Nonprofit Law Prof Blog

Franklin on the Regulation of Charities

Eric Franklin (UNLV) has posted A More Charitable Charity: Administrative Necessity Provides an Opportunity to Promote Altruism in Charities on SSRN with the following abstract:

The law of charities governs an absurdly wide-ranging field of organizations. A small group of antiquated statutes purport to govern a diversity of entities that range from hospitals worth millions of dollars to purely volunteer-run organizations that provide free childcare. Given the expansive nature of the law of charities, perhaps it is understandable that the law lacks a coherent guiding principle. This alone would not be problematic if not for the fact that most tax-exempt organizations do not comport with the general public’s idea of charity. An intuitive definition of charity relies upon a lack of self-regard. In other words, charity requires some level of altruism. But many charities pay lavish salaries and some are major players in the crass commercialism of the private market; such activities are far from any reasonable definition of altruism. Thus, to the extent that we expect charitable organizations to exhibit some level of altruism, the concept of charity has been stretched to a level that is almost unrecognizable.

In addition to diluting the concept of charity, the over-inclusive nature of tax-exempt law resulted in an unreasonable administrative burden for the IRS. Entities vying for charitable status flooded the agency with tax-exempt applications, crippling the IRS and resulting in an unacceptable backlog. To address this, the IRS created a streamlined application to make the application process more efficient. But critics claim that the streamlined process lacks anything resembling rigor and provides precious little data for evaluation.

Somewhat surprisingly, and certainly unintentionally, the IRS’s solution to its administrative burden provides an opportunity to address the law allowing charities to act in a less-than-altruistic manner. The IRS’s desperate attempt to curtail its administrative burden presents the occasion to create a new family of charities — one that does not strain any traditional definition of “charity.” This Article argues that, in exchange for the use of this streamlined process, charities should agree to forgo salaried employees and commercial activity. Such charities will, in a very real sense, be forced to operate in a more altruistic manner. Thus, these charities will be, in a sense, more charitable.

--Eric C. Chaffee

 

New York Organization Seeking to Invalidate Transparency Law

A new development in the NY bill (reported on yesterday) aimed at increasing transparency in 501(c)(3) and 501(c)(4) organizations has emerged. Citizens Union of New York has filed suit in federal court challenging the new law, claiming the regulations impede on their right of free speech. The group argues the law “’chills’ speech by forcing donors to choose between ‘exercising speech . . . and subjecting themselves to burdensome obligations and public disclosures.’” The organization further believes the disclosure requirements will dissuade donations, directly impacting their operations. Will other non-profits in New York feel the same?

 

David A. Brennen

New York Increasing Transparency Amongst 501(c)(3) and 501(c)(4) Organizations

New York Governor Andrew Cuomo signed into law Bill No. A. 10742/S. 8160 in an effort to increase transparency between donations coming from 501(c)(3) organizations going to 501(c)(4) organizations.

Some of the upcoming changes for 501(c)(4) organizations include a dramatically decreased amount (decreasing from $50,000 to $15,000) of funds spent on lobbying that triggers a source of funding report, and added more details to be included in said report.

Among other things, 501(c)(3) organizations now must fill out detailed reports for gifts to 501(c)(4) organizations that are greater than $2,500.

A detailed memo from the Lawyers Alliance for New York outlines the implications for non-profit organizations and exactly what the new regulations are.

 

David A. Brennen

Organization Allegedly Helps Hundreds of Corporations Evade Taxes

The Justice Department is investigating South Beach Missions of Oregon for allegedly fraudulently registering corporations as religions, entitling said corporations to 501(c)(3) status. The Justice Department believes that South Beach Missions is intentionally duping the federal government, and showing people how to set up phony churches in order to protect their assets from taxes. The government claims the organization has registered 126 active corporations, and 343 inactive ones, leading to “substantial” harm to the tax payer left footing the bill.

Unsurprisingly, South Beach Missions claims they have done no wrong, and believe they are acting within their First Amendment rights. Ted Landry, president of South Beach Missions, firmly believes he is helping people practice their legitimate religion. Mr. Landry believes the government has no place in defining what is and what is not religion, stating “you’re the only one who gets to figure it out.” South Beach Missions insists that they do not give out legal advice, despite the fact they circulate a 12-page booklet on the legality of corporations and churches.

There are obvious public policy concerns with people being able to establish pseudo-religions in the name of tax breaks. Further, unsuspecting churches registered by South Beach may face a crippling tax liability down the road if the government finds their church is not exempt, even if they were honestly practicing their religion. As obvious as the need to abate tax fraud is, so is the need for the government to allow for the freedom of religion, and adhere to Constitutional principles. It will be interesting to see how this is resolved.

 

David A. Brennen

Are changes to chartitable gifts coming with the new year, and new administration?

A recent Bloomberg article by Colleen Murphy outlines some major potential changes impacting charitable giving that could come soon after President Elect Trump takes office.

The author believes alterations of charitable giving deductions could take place in the near future. Although there is no concrete plan or proposal, the House Ways and Means Committee “will develop options to ensure the tax code continues to encourage donations, while simplifying compliance and record-keeping and making the tax benefit effective and efficient.” Clearly, altering the amount one can claim as a tax deduction can significantly impact overall giving to 501(c)(3) organizations.

Another potential change is a cap of itemized deductions individuals may claim. President Elect Trump has proposed a ceiling of $100,000 for individuals and $200,000 for couples looking to subtract itemized deductions from their total tax bill. An expert claims that such a rule could diminish large-scale donations, some of which are vital to the existence of many tax-exempt organizations.

A third plausible change coming in the near-term is the overall lowered tax rates promised by President Elect Trump. Mr. Trump aims to reduce the current seven-bracket system to a three-bracket system, leading to a reduced tax burden for working and middle-class Americans. Experts are split on how this may impact charitable donations. Some believe that the reduced rate will lessen the impact of itemized deductions, disincentivizing individuals from making contributions. Another school of thought believe the reduced rates could increase donations, incentivizing individuals to “load up on deductions and decrease their tax burden.”

Finally, the author believes that some existing rules could be revamped over the next few years. Hadar Susskind, senior vice president of government relations at the Council on Foundations in Washington, stated that potential changes could include “Creating charitable giving accounts, simplifying the excise tax on private foundations and allowing the rollover of individual retirement accounts to donor-advised funds.”

Time will tell what the new year, and new administration, have in store for the nonprofit tax world.

David A. Brennen

Potential Changes to South Carolina Educational Tax Credits

Legislation has been pre-filed in South Carolina by State Senator Tom Davis in an attempt to double a tax credit program that helps fund disabled students’ private education. The Legislation also plans to offer an additional $25 million in tax credits for the donors whose money would allow poor children to go to private school.

Senator Davis introduced the legislation in response to a South Carolina Supreme Court case where it was declared the state was not doing enough for poor, rural students and their schools. Davis believes making private schools a realistic option for many students is a step in the right direction.

The proposal would offer more tax credits to those who donate to a nonprofit that “makes private school tuition grants to students with disabilities or those who live in poverty.” These credits would allow the donor to reduce their state taxes by up to 60 percent.

South Carolina currently offers up to $10 million in tax credits for donations helping disabled students. The expansion would expand that offering to $25 million, and grant another $25 million specifically for impoverished students.

Whatever program the state ultimately adopts, hopefully it provides students with the quality education they both require and deserve.

 

David A. Brennen