Nonprofit Law Prof Blog

Art Museum Deaccessions to Diversify

For some reason the issue of a nonprofit art museum selling some of its collection off resonates at a high level for me. Sometimes, they sell off in order to generate working capital. Probably never really a good idea because you are not solving the long term problem of a sustainable future for the museum. 

The Toledo Museum of Art in Ohio just announced it is selling off a number of Impressionist works in order to diversify it's collection. Of course the fascinating question remains how do you best diversify - by the folks who come to your museum and are included, or by the story your art works tell? I'm not sure of the answer and it is probably a bit of both, but it's a fascinating and important question to ask. Obviously a Museum needs to grow and change over the years and so curating its collection is key.

From the story in Hyperallergenic: 

"The Toledo Museum of Art (TMA) will send three works by Paul Cézanne, Henri Matisse, and Pierre-Auguste Renoir to auction next month. Proceeds from the sale, an estimated $60 million, will be used to build a more diverse collection with the goal of “broadening the narrative of art history,” the museum said in a statement.

The TMA will deaccession Renoir’s “Nu s’essuyant (The Bather)” (1912), Cézanne’s “Clairière (The Glade)” (c. 1895), and Matisse’s “Fleurs ou Fleurs devant un portrait” (1923). The works will be offered as part of Sotheby’s Modern Evening Auction on May 17."

Museum leaders say its collection is already strong in that area and this opens up resources to expand its collection in other ways.

Philip Hackney

  

Representative Introduces Bill to Replace Form 1023EZ

Representatives Betsy McCollum and Fred Upton introduced a bill on Tuesday to replace the Form 1023EZ. The bill is entitled the Nonprofit Sector Strength and Partnership Act of 2022.

The bill, among other things, would create a White House Office on Nonprofit Sector Partnership and an Interagency Council on Nonprofit Sector Partnership. 

From Rep. McCollum's press release: 

Congresswoman Betty McCollum (MN-04) and Congressman Fred Upton (MI-06) have introduced the Nonprofit Sector Strength and Partnership Act of 2022 to strengthen the nonprofit sector and its relationship with the federal government. The legislation will improve access to data about the nonprofit sector, and leverage the mission, knowledge, and impact of thousands of nonprofits to work together more effectively in pursuit of shared goals.

“In my home state of Minnesota, the nonprofit sector makes up nearly 14 percent of our workforce and generates $66 billion in annual revenue – which is why it is so important that the sector has a seat at the table when it comes to federal lawmaking,” Rep. Betty McCollum said. “Federal government, state, and local governments rely on the nonprofit sector and its ability to harness and direct the generosity, service, and volunteerism of the American people. Just as small businesses have the Small Business Administration (SBA) to facilitate access to federal resources, the nonprofit sector should be afforded this same level of support. I’m grateful to Independent Sector and other nonprofit leaders who have helped shape this idea into the legislation we’ve introduced today. Together, we can establish mechanisms that will enable nonprofits to better serve our communities.”

Philip Hackney

Laws and Enforcement Governing the Political Activities of Tax Exempt Entities Hearing

The Senate Finance Committee's Subcommittee on Tax and IRS Oversight, chaired by Senator Whitehouse, is holding a hearing on May 4 on entitled Laws and Enforcement Governing the Political Activities of Tax Exempt Entities. 

It's a little odd to report on this one, because I am one of the witnesses who will present testimony.

The witness list includes

Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law, Pittsburgh, PA

Bradley A. Smith, Chairman and Founder, Institute for Free Speech, Washington, D.C. 

Ann M. Ravel, Former Chair (2015), United States Federal Election Commission, Los Gatos, CA

Scott Walter, President, Capital Research Center, Washington, D.C. 

I will be posting my testimony soon. I will try to post the other written testimony as well.

Philip Hackney

Harvard joins other Major Universities in Confronting its Role in Slavery

Harvard is the latest university to confront its role in slavery releasing a report entitled  “Harvard and the Legacy of Slavery”  and pledging $100 million for initiatives and an endowment to reckon with the findings in the report.

From the article: "Harvard is among the latest major universities to engage in a public reckoning with their role in slavery, a trend that emerged after Brown University published a soul-searching report in 2006 on its ties to the transatlantic slave trade. Georgetown University, the University of Virginia and William & Mary, among others, have also dug deeply into their slavery-stained past in recent years. A group called Universities Studying Slavery, based at U-Va., counts about 90 members (including Harvard) in the United States and abroad."

"The report recommended an expansion of partnerships with historically Black colleges and universities (HBCUs). Under this plan, Harvard would pay for HBCU faculty members to spend a summer, semester or school year in visiting appointments on the Cambridge campus, and Harvard professors would be able to do the same at HBCUs. The report also envisioned that HBCU students would be invited to spend a summer or one or two semesters at Harvard during their junior year — with financial aid from Harvard. Juniors at Harvard could spend time at HBCUs as well. Students in those programs would be known as Du Bois Scholars, honoring the civil rights leader W.E.B. Du Bois, who in 1895 became the first African American to earn a PhD from Harvard."

Philip Hackney

May 16 Deadline for Filing Form 990 Series

IRS issued a useful reminder last week that May 16, 2022 is the upcoming deadline for filing the Form 990 series and Form 4720.

IR-2022-93, April 21, 2022

WASHINGTON — The Internal Revenue Service today reminded tax-exempt organizations that many have a filing deadline of May 16, 2022. Those that operate on a calendar-year (CY) basis have certain annual information and tax returns they file with the IRS. These returns are:

• Form 990-series annual information returns (Forms 990, 990-EZ, 990-PF)
• Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990-EZ
• Form 990-T, Exempt Organization Business Income Tax Return (other than certain trusts)
• Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code

Mandatory electronic filing

Electronic filing provides fast acknowledgement that the IRS has received the return and reduces processing time, making compliance with reporting requirements easier.

Organizations filing a Form 990, 990-EZ, 990-PF or 990-T for CY2021 must file their returns electronically. Private foundations filing a Form 4720 for CY 2021 must file the form electronically. Charities and other tax-exempt organizations can file these forms electronically through an IRS Authorized e-File Provider.

Organizations eligible to submit Form 990-N must do so electronically and can submit it through Form 990-N (e-Postcard) on IRS.gov.

"To help exempt organizations comply with their filing requirements, the IRS provides a series of pre-recorded online workshops," said Robert Malone, Exempt Organizations and Government Entities Director. "These workshops are designed to assist officers, board members and volunteers with the steps they need to take to maintain their tax-exempt status, including filing annual information returns."

Common errors

The IRS also reminds organizations to submit complete and accurate returns. If an organization's return is incomplete or the wrong return for the organization, the return will be rejected. Common errors include missing or incomplete schedules.

Extension of time to file

Tax-exempt organizations that need additional time to file beyond the May 16 deadline can request a 6-month automatic extension by filing Form 8868, Application for Extension of Time To File an Exempt Organization Return PDF. In situations where tax is due, extending the time for filing a return does not extend the time for paying tax. The IRS encourages organizations requesting an extension to electronically file Form 8868.

 

Philip Hackney

Call for Papers: 2023 AALS Annual Meeting

Call for Papers
AALS Section on Nonprofit and Philanthropy Law
2023 Annual Meeting
January 4-7
San Diego, CA

Nonprofits & Philanthropy

The AALS Section on Nonprofit and Philanthropy Law announces a call for papers to be presented as works-in-progress in our committee session at the 2023 AALS Annual Meeting in San Diego, CA from January 4-7, 2023.

The Section seeks submissions on a variety of topics and methodological approaches related to Nonprofit and Philanthropy Law. Given the recent importance and novelty of state nonprofit law, we are especially interested in scholarship that illuminates, elucidates, and otherwise engages with the work states are doing in the nonprofit world, but are happy to consider any scholarship in the field. We are interested in all states of article development.

Eligibility: Scholars teaching at AALS member or nonmember fee-paid schools. We particularly encourage new voices in the field to submit.

Due Date: June 15, 2022

Form and Content of Submission: Submissions may range from early drafts to articles that have been submitted for publication, but not articles that will have already been published by January 7, 2023.

Submission Method: please submit papers electronically to sbrunson@luc.edu with “AALS Nonprofit and Philanthropy Law Submission” in the email subject line.

Submission Review: Papers will be selected for inclusion in the program after review by members of the AALS Section on Nonprofit and Philanthropy Law.

Additional Information: Presenters are responsible for their own expenses associated with the conference. If you have any questions, please contact the chair, Sam Brunson, at sbrunson@luc.edu.

Bernardo: The interconnection between welfare services and the market in the United States with a focus on the elderly: the application of antitrust law to nonprofits

Julia Ortego Bernardo (Universidad Autónoma de Madrid) has posted The interconnection between welfare services and the market in the United States with a focus on the elderly: the application of antitrust law to nonprofits. Here is the Background and Introduction section (footnotes omitted):

It is widely acknowledged that the US welfare system evolved differently from other industrialized countries’ welfare regimes. From a neutral standpoint, scholarly works evidence that the US social service framework cannot be compared to the welfare states implemented in Western Europe over the 20th century−which remain in place. This is due to the different approaches to welfare objectives. The prominent role of private organizations and nonprofits is one of the US system’s defining features, although public authorities’ action (or, better said, government intervention) has not been set aside completely.

The underlying rationale of the US welfare system largely relies on two premises: first, welfare benefits qualify as commodities that can be delivered by private entities (i) operating in the market; and thus (ii) able to meet the existing demand. Second, social service recipients or, where appropriate, welfare officials, have somewhat free choice to a certain extent regarding the services, which, also, would be available to anyone.

However, note that these ideas regarding the efficient operation of social service markets might not be true in practice. In fact, often there are market failures, i.e., the price, quantity or quality of the delivered social services may be unsuitable or simply not enough to meet society’s needs. The most common market failures in the field of social services, although not the only ones, are the so-called “informational market failures” or information asymmetries. If they lack information, welfare recipients can hardly assess the quality and value for money of welfare services. Ultimately, users are unable to choose correctly between services. These and other market failures trigger government intervention, which relies on two instruments: (i) regulation; and (ii) antitrust law. As for (ii), it is worth noting that it qualifies as a paramount example of indirect economic regulation. In the United States, the scope of antitrust law covers a wide range of social services, insofar as their provision is totally or partially subject to market conditions. By fining anticompetitive practices and behaviors, public authorities indirectly enhance the system, since the fines have a positive impact on the price and quality of services.

Within the field of US welfare, public action has been somewhat superseded by private entities’ initiatives (including both companies and nonprofits) and market-based management. This poses several challenges and concerns. Does the protection provided by antitrust law cover the activity of non-profit organizations? We will answer this question below. This paper examines (i) the development of strictly assistance-based services or benefits in the US (section 2.1); (ii) their current legal framework (section 2.2) with regards to other social services, particularly those catering to older adults (section 2.3); and (iv) the positive and negative outcomes (section 3.1) and oversight (section 3.2) of private initiatives, including not-for-profit action (section 3.3).

Lloyd Mayer

Binfarè & Zimmerschied: Doing Good and Doing it with (Investment) Style [private foundation investing]

Matteo Binfarè and Kyle Zimmerschied (both University of Missouri at Columbia) have posted Doing Good and Doing it with (Investment) Style. Here is the abstract:

We study the asset allocation, spending behavior, fees, and investment performance of U.S. private foundations, which have different economic objectives than other institutional investors. We find that large foundations generate positive risk-adjusted returns of about one percent per year and document considerable variation in alphas over time. Larger and more sophisticated foundations perform better and invest more aggressively. Foundations with concentrated stock holdings have higher returns, but also take on more risk. Because of the constraints imposed by the five percent minimum spending rule and accommodating monetary policy, private foundations also increase their risk-taking and reach for yield. Due to these constraints, a conservative asset allocation will decrease real wealth over time resulting in less charitable giving.

Lloyd Mayer

Goldeberg & LeClair: A proposal for a new type of charitable-business structure

Robert S. Goldberg (Adelphi University) and Mark S. LeClair (Fairfield University) have published A proposal for a new type of charitable-business structure: the donor-investor organization in the Journal of Sustainable Finance & Investment. Here is the abstract:

Non-profits redistribute assets in pursuit of a social goal, and for-profits organize assets to generate income and growth. While both organizations face a principal-agent problem, non-profits face unique challenges ensuring that managers adhere to the goals of endowers or donors. Regulations have failed to successfully address the principal-agent problem, and hybrid structures such as Benefit Corporations have profit as one of the objectives. We propose a new type of entity with both a business arm and a charitable arm, with a social purpose as the only objective, committing all profits to the entity’s charitable mission. Investors, both small and large, receive a stream of future tax deductions based on outlays for the organization’s mission, while retaining legal control of the entity’s operations. While not meant to replace all charities, the proposed structure provides a new way for investors, business people and non-profit professionals to work towards a social good.

Lloyd Mayer

Molk: Where Nonprofits Incorporate and Why It Matters

Peter Molk (Florida) has posted Where Nonprofits Incorporate and Why It Matters, forthcoming in the Iowa Law Review. Here is the abstract:

Nonprofit corporations account for over a trillion dollars of American annual GDP, employ twelve million people, and include some of the most well-known organizations in the world. Yet despite their significance, many core corporate governance issues about nonprofits remain a black box. This Article, using newly available data, begins to remedy this gap in the literature.

Using filing data from 300,000 charitable nonprofits, I examine the foundational issue of where nonprofits incorporate, a decision that determines both the law of nonprofit corporate governance affairs and public oversight apparatus for governance and compliance. Unlike publicly traded corporations, I find nonprofit incorporation choice is not a vigorously competitive race to the top or bottom, but instead is better characterized as a stroll. A nonprofit’s headquarters jurisdiction is the most popular incorporation destination - far more common than for publicly traded corporations. However, among those nonprofits that incorporate out-of-jurisdiction, Delaware is the most popular destination, with the District of Columbia a surprising second. The findings are consistent with nonprofits’ selecting weaker governance and oversight rules, suggesting a potential “stroll to the bottom” among nonprofits. Using these results, I offer evidence-based policy implications to improve governance of nonprofits, to reverse the potential stroll to the bottom, and to invigorate beneficial state competition for nonprofit incorporations.

Lloyd Mayer

Murray: Charities & Discrimination

Ian Murray (University of Western Australia) has published Charities & Discrimination: Is Charity Law Always a Better Solution than Public Policy? in the Nonprofit Policy Forum. Here is the abstract:

Discrimination by charities raises questions about the appropriate extent of equality regulation and has implications for government outsourcing through charities and for the provision of tax concessions. Professor Parachin has recently provided a justification for denying the application of public equality norms to charities through the public policy test of charity law. This paper builds on that work by considering whether liberal societies might, however, have good grounds to apply public equality norms to charities in circumstances such as the provision of outsourced government services, state enforcement of egoistic giving, or where doing so is a proportionate means to prevent harm.

Lloyd Mayer

Overgaard & Kerlin: A legally-informed definition of volunteering in nonprofits and social enterprises

Charlotte Overgaard (MacQuarie) and Janelle Kerlin (Georgia State) have published A legally-informed definition of volunteering in nonprofits and social enterprises: Unpaid work meets profit motives in Nonprofit Management & Leadership. Here is the abstract:

This article presents a definition of volunteering that will help organizations and workers, especially those engaged in commercial activity for a social purpose, determine when U.S. organizations can legally draw on volunteer labor. By drawing on recent U.S. court cases, the intentions of the Fair Labor Standards Act (FLSA) to protect vulnerable workers and the wider framing literature on organizational logics, work, and volunteering, we outline under which circumstances workers are considered employees rather than volunteers and therefore covered by the FLSA and entitled to minimum pay. We show that in order to determine the legalities of work under current law, it is necessary, but not sufficient, to consider whether activities are carried out for commercial purposes. What matters most for a legally-informed definition is the role performed within organizations and the promises made to individual workers in terms of compensation.

Lloyd Mayer

Plerhoples: Purpose Driven Companies in the United States

Alicia E. Plerhoples (Georgetown) has posted Purpose Driven Companies in the United States, to be published in the International Handbook of Social Enterprise Law: Benefit Corporations and Other Purpose Driven Companies (Henry Peters, et al., eds., forthcoming 2022),. Here is the abstract:

The United States is the birthplace of benefit corporations precisely because of American society’s over-reliance on the private sector to solve societal problems. U.S. federal and state regulation continuously fails to provide robust social safety nets or prevent ecological disasters. American society looks to companies to do such work. U.S. social enterprise entities attempt to upend the U.S. legal framework which binds fiduciaries to focus on shareholder value. These entities are permitted, and sometimes required, to take into account environmental, social, and governance (“ESG”) impacts of their operations, essentially internalizing ESG costs that would otherwise be paid by American communities and the environment. This chapter traces social enterprise development under U.S. law, starting with a brief discussion of corporate law as a creature of state law. It then provides an overview of the two major types of social enterprise entities in the United States: (1) the Delaware Public Benefit Corporation, and (2) the California Special Purpose Corporation. The chapter briefly discusses other types of U.S. social enterprise entities, including hybrid ventures, worker cooperatives, and the low-profit liability company. The chapter concludes with a discussion of responses to companies’ ESG efforts by legal scholars, asset managers, and the U.S. Securities and Exchange Commission. These responses and the uptake of publicly traded public benefit corporations indicate a seismic shift forward in the use of ESG frameworks in the United States.

Lloyd Mayer

Salamon, Haddock & Toepler: Conceptualizing, Measuring, and Theorizing the Third Sector

Lester M. Salamon (Johns Hopkins), who died in 2021, and Megan A. Haddock (ISTR) and Stefan Toepler (George Mason Schar School), who revised and completed the article after Professor Salmon passed away, have published Conceptualizing, Measuring, and Theorizing the Third Sector: Embedding Statistical and Methodological Developments Awaiting Broader Scholarly Take-up in VOLUNTAS. Here is the abstract:

This article reviews and calls attention to the work underlying significant improvements in the conceptualization, measurement and analysis of the third sector on a comparative basis worldwide that have been made over the past three decades. This article provides an update on the current status of each measurement instrument, their institutionalization in the world’s major official statistical systems, and describes how they can work in concert to provide regular, robust, and accurate information about the third sector at the national level around the world. This article also represents a call to action for the research community to advocate for having these research tools implemented in their own countries, to protect the progress made, to support and provide oversight of their implementation, to use the resulting data in their own research, and to initiate improvements in the development of these tools in the future. Doing so will grow the base of cross-nationally comparable data on the third sector, will provide lenses for us to better see the features that make the civil society sector in each country distinct, and will open the way for vastly expanded empirically grounded theory-building in this field.

Lloyd Mayer

New Nonprofit Data Tools: New Giving Dashboard and Form 990 Data Recommendations

The ever increasing flood of data about nonprofits demands new tools to help analyze it. Fortunately, two new resources have recently become available.

First, the Urban Institute's Center on Nonprofits and Philanthropy has launched a Giving Dashboard. Its categories cover a range of giving forms, including individual giving, noncash contributions, volunteering, impact investing, political giving, donor-advised funds, digital currency, and crowdfunding. Here is the description:

Below, we have collected and organized data into a giving dashboard that provides a snapshot of the many ways Americans give. We define giving expansively to include not only donations to tax-exempt nonprofits, but also crowdfunding, impact investing, and more. Many of our categories contain several measures from a range of data sources. On the right side of the dashboard, we provide a quick overview of each category by highlighting how the first measure in the category changed during the latest year for which data are available. By clicking on the category, you can explore all the measures within it. Although many types of giving resist quantification, the figures in this dashboard represent indicators that illuminate the dominant trends shaping the contemporary giving landscape in the United States.

Second, the Aspen Institute's Program on Philanthropy and Social Innovation has published a new report, Stories From the Frontier: Breakthroughs, Challenges, and Recommendations from the First Five Years of Open 990 Data. Here is the description:

Read our new report to learn how open Form 990 data is empowering change throughout the nonprofit sector! PSI commissioned the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University to author the report.

Making 990 data searchable and available for free to the public has revolutionized nonprofit information and scholarship by massively reducing costs and increasing efficiency. Researchers, nonprofits, government regulators, and journalists are using previously inaccessible data to further transparency, educate donors, advance knowledge, and fuel innovation. The report also provides a list of tools and resources for accessing 990 data.

Lloyd Mayer

New Edition of the Model Nonprofit Corporation Act Now Available

The American Bar Association has published the Model Nonprofit Corporation Act, 4th Edition. Only time will tell if it is more successful than the 3d Edition, that was only adopted by one jurisdiction (the District of Columbia). Here is a description:

The 4th Edition of Model Nonprofit Corporation Act is a model statute governing nonprofit corporations designed for adoption by state legislatures. The 4th Edition of the MNCA was adopted in 2021 and is a substantial revision of the Act while preserving important aspects of the 3d Edition. The Act follows the Model Business Corporation Act provisions to the extent possible while highlighting and respecting the characteristics that distinguish nonprofit from profit corporations.

The original Model Nonprofit Corporation Act was approved by the ABA Business Law Section Corporate Laws Committee in 1952 and has evolved with revisions and updates by the Nonprofit Organizations Committee. The MNCA is a model set of statutes governing nonprofit corporations proposed for adoption by state legislatures. This updated Fourth Edition contains many changes that follow the updated provisions and revised official comments in the 2016 revision of the Model Business Corporation Act, along with a variety of other changes. New provisions in the Fourth Edition include the ability to renounce in advance corporation opportunities, procedures to ratify defective corporate actions and records, and the validity of forum selection bylaws. While it includes important new provisions, the Fourth Edition also stands in direct continuity with prior versions and continues the substantive approach of the Third Edition.

A general nonprofit corporation statute must be designed to provide rules for all types of nonprofit corporations from large hospital systems to small human services nonprofits to country clubs and to the other thousands of nonprofit corporations that exist in each state. Besides following the MBCA as much as possible, the MNCA provides as much flexibility as possible to nonprofit corporations as to how they are structured and governed. The Fourth Edition continues to provide great flexibility for nonprofit corporations to organize and operate in what they believe to be the most efficient and effective manner.

Lloyd Mayer

Charity Scandals: AME Church Suspends Pensions; Finance Director Stole $4.7 Million from WV Charity; Update on Minnesota's Feeding the Future

It sadly has become difficult to keep up with all of the news reports about charity insiders misusing funds - maybe it is time to update the 2003 paper by Marion R. Fremont-Smith and Andras Kosaras on Wrongdoing By Officers and Directors of Charities: A Survey of Press Reports 1995-2002, 42 Exempt Organization Tax Review 25. So I am going to limit my reporting here to several recent reports involving millions of dollars each:

• AME Church: The Wall Street Journal reports (subscription required) that the African Methodist Episcopal Church "has suspended retirement payments and discussed steep cuts to the savings of its ministers amid an investigation into missing funds." The church further said that there is an ongoing investigation, including by federal law enforcement, of a possible financial crime. The pension fund, which reportedly had about $120 million in assets as of 2017, serves about 5,000 retired clergy and church workers. Additional coverage: Religious News Service.

• River Valley Child Development Services (West Virginia): MarketWatch reports that a court has ordered the former director of business and finance of this charity to repay $4.7 million that she stole in the wake of her guilty plea and sentencing to seven years in prison. The article goes on to note that as part of her restitution agreement she has agreed to forfeit six airplanes apparently from a small aircraft charter and aviation services company she owned, the proceeds from the sale of three houses, and two cars.

• Feeding the Future (Minnesota) Update: I previously reported on the apparent diversion of tens of millions of dollars from federal funds provided to this charity. The Star Tribune reports that a judge will now oversee the closure of the charity after a request from the Minnesota Attorney General's office and the charity's board voting to voluntarily dissolve it. The court has begun the process of obtaining financial documentation and a complete inventory of the charity's assets. To date no charges have been filed, but federal and state investigations are ongoing. Extensive additional coverage: N.Y. Times.

Lloyd Mayer

Ukraine Donations Update: Billions of Dollars, Millions of Volunteers, Airbnb, Crypto, Tax Research Scholarships

Donations to help Ukrainians and stories about them continue to promulgate, even as Russia's invasion of Ukraine continues. Here are some highlights:

• Candid is tracking the philanthropic response to the war in Ukraine, including reporting almost 600 grants totaling over $700 million and another 137 pledges worth over $660 million. It also reported on a survey from Fidelity Charitable that found a quarter of Americans have donated to support Ukraine.

• Global Citizen reports that the Stand Up for Ukraine event in Warsaw resulted in pledges totaling over $10 billion to support the millions who have had to flee their homes in Ukraine. This is in addition to numerous grassroots volunteer efforts, as detailed by Elizabeth Cullen Dunn (Indiana University) at The Conversation.

• Airbnb's much publicized efforts to help Ukrainian refugees have at times created frustrating situations for those refugees, according to a recent MarketWatch report.

• Crypto donations are also part of the effort, in part because Ukraine aid groups are actively seeking them according to this Chronicle of Philanthropy article (subscription required). The L.A. Times also reports that over $59 million in crypto assets have been received by the National Bank of Ukraine and other recipients that support the Ukrainian military.

• Tax Research Scholarships: Three European and international tax organizations (EATLP, IBFD, and IFA) have joined together to offer research grants to graduate students and others pursuing tax research that have had their careers disputed by the war in Ukraine. The deadline for applying for the the grants of up to EUR 3000 per month for up to one year is April 30, 2022.

Lloyd Mayer

 

Conservation Easements Update: Circuit Split, DOJ Indictment, Biden Administration Proposal, IRS Exam Guidance, Recent Articles

Conservation easements continue to be a hot topic for the federal courts, the executive branch, and scholars. Here are some recent developments:

• The U.S. Court of Appeals for the Sixth Circuit in Oakbrook Land Holdings, LLC v. Commissioner (March 14, 2022) upheld regulation 26 C.F.R. section 1.170A-14(g)(6) relating to when a conversation purposes for an easement is deemed protected in perpetuity even if some external event frustrates the conservation goals, affirming the Tax Court's holding on this point. This creates a circuit split with the Eleventh Circuit, which held in Hewitt v. Commissioner that a portion of the regulation is procedurally invalid under the Administrative Procedure Act. Possible next stop: the Supreme Court of the United States.

• The U.S. Department of Justice announced that a federal grand jury returned a superseding indictment charging seven individuals with federal crimes arising out of fraudulent tax shelters involving conservation easements, including one individual who had been previously charged. The DOJ's press release identifies three of the charged individuals as CPAs and two as licensed appraisers.

• The Biden Administration proposed a limit on the deduction available to partners from certain syndicated conservation transactions in its Budget for Fiscal Year 2023 (see p. 132). As detailed in the related General Explanations document (pp. 56-57), the proposal would "provide that a contribution by a partnership . . . is not treated as a qualified conservation contribution (and thus, the deduction for the contribution is disallowed) if the amount of such contribution exceeds two and a half times the sum of each partner’s relevant basis in such partnership." Certain exceptions apply, including if a three-year holding period requirement is satisfied. As proposed, this limit would be effective for taxable years ending after December 23, 2016 (December 31, 2018 for contributions to preserve a certified historic structure).

•  The Internal Revenue Service has issued a memorandum addressed to IRS employees assigned to syndicated conservation easement examinations. It provides interim guidance updating certain procedures relating to these exams when the statute of limitations period is growing short.

• Amy Blake (Texas Tech) has posted How a New Farm Bill with a Twist on Conservation Easements Can Save the Environment and the Family Farm. Here is the abstract:

Have you ever considered how tax law impacts the environment? It certainly does. A simple, tax-based conservation program enacted in the next farm bill can solve two major issues that are rapidly destroying the environment and the world’s food supply.

The first of these issues is the loss of natural lands due to the rapid outward expansion of urban cities, permanently damaging the environment. Once concrete is poured and skyscrapers are built, the land below that once fostered carbon sequestering plants and soil will never be recovered. Properties that provide natural land, open space, critical habitat, and contribute to the world’s food supply are falling victim to continuous population growth and industrialization around the nation.

The second issue is the federal estate tax inhibiting agricultural landowners from passing their land on to the next generation, resulting in forced land sales. The federal estate tax burden is causing owners of natural land and productive farmland to have no choice but to sell their property, resulting in more land being developed and industrialized. However, it is not too late to shape the future of land conservation on a large scale.

President Biden’s goal of conserving thirty percent of America’s lands and waters by 2030 can be met through the enactment of a new farm bill program with a twist on conservation easements to create a new, voluntary conservation tool that maintains land values and property rights. This proposed conservation program includes innovative tax incentives that better pair the needs of landowners with the goals of the government.

Family farms are becoming an endangered species. This Article proposes a farm bill conservation program that addresses not only land loss and estate tax issues, but also addresses various hardships that are consuming the agricultural industry such as changes in landowner demographics, falling commodity prices, misinformation, and rural economies’ dependence on the agriculture industry. This proposed conservation program should be enacted in the 2023 Farm Bill in order to yield the best results for environmental conservation, food supply, and rural economies.

• Bryan Camp (Texas Tech) has written Lesson From The Tax Court: Penalty Approval In Conservation Easement Cases for TaxProf Blog.

Lloyd Mayer

DAF Update: Biden Administration Tips Toe In; Studies and More Studies

Cherry picking an issue flagged by the IRS in 2017 (Notice 2017-73) and addressed by one provision of the pending ACE Act (section 5), the Biden Administration's FY2023 Budget includes a provision (see page 132) that would bar private foundations from counting distributions to donor advised funds toward their minimum payout requirement under IRC 4942, except in limited circumstances (for more details, see pages 58-59 of the General Explanations of the Administration's revenue proposals). While passage of this provision is of course uncertain, it is important because it indicates that the Administration is at least tipping its toe into the DAF reform area. At the same time, 12 bipartisan members of the 43-member Ways and Means Committee issued a letter supporting DAFs and opposing recent DAF reform proposals. (Hat tip: Chronicle of Philanthropy (but incorrectly identifying the signers as all Republicans, when 7 of the 12 are Democrats)).

At the same time studies of DAFs continue to accumulate. The Institute of Policy Studies recently issued the results from two studies:

• Private Foundation Giving to Commercial Donor-Advised Funds based on the IRS returns of private foundations that filed electronically from 2016 to 2018 and a list of the 45 largest commercial DAF sponsors, with the following findings: 
  • Private foundation giving to these commercial DAFs averaged $737 million per year from 2016 to 2018.
  • From 2016 to 2018, gifts from DAF-giving private foundations to these commercial DAFs averaged about $605,000 each, while their gifts to other recipients averaged just under $119,000 each.
  • 229 foundations gave $1 million or more to these commercial DAFs from 2016 to 2018.
  • Grants to these commercial DAFs made up one hundred percent of all charitable distributions for 157 foundations from 2016 to 2018.

• Larger Community Foundations Have Become Heavily Reliant on Donor-Advised Funds based on the electronically filed IRS returns of 206 community foundations that participated in Candid's 2019 Columbus Survey, with the following findings:
  • DAFs accounted for a median 24 percent of assets.
  • A median 41 percent of all incoming contributions consisted of contributions to DAFs.
  • A median 42 percent of all outgoing grants were grants from DAFs.
  • Larger community foundations tend to be much more heavily reliant on DAFs for their incoming revenue streams; DAFs account for a much larger proportion of their outgoing grants; and DAFs make up a much larger proportion of their total assets.

The Donor Advised Fund Research Collaborative also recently made available the result of this study:

• Donor-Advised Fund Account Patterns and Trends (2017-2020) based on 13,000 DAF accounts from 2017 to 2020 at 21 community foundations and religiously-affiliated DAF sponsors in the United States (but not including national, commercial DAFs), with findings including:
  • While 11% of DAFs had over $1 million in assets, the typical DAF is equally likely to be a small-sized DAF with assets under $50,000 or a medium-sized DAF with assets between $50,000 and $1 million.
  • The median four-year average payout rate among all accounts was 11%; among spendable DAFs, the median payout rate was 13%.
  • Large accounts over $1 million were 11% of all accounts and represented at least 85% of the assets in the DAFRC sample.
  • The majority of DAF contributions were received in the fourth quarter, including approximately 55% of dollars contributed and 42% of contribution transactions.

The Chronicle of Philanthropy also reported that giving from two of the largest sponsors of donor-advised funds grew slower in 2021 than in 2020.

Lloyd Mayer