Nonprofit Law Prof Blog

French v. Comm’r—Conservation Easement Deduction Denied for Lack of Contemporaneous Written Acknowledgment

In French v. Comm'r, T.C. Memo. 2016-53, the Tax court sustained the IRS’s disallowance of more than $133,000 of carry-over deductions relating to a 2005 donation of a conservation easement to the Montana Land Reliance (MLR). Although the IRS challenged the deductions on a number of grounds, the Tax Court sustained the disallowance because the taxpayers failed to obtain a contemporaneous written acknowledgment of the donation from MLR as required by IRC § 170(f)(8)(A).

Contemporaneous Written Acknowledgment Requirements

The Tax Court explained the contemporaneous written acknowledgment (CWA) requirements as follows:

• pursuant to § 170(f)(8)(A), no deduction is allowed for a charitable contribution of $250 or more unless the contribution is substantiated with a CWA obtained from the donee organization;

• a CWA “need not take any particular form,” but it must meet the requirements of § 170(f)(8)(B), which requires that a CWA include:
  • the amount of cash and a description (but not value) of any property other than cash contributed,
  • whether the donee organization provided any goods or services in consideration, in whole or in part, for the property contributed, and
  • a description and good faith estimate of the value of any such goods or services;

• the doctrine of substantial compliance does not apply to excuse compliance with the strict substantiation requirements of § 170(f)(8)(B) and, if a taxpayer fails to meet those requirements, the entire deduction is disallowed; and

• to be “contemporaneous,” § 170(f)(8)(C) requires that the taxpayer obtain the written acknowledgment on or before the earlier of (i) the date the return was filed or (ii) the due date (including extensions) for filing the return for the year in which the charitable contribution was made.

Analysis

Because the taxpayers in French donated the conservation easement in 2005, they were required to obtain a written acknowledgment from MLR that was “contemporaneous” with their 2005 return and satisfied the requirements of § 170(f)(8)(B). The taxpayers had two “written acknowledgments” from MLR that might have qualified as CWAs: (i) a letter from an MLR representative dated June 6, 2006, stating that “no goods or services were furnished in respect of your easement donation” and (ii) the conservation easement deed, which was signed by a representative of MLR and recorded on December 29, 2005.

Letter from MLR Was Not "Contemporaneous"

The letter from MLR did not satisfy the CWA requirements because it was not obtained by the taxpayers on or before the date they filed their amended 2005 return. The taxpayers filed their amended 2005 return on or before April 15, 2006, but they did not obtain MLR’s letter until June of 2006, approximately two months later. Accordingly, the letter was not “contemporaneous” with their return.

Conservation Easement Deed Was Insufficient to Prove Donee Provided No Goods or Services

The conservation easement deed, which was signed by a representative of MLR and recorded in December of 2005, was “contemporaneous” with taxpayers’ amended 2005 return because it was obtained by the taxpayers before the date on which they filed that return. However, to comply with the “strict substantiation requirements” of § 170(f)(8)(B)(ii), a CWA must “state whether the donee organization provided goods or services in exchange for the donor’s charitable contribution.” The Tax Court found that the conservation easement deed in French did not satisfy this requirement.

The Tax Court explained that a conservation easement deed can satisfy the substantiation requirements of § 170(f)(8)(B)(ii) in two ways: (i) the deed contains a statement as to whether the donee provided goods or services for the contribution or, (ii) if the deed does not contain such an explicit statement, the deed as a whole contains sufficient information to allow the IRS to determine whether taxpayers received consideration in exchange for the contribution. The Tax Court cited Averyt v. Comm’r, T.C. Memo. 2012-198, and RP Golf, LLC v. Comm’r, T.C. Memo. 2012-282, as examples of deeds complying with the latter approach.

In both Averyt and RP Golf, LLC, the taxpayers claimed deductions for conservation easement donations and were permitted to rely on the easement deeds as CWAs even though neither deed stated whether the donee organization provided any goods or services in exchange for the donation. In Averyt, the deed stated that the easement was granted for the purpose of conservation and that the deed was the entire agreement of the parties. In RP Golf, LLC, the deed stated that the easement was made “in consideration of the covenants and representations contained herein and for other good and valuable consideration”; but the deed did not include any consideration of any value other than the preservation of the property. The deed in RP Golf, LLC, also stated that it was the entire agreement of the parties. In both cases, the Tax Court held that the deeds, “taken as a whole,” proved compliance with § 170(f)(8)(B)(ii). Accordingly, when a conservation easement deed does not explicitly state whether the donee provided goods or services in exchange for the donation, the deed, taken as a whole, must prove compliance with § 170(f)(8)(B)(ii), and factors that support compliance are that (i) the deed recites no consideration received from the donee other than the preservation of the property and (ii) the deed contains a provision stating that the deed is the entire agreement of the parties. According to the Tax Court, that information allows the IRS to conclude that a taxpayer did not receive any consideration for the contribution and correctly reported his or her charitable contribution.

In French, the conservation easement deed did not state whether the donee provided goods or services in exchange for the charitable contribution. In addition, although the deed included provisions stating that the intent of the parties was to preserve the property, those provisions did not confirm that the preservation of the property was the only consideration provided by MLR in exchange for the donation because the deed did not include a provision stating that it was the entire agreement of the parties. “Without such a provision,” said the Tax Court, “the IRS could not have determined by reviewing the deed whether taxpayers received consideration in exchange for the contribution of the easement.” Accordingly, the deed, taken as a whole, was insufficient to satisfy § 170(f)(8)(B)(ii), and failure to comply with that section was fatal to the claimed deductions. To justify the seeming harshness of this rule, the Tax Court cited to Addis v. Commissioner, 374 F.3d 881, 887 (9th Cir. 2004), in which the 9^th Circuit explained that “[t]he deterrence value of section 170(f)(8)’s total denial of a deduction comports with the effective administration of a self-assessment and self- reporting system.”

Although the IRS also argued that the taxpayers in French did not have an ownership interest in the underlying property (because the easement donation was made through trusts) and overvalued the easement, the Tax Court did not address those issues.

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

 

Loewenstein on Benefit Corporations

Mark Loewenstein (Colorado) offered thoughtful comments today on Colorado's adoption of a benefit corporation statute as part of The 29th Annual Corporate Law Center Symposium at The University of Cincinnati College of Law.  He has memorialized some of his view on benefit corporations in an article that he recently posted on SSRN, which is entitled, Benefit Corporations: A Challenge in Corporate Governance.  The article originally appeared in a 2013 issue of the The Business Lawyer and is well worth a read.  The abstract states the following:

Benefit corporations are a new form of business entity that is rapidly being adopted around the country. Though the legislation varies from jurisdiction to jurisdiction, most statutes are based on a model proposed and promoted by B Lab, itself a nonprofit corporation. The essence of these statutes is that, in making business judgments, the directors of a benefit corporation must consider the impact of their decisions on the environment and society. The model legislation, though, may create serious governance issues for the directors of benefit corporations that operate under these laws. This article analyzes the model legislation and identifies its weaknesses, particularly with respect to governance issues.

-- Eric C. Chaffee

Goswami & Urminsky on Charitable Donations

Indranil Goswami (Chicago School of Business) and Oleg Urminsky (Chicago School of Business) have posted When Should the Ask Be a Nudge? The Effect of Default Amounts on Charitable Donations on SSRN with the following abstract:

How does setting a donation option as the default in a charitable appeal affect people’s decisions? In eight studies, comprising 11,508 participants making 2,423 donation decisions in both experimental settings and a large-scale natural field experiment, we investigate the effect of “choice-option” defaults on the donation rate, average donation amount, and the resulting revenue. We find (1) a “lower-bar” effect, where defaulting a low amount increases donation rate, (2) a “scale-back” effect where low defaults reduce average donation amounts and (3) a “default-distraction” effect, where introducing any defaults reduces the effect of other cues, such as positive charity information. Contrary to the view that setting defaults will backfire, defaults increased revenue in our field study. However, our findings suggest that defaults can sometimes be a “self-cancelling” intervention, with countervailing effects of default option magnitude on decisions and resulting in no net effect on revenue. We discuss the implications of our findings for research on fundraising specifically, for choice architecture and behavioral interventions more generally, as well as for the use of “nudges” in policy decisions.

-- Eric C. Chaffee

National Council of Nonprofits on the Nonprofit Sector

One of the challenges of teaching about nonprofits is finding reliable and useful data regarding the sector.  The National Council of Nonprofits has compiled a collection of Research, Reports, and Data on the Nonprofit Sector, which should be enough to make any quant's mouth water.

-- Eric C. Chaffee

Liu on the Size of the Nonprofit Sector

Gao Liu (Florida Atlantic University) posted Government Decentralization and the Size of the Nonprofit Sector: Revisiting the Government Failure Theory on SSRN with the following abstract:

This article revisits government failure theory by examining the relationship between government decentralization and the size of the nonprofit sector (NPS). Government failure theory posits that nonprofits are most active in regions where the largest gap exists between the homogeneous supply of public service and heterogeneous citizen demands. Following this theory, government decentralization should decrease the size of the NPS, as it increases the efficiency and heterogeneity of government services. This article tests this hypothesis using a sample of U.S. counties. Decentralization is measured in two dimensions: vertical decentralization and horizontal fragmentation. After using instrumental regressions to eliminate the endogeneity bias, we find that counties with a more horizontally fragmented governmental system are associated with a larger NPS. Vertical centralization leads to a denser NPS but has no impact on the NPS revenue or assets. The impacts of resident heterogeneity are also mixed. As such, government failure theory is only partially supported, at best. Contrarily, interdependence theory is supported by this study.

-- Eric C. Chaffee

Gaylord on RFRA and Religious Nonprofits

Scott W. Gaylord (Elon) has posted RFRA Rights Revisited: Substantial Burdens, Judicial Competence, and the Religious Nonprofit Cases to SSRN:

The most recent challenge to the free exercise of religion is here. And while it stems from the same legislation that prompted the action in Burwell v. Hobby Lobby Stores, Inc. — the contraception mandate under the Patient Protection and Affordable Care Act (the “ACA”) — it raises unique and equally important issues: what constitutes a substantial burden on the exercise of religion and who gets to decide (the religious adherents or the courts). In Hobby Lobby, the government contended that for-profit corporations could not exercise religion and, consequently, could not avail themselves of the broad protection afforded free exercise under the Religious Freedom Restoration Act. In the seven religious nonprofit cases pending before the United States Supreme Court, the government acknowledges that RFRA applies to religious nonprofits but now alleges that the ACA does not substantially burden the free exercise of these religious organizations. In particular, the government argues that the accommodation to the contraception mandate (which permits religious nonprofits to avoid directly providing coverage for all FDA-approved contraceptives and sterilization procedures by giving notice to their insurance issuers or third party administrators that the religious organizations object to providing such coverage) does not burden, let alone substantially burden, the religious nonprofits’ exercise of religion.

To date, eight circuit courts of appeals have sided with the government, instructing the religious nonprofits that their sincerely held belief — that the accommodation makes them complicit in a grave moral wrong (i.e., the provision of contraceptives and abortifacients) — is incorrect because the ACA, not any actions by the religious nonprofits, is the legal cause of the insurance issuers’ and TPAs’ obligation to provide such coverage. Under the majority’s “Pontius Pilate” defense, the accommodation “washes the hands” of religious nonprofits, cleansing them of any legal or moral responsibility for providing the objectionable coverage. As a result, the religious nonprofits cannot meet their burden under RFRA because the accommodation does not substantially burden their exercise of religion. Only the Eighth Circuit has ruled for the religious nonprofits. The Supreme Court’s resolution of the circuit conflict, therefore, will impact the scope of free exercise protection far beyond the ACA context by deciding whether courts or religious practitioners have the right to determine when government-mandated actions actually contravene sincerely held religious beliefs.

This article contends that the circuit court majority is wrong. Contrary to the majority’s claim, Hobby Lobby and Holt v. Hobbs preclude courts from deciding whether the ACA (or any other statute) actually burdens a religious adherent’s sincerely held beliefs. Although, as Chief Justice Marshall famously declared, “it is emphatically the province and duty of the judicial department to declare what the law is,” courts lack the authority and competence to declare what the religious commitments of a faith are and when those commitments are violated. Under the Court’s free exercise precedents, courts can determine only whether the government puts a religious practitioner to the choice of engaging in conduct that violates her beliefs or of disobeying the government’s policy and facing “serious” consequences. Religious and philosophical questions regarding moral complicity are left to religious adherents, not the courts. As the Founders recognized, religious and moral questions transcend the legal, imposing a different — and higher — obligation on religious believers. For religious adherents, only God (through a religious authority determined in accordance with their sincere religious beliefs) can determine whether an action makes them complicit in sin. Consequently, as the Court explained in Hobby Lobby, “question[s]” about moral complicity are ones “that the federal courts have no business addressing.”

-- Eric C. Chaffee

Zoning Violations and Tax-Exempt Status

When does an alleged zoning violation justify automatic removal of a property's tax-exempt status? New York State Supreme Court --Appellate Division, Second Department, recently had the opportunity to review the issue.

In Community Assn., Inc. v. Town of Ramapo, 2016 NY Slip Op 01458, 2nd Dept 3-2-16, the Second Department, reversing the trial court, determined that an alleged violation, for which the property owner had never been cited, did not justify the automatic removal of the property's tax-exempt status. The property had been tax-exempt for years as low-income property. The court found that the alleged zoning violation -- that the property owner had more than two residential apartments -- was not incompatible with the tax-exempt use. Therefore, the court held, the alleged zoning violation could not justify automatic removal of the tax-exempt status. Said the court:

[E]ven assuming that a zoning violation had been sufficiently established, the defendants have failed to articulate why such a violation, under the particular circumstances presented, should result in loss of the plaintiff's tax exemption. Not all violations of law automatically result in the loss of a tax exemption ... . 'The concern of the taxing authority is not with the observance or non-observance by plaintiff of regulatory provisions relating to a specific building, but to the use to which the real property as an entity is or is intended to be devoted' ... . This is not a case in which the applicable zoning regulation is incompatible with the occupant's tax-exempt use ... . In such cases, the rationale for denying the tax exemption is simple and clear, as compliance with both the tax-exempt use and the zoning regulation is impossible. Here, by contrast, the tax-exempt use of providing residential housing to low-income tenants is consonant with the property's permitted use as a two-family dwelling. Under these circumstances, the defendants have failed to establish, prima facie, that the nature of the alleged violation (i.e., that the plaintiff had more than two residential apartments) can serve as a valid legal basis for denying the property tax exemption ...".

So to answer the question with which we started, When does a zoning violation justify automatic removal of a property's tax-exempt status? New York's Second Department is clear: When the applicable zoning regulation is incompatible with the property occupant's tax-exempt use. 

VEJ       

 

NonProfit times: Clinton Tax Plan Supports Charitable Deduction

The NonProfit Times is reporting that under a tax proposal put forth by Democratic presidential hopeful Hillary Clinton, the charitable deduction would be exempt from a 28-percent deduction cap  and the estate tax exclusion would return to 2009 levels.

The report is based on an analysis conducted by the Tax Policy Center (TPC).  TPC is a joint project of the Urban Institute and the Brookings Institution.

According to the Times:

The tax benefit from specified deductions and exclusions would be limited to 28 percent. The cap would apply to all itemized deductions except charitable contributions but would reduce the value of deductions and exclusions for taxpayers in the 33 percent and higher tax brackets.

The proposals also would permanently reduce the tax threshold for estate taxes to $3.5 million ($7 million for married couples) with no adjustment for inflation, increase the top tax rate to 45 percent, and set the lifetime gift tax exemption at $1 million. In 2015, the basic exclusion for the estate tax is $5.45 million and Clinton’s plan would return it back to 2009 levels.

The Times further reports that the Association of Fundraising Professionals (AFP) and the Alliance for Charitable Reform (ACR) have both come out in support of Clinton's proposal.

 

VEJ

 

 

 

 

Backer, Note, Religious Nonprofit Political Activity

Jonathan Backer (Michigan '15) has published Thou Shalt Not Electioneer: Religious Nonprofit Political Activity and the Threat "God PACs" Pose to Democracy and Religion, 114 Mich. L. Rev. 619 (2016). Here is the abstract:

The Supreme Court’s 2010 decision in Citizens United v. FEC invalidated a longstanding restriction on corporate and union campaign spending in federal elections, freeing entities with diverse political goals to spend unlimited amounts supporting candidates for federal office. Houses of worship and other religious nonprofits, however, remain strictly prohibited from engaging in partisan political activity as a condition of tax-exempt status under Internal Revenue Code § 501(c)(3). Absent this “electioneering prohibition,” religious nonprofits would be very attractive vehicles for political activity. These 501(c)(3) organizations can attract donors with the incentive of tax deductions for contributions. Moreover, houses of worship need not file with a government agency to begin operating and deriving tax benefits, and the IRS has shown reluctance to aggressively audit their activities. Two circuits have previously upheld the electioneering prohibition against legal challenges, but recent jurisprudential shifts expose the tax code provision to challenge under the Religious Freedom Restoration Act (RFRA), which directs courts to apply strict scrutiny to facially neutral laws that substantially burden the free exercise of religion. First, Burwell v. Hobby Lobby Stores, Inc. greatly reduced the barriers to successful RFRA claims. Second, by lifting restrictions on political speech for many other types of organizations, Citizens United magnified the burden the electioneering prohibition imposes on religious organizations. The decision also rejected compelling state interests that might have previously shielded the law from invalidation. This Note is the first analysis of the electioneering prohibition’s vulnerability in this new legal climate. Despite these significant developments, this Note ultimately concludes that the electioneering prohibition can survive RFRA challenges because the prospect for widespread use of religious organizations as conduits for political activity undermines the values reflected in Establishment Clause jurisprudence.

Lloyd Mayer

Aprill, The Section 527 Obstacle to Meaningful Section 501(c)(4) Regulation

Ellen Aprill (Loyola L.A.) has published The Section 527 Obstacle to Meaningful Section 501(c)(4) Regulation, 13 Pitt. Tax Rev. 43 (2015). Here is the abstract:

As is well known, on May 10, 2013, at a session of the American Bar Association Tax Section meeting in Washington, DC, Lois Lerner, at the time the director of the Exempt Organization Division of the Internal Revenue Service, apologized for IRS mishandling of applications by Tea Party groups for exemption as social welfare groups under § 501(c)(4) of the Code. A few days later, the Department of the Treasury Inspector General released a report (TIGTA Report) concluding that the “IRS used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions instead of indications of potential political campaign intervention

 

Lloyd Mayer

Fici, Recognition and Legal Forms of Social Enterprise in Europe

Antonio Fici (European Research Institute on Cooperative & Social Enterprise) has posted on SSRN Recognition and Legal Forms of Social Enterprise in Europe: A Critical Analysis from a Comparative Law Perspective. Here is the abstract:

Social enterprise lawmaking is a growth industry. In the United States alone, over the last few years, there has been a proliferation of state laws establishing specific legal forms for social enterprises. The situation is not different in Europe, where the process began much earlier than in the United States and today at least fifteen European Union member states have specific laws for social enterprise. This article will describe the current state of the legislation on social enterprise in Europe, inquiring into its fundamental role in the development of the social economy and its particular logics as distinct from those of the for-profit capitalistic economy. It will explore the models of social enterprise regulation that seem more consistent with the economic growth inspired by the paradigms of the social economy. It will finally explain why, in regulating and shaping social enterprise, the model of the social enterprise in the cooperative form is to be preferred to that of the social enterprise in the company form.

Lloyd Mayer

Fishman, Who Can Regulate Fraudulent Charitable Solicitation?

James Fishman (Pace) has published Who Can Regulate Fraudulent Charitable Solicitation?, 13 Pitt. Tax Rev. 1 (2015). Here is the abstract:

The scenario is common: a charity, typically with a name including an emotional word like “cancer,” “children,” “veterans,” “police,” or “firefighters,” signs a contract with a professional fundraiser to organize and run a campaign to solicit charitable contributions. The charity may be legitimate or a sham. The directors of the charity may be allied or coconspirators with the fundraiser, or as likely, well-meaning but naïve individuals. The fundraiser raises millions of dollars through telemarketing, Internet, or direct mail solicitation. The charity receives but a small percentage of the amount. In some cases, at the close of the campaign, the organization owes the solicitor more than the amount raised for the charity. Thereafter, the state attorney general investigates the charity and finds fraud in the solicitation or an improper use of the funds raised. As part of the settlement, the professional solicitor agrees to be barred from operating in that particular state. Thereafter, the fundraiser moves to a neighboring jurisdiction, opens business (perhaps under a different name), and commences the same cycle of fraudulent fundraising using another charity

Deception in solicitation and misuse of monies raised for charitable purposes is not only a fraud on the donor; it also can be a diversion of tax dollars from state or federal treasuries. This article examines several approaches for regulating unscrupulous professional fundraisers and preventing carpetbagging, moving from jurisdiction to jurisdiction, committing fraud, or willfully violating regulatory requirements. It examines limitations in the existing regulatory framework to prevent charity fraud and offers possible solutions to the problem. As a first solution, the Internal Revenue Service should revitalize and extend the “private benefit doctrine” as a tool of enforcement. Second, Congress and the Service should amend § 4958 to address excess benefit transactions to more clearly include unscrupulous solicitors. A third possible resolution to the problem outlined would be the expansion of the Federal Trade Commission’s enforcement authority to cover charitable solicitation generally. Currently, the FTC has authority over telemarketing by for-profit fundraisers.3 The legislation proposed would enable the creation of a self-regulatory organization under Federal Trade Commission aegis that fundraisers would be required to join. This new organization would enforce norms and rules for professional fundraisers, have the authority to discipline and, if necessary, to bar dishonest fundraisers from the fundraising industry. A final recommendation is the creation of an online, readily accessible database containing records of violations of professional fundraising companies and the individuals who own and work for them, the contracts between professional solicitors and the charities they work for, the results of fundraising campaigns listing the percentage of dollars raised that goes to the charity, and the texts of settlement agreements between state charity officials and fundraisers and the charities involved. An important issue not addressed in detail is the fiduciary responsibility of charity boards to carefully select the firms that manage their solicitation campaigns.

Lloyd Mayer

Fleischer, How is the Opera Like a Soup Kitchen?

Miranda Perry Fleischer (San Diego) has published on SSRN How is the Opera Like a Soup Kitchen, The Philosophical Foundations of Tax Law (Oxford University Press, forthcoming 2016). Here is the abstract:

The charitable tax subsidies are, at heart, redistributive. Some individuals (the recipients of charitable goods and services, such as students, museum-goers, and soup kitchen patrons) receive benefits. Other individuals pay for these benefits, both voluntarily (through donations) and involuntarily (in the form of higher taxes or reduced benefits). At first glance, it appears that the redistribution effectuated by the subsidies violates commonly-held notions of distributive justice. After all, the subsidies treat charities that serve the wealthy (like the opera) the same as charities that aid the poor (such as the soup kitchen). How can spending public funds on the wealthy in this manner be considered just? As this Chapter shows, so doing is just under expansive interpretations of resource egalitarianism and left-libertarianism that account for expensive tastes and talent-pooling. These understandings argue that individuals with expensive tastes deserve compensation to put them on equal footing with individuals with ordinary tastes when pursuing their visions of the good life – just as individuals who lack financial resources deserve compensation to put them on equal footing with the financially-advantaged when pursuing their life plans. Subsidizing not only the soup kitchen but also the opera thus helps a variety of individuals who are disadvantaged in their ability to pursue their visions of a good life to achieve those visions.

Lloyd Mayer

Hackney, Charitable Organization Oversight: Rules v. Standards

Philip Hackney (LSU) has published Charity Organization Oversight: Rules v. Standards, 13 Pitt. Tax Rev. 83 (2015). Here is the abstract:

Congress has traditionally utilized standards as a means of communicating charitable tax law in the Code. In the past fifteen years, however, Congress has increasingly turned to rules to stop fraud and abuse in the charitable sector. I review the rules versus standards debate to evaluate this trend. Are Congressional rules the best method for regulating the charitable sector? While the complex changing nature of charitable purpose would suggest standards are better, the inadequacy of IRS enforcement and the large number of unsophisticated charitable organizations both augur strongly in favor of rules. Congress, however, is not the ideal institution to implement rules for charitable purpose. The IRS is the better institution generally to institute rules there because of its informational advantage over Congress. Additionally, the IRS can implement rules in a more flexible rule format than can Congress. Still, Congress as a rulemaker makes sense in a few scenarios: (1) where it implements transparent procedural requirements; (2) where it regulates discrete behavior of charitable organization acts; and, (3) where it intends to remove a set of organizations from charitable status through simple rules.

Lloyd Mayer

Knaplund, Becoming Charitable: Predicting and Encouraging Charitable Bequests in Wills

Kristine Knaplund (Pepperdine) has published Becoming Charitable: Predicting and Encouraging Charitable Bequests of Wills, 77 Pitt. L. Rev. 1 (2015). Here is the abstract from the SSRN posting of the article:

What causes people to leave their property to charity in their wills? Many scholars have explored the effects of tax laws on charitable bequests, but now that more than 99% of Americans’ estates are exempt from federal taxes, what non-tax factors predict charitable giving? This Article explores charitable bequests before the federal estate tax and a deduction for charitable bequests were enacted by Congress. By examining two years of probate files in Los Angeles and St. Louis, in which 16.6% of St. Louis testators, but only 8.3% in Los Angeles, made charitable bequests, we can begin to discern why testators in St. Louis were far more inclined to give to charity. The surprising results may help policy makers encourage those in the United States and in developing countries to give beyond their family and friends.

This Article is unique in that it is the first to examine not just whether a will included a charitable bequest, but whether the charity received it. This crucial information adds key insights to who gives to charity. In fact, if we compare the two cities by looking at charitable bequests which were actually received, St. Louis testators are even farther ahead of their Los Angeles counterparts, with 15% of St. Louis testators giving to charity compared to 6% in LA.

By examining hundreds of wills executed before the federal estate tax was enacted, we can see patterns for the vast majority of people who die with estates far too small to be impacted by the estate tax. Five clear steps emerge to ensure that testators will give to charity.

Lloyd Mayer

McConnell & Goodrich, On Resolving Church Property Disputes

Michael McConnell (Stanford) and Luke Goodrich (Becket Fund for Religious Liberty; Utah) have posted on SSRN On Resolving Church Property Disputes, Arizona Law Review (forthcoming). Here is the abstract:

In recent decades, major religious denominations have experienced some of the largest schisms in our nation’s history, resulting in a flood of church property disputes. Unfortunately, the law governing these disputes is in disarray. Some states treat church property disputes just like disputes within other voluntary associations — applying ordinary principles of trust and property law to the deeds and other written legal instruments. Other states resolve church property disputes by deferring to religious documents such as church constitutions — even when those documents would have no legal effect under ordinary principles of trust or property law.

We argue that both courts and churches are better served by relying on ordinary principles of trust and property law, and that only this approach is fully consistent with the church autonomy principles of the First Amendment. Only this approach preserves the right of churches to adopt any form of governance they wish, keeps courts from becoming entangled in religious questions, and promotes clear property rights. By contrast, deferring to internal religious documents unconstitutionally pressures churches toward more hierarchical governance, invites courts to resolve disputes over internal church rules and practices, and creates costly uncertainty.

Lloyd Mayer

Newman, What is a Church?

Joel Newman (Wake Forest) has posted on SSRN What is a Church? A Look at Tax Exemptions for the Original Kleptonian Neo-American Church and the First Church of Cannabis, Lexis Federal Tax J.Q. (Dec. 2015). Here is the abstract:

The tax definition of "church," as well as the definition of "religion," have evolved. For years, the IRS defined churches with a fourteen factor test. More recent cases and rulings, however, have used an "associational" test.

This article applies these two definitions to two "marijuana churches" -- the Original Kleptonian Neo-American Church, founded in the 1960's, and the First Church of Cannabis, founded in 2015. I conclude that both churches either would already pass muster under either definition, or could easily do so with a bit of tweaking and some lawyerly advice. Therefore, it would not be too difficult to game the system, and to create a religious organization and a church for tax purposes, even when that status is not legitimate.

However, in light of First Amendment concerns, there are no alternative definitions that would do the job any better. The risk that an occasional illegitimate organization might derive the tax benefits of being a religious organization or church is an acceptable price to pay for a robust First Amendment.

Lloyd Mayer

Yockey, Using Form to Counter Corruption: The Promise of the Public Benefit Corproation

Joseph Yockey (Iowa) has published Using Form to Counter Corruption: The Promise of the Public Benefit Corporation, 49 U.C. Davis L. Rev. 623 (2015). Here is the abstract from the paper's SSRN posting:

Many observers argue that part of the blame for foreign corrupt practices should be placed on legal form. Their claim is that traditional corporate norms of shareholder wealth maximization help explain why corporate corruption is so prevalent. This essay shifts that argument to examine whether there are characteristics among corporate forms that can boost the efficacy of internal compliance strategies. In doing so, the paper’s primary recommendation is for founders to focus greater attention on an emerging new corporate association — the public benefit corporation — as a promising option for blueprinting sustainable anti-corruption compliance.

Lloyd Mayer

Nonprofit and Voluntary Sector Quarterly February 2016 Issue

The Nonprofit and Voluntary Sector Quarterly has published its February 2016 issue. Here is the table of contents:

Articles

Suzie S. Weng, Leadership in an Asian American Community in the South: The Development of an Informal Support Network to Increase Access to Services

Floris Vermeulen, Debra C. Minkoff, and Tom van der Meer, The Local Embedding of Community-Based Organizations

Melissa K. Hyde, Jeff Dunn, Caitlin Bax, and Suzanne K. Chambers, Episodic Volunteering and Retention: An Integrated Theoretical Approach

Florentine Maier, Michael Meyer, and Martin Steinbereithner, Nonprofit Organizations Becoming Business-Like: A Systematic Review

Genevieve G. Shaker, Victor M. H. Borden, and Brittany L. Kienker, Workplace Giving in Universities: A U.S. Case Study at Indiana University

Arthur A. Stukas, Russell Hoye, Matthew Nicholson, Kevin M. Brown, and Laura Aisbett, Motivations to Volunteer and Their Associations With Volunteers’ Well-Being

Rikki Abzug, Alexandre Olbrecht, Murray Sabrin, and Erwin DeLeon, Nonprofit Financing to the Rescue? The Slightly Twisted Case of Local Educational Foundations and Public Education in New Jersey

David A. Campbell and Kristina T. Lambright, Program Performance and Multiple Constituency Theory

Walter Wymer and Sharyn Rundle-Thiele, Supporter Loyalty: Conceptualization, Measurement, and Outcomes 

Research Note

Dyana P. Mason, Recognition and Cross-Cultural Communications as Motivators for Charitable Giving: A Field Experiment 

Book Reviews

Jenny Harrow, Book Review: Creating Value in Nonprofit-Business Collaborations: New Thinking and Practice by J. E. Austin and M. M. Seitanidi

Tobias Bürger, Book Review: Social Purpose Enterprises: Case Studies for Social Change by J. Quarter, S. Ryan and A. Chan (Eds.)

Amy Blackford, Book Review: Catalysts for Change by M. Martinez-Cosio and M. Rabinowitz Bussell

Lloyd Mayer

IRS Scandal Update: Crossroad GPS Approval, Class Certification in One Case, Settlement of Another, and 501(c)(4) Notices

The biggest development coming out of the IRS scandal in recent months was the public revelation that in November 2015 the IRS approved the application by Crossroads GPS for recognition of exemption under Internal Revenue Code section 501(c)(4). This approval means the entire application file is available to the public, and Robert Maguire has very helpfully made all the documents available at OpenSecrets.org at the end of his analysis of them. Based on a quick review of these hundreds of pages of documents, here are several take-aways:

• Part V of the Protest (and Part VI of the Revised Protest) highlights the most constitutionally problematic aspect of the existing limit on political activity by section 501(c)(4) organizations (and also of the prohibition on such activity by section 501(c)(3) organizations) - the vagueness of the facts and circumstances approach for determining whether a given communication or other activity is actually political campaign intervention.

• Regardless of your views on the merits of the application and the final IRS decision regarding it, the legal writing and submissions by the attorneys representing Crossroads GPS provide a good example of professional but strong (and ultimately effective) advocacy based on an extensive factual record. This advocacy both focused on small but critical details - such as whether particular communications were in fact political campaign intervention - and larger legal issues such as the constitutional issue mentioned above.

• The application materials provide many examples of communications and other activities that may - or may not - cross the line into political campaign intervention. In addition, most and possibly all of the communications are helpfully summarized in charts submitted by Crossroads GPS that include the geographic area of distribution, whether the organization asserted that the communication was part of an ongoing series, and other facts that the IRS has identified as relevant.

• Taken as a whole, the documents provide a comprehensive illustration of the application for recognition of exemption process, including the initial application, IRS questions and detailed responses, proposed denial, protest, communications with IRS Appeals regarding the protest, and then finally the favorable determination letter. It also reveals several apparent procedural missteps on the part of the IRS that Crossroads GPS then used to strengthen its case for granting the application.

Media coverage: Politico; ProPublica; Washington Post. Not surprisingly, the IRS decision has generated both scathing criticism (see this NY Times editorial), as well as defenders (see this commentary by exempt organizations and constitutional law attorney Barnaby Zall).

In other news, the IRS lost a motion in one case related to the scandal but managed to settle another case. The loss came in NorCal Tea Party Patriots v. IRS, where a U.S. District Court certified a class consisting of various groups that allege they were subject to an improper level of scrutiny by the IRS during the exemption application process because of their political views. For an analysis of the decision, see this Forbes column by Peter J. Reilly. More positively for the IRS, Law360 reports that the IRS agreed with the Republican National Committee to dismiss a federal suit by the RNC against the Service involving a request for documents relating to the Service's treatment of exemption applications under section 501(c)(4). As part of the settlement, the IRS agreed to pay more than $20,000 in attorney's fees.

Finally, the IRS announced in Notice 2016-09 that the new notice required from certain section 501(c)(4) organizations based on a statutory change Congress made this past December will not be due until at least 60 days after Treasury and the IRS issue temporary regulations under new section 506. The Notice also clarifies that an organization seeking recognition from the IRS of its exemption under section 501(c)(4) will still need to apply for such recognition and, until further guidance is issued, organizations seeking such recognition should continue to use Form 1024. Such an application remains optional, however.

Lloyd Mayer