Nonprofit Law Prof Blog

Nonprofit Halloween

Happy Halloween! In honor of today, I wanted some sort of Halloween nonprofit story.

Frankly, when I think about holidays and nonprofits, I think about the Thanksgiving-to-Christmas corridor. That seems to be when a lot of volunteering happens and, as the end of the tax year approaches, it also seems to be when a lot of year-end funding requests happen.

Are there any Halloween-oriented charities? Almost certainly. And the one I found quickly on Google was 'Ween Dream, a Louisiana-based public charity that provides costumes to kids who might otherwise not have costumes.

It's a small organization, collecting roughly $10,000 of donations annually. I don't know anything substantive about it, but I like that they're taking a charitable approach to a holiday that, as wonderful as it is, doesn't usually invoke thoughts of charity.

Samuel D. Brunson

Photo by Devers Kerr on Unsplash

Think Tank Alert: American Idea Foundation

On Monday, former House Speaker Paul Ryan launched the American Idea Foundation. The American Idea Foundation is a nonprofit, exempt under section 501(c)(3), and plans to focus on Ryan's legislative interests from his years in Congress, including poverty, economic opportunity, and "evidence-based approach[es]" to solving other problems.

At this point, of course, there's not much to say about the American Idea Foundation. It just launched, and hasn't filed any 990s or actually done anything. And, in fact, it's not completely clear to me what the Foundation plans on doing. It doesn't look like it plans on doing its own research; rather, it plans to identify successful organizations, and maybe education policymakers about what they're doing?

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Using Nonprofits For Illegal Purposes

Last week, Reuters reported that two nonprofits agreed to pay $6 million to resolve allegations that they had helped pharmaceutical companies in a way that violated the False Claims Act.

Chronic Disease Fund and Patient Access Network Foundation, the two nonprofits that paid the fine, are pubic charities, exempt under section 501(c)(3). Their charitable mission? To help poor individuals with chronic diseases get the medication they need by paying their out-of-pocket costs for the medication. The allegations that they settled claim that seven pharma companies used the nonprofits as flow-throughs, essentially donating money to the nonprofits, which would then help patients pay for those drug companies' medicines.

The problem? The Anti-Kickback Statute prohibits drug companies from subsidizing copayments from patients on Medicare. Drug companies can donate to nonprofits that subsidize these out-of-pocket expenses, but the nonprofits must operate independently from their donors; here, the allegation was that CDF and PANF didn't act independently. And, while neither admitted wrongdoing, they did settle.

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Pitt Tax Review - The 1969 Tax Reform Act and Charities: Fifty Years Later, Symposium

By: Philip Hackney

The University of Pittsburgh School of Law's Pittsburgh Tax Review hosts a symposium this Friday November 1, 2019 entitled: "The 1969 Tax Reform Act and Charities: Fifty Years Later.” It will offer experts in the taxation of charities, and those working in the nonprofit field, the opportunity to reflect upon and discuss the impact of the changes made by the 1969 Tax Reform Act 50 years after the law’s enactment. It will be held at The University Club in the Gold Room, located at 123 University Place on Pitt's campus. You can RSVP here. If you are in the area, please join us. 

The event is free and open to the public. CLE of 4.5 hours is available for $90. It will be livestreamed at this youtube link.

Here is the schedule and the speakers:

8-9 Registration/continental breakfast

9 – 9:15 Introduction

 

Panel 1: Investing for Charity 9:15 – 10:45

Ray Madoff,  The Five Percent Fig Leaf

Dana Brakman Reiser, Foundation Regulation in Our Age of Impact

Commenter: Carolyn D. Duronio, Partner, Reed Smith LLP

 

10:45 -11 Break

 

Panel 2 Origins of Private Foundation Rules and their Meaning for Today 11 – 12:30

Jim Fishman,  Does the Origin of the 1969 Private Foundation Rules Suggest a Match for Current Regulatory Needs?

Khrista McCarden, Private Operating Foundation Reform & J. Paul Getty.

Commenter: Penina K. Lieber, Partner of Counsel, Dinsmore & Shohl LLP

 

12:30-1:30 lunch

 

Panel 3 Regulating Charitable Actors  1:30 -3:00

Ellen P. Aprill,  The Private Foundation Excise Tax on Self Dealing:  Contours, Comparison and Character

Elaine Waterhouse Wilson, Is Consistency the Hobgoblin of Little Minds? Co-Investment under Section 4941

Commenter: Philip Hackney, Associate Professor, University of Pittsburgh School of Law

Goswami & Urminsky on Fundraising

Indranil Goswami and Oleg Urminsky have posted No Substitute for the Real Thing: The Importance of In-Context Field Experiments in Fundraising on SSRN with the following abstract:

We present a complete empirical case study of fundraising campaign decisions that demonstrates the importance of in-context field experiments. We first design novel matching-based fundraising appeals. We derive theory-based predictions from the standard impure altruism model and solicit expert opinion about the potential performance of our interventions. Both theory-based prediction and descriptive advice suggest improved fundraising performance from a framing intervention that credited donors for the matched funds (compared to a typical match framing). However, results from a natural field experiment with prior donors of a non-profit showed significantly poorer performance of this framing compared to a regularly framed matching intervention. This surprising finding was confirmed in a second natural field experiment, to establish the ground truth. Theoretically, our results highlight the limitations of both impure altruism models and of expert opinion in predicting complex “warm glow” motivation. More practically, our results question the availability of useful guidance, and suggest the indispensability of field testing for interventions in fundraising.

 

Eric C. Chaffee

Colinvaux and Madoff vs. Harris and Hemel: On Donor Advised Funds

Roger Colinvaux and Ray Madoff have published an interesting opinion piece in the Chronicle of Philanthropy.  Here are the opening few paragraphs:

More than $110 billion that Americans have earmarked for charity are now housed in donor-advised funds. DAFs are a fundraising phenomenon that make it easy to set aside dollars for good causes and get significant tax benefits right away. But while the dollars are flooding into DAFs, too few dollars are coming out. That is because the legal framework governing these funds is out of sync with the way tax incentives are supposed to work. The reason for tax incentives is to get people to take an action deemed good for society, in this case, to make funds available so that charities can use them in support of their mission. But with donor-advised funds, the system is backwards: the federal government provides donors huge tax subsidies upfront, handing them out when the donor sets up a fund or augments it, but there is  no incentive to actually give the money away.  As legal scholars focused on public policy, we have long been concerned that the tax rules are not working as they should to get money to charities. When it comes to DAFs, we have advocated for the imposition of a payout term to ensure that DAF funds are distributed within a reasonable amount of time — say, a decade.  While a payout is one solution, as we have been studying the issue and hearing objections from sponsors of donor-advised funds, we have realized there is an even better approach that could maximize contributions, help donors save on taxes, and avoid abuses that lose money for the Treasury.  Our proposal essentially splits the tax benefit into two parts: Donors would get some financial benefits when they put money into the fund and receive additional benefits when they send money out of the fund to nonprofits they want to support.

For a counter-argument to the Colinvaux and Madoff's proposal see this opinion piece by Kate Harris (student) and Daniel Hemel in the following week's edition of Chronicle of Philanthropy:

The latest proposal for DAF reform comes from Roger Colinvaux and Ray Madoff, law professors at Catholic University of America and Boston College, respectively. Colinvaux and Madoff are thoughtful and accomplished scholars of nonprofit law whose ideas attract wide attention — and rightly so. Their suggested reform — under the headline “A Donor-Advised Fund Proposal That Would Work for Everyone” — would deny DAF donors a charitable-contribution deduction until money is distributed from their accounts to an active charity. At the time of distribution, under Colinvaux and Madoff’s proposal, donors would be able to deduct the amount paid out to charity (which may be more than donors put in if their DAF investments appreciated in the interim). This, the authors argue, would encourage DAF donors to put their charitable funds to use quickly rather than allowing dollars to languish in DAFs for lengthy periods.  Colinvaux and Madoff’s idea is, in some respects, a “light touch” approach to DAF reform. Contrast their proposal with alternatives that would require DAFs to distribute funds within a short timeframe (e.g., five years) or to pay out a certain fraction of their assets annually (e.g., 7 percent). Colinvaux and Madoff would not require anyone to do anything; they would instead delay (but not deny) tax benefits. Theirs is a nudge rather than a hammer. Nonetheless, the Colinvaux-Madoff proposal would have wide-ranging ramifications for DAFs and their donors. It would stymie taxpayers who seek to use DAFs to spread philanthropic activity across the life cycle. It would dramatically reduce the tax benefits of DAFs for middle-income donors. And it raises the potential for unintended and unwanted consequences.

Darryll K. Jones

Silber on Foreign Corruption of the Political Process Through Social Welfare Organizations

Norman I. Silber has posted Foreign Corruption of the Political Process Through Social Welfare Organizations on SSRN with the following abstract:

Social welfare organizations are prohibited from channeling foreign contributions to favored political candidates. Prospects for enforcing this prohibition, however, are uncertain. Do federal election laws or tax laws provide effective tools? Are state authorities equipped to hold a nonprofit culpable as an entity, or to hold a manager or board member responsible? These questions are important to understand whether the existing rules safeguard the nonprofit community and the fairness of elections. This Essay concludes that federal tax and election rules are likely to be less effective than the authority vested with state attorneys general to monitor and hold accountable nonprofits and their officers and directors who become vehicles for foreign interference in national elections.

 

Eric C. Chaffee

 

GAO Recommends More Active Enforcement of Abusive Schemes Involving Tax Exempt Entities

From the GAO Highlights page of GAO-19-491, entitled "Tax Law Enforcement:  IRS Could Better Leverage Existing Data to identify Abusive Schemes Involving Tax-Exempt Entities (September 2019):

Why GAO Did This Study

Abusive tax schemes contribute to the tax gap and threaten the tax system's integrity. When abusive tax schemes involve tax-exempt entities, they also can erode the public’s confidence in the charitable sector.  GAO was asked to review what is known about abusive transactions involving tax-exempt entities and how IRS addresses them. This report, among other things, (1) describes ways in which taxpayers have abused an entity's tax-exempt status; (2) examines trends in IRS’s compliance efforts; and (3) assesses how IRS identifies emerging abusive tax schemes involving tax-exempt entities. GAO reviewed research on tax schemes involving tax-exempt entities, and interviewed relevant professionals and researchers about tax schemes involving tax-exempt entities; compiled statistics from IRS audit and disclosure data; and compared documentation and testimony from IRS officials on IRS programs and guidance from its operating divisions with certain internal control and GAO fraud framework criteria.

What GAO Recommends

GAO is making five recommendations to IRS to strengthen its internal controls, including that it link data across operating divisions, test the ability of a database to facilitate analysis of audit data, and use existing analytic tools to further mine information on tax forms. In commenting on a draft of this report, IRS agreed with all of GAO’s recommendations.

What GAO Found

Taxpayers have used a variety of abusive tax schemes involving tax-exempt entities. In some schemes, the tax-exempt entity is complicit in the scheme, while in others it is not. For example, an abusive tax scheme could involve multiple donors grossly overvaluing charitable contributions, where the tax-exempt entity is not part of the scheme. Conversely, some patient assistance programs—which can help patients obtain medical care or medications—have been used by pharmaceutical manufacturers to make charitable donations that can be viewed as furthering private interests. Internal Revenue Service (IRS) audits of abusive tax schemes are trending downward, as the figure below shows audits by IRS’s Large Business and International division. This trend has occurred amid generally declining IRS resources and corresponds with an overall decrease in audit activity by IRS over recent years. IRS has a variety of programs working collectively to identify abusive tax schemes involving tax-exempt entities, but some internal control weaknesses exist in its approach. For example, GAO found three ways that IRS data or programs were inconsistent with internal control standards for using quality information. First, database project codes used for identifying data on abusive tax schemes are not linked across IRS’s audit divisions and do not consistently identify whether a tax-exempt entity was involved. Second, IRS has not leveraged a database with cross-divisional information to facilitate its analysis and monitoring of audit data across divisions. Finally, IRS has not used existing analytic tools to mine the narrative fields of tax forms. Doing so could provide audit leads on abusive schemes involving tax-exempt entities. These deficiencies inhibit IRS’s ability to identify abusive tax schemes and develop responses to those schemes.

The Report was commissioned by and delivered to the Senate Finance Committee.  

 

Darryll K. Jones

 

Can Philanthropy Save Democracy?

In its October 1st edition, The Chronicle of Philanthropy published Can Philanthropy Save Democracy? -- an interesting read.  The number of grant organizations that are funding efforts to strengthen the democratic process is on the rise.  According to the article, "Foundation support nationwide for democracy projects jumped 34 percent in 2017, to $553 million, according to Candid, which tracks grant-maker activity. Those are the most recent figures available, but all signs suggest that spending is on the rise."  As the article points out, these efforts have no political or ideological limitations or consensus for that matter; donors are as varied as George Soros and Charles Koch. 

The bi-partisan Democracy Fund, which supports a wide assortment of democracy efforts, was created by eBay founder and philanthropist Pierre Omidyar in 2014 "to help ensure that the American people come first in  our democracy."  Its president, Joe Goldman, believes philanthropic organizations and individuals have a mandate to reverse the "weakening of important American institutions."  While large donors and foundations have traditionally steered clear of political involvement, Goldman opines that the landscape is evolving:  

Historically it was perfectly appropriate for some funders to say, "Look, my role is technocratic. My role is to stay out of politics" . . .  But there are points in time when the threats are such that we all need to stand up for our values. Our democracy has gone through many challenging periods, but we are definitely in a crisis point. People recognize we are in a bad spot. . . A lot rides on the outcome. . . 

Whether you care about the environment, housing, or the national debt, these issues are all fundamentally affected by the degree to which our political system is healthy and functioning.

As part of this uptick in funding, Omidyar has more than tripled the Democracy Fund's annual grant-making budget to $50 million.  

Believing that a "strong philanthropic response to something new and worrisome going on in America" as a result of the 2016 election cycle, Protect Democracy was created by former White House lawyers under President Obama.  Protect Democracy's website describes itself as a "nonpartisan, nonprofit organization dedicated to fighting attacks, from at home and abroad, on our right to free, fair, and fully informed self-government."  The organization's budget has grown from a meager $400,000 to over $10 million annually.  One of its co-founders, Ian Bassin, explained the need for such nonprofits as Protect Democracy:

A lot of work has gone into things like gerrymandering, voting rights, and campaign finance. . .  There hasn’t been nearly as much time thinking about how we make sure that our fundamental system of checks and balances is strong and able to withstand modern autocratic movements. We need to make sure we’re spending resources there as well.

The Ford Foundation, Carnegie Corporation of New York, and other established grantmaking organizations have stepped up their funding of efforts to strengthen democracy.  According to the article, Ford’s "democracy budget" is about $25 million a year, recently committing an additional $5 million to support accurate census efforts. Carnegie anticipates making $7 million in grants supporting voting rights and related issues in its current fiscal year, an increase of $5.2 million over the prior year. The article reports that increased funding has also focused on strengthening journalism to boost democracy; funders including The Knight Foundation, The Hewlett Foundation, The MacArthur Foundation, and Craig Newmark (founder of Craigslist).

Nicholas Mirkay

Ongoing Congressional Scrutiny of Syndicated Conservation Easements

In a follow-up to a March blog entry  regarding Congressional scrutiny of syndicated conservation easements, Senate Finance Committee Chairman Chuck Grassley and Ranking Member Ron Wyden announced in mid-September that subpoenas were issued for documents relevant to their bipartisan investigation of syndicated conservation-easement transactions.  Wyden stated in the announcement: 

As we’ve both said all along, conservation easements have very legitimate purposes. We need to protect those purposes and protect the American taxpayer. If a handful of folks can game the system for profit, then we’re all left holding the bag. We expect fulsome cooperation with our investigation, and it’s unfortunate we’ve had to resort to compulsory process. Ultimately, when Congress makes an inquiry, it needs to be answered. It’s not optional.

Timothy Lindstrom, Esq., associated with the Land Trust Alliance, provided the following explanation of syndicated easements:

Let’s say a man named John donates a conservation easement on his farm to a land trust. His appraiser valued the farm at $3 million before the easement and $2 million after the easement. Therefore, the easement is worth $1 million, which would be the amount of the tax deduction available for the donation. John doesn’t have sufficient income to use this deduction. He wants to sell the deduction to someone who can use it.

Federal tax law does not allow the donor of a conservation easement, or of any other property for that matter, to transfer the deduction generated by the donation to someone else. A federal tax deduction is personal to the donor. If the donor can use the deduction, fine; if not, it disappears. In other words, John can’t sell his deduction.

This is simple. However, some legitimate conservationists, and some not-so-legitimate tax shelter “facilitators,” are using limited liability companies and other so-called “pass-through” entities to try to “syndicate” tax deductions — in essence, to sell them — in ways that an individual, such as John, cannot accomplish. These deals are anything but “simple.”

Lindstrom acurrately points out that not all syndications are "shams," but advocates for syndications that allocate tax deductions to be scrutinized.  Syndications that fail to comply with complex allocation rules for pass-through entities and/or utilize inflated easement appraisals, according to Lindstrom, threaten "the viability of the tax benefits for conservation easements and the credibility of the voluntary land conservation effort."

Nicholas Mirkay

 

IRS Audit of the NRA's Tax-Exempt Status Requested

In a follow-up to a previous post this week The NRA and Russia:  How a Tax Exempt Organization Became a Foreign Asset, Senate Minority Leader Chuck Schumer and Senate Finance Committee ranking member Ron Wyden called for an IRS examination of the NRA's ongoing tax-exempt status in a October 2nd letter to IRS Commissioner Chuck Rettig.   The request comes on the heels of the Senate Finance Democrats' release last week of a report on the organizations's interactions with Russian nationals.  Schumer and Wyden stated in the letter:  "Given this report's concerning findings and other allegations of potential violations of tax exempt law by the NRA, it is incumbent on the IRS to fully investigate the organization's activities to determine whether the NRA's tax exemption should be disallowed."  

The NRA is a tax-exempt under section 501(c)(4) of the Internal Revenue Code as a social-welfare organization.  The organization also has affiliated entities that are tax-exempt under sections 501(c)(3) and 527 of the Code.

Schumer and Wyden assert in their letter that the findings of the report raise concerns of whether the NRA's activities violated the statutory social welfare requirements, including the use of tax-exempt resources for non-tax-exempt purposes.  "In light of the continued efforts of Russia to undermine American democracy, IRS must use its full authority to prevent foreign adversaries from again exploiting tax-exempt organizations to undermine American interests," Wyden and Schumer wrote.  The NRA and Senate Republicans take issue with the report and its findings.

As we previously blogged, the New York and District of Columbia attorneys general are conducting their own investigations about whether the NRA is complying with state tax laws. 

[Sources:  Politico, The Hill]

Nicholas Mirkay

Call for Contributions: International Society for Third-Sector Research 2020

The International Society for Third-Sector Research is calling for contributions for its 2020 biennial conference, to be held in Montreal on July 7-10. The deadline is October 26th. As detailed in the Call for Contributions, submission can be in the form an individual submit an abstract for a paper or poster or in the form of a joint proposal with others for a panel or roundtable. My understanding is that panel submissions are particularly encouraged and tend to have a higher rate of acceptance than individual submissions. I am chairing the "Challenges and Opportunities of Advocacy and Campaigning in an Era of 'Fake News'" track for the conference, and so would particularly encourage submissions relating to this track. See the Call for Contributions for the other tracks.

Lloyd Mayer

Aprill: A Tax Lesson for Election Law

Ellen P. Aprill (Loyola LA) published A Tax Lesson for Election Law in the September 30th edition of Tax Notes.  The following are the introductory paragraphs of the article:

An August 22 deadlock by the Federal Election Commission regarding a request for an advisory opinion highlights the complicated role that tax law plays in regulating campaign finance. It underscores important differences between section 501(c)(3) and (c)(4) organizations not only under section 501(c), but also under section 527. Moreover, because the resignation of the FEC vice chair has left the commission without quorum and thus unable to act, tax regulation of campaign finance has increased importance.

On May 31 the Price for Congress committee (the Price committee) filed a request with the FEC for an advisory opinion regarding transfer of remaining campaign funds from former legislator Price’s campaign committee. The committee asked for approval to transfer some, although not all, of its remaining almost $1.8 million to a section 501(c)(4) social welfare organization (the 501(c)(4)). The request prompted passionate debate and deep division but no resolution by the FEC commissioners when it was discussed on July 25 and again on August 22.

As proposed, the 501(c)(4) would “engage in research, education, presentation, and publications with respect to health, budget, and other public policy matters.” Although unlike section 501(c)(3) organizations, a 501(c)(4) is permitted to lobby without limit and to engage in considerable campaign intervention, the request stated that this 501(c)(4) “will not attempt to influence legislation nor participate or intervene in any political campaign.” The Price committee also proposed that any transferred funds be placed in a separate account and not be commingled with other assets of the 501(c)(4). To comply with applicable election law regarding private use by former candidates, neither the transferred funds in this special account nor income generated from these funds would be used to provide Price, any members of his family, or former employees of the Price committee or of Price’s government offices with compensation, gifts, or material reimbursement, or “to influence any election.” Price, however, would serve as the organization’s president and chief executive officer, albeit without any compensation. The Price committee anticipates that he would “speak, write, publish, or otherwise make appearance to present the work” of the 501(c)(4).

Under election law, campaign funds can be contributed “to an organization described in section 170(c) of the Internal Revenue Code” as well as “for any other lawful purposes.” Under tax law, a 501(c)(4) would not be described in section 170(c) because that provision describes organizations that are eligible to receive tax-deductible charitable contributions, and a 501(c)(4), unlike a 501(c)(3), is not such an organization. 

In responding to the Price committee request, however, FEC draft advisory opinion 19-33-A, issued on July 17, did not read the reference to section 170(c) as limiting transfers to organizations eligible to receive deductible charitable contributions. The draft opinion explains that if an organization engages in educational activity and constrains itself from lobbying and campaign intervention, it is described in section 170(c) for purposes of campaign finance law, even if it is not eligible to receive tax-deductible contributions.

At the July 25 FEC meeting, Chair Ellen L. Weintraub objected strongly: “If we were to approve this advisory opinion, it would extend the ‘personal use’ exemption to 501(c)(4) organizations in a way that the commission has not done before.” Republican members disagreed, and the FEC postponed its decision. . . . 

At its meeting on August 22, however, the FEC “was unable to render an opinion by the required four affirmative votes and concluded its consideration of the request.” The Price committee will now have to decide whether to proceed without an FEC advisory opinion. The commission’s lack of sufficient commissioners for a quorum, however, prevents any possible enforcement action. 

Whatever the Price committee decides, its choice of a 501(c)(4) rather than a 501(c)(3) raises several issues under applicable tax law and its interaction with election law. In short, transfers to a 501(c)(4) rather than a 501(c)(3) offer advantages regarding IRS transaction costs and oversight, but also involve some income tax risks to the former candidate. The Price committee request also reminds us of some of the inadequacies of our regulation of campaign financing, both through tax law and election law. . . .

Nicholas Mirkay

Educational Tax-Exempt Status = Academic Freedom

In September 25 letters to the presidents of Duke, Harvard, and Villanova universities and Sarah Lawrence College, Senate Finance Committee Chair Chuck Grassley raised concerns and sought information on the current culture of academic freedom on their respective campuses.  In a recent op-ed published by the Wall Street Journal,  Grassley raised concerns about the current state of academic freedom in higher education, opining that students' demand for "safety" from "harm" is eroding academic freedom and the very point of higher education.  In each of the letters Grassley elaborated further:

Unfortunately, over the past year I have read a variety of media reports discussing incidents in higher education involving faculty suffering difficulties with or expressing concerns about teaching or researching topics that might challenge or encourage critical thinking about the conventional wisdom or a popular ideology of the day. . .  Students who can work and think critically for themselves are best equipped to tackle the most difficult challenges we face and participate fully and effectively in our democracy. 

A fundamental piece of this democracy-enabling purpose is that college and university professors should be free to teach and research – and students should be free to learn – to the best of their abilities in defiance of an undiscerning "instinct to believe what others do."  The United States’ higher education has long been the envy of the world for its ability to do just that. This letter respectfully requests information regarding the university’s commitment to creating such an educational environment in which its faculty can teach topics and take positions on matters that defy conventional wisdom and challenge orthodoxies in necessary but perhaps uncomfortable ways. . . .

With respect to tax-exempt status, Grassley quoted Bob Jones University vs. United States:  "Charitable exemptions are justified on the basis that the exempt entity confers a public benefit -- a benefit which the society or community may not itself choose or be able to provide, or which supplements and advances the work of public institutions already supported by tax revenues."  He further agreed with a description of tax-exempt purpose as to higher education being "fundamental to fostering the productive and civic capacity of [the Nation's] citizens."

The requested responses from the four institutions are due by October 25, 2019.

[See also Tax Notes dated September 30, 2019, Tax-Exempt Higher Ed Must Allow Academic Freedom]

Nicholas Mirkay

"The NRA And Russia: How a Tax Exempt Organization Became a Foreign Asset"

A 76 page Senate Finance Committee Report concludes that the NRA engaged in activities for private inurement, excess benefit and improper political influence peddling.  The report paints a dark picture of a powerful exempt organization coming under the influence of a foreign power and calls for legislative reforms.  Here is the conclusion from the Senate Finance Committee Minority Report entitled, "The NRA and Russsia:  How a Tax Exempt Organization Became a Foreign Asset;"

V. Conclusion

The minority staff investigation confirms that the NRA, its officers, board members, and donors engaged in a years-long effort to facilitate the U.S.-based activities of Maria Butina and Alexander Torshin. The U.S. Justice Department determined the activity of those Russian nationals—one now convicted of a felony charge of conspiracy to act as an unregistered foreign agent and the other designated by the U.S. Treasury Department for the Russian Federation’s global malign activity, including attempting to subvert Western democracies and malicious cyber activities—amounted to an illegal conspiracy to gain access to American organizations through the NRA. The scope of the NRA’s support for these Russian activities raises concerns about whether the activity in which the NRA, its officers and board members engaged  were in furtherance of the organization’s exempt purpose. The minority staff investigation confirms that some members of the NRA delegation participated in the Moscow trip primarily or solely for the purpose of advancing personal business interests, rather than advancing the NRA’s tax-exempt purpose. The findings of this report suggest that the use of the organization to advance personal business interests may have exposed the NRA to further  involvement in the Russian influence operation. In addition, use of NRA’s tax-exempt funds and resources in this manner raise concerns about the use of tax-exempt resources for a non-exempt purpose, private inurement prohibited under IRC section 501(c)(4), and prohibited excess benefit transactions under section 4958.  The IRS has long held that illegal activity conducted by a section 501(c)(4) tax-exempt entity or by an official in his official capacity can jeopardize its tax exemption. These particular findings should be considered in the context of any other potentially improper conduct that benefited its officers or board members the NRA may have been engaged in.  The minority staff investigation also confirms some members of the NRA delegation met with sanctioned  individuals. Further, members of the NRA delegation provided interviews, permitted the use of trademarked NRA logos, and appeared in promotional material for at least one sanctioned Russian arms manufacturer in their official capacity as representatives of the NRA. These interactions raise significant concerns under U.S. sanctions law. As described in this report, U.S. sanctions law does not prohibit meeting with SDNs, but does bar U.S. persons dealing in present, future, or contingent property interests of SDNs, including making or receiving contributions of funds, goods, or services to designated entities.  Participants’ willingness to meet with sanctioned individuals and entities, despite recognition of their  SDN status and the potential political sensitivity of such meetings, enabled Butina and Torshin to further entrench themselves in the NRA. This report illustrates potential weaknesses related to potential misuse of tax-exempt resources by section 501(c)(4) organizations and how such misuse can expose an organization to improper influence. The Committee and Congress should explore whether the current rules surrounding private benefit and inurement under section 501(c)(4) should be strengthened. In addition, the Committee and Congress should explore whether and to what extent the public policy doctrine and similar rules should apply to section 501(c)(4) organizations. Further, this report illustrates potential weaknesses to foreign intelligence threats by American tax-exempt organizations. Congress should explore options to reform tax-exempt laws to protect against foreign threats. Options for reform could include increased disclosure and information reporting, clarifying the definition of political activity for purposes of section 501, strengthening campaign finance rules surrounding so-called “dark money” organizations such as politically-active section 501(c)(4) organizations, and potentially establishing rules similar to those under section 501(p) to provide for the  suspension of tax exempt status of any organization that has organized meetings with sanctioned individuals or engaged in similar acts. A compulsory audit of the organization’s activity would be required to fully determine the severity of the actions identified in this report. Committee minority staff is aware that the New York State and District of Columbia Attorneys General offices have initiated audits of the NRA’s compliance with applicable tax laws. In addition, because determinations related to enforcement actions and revocation of tax-exempt status may depend on the persistence and quantity of impermissible acts, a broader review of NRA’s activities in recent years is necessary to determine whether NRA has engaged in a persistent pattern of impermissible conduct. The minority staff is aware of additional allegations of private inurement and
misuse of tax-exempt resources at the NRA beyond the 2015 Russia trip. Ranking Member Wyden has initiated an inquiry into these allegations and the minority staff will continue to review the findings from that investigation.

The Majority Staff Report accompanying the Minority Staff Report wholly disagrees.  Here is the conclusion from that report:  

CONCLUSION

The U.S. and Russia relationship was vastly different in 2015 than it is today. In hindsight, the misplaced optimism that the Obama administration had toward Russia was obviously ill conceived given what we know today. The Minority report seeks to apply today’s standard, and what we know now about Russia, to the actions of various board members of the NRA. In that vein, the report is littered with salacious, unsubstantiated accusations, and reads as if there were an elaborate conspiracy theory by members of the NRA to aid in the attempted Russian infiltration of conservative organizations and the Republican Party. Unfortunately, just as the Obama administration cannot go back to correct its approach with Russia, the Minority cannot apply today’s standards with the conduct of NRA board members in 2015. But that’s what it does. The Minority report finds no facts that give rise to the possibility that personnel associated with the NRA engaged in any activities that call into question its tax-exempt status. The Minority report takes hold of the common practice of business travelers, giving multiple purposes to their business trips, so that ordinary behavior is painted with some supposedly nefarious purpose. To the extent NRA funds were used improperly in any facts discussed in the Minority report, it appears to have been minor, hardly a rounding error for an organization with hundreds of millions of dollars in revenue each year and nothing that cannot be corrected with minor intermediate sanctions. The Minority report discusses sanctioned individuals and companies in Russia with the hopes of connecting them to NRA personnel so as to “raise concerns,” but even the Minority must admit that just meeting with individuals on an OFAC list does not, unto itself, violate U.S. law. It is fair to analyze the wisdom of traveling to Russia in December 2015 to meet with high-ranking Russian officials, but it is nowhere close to reasonable to question the tax-exempt status of the NRA because of it. In the end, the Minority report contains much conclusory innuendo about an organization, the NRA, and repeatedly attempts to paint a picture that does not exist. The Minority report uses terms like “raises concerns” in an attempt to embarrass the NRA while absolving the Minority from having to assert any serious factual or legal analysis. The Minority report exaggerates several details while omitting or downplaying mitigating facts. The Minority report states, on several occasions, that it was unable to establish many assertions that it purports to make. In the Minority report, statements like these are often inserted at the end of a section, left without any analysis or elaboration. Glossing over such facts just because they are damning to a narrative  does not mean they do not exist. Despite this, the Minority report seeks to use this report as justification for a compulsory audit of the NRA in order to conduct yet another fishing expedition for wrongdoing. Therefore, the Majority finds that the facts do not support the Minority’s narrative or conclusions.

For press coverage see here and here.  

Darryll K. Jones