Nonprofit Law Prof Blog

Martin, Should the Government Be in the Business of Taxing Churches?

J. Michael Martin (Evangelical Council for Financial Accountability) has published Should the Government Be in the Business of Taxing Churches?, 29 Regent U. L. Rev. 309 (2017). Here are the first two paragraphs of the introduction (footnotes omitted):

Throughout our entire history as a nation, the United States has never imposed a federal income tax on churches. In spite of this longstanding policy for over two centuries and the principle it represents of the separate spheres of sovereignty of church and state in America, some critics have recently become more vocal in questioning the legitimacy of church tax-exempt status, based primarily on financial and constitutional concerns.

As a practical matter, the courts and Congress are the two institutions where the unbroken practice of church tax exemption could be placed at risk. As the dissenting Supreme Court justices observed in Obergefell v. Hodges, the newly interpreted constitutional right to samesex marriage in the courts could evolve to threaten tax exemptions and other freedoms heretofore enjoyed by religious organizations. Also, with one political party now controlling Congress and the White House after the 2016 elections, new legislation like comprehensive tax reform has its greatest chance of passage in decades. And as with any scenario involving tax reform, there is always the chance that churches and other types of corporations and entities could find their tax status changing under a new paradigm. In light of these developments, more people may be asking: “Why should churches continue to be tax-exempt?” As the title of this Article suggests, perhaps a more appropriate way to frame the inquiry might be: “Should the government be in the business of taxing churches?”

Lloyd Mayer

Schlunk: Why the Charitable Deduction for Gifts to Educational Endowments Should Be Repealed

Herwig Schlunk (Vanderbilt) has published Why the Charitable Deduction for Gifts to Educational Endowments Should Be Repealed, 71 U. Miami L. Rev. 702 (2017). Here is the introduction (footnotes omitted):

The country’s collective patience for coddling private institutions of higher education is waning. At the local level, there is an effort afoot to challenge the tax-exempt status of Princeton University. At the state level, legislators in Massachusetts and Connecticut have suggested imposing taxes that would target Harvard University and Yale University. At the federal level, a number of proposals have been floated that would impact the tax treatment of universities and their endowments, including imposing an excise tax on endowment income.

In this paper, I will add my voice to the chorus of those who would change the rules of federal taxation as applied to institutions of higher education. But rather than focus on the taxation of such institutions directly, I will instead focus on the propriety of granting such institutions the ability to receive gifts that are tax-deductible by the donor. I argue that in the specific and limited context of gifts made to university endowments, an adequate defense for providing the tax preference of a charitable contribution deduction is lacking. 

Lloyd Mayer

Tyler: Essential Policy and Practice Considerations for Facilitating Social Enterprise

John Tyler (Ewing Marion Kauffman Foundation) has posted Essential Policy and Practice Considerations for Facilitating Social Enterprise: Commitment, Connections, Harm, and Accountability, forthcoming in J. Yockey & B. Means, eds., The Cambridge Handbook of Social Enterprise Law, on SSRN. Here is the abstract:

There are numerous opportunities for policy interventions to clarify, enable, or perhaps even inhibit social entrepreneurship. As one example, consider the emergence and expansive growth of available social business forms, particularly of the benefit corporation, which substantially modified traditional conceptions of fiduciary duties perhaps to the point of elimination. Other policy efforts or possibilities include financing mechanisms involving public money, tax favored treatment, exemptions from securities requirements, and affording bid procurement preferences on government contracts. 

As an essential precursor to material policy concessions to social entrepreneurship, especially to the extent it or its enterprises compete with or seek to distinguish themselves from other market participants, several determinations must be made. These determinations have two key roles: (a) shaping whether to provide the relevant incentives or make the applicable concessions and, if so, (b) how far to go to ensure a reasonably commensurate relationship between benefits and burdens for enterprises, movements, and society. 

Four essential sets of questions should shape, or in some cases even dictate, how those roles are defined. Beyond policy, these sets of questions have practical implications for those who invest in, operate, and interact with social ventures. Lack of mutual clarity about any or all of these risks longer term problems for the enterprises and those involved with them but more importantly for the social benefits being sought. 
• What should the underlying commitment be to pursuing social results: devotion or does mere tolerance suffice? 
• What should the relationship be between the effort dedicated to social returns and the actually realized result? 
• What attention should be given to or require about social harms that might be associated with, connected to, or caused by actions taken in the pursuit of social good? 
• What form(s) should accountability take and what consequences, if any, should be expected for failure – not just non-compliance but less than optimal outcomes? 

Clarity on these matters can also help regulators and enforcement personnel as they evaluate whether/how to proceed with guidance or actions. Resolving ambiguities that exist could facilitate more and faster adoption of social business forms and other efforts to achieve worthy objectives of the social entrepreneurship movement. 

In some ways, this analysis also involves bringing clarity and discipline to whether “impact” and “intent to have impact” are the same or even similar.

Lloyd Mayer

Nonprofit Voluntary Sector Quarterly August 2017 Issue

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

Articles

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Accountability in Nonprofit Governance: A Process-Based Study

Richard Tacon, Geoff Walters, Chris Cornforth

Pressure to Manage Ratios and Willingness to Do So: Evidence From Nonprofit Managers

Linda M. Parsons, Charlotte Pryor, Andrea Alston Roberts

Improving Charity Accountability: Lessons From the Scottish Experience

Diarmuid McDonnell

Founders, Families, and Futures: Perspectives on the Accountability of Australian Private Ancillary Funds

Alexandra Williamson, Belinda Luke, Diana Leat, Craig Furneaux

Toward a Theory of Membership Association Finance

H. Woods Bowman†

Managing Dual Identities in Nonprofit Rebranding: An Exploratory Study

Zoe Lee, Humphrey Bourne

Charitable Giving in Arts and Culture Nonprofits: The Impact of Organizational Characteristics

Kelly Krawczyk, Michelle Wooddell, Ashley Dias

Nudging Art Lovers to Donate

Boram Lee, Ian Fraser, Ian Fillis

Research Note

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Understanding and Measuring Endowment in Public Charities

Thad D. Calabrese, Todd L. Ely

Book Reviews

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Book Review: Nonprofit Organizations: Theory, Management, Policy by H. K. Anheier

Book Review: Cases in Innovative Nonprofits: Organizations That Make a Difference by R. A. Cnaan and D. Vinokur-Kaplan (Eds.)

Book Review: An Introduction to the Nonprofit Sector: A Practical approach for the Twenty-first Century by G. M. Grobman

Book Review: Nonprofit Organizations and Civil Society in the United States by K. LeRoux and M. K. Feeney

Book Review: Understanding the Social Economy of the United States by L. Mook, J. R. Whitman, J. Quarter, and A. Armstrong

Book Review: Effective Nonprofit Management: Context and Environment by J. E. Pynes

Book Review: Managing Nonprofit Organizations in a Policy World by S. K. Vaughan and S. Arsneault

Kevin Kearns

Book Review: The Logic of Charity: Great Expectations in Hard Times by J. Mohan and B. Breeze

Marty Sulek

 

Lloyd Mayer

NAAG/NASCO Annual Meeting October 2-4, 2017

The National Association of Attorneys General and the National Association of State Charity Officials are having their Annual Meeting on October 2-4, 2017 in Washington, DC. Here is the description:

This year’s NASCO Conference will be held in Washington D.C. at the Westin Washington, D.C. City Center and will run from October 2 – 4. Monday’s session is open to the public and provides an opportunity for representatives of the nonprofit sector and members of the public to meet and participate in discussions with state regulators. Tuesday and Wednesday are for regulators only, providing significant opportunity for state charity regulators to discuss the latest topics and learn from each other.

The theme for this year’s conference is “The Impact of Technology on Charities Regulation.” The agenda for both the public day and the regulator only days will offer a mix of presentations by state regulators and speakers from the non-profit sector addressing this theme and other recent developments affecting state charitable regulation.

The session on Monday will include discussions on crowdfunding and improving communication between charities regulators and the charitable sector. We will conclude Tuesday’s regulator-only session with a networking social hour and dinner, followed by the NASCO business meeting. Finally, the regulator-only portion of the conference will wrap up on Wednesday morning with discussions on developing enforcement actions and multistate priorities for the coming year.

Lloyd Mayer

Politics: Facts & Circumstances Test Survives Constitutional Challenge; Donor Disclosure Decision & Debate

In a little noticed decision, but perhaps only because of the conclusion it reached, a federal district court in one of the cases arising out of the IRS application controversy rejected a constitutional challenge to the facts and circumstances test for political campaign activity embodied in Revenue Ruling 2004-6. In Freedom Path v. IRS (N.D.Tex. July 7, 2017), the court considered a motion for partial summary judgment asserting that the test was unconstitutionally vague in violation of both the Due Process Clause of the Fifth Amendment and the First Amendment, as well as being overbroad and promoting viewpoint discrimination in further violation of the First Amendment. The court found that the identification of eleven specific and objective, although non-exclusive, factors in the Revenue Ruling was sufficient to defeat the facial challenge to the ruling based on vagueness. With respect to the First Amendment claims, the court distinguished decisions in the campaign finance area on the grounds that the tax rules relate to what types of speech will be subsidized through the federal tax system, as opposed to banning, restraining, or punishing speech, and concluded that the ruling therefore surveyed First Amendment challenge.

The other currently hot constitutional and policy topic relating to politics and nonprofits is the extent to which the government can or should compel the disclosure of  information relating to nonprofits involved in political activities or politically sensitive areas. There have two recent interesting developments in this area. First, in Matter of Evergreen Assn. v. Schneiderman (June 21, 2017), a state appellate court in New York limited the scope of a subpoena to a nonprofit organization on the grounds that it "infringed on the First Amendment right of the [nonprofit and its staff] to freedom of association, and was not sufficiently tailored to serve the compelling investigative purpose for which it was issued." The nonprofit at issue operates crisis pregnancy centers and the investigation related to the alleged unauthorized practice of medicine at those centers. The subpoena sought, among other information, a broad range of information relating to individuals and organizations associated with the nonprofit, including all of its staff; the court ordered that the subpoena be limited to information pertaining to the alleged unauthorized practice of medicine, with the trial court to conduct an in camera review of responsive documents to determine which ones satisfied this requirement.

Finally, there was an interesting addition to the ongoing debate about "dark money" and politically active nonprofits. Writing in the American Prospect, Nan Aron and Abby Levine of the Alliance for Justice argue against blanket disclosure of donors to politically active nonprofits such as social welfare organizations, instead supporting an approach that distinguishes between groups that "are funded by a small group of big donors and those that receive broad support from many people." Their arguments echo some of the more thoughtful supporters of campaign finance disclosure rules (see, for example, Richard Briffault (Columbia)), who recognize that the purported goals of such disclosure are not furthered by publicly identifying the many relatively small donors to candidates and political parties, so so such disclosure should be "rightsized" to target the information that is actually helpful to voters.

Lloyd Mayer

Hate Groups & Tax Benefits

Both Terri Helge and Joseph Mead previously reported in this space on the tax benefits that many organizations often identified as "hate groups" enjoy because of the broad and vague requirements for qualifying as an educational organization under Internal Revenue Code sections 501(c)(3) and 170(c)(2). Not surprisingly, the events in Charlottesville have led to a renewed discussion of this topic. Recent coverage includes a Business Insider story on this topic and a fascinating blog post by Sam Brunson (Loyola Chicago) on the conflict almost a hundred years ago between the IRS and the KKK (and from which the photo shown here is borrowed).

Lloyd Mayer

Another Crackdown on Foreign NGOs - Will the G20 Try to Address This Issue?

The N.Y. Times reports that the Cambodian Prime Minister has ordered U.S.-based Agape International Missions to end its operations in that country after it was featured in a CNN report on the sex trade there. As detailed in the story, the Prime Minister accused the NGO of possibly misleading CNN regarding the extent of the sex trade in Cambodia and thereby violating the terms of its operating agreement with the government. At this time it is not clear how Agape will respond or whether the Prime Minister's statements have in fact led to the expulsion of the group from that country.

Regardless of the details of this particular situation, there is a growing trend of foreign NGOs, domestic NGOs with foreign support, and sometimes domestic NGOs more generally being targeted for burdensome regulation or worse by the governments of many countries, as I have detailed in this space previously. These concerns have led Helmut K. Anheier (President of the Hertie School of Governance in Germany) to call on the G20 to address this issue in a recent G20 Policy Paper. Here is the abstract:

The roles of non-governmental or civil society organizations have become more complex, especially in the context of changing relationships with nation states and the international community. In many instances, state–civil society relations have worsened, leading experts to speak of a “shrinking space” for civil society nationally as well as internationally. The author proposes to initiate a process for the establishment of an independent high-level commission of eminent persons (i) to examine the changing policy environment for civil society organizations in many countries as well as internationally, (ii) to review the reasons behind the shrinking space civil society encounters in some parts of the world and its steady development in others, and (iii) to make concrete proposals for how the state and the international system on the one hand and civil society on the other hand can relate in productive ways in national and multilateral contexts.

Lloyd Mayer

The Achilles Heel of Charitable Contribution Deductions - Paperwork

Over the summer, the United States Tax Court in RERI Holdings I, LLC v. Commissioner upheld the disallowance of a $33 million charitable contribution deduction because of the failure of RERI Holdings I, LLC to state on its required Form 8283 appraisal summary the "Donor's cost or other adjusted basis" for the property. The court further held that the failure could not be excused by substantial compliance because the omission "prevented the appraisal summary from achieving its intended purpose" of alerting the IRS of potential overvaluations of contributed property (and thereby deterring taxpayers from claiming excessive deductions). In this instance the omitted basis would have been approximately $3 million, or roughly one-tenth the value claimed for the contributed property.

While failures to substantiate charitable contributions adequately occur frequently in tax cases, they usually do not affect such large claimed deductions because presumably as the numbers get larger the care and expertise of the professionals involved becomes greater. There may have been more going on here, however. At least one commentator, Peter J. Reilly over at Forbes, concludes that the "brazeness of the charitable plan . . . revealed in the Tax Court RERI Holdings I decision is stunning" in an article titled Billionaire Stephen Ross And the Ten for One Charitable Deduction. Assuming the IRS took a similar view, it very well could have been looking for any possible flaw in the deduction that could be used to disallow it, and the substantiation omission provided a simple way to do so (as opposed to getting into a messy valuation dispute, although the court's opinion goes there anyway in order to determine if certain penalties applied).

No word yet on whether RERI Holdings I will appeal.

Lloyd Mayer

Conservation Easements: Today's Biggest Charitable Contribution Deduction Loophole?

How large is the potential for hard-to-detect and even harder-to-counter abuse when it comes to the federal income tax deduction for "qualified conservation contributions" under Internal Revenue Code section 170(h)? As Peter J. Reilly highlights at Forbes, the potential appears to be pretty large based on early responses to Notice 2017-10's addition of syndicated easements to the list of listed transactions that must be reported to the IRS. In a July 13, 2017 letter to Senator Ron Wyden, ranking member of the Senate Finance Committee, IRS Commissioner Koskinen reported that the 40 fully completed and processed reporting forms, out of 104 processed and 200 received to date, showed an aggregate charitable contribution deduction of over $217 million with preliminary calculations finding that the average deduction was nine times the amount of the investment in the transaction. Other coverage: Tax Analysts.

Such syndicated easements are only part of the conservation easement universe, but the continuing stream of federal court decisions rejecting in whole or in part deductions claimed for such easements highlight the broader issues with this deduction. For example, the U.S. Court of Appeals for the Eighth Circuit recently affirmed disallowance of a $16.4 million deduction for a failure to protect the conservation purpose in perpetuity (RP Golf v. Commissioner). Not all IRS challenges are necessarily successful, however; for example, the U.S. Court of Appeals for the Fifth Circuit recently reversed disallowance of $15.9 million in deductions, although the court remanded the case for consideration of additional reasons for disallowance asserted by the IRS (BC Ranch II, L.P. v. Commissioner).

Recent reports also highlight the broader concerns with such deductions. In May, Adam Looney of the Brookings Institute issued Charitable Contributions of Conservation Easements, listing general tax policy concerns that predated the recent surge in such contributions:

• "Donations are concentrated in transactions that seem unrelated to conservation benefits," including with respect to type of transaction, geographic area, and donee organizations.

• "A small handful of donee organizations are responsible for a disproportionate share of donations," with 25 organizations (as compared to 1,700 land trusts nationwide) receiving between 2010 and 2012 about half of all such contributions, measured by dollar value.

• "Most organizations that receive donations of easements do not report them as gifts or revenues on their public tax returns," impeding transparency, public accountability, and IRS enforcement.

• "Donations of 'partial interests' are difficult to administer," including with respect to determining the fair market value of the contribution for deduction purposes.

The report is also available through the Urban Institute & Brookings Institution Tax Policy Center.

Nancy McLaughlin (Utah) has also continued her excellent coverage of this topic. Here is the abstract for her latest article, Tax Deductible Conservation Easements and the Essential Perpetuity Requirements, Virginia Tax Review (forthcoming):

Property owners who make charitable gifts of perpetual conservation easements are eligible to claim federal charitable income tax deductions. Through this tax-incentive program the public is investing billions of dollars in easements encumbering millions of acres nationwide. In response to reports of abuse in the early 2000s, the Internal Revenue Service (Service) began auditing and litigating questionable easement donation transactions, and the resulting case law reveals significant failures to comply with the deduction’s requirements. Recently, the Service has come under fire for enforcing the deduction’s “perpetuity” requirements, which are intended to ensure that the easements will protect the subject properties’ conservation values in perpetuity and that the public’s investment in the easements will not be lost. Critics claim that the agency is improperly discouraging easement donations by denying deductions for technical foot faults, and some have called for a change to the law that would allow taxpayers to cure their failures to comply with the perpetuity requirements if they are discovered on audit. 

This Article illustrates that noncompliance with the perpetuity requirements should not be viewed as technical foot faults. To the contrary, compliance is essential to the integrity of the tax-incentive program and the easements subsidized through the program. In addition, allowing taxpayers to cure failures to comply with the perpetuity requirements if they are discovered on audit would significantly increase noncompliance and abuse and, given the reliance nationwide on deductible easements to accomplish conservation goals, risk fatally undermining an entire generation of conservation efforts. This Article recommends a more prudent approach: the Treasury’s issuance of guidance that would greatly facilitate compliance with the perpetuity requirements, reduce transaction costs for taxpayers, and significantly shore up the integrity of the program.

Lloyd Mayer

Gaudeul & Kaczmarek on Charitable Giving

Alexia Gaudeul and Magdalena Claudia Kaczmarek have posted Does Nudging Intentions Translate into Action? Why Nudging Pledges to Charities Does Not Result in Increased Donations on SSRN with the following abstract:

Recent evidence suggests that nudges, i.e. alterations in the decisional context, can have large effects on decisions and can improve individual and public welfare. This paper presents the results of a controlled experiment that was designed to evaluate not only the effectiveness of a default manipulation on decision making in a charity giving context, but also whether yielding or opposing a nudge affects attitudes, and whether nudging intentions (pledges) translate into behaviour (donations). The results show that while making pledges the default increased pledges, it did not increase donations because the nudge affected only participants who were close to indifference between pledging and not pledging and were thus unlikely to actually do the effort of translating their pledges into donations. Participants who were nudged to pledge pledged more often than participants who were nudged to keep, but they were less likely to maintain their participation in the experiment, and those who kept participating were less likely to pledge again. This, along with high attrition among nudged pledgers explains why nudging pledges did not result in higher actual donations. We interpret our findings in terms of a selection effect of nudges, and discuss practical implications of our experiment in terms of the applicability of default-based nudges as a tool for policy interventions.

--Eric C. Chaffee

Milde & Yawson on Social Media Use by Nonprofits

Katherine Milde (Quinnipiac) and Robert M. Yawson (Quinnipiac) have posted on SSRN with the following abstract:

The aim of this paper is to detail the social media engagement efforts used by successful nonprofits and to build on these insights in developing recommendations for effective social media plans to increase the visibility and service areas of public service organizations. The topic of social media use by nonprofits is viewed through a practice lens. Specific campaign activities for becoming distinguished nonprofits are identified. Essential aspects of social media engagement initiatives that translate into public service activities include tying online effort to the mission of the organization, providing for a dedicated person or team to ensure pointed social media efforts integrated into existing strategies, and developing a cost analysis coupled with benchmarks for success. Incorporating the recommendations detailed in this paper may help to expand the reach of otherwise resource-limited public service organizations, and can foster the transition from merely having supporters on paper to working with engaged, committed, and informed volunteers and donors.

--Eric C. Chaffee

Ball on Pro Bono Business Lawyering

Alina Ball (Hastings) has posted Primary Care Lawyers: A Holistic Approach to Pro Bono Business Lawyering on SSRN with the following abstract:

Pro bono programs for business lawyers provide small businesses in low-income communities and nonprofits much needed access to legal representation. However, the dominant pro bono business law model could be reframed to provide better representation to pro bono business clients. Premised on traditional pro bono models of individual representation where a pro bono attorney is assigned to assist on an individual’s discrete litigation matter, the dominant pro bono business law model is not designed to provide business clients with holistic and integrated representation. To provide pro bono business clients with the legal counsel they truly need, we must align our expectations of pro bono business law representation with the realities of transactional practice. This requires shifting away from representation on discrete issues towards a model that provides long-term counsel and advice on the variety of interconnected transactional matters that businesses maneuver on a regular basis. This essay argues for a new archetype for pro bono business law representation structured to address the multilayered legal needs of pro bono business clients and explains why law school clinics may be the best institutional force to lead this essential change.

--Eric C. Chaffee