Nonprofit Law Prof Blog

TIGTA Recommends Training and Procedural Changes for EO Determinations

From TIGTA's report, issued December 19, 2022:

Why TIGTA Did This Audit

This audit was initiated at the request of 13 U.S. Senators. The overall objective of this audit was to evaluate the Tax Exempt and Government Entities Division’s oversight controls and procedures when issuing proposed adverse Internal Revenue Code (I.R.C.) § 501(c)(3) tax-exempt status determination letters.

What TIGTA Found

Determination case files were sometimes incomplete, and employees did not always document actions taken when processing proposed and final adverse determinations. Our review of all 68 proposed adverse determination case files closed in Fiscal Year 2021 identified 40 (59 percent) case files that were missing required documents or information needed to support the actions taken by EOD specialists and Quality Assurance reviewers. For example, in 18 (26 percent) of 68 cases, EOD specialists did not document their manager’s concurrence with the proposed adverse determination, as required. Due to the missing documentation, TIGTA could not always confirm that EOD specialists and Quality Assurance reviewers completed all the necessary actions to process proposed adverse determinations. In addition, EOD management does not always effectively use Quality Measurement Process results to address identified quality issues. The Quality Measurement Process evaluates work quality in four categories of accuracy and timeliness measures. Although the overall quality score for the four categories evaluated averaged 82 percent in Fiscal Year 2021, individual attributes received far less favorable ratings. For example, Fiscal Year 2021 quarterly reports consistently indicated low scores for the “Timely Actions Taken” attribute. Finally, EOD management has not established quantifiable goals for quality review results. Goals help measure how organizations perform relative to its past performance and shows the progress in management’s efforts to improve the quality of programs. EOD specialists, Quality Assurance reviewers, and managers received religious, civil, and Constitutional rights training on how to determine if an organization is a church and were participants in discussions about the Bill of Rights and the Civil Rights Act of 1964, including the freedom of religion and nondiscrimination based on religion.

What TIGTA Recommended:

TIGTA recommended that the Director, Exempt Organizations: 1) ensure that EOD specialists complete, and managers review, all required actions when processing proposed denials of tax exemption; 2) require EOD specialists to fully document discussions with taxpayers and actions taken; 3) require Quality Assurance reviewers to document that applicants did not submit a protest; 4) provide refresher training to EOD specialists and Quality Assurance reviewers; 5) ensure that actions taken to address common quality deficiencies resolve the issues; and 6) develop baseline goals for quality review scores and adjust them periodically, as needed. IRS management agreed with all six recommendations and plans to take corrective actions.

This article summarizes the report, and quotes EOD's response (the full response is included in the report):

In response to the report, Eric Slack director of employee plans at the IRS's Tax-Exempt and Government Entities division, pointed out that in fiscal year 2021, the IRS closed approximately 90,000 applications for Section 501(c)3 status, approving approximately 78,000 of them and denying only about 60 applications, while around 12,000 were closed in other ways, such as withdrawal by the applicant before a determination was made.

"We make determinations of tax-exempt status based solely on the facts, attestations and representations in the administrative file of each individual case," he wrote. "We are committed to respecting taxpayer rights in this process, including the right to be informed, to challenge the IRS's decision and be heard, and to appeal the IRS's position in an independent forum.

dkj

National Mustard Museum!

I don't eat ketchup.

While I like basically all of the ingredients in ketchup (tomatoes, sugar, vinegar, salt), for some reason I find them disgusting put together. And there's no need to try to convert me to your particular ketchup---I've tried. I've tried store brands. I've tried gourmet brands. Back when I lived in New York, one of my favorite restaurants was Home, located in the Village. Home's motto was "Fine food. Fine ketchup." But even though I agreed with the first sentence, I could never make the second work.

Which is why my family was so excited when we went to the National Mustard Museum just outside of Madison, WI. (I love looking at strange, quirky little nonprofits, and the Mustard Museum definitely fits that. Also, if you're ever in Pocatello, ID, you should stop by the Idaho Potato Museum.) Its focus on mustard was accompanied by a deep criticism of other condiments, highlighted by the t-shirt my family made me buy.

From a policy perspective, should we allow tax exemption to the National Mustard Museum? On a Friday morning (one that featured the release of several years of Trump's tax returns), I have to admit that I'm not really thinking about that. But it's definitely a fun and quirky use of tax exemptions.

Samuel D. Brunson

Nonprofits at AALS

Just a quick reminder: a week from today (that is, Thursday, Jan. 5) the Nonprofit and Philanthropy Law section of AALS is having its annual session. The session will be at 8:00 am in the Marriott Grand Ballroom 13. We'll hear excellent scholarship from Tinu Adediran, Phil Hackney, and Jill Horowitz. I hope to see many of you there! 

Samuel D. Brunson

Stranger Things With Syndicated Conservation Easements

 

My college-aged daughter is home for the holidays and she is a Netflix junky.  Some of the things she recommends are pretty good.  Like Stranger Things -- I tried to explain that it was just a jazzed up version of Scooby-Doo and "those meddling kids" but she wasn't impressed that old folks could possibly recognize anything new and IT related.  You gotta be a person of  a certain age to understand the reference, I guess.  Anyway, I thought of the show -- Stranger Things -- as I was scouring the internet looking for something interesting to say about nonprofit law.  Its a slow news day, I think, in Independent Sectorville but I did run across this  U.S. Attorney's press release from earlier this year.  The PR announces an indictment against tax shelter promoters.  More on that below.  As near as I can tell, though, Stranger Things is about someone having let loose some kind of monster on the earth, and the meddling kids are involuntarily drafted into the effort to put the monster back into his confinement somewhere but neither in the real nor the virtual world.  I guess that leaves the spiritual world but I really can't figure out what seems easy and normal to my daughter. 

Stranger Things' basic plot, describes the on-going battle against Syndicated Conservation Easements (SCE).  A monster has been loosed upon the tax landscape and those fearless government kids have been working feverishly to trap the monster back into its netherworld.  Isn't that how most tax shelter battles go? Every time we smash the monster, it reincarnates for another tax season and here we are on Season 5, I think, of Stranger Things.   We have previously blogged about SCEs here and here.   The only recent thing I found was a district court's denial a few days ago of a motion to dismiss in United States Fischer, et. al.   But I worked backwards and happened upon the indictment in that case.  I swear I don't know how I made it through law school back in the stone ages.  It was all theory and argument, cost benefit, utilitarianism and all that jazz, usually too divorced from facts to be of interest except as required to pass the class.  All with chalk and blackboards, if the Professor was really feeling the topic that day.  I also walked ten miles in the snow with no shoes to make it to class, but kids these days have it so easy and interesting.  They can find real life examples of pretty much every dry legal theory ever IRAC'd.   Anyway, the indictment is informative because it almost puts the reader in the room while the nefarious conspirators -- in short sleeve shirts and ties, glasses, number 2 pencil and pencils pocket in place, no doubt -- plan out the monster's release upon the tax landscape.  I find these real life examples make students look up from their laptops more often than one of my dry old Dad jokes.  I have cut and pasted liberally from the indictment below the fold but you can only really get the "in the room" otherworldly feel for how syndicated conservation easements are hatched and loosed by reading the whole indictment.  The indictment describes what seems like an unbelievable plot that nevertheless persisted long enough to wreak havoc in some quarters of the tax landscape.  

dkj

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Project Veritas Admits Excess Benefit Transaction

From the N.Y. Times

Project Veritas, the right-wing group known for its sting operations, reported in its latest filing to the I.R.S. that it provided a prohibited “excess benefit” last year to its founder, James O’Keefe.  Every year, the I.R.S. asks nonprofits to report if their executives received undue or excessive benefits. In its 2021 filings with federal and state regulators, Project Veritas said yes, reporting $20,512 in excess benefits to Mr. O’Keefe.  In those tax filings, submitted in November and posted online by charity regulators in Hawaii, Project Veritas did not describe the benefits.  On Monday, the executive director of Project Veritas, Daniel Strack, said the spending related to Project Veritas staff who accompanied Mr. O’Keefe when he starred in an outdoor production of "Oklahoma!" staged at a farm in Roseland, Va. “The disclosure on our 990 pertains to Project Veritas staff helping film behind the scenes and staff who were on site to accommodate James,” Mr. Strack wrote in a statement issued through a spokesman, referring to the filing with the I.R.S.  As a result, the group said, Mr. O’Keefe had incurred a tax equal to 25 percent of the excess benefit, or $5,128. Mr. Strack, through the spokesman, said the tax “has been paid.”

Hmmmmm. You can read the organization's 990 here but I gotta tell you this is the kind of loose string that resulted in Richard Nixon's resignation, even if the organization is valuing the excess benefit at only about $20,000, and the 4958 excise tax at $5,000.  It looks innocuous enough (why would Veritas even bother to report this, I wonder) and the explanation is ho hum.  But why was the CEO moonlighting as a Broadway wannabe anyway?  I'm thinking, maybe we ought to follow the money!  Now I'm not one to spread rumors, but one needs to ask what other expenses were paid by Veritas whilst its CEO was off chasing the bright lights, an extra salary, and using Veritas to film and prepare advertisements for the play. Were his expenses paid by Veritas, and did he take some Veritas staff with him as though he was working towards Veritas' charitable mission?  Veritas' website has a link to this headline: James O'Keefe Lands Lead Role in Off-Broadway Outdoor Production of "Oklahoma!"  Performing in Solidarity with Artists Who've Been Cancelled.  And the web has it all over that O'Keefe is actually a frustrated would-be Broadway actor, disguised as a right wing charitable "educational" organization CEO.  Seems to me that Veritas is not hurting that cause, I'm just saying!  The Veritas website looks like the play (Oklahoma) is actually sponsored by Veritas and the link takes readers to a page from which they may order tickets.  Another loose string that ought to generate curiosity at National Tax is the sharing of expenses and personnel (with its 501(c)(4) action organization through which much of its actionable or illegal "sting" operations are conducted) hinted at on Schedule R. I am just asking questions here is all.  

 

dkj 

VIP Treatment at NYU Hospital

Nonprofit and for-profit hospital differ in very few ways--both generally provide the same services and both can be extremely profitable. One dividing line? Charity care. For a federal tax exemption, a nonprofit hospital is supposed to demonstrate that it provides an emergency room open to all, irrespective of ability to pay, and hospital care for all capable of paying, whether they're paying in cash or with Medicaid. (Some states have additional requirements; in Illinois, for example, to qualify for a property tax exemption, a hospital must provide more free and discounted services to certain communities than they would have paid in property taxes during the year.)

As part of its extensive investigation on nonprofit and tax-exempt hospitals, the New York Times reported last week that NYU's emergency room prioritizes VIPs, especially relatives of trustees, donors, and their families. (Unsurprisingly, NYU denies having a VIP program.)

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Nonprofit Hospital Community Benefit in Poor Areas and Nonprofit Hospital Profitability

Scholars, media, and policy makers continue to focus attention on nonprofit hospitals, as demonstrated by this WSJ article published Monday:

 

Many of the nation’s largest nonprofit hospital systems, which give aid to poorer communities to earn tax breaks, have been leaving those areas and moving into wealthier ones as they have added and shed hospitals in the last two decades. As nonprofits, these regional and national giants reap $8.8 billion from tax breaks annually, by one Johns Hopkins University researcher’s estimate. Among their obligations, they are expected to provide free medical care to those least able to afford it. Many top nonprofits, however, avoid communities where more people are likely to need that aid, according to a Wall Street Journal analysis of nearly 470 transactions. As these systems grew, many were more likely to divest or close hospitals in low-income communities than to add them. Since 2001, half the hospitals divested by CommonSpirit Health, a large Catholic system based in Chicago, were in communities where the poverty rate was above the medians for state hospital markets, compared with 30% of those it added. At Bon Secours Mercy Health, formed by the 2018 merger of two growing regional nonprofits, about 42% of hospitals it divested were in areas with higher poverty, compared with 27% of hospitals it added. Of hospitals divested or closed by St. Louis-based Ascension, about half were located in higher-poverty areas, compared with 40% of the Catholic system’s acquisitions.

Coincidentally, two scholars have posted "Nonprofit Regulation and Earnings Distribution:  Nonprofit Hospital."  Here is the abstract:

Organizing as a nonprofit amplifies agency problems through limited ownership and restricted earnings distribution. We examine how these agency problems influence the distribution of economic profits by nonprofit hospitals, which dominate the population of tax-exempt organizations and account for a large fraction of the US economy. Using detailed hospital-level financial data, we find that nonprofit hospitals earn large economic profit. We also show that these hospitals hold five times more cash and 85% more retained earnings than for-profit hospitals. In addition, we document that general and administrative labor expenses are 60% larger, physician labor expenses are 32% larger, and expenses for drugs provided to patients are 31% larger for nonprofit hospitals. Finally, we find that nonprofit hospitals invest more in land improvements and buildings. The evidence suggests that nonprofit hospitals distribute economic profits through wages and capital expenditures.

dkj

Hospitals and Politics

As the distance between nonprofit and for-profit hospitals narrows, peoplee hve begun asking whether hospitals should qualify as tax-exempt, a question I'm going to look at over the next couple days. Before we get there, though: almost 60% of hospitals are nonprofit. I assume that a large portion of those nonprofit hospitals are also tax-exempt and, as such, subject to the rules for tax-exempt organizations. Including the campaigning prohibition.

As a general rule, when I think of tax-exempt organizations violating the campaigning prohibition, I think of churches. In fact, I'd probably generally put hospitals at the bottom of my list of violators.

I'd be wrong, though. WTTW and ProPublica have recently looked at Roseland Community Hospital, a nonprofit hospital on the South Side of Chicago. Their investigations focused primarily on patient care and funding issues, but in the course of their investigations, the reporters came across an unexpected issue: Tim Egan, the CEO, has endorsed at least one candidate in his capacity as hospital CEO.

As we spend much of the rest of the week looking at whether hospitals should qualify for tax exemption, it's worth starting out asking whether those that are exempt follow the rules that govern tax-exempt organizations. At least one, it appears, does not.

Samuel D. Brunson 

Photo by Robert L. on Unsplash

The Thorny Questions Raised by Charitable Giving

There is a pretty good year end opinion piece in the NY Times regarding the inefficiency and un-democratization of charitable giving these days.  Here is a sample:

I began thinking about this after I received an email from a psychology professor, Benjamin Beit-Hallahmi, criticizing what he called “the capitalist system of charities in the U.S.A.” He wrote that charities are “competing to the death for the same 50 cents.”

“Thus,” he went on, “hundreds of organizations fight hunger locally and nationally. When it comes to illnesses, there are thousands of organizations competing. This means a terrible waste of resources.” He recommended that I look at Germany, where the government performs functions that charities perform in the United States.

When Bernie Sanders was the mayor of Burlington, Vt., in 1981, he shocked a meeting of the Chittenden County United Way by saying, “I don’t believe in charities,” arguing that government should be responsible for providing social services. The Times reported that he brought “a shocked silence to a packed hotel banquet room.”

Sanders’s opposite might be John Stossel, the libertarian commentator, who argued two years ago that charity is better than government. “Charities are free to help people who truly need help while giving a push to people who need ‘a kick in the butt.’ Government’s one-size-fits-all rules discourage that.”

The problem is that the priorities for philanthropy are set by the people with the money — libertarians from Silicon Valley, crypto dudes, financiers and so on. Fund-raisers have increasingly focused their attention on these ultrarich people because they give the most money per hour the fund-raisers spend on their jobs. Other people’s preferences are relatively neglected. A study in 2007 by the Center for Philanthropy at Indiana University found that people with incomes of $1 million and more directed only 3.8 percent of their giving to basic needs of the poor, while people making $100,000 to $200,000 gave 12.4 percent to meet those needs.

One factor in the decrease is the growth of inequality, which makes foraging for gifts among the wealthy more cost-effective. “Fund-raisers will tell you the single most important reason people give is they’re asked,” said Leslie Lenkowsky, a professor emeritus at Indiana University. Lenkowsky also cited the decline in religiosity, since churches and other religious institutions have long been a nexus for giving. The increase in the standard deduction in the Tax Cuts and Jobs Act of 2017 didn’t help, either, since it took away the tax incentive for millions of middle-class American to make donations.

dkj

Taliban Order Women to stop working for NGOs

In a stunning display of bonehead-ism, the Taliban ordered all NGOs operating in Afghanistan to stop employing humans with XX chromosomes.  The order is indefinite and states that NGOs not complying will lose their license to operate in country.  XY chromosome humans may continue working with NGOs.  The order was prompted apparently by the Ministry of Economy's observation that NGO's were not requiring XX humans to wear proper clothing while providing services to or for NGOs.  The United Nations, Secretary of State Antony Blinken, and several large NGOs - the Red Cross,  Save the Children, Care, and the Norwegian Refugee Council, have all issued statements urging the Taliban to reverse course.  The organizations have all suspended operations, explaining that they depend heavily on XX humans and that the order makes it impossible to carry out their charitable missions.  Here is the UN statement:  

Statement attributable to the Spokesperson for the Secretary-General - on Afghanistan

The Secretary-General is deeply disturbed by the reported order of the de facto Taliban authorities banning women from working for national and international non-governmental organizations. This decision will undermine the work of numerous organizations working across the country helping those most vulnerable, especially women and girls. The United Nations and its partners, including national and international non-governmental organizations, are helping more than 28 million Afghans who depend on humanitarian aid to survive. The effective delivery of humanitarian assistance requires full, safe and unhindered access for all aid workers, including women. The reported ban on women working with the international community to save lives and livelihoods in Afghanistan will cause further untold hardship on the people of Afghanistan.  The Secretary-General reiterates the rights of all women to participate in the workforce thus contributing to the greater good. 

Here is the Red Cross statement, which also references the Taliban's order banning XX humans from education as well.  

The ICRC in Afghanistan employs hundreds of women. Humanitarian work in Afghanistan and around the world is only possible thanks to the efforts of all staff, including women. Questioning the full inclusion and participation of women in operations would jeopardize the whole humanitarian action.

The ICRC is particularly concerned about the future of the Afghan healthcare system and its female patients. Since November 2021, the ICRC has been supporting 45 health structures including hospitals and medical schools, with a total capacity of 7057 beds serving an estimated population of 26 million people. This support includes the payment of the running costs, medical consumables and the salaries of 10,483 health workers (around one third - 33% - of which are women). This support is ongoing and discussions are currently taking place with relevant authorities regarding the impact the recent decision might have on it.

It is clear that if women are no longer able to complete their health studies, in different specialties, it will have an even more severe impact on the delivery of healthcare services across Afghanistan, putting millions of lives at risk.

At a time at which more than half the population (over 24 million people) is in need of humanitarian assistance, we urge the IEA authorities to consider the impact of the recent announcement on the population and to find a solution that will enable all humanitarian actors, to continue delivering life-saving assistance to millions of Afghans.

Here is a helpful link to Afghan laws, but apparently this is a nation of men, neither of laws nor women.  Click on the BBC podcast below for a report providing the larger context.  

 

 

dkj

 

NYC's St. Nicholas Greek Orthodox Church

A couple days ago the New York Times published a story about the newly-rebuilt St. Nicholas Greek Orthodox Church, the one church destroyed in the 9-11 attacks. 

The church wasn't just rebuilt, though: it has been transformed from a humble local church. It is now the St. Nicholas Greek Orthodox Church & National Shrine, 

a destination for all. It offers a bereavement center that will serve as a place for meditation and prayer for people of any faith. The structure itself cost $85 million and features white marble imported from the same quarry that provided stone for the Parthenon. Its interior is decorated with icons hand-painted by a monk in Greece. The building sits proudly on an elevated plaza called Liberty Park, which overlooks the pools of the 9/11 Memorial. Its translucent dome glows at night.

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Hurry up and Wait: The IRS is Two Years and Half a Million 990s Behind

ProPublica reports that the IRS is about two years and half million 990s behind in its record release:

According to a ProPublica review of public IRS data, which powers our Nonprofit Explorer database, the agency is behind on releasing nearly half a million tax records, known as Form 990s, for tax-exempt organizations. The delays, which began two years ago, are stymying access to key financial information that governments, the public and grantmakers use to evaluate the nation’s tax-exempt companies. The gap in reporting has become so profound that state charitable enforcement officers are sounding the alarm. In November, the National Association of State Charity Officials sent a letter urging the IRS to address backlogged 990 data releases . . .

“For charity regulators, the Form 990 series not only helps ensure transparency and accountability, but also provides vital information for state investigations into potential fraud and misuse of charitable resources,” the organization wrote. “It is critical that the availability of that data be timely.”

Here is an excerpt from the letter from state charity regulators:

The NASCO board strongly supports the public availability of information nonprofits report through the Form 990 series and urges the IRS to address delays in the timely availability of these forms.

The Form 990 series is a critical tool for charity regulators, donors, grantors, and the public. For charity regulators, the Form 990 series not only helps ensure transparency and accountability, but also provides vital information for state investigations into potential fraud and misuse of charitable resources. For discerning donors, the Form 990 is an important source of information to support wise giving practices. For responsible grantors, the Form 990 can be an important tool to examine the financial health of potential grantees and ensure they are in compliance with regulatory obligations.

Lags in the availability of the critical data contained in the Form 990 adversely affect regulators, the public, and most importantly, the nonprofit. Because many NASCO member offices rely on the publicly available versions of Forms 990 submitted to the IRS rather than requiring submission of the Forms 990 to their state offices, it is critical that the availability of that data be timely. We are aware of and have observed significant lags in the amount of time between when charities submit Forms 990 to the IRS and when the IRS posts them. This creates an incomplete picture of a charitable organization when a NASCO office undertakes an investigation of a charity and can lead to confusion for potential charitable donors and others.

Now I know why its hard to find the 2022 return for the Musk Foundation (I rant and rave about Musk's legitimate but unjustifiable tax avoidance via the charitable contribution deduction tomorrow).   

 

dkj

EO Updates Publication 5730 - Technical Guide 3-4 Exempt Purpose, Scientific Organizations

The Service revised Publication 5730 this month.  That publication provides a broad and thorough overview of everything you might want to know about Scientific Organizations.  Here is the summary:

A. Summary

(1) The following Issues being discussed in this document include:

    a. Definition of scientific

    b. Activities that further scientific purposes

    c. Analysis techniques for determining whether activities further those purposes and

    d. Other issues related to scientific purposes.

(2) Other issues discussed include:

    a. Private benefit, inurement and the assessment of intermediate sanctions under Section 4958

    b. Unrelated business income (UBI) derived from research activities and exclusions from UBI under Section 512(b)(8).

(3) Audit techniques discussed include:

    a. Conducting the organizational and operational test

    b. Identifying activities and determining if they further the organization’s exempt purpose

    c. Developing examination issues

    d. Identifying and resolving private benefit and inurement issues

    e. Assessing intermediate sanctions

    f. Identifying and resolving UBI issues.

 

dkj

When Tax-Exempt Nonprofits Detract Value From Society

I ran across an interesting paper regarding the measurement of and consequences from negative externalities generated by nonprofits.  Of course, most laws regulating nonprofits (tax or otherwise) are for the purpose of limiting or eliminating negative externalities.  The private foundation excise taxes, for example, are all designed to diminish whatever negative externalities are generated by embargoing large chunks of wealth from taxation.  The tax on unrelated income is an attempt to defeat a negative externality (unfair competition).  To the extent we can better measure negative externalities we can either increase or decrease bothersome and costly regulations.  Anyway, here is the abstract:

Nonprofits receive tax exemptions in return for social value creation and delivery. While the outcomes of these tax exemptions are often positive, there are value detracting situations in which the cost of granting the tax exemption is likely to exceed its benefits. To date, explanations for these value detracting situations remain scattered and discipline centric. Therefore, the purpose of this paper is to clarify the conditions under which tax-exempt nonprofits detract value from society. We survey fifteen years of tax-exempt nonprofit scholarship, across nine disciplines, and identify three value detracting conditions: policymaking and regulation intemperance, nonprofit management and governance distraction, and detection and prosecution inconsistencies. These three conditions interact and reinforce each other, compounding the value destruction to society. Overall, our findings offer important policy insights regarding the unintended consequences of tax exemptions and our framework can be used to identify negative return situations.

dkj

FTX Bankruptcy Trustee to Clawback Charitable Donations

An FTX press release:

WILMINGTON, Del., Dec. 19, 2022 /PRNewswire/ -- FTX Trading Ltd. (d.b.a. FTX.com), and its affiliated debtors (together, the "FTX Debtors"), today announced the FTX Debtors have been approached by a number of recipients of contributions or other payments that were made by or at the direction of the FTX Debtors, Samuel Bankman-Fried or other officers or principals of the FTX Debtors (collectively, the "FTX Contributors"). These recipients have requested directions for the return of such funds to the FTX Debtors. The FTX Debtors are working with these recipients to secure the prompt return of such funds to the FTX Estates for the benefit of customers and creditors.

The FTX Debtors invite all recipients of such payments to contact the FTX Debtors at (FTXrepay@ftx.us) to make arrangements for the return of such payments. To the extent such payments are not returned voluntarily, the FTX Debtors intend to commence actions before the Bankruptcy Court to require the return of such payments, with interest accruing from the date any action is commenced. Recipients are cautioned that making a payment or donation to a third party (including a charity) in the amount of any payment received from a FTX Contributor does not prevent the FTX Debtors from seeking recovery from the recipient or any subsequent transferee.

For background reading see this article in The Guardian, an excerpt from which states:

Bankman-Fried, other members of FTX leadership and a number of members of the FTX group all developed reputations for corporate philanthropy to the tune of hundreds of millions of dollars.  He was one of the largest political donors in the United States, giving directly to Democratic politicians and to Republican causes. Other members of the FTX inner circle were also high-profile donors, such as Ryan Salame, the co-chief executive of FTX’s Bahamian subsidiary.  As well as political causes, Bankman-Fried donated large sums to charities, endowing the FTX Foundation and FTX Future Fund to promote his interests. The FTX Foundation had given away $140m (£115m), the organisation reported in October, of which $90m had gone to the Future Fund.  In criminal charges filed in the state of New York, the Department of Justice has alleged that the donations were the result of criminal money laundering, since the money was effectively taken from customer accounts.

I am sitting here wondering what I would contribute to the crisis management team at an impacted nonprofit.  What steps to take?  Set the money aside in a segregated account pending resolution of the bankruptcy (which could take years, I am told)?  Contact FTX?  Any tax exempt status concerns?  And what if the funds have been committed?  

 

dkj

What the Georgia Senate Runoff Taught Us About Charity and Politics

From an op/ed in the Chronicle of Philanthropy:

With democratic Sen. Rafael Warnock’s victory, another contentious Georgia Senate race is over and, with it, the attention focused on nonprofits for their role in registering, educating, and mobilizing voters and monitoring the fairness of the electoral process.  Millions of dollars flowed into the state over the past year, and much of it went to nonprofit groups.  This outpouring of support may have ensured a robust turnout in both the November general election and the runoff, but it also raises serious questions about the increasingly blurred boundary between charitable and political giving. Of particular concern is donors’ ability to transfer money to 501(c)(4) organizations from other tax-exempt groups — and, in the process, avoid paying capital-gains taxes on the gift. In the past two decades, election-related activities have become increasingly common in the nonprofit world, with millions of dollars going directly to 501(c)(3) groups — organizations that can’t do much lobbying — and 501(c)(4) organizations, which can pursue more advocacy.  Foundations have given more than $2 billion to activities focused on elections since 2011, according to data compiled by Candid, an independent research group. Very wealthy donors often donate appreciated assets, such as stock, thereby avoiding capital-gains taxes. If the recipient is a 501(c)(3), they also receive a charitable deduction. These contributions are undoubtedly legal, but they also stretch and bend the core framework separating charity and politics.

dkj

The Value of Subsidy

Nathan Born and Adam Looney have posted an interesting piece entitled "How Much Do Tax Exempt Organizations Benefit from Tax Exemption?"  Here is the abstract:

Tax-exempt organizations are subsidized relative to taxable organizations because income related to furthering their core mission is excluded from income tax. The value of this subsidy is unclear. There is no government-provided estimate, and the tax benefit for any organization depends on the organization’s activities. Using samples of administrative data on tax-exempt organizations, we estimate the tax expenditure associated with federal income tax exemption for organizations exempt under Sections 501(c)3 to 501(c)8 of the Internal Revenue Code. In 2018, we estimate the value of income tax exemption for these sectors was $21.2 billion. Most organizations do not benefit from tax exemption because they produce no income. Hospitals and health systems, which earn profit from providing patient care, benefit the most from tax exemption, followed by institutions with endowment income that is not disbursed furthering exempt causes, and certain other large organizations that derive income from the services they provide.

dkj

Dynasty Trusts

Americans for Tax Fairness, through principal author, Bob Lord with assistance from some academic smarty pants whose names are recognizable, published an interesting report earlier this year on the persistence of Dynasty Trusts.  Here is a sample from the Executive Summary: 

Dynastic wealth has been with us since before the American Revolution. But the accumulations of wealth by ultrarich families in recent decades now exceed even those from the Gilded Age of the late 19th century. And huge family fortunes continue to pile up day after day with no end in sight. This unceasing buildup of private wealth makes our society less equal, our economy less stable and our democracy less secure. Taxes levied on the intergenerational transfer of wealth are supposed to curb this accumulation, but big loopholes in federal tax law allow it to mostly proceed unchecked. Payment of estate, gift and generation-skipping taxes (collectively known as wealth-transfer taxes) have become for all practical purposes optional for the ultrawealthy. Ultrarich families use dynasty trusts—the term for a variety of wealth-accumulating structures that remain in place for multiple generations—to ensure their fortunes cascade down to children, grandchildren and beyond undiminished by wealth-transfer taxes.  

The picture below is from a different source but it alarmingly (I guess) depicts the problem.  

 

I should admit that I avoid estate and gift taxation like sick man avoids a conference of anti-vaxers.  I have ever since I finished my Estate and Gift tax exam many many moons ago.  I mean, if the estate tax is supposed to preclude the concentration and amassing of generational wealth . . . well, I got bad news for us all.  Anyway, the most I can intelligently state with regard to dynasty trusts and the report is that somehow I get the feeling it has something to do with charitable giving under the Income and Estate tax systems.  So rather than completely expose my ignorance, I will just paste the Table of Contents and let the estate and gift tax geeks out there figure it out:  

Table of Contents

2     EXECUTIVE SUMMARY
5     BACKGROUND: RISE AND DECLINE OF THE ESTATE TAX
7     SUPERCHARGED ESTATE TAX AVOIDANCE: THE RISE OF DYNASTY TRUSTS
10     Generation-skipping Tax Exemption Creates and Inflates Dynasty Trusts
12     Valuation Discounts for Interests in Family-controlled Entities
13     Intentionally Defective Grantor Trusts (IDGTs)
16     Zeroed-out Grantor Retained Annuity Trusts
17     Irrevocable Life Insurance Trusts (ILITS) and Use of “Crummey Powers”
19     Effective Gift Tax Rate
19     Impact of Stepped-up Basis on Dynastic Wealth Accumulation
22     SCALE OF WEALTH TRANSFER TAX AVOIDANCE
22     Estate Tax Avoidance by Dynasty Trust Assets Over the Next 30 Years
22     Extensive Exploitation of Tax Loopholes by the Ultrarich
25     Case Examples of the Use of Family Dynasty Trusts to Avoid Taxes
27     ALARMING FUTURE OF DYNASTIC WEALTH
30     WEALTH DEFENSE INDUSTRY FUELS DYNASTIC WEALTH ACCUMULATION AND FRUSTRATES CHARITABLE                     IMPULSES
31     SOCIETAL PROBLEMS OF DYNASTIC WEALTH
31     Concentration of Political Power
33     Dynastic Wealth Escapes Public Oversight or Regulation
35     REVERSING DYNASTIC WEALTH ACCUMULATION
37     CONCLUSION
38     ENDNOTES

dkj

Charitable Giving 1992-2021

The Dorothy A. Johnson Center at Grand Valley State released an informative 30 year retrospective on charitable giving.  Philanthropy 1992-2022:  Giving Changed -- How Much, Where To, and Who From discusses and links to a good bit of data to help inform charitable giving policy.  Here is a sample:

This essay not only reminds us what things looked like in 1992, but reveals how the practices of giving, the makeup and number of institutions, and the intensity and breadth of research and teaching about philanthropy have all expanded considerably and changed in sometimes dramatic ways.  Megadonors have become much more mega, the lines between the sectors have blurred more than anyone expected, and many more academic programs have opened their doors. Still, many aspects of the field and its institutions have endured — not always for the better. Nonprofit ethics scandals remain in the news as they were 30 years ago, and we still struggle with how to address persistent social and racial inequities. However, the overriding theme here is the incredible expansion and change in these past thirty years.

Giving increased in tandem with the economy, but the mix of giving sources shifted.

According to our best annual estimate of charitable giving, in the publication Giving USA, total giving from all sources in 1992 was $124.31 billion. In 2021 (the latest year calculated), that total rose to $484.85, an increase of $360 billion over 30 years.  However, this increase is not as astonishing as it might seem because the total giving figure has continued to track closely with the size of the overall U.S. economy. Giving now is roughly 2% of the national GDP, just as it was 2% back in 1992. As the economy grew, so did giving.  What has changed is the mix of charitable sources, as shown in Table 1. The most dramatic change is in the relative amount of total giving coming from individuals versus foundations. While individuals are still the largest source, they account now for only about two-thirds of total giving — whereas they were 82% of the total 30 years ago. This relative decline is less a result of individual giving declining, and more because the share of giving coming from foundations has risen so significantly, from less than 7% in 1992 to nearly 19% of all giving today.

 

dkj

 

 

Charitably Guilt-Tripping

Well, I finally understand the sinister psychology underneath those free mailing labels, pens, and other items with just enough utility that we just can't throw them out.  The secret is you can't throw the stuff out so it!!  So every time you use the pens or mailing labels, you are reminded that some "poor" charity (or its for-profit solicitation firm) is struggling because you didn't make a donation in exchange for the pens or labels you never asked for in the first place but are using right now!  Its all right here in this WSJ editorial.

To increase their chances for a share of those funds, charities have learned that a free token or gift goes a long way. Recipients will often feel guilty about not making a donation and will be even more ashamed if they use the gift without paying for it.  I struggle with this every time an unsolicited mailer arrives with greeting cards, kids’ socks, or other tchotchkes. By law, “you may keep such shipments as free gifts,” according to the Federal Trade Commission. But few of us treat this issue in legal terms. It’s not practical to send the items back, even though Boys Town tells me that a small percentage of people do. I tried giving the things I receive away, but I’ve found no takers. Tossing perfectly good pens and paper in the trash makes no sense. So I use the stuff, reminding myself that I make my share of charitable donations every year—just not necessarily to the organizations that keep filling my mailbox. Still, a tinge of guilt remains.

Guilt, especially in a capitalist world, is a great motivator for altruism.  Its why I give to panhandlers every now and again, quite frankly.  Pure guilt, and also hedging my bets of getting into Heaven I guess.  In small town Nampa Idaho (why anybody would chose Nampa over Tampa is a mystery to me), the City Council has made it easier for me to keep on walking without feeling guilty if I don't give to panhandlers:

Signs like this would help alleviate my anti-panhandler guilt, and if I later forgot to send a donation to NPR or something, I would be that much richer and less guilty.  The loudest opposition to the signs comes from the Nampa nonprofits, apparently:

In October, Nampa City Council unanimously authorized police to spend up to $1,800 to develop 10 anti-panhandling signs and place them throughout the city. Nine signs have been installed so far, and the final sign’s location is yet to be determined, though staff are considering areas near Interstate 84 on- and off-ramps.  The signs have spurred backlash from community members, particularly from local nonprofit leader Kenton Lee of Because International. Lee has opposed the signs from the beginning and has come before the council multiple times to argue that the signs categorize the city’s homeless population as drug addicts or alcoholics, and later asked why the signs say “no panhandling” when city code does not specifically ban panhandling.

I would wager that guilt motivates a lot more charitable giving than the Tax Code.  But I could be wrong.

 

dkj