Nonprofit Law Prof Blog

Issa: House Bill Will Save Nonprofit Postal Rates

The NonProfitTimes is reporting that the section of a U.S. Postal Service reform bill in Congress that would have eliminated discounted nonprofit postal rates during a 12-year period has been eliminated from the legislation.

According to Tony Conway, executive director of the Alliance of Nonprofit Managers in Washington, D.C., Rep. Darrell Issa (R-Calif.), chairman of the House Committee on Oversight and Government Reform and the leading sponsor of the postal reform bill, H.R. 2309, informed the Alliance that Section 403 of the bill will be deleted when it goes to the House floor for a vote later this summer.

The Times reports that Ali Ahmad, a spokesman for Issa, confirmed the section had been removed. The Alliance had strongly opposed Section 403.  The Times continues:

“We have averted a serious problem,” said Meta Brophy, director, publishing operations at Consumer Reports in Yonkers, N.Y., and board chair of the Alliance. “Congratulations to the Alliance members that took the time to educate their Representatives about the importance of this issue. And kudos to Chairman Issa and his colleagues, who recognized the importance of preserving the benefits offered by the nonprofit sector to a healthy civil society, especially now, when the government’s resources have become so overstretched.”

VEJ

Panel Discussion to Examine "Giving USA" Report

The Chronicle of Philanthropy is reporting that its featuers editor, Holly Hall, will tomorrow moderate a panel discussion about this year's "Giving USA" report.  The event will be held at the Hudson Institute's Bradley Center for Philanthropy and Civic Renewal in Washington, D.C.  It begins at noon Eastern Time, and will be available via Webcast.

VEJ 

 

 

Seventeen Entrepreneurs Receive Grants to Promote African Economic Growth

The United States Agency for International Development (USAID), Western Union, and the Western Union Foundation on Monday announced the names of seventeen U.S.-based entrepreneurs who will receive matching grants to fund innovative business plans and help promote economic growth in Africa through the second African Diaspora Marketplace (ADM II) competition.

Launched in 2009, ADM II is a public-private initiative that works to harness the knowledge and resources of U.S.-based entrepreneurs to advance the ability of small- and midsize enterprises in Africa to secure capital. Forty-four of the nearly five hundred plans submitted — most in the categories of
agribusiness, information and communications technology, and renewable energy —
vied for the top awards.

According to Philanthropy News Digest,

Winning proposals included a Kenyan agribusiness that is implementing
sustainable "zero-waste" practices through the commercial production of
high-efficiency organic fertilizer; the first legal technology provider in
Tunisia; an alternative-power generator in Liberia that utilizes agricultural
waste; and an online medical information delivery system in Nigeria. Each
awardee is eligible for a total investment of up to $70,000, which includes up
to $50,000 in matching cash grants and as much as $20,000 in technical
assistance.

Commenting on ADM II, USAID administrator, Rajiv Shah, said: "The African Diaspora Marketplace will strengthen and help satisfy demand for locally produced products and services.  These businesses will buy, sell, and hire from within the communities they serve, putting money into the local economy, building local capacity, and fueling broad-based economic development."

VEJ

 

 

Delaware AG Alleges Mismanagement of Charitable duPont Trust

As reported in The Washington Post, a $4 billion charitable trust created by the late Alfred I. duPont is the subject of scrutiny by the Delaware Attorney General Beau Biden.  Biden alleges in court documents filed in Florida, where the trust is managed, that the trustees have mismanaged the trust and not adhered to the grantor's intentions.  Specifically, the trustees are accused of deviating significantly from duPont's original intent by not focusing the trust on Delaware, as stipulated in duPont's will.  The trust provides annuity payments to certain beneficiaries of duPont's will and, more significantly, funds the Nemours Foundation which operates health care facilities in Delaware, Florida, New Jersey, and Pennyslvania.  The Foundation also operates the Nemours Mansion and Gardens in Wilmington, Delaware.  Among some of the allegations in the court filing, the Delaware AG claims that certain renovation costs of the Mansion as well as administrative expenses were over-attributed to Delaware, thereby reducing its annual trust distributions over a 6-year period.  As a result, the trust has not been operating more for the benefit of Delawareans.

The trustees "welcome a dialogue" with the Delaware AG.  This court filing adds further complications to the trustees' efforts to bifurcate the existing trust to achieve better foreign tax treatment for its overseas investments.  For more details on the lawsuit, see the Delaware AG's media release.

(Hat tip:  Philanthropy News Digest)

NAM

Colinvaux: Testimony at Oversight Hearing on Tax Exempt Organizations

Roger Colinvaux (Catholic University) has posted "Testimony of Professor Roger Colinvaux Before the House Committee on Ways & Means, Subcommittee on Oversight Hearing on Tax Exempt Organizations" to SSRN.  The article was published in Tax Notes.  His testimony was previously blogged herein.  The abstract provides:

Recent legislation has established new legislative precedents that run counter to the traditional regulatory approach of 501(c)(3) organizations: precedents for distinct exemption standards based on the type of organization, a weakening of the basis for distinguishing among charities as “public” or “private,” and a related preference for brighter enforcement lines and frustration with the status quo. These trends make for growing complexity, but are in large part a reasonable response to the historic legacy of defining a sector based on broadly conceived purposes and the inherent difficulties of oversight that follow. Going forward, it is critical to assess the federal role in support of the section 501(c)(3) sector, and at a minimum, take steps to further the integrity of the sector by minimizing opportunities for abuse. More broadly, if the federal approach is to be reconceived, the tax policy focus should shift to greater promotion of activities rather than purposes, and require more from the sector than avoiding bad outcomes.

NAM

Churches Gearing Up For Election Season - Fortnight for Freedom and Pulpit Freedom Sunday

As reported in the Chicago Tribune, a recent Reuters article discusses the ongoing work of the Alliance Defense Fund, the creator of Pulpit Freedom Sunday.  As previously blogged, this event's purpose is to "have the Johnson Amendment [adding the political activity prohibition to section 501(c)(3)] declared unconstitutional – and once and for all remove the ability of the IRS to censor what a pastor says from the pulpit."  In 2011, approximately 540 pastors in churches around the country "preached sermons that compared the positions held by candidates with what Scripture says about those issues. The pastors then made specific recommendations about those candidates (including recommendations about whether the congregation should vote for or against them)."  The goal of the movement is to force a court case on the issue, with hopes that it will result in their favor - striking the prohibition from 501(c)(3).  The article discusses the continuing recruitment of new pastors to join the movement, forcing the IRS to act and begin the ultimate court fight.

In a similar, but unrelated event, The U.S. Conference of Catholic Bishops have called for their own Fortnight for Freedom beginning this week (from June 21 to July 4), which encompasses holding masses and rallies, and using parish bulletins to voice opposition to the Obama administration's healthcare regulations on contraceptives.  The Conference's website describes this event as a "special period of prayer, study, catechesis, and public action [that] will emphasize both our Christian and American heritage of liberty. Dioceses and parishes around the country have scheduled special events that support a great national campaign of teaching and witness for religious liberty."

The article concludes with some interesting data from recent Pew Research Center studies on this issue.  In a January 2012 poll, only 18% of the participants responded that a candidate endorsement by their minister, priest or rabbi would impact their voting decision; 70% polled that it would have no impact. 
In a second study conducted this spring, Pew discovered that most parishioners prefer that their religious leaders stay out of the political realm, with Catholic participants being the "most adamant."

NAM

More on 501(c)(4)s - Disclosure, Private Benefit and Political Activities

Disclosure.  The Daily Tax Report discusses a June 18 letter written by eleven Republican Senators questing the IRS's continuing practice of requesting donor information from organizations seeking a 501(c)(4) tax exemption.  The letter requests that Commissioner Shulman provide more answers to questions regarding the IRS's statutory authority for, as well as its process in, requesting such information.  The letter points out the asserted inconsistency between such IRS requests and the Form 1024, which does not specifically ask for the names and addresses of potential financing sources.  The signatories assert that Congress has provided for statutory protections of donors' privacy and that the IRS practice is circumventing that protection.  This letter follows up on a March 14 letter to the IRS on requests for information sent to 501(c)(4) exemption applicants.

Private Benefit.  In PLR_201224034, the IRS revoked the exemption of a 501(c)(4) organization, determining that its primary purpose was to advance the private interests of its founder, a "political figure" who was a candidate for elected office in 2004 and 2010.  The organization asserted that it was a citizen's advocacy group focused on solving some of the state's critical problems.  In reviewing the organization's blog posts, the IRS found that most centered on current or pending legislation, as well as the agendas of elected political officials.  Of 17 blog posts reviewed, five criticized the founder's former opponent in a race for elected office, occurring both before and after the election.  Furthermore, the blog page on the organization's website contained links to the founder's campaign website.  Most of the organization's funding came from the founder's donations.   The IRS found that the organization's purpose was to primarily benefit the founder and founder's political "agenda and platforms."  This was further supported by the fact that the founder is the only board member and officer.  Consequently, no community input, oversight, or independence from the founder is present.  The IRS further concluded that the organization had "not established that your primary activity is not to engage in direct or indirect political intervention."  According to the Daily Tax Report, some commentators, such as Marcus Owens at Caplin & Drysdale, find that conclusion to be out of the norm, as Owens stated:  "It suggests that the test for exempt status isn't just that the applicant describe how its activities come within (c)(4), but that it must affirmatively establish what it is not, namely, a political organization."  The PLR did note, however, that a 501(c)(4) organization may engage in political activities, provided it is not "primarily engaged" in politics.

Political Activity Spending.  The Nonprofit Quarterly discusses a report revealing that in the 2010 election, 501(c)(4) organizations outspent super PACs by a three to two margin ($95 million to $65 million).  Ninety percent of the (c)(4)s did not reveal their donors' identity, consistent with the lack of a requirement for them to do so.  The two centers that issued the report (Center for Responsive Politics and the Center for Public Integrity) noted that the vast majority of (c)(4) spending came from conservatively-aligned groups.

Another Politically-Motivated (c)(4)?  The Nonprofit Quarterly reports that former Senator Rick Santorum is forming a new 501(c)(4) organization, Patriot Voices.  The purpose of this organization is reportedly “to mobilize 1 million conservatives around the country to promote faith, family, freedom and opportunity.”  Once again, the primary motivation of forming the 501(c)(4), despite Santorum already having a PAC, is to avoid the donor disclosure rules associated with PACs.  The Nonprofit Quarterly article states that Santorum confirmed that the new (c)(4) will work with his PAC, the Red White and Blue Fund.  As the article further explains, these two organizations can be interdependent, with the (c)(4) accepting privacy-protected donations and then turning around and making contributions to the PAC.

NAM

 

 

Op-Ed in Support of Minimum Charity Care Requirement for Nonprofit Hospitals

Pablo Eisenberg, a senior Fellow at the Georgetown Public Policy Institute, opined in a recent piece for the Huffington Post that Congress needs to set a benchmark for nonprofit hospitals to provide a minimum amount of charity care in exchange for their tax-exempt status.  Eisenberg discusses a recent investigative report on North Carolina nonprofit hospitals revealing increases in profits, reserves and compensation packages for their executives in recent years while less than 3 percent of their operating budgets were spent on charity care.  Eisenberg also references the recent legislative solution to the standoff between Illinois hospitals and the counties seeking to require a minimum charity care standard in exchange for property tax exemption. He frames that solution as a success for those hospitals in avoiding revocation of their tax exemptions.  A federal legislative solution is necessary, Eisenberg opines, to ensure nonprofit hospitals "earn" their tax-exempt status by adequately serving the poor.

NAM

The Abusive Power of Philanthropy: Myth or Reality?

I stopped for a moment to read about the mess going on at the University of Viginia over on Slate this afternoon to find this interesting tidbit on the price colleges, universities and other institutions may have to pay as they are increasingly deprived of state funding and become more dependent on private altruism for their survival.  In case you have not heard, the University of Virginia's Board of Visitors suddenly and without warning fired President Teresa Sullivan.  Apparently, Sullivan had an unknown enemy in the person of Board Rector (or chairperson), Helen Dragas.  Why Ms. Dragas harbors such antipathy to UVA's first woman President remains a mystery but according to a whole slew of media reports, it was Helen Dragas who engineered the vote that led to President Sullivan's firing, all at the behest of wealthy UVA alum and donor, Peter Kiernan .  What I found fascinating in a Slate op-ed piece was this observation: 

So as tuition peaks and federal support dries up, the only stream still flowing is philanthropy. Our addiction to philanthropy carries great costs as well as benefits to public higher education in America. We are hooked on it because we have no choice. Either we beg people for favors or our research grinds to a halt and we charge students even more. I am complicit in this. I enthusiastically help raise money for the university. And my salary is subsidized by a generous endowment from board member Tim Robertson, son of the Rev. Pat Robertson.

The reason folks such as Dragas and Kiernan get to call the shots at major universities is that they write huge, tax-deductable checks to them. They buy influence and we subsidize their purchases. So too often an institution that is supposed to set its priorities based on the needs of a state or the needs of the planet instead alters its profile and curriculum to reflect the whims of the wealthy. Fortunately this does not happen often, and the vast majority of donors simply want to give back to the institutions that gave them so much. They ask nothing in return and admire the work we do. But it happens often enough to significantly undermine any sense of democratic accountability for public institutions.

True altruism hardly exists.  There is always a price to be paid.  Apparently, Kiernan thought he had purchased the power to hire and fire UVA's president via his "tax deductible checks" to UVA.  One supposes that the same power might apply all the way down to the hiring of Dean's and even faculty.  Now this is really fascinating, the argument that as state subsidization of public colleges and universities dry up, higher education stakeholders will become increasingly "addicted" to philanthropy -- I always thought philanthropy was a good thing, but asserting an addiction to philanthropy in perjorative terms is like suggesting moderate daily exercise is a bad thing.  And that addiction will make colleges and universities beholden to private foundations.  I have heard this argument before.  Anyway, the writer, a professor at UVA, goes on to suggest that larger donors will increasingly be able to dictate what happens on college campuses and, inevitably, this will lead to the ruination of higher education.  Apparently, though, stakeholder outrage is causing a serious backlash against the power-grab, according to a recent post on the Washington Post Blog.  Big donors and their surrogates are backtracking and apologizing all over the place.  In fact, President Sullivan appears to be in a stronger position now than she was before "big donor" attempted the coup.  It is too soon to start articulating the proverbial "moral of the story," but it appears that philanthropy, itself, is not the problem; that is, there is nothing inherent about philanthropy that ought to make us suspicious.  Indeed, it is more likely that the unabashed chutzpah that donor's sometimes mistakenly assume is justified by their philanathropy will not be tolerated.  So, let's not start adding to the already existing morass of rules and regulations pertaining to private foundations.  It seems to me that the drama will play itself out to a correct conclusion, whatever that may be. 

 

dkj

Briffault, Brody, and Mayer on Disclosure

Richard Briffault (Columbia), Evelyn Brody (Chicago-Kent), and I have posted or published new papers relating to disclosure by nonprofits.  Here are the abstracts or a portion of the introduction.

Briffault's Updating Disclosure for the New Era of Independent Spending (SSRN) (abstract):

One of the most striking developments in recent elections has been the upsurge in spending by independent committees, particularly Super PACs and 501(c) nonprofit corporations, that are not technically affiliated with specific candidates or parties but that frequently work to promote or oppose specific candidates or parties. In many elections, these committees are de facto surrogates for the candidates they are aiding. Although our disclosure laws are reasonably effective at obtaining the disclosure of the identities of donors to candidates and parties, they fail to provide effective disclosure of the identities of the donors to independent committees. The Citizens United decision indicates that expanding disclosure to address the surge is independent is primarily a technical and political one, not a constitutional one, as the Court has strongly endorsed the disclosure laws and their application to independent committees.

This article lays out a reform agenda for adapting our disclosure laws to this new era of independent spending. It addresses four issues: how to obtain the identities of the donors who contribute to organizations that engage in independent spending; how to define the election-related activity that triggers the duty to disclose; how to obtain the identities of the natural persons behind corporate contributions and expenditures; and how to assure that disclosure is made in a timely fashion.

In earlier work, I have suggested that we require too much disclosure of personal information concerning relatively small donors. However, we currently provide too little information about the donors who are financing the independent committees that loom increasingly large over our elections. Rightsizing disclosure to enable voters to understand the financial forces behind our candidates requires that we both raise the monetary thresholds for disclosure and extend the ambit of disclosure to include the donors who are paying for independent spending.

Brody's Sunshine and Shadows on Charity Governance: Public Disclosure as a Regulatory Tool (12 Fla. Tax Rev. 183 (2012)) (paragraph from introduction):

Sunlight, of course, creates both clarity and shadows. Knowing that detailed information about charity
structure and practices will be available to the public can—as no doubt intended—influence charity behavior. However, requiring charities to disclose information to the IRS is a separate question from requiring charities to disclose their IRS filings to the public. Since 1987 exempt organizations have operated under a statutory obligation to provide their Forms 990 upon demand. That significant development has long made me wonder about the effect on the nonprofit sector from mandated public disclosure of tax filings.4 In a March 2010 letter, then-ranking member (and former chair) of the Senate Finance Committee, Charles Grassley, praised the 2008 redesign of the Form 990 in declaring: “The best way I know to increase voluntary compliance is to inject transparency.”

Mayer's Nonporofits, Politics, and Privacy (62 Case Western Reserve L. Rev. (forthcoming)) (abstract):

With the rapidly increasing flows of money into politics and accompanying calls for greater disclosure of the sources of those funds, the time is ripe for a deeper consideration of the policy concerns that underlie disclosure requirements and the related issue of privacy. One important aspect of this deeper consideration is recognizing that this particular area is at the intersection of three significantly different disclosure regimes. Those three regimes are (1) federal tax law generally, (2) federal tax law as it applies to tax-exempt nonprofit organizations, and (3) federal election law. These regimes are a study in contrasts. Federal tax law strongly protects taxpayer information from public disclosure. Federal tax exemption law strongly favors public disclosure of institutional information, but it is more ambivalent about public disclosure of information relating to individuals. Federal election law strongly favors public disclosure of all relevant financial information, including information relating to individuals. Understanding the reasons for these differences is important when determining whether disclosures at the intersection of the three regimes are appropriate and desirable. The other, related aspect of this deeper consideration is privacy. The concept of privacy is one that is instantly recognizable and yet theoretically, much less legally, hard to define. This difficulty stems in part from the many possible applications of the privacy concept. Fortunately for the purposes of this Article, the context here is fairly clear and narrow: the public disclosure of information relating to nonprofit organizations involved in politics and their supporters. Even in this narrow context, however, there are at least two competing approaches with respect to privacy. One approach takes a cost-benefit approach. It judges disclosure requirements based on their quantifiable costs and benefits, including among those costs the harm to privacy, however measured. The other, less frequently used approach is a right-to-privacy approach that considers privacy a fundamental right that can only be abridged if there is a relatively strong interest for doing so and then only to the extent required to further that interest. 

The first Part of this Article briefly reviews and contrasts the history and current rules governing disclosure and privacy in the federal tax, federal tax exemption, and federal election law contexts. This review reveals that both the cost-benefit approach and the right-to-privacy approach can be found in this history, but to a greater or lesser extent depending on the context. The second Part explores these two different approaches and the extent to which the existing disclosure rules reflect those approaches. This Part shows that the rules are sometimes but not always based both on the cost-benefit approach to disclosure, in which privacy harms are but one possible cost, and on the right-to-privacy approach. The third Part considers recent proposals for disclosure rules relating to nonprofit organizations engaged in political activity using both the cost-benefit approach and the right-to-privacy approach. This consideration reveals that certain proposals, which relate to disclosure of financial information primarily about the organizations themselves, generally are justifiable under either approach. Certain other proposals that would require disclosure of financial information primarily relating to individuals, however, are more difficult to justify under a right-to-privacy approach. I conclude by discussing why this difference exists and what it means for the desirability of disclosure in this area.

LHM

Law, Society & Taxation Nonprofit Panel & Papers

The Law and Society Association's 2012 International Meeting in Honolulu earlier this month featured the following panel and additional papers relating to nonprofits:

• Charities and Public Policy Panel
  • Nina J. Crimm (St John's) & Laurence H. Winer (Arizona State), 
  • Terri Lynne Helge (Texas Wesleyan), Reforming the Private Benefit Doctrine
  • Grace S. Lee (Alabama), Toward a More Dynamic Theory Regarding the Charitable Deduction
  • Henry Ordower (Saint Lewis), Charitable Contributions of Services
  • Miranda L. Stewart (Melborne), Doing Business to Do Good: Should We Tax the Business Profits of Not for Profits

• Meredith A. Cartwright (York), Tax Subsidies for the Religious Training of Children in Religious Schools in US and Canadian Tax and Constitutional Law: “Public” or “Private” “Personal” (In)Tangible Benefits of a Suspect “Gift”

• Daniel B. Rubin (Michigan), A Population Health-Based Approach to Nonprofit Hospital Tax Exemption

• Richard Schmalbeck (Duke), The Role of Declaratory Judgments in Shaping the Concept of Charity

LHM

Call for Papers from Columbia Law School Charities Law Project

The Charities Regulation and Oversight Project, which is part of the National State Attorneys General Program at Columbia Law School, has issued a call for papers for its February 2013 conference "The Future of State Charities Regulation".  Here are the details:

The Charities Regulation and Oversight Project of the National State Attorneys General Program at Columbia Law School will host the 2013 Charities Regulation Policy Conference: “The Future of State Charities Regulation and Enforcement”, to be held on February 7th & 8th, 2013, at Columbia Law School in New York City. The 2013 conference will be the third major policy conference at Columbia Law School devoted to issues regarding state regulation, oversight and enforcement of the charitable and nonprofit sector. Developed in partnership with the National Attorneys General Training and Research Institute, the conference will address the complex issues surrounding the current status, and the future trajectory of, state regulation of the charitable sector.

 

The 2013 conference is intended to promote dialogue among regulators, leaders from the sector, practitioners and academics regarding challenges confronting state regulation of the sector and to develop proposals for improvement.

 

Anticipated topics include the state/federal relationship; structure and funding of state charities officials; the fundamental role of states in governance issues; challenges and interest of the states in social mission/hybrid corporate organizations; the role of states in nonprofit healthcare; changing landscape of state-based charitable solicitation; jurisdiction over religious organizations; interstate and international jurisdiction; emerging issues surrounding advocacy and political activity by the sector. The Charities Project seeks a diverse range of perspectives for the conference; paper submissions are encouraged from practitioners, regulators, leaders from the sector itself and academics. Proposal abstracts, no more than one page in length, should be sent to charities@law.columbia.edu by July 13, 2012. Drafts for final papers for the conference should be approximately 5000 words.

 

Please contact Frances Laviscount Program Coordinator, at flavis@law.columbia.edu or 212-851-1061 with any questions regarding the conference or paper submissions.

LHM

Bishop: Sectorization & L3C Regulatory Arbitrage of Joint Ventures with Nonprofits

Carter G. Bishop (Suffolk) has posted Sectorization & L3C Regulatory Arbitrage of Joint Ventures with Nonprofits on SSNR.  Here is the abstract:

The raison d’etre for the nascent low-profit limited liability company (L3C) is to stimulate collaboration (“sectorization”) among government, private and charitable sectors in order to redirect for-profit capital models into the nonprofit sector. The hope is that the L3C will not only generate additional resources for charitable purposes, but also fundamentally transform business culture by signaling a more efficient way to “do good while doing well.” The L3C has been criticized for targeting only private foundation program related investments, a capital pipeline already exhausted by existing profit entity models. When compared to the existing nonprofit joint venture, the L3C emerges as a less efficient arbitrage model for stimulating profit sector investment in charitable enterprises. A comparative analysis yields instructive lessons regarding deficiencies in federal tax regulation of program related investments and joint ventures. In both cases, the federal tax rules utilize a differing “control test” to assure the exempt entity directs assets toward its charitable mission and away from private benefit to profit sector participants. This Article provides the first comprehensive comparative theory that the existing nonprofit-profit joint venture model is a more efficient solution to assuring compliance with the charitable mission when blending market returns to market capital investors. This theoretical framework exposes why L3C statutory operating procedures unnecessarily cripple profit efforts, undermine its effectiveness, and present policy dilemmas less prevalent in joint ventures where the nonprofit must exercise control over the business entity rather than simply an investment in the entity. As a result, program related investments should be scaled back and limited to determining only whether an investment jeopardizes a foundation’s exempt mission where the scale of the investment has a self-limiting role.

LHM

Galle: Charities in Politics

Brian D. Galle (Boston College) has posted Charities in Politics: A Reappraisal on SSRN (forthcoming William & Mary Law Review).  Here is the abstract:

Federal law significantly limits the political activities of charities, but no one really knows why. In the wake of Citizens United, the absence of any strong normative grounding for the limits may leave the rules vulnerable to constitutional challenge. This Article steps into that breach, offering a set of policy reasons to separate politics from charity. I also sketch ways in which my more-precise exposition of the rationale for the limits helps guide interpretation of the complex legal rules implementing them.

Any defense of the political limits begins with significant challenges because of a long tradition of scholarly criticism of them. Critics of the limits suggest that the “market failures” that justify tax subsidies for charity also afflict group efforts to monitor politicians and organize politically, so that the subsidy should extend to cover those activities. These claims, though, overlook a series of additional issues suggested by transaction cost economics and other aspects of economic theory.

Most significantly, even if lobbying and electioneering should be subsidized, it does not follow that these functions should be carried out by charities. I argue that combining politics with charity produces a set of diseconomies of scope, including higher agency costs, diminished “warm glow” from giving, and greater inframarginality of deduction recipients. In addition, I argue that the economically ideal tools for reaching the socially optimal levels of charity and lobbying are incompatible with one another. While there are also off-setting gains from the combination, many of these gains further exacerbate the diseconomies.

LHM

Viola: Abandoning Property Taxes Assessed on Fallow Nonprofit Property

Brittany L. Viola (J.D. 2012, Illinois) has published an interesting note titled Abandoning Property Taxes Assessed on Fallow Nonprofit Property (2012 U. Ill. L. Rev. 287).  Here is the abstract:

Financial distress has led to a rise in the shuttering of tax-exempt property owned by non-profit organizations. Typically, nonprofits are not subject to property taxes if they use their properties for charitable purposes. Because these now-fallow properties are no longer being used, a debate has emerged over whether to assess them a property tax. On one side of the debate are those who argue for a strict construction of “charitable use”—one that would exclude non-fallow properties from exemption. Proponents of this construction argue that fallow nonprofit property should be taxed to share the burden of cash-strapped local governments. On the other side of the debate are those who argue for a broad construction of “charitable use”—one that reflects the purposes of nonprofit tax exemptions by excluding fallow nonprofit property from taxation. Proponents of the broad exemption argue that taxing these properties only serves to further strain financially troubled nonprofits, leading to fewer services for the people these nonprofits serve, and in turn placing greater demand on the government. Further complicating the issue is the diverse construction of tax exemptions across the fifty states. This Note examines the varying constructions and purposes of property tax exemptions for nonprofits. The Note concludes by suggesting a simple, more uniform system of taxing nonprofit property under the broad construction of “charitable use” so that fallow nonprofit property remains exempt. This approach would best serve the purposes of nonprofit tax exemptions and the people nonprofits serve.

LHM

Harrison & Seim: Nonprofit Tax Exemptions and Market Structure

Theresa Harrison and Katja Seim (University of Pennsylvania) have posted Nonprofit Tax Exemptions and Market Structure: The Case of Fitness Centers on SSRN.  Here is the abstract:

Nonprofits are increasingly present in industries with a large for-profit sector, raising questions about their competitive advantage afforded by the nonprofit tax exemption. We estimate an equilibrium model of market structure for recreation/fitness centers to assess whether nonprofit and for-profit firms compete directly for the same customer base. Our results suggest that the two ownership types serve independent markets. Consequently, nonprofits do not meaningfully crowd out for-profit competitors. We find that local property taxes, as a proxy for a firm’s tax burden, significantly affect for-profit entry and that nonprofit entry would fall by 25%, without affecting for-profit entry, if the same property tax liability was imposed.

LHM

Zelinsky: Do Religious Tax Exemptions Entangle in Violation of the Establishment Clause?

Edward A. Zelinsky (Cardozo) has posted Do Religious Tax Exemptions Entangle in Violation of the Establishment Clause? The Constitutionality of the Parsonage Allowance Exclusion and the Religious Exemptions of the Individual Health Care Mandate and the FICA and Self-Employment Taxes on SSRN.  Here is the abstract:

In Freedom From Religion Foundation v. Geithner, the Freedom From Religion Foundation (FFRF) argues that Code Section 107 and the income tax exclusion that section grants to “minister[s] of the gospel” for parsonage allowances violate the Establishment Clause of the First Amendment. This case has important implications for a new federal law mandating that individuals maintain “minimum essential” health care coverage for themselves and their dependents. That mandate contains two religious exemptions. One of these exemptions incorporates a pre-existing religious exemption from the federal self-employment tax. These sectarian exemptions raise the same First Amendment issues as does the Code’s exclusion from gross income of clerical housing allowances.

I ultimately find unpersuasive the indictment of Section 107 as constitutionally entangling. For the same reasons, I also conclude that the religious exemptions of the Social Security taxes and of the individual health mandate pass First Amendment muster. In the modern world, extensive contact between tax systems and religious institutions is unavoidable. Whether religious entities and actors are taxed or exempted, there are inevitable tensions between the contemporary state and sectarian institutions and their personnel. Whether religious entities and actors are taxed or exempted, there are no disentangling alternatives, just imperfect trade-offs between different forms of entanglement.

Thus, Section 107 and the exclusion from gross income it grants to clerical recipients of housing and parsonage allowances are constitutionally permitted, though not constitutionally required, responses to the problems of entanglement inherent in the relationship between modern government and religion. Similarly, the Code’s sectarian exemptions from the individual health care mandate and from the FICA and self-employment taxes are acceptable, though not obligatory, means under the First Amendment of managing the inevitable contacts and tensions between the contemporary state and the religious community.

However, as a matter of tax policy, the exclusion of Section 107(2) for cash parsonage allowances stands on weaker ground than does the exclusion of Section 107(1) for in-kind housing provided to “minister[s] of the gospel.” The taxation of such cash allowances, in contrast to the taxation of housing provided in-kind, does not involve problems of valuation or of taxpayer liquidity and is thus more practicable as a matter of tax policy.

LHM

Bad News for Political 501(c)(4)s: 4th Circuit Upholds "Major Purpose" Test for Political Committees

In a case with potentially major ramifications for politically active section 501(c)(4) organizations, the U.S. Court of Appeals for the Fourth Circuit has upheld the Federal Election Commission's "major purpose" test for determining whether an organization is a political committee or PAC and so subject to extensive disclosure requirements.  As described in the opinion, under the major purpose test "the Commission
first considers a group’s political activities, such as spending on a particular electoral or issue-advocacy campaign, and then it evaluates an organization’s 'major purpose,' as revealed by that group’s public statements, fundraising appeals, government filings, and organizational documents" (citations omitted).  The FEC's summary of the litigation details the challenge made in this case:

A group or association that crosses the $1,000 contribution or expenditure threshold will only be deemed a political committee if its "major purpose" is to engage in federal campaign activity. [The plaintiff] claims that the FEC set forth an enforcement policy regarding PAC status in a policy statement and that this enforcement policy is "based on an ad hoc, case-by-case, analysis of vague and impermissible factors applied to undefined facts derived through broad-ranging, intrusive, and burdensome investigations . . . that, in themselves, can often shut down an organization, without adequate bright lines to protect issue advocacy in this core First Amendment area."  [The plaintiff] asks the court to find this "enforcement policy" unconstitutionally vague and overbroad and in excess of the FEC’s statutory authority.

In a unanimous opinion, the court concluded that the FEC's current major purpose test is "a sensible approach to determining whether an organization qualifies for PAC status.  And more importantly the Commission's multi-factor major-purpose test is consistent with Supreme Court precedent and does not unlawfully deter protected speech."  In doing so, the court chose to apply the less stringent "exacting scrutiny" standard instead of the "strict scrutiny" standard because, in the wake of Citizens United, political committee status only imposes disclosure and organizational requirements but no other restrictions.  While the plaintiff here (The Real Truth About Abortion, Inc., formerly known as The Real Truth About Obama, Inc.) is a section 527 organization for federal tax purposes, the same test would apply to other types of politically active organizations, including section 501(c)(4) entities.

Hat Tip:  Election Law Blog

LHM

IRS Provides New Information for Credit Unions Facing Automatic Revocation of Exemption

The IRS has provided new information for federal and state credit unions that have had either their own tax-exempt status revoked automatically for failure to file annual returns for three years or have received a notification that their parent organization has been subject to such revocation.  The new information addresses three common situations:

• When a federal credit union has had its tax-exempt status revoked even though it is not required to file an annual return (letter to IRS asserting federal credit union status required).

• When a state credit union, which is required to file an annual return, has had its tax-exempt status revoked (application for reinstatement of tax-exempt status required if the credit union was required but failed to file annual returns for three consecutive years).

• When a credit union has been notified that its parent organization has lost its tax-exempt status (noting a situation that has arisen because some state agencies that had previously filed group information returns on behalf of all exempt state-chartered credit unions under their control and supervision have ceased to do so).

LHM

 

NY Threatens to Strike 1,649 Deliquent Charities from State Rolls

The NY Post reports that New York Attorney General Eric Schneiderman is planning to send letters this week to 1,649 charities threatening them with cancellation of their registrations with the state unless they submit late reports within 20 days.  If the AG cancels their registrations, the charities will no longer be legally eligible to raise funds in the state from either private or government sources.  The New York registration and reporting requirements are enforced by New York's Charities Bureau, housed in the AG's office.

LHM