Nonprofit Law Prof Blog

Pope Francis Decries Misplaced Priorities of Capitalist World

For many Americans, Black Friday began last night -- or even yesterday, Thanksgiving day.  And now the Holiday Season is upon us.  It would do us well to note what Pope Francis, leader of the world's 1.2 billion Roman Catholics, had to say this week about the misplaced priorities of our capitalist world that worships money.  The pontiff asked:

How can it be that it is not news when an elderly homeless person dies of exposure, but it is news when the stock market loses two points?

That's a good question!  Pope Francis then supplied the answer:

Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world.  This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.  Meanwhile, the excluded are still waiting.  To sustain a lifestyle which excludes others, or to sustain enthusiasm for that selfish ideal, a globalization of indifference has developed. 

 VEJ

Washington Post: New Rules Bring Both Clarity and Confusion

I'll admit it: I've been closely following the release of the proposed new Treasury regulations governing political advocacy of 501(c)(4) organizations.  Today's Washington Post asserts that the new rules bring both clarity and confusion to a broken system.  The Post's article begins by acknowleding that the rules governing the political activities of nonprofit advocacy groups is "an area of the tax code that has been crying out for greater clarity."  According to the newspaper, while the "proposed regulation unvieled Tuesday by the Treasury Department draws the boundaries clearly," they "instantly kicked off intense debate about whether the lines are in the right place."

According to the Post,

One phrase in the official notice summed up the imperfect nature of the exercise.  The new rules, the department said, "may be both more restrictive and more permissive than the current approach."

Notwithstanding the apparent confusion, the Post acknowledges what we all know: the system was broken and needed to be fixed.

VEJ

 

 

  

 

 

Nonprofit Sector Reacts to Proposed Political Activity Rules for Tax-Exempt Organizations

Earlier this week, we blogged about the proposed new political activity rules for tax-exempt organizations proposed by the U.S. Department of the Treasury and the Internal Revenue Service.  The NonProfitTimes is reporting that the proposed rules are drawing sharp criticism from some members of the nonprofit sector.

As an initial matter, we note that the rules specifically target 501(c)(4) organizations and political lobbying and activism.  However, the Times notes that the proposed rules can also apply to 501(c)(3) groups.  For example, under the proposed regulations, activities that will be counted as political activity include voter registration drives, nonpartisan voter guides and events such as debates at which candidates appear.  Section 501(c)(3) groups sometimes organize these activities.

Now,  

Organizations classified as 501(c)(4) social welfare organizations are permitted to undertake political activity, so long as it does not constitute the group’s primary purpose. Nonpartisan activities such as voter registration drives currently are not counted against that threshold. The IRS uses a “facts and circumstances” determination on a case-by-case basis to decide whether a given group’s political activity is its primary purpose.

The facts and circumstances test [is] “all very specific to an organization,” according to Viveca Novak, editorial and communications director at the Center for Responsive Politics in Washington, D.C. “It is subjective and can be ambiguous. What the IRS is trying to do is just have some bright line rules.”

This does not satisfy some members of the nonprofit sector.  The NonProfitTimes reports that some sector members have labeled the proposed rules "an attack on First Amendment free speech rights." 

The report notes opposition from other sources:

Marcus Owens, the former director of the IRS Tax Exemption Division and now a lawyer at the Washington, D.C. firm Caplin and Drysdale, said, the proposed rule “eliminates some of the tax rule ambiguities and replaces them with election law ambiguities. There’s still a lot of uncertainty. There’s just different words describing that uncertainty.”

Owens believes the regulations go too far in restricting activities that, because of their nonpartisan nature, did not count as political acts. “It means that for groups like the League of Women Voters, which publishes voters’ guides, that won’t happen in all likelihood,” he said. “What we’ll be left with is biased guides from political groups. Instead of more objective presentation, the public is going to get bombarded with partisan communications.”

Some groups agree with Owens that the proposed regulations go too far, saying that they infringe on free speech. “These proposed new regulations put the First Amendment rights of Americans at even greater risk,” Jay Sekulow, chief counsel of the American Center for Law and Justice in Washington, D.C. said via a statement. “With this move, the Obama Administration opens a new front in its war against political dissent.”

Owens points out that some of the activities that the regulations call political activity, such as get-out-the-vote drives and issue communications, are permitted for 501(c)(3) charities and foundations, which are restricted entirely from political activity. “The Treasury has created a harsher rule,” he said. “They could have mimicked the standards private foundations have to adhere to but instead went with a shotgun approach that does a disservice to the public.”

Gary Bass, executive director of the Bauman Foundation in Washington, D.C., called the proposal “extremely troubling for those who believe in democratic practices.” He worries about the implications for 501(c)(3) groups: “If nonpartisan voter registration, get-out-the-vote, etc., are political for (c)4’s, how can they not be for (c)3’s?” he asked rhetorically.

Bass, like Owens, is critical of the proposal’s ambiguity. “Once again, nonprofits don’t know what they can do,” he said. “The first principle for a rule should be to encourage democratic practice while stifling abuses. This NPRM (notice of proposed rulemaking) abandons such a principle.”

Further, he said the proposed rules will have a chilling effect on foundation funding for nonpartisan civic engagement like voter registration. “Even if there is a legal pathway, it will scare the hell out of foundation legal counsel—and encourage foundations to stay out of this area of funding.”

Not all sector members are critical.  The Times reports that unlike Owens and Bass,

Other groups are more optimistic about the proposal. “The proposal is good for no other reason than it gets the ball rolling on a critical issue,” said Craig Holman, Ph.D., a government affairs lobbyist with the Washington, D.C. group Public Citizen. “It admirably attempts to offer some clarity in what nonprofit groups can and cannot do and reduces the discretion of the IRS in evaluating activities of nonprofits. Overall, it is a positive step by the Treasury Department.”

Fred Wertheimer, president of Democracy 21 in Washington, D.C., agreed. “Democracy 21 applauds the action taken today by the Treasury Department and the Internal Revenue Service to initiate a rulemaking to address the inadequate rules that have been used by the IRS to determine 501(c)4 tax-exempt status,” said Wertheimer in a statement.

Once the regulations are published in the Federal Register, the public will have at least 60 days to comment.

VEJ

Kristof on Charitable Giving: Where is the Love?

I was perusing the International New York Times when I came across this op-ed by Nicholas D. Kristof.  He asks a simple question at Thanksgiving time: Where is the Love?  I recommend it to you.

VEJ 

School of Philanthropy Study: Charitable Donations Jump When Linked to Religion

The NonProfitTimes is reporting that a recent study on charitable giving reveals that charitable giving increases significantly when the recipients are religiously-linked nonprofits.  According to the Times:

Some 41 percent of all U.S. donations go to religious congregations. That number jumps to 73 percent when religiously-linked nonprofits such as Catholic Charities, the Salvation Army and Jewish federations are included. Those are some results from the Lilly Family School of Philanthropy at Indiana University study called “Connected to Give: Faith Communities.”

The study, carried out by the Lilly School in conjunction with Los Angeles, Calif. nonprofit research lab Jumpstart and GBA Strategies in Washington, D.C., is the third of six reports. It surveyed 4,862 American households of various religious traditions.

Four out of five Americans identify themselves with a particular religion. Of those, 65 percent give to congregations or charities. Of those who do not identify with a religion, 56 percent give. “The 9-point difference is due largely to contributions from (religiously) affiliated Americans to organizations with religious ties,” wrote the study’s authors.

“It’s like putting on 3-D glasses,” said one of the study’s authors, Shawn Landres, Ph.D., CEO and research director of Jumpstart, via a statement from the Lilly School. “In addition to looking at congregations, when we also look at the religious identity of the organization and the religious or spiritual orientation of the donor, it turns out that a majority of Americans contribute to organizations with religious ties and a majority of Americans cite religious commitments as key motivations for their giving.”

Almost two-thirds, or 63 percent, of Americans gave to congregations or charitable organizations in 2012, with a median gift of $660. Congregations saw the highest median gift at $375. The median gift to not religiously identified organizations (NRIOs) was greater than that of religiously identified organizations (RIOs), at $250 to $150.

“When it comes to religious identity and giving, demographic categories like income and age resist generalization,” wrote the report’s authors. While the report says that religious denomination alone does not affect giving, other factors help shape rates of giving among the denominations, according to the authors. Jews give at the highest rate to religious and charitable denominations, at 76 percent. Christians — black Protestants, Evangelical Protestants, mainline Protestants and Roman Catholics — all give at similar rates, between 61 percent and 68 percent. Those identifying as not religiously affiliated give at the lowest rate, 46 percent.

The study also examined people's motivation for giving.  As reported by the NonProfitTimes, the study revealed that

More than half of Americans who give, or 55 percent, said that religion is an important or very important motivation for charitable giving. Other common motivations include believing they can make a change through giving (57 percent) and thinking they should help others who have less (55 percent).

What a heart-warming story.  Happy Thanksgiving to all.

VEJ

"Giving Tuesday" Attracts 7,000 Nonprofits

Today's Chronicle of Philanthropy is reporting that more than than 7,000 nonprofits plan to band together to promote Giving Tuesday next week.  This represent's a significant increase over last year's 2,500 charities that participated in the event.

According to the Chronicle, companies, foundations, and other big donors are also chipping in to promote the day, which will largely rely on social media to promote giving and volunteering.  The Chronicle continues:

Even the Obama administration is urging people to give and volunteer on December 3. In the White House Blog, Jonathan Greenblatt, director of the Office of Social Innovation and Civic Participation, calls Giving Tuesday “a wonderful opportunity for a national conversation about the ability of all Americans to participate in positive action.”

The first "Giving Tuesday" was organized last year as an answer to the Black Friday and Cyber Monday shopping traditions.

VEJ

American Fund for Alternatives to Animal Research Invites Applications for Postdoctoral Fellowship

The American Fund for Alternatives to Animal Research and the New England Anti-Vivisection Society are offering a $40,000, one-year postdoctoral fellowship grant (with possible renewal) to a woman interested in using alternatives to animal methods in the investigation of women's health or sex differences.  The award is available to female postdoctoral scientists researching women's health or sex differences whose research involves the development, validation, or use of non-animal alternatives.  Applicants must hold an interest in using or promoting non-animal alternatives in research.

Complete program guidelines and application instructions are available at the AFAAR Website.  Application deadline in December 15, 2013.

VEJ

(C)(4) Political Activity Regs: Complete Text

Notices of Proposed Rulemaking, Proposed Amendments of Regulations (REG-134417-13), NPRM REG-134417-13, Internal Revenue Service, (Nov. 29, 2013)

Proposed Amendments of Regulations (REG-134417-13), published in the Federal Register on November 29, 2013.

[Code Sec 501]

Tax-exempt organizations: Social welfare organizations: Qualifications: Candidate-related political activity.–

Amendments of Reg. 1.501(c)(4)-1, providing guidance to tax-exempt social welfare organizations on political activities related to candidates that will not be considered to promote social welfare, are proposed. The text is at ¶22,610B.

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations that provide guidance to tax-exempt social welfare organizations on political activities related to candidates that will not be considered to promote social welfare. These regulations will affect tax-exempt social welfare organizations and organizations seeking such status. This document requests comments from the public regarding these proposed regulations. This document also requests comments from the public regarding the standard under current regulations that considers a tax-exempt social welfare organization to be operated exclusively for the promotion of social welfare if it is “primarily” engaged in activities that promote the common good and general welfare of the people of the community, including how this standard should be measured and whether this standard should be changed.

DATES: Written or electronic comments and requests for a public hearing must be received by [INSERT DATE 90 DAYS AFTER PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER].

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-134417-13), Room 5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-134417-13), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-134417-13).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Amy F. Giuliano at (202) 317-5800; concerning submission of comments and requests for a public hearing, Oluwafunmilayo Taylor at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by [INSERT DATE 60 DAYS AFTER PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER].

Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information;

How the quality, utility, and clarity of the information to be collected may be enhanced; and

How the burden of complying with the proposed collection of information may be minimized, including through forms of information technology.

The collection of information in these proposed regulations is in §1.501(c)(4)-1(a)(2)(iii)(D), which provides a special rule for contributions by an organization described in section 501(c)(4) of the Internal Revenue Code (Code) to an organization described in section 501(c). Generally, a contribution by a section 501(c)(4) organization to a section 501(c) organization that engages in candidate-related political activity will be considered candidate-related political activity by the section 501(c)(4) organization. The special rule in §1.501(c)(4)-1(a)(2)(iii)(D) provides that a contribution to a section 501(c) organization will not be treated as a contribution to an organization engaged in candidate-related political activity if the contributor organization obtains a written representation from an authorized officer of the recipient organization stating that the recipient organization does not engage in any such activity and the contribution is subject to a written restriction that it not be used for candidate-related political activity. This special provision would not apply if the contributor organization knows or has reason to know that the representation is inaccurate or unreliable. The expected recordkeepers are section 501(c)(4) organizations that choose to contribute to, and to seek a written representation from, a section 501(c) organization.

Estimated number of recordkeepers: 2,000.

Estimated average annual burden hours per recordkeeper: 2 hours.

Estimated total annual recordkeeping burden: 4,000 hours.

A particular section 501(c)(4) organization may require more or less time, depending on the number of contributions for which a representation is sought.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and return information are confidential, as required by section 6103.

Background

Section 501(c)(4) of the Code provides a Federal income tax exemption, in part, for “[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” This exemption dates back to the enactment of the federal income tax in 1913. See Tariff Act of 1913, 38 Stat. 114 (1913). The statutory provision was largely unchanged until 1996, when section 501(c)(4) was amended to prohibit inurement of an organization's net earnings to private shareholders or individuals.

Prior to 1924, the accompanying Treasury regulations did not elaborate on the meaning of “promotion of social welfare.” See Regulations 33 (Rev.), art. 67 (1918). Treasury regulations promulgated in 1924 explained that civic leagues qualifying for exemption under section 231(8) of the Revenue Act of 1924, the predecessor to section 501(c)(4) of the 1986 Code, are “those not organized for profit but operated exclusively for purposes beneficial to the community as a whole,” and generally include “organizations engaged in promoting the welfare of mankind, other than organizations comprehended within [section 231(6) of the Revenue Act of 1924, the predecessor to section 501(c)(3) of the 1986 Code].” See Regulations 65, art. 519 (1924). The regulations remained substantially the same until 1959.

The current regulations under section 501(c)(4) were proposed and finalized in 1959. They provide that “[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.” Treas. Reg. §1.501(c)(4)-1(a)(2)(i). An organization “embraced” within section 501(c)(4) is one that is “operated primarily for the purpose of bringing about civic betterments and social improvements.” Id. The regulations further provide that “[t]he promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.” Treas. Reg. §1.501(c)(4)-1(a)(2)(ii). This language is similar to language that appears in section 501(c)(3) requiring section 501(c)(3) organizations not to “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office” (“political campaign intervention”). However, unlike the absolute prohibition that applies to charitable organizations described in section 501(c)(3), an organization that primarily engages in activities that promote social welfare will be considered under the current regulations to be operating exclusively for the promotion of social welfare, and may qualify for taxexempt status under section 501(c)(4), even though it engages in some political campaign intervention.

The section 501(c)(4) regulations have not been amended since 1959, although Congress took steps in the intervening years to address further the relationship of political campaign activities to tax-exempt status. In particular, section 527, which governs the tax treatment of political organizations, was enacted in 1975 and provides generally that amounts received as contributions and other funds raised for political purposes (section 527 exempt function income) are not subject to tax. Section 527(e)(1) defines a “political organization” as “a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function.” Section 527(f) also imposes a tax on exempt organizations described in section 501(c), including section 501(c)(4) social welfare organizations, that make an expenditure furthering a section 527 exempt function. The tax is imposed on the lesser of the organization's net investment income or section 527 exempt function expenditures. Section 527(e)(2) defines “exempt function” as “the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any federal, state, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors” (referred to in this document as “section 527 exempt function”). ¹ 

Unlike the section 501(c)(3) standard of political campaign intervention, and the similar standard currently applied under section 501(c)(4), both of which focus solely on candidates for elective public office, a section 527 exempt function encompasses activities related to a broader range of officials, including those who are appointed or nominated, such as executive branch officials and certain judges. Thus, while there is currently significant overlap in the activities that constitute political campaign intervention under sections 501(c)(3) and 501(c)(4) and those that further a section 527 exempt function, the concepts are not synonymous.

Over the years, the IRS has stated that whether an organization is engaged in political campaign intervention depends upon all of the facts and circumstances of each case. See Rev. Rul. 78-248 (1978-1 CB 154) (illustrating application of the facts and circumstances analysis to voter education activities conducted by section 501(c)(3) organizations); Rev. Rul. 80-282 (1980-2 CB 178) (amplifying Rev. Rul. 78-248 regarding the timing and distribution of voter education materials); Rev. Rul. 86-95 (1986-2 CB 73) (holding a public forum for the purpose of educating and informing the voters, which provides fair and impartial treatment of candidates, and which does not promote or advance one candidate over another, does not constitute political campaign intervention under section 501(c)(3)). More recently, the IRS released Rev. Rul. 2007-41 (2007-1 CB 1421), providing 21 examples illustrating facts and circumstances to be considered in determining whether a section 501(c)(3) organization's activities (including voter education, voter registration, and get-out-the-vote drives; individual activity by organization leaders; candidate appearances; business activities; and Web sites) result in political campaign intervention. The IRS generally applies the same facts and circumstances analysis under section 501(c)(4). See Rev. Rul. 81-95 (1981-1 CB 332) (citing revenue rulings under section 501(c)(3) for examples of what constitutes participation or intervention in political campaigns for purposes of section 501(c)(4)).

Similarly, Rev. Rul. 2004-6 (2004-1 CB 328) provides six examples illustrating facts and circumstances to be considered in determining whether a section 501(c) organization (such as a section 501(c)(4) social welfare organization) that engages in public policy advocacy has expended funds for a section 527 exempt function. The analysis reflected in these revenue rulings for determining whether an organization has engaged in political campaign intervention, or has expended funds for a section 527 exempt function, is factintensive.

Recently, increased attention has been focused on potential political campaign intervention by section 501(c)(4) organizations. A recent IRS report relating to IRS review of applications for tax-exempt status states that “[o]ne of the significant challenges with the 501(c)(4) [application] review process has been the lack of a clear and concise definition of ‘political campaign intervention.’” Internal Revenue Service, “Charting a Path Forward at the IRS: Initial Assessment and Plan of Action” at 20 (June 24, 2013). In addition, “[t]he distinction between campaign intervention and social welfare activity, and the measurement of the organization's social welfare activities relative to its total activities, have created considerable confusion for both the public and the IRS in making appropriate section 501(c)(4) determinations.” Id. at 28. The Treasury Department and the IRS recognize that both the public and the IRS would benefit from clearer definitions of these concepts.

Explanation of Provisions

1. Overview

The Treasury Department and the IRS recognize that more definitive rules with respect to political activities related to candidates - rather than the existing, fact-intensive analysis - would be helpful in applying the rules regarding qualification for tax-exempt status under section 501(c)(4). Although more definitive rules might fail to capture (or might sweep in) activities that would (or would not) be captured under the IRS' traditional facts and circumstances approach, adopting rules with sharper distinctions in this area would provide greater certainty and reduce the need for detailed factual analysis in determining whether an organization is described in section 501(c)(4). Accordingly, the Treasury Department and the IRS propose to amend Treas. Reg. §1.501(c)(4)-1(a)(2) to identify specific political activities that would be considered candidaterelated political activities that do not promote social welfare.

To distinguish the proposed rules under section 501(c)(4) from the section 501(c)(3) standard and the similar standard currently applied under section 501(c)(4), the proposed regulations would amend Treas. Reg. §1.501(c)(4)-1(a)(2)(ii) to delete the current reference to “direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office,” which is similar to language in the section 501(c)(3) statute and regulations. Instead the proposed regulations would revise Treas. Reg. §1.501(c)(4)-1(a)(2)(ii) to state that “[t]he promotion of social welfare does not include direct or indirect candidate-related political activity.” As explained in more detail in section 2 of this preamble, the proposed rules draw upon existing definitions of political campaign activity, both in the Code and in federal election law, to define candidate-related political activity that would not be considered to promote social welfare. The proposed rules draw in particular from certain statutory provisions of section 527, which specifically deals with political organizations and taxes section 501(c) organizations, including section 501(c)(4) organizations, on certain types of political campaign activities. Recognizing that it may be beneficial to have a more uniform set of rules relating to political campaign activity for tax-exempt organizations, the Treasury Department and the IRS request comments in subparagraphs a through c of this section of the preamble regarding whether the same or a similar approach should be adopted in addressing political campaign activities of other section 501(c) organizations, as well as whether the regulations under section 527 should be revised to adopt the same or a similar approach in defining section 527 exempt function activity.

a. Interaction with section 501(c)(3)

These proposed regulations do not address the definition of political campaign intervention under section 501(c)(3). The Treasury Department and the IRS recognize that, because such intervention is absolutely prohibited under section 501(c)(3), a more nuanced consideration of the totality of facts and circumstances may be appropriate in that context. The Treasury Department and the IRS request comments on the advisability of adopting an approach to defining political campaign intervention under section 501(c)(3) similar to the approach set forth in these regulations, either in lieu of the facts and circumstances approach reflected in Rev. Rul. 2007-41 or in addition to that approach (for example, by creating a clearly defined presumption or safe harbor). The Treasury Department and the IRS also request comments on whether any modifications or exceptions would be needed in the section 501(c)(3) context and, if so, how to ensure that any such modifications or exceptions are clearly defined and administrable. Any such change would be introduced in the form of proposed regulations to allow an additional opportunity for public comment.

b. Interaction with section 527

As noted in the “Background” section of this preamble, a section 501(c)(4) organization is subject to tax under section 527(f) if it makes expenditures for a section 527 exempt function. Consistent with section 527, the proposed regulations provide that “candidate-related political activity” for purposes of section 501(c)(4) includes activities relating to selection, nomination, election, or appointment of individuals to serve as public officials, officers in a political organization, or Presidential or Vice Presidential electors. These proposed regulations do not, however, address the definition of “exempt function” activity under section 527 or the application of section 527(f). The Treasury Department and the IRS request comments on the advisability of adopting rules that are the same as or similar to these proposed regulations for purposes of defining section 527 exempt function activity in lieu of the facts and circumstances approach reflected in Rev. Rul. 2004-6. Any such change would be introduced in the form of proposed regulations to allow an additional opportunity for public comment.

c. Interaction with sections 501(c)(5) and 501(c)(6)

The proposed regulations define candidate-related political activity for social welfare organizations described in section 501(c)(4). The Treasury Department and the IRS are considering whether to amend the current regulations under sections 501(c)(5) and 501(c)(6) to provide that exempt purposes under those regulations (which include “the betterment of the conditions of those engaged in [labor, agricultural, or horticultural] pursuits” in the case of a section 501(c)(5) organization and promoting a “common business interest” in the case of a section 501(c)(6) organization) do not include candidaterelated political activity as defined in these proposed regulations. The Treasury Department and the IRS request comments on the advisability of adopting this approach in defining activities that do not further exempt purposes under sections 501(c)(5) and 501(c)(6). Any such change would be introduced in the form of proposed regulations to allow an additional opportunity for public comment.

d. Additional guidance on the meaning of “operated exclusively for the promotion of social welfare”

The Treasury Department and the IRS have received requests for guidance on the meaning of “primarily” as used in the current regulations under section 501(c)(4). The current regulations provide, in part, that an organization is operated exclusively for the promotion of social welfare within the meaning of section 501(c)(4) if it is “primarily engaged” in promoting in some way the common good and general welfare of the people of the community. Treas. Reg. §1.501(c)(4)-1(a)(2)(i). As part of the same 1959 Treasury decision promulgating the current section 501(c)(4) regulations, regulations under section 501(c)(3) were adopted containing similar language: “[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 of such exempt purposes specified in section 501(c)(3).” Treas. Reg. §1.501(c)(3)-1(c)(1). Unlike the section 501(c)(4) regulations, however, the section 501(c)(3) regulations also provide that “[a]n organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.” Id.

Some have questioned the use of the “primarily” standard in the section 501(c)(4) regulations and suggested that this standard should be changed. The Treasury Department and the IRS are considering whether the current section 501(c)(4) regulations should be modified in this regard and, if the “primarily” standard is retained, whether the standard should be defined with more precision or revised to mirror the standard under the section 501(c)(3) regulations. Given the potential impact on organizations currently recognized as described in section 501(c)(4) of any change in the “primarily” standard, the Treasury Department and the IRS wish to receive comments from a broad range of organizations before deciding how to proceed. Accordingly, the Treasury Department and the IRS invite comments from the public on what proportion of an organization's activities must promote social welfare for an organization to qualify under section 501(c)(4) and whether additional limits should be imposed on any or all activities that do not further social welfare. The Treasury Department and the IRS also request comments on how to measure the activities of organizations seeking to qualify as section 501(c)(4) social welfare organizations for these purposes.

2. Definition of Candidate-Related Political Activity

These proposed regulations provide guidance on which activities will be considered candidate-related political activity for purposes of the regulations under section 501(c)(4). These proposed regulations would replace the language in the existing final regulation under section 501(c)(4) - “participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office” - with a new term - “candidate-related political activity” - to differentiate the proposed section 501(c)(4) rule from the standard employed under section 501(c)(3) (and currently employed under section 501(c)(4)). The proposed rule is intended to help organizations and the IRS more readily identify activities that constitute candidate-related political activity and, therefore, do not promote social welfare within the meaning of section 501(c)(4). These proposed regulations do not otherwise define the promotion of social welfare under section 501(c)(4). The Treasury Department and the IRS note that the fact that an activity is not candidate-related political activity under these proposed regulations does not mean that the activity promotes social welfare. Whether such an activity promotes social welfare is an independent determination.

In defining candidate-related political activity for purposes of section 501(c)(4), these proposed regulations draw key concepts from the federal election campaign laws, with appropriate modifications reflecting the purpose of these regulations to define which organizations may receive the benefits of section 501(c)(4) tax-exempt status and to promote tax compliance (as opposed to campaign finance regulation). In addition, the concepts drawn from the federal election campaign laws have been modified to reflect that section 501(c)(4) organizations may be involved in activities related to local or state elections (in addition to federal elections), as well as the broader scope of the proposed definition of candidate (which is not limited to candidates for federal elective office).

The proposed regulations provide that candidate-related political activity includes activities that the IRS has traditionally considered to be political campaign activity per se , such as contributions to candidates and communications that expressly advocate for the election or defeat of a candidate. The proposed regulations also would treat as candidate-related political activity certain activities that, because they occur close in time to an election or are election-related, have a greater potential to affect the outcome of an election. Currently, such activities are subject to a facts and circumstances analysis before a determination can be made as to whether the activity furthers social welfare within the meaning of section 501(c)(4). Under the approach in these proposed regulations, such activities instead would be subject to a more definitive rule. In addition, consistent with the goal of providing greater clarity, the proposed regulations would identify certain specific activities as candidate-related political activity. The Treasury Department and the IRS acknowledge that the approach taken in these proposed regulations, while clearer, may be both more restrictive and more permissive than the current approach, but believe the proposed approach is justified by the need to provide greater certainty to section 501(c)(4) organizations regarding their activities and reduce the need for fact-intensive determinations.

The Treasury Department and the IRS note that a particular activity may fit within one or more categories of candidate-related political activity described in subsections b through e of this section 2 of the preamble; the categories are not mutually exclusive. For example, the category of express advocacy communications may overlap with the category of certain communications close in time to an election.

a. Definition of “candidate”

These proposed regulations provide that, consistent with the scope of section 527, “candidate” means an individual who identifies himself or is proposed by another for selection, nomination, election, or appointment to any public office or office in a political organization, or to be a Presidential or Vice-Presidential elector, whether or not the individual is ultimately selected, nominated, elected, or appointed. In addition, the proposed regulations clarify that for these purposes the term “candidate” also includes any officeholder who is the subject of a recall election. The Treasury Department and the IRS note that defining “candidate-related political activity” in these proposed regulations to include activities related to candidates for a broader range of offices (such as activities relating to the appointment or confirmation of executive branch officials and judicial nominees) is a change from the historical application in the section 501(c)(4) context of the section 501(c)(3) standard of political campaign intervention, which focuses on candidates for elective public office only. See Treas. Reg. §1.501(c)(3)-1(c)(3)(iii). These proposed regulations instead would apply a definition that reflects the broader scope of section 527 and that is already applied to a section 501(c)(4) organization engaged in section 527 exempt function activity through section 527(f).

b. Express advocacy communications

These proposed regulations provide that candidate-related political activity includes communications that expressly advocate for or against a candidate. These proposed regulations draw from Federal Election Commission rules in defining “expressly advocate,” but expand the concept to include communications expressing a view on the selection, nomination, or appointment of individuals, or on the election or defeat of one or more candidates or of candidates of a political party. These proposed regulations make clear that all communications - including written, printed, electronic (including Internet), video, and oral communications - that express a view, whether for or against, on a clearly identified candidate (or on candidates of a political party) would constitute candidate-related political activity. A candidate can be “clearly identified” in a communication by name, photograph, or reference (such as “the incumbent” or a reference to a particular issue or characteristic distinguishing the candidate from others). The proposed regulations also provide that candidate-related political activity includes any express advocacy communication the expenditures for which an organization reports to the Federal Election Commission under the Federal Election Campaign Act as an independent expenditure.

c. Public communications close in time to an election

Under current guidance, the timing of a communication about a candidate that is made shortly before an election is a factor tending to indicate a greater risk of political campaign intervention or section 527 exempt function activity. In the interest of greater clarity, these proposed regulations would move away from the facts and circumstances approach that the IRS has traditionally applied in analyzing certain activities conducted close in time to an election. These proposed regulations draw from provisions of federal election campaign laws that treat certain communications that are close in time to an election and that refer to a clearly identified candidate as electioneering communications, but make certain modifications. The proposed regulations expand the types of candidates and communications that are covered to reflect the types of activities an organization might conduct related to local and state, as well as federal, contests, including any election or ballot measure to recall an individual who holds state or local elective public office. In addition, the expansion of the types of communications covered in the proposed regulations reflects the fact that an organization's tax exempt status is determined based on all of its activities, even low cost and volunteer activities, not just its large expenditures.

Under the proposed definition, any public communication that is made within 60 days before a general election or 30 days before a primary election and that clearly identifies a candidate for public office (or, in the case of a general election, refers to a political party represented in that election) would be considered candidate-related political activity. These timeframes are the same as those appearing in the Federal Election Campaign Act definition of electioneering communications. The definition of “election,” including what would be treated as a primary or a general election, is consistent with section 527(j) and the federal election campaign laws.

A communication is “public” if it is made using certain mass media (specifically, by broadcast, in a newspaper, or on the Internet), constitutes paid advertising, or reaches or is intended to reach at least 500 people (including mass mailings or telephone banks). The Treasury Department and the IRS intend that content previously posted by an organization on its Web site that clearly identifies a candidate and remains on the Web site during the specified pre-election period would be treated as candidate-related political activity.

The proposed regulations also provide that candidate-related political activity includes any communication the expenditures for which an organization reports to the Federal Election Commission under the Federal Election Campaign Act, including electioneering communications.

The approach taken in the proposed definition of candidate-related political activity would avoid the need to consider potential mitigating or aggravating circumstances in particular cases (such as whether an issueoriented communication is “neutral” or “biased” with respect to a candidate). Thus, this definition would apply without regard to whether a public communication is intended to influence the election or some other, non-electoral action (such as a vote on pending legislation) and without regard to whether such communication was part of a series of similar communications. Moreover, a public communication made outside the 60-day or 30-day period would not be candidate-related political activity if it does not fall within the ambit of express advocacy communications or another specific provision of the definition. The Treasury Department and the IRS request comments on whether the length of the period should be longer (or shorter) and whether there are particular communications that (regardless of timing) should be excluded from the definition because they can be presumed to neither influence nor constitute an attempt to influence the outcome of an election. Any comments should specifically address how the proposed exclusion is consistent with the goal of providing clear rules that avoid fact-intensive determinations.

The Treasury Department and the IRS also note that this rule regarding public communications close in time to an election would not apply to public communications identifying a candidate for a state or federal appointive office that are made within a specified number of days before a scheduled appointment, confirmation hearing or vote, or other selection event. The Treasury Department and the IRS request comments on whether a similar rule should apply with respect to communications within a specified period of time before such a scheduled appointment, confirmation hearing or vote, or other selection event.

d. Contributions to a candidate, political organization, or any section 501(c) entity engaged in candidate-related political activity

The proposed definition of candidate-related political activity would include contributions of money or anything of value to or the solicitation of contributions on behalf of (1) any person if such contribution is recognized under applicable federal, state, or local campaign finance law as a reportable contribution; (2) any political party, political committee, or other section 527 organization; or (3) any organization described in section 501(c) that engages in candidate-related political activity within the meaning of this proposed rule. This definition of contribution is similar to the definition of contribution that applies for purposes of section 527. The Treasury Department and the IRS intend that the term “anything of value” would include both in-kind donations and other support (for example, volunteer hours and free or discounted rentals of facilities or mailing lists). The Treasury Department and the IRS request comments on whether other transfers, such as indirect contributions described in section 276 to political parties or political candidates, should be treated as candidate-related political activity.

The Treasury Department and the IRS recognize that a section 501(c)(4) organization making a contribution may not know whether a recipient section 501(c) organization engages in candidate-related political activity. The proposed regulations provide that, for purposes of this definition, a recipient organization would not be treated as a section 501(c) organization engaged in candidaterelated political activity if the contributor organization obtains a written representation from an authorized officer of the recipient organization stating that the recipient organization does not engage in any such activity and the contribution is subject to a written restriction that it not be used for candidaterelated political activity. This special provision would apply only if the contributor organization does not know or have reason to know that the representation is inaccurate or unreliable.

e. Election-related activities

The proposed definition of candidate-related political activity would include certain specified election-related activities, including the conduct of voter registration and get-out-the-vote drives, distribution of material prepared by or on behalf of a candidate or section 527 organization, and preparation or distribution of a voter guide and accompanying material that refers to a candidate or a political party. In addition, an organization that hosts an event on its premises or conducts an event off-site within 30 days of a primary election or 60 days of a general election at which one or more candidates in such election appear as part of the program (whether or not such appearance was previously scheduled) would be engaged in candidate-related political activity under the proposed definition.

The Treasury Department and the IRS acknowledge that under the facts and circumstances analysis currently used for section 501(c)(4) organizations as well as for section 501(c)(3) organizations, these election-related activities may not be considered political campaign intervention if conducted in a non-partisan and unbiased manner. However, these determinations are highly fact-intensive. The Treasury Department and the IRS request comments on whether any particular activities conducted by section 501(c)(4) organizations should be excepted from the definition of candidate-related political activity as voter education activity and, if so, a description of how the proposed exception will both ensure that excepted activities are conducted in a non-partisan and unbiased manner and avoid a fact-intensive analysis.

f. Attribution to a section 501(c)(4) organization of certain activities and communications

These proposed regulations provide that activities conducted by an organization include, but are not limited to, (1) activities paid for by the organization or conducted by the organization's officers, directors, or employees acting in that capacity, or by volunteers acting under the organization's direction or supervision; (2) communications made (whether or not such communications were previously scheduled) as part of the program at an official function of the organization or in an official publication of the organization; and (3) other communications (such as television advertisements) the creation or distribution of which is paid for by the organization. These proposed regulations also provide that an organization's Web site is an official publication of the organization, so that material posted by the organization on its Web site may constitute candidate-related political activity. The proposed regulations do not specifically address material posted by third parties on an organization's Web site. The Treasury Department and the IRS request comments on whether, and under what circumstances, material posted by a third party on an interactive part of the organization's Web site should be attributed to the organization for purposes of this rule. In addition, the Treasury Department and the IRS have stated in guidance under section 501(c)(3) regarding political campaign intervention that when a charitable organization chooses to establish a link to another Web site, the organization is responsible for the consequences of establishing and maintaining that link, even if it does not have control over the content of the linked site. See Rev. Rul. 2007-41. The Treasury Department and the IRS request comments on whether the consequences of establishing and maintaining a link to another Web site should be the same or different for purposes of the proposed definition of candidate-related political activity.

Proposed Effective/Applicability Date

These regulations are proposed to be effective the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. For proposed date of applicability, see §1.501(c)(4)-1(c).

Statement of Availability for IRS Documents

For copies of recently issued Revenue Procedures, Revenue Rulings, Notices, and other guidance published in the Internal Revenue Bulletin or Cumulative Bulletin, please visit the IRS Web site at http://www.irs.gov or the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that this rule will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that only a minimal burden would be imposed by the rule, if adopted. Under the proposal, if a section 501(c)(4) organization chooses to contribute to a section 501(c) organization and wants assurance that the contribution will not be treated as candidate-related political activity, it may seek a written representation that the recipient does not engage in candidate-related political activity within the meaning of these regulations. Therefore, a regulatory flexibility analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The Treasury Department and the IRS generally request comments on all aspects of the proposed rules. In particular, the Treasury Department and the IRS request comments on whether there are other specific activities that should be included in, or excepted from, the definition of candidate-related political activity for purposes of section 501(c)(4). Such comments should address how the proposed addition or exception is consistent with the goals of providing more definitive rules and reducing the need for fact-intensive analysis of the activity. All comments submitted by the public will be made available for public inspection and copying at www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register.

Drafting Information

The principal author of these regulations is Amy F. Giuliano, Office of Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.501(c)(4)-1 is proposed to be amended by revising the first sentence of paragraph (a)(2)(ii) and adding paragraphs (a)(2)(iii) and (c) to read as follows:

§1.501(c)(4)-1 Civic organizations and local associations of employees.

(a) * * *

(2) * * *

(ii) * * * The promotion of social welfare does not include direct or indirect candidate-related political activity, as defined in paragraph (a)(2)(iii) of this section. * * *

(iii) Definition of candidate-related political activity—(A) In general. For purposes of this section, candidate-related political activity means:

( 1) Any communication (as defined in paragraph (a)(2)(iii)(B)( 3) of this section) expressing a view on, whether for or against, the selection, nomination, election, or appointment of one or more clearly identified candidates or of candidates of a political party that—

( i) Contains words that expressly advocate, such as “vote,” “oppose,” “support,” “elect,” “defeat,” or “reject;” or

( ii) Is susceptible of no reasonable interpretation other than a call for or against the selection, nomination, election, or appointment of one or more candidates or of candidates of a political party;

( 2) Any public communication (defined in paragraph (a)(2)(iii)(B)( 5) of this section) within 30 days of a primary election or 60 days of a general election that refers to one or more clearly identified candidates in that election or, in the case of a general election, refers to one or more political parties represented in that election;

( 3) Any communication the expenditures for which are reported to the Federal Election Commission, including independent expenditures and electioneering communications;

( 4) A contribution (including a gift, grant, subscription, loan, advance, or deposit) of money or anything of value to or the solicitation of contributions on behalf of—

( i) Any person, if the transfer is recognized under applicable federal, state, or local campaign finance law as a reportable contribution to a candidate for elective office;

( ii) Any section 527 organization; or

( iii) Any organization described in section 501(c) that engages in candidate-related political activity within the meaning of this paragraph (a)(2)(iii) (see special rule in paragraph (a)(2)(iii)(D) of this section);

( 5) Conduct of a voter registration drive or “get-out-the-vote” drive;

( 6) Distribution of any material prepared by or on behalf of a candidate or by a section 527 organization including, without limitation, written materials, and audio and video recordings;

( 7) Preparation or distribution of a voter guide that refers to one or more clearly identified candidates or, in the case of a general election, to one or more political parties (including material accompanying the voter guide); or

( 8) Hosting or conducting an event within 30 days of a primary election or 60 days of a general election at which one or more candidates in such election appear as part of the program.

(B) Related definitions. The following terms are defined for purposes of this paragraph (a)(2)(iii) only:

( 1) “ Candidate” means an individual who publicly offers himself, or is proposed by another, for selection, nomination, election, or appointment to any federal, state, or local public office or office in a political organization, or to be a Presidential or Vice-Presidential elector, whether or not such individual is ultimately selected, nominated, elected, or appointed. Any officeholder who is the subject of a recall election shall be treated as a candidate in the recall election.

( 2) “ Clearly identified” means the name of the candidate involved appears, a photograph or drawing of the candidate appears, or the identity of the candidate is apparent by reference, such as by use of the candidate's recorded voice or of terms such as “the Mayor,” “your Congressman,” “the incumbent,” “the Democratic nominee,” or “the Republican candidate for County Supervisor.” In addition, a candidate may be “clearly identified” by reference to an issue or characteristic used to distinguish the candidate from other candidates.

( 3) “ Communication” means any communication by whatever means, including written, printed, electronic (including Internet), video, or oral communications.

( 4) “ Election” means a general, special, primary, or runoff election for federal, state, or local office; a convention or caucus of a political party that has authority to nominate a candidate for federal, state or local office; a primary election held for the selection of delegates to a national nominating convention of a political party; or a primary election held for the expression of a preference for the nomination of individuals for election to the office of President. A special election or a runoff election is treated as a primary election if held to nominate a candidate. A convention or caucus of a political party that has authority to nominate a candidate is also treated as a primary election. A special election or a runoff election is treated as a general election if held to elect a candidate. Any election or ballot measure to recall an individual who holds state or local elective public office is also treated as a general election.

( 5) “ Public communication” means any communication (as defined in paragraph (a)(2)(iii)(B)( 3) of this section)—

( i) By broadcast, cable, or satellite;

( ii) On an Internet Web site;

( iii) In a newspaper, magazine, or other periodical;

( iv) In the form of paid advertising; or

( v) That otherwise reaches, or is intended to reach, more than 500 persons.

( 6) “ Section 527 organization” means an organization described in section 527(e)(1) (including a separate segregated fund described in section 527(f)(3)), whether or not the organization has filed notice under section 527(i).

(C) Attribution. For purposes of this section, activities conducted by an organization include activities paid for by the organization or conducted by an officer, director, or employee acting in that capacity or by volunteers acting under the organization's direction or supervision. Communications made by an organization include communications the creation or distribution of which is paid for by the organization or that are made in an official publication of the organization (including statements or material posted by the organization on its Web site), as part of the program at an official function of the organization, by an officer or director acting in that capacity, or by an employee, volunteer, or other representative authorized to communicate on behalf of the organization and acting in that capacity.

(D) Special rule regarding contributions to section 501(c) organizations. For purposes of paragraph (a)(2)(iii)(A)( 4) of this section, a contribution to an organization described in section 501(c) will not be treated as a contribution to an organization engaged in candidate-related political activity if—

( 1) The contributor organization obtains a written representation from an authorized officer of the recipient organization stating that the recipient organization does not engage in such activity (and the contributor organization does not know or have reason to know that the representation is inaccurate or unreliable); and

( 2) The contribution is subject to a written restriction that it not be used for candidate-related political activity within the meaning of this paragraph (a)(2)(iii).

(c) Effective/applicability date. Paragraphs (a)(2)(ii) and (iii) of this section apply on and after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

John Dalrymple

Deputy Commissioner for Services and Enforcement.

Footnotes

¹              In 2000 and 2002, section 527 was amended to require political organizations (with some exceptions) to file a notice with the IRS when first organized and to periodically disclose publicly certain information regarding their expenditures and contributions. See sections 527(i) and 527(j).

 

dkj

 

IRS, Treasury, Propose New Rules for Nonprofits' Political Activity

After years of discussion and debate on the meaning and application of the political activity and lobbying restrictions imposed on nonprofits by IRC Sec. 501(c)(3), the IRS and Treasury will soon move to implement rules that will rein in these nonprofits.  According to the New York Times, new rules proposed by the Treasury and the IRS will clarify "both how the I.R.S. defines political activity and how much nonprofits are allowed to spend on it. The proposal covers not just television advertising, but bread-and-butter political work like candidate forums and get-out-the-vote drives."

What, we wonder, is driving the development of these new rules?  According to the Times, the Obama Administration wants to make the current rules less vague:

Administration officials described the new proposal as a response to complaints — including objections from the Treasury’s own inspector general after the Tea Party controversy — that the existing regulations were too vague, leading to inconsistent or arbitrary enforcement. The I.R.S. would be better equipped to enforce the rules, the officials said, if they were clearer, while nonprofit groups would be better able to comply.

We shall wait to see what really happens.

VEJ

 

Kellogg Foundation Launches Development Fellowship Program

The W.K. Kellogg Foundation recently launched its WKKF Community Leadership Network, a three-year fellowship program for community-based leaders.  According to a report in today's Philanthropy News Digest, the iniaitive "aims to develop the leadership skills of individuals working to help vulnerable children and families achieve optimal health and well-being, academic success, and financial security."

To that end, every WKKF fellow will receive an annual stipend of $20,000 and be reimbursed for travel expenses as they enhance their leadership skills through quarterly meetings with fellow community leaders.  The Digest continues:

The initiative aims to support an inclusive, intergenerational mix of emerging and established leaders who can unify diverse communities into a cohesive whole dedicated to the advancement of at-risk children and their families. For each cohort, a hundred fellows will be selected from the foundation’s geographic focus areas in the U.S. — Michigan, Mississippi, New Mexico, and New Orleans — while another twenty will be selected from outside these regions to serve as a national cohort whose work will focus on racial healing and equity. Fellows will be required to participate in individual and group learning activities that foster ongoing connectedness beyond the three-year program. 

Commenting on the launching of the new program, WKKF president and CEO, Sterling K. Speirn, said: "The initiative is meant to advance our goal of leveraging community leaders to find and implement lasting solutions for improving the lives of vulnerable children and their families. During the program, fellows will develop skills directly applicable to addressing the needs of vulnerable children and the structural disparities that disrupt their lives and well-being."

VEJ     

Mark Your Calendars: The Role of Nonprofits Under the Affordable Care Act (at AALS)

At the upcoming meeting of the Association of American Law Schools, the Section on Nonprofit and Philanthropy Law and the Section on Law, Medicine and Health Care are co-sponsoring a program, The Role of Nonprofits Under the Affordable Care Act.  Here are the most recent details that I have received:

Date and Time: Friday, January 3rd, 10:30 a.m. – 12:15 p.m.

 

Moderator and Commentator:  Catherine E. Livingston, Partner, Jones Day, Washington, DC

 

Speakers:

 

Kathleen M. Boozang, Seton Hall University School of Law

Mary A. Crossley, University of Pittsburgh School of Law, Speaker from Call for Papers

Erin C. Fuse Brown, Georgie State University College of Law, Speaker from Call for Papers

Thomas L. Greaney, Saint Louis University School of Law

Robert A. Katz, Indiana University Robert H. McKinney School of Law

Mark A. Hall, Wake Forest University School of Law

Jean Wright Veilleux, Charlotte School of Law, Speaker from Call for Papers

 

Program Description: The program will examine the role of nonprofit and other tax-exempt organizations under the Affordable Care Act of 2010. Topics include the Act’s impact on nonprofits, including the ACA’s new requirements for 501(c)(3) tax-exempt hospitals, the participation of nonprofit hospitals in Accountable Care Organizations (ACOs), and the creation of nonprofit Consumer Operated and Oriented Plans (CO-OPs).

 

Business Meeting: At Program Conclusion

 

JRB

Article on Constitutional Issues Raised by PILOTs

Maria Di Miceli has recently published Drive Your Own PILOT: Federal and State Constitutional Challenges to the Imposition of Payments in Lieu of Taxes on Tax-Exempt Entities, in the Tax Lawyer.  Here is the abstract:

With the recession raging on, state and local governments continue to look for innovative ways to save money and slash state and local government programs. Despite providing a public good to states and municipalities, the nonprofit, tax-exempt sector is no exception to state and local government's purview. One of the methods used by governments is to levy ad hoc, coerced payments in lieu of taxes ("PILOTs") on tax-exempt organizations. Major cities such as Boston, Philadelphia, and Madison have taken a myriad of approaches and, thus far, nonprofits have generally been on the weak side of the bargaining table. But what state, local, and federal constitutional challenges might a nonprofit make against the imposition of a PILOT? And what is a PILOT anyway: a tax, fee, contract, penalty, or some combination? This Article will explore those and other areas in an attempt to help entities effectively drive their own PILOT.

 Hat Tip: TaxProf Blog

JRB

Aleh Foundation at Center of Legal Controversy

According to The Jewish Week, the Brooklyn-based Aleh Foundation is the defendant in a $5 million lawsuit filed by Masha and Shaul Yakobzon, an Israeli couple who moved to New York City about ten years ago to obtain better medical care for their young daughter, Ayalah.  Aleh Foundation allegedly used a photograph of Ayalah to solicit funds, ostensibly to support her family’s efforts to serve her needs.  Says the story:

The only problem is that the Aleh Foundation, which purports to be the American fundraising arm of ALEH, a well-known Israeli charity that provides residential facilities for the disabled, never gave a dime for Ayalah’s care, and it used her likeness fraudulently, according to a $5 million lawsuit filed this fall in Brooklyn Supreme Court.  [The suit claims] … that representatives of the Aleh Foundation never indicated that their daughter’s likeness “might be widely published, disseminated, or otherwise exploited for a fundraising campaign.” And, the parents claim, “No funds, additional special services, products, or monetary assistance of any kind, has been provided” to the family for Ayalah’s care.

And that’s not all.  The story also reports that officials of ALEH, described as “a well-known Israeli charity that provides residential facilities for the disabled,” have been attempting to distance their charity from the Brooklyn entity. The story continues:

For officials at ALEH, who have for three years been trying quietly to get the Aleh Foundation and its longtime head, the politically connected Borough Park rabbi, Shlomo Braun, to stop passing himself off as a representative of the charity, the Yakobzons’ lawsuit is the last straw. And it has pushed what had been a private dispute into public view.

 

Talking to the media for the first time, in extensive interviews with The Jewish Week, ALEH officials are mounting an offensive against Rabbi Braun in an effort to prevent confusion in the minds of donors about the relationship between the two groups. They allege that Rabbi Braun has funneled only a fraction of the money he has raised on ALEH’s behalf to the organization in Israel. And they claim that he has not provided requested documentation about his fundraising expenses.

The story contains additional details of the history of the two entities and the specific concerns of the representatives of the Israeli charity regarding what they believe to be fundraising irregularities surrounding the Brooklyn entity.  It is also noteworthy that Charity Navigator, which rates the efficiency of nonprofits, has issued a “donor advisory” with respect to the Brooklyn entity because of the lawsuit. 

JRB

Bi-Partisan Support for Retaining Existing Limits on the Charitable Contributions Deduction?

The NonProfit Times reports that two United States Senators and Senate Finance Committee Members,  John Thune (R-S.D.) and Ron Wyden (D-Ore.), have drafted a letter to their leadership to urge maintaining the charitable contributions deduction.  The letter, timed to coincide with “Protect Giving Day,” garnered support from some 200 representatives of 140 nonprofit organizations.  The gist of the letter appears in the following excerpts, reported in the Times:

We write to you to underscore the importance of protecting the full value and scope of the charitable deduction during a comprehensive rewrite of the tax code ….  Analysis has repeatedly shown that proposals to cut, cap, or limit the charitable deduction could cause charitable donations to decline by billions of dollars annually. Worse yet, weakening the charitable deduction would most hurt the adults and children who receive vital charitable services from organizations like soup kitchens, after-school programs, and medical research projects, just to name a few.

The Times further reports that, at a congressional staff lunch attended by nonprofit leaders and tax policy experts, new research was presented concerning “the recession’s impact on charitable giving and the potential impact of limits to the charitable deduction.”  According to Dr. Arthur Brooks, President of the American Enterprise Institute, charitable giving is now at pre-recession levels, and the administration’s perennial proposal to limit the benefit of the charitable contributions deduction by treating donors as though their maximum marginal income tax rate were 28 percent (for purposes of calculating the deduction) “could cause giving to decline by nearly $10 billion in the first year.”

JRB

Colombo Posts Papers on SSRN

Illinois Law Professor and fellow blogger John D. Colombo has recently posted the following papers on SSRN, listed by title and accompanying abstract.

Here is the first:

The IRS University Compliance Project Report on UBIT Issues: Roadmap for Enforcement ...Reform...or Repeal?

The recent completion of the IRS College and University Compliance Project again raises questions about the rationale for and purpose of the Unrelated Business Income Tax (UBIT). This paper addresses these questions in three main parts. Part I reviews existing UBIT law, particularly as it applies to colleges and universities. The second part is a short summary of the IRS findings on UBIT compliance. The final part then examines whether the UBIT should be reformed or even repealed. The paper concludes that while expansion of the UBIT to an all-inclusive commerciality tax (a proposal I have made in previous papers) is still my preferred solution, absent such reform, Congress should consider simply repealing the UBIT and relying on disclosure and non-tax incentives to control commercial activity by charities.

And the second:

Private Benefit: What Is It -- And What Do We Want It to Be?

Beginning with the landmark decision American Campaign Academy v. Commissioner in 1989, the Internal Revenue Service has used the “private benefit” doctrine as a primary tool to police the activities of charitable organizations exempt under Code Section 501(c)(3). Unfortunately, the doctrine literally has no doctrinal content. Unlike its sibling, the private inurement doctrine, the private benefit doctrine has no statutory basis in 501(c)(3). Though the IRS claims the doctrine flows from the 1959 Treasury Regulations, it is a claim that is questionable given the language used, and in any event, this interpretation of the regulations appears not to have been “discovered” until some at least a decade after the regulations were promulgated.  This paper reviews the history and application of the private benefit doctrine, and suggests a specific normative test for application of the doctrine to situations involving a “failure to conserve” charitable assets.

And the third:

The Role of Redistribution to the Poor in Federal Tax Exemption for Charities

Over the past several years, many commentators have suggested that federal tax exemption for charities should be limited to organizations that help the poor – that is, organizations with a redistributive mission. This paper reviews and comments on three areas of existing federal exemption law where the redistribution view either already controls tax benefits or is being pushed by policy makers as a change to existing law: the push for a charity care standard for exempting nonprofit hospitals, the current university endowment debate, and a hodge-podge of rulings relating to what I will call “middle class charity” in which the IRS has denied exemption to nonprofit organizations providing services to the middle class (as opposed to the poor). Part I provides a brief introduction to the history of the redistribution concept in federal exemption under 501(c)(3) prior to the current regulations introduced in 1959. Part II then provides a summary of current law and proposals in the three areas described above (nonprofit hospitals, programs aimed at the middle class, and university endowments). Part III then turns to some analysis and observations. The main observations are (1) that the redistributive push in the areas identified by this paper is almost certainly bad policy and inconsistent with the IRS’s supposed adoption of the broad common-law view of charity in the 1959 regulations; (2) that the redistributive paradigm seems to pop up most in areas where the organizations in question carry on activities that look very similar to commercial enterprises – in other words, what we may be seeing is the use of the redistribution paradigm to help distinguish charitable services from ordinary for-profit business; (3) limiting the definition of charitable for tax exemption purposes to relief of the poor is inconsistent with the historical definition of charity; and (4) the effort to limit the scope of tax exemption/deductibility to redistribution to the poor is inconsistent with virtually all the theories proposed to explain tax exemption and essentially adopts one particular view of distributive justice that may not be appropriate in formulating tax benefits for charities. Until tax policy chooses an underlying rationale for charitable tax exemption, however, the inconsistencies in applying exemption are likely to continue.

JRB

61 York Acquisition, LLC v. Commissioner – $10.7m Facade Easement Deduction Denied For Failure to Restrict Entire Exterior

On December 18, 2006, 61 York Acquisition, LLC (the Partnership) granted a façade easement with respect to a certified historic structure located in the Historic Michigan Boulevard District of Chicago to the National Architectural Trust, or NAT (now known as the Trust for Architectural Easements). Consistent with IRC § 170(h)(4)(B), as amended by the Pension Protection Act of 2006, the easement requires the grantor to obtain prior written consent from NAT before making any change to the “Protected Facades,” which include “the existing facades on the front, sides and rear of the Building and the measured height of the Building.” The Partnership claimed a $10.7 million charitable income tax deduction for the donation on its 2006 partnership tax return. The IRS disallowed the deduction in full and, in 61 York Acquisition, LLC v. Commissioner, T.C. Memo. 2013-266, the Tax Court granted the IRS’s motion for summary judgment sustaining the disallowance.

At the time of the donation of the facade easement, ownership of the structure subject to the easement was divided into two parts: the Partnership owned the first 14 floors (the Office Property), and a third party owned the top 6 floors (the Residential Property). In addition, the two owners had entered into an agreement (the Agreement) pursuant to which:

• the Partnership owned the “Façade,” defined as including only portions of two sides of the building,
• the Partnership reserved the right to grant an easement with respect to the Façade,
• the Partnership was responsible for maintenance of the Façade as well as maintenance of other portions of the facade of the structure, and
• any owner who wished to make an addition, improvement, or alteration that materially altered the Façade had to obtain prior written consent of the other owner.

The IRS disallowed the Partnership’s claimed deduction on the grounds that the Partnership could not have granted a valid easement restricting the entire exterior of the structure (front, sides, rear, and height) because the Partnership did not own the entire exterior of the building. The taxpayer argued that the terms of the easement and the Agreement collectively imposed enforceable restrictions on the entire exterior of the property, and that, under Illinois law, ownership of the entire exterior is not required to grant an easement that imposes enforceable restrictions on the entire exterior.

The Tax Court sided with the IRS. The court first reiterated the well-established rule that, while “[s]tate law determines the nature of property rights, … Federal law determines the appropriate tax treatment of those rights.” Accordingly, to determine whether the easement complied with the federal requirement that a façade easement restrict the entire exterior of a structure, the court looked to state law to determine the effect of the easement.

The court determined that, under Illinois law, “a person can grant only a right which he himself possesses,” Accordingly, the Partnership did not grant an easement in the entire exterior of the structure, as required under federal law, because the Partnership had rights only to the Façade, which was defined to include only portions of two sides of the structure.

The court rejected the taxpayer’s argument that the Partnership had an assignable right in the entire exterior because the Partnership had an obligation under the Agreement to maintain the entire exterior. The court explained that it declined to “find a right [to restrict] in an obligation [to maintain],” and noted that the taxpayer cited no Illinois case law in support of its proposition.

The court also rejected the taxpayer’s argument that the Agreement, which disallowed certain alterations to the property without the prior written consent of the other property owner, gave the Partnership an assignable right to restrict with respect to the entire exterior of the property. The court explained that the Agreement required the altering owner to obtain prior written consent from the other owner only if the alteration would materially alter the Façade. The Partnership thus did not have the right to restrict alterations to the two sides of the structure not covered by the definition of Façade, or to the excluded portions of the other two sides. The Partnership, said the court, could not contribute rights it did not possess.

Even if the Agreement had granted the Partnership rights to restrict alterations with respect to the entire exterior of the structure, it is not clear that the donation of those rights would satisfy the perpetuity or other requirements under § 170(h), or what the value of those rights would be for purposes of § 170(h). Cf. Schwab v. Commissioner, T.C. Memo 1994-232 (the parties stipulated that donation of rights to restrict land the taxpayer did not own was a qualified conservation contribution).

61 York Acquisitions, LLC, is yet another in a string of cases involving challenges to deductions claimed with respect to façade easements donated to NAT. See Herman v. Commissioner, T.C. Memo. 2009-205; 1982 East LLC v. Commissioner, T.C. Memo. 2011-84; Dunlap v. Commissioner, T.C. Memo. 2012-126; Rothman v. Commissioner, T.C. Memo. 2012-218; Graev v. Commissioner, 140 T.C. No. 17 (2013); Friedberg v. Commissioner, T.C. Memo. 2013-224; and  Gorra v. Commissioner, T.C. Memo. 2013-254. See also Kaufman v. Shulman, 687 F.3d. 21 (1st Cir. 2012) (remanding to the Tax Court on the issue of valuation and noting that, because of local historic preservation laws, the Tax Court might well find that the façade easement donated to NAT was worth little or nothing). NAT also was the subject of a 2011 Department of Justice lawsuit (discussed here) alleging that NAT was engaged in abusive practices. The suit settled with NAT denying the allegations but agreeing to a permanent injunction prohibiting it from engaging in the practices.

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law

Charity Entitled to Exemption for Apartment Leased to Individual

Tax Analysts’ State Tax Today (subscription required) reports an interesting decision of the Ohio Board of Tax Appeals. In Talbert Services, Inc. v. Testa, an outpatient clinic provided assessment, treatment, case management, and referral services for clients suffering from substance abuse and mental health disorders on property that included an apartment.  When the clinic bought the property in 2008, an individual lived in the apartment, and he continued to do so for several years.  The Tax Commissioner denied property tax exemption for the apartment on the grounds that it was not used for charitable purposes because it was leased to an individual.  Reversing this determination, the Ohio Board of Tax Appeals found that the apartment was used by for charitable purposes.  It accepted testimony that, although the tenant was not an official client of the clinic, a director “provided one-on-one informal counseling and referral services to the tenant, just as [the clinic] … provided to its other clients.”  Further, the clinic did not lease the apartment with a view to profit, but merely used the rent to cover its expenses.  

The electronic citation of this decision is 2013 STT 223-22.
 

JRB

IRS Warns of Disaster Relief Scams in Wake of Typhoon

On November 15, the IRS issued a consumer alert about possible scams taking place following Typhoon Haiyan, which hit the Philippines on November 8 and brought widespread devastation.  Says the alert:

Following major disasters, it is common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Such fraudulent schemes may involve contact by telephone, social media, email or in-person solicitations.

The IRS cautions people wishing to make disaster-related charitable donations to avoid scam artists by following these tips …

The specific pointers offered by the IRS are available here.

JRB

California State Senator and Brother’s Charity Under Scrutiny

As reported in the Los Angeles Times, a leaked affidavit of an FBI agent asserts that California State Senator Ronald S. Calderon has offered political favors in connection with facilitating contributions to a charitable nonprofit established by his brother, Tom Calderon, with less than entirely charitable goals in mind.  Key excerpts of the story follow:

Calderon … allegedly accepted $60,000 from an undercover FBI agent posing as a studio executive in exchange for pursuing legislation to expand tax breaks for film companies, according to a sealed FBI affidavit made public by a cable network.

The agent agreed to pay $25,000 of the money to a nonprofit set up by the senator's brother, former Assemblyman Tom Calderon, says the affidavit ….

"We have this nonprofit. It is called Californians for Diversity," Calderon told the agent, according to a transcript of a recording included in the document.

The group, Calderon said, was set up to advocate positions on issues being debated in California.

"Then Tom and I down the road, we build that up, we can pay ourselves," the senator allegedly told the agent. "Just kind of make, you know, part of [a] living."

The nonprofit, formed in 2008, also received $25,000 from "Yes We Can," a political committee of the California Legislative Latino Caucus, which made the donation in January.

The FBI affidavit alleges the "Yes We Can" donation was arranged by Sen. Kevin de Leon …"in exchange for Ronald Calderon agreeing not to challenge Senator [Ricardo] Lara to become the Chairman of the Latino Caucus."

"They are doing exactly what contribution limits are there to guard against," said [Loyola Law Professor Jessica] Levinson, a member of the Los Angeles Ethics Commission.

According to the story, Calderon and De Leon have denied any wrongdoing, and nobody named in the affidavit has yet been charged with a crime.

The Times reports on connections between other California lawmakers and various nonprofit entities, but pinpoints nothing of such import as the facts surrounding Senator Calderon.

JRB

Gorra v. Commissioner - Facade Easement Deductible but Gross Valuation Misstatement Penalty Applied

In Gorra v. Commissioner, T.C. Memo. 2013-254, the Tax Court held that the taxpayers were entitled to a charitable income tax deduction under IRC § 170(h) for the donation of a façade easement on a residential townhouse located in the Carnegie Hill Historic District of New York City to the National Architectural Trust, or NAT (now the Trust for Architectural Easements, or TAE). The court also held, however, that easement caused only a 2% reduction in the value of the subject property and the taxpayers were liable for a 40% gross valuation misstatement penalty. These and the other holdings in the lengthy opinion are discussed below.

Qualified Real Property Interest

The Tax Court found that the façade easement was a “qualified real property interest” for purposes of IRC § 170(h)(2)(C)--“a restriction (granted in perpetuity) on the use which may be made of the real property.” Unlike the nondeductible golf course easement at issue in Belk v. Commissioner, 140 T.C. No. 1 (2013), reconsideration denied and opinion supplemented in T.C. Memo 2013-154, which permitted the parties to remove portions of the golf course from the easement and replace them with property currently not subject to the easement (i.e., to engage in “substitutions” or “swaps”), the court found that the façade easement in Gorra “clearly defines the property donated under the easement and restricts the easement to that property” and does not authorize substitutions.

Valid Conservation Purpose

The IRS argued that the façade easement was not donated for a valid conservation purpose because the easement did not preserve the property beyond what is already required under New York’s Landmarks Preservation Law, which is enforced by the Landmarks Preservation Commission (LPC). The Tax Court disagreed, finding the easement in Gorra to be more restrictive than the Landmarks Law in a number of respects, including that it protects the front, side, rear, and measured height of the property as required by IRC § 170(h)(4) as revised by the Pension Protection Act of 2006. The court also found that (i) TAE actively monitors its easements, while LPC is passive and relies heavily on complaints to uncover violations, (ii) TAE performed annual inspections of the subject property and kept records, including photographs, while it was unclear whether LPC ever inspected the property, and (iii) the taxpayers’ arguments regarding TAE’s ability to enforce the restrictions more effectively than LPC were convincing. In its finding of facts, the court noted that TAE employs three people to monitor 550 properties (which translates to 183.3 properties per employee), while LPC is responsible for the preservation of 26,000 structures and has a staff of four employees responsible for inspection (which translates to 6,500 properties per employee).

The court also noted that, although the easement allows TAE to consent to changes to the property, the deed requires that any change must comply with all applicable federal, state, and local government laws and regulations, and Treasury Regulation § 1.170A-14(d)(5) specifically allows a facade easement donation to satisfy the conservation purposes test even if future development is allowed, provided that development is subject to applicable federal, state, and local government laws and regulations.

Conservation Purpose Protected In Perpetuity

The Tax Court found that the conservation purpose of the façade easement was protected in perpetuity as required by IRC § 170(h)(5)(A). The court noted that, while the taxpayers had requested that the easement be terminated because they were having a difficult time selling the property, TAE denied that request. “Under the terms of the deed,” said the court, “the easement is granted in perpetuity and may not be terminated at any time.” The court also found that the façade easement is distinguishable from the nondeductible easements at issue in Carpenter v. Commissioner, T.C. Memo. 2012-1, reconsideration denied and opinion supplemented in T.C. Memo. 2013-172, because the façade easement does not include a provision authorizing extinguishment of the easement by mutual agreement of the parties and, instead, allows the easement to be extinguished by judicial decree consistent with the requirements of Treasury Regulation § 1.170A-14(g)(6).

Recordation Date

NAT delivered the easement to the recorder’s office on December 28, 2006, paid the recording fees and taxes, and obtained a receipt for the delivery. Due to a cover sheet error, however, the easement was not recorded until January 18, 2007. The IRS argued that the deed was not recorded until 2007. The Tax Court disagreed, holding that, under New York law, delivery of the deed to the recorder’s office, with receipt acknowledged, constituted recordation, even though there was a delay in the actual recording until the following year because of the cover sheet error. The court cited N.Y. Real Prop. Law § 317, which provides that every instrument entitled to be recorded is considered recorded from the time of delivery to the recording officer.

Qualified Appraisal

The Tax Court found that the taxpayer’s appraisal constituted a “qualified appraisal” as defined in Treasury Regulation § 1.170A-13(c)(3). Although the appraiser used the phrase “market value” in the appraisal, the court found that the appraiser’s definition of that term was synonymous with the definition of “fair market value” used in the Treasury Regulations. The court also found that the appraisal, which employed the before and after method, a paired sales analysis, and a percentage diminution, included the “method of valuation used” and reported the “specific basis for valuation” as required by the Treasury Regulations. The court noted that, as in Scheidelman v. Commissioner, 682 F.3d 189, 198 (2d Cir. 2012), while the IRS might deem the appraiser’s analysis unconvincing, “it is incontestably there.”

Generally Accepted Appraisal Standards

IRC § 170(f)(11)(E) as amended by the Pension Protection Act of 2006 specifies that a “qualified appraisal” must be conducted by a qualified appraiser in accordance with generally accepted appraisal standards, and IRS Notice 2006-96 provides that an appraisal will meet the specifications of § 170(f)(11)(E) if, for example, “the appraisal is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice (‘USPAP’).” The Tax Court summarily dismissed the IRS’s argument that the taxpayer’s appraisal had serious defects and was inconsistent with USPAP, noting that “[a]ppraising is not an exact science and has a subjective nature.”

Valuation

After a careful review of the valuation experts’ reports, the Tax Court concluded that the facade easement caused only a 2% (or $104,000) reduction in the value of the subject property, and the reduction stemmed from the heightened financial burdens of an eased façade, enforcement actions of TAE, and the scope of the easement. The court found that the taxpayers did not meet their burden of proving that the easement resulted in a 9% (or $465,000) reduction in the value of the property. The court also rejected the IRS expert’s assertion that the easement had no value, noting that the easement was more restrictive than local historic preservation laws and “[o]rdinarily, any encumbrance on real property, however slight, would tend to have some negative effect on the property’s fair market value.”

Penalties

The Pension Protection Act of 2006 lowered the threshold for imposition of the 40% penalty for gross valuation misstatements under IRC § 6662(h) and eliminated the reasonable cause exception for gross valuation misstatements with respect to charitable deduction property (i.e., the penalty in a case such as this is a strict liability penalty). The taxpayers in Gorra were liable for this penalty because their original asserted value for the easement ($605,000) was more than 200% of the amount determined by the court to be the correct value ($104,000). The court rejected the taxpayers’ argument that the penalty was an “excessive fine” under the Eigth Amendment to the United States Constitution, noting that such penalties are remedial in nature, not “punishments,” and are an important tool because they enhance voluntary compliance with tax laws.

Gorra is the most recent in a string of cases involving challenges to deductions for façade easements donated to NAT. See Herman v. Commissioner, T.C. Memo. 2009-205; 1982 East LLC v. Commissioner, T.C. Memo. 2011-84; Dunlap v. Commissioner, T.C. Memo. 2012-126; Rothman v. Commissioner, T.C. Memo. 2012-218; Graev v. Commissioner, 140 T.C. No. 17 (2013); Friedberg v. Commissioner, T.C. Memo. 2013-224. See also Kaufman v. Shulman, 687 F.3d. 21 (1st Cir. 2012) (remanding to the Tax Court on the issue of valuation and noting that, because of local historic preservation laws, the Tax Court might well find that the façade easement donated to NAT was worth little or nothing). NAT also was the subject of a 2011 Department of Justice lawsuit (discussed here) alleging that NAT was engaged in abusive practices. The suit settled with NAT denying the allegations but agreeing to a permanent injunction prohibiting it from engaging in the practices.

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law