Nonprofit Law Prof Blog

Are There Just Too Many Nonprofits?

This interesting podcast addresses the question of overcrowding in the nonprofit sector.   The podcast is based on a recent study entitled "A Field Too Crowded?  How Measures of Market Structure Shape Nonprofit Fiscal Health."  Here is an excerpt from the study:

 

Are there too many nonprofits? America’s nonprofit sector has steadily increased in size over the past century, raising concerns about the effect of this growth on the financial sustainability of the sector. McLaughlin (2010, p. xvi) argued that the rapid growth of the nonprofit sector has weakened the “collective power of the entire field,” whereas Callahan (2015) raised concerns that few nonprofits can ever reach the scale needed to make an impact. Concerns about competitive pressures push nonprofits to collaborate (Gazley & Guo, 2015), consolidate (Seaman, Wilsker, & Young, 2014) , and merge (La Piana, 2010)—in part to achieve better economies of scale (Egger, 2012). Although scholars and practitioners have wrestled with various aspects of whether we have “too many” nonprofits, questions remain about how we measure crowding and how we analyze the effects of a growing field. For example, Harrison and Thornton (2014) suggested that before declaring a crowded supply of nonprofits, one must carefully examine changing dimensions of the demand for nonprofits.  Anheier (2004) argued that a careful study of growth trends supports the case, at least in the United States, that we may not have exceeded our carrying capacity or “the number of organizations that can be supported by the social, economic, and political conditions, given available resources” (pp. 281-282).

dkj

David J. Herzig and Samuel D. Brunson on White Supremacist Groups and Tax Exemption

David Herzig (previously at Valpo, now at EY)) and Samuel Brunson (Loyola Chicago) wrote an opinion piece last year on whether alleged hate groups should be allowed exemption from tax under 501(c)(3).  I thought it was worth considering after Charlotesville, then again after the alt-right's tax exempt status was restored recently, administratively and without much consideration for their ideas, as would [apparently] not be appropriate under the American conception of speech and thought.  I thought about it again after the shocking events in Pittsburgh on Saturday morning.  Here is some of what Hertzig and Brunson said in challenging my initial thinking:

But some viewpoints are fundamentally untethered from American values and should no longer receive any state support or endorsement. We are not arguing that such despicable views be excluded from the public sphere; free speech is too important a value to dismiss just because some people’s speech is repugnant. But under current law, tax exemption represents something more than merely permitting free speech.

In 1983, the Supreme Court declared an extra-statutory rule for tax exemption — the “fundamental public policy” doctrine. In Bob Jones University v. United States, the court held that the I.R.S. could constitutionally revoke the tax exemption of a religiously affiliated university because its racist policy violated a “fundamental public policy.”The court did not explain how to determine when a societal value became a fundamental public policy. But it pointed out that the courts, the executive branch and the legislative branch had all been working to eliminate school desegregation; that concerted effort indicated that nondiscrimination in schools was a fundamental public policy.

Despite the rhetoric of various white supremacist and white nationalist groups, an important bipartisan consensus emerged out of the chaos of the Charlottesville rally: Advocacy of white supremacy and hatred by the K.K.K., neo-Nazis and the far right are not acceptable public viewpoints. Robust denunciations came from politicians across the political spectrum and included leading Republican politicians like Mitch McConnell, the Senate majority leader, and Paul Ryan, the House speaker. The list also included members of the executive branch, including Attorney General Jeff Sessions and Vice President Mike Pence.   If it was not clear that white supremacy violated a fundamental public policy in the era of the Bob Jones case, it is clear now. The widespread condemnation of racism expressed by both the executive and legislative branches of the government provides convincing evidence that white supremacist actions violate fundamental public policy. Thus, those organizations that advocate white supremacy and organize white supremacist events do not qualify as tax-exempt under the Supreme Court’s reasoning, and the law requires the I.R.S. to revoke their tax exemptions.  If the administration is going to “take the most vigorous actions” against white supremacists and neo-Nazis, the first step would be to review and revoke the tax exemption for any organizations that espouse these ideologies.

How will the government determine which organizations violate this fundamental public policy? Certainly, any group that sponsors violence against racial or ethnic minorities should not qualify for a tax exemption. Moreover, any group that proclaims the superiority of whites, or supports the separation of the population by race, should be scrutinized. Where an organization’s mission statement suggests a focus on the superiority of whites, or the inferiority of other groups, the I.R.S. should look closely at what the group does. (Though surprising, it is not unheard-of for a group to explicitly state its white supremacist purposes. The New Century Foundation, for example, says in its mission statement, “We also believe the European-American majority has legitimate group interests now being ignored.”)  Unless the I.R.S. is able to determine that an exempt organization does not advocate a racial policy that violates the fundamental public policy against white supremacy, it should lose its exemption.  Since the Bob Jones decision, the I.R.S. has been reluctant to apply the fundamental public policy doctrine. With exceptions that could be numbered on one hand, the I.R.S. has invoked fundamental public policy only to revoke the exemptions of private schools that discriminated on the basis of race. Moreover, after accusations that the I.R.S. discriminated against Tea Party groups by delaying or denying their applications for nonprofit status, the agency has been treading more carefully than ever.  The case of white supremacist groups is different: Politicians and citizens on the left and the right have recognized the odiousness of white supremacist groups.  To be clear, public charities have an important historic role in espousing minority and unpopular views, and these groups should not be punished or censored simply because of their speech. Moreover, their articulating their bad ideas ultimately leads to society’s forcefully refuting those ideas, which, in the end, makes the cause of anti-racism stronger.  But a tax exemption is something different. The Constitution protects these groups’ right to free speech, but it doesn’t promise anyone freedom from taxes.

The problem, of course, is that the groups don't explicitly say or teach that we should "kill all the [fill in the blank]."  They say things that in other countries are considered to incite others to "kill all the [fill in the blank].  Usually, they teach the inferiority or superiority of one group or another, or blame some social malady on one group or another.  Then, when violence erupts they argue that violence is entirely antithetical to their viewpoint.  Some countries, Canada and Germany, for example, don't view that as an insurmountable obstacle to the preservation of free speech and the simultaneous prohibition of hate speech.  Consider this article comparing American and German treatment of free speech.  The article discusses Germany's constitutional free speech protection and then quotes a provision of German law that states "Whosoever, in a manner liable to disturb public peace, (1) incites hatred against parts of the population or invites violence or arbitrary acts against them, or (2) attacks the human dignity of others by insulting, maliciously degrading or defaming parts of the population shall be punished with imprisonment of no less than three months and not exceeding five years."  Still, countries that wrestle with hate speech have a hard time enforcing prohibitions.  Denying tax exempt status for groups that engage in hate speech may not be the same thing as prohibiting speech, but, it seems to me, would be just as difficult and would simply move the burdens and problems of enforcement to a different arm of government.   In the wake of Pittsburgh, I am willing to try though.

dkj

 

Erick Franklin Amarante's "Unregulated Charity"

Erick F. Amarante (Rocky Top) has posted "Unregulated Charity."  Here is the abstract:

The vast majority of charities in the United States operate in a regulatory blind spot, as they are neither meaningfully evaluated when they apply for charitable status nor substantively monitored after they receive charitable status. Driven by severe budget constraints, the IRS decided to essentially ignore any charity that claims it will realize less than $50,000 in annual gross receipts. From a practical perspective, the IRS’s decision makes sense. To the extent smaller charities are less likely to cause harm, it is reasonable (perhaps even preferable) to subject them to less scrutiny. This type of prioritization, known as risk-based regulation, has become increasingly popular as regulatory budgets have continued to shrink. But however intuitive, reasonable, or widespread, the fact remains that the IRS has effectively absolved itself of the duty to oversee the majority of charities.

This Article explores, on both a micro- and macro-level, the negative consequences of the IRS’s decision to leave smaller charities unregulated. On the micro-level, the lack of regulation impacts virtually every person who interacts with the charitable sector, including donors, beneficiaries of charities, and private actors in the market. On the macro-level, as an increasing number of charities operate without proper regulation, the public will lose faith in the charitable sector and hasten the erosion of the “halo effect” enjoyed by all charitable organizations, large and small.

This Article is the first to identify and discuss the harms associated with the IRS’s failure to apply either front-end or back-end scrutiny to smaller charities. To address this regulatory failure, this Article argues that the IRS should require a more robust retrospective regulatory tool for all charities, regardless of size. This solution represents a cost-effective means for the IRS to meet its regulatory burden in a manner that will help restore public faith in the charitable sector.

dkj

Point/Counterpoint: Section 501(c)(3) and the Taxation of Speech

Mark Pulliam (Law & Liberty Blog; Retired Partner, Latham & Watkins), Is Section 501(c)(3) a Form of Censorship?:

Columbia Law School Professor Philip Hamburger is a prodigious and iconoclastic legal scholar. ... Hamburger’s latest subject, in Liberal Suppression ([University of Chicago Press] 2018), is an inquiry into the legitimacy of restrictions on the political speech of non-profit organizations.  Section 501(c)(3) exempts religious, educational, and charitable organizations from federal income tax but denies them this exemption if they engage in campaign speech for or against any candidate for public office or devote a substantial part of their activities to propaganda or other attempts to influence legislation. Section 170(c) makes contributions to qualifying non-profits tax-deductible to the donor. According to Hamburger, these exemptions and deductions amount to “many billions of dollars annually.”

Most people’s knee-jerk reaction is that section 501(c)(3)’s restrictions are justified by the tax-exempt status such non-profit organizations applied for and received. Rejecting such preconceptions in his trademark fashion, Hamburger strongly disagrees. Although non-profits are free to express a wide range of opinions—even political opinions—outside of political contests, Hamburger views section 501(c)(3) as “an extraordinary abridgement of an essential freedom,” which ought to be considered unconstitutional. Inasmuch as the Supreme Court has unanimously upheld the lobbying restrictions in section 501(c)(3), Liberal Suppression is nothing if not ambitious, but is it persuasive? Realizing that his arguments may appear to be an “uphill struggle,” early on Hamburger asks readers to “hold their skepticism in abeyance.”

After reading the book, my skepticism remains stubbornly intact.

Hamburger reminds the reader that from colonial times until the amendment of section 501(c)(3) in 1934 (and further tightening in 1954, and again in 1987), which imposed the restrictions he finds objectionable, American clergy actively participated in politics from the pulpit. The timing of the 1934 and 1954 restrictions, he points out, coincides with a period of “liberal” anti-Catholic sentiment in America. The principal culprits in Hamburger’s tale are nativists such as Ku Klux Klan imperial wizard Hiram Evans and then-Senator Lyndon B. Johnson, who faced a Catholic opponent in the 1954 senatorial primary.  Hamburger portrays them as the instigators of section 501(c)(3)’s “oppressive” political restrictions. ...

Does section 501(c)(3) “threaten the core of most First Amendment freedoms,” as Hamburger claims? Liberal Suppression, despite its undeniable erudition and interesting digressions into American political (and theological) thought and historical asides, falls short of making a compelling case. Hamburger is likewise unconvincing in his attempt to make a connection between the restrictions in section 501(c)(3) and contemporary forms of censorship such as campus speech codes. While Hamburger’s theoretical arguments seem to miss their mark, they are always engaging and sometimes contains gems like this:

"American religion has increasingly been aligned with popular liberal and progressive opinion—even to the point of looking for salvation not in another world but in this one, and not so much from God as from democratic government."

 

Philip Hamburger (Columbia), Section 501(c)(3)’s Legacy of Prejudice: Mark Pulliam Sees No Evil:

My new book, Liberal Suppression, argues that section 501(c)(3)’s speech restrictions are prejudiced and unconstitutional. These conclusions run counter to widespread assumptions, and it is therefore understandable that Mark Pulliam and other thoughtful readers find them difficult to stomach. All the same, it is important at least to come to grips with the realities that underlie the book’s conclusions, and Pulliam’s review fails to do this. To evaluate the prejudice, one must understand its nature; and to judge the constitutional arguments, one must recognize their breadth and strength.

The prejudice underlying section 501(c)(3) arose from theologically liberal anxieties about the speech of churches. And as traced by my book, the prejudice gradually expanded into a broader liberal fear about the speech of all sort of idealistic organizations. Indeed, these liberal concerns have expanded to include fears about the orthodox or stereotypical speech of individuals. It is therefore disappointing that Pulliam reduces my account of prejudice to a simplistic complaint about narrow anti-Catholicism.

My book, in his view, argues that section 501(c)(3) speech restrictions were added “in order to reduce the influence of the Catholic Church.” Certainly, anti-Catholicism was the opening wedge. But as my book repeatedly emphasizes, the relevant prejudices were not narrowly anti-Catholic. Already in the early nineteenth, they were broadened out to take aim at business corporations, and in the strain that is central to my book, they soon reached not only churches—Protestant as well as Catholic—but also the full range of churchy organizations, including eventually all sort of idealistic groups that were not religious. ...

[T]he prejudiced sentiment about the speech of ecclesiastical and other idealistic organizations is painfully evident in section 501(c)(3). Pulliam protests that I have not shown this. Well, consider just one phrase—the section’s limit on “carrying on propaganda, or otherwise attempting to influence legislation.” Those words were no accident. They came directly out of nativist literature—a literature that, again, reached across much of American society, from KKK klaverns to Ivy League philosophy departments. Once more, the low and the high had more in common than the latter wanted to acknowledge.

Pulliam’s review, in short, recognizes neither the broad character of the prejudice nor its societal depth. And in taking a confined view of both, he misunderstands the antagonisms that underlay section 501(c)(3) and still undergird a host of other speech restrictions. ...

Tax lawyers and First Amendment lawyers tend to have very different sensibilities about the speech restrictions. Tax lawyers usually observe that churches etc. are only slightly quieted down, for they can convey their messages through auxiliary organizations, such as section 501(c)(4) organizations and section 527 PACs. First Amendment doctrine, however, treats even the slightest restriction on political speech with apprehension. And the freedom of speech is not merely the freedom to have one’s message come out of someone else’s mouth; most basically it is the freedom to speak—to speak through one’s own mouth, in one’s own voice.

Unlike Pulliam, most Americans, on both sides of the issue, understand that section 501(c)(3) matters for speech. It is the only subsection of the Internal Revenue Code that is widely known—even by its section number—and that is no accident. The whole point of the section’s speech restrictions was to satisfy deeply felt theo-political anxieties about speech—anxieties that remain pervasive. And this is why so many Americans care. Whether they like or fear the speech of ecclesiastical and other idealistic organizations, they understand that section 501(c)(3) chills such groups.

 

[Hat tip:  TaxProf Blog]

NMirkay

Forbes: Will The TCJA Upend The Non-Profit World?

A  recent Forbes article encapsulated the nearly 10-month discussion of how the Tax Cuts & Jobs Act of 2017 (TCJA) will affect charitable giving and thus the finances of nonprofit entities.  Although the TCJA did not make major changes to the tax law regarding charitable contributions, the increase in the standard deduction is estimated to significantly reduce the number of households that itemize deductions.  The article references the Tax Policy Center's forecast at the beginning of the year that the TCJA could reduce donations by approximately 5 percent, and reduce the number of households taking an itemized deduction for charitable contributions from 21 percent in 2017 to 8 percent in 2018.  The article summarizes the concerns of various players in the nonprofit sector (organizations, researchers, government officials):

• The TCJA likely will accelerate a growing shift from low- and moderate-income contributors to a relatively small number of mega-donors, a trend that makes many in the non-profit sector very uncomfortable.
• That shift will create winners and losers among non-profits. Religious and social service agencies may see contributions drop while bigger colleges, hospitals, and high-end arts organizations are largely unscathed.
• The benefits of the charitable giving deduction may go well beyond its ability to reduce the after-tax cost of giving. The signal it sends—that charitable giving is a good thing—may be as important as the dollars donors save.
• There is a lot unknown about what motivates givers, especially younger donors.

NMirkay

TIGTA Determines Enforcement of Political Activity Restrictions Against Exempt Organizations is lacking -- makes 5 recommendations.

In an October 4, 2018 Report, the Treasury Inspector General concluded that the Service should improve its enforcement mechanisms relating to the policing of political activity by organizations exempt under IRC 501(c)(3) and (4).  The report was prompted by Senate Finance investigation:

A U.S. Senate Committee on Finance (Committee) bipartisan investigation concluded that the IRS had not performed any examinations of 501(c)(4) tax-exempt groups based on referrals alleging impermissible political activity from 2010 to 2014. In addition, an internal IRS review concluded that the prior IRS process potentially gave the impression that somehow the political leanings of organizations were considered when evaluating referrals. The Committee recommended that TIGTA review the IRS’s revised procedures and whether referrals have resulted in examinations.

dkj

Grewal: The Proposed SALT Regulations May Be Doomed

As discussed in a previous post, the Treasury and IRS issued proposed regulations to address the attempts by states to create a way for their residents to get around the recently enacted 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.  Andy Grewal (Iowa), who has been at the center of this debate, has published another article on this topic in the Iowa Law Review Online (103 Iowa Law Review Online 75 (2018)) entitled The Proposed SALT Regulations May Be Doomed.  Here is a description of the article:

The IRS recently followed through on its promise to address state strategies designed to avoid the new state & local tax deduction limits. Although programs adopted by blue states sparked the IRS’s interest, the proposed regulations address both blue and red state programs. This has, predictably, led to IRS criticism from all sides. But the IRS was right to step in here. Revenue and policy concerns easily justify administrative guidance on the state strategies.

Unfortunately, the proposed regulations suffer from some significant technical and conceptual flaws. Those flaws, if left unaddressed, may jeopardize the validity of any final regulations, especially as they apply to red state programs. This essay discusses the flaws in the proposed regulations and offers recommendations for improvement.

 

NMirkay

Charities Regulation on the International Front: Emerging Issues in Globalization

The Nonprofit Management Program at Columbia University’s School of Professional Studies is presenting its next Master Class in the program's Professional Development Series on November 15, 2018:  "Charities Regulation on the International Front: Emerging Issues in Globalization."

A description of the program:

Regulation and enforcement in the charitable sector are increasingly global in scope. Whether addressing cross-border charitable solicitation, oversight issues within religiously based organizations, terrorism concerns, money laundering, or the burgeoning technological platforms that enable new and expanded reach for these activities internationally, charities regulators are on the front lines of some of the most cutting-edge international legal issues. Join us for a deep-dive discussion with our panel of experts discussing the new globalized context of charities regulation.

Panelists:

James G. Sheehan, Chief, Charities Bureau, New York State Attorney General's Office

Ruth M. Madrigal Partner, Steptoe & Johnson LLP, Former Attorney-Advisor, Office of Tax Policy Department of the Treasury

Marcus S. Owens Partner, Loeb & Loeb, Former Director, Exempt Organizations Division of the Internal Revenue Service

Sarah Atkinson, Director of Policy and Communications Charity Commission for England and Wales

Tony Manconi, Director General, Charities Directorate Canada Revenue Agency

Moderator: Cindy M. Lott, Esq., Academic Director, Nonprofit Management Programs and Senior Lecturer'

 

NMirkay

Local Regulation of Charitable Solicitation in the US's Largest Cities

Following up on yesterday's post on local land use controls of nonprofits, I want to briefly share some findings from a forthcoming article on local regulation of charitable solicitation. As you probably know, states often nonprofits that solicit donations from residents of their state to register with the state. Many cities have similar requirements -- in fact, cities were often the first to act in the regulation of charitable solicitation. And yet, we almost never hear about (or study) local requirements (outside of, perhaps, laws about panhandling and begging), so I was curious how common they were. Turns out, they're pretty common.

I looked at the laws of the largest 50 cities in the United States by population. Every single one of them had a law that specifically targeted charitable solicitation in some way.  Most cities had sidewalk solicitation ordinances, designed to deter panhandlers, which have been subject to numerous constitutional challenges in recent years. Several cities also had severe restrictions about roadside solicitation, allowing it only a few days a year, and requiring costly insurance and CPR training. About a quarter of the cities had restrictions about the location and maintenance of donation bins. 

Most interesting, at least to me, are the cities that broadly require registration of any nonprofit soliciting in the city by any means, including phone, mail, email, internet, television, radio, etc. (See the table, but note Houston's ordinance only applies to telephone and face to face solicitation.) Additional cities (not listed) had special registration requirements for public solicitation, paid solicitors, or other particular situations. Some of the registration requirements are specific, demanding information about social security numbers of all solicitors, requiring that the registration be completed at least 10, 15, or 30 days prior to the onset of any solicitation, or, in the case of Oakland, California, a pretty clearly unconstitutional requirement that no more than 16% of direct gifts will be used on costs. 

Although many of these rules appear to be holdovers form an earlier era, they remain on the books and cities continue to update them (and process the registrations required). In fact, 3 of the cities with these registration requirements revisited them last year, made minor adjustments, but chose to leave them in full force. While I doubt many organizations face any serious legal jeopardy for overlooking these local laws -- and they are regularly overlooked! -- their existence adds an additional cost to nonprofits attempting to follow all of the laws that might apply to their solicitation campaigns.

-Joseph Mead

IJ Lawsuit: Akron Charity Sues for Right to Shelter the Homeless

This week, the Institute for Justice sued on behalf of an Akron, Ohio, nonprofit that has established an encampment for people experiencing homelessness. (See also this New York Times article about the suit.)

Homeless Charity, Akron Ohio

The Homeless Charity and Village has been providing shelter for people without anywhere else to go for more than a year. The organization's logic is that, while camping in a tent is not ideal, an encampment is much better/safer than the likely alternatives, which is either dispersed camping or sleeping "rough." The lawsuit contends that denying the nonprofit the right to use its property in this way, under the circumstances of the case, is an irrational restriction on property rights. (Disclosure: I authored and co-signed a letter in support of the nonprofit on behalf of other local nonprofits and faculty over the summer.) The City of Akron, in contrast, argues that a campground is not an appropriate land use under its zoning code.

 

In an unrelated case, also filed this week, a Cincinnati church is seeking a writ of mandamus to abrogate a injunction that prohibits people from seeking or offering shelter in a tent on public or private land. (Disclosure: I am counsel of record in this case). The injunction was entered in a nuisance lawsuit brought by Hamilton County against the City of Cincinnati at the City's request. The church, which offers its land as a refuge to people experiencing homelessness, argues that the injunction was not properly issued and cannot apply to non-parties who were not part of the underlying case. 

Akron and Cincinnati are certainly not the first or only cities to clash with nonprofits over their land use. Many cities use zoning laws to restrict or exclude houses of worship (often triggering RLUIPA), group homes, schools for kids with disabilities, or other service providers. Some cities establish extensive business districts that expressly exclude nonprofit uses, either because they prioritize the value that businesses provide, or are concerned about the lack of revenue that a tax-exempt use would cause to the city. Although there hasn't yet been a lot of study of local control over nonprofit service delivery, that may change as city versus nonprofit disputes spill over into the courts. 

@JosephWMead

The Philanthropic Closet - How many LGBTQ people work in philanthropy?

This week, Funders for LGBTQ Issues released findings from a survey of nearly 1000 people who work at foundations.

Funders for LGBTQ Issues

Among its findings, 16% of respondents identified as lesbian, gay, or bisexual, and 2% identified as genderqueer, transgender, or gender non-conforming. However, a majority (53%) have not disclosed their LGBTQ identity at work. Those who serve on the board or as CEO are more likely to be "out" than those working as program staff or in other positions, where about 35% of staff have disclosed their identity to colleagues. (As the study notes, for comparison, about half of workers in the corporate sector have disclosed their identity at work.) Additional research may shed light on whether and why LGBTQ workers don't feel comfortable being out at their foundations, and what implications that may have for who serves in those roles and how grantee projects are evaluated. 

-@josephwmead

Fidelity Charitable issues findings from survey on Tax Reform and Charitable Giving

Fidelity Charitable, one of the largest peddlers of Donor-Advised Funds, issued this interesting report about donor responses to 2017 federal tax changes (which increased the standard deduction, removing, for many people, the federal tax incentive to

Source: Fidelity Charitable

donate). Based on a survey of prior donors who itemized in 2017, more than 60% said that they planned to maintain prior levels of giving, with 19% planning to increase.  The report also finds that 20% of those surveyed aren't sure yet whether they will itemize in future years, although the report suggests that many of the respondents might not yet realize the impact of the tax changes on their situation. Thus, the promise to continue to maintain prior levels of giving may be too optimistic. The report concludes:

[T]hese findings demonstrate taxpayers may still be on autopilot from 2017 and have not updated their tax strategy to align with tax code changes. Given the confusion around the new standard deduction, it may take until they file their 2018 taxes to completely absorb the impact of the changes and potentially adjust charitable plans. Therefore tax reform’s influence on giving at large will likely not be fully known until 2019.

Blue State Attorneys General Continue Fight Against Proposed Anti-Workaround Regs

We have previously blogged on the pros and cons of the Treasury Department's Proposed Charitable Contribution deduction regulations, designed to prevent residents of high tax states from increasing charitable contributions as a way of "working around" the recently enacted $10,000 limitation on state and local tax deductions.  We blogged on it again here.  My own view is that if a charitable contribution is to be reduced by the receipt or expectation of return benefit, a whole 'lotta corporate charitable contributions should be in jeopardy.  A corporate charitable contribution is not a "detached and disinterested" transfer like a a 104 gift.   Anyway, AGs from California, Connecticut, New Jersey and New York have sharply criticized the proposed regulations in what could be a preview of arguments made in pending or future lawsuits.  As a reminder, here is how Treasury summarizes the proposed regulation's effect (Proposed Reg. 1.170A-1(h)(3) (August 27, 2018):

 

After reviewing the issue, and in light of the longstanding principles of the cases and tax regulations discussed above, the Treasury Department and the IRS believe that when a taxpayer receives or expects to receive a state or local tax credit in return for a payment or transfer to an entity listed in section 170(c), the receipt of this tax benefit constitutes a quid pro quo that may preclude a full deduction under section 170(a). In applying section 170 and the quid pro quo doctrine, the Treasury Department and the IRS do not believe it is appropriate to categorically exempt state or local tax benefits from the normal rules that apply to other benefits received by a taxpayer in exchange for a contribution. Thus, the Treasury Department and the IRS believe that the amount otherwise deductible as a charitable contribution must generally be reduced by the amount of the state or local tax credit received or expected to be received, just as it is reduced for many other benefits. Accordingly, the Treasury Department and the IRS propose regulations proposing to amend existing regulations under section 170 to clarify this general requirement, to provide for a de minimis exception from the general rule, and to make other conforming amendments.

 

Compelling policy considerations reinforce the interpretation and application of section 170 in this context. Disregarding the value of all state tax benefits received or expected to be received in return for charitable contributions would precipitate significant revenue losses that would undermine and be inconsistent with the limitation on the deduction for state and local taxes adopted by Congress in section 164(b)(6). Such an approach would incentivize and enable taxpayers to characterize payments as fully deductible charitable contributions for federal income tax purposes, while using the same payments to satisfy or offset their state or local tax liabilities. Disregarding the tax benefit would also undermine the intent of Congress in enacting section 170, that is, to provide a deduction for taxpayers' gratuitous payments to qualifying entities, not for transfers that result in economic returns. The Treasury Department and the IRS believe that appropriate application of the quid pro quo doctrine to substantial state or local tax benefits is consistent with the Code and sound tax administration.

 

In their 12 page letter, dated yesterday, the AGs, without actually saying so, decry tax policy by political payback.  But that conclusion, I'll admit, is in the eye of the beholder.  Here is part of the AGs' more formal argument:

 

Critically, case law and the IRS’s own administrative guidance have uniformly held that the expectation of a tax benefit does not give rise to a quid pro quo that would negate charitable intent or reduce the amount of a charitable deduction. See, e.g., Browning v. Comm’r., 109 T.C. 303, 325 (1997) (rejecting as “untenable” the argument that a taxpayer “may be entitled to a charitable contribution deduction of some lesser amount on account of the economic value of the deduction”); McLennan v. United States, 24 Cl. Ct. 102, 106 n.8 (1991) (noting that “a donation . . . for the exclusive purpose of receiving a tax deduction does not vitiate the charitable nature of the contribution”), aff’d 994 F.2d 839 (Fed. Cir. 1993); Transamerica Corp. v. United States, 15 Cl. Ct. 420, 465 (1988) (stating that “[e]ven where the donation is made solely for the purpose of obtaining a tax benefit, the taxpayer is entitled to the deduction”); Skripak v. Comm’r., 84 T.C. 285, 319 (1985) (averring that “a taxpayer’s desire to avoid or eliminate taxes . . . cannot be used as a basis for disallowing the deduction for that charitable contribution”).

 

Simply put, existing authority uniformly suggests that tax benefits do not constitute either “consideration,” see Am. Bar Endowment, 477 U.S. at 118, or a “good[] or service[]” that gives rise to a quid pro quo, see Treas. Reg. § 1.170A-1(h)(2). Rather, courts and the IRS have treated tax benefits as a simple reduction in tax liability, not as consideration reflecting a bargained-for exchange.  In a memorandum released on February 4, 2011, the IRS’s Office of Chief Counsel addressed the deductibility of charitable contributions that trigger SALT credits.  See IRS CCA 201105010. Drawing on the precedents cited above, and noting that “[t]he tax benefit of a federal or state charitable contribution deduction is not regarded as a return benefit that negates charitable intent, reducing or eliminating the deduction,” the Chief Counsel expressly approved of charitable tax credit programs, advising taxpayers that they could still deduct the full amount of their charitable donations without subtracting the value of SALT credits. Id. at 2-5. In so doing, the Chief Counsel squarely confronted the question of whether “a tax benefit in the form of a state tax credit . . . is distinguishable from the benefit of a state tax deduction.” Id. at 4. The Chief Counsel’s answer was clear. “[W]e see no reason,” the Chief Counsel concluded, “to distinguish the value of a state tax deduction, and the value of a state tax credit, or to draw a bright-line distinction based on the amount of the tax benefit in question.” Id. at 5. The Chief Counsel correctly rejected this formalistic distinction. Indeed, the effect of a tax credit is the same as that of a tax deduction—both reduce the beneficiary’s tax liability and incentivize particular kinds of behavior. As the Chief Counsel recognized, therefore, a rule treating credits as evidence of a quid pro quo while discounting the value of deductions would be incongruous. Significantly, the Tax Court subsequently agreed with the Chief Counsel.

 

In Tempel v. Commissioner, the court observed that “[s]ome commentators have suggested a State’s grant of State income tax credits to taxpayers who make charitable donations . . . should be treated as a  transaction that is in part a sale and in part a gift.” 136 T.C. 341, 351 n.17 (2011). Citing IRS CCA 201105010, and noting that “[t]he Commissioner has eschewed this approach,” the court “discern[ed] no reason to disturb this practice.” Ibid. “A reduced tax,” the court went on, should not diminish the amount of a charitable deduction. Ibid.  With the proposed rules, however, the IRS has abandoned this longstanding approach by creating one regime for tax credits and another for tax deductions. See Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (identifying “consistency with earlier . . . pronouncements” as a factor in evaluating agency action). In so doing, the IRS has elevated form over substance and engaged in arbitrary and capricious rulemaking. The difference between a tax deduction and a tax credit is typically a difference of degree of economic benefit; it is not a different kind of benefit. But the IRS has now chosen to ignore the tax benefits flowing to a taxpayer from deductions, while accounting for the tax benefits that result from credits. This is a creature of the IRS’s own imagination, and not an interpretation of anything found in Section 170 of the Tax Code.

. . . 

 

Worst of all, the IRS’s approach is a far cry from the statutory language it’s supposed to be implementing. Section 170 “allow[s] as a deduction any charitable contribution . . . made within the taxable year.” I.R.C. § 170(a)(1). Nothing in Section 170 provides a basis for a rule requiring taxpayers to subtract the value of tax benefits—whether in the form of credits or deductions— from their charitable deductions. Indeed, the very purpose of Section 170 is to encourage charitable giving through the provision of tax benefits. As a consequence, as noted above, judicial precedent and administrative guidance have unanimously affirmed the principle that the expectation of a tax benefit does not give rise to a quid pro quo that would negate charitable intent or reduce the amount of a charitable deduction. See, e.g., Browning, 109 T.C. at 325; McLennan, 24 Cl. Ct. at 106 n.8; Transamerica, 15 Cl. Ct. at 465; Skripak, 84 T.C. at 319; IRS CCA 201105010.

 

Had Congress wished to revise the Code so as to reverse this longstanding precedent, it would have done so in clear terms. It has not done so, including in the most recent federal tax overhaul. Rather, members sponsoring that overhaul legislation repeatedly stressed that the legislation kept the charitable deduction under Section 170 in place. As House Speaker Paul Ryan explained: “[T]he Tax Cuts & Jobs Act preserves the deduction for charitable giving.” House Ways & Means Committee Chairman Kevin Brady (R-Tex.) likewise stressed: “Preserving and expanding the charitable deduction will continue to encourage and reward Americans who give back to their local church, charity, or other cause they believe in.” Senate Finance Committee Chairman Orrin Hatch (R-Utah) likewise stressed that the bill “preserves . . . the deduction for charitable contributions.” See also, e.g., 163 Cong. Rec. S7873 (Statement of Sen. Hoeven (RND))(“We continue the deductibility of charitable contributions.”). The bill did make some changes to Section 170, e.g., increasing the percentage of a taxpayer’s income that can be deductible under Section 170 for cash donations and preventing taxpayers from claiming amounts paid for college athletic event seating rights. Pub. L. No. 115-97, §§ 11023, 13704; H.R. Rep. 115-466 (Conference Report), at 273. These changes reinforce that Congress knew how to modify Section 170—even to account for value received in exchange for certain kinds of donations. But Congress did not change Section 170 to establish that receipt of a state or local tax benefit would constitute a quid pro quo negating charitable intent. It is not within the IRS’s rulemaking power to usurp Congressional authority and overrule a tax law principle that has been unquestioned for more than 100 years. See, e.g., Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 846 (1986) (“It is well established that when Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the ‘congressional failure to revise or repeal the agency’s interpretation is persuasive evidence that the interpretation is the one intended by Congress.’”).

 

dkj

TE/GE Issues FY19 Program Letter

Get the full text of the IRS TE/GE Program Letter.  

A Brief Primer on Economic Development Corporations

Colin Walsh, J.D., and Jordan Kohl, J.D., LL.M., Chicago point us in the right direction, and shed a little light on the private benefit doctrine, in their helpful newsletter on Economic Development Corporations that assist private businesses to achieve a public benefit.  Here is a part of what they conclude:

 

In Rev. Rul. 74-587, the organization qualified for a tax exemption because it provided below-market loans to minority-owned businesses in blighted areas. Similarly, in Rev. Rul. 76-419, the organization qualified for a tax exemption because it purchased land in blighted areas, converted the land into an industrial park, and induced businesses to relocate to the park and hire local unemployed residents.

 

In Rev. Rul. 77-111, however, the tax exemption was denied because the organization provided assistance to businesses that were not owned by disadvantaged groups and did not experience difficulties as a result of their location in a blighted area. The organization's purpose was to increase business patronage in a deteriorated area predominantly inhabited by minorities. The organization used television and radio advertisements to encourage shopping in the area, created a speaker's bureau of local businesspeople to discuss the shopping environment with different groups, operated a telephone service providing transportation and accommodations information to prospective shoppers, and informed the news media of the area's problems and potential. The IRS determined that while the organization's activities served some charitable purposes under Sec. 501(c)(3), the organization's activities' "overall thrust [wa]s to promote business rather than to accomplish exclusively 501(c)(3) objectives." The organization provided assistance to businesses that were not minority-owned and that were not experiencing difficulty due to being located in a deteriorated section of the community. The IRS therefore ruled that the organization did not qualify as tax-exempt under Sec. 501(c)(3).

 

Rev. Rul. 77-111 suggests that the IRS does not believe organizations that promote gentrification should qualify as EDCs. Instead, the IRS's position appears to be that EDCs must provide assistance directly to disadvantaged groups.

dkj

ACE Issue Brief on Campus Political Activity

The American Council on Education has updated its useful "Issue Brief" on campus political activity, noting in particular President Trump's campaign statements against the so-called "Johnson Amendment."  Here is the opening paragraphs of "Political Campaign-Related Activities of and at Colleges and Universities:"  

 

We summarize here “do’s” and “don’ts” of potential entanglements of colleges and universities, and their personnel, in campaigns for public office. This summary, which updates a March 2016 ACE memorandum, is not exhaustive and omits legal citations. It is based on judicial and IRS rulings under Section 501(c)(3) of the Internal Revenue Code; IRS guidance; and the Federal Election Campaign Act of 1971, as amended, as well as Federal Election Commission regulations that apply to colleges and universities.  This Issue Brief is most directly relevant to private institutions, as it mainly draws on legal authorities and guidance that is applicable to them. Specific state laws that speak to political campaign activities at public institutions are not addressed here. However, public institutions would be prudent to consider this guidance as likely analogous in most respects to their applicable restrictions under relevant state laws.

 

Also not specified here are the potential penalties for improper political activity by and at a college or university.  Generally speaking, they can include loss of the institution’s tax-exempt status, imposition of taxes on the institution and its responsible managers, and other risks, including federal or state government lawsuits, audits, and investigations.  Of note, the IRS has not issued any additional precedential guidance on the political campaign activities of Section 501(c)(3) tax-exempt organizations since the publication of our March 2016 memorandum. Nevertheless, the political campaign activities of tax-exempt organizations continue to be a subject of considerable controversy and public debate. During the past year, the Trump Administration and certain Republican members of Congress have repeatedly sought to repeal or limit the Johnson Amendment, which refers to the portion of Section 501(c)(3) that prohibits 501(c)(3) non-profit organizations from participating or intervening in any political campaign. Although their efforts have so far been unsuccessful, repealing the Johnson Amendment remains on their agenda.  In this charged climate, political campaign-related activities that occur on college campuses or are perceived to be undertaken by a college or university are likely to continue to be scrutinized. In addition, colleges and universities continue to be criticized by free-speech groups over their policies and practices. Because of the complexities and challenges in this area, we recommend that each institution consult its counsel before taking proposed actions.

 

dkj

HBO Tackles the Oxymoronic "Student - Athlete"

My dad had four sons.  I have four daughters.  The one athlete amongst them used to ask me all the time, when she was 9 or 10 years old, if she could tag along with me whilst me and some buddies tried to shoot in the 90's on some expensive Orlando golf course.  "No, baby girl," I'd say, "Daddy is playing with a buncha old men and, well, you just wouldn't have any fun."  Times have certainly changed.  When she's home from college, where she's golfing everyday with her D-I teammates, watching the golf channel, partying, watching more golf channel, and . . . oh yeah, going to class and the "study hall" that is mandatory for all "student-athletes," the last thing she wants to do is wait around watching me shoot a triple bogey while she is on the green in regulation.  I shoulda had her out on the course at 3 or 4 years old.  I chuckled about that as I watched HBO's new documentary last night entitled, "Student-Athlete."   Life could be worse, I suppose.  My third daughter has a real competitive streak and  as a "he" my "son" might have spent untold hours in the gym, on the court, or on the football field, all places much more dangerous than the golf course.  Instead of in class.  Or maybe in class but the coach probably would not have approved of "too" much time away from practice.  HBO likely overstates the case (but not by much) when it claims that athletes get nothing out of the deal.  Sure, a lot of former student athletes hardly earn more than if they had skipped college altogether.  The documentary does a good job of portraying the stereotypically exploited student athlete, who now finds himself out of eligibility and sleeping in his car.  But, then, a lot of "student-athletes" would never ever have stepped on a college campus if it were not for the NCAA.  All that is so much besides the real point, though.  

There are a few more provocative soundbites from the documentary (more precisely linked below) that I wish were included in the actual episode.  On the recent academic front, Schmalbeck and Zelenack, two familiar experts, have a good paper coming out soon (if its not already out) proving at least four ways the NCAA is more business than charity.  But alas, the paper only nibbles around the edges of the real problem.  You can read the abstract over on Taxprof.  The paper only suggests what is obvious.  The NCAA is BIG business and ought to be taxed as such, just like professional sports teams.  Its no longer just a story about taxing the NCAA around the edges of its "unrelated business;"  the whole thing is unrelated.  And, it's racial injustice, it's CEO coaches earning millions and who damn well better make sure his or her "employees" know the play-book never mind the textbook, its worthless degrees, and its billions of dollars for everybody except the "student-athlete."  Professor Anne Marie Lafaso's recent article Groomed for Exploitation!  "matriculates" the ball further down the field, if we are being honest about it.  And we are aren't we?  Honest, I mean.  Anyway, here is her abstract:

In this article, I examine the connection between the exploitation of college football players and the persistence of the student-athlete myth. The argument that exploitation is enabled by this myth is presented in five parts. First, I briefly define the concept of exploitation, distinguish between two types of exploitation (transactional and structural), and posit that, while there may be some transactional exploitation in dealings between college football players and their schools, this situation poses the problems associated with structural exploitation.

Second, I describe an important part of the sociological context in which this story is unfolding; that these young athletes are groomed for exploitation as high school students and then further exploited as college athletes. To that end, I briefly review six aspects of that exploitation: (1) the sport is brutal; (2) there is a low financial payoff for a sport so high in health and safety risks; (3) college football has been commercialized for some time with Power Five universities and the NCAA having much at stake; [emphasis added] (4) the student-athlete ideal is a myth perpetuated by those who have a financial stake; [emphasis added] (5) Power Five universities hold monopsony power; and (6) lawmakers have been unwilling to recognize this vulnerability, thereby exacerbating the exploitation.

Third, I position this discussion in the context of two recent news stories: the case of the Frostburg State football player who died in practice because of a concussion that his coach allegedly ignored; and the Northwestern case, in which the football players attempted to form a union. By placing this controversy within the context of two specific cases, one which represents the brutality of the sport and the other which represents players’ unsuccessful attempt at self-help, the reader should gain insights into the horrific exploitation of our young people all in the name of commercialization.

Fourth, I argue that the National Labor Relations Board should have found that the Northwestern football players were employees for purposes of collective bargaining and mutual aid or protection. Finally, I explain that cognitive dissidence results from the fact that college student athletes often meet the statutory definition of employee and our intuition that college athletes should not be employees of the very university that allegedly has an interest in educating that young person.

"Monopsony power!"  And completely untaxed.  Anyway, Go Gators!

 

dkj

 

 

Brody Receives ARNOVA Distinguished Achievement in Leadership and Nonprofit and Voluntary Action Research Award

I am pleased to share the good news that Evelyn Brody (Chicago-Kent) is the recipient of the 2018 ARNOVA Distinguished Achievement in Leadership and Nonprofit and Voluntary Action Research Award. 

The Distinguished Achievement Award is given annually for significant and sustained contributions to the field through research and leadership. Nominees must have demonstrated outstanding achievement(s) in the field of nonprofit and voluntary action research and/or significant leadership achievements in the advancement and promotion of such research over an extended period of time.

Professor Brody will be presented with this award at the ARNOVA Annual Conference in Austin, Texas from November 15-17, 2018.  Please join me in congratulating Evelyn on this outstanding achievement.

TLH

Mayer Honored as Notre Dame All-Faculty Team Honoree

I am delighted to share the good news that Lloyd Hitoshi Mayer (Notre Dame) was honored last weekend as a member of the 2018 Notre Dame All-Faculty Team. The Notre Dame All-Faculty Team borrows from the tradition of recognizing outstanding student-athletes being named to All-American teams.  In doing so, Notre Dame recognizes the accomplishments of its most outstanding professors:

At every home football game, the provost will honor a different member of the faculty on the field during a timeout. These . . . individuals have been chosen from across Notre Dame’s colleges and schools for their excellence in research, teaching, and service to the University.

Please join me in congratulating Lloyd on this well-deserved honor.

TLH