Nonprofit Law Prof Blog

SSRN Update: Articles on Public Interest Law, Church Bankruptcy, and Conservation

(1) Kathryn Sabbeth (UNC) has posted: "What's Money Got to Do With It?: Public Interest Lawyering and Profit." Here is the abstract: 

Definitions of public interest lawyering influence financial support, regulation of lawyers, and professional identity. This Article examines three contexts in which legal institutions have operationalized the concept of public interest lawyering: tax exemptions, exceptions to solicitation prohibitions, and fee-shifting statutes. The Article critiques the common conception of public interest lawyering as work provided by non-profit organizations or through volunteer activities outside the mainstream market for legal services. It argues that interpreting public interest lawyering as a market exception not only is incomplete but also threatens the viability of important work.

(2) Pamela Foohey (Indiana) has posted "When Faith Falls Short: Bankruptcy Decisions of Churches." Here is the abstract:

What does a church do when it is about to go bust? Religious organizations, like any business, can experience financial distress. Leaders could try to solve their churches’ financial problems on their own. Perhaps leaders do not view the problems as addressable with law. Or perhaps they do not think, as a moral or spiritual matter, that they should resort to the legal system, such as bankruptcy, to deal with their churches’ inability to pay its debts. Yet about ninety religious organizations seek to reorganize under the Bankruptcy Code every year. This Article relies on interviews with forty-five of these organizations’ leaders and attorneys to examine how the leaders conceptualized their churches’ financial distress as legal problems and decided to address those legal problems with bankruptcy.

Through these inquiries, the Article sheds light on longstanding questions about how people and organizations decide to use the legal system versus doing nothing or solving problems through self-help. The Article thus provides one of the first assessments of how small organizations view their problems as legal problems, and the first assessment of how leaders of small organizations decide to file for bankruptcy.

Church leaders’ journeys began with struggling to solve their congregations’ financial problems themselves and proclaiming that “bankruptcy from a spiritual standpoint is a no-no.” Most often, creditors’ foreclosure threats brought law to leaders’ attention. Leaders then turned to social networks for help understanding their legal options. Drawing from these results, the Article also scrutinizes how leaders’ reliance on social networks and feelings of stigma and shame because of their decisions to file influence debates about restricting access to bankruptcy.

(3) Jesse Phelps (USDA) has posted "'A Tinge of Melancholy Lay Upon the Countryside': Agricultural Historic Resources Within Contemporary Agricultural and Historic Preservation Law." Here is the abstract:

Preservation of working lands and resources has become the focus of many interested in the protection of rural areas. Despite public support for such initiatives and quantifiable successes, preservation advocates have struggled to utilize the current tools available to safeguard historic resources. To address this gap, this Article first considers the unique nature of agricultural historic resources and the challenges they present from a preservation perspective. It then assesses the current framework of historic preservation laws, developed largely for urban neighborhoods, and the issues preservationists face in applying these tools to the rural context. Last, this Article proposes a series of policy solutions that would provide meaningful assistance to rural preservationists in achieving their objectives. Ultimately, historic preservation has the potential to play a strong role in preserving the character of rural areas, but only if this profound policy disconnect can begin to be bridged.

RC

Hospital Boards and Quality of Care

The New York Times reported on the relationship between a sound hospital board of directors and the quality of care provided by the hospital. Here is the beginning of the article:

"If you or a loved one is having a heart attack, your most pressing concerns probably include how quickly you can get to the hospital and the quality of care you’ll receive. You’re probably not thinking about the hospital’s board room, even though quality of care for heart attacks and many other conditions may be determined in large part by decisions made there. Several studies show that hospital boards can improve quality and can make decisions associated with reduced mortality rates. But not all boards do so." Another interesting installment on the relationship between good governance and charitable outputs.

RC

Senate Hearing on Colleges and Universities

The U.S. Senate Committee on Health, Education, Labor & Pensions held a hearing today (Feb. 24) titled: Recalibrating Regulation of Colleges and Universities: Report of the Task Force on Federal Regulation of Higher Education. The Report is available here. Coverage of the hearing was provided by the Washington Post in an article titled "Are Colleges Over Regulated?" The Post describes the hearing as an initial step in “efforts to simplify federal regulations of colleges and universities, seeking to lay the groundwork for a rewrite of the nation’s higher education law.” 

RC

The new phone book's here! The new phone book's here!

One of the best resources out there for keeping track of state adoption of hybrid entities is socentlaw.com and specifically, the fantastic multi-colored map that keeps track of who has what where.   

So it is with a great excitement that would do Navin Johnson proud that we can share that Cass Brewer has updated his map.   Check it out!

EWW (dating herself....)

Alexander, "Benefit Corporations-The Latest Development in the Evolution of Social Enterprise: Are They Worthy of Taxpayer Subsidy?"

H/t the mothership at Tax Prof Blog:

Mystica M. Alexander, "Benefit Corporations-The Latest Development in the Evolution of Social Enterprise: Are They Worthy of Taxpayer Subsidy?", 38 Seton Hall Legis J. 219 (2014):  

The purpose of this Article is twofold: (1) placing the Benefit Corporation within the historical context of the social enterprise movement in the United States, and (2) considering whether Benefit Corporations should qualify for the preferred tax treatment given to nonprofit organizations. Part II of this Article explores the evolution of the social enterprise movement and the path leading to the hybrid entity’s rise in the United States. Part III provides a closer look at the legal requirements imposed on Benefit Corporations. Part IV outlines the requirements that must be met for a nonprofit organization to qualify for tax benefits and the rationale behind such benefits. Part V addresses whether the tax benefits made available to nonprofit organizations should be extended to Benefit Corporations. This Article concludes that although the Benefit Corporation represents a natural progression in the evolution of social enterprise, its organizational and operational structure does not provide sufficient grounds for extending special tax treatment to these organizations.

EWW

Third Circuit: Religious Nonprofits Must Comply With The ACA

On February 11, 2015, the Third Circuit handed down Geneva College v. Sec'y United States HHS. The case was brought by a group of nonprofit organizations that objected to purchasing healthcare plans that cover contraceptives in accordance with the Affordable Care Act. While Geneva College was exempt from providing such healthcare plans, the College argued that the ACA ultimately required it to sanction the use of contraceptives through an “opt out” provision. The Third Circuit, however, ruled the College’s religious beliefs were not substantially burdened by the ACA’s opt out provision.

At first blush this case seems similar to Burwell v. Hobby Lobby Stores, Inc. However, in Burwell the Supreme Court held that Hobby Lobby, a closely held corporation with a religious identity, had to choose between complying with the ACA in violation of its religious beliefs, or refuse to comply and face large fines. The Court held that the law violated the test set forth in RFRA. In relevant part, RFRA states that the “[g]overnment may substantially burden a person's exercise of religion only if it demonstrates that application of the burden to the person—(1) is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest."

 Here, under the ACA, religious nonprofits may “opt out” of providing health insurance that covers contraceptives. Under the ACA, nonprofits may submit a form to the government evidencing their religious objection. Once submitted, the nonprofit is exempt from providing the coverage, and the insured is able to obtain coverage for contraceptives elsewhere at no additional cost to the insured. The Geneva College claimed that submitting the exemption form to the government, it is “triggering, facilitating, or making [the appellees] complicit” in providing coverage for contraceptives despite not having to do so directly.

The Third Circuit disagreed, holding that the College’s religious exercise is substantially burdened by the opt out requirement. The Court of Appeals stated that the “[opt out provision] does not necessitate any action that interferes with the appellees' religious activities… [t]he appellees' real objection is to what happens after the form is provided—that is, to the actions of the insurance issuers and the third-party administrators, required by law, once the appellees give notice of their objection.” The Court of appeals went on to say “RFRA does not give the appellee a religious veto against plan providers’ compliance with [ACA regulations].”

Similar challenges to the ACA have been heard by the Fifth, Sixth and District of Columbia circuits, all of which ruling in favor of the government. Some say that this issue will almost certainly be heard by the Supreme Court next term. It should be interesting to see how the Court will decide this case and what it will mean for religious nonprofits.

DAB

Nonprofits Find Much to Like in Obama's Tax Proposal

An interesting article from the Chronicle of Philanthropy explains that there may be something in the president’s budget proposal that nonprofits may appreciate. According to the article, the budget would ultimately “raise the capital-gains tax, paid on inheritances of money and property, from its current rate of 23.8 percent to 28 percent for high-income taxpayers. In addition, the tax plan would close what some tax experts call the ‘trust-fund loophole.’”  According to some, these provisions would incentivize wealthy taxpayers to bequeath a greater portion of their assets to nonprofits to avoid paying the hefty capital gains tax. However, this assumes that the President or Congress won’t put limits on the charitable tax deduction.

It is important to note that the President’s budget has already garnered a great deal of criticism from GOP law makers. One of the greatest points of contention comes from the increase in capital-gains tax. It will be interesting to see the final budget and how it may affect donor behavior.     

DAB

Pennsylvania Lawmakers Seek To Enact Constitutional Amendment Limiting Judicial Interpretation of Nonprofits

The Pennsylvania General Assembly is considering a constitutional amendment that would give the General Assembly the sole authority to set the standard for “purely public charities.” According to a memo from Senators Ryan P. Aument (R) and Joseph B. Scarnati (R), the Amendment is apparently in response to the Pennsylvania Supreme Court case Mesivtah v. Pike County Board of Assessment Appeals. The court held that that Camp Mesivtah was not a purely public charity even though it qualified under the Pennsylvania Institutions of Purely Public Charity Act. The proposed constitutional amendment is purported to overrule the Mesivtah decision and obviate the need for the judiciary to interpret or set standards regarding the requirements for tax exempt status.

The Pennsylvania Institutions of Purely Public Charity Act may reflect the will of the General Assembly, but is a constitutional amendment going to keep the courts out of the business of interpreting the Act? Read more here.

DAB

Maine’s Governor Proposes Budget That Would Include Property Tax for Large Nonprofits

Maine’s legislature is in the process of considering the governor’s biennial budget proposal. In relevant part, the budget includes a tax on “large” nonprofit organizations operating within the state. The provision would require municipalities to tax nonprofit organizations at 50% of assessed property value over $500,000 as well give municipalities the authority to impose other fees. This has prompted many to say that the budget, if adopted as is by the legislature, would ultimately be an overhaul of the state’s tax code.

Rhetoric about taxing nonprofits and exempt organizations is nothing new. However, the notion is gaining traction in many states, particularly in the northeast. And while some states have attempted to impose similar taxes, this is the first time such a proposal has been made part of a governor’s budget proposal. Proponents of the measure claim that the tax would help broaden the base and allow the state to cut taxes for citizens in need of tax relief. Read more here.

If adopted by the legislature, how might this affect the nonprofit sector nationally? Are other states likely to follow suit? 

DAB

Article on the Charitable Contributions Deduction and Social Justice

Fran Quigley (Indiana University Robert H. McKinney School of Law) has posted For Goodness’ Sake: A Two-Part Proposal for Remedying the U.S. Charity/Justice Imbalance on SSRN.  Here is the abstract:

 

The U.S. approach to addressing economic and social needs strongly favors individual and corporate charity over the establishment and enforcement of economic and social rights. This charity/justice imbalance has a severely negative impact on the nation’s poor, who despite the overall U.S. wealth struggle with inadequate access to healthcare, housing, and nutrition. This article suggests a two-part approach for remedying the charity/justice imbalance in the U.S.: First, the U.S. should eliminate the charitable tax deduction, a policy creation that does not effectively address economic and social needs, forces an inequitable poverty relief and tax burden on the middle class, and lulls the nation into a false sense of complacency about its poverty crisis. Second, the U.S. should replace the deduction with ratification of the International Covenant on Economic, Social and Cultural Rights. This two-part process would reverse the U.S. legacy of avoiding enforceable commitments to economic and social rights. Charity would take a step back; justice a step forward.

 

 JRB

Article on College Athletics and Taxation

Richard Schmalbeck (Duke University School of Law) has posted Ending the Sweetheart Deal between Big-Time College Sports and the Tax System on SSRN.  Here is the abstract:

 

This paper was prepared for the annual conference of the National Center for Philanthropy and Law, held at the NYU Law School, held October 24-25, 2013. The overall topic was “Tax Issues Affecting Colleges and Universities,” and I was asked to address specifically those issues relating to athletics. This paper considers two specific issues that have in common only that they involve college sports, and are plagued by egregiously bad, (in this case, egregiously generous), tax treatment: the failure of the IRS to regard any part of the revenue from college sports as unrelated business income, and the choice by Congress to allow taxpayers to deduct 80% of contributions that they make to colleges or their “booster clubs,” even when those contributions entitle the donors to special privileges in purchasing tickets to college athletic events.

Most readers are probably familiar with the general rules regarding charitable contributions deductions, but a word about the unrelated business income tax may be helpful. An organization may qualify (or continue to qualify) as a tax-exempt organization, eligible to receive tax-deductible contributions, if its activities are primarily charitable. However, if the organization regularly carries on trade or business activities that are unrelated to its exempt purpose, the income from those activities is subject to federal income taxation at the same rates applicable to for-profit corporations. Although those rates are low for small businesses (those earning less than $75,000 per year), corporate earnings in excess of that amount are taxed at a rate of 34% on up to ten million dollars of income, and 35% beyond that amount. The unrelated business income tax raises very little revenue, but is thought to have an in terrorem effect, discouraging nonprofit organizations from engaging in unrelated business activities. While the unrelated business tax exists primarily because of Congressional concerns about unfair competition with for-profit businesses, a better description of its actual effect is that it discourages nonprofit organizations from pursuit of business activities that do not further any exempt purpose.

 

JRB

Article on Fiduciary Duties

Lionel Smith (McGill University - Faculty of Law - Paul-André Crépeau Centre for Private and Comparative Law; King's College London – The Dickson Poon School of Law) has posted Fiduciary Relationships: Ensuring the Loyal Exercise of Judgement on Behalf of Another on SSRN.  Here is the abstract:

In this article, I present a theory of fiduciary relationships that seeks to address both the justification and the content of fiduciary duties. It will also address the question of remedies, which sheds important and neglected light on the question why this part of the law has the shape that it does. All three aspects — the reasons we impose these duties, what these duties require, and the remedies associated with them — are linked to one another in a conceptual unity that reveals the interlocking aspects of private law’s concern with relationships in which one person is empowered to exercise decision-making authority on behalf of another.

 

JRB

Article on Benefit Corporation Legislation

Hans Rawhouser (UNLV College of Business), Michael E. Cummings (UNLV College of Business), and Andrew Crane (York University - Schulich School of Business) have posted Benefit Corporation Legislation and the Emergence of a Social Hybrid Category on SSRN.  Here is the abstract:

Previous research highlights the tensions that social hybrids face by spanning categories. This paper explores the emergence of legislation to support a new category for social hybrids, focusing on Benefit Corporation legislation in the United States. We present quantitative analysis of the state-level factors that make a state suitable for a social hybrid category (attractiveness for for-profit business and non-profits, existing social hybrid organizations, legislative intensity, political leanings) followed by qualitative analysis of the arguments marshaled for the creation of the Benefit Corporation legal form. Our findings raise important insights for research on social hybrids and suggest a range of practical implications.

JRB 

Most Recent Nonprofit Advocacy Matters

The most recent edition of Nonprofit Advocacy Matters, published by the National Council of Nonprofits, contains a number of entries that may interest readers.  Headlines include the following:

 

Federal Budget 101 (discussing the significance of the President’s Budget, the Budget Resolution prepared by the House and Senate Budget Committees, the Appropriations process and the process of Budget Reconciliation)

 

Got Influence? (opining that “nonprofits from eleven states have the inside track on delivering the message on how tax exemptions, giving incentives, and regulations” affect the charitable sector because leadership assignments in the Senate Finance Committee “will affect the policy debates and legislation for the next two years”)

 

Maine Governor Proposes Taxes on Nonprofits (reporting that the budget plan of the Governor of Maine “would remove the full exemption from property taxation on properties owned by nonprofit organizations with an assessed value in excess of $500,000, and reduce the exemption to 50 percent on the portion of the value in excess of $500,000”)

 

Court Orders Massachusetts to Update Rates Paid to Nonprofits (reporting that a state judge has ordered the Massachusetts Secretary of the Executive Office of Health and Human Services to “update the rates paid to nonprofits for human services provided on behalf of the Commonwealth”)

 

Nonprofit Independence Challenged, Preserved in the Northeast (citing recent examples of how “public and government officials often misunderstand the relationship between governments and charitable nonprofits and mistakenly presume that rules and mandates by government ought to automatically apply to these independent organizations”) 

 

Taxes, Fees, PILOTs (noting developments in Alaska and Pennsylvania)

 

New State Offices for Faith-Based Nonprofits (discussing the creation in New York of an Office “to assist and leverage community and faith-based organizations in the delivery of education, health, workforce training, food programs, and social services to communities, particularly those most in need” and proposed legislation in Pennsylvania to establish an Office “that would do much of the same work contemplated for the new New York Office”)

  

JRB

NY Governor Cuomo Proposes Tax Credit for Gifts to Educational Nonprofits

As reported in The Buffalo News, New York Governor Andrew Cuomo is proposing that those who donate to organizations “that give scholarships to low- and middle-income families to attend private schools would get a tax break,” as would those who donate “to education foundations and other groups that help public schools.”  The form of the proposed tax incentive is reported to be a state income tax credit that “would take up to 75 cents off the tax bill for every dollar donated, up to a $1 million.”

Enacting the proposal into law may require some political maneuvering.  The story continues:

In Albany, debate over the tax credit has been framed as a fight between private school supporters and public school advocates. But Cuomo last month linked it to another education proposal, the DREAM Act, short for Development, Relief and Education for Alien Minors, which would let children of undocumented immigrants get college tuition assistance.

 

Cuomo told lawmakers last month that he would only approve the two together.

The article states that opponents fear the proposal will lead to less support for public schools, whereas others see benefits to public education in that donors to charities “that raise money for school improvements or academic programs at public schools would be eligible for the tax credit under Cuomo’s plans.” 

 

JRB

Tax and Spending Proposals Affecting Charities and Charitable Gifts

The Chronicle of Philanthropy is running three stories discussing certain of the provisions affecting the charitable sector in President Obama’s proposed budget, one of which stories also notes efforts in the House of Representatives to make permanent several temporary charitable giving incentives. 

 

One article observes the “mix of praise and criticism for a nearly $4-trillion budget package for fiscal year 2016 that was formally released by the White House on Monday.”  The sense of the article is that the nonprofit sector is (unsurprisingly) embracing many of the President’s funding initiatives, while (also unsurprisingly) expressing some disappointment with his perennial proposal to limit the value of the charitable contributions deduction to higher income taxpayers.  One of the fairest assessments comes from a YMCA leader:

              

Regardless of what is ultimately passed by Congress, the proposal is a good reflection of the President’s priorities, said Neal Denton, senior vice president and chief government affairs officer for the YMCA of the USA. “We’re especially happy to see his focus on ensuring opportunities for children and families to learn, grow, and thrive,” he said, noting line items that would increase access to child care and early education, among other things.

  

Key excerpts from another article, which focuses on tax matters:

 

Part of a massive $4-trillion proposal, President Obama’s plan would limit the value of all itemized deductions, including one for charitable gifts, to 28 percent for individuals who earn more than $200,000 and couples who earn more than $250,000. …

 

The budget plan follows a tax proposal President Obama made in January that would raise the capital-gains tax rate and close what the White House called the "trust-fund loophole," which limits heirs’ exposure to gains in the value of the assets they inherit. The president’s plan would subject appreciated value to the capital-gains tax but would provide an exemption if the assets are donated to charity.

 

Joanne Florino, senior vice president for public policy at the Philanthropy Roundtable, an organization that represents donors, said it was curious that President Obama exempted charitable gifts on those inheritances, yet is still pushing to limit the deduction over all. …

 

Meanwhile, House Republicans are pushing to make a set of temporary tax breaks for charitable giving permanent. The tax benefits, for gifts of land for conservation purposes, gifts of food to food banks and other charities, and gifts made by retirees straight from individual retirement accounts, are part of a slate of about 50 temporary tax provisions called "extenders" that are usually renewed each year.

 

And yet another piece explains why the President’s proposal to raise the estate tax rate – while simultaneously not subjecting appreciation on assets to federal income taxation when the assets are donated to charitable entities – is a significant tax incentive for charitable giving:

 

An estate-tax increase would provide a huge benefit to charities because donations to these groups would become the only easy way to legally avoid capital-gains taxes, according to Len Burman, director of the Tax Policy Center.
 
Rather than pass assets down to heirs and incur a higher tax levy, more wealthy tax filers will chose to bequeath their assets to charities upon their death, Mr. Burman said.
 
“The president has locked up the philanthropic sector vote,” he wrote in TaxVox, a blog maintained by the center. “Except, of course, he isn’t running again.”

 

For an opinion-free survey of the President’s tax-related proposals affecting charities, see this previous entry on the blog.

 

JRB

President’s Budget Proposals Affecting Charities

President Obama’s proposed Fiscal Year 2016 Budget (“Proposed Budget”) contains a few provisions affecting charities and charitably minded donors.  The following proposals are of interest. Direct quotes are from either the Proposed Budget or the Department of the Treasury’s General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals (“Treasury Explanations”), as indicated.

Limit the Benefit of the Charitable Contributions Deduction

“The Budget would limit the value of most tax deductions and exclusions to 28 cents on the dollar, a limitation that would affect only couples with incomes over about $250,000 (singles with incomes over about $200,000). The limit would apply to all itemized deductions, as well as other tax benefits, such as tax-exempt interest and tax exclusions for retirement contributions and employer-sponsored health insurance.”  Proposed Budget, 56.

Obviously, the charitable contributions deduction is, as in prior years’ budgets proposed by the President, subject to the limitation.  According to Treasury Explanations, the provision “would apply to itemized deductions after they have been reduced by the statutory limitation on certain itemized deductions for higher-income taxpayers.”  Treasury Explanations, 155.

Repeal the Non-Hospital Bond Limitation on Qualified Section 501(c)(3) Bonds

As discussed in Treasury Explanations, “[t]he Tax Reform Act of 1986 established a $150 million limit on the volume of outstanding, non-hospital, tax-exempt section 501(c)(3) bonds. The limit was repealed in 1997 with respect to bonds issued after August 5, 1997, if at least 95 percent of the net proceeds were used to finance capital expenditures incurred after that date. Thus, the limitation continues to apply to bonds more than five percent of the net proceeds of which finance or refinance (1) working capital expenditures, or (2) capital expenditures, incurred on or before August 5, 1997.”  Treasury Explanations, 77.  Treasury believes that the $150 million limitation “results in complexity and provides disparate treatment depending on the nature and timing of bond-financed expenditures,” and that repealing it “would enable nonprofit universities to utilize tax-exempt financing on a basis comparable to public universities.”  Id.  Under the administration’s proposal, “[t]he $150 million limit on the volume of outstanding, non-hospital, tax-exempt bonds for the benefit of any one section 501(c)(3) organization would be repealed in its entirety, effective for bonds issued after the date of enactment.”  Id.

Disallow Deduction for Payments Entitling Payor the Right to Buy College Athletics Tickets

As Treasury Explanations notes, “donors to colleges and universities that receive in exchange for their contributions the right to purchase tickets for seating at an athletic event may deduct 80 percent of the contribution.”  Treasury Explanations, 177. The administration’s proposal would disallow a deduction for any such transfer for the right to buy tickets to sporting events.  See id.

Consolidate AGI-Based Limitations on Charitable Contributions Deduction

Current law limits the charitable contributions deduction to various percentages of a taxpayer’s “contribution base” (basically AGI), depending on the type of charitable donee and the type of donated property.  “The proposal would simplify this complicated set of rules limiting deductions for charitable contributions. Under the proposal, the contribution base limit would remain at 50 percent for contributions of cash to public charities. For all other contributions, a single deduction limit of 30 percent of the taxpayer's contribution base would apply, irrespective of the type of property donated, the type of organization receiving the donation, and whether the contribution is to or for the use of the organization. In addition, the proposal would extend the carry-forward period for contributions in excess of these limitations from five to 15 years.”  Treasury Explanations, 280.

Modify Deduction for Qualified Conservation Contributions

Code section 170 provides special rules for qualified conservation contributions.  The administration proposes several modifications to the rules governing the deduction, and also proposes “to pilot a non-refundable credit for conservation easement contributions as an alternative to the conservation contribution deduction ….”  Treasury Explanations, 191. 

Additional details excerpted from Treasury Explanations:

This proposal would make permanent the temporary enhanced incentives for conservation easement contributions that expired on December 31, 2014. In addition, to address concerns regarding abusive uses of this deduction and to promote effective, high-value conservation efforts, the proposal includes a number of reforms:

 

First, the proposal would strengthen standards for organizations to qualify to receive deductible contributions of conservation easements by requiring such organizations to meet minimum requirements, specified in regulations, which would be based on the experiences and best practices developed in several States and by voluntary accreditation programs. For example, the regulations could, among other things, specify that a “qualified organization” must not be related to the donor or to any person that is or has been related to the donor for at least ten years; must have sufficient assets and expertise to be reasonably able to enforce the terms of all easements it holds; and must have an approved policy for selecting, reviewing, and approving conservations [sic] easements that fulfill a conservation purpose. An organization that accepts contributions that it knows (or should know) are substantially overvalued or do not further an appropriate conservation purpose would jeopardize their status as a “qualified organization.”

 

Second, the proposal would modify the definition of eligible “conservation purposes” for which deductible contributions may be made, requiring that all contributed easements further a clearly delineated Federal conservation policy (or an authorized State or tribal government policy) and yield significant public benefit.

 

Third, in order to take a deduction, a donor must provide a detailed description of the conservation purpose or purposes furthered by the contribution, including a description of the significant public benefits it will yield, and the donee organization must attest that the conservation purpose, public benefits, and fair market value of the easement reported to the IRS are accurate. Penalties would apply on [sic] organizations and organization managers that attest to values that they know (or should know) are substantially overstated or that receive contributions that do not serve an eligible conservation purpose.

 

Finally, the proposal would require additional reporting of information about contributed conservation easements and their fair market values. Section 6033 would be amended to require electronic reporting and public disclosure by donee organizations regarding deductible contributions of easements that is sufficient for transparency and accountability including: detailed descriptions of the subject property and the restrictions imposed on the property, the conservation purposes served by the easement, and any rights retained by the donor or related persons; the fair market value of both the easement and the full fee interest in the property at the time of the contribution; and a description of any easement modifications or actions taken to enforce the easement that were taken during the taxable year. As is the case under current law, personally identifying information regarding the donor would not be subject to public disclosure.

*  *  *

 

The proposal would amend the charitable contribution deduction provision to prohibit a deduction for any contribution of a partial interest in property that is, or is intended to be, used as a golf course.

*  *  *

The proposal would disallow a deduction for any value of an historic preservation easement associated with forgone upward development above an historic building. It would also require contributions of conservation easements for all historic buildings, including those listed in the National Register, to comply with a 2006 amendment that requires contributions of historic preservation easements on buildings in registered historic districts to comply with special rules relating to the preservation of the entire exterior of the building and the documentation of the easement contribution.  Treasury Explanations, 190-192.

Reform Private Foundation Excise Tax on Net Investment Income

As discussed in Treasury Explanations, under Code section 4940, tax-exempt private foundations generally are subject to a two percent excise tax on their net investment income. However, the applicable rate is generally one percent in any year in which the foundation’s qualifying distributions exceed the average level of its qualifying distributions over the five preceding taxable years. Treasury Explanations, 267.  The administration proposes to “replace the two rates of tax on private foundations that are exempt from Federal income tax with a single tax rate of 1.35 percent.” Id.  No special reduction in excise tax would apply to tax-exempt private foundations that maintain their historic levels of charitable distributions.  See id.  Further, “[t]he tax on private foundations not exempt from Federal income tax would be equal to the excess (if any) of the sum of the 1.35-percent excise tax on net investment income and the amount of the unrelated business income tax that would have been imposed if the foundation were tax exempt, over the income tax imposed on the foundation.”  Id.   

JRB

Questionable Tax Court Summary Opinion Allows Partial Charitable Contributions Deduction

In Lain v. Commissioner, T.C. Summary Opinion 2015-5 (Feb. 2, 2015), the United States Tax Court issued a summary opinion allowing partial deductions for medical and dental expenses, charitable contributions, and other expenses claimed by the taxpayers.  As to their charitable contributions, the taxpayers claimed a deduction of $8,880, consisting of $5,730 by cash or check and $3,150 worth of clothing.

At trial, one of the taxpayer’s submitted a canceled check for $95 made payable to a local church, and he testified that he and his wife weekly donated $20 in cash to the church.  The taxpayers, however, were unable to substantiate many of their expenses because their records were destroyed by water from a pipe that had burst. 

Citing several cases, the Tax Court observed the principle that, when a taxpayer’s records suffer destruction on account of circumstances beyond the taxpayer’s control, she may substantiate her claimed expenses through reasonable reconstruction.  Two paragraphs of the opinion set forth the Tax Court’s disposition of the claimed charitable contributions deduction:

 

Petitioners contend that they are entitled to a Schedule A charitable contribution deduction of $8,880. In general, section 170(a) allows a deduction for any charitable contribution by the taxpayer made within the taxable year. Charitable contribution deductions are subject to the recordkeeping requirements of section 1.170A-13(a), Income Tax Regs., for contributions of money, and section 1.170A-13(b), Income Tax Regs, for contributions of property other than money. Where the contribution is $250 or more, section 170(f)(8) requires the taxpayer to substantiate the claimed contribution with a written contemporaneous acknowledgment from the donee organization. If a taxpayer makes a charitable contribution of property other than money in excess of $500, the taxpayer must maintain written records showing the manner of acquisition of the property and the approximate date of acquisition. See sec. 1.170A-13(b)(3), Income Tax Regs.

 

At trial Mr. Lain submitted a canceled check for $95 payable to St. Timothy Catholic Church. In addition, he credibly testified that he placed $20 in cash “into the plate” when attending weekly church services. Mr. Lain also credibly testified that petitioners made some donations of property to qualified charitable organizations. On the basis of petitioners’ documentary evidence and Mr. Lain’s credible testimony, we find that petitioners contributed at least $1,095 in money (check and cash) to St. Timothy Catholic Church and at least $200 in property other than money to qualified charitable organizations. Consequently, we hold that petitioners are entitled to deduct $1,295 for charitable contributions for 2010. [footnote omitted]

 

I am perplexed by the allowance of a deduction for some of the cash placed in the offering plate.  Although the opinion discusses section 170(f)(8) of the Internal Revenue Code (the “Code”), it does not mention Code section 170(f)(17), which provides as follows:

 

No deduction shall be allowed under subsection (a) for any contribution of a cash, check, or other monetary gift unless the donor maintains as a record of such contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.

 

This provision was added by the Pension Protection Act of 2006, so it governs the taxpayers’ year in question, notwithstanding that the Treasury regulations cited by the court do not reflect the statutory change.  It is possible that the cash donated by the taxpayers was placed in an envelope that identified the taxpayers and allowed the church to authenticate the donations, and that the church sent acknowledgments to the taxpayers that were destroyed by the water leak.  But such facts are never stated in the opinion.  The facts described in the opinion read as though the taxpayers just placed cash directly in the plate.  No deduction is available in such a case.

Of course, under Code section 7463(b), this summary opinion cannot be cited as precedent. 

 

JRB

IRS Warns Taxpayers of Fraudulent “Charities”

The Internal Revenue Service recently issued a public warning about groups “masquerading as a charitable organization” to lure unsuspecting donors, a scam making the IRS’s 2015 “Dirty Dozen” list.  Here are some of the highlights of the IRS’s admonition:

 

Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.

 

Don’t give out personal financial information, such as Social Security numbers or passwords to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money. People use credit card numbers to make legitimate donations but please be very careful when you are speaking with someone who called you.

 

Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

 

Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

 

JRB

Budget Cuts May Impact EO Rulings

According to Tax Notes Today (subscription required), at the Exempt Organizations session of the American Bar Association Section of Taxation meeting in Houston, Victoria Judson, IRS Associate Chief Counsel (Tax Exempt & Government Entities), stated that cuts to the agency’s budget – 5% this year alone – could adversely affect the issuance of private letter rulings on topics important to tax-exempt organizations. The IRS may attempt to fill the void through small guidance projects addressing issues commonly appearing in requests for letter rulings, and through model letter rulings issued under an automatic approval process if a letter ruling request follows a pattern.

 

Electronic Cite: 2015 TNT 21-21

 

JRB