Nonprofit Law Prof Blog

Musk, OpenAI, and the Internal Affairs Doctrine

One thing that's particularly puzzling about Musk's suit against OpenAI is that he's bringing it in California. After all, OpenAI is incorporated under the laws of Delaware, so Delaware would seem a more apt jurisdiction to bring the suit in.

Of course, Musk has some history with Delaware courts, and may prefer to avoid them. Moreover, I suspect that he couldn't bring much of his suit in Delaware. In general, the ability to enforce nonprofit boards' fiduciary duties lies with the state Attorney General. In fact, for nonprofit corporations without member and with self-perpetuating boards of directors (such as OpenAI), generally "only the attorney general or a director has standing to sue" to enforce fiduciary duties. Delaware seems to follow this rule: the Chancery Court has acknowledged the rule that donors lack standing to enforce directors' fiduciary duties.

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Is ChatGPT-4 Artificial General Intelligence?

Yesterday I wrote about some problems with the alleged Founding Agreement that makes up the foundation of Elon Musk's lawsuit against OpenAI and Sam Altman. Today I want to shift to one of the suit's prayers for relief.

Musk wants the court to declare that ChatGPT (and that Q* and/or OpenAI's next generation large language models) constitute "artificial general intelligence" and are thus "outside the scope of OpenAI’s license to Microsoft."

This prayer for relief requires a little unpacking. Earlier in the complaint, Musk says that OpenAI's license agreement excludes artificial general intelligence. That is, if ChatGPT-4 is artificial general intelligence, OpenAI cannot license it to Microsoft. And, Musk says, Microsoft's own researchers believe that ChatGPT-4 "could reasonably be viewed as an early (yet still incomplete) version of an artificial general intelligence . . . system."

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OpenAI's Founding Agreement

As Darryll mentioned on Friday, Elon Musk has sued OpenAI. And because OpenAI is a nonprofit organization, and because much of the suit is based on its nonprofit status, it seems only fitting that we look at the suit in some depth. So this week, I'm  going to look at a couple issues surrounding Musk's suit against OpenAI. (If you want to read the complaint, you can find it here.)

Musk's first cause of action is for breach of contract. And what contract? Musk describes it as the "Founding Agreement" of OpenAI. According to Musk, this Founding Agreement had two parts: that OpenAI

(a) would be a nonprofit developing AGI for the benefit of humanity, not for a for-profit company seeking to maximize shareholder profits; and (b) would be open-source, balancing only countervailing safety considerations, and would not keep its technology closed and secret for proprietary commercial reasons.

Of course, there isn't a signed version of this Founding Agreement. Musk asserts that it is memorialized, among other places, as part of OpenAI's certificate of incorporation.

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The NRA Saga Continues ... Wayne LaPierre Takes the Stand

In the continuing saga of everything not to do as a nonprofit organization, the trial of the NRA and some of its top executives is in full swing.

If you haven't been keeping track, in 2020, New York Attorney General Letitia James brought suit against the NRA alleging correcption and misuse of assets under a variety of New York statutes, including "New York’s Estates, Powers & Trusts Laws; New York’s Not-for-Profit Corporation Law; the New York Prudent Management of Institutional Funds Act; and New York’s Executive Law." Around that time, we also found out that the NRA owed the IRS roughly $3.4 million in taxes and penalties as detailed more fully here, complete with commentary from Nonprofit Law Prof Blog's own Phil Hackney.  And of course,  as detailed in this NPR article, the NRA tried to file for bankruptcy, but it petition was dismissed on the basis that the" group had not filed the case in good faith" and was "using the bankruptcy case to address a regulatory enforcement problem."

Late last week and into this week, Wayne LaPierre, now ex-CEO of the NRA (apparently, his resignation is effective today, accoring to the New York Times), took the stand in the New York law suit against the NRA and some of its top executives, including LaPierre.  In an interesting turn, LaPierre is ... sort of... testfying for the NRA.  And sort of... against... the NRA.   It's confusing for sure.  He's an individual defendent and the NRA is also a defendant as an organization.  According to the Times and other outlets, LaPierre admitted to poor management and personal use of NRA assets under the questioning of the NRA's lawyers (not the state's lawyers) in an effort to blame the organization's issues on LaPierre personally and not on the institution.   The organization is taking the position that subsequent changes to its expense reimburement plan and other governance reforms are sufficient to show that it shouldn't be liabile institution

New York can penalize the organization and can also ask for restitution to the organization from the executives that misued its assets.   The resulting blamefest is an interesting watch.    Having watched the rise of the NRA as a political force in the gun rights movement (see Matthew Lacombe's book, Firepower: How the NRA Turned Gun Owners into a Political Force), it is interesting to watch the once formidable organization fall from those heights.   It will be interesting to see what remains when all is said and done.

With popcorn, eww

 

The Nonprofit Leadership Crisis: A Natural Consequence of the "Running Like a Business" Mentality

In Friday's Chronicle of Philanthropy,  an opinion piece by Frances Kunreuther and Sean Thomas -Brietfleld of the Building Movement Project discusses a new study on nonprofit leadership generally and specifically, on barriers to increasing the number of diverse nonprofit executives.  The report follows similar studies done by the organization in 2016 and 2019, so it is able to identify some key trends in nonprofit leadership.   The key findings of the most recent report, entitled "The Push and Pull: Declining Interest in Nonprofit Leadership, " is that, despite increases in mentorship, coaching, and other types of support,  there is

a decreased interest in top leadership roles and a simultaneous increase in respondents who said they were not interested in these roles. The report also shows that, contrary to our hypotheses, respondents who had received more supports were less interested in the executive director role while respondents who faced more challenges in their careers were more likely to pursue top leadership positions. BIPOC respondents more commonly faced these challenges overall, though the trend in aspiration was true for both BIPOC and white survey takers. These trends suggest a “push” into leadership roles to ameliorate the issues nonprofit staff have experienced, rather than a “pull” into these roles on their merit. Finally, to explain why BIPOC staff were particularly less interested in the executive director position, this report looks at the obstacles BIPOC leaders face in their roles.

While there does appear to be a general increase in leadership resources available to aspiring nonprofit leaders, signficant challenges remain - challenges that are exacerbated for people of color.  According to the study, these challenges continue to include low and/or inequitable pay, lack of board of director and senior executive leadership, and signficant increases in job responsibility and expectations leading to high levels of burnout.  The report's summary conclusion highlights these issues:

Nonprofit organizations and the sector have an opportunity to address the declining interest in top leadership positions. This means creating more pulls towards leadership, particularly investing in well-functioning (rather than dysfunctional) internal operations so that leaders have the ability to succeed without constant self-sacrifice. Making executive positions doable and adding more support for leaders could address not only what is pushing, rather than pulling, BIPOC staffers into leading, but also pushing Executive Directors out of their jobs. This is even more important given the types of external challenges leaders will continue to face in the coming years.

As I read the report and its conclusions, I couldn't help but zoom out to see this as a evidence of the error of the "run charity like a business" mentality. Personally, nothing irks me more than that notion, which I will rail against at all turns. In my view, this notion devalues the very real need for high level human capital in the nonprofit space. Nonprofit salaries are "overhead" to be minimized because they not "programmatic" - leading to individual donors scouring for overhead percentages and institutional funders limiting the scope of reimbursable expenses.  We challenge nonprofits to do more with less as funding sources dry up and needs increase, and it seems that the first place we look to criticize is nonprofit salaries.  "Do less with more" is code for squeezing more out of our people - it's no wonder that people walk away saying enough is enough. Even more troubling, this view is calclified into how we regulate grantmaking, fiduciary duties, and compensation, which creates barriers to change.  So long as we continue to view - socially and legally - nonprofit labor as an expense to be minimized rather than a resource to be nutured, this leadership crisis will continue.

Frustratedly, eww

 

 

 

Trifecta Follow-up to Title IX, NIL Collectives, and NRA Trial

This fine Friday, I have follow-up mini posts about all three of the things I blogged about this week: Title IX, NIL collectives, and the NRA trail. So, in reverse chronological order, here they are:

Yesterday, I wrote about the suit against Hillsdale college asserting that it was subject to Title IX regulation on account of its tax-exempt status. My colleague Darryll Jones alerted me to a press release from Senator Marco Rubio on Wednesday announcing proposed legislation to clarify that tax exemption is not “Federal financial assistance” for the purpose of Title IX. Obviously, if the legislation passes, that clarifies the law. But our legislative branch is not designed to easily pass legislation, and (it sure seems like) that the problem is worse these days, so I think it’s likely courts will probably have to make up their own mind what the original statute means.

On Wednesday, I wrote about NIL collectives, and got a very good series of questions from a commenter that I think are worth answering. A reader commented, “How do they determine the amount of the payments to avoid them being classified as excess benefit payments?  Do equal payments have to be paid to all players on the team?  How do you determine if one player's NIL is more valuable than another? I heard that Univ. of Texas is paying $50,000 to new football linemen; can they pay this to certain players and not to others?”

The answer to the first question is easy: “excess benefit” payments (if this is meant in its technical sense to refer to “excess benefit transaction” penalties in the Tax Code) occur between an organization and “disqualified persons” (people who have some level of control over the organization). Players are unlikely to be disqualified persons, so payments between NIL collectives and players will probably never be “excess benefit” payments. That’s why the question for NIL collectives is whether there too much private benefit, not whether there is any “inurement.” Honestly, if I were to try to identify the five most important things to understand about nonprofit law (for the students who take my introductory class, for example) this line between inurement and private benefit is definitely on the list, and so I can’t help point it out, even at the risk of fetishizing the phrase “excess benefit.”

But charities still have an obligation not to make excessively large payments to private persons who are not “disqualified persons,” notwithstanding the fact that “excess benefit” is technically the wrong word for such payments. As a state law matter, this obligation is found somewhere in the duty of care or the duty of obedience, the concept of “waste,” or in statutes that try to clarify this obligation. Some people (including the IRS) think that this duty is also reflected in the Federal-law concept of “excess private benefit.” Jurist Richard Posner famously proposed that idea (in dicta) in his opinion in the United Cancer Council case. This is also plausibly what the IRS means when it says that private benefit can be excessive either quantitatively or qualitatively. As I mentioned on Wednesday, Hail! Impact (the charitable NIL collective that has received IRS approval of tax-exempt status) solves the quantitative problem by only using 30% of its fund expenditures to pay NIL fees to athletes and uses the other 70% for truly charitable expenditures. But that 30/70 solution doesn’t solve the “qualitative” problem.

So, how should a charitable NIL collective make sure that it is not providing an excessive private benefit to athletes qualitatively through the wrong structure of its individual payments? The answer is: hard to know. The theory should be that it’s pretty safe if it pays them “fair market value” for the rights. That’s what American University (my employer, a charity) does when it decides how much to pay me. It tries to figure out what the market would bear, and then (if my economic theory serves me in this case) pays me the lowest it can get away with to keep me from jumping ship and to motivate me to do whatever it is that it wants me to do. So, as to the question of whether the NIL collective must (or can) pay the same amount to all players or must (or can) pay each player based on the value of their individual NIL, the default answer should be that it makes more sense to pay them based on an evaluation of their individual NIL value. But, of course, if the collective thinks that it can get away with paying all players the same amount, and if it thinks that’s good for the team or school, I can’t think of an argument for why that would violate the “private benefit” doctrine (or the directors’ state-law duty of care or obedience). But because the “qualitative” aspect of the private benefit doctrine is so under-developed as a legal matter, I’m not sure there is a clear answer to how it would apply in this case. Now that the IRS Chief Counsel’s office is focused on NIL collectives (as evidenced by the pretty quick and excellent Memorandum), I could imagine them using this opportunity to provide some guidance on their interpretation of the question. But, just like with Congress clarifying the scope of Title IX, I wouldn’t hold my breath. They’ve got a lot of other legitimate priorities, to say the least.

On Tuesday, I wrote about the expert testimony given by Jeffrey Tenenbaum in the NRA case. It was pointed out to me that there is some tension in what I wrote (that I wasn’t really aware of) about the purpose of Mr. Tenenbaum’s testimony: whether it was to establish “customary” practices among nonprofits or “best” practices. As I pointed out in the first paragraph, the court permitted his testimony about “what is regular and customary in the nonprofit sector.” But then in that same paragraph, I said he testified that “best practices” counsel against boards of more than 30 members because large boards make it “impossible [for individual board members] to fulfill their duties.” That’s a confusing quote because “best practices” is a quote of my source, NRA Watch, which said that “Tenenbaum said that best practices typically dictated an ideal non-profit board size of between 12 and 20 people.” But it did not quote him as using the term “best practices.” Instead it quoted him as saying that if a board has more than 30 people, it “becomes impossible [for individual board members] to fulfill your duties.” Anyway, in case it was confusing at all, I changed my own sentence in my final paragraph to clarify that I think it is valuable for juries to be educated about customary practices in the nonprofit sector, and that I’m glad Mr. Tenenbaum did that in this case. Although, obviously, it is still true that the jury will have to apply the legal standard, not whether NRA practices are “customary” or not.

Benjamin Leff

More Thoughts on NIL Collectives

Sometimes I like to share my own perspective on issues previously covered well by my colleague bloggers. In this case, I’m following up two posts (this one and this one) by my colleague Darryll Jones on IRS guidance issued last May about the possibility of tax-exempt status for so-called NIL collectives.  I also like to take the opportunity to recommend podcasts when they are informative, and in this case there are excellent episodes of The Daily and Taxes for the Masses (discussion of tax-exemption begins at minute 12:50).

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

In my view, the weakest part of the Memorandum is that it doesn’t really explain why NIL payments to student athletes do not potentially serve the charitable purpose of advancing education or amateur sports competitions, even though athletic scholarships presumably would. Instead of distinguishing between merit-based athletic scholarships (that presumably do not create an impermissible private benefit) and NIL payments (that do), it discusses need-based scholarships, which would clearly be permissible because mitigating poverty is a well-established charitable purpose. The comparison between need-based scholarships and NIL payments is kind of a red herring, since it’s so obvious how those two kinds of payments are different from each other. But I know of no authority to support the idea that scholarships based on athletic ability rather than need fail to advance a charitable purpose because they are not need-based. Obviously, NIL payments and athletic scholarships are different from each other, and so this weakness of the Memorandum does not mean that it is wrong. It just fails to explain what is materially different between NIL payments and athletic scholarships when evaluating private benefit to student athletes.

But the fact that NIL payments do not themselves constitute a charitable purpose does not mean that NIL Collectives that pay them necessarily fail to qualify for tax-exempt status. Once a noncharitable purpose (NIL payments) is identified, the collective must determine if its noncharitable activities constitute a private benefit to the student athletes that is too substantial, either quantitatively or qualitatively. Professor Jones’s January 10 post cites a Chronicle of Philanthropy article that describes a new charitable NIL collective (“Hail! Impact”) that purports to qualify for tax-exempt status even though it makes NIL payments to student athletes. The organization’s theory is that so long as 70% of its funds are used for a proper charitable purpose, the 30% of its funds that are used for NIL fees do not create a substantial private benefit, either quantitatively or qualitatively. The article also states that the organization, “worked with the IRS and believes it is the first NIL collective to be designated a charity since the agency issued its guidance about donations.” In other words, the IRS appears to have blessed this 70/30 split as the proper way to structure an NIL collective. Given that donating money in general support of athletic programs at a tax-exempt college or university has always been treated as a tax-exempt purpose, NIL Collectives could be formed to transfer 70% of all contributions to the university in support of its athletic programs (and presumably could be spent on merit-based athletic scholarships) and the remaining 30% could be spent on NIL payments to student athletes. It remains to be seen how many NIL collectives will choose this path and how many will simply organize as profit-making ventures for their investors, taking as much profit as they can from exploiting the NIL rights of student athletes.

The podcasts I recommended take the position that charitable NIL collectives are an abuse of the Tax Code. But the fact is that under current law, there is nothing impermissible about an NIL Collective making NIL payments to athletes, as long as that activity is insubstantial in relation to its charitable activities. That’s why charities can engage in lobbying activities, for example, or enter into a joint venture with for-profit partners, or pay relatively high (but reasonable!) fees to fundraising firms, or engage in any number of other activities. As many of the Nonprofit Law Professor Blog posts point out, there are areas in which the law of private benefit probably fails to sufficiently protect the nonprofit sector. I definitely agree that a more coherent framework would be preferable to the one we have. But I’m not sure I am persuaded that I should be outraged by tax-exempt NIL collectives. If donors want to give to universities’ athletic programs and “on the side” provide NIL payments to student athletes, I’m OK with that. I think these NIL payments are less likely to undermine the educational objectives of the schools than those made by ordinary for-profit investors, and I even (perhaps naively) think they might be less exploitative of the athletes. If fans want to donate to make payments to student athletes, don’t we imagine, at least as a starting point, that they are might care more about those student athletes than investors who are simply trying to make a buck off a teenagers’ NIL value? Or do I need to go back and re-read my Milton Freidman?

--Benjamin Leff

Global Fund Approves US$9.2 Billion in New Grants to Accelerate Fight Against HIV, TB and Malaria in More Than 70 Countries

I came across this press release today. It had a feel-good ring to it -- some good news to start the new year. Here it is, straight from the source:

GENEVA – The Global Fund to Fight AIDS, Tuberculosis and Malaria has approved US$9.2 billion for grants starting in 2024. 152 new grants will begin implementation this month, supporting more than 70 countries to continue their lifesaving work to end the three epidemics and build sustainable and climate-resilient systems for health over the 2024-2026 period.

In November 2022, following a record-breaking Seventh Replenishment outcome of US$15.7 billion, the Board of the Global Fund approved the largest-ever investments to boost the fight against HIV, TB and malaria and strengthen health systems: US$13.7 billion, including US$13.1 billion in country allocations, to more than 120 countries over the 2024-2026 period.

The remaining country allocation funds to invest over the next 3 years – up to US$4 billion – are scheduled for later start dates.

Peter Sands, Executive Director of the Global Fund, said: "Sustaining our progress against the world’s deadliest diseases and helping build more resilient and inclusive systems for health will save millions of lives, address glaring health inequities and enable communities to flourish. At a time when so many of the poorest and most vulnerable people are also being affected by climate change, conflict, economic stresses and an erosion of human rights, there is an imperative to ensure sustained and adequate funding of such demonstrably effective lifesaving interventions. We are extremely thankful to our donors for their continued support and to all our stakeholders across the partnership who have worked so hard to develop these new grants so quickly and effectively.”

Over the past year, country partners have worked with Country Coordinating Mechanisms (national government, community and health experts that develop and guide Global Fund-supported programs in a country) to develop detailed funding requests for programs to respond to the epidemics at the country level. As part of the Global Fund’s grant-making process, all funding requests are reviewed by an independent Technical Review Panel and then by the Grant Approvals Committee for quality and comprehensiveness before going to the Global Fund Board for final approval. Once the Board approves a grant, the Grant Confirmation is signed, and the Global Fund can process the first disbursement.

In addition to the core grants awarded, the Global Fund continues supporting countries to reinvest funds from the COVID-19 Response Mechanism (C19RM) in health systems strengthening and pandemic preparedness. This includes over US$2 billion in investments for medical oxygen, community systems and community health workers, supply chain, laboratories, surveillance, data systems and inter-operability, and waste management.

As I said before, this is surely good news with which to start the new year. May the grants be used wisely.

Prof. Vaughn E. James, Texas Tech University School of Law

 

National Taxpayer Advocate Releases Annual Report

I shall state upfront: this post is not limited to the nonprofit sector. Instead, it should be of interest to all taxpayers. I confess that each year I look forward to the National Taxpayer Advocate's Annual Report to Congress. Although the report was of greater importance to me during the six years that I served as director of the Texas Tech University School of Law Low-Income Taxpayer Clinic, today, many years after I have moved on to other things, I still look forward to hearing what the Taxpayer Advocate has to say in the Annual Report to Congress.

Early this morning, I received the news: National Taxpayer Advocate Erin M. Collins had released the 2023 Report to Congress, describing the year as an “extraordinary transition for the IRS and therefore for taxpayers.”

The report credits the Internal Revenue Service with substantially improving taxpayer services and developing plans to transform the taxpayer experience in the coming years. However, it identifies some areas of weakness, including paper processing. 

Now, the annual report is required to identify the 10 most serious problems taxpayers are experiencing in their dealings with the IRS and to make administrative and legislative recommendations to address those problems. This year's report presented the following administrative recommendations to address some of the serious problems the Advocate identified:

1. Prioritize the improvement of online accounts for individual taxpayers, business taxpayers and tax professionals to provide functionality comparable to that of private financial institutions. Of all the steps the IRS can take to improve the taxpayer experience, creating robust online accounts has the potential to be the most transformative and should receive the highest priority. However, the report says, online accounts must be significantly improved so more taxpayers will see the benefits of using them, and the IRS must do a much better job of promoting them. During 2023, individual taxpayers filed more than 160 million income tax returns, yet only 16.8 million users accessed individual online accounts. That’s just over 10%. Not good enough.
2. Improve the IRS’s ability to attract, hire and retain qualified employees. The report says the IRS continues to struggle to hire qualified candidates in many key areas. It says three of the main reasons are failure to advertise positions to the optimal target audience by job series, the slow pace of the hiring process and non-competitive pay. The report recommends the IRS devote more effort to identifying and conducting outreach to target audiences by job series, work to continue to shorten the clearance and onboarding process for selected applicants, and work with the Office of Personnel Management and Congress to obtain more pay flexibility for hard-to-fill positions.
3. Ensure all IRS employees – particularly customer-facing employees – are well-trained. The report says the IRS has historically faced challenges providing adequate training to customer-facing employees, partly due to the complexity of the tax system and lack of funding. However, those challenges are greater when the agency is staffing up, as it is currently doing. Results from the recently concluded 2023 Federal Employee Viewpoint Survey show nearly a quarter of IRS employees provided a negative response to the statement, “I receive the training I need to do my job well.” The report says: “It is critical that the IRS make comprehensive training a priority and ensure that new hires receive adequate training before they are assigned to tasks with taxpayer impact.”
4. Upgrade the back end of the “Document Upload Tool” (DUT) to fully automate the processing of taxpayer correspondence. The IRS has created and implemented the DUT to allow taxpayers to upload documents electronically in response to an IRS notice, letter, telephone conversation or visit. The report says that is “great news” for taxpayers. Once the documents reach the IRS, however, they are still processed as if they came in on paper. All documents go to a central location and then must be parceled out to the appropriate function for processing and response. As part of its Paperless Processing Initiative, the IRS said that “[h]alf of paper-submitted correspondence, non-tax forms, and notice responses will be processed digitally” by the 2025 filing season. Digital processing will shorten response times and enable the IRS to reassign employees to other high priority areas. The report recommends the IRS continue its efforts to digitize the processing of more taxpayer submissions and create back-end processes for DUT submissions.
5. Enable all taxpayers to e-file their federal tax returns. While the significant majority of taxpayers e-file their tax returns, the IRS still received more than 11 million individual returns and 15 million business returns on paper last year. The processing of paper returns causes delays in delivering refunds and increases administrative costs for the IRS. Some taxpayers may prefer to file on paper, and the report says the IRS should continue to improve the filing experience for paper filers. But many taxpayers who would prefer to e-file their returns cannot do so for a variety of reasons. For example, about 150 to 200 IRS forms still are not eligible for e-filing. The report describes the main barriers to e-filing and recommends steps the IRS can take to remove them.
6. Extend eligibility for first-time penalty abatement to all international information return penalties. U.S. persons who receive gifts or inheritances from foreign persons or who own interests in certain foreign partnerships and corporations and engage in cross-border business activities are potentially subject to a wide range of U.S. reporting requirements. The report says many of these reporting requirements are obscure and complex, and they sometimes apply to lower-income taxpayers and immigrants who may not be aware of them. Yet taxpayers who do not comply with applicable reporting requirements are subject to penalties that “are automatically assessed, broadly applied, needlessly harsh, and often unexpected,” the report says. These penalties apply if a filing is late, incomplete or inaccurate. “Rather than promoting tax compliance through taxpayer education and support,” Collins wrote, “the IRS has opted to flex its administrative muscle and bring down the enforcement hammer on good-faith taxpayers and bad actors alike.” The report recommends that the IRS offer first-time penalty abatement in these cases in appropriate circumstances.

The report also proposed 66 legislative recommendations intended to strengthen taxpayer rights and improve tax administration. The following five legislative recommendations are noteworthy:

1. Require the IRS to timely process claims for credit or refund. Millions of taxpayers file claims for credit or refund with the IRS each year, yet under current law, there is no requirement that the IRS pay or deny them. It may simply ignore them. The taxpayers’ remedy is to file a refund suit in a U.S. district court or the U.S. Court of Federal Claims. For many taxpayers, that is not a realistic or affordable option, as full payment of the disputed amount is generally required, and there can be sizeable litigation fees. “The absence of a processing requirement is a poster child for non-responsive government,” the report says. While the IRS generally does process claims for credit or refund, the claims can, and sometimes do, spend months and even years in administrative limbo within the IRS. TAS recommends Congress require the IRS to act on claims for credit or refund in a timely manner and impose certain consequences for failing to do so.

2. Authorize the IRS to establish minimum standards for paid tax return preparers and revoke the identification numbers of sanctioned preparers. The IRS receives over 160 million individual income tax returns each year, and most are prepared by paid tax return preparers. While some tax return preparers must meet licensing requirements (e.g., certified public accountants, attorneys and enrolled agents), most preparers are not credentialed. Numerous studies have found that non-credentialed preparers disproportionately prepare inaccurate returns, causing some taxpayers to overpay their taxes and others to underpay, which may lead to penalties and interest charges. In FY 2022, the IRS estimated the improper payments rate attributable to improper EITC claims was 32%, amounting to $18.2 billion. Among tax returns claiming the EITC prepared by paid tax return preparers, 94% of the total dollar amount of EITC audit adjustments was attributable to returns prepared by non-credentialed preparers.

   The report says federal and state laws generally require lawyers, doctors, securities dealers, financial planners, actuaries, appraisers, contractors, motor vehicle operators and even barbers and beauticians to obtain licenses or certifications and, in most cases, to pass competency tests. Both to protect taxpayers and the public fisc, TAS recommends Congress authorize the IRS to establish minimum competency standards for tax return preparers and to revoke the Preparer Tax Identification Numbers of preparers who have been sanctioned for improper conduct.

3. Expand the U.S. Tax Court’s jurisdiction to adjudicate refund cases. Under current law, taxpayers who owe tax and wish to litigate a dispute with the IRS without paying the tax first can go to the U.S. Tax Court, while taxpayers who have paid their tax liability and are seeking a refund must sue in a U.S. district court or the U.S. Court of Federal Claims. Although this dichotomy between deficiency cases and refund cases has existed for decades, TAS recommends Congress give taxpayers the option to litigate both deficiency and refund disputes in the U.S. Tax Court. Due to the tax expertise of its judges, the Tax Court is often better equipped to consider tax controversies than other courts. It is also more accessible than other courts to unsophisticated and unrepresented taxpayers because it uses informal procedures, particularly in disputes that do not exceed $50,000 per tax year or period.

4. Extend the “reasonable cause” defense for the failure-to-file penalty to taxpayers who rely on return preparers to e-file their returns. A taxpayer who files a tax return after the filing deadline is subject to a penalty of up to 25% of the tax due unless the taxpayer can show the failure was due to “reasonable cause.” Most taxpayers hire tax professionals to prepare their returns, and tax professionals sometimes fail to meet filing deadlines without notifying the taxpayer. In 1985, when all returns were filed on paper, the Supreme Court held that a taxpayer’s reliance on a preparer to file a tax return did not constitute “reasonable cause” to excuse the failure-to-file penalty. In 2023, a U.S. Court of Appeals extended that holding to e-filed returns.

   For several reasons, it is often much more difficult for taxpayers to verify that a return preparer has e-filed a return than to verify that a return has been paper-filed. “Penalizing taxpayers who engage preparers and do their best to comply with their tax obligations is grossly unfair and undermines the congressional policy that the IRS encourage e-filing,” the report says. “Under the recent Court of Appeals’ ruling, astute taxpayers would be well advised to ask their preparers to give them paper copies of their prepared returns and then transmit the returns by certified or registered mail themselves so they can prove compliance.” TAS recommends Congress clarify that reliance on a preparer to e-file a tax return may constitute “reasonable cause” for penalty relief and require the Treasury Department to issue regulations detailing what constitutes ordinary business care and prudence to evaluate reasonable cause requests.

5. Enable the Low-Income Taxpayer Clinic (LITC) program to assist more taxpayers in controversies with the IRS. The LITC program effectively assists low-income taxpayers and taxpayers who speak English as a second language. When the LITC grant program was established in 1998, the law limited annual grants to a maximum of $100,000 per clinic. The law also imposed a 100% “match” requirement (meaning a clinic cannot receive more in LITC grant funds than it is able to obtain from other sources). The nature and scope of the LITC program has evolved considerably since 1998, and those requirements are limiting the number of taxpayers the program is able to assist. While the Consolidated Appropriations Act, 2023, raised the per-clinic cap to $200,000 for one year and that provision may be carried forward into 2024, TAS recommends that Congress remove or substantially increase the per-clinic cap permanently and allow the IRS to reduce the match requirement to 25% where doing so would expand coverage to additional taxpayers.

Now we wait to see whether the IRS and Congress will address the recommendations put forward by the National Taxpayer Advocate.

Prof. Vaughn E. James, Texas Tech University School of Law

 

Will DAFs Eat the Nonprofit World?

In interesting nonprofit news, the Jewish News of Northern California reports that the Jewish Community Federation and Endowment Fund, a more than 100-year-old Bay Area Jewish charity, is significantly changing its strategy. Where it spent most of its existence providing direct charitable aid, both directly and by giving to other charitable organizations, it is transitioning to becoming a community foundation. In that role, it will advise donors and support DAFs.

The article is interesting, but there are a couple things I'd like to highlight from it. First, the article says that this move represents a national trend: donors are less interested in communal giving and more interested in directing exactly where their charitable dollars go.

Second, this represents a real shift in the Federation's charitable mission. Where before, as best I can tell, its charitable giving went primarily to support Jewish causes, if it stops giving directly and instead oversees DAFs, it kind of loses that targeted giving. in 2021-2022, 17% of the Federation's DAF giving went to Jewish causes. The other 83% went to nonsectarian charities, including civil rights groups, museums, universities, etc. That has to change the landscape for its former donees.

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Pell Grants and Wealthy Universities

This morning, Inside Higher Ed reported on a bipartisan House bill that would allow students in short (8-14- week) career training programs to receive Pell Grants. There has been some controversy over the idea--questioning, for example, whether the short-term training would pay of and whether students at for-profit programs should have access--but support for the move has been growing.

But the House's "Bipartisan Workforce Pell Act" (which honestly, what a disappointing name: "BWPA" doesn't spell anything; I'm old enough to remember when Congress came up with an acronym and then awkwardly stuck in words that would spell that acronym!) included one surprise: its funding mechanism.

See, the expansion is potentially expensive. So the House decided that, to fund it, the bill would remove eligibility for Pell Grants from any student attending a school subject to the excise tax on university endowments (basically, any school that has an endowment of $500,000 or more per student; it applies to an estimated 50 schools). 

I'm not going to give a blow-by-blow of reasons different groups support or oppose the bill--Inside Higher Ed's article does an excellent job with that. I will note, though, that it faces a steep climb when it arrives at the Senate. And also, that it seems to reflect a bipartisan skepticism of the value of elite higher education. Where will this go? We'll have to watch.

Samuel D. Brunson

Bellevue Hospital and Bariatric Surgery

Last week, the New York Times published a story on Bellevue Hospital (the one in New York, not the one Google sometimes seems to prefer in Bellevue, Ohio). The short version is this: Bellevue Hospital has ramped up its bariatric surgeries, which has become a financial boon: it gets reimbursed at least $11,000 per surgery and the surgeons who do bariatric surgery get paid at least in part based on the number of surgeries they perform (in contrast to the other doctors at Bellevue, who get paid a salary). These incentives, the Times says, have encouraged the hospital to perform more bariatric surgeries with less lead time on people less likely to meet the standards for receiving such surgeries.

And I'll note here that the hospital denies the bad implications of the story.

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A Follow-Up on Late Night Musings: More on The Charitable Act

Lo and behold, I opened up Tax Notes Today (subscription required) this morning and found an article on the Charitable Giving Coalition’s position on the renewal of the above the line charitable deduction, which I discussed in my post yesterday.

The Tax Notes article notes that the Charitable Giving Coalition sent a letter to the House Ways and Means Committee and Senate Finance Committee in support of The Charitable Act. The Charitable Act reinstates the above the line charitable deduction, increases the limitation from $300 to one-third of the then standard deduction, and permits gifts to donor advised funds.  In support of the need for the Act, the Charitable Giving Coalition noted in its letter (cited in Tax Notes) that

Giving trends from 2020 and 2021, when the temporary non-itemizer charitable deduction was in place, indicate the deduction works. According to the Fundraising Effectiveness Project, charitable gifts of $300 — the cap of the temporary deduction in 2020 — increased by 28 percent on the last day of the year. Furthermore, interim Internal Revenue Service data for tax year 2021 shows 47 million households used the non-itemizer charitable deduction for donations totaling around $18 billion. A higher deduction cap, as included in the Charitable Act, would encourage even more charitable giving in communities across the country.

While I am generally in favor of reviving the above the line deduction, I’m dubious that this thinking holds. The primary beneficiaries of the above the line deduction are lower and middle income tax payers, If the “universal” deduction (which isn’t universal because it’s not available to those who itemized…) is increased, then the question is whether individuals who don’t itemize have the financial ability to make significantly larger contributions.  There is a marked difference in $300 and $4600, the estimate for the higher deduction.  I’d also be curious to know how much of the $300 giving is giving that’s already occurred and is just being captured for the first time in tax statistics – things like the weekly contributions to the church plate and such not.  Maybe the last $25 dollars given on Giving Tuesday, but I’d be curious where the incentive effect of increase in the universal deduction tails off.  Probably an interesting project to look at…

Curiously, eww

Some Late Night Reflections on Giving Tuesday

If you are like me, your inbox today is filled with emails from nonprofits looking for donations – Giving Tuesday has been in full swing.  I’ll admit to being somewhat cynical about Giving Tuesday.   I support the charities I support during the year and I don’t need a special day to do it.  I suppose one could see it as a day of penance for the twin orgies of commercialism known as Black Friday and Cyber Monday.  I am, however, without shame and feel no need to buy any indulgences on Giving Tuesday for my recent overconsumption.

But it would appear that I’m alone in my cynicism and that’s a good thing – no one needs curmudgeons like me grumbling about such things!   GivingTuesday.org tracks the impact of Giving Tuesday on charitable donations.   There are a number of interesting observations in the information collected in their Data Commons about giving trends, including the impact of Giving Tuesday.   According to one of their reports, Giving Tuesday enhances giving among supporters, grows existing relationships, and importantly, engages younger volunteers.

Givewp.com, citing the 2022 GivingTuesday.com study, states that

• In 2022, donors in the United States gave $3.1 billion on Giving Tuesday, 15% more than in 2021

• More than 20 million people gave, with 6% more donors in 2022 than in 2021

• 82% of nonprofits that participated in Giving Tuesday tried something new

• #GivingTuesday trends annually on social media

• More than $1 billion of U.S. Giving Tuesday donations were contributed online

That lead me to think about a potentially tax law significant change that occurred between 2022 and 2021 – that being the sunset of the $300 above the line deduction for cash charitable gifts from the CARES Act.  It seems like that particular deduction would be beneficial to the folks that Giving Tuesday targets – smaller, younger, and online donors.  That deduction hasn’t been in effect for 2022 and 2023, but there is at least some noise about trying to bring it back.  There have been a number of bills trying to revive and maybe even increase the deduction – you can find a summary of them at the Charitable Giving Coalition website here.   The most recent bill would reinstate the deduction for 2023 and 2024 but increase the limit to 1/3 of the standard deduction.

Who knows what the future of the above the line deduction is, given that all of the tax cuts that are facing sunset will be revisited here in due time.   In a world where the increased standard deduction remains and fewer people itemize, the above the line charitable deduction has its merits, especially among younger and less wealthy donors.   That being said, Roll Call reports that the Joint Committee on Taxation estimates that the above the line charitable deduction cost $2.9 billion in 2021, which is a pretty significant chunk of change.

While we wait to see what the tax writers will do… it’s now 11 pm eastern on Giving Tuesday – there’s still time to support your favorite charity, even if you won’t get an above the line deduction for it.

Grumpily guilted into generosity, eww

Major DAFs Support Anti-Vax Organizations

Yesterday, Rolling Stone reported that Fidelity Charitable and the Vanguard Charitable Endowment Program had given millions of dollars to organizations that push vaccine misinformation, including RFK Jr.'s Children's Health Defense. 

And how did two of the largest public charities in the U.S. give money to anti-vaccination groups? As DAF sponsors.

But wait, you might say. DAFs? DAFs are controlled by individual donors who decide where the money goes. The sponsor is basically only the holder of the dollars.

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Think Big America

This morning, the Chicago Sun-Times (itself a nonprofit, tax-exempt news organization!) reported that Illinois Governor J.B. Pritzker has launched Think Big America. (I've looked for the Think Big America website, but when I click on the mostly likely Google results, my browser warns me not to go there, so for now, I'm unaware of whether and where Think Big America's website is. It looks like what shows up on Google--kind of--is Ben Carson's Think BIG America PAC, so the naming may raise some issues.) 

Think Big America is a 501(c)(4) social welfare organization. And Gov. Pritzker formed it (and contributed some amount of seed money to it) in order to protect and expand abortion rights throughout the country.

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Nevada, Nonprofits, and Conflicts of Interest

This morning I learned a lot more than I knew before about the Nevada legislature. For instance, the legislature only meets every two years, and legislators are only paid for up to 60 days of the 120-day legislative session, which means that, unless they're independently wealthy, they have to work another job to support themselves.

And what does this have to do with nonprofits? Well, the Nevada Independent is reporting a nonprofit-related political scandal (or maybe "scandal") stemming, in part, from the part-time nature of the legislature. 

See, Nevada also has what strikes me as a weird budgeting procedure. In essence, the governor proposes a 2-year budget based on previous revenues. If revenue comes in higher, the legislature can pass a "Christmas Tree bill," negotiated behind closed doors and exempt from state open meetings and public information laws.

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Can You Smell What The Rock is Getting in Bad Tax Advice?

In my recent post, "Can You Smell What the Rock is Donating?", I talked a little bit about a number of different nonprofits that were accepting donations from some high profile folks, such as The Rock, in order to provide charitable support for those involved in the SAG-AFTRA and the (hopefully now ended) Writers' Guild strike.  Well, The Rock and his charitable donations are back, at least indirectly.  With a h/t to this thread started by Andrea Carr CPA (@andreacpa0 on X formerly known as Twitter) - she found the following on the website of the Entertainment Industry Foundation.  The EI Foundation is sponsoring a "People's Fund of Maui," which is giving "direct financial assistance to Maui community members experiencing devestating losses form the fires in Lahaina and Kula."  Apparently the People's Fund will make monthly payments to impacted residents of Maui for as long as it has funds, which include some hefty initial gifts from Oprah and, you guessed it, The Rock.  Which is amazing all around.

In the not-so-amazing category ... in the FAQs for applicants, the website states:

Are there any restrictions on how funds are used?

Financial disbursements provided by the People's Fund of Maui are considered Qualified Disaster Relief Payments and are intended for the following expenses... (edited)

Will I need to report the monthly payments on my taxes?

No, you will not need to report the monthly income payments on your taxes.   Payments will be characterized under the IRS's "charitable gift status" which is non-taxable and only needs to be reported to the IRS if individuals receive $17,500 or more in one year.  Individuals will only need to report this income payment if they received additional cash/asset gifts that bring the total to more than $17,500 a year.

Um... no.  I mean, they aren't taxable, so that part is right but otherwise... no.

Whenever I talk about gifts under Section 102 (and our old friend, Commissioner v. Duberstein) to students in Tax I class, I always mention that the INCOME tax treatment of gifts is different from the ESTATE & GIFT tax treatment of these items.  It is a Federal income tax class so I always debate whether it is worth precious class time to go through the difference, but in my experience there is so much confusion on this point that it comes up year after year.  So thanks, EI Foundation, for validating my teaching.

Revenue Ruling 2003-12 posits the following hypo in Situation 2:

Situation 2. O, a charitable organization described in § 501(c)(3) that is exempt from tax under § 501(a), whose purpose is to provide assistance to individuals who are affected by disasters, also makes grants to distressed individuals affected by the flood described in Situation 1. The grants will pay or reimburse individuals for medical, temporary housing, and transportation expenses they incur as a result of the flood that are not compensated for by insurance or otherwise.

Substitute "flood" with "wildfire" and well, you have Situation 2 in Maui - I do note that Situation 1 in the Revenue Ruling involves a Presidentially declared disaster as defined in Code Section 1033(h)(3), which appears to include the Hawaii Wildfires. 

In any event, I'm not sure it really matters. Rev. Ruling 2003-12 concludes with regard to Situation 2 (emphasis added):

In Situation 2, the grants made by O are designed to help distressed individuals with unreimbursed medical, temporary housing, or transportation expenses they incur as a result of the flood. Under these facts, O’s grants are made out of detached and disinterested generosity rather than to fulfill any moral or legal duty. Thus, the grants are excluded from the gross income of the recipients as gifts under § 102. Because payments by non-governmental entities are not considered payments for the general welfare, the grants made by O are not excluded from the recipients’ gross income under the general welfare exclusion. Rev. Rul. 82-106, 1982-1 C.B. 16. It is not necessary to reach the question of whether § 139 applies to the grants.

Accordingly, assistance from a charity to a disaster recipient are straight up gifts under Section 102 and Duberstein.  Revenue Ruling 2003-12 is really clear that you don't need to get to the issue of whether the funds are "Qualified Distaster Relief Payments" under Code Section 139. Code Section 139 is important for GOVERNMENT payments for disaster relief and potentially for disaster relief payments from an EMPLOYER - but not grants from a private charity.

And finally, as Andrea Carr CPA put it on X/Twitter:

i'm tired and exhausted, what is "charitable gift status"?  Does someone know the IRC that covers this?  Where is $17,500 coming from?

I'm guessing here because it is a common mistake, but maybe they are referencing the gift tax annual exclusion under Code Section 2503(b), which is $17,000 for 2023 after inflation adjustment - as one X/Twitter person indicated, $17,500 could be a typo?  Of course, the gift tax doesn't apply to transfers to charity under Code Section 2522 (assuming we don't have DAF or supporting organization issues), so The Rock and Oprah are safe on that.  However, even if that's the case, the gift tax falls on the DONOR of the gift - not the recipient (assuming we don't have a net gift situation), so at no point would the gift tax exclusion impact recipient of the funds - and even then, it would never impact the income tax treatment of the funds.  Because this is a gift tax exclusion.  Different tax.  And the gift tax doesn't even apply here.  So... 

I got nothing on "charitable gift status."

So, EI Foundation, I know I'm coming down pretty hard on you here and I'm sorry for that.  Some on X/Twitter blame AI (see ... all my posts align in the universe).  Maybe there's something we can't tell from the information you've put up on your website that would change this anaylsis.  But let me repeat that the things you are doing, not only for Maui but for all of the other charitable purposes and recipients you fund, are really really awesome and thank you for all you do in that regard.   

Educationally, eww

Politico Look at Ginni Thomas, Leonard Leo, Nonprofits and Citizens United

Politico had an extensively researched story looking at the history of Ginni Thomas and Leonard Leo and their association with nonprofits that have filed amicus briefs with the Supreme Court while directing money to Ginni Thomas.

From the story: "Two months before the Citizens United decision, but after the justices had signaled their intentions by requesting new arguments, attorney Cleta Mitchell — later to play a role in Donald Trump’s false claims about the 2020 elections — filed papers for Ginni Thomas to create a nonprofit group of a type that ultimately benefited from the decision. Leo was one of two directors listed on a separate application to conduct business in the state of Virginia. Thomas was president. She signed it on New Year’s Eve of 2009, and Crow provided much of the initial cash. A key Leo aide, Sarah Field, would come aboard to help Thomas manage the group, which they called Liberty Central.

After Liberty Central went public, it provoked an outcry over a Supreme Court justice’s wife promoting causes like overturning Obamacare that were before her husband’s court. Leo and Thomas changed gears. His network reactivated a dormant group, the Judicial Education Project, which would go on to become a major supplier of amicus briefs before the nation’s highest court. She created a for-profit consulting business using a similar name — Liberty Consulting — that enabled her to perform consulting work for conservative activist groups.

The Judicial Education Project supplied some of her business: Documents indicate Leo ordered at least one recipient of his groups’ funds, Kellyanne Conway, to make payments to Ginni Thomas for unspecified work, according to a Washington Post story earlier this year.

Now, Liberty Consulting is a focus of interest from congressional committees probing the Supreme Court’s ethics disclosures. Senate Democrats have demanded that Leo and Crow provide a list of “gifts, payments, or other items of value” they’ve given Thomas and her husband."

"Together, the probes have combined to raise the question of whether Leo’s groups have taken advantage of lax disclosure laws to send additional business and funds to Ginni Thomas, among other activists. That would be legal as long as Thomas was providing services commensurate with the payments."

Philip Hackney

The College Board and [Checks Notes] TikTok?!?

Yesterday, Darryll wrote about the Smithsonian's apology for its (often racist) collection of human remains and its description of what it was doing to remediate the problem.  Essentially. he said, "[t]heir response is a model for nonprofit crisis management -- admit your mistake and fix it."

Today, I'm going to write about a nonprofit taking a far worse tack: lying about what it did and then, when caught, try to make an excuse for it. This morning, Gizmodo reported that the College Board shares SAT scores and grades with Facebook and TikTok. A College Board spokesperson unequivocally denied doing so. So Gizmodo sent a screenshot of the College Board doing just that, to which the spokesperson replied, “'Pixels are simply a means to measure the effectiveness of College Board advertising,” the spokesperson said. “If a student uses the college search tool on CB.org, the student can add a GPA and SAT score range to the search filters. Those values are passed in the pixel, not because we configured the pixel that way but because that’s how the pixel works.'”

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