Nonprofit Law Prof Blog

Belk v. Commissioner - "Floating" Conservation Easements Are Not Deductible

In Belk v Comm’r, 140 T.C. No. 1 (Jan. 28, 2013), a regular Tax Court opinion, the court held that a conservation easement that permits the parties to agree to “substitutions,” even if subject to certain limitations, is not eligible for a charitable income tax deduction under IRC § 170(h). The taxpayers had donated the easement, which encumbers a 184.627-acre golf course in the Olde Sycamore residential development, to a land trust in 2004 and claimed a $10.5 million deduction.

Article III of the conservation easement authorizes the landowner to remove land from the protection of the easement in exchange for adding an equal or greater amount of contiguous land to the easement, provided, inter alia, that in the opinion of the grantee: (i) the substitute land “is of the same or better ecological stability” as the land removed, (ii) the fair market value of the “easement interest” on the substitute land will be at least equal to or greater than the fair market value of the “easement interest” that encumbers the land to be removed (and that will be extinguished as a result of the substitution), and (iii) the substitution will have no adverse effect on the conservation purposes of the easement. Article III further provides that substitutions must be documented in a recorded amendment. Article VIII of the easement contains a typical “amendment clause” that authorizes the landowner and grantee to agree to amendments that, inter alia, are not inconsistent with the conservation purposes of the easement and will not result in the easement failing to qualify for a deduction under § 170(h).

The IRS argued that an easement that does not relate to a specific piece of property (a “floating easement”) is not eligible for a deduction under § 170(h) because it violates the perpetuity requirements. The Tax Court agreed, holding that the easement failed to satisfy the requirement that a tax-deductible conservation easement be a “use restriction granted in perpetuity.” See IRC § 170(h)(2)(C); Treas. Reg. § 1.170A-14(b)(2). “To conclude otherwise,” explained the court, “would permit petitioners a deduction for agreeing not to develop the golf course when the golf course can be developed by substituting [other property for] the property subject to the conservation easement.” 

Citing to Treas. Reg. § 1.170A-14(c)(2) (the "restriction on transfer" requirement), the Tax Court noted that the regulations permit substitutions, but only under limited circumstances, including that an unexpected change in conditions has to have made continued use of the property for conservation purposes impossible or impractical. Treasury Regulation § 1.170A-14(c)(2) appears to provide that the restriction on transfer requirement will not be violated if the holder is permitted to extinguish (i.e., transfer) the easement in accordance with Treas. Reg. § 1.170A-14(g)(6), and that regulation sanctions substitutions in limited circumstances (i.e., in a judicial proceeding, upon a finding that continued use of the property for conservation purposes has become impossible or impractical, and with a payment of at least a minimum proportionate share of proceeds to the holder to be used “in a manner consistent with the conservation purposes of the original contribution”). The easement at issue in Belk did not limit substitutions to such circumstances. Although Treasury Regulation § 1.170A-14(c)(2) cross-references to Treasury Regulation § 1.170A-14(g)(5)(ii), the proper cross-reference is to -14(g)(6)(ii); the Treasury failed to update the cross-references when it finalized the proposed regulations in 1986. 

The Tax Court found it immaterial that the land trust has to approve the substitutions, explaining:

There is nothing in the Code, the regulations, or the legislative history to suggest that section 170(h)(2)(C) is to be read to require that the interest in property donated be a restriction on the use of the real property granted in perpetuity unless the parties agree otherwise. The requirements of section 170(h) apply even if taxpayers and qualified organizations wish to agree otherwise.

The court also found it immaterial that Article VIII’s amendment clause prohibits the grantee from agreeing to amendments that would result in the easement failing to qualify for a deduction under § 170(h). The court explained that when there is a conflict between a specific provision (the substitution provision) and a general provision (the amendment clause), the specific provision controls. The court also noted that the parties’ intent controls and, by specifically reserving the right to agree to substitutions as provided in Article III, the parties evidenced an intent to neither prohibit substitutions nor limit them to the circumstances permitted under the Regulations.

In an IRS General Information Letter dated March 5, 2012, the agency advised that the contribution of a conservation easement that authorizes substitutions (sometimes referred to as "swaps") other in accordance with the extinguishment and proceeds requirements of Treasury Regulation § 1.170A-14(g)(6) will not be eligible for a federal charitable income tax deduction under section 170(h).

The Instructions to Schedule D for the Form 990, which require nonprofits to report on their conservation easement transfer, modification, and termination activities, explain that an easement is released, extinguished, or terminated “when all or part of the property subject to the easement is removed from the protection of the easement in exchange for the protection of some other property or cash to be used to protect some other property.”

NAMcL

Call for Nominations: Outstanding Nonprofit Lawyer for 2013

Our friends at the Committee on Nonprofit Organizations of the Business Law Section of the ABA have issued a call for nominations for the 2013 Outstanding Nonprofit Lawyer Awards.  Each year, the Committee recognizes outstanding legal professionals in each of the following categories:

• Academic;
• Attorney (principally for outside counsel to nonprofit organizations);
• Nonprofit In-House Counsel;
• Young Attorney (under 35 or in practice for less than 10 years);
  and
• Vanguard Award (lifetime commitment/achievement). 

A link to the Committee's website with additional information can be found here.   At that website, you can find the nomination form and a list of past recipients.  The deadline for nominations is March 15, 2013, and the award winners will be announced at the Business Law Section's Spring Meeting in Washington, D.C. in April.  Please direct all nominations and questions to William M. Klimon, Caplin & Drysdale, One Thomas Circle, NW, Suite 1100, Washington, D.C. 20005, by phone (202) 862-5022, by fax (202) 429-3301, or by email wklimon@capdale.com.

EWW

Nonprofit Hospital Purchasers: Let This Be a Lesson to You!

From The Chronicle of Philanthropy, citing The Kansas City Star and The New York Times, comes this report on a lawsuit brought by a foundation that received most of the proceeds from the 2003 sale of the nonprofit hospitals previously owned by Health Midwest to Hospital Corporation of America (HCA), the larger operator of for-profit hospitals in the country.

In the sales agreement, Health Midwest required HCA to undertake certain activities, including providing an estimated $500,000,000 in charity care and to spend approximately $450,000,000 to improve existing health care facilities.  The Health Care Foundation of Greater Kansas City filed suit against HCA in 2009, allegeing that HCA had not complied with these provisions in the the original sales agreement.  The case went to trial in late 2011.

In its Final Order (warning: 142 pages!) issued on January 24, 1013, the trial court found that HCA failed to comply with the requirement to spend the allotted funds on existing health care facilities.  In addition, the court was concerned about HCA's compliance with its charity care requirements, but found that the level of detail provided by HCA was insufficient to make a final determination on the matter. 

From my brief review of the Order (I emphasize brief - did I mention 142 pages?), it appears that the capital improvements issue hinged primarily on the language of the sales agreement, which required the capital improvement spending to occur in "existing" facilities, and not in new or replacement facilities.  (My personal highlight of the Order in this regard - paragraphs 140 and 141, wherein the Court states that the then Chair and CEO of HCA admitted to not reading the full agreement before signing it and to understanding the operative language to be "legalese".)   The court found a minimal short fall in capital improvements of approximately $162,000,000, to be paid immediately to the Foundation, with more possibly to follow based on a court-supervised accounting.

With regard to the issue of charity care, the sales agreement specifically divided the world between charity care and care for indigents (based on gross charges foregone), and uncompensated care (based on bad debt).  See Paragraph 208.  A separate part of the agreement required HCA to continue to participate in Medicare and Medicaid for ten years.  See Paragraph 210.   Apparently, the Attorneys General of both Kansas and Missouri had requested information breaking down HCA's expenditures between charity care and uncompensated care, to no avail.  See Paragraph 456, et. seq.   Some of the compliance reports issued by HCA with regard to charity care compliance appeared incomplete and inconsistent.  As a result, the order requires the court-supervised accounting to look specifically at the provision of charity and uncompensated care as mandated by the sales agreement.

According to The Kansas City Star article, "HCA representatives have consistently said the company met or surpassed its obligations, and ... said the company would appeal the decision."

EWW

Perhaps We Should Be Like the Philippines?

For a number of years, I've espoused the view that we should expand the unrelated business income tax to a "commercial activity" tax - that is, a charity engaged in any commercial activity should pay taxes on any net revenues from that activity, whether or not the activity is "related" in some way to the organization's charitable purpose.  See, e.g., John D. Colombo, Commercial Activity and Charitable Tax Exemption 44 WM. & MARY L. REV. 487 (2002).  I've also opined that if we did this, we could grant tax exemption rather broadly to permit organizations with some legitimate charitable purpose the ability to get tax-deductible contributions for their charitable activities, while still fully taxing any commercial activity.  I believe this would simplify current law and compliance.  For example, museum gift shop revenues would be fully taxable, instead of having to parse whether specific sales were "related" or "unrelated" as is currently the case (e.g., an art museum gift shop can sell replicas of art, art books, "arty" postcards and the like without UBIT liability, but sales of science books or "I Love NY" coffee mugs are subject to the UBIT; see, e.g., Rev. Rul. 73-104).  A charity that operates a pay garage would pay taxes on the garage revenues as a whole, without allocating between parking receipts that are "related" to charitable activities and those that are not.  I readily admit there are still some interpretive issues (are museum admission charges "commercial" revenues?), but I think these issues would be fewer and easier to resolve than esoteric questions of "relatedness."

It appears that a recent decision by the Supreme Court of the Philippines interpreting its statutory law with respect to charities has more or less adopted my approach with respect to nonprofit hospitals (to be clear, they didn't do this because they read anything I wrote; still, this indicates my approach isn't completely crazy).  In Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. No. 195909, September 26, 2012 (full opinion here; an excellent summary is available here), the Philippine Supreme Court held that Philippine law distinguished between a fully exempt "charitable" hospital or educational institution (whose activities must be exclusively charitable) and a private nonprofit hospital or educational institution engaged in some charitable and some commercial activity.  With respect to the latter, the organization is required to pay income tax on their commercial revenues (albeit at a reduced rate as provided in Philippine law), but not required to pay tax on revenues resulting from charitable activities.  In the context of the private nonprofit hospital at issue, the court held that revenues from paying patients would be taxable (again, at the reduced rate provided for by Philippine law), because these revenues were part of a for-profit business.

The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively” for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).

In other words, revenues from commercial (e.g., for-profit) activity (in this case, paying patients) are taxable, but the organization remains tax-exempt on its actual charitable activities.  There is no "relatedness" test here as under our UBIT; the only question is whether an activity is for-profit (commercial).

While this decision obviously is the result of the sui generis statutory law in the Philippines, if it works there, I don't see any reason why it couldn't work here . . . the description of St. Luke's operations in the opinion sounds like a pretty typical nonprofit hospital here in the U.S. (We'll have to talk, though, about this preferential rate stuff . . .).

JDC 

Nonprofits Development Directors: "Take This Job And . . . "

A surprising new report, discussed in this Los Angeles Times article today suggests that the primary impediment to charitable fundraising is that Directors of Development hate their jobs. 

A key finding is that half the chief fundraisers -- or “development directors” as they're known in the nonprofit world -- expect to leave their current jobs within two years due to an assortment of pressures, including a frequent feeling that they’re out on a limb because they're expected to produce results without having enough backup from bosses and boards that haven’t managed to put effective, systematic fundraising plans and approaches in place. Only 58% of the development directors rated their organizations’ fundraising as “effective” or “very effective,” compared with 83% of the chief executives, and nearly a third of the fundraisers said they’d been given “unrealistic” goals. Their average annual pay ranged from $49,141 at organizations with budgets under $1 million to $100,127 when budgets exceeded $10 million.

The report suggests that organizations typically leave the dirty job of asking for donations to one person and then put a lot of pressure on that one person to produce results.  Seems a silly complaint if  you ask me.  After all, every Development Director I have known claim to be experts in, well, raising money!  And most places actually discourage others in the organization from making money and charitable contribution pitches, lest they inadvertently bombard the target with multiple or conflicting messages.  Or maybe its just that when Development Directors cultivate a potential benefactor and  are ready to reel that benefactor in, they don't get the support from the top person they need.  Its that top person, ultimately, that closes the deal after all.

dkj

 

 

 

Perpetual Conservation Easements Conference

The Wallace Stegner Center at the University of Utah SJ Quinney College of Law is hosting the following conference. Those unable to travel to Salt Lake City can watch the live webcast of the event. 

Perpetual Conservation Easements: What Have We Learned and Where Should We Go From Here?

Friday, February 15, 2013, Noon-5:00 pm MST

Watch Live Online at ulaw.tv (the link to the live webcast will be posted on the day of the conference)

The public is investing billions of dollars in conservation easements, which now protect more than 18 million acres throughout the United States. But uncertainties in the law and abusive practices threaten to undermine public confidence in and the effectiveness of conservation easements as land protection tools. This conference will explore these issues, with the goal of minimizing abuse and helping to ensure that conservation easements actually provide the promised conservation benefits to the public over the long term. Leaders in their respective fields will address (i) the federal tax incentives offered with respect to easements donated as charitable gifts to certain qualified holders, (ii) the state conservation easement enabling statutes, (iii) federal and state oversight of charities, and (iv) the role of state attorney general offices in the charitable sector and in the protection of charitable assets on behalf of the public. For more information and a detailed agenda see Perpetual Conservation Easements.

Scheidelman v. Commissioner – A Long Journey to the Denial of a Deduction for a Facade Easement Donation

Scheidelman granted a façade easement encumbering a building located in a historic district in Brooklyn, New York, to the National Architectural Trust in 2004 and claimed a charitable deduction with regard to the grant on her 2004, 2005, and 2006 income tax returns. The IRS disallowed the deductions and, in Scheidelman v. Commissioner, T.C. Memo. 2010-151 (July 14, 2010), Tax Court sustained the disallowances. The Tax Court determined that the appraisal Scheidelman obtained to substantiate the deductions was not a “qualified appraisal” because it failed to state the method and basis of valuation as required by Treasury Regulation § 1.170A–13(c)(3)(ii)(J) and (K).

Two years later, in Scheidelman v. Commissioner, 682 F.3d 189 (2nd Cir., June 15, 2012), the Second Circuit vacated and remanded the case, holding that the appraisal sufficiently detailed the method and basis of valuation. The Second Circuit explained

[f]or the purpose of gauging compliance with the reporting requirement, it is irrelevant that the IRS believes the method employed was sloppy or inaccurate, or haphazardly applied—it remains a method, and [the appraiser] described it. The regulation requires only that the appraiser identify the valuation method “used”; it does not require that the method adopted be reliable.

However, the Second Circuit also noted that its conclusion that the appraisal met the minimal "qualified appraisal" requirements mandated neither that the Tax Court find the appraisal persuasive nor that Scheidelman be entitled to a deduction for the donation of the easement.

On January 16, 2013, the Tax Court issued its opinion on remand: Scheidelman v. Comm’r, T.C. Memo. 2013-18. The Tax Court acknowledged that “’ordinarily any encumbrance on real property, howsoever slight, would tend to have some negative effect on that property’s fair market value.’” The court concluded, however, that the preponderance of the evidence supported the IRS’s position that the easement had no value, and the IRS’s position was “the more persuasive, regardless of the burden of proof.” The court also had harsh words for the taxpayer’s expert at trial, stating

Ehrmann ignored studies suggesting a contrary result and adopted those supporting his client’s desired value. Ehrmann’s testimony had all of the earmarks of overzealous advocacy in support of NAT’s marketing program and, indirectly, [the taxpayer’s] tax reporting. His conclusion that the easement should be valued at $150,000 is unpersuasive and not credible.

Expert opinions that disregard relevant facts affecting valuation or exaggerate value to incredible levels are rejected. . . . An expert loses usefulness to the Court and loses credibility when giving testimony tainted by overzealous advocacy.

NAMcL

Local Property Tax Exemption Fights Still Going Strong

A modestly-improving economy does not seem to have halted the trend of local property tax exemption fights.   Here's a roundup of recent ones, to give a flavor of the scope of what's going on.

Vanderbilt University is seeking full property tax exemption for 11 fraternity/sorority houses.  According to Vanderbilt, an agreement with the Greek organizations transferred full control over the property to Vanderbilt, and therefore the houses should be exempt like any other student housing.  The move would save Vanderbilt (whose 2013 operating budget was $3.7 billion) $74,000 in annual property taxes.  To paraphrase the late Senator Everett Dirksen, "$74,000 here and $74,000 there, and pretty soon you're talking about real money."

Meanwhile, the town of Hebron, Indiana, is fighting property tax exemption granted by the state to a set of apartment buildings. "Town Clerk-Treasurer Terri Waywood said the exemption was granted because the complex provides its tenants with classes in managing money and other services they can't get anywhere else in town."  Sounds like a tax-exemption blueprint for all the apartment complexes in Indiana; heck, who doesn't need help managing their money?  Even the folks on Downton Abbey could use some instruction on this front . . . 

In Knoxville, Tennessee, a pair of golf courses are fighting to re-establish exempt status, and Texas State University's exempt status apparently is causing some budgetary headaches (heartache?) in San Marcos, Texas.

Some days I wonder whether the solution is just to get rid of all tax exemptions . . .

JDC

 

Pesky v. United States – Government Asserts Civil Fraud Penalty in Conservation Easement Donation Case

In Pesky v. United States, 2013 WL 97752 (D. Idaho, Jan. 7, 2013), the United States District Court for the District of Idaho held that the United States adequately pled a counterclaim for a civil fraud penalty under Internal Revenue Code § 6663 based on the Peskys’ allegedly fraudulently claimed charitable deduction for the conveyance of a conservation easement. The court did not determine that the Peskys were liable for the fraud penalty; it decided only that the case can proceed on the merits.

The U.S. alleges that Mr. Pesky, through his attorney, negotiated and eventually engaged in a quid pro quo transaction with The Nature Conservancy (TNC) whereby TNC gave the Peskys (i) an option to buy property located in Ketchum, Idaho (the Ketchum Property) and (ii) a perfected access easement for a driveway over the adjacent Hemingway Property (which was owned by TNC), in exchange for the Peskys giving to TNC (i) $400,000 and (ii) a conservation easement limiting development of the Ketchum Property. The U.S. also alleges that Pesky attempted to structure the transaction to hide its quid pro quo nature so that he could claim a $ 3 million charitable deduction based on the value of the conservation easement. Pesky allegedly exercised his option to purchase the Ketchum Property for $1.6 million and then eventually donated the conservation easement and sold the property (after the driveway easement was perfected) for around $7 million.

In an earlier case, United States v. Richey, 632 F.3d 559 (9th Cir. 2011), the Ninth Circuit overturned the district court's holding that the work file of Mark Richey, the appraiser of the conservation easement at issue in Pesky, was protected by the attorney-client privilege and by the work-product doctrine. The court remanded the case back to the district court for an in camera examination of the materials summoned by the IRS to determine which documents, if any, were protected from disclosure.

NAMcL

Starting a Second Term - With Your Own (c)(4)

A number of news sources reported at the end of last week that President Obama was converting his campaign organization into a 501(c)(4) organization, "Organizing for Action."  Apparently this has upset Mike Huckabee (who apparently had his own exempt PAC, as this article points out), but I'd note that that at least we have fair assurance that this new (c)(4) won't be a thinly-disguised campaign funding vehicle, since President Obama can't be re-elected.  It also allows me to emphasize a point lost in most of the "(c)(4) and politics" discussion: (c)(4)'s can engage in essentially an unlimited amount of legislative lobbying, which the IRS views as a proper social welfare activity (see the IRS 2003 EO CPE text, available here), but in theory they cannot engage in an unlimited amount of candidate-for-public-office activity (unlike (c)(3) charities, which cannot engage in any candidate support activities, a (c)(4) can engage in some, as long as that is not their "primary purpose").  

Still, I have become ever-more convinced that we should simply eliminate (c)(4) status from Section 501. Organizations that are truly supporting social welfare should be able to qualify as charitable organizations with some modest limits on their lobbying activity (add some educational functions, cut back a bit on lobbying, and you're probably there, since the IRS can't really enforce the "no substantial part" test under 501(c)(3) anyway).  Everyone else either needs to admit they are a 527 political organization or go away.

JDC

IRS Inaction on Noncash Charitable Contributions Resulting in Lost Revenue

As reported by The Chronicle of Philanthropy and BNA Daily Tax Report, a recent Treasury Inspector General for Tax Administration report estimates that approximately 60% of of claimed noncash charitable contributions (e.g., cars, boats, artwork, real estate) are reported incorrectly with little to no IRS enforcement.  The report further estimates that more than 273,000 taxpayers erroneously reported $3.8 billion in noncash contributions in taxable year 2010 (i.e., the proper paperwork and appraisals were not filed), resulting in potentially $1.1 billion in lost revenues to the federal government.  The IRS disputes the amount of revenue loss.

One of the primary areas of concern centers on car/vehicle donations.  Although taxpayers are generally allowed to deduct the fair market value of property donated to qualified charitable donees, there are further limitations on car donations.  Specifically, a car donor must substantiate, and not deduct more than, the amount the charity received from selling the car for cash.  The report concluded that the IRS is not effectively enforcing compliance with the reporting requirements for motor vehicle donations.  Over 35,846 tax returns filed for 2011 claiming $77 million in charitable donations of cars failed to comply with reporting requirements.

Senator Charles Grassley (R-Iowa), who chaired the 2005 law changes requiring greater taxpayer substantiation of the value of donated items, criticized the Obama administration's push to raise taxes on higher-income taxpayers, while "giving a free pass to those claiming high-value deductions for donations of vehicles, art, or securities.”

NAM

Hall: PILOTs - Congress's Flawed Solution to Burden of Federal Land Ownership

Dayton L. Hall (Washburn, 2013 JD Candidate) has posted Payments in Lieu of Taxes:  Congress's Flawed Solution to the Burden of Federal Land Ownership on Counties to SSRN.  Here is the abstract:

The federal government makes Payments in Lieu of Taxes (“PILT”) to local governments to help ease the tax burden of federal ownership of land. Because federally owned land is nontaxable, PILT payments are intended to compensate local governments for losses in property taxes due to federal ownership of land within local governments’ boundaries. This Article explains the history and application of the PILT program, analyzes the equity and efficiency of the legislation, concludes that certain aspects of the PILT Act are both inequitable and inefficient, and proposes appropriate revisions. Specifically, this Article concludes and proposes the following: (1) shifting to a tax equivalency payment system based on states’ property valuation laws would be too complicated and inefficient, despite the benefit that such a program might provide more consistent, foreseeable payments to local governments; (2) PILT payments unjustifiably discriminate against less populated counties that contain substantial federal acreage, so the PILT calculation method should be revised to remedy this discrimination; (3) PILT distribution methods creates an inefficient incentive for states to form alternative political subdivisions to maximize payments, so this incentive should be eliminated; and (4) Congress must find a long-term funding solution so that local governments can rely on PILT payments in their long-term planning endeavors.

NAM

Overvaluation of Gifts in Kind

An interesting article in Forbes online caught my eye today.  The article, entitled "Charity Eyes Quarter-Billion-Dollar Write-Down In Value of Goods Handled" discusses one large charity's recent disclosure that it overvalued gifts in kind by $250 million.  "The epic restatement downward would rank among the biggest ever by a single charity and is the latest chapter in a festering controversy over the way some nonprofits value and account for noncash d0onations known as gift-in-kind, or GIF."  We all know the incentives individual taxpayers might have to overstate the value of donated goods -- a bigger charitable contribution deduction, for one -- but what are some of the reasons a charity would overstate the value of non-cash contribution? Forbes implies that the charity may have been motivated by the "ranking game," something we Law Schools would never do of course.   The valuation, reported on the charity's 990 made it the 51st largest charity in the United States, as measured by private donations received in 2011.  See here for a list of the largest U.S. Charities for 2012.  A charity's over-valuation could both help or hurt its status.  Too much from one person might push the charity into the private foundation quagmire.  Too little might have the same effect.  In any event, Forbes makes it seem like overvaluation is a real problem in the charitable world:

The situation also underscores one of the dirty but legal secrets of the GIK word: Multiple charities often claim credit for the same noncash gift as it moves from one nonprofit to another to another in a “daisy chain” that makes each seem bigger and more financially efficient. However, at the same time charity experts say it often takes the efforts of several nonprofits to collect, move and distribute the same batch of goods to locations domestic and foreign.

Valuation is a problem in pretty much all areas of taxation.  Those seeking to reduce tax liability will either understate the value of something (when it comes to reporting income) or overstate the value of something (when it comes to claiming a deduction).  And there are plenty of rules relating to valuation, just look at the regulations under IRC 170.  But it never occurred to me that mis-valuation might be a problem for nonprofits.  I wonder what other potential benefits -- other than a higher ranking -- might be had from overvaluation of charitable gifts. 

 

DKJ

Justify Thyself?

In one way or another, nonprofit organizations are continually required to justify their own existence.  That is, as organizations exempt from taxation.  The Catch 22 in responding to the mandate is that nonprofits implicitly justify the unstated question:  "Are you even worth it?"  Nonprofits either justify the question or appear to "protest too much."  Better to just address the question head on if you ask me but not through boilerplate That's the question, after all, implicit in local municipalities' continuing efforts to impose PILOTS on nonprofits. Pittsburgh, Pennsylvania, for example, recently appointed another PILOT task force whose ultimate charge is to determine whether nonprofits are "worth it?"  "Well . . .  are you!?"  asks Pittsfied, Massachussetts' Mayor, according to this report.  Meanwhile, local nonprofit organizations continually issue those boring and, even worse, less convincing studies designed to show their significant positive impact on local economies.  North Dakota, Idaho, Kentucky, Nebraska, New Hampshire and Oregon are just some of the states adhering to the same old tired playbook.  Meanwhile, local governments push ahead with their plans, slowly but continually eroding tax exemption on the local level.  Deservedly so, if all nonprofits can do is issue reports that don't get to the real question; "what exactly does the tax exempt nonprofit sector provide that cannot be had from the taxable for profit sector?"  I think this is the nagging question that follows nonprofits from 2012 and into 2013.  Justify thyself.

DKJ

[See Payroll tax would elicit some cash from large Pittsburgh nonprofits (Pittsburgh Post-Gazette)]

Charities Still Leery After Fiscal Cliff Deal

In an article entitled "Charitable groups fear tax victory in 'fiscal cliff' deal will prove hollow," The Hill reports that, despite the preservation of the charitable contribution deduction in the recent American Taxpayer Relief Act of 2012, charitable organizations are still concerned about their future due to debt ceiling negotiations and other automatic spending cuts still to be addressed by Congress.  The article discusses that charities should take heart in recent Tax Policy Center estimates that charitable giving will increase approximatley 1 percent in 2013 and the reenacted "Pease" limitation on itemized deductions should have "negligible effects on the tax incentive for charitable giving."  Nevertheless, charities are concerned that the Obama Administration will continue to push for limits on deductions for wealthy taxpayers, thereby resulting in decreased charitable donations overall.  

[See also, "Catholic Charities and Others Fretting over Tax Plight of the Wealthy" in Nonprofit Quarterly]

NAM

Owley: The Future of the Past regarding Historic Preservation Easements

Jessica Owley (SUNY-Buffalo) has posted The Future of the Past:  Historic Preservation Easements (Zoning Law & Practice Report, Nov. 2012) to SSRN.  Here is the abstract:

This brief article summarizes recent case law related to historic preservation easements. As historic preservation easements and other conservation easements age, the number of legal disputes involving them has grown. Challenges to historic conservation easements generally arise in the tax court because many of them are donations. The IRS is taking a close looks at conservation easements generally, appearing to focus particularly on façade easements. 

Most states (and the IRS) require historic preservation easements to be perpetual. Courts are beginning to scrutinize what perpetuity means and are looking closely at easement language regarding mortgage subordination, condemnation, and extinguishment. This move by the IRS should indicate to landowners, land trusts, and funders that historic preservation easements should be carefully written to comply with all state and federal regulations with an eye to ensuring their long-term viability. Additionally, the IRS and courts have been particularly concerned with the accuracy of appraisals, which reach millions of dollars. Appraisals need to delineate their method and basis for calculation. The IRS’ scrutiny, however, has been tougher than the courts’. While the Tax Court has often sided with the IRS (on issues of perpetuity, particularly), the circuit courts seem to err in favor of upholding conservation easements and allowing deductions.

NAM

Galle and Walker: Constraining Executive Compensation - Evidence from University President Pay

Brian D. Galle (Boston College) and David I. Walker (Boston University) have posted Does Stakeholder Outrage Constrain Executive Compensaton:  Evidence from University President Pay to SSRN.  Here is the abstract:

We analyze the determinants of the compensation of private college and university presidents from 1999 through 2007. We find that the fraction of institutional revenue derived from current donations is negatively associated with compensation and that presidents of religiously-affiliated institutions receive lower levels of compensation. Looking at the determinants of contributions, we find a negative association between presidential pay and subsequent donations. We interpret these results as consistent with the hypotheses that donors to nonprofits are sensitive to executive pay and that stakeholder outrage plays a role in constraining that pay. We discuss the implications of these findings for the regulation of nonprofits and for our broader understanding of the pay-setting process at for-profit as well as nonprofit organizations.

NAM

Weisbord: Charitable Insolvency and Corporate Governance in Reorganizations

Reid K. Weisbord (Rutgers-Newark) has posted Charitable Insolvency and Corporate Governance in Bankruptcy Reorganization to SSRN.  Here is the abstract:

Poor corporate governance is pervasive in the charitable nonprofit sector and, in numerous cases, mismanagement and abuse have led to the financial distress or failure of charitable nonprofit firms. The rich literature on nonprofit law has considered the need for better corporate governance and enforcement of fiduciary duties, but the scholarship has yet to address the implications of financial distress and insolvency on corporate governance. This Article fills that void and argues that, when a charity encounters financial distress and approaches the point of insolvency, features of nonprofit and bankruptcy law tend to exacerbate rather than ameliorate the corporate governance problem. In particular, charitable insiders who breach their fiduciary duties are in a better position to entrench themselves and avoid termination than their for-profit counterparts. In the for-profit sector, three constraints tend to regulate corporate governance by helping oust fiduciaries responsible for financial distress: (1) bank monitoring of commercial loan covenants; (2) absolute priority and the transfer of ownership in bankruptcy; and (3) involuntary bankruptcy proceedings. In the nonprofit sector, however, those constraints are either less effective or do not apply. As a result, blameworthy charitable fiduciaries are better able to entrench themselves and, absent new leadership, financially distressed charities are less likely to achieve a full and sustainable financial recovery. This Article suggests that the law might better protect the public interest in charitable assets from waste and abuse by presumptively appointing bankruptcy examiners in all Chapter 11 reorganization proceedings involving substantial charitable assets. Once appointed, bankruptcy examiners would be tasked with identifying the cause of insolvency and individuals responsible for the charity’s financial distress.

NAM

Wolf: Religious Giving as Guide to Good Taxation

Robert Wolf (Wisconsin-La Crosse, Finance Dept.) has posted Religious Giving as a Guide to the Principles of Good Taxation (Journal of Accounting, Ethics, and Public Policy, 2012)  to SSRN.  Here is the abstract:

The principles of good taxation are a set of guiding values necessary for any responsible state to consider in constructing their tax policy. The principles are derived from various philosophical and economic discussions including but not limited to the role of the state, ownership of natural resources, the optimal size of the state, the emphasis on individual versus community rights, and what is reasonable. Adam Smith (1776) initiated the discussion on the principles of good taxation including equality, certainty, convenience and economy. Others have expanded and articulated the principles to include reasonable and neutral. Curran (2001), Hamill (2006), and others have considered the principles of good taxation from a religious viewpoint. Along different lines, Croteau (2005) develops the principles of giving for a religious institution. As religious institutions rely on giving in a similar manner that states rely on taxes, it is useful to review the principles of good taxation in comparison to the principles of giving. This research finds strong consistency between the principles of good taxation and the principles of giving. Additionally, the principles of giving make a strong argument for elevating the importance of effective allocation of tax revenues as a principle of tax collections.

NAM

McLaughlin: Extinguishing and Amending Tax-Deductible Conservation Easements

Our contributing editor, Nancy A. McLaughlin (Utah), has posted Extinguishing and Amending Tax-Deductible Conservation Easements:  Protecting the Federal Investment after Carpenter, Simmons, and Kaufman (Florida Tax Review, 2012) to SSRN.  Here is the abstract:

Taxpayers are investing billions of dollars in conservation easements intended to permanently protect unique or otherwise significant land areas or structures through the federal charitable income tax deduction available to easement donors under Internal Revenue Code § 170(h). Astounding amounts of governmental and judicial resources are also being expended to ensure that the easements are not overvalued, that they satisfy elaborate conservation purposes and other threshold requirements, and that the donations are properly substantiated. This enormous up-front investment will be for naught, however, if the purportedly permanent protections prove to be ephemeral because government and nonprofit holders are able to release, sell, swap, or otherwise extinguish the easements in disregard of the restriction on transfer, extinguishment, division of proceeds, and other perpetuity-related requirements in § 170(h) and the Treasury Regulations. The Tax Court’s holding in Carpenter v. Commissioner was an important victory for the IRS and the public because it provides some key guidance regarding compliance with § 170(h)’s perpetuity-related requirements. However, Carpenter has also engendered some confusion and speculation, and recent Circuit Court decisions have compounded the problem by undermining the IRS’s efforts to enforce the perpetuity-related requirements. This article examines these cases against the backdrop of the legislative history of § 170(h), state law, and public policy. It concludes that clear federal rules regarding the transfer, amendment, and extinguishment of tax-deductible conservation easements are needed because, without such rules, the purportedly perpetual protections will erode over time and the enormous public investment in the easements and the conservation values they are intended to protect for the benefit of future generations will be lost.

NAM