Nonprofit Law Prof Blog

Buckles: Obedience Norms that Bind Overseers of Charities

Johnny Rex Buckles (Houston) published "How Deep Are the Springs of Obedience Norms that Bind the Overseers of  Charities?," in 62 Cath. U. L. Rev. 913 (2013).  Here are some excerpts from the article's introduction:

    This Article explores whether and how the exercise of discretion by charity fiduciaries in recasting a charity’s direction is, and should be, limited. Analyzing this basic issue raises additional, difficult inquiries: If the law does limit the ability of charity fiduciaries to determine the charitable paths of their entities, what standards govern the exercise of fiduciary discretion? To what extent does , and should, the law treat fiduciaries of charitable trusts dissimilarly from those who govern charitable nonprofit corporations? What role should governmental actors play in monitoring these decisions by charity managers? If governmental actors should assume some monitoring role, should their review of fiduciary decisions be ex ante or ex post? Which governmental actors should be involved? Can donors and other stakeholders sufficiently protect their interests absent a strong supervisory role by the government?

    These questions are not simply esoteric enigmas deisgned to tickle the ears of legal scholars. . . .  Moreover, these questions are especially timely, for the law of obedience norms governing fiduciaries of charitable corporations is unsettled and in great need of refinement. Even the law governing trustees of charitable trusts, which is comparatively stable and uniform, merits reassessment once the meaning and purposes of obedience norms are thoroughly examined.

    To foster the development of the law governing charity fiduciaries, this Article presents a taxonomy of obedience norms,20 a doctrinal analysis of these norms, and a policy discussion to help answer these questions. Part I explains the fundamental nature of obedience norms and articulates and illustrates the various types of obedience norms. Parts II and III discuss legal authorities supporting or rejecting various obedience norms as applied to trustees of charitable trusts and directors of charitable nonprofit corporations, respectively. Part IV this Article evaluates the policy considerations that may justify one or more obedience norms. Finally, by presenting an analytical series of questions, Part V explains how the law should develop in imposing, and declining to impose, obedience norms on charity fiduciaries.

Nicholas Mirkay

 

 

Nonprofits and Taxation at Law & Society Meeting

Today's Law & Society Association Annual Meeting had a panel on Nonprofits and Taxation.  Here are the papers presented:

Harry Ordower (St. Louis), Chair & Discussant))

• Samuel Brunson (Loyola-Chicago), Just Passing Through: Eliminating the Mutual Fund Distribution Requirement
• Ray Madoff (Boston College), Loophole or Lifeline: Closing the Gap Between the Rhetoric and the Reality of the Charitable Deduction: "The charitable deduction has long been criticized by tax scholars for providing disproportionate advantage to wealthy donors. However, current debates over the charitable deduction have produced push-back over this framing of the issue. Under the banner: -"it isn't a loophole, it's a lifeline" proponents of the charitable deduction have argued that the real beneficiaries of the charitable deduction are not donors, but instead are the poor who receive the ultimate benefits of the charitable dollars. Nonetheless, the current operation of the rule belies this characterization. This paper explores what the charitable deduction should look like if it's true focus is on recipients. "
• Leonel Pessôa (Universidade Nove de Julho), Taxation of Nonprofits: The Main Problems in Brazil: "The aim of this paper is to analyze the main problems in the taxation of the nonprofit organizations in Brazil and the impact of these problems on their activities. "

(Hat tip:  TaxProfBlog)

Nicholas Mirkay

Hospitals Cutting Charity Care; Relying on Affordable Care Act Coverage

As reported in Sunday's The New York Times, a trend among hospitals around the country is to reduce financial assistance to uninsured patients with the intent of forcing such patients to obtain coverage under the Affordable Care Act.  The criticism is obvious - uninsured lower- and middle-income citizens without coverage will not take advantage of the ACA due to perceived, and perhaps actual, unaffordability and therefore forgoe health care all together.  The push-and-pull for hospitals centers on the ACA's reduction of federal payments to hospitals that treat large number of uninsured patients (again, hoping to force such patients to seek coverage in online marketplaces) and the actual need to provide free or reduced-cost health care to those most in need of it.  

The Times article illustrates hospitals' various policies to address this real problem:

In St. Louis, Barnes-Jewish Hospital has started charging co-payments to uninsured patients, no matter how poor they are. The Southern New Hampshire Medical Center in Nashua no longer provides free care for most uninsured patients who are above the federal poverty line — $11,670 for an individual. And in Burlington, Vt., Fletcher Allen Health Care has reduced financial aid for uninsured patients who earn between twice and four times the poverty level.

Continuing charity care for the uninsured, argues some health care providers, defeats the very purpose of the ACA.  However, uninsured advocates argue that many uninsureds forgoe coverage under the ACA inaugural enrollment because the plans are expensive, even with government subsidies.  Some argue that it is still a matter of message - encouraging people who now have access to coverage under the ACA to take advantage of the opportunity.

The article further states:

Many hospitals appear focused on reducing aid only for patients who earn between 200 percent and 400 percent of the poverty level, or between $23,340 and $46,680 for an individual. Many of those people presumably have jobs and would qualify for subsidized coverage under the new law.

The Times further reported that financial challenges for uninsureds are "particularly daunting" in the states that have not yet expanded their Medicaid programs, which currently totals over 24 states.

An issue not addressed by the Times Article is how these emerging charity care policies, to best comply with and take advantage of the new ACA reimbursement rules, will affect these tax-exempt hospitals' Form 990 Schedule H reporting?  Has Congress and the IRS contemplated the changes to charity care numbers in light of the above-referenced ACA rules?

 

Nicholas Mirkay

Atheist Organizations Lose Challenge to IRC/IRS Differing Treatment of Churches

In American Atheists v. Shulman, the U.S. District Court for the Eastern Division of Kentucky rejected three atheist organizations' contentions that the IRS unconstitutionally discriminates against non-religious tax-exempt organizations.  Specifically, the Atheists alleged that the IRS’s differing treatment of churches as opposed to  other tax-exempt organiations was unconstitutionally.  Specifically, the Atheists requested that the Court issue a judgment “[d]eclaring that all Tax Code provisions treating religious organizations and churches differently than other 501(c)(3) entities are unconstitutional violations" of the Equal Protection laws of the Fifth Amendment, the First Amendment and the Religious Test Clause of Article VI, §3 of the Constitution. The Atheists claimed "upon information and belief a number of atheist organizations have tried to obtain IRS classification as religious organizations or churches under §501(c)(3) or to otherwise obtain equal treatment,” and “most of those applications and attempts were rejected by the IRS."  However, the Court found that the Atheists admitted in pleadings that they themselves had never sought recognition as a religious organization or church under §501(c)(3).  The Atheists responded that they have not applied for exemption as a religious organization or a church because seeking such a classification would "violate their sincerely held belief."

Nevertheless, the Court found that the Atheists lacked the necessary standing to bring the suit, in part because they could have applied for religious  designation.  The Court concluded that the Atheists failed to establish any injury-in-fact and their assertion that they would fail to qualify as a church or religious organization was "mere speculation."  To the contrary, stated the Court, "[a] review of case law establishes that the words ‘church,’ ‘religious organization,’ and ‘minister,’ do not necessarily require a theistic or deity-centered meaning." 

(See also articles in The Salt Lake Tribune, Forbes, and ABA Journal)

Nicholas Mirkay

 

Hackney: Why Section 501(c)(6) Trade Associations are Undeserving of Tax Exemption

Philip Hackney (LSU), has posted "Taxing the Unheavenly Chorus: Why Section 501(C)(6) Trade Associations Are Undeserving of Tax Exemption," to SSRN.  It is forthcoming in 92 Denv. U. L. Rev. ___ (2014):

Our federal, state, and local governments provide a subsidy that enhances the political voice of business interests. This article discusses the federal subsidy for business interests provided through the Internal Revenue Code (“Code”) and argues why we should end that subsidy. Under the same section that provides exemption from income tax for charitable organizations, the Code also exempts nonprofit organizations classified as “business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues.” Theory supporting tax exemption states that we should subsidize nonprofit organizations that provide goods or services that are undersupplied by the market. A charitable organization that assists the poor is a classic example of a service undersupplied by the market. Business interest group services, however, are found in abundance. Data shows that there is a significant bias in the interest group system in favor of business interests and away from interests such as labor, the poor, and the environment. Tax-exemption at federal, state, and local levels likely fosters at least some of this bias in our democracy. Rather than enhancing a pluralistic society, as some argue is a prime benefit of our tax-exempt system, tax-exemption for business interest groups enhances the voice of the powerful and detracts from the voice of the weak. Thus, because business interests experience little in the way of market failure and tax-exemption for such groups likely leads to a bias in our democratic system I argue we should end exemption for nonprofit business interests.

(Hat tip:  TaxProfBlog)

Nicholas Mirkay

Z Street's Unconstitutionality Claim Against IRS Upheld by U.S. District Court

Over 2 years ago, we blogged about a unique lawsuit being filed by Z Street, a pro-Israel nonprofit corporation, against the IRS.  Specifically, Z Street alleged that the IRS's "Israel Special Policy” utilized in reviewing the organization's application for Section 501(c)(3) status violated the organization's First Amendment rights in that the IRS policy constituted viewpoint discrimination.  Z Street requested an injunction compelling the IRS to disclose the policy and its parameters and usage, and to refrain from such use in evaluating the organization's exemption application.  

In a May 27 decision, the U.S. District Court for the District of Columbia denied the IRS's motion to dismiss the organization's complaint on all 3 grounds.  The IRS presented three legal arguments that the Court lacked subject-matter jurisdiction over the organization's constitutional claim.  First, the IRS argued that the Anti-Injunction Act (“AIA”), 26 U.S.C. § 7421 (2013), precluded the Court from exercising jurisdiction.  Second, it asserted that the Court could not grant the relief sought by the organization under the Declaratory Judgment Act (“DJA”), 28 U.S.C. § 2201 (2013).  Finally, the IRS argued that Z Street's complaint was barred by the doctrine of sovereign immunity.   In addition, the IRS asserted that Z Street failed to state a claim upon which relief can be granted because the organization has an adequate remedy at law (namely, 26 U.S.C. §7428), thereby foreclosing the equitable relief that it sought. Because the Court rejected the IRS's "core contention" that Z Street sought a determination on its eligibility for Section 501(c)(3) tax-exempt status, the Court rejected the IRS's assertions that the AIA, the DJA, or sovereign immunity barred the organization's request for equitable relief and that Z Street had an adequate remedy at law.

With respect to the remedies sought by Z Street, Judge Ketanji Brown specifically acknowledged:

In this regard, looking at the requested remedy as the D.C. Circuit requires, Z  Street’s complaint requests only two things: (1) a declaration that the Israel Special Policy violates the First Amendment, and (2) an injunction that requires disclosure of information regarding the Israel Special Policy, bars the IRS from subjecting Z Street’s application for Section 501(c)(3) status to the Israel Special Policy, and that mandates that Z Street’s application be adjudicated “fairly” and “expeditiously.”

In the opinion's conclusion, Judge Brown opines:

Defendant [IRS] struggles mightily to transform a lawsuit that clearly challenges the constitutionality of the process that the IRS allegedly employs when it determines the tax-exempt status of certain organizations into a dispute over tax liability as a means of attempting to thwart this action's advancement,” Jackson said. “But the instant complaint, which in no way seeks an assessment of the taxes to be paid or even a determination of the Plaintiff's Section 501(c)(3) status, is not so easily deterred.

 (Hat tip:  Daily Tax Report)

Nicholas Mirkay

TE/GE Advisory Committee Sets June 11th Public Meeting

The IRS Tax-Exempt and Government Entities Advisory Committee will hold a public meeting on June 11, 2014 with respect to significant issues affecting such entities.  Per the May 28th Federal Register notice, the meeting will be held from 9:30 to 11:30 a.m. in the main IRS building on 1111 Constitution Avenue., N.W. , Washington, D.C., Room 3313.

Issues to be addressed include:

• Preapproved and determination letter programs;
• Unrelated business income tax compliance of colleges and universities;
• Government employees and the Affordable Care Act; 
• IRS tribal consultation and compliance audit improvements; and
• Tax-exempt bonds and increased reliance on the facts-and-circumstances test to analyze management contracts.

Nicholas Mirkay

Blue Cross Parent Sued

A regional Blue Cross and Blue Shield parent company is the defendant in a lawsuit alleging inappropriate retention of profits and excessive executive compensation, reports the Chicago Tribune.  Here are some of the reported details:

 

Health Care Service Corp., a nonprofit mutual insurance company that operates Blue Cross and Blue Shield plans in Illinois, Texas, Oklahoma, New Mexico and Montana, is accused of breaching its contracts with members by accumulating excess profits of about $4.9 billion.  Instead of disbursing that money to its health insurance members either through a paid dividend, reduced prescription drug costs or lower premiums, the company paid out nearly $100 million in bonuses to its top 10 executives from 2011 to 2013, according to the suit. 

The complaint was filed Monday by Babbitt Municipalities Inc., a Chicago-based benefits administration company that conducts business as Group Benefits Associates and works primarily with labor unions. It seeks certification as a class action that would include all policyholders in HCSC’s fully insured business, which totaled about 8.5 million members as of Dec. 31. 

 

JRB

Nonprofits and the Detroit Bailout

The Detroit Free Press reports that the Michigan House of Representatives, in a bipartisan 103-7 vote, has approved legislation to help lift the City of Detroit from bankruptcy.  The main bill is reported to specify conditions to the $194.8 million the State of Michigan could give Detroit to ameliorate reductions in pension benefits and to preserve holdings at the Detroit Institute of Arts. The role of nonprofits in the bailout is explained as follows:

 

The state’s contribution is part of a so-called grand bargain that will be combined with $366 million pledged from charitable foundations and $100 million from the Detroit Institute of Arts. The money is designed to ease the cuts for pensioners and retirees and protect the artwork at the Detroit Institute of Art[s] from sale.

 

JRB

Status of Proposed Section 501(c)(4) Rule Changes

As reported in multiples news sources (e.g., the NY Times, Reuters, and Business Week), the IRS has announced that it will likely revise proposed regulations addressing the political activities of section 501(c)(4) entities.  Here is the text of the official announcement from the IRS:

 

Last November, Treasury and the IRS proposed a new regulation governing political activity of section 501(c)(4) organizations. The proposal generated over 150,000 written comments — the most comments ever received by Treasury and IRS on a proposed tax regulation. Consistent with our standard rulemaking process, we intend to review those comments carefully, take into account public feedback, and consider any necessary changes. Consistent with what Commissioner Koskinen has previously stated, it is likely that we will make some changes to the proposed regulation in light of the comments we have received. Given the diversity of views expressed and the volume of substantive input, we have concluded that it would be more efficient and useful to hold a public hearing after we publish the revised proposed regulation. Treasury and the IRS remain committed to providing updated standards for tax-exemption that are fair, clear, and easier to administer.

 

JRB

Nonprofit Operating in War Zones Investigated

The Washington Post is running a story involving Arlington-based International Relief and Development (“IRD”), “the largest recipient of grants of any nonprofit organization funded by the U.S. Agency for International Development” (“USAID”).  Eighty-two percent of IRD’s $2.4 billion in funds received since 2007 reportedly were devoted to USAID projects in Iraq and Afghanistan. 

The Post reports that a federal inspector general is seeking the identities of employees who signed confidentiality agreements with IRD that prohibited them “from making disparaging remarks about the company to ‘funding agencies’ or ‘officials of any government.’”  The existence of the agreements became an issue when the Post, in examining IRD’s operations, heard from former IRD employees that they had witnessed waste and potential fraud, but feared the prospect of coming forward because of the agreements.  Additional details follow:

IRD Special Inspector General for Afghanistan Reconstruction John F. Sopko said in a letter delivered to IRD President Arthur B. Keys on Wednesday that the agreements could violate the False Claims Act and other statutes designed to protect taxpayers and whistleblowers.

 

In addition to the names, he asked IRD to disclose the federal contracts and grants that the employees worked on while they were with the Virginia nonprofit group, as well as any correspondence with the company. Forty-nine IRD employees signed the agreements at issue, seven on programs in Afghanistan, the nonprofit group said.

 

“We are actively seeking information concerning IRD’s compliance with whistleblower protection laws and regulations,” the inspector general wrote.

 

IRD has issued a statement pledging its cooperation with the inspector general.  In addition, according to the Post, IRD General Counsel Jason Matechak has told the inspector general that employees have been notified that the agreements do not preclude them from participating in a governmental investigation, and that IRD “would not seek to enforce the separation agreement in a manner that would run afoul of the False Claims Act.”

 

JRB

California AG Scrutinizing San Diego Opera

The Los Angeles Times reports that California Attorney General Kamala Harris is examining the San Diego Opera, a tax-exempt section 501(c)(3) organization that has recently announced its intention to continue operating notwithstanding a prior decision to shut down.  Thus far, the AG has directed the opera company to produce certain records and retain all existing documents.  A spokesman for the opera is reported as saying that he could not elaborate on the nature of the AG’s request.

The story continues with an explanation of how the AG’s inquiry may have sprung to life:

Lorena Gonzalez, a state assemblywoman for District 80 in San Diego, said she'd reached out to the attorney general in mid-April with concerns about the way opera leaders handled the announcement that the opera would close.

She said there were questions about Ian Campbell, the opera's longtime general and artistic director, and whether he and other leaders had given an accurate portrait of the company's financial health when communicating with potential donors and government funding sources.

"There are questions about whether the company received taxpayer dollars based on false information," said Gonzalez.

However, a lawyer for Campbell disputed Gonzalez's concerns. "Ian was fairly consistent in representing accurate information to donors and especially internally within the company," said Gil Cabrera, a San Diego attorney.

According to the Times, Keith Fisher, the opera's COO, issued a statement that the opera welcomed "the opportunity to open our records to Kamala Harris' office, as doing so will assure the public of our promise of transparency and good governance."

 

JRB

The Future of the NCAA

The Christian Science Monitor is running a fairly interesting piece on the challenges facing a major charitable nonprofit – the National Collegiate Athletics Association.  Without revisiting the various arguments on whether the NCAA should remain exempt from federal income tax, the story briefly addresses some of the legal matters of relevance to the NCAA – including a couple of antitrust suits working their way through the courts, as well as the NLRB ruling that Northwestern University football players can unionize.  Perhaps of more interest is the story’s discussion of possible changes to NCAA rules.  Key excerpts follow:

The lawsuits and mounting pressure from Congress point to a long period of reform in which the NCAA is likely to be reshaped more deeply ….

Perhaps colleges will be allowed to offer more than scholarships to lure top prospects. Or top players will be able to cash in on their fame though image rights. Or perhaps major college football will be broken off from universities as a semi-independent entity with new rules. The unprecedented nature of the challenges facing the NCAA means it's virtually impossible to predict what might come next. But many analysts believe college football and basketball will be different, and perhaps significantly so. …

At the core of the reform campaign is the conviction among players that they are becoming employees without adequate compensation.

The article then briefly describes in broad brush various proposed NCAA reforms, some more sweeping than others.

 JRB 

“One Fund” Scammer Receives Jail Time

CNN reports that a woman who attempted to defraud One Fund Boston, the charitable nonprofit created to aid victims of the Boston Marathon bombings, pleaded guilty Tuesday to collecting a fraudulent $480,000 claim filed with the charity.  Audrea Gause, a New Yorker, reportedly was sentenced to two and a half to three years in prison.  The story states that Gause submitted forged medical records in June 2013 indicating that she had suffered injuries in the bombings, but an investigation found that she was not a patient at Boston Medical Center on the day of the bombings or at Albany Medical Center at the times that she had previously claimed.  The money has been secured and will be returned to the charity. 

According to the Massachusetts Attorney General's office, two brothers are also awaiting trial for attempting to defraud the One Fund in a separate scam.

JRB

AALS Sections Call for Paper Proposals

I received the following call for paper proposals from our colleague and fellow blogger, Professor Lloyd Mayer, which I pass along:

 

AALS Section on Nonprofit and Philanthropy Law

&

AALS Section on Taxation (Co-Sponsor)

 

Call for Paper Proposals

2015 Annual Meeting Section Panel

Saturday, January 3, 2015, 10:30 a.m.–12:15 p.m.

IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable?

 

The Section on Nonprofit and Philanthropy Law is issuing a call for paper proposals for its session on IRS oversight of charitable and other tax-exempt nonprofit organizations. The panel, co-sponsored by the Section on Taxation, will be held on Saturday, January 3, 2015, from 10:30 a.m. to 12:15 p.m., at the 2015 Annual Meeting in Washington, DC. Proposed papers might address: the role of the IRS in overseeing specific aspects of tax-exempt nonprofit organizations, such as political activity or governance; the relative strengths and weaknesses of IRS oversight compared to oversight by other actors, including state attorneys general and private, self-regulating bodies; the effect of the late-1990s reorganization of the IRS on its ability to oversee tax-exempt nonprofit organizations; or the overlapping jurisdictions of the IRS with other federal agencies that oversee aspects of nonprofit organizations, such as the Federal Election Commission, the Federal Trade Commission, and the Department of Education.

Panelists will be a mix of presenters chosen through this call for paper proposals and solicited panelists with relevant expertise. Presenters will have the opportunity to publish their papers in the faculty-edited Pittsburgh Tax Review. To facilitate such publication, panelists will be expected to have a completed draft by the January 3, 2015 panel presentation and a final draft by February 28, 2015.

To submit your proposal, please email a short description (no more than 750 words) of your paper to Lloyd Hitoshi Mayer, Chair of the Section on Nonprofit and Philanthropy Law, at lmayer@nd.edu, and Miranda Fleischer, Chair of the Section on Taxation, at mirandafleischer@sandiego.edu. The deadline for proposals is Friday, August 15, 2014. The Executive Committees of the sponsoring sections will select the papers to be presented by mid-September. Please be aware that pursuant to AALS rules, only full-time faculty members of AALS members law schools are eligible to submit a paper proposal in response to a section’s call for papers. However, fellows from AALS member law schools are also eligible to submit a paper proposal if they include a CV with their proposal. Faculty at fee-paid law schools, international, visiting, and adjunct faculty members, graduate students, and non-law school faculty are not eligible to submit.

If you have any questions, please contact Lloyd Hitoshi Mayer at lmayer@nd.edu.

JRB

Most Recent Nonprofit Advocacy Matters

The National Council of Nonprofits has published its most recent edition of Nonprofit Advocacy Matters.  Coverage includes the following:

1. Descriptions of, and links to, recent studies on government-nonprofit contracting issues, one by the Urban Institute and another by the National Council of Nonprofits;
2. A brief critique of the Office of Personnel Management’s rule changes governing the Combined Federal Campaign, which will (it is argued) adversely affect federal workplace giving to nonprofits; and 
3. A summary of a new California law requiring politically active, non-charitable nonprofits to disclose the names of their donors in some circumstances. The law reportedly requires IRC section 501(c)(4) organizations and IRC section 501(c)(6) trade associations to make public their donors’ names if the donee entity spends or contributes over $50,000/year (or $100,000/four-year period)  in electioneering in the state.  The names of those donors giving $1,000 or more for political activity in California must be disclosed.  According to the piece, the new law also requires committees raising at least $1 million on ballot measures to disclose the 10 most generous donors who donated at least $10,000.

JRB 

Massachusetts Supreme Judicial Court Holds that Conservation Land Open to the Public is Exempt from Property Tax

In New England Forestry Foundation v. Board of Assessors of Town of Hawley, SJC-11432 (May 15, 2014), the Massachusetts Supreme Judicial Court held that land owned in fee by a charitable conservation organization, the New England Forestry Foundation (NEFF), and open to the public was eligible for a property tax exemption. The court drew an important distinction between conservation lands to which the public is permitted access and those to which the public is denied access, and imposed a heightened burden in the latter case to qualify for the exemption.

Background

NEFF’s mission is to provide “for the conservation and ecologically sound management of privately owned forestlands.” It accomplishes this mission by, among other things, educating landowners, foresters, forest product industries, and the general public about the benefits of forest stewardship; permanently protecting forests through gifts and acquisitions of land; actively managing lands as demonstration and educational forests; and supporting the development of forest policy and forest practices that encourage and sustain private ownership.

The property at issue is a 120-acre parcel of forested land, known as the “Hawley Forest,” which is bordered on two sides by a State forest. NEFF conducts sustainable forestry practices on the property and the property is open to the public.

NEFF applied for a full property tax exemption for the property under Massachusetts G. L. c. 59, § 5, Third (Clause Third), which exempts from taxation “real estate owned by … a charitable organization and occupied by it or its officers for the purposes for which it is organized.” The Board of Assessors of the Town of Hawley denied the application, and in a January 2013 opinion (discussed here), the Massachusetts Appellate Tax Board upheld that denial. NEFF appealed, and both NEFF and assessors filed applications for direct review by the Massachusetts Supreme Judicial Court.

The Two-Pronged Test

In holding that NEFF qualified for an exemption with regard to the Hawley Forest for the year at issue, the Massachusetts Supreme Judicial Court explained that qualification for an exemption under Clause Third requires satisfaction of a two-pronged test:

1. the organization seeking the exemption must qualify as a “charitable organization” within the meaning of Clause Third, and
2. the organization must occupy the property in furtherance of its charitable purposes.

The court found that NEFF satisfied both prongs of this test.

1. Charitable Organization Requirement

The court explained that neither an organization’s legal status as a charitable corporation nor its exemption from federal taxation under IRC § 501(c)(3) is sufficient to satisfy Clause Third’s “charitable organization” requirement. Rather, the organization must prove that “it is in fact so conducted that in actual operation it is a public charity.”

Citing to Jackson v. Phillips, 14 Allen 539, 556 (1867), the court explained that charity is

a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves in life, or by erecting or maintaining public buildings or works or by otherwise lessening the burdens of government.

The court then explained that the closer an organization’s dominant purposes and methods hew to these traditional charitable purposes, the more likely the organization is to qualify as a “charitable organization” under Clause Third.

The court found that NEFF’s purposes constituted traditional charitable purposes within the meaning of Clause Third and the Jackson v. Phillips definition of charity because NEFF’s programs and activities both (i) benefit an indefinite number of people and (ii) assist in lessening the burdens of government.

a. Benefiting an Indefinite Number of People

When the Massachusetts Appellate Tax Board denied NEFF’s application for a tax exemption, it dismissed NEFF’s argument that the Hawley Forest should be exempt because it provides an environmental benefit in the form of preservation of a habitat for diverse species. In support of its denial, the Board cited a 1966 tax exemption case, Assessors of Boston v. The Vincent Club, 351 Mass. 10, 14 (1966), in which the court stated

simply keeping land open and allowing its natural habitat to flourish is not sufficiently charitable. Appellant must demonstrate ‘an active appropriation to the immediate uses of the charitable cause for which the owner was organized.’

The Board also noted that “the absence of public access to land has consistently proven fatal to a landowner’s claim of charitable exemption.”

Recognizing that times have changed in the almost 50 years since it decided Vincent Club, the court updated its view in NEFF v. Hawley. The court explained:

Historically, the “benefit” provided by land held as open space or in its natural state has been measured by the direct access of people to that land for such purposes as recreation, scenic views, or education…. However, as the science of conservation has advanced, it has become more apparent that properly preserved and managed conservation land can provide a tangible benefit to a community even if few people enter the land. For example, … conservation of large forested blocks of land [i]s an effective means of contributing to “ecosystem resilience” in the face of rising temperatures and more severe storms because forests naturally absorb carbon and other harmful emissions. Additionally, open space land naturally absorbs and helps dissipate stormwater runoff without the need for drainage systems that are required in paved and developed areas. Furthermore, forest land helps to clean the air by filtering particulates naturally, and it regulates and purifies the fresh water supply by stabilizing soils that store water over time and filter contaminants.

The court concluded that, “by holding land in its natural pristine condition and thereby protecting wildlife habitats, filtering the air and water supply, and absorbing carbon emissions, combined with engaging in sustainable harvests to ensure the longevity of the forest, NEFF engages in charitable activities of a type that may benefit the general public.”

The court also noted in a footnote that, for purposes of satisfying the “charitable organization” requirement of Clause Third, the Massachusetts Appellate Tax Board has required land conservation organizations to demonstrate that they “invite, encourage, and facilitate the entry of the public at large onto their lands.” The court rejected this test, emphasizing that public access is not required, provided the organization can demonstrate that it is not simply seeking to set aside land for its own private use or as a buffer around its members’ private property and, instead, is carrying out land conservation and environmental protection activities that benefit the public at large.

b. Lessening the Burdens of Government

With regard to whether NEFF’s activities lessen the burdens of government, the court explained that the Massachusetts constitution obligates the State to engage in conservation and environmental protection and NEFF assists the State in achieving its conservation policy goals. The court noted, among other things, that (i) the Hawley Forest, which is bordered on two sides by a State forest, extends a block of forested land preserved by the State, and this is important to the preservation of species that require a certain amount of continuous area to thrive and to the biodiversity of forest lands more generally, (ii) NEFF and other conservation organizations have been identified as essential partners in statewide conservation efforts, and (iii) the contribution that privately held forest land can make to improving air and water quality and mitigating the effects of erosion, rising temperatures, and other ecosystem disruptions assists the State by reducing the cost associated with safeguarding air and water supplies and responding to the effects of pollution. The court also cited a California case that acknowledges that property used exclusively as a nature preserve to protect native plants or animals may qualify as charitable because it lessens the government’s burden to preserve ecological communities and native flora and fauna.

2. The Occupancy Requirement

To qualify for the exemption, NEFF also had to show that it “occupied” the Hawley Forest in furtherance of its charitable purposes for the year at issue. To make sense of this requirement, the court looked to the purpose of Clause Third. The court explained that Clause Third recognizes the contribution a charity makes to the public either on, or through, its use of its property. Unlike a private landowner whose land ownership burdens the government by making use of a range of public services and benefits, the burden a charity’s ownership of land places on the government may be offset by its use of the land in a manner that benefits the public and lessens the burdens of government. Thus, explained the court, it is fair and proportional to tax privately held land while exempting a charitable organization’s land provided the organization uses the land in a manner that contributes to the community and reduces the burdens of government. In sum, the requirement that land be “occupied” for an organization’s charitable purposes is “best understood as the Legislature seeking to ensure that a charity’s land is not being held as a private landowner would hold it and, instead, is being held as an entity would hold it for the public good.”

The court went on to explain, however, that in the case of open space or conservation land, this inquiry is complicated by the fact that both private and charitable landowners may have an incentive to hold land in an undeveloped state (such as to benefit from lower property tax rates). Accordingly, in this context, a charitable organization must demonstrate that it occupies the land at issue in a manner less like a private landowner and more like an entity seeking to further the public good.

In NEFF’s case, the Massachusetts Appellate Tax Board approached this inquiry by focusing on the degree of public access NEFF encouraged and achieved at the Hawley Forest, and the Board concluded that NEFF’s promotion of public access was insufficient to demonstrate that it occupied the land for the benefit of the public. The court disagreed with this approach, explaining that Clause Third does not impose an affirmative duty to promote and facilitate public access on conservation lands. The court also acknowledged that, in certain circumstances, such as in the case of a particularly fragile habitat or ecosystem, a public access requirement could operate to thwart the very conservation objectives an organization is seeking to achieve. Accordingly, the court concluded that, in a case such as NEFF’s, where public access to the property is allowed but not necessary for the organization to achieve its charitable purposes, the promotion and achievement of public access is not required to demonstrate “occupancy” for purposes of the Clause Third exemption.

The court went on, however, to note that the right that is most central to the “bundle” of rights enjoyed by a private property owner is not the freedom from an obligation to invite visitors, but the affirmative right to exclude others from one’s property. Consequently, said the court, the appropriate inquiry (regarding whether property is being held as a private landowner would hold it or, instead, as an entity would hold it for the public good) begins with whether the entity takes affirmative steps to exclude the public from the land, such as through physical barriers, “no trespassing” signs, or actively patrolling the land. The court then stated:

If a charitable organization engages in such exclusion, the organization faces a heightened burden to show that such exclusion of the public is necessary to enable it to achieve its charitable purposes. Although an organization may succeed in meeting this burden, it may do so only by presenting compelling facts demonstrating that the exclusion of the public is necessary to achieve a public benefit through other activities carried out on, or through use of, the land, such as when conservation activities may pose a danger to public safety or where the ecosystem is so fragile that any human presence could undermine the organization’s conservation efforts. Such rationales may often be time-limited, such as during a timber harvest when trees are being felled or during the nesting period of a vulnerable species. Placing a high burden on organizations that actively exclude the general public from their lands helps to identify and exclude from exemption those land-conservation organizations that treat their land more as a private club or a buffer zone around the private property of organization insiders. However this requirement also acknowledges that in particular circumstances the exclusion of the public from the land may be necessary for a bona fide land-conservation organization to carry out its mission and therefore should not per se preclude an organization from otherwise demonstrating that it occupies the land.

Accordingly, a “charitable organization” within the meaning of Clause Third that affirmatively excludes the public from its conservation lands has to make a particularly convincing case that such exclusion is necessary to enable it to carry out its conservation mission.

NEFF did not fall into this category because it did not take active steps to exclude the public from the Hawley Forest during the tax year in question. Rather, it took steps to inform the public that the property was available for recreation. The court noted that, if NEFF’s only claimed charitable purpose were recreational or educational, it might have had to demonstrate more regular public use of the property to satisfy the occupancy requirement. However, since NEFF also used the Hawley Forest for sustainable forestry and environmental preservation purposes, the court found that it met its burden to show that it “occupied” the Hawley forest in furtherance of its charitable purposes within the meaning of Clause Third.

In sum, a land conservation organization that satisfies the “charitable organization” requirement must divide its conservation lands into two rough categories for purposes of determining satisfaction of the “occupancy” requirement.

• Conservation land to which the public is permitted access. A conservation organization would appear to satisfy the occupancy requirement with respect to this land, and therefore be eligible for the exemption, even if it does not actively encourage or advertise public access, provided the organization uses the land for charitable purposes that can be accomplished without public access, such as sustainable forestry and environmental preservation. On the other hand, if the organization uses the land for recreational or educational purposes only, the organization would have to demonstrate more regular public use.

• Conservation land to which the public is denied access. A conservation organization would appear to satisfy the occupancy requirement with respect to this land, and therefore be eligible for the exemption, only if the organization makes a particularly convincing case that exclusion of the public is necessary to enable it to achieve a public benefit through other activities carried out on the land. Moreover, such other activities may often be time-limited. For example, exclusion of the public may be necessary only during a timber harvest for safety reasons, or only during the nesting period of a vulnerable species to ensure the species is not disturbed during this critical period.

While the court recognized that many public benefits can flow from conserving land in its undeveloped state in addition to public access to the land, the court also was concerned about abuse. Accordingly, it held that land conservation organizations that want to claim a property tax exemption with regard to their conservation lands must make a compelling case of necessity if they want to affirmatively exclude the public from such lands. Not explored in the court's opinion is the extent to which the feared abuse—land-conservation organizations treating their lands as a private club or a buffer zone around the private property of organization insiders—is occuring. 

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

 

 

Gates Foundation Gives Grant to Keep Vaccines Cool

 

The Bill and Melinda Gates Foundation is well known for its efforts to help eradicate diseases from the developing world.  But achieving this goal has in the past encountered a significant problem: eradicating diseases often requires immunization, which relies on keeping vials of vaccine cold until they can be administered.  The vials have to be kept at exactly the right temperature — too hot or too cold, and the vaccine could lose its effectiveness.   That is a significant problem for places that do not have consistent access to electricity.

The foundation may have found a solution: the Sure Chill Company in Wales has announced receipt of a $1.4 million grant from the Gates Foundation to develop a vaccine cooler that will help advance efforts to eliminate preventable diseases worldwide. 

The grant will enable the company to take the cooler from the proof-of-concept stage — which had been supported by a previous $100,000 grant from the foundation — to field trials over the next year in eastern and western Africa. The firm's technology harnesses a unique property of water to create a constantly chilled environment within the unit, enabling the cooler to operate for thirty-five days without power.

If the trials are successful, the development of these "super" coolers will represent a giant step in the eradication of diseases in the developing world. 

VEJ

 

European Court of Justice Okays Data Scrubbing -- Impact on International Nonprofits Unclear

The Luxembourg-based European Court of Justice today ruled that Internet companies can be made to remove irrelevant or excessive personal information from search engine results.  In a case pitting privacy campaigners against Google, the European Union's highest court upheld the complaint of a Spanish man who objected to the fact that Google searches on his name threw up links to a 1998 newspaper article about the repossession of his home.

The case highlighted the struggle in cyberspace between free speech advocates and supporters of privacy rights who say people should have the "right to be forgotten" - meaning that they should be able to remove their digital traces from the Internet.

Here in the United States, today's NonProfit Times is pondering the ruling's impact on  international nonprofits.

In its ruling, the court reasoned that "An [I]nternet search engine operator is responsible for the processing that it carries out of personal data which appear on web pages published by third parties.  Thus," the court continued,

if, following a search made on the basis of a person's name, the list of results displays a link to a web page which contains information on the person in question, that data subject may approach the operator directly and, where the operator does not grant his request, bring the matter before the competent authorities in order to obtain, under certain conditions, the removal of that link from the list of results.

Moreover, the court ruled, the search engine operator is, "in certain circumstances, obliged to remove links to web pages that are published by third parties and contain information relating to a person from the list of results displayed following a search made on the basis of that person's name," even if "the publication in itself on those pages is lawful."

The Times notes that the impact of the decision on nonprofits is unclear.  For example, it is unclaer whether the decision, which is based on a 1995 data protection directive, will affect requests for deletion of donor histories in nonprofits' databases.  Fielding Yost, president and founder of database software producer Saturn Corporation in Cheverly, Maryland, stated: "Right now we don't know precisely what the law says.  we just know that Google lost.  We've never been faced [with a situation] where someone would say remove my donation history, unless they sent in a delete [request] from the charity.  I don't think we're in the same application that Google is.  Maybe it'll broaden and extend [to] that."

In the final analysis, Yost does not believe the law requires charities to scrub their donation history as Google must scrub links.

But Steven Shattuck, vice president for marketing at Bloomerang in Indianapolis, Indiana, believes the law will require nonprofits  to scrub donor records.  Said Shattuck: "Probably in Eurpoe, folks would have the right to be scrubbed.  It is the electronic idenitification of a person's personal records.  I think it sets a precedent, for sure."

The ruling's impact on international nonprofits will unfold as the days, weeks, and months go by. 

VEJ 

Palmer Ranch v. Commissioner—$19.9 million Conservation Easement Deduction Allowed Based on “Reasonably Probable” Rezoning

In Palmer Ranch Holdings, Ltd. v. Commissioner, T.C. Memo 2014-79, the Tax Court allowed a $19.9 million deduction for a partnership’s donation of a conservation easement, which represented a 95% diminution in the value of the property. The court found the partnership’s appraisal, which assumed the subject property could have been rezoned before the easement donation to allow higher density development, to be more persuasive.

The subject property is an 82.19-acre parcel located in Sarasota County, Florida, that includes upland developable acreage as well as wetlands, a wildlife corridor, and a bald eagle nest. The partnership donated the easement to the county in December of 2006 for the purpose of preserving the property for public use, conservation, and open space.

The IRS conceded that the easement constituted a qualified conservation contribution for purposes of IRC § 170(h), so the only issue before the Tax Court was the fair market value of the easement. The court explained that the fair market value of a conservation easement is generally equal to the difference between the fair market value of the subject property before the granting of the easement (the “before-value”) and the fair market value of the subject property after the granting of the easement (the “after-value”) and, in determining the property’s before-value, there must be taken into account not only the property's then-current use, but also its highest and best use. Quoting Olson v. United States, 292 U.S. 246, 255 (1934), the court noted that a property's highest and best use is “the highest and most profitable use for which it is adaptable and needed or likely to be needed in the reasonably near future.” The court explained that “[i]f different from the current use, a proposed highest and best use requires ‘closeness in time’ and ‘reasonable probability.’”

Before-Value

The IRS’s appraiser estimated the before-value of the Palmer Ranch property to be $7.7 million. This estimate was based on the property’s actual zoning classification on the date of the donation.

The partnership’s appraiser, on the other hand, estimated the property’s before-value to be $25.2 million. This estimate was based, in part, on the assumption that the property could be successfully rezoned. Although the property’s zoning classification in 2006 was for “residential estates,” which limited current development to 41 units (1 unit per 2 acres), a land planning and engineering firm hired by the partnership concluded that the property could have been rezoned to permit a 360-unit multifamily development, provided the denser development was concentrated (or clustered) on the developable portions of property and left the environmentally sensitive areas largely as open space.

At trial, the IRS argued that successful rezoning of the property at the time of the donation was not reasonably probable given four factors: (i) a failed rezoning history with respect to the property, (ii) environmental concerns, (iii) limited access to outside roads, and (iv) neighborhood opposition. The court examined each of those factors in turn and found for the partnership. The court determined that (i) nothing in the rezoning history foreclosed the possibility of a successful rezoning, (ii) the proposed rezoning would have protected the eagle nest and wetland areas, and given due consideration to the wildlife corridor, within which there were significant developable areas, and (iii) required road access for development on the subject property could have been provided through adjacent land owned by the partnership and through extension of a "stubbed out" residential street in an adjacent development. The court noted that the stubbed out road demonstrated a general expectation that future residents of the subject parcel would use the road to access their homes. The court also gave little credence to the IRS’s arguments that neighborhood opposition would have precluded the hypothetical development, despite the IRS’s pointing to the neighbors’ “fervor and organization” against proposed development of the subject property in 2004. The court refused to assume that neighbors would object to the rezoning or that the board of county commissioners would find merit to their objections.

The court ultimately determined that the before-value of the property was $21,005,278—it adjusted the partnership’s appraised value downward slightly to account for the softening of the real estate market in the area 2006.

The Olson Formula

It is not clear from the Tax Court’s opinion whether the partnership’s appraiser or the court took into account the costs, time, and risks associated with obtaining the rezoning approval in estimating the property’s before-value. Consideration of those factors would appear to be required under the Olson formula, which, stated in full, provides: “The highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future is to be considered, not necessarily as the measure of value, but to the full extent that the prospect of demand for such use affects the market value while the property is privately held” (emphasis added).

The court noted that the process to rezone and develop land would have involved the following steps:

• a preapplication meeting with County staff,
• a neighborhood workshop with adjacent property owners, 
• submitting of applications to the County, which would be subject to staff review,
• public hearings by a lay body (the planning commission), and
• a public hearing by the board of county commissioners, wherein the commissioners would take final action.

In addition, even if the commissioners issued a final determination, the determination would still be subject to the circuit court's review. And for the subject property to receive rezoning approval, the applications would have to be consistent with the region’s master development order, the comprehensive plan, zoning regulations, and land development regulations.

Although obtaining approval of the rezoning may have been reasonably probable, a hypothetical willing buyer would have factored into the price he or she would be willing to pay the costs, time, and risks associated with the process outlined above. Whether this was taken into account in estimating the before-value of the hypothetically rezoned property is not clear.

After-Value

The conservation easement limits use of the subject property to a nature park; recreational improvements, such as campgrounds, swimming pools, and athletic fields; and agricultural uses. The property is now used as a public park, a community garden, a conservation area, and preserved open space.

Given the use restrictions in the easement, the court determined that potential purchasers of the property would be limited to either a nonprofit organization or the State of Florida. The court also noted that this already shallow pool of purchasers is further reduced because any purchaser would also have to be willing to carry out any of the permitted uses subject to the easement's restrictions.

While both parties’ appraisers agreed that the conservation easement severely limits the marketability of the subject property and, thus, significantly reduced the property’s value, the IRS’s appraiser estimated a 90% diminution in value, while the partnership’s appraiser estimated a 95% diminution in value. After explaining that “reasonable minds may disagree when it comes to providing estimates such as these” and valuation is necessarily an approximation, the court ultimately adopted the partnership’s estimate. Accordingly, the court determined that the conservation easement had a value of $19,955,014 (i.e., a $21,005,278 before-value less a $1,050,264 after-value).

No Penalty

The Tax Court held that the partnership was not liable for an accuracy-related penalty because it acted with reasonable cause and in good faith (i.e., it relied in good faith on the advice of a qualified tax adviser) with regard to its claimed deduction for the easement donation.

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