Saturday, November 9, 2019
On November 7, New York Supreme Court Judge Saliann Scarpulla ordered President Trump to pay $2 million in resitution to charity for his breach of his fiduciary duties as an officer and director of the Trump Foundation. The link attached to ordered above is the Judge's actual order. Since this is written up a lot in other places, like here by David Fahrenthold who has been the best chronicler of the Foundation, I only provide resources here for digging deeper into the case.
To fully comprehend what has happened to the Trump Foundation, President Trump, and his children, you have to read more than the order. They all entered into a series of stipulations with the NY AG Letitia James. The stipulations spell out a series of significant admissions of wrongdoing made by President Trump and his three children who sat on the board. The press release issued by the NY AG does a nice job of summarizing all that has taken place. I recommend reading all three.
If interested in seeing all of the evidence held by the NY AG you can go to the NY Supreme Court and search in the case index for the index number of the case (451130/2018). That should take you here, which if it works would save you the time of searching the case index. More information can be found from CREW who did a FOIA search that yielded the Form 4720s and checks filed by the Foundation with the IRS.
I have written about the matter on The Conversation here. In that piece I try to grapple with whether there are any situations in history that place this occurrence in proper historical context. If you get a chance to look at that, and have thoughts about the choice, let me know what you think.
Friday, October 4, 2019
In a follow-up to a March blog entry regarding Congressional scrutiny of syndicated conservation easements, Senate Finance Committee Chairman Chuck Grassley and Ranking Member Ron Wyden announced in mid-September that subpoenas were issued for documents relevant to their bipartisan investigation of syndicated conservation-easement transactions. Wyden stated in the announcement:
As we’ve both said all along, conservation easements have very legitimate purposes. We need to protect those purposes and protect the American taxpayer. If a handful of folks can game the system for profit, then we’re all left holding the bag. We expect fulsome cooperation with our investigation, and it’s unfortunate we’ve had to resort to compulsory process. Ultimately, when Congress makes an inquiry, it needs to be answered. It’s not optional.
Let’s say a man named John donates a conservation easement on his farm to a land trust. His appraiser valued the farm at $3 million before the easement and $2 million after the easement. Therefore, the easement is worth $1 million, which would be the amount of the tax deduction available for the donation. John doesn’t have sufficient income to use this deduction. He wants to sell the deduction to someone who can use it.
Federal tax law does not allow the donor of a conservation easement, or of any other property for that matter, to transfer the deduction generated by the donation to someone else. A federal tax deduction is personal to the donor. If the donor can use the deduction, fine; if not, it disappears. In other words, John can’t sell his deduction.
This is simple. However, some legitimate conservationists, and some not-so-legitimate tax shelter “facilitators,” are using limited liability companies and other so-called “pass-through” entities to try to “syndicate” tax deductions — in essence, to sell them — in ways that an individual, such as John, cannot accomplish. These deals are anything but “simple.”
Lindstrom acurrately points out that not all syndications are "shams," but advocates for syndications that allocate tax deductions to be scrutinized. Syndications that fail to comply with complex allocation rules for pass-through entities and/or utilize inflated easement appraisals, according to Lindstrom, threaten "the viability of the tax benefits for conservation easements and the credibility of the voluntary land conservation effort."
In a follow-up to a previous post this week The NRA and Russia: How a Tax Exempt Organization Became a Foreign Asset, Senate Minority Leader Chuck Schumer and Senate Finance Committee ranking member Ron Wyden called for an IRS examination of the NRA's ongoing tax-exempt status in a October 2nd letter to IRS Commissioner Chuck Rettig. The request comes on the heels of the Senate Finance Democrats' release last week of a report on the organizations's interactions with Russian nationals. Schumer and Wyden stated in the letter: "Given this report's concerning findings and other allegations of potential violations of tax exempt law by the NRA, it is incumbent on the IRS to fully investigate the organization's activities to determine whether the NRA's tax exemption should be disallowed."
The NRA is a tax-exempt under section 501(c)(4) of the Internal Revenue Code as a social-welfare organization. The organization also has affiliated entities that are tax-exempt under sections 501(c)(3) and 527 of the Code.
Schumer and Wyden assert in their letter that the findings of the report raise concerns of whether the NRA's activities violated the statutory social welfare requirements, including the use of tax-exempt resources for non-tax-exempt purposes. "In light of the continued efforts of Russia to undermine American democracy, IRS must use its full authority to prevent foreign adversaries from again exploiting tax-exempt organizations to undermine American interests," Wyden and Schumer wrote. The NRA and Senate Republicans take issue with the report and its findings.
As we previously blogged, the New York and District of Columbia attorneys general are conducting their own investigations about whether the NRA is complying with state tax laws.
Tuesday, October 1, 2019
An August 22 deadlock by the Federal Election Commission regarding a request for an advisory opinion highlights the complicated role that tax law plays in regulating campaign finance. It underscores important differences between section 501(c)(3) and (c)(4) organizations not only under section 501(c), but also under section 527. Moreover, because the resignation of the FEC vice chair has left the commission without quorum and thus unable to act, tax regulation of campaign finance has increased importance.
On May 31 the Price for Congress committee (the Price committee) filed a request with the FEC for an advisory opinion regarding transfer of remaining campaign funds from former legislator Price’s campaign committee. The committee asked for approval to transfer some, although not all, of its remaining almost $1.8 million to a section 501(c)(4) social welfare organization (the 501(c)(4)). The request prompted passionate debate and deep division but no resolution by the FEC commissioners when it was discussed on July 25 and again on August 22.
As proposed, the 501(c)(4) would “engage in research, education, presentation, and publications with respect to health, budget, and other public policy matters.” Although unlike section 501(c)(3) organizations, a 501(c)(4) is permitted to lobby without limit and to engage in considerable campaign intervention, the request stated that this 501(c)(4) “will not attempt to influence legislation nor participate or intervene in any political campaign.” The Price committee also proposed that any transferred funds be placed in a separate account and not be commingled with other assets of the 501(c)(4). To comply with applicable election law regarding private use by former candidates, neither the transferred funds in this special account nor income generated from these funds would be used to provide Price, any members of his family, or former employees of the Price committee or of Price’s government offices with compensation, gifts, or material reimbursement, or “to influence any election.” Price, however, would serve as the organization’s president and chief executive officer, albeit without any compensation. The Price committee anticipates that he would “speak, write, publish, or otherwise make appearance to present the work” of the 501(c)(4).
Under election law, campaign funds can be contributed “to an organization described in section 170(c) of the Internal Revenue Code” as well as “for any other lawful purposes.” Under tax law, a 501(c)(4) would not be described in section 170(c) because that provision describes organizations that are eligible to receive tax-deductible charitable contributions, and a 501(c)(4), unlike a 501(c)(3), is not such an organization.
In responding to the Price committee request, however, FEC draft advisory opinion 19-33-A, issued on July 17, did not read the reference to section 170(c) as limiting transfers to organizations eligible to receive deductible charitable contributions. The draft opinion explains that if an organization engages in educational activity and constrains itself from lobbying and campaign intervention, it is described in section 170(c) for purposes of campaign finance law, even if it is not eligible to receive tax-deductible contributions.
At the July 25 FEC meeting, Chair Ellen L. Weintraub objected strongly: “If we were to approve this advisory opinion, it would extend the ‘personal use’ exemption to 501(c)(4) organizations in a way that the commission has not done before.” Republican members disagreed, and the FEC postponed its decision. . . .
At its meeting on August 22, however, the FEC “was unable to render an opinion by the required four affirmative votes and concluded its consideration of the request.” The Price committee will now have to decide whether to proceed without an FEC advisory opinion. The commission’s lack of sufficient commissioners for a quorum, however, prevents any possible enforcement action.
Whatever the Price committee decides, its choice of a 501(c)(4) rather than a 501(c)(3) raises several issues under applicable tax law and its interaction with election law. In short, transfers to a 501(c)(4) rather than a 501(c)(3) offer advantages regarding IRS transaction costs and oversight, but also involve some income tax risks to the former candidate. The Price committee request also reminds us of some of the inadequacies of our regulation of campaign financing, both through tax law and election law. . . .
Thursday, September 19, 2019
Ray Madoff (Boston College) and Roger Colinvaux (Catholic University) published Charitable Tax Reform for the 21st Century in the September 16th issue of Tax Notes. The following are the introductory paragraphs of the article:
Charitable organizations play a fundamental role in American society, fulfilling functions that would otherwise fall to government, providing creative solutions to society’s most pressing problems, and serving our highest ideals. The federal government has long provided generous tax incentives for charitable donations, with current benefits reaching up to 74 percent of the amount of the gift. Unfortunately, however, the design of the tax incentives is now woefully out of step with their purpose and the realities of charitable fundraising today, resulting in a system that is incoherent, ineffective, and on the verge of failure.
Taking a broad view, we believe that there are two overarching policy goals of the charitable tax incentives. The first is to promote actual charitable work and the second is to foster a strong culture of charitable giving with broad participation.
The fundamental purpose of providing charitable tax benefits is to support charitable work. If the good work of charities never gets done, tax benefits are wasted, costing the government significant revenue but providing no benefit to the public. In order to encourage actual charitable work, Congress based the giving incentive on donors giving up dominion and control of their donations. Only when donors give up control are funds fully available for charities to deploy in support of their mission. . . .
To summarize our concerns, the system of charitable tax benefits is failing on three main fronts: (1) current rules provide no giving incentive for 90 percent of American taxpayers, leaving charities reliant on a shrinking and narrow base of support; (2) current rules no longer provide any assurance that tax-benefited donations will ever be made available for charitable use; and (3) long-standing rules designed to promote the public good (for example, on payout, disclosure, and lobbying) are easy to avoid through the use of DAFs.
Both of us have written numerous articles and opinion pieces on ways to improve the tax rules to make them fairer and work better for the people who rely on charitable efforts, and there are many ways to approach these complex issues. In this article, we outline five proposals that we believe provide the best ways to fix the problems facing the charitable sector:
1. replace the current charitable deduction with a credit for charitable giving available for all taxpayers who give more than a designated floor;
2. reform the rules applicable to DAFs so that some tax benefits are conferred upon transfer to a DAF while others are deferred until the donation is no longer subject to the donor’s advisory privileges;
3. reform private foundation payout rules to close the loophole that allows a charity to avoid private foundation status by funding the charity through a DAF;
4. prohibit private foundations from counting a grant to a DAF as satisfying their 5 percent payout requirement, require disclosure of foundation to DAF grants, and bar foundations from counting payments to insiders (such as travel and compensation) as payments for charitable purposes; and
5. reform the excise tax applicable to private foundations to provide incentives for them to increase their charitable expenditures. . . .
Janene R. Finley (St. Ambrose University) has published Reforming the Charitable Contribution Tax Deduction: Accounting for Random Acts of Charity, 10 Wm. & Mary Bus. L. Rev. 479 (2019). The abstract:
Concern for the tax treatment of charitable contributions has increased as a result of the Tax Cuts and Jobs Act of 2017. Although the new law increased the limitation of deductible charitable contributions to 60 percent of adjusted gross income, the standard deduction was also increased. Increasing the standard deduction is expected to reduce the number of taxpayers who are able to itemize their deductions in the next tax year, which is expected to reduce charitable giving in the future. This Article discusses proposals to amend the Internal Revenue Code to promote charitable giving, including a non-itemizer deduction.
In addition, random acts of charity are explained, and consideration of those acts as charitable contributions for purposes of the charitable contribution tax deduction is proposed.
[Hat tip: TaxProf Blog]
Friday, September 6, 2019
Treasury just released Proposed Regulations under Code Section 6033 regarding donor disclosure (technically, it is filed but not yet published - it is scheduled to be published on September 10), which addresses the issue of what information an exempt organization must disclose about its donors.
If you are late to the story, a little recap is in order:
- Section 6033(b)(5) provides Section 501(c)(3) organizations must provide donor information for "substantial contributors."
- Treasury Regulation 1.6033-2(a)(2)(ii)(f) states that any organization required to file an annual information return must provide information regarding donors who give more than $5,000 during the year.
- On July 17, 2018, Treasury issued Revenue Procedure 2018-38, which states that, effective as of Dec. 31, 2018, exempt organizations that are not exempt under Section 501(c)(3) do not have to file the Schedule B with donor information, but they should keep the information and make it available upon IRS request. Section 501(c)(3) organizations must still provide this information as required by Section 6033(b)(5). See a more detailed description from KPMG here.
- Not everyone was particularly pleased about this and, not surprisingly, litigation ensued.
- On July 30, 2018, in Bullock v. IRS, the U.S. District Court for Montana (Bullock being the Governor of Montana; the state of New Jersey also was a plaintiff) determined that Treasury did not follow proper procedure under the APA in issuing the Rev Proc. The District Court held that the Rev. Proc. was really an amendment to Treasury Regulation 1.6033-2(a)(2)(ii)(f), and therefore was a "change in existing law or policy" (i.e., it was a legislative rather than interpretive rule) that required APA notice and comment. Accordingly, it was set aside.
- These new regs specifically respond to the Bullock v. IRS (in fact, it mentions it by name on page 10) by issuing these Proposed Regulations, which are subject to notice and comment.
While I've not held the proposed regulations and the Rev Proc up to each other side by side quite yet, it does appear that the Proposed Regulations are essentially similar to the Rev. Proc, expect for the request for notice and comment. Because the Proposed Regs are not yet officially published, there is no official due date for the comments, other than 90 days from the date of publication. If they hold true to their word, it would be 90 days from Sept. 10.
Monday, August 19, 2019
The Economist had an interesting story this past week on some of our largest charities - charities associated with drugmakers.
Perhaps you have also noticed the tendency that when you go to buy an expensive brand drug that despite the fact that you have insurance, there is still an expensive co-pay involved. However, there are sometimes charities that can help you with that co-pay depending on your circumstances. You might have wondered why they do that.
Well, the Economist has investigated.
From the story: "According to public tax filings for 2016, the last year for which data are available, total spending across 13 of the largest pharmaceutical companies operating in America was $7.4bn. The charity run by AbbVie, a drugmaker that manufactures Humira, a widely taken immuno-suppressant, is the third-largest charity in America. Its competitors are not far behind. Bristol-Myers Squibb, which makes cancer drugs, runs the fourth-largest. Johnson & Johnson, an American health conglomerate, runs the fifth-largest. Half of America’s 20 largest charities are affiliated with pharmaceutical companies.
Not everyone qualifies for their help. Unsurprisingly, pharma-affiliated charities fund co-payments only on prescriptions for drugs that they manufacture. There is often an income threshold, too, which excludes the richest Americans—though it is usually set quite high, at around five times the household poverty line. They are prohibited from funding co-payments for those on Medicaid (which helps the poor) and Medicare (which helps the elderly) by the anti-kickback statute, which prevents private companies from inducing people to use government services. Those patients can accept co-pay support from independent charities, such as the Patient Advocate Foundation."
I am a bit troubled by the idea of the IRS granting and maintaining exemption for a charity that is associated with a for-profit that only pays for drugs that the for-profit provides. I have not investigated any of these enough to come to any conclusion. However, the fact that this is now a significant part of the charitable environment, and it is associated with a major public policy suggests to me that Congress needs to give real thought to how this system fits in with charity and with prescription drugs generally. More reasoned thought is needed. The IRS needs to do its best job in assessing whether these organizations meet the requirements of charity, but given the significant policy domains this issue crosses, it's probably not the best place to answer such questions.
As it is now, it appears that Pharma has cobbled together a financial solution to a problem they faced as a business, that happens to involve "charity," rather than that Pharma is seeking to do charitable things that deserves the moniker.
I have not personally seen any guidance or determ letters from the IRS on this matter. If anyone has one, would love to see what the IRS has concluded on the matter.
Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law
Wednesday, August 14, 2019
Slow Summer for IRS on EO Issues: 4968 Proposed Regs, Final 501(c)(4) Notice Regs, 2018 EO Return Data
- Proposed Section 4958 Regulations: Darryll Jones previously blogged in this space about both the proposed regs and the perhaps inadvertent affect those regs could have on Berea College, located in Senator Mitch McConnell's home state. Now Alexander Reid and Kensington Wolgamott, the latter a former student of mine, have written an analysis of those proposed regs titled For Colleges, IRS' Endowment Tax Proposal is Overly Taxing in Law360. In addition, James Fishman (Pace) has posted a critique of the underlying statute and a proposed alternative, titled How Big Is Too Big: Should Certain Higher Educational Endowments' Net Investment Income Be Subject to Tax? Here is the abstract:
Section 13701 of the 2017 Tax Reform Act created new Internal Revenue Code § 4968 that imposes a 1.4% excise tax on the net investment income of certain large private college and university endowments. The affected institutions must have at least 500 tuition-paying students during the preceding taxable year, provided more than 50% of its students are located in the United States, plus assets (other than assets used directly in carrying out the institution’s exempt purpose) with an aggregate fair market value at the end of the preceding taxable year equal to at least $500,000 per full-time or full-time equivalent student. Approximately twenty-seven to thirty-five colleges and universities are affected.
This paper argues that the legislation as enacted is politically motivated and fatally flawed. The “assets per student” ratio that triggers the tax is both over and under-inclusive, and irrelevant and arbitrary as a guide to excessive endowment accumulation. The legislation serves to exempt multi-billion dollar endowments of many universities yet ensnare smaller colleges that may have more limited resources, but the endowment to student ration exceeds $500,000.
The growing income inequality in American society is reflected in the inequality of access to elite schools with billion dollar endowments. While large endowment schools have increased financial aid, the percentage of students from lower income families has remained the same. A student whose parents come from the top one percent of income distribution is 77 times more likely to attend an Ivy League college than one from the bottom income quintile. Among “Ivy League Plus” colleges (the eight Ivy League colleges plus Chicago, Stanford, MIT and Duke), more students come from families in the top 1% of income distribution (14.5%) than the bottom half of the income distribution (13.5%).
Recommended is that the investment income tax be triggered for all billion dollar endowment institutions when the endowment earns $75 million in net investment income ($150 million for public school billion dollar endowments). The endowment per student ratio should be jettisoned. Schools could offset the net income investment tax on a one dollar to one dollar basis by increasing financial assistance to the student body. If the school increases the admission of students from underrepresented constituencies, the tax offset would be two dollars for each dollar spent in expanding the number of such students.
- Final Section 506 Regulations: Last month the IRS issued final regulations implementing the notice requirement for new section 501(c)(4) organizations, codified in section 506 of the Internal Revenue Code. The final regs are little changed from the previously issued temporary regs and notice of proposed rulemaking, as the IRS generally rejected changes proposed by the few parties who submitted comments, as detailed in the comments and explanation of provisions section that accompanies the final regs. The final regs do clarify that a subordinate organization included in a group exemption letter is still subject to the notice requirement.
- 2018 EO Financial Data: The IRS Statistics of Income Division has released selected financial data from exempt organization returns (Forms 990 and 990-EZ) filed in calendar year 2018. These data are available in two large Excel spreadsheets, which should be helpful for empirically minded nonprofit researchers.
Monday, August 12, 2019
We have previously blogged about congressional, DOJ, and IRS scrutiny of conservation easement donations, as well as academic coverage of this topic led by our contributing editor, Nancy A. McLaughlin (Utah). This scrutiny shows no signs of abating, with the following developments just in the past couple of months:
- Senators Chuck Grassley and Ron Wyden, Chair and ranking member of the Senate Finance Committee, sent three letters in June asking for further answers to their questions relating to syndicated conservation easements. Hat tip: Tax Analysts (Fred Stokeld) (subscription required).
- The Joint Committee on Taxation issued a report last month concluding that enactment of the Charitable Conservation Easement Program Integrity Act of 2019 (S. 170), which is designed to end abusive conservation easement tax breaks would raise $6.6 billion over several years. The JCT letter is available from Tax Analysts (subscription required).
- That followed a June report (revised slightly in July) from the Congressional Research Service describing the concerns regarding abuse of conservation easement tax breaks.
- It also coincided with three recent publications relating to conservation articles, including from the ABA Real Property Trust and Estate Conservation Easement Task Force (Recommendations Regarding Conservation Easements and Federal Tax Law), attorney Jenny L. Johnson Ware of the Johnson Moore LLC firm (Valuing Conservation Easements: An Empirical Analysis of Decided Cases), and Professor McLaughlin, who posted an updated version of Trying Times: Conservation Easements and Federal Tax Law (last revised June 2019).
With organizations that support appropriate tax breaks for legitimate conservation easements, such as the Land Trust Alliance, trying to avoid having Congress throw the baby out with the bath water, while DOJ and the IRS battle promoters and contributors of allegedly abusive conservation easement donations in the courts, it will be interesting to see how this issue ultimately shakes out both legislatively and in litigation.
Thursday, August 8, 2019
Mae Quinn (Florida-Levin College of Law) posted Wealth Accumulation at Elite Colleges, Endowment Taxation, and the Unlikely Story of How Donald Trump Got One Thing Right to SSRN (Wake Forest Law Review, forthcoming). Here is the abstract:
President Donald Trump has declared war on immigrants, diversity, and those who dare to dissent. Rooted in resentments about who people are, where they were born, and what they believe, these executive-led assaults are dangerous developments in the modern era. However, in the course of Trump's many retrograde tirades, he has somehow managed to get one thing right-too many elite private colleges in the United States, considered nonprofit entities, have amassed way too much wealth.
This Article recounts this unlikely story, including how the Trump Administration's 2017 endowment tax could work to advance diversity. The new endowment tax penalizes private colleges for stockpiling assets. In response, potentially impacted universities have argued they are victims of an unfair conservative conspiracy intended to target liberal ideology. But the data demonstrates that this is not true. And concerns about rich colleges hoarding their resources have come from both the right and the left.
Moreover, Trump's endowment tax could be seen as an opportunity and invitation to increase egalitarianism and equity in this country. If rich colleges simply utilize more of their massive savings to further social justice, impact poverty, and enhance public good-particularly in their own at-risk communities-they will not only avoid federal taxation but also begin to address critiques about their elitism and greed. In doing so such universities would not only thwart Trump and his tax but stand with vulnerable groups who are the true victims of the Trump Administration's ever-expanding conservative attacks.
As published in The Chronicle of Philanthropy, a recent survey conducted by the Nonprofit Research Collaborative revealed that approximately 75% of charities surveyed achieved their 2018 fundraising goals, and 63% stated that their donations increased from the previous year. While consistent with the results of last year's survey on 2017 fundraising, charities and fundraisers alike were prepared for potentially significant drops in fundraising dollars due to the Tax Cuts and Jobs Act of 2017 (TCJA). Of the charities surveyed, 26% reported that the TCJA did not affect their fundraising, with 17% stating the new tax law had a negative impact on their fundraising results.
Online surveys of individual donors revealed that 56% reported that their giving in 2018 was the same as 2017, beating out pessimistic forecasts based on TCJA. Although a recent "Giving USA" report found that charitable donations decreased 1.7% in 2018, a majority of the fundraisers (60%) in the survey referenced above were optimistic that their fundraising efforts would yield greater donations in 2019 than the prior year.
Thursday, June 27, 2019
President Trump talked about the so called "Johnson Amendment" again the other day. The Johnson Amendment, as probably most of the readers of this blog know, is the language contained in section 501(c)(3) of the Internal Revenue Code that prohibits a charity hoping to maintain its status as exempt from federal income tax from intervening in any political campaign. I say so called as it was not called that on its entry to the Code, though this article does suggest it was LBJ who was the author of the language added to the Code in 1954.
The President, speaking before the Faith and Freedom Coalition conference in Washington stated: “Our pastors, our ministers, our priests, our rabbis . . . [are] allowed to speak again . . . allowed to talk without having to lose your tax exemption, your tax status, and being punished for speaking." He then apparently jokingly cautioned that if a pastor spoke against him “we’ll bring back that Johnson Amendment so fast,” the president said to laughter, adding, “I’m only kidding.”
President Trump signed an executive order back in May. The law of course is still found within section 501(c)(3) and thus is a duly enforceable law. In my opinion, the executive order did not do anything to change the actual state of affairs of the meaning of the law or its interaction with other laws, such as the Religious Freedom Restoration Act, or constitutional rights. If anything, the current state of the law should work to protect those he jokingly threatened to use the state of the law against.
The news article I cite to above unfortunately wrongly states the following: "The president has not undone the law, like he sometimes claims he has, but rather told the Treasury Department it can enforce at its own discretion — leaving the possibility that the Trump administration could only penalize churches that oppose the president."
Although the President has not undone the law, as the article correctly states, I say wrongly in two senses: (1) he has not told the Treasury Department that it can enforce at its own discretion - he only directs Treasury to apply the law with due regard to allowing individuals and organizations to speak when speaking from a religious perspective "where speech of similar character has, consistent with law, not ordinarily been treated as participation or intervention in a political campaign", and (2) it would be unlawful for the administration to penalize churches that oppose the president, and his executive order did not create that possibility of such unlawful action. If you have interest in more detail on the (obvious) legal problems associated with (2), I wrote about the legal reasons why it would be unlawful for the IRS to unequally enforce the law in such a way in a longer scholarly article here considering the claims that the IRS violated conservative organizations rights when it specifically used names of groups like the Tea Party in managing its application system.
Thursday, June 20, 2019
The drip-drip of bad news about the National Rifle Association and the University of Maryland Medical System continues. For the NRA, the newest revelation was that 18 members of the NRA's 76-member board had direct or indirect financial transactions with the organization at some point during the past three years even though board members are not compensated for their service. Transactions with board members of tax-exempt nonprofit organizations are generally allowed if the terms, including the amounts paid, are reasonable in light of what the organization receives in return, and particularly if they are vetted through a conflict of interest policy (which policy the NRA has). Nevertheless, the number of board members involved and the amounts - ranging from tens thousands of dollars to in one case over $3 million in purchases - raises the question of whether the judgment of those board members might be affected by the transactions, particularly when it comes to evaluating the performance of the executives who control such transactions. As Mother Jones reports, however, the IRS is unlikely to try to revoke the tax-exempt status of the NRA even given these recent revelations. The more potent threat to the organization is instead the ongoing New York Attorney General investigation, as the NRA is incorporated in New York.
Meanwhile, similar governance issues continue to come to come to light at the University of Maryland Medical System, but with somewhat different results. These issues include longstanding financial relationships with a number of board members, including a former state Senator, and disregard for the two consecutive five-year terms limit on board service. Unlike the situation with the NRA, these revelations have also claimed a number of leadership casualties, most recently four top executives (including the system's primary lawyer) who resigned earlier this month. Given the ongoing federal and state investigations and legislative calls to force all current board members to step down, more leadership changes are probably likely.
Wednesday, June 19, 2019
Congress has passed the Taxpayer First Act (H.R. 3151), and President Trump is expected to sign the bill. Almost at the very end of the bill, after numerous other improvements to tax procedures, is a section that will require tax-exempt organizations to electronically file their Form 990 series returns and the IRS to publicly release the data from these returns in machine readable format "as soon as practicable." The Secretary of the Treasury, or his delegate, may delay the mandatory electronic filing for up to two years for financially smaller organizations if not doing so would cause an undue burden. The bill also requires the government to notify organizations that fail to file a required annual return for two years in a row, if a third consecutive missed filing will lead to automatic revocation of the group's tax-exempt status.
As detailed in (shameless plug) my article on Big Data and nonprofits, these changes will provide researchers, journalists, and other members of the public with an enormous amount of information about tax-exempt organizations. While these data will require a significant amount of work to be usable, there is already a Nonprofit Open Data Collective in place to do this work. The much easier access to this information that this legislation will provide holds the promise of greatly expanding the ability to research most organizations in the nonprofit sector.
Tuesday, June 18, 2019
The Treasury Inspector General for Tax Administration (TIGTA) issued a report earlier this month detailing the steps the IRS and Chief Counsel have taken to implement new Internal Revenue Code section 4960. This section impose a 21 percent excise tax on applicable tax-exempt organizations that pay more than $1 million in compensation to any covered employee for taxable years beginning after December 31, 2017. (The excise tax also applies to any excess parachute payment paid to a covered employee.) The report is an interesting look into how much has to be done behind the scenes to implement a new Code section. For example, tax forms, instructions, and computer programming had to be updated, needed guidance had to be issued, and tax-exempt organizations, their advisors, and IRS employees had to be informed about the new provision. TIGTA estimated that a couple thousand employees of tax-exempt employees received wages over the $1 million threshold, and the IRS estimated that 2,700 organizations would be affected by the tax in tax year 2018.
TIGTA found that generally the IRS and Chief Counsel successfully completed the necessary implementation steps in a timely fashion. These steps included having available by December 31, 2018 a revised Form 4720 (including new Schedule N) and related instructions, a (slightly) revised Form 990 and Form 990-PF (and related instructions) so that each form now includes a line item identifying if the filing organization has to pay the tax, and proposed regulations and interim guidance. (Treasury and the IRS released the final regulations on April 9, 2019, which cover procedural issues relating to paying the tax; the interim guidance still applies for substantive issues.) However, the one gap that TIGTA found was the lack of a completed strategy to identify and address noncompliance after organizations file their returns, as required by the Government Accountability Office's Standards for Internal Control in the Federal Government (known as the Green Book).
Final SALT 170 Regulations Hold the Course; Notice Provides Safe Harbor for Taxpayers With SALT Below SALT Deduction Limit
The Treasury Department and IRS just issued the final regulations under Internal Revenue Code section 170 relating to the effect of state and local tax (SALT) credits on charitable contribution deductions (T.D. 9864). The final regulations generally track the proposed regulations, in that they require taxpayers to reduce the amount of their deduction by any SALT credits received or expected to be received because such credits constitute a return benefit to the taxpayer. They also retain an exception for credits that do not exceed 15 percent of the taxpayer's payment (or the fair market value of property transferred), and continue to not apply to SALT deductions unless the deduction exceeds the payment (or the fair market value of property contributed). While most of the over 7,700 comments supported finalizing the proposed regulations without change, some comments questioned various aspects of the proposed regulations, including the position that SALT credits are return benefits that should reduce the charitable contribution deduction in this instance, but for the most part Treasury and the IRS did not follow these critical comments. This included rejecting calls to push back the effective date of August 27, 2018 contained in the proposed regulations.
At the same time, the IRS issued Notice 2019-12. It states that Treasury and the IRS intend to issue a proposed regulation creating a safe harbor under Code section 164 that would allow certain taxpayers to treat as a SALT payment the disallowed portion of the charitable contribution deduction. This safe harbor would be available for taxpayers who itemize deductions for federal income tax purposes and have state and local tax liability under the $10,000 limit on SALT deductions. Those taxpayers would be permitted to deduct under section 164 the amount of SALT offset by the credits, until they reach the SALT deduction limit. This safe harbor join the Revenue Procedure 2019-12 safe harbor for business taxpayers who make business-related payments to charities or government entities and receive SALT credits in return; that safe harbor allows those taxpayers to still deduct the full amount of those payments as business expenses under Code section 162.
Previous Blog Coverage: Grewal on Why the Proposed Regulations May Be Doomed; Proposed Regulations Hearing; Rev. Proc. 2019-12.
Friday, May 17, 2019
Charitable Contribution Cases: An Alleged $151 Million Conservation Easement; Tens of Millions in Bogus Contributions
In Battelle Glover Investments, LLC v. Commissioner (link to petition available from Tax Analysts; subscription required), a partnership is challenging a $151 million charitable contribution deduction disallowance arising out of a conservation easement donation. According to the petition, the conservation easement was on approximately 97.8 acres of limestone mining property donated to the Southeast Regional Land Conservancy, Inc. The petition indicates the Internal Revenue Service is disallowing the deduction on multiple grounds, including that the partnership failed to satisfy all of the requirements of Internal Revenue Code section 170 and that the correct valuation of the conservation easement was zero. The IRS is also seeking to impose a 40% valuation misstatement penalty. This case is of course only the latest, high-dollar conservation easement dispute, as the IRS has brought hundreds of cases challenging charitable contribution deductions in this area, as documented by co-blogger Nancy A. McLaughlin (University of Utah).
In United States v. Meyer, the federal government successfully sought injunctive relief against an attorney who promoted the "Ultimate Tax Plan," also sometimes referred to as a "Charitable LLC" or "Charitable Limited Partnership." According to the complaint filed last year in federal district court, the scheme involved sham donations to purported charities controlled by Mr. Meyer and his advice to the participants that as a result of those donations they could take unwarranted charitable contribution deductions. The complaint stated that the total cost to the Treasury was more than $35 million in lost tax revenue. Each of the three charities involved were based in Indiana and had successfully applied for IRS recognition of exemption under Code section 501(c)(3). However, in recent years Mr. Meyer had entered into agreements with the IRS that retroactively revoked the tax-exempt status of all three charities based on either inurement grounds or their use in the alleged scheme. Mr. Meyer made money off this scheme by charging various fees related to the purported donations. The case apparently has had significant ripple effects, in that it appears to have triggered audits of many of the scheme's participants, and possibly investigations into the financial planners and CPAs to whom Mr. Meyer marketed it (and sometimes paid for referrals). Coverage: Bloomberg Tax; Forbes.
Both these cases illustrate the potential for abuse of the charitable contribution deduction, to the significant detriment of the federal treasury.
Thursday, May 16, 2019
New Jersey is the latest state to compel disclosure of significant donors in the wake of the federal government's decision to eliminate reporting to the IRS by tax-exempt organizations (other than 501(c)(3)s) of their significant donors. NJ Attorney General Gurbir S. Grewal and the NJ Division of Consumer Affairs announced a new rule earlier this week that will require both charities and social welfare organizations that have to file annual reports with the Division's Charities Registration Section to include the identities of contributors who have given $5,000 or more during the year. (Like a number of states, New Jersey apparently defines "charitable organization" broadly for state registration purposes, so as to encompass not only Internal Revenue Code section 501(c)(3) organizations but also Internal Revenue Code section 501(c)(4) social welfare organizations.) According to statements accompanying the new rule, the donor information will not be subject to public disclosure. This announcement was in the wake of New Jersey and New York suing the federal government for failing to comply with Freedom of Information Act requests submitted by those states relating to that earlier decision, and New Jersey joining a lawsuit brought by Montana challenging the decision.
Interestingly, however, last week New Jersey's governor vetoed a bill (S1500) that would have compelled donor disclosure by organizations engaged in independent political expenditures, among other measures. Governor Philip D. Murphy's 20-page explanation raised both constitutional concerns with the legislation as enacted and policy concerns that the bill did not go far enough in certain respects. The constitutional concerns included ones relating to the bill's application to legislative and regulatory advocacy, not just election-related expenditures. The policy concerns includes ones related to a failure to extend pay-to-play disclosures and to require certain disclosures from recipients of economic development subsidies.
In other disclosure news, the U.S. Court of Appeals for the Ninth Circuit rejected petitions fo rehearing en banc of the earlier three-judge panel decision in Americans for Prosperity Foundation v. Becerra, turning away an as applied challenge to the California Attorney General's requiring that the foundation provide a copy of its Form 990 Schedule B (which identifies significant donors) to that office. The rejection is notable because it was over a lengthy dissent by five judges, to which the three judges on the initial panel responded.
I think it can be safely predicted that in this era of "dark money" we will continue to see state level compelled disclosure developments, and litigation in response, for the foreseeable future.
Wednesday, May 15, 2019
Following up on previous coverage in this space, Baltimore Mayor Catherine Pugh's nonprofit-related problems led to her resignation earlier this month in the wake of FBI and IRS agents raiding her homes and mayoral office. The issue that led to her downfall: alleged self-dealing, arising from the $500,000 purchase of a book she wrote by a nonprofit on the board of which she sat. Additional coverage: Baltimore Sun (which broke the original story); CNN; Washington Post.