Saturday, September 19, 2020
The Pittsburgh Tax Review has published a special issue marking the 50th anniversary of the Tax Reform Act of 1969. Here is the articles:
The 1969 Tax Reform Act and Charities: Fifty Years Later by Philip Hackney
The Private Foundation Rules at Fifty: How Did We Get Them and Do They Meet Current Needs? by James J. Fishman
The Private Foundation Excise Tax on Self-Dealing: Contours, Comparisons, and Character by Ellen P. Aprill
The Five Percent Fig Leaf by Ray D. Madoff
Foundation Regulation in Our Age of Impact by Dana Brakman Reiser
Private Operating Foundation Reform and J. Paul Getty by Khrista McCarden
Oonagh B. Breen (University College Dublin) has published Regulating European Philanthropy: Lessons from the Scholarly Legacy of Evelyn Brody in the Nopnrofit Policy Forum. Here is the abstract:
Throughout her long and distinguished academic career, spanning more than three decades, as a Professor of Law at Chicago-Kent University, Evelyn Brody’s work has interrogated three broad themes that underpin and drive charity law – the tax treatment of charities; the governance framework applicable to charities, its application, monitoring and enforcement; and the evolution of charitable structures over time, whether from an economic convergence perspective, a constitutional right of association perspective or from a public/private benefit perspective. This article reviews Brody’s contribution in these key areas. It explores the resonance of her work outside of the United States and its relevance for EU non-profit scholars before looking to Brody’s research legacy for future nonprofit scholars on both sides of the Atlantic.
The "deaccessioning police" argue that it is "unethical" for art museums to "deaccession" or "sell" works of art from their collections for any purpose other than buying different works of art, because museums do not really own the art in their collections, but only hold it subject to the "public trust doctrine." This essay observes that the public trust doctrine doesn't apply to art, and that the arguments made by the deaccessioning police are absurd, on their own terms.
Brian D. Galle (Georgetown) has posted The Quick (Spending) and the Dead: The Agency Costs of Forever Philanthropy, which will be published in the Vanderbilt Law Review. Here is the abstract:
American philanthropic institutions control upwards of a trillion dollars of wealth. Because contributions to these entities are deductible from both income and estate taxes, and the entities’ earnings are tax-free, that trillion dollars is heavily underwritten by contemporary taxpayers. Law offers little assurance that those who pay will be those who benefit, however. To the contrary, since these subsidies become more valuable the longer charitable assets are left unspent, law strongly encourages philanthropies to save rather than spend, even in situations of great current need. Other legal rules further encourage grant-making institutions to strive to exist “in perpetuity.”
This Essay offers new empirical evidence of the social cost of forever philanthropy, that is, of institutions that long outlive their founders. Drawing on a relatively unique dataset of foundation donors, and combining it with a large archive of tax returns filed by private foundations, I search for evidence that managers of long-lasting organizations depart significantly from the preferences of the organization’s supporters. I find that a firm’s overhead, or the ratio of administrative expenses to grants made, jumps by about 12% as soon as the organization’s last living donor dies. Payout rates, or the share of assets spent each year, move sharply in the opposite direction, falling about 7% at that time.
I interpret these findings as evidence of substantial agency costs. Since the timing of the donor’s death is relatively random, these outcomes offer convincing causal evidence that the ability of a donor to monitor her foundation’s managers importantly affects whether those managers follow her wishes. I argue that overhead and payout changes in the direction I observe strongly suggest that managers, once free from direct oversight, are operating the firm for their own comfort and security. Thus, by unnaturally extending the lifespan of foundations, law is encouraging wasteful allocation of taxpayer-supported charitable resources.
Therefore, I suggest several policy options that would reduce the agency-cost problem. Among others, I support maintaining or increasing legal requirements for mandatory distributions by private foundations, and closing legal loopholes offered by a relatively new charitable phenomenon, the donor advised fund.
Michael Haber (Hofstra) has posted Legal Issues in Mutual Aid Operations: A Preliminary Guide. Here is the abstract:
This is a preliminary guide to legal issues that impact groups engaged in mutual aid. It is targeted to groups that have been responding to the COVID-19 crisis in New York, but has information that may be relevant for groups engaged in mutual aid in other contexts and other places. It gives legal information on topics including: risk of liability; questions around governance and incorporation; safety policies, liability waivers, and insurance; banking and mutual aid; funding mutual aid and taxation of mutual aid; crowdfunding regulations; and food storage and safety rules.
Langford (two papers): Conflicts and Coherence in the Charities Sphere; Using the Corporate Form for Public Benefit
Rosemary Teele Langford (Melbourne) has posted two articles. The first is Conflicts and Coherence in the Charities Sphere: Would a Conflict By Any Other Name Proscribe the Same?, 14 Journal of Equity 1 (2020). Here is the abstract:
Proscriptions on conflicts of interest have long been a core component of governance regimes. In the charities sphere such proscriptions arise from a number of sources, including general law, statute and governance standards articulated by the regulator. Unfortunately the wording of relevant conflicts duties varies extensively, giving rise to acute incoherence and uncertainty. This article undertakes detailed critical analysis of the myriad of conflicts duties in order to provide certainty and comprehensive guidance. This resolution is relevant beyond the charitable sphere given the multitude of ways in which conflicts proscriptions are expressed in other governance contexts.
The second is Use of the Corporate Form for Public Benefit - Revitalisation of Australian Corporations Law, which will be published in 43 University of New South Wales Law Journal No. 3 (2020). Here is the abstract:
This article specifically addresses the theme of revitalisation of Australian law in the facilitation of purpose-based companies. It is the second of two articles on purpose-based governance in the charitable and for-profit spheres. Building on the first article, this article critically analyses relevant features of the Australian corporations law regime. It pays close attention to challenges relating to the application of directors’ duties where companies have multiple purposes and to the drafting of appropriate constitutional provisions. In so doing it draws on insights from overseas jurisdictions that have enacted legislation to enable purpose-based companies.
Shuoyan Li (Shanghai University) has published Global Civil Society Under the New INGO Regulatory Law: A Comparative Case Study of Two INGOs in China, in VOLUNTAS. Here is the abstract:
This paper tries to explain why similar International Nongovernmental Organizations (INGOs) have different scopes under the new regulatory law in China. While previous studies have often associated fragmented authoritarianism with more room for civil sectors, the unintended consequence has been largely ignored. The paper argues that while civil sectors benefit from decentralized bureaucratic politics, the conflict between bureaucracies may also become an obstacle. This argument is based on a comparative case study of two similar INGOs whose missions are to solve poverty issues. While World Vision International had difficulties becoming a national organization after establishing several provincial offices with the help of local authorities, Oxfam succeeded and received permission from CPAFFC because it terminated collaboration with other local authorities, which put CPAFFC at ease. The interviews illustrate that competition among different departments and concerns about political risk lead to different outcomes for civil society. Government agencies will doubt an INGO’s willingness to commit to a new relationship if it has too many partners. This implication reveals the complex effects of fragmented bureaucracy on INGOs. The decentralized political structure may lead to different outcomes for INGOs. It is necessary for INGOs to understand the political logic of the new INGO law so that they can choose the proper strategy to maximize their benefits.
Francisco-José López-Arceiz (Universidad Pública de Navarra) and Ana J. Bellostas (University of Zaragoza) have published Nonprofit governance and outside corruption: The role of accountability, stakeholder participation, and management systems in Nonprofit Management & Leadership. Here is the abstract:
Outside corruption implies that a nonprofit organizatio
n is used to commit an infraction or crime. In Spain, this type of corruption has been detected in the context of public nonprofits as a result of the legal reform that enabled the judgment of the criminal responsibility of legal entities. A large percentage of these entities were affected by the reform, but little is known about the possible practices that can altogether prevent this behavior. In particular, there are few studies that consider nonprofit governance as a possible measure to avoid corruption in this context. For this reason, our aim is to analyze the role of certain nonprofit governance practices in fighting corruption. Using structural equation modeling, our results reveal that nonprofit governance is a key tool for mitigating corruption, although the weights of the different practices are not the same.
I have posted Charitable Crowdfunding. Here is the abstract:
Charitable crowdfunding is a global and rapidly growing new method for raising money to benefit charities and individuals in need. While mass fundraising has existed for more than a hundred years, crowdfunding is distinguishable from those earlier efforts because of its low cost, speed of implementation, and broad reach. Reflecting these advantages, it now accounts annually for
billions of dollars raised from tens of millions of donors through hundreds of Internet platforms such as Charidy, Facebook, GoFundMe, and GlobalGiving. Although most charitable crowdfunding campaigns raise only modest amounts, every year several efforts attract tens of millions of dollars in donations. However, charitable crowdfunding also has its downsides. Donors may misunderstand how the beneficiaries will use the funds raised or a campaign that unexpectedly goes viral may overwhelm a small charity or greatly exceed an individual’s needs. There have also been instances of outright fraud, as well as concerns raised about money laundering and terrorist financing.
Existing laws relating to charitable solicitations and charities more generally have either uncertain or limited application to charitable crowdfunding. Broader fraud and money laundering laws may apply to the worst abuses, but these usually criminal statutes are rarely invoked. The challenge faced by government regulators is therefore whether and how to modify existing laws to address the downsides of this new activity without unduly inhibiting the generosity that charitable crowdfunding encourages. This challenge is made more difficult by the lack of information regarding the positive effects as well as the downsides of crowdfunding. Finally, existing scholarship relating to charitable crowdfunding focuses on either the motivations of donors or tax implications instead of addressing this regulatory problem, even as some governments are beginning to develop proposals to address this activity.
This Article fills this gap by reviewing the existing, incomplete information regarding charitable crowdfunding and theories for regulating in the face of uncertainty to develop recommendations for addressing this new and growing phenomenon. Given we know very little about the positive and negative effects of charitable crowdfunding, and given that any harms are likely modest, purely financial, and often readily cured, I recommend that governments should at this time only take two steps. First, governments should require notification of designated beneficiaries to help ensure funds raised reach those beneficiaries. Second, governments should require notification of regulators, but only for the small subset of campaigns that cross a relatively high threshold, to both provide information about the scale and growth of charitable crowdfunding and deter problems with the largest campaigns. Additionally, I disagree with initial steps taken by some governments to impose more comprehensive consent and administration requirements on many or all charitable crowdfunding campaigns because such requirements are unnecessary hindrances on this new and innovative way of encouraging generosity, given there is little evidence of widespread problems and given that any potential harm is almost certainly relatively small and easily remedied if it occurs.
McMillan: Noncharitable Nonprofit Organizations and Tax Policy: Working Toward a Public Benefit Theory
Lori A. McMillan (Washburn) has posted Noncharitable Nonprofit Organizations and Tax Policy: Working Toward a Public Benefit Theory, which will be published 59 Washburn Law Journal No. 2 (2020). Here is the abstract:
Noncharitable Nonprofits in Canada are exempt from federal income tax, but are subjected to little scrutiny to qualify for this exemption. The tax policy behind this exemption is explored in this paper, trying to determine what should underpin the exemption for these types of organization.
The stakes for proper nonprofit governance are extremely high. Over 1.5 million nonprofits are registered with the IRS, collectively empl
oying 12 million people and accounting for 5.4% of US GDP. Yet while for-profit companies have significant checks on the behavior of boards and management, nonprofit firms lack many of the same types of internal and external governance control mechanisms. COVID-19 is just the latest in a long history of shocks to expose the lack of preparedness and capability of many nonprofit boards in fulfilling their essential governance functions.
This Article contributes to the corporate governance literature by identifying aspects of nonprofit governance that create unnecessary risk to nonprofit entities and to society overall. Currently many governance failures that would be corrected in traditional for-profit entities go unaddressed among nonprofits. We make unique contributions to addressing these governance shortcomings by suggesting an enforcement reorientation by both public and private actors. Our novel solutions encompass disclosure, certification, oversight by state attorneys general, and federal actors.
Jacob Hale Russell (Rutgers) has posted For Whom Are Non-Profit Managers Trustees? The Contractual Revolution in Charity Governance, which will be published in Fiduciary Obligations in Business (forthcoming). Here is the abstract:
This chapter chronicles an unnoticed aspect of the intellectual history of the “contractarian” paradigm, the descriptive claim that firms are best characterized as nexus of contracts. Although the paradigm’s rise in the 1980s in the corporate world is well known, little has been said about its success in rewriting both theory and doctrine in charitable and not-for-profit law. The contract paradigm has reshaped the questions that not-for-profit scholarship attempts to answers, and it is tightly linked to developments in not-for-profit doctrine and practice. Key examples include the growth of donor standing — the notion that not-for-profits have a fiduciary duty to their donors, and that donors may bring suit for breaches — and the growing obsession with “donor intent” throughout the not-for-profit sphere. I contrast contractarianism with an institutionalist “public trust” conception of charities, which was the prevailing intellectual paradigm for most of the 20th century.
David M. Schizer (Columbia) has posted Enhancing Efficiency at Nonprofits with Analysis and Disclosure. Here is the abstract:
The U.S. nonprofit sector spends $2.54 trillion each year. If the sector were a country, it would have the eighth largest economy in the world, ahead of Brazil, Italy, Canada, and Russia. The government provides nonprofits with billions in tax subsidies, but instead of evaluating the quality of their work, it leaves this responsibility to nonprofit managers, boards, and donors. The best nonprofits are laboratories of innovation, but unfortunately some are stagnant backwaters, which waste money on out-of-date missions and inefficient programs. To promote more innovation and less stagnation, this Article makes two contributions to the literature.
First, this Article breaks new ground in identifying sources of inefficiency at nonprofits. The literature focuses on incentives, arguing that managers and board members are less motivated to run a nonprofit efficiently because they cannot keep its profits. In response, this Article emphasizes that the problem is not just motivation, but also information. Measuring success is harder at nonprofits. Instead of tracking profitability, they use metrics that are less reliable and harder to measure. These measurement challenges complicate the efforts even of dedicated and competent managers to operate efficiently. While this information problem is familiar, another has been largely overlooked in the literature: When success is hard to measure, incompetence and self-interested practices are less visible, and thus are harder to stop. For example, if managers regularly overpay vendors, the consequence at a for-profit firm (lower profits) is easier to observe than at a nonprofit (less effective service for beneficiaries).
Second, this Article recommends a response to this underappreciated source of inefficiency: better analysis and disclosure as a strategy for organizational change. In principle, nonprofits are supposed to maximize social return, but how can they operationalize this abstract principle? To help them do so, this Article recommends three questions that nonprofits should answer every year: first, how important are the challenges the nonprofit is trying to address?; second, how effective are the nonprofit’s responses to these challenges?; and third, is the nonprofit the right organization to respond to these challenges? These questions press nonprofit managers and boards to be more explicit about priorities, monitor progress, improve and expand high-value programs, and fix or shut down ineffective ones. This Article also recommends that nonprofits should disclose this analysis to the public, even though current law does not require them to do so. This disclosure would empower donors and rating agencies to be more effective monitors. It also would help donors make better informed philanthropic choices and would enable charities to borrow innovative ideas from each other more easily.
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