Nonprofit Law Prof Blog

Justice Entrepreneurs Project

With my background in nonprofit law, I get to know our public interest students pretty well - I'm sure many of you have the same experience.    Here in West Virginia, we also have a very strong need for attorneys who are willing to work in rural communities and to solve access to justice issues for low- and moderate- income clients.   Projects like the Justice Entrepreneurs Project, sponsored by the Chicago Bar Foundation, can help bridge that gap.   

The Chicago Bar Foundation's Justice Entrepreneurs Project (JEP) is accepting applications for its next class of lawyers who will begin the program in November 2014.  The JEP is looking for entrepreneurial and public interest-minded recent law graduates who are interested in creating their own law practices serving low and moderate income clients.  Participants in the 18-month program will receive training, mentoring and other support on business and legal issues as well as space and other infrastructure as they get started with their practices.  The application deadline is September 2 and information sessions to learn more about the program will be held at the JEP offices at 208 S. Jefferson, Suite 204, on August 15 at 12:15 p.m. and August 21 at 5:30 p.m..  More information about the JEP is available ... at www.chicagobarfoundation.org/jep.

 

EWW

 

 

 

 

The National Taxpayer Advocate Isn't Happy with EO but the Form 1023 EZ Isn't the Answer

On July 16, the National Taxpayer Advocate released its mid-year report to Congress.   The IRS release is here and the report itself is here.

Given all that has occurred in the last year in EO, I suppose it is not a big surpise that the Taxpayer Advocate Service (TAS) has a lot to say about EO and not very much of it is good.   One of its areas of focus is the exempt status process, with the relevant part of the report entitled, "Despite Improvements, TAS Remains Concerned About IRS Treatement of Taxpayers Applying for Exempt Status."

Rather than focus on the Section 501(c)(4) and political activities issues, which makes up much of this section of the report, I wanted to focus on the TAS' comments on the new Form 1023-EZ.  One would have thought that the TAS, which was been extraordinarly critical of exempt status wait times (and rightfully so), would have welcomed the Form 1023-EZ.   In fact, the report notes that the TAS suggested the creation of a Form 1023-EZ as part of its 2011 report to Congress.   So you'd think that the new form (available here) would be good news.

 But not so much, apparently:

The National Taxpayer Advocate continues to be deeply concerned about the IRS' abdication of its responsibility to determine whether an organization is organized and operated for an exempt purpose and not mrerely accept an organization's statement to that effect.

Back in practice, the issue often arose whether to attach a certain document or not to the Form 1023.   My response, with which many may disagree, was usually to attach more and not less - assuming, of course, there was really no issue to be raised by the additional documentation.   I always liked the security of being able to say that we sent everything in, the IRS vetted it (or at least had the opportunity to vet it), and we could rely on having provided a complete application.   Clearly, an organization submitting the 1023-EZ can't have that limited comfort, illusory as it may have been, as it really submits almost nothing as part of the application.

The TAS' primary concern appears to be with the IRS' intention to police determinations made through the 1023-EZ process with a follow-up audit.   Given the state of the IRS' budget, I'm not really worried about those audits actually happening.   Personally, I'm more worried for donors, who often seem to use the "Section 501(c)(3)" label as a filter for fraud protection.   That probably was never truly accurate, but it's even less accurate now.

I'd love to hear thoughts....

EWW 

 

 

 

Love from the ABA's The Tax Lawyer (x2!)

The spring volume of the ABA Tax Section's scholarly journal, The Tax Lawyer (67 The Tax Lawyer 517(2014)), has not one BUT TWO articles on charitable tax issues:

Reforming the Taxation of Exempt Organizations and Their Patrons by David S. Miller of Cadwalader, Wickersham & Taft  (an SSRN post on a similar topic is here; its abstract follows).

The paper contemplates a radical reformation of our entire system for taxing exempt organizations and their patrons.

First, all non-charitable exempt organizations that compete with taxable commercial businesses (such as fraternal benefit societies that provide insurance (section 501(c)(8)) and credit unions (501(c)(4))) would become taxable. Also, business leagues, chambers of commerce, and the Professional Golf Association and National Football League would be taxable but could operate as partnerships. Thus, section 501(c)(6) would be repealed.

Most other tax-exempt organizations would be reassigned into one of five categories, corresponding roughly to current section 501(c)(1) (U.S. governmental organizations), section 501(c)(3) (charitable), section 501(c)(4) (social welfare), section 501(c)(7) (social clubs, but stated more generally as mutual benefit organizations), and retirement plans.

The paper leaves section 501(c)(1) entirely intact, and largely leaves section 501(c)(3) alone, except that it proposes that certain very large public charities with “excessive endowments” be taxable on their investment income to the extent the income is not used directly for charitable purposes.

This paper also generally leaves section 501(c)(4) alone, except that any 501(c)(4) (or other tax-exempt organization) that engages in a significant amount of lobbying or campaigning would be taxable on all of its investment income.

The fourth catchall category – corresponding roughly to the tax treatment of social clubs ‒ would cover virtually all other tax-exempt organizations (other than retirement plans). Very generally, these organizations would not be subject to tax on donations or per capita membership dues, but would be taxable on investment income, fees charged to non-members, and fees charged to members disproportionately.

The paper proposes two significant changes to the treatment of donors. First, section 84 would be expanded to treat any donation of appreciated property to a tax-exempt organization as a sale of that property. Second, any donation to a tax-exempt organization that engages in significant lobbying or campaigning and does not disclose the name of the donor would be treated as a taxable gift by the donor (subject to the annual exclusion and lifetime exemption).

Finally, the paper proposes two measures of relief for tax-exempt organizations. First, the unrelated debt-financed income rules would be repealed. Second, limited amounts of political statements by the management of 501(c)(3) organizations (like election-time sermons) would not jeopardize the tax-exempt status of the organization.

 

Charitable Contributions of Services: Charitable Gift Planning for Nonitemizers, by Henry Ordower, Professor of Law, Saint Louis University School of Law

This Article examines the tax treatment of charitable contributions and concludes that contributors who do not itemize their deductions (nonitemizers) should contribute their services to charity whenever possible rather than contributing cash or property. Charitable donees similarly should embrace opportunities to accept and utilize service contributions from their donor bases, give service contributions as much recognition as money or property contributions, and encourage their lower-income donors to render services rather than giving money earned with performance of services. The Article suggests that nonitemizing taxpayers are the donors who have the most “skin in the game” for charitable contributions in terms of sacrifice. Promoting service rather than money or property contributions maximizes the tax subsidy of the charitable contributions. From the perspective of efficient tax planning for low and moderate-income taxpayers, the tradition of volunteerism in the United States is compelling. Yet, despite the ability to get more “bang for the buck” from service contributions, many charitable organizations that used to rely on volunteers for support increasingly have shifted their operations to reliance on paid staff and pushed even the low-income members of their donor base to contribute money rather than volunteer services.

Private Foundation investments have almost erased the impact of 2008

The 2013 Common Fund/Council on Foundation study of private foundation investments is available here, and it's generally pretty good news.  

According to a summary article at Chronicle of Philanthropy, private foundation investments grew on average 15.6% in 2013.    The five year annual return, including 2013, is now at 12%; compare that to last year's five year annual return, which was only 1.7%.    The article notes that the disasterous retuns of 2008 have now rolled out of the 5 year running average.  In additional good news, foundation debt is down and spending is up.  

The bad news - nonprofit grant recipientss are still in a rough state, which is part of the reason why foundation giving is up.  In addition, the report warns of increasing volatility and, therefore, likely lower returns in the coming year.

EWW

 

$650 Million Gift to Study Genetics of Psychiatric Disorders

 

The Chronicle of Philanthropy is commenting on billionaire businessman Ted Stanley's recent $650-million pledge to the Broad Institute to study the genetics of psychiatric disorders.  The pledge is one of the largest individual donations ever to medical research. 

The pledge comes at a very opportune moment.  According to the Chronicle,

About one in four adults suffers from a mental disorder, and one in 17 people live with a serious mental illness like major depression, bipolar disorder, or schizophrenia, according to the National Institute on Mental Health. The World Health Organization estimates 450 million people worldwide suffer from such diseases.

One would think that such staggering statistics would lead state and national leaders to allocate more funds to addressing the needs of the mentally ill.  Not so, says the Chronicle.  Instead, 

. . . from 2009 to 2011, states cut more than $1.8-billion from their budgets for services helping children and adults who have mental illnesses, states the National Alliance on Mental Illness. Support for scientific research has dwindled, and what remains is difficult to obtain because of increased competition for scarce dollars.

This is a sad situation.  Like the Chronicle, I hope Mr. Stanley's gift will "spark a flurry of additional donations to mental-health causes."

VEJ

 

Eisenberg: Start Campaign to Curtail Excessive Trustee Fees

Writing in yesterday's Chronicle of Philanthropy, Pablo Eisenberg, a senior fellow at the Center for Public and Nonprofit Leadership at the Georgetown Public Policy Institute, calls on nonprofits to start a campaign to ask Congress and the IRS to curtail excessive trustee fees paid by nonprofit foundations.

According to Eisenberg, "[t]he tens of millions of dollars that foundations pay to trustees every year is a total waste of money that could be used to finance needy nonprofit organizations.  He contends that:

Fresh concerns about those fees were raised when the news become public that the Otto Bremer Foundation, which last year gave $38-million in grants, had paid its three board trustees more than $1.2-million in 2013. So egregious was the payment that Aaron Dorfman, executive director of the National Committee for Responsive Philanthropy, requested an immediate investigation by the Minnesota attorney general.

The Bremer trustees had fired the foundation’s executive director, leaving them totally in charge without any accountability mechanisms in place.

Eisenberg continues:

Data about the total amount trustees are paid are hard to come by, but a Chronicle of Philanthropy survey in 2011 found that 38 of the nation’s 50 largest foundations paid a fee to their trustees amounting to a total of $11-million.

He also reports that

[a] 2006 Urban Institute report about the compensation practices of 10,000 of the largest foundations based on 2001 tax returns found that 3,400 of the foundations had paid a total of almost $200-million in trustee fees.

Finally, he reveals that an earlier study of 238 foundations he conducted with two of his graduate students at Georgetown University in 2003 revealed that the foundations "had paid more than $44-million in trustee fees.  About two-thirds of the 176 largest foundations compensated their board members, while 79 percent of the 62 smaller foundations surveyed paid their board members."

On the basis of this sample, Eisenberg and his students estimated that foundations throughout the country had paid more than $300-million in trustee fees.

That is a lot of money.  Moreover, says Eisenberg, it is infuriating:

What has infuriated foundation critics and many nonprofits is that foundation trustees are among the wealthiest and highest-paid individuals in the country. As Aaron Dorfman has noted, most foundation trustees would take on their duties even if they weren’t paid. Most other nonprofits don’t pay their trustees, after all.

But habits die hard. Many foundations maintain that it is important to offer fees as an incentive to busy corporate and wealthy individuals who might otherwise not give their time. And, they add, it is difficult enough to recruit topnotch board members; fees just make the process easier. The corporate culture that believes "time is money" is a tradition that lingers on.

Eisenberg admits, though, that annoyance at the practice of trustee fees has not yet ­morphed into sufficient energy and public pressure that could produce some changes.  Neither philanthropic trade associations, philanthropy roundtables, nor regulators and legislators appear ready to do something about the excessive fees.  Hence, Eisenberg has a solution: nonprofits should stasrt a campaign to have Congress and the IRS curtail these excessive trustee fees.  Eisenberg concludes:

Nonprofits should start a campaign to ask Congress and the IRS to curtail excessive fees. Almost all nonprofit groups hungry for new dollars should be willing to support the idea, and how could politicians be opposed to the idea that more money goes to communities than affluent trustees? Now we just need some leadership to get the movement going.

Will the nonprofits respond?  Time will tell.

VEJ

School of Philanthropy Dean Search Down to Two

The Nonprofit Times is reporting that the search for someone to fill the shoes of retiring founding dean Eugene R. Tempel at the Indiana University Lilly Family School of Philanthropy has been narrowed down to two candidates. 

The Times reports that while the university will only confirm that the search is ongoing and the intention is to have a new dean by January 1, 2015, the Times has information that only two candidates -- neither of whom is from Indiana University -- remain.

The Times continues:

Multiple sources have told The NonProfit Times that the process has not been as smooth as was expected. In fact, there has been some consideration as to under what terms Tempel might stay on for up to one more year if the new dean is not selected soon, according to multiple sources within the university and search process.

The search committee presented candidates to Charles R. Bantz, Ph.D., chancellor of the Indianapolis campus, known as IPUI since it is shared with Purdue University. There were three finalists but one of them, from a university in California, has withdrawn his application, according to sources.

Andrew R. Klein, J.D., chair of the IU Lilly Family School of Philanthropy selection committee and dean of the IU Robert H. McKinney School of Law, disputed the idea that the search has not gone as smoothly as hoped. He said the plan was to present a pool of candidates to the administration by mid-summer and that has happened. He said eight candidates were reduced to “those who came back to campus.”

He declined to confirm the number of candidates who made campus visits and the number of candidates still in the running for the coveted position in nonprofit academia. He cited a confidentiality pledge to the candidates who are still employed. “Chancellor Bantz is in consultation with President (Michael A.) McRobbie about the search,” he said. “The appointment of any dean is ultimately made by the Board of Trustees of Indiana University,” Klein said. “I am not involved in the conversations at this point, but I am certain that Chancellor Bantz is consulting with President McRobbie to make sure the administration presents a candidate to the board in which they both have confidence.”

The Lilly Family School evolved from the internationally known Center on Philanthropy of the IU-Purdue University campus in Indianapolis, Indiana.  The school encompasses and expands all of the previous academic degree, research and training programs at Indiana University, including The Fund Raising School, the Lake Institute on Faith & Giving, the Women’s Philanthropy Institute and International Programs.

VEJ

 

Charities that Support People with Mental Illness Win Hilton Prize

This morning I came across this touching story published in Friday's Chronicle of Philanthropy.  The story begins by stating that the biggest danger for people living with severe mental illnesses is not navigating the health-care system or finding a good therapist, but living in isolation.  Because people with mental illnesses no longer spend much time in hospitals, they end up living alone.  According to Kenneth Dudek, president of Fountain House, a New York charity that helps mentally ill people live independently, living in isolation makes the illness worse and the patients do not get the help they need.

For its efforts to provide a sense of community to the mentally ill, Fountain House and its sister organization, Clubhouse International, have won the Conrad N. Hilton Humnanitarian Prize, a $1.5 million award that recognizes an organization that works to alleviate human suffering. 

This is the first time the prize has been awarded to a mental-health organization.  According to Hawley Hilton McAuliffe, a member of the prize's jury and granddaughter of Conrad Hilton, the organizations were chosen because mental health has not received much attention despite the prevalence of the problem.  Said McAuliffe: "It's a humanitarian crisis at this point, especially here in the United States.  It's one area that has not been addressed by many organizations."

McAuliffe revealed that  as the prize jury deliberated about this year's award, it considered Fountain House's success at giving mentally ill people opportunities to find fellowship.  It also considered the recent spate of mass shootings by mentally ill individuals, in particular the spree committed by 22-year-old Elliott Rodger, who killed six people and injured 13 others near the campus of the University of California at Santa Barbara in  May.  The Chornicle quotes McAuliffe as saying, "Here was this isolated individual who had no sense of community.  Wouldn't Fountain House have been a good resource for him?" 

The truth is, many mentally ill people are in need of similar resources.  The Chronicle states it well:

In the United States alone, 13.6 million people live with a serious mental illness like major depression, bipolar disorder, or schizophrenia, according to the National Alliance on Mental Illness. And the World Health Organization estimates 450 million people worldwide suffer from such illnesses. Three-quarters of chronic mental illnesses begin by the age of 24, but people sometimes wait decades to seek treatment. Most alarming, nearly half of all homeless adults in America has a severe mental illness.

That is a sobering statistic.  I applaud Fountain House and Clubhouse International for the assistance they give to some of the suffering people.

VEJ

 

Assessment of the "America Gives More Act"

Unsurprisingly, the U.S. House passed charitable giving legislation, the “America Gives More Act,” on July 17 by a vote of 277-130. (For a summary of the bill’s contents, see prior blog post.) Broadly, the bill would encourage food donations, transfers from IRAs, conservation easement donations, extend the time to claim charitable deductions to April 15, and reduce the tax on private foundation investment income. According to the Joint Committee on Taxation, the legislation would cost taxpayers $16.2 billion over ten years.

Supporters of the bill (mostly Republicans) emphasized familiar themes. Charitable giving legislation is good because giving helps those in need (see, e.g., Chairman Camp's floor statement, Majority Whip McCarthy's statement) and because giving itself should be encouraged. The bill was also praised as a simplification (Statement of Representative Griffin) (though only one of the five provisions simplifies the Code).

Opponents of the bill (all Democrats, but one), though praiseworthy of charitable giving in general, cited in particular the failure to pay for the tax benefits and the resulting increase in the deficit. (Floor statement of Representative Levin, the White House.) The White House also objected that the giving incentives would benefit high-income taxpayers. One Democrat, Representative Lloyd Doggett, objected on substantive grounds, saying that the incentives for donations of food inventory encouraged donations of items with "no nutritional value, like Twinkies, candy, stale potato chips, and expired foods.” “We do not need a permanent tax break for Twinkies” he said. (Video of Mr. Doggett's commentary on the food proposal here.)

How to assess the legislation? Helping “the needy” certainly is a familiar rationale cited in support of charitable giving legislation. But it bears repeating that “the needy” is but one segment of the 501(c)(3) sector. (Additional commentary on who benefits from the charitable deduction here). Broad-based charitable giving incentives such as extending the filing deadline and encouraging more IRA transfers are not directed toward helping the needy. Thus, if this really is a goal of lawmakers, much more targeted legislation to benefit social safety net organizations would be more appropriate.

Further, it is hard to ignore the absence of offsets. When tax benefits like these are not paid for, the question should be whether the America Gives More Act is the best use of $16.2 billion dollars. It is ironic that about 64 percent of the Act’s cost comes from extending two provisions (the special rule for food donations and the exclusion for IRA distributions) that were allowed to expire in the Tax Reform Act, which undermines the argument that this legislation is an optimal use of tax dollars.

Other provisions have some merit, depending on the goal. Extending the time to claim donations to April 15 may be a cost effective way to get more dollars to 501(c)(3) organizations, assuming the IRS can administer the provision to protect against double deductions.

Streamlining the excise tax on private foundations will likely result in diverting dollars from the U.S. Treasury to foundation grantees – sort of an inter-501(c)(3) sector transfer. This may be desirable, depending on one's judgment about whether foundations or the government spends money more in the public interest. But the provision does not result in new charitable dollars and so is not a giving incentive.

The permanent extension and expansion of the special rules for deductions of conservation easements without any associated reforms is harder to understand, given the many administrative difficulties and abuses associated with this provision of the tax Code. (For commentary, see Halperin, McLaughlin, Colinvaux).

So although there may be merit in the margins to some provisions, as a whole, the case for the legislation without offsets is rather underwhelming. If there were offsets, then at least the trade-offs could be more directly assessed. 

In short, although it is obvious that the America Gives More Act is not intended as a tax reform measure but rather reflects legislative business as usual, nonetheless it is disappointing to see more give-aways without much if any consideration of who should pay, and whether the give-aways are really worth it. But without an offset, there is little electoral cost to voting in favor of legislation, especially charitable giving legislation, which is always easy to frame, without much analysis, as helping those in need.

Roger Colinvaux

Notes on the CPI Report on the IRS Targeting Scandal

The Center for Public Integrity has released an investigative report about the IRS Tea Party targeting scandal, in which the CPI reviewed thousands of pages of documents and interviewed dozens of insiders. The report provides a good high-level overview of the scandal, and makes a few useful findings about the Exempt Organization function within the IRS. To many, the findings may come as no surprise, but bear repeating: over time the IRS has fewer employees to regulate a rapidly growing sector, the already low rate at which the IRS investigates exempt organizations is shrinking, the social welfare category (i.e., the one at the heart of the targeting scandal) is growing, and the IRS is increasingly timid – backing down to political pressure. Unfortunately, none of this makes for an effective overseer of a vital part of civil society.

Although the report is useful, some peripheral statements should be more closely considered if only because a number of misconceptions about the IRS targeting scandal continue inadvertently to be spread. One statement in the report is that “It wasnʼt until the Supreme Courtʼs Citizens United v. Federal Election Commission decision in 2010, however, that politically active nonprofits — social welfare groups as well as 501(c)(5) labor unions and 501(c)(6) trade groups — became a major force in political elections, all while receiving a de facto tax subsidy.” The implication from the “de facto tax subsidy” language is that political activity, when conducted after Citizens United by a noncharitable tax-exempt like a 501(c)(4), (5), or (6), gets an unwarranted subsidy and is abusive. But this is not really right. Political activity by a noncharitable exempt generally is not tax-advantaged relative to the same activity by a political organization (aka a “527”). Rather, political activity by a noncharitable exempt actually triggers a tax that is intended to make the tax treatment of political activity consistent across sections of the tax code. There is no abusive subsidy for political activity here.

Later, the report notes that “Social welfare and other nonprofit groups galloped into the post-Citizens United era with an inherent advantage over overtly political groups: They could hide the source of their funding, regardless of whether those sources were corporations, individuals or other special interests. And they're only required tell the FEC the names of donors who give money to help produce specific ads — something that rarely happens.” This point bears more than passing emphasis. The anonymity offered to donors by noncharitable exempt status, and not a tax subsidy, is the underlying legal issue at the heart of the targeting scandal post-Citizens United. In other words, the targeting scandal is not really about taxes at all, it is about donor disclosure or the lack thereof.

The report says that: “The tea party affair has directed attention away from what many IRS workers say is the much larger problem — regulating the activities of politically charged nonprofits.” and also that the IRS is “supposed to ensure 501(c) nonprofit organizations don't become more political than the law allows.” The broad meaning here is right: the targeting scandal has diverted attention from some real problems with the legal architecture. Also, the IRS does have a legitimate role to play when it comes to political activity and tax exemption. But these statements unintentionally play into another misconception about the IRS’s role when it comes to the political activity of noncharitable exempts and political organizations. In this context, the IRS does not really “regulate” political activity in the sense of deciding whether or not the activity is permitted. Rather, the IRS’s function is to classify organizations based on their purpose as measured by the quantum of their activities. This is an important distinction. The IRS does not regulate speech or activity as such; rather, the IRS, as charged by Congress, assesses organization purposes and activities and applies a tax label ((c)(4), 527, etc.). So political activity is relevant to tax classification, but it is not a question of permitting or prohibiting political activity.

The report also states that “Political ‘527 groups’ are tax exempt like 501(c)(4) groups, but unlike them, they must disclose their donors.” It should be noted that the point about disclosure is correct, but not the point about tax-exemption. Broadly, 527 groups are taxed on their investment income whereas 501(c)(4)s and other noncharitable exempts are not. So the tax treatment is not equivalent. But as noted earlier, if a noncharitable exempt engages in political activity, then a tax is triggered, which is intended to make the organizational tax treatment of political activity broadly uniform across exemption categories.

But none of this undermines the key thrust of the report's message -- that the regulatory environment of the IRS exempt organization function is in crisis and in need of constructive solutions.

Roger Colinvaux

U.S. House to Consider Charitable Giving Legislation

The House of Representatives this week is likely to take up charitable giving legislation. Last week, the Rules Committee reported out H.R. 4619, which modifies and expands on a charitable giving bill of the same number marked up by the Ways and Means Committee on May 29. Committee Report here.

Renamed the “America Gives More Act of 2014,” H.R. 4619 combines several separate charitable giving measures. The charitable giving incentives of H.R. 4619 now are:

• Food Donations. Make the special enhanced deduction for charitable contributions of food inventory permanent and modify this enhanced deduction to: increase the percentage limitation from ten to fifteen percent for business taxpayers, provide for a special deemed basis rule for certain taxpayers, and permit fair market value of donated food to be determined disregarding the fact that there may not be a market for the food, among other special valuation rules. (This provision applies retroactively to restore this expired deduction.)
  
  
• IRA Distributions to Charity. Make permanent the exclusion for distributions from individual retirement arrangements to certain public charities. (This provision applies retroactively to restore this expired exclusion.)
  
  
• Conservation Easements. Make permanent the special percentage limitations and carryforwards for charitable donations of conservation easements, and extend such favorable treatment to contributions by certain Native Corporations, as defined under the Alaska Native Claims Settlement Act. (This provision applies retroactively to restore this expired deduction.)
  
  
• Extend Time to Claim. Generally allow taxpayers until the tax-filing deadline (April 15) to claim charitable deductions for the tax year.
  
  
• Reduce Foundation Excise Tax on Investment Income. Replace the two rates of tax on the investment income of private foundations with a single flat rate of one percent. 

These provisions are broadly consistent with provisions in the “Tax Reform Act of 2014,” a discussion draft released by Ways and Means Committee Chairman Dave Camp in February, with some notable exceptions. For instance, the Tax Reform Act:

• Eliminates the special enhanced deduction for food inventory rather than retaining and expanding it.
  
  
• Does not include the IRA distribution exclusion, i.e., allows it to expire.
  
  
• Does not expand the special rules for donations of conservation easements to new donor categories, and provides for a modest reform that no deduction is allowed for easements relating to golf courses, a proposal also advocated by the Treasury Department (page 95).

Whether the differences between H.R. 4619 and the Tax Reform Act reflect a change in position (and a move away from reform) or reflect the fact that H.R. 4619 is not primarily a tax reform measure remain to be seen. 

Roger Colinvaux

What Does the Hobby Lobby Decision Mean for Religious Nonprofits?

There has been an enormous amount of academic, other commentator, and media coverage of the Supreme Court's recent decision in Burwell v. Hobby Lobby Stores.  Included in the discussion has been much speculation about how the decision, involving a closely-held, family-owned, for-profit corporation, impacts ongoing litigation involving religious nonprofit corporations challenging whether the limited accommodation provided for them under the same rule (requiring  coverage of contraceptive services) is sufficient under the federal Religious Freedom Restoration Act.  Language in the majority opinion (slip op. p. 44) and in Justice Kennedy's concurring opinion (slip op. p. 3) seems to suggest although not hold that it is, but on Thursday the Court issued an injunction barring the federal government from requiring Wheaton College to use the form prescribed by the government to implement the accommodation, pending resolution of the College's appeal.  The order generated a strong dissent from Justice Sotomayor (joined by Justice Ginsburg and Justice Kagan), who concluded the College had not stated a viable claim under RFRA.  The dissent is unusual, especially given that the order on its face makes it clear that it "should not be construed as an expression of the Court's views on the merits."

My understanding of what is going on here is as follows.  First, many religious nonprofits (my employer, the University of Notre Dame, included) are not flatly exempted from the requirement to cover contraceptive services.  The existing flat exemption is limited to churches and, using terms familiar to nonprofit scholars and practiti0ners and indeed defined by reference to Internal Revenue Code § 6033, conventions or associations of churches, integrated auxiliaries of churches, and the exclusively religious activities of any religious order.  Other religious nonprofits instead are accommodated by being given the opportunity to complete the above-mentioned form stating their objection to providing some or all of the required coverage.  The effect of this form differs depending on whether the nonprofit otherwise would provide such coverage through a third-party insurer or through a third-party administrator because the nonprofit is self-insured.

The University of Notre Dame provides a good example of both of these situations and how they differ, particularly from the perspective of the nonprofit (and indeed Notre Dame is challenging the sufficiency of the accommodation in court).  These facts are drawn from the Seventh Circuit's recent opinion adverse to Notre Dame, although it should be noted that many similarly situated religious nonprofits have won similar cases in the lower federal courts (pre-Hobby Lobby).  For those students at Notre Dame who need health insurance, Notre Dame has a contract permitting students to purchase such insurance from an insurance company, Aetna.  The effect of Notre Dame completing the above form (EBSA Form 700) is to tell Aetna Notre Dame (and its students) will not pay for such coverage, which effectively requires Aetna to do so because under the Affordable Care Act health insurance companies have to provide such coverage.  So by completing the form, Notre Dame effectively shifts the cost of such coverage from itself (and its students) to Aetna.

For faculty and staff at Notre Dame who need health insurance, the situation is subtlely different.  Notre Dame is self-insured, which means it pays for all covered health insurance (subject to a modest employee up-front contribution and co-pays) although it hires a third-party to administer this coverage (Meritain).   The difference here is that Meritian is not a health insurer, so it is not obligated to provide coverage for contraceptive services even if Notre Dame refuses to do so absent an additional legal step.  The additional legal step providing by the current accommodation is that Notre Dame's completion of the EBSA Form 700 triggers a new requirement that Meritain provide this coverage, accompanied by a right for Meritain to obtain reimbursement of at least 110 percent of its costs of doing so from the federal government.  My understanding is that under Notre Dame's understanding of the theological concept of cooperating with evil, since the effect of Notre Dame completing the form is to trigger a new requirement that Meritain provide contraceptive coverage (albeit ultimatley paid for by the federal government), being required to complete the form is viewed by Notre Dame as a greater  burden on its exercise of religion that exists when the coverage is provided by a third-party health insurer (although I assume Notre Dame is continuing to argue that the accommodation in that situation is also not sufficient under RFRA).  As the Supreme Court majority noted in the Hobby Lobby decision (slip op. pp. 36-38), whether a particular act is sufficiently connected to the ultimate evil objected to make that act itself morally objectionable is itself a religious belief and so subject only to test of sincerity in the courts (which test I assume Notre Dame would have no trouble passing).

Bottom line, the Hobby Lobby decision does not clearly resolve the cases involving religious nopnrofits that are not flatly exempt from the contraceptives services coverage requirement but instead accommodated as described above.  Furthermore, those religious noprofits that provide health coverage through self-insurance as opposed to a through a third-party insurer have a subtely stronger claim  that the existing accommodation is not sufficient under RFRA.  Whether the lower courts, and ultimatley the Supreme Court, believe this difference is determinative remains to be seen.

Lloyd Mayer

Silencing the Nonprofit Sector in Algeria, Azerbaijan, Ecuador, Indonesia - and Canada and the UK

Third Sector reports that the Charities Aid Foundation has issued a report criticizing several countries for introducing legislation or taking other steps aimed at preventing nonprofits from criticizing their governments.  Titled Future World Giving: Enabling an Independent Not-for-profit Sector, the report highlights six countries that have introduced such legislation and several others where government critics, including the leaders and members of NGOs, face prosecution and other government persecution.  The report also highlights how governments often use their funding of NGOs to impose conditions on those groups that effectively silence them, an issue that recently reached the Supreme Court here in the United States.

Lloyd Mayer

Philanthropy Classes Highlight Issues for Donors - Including the Funder of the Class

The NY Times Dealbook reports that Geoffrey P. Raynor, founder of the hedge fund Q Investments, has funded classes on philanthropy at several prominent universities, including Harard, Northwestern, Princeton, Stanford, and Yale.  The classes give students real world experience in giving money away (tens of thousands of dollars for each group of enrolled students).  They also give students an opportunity to question Mr. Raynor, who requires that he be given two hours to speak to the students personally.  According to the article, some of those question and answer sessions have become a bit testy, with students challenging Mr. Raynor's approach to philanthropy and questioning how he made his money.  The one lesson that all of the students seem to take away, however, is that giving away money well is harder than it first appears.

Lloyd Mayer

New New York "Independent Expenditure" Disclosure Requirements

Nicholas Mirkay previously wrote in this space about the new California law that requires disclosure of donors and other information for nonprofits engaged in certain political communications in that state.  New York also recently enacted new disclosure requirements for "independent expenditures" and then issued emergency regulations to implement these new rules that will impact nonprofits engaged in certain political communications in that state.

For purposes of the New York law, the range of communications that trigger disclosure is much broader than the federal definition of "express advocacy" or "electioneering communications".  More specifically, those communications are defined as follows:

• Type of Communication:  Audio or video communication via broadcast, cable, or satellite, written communication via advertisements, pamphlets, circulars, flayers, brochures, or letterheads, or other published statements (including paid Internet advertising), if the communication is conveyed to 500 or more members of a general public audience.

• Content of Communication:  Either contains words such as "vote," "oppose," "support," "elect," "defeat," or "reject" that call for the election or defeat of a cleary identified candidate or refers to and advocates for or against a clearly identified candidate or ballot propoal; whether a communication advocates for or against is based on an all relevant facts and circumstances test.

• Timing of Communication:  Anytime for communications that contains the express advocacy words; on or after January 1 of the election year for other communications that advocate for or against.

All groups covered by these rules, including nonprofits, must register before making any independent expenditures and then must file reports disclosing both expenditure details and identifying information for any person providing a contribution of $1,000 or more.

In related news, according to a Politico report Citizens United recently announced it plans to sue the New York Attorney General over his issuance of earlier regulations imposing new disclosure requirements on nonprofits engaged in election-related spending.  It is not clear if the lawsuit will be expanded to also encompass the recently enacted disclosure rules.

Lloyd Mayer

Complaints Against Charity Regulator On the Rise - in the UK

In an interesting example of government transparency, Third Sector reports that the Charity Commission for England and Wales has issued its Annual Complaints Review showing that complaints made against the Commission increased in 2013/14 over a third from the previous year and that the proportion of complaints fully or partially upheld almost doubled (from 19 percent to 34 percent).  More specifically, the Commission received 152 "Stage 1" complaints, with about a third of the complaints moving to Stage 2 consideration (because the customer was dissatisfied after the Stage 1 review).  To put the number of complaints in context, the Commission during the same period received 6,681 applications for registration as a charity (or about a tenth of the § 501(c)(3) applications the IRS receives annually).  The most common issue raised (and some complaints raised multiple issues) was insufficient regulatory intervention by the Commission.

While I realize that the National Taxpayer Advocate may to some extent gather similar information with respect to the IRS, it is telling that when the Advocate's office reviewed the exempt organization application process last summer it began by stating that "[i]In addressing the exempt organization (EO) issues, the Advocate’s office does not have investigative authority and did not seek to duplicate other ongoing investigations."  The existence of this type of detailed information in the UK may be another argument for a national exempt organizations regulator that is not part of the IRS, as Marc Owens has proposed.

Lloyd Mayer 

How to Hide Billions of Dollars in Charitable Giving - At Least for A While

Bloomberg Businessweek had a fascinating article in May detailing how three billionaires used a complex web of private foundations and limited liability companies to hide not their political activity (they are not the Koch brothers) but instead their charitable giving.  Committed to keeping a low profile while supporting their desired causes, the reporter who wrote the story only stumbled across their activities when he noticed two multi-billion dollar charitable funds listed in an IRS database.  It then apparently took a year to pull from public documents - IRS annual returns, secretary of state filings, and so on - the overall structure and the individuals ultimately behind it: the three founders of a little known but apparently highly successful hedge fund, TGS Management.  Since 2000 the two funds have distributed more than $1.8 billion to various charities (including $700 million to combat Huntington's disease), plus an additional $1 billion that went to the Vanguard Charitable Endowment Program and so the ultimate charitable recipients for that amount are not known.

Bottom line, it is still possible to be a anonymous charitable giver, even on a very large scale, at least for a while.

Lloyd Mayer

Bloomberg: "Princeton Agrees to Pay Town More Than $24 Million Over Seven Years"

We previously blogged (here and here) about the lawsuit Princeton, New Jersey residents filed in 2013 against Princeton University, arguing that the University no longer qualified for exemption from property taxes because of its hundreds of millions of dollars in revenues from royalties and commercial ventures.  We missed, however, the latest major development in this dispute, which was reported by Bloomberg.  In late April of this year, the University announced that it had entered into an agreement with the town to  pay more than $24 million, mostly in unrestricted payments, to the town on a voluntary, one-time basis over the next seven years.  The amount is a significant increase over the amounts Princeton had been paying the town voluntarily.  

The agreements appears designed to undermine the pending lawsuit, and it apparently surprised the residents who brought the claim and their attorney based on comments in the Bloomberg article.  I am not familiar enough with the lawsuit, the agreement, or New Jersey law to know if the agreement effecctively moots the lawsuit or otherwise provides grounds for a motion to dismiss by the Unviersity, but I assume that the University's lawyers will eventually argue something along these lines.

Lloyd Mayer

IRS Issues Form 1023-EZ Rules Limiting Eligibility to Smaller (Financially) Organizations

The IRS today issued rules governing use of the recently proposed Form 1023-EZ.  As detailed in the instructions for this form, an organization must answer "No" to all three of the following questions relating to financial size in order to be eligible to use this shortened application form:

1.  Do you project that your annual gross receipts will exceed $50,000 in any of the next 3 years?

2.  Have your annual gross receipts exceeded $50,000 in any of the past 3 years?

3.  Do you have total assets in excess of $250,000?

The instructions also provide 23 other questions relating to the characteristics of the applying organization (such as whether the organization is a church, school, hospital, or supporting organization), that also all have to be answered "No" for the organization to be eligible to use the Form 1023-EZ.  More information about the new form is available from the IRS here, including how to obtain a copy of the form.

The IRS also issued final and temporary regulations, with the temporary regulations also serving a proposed regulations, governing which organizations are eligible to use the streamlined application process for recognition of tax-exempt status under section 501(c)(3) provided by Form 1023. Finally, the IRS issued Revenue Procedure 2014-40, which "sets forth procedures for applying for and for issuing determination letters on the exempt status under § 501(c)(3) of the Internal Revenue Code (Code) using Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code.  This revenue procedure is generally available for certain U.S. organizations with assets of $250,000 or less and annual gross receipts of $50,000 or less."  

Lloyd Mayer

Applying Cy Près to the Corcoran Gallery of Art

The Washington Post reports that the Corcoran Galley of Art has filed papers in D.C. Superior Court outlining its plan to keep its collection in the DC area through an arrangement with George Washington University ( GWToday announcement) and the National Gallery of Art (National Gallery announcement).  As the article details, the plan is apparently driven by the fact the Corcoran has run deficits for 11 of the past 13 years, leading it to conclude that it is not financially possible for the gallery and related college to continue to operate in its  current form.  The Corcoran is therefore invoking the cy près doctrine to permit changes to how its collection and educational activities are handled in the future.

Under the plan the National Gallery will have first claim on the Corcoran's collection, with any art that the National Gallery chooses not to keep offered first to institutions within the city and then in a growing geographic area outside of the city.  The Attorney General for the District of Columbia must approve any transfer of art outside the city, however.   The entire process of allocating the artwork may start as early as mid-August.  For its part, George Washington University will take over the Corcoran College of Art and Design and also maintain the Corcoran's existing gallery space, as a fail-safe location for the collection taken by the National Gallery.  The Corcoran itself will continue to exist, but as a much smaller nonprofit organization devote to the arts.

For more information, see the motion filed by the The Trustee of the Corcoran Gallery of Art (courtesy of the Washington Post).

Hat Tip:  Miriam Galston (GWU)

Lloyd Mayer