Friday, November 8, 2024
Nonprofit Conversions
Nonprofit Valuations: Transactions Requiring an Accurate Valuation of Your Nonprofit
From today's Bloomberg Law:
. . .
Trustees may decide for business or regulatory reasons that their work might be better accomplished under a different legal statute through which successors acquire both legal and beneficial ownership. To carry out that sort of conversion, the successors must purchase the nonprofit’s assets. This is true even if the successors were former trustees. Their prior status as trustees affords them no rights to simply appropriate the assets to their profit-making endeavors because they never owned the assets in the first place. They must fairly purchase the assets from the taxpayers.
Trustees who seek beneficial ownership become both sellers and potential buyers regarding publicly owned assets. As public fiduciaries, trustees are legally obliged to negotiate on behalf of taxpayers for the best price. But in their private roles, trustees are naturally motivated to pay the least amount possible for the assets. Clearly, the public can’t be sanguine if the buyers are also the sellers’ agent. The conflict is clear—yet it would be bad policy to entirely prohibit such transactions, so the law imposes guardrails.
Both process and price for a nonprofit conversion—a sale of all or some of the assets—must fairly protect the real owners’ financial interest. State and federal tax laws determine what is fair. To be substantively fair, the sale price must at least be equal fair market value, a concept easily articulated but difficult to determine. To be procedurally fair, the negotiation process must negate the impact of the trustees’ irredeemable conflict. Fair price and process are generally though not invariably symbiotic. A sale price will typically be considered fair, with no other required proof, if the process is fair.
A process will be considered fair if the resulting price is within a provable range of comparable prices, but the latter correlation may vary. In Smith v. Van Gorkum, for example, the beneficial owners sold stock for a premium, and yet the Delaware Supreme Court found that directors violated their fiduciary duties because of an unfair process. When trustees are both buyers and sellers, the transaction must be negotiated by substitute trustees free of financial conflict who comply with the same fiduciary duties applicable to the conflicted trustees. The practical and legal requirements are codified in Reg. 53.4958-6.
. . .
darryll k. jones
November 8, 2024 | Permalink | Comments (0)
Trump Wins Campaign Intervention Olympics: What About The Johnson Amendment?
Sound and fury signifying nothing: At the ceremonial signing of EO 13798 (2017)
Now that one party will be in control of all three branches of federal government what sort of changes might we expect in nonprofit and tax exemption law? Let’s start with campaign intervention, the most visible issue. Trump has promised to do away with the Johnson Amendment. Within the first week, he said just last month. But let’s cut him some hyperbolic slack. If he means it, Ways and Means will comply very quickly because it is led by political expediency more often than not. Finance will go along too, if push came to shove. Finance has not often jumped into the frat boy hearings Ways and Means has conducted against Civil Society for the last two years. It likes to think things through at least. So it might take some pushing and shoving to get Finance on board. But eventually, the Johnson Amendment could be gone in one fell swoop.
I still wouldn’t bet on that happening as fast as all that. A wide spectrum of nonprofit organizations – left, center, and right leaning – want the cover and legitimacy the Johnson Amendment affords. It’s not like the Johnson Amendment prevents what it prohibits anyway. Language is too complex for a law against “endorsement” or “opposition” to really prevent a nonprofit from endorsing or opposing one candidate or another. Let’s just be honest about it.
There are benefits to keeping the Johnson Amendment even for the most politically inclined charities. With it, charities can associate with, support, and curry favor from any politician patron while at the same time prevent their own capture by political patrons. Have cake, eat it too. With the Johnson Amendment even the most politically biased nonprofit can deny and fend off explicit political capture. That helps the organization and the entire sector maintain at least nominal credibility. Civil Society – left, center, or right -- understands that once nonprofit groups become explicitly identifiable by political beliefs, the whole sector will suffer as political winds invariably shift back and forth, and successive politicians demand explicit loyalty in exchange for legislative favors. The effect will be universal because politics is all about “you are either for us or against us.” Even organizations that want nothing to do with politics will be forced to pick one side or the other. They will have to be one or the other, or not exist at all. And donors will respond to Civil Society accordingly. They will want to know who an organization is with before making a donation. Maintaining the Johnson Amendment helps them fight off those pressures, and the perception or reality of political capture.
Trump promised though, and his victory speech included the phrase, “promises made and promises will be kept.” But he made that promise to religious folks. He doesn’t have to get rid of the Johnson Amendment for non-religious organizations if all he wants to do is keep a promise. He doesn't even have to keep the promise for non-church religious organizations. Truth be told, he should keep that promise to churches only. As applied to organized worship, and only that, the Johnson Amendment is unconstitutional, unworkable, and unenforceable anyway. It violates the First Amendment twice. "You know that," as Trump would say with insufferable smugness.
The Johnson Amendment should be entirely repealed only with regard to organized worshippers, nobody else. It should continue to apply to religious and non-religious organizations, alike. There is a difference between organized worship and activities motivated by religious beliefs. One is the essence of free exercise, the other is peripheral. Organized worship – when people are talking to God, rather than to each other -- is the essence of free exercise. A tax-exempt radio broadcast, even one about religion ain't talking to God, it's just peripheral. Religious organizations may be regulated more than organized worship. We already admit this much in the Tax Code. For example, not every religious organization is entitled to the protections of the Church Audit Procedures because not every religious organization is engaged in the essence of worship.
Just for the sake of argument, assume the Johnson Amendment does not violate the right of free speech, and political silence may be required as a condition of tax exemption. That dubious assumption would still not overcome the constitutional barrier against laws prohibiting the free exercise of religion. The Johnson Amendment ought to be repealed with regard to organized worship. If we stipulate that it does not violate the right of free speech then it should be maintained for religious organizations (and all other groups) because they are not organized worshippers engaged in the essence of free exercise.
Trump could keep his promise, to churches at least, by issuing an Executive Order amending or supplementing the delicate and ineffectual verbal tap dance in EO 13798. I quote it below, read it for yourself. It has lots of words, but it changed nothing. It merely supports the routine exercise of prosecutorial discretion in favor of churches and religious organizations. Something the Service was doing anyway. To really keep the promise, Trump only needs to say that the government shall bring no enforcement action against any “house of worship” for any speech on the basis that the speech endorses or opposes a candidate for political office. That is the pragmatic state of the law today anyway.
Sec. 2. Respecting Religious and Political Speech. All executive departments and agencies (agencies) shall, to the greatest extent practicable and to the extent permitted by law, respect and protect the freedom of persons and organizations to engage in religious and political speech. In particular, the Secretary of the Treasury shall ensure, to the extent permitted by law, that the Department of the Treasury does not take any adverse action against any individual, house of worship, or other religious organization on the basis that such individual or organization speaks or has spoken about moral or political issues from a religious perspective, where speech of similar character has, consistent with law, not ordinarily been treated as participation or intervention in a political campaign on behalf of (or in opposition to) a candidate for public office by the Department of the Treasury. As used in this section, the term "adverse action" means the imposition of any tax or tax penalty; the delay or denial of tax-exempt status; the disallowance of tax deductions for contributions made to entities exempted from taxation under section 501(c)(3) of title 26, United States Code; or any other action that makes unavailable or denies any tax deduction, exemption, credit, or benefit.
darryll k. jones
November 8, 2024 | Permalink | Comments (0)
Thursday, November 7, 2024
New Report Paints a Bleak Picture of Civil Society Worldwide
CIVICUS is a 501(c)(3), headquartered Johannesburg, South Africa. According to Guidestar, it is a "global alliance of civil society organisations and activists dedicated to strengthening citizen action and civil society throughout the world." CIVICUS' 2024 State of Civil Society Report is an impressive advocacy report. It pretty much points the finger at a lot of different countries -- including the United States, Russian, Israel, Turkey, Argentina, Finland, the Netherlands, and the Sudan -- for what it views as the very bad environment for Civil Society. You would think there is a worldwide conspiracy against Civil Society.
The report is alarming but not so far-fetched. Civil Society largely comprises outsiders who invariably threaten incumbents. Even nonprofits that provide free meals to people threaten incumbents. Widely varied governments express just as widely held suspicions of Civil Society via similar forms of legal or extra-legal restrictions all over the world. Here are a few excerpts from the Report:
Belligerents are brazenly flouting long-established tenets of international human rights and humanitarian law because they expect to get away with it. Global governance institutions are flailing as states make hypocritical decisions that undermine the rules-based international order. Civil society has solutions for global governance reform but isn’t getting a seat at the table. Powerful states including Russia and the USA are demonstrating selective respect for the rules, shielding allies but castigating enemies. This is clear among the many states that rushed to Ukraine’s defence but continue to back Israel. At the basest level, some states are displaying racism as they show concern for white people’s human rights but not for those of people of colour. International rules are supposed to make sure atrocities such as those being systematically perpetrated in Gaza don’t happen, and if they do, they’re quickly halted and those responsible face justice. But the key United Nations (UN) body, the Security Council, is immobilised by powerful states using their veto. Among those who hold the cards, principled and empathetic leadership is in short supply, as are humility and a willingness to listen.
. . .
The climate crisis is a global emergency with immediate and long-term consequences. The need to act has never been clearer. 2023 was the hottest year on record. Seemingly every week brought news of another extreme weather event, affecting the most vulnerable people the worst. The calls for urgent change are coming loudest from civil society, but in 2023 activists faced growing pushback. Many states are collapsing the space for climate activism, including in global north countries with vibrant climate movements where the right to speak out used to be respected.
. . .
The repression of civic space should be recognised as the new frontier of climate denial. Outright denial is now relatively rare, but states and fossil fuel corporations, by suppressing civil society’s ability to keep up the pressure, threaten to delay action on the scale required until it’s too late.
. . .
Attacks on democracy are making it harder for people to advance the solutions today’s crises require. As 2023 began, 72 per cent of people lived in authoritarian regimes, and the situation didn’t improve as the year went on. A record number of countries are sliding towards authoritarianism, while the number of countries democratising is the lowest in decades.
. . .
Civil society’s hard-won, decades-long trend of progress in women’s and LGBTQI+ rights has slowed down, hitting the
buffers of a backlash that’s grown more intense. A wellfunded, transnational movement with US roots that has fought against gender rights for decades is winning increasing influence. In many countries, as the anti-rights backlash is being instrumentalised for political gain, attacks on activists who defend rights are growing.
It can't just be dismissed as alarmist propaganda.
darryll k. jones
November 7, 2024 | Permalink | Comments (0)
Microsoft's Comments on Private Benefit and Public Good in the OpenAI (c)(3) Joint Venture
We have previously reported that Delaware has made inquiries to OpenAI (c)(3) regarding its reported transition to a public benefit corporation. Now comes word that OpenAI (c)(3) has initiated talks with California's AG:
Meanwhile, Microsoft's most recent 10Q contains a few nuggets relevant to whether profit and tax exempt charity can coexist in a single entity. First, this statement relevant to Revenue Ruling 98-15's requirement that OpenAI (c)(3) have ultimate authority over the joint venture:
Investments that are considered variable interest entities (“VIEs”) are evaluated to determine whether we are the primary beneficiary of the VIE, in which case we would be required to consolidate the entity. We evaluate whether we have (1) the power to direct the activities that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We have determined we are not the primary beneficiary of any of our VIE investments. Therefore, our VIE investments are not consolidated and the majority are accounted for under the equity method of accounting. We have an investment in OpenAI Global, LLC (“OpenAI”) and have made total funding commitments of $13 billion. The investment is accounted for under the equity method of accounting.
I suppose the statement is legally accurate, that Microsoft does not have the "power to direct" OpenAI LLC's activities. But it is probably inconsistent with the economic reality. And then Microsoft includes this statement, implicitly justifying OpenAI LLC's charitable purpose while also suggesting that the charitable and business purposes are co-extensive:
Issues in the development and use of AI may result in reputational or competitive harm or liability. We are building AI into many of our offerings, including our productivity services, and we are also making AI available for our customers to use in solutions that they build. This AI may be developed by Microsoft or others, including our strategic partner, OpenAI. We expect these elements of our business to grow. We envision a future in which AI operating in devices, applications, and the cloud helps our customers be more productive in their work and personal lives. As with many innovations, AI presents risks and challenges that could affect its adoption, and therefore our business. AI algorithms or training methodologies may be flawed. Datasets may be overbroad, insufficient, or contain biased information. Content generated by AI systems may be offensive, illegal, inaccurate, or otherwise harmful. Ineffective or inadequate AI development or deployment practices by Microsoft or others could result in incidents that impair the acceptance of AI solutions, cause harm to individuals, customers, or society, or result in our products and services not working as intended. Human review of certain inputs and outputs may be required. . . If we enable or offer AI solutions that have unintended consequences, unintended usage or customization by our customers and partners, are contrary to our responsible AI policies and practices, or are otherwise controversial because of their impact on human rights, privacy, employment, or other social, economic, or political issues, our reputation, competitive position, business, financial condition, and results of operations may be adversely affected.
It's just plain good business to act in accordance with OpenAI (c)(3)'s charitable goals. For now, anyway. Microsoft is still in it just for the money, though. In an earnings conference call, Microsoft's CEO said this:
“The partnership for both sides — that’s OpenAI and Microsoft — has been super beneficial,” he said, adding that Microsoft “effectively sponsored” what became one of the “highest-valued private companies today when we invested in them, and really took a bet on them and their innovation, four or five years ago.”
That, in turn, “has led to great success” for both companies, which Microsoft and OpenAI continue to build upon, Nadella said. He cited Microsoft providing OpenAI with the infrastructure needed for their innovations, and Microsoft’s ability to leverage the resulting AI models from OpenAI, in addition to those that it trains and runs itself. “We feel very, very good about our investment stake in OpenAI, and our own our focus,” he said. “We’re always in constant dialogue with them. In a partnership like this, when both sides have achieved mutual success at the pace at which we’ve achieved it, that means we need to push each other to do more to capture the moment, and that’s what we plan to do — and we intend to keep building on it.”
Charity is nice, but this is all about the Benjamins.
darryll k. jones
November 7, 2024 | Permalink | Comments (0)
Wednesday, November 6, 2024
District Court Preliminarily Expands Ministerial Exception
A federal district court granted a preliminary injunction last Friday, prohibiting Washington from enforcing an anti-discrimination law affecting churches and other religious organizations. The "Washington Law Against Discrimination" (WLAD), as interpreted by the Washington Supreme Court, prohibits religious organizations from discriminating in their hiring of non-ministerial employees. Plaintiffs assert that WLAD is federally unconstitutional and the District Court preliminarily agreed. There aren’t any factual disputes in the case so it’s a pretty safe bet that Washington will lose upon final adjudication. This will be the first time the ministerial exception is applied to allow religious organizations to discriminate in the hiring of non-ministerial staff. Here is a brief recap from an earlier post:
We told you just a few weeks ago that the Ninth Circuit heard oral arguments concerning the ministerial exception. That exception stands for the proposition that religious organizations cannot be required by anti-discrimination laws to hire people who do not adhere to the organization's religious doctrine. But so far, the exception applies only to an organization’s hiring of ministerial staff – people who teach or proselytize. The Catholic Church can't be forced by anti-discrimination laws to hire a gay Bishop. The Washington cases making their way to the Supreme Court involve whether the exception permits discrimination in the hiring of non-ministerial staff. An IT director, an administrative assistant, a facilities manager or even a faculty member teaching math or a foreign language at a religious school or university, for example. Does the ministerial exception allow religious organizations to discriminate against a lesbian IT director whose job requirements have nothing to do with the organization’s religious doctrine? The two Washington cases involve Christian ministries who assert the right to limit their hiring of all staff, not just ministerial staff, to people who adhere to the ministries' religious doctrine. Those organizations want to extend the exception to non-ministerial staff and at least two justices -- Alito and Thomas -- are eager to hear the cases.
The District Court found that the religious organizations will likely succeed because the law fails strict scrutiny analysis:
Plaintiff is likely to succeed on the merits of its Free Exercise claim. The Free Exercise Clause provides that “Congress shall make no law . . . prohibiting the free exercise” of religion. U.S. Const. amend. I. The Supreme Court “has held the Clause applicable to the States under the terms of the Fourteenth Amendment.” Kennedy v. Bremerton Sch. Dist., 597 U.S. 507, 524 (2022) (citing Cantwell v. Connecticut, 310 U.S. 296, 303 (1940)). “A law burdening religious practice that is not neutral or not of general application must undergo the most rigorous of scrutiny. To satisfy the commands of the First Amendment, a law restrictive of religious practice must advance interests of the highest order and must be narrowly tailored in pursuit of those interests.” Church of Lukumi Babalu Aye, Inc. v. City of Hialeah, 508 U.S. 520, 546 (1993).
. . .
Defendants address strict scrutiny as follows: “Preventing discrimination is a compelling government interest, and the best way to prevent discrimination is to prohibit it while honoring the ministerial exception from the First Amendment as set forth by the U.S. Supreme Court. The WLAD does exactly that.” However, as Plaintiff correctly observes, “[f]or over 70 years Washington advanced its interests while exempting nonprofit religious organizations.” see Woods, 481 P.3d at 1064 (“As originally enacted, WLAD exempted from the definition of ‘employer’ ‘any religious, charitable, educational, social or fraternal association or corporation, not organized for private profit.’”) Because there is a “less restrictive measure” to advancing Defendants’ interest, the WLAD likely fails the “tailoring prong of the strict scrutiny test.” Fellowship of Christian Athletes, 82 F.4th at 694.
darryll k. jones
November 6, 2024 | Permalink | Comments (0)
The AMT's Strictly Financial "Disincentive" on Corporate Charitable Giving
Is it a "disincentive" to withhold an unwarranted reward? That question occurred to me as I read an interesting piece in Tax Notes yesterday. Libin Zhang discusses the motivational effect of the 2022 Inflation Reduction Act on corporate charitable giving. For AMT purposes, corporations do not get to deduct built-in-gain when donating appreciated property to charity. Zhang focuses on a 2022 change to the Alternative Minimum Tax. Here is a short excerpt:
Under the Inflation Reduction Act of 2022, large corporations are generally subject to a 15 percent corporate alternative minimum tax on their book income as determined for financial accounting purposes in 2023 and later. One difference between book income and taxable income is that the tax system encourages charitable giving to nonprofit organizations. Those incentives do not exist for book income tax purposes, which can significantly reduce the tax benefits of charitable contributions.
Corporations may need to reduce their noncash charitable contributions by up to 15 percent to have the same after-tax cost as under prior law. A smaller detriment applies to corporate cash charitable contributions. Corporations may also consider postponing their charitable contributions until a later year in which they are certain that the contributions provide full tax benefits under both the regular tax and corporate AMT regimes.
Charitable Contributions and the Disappearing Regular Tax Gain
When a taxpayer donates appreciated property to a charity, the regular tax system typically allows the taxpayer to claim a charitable deduction for the property’s fair market value, without recognizing any gain in the property. For example, if a corporation donates a capital asset worth $100 with a tax basis of $0, the corporation can claim a $100 charitable contribution deduction under section 170. None of the $100 of unrealized gain in the stock is recognized for regular tax purposes.
Generally accepted accounting principles and other financial accounting standards are less interested in encouraging charitable giving and are more focused on balancing the books. Charitable gifts are treated as expenses equal to the fair value of the assets given, but gain or loss is also recognized if the donated asset’s fair value differs from its carry amount. For example, if a corporation donates an asset worth $100 with a tax basis of $0, the corporation recognizes a $100 expense but also $100 of offsetting gain under GAAP. The corporation has a zero net deduction for corporate AMT purposes. The corporation may have up to $100 of additional corporate AMT income and $15 of additional corporate AMT liability, when compared with its regular taxable income that is benefiting from the $100 charitable contribution deduction.
Zhang concludes that the AMT strips away the tax reward for corporate charitable contributions. It "disincentivizes" corporate charitable giving, particularly with respect to appreciated assets. He gives a concise history, noting that Professor Michael Graetz advocated for the current approach before it was first adopted in the Tax Reform Act of 1986. The AMT was amended under the Clinton Administration to allow the AMT charitable contribution deduction, but then Professors David Gamage, Reuven S. Avi-Yonah, and Darien Shanske advocated for a return to the pre-1993 approach. That's how we got to the IRA 2022 approach. Professors always insist on correct theory in tax law. It is theoretically incorrect to provide a deduction for untaxed appreciation. But I bet the return to the 1986 approach was not so much motivated by proper theory as much as the need to pay for some other discretionary spending.
I am not so sure "disincentive" is the right word anyway, unless the withdrawal of an unwarranted benefit -- deduction of untaxed appreciation -- is properly viewed as a disincentive. Economically incentives and disincentives are measured strictly by dollars gained or lost. By that measure, maybe the AMT is accurately described as a disincentive. But it is a fallacy to think that tax policy is simple Milton Friedman-esque math. If the denied tax benefit is offset by publicly shared gain -- e.g., reduced crime, better health care, lower drop-out rates, or increased green space -- an uncertain amount of which reduces aggregate corporate taxes, the disincentive disappears. Increased crime, poor health care, a poorly educated populace, and environmental harms increase corporate taxes, too.
darryll k. jones
November 6, 2024 | Permalink | Comments (0)
Tuesday, November 5, 2024
Campaign Intervention Olympics, Gold Medal Round
Well, folks we have finally reached the gold medal round of the campaign intervention Olympics. There are two finalists. In Lane 1, we have Donald Trump. At a campaign visit with a bunch of religious folks a week or ten days ago, Trump said that he did away with the Johnson Amendment during his first term and he forced the IRS to stop harassing churches who wanted to endorse presidential candidates. That part is at 35:37 in the video below. But after his 2020 opponent stole the election, his 2024 opponent reinstated the Johnson Amendment and set the IRS dogs loose again on churches. He also said his daughter Tiffany graduated number 1 in her Georgetown Law School class, by the way. None of that actually happened-- I'm sure Tiffany is a skilled lawyer but Georgetown does not rank its students. It all made for a good stump speech and anyway he promised the Johnson Amendment will be gone by the first week of his administration.
In Lane 2, we have Kamala Harris. Although she previously let the IRS dogs out on churches endorsing candidates, according to Trump, she does not mind as much church endorsement as she can get for herself. Sunday, she made a campaign stop at a Detroit, Michigan church. After leading the congregation in loud "victory! victory! victory!" cheers, the Pastor introduced Harris as "the next President of the United States . . . Kamala Harris!" That starts around 21:15. The congregation went wild:
It's been a great Olympics. Let's do it again in four years.
darryll k. jones
November 5, 2024 | Permalink | Comments (0)
The Push and Pull of Public and Private Spending on Charity Care
From Understanding Public and Private Health Care
When public spending on charity care increases, nonprofit hospital charity care decreases by a 9:1 ratio. But that's because the demand for charity care decreases, not because nonprofit hospitals intentionally cut back on charity care, according Kelsey Moran, a research economist at MIT.
I don't know what to do with that data point. At first I thought, "d'uh!" But maybe it means that nonprofit hospitals spend $9 for the same charity care that it costs the government only $1 to achieve. Maybe it means indirect subsidies -- tax exemptions and charitable contributions -- are terribly inefficient ways to pursue public goods. Maybe it means that 90% of subsidies are diverted to something other than charity care -- like eyepopping salaries maybe. Or . . . it could be that I don't quite understand what a "one standard deviation decrease" means. I can only surmise that increases in public spending disproportionately correlate with decreases in nonprofit hospital charity care. Here is the conclusion to Safety Net Crowd-Out: How Public Programs Affect Non-Profit Hospital Charity Care:
Little is known about the relationship between private and public provisions of charity healthcare. By examining changes in non-profit hospitals’ financial assistance spending levels and written policies following increases in public healthcare safety net provision, this paper provides important insights into the dynamics of public and private organizations in charity healthcare markets.
Overall, my analysis provides substantial evidence of public spending crowding out private spending on charity healthcare. I find that a one standard deviation increase in Federally Qualified Health Centers (FQHCs) per baseline uninsured results in a 9% decrease in nonprofit hospital charity care. Additionally, I show that state-level Medicaid expansions lead to a 35% decrease in both non-profit hospital charity care and uncompensated care expenditures, with effects persisting over multiple years. This Medicaid analysis extends previous short term studies on this topic by demonstrating the long-term impacts of public health insurance expansion on private charity care.
Despite significant changes in charity care levels, I find no evidence that increased public healthcare safety net provision affects non-profit hospitals’ financial assistance policies; hospitals appear to simply allow their charity spending to fall with demand. I also establish that there is virtually no correlation between changes in these policies and hospital charity expenditures. These results raise questions about the role and effectiveness of non-profit hospitals’ financial assistance policies, indicating a need for further research into policy-setting practices. In conclusion, this paper demonstrates clear evidence of public spending displacing private charity care in the healthcare sector. As policymakers in the U.S. continue to grapple with healthcare reform, understanding these complex interactions between public and private providers will be crucial for designing effective and efficient safety net programs.
I didn't have time to read the paper closely so I wrote to the author, a Ph.D. candidate, and she provided me with this helpful explanation:
I interpret that to mean that an increase (.00083%) in federally supported clinics results in a disproportionate (9%) decrease in charity care dispensed at nonprofit hospitals, but not necessarily because nonprofit hospitals intentionally decrease charity care.
darryll k. jones
November 5, 2024 | Permalink | Comments (0)
Monday, November 4, 2024
Maryland Attorney General Threatens Nonprofit Vote Shamers
A portion of the vote shaming letter used in New York
Any government letter that contains the phrase, “you are hereby instructed to CEASE AND DESIST from any communication,” is gonna be trouble. For the government, not the recipient. Any fool ought to know that much. But that’s what happened last week on Halloween. The Maryland Attorney General, sent a letter saying that much and more to two nonprofits behind the effort to shame out Democratic votes. He’s mad because the nonprofits sent letters saying they intend to disclose recipient’s voting record (“so you better vote, this time!”). The letter . . . states that "the Voter Participation Center will be reviewing these records after the election to determine whether or not you joined your neighbors in voting.” The shame letters target African Americans, among other typically Democratic voters. I’m not sure whether I should be happy or mad about it, but that’s beside the point right now.
The AG, a Democratic brother from another mother, told them to shut up. Like me, he must be conflicted. He said the nonprofits’ talk is making some people feel bad – “intimidated, threatened, shocked, and [downright] ill-at-ease.” Regardless of the cognitive dissonance that inspired the effort, the threat is ridiculously unconstitutional state action against obnoxious and mouthy nonprofits harvesting Democratic votes. This is why I love scavenging for nonprofit stories. I love to laugh and there are just so many laughs. Here is a part of a WSJ report:
Nonprofit groups that sent letters threatening to publicize Maryland residents who fail to vote in Tuesday’s election have run afoul of the state’s attorney general, who ordered them to cease and desist with the mailings. Recipients who spoke to state officials “have uniformly described feeling intimidated, threatened, shocked, and ill-at-ease by this mailing, as the letter suggests that there will be follow-up after the election,” Maryland Attorney General Anthony Brown said. “This threat to publicly expose the recipient’s voting record violates both Maryland and federal laws.” Brown, a Democrat, ordered the Center for Voter Information and its affiliated Voter Participation Center, both based at the same Washington D.C., address, to respond by Friday.
Similar letters have blanketed mailboxes in other states, including New York. The groups are led by Tom Lopach, a longtime political operative who has worked for Democrats including former Montana Gov. Steve Bullock, Montana Sen. Jon Tester and the late Sen. Ted Kennedy of Massachusetts. The organizations’ website says they “use data-driven methods of direct mail and digital engagement to register to vote and turn out to vote members of the New American Majority—people of color, unmarried women, and young people—with the end goal of helping to ensure a representative electorate in US elections.”
I mentioned above that the two nonprofit organizations, the Voter Participation Center and the Center for Voter Information, are being intentional assholes for their cause. Here is what one of the participants said, just to prove the point:
“I recognize that some people find the language in our letters off-putting,” Lopach said during an interview before the cease-and-desist letter was sent. “But again, for well over a decade, we’ve used letters like this. And we’ve used and tested letters with softer language, and what we have found is that this is the most effective get-out-the-vote letter that we can use.” Lopach said the centers have been working “for over 21 years” to increase voter participation.
“In everything we do, we run a randomized control trial. We test different language year after year, in special elections, in general elections, off years, midterm elections, and we have found that these letters are the most effective tool at increasing voter turnout, especially among the young population we serve,” he said. Jared DeMarinis, Maryland State Board of Elections administrator, said voter registration information is public record, so long as it is used for “electoral purposes.”
darryll k. jones
November 4, 2024 | Permalink | Comments (1)
FTX Trustees Claw Back $8.5 Million Donor Advised Fund Contribution
After one of my publications sparked mild outrage last year, Joe Bankman sent me an encouraging email. A "keep your chin up, kid" sort of thing. Just a sentence or two. I was amazed at his kindness considering the turmoil engulfing his family at the time. I responded with thanks and my own note of encouragement. He probably didn't need or want to hear it but I felt awkward. I imagine he just wanted to be back in his academic world for a minute and that's why he sent the note. He probably didn't want to be reminded, not even from a sympathetic person. I can only relate minimally. Many years ago, my oldest brother got in trouble on a very penny ante scale compared to FTX. I can still remember my parents' silent anguish hovering in the house like a cloud of smoke for months. The New York Times published an article focusing on the FTX families' efforts to come to terms with the enormity of their storm. It gives a fleeting glimpse of the parents' struggles to understand how their wunderkinder ended up in such a mess. That's what they are still, just very smart kids who did something really really dumb on an international stage. Deer in sudden headlights. Here is a sample from the Times:
Mr. Bankman-Fried started working with Ms. Ellison, Mr. Singh and Mr. Wang in 2018, when he ran a crypto hedge fund, Alameda Research, in Berkeley, Calif. All recent college graduates, they bonded over a shared commitment to effective altruism — a philanthropic movement that calls on young people to donate most of their money to charity. Ms. Ellison’s parents were skeptical of her life decisions. She ignored the “standard parental advice” to buy a house and avoid storing all her savings on FTX, her father, Glenn Ellison, wrote to the court. “I was a bit shocked when the first tax receipt for a charitable contribution a hundred times larger than I would have thought a college student should make arrived in the mail,” Mr. Ellison wrote in a filing last month.
I told you last summer that FTX bankruptcy trustees were trying to claw back charitable contributions made at the behest of erstwhile FTX fiduciaries, some of whom are now serving prison sentences. The trustees insist that the same fraudulent intentions motivating the business scam also motivated charitable donations made from the proceeds of that scam. The Trustees have settled one such effort against the Silicon Valley Community Foundation. From Bloomberg:
Silicon Valley, an administrator of donor-advised funds, agreed to transfer more than $8.5 million in cash and 34,000 proprietary FTX tokens (FTT) that it held in funds previously managed by executives Caroline Ellison and Nishad Singh. The deal resolves the need to litigate claims that the 2021 donations by those in Bankman-Fried’s inner circle amount to fraudulent transfers. Ellison, who ran FTX-adjacent hedge fund Alameda Research and was romantically involved with Bankman-Fried, was recently sentenced to two years in prison for assisting her former boyfriend loot $8 billion worth of FTX customer funds. Singh, who was the company’s chief engineer, avoided prison time over his role in the fraud.
Here is the SVCF Claw back Agreement.
darryll k. jones
November 4, 2024 | Permalink | Comments (0)
Friday, November 1, 2024
Does Memorial Hermann Threaten (c)(4) Campaign Intervention Limits
The Fifth Circuit’s opinion this week in Memorial Hermann is giving me math brain cramps. The Wall Street Journal reported this week that Memorial Hermann "threatens" social welfare organizations that rely on dark money to engage in campaign intervention. I don't see how that can be true and its bothering me enough to blog about it. Here is a sample from the article:
WASHINGTON—A federal appeals court narrowed the tax rule that has let conservative and liberal groups pour billions of dollars into political campaigns without disclosing their donors, and the case could restrict the flow of so-called dark money into politics. The unanimous opinion from a three-judge panel of the 5th U.S. Circuit Court of Appeals came this week in a healthcare case that didn’t directly address politically active organizations. But the decision—from a conservative court—sets a tighter legal standard for tax-exempt status that the advocates for political donor transparency have long sought. The court said groups can’t qualify for tax exemption under Section 501(c)(4) of the tax code if they have a substantial nonexempt purpose. That is a much stricter standard than the one in Internal Revenue Service regulations, which say groups only need a primary purpose that qualifies for the exemption. That has been interpreted to allow tax exemptions for groups that spend 51% of their money on lobbying or other clearly allowed activities—and 49% on politics. “The people who are making the case that they can do up to 49%, do they have a leg to stand on? Their leg got a lot weaker,” said Phil Hackney, a University of Pittsburgh tax law professor.
Everybody is trying to quantify the difference between “substantial” and “primary.” But neither word can be quantified with any certainty. That’s why we use the words in the first place; to describe the unquantifiable relative predominance of a thing. We try anyway, I suppose.
It all starts with "exclusively,” a word English speakers use to means 100%. We are operating in a world of whole numbers here. Charities and social welfare organizations must be "exclusively operated" for their exempt purposes. Well, the Supreme Court long ago said exclusively means “substantial.” “Substantial” is less than exclusive so it must mean less than 100% but at least 50%. Something less than the 50% of the whole can’t be substantial, it's all relative, you understand. “Primary” is less than “substantial,” according to administrative pronouncements cited in Hermann, so that must mean less than 50% but more than minimal, a word we don't need to quantify unless we are trying to determine "incidental." But we know that anything equal or greater than 50% is substantial. Before Memorial Hermann threw out the word "primary" in the (c)(4) regs, 49% was not fatal. But it still can't be fatal. Because a (c)(4) that is a 49% campaign interventionist still doesn't have a substantial non-exempt purpose even if primary really means substantial. Forty nine percent still can't be substantial.
If primary really means substantial, as the Fifth Circuit decided when defining "exclusively," and substantial means at least 51%, Memorial Herman is not a threat to politically active (c)(4)s because they are only prohibited from primary now defined as substantial (50%) campaign intervention. I think the reason some think Memorial Hermann changes that is because “substantial” is used both prescriptively and proscriptively to describe how much an organization must and can’t do. Social Welfare organizations must engage in social welfare substantially (51%). But they may not engage in campaign intervention substantially (51%). Thus, to do both simultaneously, a social welfare organization can still engage in politics to the 49th percentile because that is not substantial. Memorial Hermann doesn’t change anything. But it does point out a broader point. The law can't effectively prohibit something that cannot be precisely defined. Or something like that.
That Journal's math just ain't mathing.
darryll k. jones
November 1, 2024 | Permalink | Comments (0)
States' Very Slow Efforts to Quantify Community Benefit Standards
From the NJ Hospital Association
Federal law does not set a definitive level of "community benefit" nonprofit hospitals must provide in return for tax exemption so there is always room to debate whether hospitals do enough to justify tax subsidies. The states, though, seem more inclined to set quantifiable levels. Two scholars have collected data regarding the adequacy of community benefit and charity care rendered by New Jersey nonprofit hospitals, after that state set a required 12% (of total expenses) community benefit standard: Here is the abstract for An Analysis of Tax Exemption and Community Benefits for Nonprofit Hospitals in New Jersey:
The public policy rationale for granting tax-exempt status to entities engaged in select commercial activities is that their overall benefits to society outweigh the private benefits received by stakeholders. Applied to hospitals, tax-exempt hospitals are expected to render charity care, later expanded to cover "community benefits" to justify their tax exemption status. Recent evidence from several sources indicates that tax exempt hospitals frequently do not meet the simple test of the cost of charity care or community benefits exceeding the taxes foregone. We examine whether tax-exempt hospitals meet this test in New Jersey from 2016-2018. We find that an average of 24% of nonprofit hospitals did not provide more incremental community benefits than tax exemptions. This number increased to an average of 83% percent if the criteria were changed from "community benefits to "charity care." Nonprofit hospitals contributed an average of 6.81% community benefits and-2.75% charity care after accounting for their tax savings due to their exempt status. Given these findings, we recommend reconsideration of the bill passed by the NJ State Legislature setting 12% community benefits to total expense ratio as the litmus test for nonprofit hospitals to avoid paying the state-mandated annual community service contribution, which is in lieu of property taxes to the host municipality.
Meanwhile, the Lown Institute has updated its "Hospital Community Benefit Policy Watch." This helpful guide provides summaries of state laws defining hospital community benefit standards, with links to all 50 states. The data indicate that only 6 states impose minimum community benefit standards, though many others have reporting requirements. Most of the recent state law activities towards enforcement of community benefit is geared towards limiting nonprofit hospital debt collection practices. Here are two sample entries regarding state efforts to quantify minimum community benefit:
The Montana Department of Public Health and Human Services proposed a new rule in July 2024 to clarify the responsibilities of nonprofit hospitals “with respect to the provision of community benefits and financial assistance in the areas they serve.” The rule directs the department to collect baseline data on hospital community benefits and formulate standards based on that data, including potential fines for noncompliance. In response to a 2020 state audit of hospital community benefit performance, Montana legislators proposed a bill in 2022 that would set higher reporting standards for hospital community benefit spending. Due to opposition from hospitals, this bill was watered down and now does not require hospitals to report anything additional to what they provide the IRS.
. . .
In response to a tax court ruling that found that some hospitals were not meeting criteria for their tax exemption, NJ passed a law in February 2021 that hospitals have to pay a $3 per-bed-per-day fee to local governments to make up for property taxes they don’t pay. Hospitals contributing more than 12 percent of their operating budget to community benefit spending are exempt from the contribution.
darryll k. jones
November 1, 2024 | Permalink | Comments (0)
DOJ Tax Cites Memorial Hermann Semantics Against Mayo Clinic
The semantics of tax exemption jurisprudence are really getting out of hand. I wrote about that problem in another post today. Here is yet another example. To be exempt from an $11.5 million unrelated debt financed income tax, Mayo Clinic has to prove that it is operated exclusively for educational purposes and has no substantial non-educational purpose. Mayo has been successful thus far, even though it engages in health care to a substantial extent a whole lot. The lower court ruled that Mayo’s health care services are part and parcel of its educational purpose. The Eighth Circuit heard oral arguments last Thursday and four days later the Fifth Circuit decided Memorial Hermann.
DOJ Tax, after sensibly and successfully arguing in Memorial Hermann that there is no meaningful difference between “substantial” and “primary” purposes, filed a notice of supplemental authority in Mayo a few days ago. The Notice cites Memorial Hermann's holding to bolster the Government's argument that Mayo Clinic is liable for the unrelated debt financed income tax. I think the effort will fail and the Government will lose because its just semantics, a restatement of an already wordy argument with more words. The issue in Mayo will more likely be decided on the substantive harm to the statute or the policy caused by declaring , or not, that Mayo's health care services are part of its overall educational purpose.
My guess is that DOJ is attempting to negate any assertion that although Mayo’s health care activities are primary central to what Mayo does, they do not prove Mayo is operating for a substantial major non-educational purpose. That argument fails if substantial major and primary central mean the same thing. If they are synonymous and they both define "exclusively" in (c)(3) and (c)(4), can we just clean up the regulations? Please?!
I am not sure the argument will make a difference since the lower court ruled that the Mayo’s educational and health care services are two inseparable parts of its substantial major and central educational teaching purpose. That hardly seems illogical. Whatever the difference between "exclusive," "substantial," and "primary," total, major and central, Memorial Hermann helps DOJ only if Mayo’s educational and health care services are separable. The lower court said they weren’t and of course physicians and med students have to treat patients even in the educational setting. That’s why they have residencies.
Anyway, here is the gist of DOJ's Notice of Supplemental Authorities:
Pursuant to Fed. R. App. P. 28(j), we submit the recent decision in Memorial Hermann Accountable Care Organization v. Commissioner, No. 23-60608 (5th Cir. Oct. 28, 2024), a case concerning whether an organization qualified as an organization “operated exclusively for the promotion of social welfare” within the meaning of I.R.C. §501(c)(4). The Fifth Circuit held that the governing test for whether an organization “operated exclusively” for a particular purpose in the tax exemption context is the “substantial nonexempt purpose test from Better Business Bureau of Washington, D.C. v. United States, [326 U.S. 279, 283 (1945)].” In so ruling, the court observed that “other circuits have endorsed the substantial nonexempt purpose test from Better Business Bureau” for determining whether an organization operated exclusively for a particular purpose. Op.6 (collecting cases). This Court is no different. See Fed’n Pharmacy Servs., Inc. v. Commissioner, 625 F.2d 804, 807 (8th Cir. 1980) (the “exclusively” requirement means that “a substantial nonexempt purpose or activity will disqualify the organization’s exempt status”) (citing Better Business Bureau); U.S.-Br. 52-53 (citing Fed’n Pharmacy).
Memorial Hermann provides further support for our argument that the Better Business Bureau standard governs here. Mayo must be “operated exclusively” for “educational rather than other purposes” to qualify for the tax exception at issue. And, under Better Business Bureau, “exclusively” means that “‘the presence of a single non-educational purpose, if substantial in nature, will destroy the [UBIT] exemption regardless of the number or importance of truly educational purposes.’ It is undisputed that Mayo operates for the “substantial purpose” of caring for patients and that caring for patients is not merely incidental to instructing Mayo’s medical students. Mayo’s substantial medical-care purpose is “non-educational” because healing patients is a different purpose than instructing students. That Mayo’s clinical practice serves both purposes simultaneously does not mean that Mayo operates exclusively for educational purposes.
. . .
I can’t help but think DOJ is hopelessly lost in semantics. Why is the UDFI exception limited to substantial educational activities and how does allowing its use in blended, unquestionably interrelated teaching and health care activities defeat the reason for the UDFI exemption? That is the issue. Not semantics.
darryll k. jones
November 1, 2024 | Permalink | Comments (0)
Thursday, October 31, 2024
Delaware Inquires of OpenAI
I told you last week that Public Citizen asked the California AG's office to supervise OpenAI (c)(3)'s disposition of its assets as the Board seeks to reorganize the tax-exempt organization as a public benefit corporation. According to a report yesterday, Delaware has apparently already began such an effort.
From Axios, yesterday:
The Delaware attorney general sent a letter to OpenAI's lawyers earlier this month asking for more information about the nonprofit company's plan to convert to a for-profit entity, Axios has learned. In the letter, AG Kathleen Jennings says she's writing in response to reports that OpenAI is contemplating converting to a for-profit entity. "If these reports are true, it is important that my office have an opportunity to review the terms of any such transaction prior to its consummation," she writes. "The current beneficiaries of OpenAI have an interest in ensuring that charitable assets are not transferred to private interests without due consideration."
I am not surprised that I can't find the letter online. I don't expect the AG has posted the letter nor do I think someone in her office leaked it. Pure speculation, I could be wrong. But Delaware is much too professional with its corporations to post or leak sensitive correspondence. Delaware ain't the top spot for corporations for nothing. Anyway, here is some of OpenAI's response as reported by Axios:
OpenAI has received the letter and looks forward to continuing discussions with the AG, "addressing their questions as we continue our ongoing work on this plan," a company representative said in an email. "The Board of Directors of OpenAI Inc., the non-profit, is focused on fulfilling our fiduciary obligation by ensuring that the company is well-positioned to continue advancing its mission of ensuring AGI benefits all of humanity," Bret Taylor, Open AI's board chair, said in a statement. "[W]e continue to consult independent financial and legal advisors, any potential restructuring would ensure the nonprofit continues to exist and thrive, and receives full value for its current stake in the OpenAI for-profit with an enhanced ability to pursue its mission."
darryll k. jones
October 31, 2024 | Permalink | Comments (0)
SAFE SPACE: A Meteorite Heading Straight for Civil Society
Jack Cummings has an interesting take on SAFE SPACE in yesterday's Tax Notes (subscription required). That guy is as much constitutional as as he is tax scholar. His prodigious book about the Supreme Court's tax jurisprudence is proof enough. More importantly, his years of reading Supreme Court tax tea leaves bolsters his not-at-all subtle assertion that SAFE SPACE will inevitably end up at the Supreme Court. The article is behind a pay wall so I have excerpted just a few paragraphs of this good read below the fold.
It's hard to say exactly, but I don't think Jack likes the idea of tax benefits for political activity. His article situates the constitutional and tax exemption issues in the context of the Tax Code's broader denial of subsidies for political spending. SAFE SPACE might even have implications for other provisions generally denying tax deductions for political spending.
The last line of his article is unsettling. It makes me think that SAFE SPACE's challenge is like a huge, powerful and unmoored meteorite heading for earth. Jack thinks its impact could be devastating, like in the Bruce Willis movie. But he points out that the meteorite might be built on a rickety factual foundation that ought to be stress tested, and maybe by that approach knocked out of the sky before impact. That's probably what Bruce Willis would do. Here is Jack's dark warning:
The Moore case required between four and five years to reach a Supreme Court decision. The SAFE SPACE case could proceed either faster or slower. The petitioner might try some novel method of speeding up the process by claiming to be under unreasonable duress lacking the exemption. But the IRS, hopefully assisted by the Justice Department and whatever resources they all can muster, should fight this petition with the same scorched earth vigor that other defendants have applied in recent years. For example, the petition makes many factual assertions that should be probed. Depositions should be taken. Records should be examined. Be wary of stipulations.
The government should know that the entire superstructure of charitable organization law is on the line with this case, and the Supreme Court will not shrink from hearing the appeal.
Well. Yippie Ki-Yay.
darryll k. jones
October 31, 2024 | Permalink | Comments (0)
Wednesday, October 30, 2024
Paxton Suspends Pursuit of Migrant Nonprofits
As you know, we have followed the lazy-eyed cowboy’s efforts to shut down migrant serving nonprofits in Texas. And his particular focus on migrant serving nonprofits that conduct voter registration drives. And Texas courts' routine rejection of those efforts as unsupported by law or evidence. And a federal magistrate's recent opinion in an entirely unrelated case that the administrative subpoena statute the cowboy uses for harassment is unconstitutional. And then finally, that the district court opinion would throw a big wrench in the migrant nonprofit harassment gears.
Well sure enough, the lazy eyed cowboy suspended his pursuit of migrant nonprofits pending final resolution of the statute’s constitutionality on appeal. He was forced to. Why, that ornery cuss would just as soon wipe his butt with the whole dang Constitution if he could. Or if that's what it took to be appointed US Attorney in a hoped for Trump administration. Here is part of the “Agreed Motion to Stay Proceedings:”
This lawsuit involves an as-applied challenge to the Request to Examine (RTE) that was served to Plaintiff Jolt Initiative, Inc. on August 31, 2024, by the Attorney General pursuant to Tex. Bus. Orgs. Code § 12.151, et. seq. On October 11, 2024, in Spirit Aerosystems, Inc. v. Paxton (24-cv-00472), the Hon. U.S. Magistrate Judge Lane heard competing motions for summary judgment regarding a facial challenge to the RTE statute relied upon by the Attorney General in this case. At the conclusion of that hearing, Magistrate Judge Lane directed Spirit Aerosystems to draft a proposed order finding the statute unconstitutional. Per 28 U.S.C. § 636(b) and Fed. R. Civ. P. 72, the Attorney General expects the Magistrate’s report and recommendation to be submitted presently to this Court for final disposition. Consequently, the Parties here agree to suspend all proceedings pending this Court’s decision in Spirit, and any subsequent appeals which may be brought in that matter. The Parties agree that a stay is the most reasonable course of action to preserve judicial economy, avoid conflicting judicial opinions, and maintain fairness. This case should be stayed until further order of the Court, whether on motion from either Party or on the Court’s own motion. The Parties agree that the RTE response deadline will be extended until 14 days after the stay is lifted.
darryll k. jones
October 30, 2024 | Permalink | Comments (0)
Gaza and Charities at War: Israel Bans UNRWA
The world should criticize Israel for banning UNRWA. UNRWA might not be perfect. But this ain't no way to run a war. Look, I am nobody's General and my family and fellow citizens' massacre wasn't live-streamed on October 7, last year. So don't misunderstand me. If it had been me or mine, you're damn right I would want my country and her allies to rain fire and brimstone on the perpetrators even if a few or a lot of innocent noncombatants got some of it too. They probably deserve it anyway, is what I would be thinking. I'd be in my rage. I get it.
The Law of War doesn't often constrain the belligerents in the thick of it. From the squad level all the way up to its highest offices, belligerents want to force the other side to surrender and will do whatever it takes. That's what we would all do as belligerents. It is up to the rest us who are not belligerents in the particular dispute and who are not blinded by a belligerent's rage to insist upon and enforce limits on the expression of that rage. In my rage, I would impose a blockade around my enemy's area of operations. I would starve them out of hiding to kill them even if others have to starve or might get killed too. It's war. But my impunity would still constitute a crime insofar as men, women and children are unnecessarily starved or killed. And for the sake of my moral humanity, I hope the world would try to convince me to constrain my justifiable rage. That's why the world should criticize Israel for banning UNRWA.
From The Associated Press
DUBAI, United Arab Emirates (AP) — Israel’s parliament has passed two laws that could prevent the U.N. agency for Palestinian refugees, a main provider of aid to Gaza, from being able to continue its work. The laws ban the agency, UNRWA, from operating and cut all ties between the agency and the Israeli government. It’s the culmination of a long-running campaign against the agency, which Israel contends has been infiltrated by Hamas. But supporters say Israel’s real aim is to sideline the issue of Palestinian refugees. The agency is the major distributor of aid in Gaza and provides education, health and other basic services to millions of Palestinian refugees across the region, including in the Israeli-occupied West Bank.
The head of the agency, Commissioner General Philippe Lazzarini, called the move “unprecedented” on X following the vote and said the bills “will only deepen the suffering Palestinians, especially in Gaza where people have been going through more than a year of sheer hell.”
Israel accuses the agency of turning a blind eye to staff members it says belong to Hamas, divert aid and use UNRWA facilities for military purposes. Israel says around a dozen of its 13,000 employees in Gaza participated in the Oct. 7, 2023 attack on southern Israel. The agency denies it knowingly aids armed groups and says it acts quickly to purge any suspected militants among its staff. One of the bills passed Monday evening bans all UNRWA activities and services on Israeli soil and is set to take effect in three months.
The second bill severs all ties between government employees and UNRWA and strips its staff of their legal immunities. Together, the bills likely bar the agency from operating in Israel and the Palestinian territories, because Israel controls access to both Gaza and the West Bank. It could force the agency to relocate its headquarters from Israeli-annexed east Jerusalem.
I've said it before. In war, you find and you kill the enemy. You don't go demonizing Civil Society for its imperfect efforts to stop the suffering.
darryll k. jones
October 30, 2024 | Permalink | Comments (0)
Tuesday, October 29, 2024
Everybody Hates HOAs.
HOA officials and board members are probably invited to neighborhood Christmas parties even less often than IRS agents. We hate getting letters from either of the bastards, let’s just be honest. But it’s kind of silly that we hate HOAs and the IRS for doing the things we need done and pay them to do. And without which our communities would decline. Still, we don’t often mourn when the IRS loses in court and I don’t know of too many people in my neighborhood who would object to our HOA getting its comeuppance in court every now and again. That's what happened last week. An HOA got its comeuppance. Well deserved, if you ask me.
Last month, Chris introduced us to the Corporate Transparency Act and its effect on exempt organizations. The CTA requires business entities to file "Beneficial Ownership Information" (BOI) reports so the government can better fight money laundering. For the most part, the 29 different types of corporations exempt under 501(c), along with political organizations exempt under IRC 527, need not be concerned about the CTA reporting requirements. But as Chris points out, there are exceptions that can surprise even those organizations. Last week, a federal district judge strictly interpreted the exempt organization exclusion. The judge ruled that the exclusion for exempt organizations is not available to homeowner associations exempt from tax under IRC 528.
The CTA grants Treasury the authority to exempt other entities not specified in the statute. But only with the concurrence of the Attorney General and the Secretary of Homeland Security. So the HOAs sent a letter asking Treasury to expand the list to include HOAs exempt under IRC 528. According to the Court:
FinCEN responded to HOA’s letter in July 2024. Deputy Director Jimmy Kirby wrote to the HOA that HOAs “are not specifically listed” among the CTA’s exemptions and must therefore report to FinCEN their beneficial owners if they “otherwise meet the definition of a ‘reporting company.’” Deputy Director Kirby further explained that FinCEN was considering whether to exempt HOAs as a “class of entities” under Section 5336(a)(11)(B)(xxiv), but noted that to do so it must make certain factual findings and obtain the written concurrence of the Attorney General of the United States and the Secretary of Homeland Security.
It sounds like Treasury was looking into the matter but apparently not soon enough for the HOAs. We all know how pushy HOAs can be. Treasury recognizes that HOAs exempt as social welfare organizations under IRC 501(c)(4) are exempt from the CTA. But exemption for HOAs under (c)(4) is not as advantageous and generally unavailable to HOAs that do not open their common facilities – like a neighborhood pool or community center – to the general public. Most HOA’s restrict common facilities to its dues paying members, naturally. The plaintiffs asserted that the HOAs exempt under IRC 528 share characteristics similar to 501(c) organizations and therefore should be exempt from the CTA as well. They added that IRC 528 requires that they be treated as exempt organizations “for purposes of any law which refers to organizations exempt from income taxes.” Thus, they should and indeed must be exempt from the disclosure and reporting requirements of the CTA. Did I mention how pushy the HOA can be? The Court explained the HOAs argument:
Plaintiffs cannot rely directly on Section 501 of the Internal Revenue Code to demonstrate that they are covered by the exemption here. Section 501(c) lists a number of different types of organizations (29 in total) that are exempt from taxation under Section 501(a). And 501(a) simply grants tax-exempt status to all those organizations listed in 501(c) and 501(d). But HOAs like Plaintiffs are not included among those organizations “described in section 501(c).” Indeed, they are described elsewhere, in Section 528 of the Internal Revenue Code. Stuck with this reality, Plaintiffs rely on a more roundabout argument in their attempt to shoehorn HOAs into the CTA’s nonprofit exemption. They argue that Section 528(a), where Congress provided that a “homeowners association shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes,” means that the reference to exempt organizations in the CTA should be read to include Plaintiffs. That is, the CTA is “any law,” and it “refers to organizations exempt from income taxes,” and so HOAs should “be considered an organization exempt from income taxes for the purpose of” the CTA.
Nope, said the Court. The law is limited to 501(c) and does not exempt 528 organizations. And then it went on to reject a bunch of other arguments based on the Administrative Procedure Act and the Constitution. The Court noted that there is a bill pending in Congress that would exclude all HOA’s, exempt under (c)(4) or IRC 528, from CTA requirements. The bill is still in committee.
The HOAs, pushy as always, are not happy with the ruling I imagine. But I'd be lying if I said I sympathize. I don't. Hell, if I can’t even display my Steeler flag in my yard, if I get a nasty gram for not recovering my garbage bins soon enough after trash pick-up, or a fee for my dues being being a half a second late, or an assessment for violating some other stupid nitpicky rule, then dadgummit these HOA jokers should be held to the precise letter of the law too. Serves them right.
darryll k. jones
October 29, 2024 | Permalink | Comments (0)
Fifth Circuit Cites Loper Bright to Invalidate Social Welfare Reg; Declares Accountable Care Organization Ineligible for (c)(4) Status
The Fifth Circuit Court of Appeals denied social welfare status to an Accountable Care Organization on Monday. In a quiet but remarkable reversal of at least 40 years of administrative jurisprudence, the Court said that a membership requirement defeats (c)(4) status for a managed care organization. For good measure along the way the Court relied on Loper Bright to declare Treasury Regulation 1.501(c)(4)-1(a)(2) invalid! The Court's action didn't bother the Government none, because the Government implicitly argued that the regulation is invalid anyway. No kidding.
We have followed Memorial Hermann’s efforts to be classified as a 501(c)(4) social welfare organization for about 18 months now. Last month the Fifth Circuit heard oral argument. I thought the judges were insufficiently focused on the private benefit issue. The parties spent time parsing the difference between “substantial” and “primary” purpose. Whether Memorial Hermann operates for a substantial or primary purpose doesn’t seem to have anything to do with whether Memorial Hermann provided more than incidental private benefit to private parties whose participation and cooperation in the Accountable Health Plan is necessary to achieve the public good. But the parties and the Fifth Circuit wasted time arguing about it anyway.
Just to recap, an accountable health care organization operates by incentivizing all health care delivery participants to work more efficiency. It gathers dues-paying members and manages their health care to achieve cost efficiencies conducive to socialized medicine, such as it is in the United States. When the private participants achieve a savings benchmark, the accountable health organization sends them a rebate check. Private parties are rewarded for their participation. So the government argued and the Fifth Circuit agreed that Memorial Hermann operated for private benefit.
The private participants are indispensable to the charitable goal. There is hardly a charitable purpose that can be accomplished without private participants and they usually don’t work for free. So just because an activity conveys private benefit doesn’t logically mean that is the organization’s purpose. If that were the case, no charity could be tax exempt. And that’s why we distinguish incidental from non-incidental benefit. Incidental is that which is necessary to achieve a charitable purpose. Non-incidental is unnecessary. The opinion illogically conflates effect and purpose.
It is fascinating, first, though to talk about the Court’s post-Chevron jurisprudence. MH argued that the word “exclusively” in (c)(4) has a different meaning than “exclusively” in (c)(3). The latter means “substantially,” under Better Business Bureau, and the former means “primarily,” under Treas. Reg. 1.501(c)(4)-1. But the Court said it would not accept different definitions of the same word in the same subsection of the same statute. And that Loper Bright says it owes no deference to 1.501(c)(4)-1. With that, the Court threw out the regulation! Read the opinion for yourself if you don’t believe me.
After doing so, the Court determined that MH did not deserve (c)(4) status because it operated for the private benefit of its members and the private health care providers who receive rebates for their successful participation. Without any analysis at all, except to note its presence, the Court concluded that a membership requirement conveyed non-incidental private benefit. That conflates effect – private benefit -- with intent – operating for a substantial non-exempt purpose. Because a membership requirement is necessary to spread risks and lower costs. It must always be present. That’s why Congress gave its imprimatur to accountable health care organizations when it enacted ObamaCare. Yes, there is private benefit because the charitable purpose cannot otherwise be achieved. But if the mere presence of private benefit proves a substantial non-exempt purpose, hardly any exempt organization should be exempt. The Court should have inquired whether the charitable goal is attainable without the private benefit. Only when a charitable purpose is attainable without the benefit should the benefit be considered non-incidental.
The Court’s ruling that a membership requirement defeats (c)(4) as well as (c)(3) surprises me for another reason. I stopped paying attention to managed care organizations in the early 1990’s. It was around that time, as it turns out, that the Service changed its mind and began denying (c)(4) exemption if managed care organizations relied on paid memberships. Before that, membership requirements were not fatal to (c)(4) exemption. The reversal makes no sense to me because a membership requirement is indispensable to holding down costs and thus health care prices. Holding costs and prices down is the indispensable method by which to better allocate health care as contemplated by ObamaCare. Clearly, better allocating health care is a public good worthy of the label “charity.” All this proves a membership requirement is necessary and thus incidental.
Anyway, that’s my argument. The Service has heard it all before. After much internal back and forth, the Service finally rejected the argument I am making. That happened about ten years ago. This case is probably the first case that the Service’s position has been adopted by a Circuit Court of Appeal. Prior to this case, only a single district court deemed a membership requirement fatal to (c)(4) status. To get the whole long history of the membership requirement as it relates to (c)(4) exemption, as well as the Service’s 50-year evolution on the issue, download General Counsel Memorandum 39829 and Private Letter Ruling 201538027. But be warned: the GCM is a good long read, about 15 pages single spaced, and the PLR is the longest private letter ruling you will ever read. It is nearly 130 pages long.
darryll k. jones
October 29, 2024 | Permalink | Comments (0)
Monday, October 28, 2024
A Rare Revenue Sharing Ruling Sheds Light on Private Inurement and Excess Benefit
From the Charity Lawyer Blog
Private Letter Ruling 202443007 contains a pedestrian, yet comprehensive and helpful discussion of IRC 115, a provision exempting income earned by the exercise of an "essential government function," as long as that income accrues to the state or political subdivision. But if you read closely, you can discern the Service’s deeper thinking about revenue sharing arrangements in tax exemption jurisprudence. Old dogs, like myself, recall a time when revenue sharing constituted private inurement, per se. Changes in the business of health care forced the Service to reconsider, and finally Congress enacted IRC 4958(c)(4) rejecting the notion that revenue sharing necessarily results in private inurement or excess benefit. Congress told Treasury to figure it out and let us know when revenue sharing is ok. But the Treasury Department has yet to articulate exactly when revenue sharing causes private inurement. This PLR provides an excellent start.
The Letter answers the question whether a state owned and operated corporation is tax exempt (albeit under IRC 115), even though a portion of net revenue is paid to a private contractor as compensation for services. If the corporation had been a charity, the private contractor would almost certainly be a “disqualified person” under IRC 4958(f)(1). IRC 115 is contingent on all income accruing to the state so any private inurement defeats its application. Thus, the PLR's analysis sheds light on when revenue sharing constitutes private inurement, not just under IRC 115 but IRC 501(c)(3) and 4958 as well.
It's useful to call the corporation the State Public Records Access Corp (SPRAC) because its purpose is to help state and local government agencies provide electronic access to public records as required by state law. It’s a public records computer software company, basically. SPRAC hired a Management Company called System Manager to run the whole thing. System Manager makes all operational decisions, including those determining income and expenses:
SPRAC hired System Manager after soliciting bids for the contract through State’s negotiated procurement process dictated by State law. The contract between SPRAC and System Manager permits SPRAC to terminate the contract and rebid it at any time with notice to System Manager. System Manager develops, in consultation with SPRAC’s staff, a detailed annual business plan, tracks all projects, and provides monthly reports to SPRAC. No director, officer, committee member, or employee of SPRAC is a director, officer, committee member, or employee of, or has a financial interest in or compensation agreement with, System Manager.
System Manager employs a project manager, web developer, designer, systems administrator, software engineers, and developers to implement projects approved by SPRAC’s board of directors and staffs a help desk for SPRAC’s customers. System Manager is also responsible for all aspects of managing the network, including acquisition, installation, operation, maintenance, and testing of all hardware, software, and enhancements thereto, and the provision of backup, support, and network service to SPRAC.
Essentially, the stated-owned corporation hired a management company to run the whole operation, and the management company is paid a variable compensation equal to a “portion” of the net revenues. Since the Management Company makes all spending and pricing decisions, the jurisprudential concern is that System Manager might skimp on spending or set high prices to increase its compensation. In either event, the public benefit would decrease as private benefit increased.
The Letter concludes that the income generated accrues to the state even though a portion is paid to the System Manager as compensation. In making the determination – essentially that revenue sharing will not cause private inurement – the Letter focuses solely on the arms-length nature of the contract:
SPRAC pays System Manager a fee for providing management and operating services for SPRAC. These fees are paid pursuant to a contract that was negotiated under State’s public bidding laws. SPRAC and System Manager have renegotiated the fee structures several times to address the different risks and costs inherent in the business at different points in time. Moreover, System Manager is required to provide monthly reports to SPRAC’s board of directors regarding all planned and existing projects. Additionally, SPRAC maintains a conflict-of-interest policy and requires its directors to file an annual statement stating that they understand and agree to comply with SPRAC’s conflict of interest policy. Upon dissolution, SPRAC’s bylaws provide that all assets are required to be distributed, or shall revert to, State, a political subdivision of State, or another entity the income of which is excludable from its gross income by application of section 115(1) that performs an essential governmental function.
It is important to emphasize that none of SPRAC's fiduciaries have a financial interest in the System Manager and all are subject to a conflict of interest policy. That's the essence of "arms-length." Thus, the revenue sharing contract has enough guardrails, checks and balances – and was formed after arms-length bargaining evincing no divided loyalties-- so that System Manager is probably unable to sacrifice public good for private benefit without the independent directors noticing and taking corrective action (including immediately terminating the contract).
I can't imagine why the same analysis should not apply to revenue sharing arrangements with public charity insiders. We could change the world "SPRAC" to "Charity," and the result would, or ought to be, the same. The Treasury should issue final regs to that effect under IRC 4958.
darryll k. jones
October 28, 2024 | Permalink | Comments (0)