Nonprofit Law Prof Blog

Mitchell v. Commissioner Revisited – 170(h) Requires Perpetuation of Conservation Easement Itself, Not Just Conservation Purposes

In Mitchell v. Commissioner, T.C. Memo. 2013-204 (Mitchell II), the Tax Court denied the taxpayer’s motion for reconsideration and supplemented its opinion in Mitchell v. Commissioner, 138 T.C. No 16 (2012) (Mitchell I). In Mitchell I, the court sustained the IRS's disallowance of a charitable income tax deduction claimed with regard to a conservation easement donation because the taxpayer failed to satisfy the mortgage subordination requirement of Treasury Regulation § 1.170A-14(g)(2).  

Background

To be eligible for a deduction under IRC § 170(h) for the donation of a conservation easement, the easement must, among other things, be “granted in perpetuity” and its conservation purpose must be “protected in perpetuity.” IRC § 170(h)(2)(C), (h)(5)(A).

To satisfy the "protected in perpetuity" requirement:

(1) the easement must be granted to an “eligible donee” as defined in Treasury Regulation § 1.170A-14(c)(1) (i.e., a qualified organization that has “a commitment to protect the conservation purposes of the donation” and “the resources to enforce the restrictions”),

(2) the easement must prohibit the donee from transferring the easement, whether or not for consideration, except for transfers to other eligible donees that agree to continue to carry out the conservation purposes of the easement as provided in Treasury Regulation § 1.170A-14(c)(2),

(3) the easement must not permit “inconsistent uses” as specified in Treasury Regulation § 1.170A-14(e) (i.e., uses that would injure or destroy significant conservation interests), and

(4) the various “enforceable in perpetuity” requirements of Treasury Regulation § 1.170A-14(g) must be satisfied, namely

• the general enforceable in perpetuity requirement ((g)(1)),
• the mortgage subordination requirement ((g)(2)),
• the mining restrictions requirement ((g)(4)),
• the baseline documentation requirement ((g)(5)(i)),
• the donee notice, access, and enforcement rights requirements (g)(5)(ii)), and
• the extinguishment and division of proceeds requirements ((g)(6)(i) and (ii)).

See Treas. Reg. § 1.170A-14(e)(1); S. Rep. No. 96-1007, 1980-2 C.B. 599 (explaining the protected in perpetuity requirement). Each of these requirements plays an important role in ensuring that the conservation purpose of a tax-deductible easement will be "protected in perpetuity" as Congress intended.

Mitchell I

Treasury Regulation § 1.170A1-4(g)(2) – the mortgage subordination requirement – provides that, in the case of a contribution made after February 13, 1986, of an interest in property that is subject to a mortgage, no deduction is permitted unless the lender subordinates its rights in the property “to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.” In Mitchell I, a partnership of which the taxpayer was a partner donated a conservation easement but did not obtain a subordination agreement from the lender holding an outstanding mortgage on the subject property until two years after the date of the gift. The Tax Court sustained the IRS's disallowance of the taxpayer's claimed deduction for the donation, finding that "the regulation requires that a subordination agreement be in place at the time of the gift.” The court explained that, had the partnership defaulted on the mortgage before the date of the subordination, the lender could have instituted foreclosure proceedings and eliminated the conservation easement. Accordingly, the conservation easement was not protected in perpetuity at the time of the gift as is required by IRC § 170(h).

In Mitchell I the taxpayer argued that the conservation purpose of the easement had been protected in perpetuity at the time of the gift even without a subordination agreement because the probability that the partnership would have defaulted on the mortgage was so remote as to be negligible. The Tax Court rejected that argument, holding that a taxpayer cannot avoid meeting the strict requirement of the subordination regulation by making a showing that the possibility of foreclosure is so remote as to be negligible. The court explained that “[t]he requirements of the subordination regulation are strict requirements that may not be avoided by use of the so-remote-as-to-be-negligible standard” of Treasury Regulation § 1.170A-14(g)(3).

Mitchell II

 In Mitchell II, the taxpayer argued that the First Circuit’s decision in Kaufman v. Commissioner, 687 F.3d 21 (1st Cir. 2012) (Kaufman III), was an intervening change in the law that required the Tax Court to reconsider its opinion in Mitchell I. The Tax Court disagreed, explaining that not only is Kaufman III not binding in Mitchell, Kaufman III addressed legal issues different from the one present in Mitchell. Kaufman III, explained the court, "addressed the proper interpretation of the proceeds regulation and, in particular, the breadth of the donee organization’s entitlement to proceeds from the sale, exchange, or involuntary conversion of property following the judicial extinguishment of a [conservation easement].” Mitchell, on the other hand, addressed interpretation of the mortgage subordination regulation.

The Tax Court also rejected all three of the taxpayer’s specific arguments in Mitchell II.

• The taxpayer argued that the partnership's financial ability to discharge the mortgage at any time before the date on which the lender agreed to the subordination “was the functional equivalent of a subordination.” The Tax Court summarily dismissed that argument, explaining “There is no functional subordination contemplated in [Treasury Regulation § 1.170A-14(g)(2)], nor do we intend to create such a rule.” 
• The taxpayer argued that the Tax Court had held in Carpenter v. Commissioner, T.C. Memo 2012-1, that Treasury Regulation 1.170A-14(g)(6) "merely creates a safe harbor,” and given the opinions in Kaufman III and Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir., June 21, 2011), “the entire regulation could and should be read as a safe harbor.” The Tax Court explained that it had rejected a similar argument in Carpenter v. Commissioner, T.C. Memo. 2013-172 (Carpenter II), and reiterated that the specific provisions of Treasury Regulation § 1.170A-14(g), including paragraph (g)(6) and (g)(2) "are mandatory and may not be ignored." For a discussion of Carpenter II, see Carpenter v. Commissioner Revisited: Federally-Deductible Conservation Easements Must be Extinguishable Only in a Judicial Proceeding.
• The taxpayer further argued that the court should "draw a general rule" with respect to the in-perpetuity requirement of IRC § 170(h)(5)(A) and Treasury Regulation § 1.170A-14(g) from the analysis in Kaufman III. In particular, the taxpayer argued that “The regulation emphasizes perpetuating an easement’s purpose as opposed to the conservation easement itself. The proceeds are protected which is the goal of the law.” The Tax Court rejected that argument, stating “Nowhere in Kaufman III did the Court of Appeals for the First Circuit state a general rule that protecting the proceeds from an extinguishment of a conservation easement would satisfy the in-perpetuity requirements of section § 1.170A-14(g) ... generally.” 

The Tax Court has distinguished the holdings in Kaufman III and Simmons in three cases, Belk v. Commissioner, T.C. Memo. 2013-154, Carpenter II, and Mitchell. This was appropriate. Among other things, Kaufman III and Simmons did not address the specific statutory or regulatory requirements at issue in Belk, Carpenter, or Mitchell, and the holdings in Kaufman III and Simmons were based on the specifics facts of those facade easement donation cases. For a discussion of this latter point, see Belk v. Commissioner - Tax Court Reaffirms its Holding that “Floating” Conservation Easements Are Not Deductible

NAMcL

Does UPMC Still Qualify for Federal Tax Exemption?

Back in March, the City of Pittsburgh decided to file suit to have the University of Pittsburgh Medical Center's state property-tax exemption revoked.  I'm not an expert in Pennsylvania law, so I've refrained from commenting on the merits of this effort.  But I am an expert in tax-exemption under Internal Revenue Code Section 501(c)(3), and in reviewing the background of this particular dispute, an interesting point popped up: UPMC may not qualify for exemption under even the generous community benefit standard adopted by the IRS in Rev. Rul. 69-545.

First, some background for those not steeped in the law of hospital tax exemption under Internal Revenue Code 501(c)(3).  Essentially from the beginning of the income tax until 1969, the IRS took the position that hospitals were tax exempt only when they provided substantial free care for the poor.  This view was set forth in Rev. Rul. 56-185, which held that nonprofit hospitals would be exempt when operated to the extent of their financial capability to provide free or below-cost services for those who could not afford to pay. 

In 1969, the IRS changed its position, and adopted what most now refer to as the "community benefit" standard for exemption of nonprofit hospitals in Rev. Rul. 69-545.  In this ruling, the IRS held that providing health care services for the general benefit of the community was a charitable purpose, even if a segment of the population (uninsured poor) was excluded "provided that the class is not so small that its relief is not of benefit to the community."  The ruling then found that "Hospital A" was exempt under this test, because it had a community board, an "open" medical staff (admitting privileges granted to all who met standards of competency) and most importantly for purposes of this blog post, "By operating an emergency room open to all persons and by providing hospital care for all those persons in the community able to pay the cost thereof either directly or through third party reimbursement, Hospital A is promoting the health of a class of persons that is broad enough to benefit the community." (Emphasis added).  Thus the third and fourth criteria for exemption were an "open" emergency room, where all patients were treated without regard to ability to pay and treatment of all patients with third-party insurance (including insurance provided by government, such as Medicare and Medicaid).

So what does all this have to do with UPMC?  One of the issues at the heart of Pittsburgh's dispute with UPMC revolves around UPMC's decision to "freeze out" people who signed up for insurance with a competing health provider.  Essentially, UPMC is locked in a battle with competitor Highmark over access by patients with Highmark's health insurance to UPMC facilities.  UPMC decided not to permit Highmark customers "in network" access to UPMC, meaning that these facilities would be far more expensive to patients with Highmark insurance than patients who insure via UPMC's own captive insurance company.  The Chair of UPMC's Board of Directors has been remarkably candid about this, even penning an explanation in a guest column in The Pittsburg Post-Gazette.

So here's the question.  If an exempt charitable hospital adopts policies that intentionally discriminate (economically) against patients with "third party reimbursement" designed essentially to force patients with "other" insurance to use "other" facilities, then is that hospital "providing hospital care for all those persons in the community able to pay the cost thereof either directly or through third party reimbursement"?  UPMC's policy arguably is purposefully exclusionary, and such an exclusionary policy could be read as inconsistent with the test adopted in Rev. Rul. 69-545. (I realize there is a counter-argument here: that argument is that Highmark's patients would still be able to access UPMC's services as "out of network" patients.  Hence, no one is being excluded from UPMC; it's just going to cost Highmark patients a whole lot more.  But "any fool knows" what is going on here: UPMC is adopting a purposefully discriminatory stance to punish a competitor).   My own view on this is simple: "charitable" hospitals ought not be permitted to discriminate economically with respect to its geographic patient base.  This kind of behavior is what we would expect of cut-throat for-profit businesses . . . but perhaps that's exactly what UPMC and other nonprofit hospitals have become.

JDC

Are Universities the Next Hospitals?

For at least three decades, one of the central theoretical and practical debates about tax-exemption  has revolved around nonprofit hospitals - in particular, whether they are "charities" that deserve exemption, either under federal law, or under state property tax exemption provisions.   I make no secret about where I fall on that debate: my view is that many (maybe most, but not all) private nonprofit hospitals are simply big businesses selling health care services for a fee.  They have about as much in common with traditional notions of charity as Apple Computer or Ford Motor Corporation, and deserve exemption as much as those companies.

Now it appears that the focus may be shifting to universities.  We have blogged in the past about the lawsuit against Princeton, essentially claiming that at least certain buildings should not be exempt from property taxes because of their commercial uses.  Then a few days ago, James Piereson and Naomi Schaefer Riley penned an opinion piece in the Wall Street Journal (may be paywall protected) about Princeton and other universities' commercialization and how it might affect exemption.  Another such piece appeared yesterday in The Norman Transcript by independent columnist Taylor Armerding.

Armerding's article is notable mostly for its histrionics, but it is interesting that the piece pushes the same buttons that have been pushed in the hospital industry for years: high salaries for executives (university presidents) and some faculty; ever-increasing costs for "customers" (students in this case, instead of patients).   So far we haven't seen muckraking stories about universities using collection agencies and "body attachments" to collect on student loans, but one wonders whether that is not far off given the debt loads at today's most prestigious institutions (and even some less-prestigious ones).  Add this to the almost-weekly calls for college athletic program reforms, and you have something of at least a small storm on the "charitable-ness" of universities.

I don't (yet) have the same view of universities as I have of hospitals.   Yes, universities "sell" education and big-time athletic programs are nothing more than minor leagues for the NBA and NFL, where money rules the roost.  But they also are engaged in important public research (though the "public-ness" of research may be under attack as universities enter into sweetheart deals with private corporations to fund research projects and "research parks" such as the one I drive by on my way home from the University of Illinois every day) and other "knowledge-enhancing" work (presentation of artistic performances, for example) that I think is still deserving of exemption.  Nonprofit hospitals largely don't do any such "public-regarding" activities (teaching hospitals excepted, but they would qualify for exemption as educational institutions anyway). 

But I've got some advice for university presidents: take a look at the history of nonprofit hospitals and learn a lesson about how commercialization and lack of attention to one's public persona changes perceptions.   I doubt that Princeton is going to lose it's tax exempt status in my lifetime, but assuming exemption is forever, like a diamond, might not be the best PR move.  Adminsitrators at Provena-Covenant hospital in Urbana, IL, probably never thought they would lose exemption, either, and the resulting inattention to anything resembling a charitable mission is a large part of the reason that they did.

JDC

Updates Available for Schmidt's Nonprofit Law: The Life Cycle of a Charitable Organization

For those of you who use Betsy Schmidt's Nonprofit Law: The Life Cycle of a Charitable Organization in your class teaching materials, updates are available at  http://www.aspenlawschool.com/books/non_profit/default.asp under "Professor Materials." 

JDC

Freedom From Religion Foundation v. Schulman and the Question of Standing

In November 2012, the Freedom From Religion Foundation filed suit against the IRS seeking an injunction to make the IRS enforce the 501(c)(3) political activity limitation against churches (a lot of folks, including me, have commented in the past on the IRS's lack of enforcement of this prohibition, which apparently is at least partly related to the IRS's failure to designate an appropriately-high-level official to institute church audits per Section 7611 of the Code after having lost litigation over this issue in 2009).

But this time I'm not commenting about the substance of all this.  Instead, the interesting part of this case so far is that the federal district court refused to dismiss the case for lack of standing.  Last March, I posted on the general rules for standing in tax cases in the context of a different lawsuit (one filed by Citizens for Responsibility and Ethics in Washington and David Gill) dealing with IRS enforcement of its exemption standards under 501(c)(4).  The FFRF suit, however, raised the question of enforcement in the 501(c)(3) context.

FFRF's complaint is available here.  In essence, FFRF claims that the IRS's non-enforcement of the political campaign prohibition in 501(c)(3) constitutes both an illegal "establishment" of religion and also discriminates against FFRF (which is not a religious organization) in violation of its constitutional rights of equal protection.  Predictably, the IRS moved to dismiss the complaint for lack of standing (the motion to dismiss is available here).  In its motion, the IRS argued (correctly, in my view) that FFRF lacked standing because it failed to allege any particularized injury - in essence, FFRF was complaining about the IRS's treatment of other taxpayers, not its treatment of FFRF.  For example, FFRF did not allege that the IRS had enforced the political campaign limit against FFRF, thereby putting it at a disadvantage vis-a-vis churches.  Instead, FFRF simply asserted that it complies with the law, churches don't, churches don't get hammered for noncompliance and that state of affairs is an equal-protection violation.

If you had asked me about the chances of FFRF surviving a motion to dismiss based on standing when the complaint was filed, I wouldn't have given a wooden nickel for such chances.  Shows what I know - because in an opinion released last week, the district court upheld FFRF's standing to sue and permitted the case to proceed.  I find the opinion curious in many respects, not the least of which is that it doesn't discuss or cite Abortion Rights Mobilization v. U.S. Conference of Catholic Bishops, 885 F.2d 1020 (2d Cir. 1989), which presented a very similar claim (and in which the Second Circuit denied standing).  Nor does the opinion reference the Supreme Court's decision in DiamlerChrysler v. Cuno, 547 U.S. 332 (2006) which discussed the taxpayer standing doctrine at some length.  But I should note that the IRS brief on its motion to dismiss didn't cite these cases either, so maybe this is yet another case of poor lawyering leading to bad judicial decisions.

While I certainly sympathize with FFRF's substantive position on this matter, I believe the district court got the standing issue wrong.  I suspect an appeal is forthcoming (though one of my colleagues who specializes in standing issues tells me that an interlocutory appeal on this issue would be difficult). I'm going to go out on a limb and predict that FFRF eventually will lose the standing issue (but I'd just note that I was also one of many who pooh-pooh-ed commerce clause objections to Obamacare, so don't go betting your house, or even a beer, on my predictive capabilities).

JDC

(Hat tip to Ellen Aprill)

IRS Chief Counsel Memorandum Addresses Conservation Easement Valuation

The IRS Office of Chief Council has published a memorandum (Number 201334039, Release Date 8/23/2013)* that provides helpful guidance on valuing conservation easements in accordance with some of the more technical requirements of Treasury Regulation § 1.170A-14(h)(3)(i). The memorandum specifically addresses the "contiguous parcel" and "enhancement" rules.

Pursuant to the contiguous parcel rule (found in the fourth sentence of Treasury Regulation § 1.170A-14(h)(3)(i)), the amount of the deduction in the case of a conservation easement covering a portion of contiguous property owned by the donor and the donor's family (as defined in § 267(c)(4)) is the difference between the fair market value of the entire contiguous parcel before and after the granting of the easement.

Pursuant to the enhancement rule (found in the fifth sentence of Treasury Regulation § 1.170A-14(h)(3)(i)), if the granting of a conservation easement after January 14, 1986, has the effect of increasing the value of any other property owned by the donor or a related person, the amount of the deduction must be reduced by the amount of the increase in the value of the other property, whether or not such property is contiguous. Related person has the same meaning as in either § 267(b) or § 707(b).

The Chief Counsel memorandum discusses (i) the meaning of the term “family” for purposes of the contiguous parcel rule, (ii) the meaning of “related person” for purposes of the enhancement rule, and (iii) rules relating to constructive ownership and entity classification and their impact on both the contiguous parcel and enhancement rules.

The Chief Counsel memorandum also explains (in footnote 1) that, for purposes of the contiguous parcel rule, whether the entire contiguous parcel is valued as one large property or as separate properties depends on the highest and best use of the entire contiguous parcel.

The examples provided in the memorandum address the following scenarios.

Scenario 1(a). Contiguous Parcel Owned by Donor.

Scenario 1(b). Contiguous Parcel Owned by Donor’s Family.

Scenario 2: Contiguous and Noncontiguous Parcels Owned by Donor.

Scenario 3(a). Contiguous Parcel Owned by a Limited Liability Company, of Which Donor Is the Single Member.

Scenario 3(b). Contiguous Parcel Owned by a Limited Liability Company, of Which Donor’s Child Is the Single Member.

Scenario 3(c). Contiguous Parcels Owned by Limited Liability Companies, of Which Donor and Donor’s Parent Are the Single Members.

Scenario 4(a). Contiguous Parcel Owned by a Limited Liability Company Classified As a Corporation, of Which Donor Is the Single Member.

Scenario 4(b). Contiguous Parcel Owned by a Limited Liability Company Classified As a Partnership, of Which Donor and Donor’s Family Are Members.

Scenario 4(c). Contiguous Parcel Owned by a Limited Liability Company Classified As a Partnership, of Which Donor’s Spouse and Unrelated Individuals Are Members.

Scenario 4(d). Contiguous Parcel Owned by a Limited Liability Company Classified As a Partnership, of Which Donor and an Unrelated Individual Are Members.

Scenario 5(a). Contiguous Parcel Owned by a Limited Liability Company Classified As a Partnership, of Which Donor Is Considered to Own More Than 50%.

Scenario 5(b). Contiguous Parcel Owned by a Limited Liability Company Classified as a Partnership, of Which Donor Is Considered to Own Less Than 50%.

For an additional insightful discussion of some of the conservation easement-specific valuation rules in Treasury Regulation § 1.170A-14(h)(3), see Browning v. Comm’r, 109 T.C. 303 (1997).

*IRS Office of Chief Counsel advice documents are legal advice, signed by executives in the National Office of the IRS Office of Chief Counsel and issued to IRS personnel who are national program executives and managers. The documents are issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. However, they are not to be used or cited as precedent.

NAMcL

 

Smith: Chevron's Conflict with the Administrative Procedures Act

Once I put away the blogging about the Van Hollen v. IRS case,  I started to tackle the pile of journals and magazines that the College of Law's circulation department dutifully sends me daily.  And what did I see on the cover of the Virginia Tax Review, Volume 32, No. 4 (Spring 2013): 

• Chevron's Conflict with the Administrative Procedures Act by Patrick J. Smith, a partner with Ivins, Phillips & Barker in Washington D.C.

Given the apparent issue in the Van Hollen case, this seems very timely - it's in the "to read over the weekend pile."   Which weekend, of course, remains to be seen,  but that has nothing to do with the article!

 

EWW

 

 

Follow up: Van Hollen Actually Does Sue!

Following up on my post from yesterday, Chris Van Hollen (and Democaracy 21, Campaign Legal Center, and Public Citizen) did file suit yesterday against the IRS and Treasury.   For those of you interested in reading the Complaint, it is in the District Court for D.C., Case 1:13-cv-01276.   I retrieved my copy from Bloomberg BNA online; if anyone has a public link, let me know and I'll post it.  A quick summary

1.  It's a proceding under the Administrative Procedure Act (APA), 5 U.S.C. 702/703/704/706(1)/and 706(2)(A), "to compel agency action unlawfully withheld and unreasonably delayed, and to set aside agency action that is contrary to law."

2.   Quote:  "By redefining 'exclusively' as 'primarily' in violation of the clear terms of its governing statutes, the IRS permits tax-exempt social welfare organizations to engage in substantial electoral activities in contravention of the law and the court decisions interpreting it" (p. 2).

3.  In answer to my question of yesterday, the Plaintiffs assert the following personal harms:

• Denial of information regarding election expenditures as Section 501(c)(4) organization do not need to disclose donors, and
• Candidates such as Van Hollen and their organizations must compete on unequal terms with tax-exempt organizations that are not subject to disclosure.

4.  The Complaint specifically alledges that the IRS' recent 40% safe harbor pronoucements allows too much non-exempt political activity.

5.  Quote:  "Electoral campaign spending by section 501(c)(4) organizations soared after the U.S. Supreme Court's decisions in FEC v. Wisconsin Right to Life ... and Citizens United v. Federal Election Commission .. , which, respectively, narrowly construed and then invalidated federal laws prohibiting corporate electoral campaign expenditures.  In the wake of those decisions, section 501(c)(4) organizations became the vehicles of choice for mobilizing anonymous contributions for political purposes." (p. 9, cites omitted).

6.  For those interested, the paragraphs that follow the quote above give some signficant figures regarding Section 501(c)(4) spending since Citizens United - e.g., in the 2012 presidential election, approximately $310 million in electoral campaign spending was by non-disclosing groups including section 501(c)(4) and 501(c)(6) organizations. (p. 11).

7.   The APA statutory standard of review is "arbitrary, capricious, and abuse of discretion, or not in accordance with law."  (p. 19).

EWW

 P.S. 8/26   Reader Russell Willis was kind enough to point me to the following link for the petition:

 http://www.democracy21.org/wp-content/uploads/2013/08/Complaint-August-20-final-for-filing.pdf

 

Thanks Russell!!!

 

Van Hollen to Sue IRS Over (c)(4) Regs

The Washington Post reports that Chris Van Hollen (D-MD) is planning on filing suit against the IRS regarding the Section 501(c)(4) regulations that have been the spotlight as of late.    Van Hollen, the ranking member of the House Budget Committee, will be the lead plaintiff in the suit, along with Democracy 21, The Campaign Legal Center, and Public Citizen.  According to the Post, CREW has a similar suit pending.

If I understand the Post's article correctly**, the suit will focus on the validity of the IRS regulations under Section 501(c)(4).   As we all probably know (ad nauseum) at this point, Section 501(c)(4) provides that an organization exempt under that section must be "operated exclusively for the promotion of social welfare" (emphasis added).

Treas. Reg. Section 1.501(c)(4)-1(a)(2) provides, "[a]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community" (emphasis added). As the promotion of social welfare does not include political campaign activity, it follows that an organization that is organized primarily for political campaign intervention purposes cannot meet the "exclusively" test of the statute.

I'm assuming that the lawsuit will take the position that it was an abuse of IRS discretion to issue regulations interpreting "exclusively" to mean "primarily" in the context of the amount of allowable  non-social welfare activities.   That raises a number of interesting issues:

• For my civil procedure and con law friends, it's been a very long time since I've looked at standing issues.    In the exemption context, of course, there is no taxpayer standing - but this isn't an exemption case.   Is Van Hollen a plaintff because he is asserting that he personally has been injured by the enforcement of this rule (for example, because of the ability of opponents to get Crossroads funding or something?)    Is there some other basis for standing?
• For my admin law friends, what is our standard of review?  Is this still straight up Chevron as a agency interpretation of statute with the force of law?  Has any of that changed given recent Supreme Court action in this area (I am rapidly getting to the outer edge of my knowledge here).  Does the fact that the IRS has recently come out with new 501(c)(4) review guidelines matter in the least?
• Are we worried about collateral damage?  The statutory language of Section 501(c)(3) also contains the word "exclusively."  Treas. Reg. Section 1.501(c)(3)-1(c)(1) states, "[a]n organization will be regarded as 'operated exclusively' for one or more exempt purposes only if it engages primarily in activities which accomplish"  one or more exempt purposes  (emphasis added).    It's always been interesting to me that in the Section 501(c)(4) context, some are willing to take the position that primarily means 51% , so you can push your political activities to 49% (of... something).   In the Section 501(c)(3) context, I personally would be unwilling to tell a client that they can do that much non-exempt activity.  Heck, I get queasy if a charity is in double digits percentage (of... anything) of non-exempt activity.   But, technically, it is the same issue of statutory/regulatory construction.

This Section 501(c)(4) ambiguity could all be fixed by legislation, of course.  Too bad none of the litigants has the ear of a Congressm.... um... wait....

(h/t Jonathan Adler via The Volokh Conspiracy Daily for pointing to this article)

EWW

** The Post article states, "Current law says the organizations must engage 'exclusively' in social welfare activities, but IRS tax code requires only that they are 'primarily engaged' in such purposes."  Of course, the tax code is current law, the tax code does not belong to the IRS, and the primarily engaged test is in the Regs.  So I'm assuming that's what the Post meant. 

Bruce Bartlett on the Charitable Deduction

In the August 20th New York Times Online, Bruce Bartlett weighed in on the future of the chartiable deduction.  For those of you not familiar with the name, Bruce Bartlett was a member of the administration for both Reagan and the elder Bush.  He was known at one time as a strong supply-sider but has broken ranks with Republicans more recently on this issue.   See his Wikipedia entry here.   

In summary, his point is that the charitable deduction needs to be re-thought as it is generally provides a disproportionate benefit to higher income taxpayers.  Higher income taxpayers have more disposable income to make signficant charitable gifts.  In addition, the majority of low income taxpayers cannot itemize, and therefore cannot benefit directly from the deduction.  Finally, the value of the deduction rises as the taxpayer's marginal tax rate goes toward the top of the scale.    He appears to favor a capped credit in lieu of a deduction as a way to continue to reward and encourage generosity while making the benefit more equitable among taxapayers.   He also posits that the cap on the credit could be "done in a way that raised net revenue to pay for rate reductions."

The credit idea has always been intriguing to me - it is what we have here in West Virginia on the state level, although it is somewhat unique in its structure.  A few thoughts:

• A credit does nothing for those that do not have a tax liability to offset.  I wonder if he would support using the credit to offset the payroll tax liability, which is often more of a burden for lower income taxpayers than the income tax.
• I am curious to know how the cap on the credit would be done in a way that raises revenue for rate deductions - and what rate deductions?  Wouldn't the high income taxpayer benefit from such a re-shuffling, as they have their overall rate lowered and there overall tax burden reduced, while not having to giving anything to charity? 
• How would that compare to, for example, a $500 above-the-line deduction?  We know that would be expensive,  which is why it's been talked about but not enacted.  If we reduced the availability of the below-the-line charitable deduction to pay for it, would that promote the fairness that Bartlett professes to want without the back door benefit of financing low overall marginal rates?
• Bartlett seems to be unimpressed by the charitable sector's argument regarding the effect of cuts in the deduction on funding for the sector.  If we think that part of the rationale for the deduction in the first place is to not just reward giving but to encourage it, we need to think seriously about that issue.  Otherwise, we are again reducing marginal rates on the backs of folks who may be able to least afford it - in this case, our charities.

EWW

 

 

Welcome Back!

Just wanted to say to all our professors, students, and others working with law schools - welcome back and best wishes for the new school year!

 

EWW

Nonprofit Coalition Disagrees with Commission

Yesterday we blogged about the recently-released report from the Commission on Accountability and Policy for Religious Organizations which recommended that clergy should be able to say whatever they believe is appropriate in the context of their religious services or other regular religious activities even when that includes content related to political candidates.  Under the Commission's new world order, such communication would be permissible as long as the organization’s cost would be the same with or without it.   The NonProfitTimes and the Chronicle of Philanthropy are today both reporting that Independent Sector, a leading coalition for nonprofits, has strongly criticized the Commision's recommendations.

“This is a deeply disturbing and troubling option,” said Independent Sector's President & CEO, Diana Aviv. “We think it should not be a possibility,” she said.

According to Aviv, some parts of the report and its recommendations were unclear, while other parts were contradictory and required further reading and study.  She viewed the report and recommendations as having the intent to “drive a truck” through the clear separation of political activity and nonpartisan political activity from other activity.

“While we agree with the commission that there is no clarity in this area, the solution is not to gut everything,” Aviv said. “This actually contaminates our advocacy work.”

The only item in the report that Independent Sector agreed with was that current regulations are vague and require clarity.  According to Aviv, a strong argument exists for reviewing the limits put in place in 1969 and 1976. Current regulations allow charities to interact with public officials on a limited basis, which Aviv said is an appropriate distinction since organizations work to educate officials on issues relevant to their missions and members.

“Speaking out and engaging in advocacy on issues is critical to the ability of nonprofits to achieve their missions. This is an entirely different matter than endorsing candidates or getting involved in political campaigns,” she said.  She sees three necessary solutions to the political speech issue: (1) greater clarify over what is political activity: (2) clearer definition of what “unsubstantial” means for 501(c)(3) organizations; and (3) disclosure of donors to 501(c)(3) organizations if their donations are used for partisan activity.

VEJ

Commission Speaks on Clergy and Free Political Speech

The Commission on Accountability and Policy for Religious Organizations has released its second report in response to a request from Sen. Charles Grassley (R-Iowa) for guidance.  The approximately 60-page report titled  “Government Regulation of Political Speech by Religious and Other 501(c)(3) Organizations: Why the Status Quo Is Untenable and Proposed Solutions” made three primary recommendations: 

• Clergy should be able to say whatever they believe is appropriate in the context of their religious services or other regular religious activities without fear of reprisal by the Internal Revenue (IRS), even when that communication includes content related to political candidates. The communication would be permissible provided that the organization’s costs would be the same with or without the political communication.
• Secular nonprofits should have “comparable latitude when engaging in regular, exempt-purpose activities and communications.”
• Current IRS policy not permitting tax-deductible funds to be disbursed for political purposes should be preserved.

According to Commission Chair Michael Batts, “The law prohibiting political campaign participation and intervention by 501(c)(3) organizations as currently applied and administered lacks clarity, integrity, respect, and consistency.”  He maintains that 501(c)(3) organizations’ leaders “are never quite sure where the lines of demarcation are, and the practical effect of such vagueness is to chill free speech -- often in the context of exercising religion.”  

The report discusses the history of the ban on political campaign participation or intervention, which was included in the Revenue Act of 1954.  It also identifies key cases in which the IRS has examined organizations or their leaders for certain actions, particularly several instances during the 2004 presidential campaign.

The Evangelical Council for Financial Accountability (ECFA) established the commission in response to a January 2011 request by Sen. Grassley to coordinate a national effort to provide input on accountability, tax policy and political expression for nonprofits in general and religious organizations in particular.  The commission is comprised of 14 members and 66 panel members, including legal experts and representatives of religious and nonprofit sector organizations.

VEJ

New National Commander at Salvation Army

The nation's second largest charity, The Salvation Army USA, yesterday announced that Commissioner David Jeffery will serve as the new National Commander of The Salvation Army USA effective November 1.  Jeffrey will succeed William Roberts, who will become the next chief of staff of the International Salvation Army.  Jeffrey's wife, Commissioner Barbara Jeffrey, will become National President of Women’s Ministries, also effective Nov. 1.

The announcements come in the wake of the August 3 election of Andre Cox as the 20th General and world leader of The Salvation Army.  Cox's election set in motion a series of executive turnovers.  Roberts will succeed Cox, who served as chief of staff, the second-highest position within the International Salvation Army, since February. He will begin his new position on October 1.  His wife, Nancy Roberts, will become World Secretary of Women’s Ministries.

The new National Commander is not new to high level service within the Salvation Army.  Since 2011, Commissioner Jeffery served as territorial commander for The Salvation Army Southern territory. Previously, he was National Chief Secretary for the USA National Headquarters in Arlington, Virginia. As National Commander, Jeffery will be chairman of the national board of trustees, responsible for presiding over tri-annual commissioners’ conferences, bringing together executives from the Salvation’s Army’s four U.S. territories.

The 59-year-old Cox shares his ministry with his wife, Commissioner Silvia Cox, who is the World President of Women’s Ministries.  Together, they will lead The Salvation Army’s 1.5 million member churches.

Cox was himself appointed as chief of staff in February. Prior to that, he was a territorial commander in the Southern African Territory, the Finland and Estonia Territory, and the United Kingdom Territory with the Republic of Ireland.  As general, he is the international leader of The Salvation Army, and the only person elected to office within the organization.  He directs operations throughout the world through administrative departments of the international headquarters in London.

All the best to the new team.

 

VEJ

New Jersey Court: Donor Intent Rules the Day

In a decision handed down last week, the New Jersey Superior Court, Appellate Division, ruled that charities that do not follow donor intent must return the gifts.  In Adler v. Save, ___A.3d___, 2013 WL 4017286, a three-judge panel ruled that a Mercer County animal shelter must return a $50,000 gift originally slated for specialized construction.

In delivering the court's opinion, Judge Jose Fuentes wrote:

We hold that a charity that accepts a gift from a donor, knowing that the donor’s expressed purpose for making the gift was to fund a particular aspect of the charity’s eleemosynary mission, is bound to return the gift when the charity unilaterally decides not to honor the donor’s originally expressed purpose.

The case turned on a gift given by a Princeton couple, Bernard and Jeanne Adler, to animal shelter SAVE (now SAVE, A Friend to Homeless Animals). The gift was to finance the building of an area for larger dogs and older cats, whose adoption prospects are limited, as part of a new facility in Princeton.

Before SAVE began construction, it merged with another animal welfare nonprofit, Friends of Homeless Animals. The new organization developed a new plan to build a shelter in nearby Montgomery Township instead.  The new shelter will be about half the size of what the new Princeton facility would have been.  Although SAVE trustee John Sayer testified that the new shelter would “absolutely” have rooms for large dogs and older cats, the court said that evidence suggested otherwise.  Judge Fuentes wrote:

Based on Mr. Sayer’s testimony and the letter announcing the merger between SAVE and Friends of Homeless Animals, we are satisfied that the 15,000 square foot shelter to be constructed in Montgomery Township does not include two rooms specifically designated for the long-term care of large dogs and older cats.

The Adlers filed suit in Mercer County in 2007, seeking the return of their $50,000 donation to SAVE.  By order dated August 26, 2010, the court held in the Adlers' favor, finding that they were entitled to the full return of their charitable gift.  SAVE appealed, arguing that the judge erred in determining that the Adlers’ gift was restricted.  SAVE also argued that even if the gift was restricted, its purpose would have been fulfilled and, barring that, the lower court should have reformed the gift under the cy pres doctrine so that SAVE could spend it on a project as near as possible to the original intent.

The appellate court disagreed, saying SAVE had courted the Adlers, who had been long-time supporters of animal welfare but who had never made a significant gift prior to the $50,000 donation, with a campaign that specifically included the two rooms and a naming opportunity. “To be clear, the record shows that SAVE: (1) decided to construct a substantially smaller facility; (2) outside the Princeton area; (3) without any specifically designated rooms for large dogs and older cats; and (4) without any mention of plaintiffs’ names,” Judge Fuentes wrote.  He continued: "By opting to disregard plaintiffs’ conditions, SAVE breached its fiduciary duty to plaintiff.  Under these circumstances, requiring SAVE to return the gift appears not only eminently suitable, but a mild sanction.”

VEJ

Russian Philanthropists Increase in Number and Generosity

Charitable giving is growing by leaps and bounds in Russia!

According to data collected by Bloomberg from 15 of the wealthiest Russians and from corporate annual reports and charitable foundations, a total of $1.64-billion was donated to philanthropic projects from 2010 through 2012. On average, respondents said they gave away 40 percent more in 2012 than in 2010.

Russian billionaire and nickel magnate, Vladimir Potanin, is leading his country’s newfound philanthropic calling.  Mr. Potanin is the first Russian to sign the Giving Pledge, promising to donate at least half of his wealth to charity.

VEJ

University of Iowa Receives $25 Million Commitment for Inherited Retinal Diseases Research

The University of Iowa Foundation last week announced receipt of a five-year, $25 million commitment from Las Vegas businessman, Stephen A. Wynn, in support of the university's Institute for Vision Research.

The funds will be used to accelerate progress toward finding cures for rare, inherited retinal diseases. According to a report in the Iowa Gazette, in recognition of the gift, the institute, which is working to develop gene and stem cell therapies that could restore vision, will be renamed the Stephen A. Wynn Institute for Vision Research.

"As a person who knows firsthand what it is like to lose vision from a rare inherited eye disease, I want to do everything I can to help others who are similarly affected keep the vision they have and eventually get back what they have lost," said Wynn, chairman and CEO of Wynn Resorts, Limited, who has retinitis pigmentosa, a disease that causes night blindness and weakness in peripheral vision. "The army of clinicians and scientists at the University of Iowa's Institute for Vision Research have uncovered many of the secrets of the genome and are now on the cusp of applying them in the clinic. I never dreamed that I would witness such breakthroughs in my lifetime, but the breakthroughs are now at hand."

Edwin Stone, director of the Vision Institute, reports that gene replacement therapies have already begun for certain inherited eye diseases.  For example, he states, earlier this year, University of Iowa scientists began conducting gene replacement therapy for a rare inherited eye disease, restoring a missing gene that makes it possible to restore vision to a child.

"Philanthropic support is very important to all aspects of academic medicine, but it is absolutely essential for developing treatments for 'orphan' disorders that occur in a few hundred people or less in the entire country," said Stone. "Mr. Wynn's generous gift will also help us maintain the very valuable collaborative relationships we have developed with other vision scientists around the world."

VEJ

 

Updates for Fishman/Schwarz Casebook Available

For those who use Jim Fishman and Steve Schwarz's casebook, Nonprofit Organizations, Cases and Materials (4th ed. 2010), the 2013 Student Update is available here and 2013 Teacher's Manual Update is available here.  (Full disclosure: I collaborated on these updates.)

LHM

Louisiana Pursues Noncompliant NGOs to Return $4.4 Million in State Funding

As set forth in a July 29th news release, State Treasurer John Kennedy is pursuing 36 non-governmental organizations who have failed to comply with Louisiana state law requiring them as recipients of state appropriations to provide progress reports and other documentation to the Treasury to maintain their funding.  If an organization fails to comply with these reporting provisions, it is required by law to return in full the state appropriation to the Treasury.  Kennedy stated  that "[w]hile most NGOs have worked in good faith with our office and have been in compliance, these 36 organizations have become the most flagrant violators of these important requirements."  If these organizations do not fulfill their required reporting obligations by August 31st, the organizations will owe approximately $4.452 million dollars to the Treasury, who will turn over collection to the State's Office of Debt Recovery.

[See also Kennedy:  NGOs owe $4.4M to state]

NAM

IRS Debacle Has New Wrinkle - Sharing Information with the FEC?

As reported by the Daily Tax Report and others, email exchanges between the Federal Election Commission and Lois Lerner, then Director of IRS Exempt Organizations Division, reveal that the IRS may have unlawfully shared confidential tax information with the FEC, according to a July 30th letter from two House Ways and Means Committee leaders.  According to the letter, nine minutes after receiving the email, Lerner requested that IRS attorneys "accommodate the FEC request."  The letter requests Acting IRS Commissioner Daniel Werfel to produce by August 14 all communications between the IRS and the FEC between 2008 and 2012, including specific communications to and from Lerner with respect to certain organizations:  American Future Fund, American Issues Project, and Citizens for the Republic, or Avenger, Inc. 

[See additional coverage by:  Washington Post, Wall Street Journal, Fox News, National Review]

NAM