Nonprofit Law Prof Blog

A hidden football tax exemption

Every year my nonprofit law class has a lively discussion about whether revenue from college football games, including revenues from bowl game broadcast contracts, ought to be exempt from taxation on grounds that the activity is educational.  This discussion is particularly relevant to students attending my university, since our football program has been mired in scandal for more than a year and many of the facts that have emerged indicate that at least some football players are barely engaged in our school's educational program.

Now comes word that the citizenry is, at least arguably, further subsidizing college football programs by means of an additional, veiled tax exemption.  According to an item in the Nonprofit Quarterly, which in turn is reporting on an investigation carried out by Bloomberg News, many colleges require charitable donations to the school in return for the privilege of buying season tickets at face value. The donor/ticket purchasers then write off the value of the mandatory donations, costing the U.S. treasury as much as $100 million per year.  Ohio State University and LSU were singled out as particularly successful (or egregious, depending on your point of view) with this quite common strategy.

TAK

Romney Charitable Tax Avoidance Device

I am one that rare species of Nonprofit Law profs who is not a tax expert, so this post falls under the category of "stories that look interesting but I don't really understand."  According to The Chronicle of Philanthropy, Mitt Romney uses a tax sheltering device, called a "charitable remainder unitrust," that "permits him to use a charity's exemption to defer taxes on capital gains from the sale of assets . . .."  The device, akin to "renting from your favorite charity of its exemption from taxation," was outlawed in 1997 but individuals who had existing trusts at that time are permitted to continue benefiting from them.  Perhaps one of our tax experts can explain further.

TAK

A Helpful IRS

I have complained before on this blog about interactions between the Community Development Law Clinic, which I supervise at UNC Law, and the IRS.  Particularly on matters of commercial activities undertaken by charitable organizations, IRS examining officers have been obtuse and inconsistent.  However, we had a recent interaction with the IRS in which it proved flexible and helpful.

We represent a group that owns athletic facilities and organizes a sports league in its community.  The organization, which grew organically in accordance with community needs and which has always been managed by volunteers, incorporated under state law more than forty years ago but never applied for 501(c)(3) status.  During its forty years of existence, it covered its expenses, mostly by charging fees, but rarely produced any surplus.  It maintained financial records, but did not get serious about financial accounting and controls until three years ago when a more professional group of board members took control.  They now wish to apply for (c)(3) status because their facilities are in need of repair and the fee income will not cover the costs.

We approached the IRS with some trepidation, given that the Form 1023 asks for five years of financial information and this organization has only three to offer.  An officer on the technical advice line told us that this sort of thing happens frequently, that the IRS is accustomed to dealing with it and does not wish to penalize well-meaning community groups such as this one, and that they can deal with the required financial information by providing the three most recent years plus a projection for the next two.

I take back at least some of the unkind things I said (or implied) about the IRS and its dealings with exempt organizations.

TAK

Nonprofit Leaders Urge Presidential Candidates to Protect Tax Break

The Chronicle of Philanthropy is reporting that leaders of big nationwide nonprofits on Thursday sent letters to President Obama and former Massachusetts Governor, Mitt Romney, urging the presidential candidates to reconsider their proposals to cut the charitable tax deduction. 

The nonprofit leaders also announced that they have scheduled a gathering on December 4 and 5 to bring hundreds of their members to Washington to tell members of Congress that any tax changes that lead to a decline in private giving would devastate nonprofits and the people they serve.

Among the organizations that sent the letters were the Salvation Army and United Way Worldwide and nonprofit coalitions like the Association of Fundraising Professionals and Independent Sector.  According to the groups, “Any proposed cap would have long-lasting negative consequences on the charitable organizations upon which millions of Americans rely for vital programs and services.” 

President Obama has several times proposed to limit the charitable deduction to 28 percent—instead of the current 35 percent—for individuals earning more than $200,000 and families earning more than $250,000. Congress has never gone along with that kind of limit, in part because of strong charity opposition.

Although Former Governor Romney has not been specific about his tax plan, he has proposed to limit the amount of deductions people could take over all.  The Chronicle reports that in a recent debate, Mr. Romney suggested that people could choose whether they wanted to take deductions for housing or charitable giving if they went over the limit.

We wait to see what will happen after the election season is over.

VEJ

Caribbean Nonprofit Uses Online Crowd Funding to Raise Funds for School Project

I'll confess my ignorance: up to a few minutes ago, I had never heard of "crowd funding."  Then this story from Caribbean360 caught my attention.  According to Caribbean360, the Grenada Goat Dairy recently announced that its campaign to fund its collaboration with the St. Patrick Anglican School had exceeded its goal of $55,000  (USD) through the campaign's use of the crowd funding website, www.Kickstarter.com.  The Grenadian non-profit organization used the method to attract local and international support, with donors giving amounts ranging from $1 to $10,000.

I know nothing about crowd funding and how it works, but if it works for the Grenada Goat Dairy, it can work for other non-profits also.  I wonder, however, whether donors' contributions are tax deductible, and whether the various websites hosting these crowd funding "events" are able to give individual donors receipts for their donations.

VEJ   

 

Faith and Voting -- Does a LInk Exist?

The Washington Post is reporting on a possible link between religiosity and voting -- or non-voting.  According to the Post, a new poll indicates that religiously unaffiliated Americans are less likely to vote in next month's elections than those Americans who are religiously affiliated.  The poll focuses on the overlap -- and sometimes contradiction -- of a person's faith identity and his or her views on topics ranging from religious freedom to abortion.

Coming so close to Election Day, the article is an interesting read.

VEJ  

The Tax Status of the NFL: Why Reporters Ought Not to Write About Nonprofits Until They Talk To An Expert

I spend a fair amount of my working life talking with reporters about tax exemption issues.  I do this not because I think I'll get quoted correctly (I almost never do; nuance, which is part of the stock in trade of an academic, is almost always lost in the translation), nor because I think I'll get famous from the occasional quote in a story, but rather because I hope to influence at the margin the competence of the stories that are written.  And I will say that most of the time (not nearly all), the reporters I talk to write stories that by and large "get it right."  I hope some of that is attributable to their discussions with me, but I think it is more attributable to the fact that reporters who seek out experts in the areas they are writing stories on really are trying to do a good job, and that tends to get reflected in the accuracy of what they write.

Contrast this to stories like this one in the Atlanta Journal Constitution, about the tax-exempt status of the NFL.  Most of the basic facts are correct - the NFL is, in fact, a tax-exempt entity under 501(c)(6).  But the reporter who wrote this story makes no effort to place this status in context, and therefore leaves the impression that this is a huge scandal.  I hate stories like this. 

I've talked many times with sports reporters across the country about this issue, and I invariably find that the reporter in question starts with no understanding about the differences between 501(c)(6) status and "charitable" status under 501(c)(3).  Most of them don't realize that trade associations don't benefit from the Section 170 charitable contributions deduction; to them, "exempt" means the same thing whether you are the NFL or the Red Cross.  When reporters leave this critical difference out, readers come away with the same confused impression: that the NFL enjoys the same tax benefits as the Salavation Army or the local church.  It doesn't.

Second, the reporters invariably fail to distinguish the NFL league entity from the individual teams.  The individual teams are taxpaying, for-profit enterprises (the Green Bay Packers do have a unique ownership structure, in which the corporation is owned by citizens of Green Bay, but it is organized as a for-profit corporation under Wisconsin law).  They are not owned by the league.  Again, notice that the quote used by the reporter from Tom Coburn talks about the value of the individual teams, juxtaposed against the very vague statement that "many" of the NFL's "subsidiaries and teams" are tax-paying entities.  This is classic obfuscation, in which the reader is left with the impression that the NFL is a monolithic nonprofit, classified in the same way as the Salvation Army, with teams that may themselves be exempt.

Finally, the story doesn't point out that 501(c)(6) status doesn't get you very much in the tax world.   In most states (actually, I think all), trade associations aren't considered charities, and their property would not be tax-exempt under general state property tax exemption rules.  So the quote in the story about the NFL having "$1 billion in assets" again leaves the mis-impression that somehow these assets are escaping taxation.  Even the value of the income tax exemption is questionable.  If you look at the NFL's 2011 Form 990, you will see that its expenses for the year exceeded its revenue.  While I can't conduct an audit from afar, it sure looks like virtually everything reported by the NFL as an expense would be deductible if the NFL were a taxpaying entity.  The result: even if the NFL weren't tax-exempt, it probably could easily arrange its affairs to pay no income tax.

Now that's not to say that exempt status is worthless; it must be worth something to the NFL, or else it would have abandoned that status, like Major League Baseball did years ago.  But this whole "shock and awe" tinge to the story makes me want to throw up.  In the overall policy world of exempt organizations, I just don't find the NFL's "trade association" status all that bothersome.   After all, all sorts of local, state and even national business organizations qualify under that same status (e.g., the American Bar Association; the American Medical Association, etc.).  There's plenty of stuff in the exempt organizations world to get worked up over (political expenditures by (c)(4)'s, for example); the NFL's status just doesn't hit my hot button.

JDC

Is Scranton Playing Hardball on PILOTs?

From the Nonprofit Quarterly comes a story about the city council of Scranton, PA and the city council's potential "hardball" approach to coaxing PILOTs from the city's nonprofit sector. 

The story recounts how the City Council has asked that it be given notice of any zoning variance applied for by a nonprofit, so that the council can (if it chooses to do so) oppose the variance before the zoning authorities.  The undercurrent of the story is that the potential opposition might be tied to whether the nonprofit agrees to a PILOT.  The author of the NPQ article indignantly claims this is discriminatory, because the tax status of the organization requesting the variance should have no bearing on whether the variance is granted:

If a tax-exempt and a tax-paying entity both apply for variances regarding off-site parking requirements, for example, it would seem to be a big stretch to argue that the tax status of an applicant trumps the empirical questions about the land use.

Well, I'm not sure I agree.  Zoning is clearly about land use, but in a larger sense it is about the overall economic health of a particular geographic area.  Tax revenues are certainly a consideration in that overall economic health and I don't find it untoward for zoning variances to consider the effect on the local tax base (assuming, of course, that consideration is not prohibited by local zoning laws; I have to believe that if the city council's attorney thinks that such consideration is appropriate, there probably isn't a Pennsylvania statute prohibiting it).  If Scranton wants to play hardball with nonprofit organizations, potentially holding zoning variances "hostage" in return for payments, that's life in big city politics.  There's some saying about "kitchens" and "heat" that seems appropriate here . . .

JDC

 

A Lesson in State Property Tax Exemption Law

The dispute between the town of Vestal, NY and United Health Services over a property tax exemption for a new clinic owned by UHS offers a good lesson in the requirements for state property tax exemption.  UHS built the clinic on land leased from a for-profit corporation.   There is no dispute that the building is tax-exempt; the dispute regards an exemption on the underlying land.

While property tax exemption laws vary considerably from state to state, in most states property tax exemption requires that the exempt property meet two requirements: (1) it must be owned by an exempt charity and (2) it must actually be used "exclusively" (which usually really means "primarily") for exempt purposes.  In New York, the relevant statutory language comes from Section 420-a of the New York Real Property Tax Law, which states:

Real property owned by a corporation or association organized or conducted exclusively for religious, charitable, hospital, educational, or moral or mental improvement of men, women or children purposes, or for two or more such purposes, and used exclusively for carrying out thereupon one or more of such purposes either by the owning corporation or association or by another such corporation or association as hereinafter provided shall be exempt from taxation as provided in this section.

The New York law seems pretty clear in requiring "ownership" by an exempt entity, which is pretty clearly not the case in the Vestal-UHS dispute.   It may be, however, that UHS is claiming that the terms of its lease are the equivalent of "ownership" for New York property tax rules.  The IRS sometimes treats very long-term leasing arrangements as the equivalent of fee ownership.  In its regulations regarding tax-deferred exchanges under Code Section 1031, for example, the IRS treats a leasehold of 30 years or more as "like kind" to a fee interest.  Treas. Reg. 1.1031(a)-1(c).

Since UHS has declined to reveal the specific provisions of its lease, I don't know what it's argument is on the ownership question (there is a suggestion in the cited story that UHS is claiming that it is responsible for paying the property taxes, which is enough to meet NY law).  I'm also not sure whether New York would recognize certain leasehold interests (or obligations to pay the taxes) as the equivalent of "ownership" for property tax purposes - perhaps some reader from New York could enlighten us on that point.

But the story is a good illustration of how state property tax exemption differs from federal (or even state) income tax exemption.  Federal income tax exemption is focused solely on the "charitable-ness" of the entity seeking exemption.  Property tax exemption, on the other hand, generally requires meeting a two-pronged "ownership and use" test.  The latter can produce different results - for example, property that is owned by a charity but not used for charitable purposes (e.g., leased to for-profit entities, or not used at all - that is, fallow property) generally will not qualify for exemption, just as property used for exempt purposes but owned by a for-profit entity and leased to a charity will not qualify.

JDC

 

Charitable Deduction Under Fire

Many people are talking about comprehensive tax reform.   There are lots of different flavors of tax reform,  but the charitable deduction seems to be on the block in most of them.  We all know about the Administration's proposal that would limit the charitable deduction.   It was striking to me that some of the panelists at the recent Ways & Means Subcommittee hearings  felt the need to speak out in a pre-emptive way about the negative effects of tax reform on the charitable deduction.  I don't think this talk is going away any time soon.

Today's article in Bloomberg News outlines the possible impact of the new Romney tax proposal, which also would limit the charitable deduction.  According to this article on CNN, here is the Romeney quote:

You could do something, for instance, as an option you could say everybody's going to get up to a $17,000 deduction, and you can use your charitable deduction, your home mortgage deduction, or others – a healthcare deduction, and you can fill that bucket, if you will, that $17,000 bucket that way. And higher income people might have a lower number," Romney said.

From that quote, all we know is that the charitable deduction is a potential target of an itemized deduction cap, as well as many other deductions of various sizes and costs.   It would be easy to say that maybe this is just a Pease limitation under another name, but the capping of the healthcare exclusion for employer provided insurance would be mostly new (if that's what he meant).  It really isn't clear what else would be in the "bucket."  Certainly it seems like there might be enough other stuff in the bucket that you MUST pay (like your property taxes and your mortgage interest), that things that you COULD pay, such as charitables, would be crowded out IF.. and it's a big IF... you are a tax motivated donor.

If we take the Forbes report from the post I made yesterday to heart, it does appear that many high net worth donors are, at least in part, tax motivated.   They may still give, but they may give less.  My guess is these types of tax reform proposals will impact charitable giving, but it is really hard to know in a vaccuum how signficant those impacts will be.

Who knows if this tax reform stuff is all just talk and none of it will come to pass?  It is easy for the cynic in me to see it all as so much posturing.  But, It is a policy debate worth having - is the tax expenditure cost of the charitable deduction "worth" the private philanthropy that it theoretically encourages?  Is the charitable deduction the same as other deductions, or is it different?  In my personal opinion, which is worth next to nothing, the frustrating thing about both the Obama and the Romney proposals is that they are numerical caps.  They sidestep the hard, subsantive discussions about whether all deductions were made equally by their Creator and therefore should be thrown together in a bucket - maybe, sadly, that's the price to be paid for tax reform, should it happen.

Sorry for the gloom and doom.  I'll try to be more chipper tomorrow.

Yours Despairingly, EWW

Next Generation Philanthropy: The Forbes 400 Report

This post from The Chronicle of Philanthropy about restricted gifts led me to download the report linked in the article that was generated as a result of the Forbes 400 Summit on Philanthropy.  Entitled "Next-Generation Philanthropy: Changing the World," the article (available free but email address required) contains the results of a survey of 264 of the world's top philanthropists, all of whom had at least $1.0 million in investable assets. 

The Chronicle article focuses on the preference for restricted gifts among higher net worth taxpayers.  But there are some other interesting nuggets that only a tax geek like me would focus on:

• 7% of individuals with assets between $1 and 5 million and 18% of individuals with assets over $50 million have utilized a pooled income fund.   That seems amazingly high to me, and I'm shocked that it actually goes up with higher income donors, rather than down. 
• Two-thirds of respondents said that they had a different philanthropic focus than their predecessors.    It stresses the need for succession planning in charitable vehicles, an area that I think is sometimes over looked. 
• In response to the question "With whom do philanthropists partner?", 40% responded business while 28% said other nonprofits and 22% said government agencies.   And you all thought we were making this social enterprise stuff up.
• 44% of respondents want a time horizon of less than ten years to see a retturn on philanthropic investment.   I'm thinking this counts as patient capital in the for profit world, but is it in the nonprofit world?
• Finally 56% of respondents say that taxes impact their philanthropic giving.

It's an interesting read for those of us thinking about how the nonprofit world and the system of private philanthropy will develop over the next generation.

EWW

PILOTs - Is the Revenue Worth the Hassle?

This Reuters piece from Sept. 28^th highlights a recent report prepared by the Lincoln Institute of Land Policy, which finds that local PILOT programs do raise some revenue, but not a significant amount.   The report (free but registration required) contains a significant amount of statistical information on the distribution of PILOT programs by region and by nonprofit sector, with hospitals and universities in the Northeast bearing the heaviest burden.  The authors believe that this may be, at least in part, because the Northeast is “substantially more reliant on the property tax as a revenue source for funding local governments than other parts of the country.”  (Page 2)

The report is an interesting read, although it notes its own limitations.  There is no good collection point for data from PILOT programs, so the collection was, by necessity, somewhat ad hoc.  As a result, the authors can only point to this information as a floor.  Moreover, although the data shows an increase in PILOT programs and revenues over time, it is difficult to know whether this increase is due to the increase in the number of programs or simply due to better data collection methodologies.   Finally, data collection is hampered by the lack of a consistent definition of a “PILOT” program.

In any event, what is striking is the relatively small amount of money raised if you aren’t in a jurisdiction like the Boston metro area, which has many large organizations making substantial payments. It makes one wonder whether the administrative costs and the poisoning of the relationship with large institutional citizens is worth the effort.  Given the status of state and local governmental budgets these days, I’m sure they’d say that every penny is needed.

EWW

Pulpit Freedom Sunday to Again Challenge Political Campaign Prohibition

Over 1,300 religious leaders are prepared to deliberately violate the section 501(c)(3) prohibition on political campaign activity this Sunday, October 7, 2012, by endorsing or opposing a political candidate for public office from their pulpits.  Sponsored by the Alliance Defending Freedom, the purpose of Pulpit Freedom Sunday is to openly exercise their claimed First Amendment freedom of religious expression, which participants claim is violated by the "1954 Johnson Amendment" to section 501(c)(3).  Since its origination in 2008, the Alliance has sought a test case that can be brought to the U.S. Supreme Court, with the desired result of the Johnson Amendment being declared unconsitutional as to churches.

However, the IRS is presently unable to adequately respond to participant churches hoping for the commencement of a legal battle over the statutory prohibition.  As reported by the Daily Tax Report, the proposed regulations to the church tax inquiry rules under section 7611 have not yet been finalized to name the IRS official responsible to carry out the statutorily prescribed inquiry rules.  The current proposed regulations would name the IRS Director of Exempt Organizations, a position currently held by Lois Lerner.

For additional perspectives and opinions on Pulpit Freedom Sunday, see the following:

Steve Siebold, "Pulpit Freedom Sunday - Should the Church be Tax-Exempt?"  (Huffington Post's The Blog)

Meredith Bennett-Smith, "Pastors to Challenge IRS Ban on Political Speech with 'Pulpit Freedom Sunday'"  (Huffington Post, containing Fox News video)

NAM

 

Deductibility of Donations in the Political Season

In the Weekend Wall Street Journal Tax Report, an article entitled, Is Your Political Donation Deductible?, provides a good overview of the various entities involved in the political arena and the deductibility of donations to those entities.  The article opens as follows:

It is the height of election season, and campaign spending is setting new records. As in previous cycles, most of the giving has come from individuals.

For those people, tax questions abound. Which donations to political causes and campaigns are tax deductible? Which ones will be disclosed on the Internet — or reported to the IRS — and which will remain secret? Which could trigger a 35% gift tax?

A crazy quilt of federal tax and election laws makes simple answers elusive. "At best the rules are opaque, and at worst they're misleading," says Ellen Aprill, a professor at Loyola Law School in Los Angeles who studies the area. The best approach, say experts, is to know the rudiments of this tricky area in order to identify the most effective donation strategies and avoid a few traps. ...

The bottom line: There are many ways to give politically to candidates and causes, depending on how much you value deductibility, disclosure or avoiding potential tangles with the IRS. Here are more details about common types of political contributions.

 

The article proceeds to discuss donations to:  (i) political campaigns, parties and certain PACs; (ii) super PACs; (iii) social-welfare nonprofits; (iv) other nonprofits such as trade associations; and (v) nonprofit public charities.

(Hat tip:  TaxProf Blog)

NAM

IRS Announces Hearing on Proposed 501(r) Rules

The Internal Revenue Service issued a notice of public hearing on October 1, 2012 pertaining to proposed regulations under IRC §501(r) that provide guidance regarding the requirements for charitable hospital organizations "relating to financial assistance and emergency medical care policies, charges for certain care provided to individuals eligible for financial assistance, and billing and collections."   The hearing will take place on October 29, 2012 in Washington, DC.

NAM

Stats on Reinstatement of Automatically-Revoked Tax-Exempts

Sandy Deja, a former IRS Exempt Organizations Specialist and author of books and websites on obtaining tax-exempt status, has posted a report, including charts and graphs, on organizations whose tax-exempt status was automatically revoked and then reinstated.  The report is available at:  http://501cfreebook.com/The_Comeback_Kids.php.

NAM