Nonprofit Law Prof Blog

Don’t Forget: IRS requires written acknowledgement for contributions of more than $250

In 2006, the co-founder of NDM Ferret Rescue Sanctuary, Inc. made forty-four (44) contributions to her organization totaling $10,022.  Seventeen (17) of those contributions, totaling $7,629, were each for $250 or more. While the IRS was satisfied that the co-founder actually made the contributions and that the organization was a valid charity, the IRS did not allow deductions for the seventeen (17) contributions over $249.99.

This is because the IRS requires a written acknowledgement from the donee for a charitable contribution of $250 or more. Moreover, the IRS imposes a timing requirement for the acknowledgement. The person wanting to claim the deduction must get the acknowledgement “on or before the earlier of” the dates he/she files the return for the year the contribution was made or the due date, including any extension, for filing the return.

The obvious moral of the story is that if you are a person who made a contribution of $250 or more to a qualified organization and you want to claim a deduction, get an acknowledgement before you file your return.

Interesting, however, is the ease with which the acknowledgement condition can be met. In the case involving NDM Ferret Rescue, one option for the co-founder would have been to write herself a letter. She would have had to provide the letter to the IRS, however, only if the deduction was questioned in an audit. Does this make much sense? What are the likely policy reasons for this requirement?

http://www.irs.gov/publications/p526/ar02.html#en_US_2012_publink1000229696

http://www.forbes.com/sites/peterjreilly/2013/03/23/charity-president-needed-to-write-herself-a-letter-to-claim-charitable-deduction/

dab

Investment making named most disabling “Nonprofit Fear”

The subject of today’s post comes from a Huffington Post article discussing the fears present in the nonprofit sector. The article provides a list of the different forms of “Nonprofit Fear.” The list includes:

• Fear of making an investment
• Fear of change
• Fear of losing a donor
• Fear of being honest
• Fear of money
• Fear of competition

The article claims these fears are disabling and they prevent nonprofit organizations from realizing their full potential. The author suggests that the biggest fear of nonprofits is the fear of making an investment.

For many nonprofit organizations, the fear of making an investment is a legitimate one. Many nonprofit organizations do not generate a lot of money, their funders are tired, and they are often working just to get by. However, the article argues that if more nonprofits would make an investment in transformation, this change would help to effectuate the organization's vision. Essentially, this type of an investment is one in which nonprofits investment time, energy, and mind share to come up with new opportunities. It involves the organization taking risks in situations when it normally would not be inclined to do otherwise.

http://www.huffingtonpost.com/nell-edgington/the-nonprofit-sector-need_b_2949069.html

dab 

Should private health clubs receive property tax-exemption?

Overtime, the YMCA has become one of the largest income earning charities in the United States. Some private health facilities see the YMCA’s exempt status, which enables them to operate and offer service for less, as an unfair advantage. Consequently, some private health facilities are frustrated because they view tax-exempt health facilities like the YMCA as competitors, not as charities. 

Recently, the owner of a series of private health facilities in Kansas spent $45,000 in campaigns of senators who would build support in the Legislature for property tax-exemption applicable to private health facilities statewide. The owner of the private health facilities argues that its largest competitor in nearly every city home to one of his facilities is a tax-exempt facility. Further, the owner argues it is time to treat all health club facilities the same.

Is there anything troubling about the competition argument? Are there any concerns with adding private health club businesses to the list of organizations receiving property tax-exemption? What impact, if any, would adding private health clubs to the list have on the local tax base?

http://cjonline.com/news/state/2013-03-25/wichita-fitness-club-owner-bets-45k-healthy-tax-break 

dab

The role the nonprofit world plays in “economic bullying”

A recent article in The Chronicle of Philanthropy uses the inequitable salaries of nonprofit employees as an example of “ economic bullying.” The article adopts the position that civil society accepts this sort of economic bullying and offers social exploitation as one the reasons. Interestingly, while the article suggests that the nonprofit world is a victim of social exploitation, it also suggests the nonprofit world is a victimizer.

The argument for the nonprofit world as victimizer is that it underpays women and human-service workers and relies heavily on unpaid volunteers for essential labor. The article goes on to suggest volunteerism in the nonprofit world presents problems because nonprofits have failed to articulate their value to society or what it costs to provide that value. Consequently, nonprofits are victimizers because they are guilty of engaging in the practice of paying people as little as possible.

To be fair to the nonprofit world, the article suggests the government plays a contributing role in social exploitation because as the major purchaser of social services, the government forces costs down to balance the budget. Still, given the characteristics of nonprofit and other exempt organizations, what alternatives are available to prevent from contributing to social exploitation?

http://philanthropy.com/blogs/money-and-mission/inequitable-salaries-at-nonprofits-are-a-kind-of-bullying/28125

dab

Tax season and the charitable gift deduction

It is that time of year again. It is tax season! So what does this mean for people who made donations to an exempt organization last year?

For people who itemize deductions on their federal tax return, one of the most popular deductions is the deduction for charitable gifts. However, for the donation to be deductible, the IRS requires the donation be made to a qualified charitable organization. To assist people wanting to utilize the charitable gift donation, the IRS has created an online search tool that enables people to find out whether the exempt charity to which they have donated is able to receive tax-deductible charitable contributions.

Generally, the IRS allows people to utilize the charitable gift deduction for donations of money and property made to a qualified charitable organization. While the value of cash donations are easily determined, donations of property must be determined by the property’s fair market value at the time of contribution.

Determining the value of the fair market value, and thus the benefit the donor stands to receive, is often a complex process and it raises interesting questions regarding the motives driving people to make donations of property. Do people donate property to an exempt organization because they believe in its purpose? Is it more likely that people donate property for tax benefits? If so, what are the benefits a person stands to receive from donating property? How are those benefits different from the benefits of donating money?

http://www.irs.gov/taxtopics/tc506.html

dab

Asking the wrong questions about the Hurricane Sandy Fund

As some of you may have heard, the charity set up by NJ first lady Mary Pat Christie to provide Hurricane Sandy relief  is under fire from watchdog groups.  It has raised around $32.0 million so far, but hasn't made any distributions in the four months from the date of the storm (as of the March 11 article).  This article in the Asbury Park Press raises a number of questions about the fund:

- Why is it taking so long?

- Why are you running it when you have no charity background?

- Why did you hire your protocol assistant as ED?

- Why is she getting paid $160,000 a year?

- Why aren't you giving funds to individuals?

- Is this all just a political stunt for your husband?

The article compares the fund to other organizations that have moved more quickly to provide Sandy relief, such as the Robin Hood Foundation.  In response to all of these questions, Mrs. Christie answers that, unlike the Robin Hood Foundation, her organization is new.  They have a small administrative budget and small staff.  In discussing the delay in distributing funds, she cites the learning curve in getting a charity up and functioning and the lessons learned from other disaster relief organizations.  She also indicates that she plans to be around for at least two or three years while the clean up continues.  

I will take it as a given that she is trying to doing something good for her state with only the best of intentions.  I also think that many of these questions have legitimate answers - four months from start up isn't a long time at all in the grand scheme of the life cycle of a charity.  Fair enough.  But given these answers, why didn't the reporter ask the question that first jumped out to me:

- Why was it necessary to set up a new organization in the first place?

If the problem is that you have new people setting up a new charity and that's why you are slow - you had an option.  That option would have been to utilize an existing charity with established procedures and experienced people?  Were there really no existing charities in the state of New Jersey that would have been willing to work with the Governor and the First Lady to set up a structure to address the needs of the population after a disaster of epic proportions?  Maybe someone who has more experience with the New Jersey charitable community can tell me otherwise, but a quick Google search brought me here, for example.

In practice, I lamented the proliferation of charities - in the best of circumstances, these new charities were the products of good intent, unbridled optimism, and poor planning.   I often tried to talk clients out of setting up new charities by encouraging them to find a partner with whom to work (what lawyer tries to talk herself out of work!), but I was rarely successful.   Now that I can think about the sector more holistically, it has caused me to wonder whether we should be making it more difficult to set up a new charity.  In looking at the recent efforts of the IRS, it seems to me there has been a trend to making it less difficult - the Form 1023 online project, the removal of the advance ruling period, the increase in the filing limits for the various flavors of the Form 990, to think of a few items off the top of my head.  

Of course, the benefit of a lower barrier to exemption access is that it encourages innovation and experimentation in the sector - a potentially inefficient but worthy outcome.  The cost of raising the barrier of access would be the "conglomeration" of charities.  Is that an acceptable price to pay to address the issue of duplicative administrative costs and the need efficient and timely operations - especially in a time when private charity plays an increasing role in the delivery of social services?  Would it really be any better?

I don't know.  Just throwing it out there.  EWW

 

 

 

Keep those driving logs up-to-date!

From The Chronicle of Philanthropy comes a report on the Charitable Driving Tax Relief Act, filed in the House of Representatives last month.   According to the report, the bill would increase the charitable volunteer per mile deduction rate of 14 cents per mile up to the rate for employee reimbursements, which is currently 56.5 cents per mile.  The IRS' latest on standard mileage rates can be found here.

Accordingly to Thomas.gov, the bill is H.R. 1212, although the text of the legislation is not yet upload.  I will keep checking back and provide a link when it is available.

EWW

Are There Exemption Issues with Law Schools Running Their Own Law Firms?

A hot topic in legal education recently has been the concept of law schools opening affiliated law firms as a way to "bridge the gap" from law school to practice.  For several links about the concept, visit Paul Caron's Tax Prof Blog and Johnny Buckles' prior post (along with the perceptive comment) here.

Would law schools opening law firms for students create tax exemption problems?  My view is "almost certainly not" though the issues depend in part on the exact structure involved. While I could probably write a book-length post about this, I'll try to simply highlight what I see as the key issues and a few thoughts.

First, I'll address a situation in which a law school operates a law firm as a part of the law school (e.g., the firm is not a separate legal entity).

The main question raised by this structure (a law school operating law firm as an "operating division" of the school itself) is whether the "commerciality" limitation somehow imperils the law school's tax exemption (this is probably only an issue if the law school is a private institution; state university law schools generally do not have to rely on Section 501(c)(3) for tax exemption; state universities are exempt either under Section 115 of the code as an "instrumentality" of state government or by simple constitutional principles of federalism; Ellen Aprill at Loyola Los Angeles has written the bible about this issue).

While the commerciality limitation is very complex, I have little doubt that it poses no trouble for law schools running law firms. Commercial activity raises essentially two issues for charities.  The first is whether the activity endangers their tax exemption.  The second is whether, if the activity is OK from an exemption standpoint, the activity will nevertheless be subject to tax under the Unrelated Business Income Tax (UBIT).  These issues are related, but not the same.

Let's concentrate on the exemption issue.  The regulations make clear that charities can engage in some activity that is not itself charitable.  The way the regulations put it is that a charity must engage "primarily" in activities that further its charitable purpose and cannot engage in more than an "insubstantial" amount of activities that are not "in furtherance of" a charitable purpose. See Treasury Regulations 1.501(c)(3)-1(c)(1).  

While there is some disagreement regarding what the phrase "in furtherance of" means in this regulation, the way I analyze these problems is by first classifying commercial activity as "related" or "unrelated" activity per the unrelated business income tax.  If a commercial activity is "related" under the UBIT, then it is no problem whatsoever for the charity, because the test for relatedness under the UBIT requires "functional" relatedness - that is, the commercial activity has to be closely connected to the charity carrying out its exempt purpose.  This test is not met simply because an activity provides an income source for the charity to spend on charitable works; the regulations state that to be related, there must be a "causal connection" between the activity and the charitable purpose.  Regs. 1.513-1(d)(2).  A commercial activity that meets this test for UBIT purposes is virtually certain to be an activity that is "in furtherance of" a charity's charitable purpose for purposes of Regs. 1.501(c)(3)-1(c)(1), and hence is not a problem.  In fact, Example 1 in the regulations, dealing with a performing arts school that charges admission for student performances, isn't far-removed from the law school law firm.

If an activity is unrelated, then in theory that activity can create exemption problems for the charity. This is where those of us that work in the area disagree; some people believe that an unrelated activity must be "insubstantial" (whatever that may mean) in order to avoid exemption problems.  I take a different view: I think that an unrelated activity can be "unlimited" in size as long as revenues from that activity are being used by the charity to expand charitable outputs.  See, e.g., John D. Colombo, Reforming Internal Revenue Code Provisions on Commercial Activity by Charities, 76 Fordham L. Rev. 667, 671-74 (2007).

But I don't think we get to that latter question here.  If law schools operate a law firm as part of the educational enterprise to bridge the gap between law school and practice, I have little doubt that the law firm would be viewed as "related" activity under the UBIT, and hence simply not a problem.  The law-school-operated-firm is pretty clearly advancing the educational mission of the law school; if an art museum can sell art reproductions in its museum store as a means of furthering its educational mission (see Rev. Rul. Rev. Rul. 73-104, 1973-1 C.B. 263), there really isn't much to argue about with the law-school law firm.  (Another relevant precedent is the "medical practice plan" used by some medical schools for their faculty to practice medicine as a means of both supplementing their salary and sharpening their practice skills; while the IRS at one time challenged exemption for these practice plans, the agency lost a series of cases and eventually gave up.  See, e.g., University of Massachusetts Medical School Group Practice Plan v. Comm'r, 74 T.C. 1299 (1980).  If a medical school can open a for-profit medical clinic for its faculty, I don't see a law school opening a law firm for its students/recent graduates as much of an issue).

So my conclusion is that a law-school operated law firm is a "related" activity under the UBIT, and therefore poses no commerciality problems to the law school's underlying exemption.  That conclusion also means that the revenues from the firm would not be taxed under the UBIT.

A more interesting question arises if the law firm is a separately-incorporated entity.  In this case, the issue would be whether this separate entity would qualify for a charitable tax exemption at all.  I personally find this a closer case.  The IRS's position is that separate corporate entities must "stand on their own" for exemption purposes - the law firm in this case would have to have its own charitable purpose.  One possibility, of course, is that the law firm would be exempt as an educational organization - after all, the purpose here is still an educational one: to give third-year students or recent graduates specific skills training as a bridge to private practice.  But the IRS takes a dim view of organizations claiming exemption when all they do is operate a for-profit business.  While a law firm whose primary purpose was to represent the poor would have an easy claim to exemption, the IRS's general view is that providing services to people who can pay for them, like the middle class, isn't a charitable purpose.  See Rev. Rul. 70-585, 1970-2 C.B. 115, Situation 4, where the IRS held that an organization whose purpose was to build affordable middle-class housing in an otherwise wealthy neighborhood was NOT a charitable purpose.  Even nonprofit hospitals must provide "something extra" beyond simply providing health services to paying patients to qualify for exemption.  See IHC Health Plans v. Comm'r, 325 F.3d 1188 (10th Cir. 2003).  So I'm not entirely sure that a separately-incorporated "bridge" law firm would get exemption.  It would be very interesting to see how the IRS would rule on such a creature.

But if the law school operates the firm as part of the law school legal entity, I just don't see much of a problem from an exemption perspective.  Perhaps some others would like to chime in via the comments section with their own analysis (the comments are moderated, so it might take a day or so for them to show up).

JDC

 

Charitable Deduction Under Fire (Part 78)

Our most current installment, courtesy of the Senate Democrats in their 2014 Budget Proposal:

The Senate Budget calls for deficit reduction of $975 billion to be achieved by eliminating loopholes and cutting unfair and inefficient spending in the tax code for the wealthiest Americans and biggest corporations. It recognizes that the Finance Committee, which has jurisdiction over tax legislation, could generate this additional revenue through a variety of different methods.

One potential approach is an across‐the‐board limit on tax expenditures claimed by high‐income taxpayers (specifically, the top two percent of income earners). This could take the form of a limit on the rate at which itemized deductions and certain other tax preferences can reduce one’s tax liability, a limit on the value of tax preferences based on a certain percentage of a taxpayer’s income, or a specific dollar cap on the amount of allowable deductions. In assessing any such across‐the‐board limit, Congress should consider the extent to which each proposal would retain a marginal tax incentive to engage in the affected activities and investments.

Another potential approach by which Congress could increase tax fairness and reduce the deficit is by reforming the structure of particular tax expenditures. The Simpson‐Bowles illustrative tax reform plan, for example, proposed to convert certain itemized deductions into limited tax credits, which more equitably deliver tax benefits and, because only about one‐third of taxpayers itemize their deductions, are often better for targeting tax incentives at low‐income and middle class families. Reforms like these could also generate substantial new revenue for deficit reduction.

See Foundation for Growth: Restoring the Promise of American Opportunity, page 66 (emphasis added).  As a reminder, the charitable deduction is an "itemized deduction."  Therefore, the charitable deduction will be limited by any indiscriminate cap on itemized deductions, whether expressed as a percentage of income or a specific dollar cap.   One could guess that the caution highlighted above in bold might have been aimed specifically at the chartiable deduction, although the mortgage interest deduction might lay a claim to such specific attention.  The nonprofit sector may have the most about which to worry, as charitable contributions are voluntary and easy to eliminate out of one's personal budget, if a taxpayer choose not to spend above the allowable deduction cap. 

Future installments to follow, no doubt.

EWW

 

Karla Simon's New Book on Civil Society in China

Professor Karla Simon's new book on Civil Society in China is now in print.  The book is available for a significant early bird discount of $60 by logging on to www.oup.com/us and using promo code 31590.

JDC

 

Arizona Taking Steps to Exempt "Fallow" Church Property

A couple of years ago one of my students, Brittany Viola (not the Olympic platform diver) wrote a note for the University of Illinois Law Review on the property tax status of "fallow" property owned by exempt organizations, particularly churches.  A PDF of that article is available here.  In the article, Ms. Viola discussed how various states, particularly in the Northeast, were attempting to tax "fallow" property - for example, shuttered Catholic schools or churches that had been closed by the local diocese (though this issue was by no means limited to property owned by the Catholic church).  The essence of the legal issue was the requirement of most state property tax exemption laws that the exempt property be "used" for an exempt purpose; arguably, fallow church property is not being "used" for religious purposes; it literally isn't being "used" at all, and hence potentially does not meet the requirements for exemption.

It appears that Arizona is in the midst of considering legislation that would protect this fallow property from taxation.  This article in the East Valley Tribune details legislation that was first proposed in the Arizona House that would permit religious organizations to buy undeveloped property and hold it subject to exemption (this original version of the legislation also apparently would have exempted other property owned by churches, but used for non-religious purposes, like student dormitories).  Word today is that a compromise version of this bill passed the Arizona House, and although it no longer protects things like student dormitories, it does apparently still provide for exemption of fallow land (I haven't been able to find a full-text version of the amended bill; I'll try to link it when I do).

I've written before about my view that churches ought not to be given the tax benefits accorded "charities." While some clearly do produce "public goods" in the form of helping the poor and disadvantaged, many are nothing more than clubs for believers.  The modern case for general tax exemptions for churches usually rests on the notion that taxing them would be unconstitutional (a violation of the federal free-exercise clause, or similar provisions in state constitutions).  I don't agree - and think that a neutral tax law applied to religious organizations would be upheld.  (The historical rationale for religious exemptions comes from the proposition that human beings could not (or should not) tax God; there are references in ancient Egyptian history and the Old Testament regarding the proposition that human beings did not have the authority to tax priests or temples.  I think we're sort of past the "if we tax churches, plagues of locusts will destroy the fields" theory.)  Social clubs do get federal income tax exemption under Section 501(c)(7), but clubs do not get the other major benefits of charitable tax exemption under 501(c)(3) (e.g., the ability to receive tax-deductible donations or to issue tax-exempt bonds), and states generally do not provide property tax exemptions for clubs.  So let's give churches the same tax benefits we give all social clubs and nothing more.

A colleague at another institution once floated the idea that churches ought to be taxed, but get an unlimited charitable deduction for actual charitable works, like expenditures for programs to help the poor.  That also sounds fine to me.  But the idea that we should be expanding exemption for churches to property that isn't even used for religious worship, particularly given the strains on local budgets, is in my view ludicrous.

JDC 

Illinois Schools Face Pain from Hospital Tax Exemption Law

It appears that one of the (perhaps unanticipated?) effects of the new Illinois law on hospital tax exemption is additional pain for strapped school districts in areas where hospitals previously had been denied exemption based upon the Illinois Supreme Court's ruling in the Provena-Covenant case.  This story posted on the WLS Radio (Chicago) web site notes that some school districts will have to refund millions of dollars collected over the past several years: Valley View School District, which covers Romeoville and Bolingbrook, will have to refund Adventist Bolingbrook Hospital between $4.5 million to $5 million and Plainfiled School District 202 apparently owes Naperville's Edwards Hospital $1 million.

 

I have a simple solution for all this: end tax exemption for nonprofit hospitals completely.  Over the years, I've admittedly supported nonprofit hospitals receiving tax exemption under certain specific conditions: for example, if they could prove that they provided services unavailable from for-profit competitors or served populations that otherwise were underserved.  But my recent reading of Steven Brill's magnum opus in Time Magazine about hospital bills has pretty much pushed me over the edge and confirmed my view that hospitals are big businesses, not charities.  Tax-exemption for nonprofit hospitals is an idea whose time was centered in the volunteer organizations of the late 1800's and early 1900's run by religious orders; that time has long since passed.

JDC 

 

A Refresher on Standing in Tax (Exemption) Cases

A couple of weeks ago, Johnny Buckles reported on the court case brought by Citizens for Responsibility and Ethics in Washington and David Gill against the IRS for what they believe is lax enforcement by the IRS of exempt status for 501(c)(4) organizations.  Johnny's post is here, and we've blogged so many times on (c)(4)'s generally that I won't even attempt a list (the search engine is your friend).

But the number of calls I've gotten from reporters who are taking this case seriously indicates that perhaps a short refresher on standing to sue in tax cases would be helpful (if nothing else, then I'll at least be able to refer reporters here!).  So here goes.

As all lawyers know, the general concept of standing to sue is a predicate to successfully bringing litigation.  In general, standing doctrine requires that the plaintiff in a case be able to allege "an injury in fact" - that is, that the defendant's conduct created a direct personal harm to the plaintiff.  The key here is the word "direct": individuals cannot generally sue the government because of some general grievance about government operations.  In tax cases, what this means is that one generally cannot sue taxing authorities over their treatment of some other taxpayer, even if one might argue that that treatment resulted in some diffuse injury to the plaintiff. I generally cannot complain that the IRS is treating someone else better than they should be, even if that better treatment arguably impacts me (e.g., I pay more in taxes) in some diffuse way.  Another way to look at this is that I cannot prove that my taxes would be impacted in any direct way by the treatment of another taxpayer.  My taxes aren't necessarily going to go down if the IRS "gets tough" with someone else; nor will they necessarily go up if the IRS lets someone else slide.  About as good a discussion of the general rules of taxpayer standing that I've read is in Kristen Hickman, How Did We Get Here Anyway?: Considering the Standing Question in DaimlerChrysler v. Cuno, 4 Georgetown Journal of Law & Public Policy 47 (2006).

One of the more famous cases dealing with standing in tax matters also happens to be a federal tax exemption case.  In Abortion Rights Mobilization v. U.S. Conference of Catholic Bishops, 885 F.2d 1020 (2d Cir. 1989), the court held that Abortion Rights Mobilization did not have standing to sue the IRS over its alleged non-enforcement of the political campaign activity limitation in Section 501(c)(3).  While the court did not rule out the possibility that taxpayers might have standing to challenge certain very narrow aspects of tax administration, it distinguished the Supreme Court's 1988 decision in Bowen v. Kendrick, 487 U.S. 589, where the court had permitted a taxpayer to challenge the grant of funds under the Adolescent Family Life Act as violating the Constitution: "Here, there is no nexus between plaintiffs' allegations and Congress' exercise of its taxing and spending power."

More recently, the Supreme Court in DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006) held that individual taxpayers did not have standing in federal court to challenge tax exemptions and other tax breaks given by the city of Toledo to DiamlerChrysler in order to entice them to locate a plant there. The Court reaffirmed the general federal taxpayer standing doctrine in Cuno, and applied the same concepts to the state taxpayers at issue in the case.

The addition by CREW of David Gill to the case likely is CREW's attempt to avoid the taxpayer standing doctrine.  Gill will argue that he personally suffered as a result of the IRS's lack of enforcement, because that lack of enforcement led to large campaign spending attacking his candidacy.  But CREW and Gill are going to have a very hard time showing that the campaign spending wouldn't have happend anyway; moreover, the Second Circuit in the Abortion Rights Mobilization case addressed the issue of "competitor" standing in a way that is going to be difficult for Gill to overcome: in rejecting "competitor" standing, the Second Circuit noted that Abortion Rights Mobilization had failed to undertake the same political activity as the Catholic Church and therefore in effect had refused to become a competitor.  Similarly, Gill could have formed his own 501(c)(4) organization to compete in his political campaign, but did not.  Gill isn't arguing that the IRS audited his own (c)(4) and found it wanting in circumstances where a competitor was let go (a set of facts that might provide standing for Gill).

As I've told all the reporters, I expect this case to be dismissed on standing grounds (if someone raises the issue; I assume they will).   We will see.

JDC

The IRS and Nonprofit Media: Towards Creating a More Informed Public

From the Council on Foundations Press Release regarding its March 4, 2013, 70 page report entitled, "The IRS and Nonprofit Media:  Towards Creating a More Informed Public". 

 

(Washington, D.C.) The Nonprofit Media Working Group, a nonpartisan group of foundation and nonprofit media leaders, today recommended that the IRS modernize its rules to remove obstacles in the way of nonprofit news outlets.The group, created by the Council on Foundations, released a  report, “The IRS and Nonprofit Media: Toward Creating a More Informed Public,” which states that the agency’s “antiquated” approach to granting tax-exempt status has undermined the creation of new media models. Although the IRS has a long history of approving the tax-exempt status of media organizations ranging from National Geographic to Pro Publica, in recent years it has become inconsistent and slower in its approvals.  “Over the last several decades, accountability reporting, especially at the local level, has contracted dramatically, with potentially grave consequences for communities, government accountability, and democracy,” said Steven Waldman, chair of the Nonprofit Media Working Group. “Nonprofit media provides an innovative solution to help fill this vacuum, but only if the IRS modernizes its approach.”

The Nonprofit Media Working Group was created by the Council on Foundations with a grant from the John S. and James L. Knight Foundation, following the recommendation by the Federal Communications Commission that a group of nonprofit tax and journalism expert convene on the topic. The new report highlights five key problems with the current IRS approach to granting nonprofit status:

1.  Applications for tax-exempt status are processed inconsistently and take too long.

2.  The IRS approach appears to undervalue journalism by sometimes not viewing it as “educational.”

3.  The IRS approach appears to inhibit the long-term sustainability of tax-exempt media organizations.

4.  Confusion may be inhibiting nonprofit entrepreneurs trying to address the information needs of communities.

5.  The IRS approach does not sufficiently recognize the changing nature of digital media.

Several of these problems stem from the IRS apparently relying on rules developed in the 1960s and 1970s. Under these rules, the IRS may deny tax-exempt status to nonprofits that gather or distribute news in a similar way to commercial outlets.  This approach, the group concluded, is no longer a sensible standard.  “There must be clear rules distinguishing nonprofit and commercial media but they should be logical rules,” continued Waldman.

Among the most significant recommendations:

• The IRS methodology for analyzing whether a media organization qualifies for exemption should not take into account irrelevant operational similarities to for-profits.

• Rather, the IRS should evaluate whether the media organization is engaged primarily in educational activities that provide a community benefit, as opposed to advancing private interests, and whether it is organized and managed as a nonprofit, tax-exempt organization.

• News and journalism do count as “educational” under the tax-exempt rules.

• The IRS should maintain the key structural requirements for being a tax-exempt media organization that properly distinguish it from commercial enterprise, such as: it cannot have shareholders or investors, it must have a governing board that is independent of private interests, and it cannot endorse candidates or lobby lawmakers.

“With the growing lack of accountability and investigative reporting, particularly in local communities, the Council convened a panel of experts to make recommendations on how the IRS can better facilitate the creation of new nonprofit media,” said Vikki Spruill, the Council’s president and CEO. “We strongly encourage the IRS to implement the recommendations made by the Nonprofit Media Working Group, as they will allow nonprofit media to fill the void in today’s reporting.”  Eric Newton, vice president of the Knight Foundation, said clearing up the IRS issues is important for efforts to improve local news. “The recession and the digital age combined to slash local news, leading to many new nonprofit media applications,” he said. “But the IRS fell back on industrial age standards and suddenly started delaying or denying requests strikingly similar to ones it had approved just months earlier. Applying 1970s rules to Web media makes about as much sense as telling spaceships they have to use the freeway.”

The Nonprofit Media Working Group includes: Chair Steven Waldman, journalist and former senior adviser to the FCC chairman; Clark Bell, Robert R. McCormick Foundation; Jim Bettinger, Stanford University; Kevin Davis, Investigative News Network; Cecilia Garcia, Benton Foundation; John Hood, John Locke Foundation; James T. Hamilton, Duke University; Joel Kramer, MinnPost; Juan Martinez, John S. and James L. Knight Foundation; Jeanne Pearlman, Pittsburgh Foundation; Calvin Sims, Ford Foundation; and Vince Stehle, Media Impact Funders.  Legal Counsel was provided by Marc Owens, former director of the IRS’s Exempt Organizations Division, and Sharon Nokes of Caplin & Drysdale.

The full report can be read at www.cof.org/nonprofitmedia.

dkj

Nonprofit Hospitals: "Community Benefit" Not Excessive Compensation is the Problem

In a provocative post on Economix today, Uwe Reinhardt casts nonprofit hospitals in the role of the true villians behind soaring healthcare costs and vicious billing practices riping apart the middle class:

Americans are shocked, just shocked. But what they should have known for years is that in most states, hospitals are free to squeeze uninsured middle- and upper-middle-class patients for every penny of savings or assets they and their families may have. That’s despite the fact that the economic turf of these hospitals – for the most part so-called nonprofit hospitals – is often protected by state Certificate of Need laws that bestow on them monopolistic power by keeping new potential competitors at bay . . . As George Bernard Shaw, whose works include “The Doctor’s Dilemma,” might have put it, that any lawmaker would grant hospitals monopolistic powers plus the freedom to price as they see fit is enough to make one despair of political humanity. . . . All manner of amazing behavior can hide under the pious label of “nonprofit.” A giant, inscrutable economic sector, in command of trillions of dollars in resources, nonprofits are governed by nonelected, self-perpetuating boards and virtually no effective accountability to any “owners” or the general public. By comparison, for-profit institutions are paragons of good corporate governance, transparency and accountability; I shall comment more on that in a future post. 

The posts goes on, painfully describing how the focus on "community benefit" and the sensationalism of hospital executive compensation has done nothing but obscure the real problem and thus the real solution. 

It should be possible to compensate hospital executives well without treating middle-class uninsured people like lemons to be squeezed fiscally. After all, as Mr. Brill shows, these so-called nonprofit hospitals typically have ample profits that would permit humane comportment in billing the uninsured while paying executives enough to retain them.

Read the post for Reinhardt's solution to the mess he lays at the feet of nonprofit hospitals.  All I can say is that economist may be no better at predicting economic outcomes than siesmologists are at predicting earthquakes, but the best of them sure are good at calling the rest of us stupid.

 

dkj