Nonprofit Law Prof Blog

New York Limits Charitable Contribution Deductions for High Earners

Earlier this month, the Chronicle of Philanthropy reported that New York Governor David A. Paterson signed into a law a bill that limits wealthy individuals - those with adjusted gross income above $10 million annually - to a deduction equal to 25 percent of their charitable contributions.  Previous law only imposed a 50 percent limit, which is still the limit for other New York taxpayers.  While only directly affecting about 3,500 people, it is estimated that the provision will raise up to $100 million in the current fiscal year alone (according to an earlier Chronicle article), indicating that a significant amount of contributions will be hit by the now lower limit.  Given that President Obama has proposed a similar, although less draconian, limit on charitable contribution deductions by the highest earners (as previously blogged about), it will be interesting to see what effect, if any, the NY law has on giving in that state.

LHM

Bankruptcy Receiver Suit Against School for Ponzi Scheme Proceeds Moves Forward

As detailed in an opinion by federal District Court Judge Paul S. Diamond, the Receiver supervising the recovery of assets on behalf of investors defrauded by Joseph S. Forte in a Ponzi scheme has stated viable claims for recovery of over $900,000 from the Malvern Preparatory School.  The judge therefore denied the School's motion to dismiss the Receiver's Complaint.  While the School argued that it had received the contributions in good faith, and the complaint does not appear to have asserted otherwise, the judge determined it still might be "unconscionable" (as required under Pennsylvania law for an unjust enrichment claim) to allow the School to retain the contributions.  The judge also permitted two claims under the Pennsylvania Uniform Fraudulent Transfer Act to stand as well.  For more information and analysis of the case, including the financial hole the school apparently dug for itself - including borrowing $3.3 million to complete the project that Forte was helping finance - as a result, see this post by Jack Siegel on his blog.

LHM

NY Times: "Conservative Group Accused of Abusing Tax Status"

The New York Times reports today that lawyers for the Democratic Congressional Campaign Committee have filed a complaint with the IRS targeting the Americans for Prosperity Foundation.  The copy of the complaint that accompanies this story alleges that the Foundation is a section 501(c)(3) organization that violated the prohibition on political campaign intervention by spending over half a million dollars on ads in four congressional districts that were timed to support the political ads of the Foundation's section 501(c)(4) affiliate, Americans for Prosperity.  The complaint further alleges that the Foundation is also an "action organization" in that its goals are only achievable through legislation and so also for that reason the Foundation is disqualified from section 501(c)(3) status.  For an excellent analysis of the complaint, see Ellen Aprill's guest post on Election Law blog.

(Hat tip:  Election Law blog)

This story follows a Washington Post blog post yesterday regarding the planned activities of these two entities - including a $4.1 million ad campaign by the Foundation apparently targeting 24 competitive House seats in 11 states - and a New Yorker article this week on the co-founder of these groups, billionaire David Koch, and his brother, Charles Koch. 

This complaint is, of course, only the latest and undoubtedly not the last complaint relating to alleged violations of either the section 501(c)(3) prohibition on political campaign intervention or the limitations on such activity under section 501(c)(4), 501(c)(5), and 501(c)(6).  Whether the IRS is up to vigorously investigating and, where necessary, prosecuting such violations is uncertain, however.  It has yet to release a long-expected report on its 2008 political activity enforcement efforts, and, unlike in other recent federal election years, it has yet to announce a new round of such enforcement activity for this year.  See the IRS Political Campaign Intervention by 501(c)(3) Tax-Exempt Organizations website.  To date it also appears not to have challenged any of the churches where pastors spoke in favor of candidates from the pulpit during "Pulpit Freedom Sundays" held in 2008 and 2009.  See the Alliance Defense Fund's Pulpit Initiative website.

LHM

Pro-Israel Nonprofit Accuses IRS of Delaying Application Because Group's Activiities May Conflict with Administration's Policies

Z Street, a pro-Israel nonprofit corporation, has filed a complaint alleging that the IRS is delaying consideration of its application for recognition of section 501(c)(3) tax-exempt status because the Service is determining whether the group's activities contradict the Administration's policies.  Most specifically, the lawsuit alleges that a named IRS agent informed the group's corporate counsel that she had two concerns with respect to the application: "(1) the advocacy activities in general, and (2) the IRS's special concern about applications from organizations whose activities are related to Israel, and that are organizations whose positions contradict the US Administration's Israeli policy." 

The first point appears to reflect a common and legitimate concern raised by the IRS with respect to public policy groups seeking section 501(c)(3) status, as the complaint goes on to assert that the agent raised the question of lobbying and whether the group might be an "action organization," which under the applicable regulations would disqualify it from section 501(c)(3) status.  The second point is the more troubling one, although the complaint's conclusion that these "IRS's admissions" "make clear that the IRS maintains an Israel Special Policy governing the processing of applications for tax exemption by organizations which are believed to be operated by persons holding political views inconsistent with those espoused by the Obama administration" appears to read a lot into the agent's alleged comments.  Nevertheless, the possibility that even a single agent, much less perhaps the agent's supervisor or others within the IRS as well, would consider denying an exemption application because an organization takes positions contradictory to that of the current administration is extremely troubling.  The second concern appears to be a far cry from the contrary to established public policy concern that ultimately led to the revocation of tax-exempt status for Bob Jones University for engaging in racial discrimination in education.

Another interesting aspect of this lawsuit is its timing.  Code section 7428 only permits a suit for declaratory judgment that an organization qualifies for section 501(c)(3) status if either the IRS has denied the application or the application has been pending for more than 270 days.  Here neither event has occurred because Z Street only filed the application on December 29, 2009, according to the complaint, or less than eight months ago (thanks to Ellen Aprill for noting this point).  Perhaps for this reason Z street does not ask for such a declaratory judgment, but instead for a declaration that the asserted 'Israel Special Policy" is a violation of the First Amendment and for other relief that would prevent the application of this policy to Z street.

As early coverage of this story, linked to below, already has revealed, the IRS' ability to respond to these accusations is limited by its inability to comment publicly on any specific pending application.  Given this limitation, general statements about how all applications are considered fairly under the applicable law will almost certainly be forthcoming shortly, however.

For further coverage: The Jewish Daily Forward; Politico (Ben Smith); TaxProf Blog; Wall Street Journal Law Blog; Weekly Standard Blog.

LHM

Is IRS Unable to Effectively Oversee Reporting by 527s?

The Treasury Inspector General for Tax Administration issued a report titled "Improvements Have Been Made, but Additional Actions Could Ensure That Section 527 Political Organizations More Fully Disclose Financial Information."  While the title is relatively mild, the criticisms are not.  TIGTA found that :

• "[O]ne out of every four Political Organization Report of Contributions and Expenditures (Form 8872) that we reviewed had incomplete or missing contributor or recipient information."

• "[T]he IRS is not reviewing these filings [Forms 8872] to determine if they are complete or if penalties should be assessed."

• "[T]he IRS is not always issuing notices at the appropriate time that include all information needed by political organizations to become compliant."

• "[T]he IRS is not following up on information it has requested form political organizations to verify compliance."

To be fair to the IRS, it had to design a system to process these highly time-sensitive filings from the ground up, and its Exempt Organizations Division is hindered by its broad mandate - of which reviewing such filings is only a small part - and limited resources (shameless self-promotion: a point I made in a 2007 article).  Nevertheless, these failings are troubling as even more and more oversight of political activity appears to be moving to the IRS (see previous blog posting on this point).

LHM

State Judge Rejects Fisk University's Plan to Sell Stake in O'Keeffe Collection

Bloomberg reports that a Tennessee Chancery Court Judge has ruled that Fisk University may not sell a 50 percent interest in its 101-piece collection donated to the school by Georgia O'Keeffe despite the university's precarious financial condition, which prevents the university from displaying the collection.  The judge determined such a sale would violate the terms of O'Keeffe's donation, specifically by resulting in the collection being moved more than 500 miles from Nashville, where Fisk is located and where O'Keeffe wanted the collection displayed.   The court ordered the Tennessee Attorney General to offer a "Nashville-based solution" within 20 days.  The decision is the latest stage of litigation that grew out of the university's 2005 decision to sell two of the works in the collection, a decision that the same judge previously ruled also broke the terms of the donation.

LHM

L.A. Times: "Cal State May Be Mixing Public and Private Funds in Nonprofit Foundations"

Public colleges and universities have long used affiliated charities to raise funds from alums, provide auxiliary services such as students housing, develop technology, and engage in other activities that might have negative ramifications - such as reduced state subsidies - if done directly by the public institutions.  The L.A. Times reports, however, that the California Faculty Association, a union for California State University system faculty and certain staff, is accusing California State University officials of going to far in the use of such affiliates when they allegedly deposited public funds with such organizations even though such entities are exempt from California's open record laws.  CFA's full report is available on its website.

LHM

Connecticut AG Sues Former Wesleyn Investment Director

Connecticut Attorney General Richard Blumenthal announced earlier this week that he is suing Wesleyan University's former investment director Thomas Kannam and three private companies with which Kannam is affiliated for allegedly misusing university endowment assets for personal trips and other inappropriate expenses.  The assertions include that Kannam used Wesleyan employees and resources to provide research and other services to these private firms, and billed Wesleyan for both business trips that benefited these companies and personal trips, for a total cost at least in the tens of thousands of dollars.  The AG argues that such expenditures violated the state's Solicitation of Charitable Funds Act.  According to the press release, the University is already in the midst of litigation against Kannam. 

(Hat tip:  Jack Siegel at Charity Governance Consulting LLC)

LHM

Knaplund on The Impact of Legislation on Charitable Bequests

Kristine S. Knaplund (Pepperdine) has posted Charity for the "Death Tax": The Impact of Legislation on Charitable Bequests on SSRN (forthcoming Gonzaga Law Review).  Here is the abstract:

The national debate over the federal estate tax has caused fear in American charities over the past ten years, a fear that is likely to continue for the foreseeable future. Since Congress acted in 2001 to repeal the “death tax” for one year, for decedents dying in 2010, charities and individuals have become increasingly concerned about the impact of a repeal on charitable donations. While only a small percentage of charitable gifts come in the form of gifts at death, these few but generous incidents in fact amount to billions of dollars, and are imperative to the operation of our charities. Today, the vast majority of estates are already exempt from the tax. If the estate tax is repealed, or, as widely expected, the exemption simply remains at the current $3.5 million, will those testators exempt from the estate tax in turn exempt charity from their estates?

Legal literature has addressed many of the factors that affect whether a testator gives to charity, including tax laws, the economy, the individual decedent’s wealth, the family members the decedent leaves behind, and the financial status of each. This article will focus on one factor that has been, thus far, largely ignored: state laws that impede gifts to charity at death. While true mortmain statutes are rare in the U.S., such impediments do still exist and must be examined in order to fully appreciate the impact on charitable donations.

Part I of this article discusses the federal estate tax enacted in 2001 and the potential impact on charities if a repeal is made permanent. Part II traces the history of federal estate tax law and charitable exemptions or deductions and contrasts the federal law with state limitations on charities, especially churches, and testators by examining four types of state statutes that serve as impediments to charitable giving: state laws designed to protect testators from overreaching by charities; state laws designed to protect testators’ families from a testator who is giving away too much; state laws designed to raise revenue from taxing charities; and true mortmain statutes, which limit the amount or value of property a charity can hold. Part III looks at our current laws, beginning with the Revenue Act of 1916, to see how many of these state laws still exist. Part IV concludes the article with a prediction of charitable donations in the future.

(Hat tip:  Tax Prof blog)

LHM

Further Ripples from the Buffett-Gates Philanthropic Challenge

We previously blogged about the philanthropic challenge Warren Buffett and Bill Gates issued to America's billionaires: pledge to give away at least half of your wealth.  The public disclosure of that challenge continues to spark debates both here and elsewhere, especially after the announcement that 38 other billionaires had accepted this challenge.  For example, over the weekend the New York Times Magazine ran an article noting that lower-income Americans consistently give proportionately more of their income to charities than the higher-income Americans, but also reporting research indicating that this pattern can be changed.  Not all reactions to the challenge have been positive, however.  The Wall Street Journal recently reported that some European commentators have been less than laudatory, criticizing the wealthy both for the methods by which they gained their riches and their apparent attempt to do what the state should be doing. 

Further coverage and commentary:  Bloomberg, The Chronicle of Philanthropy (subscription required for full article), New York Times, San Francisco Chronicle, Wall Street Journal.

LHM

Is the IRS the New FEC?

The Washington Post reports that in the wake of the Supreme Court's Citizens United decision the burden of regulating political activity has shifted from the Federal Election Commission to the Internal Revenue Service.  While some groups will operate as either registered political committees - and so still subject to the disclosure rules administered by the FEC - or 527 groups - and so subject to the disclosure rules administered by the IRS - the article notes that many politically involved groups will claim Internal Revenue Code section 501(c)(4) status, which allows them to keep the identity of their donors secret.  Unions, tax-exempt under section 501(c)(5), and trade associations, tax-exempt under 501(c)(6), also are not required to disclose their donors.  All of these groups must have a "primary" purpose other than engaging in political activity, but as the article notes this is a vague and unclear standard.  Moreover, the IRS is by its very nature an after-the-fact regulator, poorly suited to acting quickly during the rush of an election season.  (Shameless self-promotion: a point I noted in arguing in a 2007 article that the FEC and not the IRS should oversee disclosures by 527s.)

LHM

Federal Social Innovation Fund Already Facing Criticism

No sooner did the White House-touted Social Innovation Fund announce its first round of grants than it faced its first round of criticisms.  The New York Times reports that a lack of transparency in the selection process for the multi-million dollar grants has led to accusations of conflicts of interest and to accountability concerns generally.  While the Fund is apparently quickly seeking to address at least some of these issues, the planned release of only redacted versions of grant applications, and then only for the grant winners, may not be enough to resolve the concerns in the eyes of critics.

LHM

Patent Granted for Charity Borrowing/CRAT Method

Paul Caron (Cincinnati) has an interesting post at TaxProf Blog relating to a patent granted to the inventor of method whereby a charity can borrow funds using tax-exempt bonds and then obtains tax benefits for investors while effectively eliminating the charity's obligation to repay the debt principal by placing the bonds in a CRAT with the charity as the remainder beneficiary.  For more details, see the article by Conrad Teitell (Cummings & Lockwood, Stamford, CT) to which Paul links.

LHM

Third Sector Daily: "Charity Commission Refuses to Change Catholic Care Gay Adoption Decision"

The Third Sector Daily reports that the Charity Commission of England and Wales has refused to allow Catholic Care to change its charitable objects to restrict is adoption services to heterosexual individuals and couples, thereby preventing Catholic Care from taking advantage of an exemption to otherwise applicable equality legislation.  Catholic Care issued a press statement in response to the decision.

LHM

Canada to Match Private Donations to Help Pakistani Flood Victims

The Toronto Globe and Mail reports that the Canadian federal government will match private donations for Pakistan flood relief dollar for dollar if those donations are made between August 2nd and September 12th.  There is no maximum to the matching.  The article notes that the government instituted similar matching programs in the wake of the Haitian earthquake and the 2004 tsunami.

LHM

Lewis on Charitable Waste

Evelyn Lewis (UC Davis) has posted Charitable Waste: Consideration of a 'Waste Not, Want Not' Tax on SSRN, which will be published in the Virginia Tax Review.  Here is the abstract:

Lavish expenditures by charities occur regularly, even in today’s depressed economy. Many are unwarranted and foolish while some prove to be extremely beneficial and valuable over time. But even the best of charitable splurges involve government waste since all charities are substantially supported by significant government subsidies. Unfortunately, most taxpayers don’t respond to charitable luxury-type waste with the same degree of outrage they do to other forms of government waste. This article first reveals the probable reasons for this different taxpayer reaction and posits that it’ll be difficult to change taxpayer response given the complexity of the perception problems. As an alternative, this article proposes a tax solution to the problem, after describing how existing laws are currently inadequate to the task of preventing or curbing lavishness by charities. Moreover, the article articulates why flat prohibitions or oppressive sanctions are unwarranted and proposes taxing only the excess amount of charitable expenditures without threat, judgment or blame about a charity’s worthiness for general tax-exemption. A chief difficulty is in defining wastefulness. This article offers criteria for the tax’s design that tackles this issue as well as other considerations.

LHM

McCormack on Recognizing the Negative Externalities Created by Charities

Shannon Weeks McCormack (UC Davis) has posted Taking the Good with the Bad: Recognizing the Negative Externalities Created by Charities and Their Implications for the Charitable Deduction on SSRN.  Here is the abstract:

The tax code allows donors to deduct amounts donated to an extremely broad variety of organizations deemed to create societal benefits (i.e. positive externalities), leading to a rapid proliferation of such organizations. Subsidy theory is one of the most utilized theories offered by scholars to limit the availability of the charitable deduction. Under this theory, a deduction is warranted for efficiency-enhancing transfers to organizations providing underfunded public goods. This Article focuses on the efficiency prong of the analysis. Subsidy theorists use the Kaldor-Hicks model for determining whether a transfer from donor to donee is efficient. According to this analysis, a transfer is efficient (and a deduction for that transfer appropriate so long as the other prongs of the analysis are fulfilled) if the total net benefits created by the transfer outweigh total harms. Subsidy theorists assume that the harms caused by donee-organizations are limited to the revenue effects of the deduction and slight psychic harms. As shown, when harm is limited in this manner, it is easy for the transfer to be efficient. However, subsidy theorists fail to recognize that many organizations that may receive tax-deductible contributions cause more serious negative externalities. This Article seeks to fill this gap. Once negative externalities are considered, it becomes clear that the results yielded by the Kaldor-Hicks model are not useful in analyzing the charitable deduction. The model produces results that may be incompatible with pluralistic notions lying at the heart of the deduction’s justification and would allow taxpayers to take deductions for donations to organizations that impinge upon important rights of certain segments of society. The Article suggests that, in order to reach appropriate results, one must ensure that certain Rawlsian notions are not violated. Specifically, individuals should be able to live full and meaningful lives, as fair and equal members of society and the government should not subsidize transfers that hinder this ability. Second, the government should not support one reasonable conception of the good over any other, and therefore deductions (i.e. subsidies) should not be granted for organizations advancing any particular conception of the good. Using these principles to assess current law, the controversial disallowance of deductions made to lobbying organizations is clearly correct. Current law, however, inappropriately allows donors to take deductions for amounts contributed to other organizations violating these principles, such as churches that engage in lobbying, sibling-organizations of lobbying groups that seek to change public opinion by proselytizing, and groups like the Boy Scouts of America that discriminate based on sexual orientation.

LHM

NVSQ New Issue: Accountabilty & Preformance Measurement

The Nonprofit and Voluntary Sector Quarterly's most recent issue is now available online.  The focus of the issue is a series of papers from a symposium on Accountability and  Performance Measurement: The Evolving Role of Nonprofits in the Hollow State.  Here is the table of contents:

Symposium Articles

• Jennifer Alexander, Jeffrey L. Brudney,and Kaifeng Yang, Introduction to the Symposium: Accountability and Performance Measurement: The Evolving Role of Nonprofits in the Hollow State

• Kelly LeRoux and Nathaniel S. Wright, Does Performance Measurement Improve Strategic Decision Making? Findings From a National Survey of Nonprofit Social Service Agencies

• Wenjue Lu Knutsen and Ralph S. Brower, Managing Expressive and Instrumental Accountabilities in Nonprofit and Voluntary Organizations: A Qualitative Investigation

• Dale E. Thomson, Exploring the Role of Funders’ Performance Reporting Mandates in Nonprofit Performance Measurement

• Janet Carlson, Alison S. Kelley, and Ken Smith, Government Performance Reforms and Nonprofit Human Services: 20 Years in Oregon

• Beth Gazley, Linking Collaborative Capacity to Performance Measurement in Government—Nonprofit Partnerships

Regular Articles

• Keely Jones Stater, How Permeable is the Nonprofit Sector? Linking Resources, Demand, and Government Provision to the Distribution of Organizations Across Nonprofit Mission-Based Fields

• David F. Suarez, Street Credentials and Management Backgrounds: Careers of Nonprofit Executives in an Evolving Sector

• Stuart C. Mendel, Are Private Government, the Nonprofit Sector, and Civil Society the Same Thing?

• Andrée Sévigny, Serge Dumont, S. Robin Cohen, and Annie Frappier, Helping Them Live Until They Die: Volunteer Practices in Palliative Home Care

• Rebecca Nesbit, A Comparison of Volunteering Data in the Panel Study of Income Dynamics and the Current Population Survey

Book Reviews

• Mel Gill, Book Review: The Center for Association Leadership, 7 Measures of Success: What Remarkable Associations Do That Others Don’t

• Naim Kapucu, Book Review: Michael J. Worth, Nonprofit Management: Principles and Practice

• Eva M. Witesman, Book Review: D. Green, From Poverty to Power: How Active Citizens and Effective States Can Change the World

LHM

Covenant Healthcare Loses Again, This Time in Wisconsin

The District 1 Court of Appeals of Wisconsin just released an opinion denying a property tax exemption to an outpatient clinic run by a subsidiary hospital of Covenant Healthcare, the same entity that owns Provena Covenant Hospital in Illinois.  Provena, as readers may recall, had its exempt status revoked by the Illinois Department of Revenue, an action recently upheld by the Illinois Supreme Court (see prior blog posts here and here).  It appears Covenant has taken it on the chin again.

The Wisconsin case, however, was not based on lack of charity care.  Instead, the Wisconsin appeals court held that the outpatient clinic essentially was nothing more than a building housing doctors' offices, which under Wisconsin law cannot be exempt.  Wisconsin Statutes § 70.11(4m), provides an exemption from property taxes for nonprofit hospitals, but specifically excludes doctors offices:

NONPROFIT HOSPITALS. (a) Real property owned and used and personal property used exclusively for the purposes of any hospital of 10 beds or more devoted primarily to the diagnosis, treatment or care of the sick, injured, or disabled, which hospital is owned and operated by a corporation, ... no part of the net earnings of which inures to the benefit of any shareholder, member, director or officer, and which hospital is not operated principally for the benefit of or principally as an adjunct of the private practice of a doctor or group of doctors. This exemption does not apply to property used for commercial purposes, as a health and fitness center or as a doctor’s office.

According to the court, the clinic at issue "(1) did not provide inpatient services; (2) provided the doctors with a space to do paperwork; and (3) saw most patients by appointment, during business hours."  That led the court to conclude that the clinic was used as a doctors' office, not an extension of a hospital.

Though the opinion is based on a unique state law, it follows the recent trend of state departments of revenue and at least some state courts (e.g., Illinois) in getting tougher on tax exemptions for nonprofit healthcare organizations.  Given the current economic climate and resulting financial pressures on states and local communities, I suspect we'll see more of this trend in the near future.

JDC

IRS to sponsor fall workships for small and mid-sized charities

From the IRS EO Update:

"The IRS will offer its popular workshop for Small and Mid-Sized Organizations in cooperation with Lawrence Technological University in Southfield, MI (Detroit) on September 22 and 23, 2010.

Each one-day workshop, presented by experienced Exempt Organizations specialists, will explain what 501(c)(3) organizations must do to keep their tax-exempt status and comply with tax obligations.  

Workshops will also be offered in Raleigh, NC (October 19) and Wilmington (October 20) in cooperation with a consortium of North Carolina academic institutions."  For more information, see the IRS Calendar of Events.

JDC