Saturday, September 29, 2018

State Charity Registration Single Portal Goes Live Just Before Annual NAAG/NASCO Conference

Cropped-Black-and-TanThe long-planned Single Portal for state charity registration just went live for the first two pilot states, Connecticut and Georgia. A second cohort of at least five states is expected to join them by January 2019, according to the website's FAQs. The site is operated by the Multistate Registration and Filing Portal, Inc., which is described as a section 501(c)(3) organization that is also an instrumentality of government formed by state charity officials. I assume not coincidentally, the site went live just before this year's National Association of Attorneys General/National Associate of State Charity Officials conference in Baltimore, scheduled for October 1st thru 3rd. The agenda for Monday, which is open to the public, is available here.

Lloyd Mayer

September 29, 2018 in Conferences, In the News, State – Executive | Permalink | Comments (0)

Friday, September 28, 2018

Donors, Disclosure, and Politics

Dark MoneyAccording to the Center for Responsive Politics, one emerging issue for both the 2018 midterm elections and the Kavanaugh confirmation battle is the flow of funds from so-called "dark money" groups - generally tax-exempt nonprofits that are not required to publicly disclose their donors. This issue has also been in the news recently because of both recent action by the IRS and a couple of significant court decisions.

In July the IRS issued Revenue Procedure 2018-38, which dropped the requirement that section 501(c) organizations report the names and addresses of substantial contributors to the IRS. This reporting had been done on Schedule B to the annual Form 990, 990-EZ, or 990-PF, with the information only available to the IRS and not subject to public disclosure (unlike the rest of Form 990/990-EZ/990-PF). This change is effective for tax years ending on or after December 31, 2018. The reporting requirement still applies to section 501(c)(3) organizations, however, as for those organizations there is a statutory requirement (found in section 6033(b)(5)) of such reporting. The stated reason for the change was:

The IRS does not need personally identifiable information of donors to be reported on Schedule B of Form 990 or Form 990-EZ in order for it to carry out its responsibilities. The requirement to report such information increases compliance costs for some private parties, consumes IRS resources in connection with the redaction of such information, and poses a risk of inadvertent disclosure of information that is not open to public inspection.

Some commentators saw a political motive in the change, however, as it relieves politically active "dark money" nonprofits from having to disclose their substantial donors to the IRS. Coverage: NPRPolitico; ProPublica. And Montana Governor Steve Bullock sued to challenge the change, asserting that Treasury failed to follow required processes under the Administrative Procedure Act. Coverage: N.Y. Times.

Supporters of donor disclosure, particularly for politically active groups, were more successful in the courtroom recently. California Attorney General Xavier Becerra successfully appealed to the Ninth Circuit the granting of as applied challenges by the Thomas More Law Center and the Koch brothers-affiliated Americans for Prosperity Foundation that had exempted the Center and APF from the state requirement to provide an unredacted copy of its Schedule B to the Attorney General's office (but not for public disclosure). The Ninth Circuit in 2015 had rejected a facial challenge to this requirement. Of course with the above change by the IRS, only section 501(c)(3) organizations (such as the Center and APF) will have Schedule Bs to submit. Coverage: ABA Journal (collecting links to coverage by major news outlets).

Possibly of even greater consequence, the U.S. District Court in the District of Columbia in CREW v. FEC vacated a longstanding FEC regulation that had permitted organizations that are not political committee but make independent expenditures (defined as expenditures to pay for communications that expressly advocate the election or defeat of a federal candidate and which are not done in coordination with any federal candidate or political party) to avoid disclosure of their significant donors to the FEC as long as the donors had not earmarked their donation to support a particular, reported independent expenditure. The court reasoned that the relevant statute instead required such disclosure if the funds provided were for the purpose of supporting independent expenditures generally. The court stayed the vacator for 45 days from the date of the decision (August 3, 2018) to give the FEC time to issue an new, interim regulations, although it is far from clear the FEC can or will do so in that time period. Attempts to obtain a further stay of the District Court's order from the Supreme Court failed, however, leaving it somewhat uncertain what rules would apply to groups making such independent expenditure in the run-up to the 2018 general election. Coverage: The Atlantic; Politico. According to Election Law expert Rick Hasen, the ruling may not have as dramatic an effect as some seem to think, however.

Lloyd Mayer

September 28, 2018 in Federal – Executive, Federal – Judicial, Federal – Legislative, In the News | Permalink | Comments (0)

How Nonprofits Should React to the New Tax Law

    In her article, Joan Gerry, discusses what is on everyone’s mind in the nonprofit community, how to react to the new tax law. She begins her article by explaining the two sides of the argument on if nonprofits will get less donations. Some people believe that because wealthier Americans will have more income, they will donate more money, offsetting the decrease in donations because of the increase in the standard deduction. On the other hand, some people believe that there are not enough wealthy Americans to offset the number of people who will now choose the standard deduction. The bulk of the article discusses how nonprofits can revamp their fundraising efforts to get more donations. To learn more about how to increase donations for your nonprofit, click here:



September 28, 2018 | Permalink | Comments (0)

How Will The New Tax Law Impact Nonprofits

    The article begins by describing the changes in tax law taking effect in 2018. These provisions are: the standard deduction doubled from $6,350 to $12,000 for individuals, and $12,700 to $24,000 for married couples. The charitable contribution deduction limit rose from 50% to 60% of an individual's adjusted gross income (AGI). The estate and gift tax exemption doubled for single filers from $5.5 million to $11 million and up to $22.4 million for married couples. The corporate tax rate has been reduced from 35 percent to 21 percent on all profits, which is 4 percent lower than the global average corporate tax rate. In theory, this should make the U.S. more globally competitive and help keep more corporate profits in the U.S. The increase in the standard deduction is expected to wipe out donations. However, decreases in individual giving may be offset by the gains of corporations, many of which have been left with extra cash because of the tax cuts. Many corporations have announced they will be giving generous donations to big nonprofits, because of these donations many local charities are worried they are going to bear the brunt of the tax cuts. To learn more about how the tax cuts will affect national and local charities, click here:



September 28, 2018 | Permalink | Comments (0)

Wednesday, September 26, 2018

Guidance Slowly Appearing for UBIT & Excess Compensation TCJA Provisions

IRSCORRECTION: The original post said Form 4720 draft Schedules N and O were not yet available, which was incorrect. They are available, on the same page as Schedule M, through the link initially provided. The post has been corrected to reflect this fact.

In its August 2018 Update for the 2017-18 Priority Guidance Plan, Treasury and the IRS identified only two exempt organization specific items from the Tax Cuts and Jobs Act (TCJA) as needing guidance this fiscal year: "computation of unrelated business taxable income for separate trades or businesses under new § 512(a)(6)" and  "certain issues relating to the excise tax on excess remuneration paid by 'applicable tax-exempt organizations' under § 4960." This was in addition to the already issued Notice relating to the calculation of net investment income for purposes of the new § 4968 excise tax applicable to certain private colleges and universities, which I previously blogged about, as well as the interaction of charitable contributions and state and local tax credits (discussed earlier this week) and a number of continuing projects unrelated to the TCJA.

True to their word, Treasury and the IRS have now issued a Notice providing initial guidance under § 512(a)(6) and draft instructions for reporting both excess compensation under § 4960 and net investment under § 4968 on IRS Form 4720 (draft for 2018, but not including the relevant schedules yet). Perhaps the most interesting (and reassuring) aspect of the Notice is that it allows tax-exempt organizations with unrelated trades or businesses to use "a reasonable, good-faith interpretation" of §§ 511-514 "considering all of the facts and circumstances" to determine if they have multiple such trades or businesses that would therefore require calculating net unrelated trade or business income for each such trade or business under § 512(a)(6). What at least requires further consideration is the suggestion that Treasury and the IRS might use the North American Industry Classification System (NAICS) 6-digit codes to determine what constitutes a separate trade or business. That is because while exempt organizations have in theory used this system to classify all of their revenue streams, including from unrelated trades or businesses, on their annual Forms 990 for many years, up until now it has not had much if any tax significance and so the NAICS' fit with actual exempt organizations activities has not been rigorously tested. For example, I noticed that my home institution's latest Form 990 included a significant amount of unrelated trade or business income under code 900099, which is not an actually NAICS code but instead the number the Form 990 instructions say to use if none of the NAICS six-digit codes "accurately describe the activity." This raises the question of whether many other tax-exempt organizations will have similar difficulty using the NAICS codes to determine their separate unrelated trades or businesses. The Notice also addresses a host of other issues, and wisely seeks comments before the issuance of any proposed regulations.

The draft Form 4720 instructions provide details for reporting excess compensation (draft Schedule N, on same page as Schedules M and O) and net investment income (draft Schedule O, on same page as Schedules M and N). One issue they do not appear to address, however, is whether the Form 4720 generally and these schedules specifically are subject to public disclosure (current law appears to be that the Form 4720 is only subject to public disclosure for private foundations).  So while the public will know these schedules have been submitted (because of related questions on the publicly available Form 990), it is not clear the public will have access to the detailed information required on the Form 4720 schedules. (Hat tip to EY for identifying this issue.)

Lloyd Mayer


September 26, 2018 in Federal – Executive | Permalink | Comments (0)

Tuesday, September 25, 2018

How Your Fundraising Can Survive the 2018 Tax Changes

    In this article, the iMission Institute discusses how nonprofits can successfully fundraise after the 2018 tax changes by employing GIFs. This article is a fun take on a normally stuffy topic. The article starts by explaining how the changes will affect nonprofits. Nonprofit fundraising will sustain a direct hit from two provisions in the new tax reform law. The Tax Policy Center estimates the change in standard deduction alone will reduce charitable giving by up to $20 billion a year. The article explains that because of the increase in the standard deduction most people will stop itemizing their deductions. To deduct your charitable giving from your taxes, you must itemize your deductions with less people itemizing, the Tax Policy Center believes a lot of people will not donate. The article ends by giving strategies of how to improve fundraisers and raise more money with the decrease in donations. To read more on how to improve fundraising with the tax changes, click here:



September 25, 2018 | Permalink | Comments (0)

Monday, September 24, 2018

Charitable Contributions, State Tax Credits, and Return Benefits: IRS Proposed Regs, IRS Announcement, and Much Commentary

IRSThe Treasury and IRS proposed regulations to address the attempts by states to create a way for their residents to get around the cap on the state and local tax (SALT) deductions by facilitating charitable contributions that would qualify the donors for state tax credits. The proposed regulations would treat the state tax credits as return benefits, thereby requiring a reduction in any otherwise available charitable contribution deduction. The proposed regaultions raise a range of issues, including:

  • administrative concerns (see a pre-proposed regs article by David Gamage (Indiana University)),  which are partially addressed by a de minimis exception for both state tax credits of up to 15% and state tax deductions resulting from charitable contributions; and
  • political issues, in that the proposed regulations do not differentiate the recent SALT cap workaround efforts from the 100 or more pre-tax legislation state programs that provided state tax credits in exchange for contributions to certain types of charities (see a pre-proposed regs State Tax Notes article (subscription required) by eight tax academics that includes an appendix listing those existing programs).

Earlier articles raising these and other issues include: Joseph Bankman et al., Caveat IRS: Problems with Abandoning the Full Deduction Rule, State Tax Notes (2018); Roger Colinvaux (Catholic), Failed Charity: Taking State Tax Benefits Into Account for Purposes of the Charitable Deduction, 66 Buffalo Law Review 779 (2018); and Andy Grewal, The Charitable Contribution Strategy: An Ineffective Salt Substitute, Virginia Tax Review (2018).

An added wrinkle is that shortly after the issuance of the proposed regulations the IRS issued an announcement stating that "[b]usiness taxpayers who make business-related payments to charities or government entities for which the taxpayers receive state or local tax credits can generally deduct the payments as business expenses." While meant as a clarification, this announcement may not in fact have clarified very much or may indeed have created a significant loophole, as Andy Grewal has noted.

Lloyd Mayer


September 24, 2018 in Federal – Executive, Publications – Articles | Permalink | Comments (0)

Sunday, September 23, 2018

Musings on the Meaning of “Primary”

The recent Illinois Supreme Court decision in Oswald v. Hamer, which I discuss here, got me thinking about the meaning of an all-important word in charitable tax exemption.  That word is “primary.”  Almost all law dealing with charitable tax exemption includes a requirement that charitable activities be “primary” to the organization (or in case of property, the use of the property).  The “primary” test usually is derived from the word “exclusively”: Section 501(c)(3) tells us that an organization is charitable if it is organized and operated “exclusively” for charitable purposes, but the IRS and courts have held that “exclusively” really means “primarily” – some non-charitable use is permissible.  Similarly, the Illinois Supreme Court and virtually all other state supreme courts who have grappled with the issue have held that “exclusive charitable use” really means “primarily charitable use.”  So the key word in establishing a right to charitable tax exemption, whether for federal income tax or state property (or other) tax is “primary.”

So how do we know when charitable activity is “primary”?  Often, this is easy.  Many charities literally do nothing but pursue their charitable purpose.  The Salvation Army or Goodwill Industries may operate thrift stores, but that operation is solely to fund their charitable mission of helping the homeless, poor and disadvantaged.   The Lincoln Center in New York City is all about advancing the performing arts.  And so on.

But for some organizations, like nonprofit hospitals, “primary” is not so clear.  If we believe that simply operating a hospital that provides health services to paying patients is a charitable purpose, then of course “primary” isn’t a problem.  But although the IRS seemed to say exactly this in Rev. Rul. 69-545, we all know now that this isn’t true; the IRS has said many times since then that merely providing health services to paying patients isn’t enough.  Similarly, if we believe that operating a community hospital “open to all without regard to ability to pay” is sufficient, then we don’t have to much worry about “primary” – all nonprofit hospitals claim this is true; if the claim and “official policy” is enough, the issue is decided.

But let us suppose that we want nonprofit hospitals to actually engage in some sort of specific activities that are observable and quantifiable.  In that case, the first part of defining “primary” would be defining the activities one thinks are charitable.  Unfortunately, there is little consensus on what those activities should be.  Should charitable activities in the context of health care be limited to free or discounted care for the uninsured?   Should it be expanded to a broad array of so-called “community benefits” which may include things like “health fairs,” community wellness seminars, and so forth?  Should it be (as I once opined) things that expand access to health care for underserved populations or providing services that for-profit providers do not provide?

For purposes of this thought experiment, let’s assume that we define charitable activities for nonprofit hospitals as expanding access to underserved populations.  Free care for uninsured poor obviously would count here, as would the costs of care below reimbursement for programs such as Medicaid that are aimed at poor populations.  I might throw in educational seminars for at-risk populations and a few other things as well, but the specifics at this stage are unimportant.  Let’s just focus for now on “expanding access” as the charitable goal, whatever the exact contours of that might be.

Fine, now we can move on to the even harder question.  How do we assess whether a nonprofit hospital is “primarily” about such a charitable mission?  Does this test require us to find that more than 50% of the hospital’s services go towards the expanding access goal?  More than 50% of its revenues?  What evidence would tell us that a hospital’s work is “primarily” charitable?

To think about this more, let’s abstract the problem – that is, take it out of the hospital context and think about a more familiar, but no less complex, context.  Many of us (me included) would say that our families occupy a “primary” position in our lives.  What does that mean?  How does a human being illustrate that is true?  Note that it probably does not mean that we spend more than 50% of our waking hours with our families.  Many of us are at work more hours during the week, month or year than we spend interacting with our families yet our families really are “primary.”  So a quantitative “51% of the time” test won’t work.  But we might observe that the work is done so that we can support our families economically; our profit from work goes to making our families’ lives (as opposed to just our own) better.  We might try to be as efficient as possible at work so that we can spend more time (maybe not that magic 51%) with our families.  We might re-arrange our work schedules to attend important family events.  If there is a family crisis, we might even leave in the middle of something very important work-wise to attend to that.  So I would say that while “primary” in this abstracted context cannot be precisely defined quantitatively, it CAN be defined through a combination of quantitative (how much time/money to do you spend on your family) and qualitative (do you take actions that indicate that “family comes first”) factors.

Now let’s go back to the hospital context.  If a hospital must engage “primarily” in charitable activities, and for this thought experiment, we define charitable activities as “expanding access,” then how would a hospital demonstrate that charity is “primary”?  Certainly, the amount of money and time spent on expanding access would be important, but just like a person might spend more time at work than with family and still rightly claim family to be “primary,” we should not simply impose a “51%” test on hospitals.  Time and money spent, nevertheless, are important, and we should demand that substantial time and money be spent.  That in turn leads to a question of what would be “substantial.”  Less that 50%, I should think, but enough that one could see importance to the endeavor.  I’ve previously used 1/3 as a benchmark, but perhaps this is too much.  The IRS has defined substantial as 10% in other contexts, and churches often frame tithing around a “10% of income to charity” obligation.  We can argue about the number, and how to precisely define it, but if a hospital cannot show that at least 10% of its financial wealth and time are spent on charitable activities, then I have a hard time classifying such activities as “primary” no matter what else it does (and perhaps I'm being too generous with a 10% test).

But a quantitative 10% number should not be enough.  Instead, we should also look for qualitative factors of “primary-ness.”  These qualitative factors, I think, should revolve around a demonstration by management that charitable activities are of first importance.  Do meetings of management focus on ways to expand access or are those meetings invariably about the profit margin?  If the hospital has a “good year” financially, does management discuss how to devote more resources to the charitable mission, or are the discussions about raising salaries and salting away the money for a new building or new equipment that may or may not be necessary?  Does management ask for reports from all of the hospital service departments on how they are working to expand access?  Or are the reports about departmental margins and financial efficiency?  Does the hospital “sell itself” to poor or at-risk patients, or does it try to hide that aspect of its operations as much as possible consistent with state law (e.g., does it go “above and beyond” legal requirements or do "the bare minimum")?

There was a time in our history (in the late 1800’s and early 1900’s) when hospitals clearly met both my quantitative and qualitative musings on “primary.”  They were run primarily to serve the poor; if you were financially well-off, you had a personal physician who would treat you (and one hoped not kill you).  If you were poor, you went to a hospital to be cared for by what were nearly always volunteers.  But this is not the way hospitals operate today, and I suspect if we are serious about the word “primary” as a test of charitable exemption, most private nonprofit hospitals would fail that test.  So be it.


September 23, 2018 | Permalink | Comments (2)

Saturday, September 22, 2018

How Did Kentucky Nonprofits End Up Taxed?

In his article, Sam Dick discusses how specific nonprofits, like Lexington’s Habitat for Humanity are affected by the recent tax reform in Kentucky. This past July, the new 6% sales tax on ticket sales for nonprofit fundraising events took effect. Lexington’s Habitat for Humanity explains how the tax is affecting their fundraising efforts. During their golf tournament in July, they absorbed the sales tax on 24 golf teams at one thousand dollars a piece. This lead to a decrease in funds raised for the charity. The small nonprofits are getting hit the hardest because not only do they have to charge sales tax on tickets, but they must hire CPAs to guide them and having to revamp their practices. Many nonprofit leaders are frustrated at how much the sales tax is hurting their organizations. If the organization’s profits are down, less people are being helped. To learn more about how the new sales tax is affecting Kentucky nonprofits, click here: 



September 22, 2018 | Permalink | Comments (0)

Friday, September 21, 2018

A (mostly unhelpful) Illinois Supreme Court Decision on Hospital Property Tax Exemption

Yesterday (Sept. 20, 2018), the Illinois Supreme Court released its long-awaited opinion in Oswald v. Hamer, a case about the constitutionality of a statute the Illinois Legislature passed in 2012 in the wake of the Provena Covenant hospital tax exemption case decided in 2010.  Unfortunately, the decision did not actually resolve the question of what a hospital must do in order to receive a property tax exemption, and in fact simply complicated that question.

Several prior blog posts detail the issues and final resolution of the Provena case, so I won’t go into detail on the background (see, e.g., here  and here).  Briefly, a plurality (not majority) of the Illinois Supreme Court held in Provena that the hospital in question failed the constitutional requirements of charitable property tax exemption because “both the number of uninsured patients receiving free or discounted care and the dollar value of the care they received” were de minimis.  While the plurality in Provena did consider what kinds of things might qualify as “charitable use” (free or discounted care for the poor being the primary one), the plurality did not lay out any specific standard for “how much” charity care (or other activities) would be necessary for a hospital to meet the charitable use requirements.  It simply said, more or less, that whatever that threshold might be, Provena did not meet it.   And the two justices that concurred in the result but dissented from the plurality’s analysis of charitable use more or less took the position that simply operating a nonprofit hospital “open to all” would qualify for charitable use without regard to any specific amount of charity care or other activity.

After Provena, the Illinois Department of Revenue withheld tax exemption from a handful of hospitals pending further contemplation of the opinion, resulting in a great howl of anguish from the nonprofit hospital industry about the uncertainty created in the wake of the case.  The Illinois legislature, largely guided by advice from the Illinois Hospital Association, responded by passing a statute providing a quantitative test for exemption: if the total value of certain services and activities (let’s call them “community benefit activities”) at least equals the property taxes that would be due on the hospital’s property, the hospital “shall be issued” a charitable exemption for its property.

The issue in Oswald was whether this statute was constitutional in light of prior Illinois Supreme Court interpretations of the constitutional requirements for charitable property tax exemption.  In particular, the court has interpreted the Illinois constitution as requiring that property be used “exclusively” for charitable purposes in order to be exempt (though “exclusively” actually means “primarily” in this context).  The plaintiff Oswald contended that the new Illinois statute violated the constitutional requirement of “exclusive charitable use” because it conferred tax exemption based upon a dollar standard that did not necessarily meet the “exclusive use” requirement.  For example, under the statute, a nonprofit hospital could in theory qualify for exemption by writing a check in an amount at least equal to the hospital’s putative property tax to a community health clinic that served the poor, even if the hospital itself served no poor patients at all, and offered zero free or discounted care.  In short, Oswald argued that since the statute permitted a charitable exemption without showing that the underlying property was in fact “exclusively” used for charitable purposes, the statute was unconstitutional.

The Illinois Supreme Court, however, held that the statute was constitutional, although the legerdemain required to reach this conclusion was substantial.  In effect, the court concluded that if there was any way to interpret the statute as being consistent with the constitutional “exclusive use” requirement, the court would do so.  Accordingly, the court stated that the statute was not really intended by the legislature to replace the exclusive use test; rather, the court essentially interpreted the statute as requiring an additional test for exemption for property owned by nonprofit hospitals: the property would have to meet both the exclusive use test, and the entity owning the property also would have to meet the monetary test of the statute.  “Therefore, a hospital applicant seeking a section 15-86 charitable property tax exemption must document the services or activities meeting the statutory criteria.  Additionally, the hospital must show that the subject property meets the constitutional test of exclusive charitable use.” [opinion page 13, emphasis added].  The word “shall” in the statute (“shall be issued a charitable exemption”) was not mandatory, according to the Court; rather, it was “permissive” – that is, despite the “shall” language, the Department of Revenue did not have to issue an exemption if the statute’s requirements were met but exclusive charitable use was lacking. I guess that in an area of law where “exclusively” means “primarily,” interpreting “shall” to mean “you can if you want to” isn’t all that surprising.

So where does the court’s opinion leave Illinois nonprofit hospitals?  My interpretation is that it leaves them mostly back where they were after the Provena decision.  The court in Oswald did not shed any light on how a nonprofit hospital would meet the “exclusive use” test, beyond referring to current precedents, including Provena and earlier exemption cases.  About the only thing that is clear is that in light of Oswald, hospitals cannot simply rely on the statute to get exemption. Meeting the statutory requirements, according to the court, is only half the battle (maybe in fact, only a tiny part of the battle since the statutory standard is relatively easy to meet, as one might expect from a statute drafted by the industry itself); the other half is showing that the property in question is “exclusively” (remember, really “primarily”) used for charitable purposes.  Does the exclusive use test require some minimum amount of charity care?  Some evidence that hospital operations are primarily designed to serve the poor?  Or is simply operating a community hospital “open to all” itself a charitable endeavor regardless the amount of charity care actually provided (as the two partially-dissenting justices in Provena suggested)?  Oswald did not answer this question, and since Provena was a plurality opinion, the really important issue – what qualifies property as being “exclusively” used for charity in the hospital context – remains as cloudy today in Illinois as it was after the Provena decision in 2010.  And that, in turn, means that more litigation is inevitable – in fact, a case involving Carle Foundation Hospital is proceeding in Champaign County Circuit Court that may be the vehicle that eventually will force the Illinois Supreme Court to actually answer the substantive question regarding what a nonprofit hospital must show to establish “exclusive charitable use.”  That case is scheduled for trial in January 2019; perhaps in a couple of years, after various appeals, we will finally have a definitive answer.


September 21, 2018 | Permalink | Comments (0)