Friday, February 7, 2020
Oonagh B. Breen (University College Dublin) and Patricia Quinn (Benefacts) have posted Philanthropic Giving in Ireland: A Scoping Project. Here is the abstract:
For a developed country, with a reputation for generosity towards the needy, Ireland has a very limited profile in structured, persistent philanthropic giving. At €120m, institutional philanthropic giving (as defined) represents a tiny proportion of Ireland’s €11bn turnover in the non-profit sector. Philanthropists need evidence of need and potential impact if their donations are to be well informed; the public needs to witness and approve of the effects of philanthropy if philanthropy is to be recognised as creating social goods; policymakers need tangible evidence to support decision-making including tax regulation.
Recognising the growing coalition of interest in measuring philanthropy and the lack of any Irish equivalent to the annual surveys produced overseas, this paper sets out to close the knowledge gap by identifying the factors necessary to make Irish philanthropy more transparent and better understood.
Supported by Benefacts, a leading non-profit research body in Ireland, the researchers aim to conduct a multi-annual research project 2018–21 to set out for the first time an agreed definition of ‘philanthropy’ in the Irish context and to provide a comparative basis for the study of Irish philanthropy by third party researchers. This paper is the first step towards facilitating valid international philanthropic comparisons between Ireland and other similar countries. Identifying the available data sources on, and gaps in knowledge about, philanthropy in Ireland, focusing specifically on gifts and receipts, it assesses the discernible trends in philanthropic giving in Ireland.
Kathryn Chan (University of Victoria) has posted Constitutionalizing the Registered Charity Regime: Reflections on Canada Without Poverty v. Canada (AG), Canadian Journal of Comparative and Contemporary Law (forthcoming 2020). Here is the abstract:
In Canada Without Poverty v Canada (AG), the Ontario Superior Court of Justice struck down provisions of the federal Income Tax Act that limited the political activities of charitable organizations, on the ground that the provisions violated the freedom of expression of the registered charity before the court. This paper addresses the decision's complex legacy, reflecting on the promise and the perils of charity law’s increasing encounters with public law. I address some of the difficult questions raised by the decision: (1) What types of associations are rights-holders under the Canadian Charter of Rights and Freedoms? (2) What are the constitutional limitations on the government’s ability to set the outer bounds of the registered charity regime? (3) What is the rationale for limiting the political advocacy of charities? While Canada Without Poverty has generated significant improvements to the registered charity regime, I argue, the Ontario Superior Court of Justice missed an important opportunity to draw constitutional law and charity law into closer conversation.
Dupuy & Prakash, Why Restrictive NGO Foreign Funding Laws Reduce Voter Turnout in Africa’s National Elections
Kendra Dupuy (Chr. Michelsen Institute) and Aseem Prakash (University of Washington) have published Why Restrictive NGO Foreign Funding Laws Reduce Voter Turnout in Africa’s National Elections in the Nonprofit and Voluntary Sector Quarterly. Here is the abstract:
Laws that restrict foreign funding to nongovernmental organizations (NGOs) can depress voting through two mechanisms. First, they can signal a democracy recession. Consequently, citizens might fear rigged elections where their vote will not influence who forms the next government. Second, by denying funding to NGOs, these laws can undermine NGOs’ ability to generate social capital, which is crucial to mitigate collective action problems associated with voting. Since 1990, 13 of Africa’s 54 states have enacted laws restricting foreign funding for NGOs. Drawing on the 2016 Afrobarometer survey (36 countries, 53,936 respondents), we find support for the argument that restrictive NGO laws reduce citizens’ electoral participation in national elections probably by signaling democracy recession, and not by undermining social capital that foreign-funded NGOs are supposed to generate. In fully democratic countries, respondents are around 94% more likely to report having voted in a recent national election even after controlling for restrictive NGO laws.
Yu et al., Understanding the Effect of Central Government Funding on the Service and Advocacy Roles of Nonprofit Organizations in China
Jianxing Yu (Zhejiang University), Yongdong Shen (Zhejiang University), and Yong Li (Tsinghua University) have published Understanding the Effect of Central Government Funding on the Service and Advocacy Roles of Nonprofit Organizations in China: A Cross-Regional Comparison, inthe Nonprofit and Voluntary Sector Quarterly. Here is the abstract:
This research examines the effects of government funding on the service and advocacy roles of nonprofit organizations in China through a cross-regional comparison. Based on a nationwide survey of 2,058 nonprofits and in-depth interviews with 65 nonprofit executives from the same sample in 2013–2017, we find that a higher level of central government funding leads to stronger organizational capacity for service provision through leveraging matching funds and to more intensive administrative advocacy and media advocacy. Furthermore, a cross-regional comparison shows that, in contrast to those in nonwestern regions, nonprofit organizations with higher levels of central government funding in the western region engage in more administrative advocacy but less in media advocacy. Taken together, these findings highlight the importance of the government’s leverage strategy and selective empowerment in shaping nonprofits’ service and advocacy roles through government funding in China.
The Nonprofit Policy Forum published a Special Issue on INGO Governance and Public Policy: Implications of the Oxfam Scandal. From the Editor's Note for the issue:
This special issue of Nonprofit Policy Forum contains a set of papers derived from a roundtable panel discussion at the 2018 ARNOVA annual conference, organized by special editor Aseem Prakash and his colleagues, to examine the recent Oxfam sexual exploitation scandal and its implications for governance of international NGOs, nonprofit theory and public policy. Prof. Prakash’s insightful introductory essay opens the issue by providing background on the scandal itself, the organizational and historical context in which it, and other NGO scandals, have occurred, and the questions that these events raise for policy, practice, nonprofit theory and future research. No need to summarize that content on this page, as Prof. Prakash’s essay provides a well-crafted yet compact overview of the symposium papers.
Lauren Rogal (Vanderbilt University) has published Executive Compensation in the Charitable Sector: Beyond the Tax Cuts and Jobs Act, 50 Seton Hall Law Review 449 (2019). Here is the abstract:
This Article examines charity executive compensation in light of the reforms enacted by the Tax Cuts and Jobs Act of 2017. Charities receive preferential tax treatment under Section 501(c)(3) of the Internal Revenue Code because they provide humanitarian, educational, and other services that benefit the public. The payment of excessive compensation undermines the policy purpose of charitable tax status by diverting resources from the public good to private gain. The costs are borne by the intended charitable beneficiaries, the subsidizing taxpayers, and the charitable sector as a whole, which requires public confidence to sustain its work.
The Tax Cuts and Jobs Act reformed charity compensation laws for the first time in decades, imposing an excise tax on compensation over $1 million. With its enactment, there are now three legal constraints on charity compensation that together provide piecemeal accountability. This Article deconstructs the three mechanisms, assessing their enforceability and metrics for appropriate compensation. It argues that the excise tax is the mechanism best tailored to the goals of Section 501(c)(3), but that it is impaired by a blunt and arbitrary metric. This Article then explores alternative metrics that may better align with the policy objectives of 501(c)(3) status and proposes avenues for further investigation.
The HistPhil blog has a series of in-depth posts reflecting on the Tax Reform Act of 1969 and its effects on tax-exempt nonprofit organizations and more broadly. Here are the titles and authors:
Karen Ferguson (Simon Fraser University), Parallel Confrontations: The Ford Foundation And the Limits of Racial Liberalism, 1968 And 2019
Ellen Aprill (Loyola-Los Angeles), Penalty or Tax: Reconsidering The Constitutionality Of The Private Foundation Excise Taxes
Lila Corwin Berman (Temple University), The Private Charity Lacunae: The Tax Reform Act Of 1969 And The Rise Of Donor-Advised Funds
James Fishman (Pace University), The Private Foundation Rules At Fifty: How Did We Get There?
Stories are starting to hit the mainstream media about the controversy brewing over ownership of the .org domain that is home to the websites of many nonprofit organizations. An opinion piece in the N.Y. Times (The Shaky Future of .org Domains) came in the wake of an ABC News story (Coalition of NGOs battling private equity firm trying to buy ".org" domain). I do not claim to understand all of the nuances here, but the main concern appears to be that not only has a private equity firm agreed to buy the domain (from the Internet Society), but the Internet Corporation of Assigned Names and Numbers (ICANN) has removed any price caps on what that firm can charge nonprofits to maintain their .org websites. See this National Council on Nonprofits article. The National Association of State Charity Officials (NASCO) has also expressed concern. The current state of play is that ICANN is still considering whether to approve the sale, but has agreed to make a decision by February 17th. (The agreement refers to the Public Interest Registry, which is apparently the technical name for the .org domain.) For a response from the firm proposing to purchase the domain, see here.
Less controversially, the Nonprofit Organizations Committee of the ABA's Business Law Section has made available for comment an exposure draft of the next, 4th edition of the Model Nonprofit Corporation Act. The timing for preparation of this new edition is curious, given there has not been a lot of state interest in adopting the 2008 3rd edition (last I checked only DC had done so). I have not had a chance to review the draft, so I do not know how significantly it departs from previous editions. Here is a list of the Task Force members who are working on the new edition: Chair Lawrence J. Beaser (BlankRome), Reporter William H. Clark, Jr. (Faegre Drinker), Associate Reporter Matthew H. Gaul (Carmody Torrance Sandak Hennessey), Willard L. Boyd III (Nyemaster Goode), William M. Klimon (Caplin & Drysdale), Kimberly Lowe (Avisen Legal), Lisa A. Runquist (Lisa A. Runquist, Attorney-at-Law), and Myron Steeves (Church Law Center).
There has recently been an eclectic set of stories about churches and their federal tax status. In its January/February 2020 issue, Christianity Today's cover story was The Hidden Cost of Tax Exemption (subscription required) with the sub-title "Churches may someday lose their tax-exempt status. Would that be as bad as it sounds?" The story concludes:
It might not be such a bad thing to lose tax-exempt status. We should consider, at the very least, the cost of maintaining this kind of cultural privilege. The true church of God, after all, is not reliant on its special status in the tax code. We can walk by faith and not by government largess.
At the other end of the spectrum, the Washington Post had a recent story titled Major evangelical nonprofits are trying a new strategy with the IRS that allows them to hide their salaries. The story cited several religious organizations, including the Billy Graham Evangelistic Association and Focus on Family, that had successful sought church status from the IRS. The implication of the story was that they sought this status not for the tax benefits (which they already enjoyed) but for the ability to hide financial details, and particularly salary information, from government and public scrutiny because of the church exemption from filing the Form 990 series annual information returns. The religious charity rating organization MinistryWatch has also been critical of this trend.
Relatedly, the U.S. District Court for the District of Columbia has now released its reasons for dismissing the lawsuit brought by a section 501(c)(3) organization associated with the Freedom from Religion Foundation that challenged the church exemption from Form 990 filings. Perhaps not surprisingly, the court found standing to be a problem (citations omitted):
NonBelief Relief alleges in its proposed amended complaint that “[t]he Defendant’s unequal treatment of the Plaintiff is ongoing and will continue as long as churches continue to be exempted from the information filing requirements of § 6033.” The Court disagrees. The injury it alleges occurred when it had to file a Form 990, a requirement from which churches and religious organizations are exempt. But as discussed above, this alleged unequal treatment is not ongoing or imminent because NonBelief Relief faces no current or future prospect of having to fill out a Form 990. See And while it is true that the loss of its tax-exempt status is, in a sense, ongoing, NonBelief Relief has not based its standing argument on that loss, and for good reason. The relief it seeks—a declaration that the church exemption is unlawful and an injunction prohibiting the Commissioner from enforcing it—will not redress that loss. And as explained above, in any event, the Anti-Injunction Act and Declaratory Judgment Act deprive the Court of jurisdiction to reinstate NonBelief Relief’s tax-exempt status.
The Freedom from Religion Foundation has promised to continue challenging the church exemption from Form 990 filing, presumably by having NonBelief Relief pay some taxes, file a claim for refund, and then going to court when the IRS refuses to grant that claim (an option described by the court in its decision).
Finally, there is some interesting pressure on classification as a church from a different. non-tax direction. The N.Y. Times had a story late last year titled Inside the War for California's Cannabis Churches (hat tip: TaxProf Blog). The story highlights the emerging conflict between such churches and California authorities seeking to enforce the various rules regulating marijuana dispensaries in that state. The key issue is whether enforcement of those rules discriminates on the basis of religion, assuming that the members of these churches can demonstrate that they beliefs relating to use of marijuana are sincerely held.
The initial results of the 2019 NACUBO-TIAA Study of Endowments, released late last month, reported that the 774 U.S. colleges, universities, and affiliated foundations reporting had an average annual endowment return of 5.3% (net of fees) from July 1, 2018 through June 30, 2019. This was a decline from the previous fiscal year's 8.2% average. Here is more information from the press release announcing the results:
Data gathered from 774 U.S. colleges, universities, and affiliated foundations for the 2019 NACUBO-TIAA Study of Endowments® (NTSE) show that participating institutions’ endowments returned an average of 5.3 percent (net of fees) for the 2019 fiscal year (July 1, 2018 – June 30, 2019).
Despite posting a lower return than FY18’s one-year average of 8.2 percent, the average 10-year endowment return reached 8.4 percent, surpassing institutions’ long-term average return objective of 7 percent for the first time in a decade. This reflects the strong stock market recovery since the 2008 financial crisis as well as solid management practices.
Due in part to strong 10-year returns, three quarters of institutions increased spending from their endowments to support students and faculty, with an average increase of more than $2 million. Participating institutions put 49 percent of their endowment spending dollars to student financial aid, 17 percent to academic programs, 11 percent to faculty, and 7 percent to campus facilities.
“The jump in spending from endowments last year shows once again the value of college and university endowments in supporting students and their access to a high-quality education,” said NACUBO President and CEO Susan Whealler Johnston. “These endowments help make opportunity available to college and university students and ensure the strength of academic programs that prepare them for work and life.”
“Endowments continue to play a significant role in institutions’ operations and financial strength, making it essential to take advantage of a wide range of investment options and strategies,” said Kevin O’Leary, Chief Executive Officer of TIAA Endowment and Philanthropic Services. “Endowment asset allocations and returns varied across different size endowment cohorts. Considering larger endowments generally have greater access to certain asset classes, such as private equity and venture capital, which were some of the highest performing asset classes in FY19, they again outperformed their smaller cohorts.”
One current hot topic with respect to higher education endowments is whether institutions should divest from fossil fuel holdings. C.J. Ryan (Roger Williams University School of Law) and Christopher Marsicano (Davidson College) have posted Examining the Impact of Divestment from Fossil Fuels on University Endowments. Here is the abstract:
Between 2011 and 2018, 35 American universities and colleges divested, either partially or completely, their endowments from fossil-fuel holdings, marking a shift toward sustainability in university endowment investment. However, the decision by these universities to divest was often marred by controversy, owing to conflicts between student- and faculty-led coalitions and the university board. Principally, endowment fiduciaries are averse to divestment decisions because they think that it will hurt the endowment's value, but this concern, motivated by a narrow interpretation of fiduciary law, can be empirically examined.
To date, the academic study of the effect of divestment on endowment values has focused on the top university endowments and has produced mixed results. Our study is different from the extant but limited literature in this area in that we examine holistically the impact of total or partial divestment on endowment values for all universities as well as a select group of institutions that are illustrative of their peers by endowment size. More importantly, we evaluate the assumption that divestment does injury endowment values through legal and empirical lenses.
Results from our difference-in-differences analyses of the effect of full and partial divestment suggest that either form of divestment does not yield discernible consequences--either positive or negative--for endowment values, at statistically significant levels. However, we do find evidence that divestment improved the value for three of four universities that we examined through synthetic control analysis, with the greatest increase in value at a university with a very large endowment (Stanford University) and modest increases at two universities with mid-sized and large endowments, respectively (University of Dayton and Syracuse University). Thus, the negative consequences of divestment may be overstated in the near-term. This challenges the assumption that divestment yields negative returns to endowments and cracks open the door for endowment fiduciaries to divest without violating duties of loyalty and prudence. We hope that this study both grounds and advances the debate about endowment divestment with empirical evidence and a reasoned discussion of its costs and benefits.
Speakers List For Today's Hearing on Eliminating Schedule B Identification of Donors for Non-Charitable 501(c)s
Today is the public hearing on the proposed regulations (REG-102508-16) that would eliminate the requirement that non-charitable section 501(c) organizations provide certain identifying information annually to the IRS on Schedule B to the Form 990/990-EZ for significant donors. The hearing is scheduled to be held in the IRS Auditorium at 1111 Constitution Avenue NW in DC, starting at 10:00 a.m. The second link provided above is to the regulations.gov website that includes not only the text of the proposed regulations but also all of the 8,387 comments received to date on them. Finally, here is the list of speakers from the agenda for the hearing:
- Noah Wall, Freedom Works Inc.
- Allen Dickerson, Institute for Free Speech
- Hans A. von Spakovsky, The Heritage Foundation
- Jenny Beth Martin, Tea Party Patriots Action
- James Bopp, Jr., James Madison Center for Free Speech
- Ryan Mulvey, Americans for Prosperity
- Carol Platt Liebau, Yankee Institute for Public Policy
- Catherine Suvari, State of New York Office of the Attorney General
- Brendan Fischer, Campaign Legal Center
- Scott Walter, Capital Research Center
- Eric Peterson, Pelican Institute for Public Policy
- Ann Stillman, Church Alliance
- G. Daniel Miller, Conner & Winters, LLP
- Mark Brnovich, Office of the Arizona Attorney General
- Ashley Varner, Freedom Foundation
- Robert Alt The Buckeye Institute
Thursday, February 6, 2020
The Urban-Brookings Tax Policy Center and the American Tax Policy Center are jointly sponsoring a conference next week that features a great line-up of speakers to discuss taxes and the future of philanthropy. If you are unable to attend in person, it will be available as a webcast both live and afterwards. Here is the full agenda:
9:30 a.m. Welcome and Introduction
- Ellen P. Aprill, Professor of Law and John E. Anderson Chair in Tax Law, Loyola Law School, Loyola Marymount Universityl; Vice President, American Tax Policy Institute
- Mark J. Mazur, Robert C. Pozen Director, Urban-Brookings Tax Policy Center
9:35 a.m. Oversight of Nonprofits
- Karin Kunstler Goldman, Deputy Bureau Chief, Charities Bureau, Office of the New York Attorney General
- Nina Olson, Executive Director, Center for Taxpayer Rights
- Marcus S. Owens, Partner, Loeb & Loeb LLP
- H. Art Taylor, President and CEO, BBB Wise Giving Alliance
- Elizabeth Young, Senior Manager, American Institute of Certified Public Accountants (moderator)
11:00 a.m. Impact of the TCJA on Nonprofits
- Joseph J. Cordes, Professor of Economics, Public Policy and Public Administration, and International Affairs, and Codirector, Regulatory Studies Center, George Washington University
- Catherine E. Livingston, Partner, Jones Day
- Ruth M. Madrigal, Principal, KPMG
- Alexander L. Reid, Partner, Morgan Lewis
- Ellen P. Aprill, Professor of Law and John E. Anderson Chair in Tax Law, Loyola Law School, Loyola Marymount University; Vice President, American Tax Policy Institute (moderator)
12:15 p.m. Lunch
12:30 p.m. “Trust in Nonprofits and Philanthropy: Why It’s Eroding and What’s Next”
- Stacy Palmer, Editor, Chronicle of Philanthropy
1:15 p.m. The Future of Charitable Giving
- Hillary Bounds, Vice President of Legal, Chan Zuckerberg Initiative
- Roger Colinvaux, Director, Law and Public Policy Program, and Professor of Law, Columbus School of Law, Catholic University of America
- Jill R. Horwitz, Vice Dean for Faculty and Intellectual Life and Professor of Law, University of California, Los Angeles, School of Law
- C. Eugene Steuerle, Institute Fellow, Urban-Brookings Tax Policy Center
- Laura Tomasko, Policy Program Manager, Urban Institute (moderator)
2:30 p.m. Event Concludes
Giving Issues: Recent Trends, More Bad Publicity for DAFs, and Greater Transparency for the PayPal Charitable Gift Fund
Starting with giving trends, in a lengthy Nonprofit Quarterly article Patrick Rooney (IUPUI Lilly School of Philanthropy) documents in great detail "the continued decline of the small donor and the growth of megadonors," with the former trend possibly accelerating because of the 2017 federal tax changes. That said, the effects of these trends likely will not affect all charities equally - a CNBC report indicates that while the largest, well-known organizations are still seeing increasing giving, many smaller, local charities are facing giving declines even in the midst of a a growing economy. And according to a study by Wealth-X, younger "ultrawealthy" donors tend to focus on one or two causes, which may further skew changes in giving levels. That said, a report from Cygnus Applied Research (executive summary requires free registration; full report must be purchased) found that most donors planned to maintain their giving amount in 2019 as compared to 2018, with 29% planning to give more and only 10% planning to give less.
The Rooney article includes a section on donor advised funds, finding that they are both continuing to grow significantly and "remain largely the realm of large donors." That growth is despite continuing bad publicity for DAFs, including news stories that both Google's Larry Page (through $400 million in grants from the Carl Victor Page Memorial Foundation) and Facebook's Sheryl Sandberg ($230 million in Facebook stock) had used giving to DAFs to, respectively, satisfy the private foundation payout rate and (presumably) generate substantial charitable contribution deductions without having to transfer funds to actual operating charities. To be fair, the funds may have eventually ended up at operating charities; there is just no way to know for sure. At the same time, the Chronicle of Philanthropy reports (subscription required) almost half of nonprofits surveyed said that DAFs hamper their ability to build relationships with donors. But there is not a complete lack of regulation of DAFs, as Tax Notes reports (subscription required) that the National Outreach Foundation has been forced to go to court to challenge the IRS' revocation of its tax-exempt status for allegedly using its role as a DAF sponsor to facilitate a tax avoidance scheme similar to one flagged by the IRS in Notice 2004-30.
Finally, the NonProfit Times reports that last month nearly two dozen states and the District of Columbia settled a dispute with the PayPal Charitable Gift Fund, Inc., the charitable arm of PayPal. According to a press release from the New York Attorney General (which also provides a link to the actual agreement), the Fund agreed to make sure donors know they are giving to the Fund, the timeframe for the selected ultimate charitable recipient to receive the donated funds, the difference between "enrolled" and "unenrolled" charities on the platform, and whether the donor's gift has been diverted to a different charity than the one the donor designated. The Fund also agreed to pay $200,000 to the National Association of Attorneys General, to be used to defray investigation and litigation costs relating to charities and to provide training and education for charity regulators.
Even though President Trump appears to have finally settled the legal issues arising out of his private foundation with the payment of the $2 million in damages owed late last year, other charity-related issues have arisen for organizations and individuals associated with him. These include renewed allegations that one of the President's impeachment lawyers and his family improperly benefitted from a network of charities to the tune of $65 million, a lawsuit by the District of Columbia Attorney General against the section 501(c)(4) 58th Presidential Inaugural Committee and for-profit entities owned by Mr. Trump and his family for alleged private inurement, reports that a section 501(c)(3) charity is giving away amounts totaling tens of thousands of dollars to hoped-for African American Trump supporters, which may not be a charitable activity, and a megachurch hosting a Trump political rally, raising questions about whether doing so violated the section 501(c)(3) prohibition on political campaign intervention.
But President Trump and those around him are far from the only political actors to engage in allegedly questionable behavior when it comes to charities, as Jack Siegel documented more than 10 years ago in The Wild, The Innocent, and the K Street Shuffle: The Tax System's Role in Policing Interactions Between Charities and Politicians (subscription required). Here is an undoubtedly incomplete list of such stories from across the political spectrum:
- As Florida House Starts Investigating Domestic Violence Nonprofit, Exec Has No Answers (Miami Herald): This investigation grew out of earlier reports questioning the high compensation paid to the CEO of this politically connected charity, which state law requires be contracted with by the Florida Department of Children and Families.
- Lawmaker Accused of Theft From Charity Announces Resignation (U.S. News/AP): A Pennsylvania state representative stepped down in the wake of the state Attorney General filing criminal charges against her, alleging that she stole more than $500,000 from a charity she operated.
- Minnesota Attorney General's Suit Accuses Former Ramsey County Commissioner of Mismanaging Charity's Funds (Star Tribune): The lawsuit alleges that the former Commissioner and others at a now-defunct veterans charity had mismanaged government funds, including through engaging in self-interested, related party transactions.
- Sloppy Accounting, Funding Debts: A Look at Maya Rockeymoore Cummings's Charity (Washington Post): This story documents a close financial relationship between a charity run by the widow of Elijah Cummings (and now candidate for his congressional seat) and her for-profit consulting firm, a relationship that was apparently not fully reported on the charity's IRS returns.
- State AG Probes Lawmakers' Charity Over Failed Minority Student Scholarships (N.Y. Post): The New York Attorney General's office has reportedly launched an investigation into whether a charity associated with a number of state lawmakers failed to pursue its stated mission of providing scholarships to needy minority students, instead focusing on events for its lawmaker members and other activities.
Wednesday, February 5, 2020
One almost certainly unintended casualty of the cap on state and local tax (SALT) deductions contained in the 2017 tax reform legislation were the numerous pre-existing state and local tax credit programs designed to favor a number of initiatives, but primarily school choice efforts (as identified in this paper). While Treasury and the IRS have taken certain steps to limit the impact of the cap on these programs, as detailed in the background and explanation of the most recent set of proposed regulations implementing the cap, the relief provided has been far from complete.
Which brings us to last night's State of the Union address. In it, President Trump touted a proposal long-supported by Education Secretary Betsy DeVos: establishing a program to allow states to provide federal tax credits to individuals and businesses that contribute to K-12 scholarship organizations. (See U.S. News coverage.) As proposed in the Education Freedom Scholarships and Opportunity Act, donations to state-identified scholarship-granting section 501(c)(3) organizations that satisfy certain requirements would give the donor a federal tax credit equal to the amount of their donation, up to 10% of their adjusted gross income for individuals and up to 5% of taxable income for corporations.
While the chance of Congress enacting this proposal during the current session, especially given the Democratic control of the House, is almost certainly negligible, the high profile support of this measure appears to be at least in part an attempt to mollify the school-choice supporters who were blindsided by the effect of the SALT cap. And of course a future Congress could enact a tax credit along these lines.
Electronic Filing for Applications and Returns Moves Forward, Even as More Form 1023-EZ Issues Emerge
The IRS Exempt Organizations division is rapidly moving into the digital age when it comes to required filings. First, in mid-December the IRS provided details on how it will implement the new congressional requirement that annual information returns and related forms be filed electronically for tax years beginning after July 1, 2019. However and as allowed by Congress, the IRS decided to postpone this requirement for Form 990-EZ filers until tax years ending July 31, 2021 or later. It also will delay until 2021 electronic filing for certain other forms that are not yet available in electronic format, including Form 990-T (for reporting unrelated business taxable income) and Form 4720 (for reporting certain excise taxes).
Second, the IRS has issued guidance on its new requirement that the Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) also be filed electronically. In Revenue Procedure 2020-8 it made clear that electronic submission is the exclusive means of submitting this form after January 31, 2020, except for submissions eligible for a 90-day transition relief period, as well as modifying other aspects of the application process to reflect the electronic filing requirement. The IRS also issued a news release summarizing the changes made by the Revenue Procedure.
But at the same time as the IRS was moving forward with electronic filing, the Acting National Taxpayer Advocate included in her Annual Report to Congress a highly critical Study of the Extent to Which the IRS Continues to Erroneously Approve Form 1023-EZ Applications. Here are the Study's key findings:
In 2015, 2016, and 2017, TAS studied representative samples of articles of incorporation for corporations from 20 states that make articles of incorporation viewable online at no cost and whose Form 1023-EZ had been approved by the IRS during the preceding year. The studies found that between 26 percent and 42 percent of the time, the approved organizations did not meet the organizational test and thus did not qualify for the exempt status the IRS had conferred. In 2019, TAS repeated the study and found that 46 percent of the approved organizations did not qualify for IRC § 501(c)(3) status.
The 2019 study also found that some states provide form, or template, articles of incorporation. Depending on the template, corporations that use the template are virtually guaranteed to meet, or fail to meet, the organizational test. A review of other information that applicants provide on Form 1023-EZ, such as their websites, may provide useful insight about whether the organization qualifies for exempt status.
Form 1023-EZ was revised in 2018 to require applicants to provide a description (in 255 characters or less) of their mission or most significant activities. However, according to IRS procedures, the described mission or activities need only be “within the scope of IRC § 501(c)(3)” to be deemed sufficient. According to the 2019 study results, the IRS made erroneous determinations more frequently after it added the description field.
Another week and another IRS victory in a conservation easement deduction dispute. This week the losing taxpayers were the individuals in Carter v. Commissioner, T.C. Memo. 2020-21. A partnership donated an easement but retained certain rights as to specific parts of the covered property that were inconsistent with the easement's conservation purposes, causing the individual taxpayers who owned the partnership to lose their claimed deductions, which in the aggregate were in the millions of dollars. (The IRS' attempt to impose penalties failed because of a procedural error, however.)
UPDATE: And on Wednesday, the IRS won another conservation easement in Tax Court. In Railroad Holdings, LLC v Commissioner, T.C. Memo 2020-22, the court found that an extinguishment provision failed to ensure that the easement was protected in perpetuity and so the claimed $16 million charitable contribution deduction failed.
This decision came in the wake of an IRS news release late last year that touted the agency's successful challenge of a syndicated conservation easement transaction in TOT Property Holdings, LLC v. Commissioner (U.S. Tax Court, Dec. 13, 2019). In the news release, the IRS "urged taxpayers involved in designated syndicated conservation easement arrangements to consult with their tax advisors following a recent U.S. Tax Court decision and agency plans to continue enforcement efforts in this area."
Yet all may not be as rosy for the IRS as it appears. Last month ProPublica published an article focusing on syndicated conservation easements titled The IRS Tried to Crack Down on Rich People Using an "Abusive" Tax Deduction. It Hasn't Gone So Well. According to the article, the DOJ, IRS, and congressional crackdown on these vehicles "seems to be having, at best, a limited effect." It noted that IRS Commissioner Chuck Rettig testified last April that the deals had not declined. It also reported that there are now three IRS divisions engaged in coordinated examinations relating to 125 identified "high-risk cases" and more than 80 Tax Court cases pending. In addition, the article cited evidence that large-scale deals were still in process as recently as last fall. It therefore remains to be seen whether the IRS' continuing war against improper deductions relating to conservation easements, whether syndicated or otherwise, will in fact be won.