Nonprofit Law Prof Blog

Ebola is a Qualified Disaster

The IRS has designated the outbreak of the Ebola virus as a qualified disaster under section 139 of the Internal Revenue Code. In the past, most qualified disaster designations have been for weather related events, or terrorism. Query whether this is the first time a qualified disaster has been declared for an infectious disease.

The principal consequence of the designation is to provide that victims who receive certain types of payments to relieve burdens suffered because of Ebola do not have income as a result of the payment (to the extent not compensated for by insurance). 

In addition, a qualified disaster designation has implications for spending by charitable organizations, particularly private foundations. For example, the IRS states that as a general matter corporate foundations “may choose” to provide assistance to employees of the corporate sponsor who are harmed by Ebola. This statement oversimplifies the issues involved, though IRS does note that “private foundations should exercise due diligence when providing disaster relief as set forth in Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations.” 

The concerns are that employers will funnel aid to select employees through the corporate foundation. This could be an act of self-dealing, the aid might not be based strictly on an objective determination of need, and further, the aid program might not be designed to serve a broad or charitable class of beneficiaries and so may really be for private not public purposes. Accordingly, the IRS details the due diligence required to prevent against such possible abuses (see pages 20-22 of the Publication). Foundations and other charities (including donor-advised funds) getting involved in disaster relief would do well to look at this guidance.

Interestingly, the sensible if elaborate due diligence regime outlined in Publication 3833 is not based on the text of the Internal Revenue Code (section 139), which makes no mention of charities or private foundations. Rather, the law here comes directly from 2001 legislative history under the heading “Rules applicable to charitable organizations making disaster relief payments.” It is a noteworthy example of law arising from the penumbra of legislation. In effect, the IRS was told in the aftermath of 9/11 to relax its attitude to foundation provision of disaster relief, but to provide for essential prophylactics. This now survives as part of section 139 qualified disaster relief.

The IRS has also provided guidance (Notice 2014-68) on leave-based donation programs in connection with Ebola. Under such a program, an employee may forego sick or annual leave in exchange for the employer making payments to a charitable organization for the relief of Ebola victims. The guidance explains that the employee does not have income as a result, nor may the employee take a charitable deduction. To qualify, the employer must make the payment to the charity before January 1, 2016.

Roger Colinvaux

Recent conferences of note

Last week, the National Center on Philanthropy and the Law at New York University held a conference titled “Regulation or Repression: Government Policing of Cross-Border Charity.” The agenda for the conference is available here and papers from the conference will be posted in due course. Papers from past conferences are available here. The NCPL website and annual conference papers are an excellent resource for scholars, practitioners, and policymakers.

In addition, the Urban Institute in Washington DC hosted a conference titled “Increasing Philanthropy through Policy and Practice.” The website describes the conference as follows:

"In the midst of recent attention to ways in which the charitable deduction might be pared, worries loom about how giving might decline. Join the Urban Institute’s Tax Policy and Charities project in examining the flip side of the issue, as we explore ways that existing incentives, along with new platforms and better practices, can be leveraged to encourage philanthropy. . . . Topics will include the proposal to extend the giving deadline for the charitable deduction to April 15 (as with individual retirement accounts), whether expanded use of donor-advised funds has encouraged greater giving, how new platforms for giving provide new opportunities, and nonprofit organizations’ efforts to improve their fundraising effectiveness." 

The webcast is accessible here.

Roger Colinvaux

Study Shows Marked Increase in Charitable Giving; Number Projected To Rise

    The U.S. Trust, in conjunction with the University of Indiana Lilly Family School of Philanthropy published an interesting study this month. The study found a marked increase in charitable giving among high net worth donors for 2014. The study also concludes that the trend is projected to increase in the coming years. The biennial study found that 98.4% of high net worth households donated to charity—the highest it has been since the study began in 1996. The study also found that the amount each household pledged has increased by 28% from last year.

     The study also tracks the reasons why donors give. The top cited reason was the belief that the donor’s gift can make a difference while only one-third cited favorable tax treatment as a determinative factor in giving. The study also tracked why donors stop giving. Some of the reasons cited were too frequent solicitations asking for inappropriate amounts, ineffectiveness of the organization, and change in organizational leadership. Read more on the article HERE.

    How may this study help charities and nonprofits going forward?  

DAB   

IRS Court Victory Over Teaparty Still Leave Open Questions of Enforcement

    The IRS secured a victory over the Tea Party in a ruling by the United States District Court for the District of Colombia in Linchpins of Liberty v. United States and True the Vote, Inc. v. IRS. The District Court found that the cases were now moot after the IRS ultimately approved the parties’ application for tax-exempt status.

    The case began after a highly controversial scandal after the IRS delayed a number of applications for tax-exempt status as a 50(c)(3) or 501(c)(4). The IRS delayed applications based on, among other things, the applicants’ name. For example, the IRS flagged applications containing words such as ‘patriot,’ ‘freedom,’ and ‘liberty’ and gave them further review. The IRS’ rationale was that an influx of applications for 501(c)(3) and 501(c)(4) status, along with the dubious nature of many of the applicants’ dealings, caused significant backlogs. The result was a significant delay in processing applications.

    Instead of litigating the case, the IRS ultimately granted tax-exempt status to most of the parties involved rendering the lawsuit moot. While this may be the end for now, this raises serious questions for the IRS going forward. What, if anything, may the IRS do to review the merits of 501(c)(3) and 501(c)(4) applications—especially those that appear suspect?     

DAB

Proposed State Constitutional Amendment To Benefit The Boy Scouts Of America

    This November, West Virginia voters will be deciding whether to amend to the state’s constitution. The proposed amendment is designed to benefit nonprofit organizations that are engaged in “adventure, educational or recreational activities for young people.” It’s no secret, however, that the sole purpose of the proposed amendment is to benefit the Boy Scouts of America.

    Every four years, the Boy Scouts of America hosts its Jamboree retreat at its Summit Bechtel Reserve—a large outdoor activity park situated beside the New River Gorge in West Virginia. During the interim years, the Boy Scouts would like to rent the park to for-profit businesses. The revenue generated from the rental fees would go toward maintaining and improving the park. However, if the Boy Scouts go forward with renting out the park without the amendment, it would almost certainly lose its state tax-exempt status. The proposed amendment would ultimately allow the Boy Scouts to operate as a tax-exempt nonprofit organization while renting the park to businesses for a profit.

    Is this sound tax policy? What about other nonprofits who would like to operate in a similar manner; what makes the Boy Scouts of America so special? Would allowing the Boy Scouts of America to operate in such a way be a boon on the state’s economy, or is the state forgoing a great deal of revenue that it would otherwise be entitled to? Read more HERE.

 

DAB

Houston Churches At Odds With City Government Over Equal Rights Ordinance: What Might The IRS Have To Say About It?

    The City of Houston, Texas has found itself in the midst of a growing controversy. The controversy stems from the passage of a city ordinance aimed at protecting the rights of LGBT residents. In response to the ordinance, several Houston pastors spoke out against the ordnance and the city’s mayor—a member of the LGBT community herself. The pastors of these churches circulated petitions among their respective congregations in an effort to get a referendum of the ordinance on the ballot. The city attorney, however, held that the petition was invalid, and the pastors filed suit.

     In connection with the lawsuit, the city attorney issued subpoenas to obtain the text of sermons from the plaintiff church pastors. The purported purpose of the subpoenas was to determine how the church congregations were instructed regarding the petition. You can read more on the story HERE

     How might the IRS view the churches’ activism? As a 501(c)(3), churches are limited in the type and amount of lobbying they may engage in. What might the subpoenas reveal about churches dealings regarding the equal rights ordinance? Could the content of the pastors’ sermons be construed as endorsing or opposing a political candidate—an activity that is absolutely prohibited under 501(c)(3)?

 

DAB

Low-Income Housing Coop: Different Board, Different Result?

    A low-income housing cooperative that sought reconsideration of the IRS’s determination that it did not qualify as a 501(c)(3) received a final determination earlier this month that it indeed fail to meet the requirements of 501(c)(3). The IRS found that it did not operate exclusively for exempt purposes, did not meet the operational test, and possibly allowed its net earnings to inure to private individuals. The membership requirements of the housing cooperative appear to reflect the safe harbor provisions detailed in Revenue Procedure 96-32; however, the IRS’s ruling pointed out that the low income housing in question benefited the individuals who controlled the cooperative. This seems to have been the straw that broke the 501(c)(3) status’ back. One cannot help but ask whether the outcome would have been different if the housing cooperative simply had elected a board that was independent from those residing in the housing.

Download Low Income Housing Coop Educational Center Not Qualified as Nonprofit

 

Khrista Johnson

IRA Charitable Rollover Provision: Will Congress Extend or Not Extend?

        An insightful Wall Street Journal commentary addresses the likely outcome for the IRA Charitable Rollover Provision. This provision allows taxpayers aged 70.5 and older to make deductible charitable contributions (up to $100,000) from their IRAs without having to include such charitable contributions in their income. In addition, the charitable contributions count against minimum IRA distribution requirements. The Wall Street Journal concludes that while Congress is likely to extend the provision this year, it is unlikely to do so before the November election. At the same time, it is possible that Congress will restore this break retroactively. The commentary provides a good balance of the implications should Congress choose to extend or not to extend.

 

Khrista Johnson

On the March to Efficiency: Millennials & Charity: Water

        A concept that I have introduced through scholarly writing and blogged about here is the need for a more efficient charitable market. In August, I commented upon a Vanguard Charitable study that found millennials are more likely to see their charitable giving as a form of investment and thus promote a culture of giving that demands more transparency and accountability, two hallmarks of a more efficient charitable market. A recent NPR broadcast that examined the work of Scott Harrison’s nonprofit, Charity: Water, confirmed just that.

        In the segment, Harrison spoke about his dual purpose in forming Charity: Water. First, he wanted to provide clean water to the almost 800 million people globally who lack access to it by building wells. Second, he sought to make an example of how a nonprofit could do its work in a way that would resonate with the next generation of givers. He recounted his own experience of being hesitant to give to charities prior to starting Charity: Water, which stemmed from the absence of information on how a charity would use the funds. Today the nonprofit world is concerned with how approximately 80 millennials make their decisions about giving, and not surprisingly, it is different from the prior generation(s). As stated in my prior post, it is widely accepted that millennials want to view their “donation” as “investment,” and at least one commentator recommends that nonprofits refer to the latter. Another salient point is how technology intersects with millennial giving. Millennials value their time, and as a result, any form of technology that makes it easier for them to invest is preferable. Moreover, the Ice Bucket Challenge that swept through social networks over the summer shows that the desire of millennials to share the details of their lives extends to their giving. In response, Charity: Water is utilizing a birthday campaign where donors can ask their network to donate one dollar for each year celebrated, i.e., $25 dollars to celebrate a 25th birthday. Charity: Water is also placing sensors on its wells, so donors may interact with the impact of their investment in a novel manner. Charity: Water’s innovative approaches are proving successful. They have helped over 4 million more people in twenty-two countries gain access to clean water. Millennials and nonprofits like Charity: Water may just help move giving into the next century and towards a more efficient charitable market.

 

Khrista Johnson

Deductible Donations to Foreign Subs

        In PLR 201438032, the Service considered whether donations to a nonprofit public benefit corporation that engages in transactions of funds with its foreign subsidiary are tax deductible and whether such transactions would harm its 501(c)(3) status.   The PLR confirms aspects of how a transaction between a 501(c)(3) and a wholly-owned foreign subsidiary should be structured to secure a favorable tax result.  One question the IRS still has not resolved is whether a donation to a  wholly-owned foreign single-member LLC is deductible.  The nonprofit world will be waiting.

        In the ruling, the subsidiary in question is a foreign nonprofit foundation whose activities, namely seeking to aid foreign orphanages, are carried out internationally.  The governing board and governing officers are under the control of the public benefit corporation.  The stated purpose of the subsidiary is to carry out the purposes and objectives of the public benefit corporation.  In terms of board overlap, at least three of the five board members of the subsidiary are members of the public benefit corporation’s board.  In terms of governance, it is clear that the public benefit corporation is involved in each area and ensures that the subsidiary complies with U.S. tax rules and regulations regarding tax-exempt entities, e.g., restrictions regarding private inurement and lobbying expenditures.  The public benefit corporation also has the ability to expel members from the board of directors and to dissolve the subsidiary.  Under the “Proposed Transaction,” the public benefit corporation may vote to transfer funds to the subsidiary.  There are also mechanisms in place to ensure a type of expenditure responsibility-like accountability for the maintenance and use of funds.  Finally, the public benefit corporation disallows earmarking, and its board maintains the requisite discretion and control over funds, i.e., does not have an obligation to transfer funds to the subsidiary.

        Both of the public benefit corporation’s requested rulings were granted.  First, the Proposed Transaction was deemed not to jeopardize the public benefit corporation’s tax-exempt status.  Second, donations made to the public benefit corporation were deemed deductible under Code section 170(a).  In reaching this ruling,  Treasury stated that the Proposed Transaction is consistent with the anti-conduit rules of Rev. Ruling 63-252 and the discretion and control requirement of Rev. Ruling 66-79.  Moreover, it looked to Revenue Ruling 68-49 which states that a 501(c)(3) organization does not jeopardize its tax-exempt status by contributing funds to non-501(c)(3) organizations as long as it can show the funds were used for 501(c)(3) purposes.  Ultimately, Treasury found the public benefit corporation’s actions congruent with this ruling.  In terms of the second ruling, Treasury found that since the public benefit corporation is an organization described in Section 170(c), contributions to it are deductible under Section 170(a). 

 

Khrista Johnson

Are Donors Doing Enough to Fight Ebola?

        As the Ebola threat looms, many observers are considering whether the responses of the U.S. government, the CDC, and the World Health Organization, inter alia, are appropriate. Similarly, nonprofit commentators are considering whether private donations of funds and resources from the U.S. are adequate. As one commentator reports, there have been several U.S. private foundations that have made large-scale contributions to the fight against Ebola; in addition, the experience of two U.S. Christian organizations operating in West Africa evinces that publicity helps generate more donations. The U.N. has estimated that $1 billion is necessary to effectively combat the Ebola virus.

        A recent article in The Chronicle of Philanthropy has predicted that the first confirmed case of Ebola in the United States will lead to greater charitable donations to stop a further outbreak of Ebola abroad. Several U.S. private foundations have already made multi-million dollar gifts to combat a spread of the virus. The Bill & Melinda Gates Foundation has decided to contribute $50 million to U.N. agencies and other organizations. The Paul G. Allen Family Foundation donated $9 million to the CDC, $2.8 million to the American Red Cross, and $100,000 in the form of matching funds to Global Giving. The William and Flora Hewlett Foundation contributed $5 million to various international health organizations. Moreover, the U.S. government has provided numerous resources, including, inter alia, individuals to build treatment units and training for health-care providers. The USAID has expended over $100 million in an effort to quell the outbreak and is on record for the contribution of an additional $75 million.

        At the same time, commentators have denounced U.S. donors as not donating enough. The Director of International Communications at the Red Cross has stated that the Ebola outbreak is not “top of mind as a place to donate” precisely because of the involvement of the U.S. government, the CDC, and the World Health Organization. Nevertheless, SIM USA, a Christian mission organization who had two health-care workers infected with Ebola in Liberia late in the summer, has received sizable donations to support its work in West Africa. SIM USA has seen an increase in volunteers, and although these actions are later than anticipated, they show promise for a mobilization of donors and volunteers to fight the deadly virus. Additionally, Samaritan’s Purse, also a Christian organization working in West Africa, experienced a 13% increase in cash contributions (when compared to last year’s donations) after one of its doctors was infected with Ebola and successfully treated at Emory University Hospital. (For more on Samaritan’s Purse, see JRB’s insightful post). Thus far, $4.4 million of its donations has been designated for fighting the Ebola outbreak. As the speculation about a U.S. outbreak grows, the public’s attention has become more focused on donating to assist with the global efforts already underway, e.g., see the following article on UK donations. For a complete list of non-governmental organizations responding to the Ebola outbreak, see here). 

 

Khrista Johnson

Leff: Preventing Private Inurement in Tranched Social Enterprises

h/t to our friends over at TaxProf Blog:

Benjamin M. Leff (American), Preventing Private Inurement in Tranched Social Enterprises, 41 Seton Hall L. Rev. ___ (2015):

Social Enterprises are organizations that are operated for the dual purpose of engaging in profit-making activity and furthering a social good. Because of their “hybrid” nature, social enterprises are perceived to be stymied by a legal system that is overly devoted to defining organizations as either businesses or nonprofits. Legal academics and legislatures have been hard at work trying to make room for social enterprises by experimenting with modifications the laws that constrain both businesses and nonprofits. One significant sector of this reform movement is devoted to making it easier for social enterprises to receive funding from both for-profit investors and charitable non-profits. They argue that social enterprises will not flourish until charitable non-profits are permitted make below-market investments in social enterprises for the purpose of subsidizing the return expected by for-profit investors. This combination of below-market charitable investments and market-rate for-profit investments is generally called a “tranched investment structure.” It is not impossible under current law, but reformers argue that it is unnecessarily difficult, primarily because of federal laws restricting nonprofit activities.

This article addresses the specific legal issues raised by a tranched investment structure. Previous scholarship (and legislative reform) has focused on specific rules that apply only to “private foundations,” a subcategory of § 501(c)(3) organizations, the general federal classification of charities. But, surprisingly, commentators have largely ignored the laws that apply to tranched investment structures involving any § 501(c)(3) organization. This article fills that gap.

This article argues that the IRS should issue guidance clarifying that the "private inurement regime" prevents a charity's insiders from investing in a for-profit social enterprise in which the charity is also an investor. At the same time, it should issue guidance clarifying that a fully independent charity investing in a for-profit social enterprise is not at risk of losing its tax exemption because of the "private benefit regime." Emphasizing the importance of independence as a check on abuses of the tranched structure will enable social entrepreneurs to innovate while the law continues to protect the interests of charitable contributors, the federal government and the charitable sector.