Nonprofit Law Prof Blog

Blurring the lines between the political and nonpolitical spheres

            With the presidential election less than a week away, politics is never far from anyone’s mind: that would seem to include organizations that, strictly speaking, are expected to avoid the political arena. The Falkirk Center, a subsidiary think tank of conservative private nonprofit Liberty University, recently featured an advertisement showing President Trump amid a closely-gathered group of people in the Oval Office, heads bowed in prayer. Alongside the picture appears text quoting Scripture and the phrase “Pray for our President.”

            The Falkirk Center is organized under Liberty University’s 501(c)(3) charter granting the group tax exemption: language used by the IRS unambiguously forbids such organizations from “directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.” To violate the IRS’ rule is a risky proposition for any tax-exempt organization, as its puts their tax exemption at risk: on the whole, however, it appears that the Falkirk Center’s advertisements fall on the right side of the tax code’s bright red line. An Inside Higher Ed piece reporting on the potential tax implications of the advertisements pointed to a statement by a Liberty spokesman stating that the Bible calls for believers to pray for kings and authority figures in order to secure peace for all, regardless of which political party that leader hails from. “[Expert] consensus,” says the article, “was that the ads push the envelope but probably don’t cross into being ‘functionally equivalent to express advocacy,’ which would make them electioneering and out of bounds for a 501(c)(3).” While Liberty University’s advertising practices may be safe from the IRS’ wrath, it has drawn sharp criticism from a number of academics and other nonprofits: to assess these viewpoints, see the Inside Higher Ed article analyzing the advertisement here.

David Brennen, Professor at the University of Kentucky College of Law

NRA executive personally under investigation by the IRS

Further troubles continue to rain down upon the heads of the top authorities at the National Rifle Association. Earlier this month it was announced that the Internal Revenue Service is investigating the possibility of bringing criminal charges against Wayne LaPierre, the executive vice president of the organization since 1991. Given the extent of the civil charges brought against the organization and its leaders by New York Attorney General Letitia James, which have been discussed in this blog in several prior posts, it is perhaps unsurprising that criminal prosecution might follow.

The Wall Street Journal, which reported this development at the beginning of October, states that the IRS is investigating LaPierre in particular (as opposed to the NRA at large) for potential tax fraud. Possibly the agency is investigating LaPierre’s taxes for activities entirely outside his decades-long role as an executive for the powerful nonprofit: however, given the proximity of this news in relation to Attorney General James’ attempt to entirely dissolve the NRA for its alleged shady business dealings, the possibility seems remote. LaPierre was unquestionably a central piece in the high-level decision making of the large 501(c)(3) organization, and the New York Attorney General called LaPierre out by name when she brought suit. It would seem that the civil suit seeking its dissolution is only the beginning for the NRA, and whether leaders within its network besides LaPierre will draw the Internal Revenue Service’s ire remains to be seen.

For a discussion of the Wall Street Journal piece and the underlying facts, see this article by Nonprofit Quarterly.

David Brennen, Professor at the University of Kentucky College of Law

 

 

24th Western Conference on Tax Exempt Organizations - coming in December

From December 3rd through the 4th, Loyola Law School will be holding its annual Western Conference on Tax Exempt Organizations. Attendees will be able to learn about a wealth of pressing developments in tax law for tax exempt organizations from top tax experts with nationwide recognition.

For more information, see Loyola's posting of the event.

David Brennen, University of Kentucky College of Law

The mystery of the automatic revocations is solved

    The end of last week saw a further development in the sharp increase in automatic revocations of tax-exempt status sent out by the IRS this year. To review the initial phase of this series of events, nearly thirty thousand tax-exempt organizations had their status automatically revoked despite the fact that the IRS had changed the relevant filing deadline from May to July. In response, Democrats from the House of Representatives demanded an explanation from Treasury Secretary Mnuchin. To read more about events leading up to that point in the situation, see this blog’s post from last week here.

    Shortly after the letter in question was sent, the IRS issued a statement confirming the suspicion voiced in our earlier blog post: namely, that the IRS messed up. Blaming “systemic limitations,” the Service admitted that it had been unable to correct the program it uses to send automatic revocation notices to tax-exempt organizations. As a result, organizations abiding by the IRS's extended deadlines were sent revocation notices anyway. However, the Service did prevent organizations properly filing before the updated July deadline from having their status listed as ‘revoked’ on the agency’s official site. Tax-exempt organizations who believe they received a revocation notice in error should contact the IRS at the fax number they have dedicated to resolving this mishap.

For the IRS’s statement, see https://www.irs.gov/charities-non-profits/current-edition-of-exempt-organizations-update

 

By David Brennen, University of Kentucky College of Law 

IRS offers tax relief for the victims of California wildfires

Last week, the IRS continued to expand an important list which has been growing since late August: the tally of counties in California where taxpayers can, in light of the catastrophic wildfires that continue to ravage the state, claim a (temporary) reprieve from filing their taxes. On October 19^th the IRS announced that “affected” taxpayers in Fresno, Los Angeles, Madera, Mendocino, Napa, San Bernadino, San Diego, Shasta, Siskiyou, and Sonoma have a delayed deadline of January 15^th to file their taxes. This deadline applies to individual taxpayers as well as many businesses (including tax-exempt organizations), all of whom have likely been affected in some way by the natural disasters plaguing the area. Whether these measures, among other forms of disaster relief, will be enough to offset the damages caused by these events is another matter entirely: while the IRS adds in its statement that affected taxpayers, businesses, and nonprofit organizations “should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case,” a few month’s delay in filing taxes may be a small comfort to many taxpayers whose homes and livelihoods have been severely impacted or else completely destroyed. Taxpayers in counties affected by Californian wildfires should note that this particular deadline extension is one of many: the IRS has declared different extensions to reflect the multitude of different fires raging throughout the state.

For the Forbes story on this development, see https://www.forbes.com/sites/robertwood/2020/10/25/irs-tax-extension-to-jan-15-for-california-wildfire-victims/?ss=taxes#5125e70425bc

For the IRS official statement, see https://www.irs.gov/newsroom/irs-announces-tax-relief-for-september-california-wildfire-victims

By Professor David Brennen, University of Kentucky College of Law

IRS partners with non-profits to raise fraud awareness

    Last week the Internal Revenue Service joined with a coalition of charities and other not-for-profit organizations in raising awareness against frauds targeting the nonprofit sector in particular. The third International Charity Fraud Awareness Week, which took place between October 19^th and the 23^rd, provides resources regarding safety precautions, proper business practices, and recognition of potential fraud attempts to non-profit organizations both large and small. Given that many nonprofits are guided by an explicit mission to give aid to those in need, it is by no means novel that criminals seek to exploit that goodwill. However the issue is of particular vitality in a time when natural disasters and the COVID epidemic are causing suffering across the nation: people are more in need of help than ever. In aid of this cause, the IRS published a statement last week on its website directing tax-exempt organizations to several practical tools including tutorials, videos, webinars, COVID-specific resources.

For the IRS’ published statement, see https://www.irs.gov/newsroom/irs-fights-fraud-aimed-at-charities-joins-international-awareness-week

 

By Professor David Brennen, University of Kentucky College of Law

IRS Automatic Revocation Forgot to Give Covid Extension?

Democrats sent a letter to the IRS recently inquiring about the fact that the IRS seems to have automatically revoked the tax exempt status of 10s of thousands of charities based on the normal filing date of those charities on May 15, rather than the extended date of July 15. 

Forbes has the story: "More than 30,000 nonprofit organizations in the U.S. have had their tax-exempt status automatically revoked by the Internal Revenue Service since May, Democratic lawmakers wrote in a letter to Treasury Secretary Steven Mnuchin, after an “apparent error” by the IRS may have erroneously revoked thousands of organizations’ tax-exempt status."

It almost surely is an error on the IRS's part, that will likely take some real work to fix, unfortunately.

Philip Hackney

Live Tweeting of Fairbairn DAF case

Aysha Bagchi has provided a tremendous service to those interested in the Fairbairn v. Fidelity Charitable Donor Advised Fund case. She is reporting on it in Bloomberg Tax, but also live tweeting it on Twitter. You can follow her here.

Philip Hackney

Nonprofit Recovery Slowing Significantly According to New Report

The Center for Civil Society Studies released a new report showing a seriously slowing of recovery of employment in the nonprofit space. I guess the good news is there still seems to be an overall recovery, but worrisome signs that the sector may sink back into employment loss.

From the report: "As part of our continued effort to track the ongoing impact of the coronavirus pandemic on nonprofit employment, we have analyzed data from the latest BLS Employment Situation Report to estimate nonprofit job losses through September 2020.
 
How did nonprofits fare in September?
Unfortunately, the month of September showed only a modest 2% recovery of nonprofit jobs compared to the situation we reported in August.¹ The only major field that enjoyed a rebound of more than 10% overall was social assistance at 12.8%. What is more, September brought significant additional losses in the key field of education totaling nearly 50,000 jobs—a drop of 24% from August employment levels, as shown in Figure 1."

Philip Hackney

Fairbairn v. Fidelity implications for DAFs

Figured readers would be interested in this look by Brian Mittendorf at the implications for Donor Advised Funds of Fairbairn v. Fidelity that appears in HistPhil.org.

"One way the concern that commercial DAFs are donor-centric arises is in the competition between sponsoring organizations. The lawsuit alleges that Fidelity Charitable differentiated itself from other charitable options by its “superior ability to handle complex assets,” even stating in correspondence about the possibility of receiving a gift of one particular type of asset that “Vanguard can’t do this but we do it frequently.” The general public may think of competition among charities as focusing on who can best put gifts to charitable use. It turns out this is an antiquated notion: the intense competition centering on seamlessly receiving and converting complex assets for donors presents a stark contrast.

A related issue is that DAFs increasingly are vehicles that provide disposal options to donors for illiquid assets. In the Fairbairn case, the assets donated were technically liquid (they were publicly traded) but the size of the donation would threaten share price if it were a sale instead of a donation, an eventuality that formed the basis for the lawsuit. However, donating such assets permits a tax deduction for the value, even though an outright sale at that value would be problematic. "

And, "A final issue that surfaces in the Fairbairn case is that some DAF sponsors may implicitly or even explicitly be beholden to their commercial affiliates. Legally speaking, Fidelity Charitable is a distinct entity from Fidelity Investments; as is the case for Vanguard Charitable and Vanguard; and so on. Yet, the shared names and logos underscore a nontrivial affiliation. Critics have argued that the commercial DAFs invest funds heavily in their affiliated investment companies and, as such, generate substantial fees for them. This, in turn, could create incentives to retain funds in investments rather than distribute them to charitable endeavors. The allegations in the Fairbairn case are consistent with this fear."

Philip Hackney

 

On Politics and Appreciated Property

Given that we're well into election season, I thought I'd end my week highlighting a significant difference between a couple types of political organizations: 501(c)(4)s and 527 groups. 

At a broad level, 501(c)(4) organizations are similar to 527 organizations: both are exempt from taxation and both can accept donations and spend those donations for political purposes. Donors do not get a deduction for donations to either type of organization.

There are, of course, some differences. 527 orgs face no limitations on their ability to spend money supporting candidates for office. The Code defines their exempt function as working to influence the selection of political figures. 501(c)(4) orgs, by contrast, have to be "primarily engaged" in promoting social welfare; the promotion of social welfare does not include supporting or opposing candidates for office. So 501(c)(4)s, unlike 527 orgs, cannot be organized with the sole purpose of supporting candidates for office.

But donors to 501(c)(4)s have a significant tax advantage, at least if they donate appreciated property. The donation of appreciated property to 501(c)(4) organizations is not a realization event. So, while the donor may not get a deduction, the donor also does not have to pay taxes on any imputed gain from the donation.

But in 1975, when Congress enacted section 527 of the Code, it also enacted section 84. Under section 84, the transfer of appreciated property to a 527 org is treated as a realization event and the donor is required to pay taxes on any appreciation as if the donor had sold the property to the political organization for its fair market value on the date of the donation.

It's probably worth pointing out that section 84 only applies where the fair market value of the property exceeds the basis at the time of transfer. A donor can't create a deduction by donating property that has lost value.

Also, thanks to Ellen Aprill for highlighting section 84 for me; it's an interesting point of deemed realization and it creates an interesting and (I suspect) unintentional break between 527 and 501(c)(4) organizations.

Samuel D. Brunson

The NRA in NY and DC

We've written about the NRA's recent legal problems on the blog before (see here and here and here for some examples).

Yesterday's NonProfitTimes had an extensive article detailing and analyzing two cases that the NRA is dealing with. In New York the Attorney General is seeking the dissolution of  main 501(c)(4) organization and is seeking to bar four current and former executives from serving on the boards of any New York nonprofit organization.

In addition, the Attorney General of the District of Columbia has alleged that the NRA Foundation, an affiliated 501(c)(3) has inappropriately used its charitable funds for disallowed purposes, put the NRA's interests ahead of its own, and failed to operate independently.

It's a fascinating summary and analysis of what may prove to be an important (and very certainly will continue to be a high-profile) attempt to regulate nonprofits.

Samuel D. Brunson

Brescia, Ansari & Hage, The Legal Needs of Nonprofits: An Empirical Study of Tax-Exempt Organizations and Their Access to Legal Services

Raymond H. Brescia (Albany Law School), Bahareh Ansari (Ph.D. candidate, University at Albany), & Hannah Hage (JD, Albany Law School) have posted The Legal Needs of Nonprofits: An Empirical Study of Tax-Exempt Organizations and Their Access to Legal Services to SSRN. Here is the abstract:

This empirical study, using quantitative and qualitative techniques, attempts to assess the state of the legal needs of non-profit organizations, with an emphasis on the ways in which non-profit organizations are or are not accessing assistance addressing their legal services needs. While most research into the extent to which Americans may or may not be accessing legal services focuses on the legal needs of individuals and families, this study focuses on the legal needs of non-profit groups. Our goal with this research project is to contribute to the growing literature on the scope of unmet legal needs in the United States. The findings from this study suggest that many of the groups we surveyed and with which we communicated do have access to legal representation, particularly as groups grow in terms of their financial wherewithal (that is, the size of their budgets). Smaller groups appear to face greater barriers to obtaining legal services, and we attempt to probe some of the reasons that is the case. At the same time, many groups, large and small, are meeting their legal needs through a range of legal services providers: whether they use legal services providers that are themselves non-profit entities that offer them assistance; they obtain the volunteer services of private lawyers who provide representation; or they are simply paying for legal services themselves. Often, as our findings indicate, they are using a mix of these different resources: they are paying for services, obtaining non-profit legal services free-of-charge, and/or utilizing the services of pro bono counsel. This study attempts to begin to fill the gap in the research by exploring not just the unmet legal needs of non-profit groups, but also probing the ways in which non-profit entities that are accessing legal services are able to obtain those services, and from whom. It also attempts to create a taxonomy of needs: an assessment of the types of legal needs the organizations we surveyed face.

Samuel D. Brunson

Donald Trump and Conservation Easements

Conservation easements have been having a day lately. As Lloyd pointed out a couple weeks ago, both the IRS and Congress are aggressively looking at conservation easements. And a week ago, the New York Times's bombshell story that it had received more than 20 years of President Trump's tax return data again.

We already knew in 2016 that Trump had claimed a deduction for conservation easements and Richard Rubin at the Wall Street Journal pointed out a month ago that his conservation easements were vulnerable to IRS challenge. But now we have a little more detail.

Before we get to that detail, though, a quick description of what a "conservation easement" is. As a general rule, to get a charitable deduction for the donation of property, the donor must give all rights in the property to an exempt organization. The Treasury regulations provide a limited exception to this rule, though: if a property owner donates a perpetual interest in land to a qualified recipient, the owner can take a deduction. Essentially, this donation prevents the property owner from developing the property.

Continue reading