Nonprofit Law Prof Blog

A $71 Billion Tax Break for Churches? Don't Think So

Last summer, several newspapers, blogs, etc. picked up on this article written by Dr. Ryan T. Cragun and two of his students, estimating that tax breaks for churches and other religious organizations cost government $71 billion per year, and like many other crazy things on the web, this doesn't seem to want to go away.

Simply put, the $71 billion number has some very serious problems.

Dr. Cragun gets $35 billion of his $71 billion number by taking the estimated donations to churches from a 2009 survey by Giving USA of $100 billion, and applying the 35% corporate tax rate to that.  But anyone with even a smidgen of knowledge about tax law knows this isn't the way it works.  We don't have a tax on GROSS INCOME; rather, the tax is on net income.

If churches were treated as taxpaying businesses, then they also would get to deduct their operating expenses and depreciation from their gross revenue in order to reach a taxable income number.  Because churches don't have to file a Form 990 or any other financial report, no one really knows what their "net profits" are, but I can verify that the several Catholic parishes I have belonged to during my life have had essentially zero net profits: they spent almost all their revenues on operating expenses, except for the occasional capital improvement (a new parish center or church renovation) which would produce depreciation deductions over time.  In other words, churches wouldn't have $100 billion of taxable income; their "profit" after operating expenses probably is close to zero in most cases.

But let's assume I'm wrong, and churches have pre-tax profits equal to, say, the average pre-tax profit margin of the S&P 500 for the past twelve years.  That pre-tax margin appears to be something like 9.2% (this story notes that the 12-year average net profit margin has been about 6%; if you gross that up to adjust for the 35% corporate tax rate, you get roughly 9.2% pre-tax).  But let's be generous and round that number up to a 10% pre-tax margin.  Now you're talking about net profits of $10 billion, not $100 billion, and Dr. Cragan's $35 billion subsidy suddenly becomes $3.5 billion.

But even that is wrong.  Under current law, donations to churches probably wouldn't be income even absent tax exemption, since donations likely would be considered gifts under Section 102, which are excluded from the income of the recipient (Section 102 applies to all taxpayers, not just charities).  So unless Dr. Cragun is suggesting that we should repeal Section 102, his actual subsidy number is now zero. And that also wipes out the $6.1 billion in estimated STATE income tax subsidy, because states almost always key off Federal tax law in calculating state taxable income (e.g., gifts would be excluded from state taxable income, as well). 

So now we've whittled Dr. Cragun's subsidy number down to $30 billion.  But that's still pretty large.  What about the rest of it?  Well, the largest chunk of what's left is his estimate of a $26 billion loss via property tax exemption.   Here's how he explains his methodology:

The Hartford Seminary estimates that there are 335,000 congregations in the United States. Using forty-seven churches in Tampa from six different religions as our basis (Presbyterians, Mormons, Baptists, Methodists, Episcopalians, and Pentecostals), we estimated that the average value of a church in the United States today is about $1.7 million (land and building). Because property taxes are paid at the state level, we averaged the total number of churches across all fifty states, multiplied the estimated number of churches by the average value, and then calculated the lost state revenues. States subsidize religions to the tune of about $26.2 billion per year by not requiring religious institutions to pay property taxes for property worth about $600 billion.

If a student used this kind of analysis in a paper for my Tax-Exempt Organizations class, I'd give them a "C" at best.  This isn't a serious attempt to value the property tax exemption for churches; a truly serious study would take a locality-by-locality analysis, using available property tax records and individual local property tax rates, which vary enormously.  Such a study would be hard and vastly time-consuming, which is probably why no one (to my knowledge) has done it.  And I don't know where Dr. Cragun gets the approximately 4.3% effective tax rate he is using here (he doesn't explain how he gets to $26.2 billion at all; I reverse-engineered his tax rate).  In one truly serious academic study of the value of tax-exemption for non-church charities - see Joseph B. Cordes, Marie Grantz and Thomas Pollak, What is the Property-Tax Exemption Worth? in Property Tax Exemption for Charities, Evelyn Brody, ed. (Urban Institute Press 2002), the authors use between a 1.3 and 2.1% national rate based on data from the Minnesota Taxpayers Association (1999) and the National Bureau of Economic Research (2000).  I doubt national property tax rates have doubled or tripled in 10 years; so even if I accepted Dr. Cragun's estimate of the total value of church-held property (which I don't; the truth is that we simply don't have a good such estimate because churches aren't required to report this number anywhere), using the Cordes, et. al. methodology yields a tax benefit of $7.8 - 12.6 billion, not $26 billion.  What the real benefit of property tax exemption to churches, however, is simply unknown.  Dr. Cragun's estimate may be low (as he suggests in his footnote 25) or it may be high.  The point is that without better data, any number is pure speculation. 

I have no argument with the basic proposition that churches get substantial tax benefits from property tax exemption and other tax breaks, but there are so many issues with the $71 billion number that I cannot take it seriously.  Neither, in my view, should the press.

JDC

Should We End Charitable Deductions for Churches? Thoughts on Section 170

Back in late October I attended the annual conference held by the National Center on Philanthropy and the Law at NYU.  The topic this year was the charitable contributions deduction, and the papers presented there were uniformly superb.  So much so, that I've been thinking about this topic off and on ever since.

The charitable contributions deduction is a mess largely because (like tax exemption itself) we have no common theoretical conception regarding why it exists.  The two main (and competing) theories are the tax-base theory and the subsidy (or what I prefer to call the "incentive" theory).  Under the tax base theory, the deduction under Section 170 exists because donations shift personal consumption from the donating taxpayer to a third party (the charity, or the beneficiary of the charity).  The tax base theory is built around the common Haig-Simons conception of taxable income, which is the sum of personal consumption plus savings during the tax year.  The tax base theory argues that a donation is neither personal consumption (as opposed to buying a new TV for personal use) nor savings; ergo, it must be excluded from the donating taxpayer's tax base.  This "exclusion" happens by giving the donating taxpayer a deduction, since the donation presumably comes from something that otherwise would be "gross income" under Section 61.  You will sometimes hear this argument as an "ability to pay" argument - that is, a donation reduces one's "wealth" and hence the person who gives away money to charity has a lower ability to pay taxes than a person who doesn't.  But "ability to pay" is grounded largely in the Haig-Simons model of income, and hence I find it preferable to think about this theory on those grounds.

Unfortunately, Section 170 doesn't really embody this theory, however attractive it may sound to some.  If we really believed in the tax base theory, deductible donations wouldn't be limited to only organized charities.  Note that under Section 170, a donation to a bank fund set up for a local family whose house burned to the ground or whose child is undergoing cancer treatment is NOT deductible, because the donation isn't to an organized charity (e.g., a 501(c)(3) organization, or government).  But if you believe in the tax base theory this kind of transfer reduces ones consumptive ability just as much as a transfer to the United Way.  Moreover, the tax base theory would not support any deduction for unrecognized appreciation in property - you can't deduct something from someone's tax base if the amount has never been included in the tax base to begin with.  And the 50%/30% limitations make no sense under this theory either - if you give away all your income during the year to charity, your consumptive/savings ability has been reduced to zero.  Ergo, so should your theoretical tax base.

Another way to look at 170, however, is that it isn't at all about properly defining the tax base.  Rather, it is simply a government incentive for people to give money to organized charity.  This is actually how most tax professionals and economists view 170.  If we look at it this way, the overall structure of 170 makes a bit more sense: if we only want to encourage giving to organized charities (perhaps to avoid some potential back-scratching scams that would occur if we expanded deductibility to the family down the street with the house fire), then 170's limitation to organized charity makes sense.  The deduction for unrealized appreciation can be viewed as simply a bigger incentive for people to make charitable gifts of high value/low basis property.  The 50%/30% limits are simply a way of the government saying "Some incentive, yes, but not too much."  And so forth (even the deduction structure makes a bit more sense: after all, if what you want is to provide an incentive for donations, best to target that incentive at the people with the most wealth to give.  The deduction structure provides a greater incentive as your marginal tax rate goes up, which makes a great deal of sense if you want to encourage rich people to part with larger percentages of their wealth).

The problem with the incentive approach, however, is that Section 170 almost certainly is badly inefficient as an incentive system.  Here's one example.  Empirical studies generally find that donations to churches are much less elastic than for other kinds of charities (for a quick summary, see this 2004 article by Jon Gruber).  Studies also show that churches exist largely on relatively small donations from people who are unlikely to itemize deductions, and hence get no benefit at all from the 170 deduction.  Put these two things together, and you can see that using 170 as incentive for charitable giving to churches is mostly a waste.  It may also be a waste for large donations that accompany "naming opportunities" where the ability to purchase some small slice of immortality may outweigh the tax incentive (though I haven't seen an empirical study on this exact point).

In any event, I am quite certain after having heard their presentation at the NCPL conference that Charlie Clotfelter at Duke and Gene Steuerle from the Urban Institute could craft an incentive system that actually worked and yet was far less wasteful (e.g., would not reduce charitable giving but would recapture a large chunk of tax revenue) than 170 as it currently exists.  This also means that the wailing and gnashing of teeth going on in the charitable sector that "the world as we know it will end" if anyone touches the charitable contribution is silly.   Huge chunks of Section 170 are hugely stupid when viewed through the incentive lens from an efficiency perspective.  

But being sensible about the contributions deduction BEGINS with agreement on the underlying purpose - that is, theory matters.  If we could agree on a theory, "blow up" 170 as it exists, and then reconstruct it according to the theory, we'd have a far simpler, far more efficient system.  Perhaps it is too late to take this approach to Section 170 given all the entrenched interests involved, but the fiscal cliff negotiations might give an opening to this kind of considered tax reform generally . . . at least, hope springs eternal.  

JDC

States Take Lead on Forcing Disclosure of Political Donations

The use of 501(c)(4) nonprofits to support political campaigns was well-documented over the past election cycle (see, for example, LHM's prior post here).  Since 501(c)(4) organizations do not qualify for tax-deductible contributions under Section 170 (only "charitable" organizations - generally those exempt under 501(c)(3) plus government entities qualify), the issue with (c)(4)'s isn't about tax giveaways for contributions used for political purposes, but rather that the use of the (c)(4) format permits politically-engaged organizations to avoid the disclosure laws applicable to federally-defined political campaign organizations.

But as this article in the Los Angeles Times illustrates, some states have become far more agressive in requiring disclosure by nonprofit organizations engaged in political activity.  The aggressive stance began with California's crackdown on Americans for Job Security which was "unmasked as the source of an $11-million donation to oppose Gov. Jerry Brown's tax increase measure and support another measure intended to curb the ability of unions to raise money for political activity."  California state officials found that AJS had run its money through two other nonprofit organizations in order to hide its origin - an effort state officials called "campaign money laundering" (California officials apparently are still investigating AJS to find the original donors of the $11 million). 

California was not alone, however.  Prior to election day, a judge in daho upheld state efforts to require disclosure from a politically-involved nonprofit.   Secretary of State Ben Ysursa sued a group called Education Voters of Idaho, which spent some $200,000 for ads backing three state ballot measures, to force disclosure of its donors.  After the court ruled in favor of the state, "the organization revealed it had received money from New York Mayor Michael R. Bloomberg and Albertsons supermarket scion Joseph P. Scott, among others."

In Montana, the state supreme court upheld on state law grounds a law banning political expenditures by corporations in spite of Citizens' United, though the U.S. Supreme Court overruled that decision.  Subsequently, the voters of Montana passed Initiative 166, directing the Montana delegation to seek a constitutional amendment overruling Citizens' United.

Since the Supreme Court has indicated its support for disclosure (as opposed to expenditure limitations) in these kinds of situations, perhaps other states will step in with disclosure laws that Congress appears to have little interest in.   One can dream . . .

JDC

Lancaster Hospital Rulings Show Joint Venture Control Test Still Alive and Well

According to this story from Lancaster Online, last May the IRS denied tax-exempt status to two joint ventures run by Lancaster General Hospital in Lancaster, PA.   One of the joint ventures was a 50-50 deal with a for-profit company to run a rehabilitation center; the other was a 50-50 deal with doctors to run an ambulatory surgery center. According to the story, the IRS denied exemption because the 50-50 arrangement did not give Lancaster General (a tax-exempt 501(c)(3) charity) sufficient control over the joint ventures to assure they were run in a charitable manner.

This result indicates that the IRS's "control" test for determining charitable status of joint venture operations between a charity and a for-profit enterprise is still alive and well.  The control test first surfaced in the "whole hospital joint venture" ruling, Rev. Rul. 98-15, and then was relaxed somewhat in the "ancillary" joint venture ruling, Rev. Rul. 2004-51.   In that latter ruling, which would seem to govern the kinds of transactions involving Lancaster General, the IRS approved a 50-50 ownership arrangement, where the charity (a university in this case) had absolute control over the way in which the substantive services (educational distance learning) were delivered - (e.g., approval of the curriculum, training materials and instructors).  After Rev. Rul. 2004-51, the control test sort of disappeared from view as practitioners learned to draft deals around the requirements.  But the Lancaster General story indicates that it is still very much alive and enforced by the IRS. 

I've frankly never understood why the IRS presses a "control" requirement in the context of ancillary joint ventures.   "Ancillary" joint ventures by their nature are simply business deals done by a charity.  The question involved in these cases should ONLY be whether the deal is a fair one to the charity (to avoid issues of private inurement and private benefit); if so, then the joint venture interest should be treated like any other commercial activity: that is, subject to the unrelated business income tax if indeed the venture's business is "unrelated" (in many cases, I would suggest that joint ventures entered into by hospitals to expand health services in fact are "related," but that's another story).  It is very odd to me that an exempt hospital or exempt university could open a BMW dealership with no ill effects on exemption other than having to pay the UBIT.   And a direct investment in a business corporation via stock doesn't create any exemption issues at all, not even UBIT issues.   But a business investment done as a joint venture suddenly causes us to break out in hives . . .    In my opinion, very odd, and not well-justified by any underlying theory applicable to exempt status.  

JDC   

Leave-Based Donation Programs

As it did with 9/11 and Katrina, the IRS has issued Notice 2012-69 granting favorable treatment to certain vacation/leave donation programs run by employers.  In summary, it appears that an employee may release vacation or similar leave back to the employer.  In return, the employer makes a cash donation to charity.  Under the Notice, the payments from the employer must be made to Section 170(c) organizations "for the relief of victims of Hurrican Sandy" and must be made before January 1, 2014.  (The Sandy Notice is almost exactly the same as the Katrina Notice and the revised 9/11 Notice).

If a program is structured appropriately, then the IRS will not treat the payments as income to the employee or take the position that the employee was in constructive receipt of funds.  Of course, that means the employee cannot take a Section 170 deduction for the donation, since the value of the leave time will be fully excluded from his or her income - allowing the deduction would be double counting!

Interestingly, the Notice indicates that the the IRS "will not assert that an employer will only be permitted to deduct these cash payments" under Section 170 rather than Section 162.   Thus, it appears that the employer may fully deduct the value of any foregone leave, even if Section 170's limitations might otherwise disallow part of the deduction.

I'm curious why the benefit to the employer - I'm also curious as to why there is no requirement that the value given to charity be somehow equal to the value of the leave surrendered.   It seems like a potential "win-win-win" for employers.  They get employees to release their vacation time, potentially for less than a cash out would be worth, and they get to take a deduction for it, without regard to Section 170 limits - as if it were still compensation paid under Section 162.  Wondering outloud, it appears from the language of the Notice that an employer could get a full charitable contribution for other donations, and then take these donations on top.  And they get the good PR to boot.  That seems like a really good deal!  (Don't get me wrong - I think such a program, and anything else that gets funds to our friends on the East Coast, is a good thing). 

Finally, I wonder what an employer would have to do to demonstrate that the recipient charity is "for the relief of victims of Hurricane Sandy."  If one gave a grant to the Red Cross for general operating expenses (or with a partial allocation to general operating expenses), would that be sufficent?

Okay - I'm not done wondering outloud quite yet.  It seems like it is well within bounds of authority for the IRS to act on the assignment of income issue - after all, that's a pretty mushy, facts-and- circumstancy-type test.  But what about the Section 162/170 determination?  (I know,I know... say thank you, IRS.. and move along.  Nothing to see here!)

EWW

 

More on Conservation Easements

With h/t to our friends at the TaxProf Blog: 

Preservation Easements in an Uncertain Regulatory Future

Jess R. Phelps (Historic New England),  Preserving Preservation Easements?:  Preservation Easements in an Uncertain Regulatory Future, 91 Neb. L. Rev. 121 (2012):

While federal tax deductions are an important tool for organizations operating easement programs, recent IRS enforcement activity has called the future of this incentive into question--at least as currently constituted. Even if these incentives continue, the presence of continued regulatory uncertainty will make federally subsidized easements less viable unless enforcement activity decreases or easement-holding organizations begin to change how they protect privately-owned homes. However, these challenges provide easement-holding organizations a chance to step back and evaluate their accomplishments of the past thirty years. Many significant structures have been protected, but preservation easements lag far behind in numbers, impact, and public awareness when compared to land conservation efforts. The public has yet to fully “buy in” to the concept of preservation easements and are suspicious of efforts to provide funds to protect private residences.

For this perception to change, easement-holding organizations need to fundamentally re-evaluate the role they play within the preservation movement and determine whether a larger role is possible. There are a variety of ways that easement-holding organizations can shift their thinking and practices to expand the benefit provided through their programs. Similarly, there are clear alternatives to securing the preservation of significant historic resources via reliance on the federal tax incentives. In the end, the efforts of easement-holding organizations to respond to these challenges and reimagine the possibilities of preservation easements will go a long way toward fulfilling SPNEA's original vision of obtaining control of the most significant historic properties and “let[ting] them to tenants under wise restrictions.”  Perhaps more importantly, these efforts can also expand upon this vision to protect the underlying stories and preserve a more meaningful spectrum of our collective architectural heritage.

EWW

IRS Asking About Group Rulings

Last month the IRS released information about the questionnaire that it is sending to more than 2,000 randomly selected central organizations to complete.  The stated purpose of the questionnaire is "[t]o help us better understand the relationship between central or parent organizations of group rulings and their subordinates, and learn how they satisfy their exemption and filing requirements."  These inquiries reflect the apparently continuing IRS concerns regarding groups rulings, as reflected in the IRS Advisory Committee on Tax Exempt and Government Entitites report relating to such rulings, issued in 2011.

LHM

McLaughlin & Small on Important Lessons to Be Learned from Federal Tax Cases

Our contributing editor Nancy A. McLaughlin (Utah) and Stephen J. Small (Law Office of Stephen J. Small) have posted Trying Times: Important Lessons to Be Learned from Recent Federal Tax Cases.  Here is the abstract:

This outline was prepared for a panel discussion on recent case law developments in the conservation easement donation context that took place at the Land Trust Alliance national conference in Salt Lake City, Utah, in early October 2012. The four panelists were Nancy A. McLaughlin, Robert W. Swenson Professor of Law at the University of Utah SJ Quinney College of Law; Stephen J. Small, national expert on conservation easement donation transactions and one of the principal drafters of the Treasury Regulations interpreting Internal Revenue Code § 170(h); Karin Gross, Supervisory Attorney, IRS Office of Chief Counsel; and Marc L. Caine, Senior Counsel, IRS Office of Chief Counsel.

LHM

Brown et al. on Charitable Donations to Higher Education

Jeffrey R. Brown (Illinois - Department of Finance) and his co-authors have posted The Supply of and Demand for Charitable Donations to Higher Education.  Here is the abstract:

Charitable donations are an important revenue source for many institutions of higher education. We explore how donations respond to economic and financial market shocks, accounting for both supply and demand channels through which these shocks operate. In panel data with fixed effects to control for unobservable differences across universities, we find that overall donations to higher education – and especially capital donations for university endowments or for buildings– are positively and significantly correlated with the average income and house values in the state where the university is located (supply effects). We also find that when a university suffers a negative endowment shock that is large relative to its operating budget, donations increase (demand effects). This is especially true for donations earmarked for current use. We conclude by discussing the importance of understanding how donations respond to economic shocks for effective financial risk management by colleges and universities.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

LHM

Nonprofit and Voluntary Sector Quarterly October Issue Available

The October issue of the Nonprofit and Voluntary Sector Quarterly is now available.  Here is the table of contents:

From the Editors’ Desk 

In Memoriam: Elinor Ostrom

Articles

•  James E. Austin and M. May Seitanidi, Collaborative Value Creation: A Review of Partnering Between Nonprofits and Businesses: Part I. Value Creation Spectrum and Collaboration Stages
  
  
• Lourdes Urriolagoitia and Alfred Vernis, May the Economic Downturn Affect Corporate Philanthropy? Exploring the Contribution Trends in Spanish and U.S. Companies
  
  
• James Griffith, A Decade of Helping: Community Service Among Recent High School Graduates Attending College
  
  
• Brett Agypt, Robert K. Christensen, and Rebecca Nesbit, A Tale of Two Charitable Campaigns: Longitudinal Analysis of Employee Giving at a Public University
  
  
• Laurie E. Paarlberg and Stephen S. Meinhold, Using Institutional Theory to Explore Local Variations in United Way’s Community Impact Model
  
  
• Kirsten Holmes and Alix Slater, Patterns of Voluntary Participation in Membership Associations: A Study of UK Heritage Supporter Groups
• Roger Bennett, Why Urban Poor Donate: A Study of Low-Income Charitable Giving in London

Research Note

• Margaret Harris, Nonprofits and Business: Toward a Subfield of Nonprofit Studies

Book Reviews

• Marlene Walk, Book Review: The Jossey-Bass Handbook of Nonprofit Leadership and Management
  
  
• Thomas Adam, Book Review: Charity in Islamic Societies
• Janice Wassenaar Maatman, Book Review: The Nonprofit Challenge: Integrating Ethics into the Purpose and Promise of Our Nation’s Charities
  
  
• Jonathan P. Hill, Book Review: Making Volunteers: Civic Life After Welfare’s End

LHM

A Case Study in Private Inurement and Private Benefit?

Bloomberg New reported recently that public relations executive Rick Berman operates several tax-exempt nonprofit groups that appear to work primarily or exclusively on matters that benefit clients of his for-profit firm, Berman and Company.  The story grew out of a Humane Society of the United States complaint filed with the IRS, and Berman's firm has responded to it and similar accusations with a fact sheet about the groups.  According to the story, Berman serves as the Executive Director or President of five tax-exempt organizations that list his public relations firm's office as their address: the American Beverage Institute, the Center for Consumer Freedom, the Employment Policies Institute Foundation, the Center for Union Facts, and the Enterprise Freedom Action Committee.  Three of the groups are section 501(c)(3)s, while the American Beverage institute is a section 501(c)(6) trade association and the Enterprise Freedom Action Committee is a section 501(c)(4) social welfare organization (the article appears to identify the last group as a 501(c)(6), but according the IRS Exempt Organiation master file it is a 501(c)(4)). 

Speaking of the IRS EO master file, a quick search of that file for the District of Columbia actually reveals one more tax-exempt group associated with Richard Berman by name, the 501(c)(6) Firstjobs Institute, and another, the 501(c)(3) Human Society for Shelter Pets, with the same address as Berman's firm and the other tax-exempt groups.

Hat tip:  EO Tax Journal.

LHM

 

Post-Election: Where Now for the Charitable Contribution Deduction?

With the 2012 election (mostly) behind us, and the fiscal cliff and growing federal government debt in front of us, it is an appropriate time to consider possible changes to the charitable contribution deduction.

Cap on Value of Itemized Deductions:  As we have previously noted, the Obama administration has repeatedly called for a cap on itemized deductions, including the charitable contributiond deduction, by limiting the benefit from such deductions to 28%.  This would mean that taxpayers with a higher marginal rate than 28% would not avoid completely the otherwise owed federal income tax on the income offset by the deduction.  Not surprisingly, leading charitable organizations, including Independent Sector, have come out in opposition to this proposal.  For an analysis of this proposal, see the 2010 Congressional Research Service report on it.

Replace Deduction with a Non-Refundable Tax Credit:  The National Commission on Fiscal Responsibility and Reform, more commonly known as the Simpson-Bowles Commission, proposed replacing the charitable contribution deduction with a 12 percent non-refundable tax credit for charitable contributions that exceed 2 percent of adjusted gross income in the Commission's final report (page 31).  With Erskine Bowles being mentioned as a possible candidate for Secretary of the Treeasury if and when current Secretary Tim Geithner steps down, the Commission's recommendations may very well still be in play despite the lack of initial enthusiam for them from either the Obama Administration or Congress.

Other Revenue-Saving Modifications:  As the agenda for the recent NYU National Center on Philanthropy and the Law Conference illustrates, there are numerous, less dramatic ways that the charitable contribution deduction could be modified, many of which could result in significant revenue savings for the federal government.  The most recent Joint Committee on Taxation tax expenditures report states that cost of the deduction over the 2011 thru 2015 fiscal years is $242.6 billion (see pages 40 and 42), so even a relatively small change could potentially generate a not insubstantial amount of additional federal income tax.  For additional resources regarding possible changes, see the Urban Institute's Tax Policy and Charities website, and especially the report titled Evaluating the Charitable Deduction and Proposed Reforms by Roger Colinvaux, Brian Galle, and C. Eugene Steuerle. 

LHM

Post-Election: 501(c)s & Political Spending

While final figures will take a while to compile, an early Center for Responsive Politics report indicates that at least $300 million of the approxmately $6 billion spent this just competed election cycle came from tax-exempt, section 501(c) organizations that are generally not required to disclose the sources of their funds.  I say "at least" because the report (and likely most if not all future reports) only captures political spending reported to the Federal Election Commission or comparable state agencies because it is for express advocacy, electioneering communications, or other activities explicitly covered by federal or state election law disclosure requirements.  For a more detailed analysis of such spending in previous election cycles, including the limitations of the data available, see the Campaign Finance Institute.

Even though such spending may be a relatively small part of total election spending, it could have a disproportionate effect on election results because of the ability of such groups to target their spending on close races.  A National Institute on Money in State Politics report documents the spending patterns of 501(c)s and other independent groups with respect to California state elections from 2005 through 2010 (California not having a prohibition on corporate and union independent election spending even before the Citizens United decision), including how such groups tend to concentrate their spending on specific races. 

It is also important to note that while media reports have tended to focus on the conservative-leaning, newly created section 501(c)(4) social welfare organizations such as Crossroads GPS, the above report on this year's spending also shows significant spending by established entities ranging from the U.S. Chamber of Commerce to the NRA to Planned Parenthood (Action Fund, I assume).  Even more strikenly, the above report on past spending in California shows the largest spenders to be almost all unions, which are presumably left-leaning generally. In other words, it is far from clear that the perceived conservative advantage in such spending will be maintained in the long run.

LHM

Why No Church Tax Inquiries? And Why No Politically Active Church Exemption Application?

With today's election, the perennial issue of church political involvement has once again gained prominence.  What is new is the since-repudiated statement of an IRS official confirming what many have long suspected - that the still pending regulations on who exactly within the IRS can sign off on a church tax inquiry have left such inquiries in limbo.  As reported by the AP and republished at the Huffington Post, and also previously reported by Christianity Today, a manager in the IRS Mid-Atlantic region said such inquiries had been suspended pending these regulations, but an IRS spokesman quickly said the manager "misspoke", although the spokesman refused to provide any more details about the status of such inquiries.  Both an academic and a practitioner quoted in the AP story said they were not aware of any church tax inquiries over the past three years.  This is apparently the case even with the increasingly popularity of Pulpit Freedom Sunday, as the press has noticed (see, for example, coverage by NBC News and The Nonprofit Quarterly).

There is also an interesting lack of activity on the side of those seeking to challenging the limits on church political activity, not with respect to such activity itself but instead with respect to forcing the IRS into court.  While a church that allegedly violates the prohibition on political campaign intervention cannot force the IRS to launch a church tax inquiry, such a church that has not yet applied for tax-exempt status could file such an application, fully disclose its actual or planned political activity, and then wait to see what the IRS does.  If the IRS grants the application that would give a green light for such activity.  If the IRS denies the application or refuses to rule on it for 270 days, the church could file a declaratory judgment action seeking a declaration that it qualifies for exemption, thereby forcing the IRS to litigate the validity of the prohibition assuming the church otherwise qualifies for exemption under Internal Revenue Code section 501(c)(3).  It is not clear why the the Alliance Defending Freedom (previously named the Alliance Defense Fund), which has brought us Pulpit Freedom Sunday, or other groups that assert they are seeking to challenging the prohibition have not pursued this route in order to bring this issue to a head.

LHM

Case Western Publishes Tribute Issue for Laura Brown Chisolm

In spring 2011, it was my sad duty to report that Professor Laura Brown Chisolm, a pioneer in nonprofit legal scholarship, had passed away.  In honor of her memory and her work, the Case Western Reserve Law Review has now published a tribute issue including both reflections on her life and scholarship and substantive articles on one of her favorite topics - nonprofits and advocacy. Here are the tributes and articles that can be found in Volume 62, Issue 3 of the Law Review:

Tribute:  A Tribute to Professor Chisolm by Daniel Van Grol

Tribute:  Laura Chisolm: An Advocate and Ally by B. Jessie Hill

Tribute:  An Ode in Memory of Dear Laura by John Simon

Tribute:  Laura Chisolm: The Light in the Room by Harvey P. Dale

Tribute:  Laura Chislom and the Mandel Center for Nonprofit Organizations by David C. Hammack

Tribute:  Laura Brown Chisolm by Karen Nelson Moore

Tribute:  Laura's Contributions by Wilbur C. Leatherberry

Tribute:  Laura Chisolm: Colleague, Peer, Friend by Jonathan L. Entin

Article:  Why the IRS Should Want to Develop Rules Regarding Charities and Politics by Ellen P. Aprill

Article:  The Political Speech of Charities in the Face of Citizens United: A Defense of Prohibition by Roger Colinvaux

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LHM

A Bit of Nuance Regarding Governor Romney's Charitable Remainder Trust

I received informative emails in response to yesterday's post regarding a Bloomberg news investigation finding that Mitt Romney employed a charitable tax avoidance device that has since been eliminated by the IRS. 

Both Russel Willis from Portland, Oregon and William Gray from Richmond, Virginia wrote that the Bloomberg report -- and I -- had missed some important nuance.  Attorney Gray's explanation was quite detailed, so for the tax junkies among you, I will quote it in full:

"CRTs were authorized by Congress in 1969 as part of the major revision of the EO rules that carved out private foundations from the universe of charities for special treatment.  In fact, funding a CRT is one of only nine ways that one can get a charitable contribution for giving away less than one's entire interest in an asset.  Pursuant to IRC sec. 664, the trust pays one or more designated beneficiaries either a fixed dollar amount or a fixed percentage of the trust asset value annually for life or a term of years, and then whatever is left in the trust is distributed to one or more designated charities.  The grantor is eligible for an income tax deduction under IRC sec. 170(f)(2) based on the actuarial value of the remainder interest, discounted to reflect the term of the trust, the income payout rate, IRS assumed interest rates, etc.  Comparable deductions are available for gift, estate and GST tax purposes. 

CRTs are useful planning tools for individuals who would like to make a gift to charity and receive a current deduction but who also want to reserve a stream of income for themselves or others.  CRTs also are tax-exempt trusts, so donors can fund them with appreciated assets and avoid any capital gain tax when the CRT sells the assets, leaving the CRT with $1.00 to invest rather than the $0.80 or less the donor would have had if s/he had sold the asset and then given or invested the proceeds.  In the late '80s or early '90s, aggressive planners began to focus on this capital gain avoidance feature, whether or not their clients had any real charitable intent.  Using a creative reading of the trust distribution rules, they designed short-term, high-payout CRTs (e.g., a two-year trust with a 80% annual payout) that allowed the donor to recover substantially all of the value of appreciated assets with little or no capital gain tax liability.  In 1997 Congress determined that these "accelerated CRTs" were abusive and inconsistent with the purpose of the CRT rules, so it amended IRC sec. 664 to limit annual payouts to 50% and to require that the charitable remainder have at least a 10% actuarial value.    

I have not seen the terms of the Romney CRT, but the Bloomberg description indicates that it was not an accelerated CRT but instead was intended to last for the Romneys' lifetimes.  As a "unitrust", it pays 8% fixed percentage of the annual trust value rather than a fixed dollar amount.  While 8% may seem an aggressive payout by today's standards, I note that the IRS assumed interest rate for June 1996, when the CRT was created, was 8%.  The relatively low charitable deduction allowed (coincidentally also about 8% according to the article) would have resulted primarily from the fact that the designated charity was likely to have to wait 30-40 years or longer before the trust would terminate.  

The dwindling value of the trust, as reported in the Bloomberg article, may be largely a result of the trustee's investment performance and subsequent economic conditions.  An 8% growth assumption, used in the actuarial calculation, has proved not to be realistic; and many CRTs established in the '90s have seen their values decline significantly.  I note that the unitrust form allocates decline proportionately between the income beneficiaries and the charity, while the "annuity trust" form, the other permissible variety of CRT, would have placed all of the burden on the charitable remainder since an annuity trust is obligated to pay the income beneficiaries a fixed dollar amount regardless of how much the underlying principal value declines. 

The Bloomberg article is misleading in implying that this trust was the type of abusive technique that led to the 1997 restrictions on CRTs or that all CRTs are somehow suspect or abusive.  The Blattmachr comments contribute to that impression because the article does not make clear that they refer primarily the short-lived and abusive "accelerated CRTs".  I have no grounds for speculating on what combination of financial, tax and charitable considerations motivated the Romneys; but I can say that the type of CRT described is one that reputable planners might have recommended to their charitably-minded clients in 1996.  As the article admits at one point, it was "legal and common among high-net-worth individuals." 

TAK