Nonprofit Law Prof Blog

IRS Requires Division Counsel Consultation for Some Public Charity Status Claims in Wake of Mayo Clinic Decision

The IRS has issued a memorandum providing "Interim Guidance on Processing a Request for Public Charity Classification under IRC Sections 509(a)(1) and 170(b)(1)(A)(ii) when Applicant’s Primary Function is not the Presentation of Formal Instruction". The guidance comes in the wake of the Eighth Circuit's Mayo Clinic decision relating to the definition of "educational organization". As provided in the memo:

Because of ongoing litigation in the Eighth Circuit Court of Appeals regarding Treasury Regulation Section 1.170A-9(c)(1), the specialist must coordinate with TEGE Division Counsel when:

1. An applicant is seeking classification or reclassification of public charity status as an educational organization under IRC Sections 509(a)(1) and 170(b)(1)(A)(ii), and
   
   
2. The applicant’s primary function is not the presentation of formal instruction.

Of course the most interesting but unanswered question is to what extent the IRS will choose to follow that appellate court decision in making these determinations, including outside of the Eighth Circuit.

Hat tip: EO Tax Journal

Lloyd Mayer

IRS Reports 2020 Excise Taxes: 4960 Tax On Executive Comp Leads the Way

The IRS Statistics of Income program has reported on its Domestic Private Foundation and Charitable Trust Statistics webpage the calendar year 2020 excise taxes reported by charities of all types on Form 4720, not just private foundations and trusts.. The largest amount by far is for the section 4960 tax on excess executive compensation, totaling more than $96 million. That figure represents almost 90 percent of all excise taxes reported, which totaled slightly more than $107 million. While more entities (524 versus 302) reported the  section 4942 excise tax on private foundation undistributed income, the total amount of that tax reported was only a little over $5 million.

Interestingly, the section 4968 tax on the net investment income of private colleges and universities was paid by so few entities, and was such a small amount, that it is not separately listed but instead aggregated with three other excise taxes to prevent disclosure of specific taxpayer data.  Only 9 entities reported any of those four excise taxes, which also included the tax on taxable distributions of sponsoring organizations, the tax on failure by hospitals to meet the section 501(r) requirements, and the tax on premiums paid on personal benefit contracts. The total tax reported for all four taxes was only a little over $3 million. While college and university endowments struggled in the fiscal year ending in June 2020, they still experienced positive returns. I wonder whether most colleges and universities with large endowments potentially exposed to this tax have found ways to minimize the investment income subject to tax or to avoid the tax entirely.

Lloyd Mayer

Nonprofit Scholar Lester Salamon Dies at 78

As the Nonprofit Times reports: "

"Lester M. Salamon, a pioneer in the study of nonprofits and a prolific author about civil society and philanthropy, died on Friday at his home in Arnold, Md. He was 78. The cause of death was not announced.

Salamon was Professor Emeritus at the Johns Hopkins University and was director of the Johns Hopkins Center for Civil Society Studies (CCSS). “While Dr. Salamon’s passing catches many of us off guard, true-to-form, he was actively working until the very last possible moment. His dedication, energy, and passion will be hard to match,” the center officials said via a statement issued today.

The statement continued: “Our collective loss will resonate across the field of nonprofit and third sector research in the United States and throughout the world. Dr. Salamon pioneered the empirical study of the nonprofit sector in the United States and then globally in partnership with extended network of colleagues.”

New York Suspends its Collection of Schedule B

The New York Attorney General's Charities Bureau chose to suspend its collection of Schedule B with substantial donor information. It intends to study the question of whether it can constitutionally collect this information in light of the recent Supreme Court decision in Americans with Prosperity Foundation v. Bonta.

They state: "The New York Attorney General’s Charities Bureau has suspended its collection of IRS Form 990 Schedule B while we review any amendments that may be necessary to our policies, procedures and forms in order to comply with the U.S. Supreme Court’s decision in Americans for Prosperity Foundation v. Bonta (594 U.S. __, 2021). Effective immediately, charities’ annual filings will no longer require disclosure information that identifies donors. Any notices that charities have received regarding any deficiency due to missing or incomplete Schedule Bs are no longer operative as to such deficiency, and annual filings will no longer be considered deficient in such regard."

Model Nonprofit Corporations Act and Designated Bodies

In February, Lloyd mentioned that the 4th edition of the Model Nonprofit Corporations Act was available for comment.

In May, the ABA released the Final Exposure Draft of the Model Act. And while I have every intention of reading through it entirely, I haven't yet.

I did start it, though. And one change it makes is the introduction of "designated bodies." Under the new Model Act, a designated body is a group to whom some, but not all, of the powers, authorities, or functions of the Board of Directors have been designated.

In an Official Comment, the ABA committee explains that it created the concept of designated body because "it is sometimes desirable for a nonprofit corporation to depart from the traditional governance structure based on a board of directors and, in appropriate circumstances, members."

It is an interesting idea, but I'm trying to think through how this new designated body differs from a committee, which was explicitly authorized in the 3rd edition of the Model Act. I'd love to hear others' ideas about the relevance of this new governance body in the world of nonprofits.

Samuel D. Brunson

Murray, Charity Law and Accumulation: Maintaining an Intergenerational Balance

Ian Murray (University of Western Australia) recently published Charity Law and Accumulation: Maintaining an Intergenerational Balance (Cambridge: Cambridge University Press, 2021). Here's a description of the book: 

Much has been written in charity law on the type of benefits that charities can provide (charitable purposes) and who such benefits must be directed towards (the public benefit question). Much less has been written about when those benefits must be provided. However, accumulation of assets by charities raises profound ethical, economic and social considerations, that are highlighted by the present retreat of the welfare state and the on-going impact of the Global Financial Crisis and COVID-19. In particular, how should the public benefits produced by charities and affected by accumulation be shared between different generations? It is, after all, inherent in the notion of accumulation, that the delivery of some benefits will be deferred. Which generation(s) should decide that allocation of benefits? Might the decision-making discretion afforded to charity controllers over accumulation and the allocation of benefits increase agency costs and so reduce the level of public benefit achieved?

This book analyses these issues through a normative, doctrinal and comparative analysis of the legal constraints upon accumulation by charities. It reveals that the legal restraints contain significant gaps in relation to the intergenerational distribution of benefits and to the balance of decision-making between generations. In particular, the book asserts that, to fill those gaps, there is room for law reform to better identify and incorporate principles of intergenerational justice into the regulation of charities. The book makes this theory and its practical application accessible to readers without specialised training in political philosophy and economics. The book also explains to those steeped in political philosophy and economics (but not law) why it is there are issues and how they can start thinking about law reform.

Samuel D. Brunson

Nonprofit Energy Efficiency

I'll admit off that bat that I haven't read through all of the 2,700-page infrastructure bill that the Senate passed last week. But on Twitter, Deseret News religion reporter Kelsey Dallas called my attention to a provision about halfway through the bill.

Section 40542 would create what it terms an "energy efficient materials pilot program." Specifically, it directs the Secretary of Energy to create a pilot program to help tax-exempt organizations increase the energy efficiency of buildings they own (and specifically it targets roofs, lighting, windows, doors, and HVAC systems).

The legislation is light on details about the program. But it appropriates $50 million for the pilot program, which is to run from 2022-2026. Organizations that are exempt under section 501(c)(3) can apply for grants of up to $200,000. The specific criteria by which the Secretary will choose which grants to award aren't established in the legislation but the legislation creates a broad structure for qualification. Grants are to be based on the energy savings the project achieves, the cost-effectiveness of the use of energy-efficient materials, the tax-exempt's plan for evaluating, measuring, and verifying energy savings, and the tax-exempt's financial need.

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