Nonprofit Law Prof Blog

Congress proposes potential expansion to charitable deduction for taxpayers

A bill introduced on the floor of Congress June 22^nd is attracting bipartisan approval and could signal a significant change in how taxpayers choose to do their deductions this year. The Universal Pandemic Response Act, proposed by republican senator James Lankford of Oklahoma, would increase the limit for above-the-line charitable deductions to one third of the standard deduction. Breaking the matter down to hard numbers, this piece of legislation would increase the charitable deduction from $300 to $4,133 for individual taxpayers and $8,267 for taxpayers filing jointly. This proposal would be a significant expansion on what has traditionally been a relatively small available deduction for taxpayers: perhaps cognizant of this, the law is set to have a short lifespan and would only extend to the end of this tax year, though it will also allow for amended 2019 tax returns with contributions made before July 15^th. Though the bill originated from the right side of the Senate, the bill has gained bipartisan support as democratic senator Chris Coons of Delaware allied with senator Lankford to rally both political parties to pass the bill. With the global financial turmoil which has followed in the wake of the COVID epidemic Americans nonprofits stand to suffer as much as, if not more than, their for-profit counterparts. Perhaps the passage of this proposed legislation will incentivize American taxpayers to lend some more support to nonprofit organizations during this time of crisis.

To view the proposed law, see the following official link from Congress: https://www.congress.gov/bill/116th-congress/senate-bill/4032

By David A. Brennen, Professor of Law at the University of Kentucky  

The future of filing for nonprofits

In a tumultuous summer that saw the temporary closing down of the Internal Revenue Service, it is worthwhile to revisit important tax legislation from the prior summer in a time before the COVID epidemic turned the world upside down: namely the Taxpayer First Act. With the passage of this law, entities wishing to file tax exemption forms 990 and 8872 will soon be required to file those forms electronically, rather than on paper as has been historically accepted. While a number of measures have been put into place which will delay the enforceability of this act for nonprofits with asset values beneath certain totals, this law marks a noteworthy shift in tax-exempt organizations’ visibility to the public at large.

The reason for this lies in the fact that the act will require the IRS to make all electronically filed returns from tax-exempt organizations available to the public in the near (yet unspecified) future. With all returns now being electronic, persons wishing to investigate nonprofits will no longer have to endure the unwieldy process of submitting written requests to the IRS, which will in turn significantly speed up how rapidly the desired information can be accessed. Given the recent scandal of the New York Attorney General seeking to dissolve the National Rifle Association over allegations of extreme levels of fraud and misuse of organizational funds, it may well be a good idea to implement a law that will serve to make the financial status of nonprofit organizations increasingly transparent to their members as well as taxpayers at large.

For information regarding the act, see the following link on the IRS’ website: https://www.irs.gov/taxpayer-first-act#:~:text=Generally%2C%20the%20legislation%20aims%20to,and%20enhance%20its%20cyber%20security.

By David A. Brennen, Professor of Law at the University of Kentucky

11th Circuit signals strong support for nonprofit housing developers this summer

The 11^th Circuit recently ruled on a case which might prove relevant on a far larger scale. On July 7^th this summer, Judge William Thomas held that the Opa-Locka Community Development Corporation’s (Opa-Locka) right of first refusal could be exercised against the attempted sale of Aswan Village, an affordable housing project that Opa-Locka financed as a nonprofit corporation. The controversy of the case revolved primarily around whether an affiliate of HallKeen Management, the owner of Aswan Village, triggered Opa-Locka’s right of first refusal and thus had to allow Opa-Locka to purchase the housing project at well-below fair market value by sending a letter to Opa-Locka indicating their intent to sell Aswan Village to a third party. Under IRC 42(i)(7) of the United States Code, a qualified nonprofit corporation such as Opa-Locka can automatically insert itself into the sale of an affordable housing project ahead of other interested buyers. The 11^th Circuit held that, absent more specific language in Opa-Locka’s contract containing its right of first refusal for Aswan Village, HallKeen’s indication of its intent to sell via a letter was sufficient to trigger Opa-Locka’s right of first refusal.

The immediate case is interwoven into a far broader national tapestry: demand for affordable housing options is high, and the availability of that housing could come under threat as for-profit companies seek to capitalize on market values for these areas which have risen steadily higher. Whether the 11^th Circuit’s stance strongly favoring nonprofit corporations’ defense of these low or fixed income housing areas will stand remains to be seen, as the firm representing HallKeen filed a motion in Miami-Dade circuit court at the end of July to have the order set aside.

For information on the case and its potential broader implications, see: https://www.prnewswire.com/news-releases/local-court-win-is-a-victory-for-affordable-housing-communities-nationwide-301091845.html

 

By David A. Brennen, Professor of Law at the University of Kentucky 

NRA comes under fire from New York attorney general

On August 6^th, New York attorney general Letitia James filed suit to dissolve the National Rifle Association, a powerful nonprofit quartered in New York. A 501(c)(4) tax-exempt organization, the NRA has stood for the protection of American second amendment rights since 1871: today, its leadership stands accused of seriously abusing organizational coffers and fraudulently concealing their actions. Attorney general James alleges in her complaint that the NRA at large instituted a culture of backroom dealing and illegal behavior which has resulted in the complete waste of millions of dollars in assets. As a tax-exempt charitable corporation, the NRA is required to use its resources to serve its members’ interests and advance its mission. James further asserts that the NRA’s internal policing mechanisms and boards routinely failed to put a stop to this illegal behavior, which is part of the reason why the attorney general now calls for complete dissolution of the organization.

            In addition to attacking the organization at large, attorney general James lists in her complaint four individuals in the NRA’s leadership: the organization’s executive vice president, former treasurer/CFO, former chief of staff, and general counsel. James’ complaint includes an impressive amount of evidence indicating that these men channeled colossal sums of NRA resources into lavishing benefits on themselves and those closest to them. If successful, the attorney general’s suit will serve as a powerful reminder that no nonprofit organization, no matter how venerable its history may be, is above the fiduciary duties it owes to its members or its reporting duties to federal and state governments alike.

 

By David A. Brennen, Professor of Law at the University of Kentucky

 

For the attorney general's press release see:

https://ag.ny.gov/press-release/2020/attorney-general-james-files-lawsuit-dissolve-nra

 

Potential reprieve for highly paid for-profit employees volunteering with nonprofits

The IRS hinted in June at further modifying an excise tax on highly-compensated employees of for-profit companies who also volunteer a portion of their time for nonprofit organizations. Section 4960, added to the Code in late 2017, imposed a significant tax on excess compensation to the five highest-paid officers of a nonprofit organization. Interpretation of this statute became the subject of debate in 2019 with the IRS’ release of 2019-04 I.R.B. 403 - a guidance on how to calculate taxes or liability under §4960. In that guidance, the IRS stated that the for-profit business employing an executive officer who also volunteers with or works for a tax-exempt business could be liable for the excise tax if the for-profit and tax-exempt businesses were deemed “related.” Following concerns voiced by commenters, the IRS proposed on June 11^th of this year a possible exception to the definition of the five highest-paid employees of a tax-exempt organization.  The §4960 exception applies if someone working with a tax-exempt organization works a number of hours no more than 10% of their total hours worked with related organizations that year and isn’t paid for their work with the tax-exempt organization. It appears that the IRS heeded industry concerns.  Indeed, if for-profit companies don’t fear being held liable for an unexpected excise tax, then those for-profit companies will be more likely to allow their highly compensated employees’ dedicate spare time lending their valuable skills to tax-exempt organizations.

 

For the IRS' published proposal regarding this rule, see: https://www.federalregister.gov/documents/2020/06/11/2020-11859/tax-on-excess-tax-exempt-organization-executive-compensation

 

By David A. Brennen, Professor of Law at the University of Kentucky

Philip Hackney, The 1969 Tax Reform Act and Charities: Fifty Years Later

I posted a new article on SSRN today that will be published in the Pitt Tax Review soon. This is an introduction to the symposium Pitt Law hosted back in November 2019 before the Covidian times on the 1969 Tax Act and Charities. I will post the link to the issue as soon as it goes live. It includes contributions from Ellen Aprill, Jim Fishman, Dana Brakman Reiser, Ray Madoff, and Khrista McCarden.

"Fifty years ago, Congress enacted the Tax Reform Act of 1969 to regulate charitable activity of the rich. Congress constricted the influence of the wealthy on private foundations and hindered the abuse of dollars put into charitable solution through income tax rules. Concerned that the likes of the Mellons, the Rockefellers, and the Fords were putting substantial wealth into foundations for huge tax breaks while continuing to control those funds for their own private ends, Congress revamped the tax rules to force charitable foundations created and controlled by the wealthy to pay out charitable dollars annually and avoid self-dealing. Today, with concerns of similar misuse of philanthropic institutions to further wealthy interests, it is worthwhile to reconsider this significant legislation fifty years later.

Natural questions arise. What was the goal of Congress with respect to charity and with respect to tax? Did it accomplish these goals? Are those goals still relevant? What goals might suggest themselves today? Do we have the ability to modify the law to support those new goals? On November 1, 2019, the Pittsburgh Tax Review hosted a symposium to examine the 1969 Tax Act."

The conclusion is kind of the kicker:

"As I reflect on this symposium that took place in 2019 before the origination of COVID-19 and the racial justice revolution ignited by the killing of Mr. George Floyd in Minneapolis, I think about the great potential of well-democratically-harnessed philanthropy and seriously doubt that can be accomplished within the space of “private” philanthropy. I lean strongly
towards eliminating tax benefits for this private “philanthropy” by denying tax exempt status to those organizations that are not public charities.

Why do I say this? Fundamentally, I believe the effort of philanthropy should not be publicly supported if it is not collectively determined. To me, Professor McCarden makes the beginnings of a persuasive case that the values inculcated and supported through the private foundation system are likely predominately exclusive ones rather than public ones. I think that lack of a public nature should matter. Oddly, the private foundation tax architecture not only supports these wealthy exclusive preferences, but as Professor McCarden points out, it forces the private foundation to spend a lot of money every year into the future furthering those preferences of the wealthy. To be clear, the problem with this form of philanthropy is not that it might support abstruse interests such as senators complained about with respect to the Mellons, but that it works to provide significant and lasting governmental benefits to the private, perhaps well meaning interests, of people simply because they happen to be wealthy. The private foundation tax architecture provides this support, lifts these efforts up, in the name of supporting collective efforts, but they are far from collectively led.

I believe deeply in the power of a fiercely independent and courageous civil society that empowers the voices of all in our communities, particularly those voices that have been and continue to be disempowered. But, the private foundation tax architecture even at its best likely can never really support such a vision because it is defined privately. And, as Professor Aprill shows, the lack of IRS enforcement capability likely makes this architecture weak anyway and unlikely to be able to ever ensure such a democratically based vision. The private foundation community is imbued with some important social justice voices such as Darren Walker of the Ford Foundation and Elizabeth Alexander of the Mellon Foundation.

Still, I believe its predominate ethic is that of Carnegie from The Gospel of Wealth: that the wealthy man is the savior of the rest of us, both in terms of their ability to invest their dollars and to spend them in ways that improve all lives. I think that wrong and harmful. That vision is not just antithetical to democracy, but it is antithetical to racial, gender, sexual orientation, and social justice. Given this, I think we ought to eliminate tax benefits for the private foundation form."

Appreciate comments good and bad on this one.

By: Philip Hackney

Was eliminating dark money donor disclosure a good thing? Generation Now may suggest not so much

A few weeks ago a federal grand jury indicted the Speaker of the House of Representatives of the State of Ohio, Larry Householder, along with 4 other individuals and a social welfare organization called Generation Now, exempt under section 501(c)(4) of the Internal Revenue Code, for engaging in a bribery scheme to pass legislation regarding nuclear energy that was worth about $1 billion. It involved approximately $60 million in bribes.

I was not blogging at the time, so writing this up after the announcement, but in my opinion this was a major indictment of the decision of the IRS to eliminate donor disclosure for dark money organizations like 501(c)(4) and (6) organizations. Disclosure of these dollars that the indictment alleges to be bribes could have very well alerted the IRS to a potentially problematic scheme. Additionally, there would have been the potential of asserting a false statement on the Form 990 filed by the social welfare organization. 

The evidence is particularly indicative that unscrupulous folk may see dark money organizations as an easy method of laundering money now: "In March 2017, Householder began receiving quarterly $250,000 payments from the related-energy companies into the bank account of Generation Now. The defendants allegedly spent millions of the company’s dollars to support Householder’s political bid to become Speaker, to support House candidates they believed would back Householder, and for their own personal benefit.  When asked how much money was in Generation Now, Clark said, “it’s unlimited.”"

In the Criminal Complaint, U.S. v. Matthew Borges, Case No. 1:20-MJ-00526 (July 16, 2020) on page 15 there is the following evidence: “Clark discussed with Householder, the use of a 501(c)(4), controlled by Householder, to receive payments: “what’s interesting is that there’s a newer solution that didn’t occur in, 13 years ago, is that they can give as much or more to the (c)(4) and nobody would ever know. So you don’t have to be afraid of anyone because there’s a mechanism to change it.”

This one is worth following and contemplating as we conceive of better policy to govern our nonprofit tax exempt sector.

By: Philip Hackney

 

NY AG seeking Dissolution: A bridge too far?

On August 6, 2020, the New York Attorney General Letitia James filed a complaint against the NRA seeking restitution from officers and directors, removal of officers and directors, and the dissolution of the nonprofit organized in New York in 1871. While it looks like few think the suit for restitution and removal wrong, many are criticizing the AG for bringing the dissolution action.

I think she was right to bring the dissolution action, but I doubt a court will grant it, and I think that is all fine.

The AP provided a good rundown of the case and immediate reactions.

Last year when leadership in the NRA was in disarray and widely predicting that the misuse of the nonprofit by its officers and directors could lead to its dissolution, I wrote that this was highly unlikely:

"At the same time, I think it’s possible that the New York authorities investigating the group might remove officers and members of its 76-member board of directors. There is even a slight possibility, as NRA CEO Wayne LaPierre warned in a fundraising letter, that New York authorities could cause the NRA “to shut down forever.” But I doubt it."

Ruth Marcus has questioned the NY AG.

The NRA has filed a lawsuit challenging the AG action on many grounds including first amendment grounds, defamation, and procedural grounds trying to nullify the dissolution action. Asher Stoker has a nice tweet thread explaining why the procedural effort was unlikely to work. The NY AG amended its complaint to comply with the strict requirements of filing a dissolution.

The AG lays out the basis for dissolution on page 138-39 of the complaint:

562. Under N-PCL § 112(a)(5), the Attorney General is authorized to maintain an action or special proceeding to dissolve a corporation under Article 11 (Judicial dissolution).
563. Under N-PCL § 1101(a)(2), the Attorney General may bring an action seeking the dissolution of a charitable corporation when “the corporation has exceeded the authority conferred upon it by law, or … has carried on, conducted or transacted its business in a persistently fraudulent or illegal manner, or by the abuse of its powers contrary to public policy of the state has become liable to be dissolved.”

Here is the N-PCL. 

Many question the AG's partiality because she is a Democrat and so vocally stated she would investigate the NRA during her campaign, and called it a terrorist organization.

I encourage everyone to read the complaint. When you read the allegations of a long running, substantial, and extensive fraud on the members of the NRA, I am left wondering when the AG may use the dissolution provision that is in New York nonprofit law, if she does not use it now. 

Importantly, and I think interestingly for the process, the New York statute states that the AG “may” bring a dissolution action under these circumstances. But, the judge then still has to decide. 

N-CPL 1109 tells the judge what to take into consideration. It says:

(a) In an action or special proceeding under this article if, in the court's discretion, it shall appear that the corporation should be dissolved, it shall make a judgment or final order dissolving the corporation.

(b) In making its decision, the court shall take into consideration the following criteria:

(1) In an action brought by the attorney-general, the interest of the public is of paramount importance.

(2) In a special proceeding brought by directors or members, the benefit to the members of a dissolution is of paramount importance.

(c) If the judgment or final order shall provide for a dissolution of the corporation, the court may, in its discretion, provide therein for the distribution of the property of the corporation to those entitled thereto according to their respective rights.  Any property of the corporation described in subparagraph one of paragraph (c) of section 1002-a (Carrying out the plan of dissolution and distribution of assets) shall be distributed in accordance with that section.

It seems to me that the appropriate way for this process to play out is for the AG to bring the dissolution action. She should present the evidence for that claim. It may be that the power structure associated with what we consider the NRA today is so impossibly entangled with the wrongdoers that it would be impossible for the NRA to be reformed to actually further the mission of the NRA. If that is the case, dissolution is the answer. I am just skeptical that this is the answer. 

Though I do not believe in the same ideological beliefs that the NRA seeks to further, I do believe a robust defense of the Second Amendment should be a part of American life. I think the large membership is entitled to an organization that honestly and fairly furthers that mission. I believe we are better off in a world where the folks that believe in that right have good representation. Because of that, I find it hard to believe it will be impossible to reform the entity with that substantial membership in mind. That said, I think it possible the AG could prove her case. I think she should be allowed the respect to bring that forward. I think we will be better for it, including especially those who are conservatives. AG James is insisting on a rule of law. We should all be grateful to her for that commitment.

I shared my general thoughts with BBC World Tonight on the day the complaint was filed. You can listen to those starting at about 27:45 in on this link.

Many have wondered whether the NRA can just move out of New York to avoid the problem. The NY AG has the direct answer by tweet. No.

It is also worth watching the DC AG complaint against the NRA Foundation. 

If you want a deep and rich understanding of the matter of the NRA I highly recommend the Gangster Capitalism podcast on the NRA.

By Philip Hackney

Barber, Farwell, and Galle: Does Mandatory Disclosure Matter? The Case of Nonprofit Fundraising

Putnam Barber, Megan Farwell, and Brian D. Galle have posted Does Mandatory Disclosure Matter? The Case of Nonprofit Fundraising to SSRN. Here is the abstract:

Do small-dollar donors seek out potentially adverse information about organizations making fundraising appeals? Do they react when it is readily available? Do they draw negative inferences when critical information is not available? To answer these questions, we consider previously unexamined large-scale natural experiments involving US charitable organizations – tax-exempt organizations that file IRS Form 990.

Using standard difference-in-differences designs, we find that donors penalize organizations with high fundraising costs when there is mandatory disclosure or involuntary disclosure by a third-party reporter. Fundraising efficacy for lower fundraising cost organizations is greater when disclosed in these ways. The contrast with donors’ behavior when such information is not available suggests that they do not draw correct inferences when potentially consequential information is not disclosed. Disclose-on-request requirements, in contrast, apparently do not have any significant impact on donors’ or organizations’ behavior. We then sketch implications for the regulation of donations to charities and their modern cousins, such as crowdfunding and social enterprise organizations.

Samuel D. Brunson

Giving USA vs. 2020 Giving

Giving USA released its 2020 report a month and a half ago or so. And the report had some good news for nonprofits: in 2019, giving increased from $431.43 billion in 2018 to $449.64 billion in 2019. In inflation-adjusted dollars, that represents a 2.4% increase.

And by and large, that increase came across the board--giving by individuals, foundations, and corporations rose. (Giving by bequest was essentially flat.) No charitable sector received less, but education, public-society benefit societies, arts, culture, and humanities, and environmental and animal charities received the largest increase in donations.

And what about the pandemic? Giving USA reports that although giving was significantly down in the first quarter of 2020, 80% of donors intend to maintain or increase their giving over the pandemic.

But will that be enough? One survey reports that up to 1/3 of charities anticipate that they may have to close within the next year as a result of the pandemic. And the Johns Hopkins Center for Civil Society Studies estimates that nonprofits shed 1.6 million jobs between March and May.

So what will the nonprofit sector look like when we finally emerge from the pandemic? At best it will look different.

Samuel D. Brunson

Brunson, Addressing Hate: Georgia, the IRS, and the Ku Klux Klan

I recently posted an early draft paper to SSRN. Addressing Hate looks at both the nonprofit incorporation and the tax-exempt status of the 1916 Ku Klux Klan. Here's the abstract: 

In 1944, the Ku Klux Klan officially suspended its operations. Two years later, it had entirely ended. In part this was the inevitable result of a decade of declining influence and membership. In part, though, it was the result of actions by the federal government and the state of Georgia.

In 1916 the Ku Klux Klan incorporated as a Georgia fraternal organization, following a model of the Masons and other fraternal organizations. It also claimed to be a tax-exempt fraternal beneficiary society under the new federal income tax. These legal statuses provided the Klan with legal rights and benefits and also shrouded it in a cloak of respectability: it could claim that it was not merely a terroristic white supremacist group, but that it provided fraternal benefits to its members and the surrounding community.

Its incorporation and tax status provided it with benefits, it also imposed obligations on the organization. The Klan ultimately proved incapable of meeting these requirements. It violated the terms of its corporate charter and of tax exemption as a fraternal beneficiary society. The Bureau of Internal Revenue assessed a $685,305 tax on the Klan and, when the Klan did not pay, filed a lien. The state of Georgia in turn revoked its corporate charter. While these moves did not cause the second Klan’s death, they did seal its death.

This Article relates the story of the Klan’s corporate and tax statuses. It focuses on this story both because the story has never been related in any detail and because it provides a perspective on how government can deal with contemporary white nationalist groups without violating the Constitution.

Samuel D. Brunson

IRS Investigation of Universities' Tax-Exempt Status

A little more than three weeks ago, President Donald Trump tweeted that the Treasury Department should investigate the tax-exempt status of universities as a result of their "Radical Left Indoctrination." Then Friday, TIGTA told Rep. Richard Neal that Treasury Secretary Mnuchin intends to follow through on some sort of investigation of the tax-exempt status of universities.

Two weeks ago, Professor Ellen P. Aprill and I wrote an op-ed for The Hill talking about the rules governing exempt educational organizations and Treasury's ability to investigate universities here.

I'm not going to reiterate our entire analysis here, but Treasury and the IRS face three significant problems in investigating universities. The first is that, even if you assume that universities are politically biased--and even if you assume they teach that bias to students--that doesn't mean they can't be exempt. Tax-exempt educational institutions  can endorse particular viewpoints.

Moreover, Treasury and the IRS run into two legal impediments in following through on this investigation. The first is section 7217, which prohibits the President from requesting that the IRS audit a particular taxpayer. The second is the Consolidated Appropriations Act, 2020 which, like the 2018 Act, prohibits the IRS from targeting groups for regulatory scrutiny on the basis of their ideological beliefs.

Samuel D. Brunson