonprofits to break these rules. The increasingly visible disregard of these rules threatens not only to damage the public reputation of the nonprofit sector as a whole but also to undermine public respect for the rule of law more generally.
Many scholars, journalists, and others have documented the increasing involvement of nonprofits in politics, including numerous apparent violations of the remaining rules governing such activity. Commentators have proposed a variety of piecemeal solutions, ranging from overhauling the existing rules to repealing those rules in part or completely, sometimes with a focus on tax laws, sometimes with a focus on election laws, and sometimes with a focus on state nonprofit laws. What is needed, however, is a comprehensive approach to this issue that considers the various ways nonprofits can be involved in politics, the positive as well as negative effects of such involvement, and the interaction between these different bodies of law at both the federal and state level that relate to such involvement.
This article takes such a comprehensive approach. Drawing on the now extensive information regarding nonprofit political involvement, and where such involvement appears to have repeatedly violated the existing legal rules, this article will first provide a roadmap of such involvement and the points where political pressures are overwhelming the existing legal rules and the agencies charged with enforcing them. Next, this article will describe the various solutions proposed by commentators, highlighting the incomplete nature of those solutions but also the insights they provide regarding the strengths and weaknesses of the various legal approaches for addressing such involvement. These insights include ones relating to the historical reasons for why the legal rules have developed in the manner they have, as well as ones relating to the relative institutional competencies of the agencies charged with interpreting and enforcing those rules.
Finally, this article will propose an overall approach to modifying the existing legal rules that relieves the identified pressure points without compromising the important public policies underlying the current legal rules, including ensuring the continuing ability of nonprofits to contribute to political debates in the United States. This approach involves revising the federal tax rules for tax-exempt nonprofits to clarify what constitutes prohibited political activity for charities, to loosen the unnecessary (from a tax policy perspective) restrictions on political activity by non-charitable, tax-exempt nonprofits, and, most controversially, to permit churches and other houses of worship to engage in political activity in the context of internal, in-person communications to members. It also involves shifting public disclosure rules relating to political activity from federal tax law to federal and state election law, refocusing such public disclosure on a broader range of such activity, and increasing the donation amounts that trigger such disclosure with respect to donor identities.
This comprehensive approach recognizes the importance of maintaining the current tax policy of not subsidizing efforts to support or oppose candidates for elected office while at the same time not unduly burdening the free speech, free association, and free exercise of religion rights of individuals who collectively engage in political activity through nonprofits. It also recognizes the institutional limitations of the Internal Revenue Service when it comes to enforcing tax rules relating to political activity, particularly given the breakneck pace of electoral politics, by placing greater emphasis on the federal and state laws, and their related agencies, that specifically regulate elections. By doing so, this approach recognizes and anticipates the dynamic nature of political involvement by nonprofits and so seeks not to prohibit but instead to channel that involvement in a manner that furthers overall democratic participation goals.
Darryll K. Jones
Wednesday, May 22, 2019
Its commencement season and the biggest story thus far is Mr. Smith's announcement that he would pay off the student loans of the Class of 2019 at Morehouse College ("The House"). The New York Times published a teaser about the tax consequences to all involved:
On Morehouse’s Atlanta campus and beyond, administrators, students and parents — and no shortage of tax and philanthropy experts — have spent the last few days wondering how, exactly, Robert F. Smith, a titan tech investor, would fulfill his promise to 396 graduates. The surprise announcement was both an extraordinary gift — and a complicated one.
I read the article thinking it would address Sections 61(a)(11), 102, 108, 117, 501(c)(3) and all the gift tax provisions the details of which I have spent my time since tax school trying never to have to deal with. But it did not. Some of the comments to the article speculate that a billionaire would not be so unsophisticated that he would not have consulted a tax attorney before deciding to pay off the student loans -- I was available, he coulda just flown me to some island resort and we coulda talked it over after a couple of rounds of golf! I would have reported the income even!
Anyway, here is my starting hypothesis. The students do not have COD because the payment or discharge of their debts was simply the vehicle by which Mr. Smith demonstrated his "detached and disinterested" generosity. It is a gift under 102. An article in Forbes agrees. This was not like Oprah hollering on national TV (from which she received advertising revenue) that "you get a car, you get a car, and you get a car!" If not a gift, much of the payments would be excluded as qualified scholarships under IRC 117. If its income, no doubt the students' have fewer assets than liabilities -- they were broke students, after all! -- so 108 would provide exclusion. As for the gift tax consequences, Mr. Smith might have avoided that (if they even apply) by making a charitable contribution (instead of a gift directly to the students) to The House, a 501(c)(3) organization no doubt, with the stipulation that it be used to pay the expenses of the class of 2019. As to the latter assertion, I suppose I would want to research whether targeting the gifts to a particular class strips the "contribution" of its deductibility just to make sure, but I doubt it. Comments?
Darryll K. Jones