Friday, November 30, 2018

Pomeroy, On Job's Defense (and the Duty of Charity, not Business, by Houses of Worship)

Chad J. Pomeroy has just published "Let My Arm Be Broken Off at the Elbow" (Job 31:22) in the Oklahoma Law Review.  Here is the introduction (sans footnotes):


The largest producer of nuts in the United States. A multi-billion dollar insurance and financial services company. The fourteenth largest radio chain in the country. “A catering company, a major television channel, an internet marketing company.” And real estate! Enormous real estate holdings in Hawaii, Montana, Nebraska, Oklahoma, Texas, Washington, and Wyoming. Probably more land in both Utah and Florida than any other private actor. Internationally, there are major investments in Argentina, Australia, Brazil, Canada, and Mexico, and about as much land in Britain as the Crown Estate.  Take these assets, add billions in stocks and bonds and other securities, and include another $6-$8 billion per year of donated funds. To most of us, such a collection of assets and income probably seems appropriate for a large, public corporation.

However, as the preceding footnotes make clear, the entity described is not a titan of industry but is instead a church. And that is the starting point for this Article: though the American legal system is deferential toward religion and churches, it is undeniable that the Church of Latter-day Saints--and other like organizations--are not just churches. They are, instead, important participants in the market economy, some of them global business enterprises of major proportions. This twinning of profit and spirit is seamless for many religions, with numerous modern churches preaching a “prosperity gospel” that promises spiritual and temporal blessings in return for donations. Still other churches--such as the Church of Scientology--directly charge for religious services that are “necessary” for spiritual improvement and advancement in the church hierarchy. And still others accumulate their own reserves of property and wealth. This asset assemblage leads, ineluctably, to enormous income and wealth concentrated in the hands of religious organizations across America.

While there is nothing inherently wrong with religious organizations amassing wealth, it is troubling that they do so while enjoying informational and tax advantages not afforded to other entities. However, these benefits are not “tax advantages”; these are “tax advantages that are expressly made unavailable to other, competing, profit-seeking entities that suffer greatly due to their comparative disadvantage.” Indeed, this Article’s foundational claim is these advantages are so significant that they have come to shape the aims and actions of many religions, effectively bending the nature of many organizations away from traditionally religious and charitable work and toward profit-seeking. This state is both unintended and inequitable. As such, these advantages should be eliminated.

Before describing any recommended changes to these tax benefits, it is critical to first understand how the American tax system treats churches. As explained in Part I, our legal and tax system is laced with a series of benefits and exemptions that favor churches over virtually every other kind of entity. These benefits permit churches to bring in funds under the auspices of a non-profit entity and then direct those funds to for-profit endeavors. Indeed, not only are churches permitted to do this, they are incentivized to do so. Because these organizations are uniquely permitted to build up networks of interlocking entities of non-profit and for-profit subsidiaries and freely funnel funds from one to the other, churches are effectively permitted to own profit-seeking entities that have an intrinsically lower cost of capital than their competitors. This system ensures that church-affiliated companies will always enjoy a superior market position. In the face of such economic opportunity, how could any entity not do what these churches have done? It is difficult to blame churches for taking advantage of a U.S. system of religious tax exemption that effectively guarantees them preferential returns on church-sourced funds when those funds are directed to profit-seeking instead of charity.

Blameworthy or not, this tax structure is problematic. Such a market-oriented incentive discourages churches from expending funds in pursuit of charitable goals. The American economy is a capitalistic one, rewarding capital, among other things. Permitting churches, with their lower cost of capital, to access markets that reward capital means that every dollar devoted to the needy is not being devoted to its highest and best use--from an internal rate-of-return perspective. That, of course, will lead to “under-spending” on charity, which is deleterious to the public policy underlying the relevant sections of the Internal Revenue Code.

The United States was clear in its reasoning when it made the decision that churches should enjoy special tax status: the government explicitly decided to forego the substantial tax revenues associated with funds raised and expended by churches because it believed that these entities--of all entities--would use those funds to do the “good works” that would otherwise be the responsibility of government. Taxing a church on funds that it could use to set up an orphanage makes no sense, for example, if such taxation would force the church to abandon its plans for the orphanage and leave the government to ultimately clean up the remains itself. Indeed, the U.S. government--through Congress, the judiciary, and the IRS--has been extraordinarily generous in its treatment of churches in connection with tax law, both in terms of how it has interpreted and applied tax laws and rules to churches and in terms of how much tax money the government has foregone. But that attempt to generate private party charity is defeated, at great expense to the American taxpayer, when churches invest instead of help.

Even more troubling than the undercutting of U.S. tax policy is when churches use their tax exempt funds to engage in massive business operations instead of directing funds toward charity. This does actual damage to the broader market economy. As discussed in Part II below, when non-taxed organizations compete against ordinary business entities in the market, they operate under different economic constraints and disrupt the normal functioning of capital supply and demand, fundamentally distorting the market place. By tapping into untaxed capital, these non-taxed businesses put downward pressure on the rates of return that would otherwise be available in an equally constructed market place, which burdens other economic actors. Accordingly, it is not simply that charitable entities undermine the intent of the IRC when they engage in profit-seeking activities--it is that by doing so, they distort the economy and introduce inherent market inefficiencies.

Part III makes recommendations intended to resolve this problem as it manifests itself in the context of churches. These suggestions largely revolve around increased transparency and the potential imposition of a tax on funds that are not spent on charitable endeavors. Laying bare the finances of these organizations will enable all stakeholders in charitable giving-- including, importantly, U.S. taxpayers--to see how their investments are being spent. Furthermore, taxing non-charitable funds would ensure that our tax system functions the way it is intended--without favor or distortion.


November 30, 2018 in Publications – Articles | Permalink | Comments (0)

NY vs. The Donald J. Trump Foundation: Complaint and Order on Motion to Dismiss

Trump petition

There is just not enough news about the President on CNN or Fox, right.  So here is the complaint in NY's litigation against the Trump Foundation:  And here is the recent order denying Defendants' Motion to Dismiss.   Thank me later.  



November 30, 2018 | Permalink | Comments (0)

NPR: What Do African Aid Recipients Think of Charity Ads?



From NPR yesterday:

It's a question that charities often debate: How should their fund-raising ads portray the people they're trying to help?  If the ads display graphic human suffering to elicit donations, they run the risk of exploiting the subjects or making them look helpless.  If the ads are more upbeat — showing aid recipients who are smiling, for example — they may ignore the subject's strife and put the power to transform the subject's life in the hands of rich, Western donors.  While this dilemma is often discussed among charity professionals, the debate hasn't always included the people in the images — the aid recipients themselves.  So a group of researchers wanted to turn the tables. What do those who are supported by aid think? That's the topic of a new survey, "Which Image Do You Prefer? A Study Of Visual Communications In Six African Countries."  The findings show a mixed bag of reactions from the survey respondents to 10 ads — but the most common emotion was sadness.  "Right now, I feel like we are inferiors as a continent. It's as if we are always begging," said one 22-year-old Ethiopian man. "I understand that there are some of our people who are in need, who cannot even have a meal a day. But are we the only ones to whom that happens? The Western countries have problems, too."  Researchers from the University of East Anglia and Radi-Aid, a charity watchdog project of the Norwegian Students' and Academics' International Assistance Fund (SAIH), surveyed 74 people who live in communities supported by aid in Ethiopia, Ghana, Malawi, South Africa, Uganda and Zambia.



November 30, 2018 | Permalink | Comments (0)

Delany and Steckel on the Private Benefit Doctrine and Pay for Success Programs

Sean Delany and Jeremy Steckel have published "Balancing Public and Private Interests In Pay for Success Programs:  Should we Care About the Private Benefit Doctrine?" in the New York University Journal of Law & Business.  Here is the abstract:

In the rapidly expanding world of social impact finance, “pay for success” or “PFS” programs are increasingly popular vehicles for attracting private resources to address historically intractable social problems. Also known as “social impact bonds,” these programs are designed to encourage private investors to advance capital to fund social services and receive a return from the government only if predetermined “success metrics” for the target populations are met. As well as private investors and government agencies, participants include social service providers, technical advisors, and other entities that have been recognized as tax-exempt under section 501(c)(3) of the Internal Revenue Code.  This Article is an effort to understand how the private benefit doctrine might affect the structures of PFS programs in the United States, and might limit or encourage their expansion in the future. The doctrine prohibits charitable entities from being operated more than incidentally for the benefit of private interests. The boundaries that tax-exempt organizations must observe when engaging with profit-making entities—whether through transactional relationships or joint ventures—to achieve their charitable missions are far from clear, because the private benefit doctrine has evolved in piecemeal fashion without a coherent conceptual framework. As PFS programs evolve and relationships between participating exempt organizations and profit-making investors are designed, how will the exempt organizations ensure they are not violating the private benefit doctrine? Despite the inconsistent jurisprudence surrounding the private benefit doctrine, applying it to PFS programs demonstrates that it protects against valid concerns not addressed elsewhere in the Code, and offers a cost-benefit framework which we use to draw conclusions about the desirability of funding social services through PFS programs.



November 30, 2018 in Publications – Articles | Permalink | Comments (0)

Thursday, November 29, 2018

Ebenezer Scrooge on Tax Exempt Status for Pups.


I am feeling a little like Ebenezer Scrooge today so I thought I would raise an objection to tax exempt status for a group of very friendly people who, nevertheless, seem to have no real charitable raison d’etre, and yet have been granted 501(c)(3) status.  I’m talking about a delightful little organization called People for Urban Progress.  I will say right up front that nobody's getting rich here and there is no secret political slush fund.  Its just that some people are having fun doing something worthwhile, just like the folks at Louis Vuitton, Gucci, or Michael Kors, and not paying taxes.  This is a complete outrage!  According to their Mission description in Part III, question 4a, of the 2016 Form 990:

“People for Urban Progress [PUP] is an Indianapolis-based 501c3 non-profit organization that advances connectivity, environmental awareness, and good design, rescues discarded materials, redesigning them for public benefit.  These locally-designed goods fund projects and big ideas that improve indianopolis’ urban spaces.  Simply put, we make goods for Indy’s Good.  We turn useless into useful.  We’re the not-for-profit that turned the RCA Dome roof into wallets, messenger bags and shade structures.  We turned bush stadium seats into bus stops.  We fund projects and ideas that enhance the city’s quality of life, connectedness and design culture. 

In other words, PUP gathers up old leather from public and private companies and uses the materials to create handbags and stuff. Then they sell that stuff via their website at regular retail prices.  Bravo and humbug, I say!  But most prominent on PUP’s website is its catalog of handbags, wallets, sports bags, totes, and bookbags, all made from recycled leather from Amtrack train seats.  Here is a picture of some their very fine products:


As far as tax exemption, "Bah Humbug!"  Here is how PUP describes its start-up: 

Sometimes, a great idea takes time to become a reality. Sometimes, you just say yes and figure out the rest. Sometimes it really works and turns out better than you ever imagined. That’s what I like to think happened when we said yes to Amtrak earlier this year.  This one is a long time coming. Years ago, a fan of PUP happened to be working with Amtrak and started mentioning our name and our work in reuse. In early 2017, we were sent a wool train seat cover to prototype into a bag.  The conversation resurfaced this year and we made friends with Kara from Amtrak’s Office of Sustainability. She was asking how we could collaborate as they updated 100 train cars from the Acela Express. The Acela Express line featured leather seat covers. We’ve been wanting to work with leather for a while now and this seemed like a great opportunity to collaborate with a company that was just as dedicated to transit, sustainability and connectivity as PUP.

This is the start of something new, this is an opportunity for PUP’s greater work to reach a national audience. We have a chance to prove to the whole world that material reuse can be practical, well designed, socially responsible and beautiful.  We said yes, we took our first delivery of material, figured it out and here we are. It’s what we do - ta da - used into usable!

I’d like to say this was an easy process and as straightforward as I just made it sound, but, that’s just not the case. This was a tough one. We received the seats, and they were dirty. Like, they had seen some gum, some coffee and a few ice cream sandwiches. We had to clean these babies before we could start. We tried all kinds of things and finally settled on dry cleaning them with a company that uses an eco-friendly process. Once they were cleaned, we unleashed our designers. They prototyped and prototyped and prototyped. I’ve been amazed by the creativity and ingenuity of our team. They took bits and pieces of leather and transformed them. The results are beautifully designed bags meant to take your next journey to a whole new level.

Over the next 10-12 months, we are on track to create approximately 2,500 bags that will roll out in small-batch releases of 150 as we repurpose the seat coverings. Products in our Amtrak Collection retail from $75 to $750 dollars. We expect to release more new designs during that time, as well, so stay tuned and we’ll let you know when the next train (or product) arrives at the station. Our hope is that you’re just as excited about this new product launch as we are! We look forward to seeing where this takes us!

PUP is creating a smarter, more sustainable and more resilient world by combining good design with existing resources. For us, it’s important to show the public that things can have a life beyond their original purpose. This project serves as an example for how that can be done in a sophisticated and innovative way. 

The bags sell for what seem like the same prices you can buy bags at moderate to high end stores that sell handbags and such.  Some bags are kinda pricey.  Like the “Agent Backpack” which sells for $385.00 or another Amtrack leather bag that’ll run you $750.  Granted this is a small organization with gross receipts of slightly less than $300,000 and net assets of about $70,000.  The currently reported gross receipts are slightly higher than during the receipts in annual periods from 2012 (gross receipts of $151,000) to 2016 (gross receipts of $197,020).  Still, it’s Christmas, and well . . . dammit people can’t just stop working to run a nonprofit with no charitable goal!  According to their 2016 Form 990, the only two compensated employees are husband and wife who, together earn about $50,000.  So no, nobody is getting rich . . . but still!  Here is what Amtrack said in its press release when it announced that the PUP will start marketing handbags made from old Amtrack leather: 

(October 16, 2018 – INDIANAPOLIS, Ind) – People for Urban Progress (PUP), an Indianapolis-based nonprofit specializing in advancing good design and civic sustainability, announced today a partnership with Amtrak to repurpose leather seat covers from 20 refreshed Amtrak Acela Express train sets and save those materials from landfills by transforming them into luxury bags. The partnership is a direct result of how both companies fully embrace sustainability as a fundamental part of their businesses. This landmark project is PUP’s first national endeavor, and a new initiative for Amtrak as well.

The limited-edition launch of the Amtrak Collection includes handmade accessories from Amtrak’s flagship Acela Express. The first launch of the slate blue luxury leather bags includes totes, backpacks and dopp kit. Approximately 2,500 bags are expected to roll out in small-batch releases during the next 10 to 12 months as the seat coverings are repurposed. All designs are developed and hand-made by the designers at PUP, who also developed the process of repurposing the seats. This includes separating the leather from the foam seat, dry cleaning the leather utilizing an environmentally friendly process and then cutting the leather and sewing it together to create each product.

“This is an exciting opportunity to showcase the work we do to remake waste and create change through the creation of our products,” said Andrea Cowley, Executive Director at People for Urban Progress. “Collaborations like this allow us to continue to advance the idea of taking careful consideration of how we recycle our cities’ resources. We make the used into useful through great design which, in turn, allows us to address civic sustainability.”

“One of the main objectives of this Upcycling Project is to divert as much waste from landfills as possible,” said Senior Sustainability Manager Kara Angotti. “We have set a corporate recycling target of 20 percent by 2020 and this project will help us advance closer to achieving that goal. This is a unique opportunity to explore the extended value in our trash and to focus on ensuring we consider what happens to our materials at the end of their useful life.”

Amtrak’s Acela Express service, best known for transporting business commuters is a high-speed train operating between Washington D.C. and Boston with stops in Baltimore, Philadelphia, New York City, Providence and more. Amtrak is refreshing the interiors of its current Acela trainsets before the next-generation Acela fleet becomes active in 2021. These seat materials from the current Acelatrainsets, which are being donated, were retired after approximately 10 years of service.

PUP is known for repurposing dated infrastructure through design and fabrication projects. In 2008, they upcycled the roof of the RCA Dome, previously the home of the Indianapolis Colts. Materials from the dome were used to design wallets, handbags, office bins and more, saving 13 acres’ worth of material from the landfill. Promotional banners and materials from Gen Con, the longest running gaming convention in the world, were fashioned into messenger bags and wallets. Baseball stadium seats were transformed into bus stops and public seating around the city of Indianapolis, still giving residents something to cheer about. The Amtrak collaboration offers a unique national opportunity to expand PUP’s mission and vision.

The full line of the Amtrak Collection will retail between $75 to $750 dollars. In addition to the new Amtrak collection, PUP sells a variety of bags and wallets made from arena roofing materials, event banners, reclaimed seatbelts and more, ranging in price between $12 and $172.

Ok, so in that press release is perhaps a slight hook.  The press release states that PUP seeks to “divert as much waste from landfills as possible.”  I suppose that could be a charitable purpose, something that helps the environment and lessens the burden of government.  But even if those are charitable goals, they seem minimal relative to the selling of leather totes and such, particularly at high end prices and as seemingly the primary activity (according to the website).  At a minimum, the regular and continuous sales of “luxury leather bags” is a substantial non-exempt activity and we all know what Better Business Bureau says about that!  "[T]he presence of a single non-[exempt] purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly [charitable] purposes."  The revenue from that activity is UBIT, at best, and a complete disqualifier at worst. 

Now everybody get back to work.  This ain't Christmas!


November 29, 2018 in In the News | Permalink | Comments (0)

Prentice, "Misreporting Nonprofit Lobbying Engagement and Expenses: Charitable Regulation and Managerial Discretion"



ARNOVA's (Association for Research on Nonprofits and Voluntary ActionNonprofit Policy Forum (Volume 9 (2018) (I think your law library has to have an electronic subscription) has an interesting article by Christopher Prentice on how nonprofits [mis]report lobbying activities and expenses.  Here is the abstract:


On the one hand, nonprofits are expected to protect values, promote ideals, and effect change, and on the other hand, they are normatively and legally discouraged from engaging in advocacy and lobbying. These countervailing forces produce a tension that nonprofit managers must navigate. Although previous research suggests that normative boundaries and legal implications constrain lobbying efforts, it is possible that these factors merely influence how some charities report their lobbying activities to authorities. Indeed, incentives to misreport lobbying engagement exist at the federal level where regulatory oversight is lax. This article compares state data obtained for a sample of charities to contemporaneous federal data regarding the lobbying engagement, payments, and expenses of these organizations and their registered lobbyists. Findings demonstrate that roughly half of the charities sampled engage in more lobbying than they report to federal authorities, lending support to the premise that managerial discretion influences nonprofit reporting. 

Other articles in Volume 9 include:

ARNOVA also has a page containing forthcoming articles.  The most recent forthcoming issue contains several articles regarding nonprofit health care.  I recommend the website for anyone writing or thinking about how tax policy impacts nonprofits. 


November 29, 2018 in Publications – Articles | Permalink | Comments (0)

Wednesday, November 28, 2018

Charities in China


The China Law Philanthropy Report, updated in August 2018, is definitely worth reading.  Here is a brief excerpt from the introduction:

Since the establishment of the People’s Republic of China (PRC) in 1949, China’s legal framework has mainly followed the civil law tradition. At the same time, it has significant characteristics of a Leninist state in which all state institutions come under the control of the Communist Party of China. At present there is no civil code in China. The General Principles of Civil Law, which came into effect in 1987, intend to create a consistent framework for the interpretation of civil law.  China’s legal framework is constraining for civil society in general and philanthropic giving in particular. During the current administration of President Xi Jinping, Chinese civil society has come under a great deal of pressure. In terms of both freedom for civil society and philanthropy, China ranks very low among the world’s countries. In 2016, Freedom House gave China the lowest possible ranking of seven for political rights, along with six for civil liberties.2 Similarly, the World Giving Index 2016 ranked China near the bottom with a score of 140 for philanthropic giving. The
Hudson Institute’s Index of Philanthropic Freedom 2015 ranked China 52 out of 64 countries in terms of creating an enabling environment for philanthropy.

Nevertheless, philanthropy has a rich and varied history in China, which is still felt in the practice of philanthropy in Taiwan and among the Chinese diaspora.  In the PRC, in contrast, philanthropic traditions were largely erased as a result of the Communist Party’s rigid rule from 1949 to 1978, when the state dominated all forms of social life, including voluntary giving. Even during the 1980s and 1990s, most philanthropic activity was controlled and shaped by government policies, priorities, and institutions. The government organized charitable donations, and people gave not because they wanted to but because they were politically and socially pressured to do so. There was little choice about the recipients either. Donations generally went directly to the government or to government-organized NGOs (GONGOs), which dominated the nonprofit sector and had a monopoly on public fundraising.

There was also little information or transparency about the use of donations. Companies donated as well, but their donations almost always went to projects in conventional areas, such as poverty alleviation, disaster relief, education, or health, which were carried out by the government or GONGOs. During this period the idea of corporate social responsibility (CSR) began to gain traction in Chinese companies, but it was regarded more as means to strengthen the private sector’s relationship with the government than with target communities.  This situation began to change about ten or fifteen years ago, as private foundations—or what the Chinese call “non-public fundraising foundations” (that is, mostly corporate and family foundations)—mushroomed and exceeded the number of GONGOs, many of which are public foundations or, in Chinese, “public fundraising foundations” (for more, see our interactive timeline The Rise of Philanthropy and Civil Society in China, 1976-2017). In addition, scandals in the philanthropic sector, primarily with GONGOs, were publicized on social media and generated public debate about reducing the government’s monopoly on philanthropic activities and promoting greater transparency and accountability in the sector. At the same time, the CSR programs implemented by Chinese companies became somewhat more diverse as companies began to work with nonprofit organizations (NPOs) as well as GONGOs.   International influences also played an increasingly important role as both NPOs and philanthropists looked overseas, particularly to the United States, for models for shaping the philanthropic sector.


November 28, 2018 | Permalink | Comments (0)

The Problem with Charitable Giving

In yesterday's NY Times, two physicians published a provocative op/ed regarding the inefficiency and regressivity of the charitable contribution deduction, particularly after the TCJA.  Here are few excerpts:

We suspect that funding tuition at one expensive New York City medical school, constructing another cancer treatment center in a city already rich with them or building even more research capacity at one of the nation’s best-endowed universities is not at the top of most voters’ priority lists. It is, instead, mainly the very, very wealthy who pass on the costs of their causes. In 2016, half of all the tax dollars deducted as a result of charitable gifts in New York State were deducted by the top 0.5 percent of tax filers, who earned $1 million or more. The bottom 60 percent of tax filers were responsible for 5 percent. . . . 

The wealthier the donor, the more taxpayers lose out. According to the Tax Policy Center, in 2017, a $1 donation from someone in the top 1 percent of earners reduced the government’s funds by 32 cents, while a $1 donation from someone in one of the bottom two income quintiles reduced it by less than 5 cents.  This is because higher earners are in higher tax brackets, which means that giving them a pass on those taxes costs the country more. It is also because wealthy individuals often have appreciated stock that they can donate, which lets them avoid paying the capital gains taxes that they would otherwise owe if they cashed in on that stock themselves.  Finally, you have to itemize deductions to get almost any reduction in taxes from giving. Nearly all wealthy people do so, but it’s rare among lower-income people. The new tax law will make it even rarer; the Tax Policy Center predicts that it will reduce the number of households that take the charitable deduction to 16 million from 37 million.  Eliminating the tax deduction for charitable giving would not be politically viable. But we could limit it, either through lowering the cap on how much of a gift can be deducted or setting a flat percent of each donated dollar that can be used as a credit against one’s tax bill.  We could also call on the philanthropists who are making these enormous contributions to voluntarily forgo the deduction. Many megawealthy individuals have followed Bill Gates's and Warren Buffett's lead and pledged to give away half of their accumulated wealth. Perhaps they could also pledge that through their funding of the causes they hold dear, they will neither reduce the ability of our government to fund its priorities, nor shift some of the cost of their gifts onto other taxpayers.

For more research on the predicted effect of the Tax Cut and Jobs Act on charitable giving, check out the Philanthropy Outlook 2018 - 2019 from the Lilly Family School of Philanthropy at IUPUI.  


November 28, 2018 in Federal – Judicial | Permalink | Comments (0)

Tuesday, November 27, 2018

[Questionable] Strategies to Avoid the IRC 4960 Excise Tax on Nick Saban's, Urban Meyer's, Jim Harbaugh's and Jimbo Fisher's Salaries.


Nick Saban will make $8.3 million this year, Urban Meyer $7.6 million, Jim Harbaugh and Jimbo Fisher will each make $7.5 million and Gus Malzahn $6.7 million.  They are all football coaches for public universities, which typically don't bother applying for 501(c)(3) status (although some of their constituent organizations often get determination letters).  Many public universities avoid federal tax under IRC 115 instead.  Nevertheless, and in all likelihood, all those coaches' employers (a typical college football coaching contract is made between the coach, the university, and an athletic foundation; the foundation usually pays the bulk of the enormous salaries to avoid state law salary caps) are looking at ways to comply with or legitimately avoid the new excise tax under IRC 4960.  According to this article in the National Law Review, exempt organizations are considering a number of options to avoid the new excise tax under IRC 4960.  Those options include:

  • There are those who believe that public universities and colleges could use their political subdivision status to be exempt from not only this tax, but also federal taxes in general.
  • Some universities are looking into having portions of the covered employee’s compensation paid by an organization that is not related to that university. Such an arrangement could allow the compensation paid by the university or college to stay under the $1-million threshold. “Not related” is the key term here. As stated above, for purposes of determining the compensation for the taxable year, monies paid from all related entities are included.
  • Split-dollar life insurance policies may become popular again. Organizations have long used split dollar policies as part of the compensation packages for many of their highest-paid individuals. Although this is not a new idea, the addition of Section 4960 may bring split-dollar policies to the mainstream due to the perceived flexibility such policies provide. The theory is that an organization would buy a split-dollar policy and have the policy allow loans against the life insurance. The policy would loan monies to the covered employee, and the loan proceeds would not be included for purposes of determining the $1-million threshold under Section 4960. Although some split-dollar policies are legitimate, employers may want to carefully consider the ones that seem too good to be true, as the Internal Revenue Service (IRS) is likely to eventually tighten the rules on these policies.

None of those options seem very promising to me.  I am especially unsure about the first option, particularly in light of IRC 4960(c)(1)(C), which includes 115(1) organizations [relating to income derived from the exercise of an "essential governmental function and accruing to the state or any political subdivison thereof"] within the definition of exempt entities subject to the tax.  Perhaps the author is implying some sort of constitutional challenge under the murky "intergovernmental tax immunity" doctrine.  Richard Epstein has a good recent article out on that topic entitled Dual Sovereignty Under the Constitution:  How Best to Protect States Against Federal Taxation and Regulation.


November 27, 2018 in Federal – Legislative | Permalink | Comments (2)

Monday, November 26, 2018

2018 Donor-Advised Fund Report

The National Philanthropic Trust recently published is 12th annual report on donor advised funds:

OUR 2018 DONOR-ADVISED FUND REPORT examines 2013 through 2017 fiscal year data from 1,002 charities. For the eighth consecutive year, there was growth in all key metrics—number of individual donor-advised funds, total grant dollars from them, total contributions to them and total charitable assets in them.

In 2017, there were 463,622 individual donor-advised funds across the country. Donors contributed $29.23 billion to these donor-advised funds and used them to recommend $19.08 billion in grants to qualified charities. Both grants and contributions reached record highs. Charitable assets in donor-advised funds totaled $110.01 billion, surpassing the $100 billion mark for the first time.

While these record-breaking totals are significant, the rates of change are even more interesting. For example, grants from donor-advised funds to qualified charities increased nearly 20 percent from 2016 to 2017, a faster rate of growth than almost every year prior. Contributions rose 16.5 percent in that same time, which is a healthy rate of growth, but slower than the prior year.

What our previous reports predicted and what I’ve observed is that donors who create donor-advised funds are actively making grants. We see that through the growth in grants to donors’ favorite charities. The simultaneous growth in contributions indicates that this pattern will continue.


November 26, 2018 | Permalink | Comments (0)

Tax Policy Center Brief on Reforming Charitable Tax Incentives: Assessing Evidence and Policy Options

Joseph Rosenberg and  C. Eugene Steuerle of the Tax Policy Center published Reforming Charitable Tax Incentives: Assessing Evidence and Policy Options.  Below is the brief's abstract:

The federal tax treatment of charitable giving and the nonprofit sector is at an inflection point. Following enactment of the Tax Cuts and Jobs Act in 2017, the number of taxpayers who will claim a charitable deduction will decline substantially. What does that mean for charitable giving and the nonprofit sector? What principles should guide tax policies affecting the nonprofit sector, and what are the policy options going forward? This brief summarizes these and other questions discussed at a recent roundtable—comprised of national experts on the issues of tax policy and charitable giving, including researchers, academics, government administrators, and charitable organizations—cohosted by the Tax Policy Center and Independent Sector.

-- TLH


November 26, 2018 in Publications – Articles | Permalink | Comments (0)

Toussaint Publishes The New Gospel of Wealth: On Social Impact Bonds and the Privatization of Public Good

Professor Etienne C. Toussaint (UDC David A. Clarke School of Law) published The New Gospel of Wealth: On Social Impact Bonds and the Privatization of Public Good, 56 Hous. L. Rev. 153 (2018).  Below is the article's abstract:

Since Andrew Carnegie penned his famous Gospel of Wealth in 1889, corporate philanthropists have championed considerable public good around the world, investing in a wide range of social programs addressing a diversity of public issues, from poverty to healthcare to criminal justice. Nevertheless, the problem of “the Rich and the Poor,” as termed by Andrew Carnegie in his famous essay, remains unsolved. Socially conscious investors have recently called for America to reimagine a new “gospel of wealth”, one that not only grapples with the what of social injustice, but also explores the how and the why of systemic social and economic inequality. An emerging social finance tool, the social impact bond (“SIB”), has been praised as a promising platform that can help solve many of our social challenges by targeting impact investments toward traditionally underfunded social welfare programs.

This Article sets forth a critical examination of the new SIB model, highlighting some of the opportunities for the social finance tool to promote social impact, while also revealing several of its challenges that may hinder its broader adoption in communities across America. In the process, this Article exposes key flaws inherent in the design of the SIB model, including its neoliberal emphasis on market-based economic development strategies and its disregard for the primary role of government in the protection and advancement of the public good. It concludes by calling for a more progressive economic development framework to guide the implementation of the SIB model, one that can help development practitioners, philanthropists, and impact investors wrestle with the deficiencies of our global capitalist economic system and overcome the entrenched systemic barriers to economic justice in America.

-- TLH

November 26, 2018 in Publications – Articles | Permalink | Comments (0)

IRS Releases Priority Guidance Plan for 2018-2019

Earlier this month, the Department of Treasury and IRS released the 2018-2019 Priority Guidance Plan.  The plan contains numerous initiatives related to the 2017 Tax Cuts and Jobs Act ("TCJA"), including the following related to exempt organizations:

  • Guidance on computation of unrelated business taxable income for separate trades or businesses under new §512(a)(6), as added by section 13702 of the TCJA. 
    • PUBLISHED 09/04/18 in IRB 2018-36 as NOT. 2018-67 (RELEASED 08/21/18).
  • Guidance on the excise tax on excess remuneration paid by “applicable tax-exempt organizations” under new §4960, as added by section 13602 of the TCJA.
  • Regulations on the excise tax on net investment income of certain private colleges and universities under new §4968, as added by section 13701 of the TCJA.
  • Regulations under §170 providing rules governing the availability of the charitable contribution deduction when a taxpayer receives or expects to receive a state or local tax credit.
  • Guidance under §274 concerning qualified transportation fringe benefits, including the application of new § 512(a)(7).


In addition, the Priority Guidance Plan identifies the following non-TCJA initiatives for exempt organizations:


1. Final regulations on §506 as added by the PATH Act of 2015. Temporary and proposed regulations were published on 7/12/16.

2. Final regulations on §509(a)(3) supporting organizations. Proposed regulations were published on February 19, 2016.

3. Guidance under §512 regarding methods of allocating expenses relating to dual use facilities.

4. Regulations under §529A on Qualified ABLE Programs as added by section 102 of the ABLE Act of 2014. Proposed regulations were published on June 22, 2015.

5. Guidance under §4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners.

6. Guidance regarding the excise taxes on donor advised funds and fund management.

7. Guidance under §6033 on reporting donor contributions.
• PUBLISHED 07/30/18 in IRB 2018-31 as REV. PROC. 2018-38 (RELEASED 07/16/18).

8. Final regulations under §6104(c). Proposed regulations were published on March 15, 2011.

9. Final regulations designating an appropriate high-level Treasury official under §7611. Proposed regulations were published on August 5, 2009.



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

Call for Papers: Empirical Analysis of Wealth Transfer Law

The University of California, Davis School of Law (King Hall) and The American College of Trust and Estate Counsel’s Legal Education Committee are happy to announce that the 8th ACTEC academic symposium will be held on Friday, October 11, 2019. The theme is Empirical Analysis of Wealth Transfer Law. The event’s goals are to bring together established and emerging scholars and to foster discussion about empirical scholarship about wills, nonprobate transfers, intestacy, inheritance taxation, and related issues.

Articles presented at the symposium will consist of those selected from this Call for Papers and those from invited speakers. All papers will be published by the UC Davis Law Review.

If you would like to be considered to present a paper, please email an abstract of no more than two pages to Professor David Horton ( by March 1, 2019. The Law Review will notify those selected by March 15, 2019. Please be aware that speakers must submit drafts that are ready for the editing stage of the production process by mid-November 2019.

Speakers will be reimbursed for their reasonable travel expenses (economy airfare, ground transportation, and up to two nights in a local hotel). Speakers will also be invited to dinner on Friday, October 11. Breakfast and lunch will be provided to speakers and attendees on October 11 courtesy of the ACTEC Foundation. Questions about the symposium or this Call for Papers should be directed to David at the email address above or Professor Adam Hirsch (

-- TLH

November 26, 2018 in Paper Presentations and Seminars | Permalink | Comments (0)

Sunday, November 18, 2018

Whitaker May Have Violated Group's Tax-Exempt Status

    In this article by the Associated Press, they discuss how the new acting attorney general, Matthew Whitaker, made repeated statements in opposition to then presidential candidate, Hilary Clinton, while speaking for a group that is barred by its tax-exempt status from supporting or opposing political candidates during campaigns. Whitaker was the president and executive of the Foundation for Accountability and Civic Trust, a nonpartisan charitable organization before working for the Justice Department. The Foundation for Accountability and Civic Trust describes itself as a nonpartisan government watchdog promoting ethics and transparency. The organization's 501c3 status prohibits the organization from promoting one political candidate over another. In a few newspaper opinion pieces where Whitaker was identified as FACT’s leader, he criticized Hilary Clinton for the use of her private email server and for appointing her charity’s donors to boards of the State Department when she was Secretary of State. Whitaker was also quoted on a radio interview saying, “I don’t think anybody in the history of our country that served in the administration has been this bold in their private fundraising and their sort of giving favors.” Daniel Borochoff, the president of CHarityWatch said that statement appears to violate the IRS ban on engagement for or against a political party because it was highly critical of a political candidate. To read the full article, click here:



November 18, 2018 | Permalink | Comments (0)

Thursday, November 15, 2018

Three Top Tax Concerns Still Facing Charity Sector

    In this article, Robert Lee discusses the major tax concerns charities are facing. The first concern is unrelated business taxable income. Charities are concerned about how the IRS will implement new tax code section 512(a)(6), which requires charities to report taxable income that a charity regularly receives from businesses not substantially related to its charitable mission for each separate trade or business. On August 21, the IRS released some guidance on this issue, proposing that nonprofits use the North American Industry Classification System to help identify separate businesses for calculating their income. The second concern is fringe benefits. Section 512(a)(7) subjects certain transportation and parking fringe benefits to the unrelated business income tax rate at 21%. To learn more about the other major concerns facing nonprofits after the 2018 tax reform, click here:



November 15, 2018 | Permalink | Comments (0)

Wednesday, November 14, 2018

So, You Think Nonprofits Should be Taxed?

    This article discusses counter-arguments for people who think nonprofits should be taxed. The first counter-argument is to argue that nonprofits should be taxed like their for-profit counterparts. For-profit businesses are taxed on their net profits, or the amount they make after expenses are deducted. Since most nonprofits spend their profits on the programs they run, there is no profit to be taxed on. According to the Urban Institute, “in 2012, the entire nonprofit sector made about $2.26 trillion in revenues and spent $2.10 trillion in expenses.” The second counter-argument is that nonprofit already pay certain taxes. Nonprofits pay pay-roll taxes and sales tax on supplies needed to run their organizations. To learn about why nonprofits should not be taxed, click here:



November 14, 2018 | Permalink | Comments (2)

Violating Political Activity Restrictions/Prohibitions Can Land Nonprofit Fiduciaries in Prison

A Press Release from the U.S. Attorney's Office, Western District of Missouri:


Former Charity CEO Pleads Guilty to Multi-Million-Dollar Political Corruption Scheme


SPRINGFIELD, Mo. – The former CEO of a charity headquartered in Springfield, Missouri has pleaded guilty to her role in a multi-million-dollar political corruption scheme that involved bribes and campaign contributions for elected public officials in Missouri and Arkansas, announced U.S. Attorney Tim Garrison of the Western District of Missouri  and Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division.

Marilyn Luann Nolan, 68, of Springfield, pleaded guilty before U.S. Magistrate Judge David P. Rush on Friday, Nov. 9, to one count of conspiracy to embezzle and misapply the funds of a charitable organization that received federal funds.

By pleading guilty, Nolan admitted that she conspired with others from 2008 to June 30, 2017, to misapply millions of dollars of the charity’s funds for substantial, undisclosed payments to lobbying firms and political advocates, monetary and in-kind contributions to the campaigns of candidates for public office, and to bribe public officials.  Nolan also admitted that she knew her co-conspirators defrauded the charity in order to enrich themselves, and her.

Nolan began working at Alternative Opportunities Inc., in 1992.  In 2015, that company merged with Preferred Family Healthcare Inc., after which it continued to be known as Preferred Family Healthcare.  Nolan was the chief executive officer and oversaw the charity’s lobbying and governmental affairs activities. 

Preferred Family Healthcare and its subsidiaries provided a variety of services to individuals in Missouri, Arkansas, Kansas, Oklahoma and Illinois, including mental and behavioral health treatment and counseling, substance abuse treatment and counseling, employment assistance, aid to individuals with developmental disabilities and medical services. 

Political Advocacy, Campaign Contributions, Fund-Raising Events

According to the plea agreement, Nolan and her conspirators caused the charity to misapply its funds to pay for political advocacy, including lobbying, that violated both IRS rules governing tax-exempt organizations, and federal laws and regulations governing recipients of federal grants and contracts.  Nolan admitted that she directed and assisted her co-conspirators to direct millions of dollars to lobbyists, including Donald Andrew Jones and Milton Russell Cranford, who previously entered pleas of guilty to federal crimes in related cases.  Nolan also directly lobbied legislators.

Under her plea agreement, Nolan also admitted that she and her conspirators:

• Caused the charity to contribute financially to the campaigns of candidates for public office through “straw donors,” including the charity’s lobbyists, who were also reimbursed by way of invoices that were falsely described as “training” and “consulting” expenses;

• Encouraged charity employees to contribute to candidates for public office and caused the charity to reimburse them for those contributions by providing funds falsely described as reimbursement for travel or other expenses the employees had not actually incurred; and

• Caused the charity to provide in-kind contributions to the campaigns of candidates for public office, including in Missouri where they organized fundraisers for several candidates running for seats in the Missouri State Senate, Missouri House of Representatives, and the Greene County Commission and in Arkansas, Nolan and her conspirators organized fundraisers (often at hotels or restaurants) for many candidates running for seats in the Arkansas State Senate and Arkansas House of Representatives.

Nolan also admitted as part of her plea to directing an employee to use the charity’s resources to arrange for catering, liquor, decorations, and other food connected to political fundraisers.  This employee used a charity-issued corporate credit card for the purchases, with Nolan’s knowledge. 

At all times relevant to Nolan’s plea, the charity was absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of, or in opposition to, any candidate for elective public office.  Contributions to political campaign funds violated this prohibition, and could have resulted in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

Bribery of Elected Public Officials

According to the plea agreement, Nolan and her conspirators misapplied some of the charity’s funds to bribe elected public officials in the following manners:

• They gave things of value to numerous public officials, in exchange for their official actions benefitting the charity and themselves personally, including cash, travel and entertainment, premium tickets to sporting events, hotel accommodations, and use of the charity’s luxury/recreational real estate;

• They hired public officials and the family members of public officials as charity employees; and

• Nolan and the conspirators disguised bribes as contract payments for things such as consulting, training, and legal services.

The government believes the schemes Nolan pleaded guilty to totaled approximately $6 million.  The parties reserved the right in the plea agreement to litigate the exact amount of that loss, for the purpose of computing the federal sentencing guidelines.

Charity Embezzlement

As part of her plea agreement, Nolan also admitted that over an approximately 12-year period from 2005 to 2017, certain charity executives embezzled millions of dollars from the charity, from which Nolan profited.  Nolan admitted that although she did not know the full details of the many embezzlement and misapplication of funds schemes, she knew at the time that the charity bore additional costs from many of those transactions, and willfully blinded herself regarding the details of her conspirators’ schemes and artifices to defraud the charity.

One example referenced in Nolan’s plea agreement consisted of the formation of an LLC that was used as the management company for Alternative Opportunities, identified in court documents as Entity A.  In 2006, Entity A was sold to a publicly-traded corporation identified in court documents as Company A, which was also partly owned by Nolan.  Nolan admitted that this sale was perpetrated for the primary purpose of enriching charity executives, including herself.  Nolan’s share of the proceeds from the sale of Entity A to Company A was $3,769,536.

Nolan further admitted as part of her plea that she also received $361,574 from two LLCs identified as Entity B and Entity C where, immediately prior to the 2006 sale of Entity A to Company A, Entity B acquired title to all real estate formerly held by Entity A and Entity C held the title to the corporation’s headquarters building in Springfield, and duplex homes located in Springfield.

Under the terms of Friday’s plea agreement, Nolan must pay $4,131,111 in restitution to the government, less a credit for taxes she paid on the funds received.

Under federal statutes, Nolan is subject to a sentence of up to five years in federal prison without parole. The maximum statutory sentence is prescribed by Congress and is provided here for informational purposes, as the sentencing of the defendant will be determined by the court based on the advisory sentencing guidelines and other statutory factors. A sentencing hearing will be scheduled after the completion of a presentence investigation by the United States Probation Office.

This case is being prosecuted by Assistant U.S. Attorney Steven M. Mohlhenrich, and Trial Attorney Marco A. Palmieri with the Public Integrity Section of the Department of Justice. It was investigated by IRS-Criminal Investigation, the FBI, and the Offices of the Inspectors General from the Departments of Justice, Labor, Veterans Affairs, and the Federal Deposit Insurance Corporation (FDIC). This is a combined investigation with the Western District of Arkansas, the Eastern District of Arkansas, and the Public Integrity Section of the Department of Justice.


November 14, 2018 | Permalink | Comments (0)

Tuesday, November 13, 2018

More on Church Campaign Intervention

In response to my post last week regarding Church campaign intervention, John Pomeranz was kind enough to send me a picture of the infamous ad that was the basis of the Branch Ministries, Inc. case.  I thought I would share it.

Church at Pierce Creek ad

Thanks again John!



November 13, 2018 | Permalink | Comments (0)

Property, Sales, Use, and Other Taxes

    In this article, the National Council for Nonprofits discusses how some cities attempt to impose discriminatory taxes or fees on nonprofit entities. In every state the property that is owned by charitable organization are exempt from property taxes. However, some cities try and get around the nonprofit tax exemption by demanding charitable organizations make voluntary payments in lieu of taxes, PILOTs for short. “Threats to property tax exemptions come in many forms from all branches of government: state and local legislative bodies trying to rewrite the rules, executive branch tax assessors seeking to reclassify exempt property, and judges trying to legislate from the bench.” One example of these threats to property tax exemption came in June 2015, where a New Jersey tax court judge revoked the property exemption of a major hospital. In his view, modern nonprofit hospitals do not look like the charity hospitals of the past and no longer deserve tax exempt status. To read about more threats to charitable organization’s tax exempt status, click here:



November 13, 2018 | Permalink | Comments (0)