Friday, September 3, 2021
University of Louisville Settles Legal Dispute with ex-President for $800,000 Paid by Insurance Company
The Associated Press and The Courier Journal report that afters years of litigation and spending more than $6 million in taxpayer funds, the University of Louisville and its affiliated foundation have agreed to resolve their legal dispute with ex-President James Ramsey for $800,000 paid under the foundation's directors and officers insurance policy. President Ramsey served for 14 years, but his tenure ended in turmoil after allegations arose relating to improper spending by both the university and the foundation, including allegedly excessive compensation paid to Ramsey and his then chief of staff. The original complaint filed by the University and the foundation can be found here.
An earlier news report stated that the IRS was auditing the foundation, presumably based at least in part on the public allegations of wrongdoing. The most recent report states that the foundation has released its tax claims against Ramsey as part of the settlement. But it is unclear to me how that agreement could prevent the IRS from imposing self-dealing or other excise tax penalties, if it chooses to do so.
Wednesday, September 1, 2021
- The 11th Circuit upheld the denial of a conservation easement deduction and imposition of accuracy-related penalties in TOT Property Holdings, LLC v. Commissioner. For an analysis of the decision, see Peter J. Reilly, TOT Property Holdings Highlights Fundamental Flaw In Conservation Syndications.
- In Hancock County Land Acquisitions v. United States, 2021 U.S. Dist. LEXIS 143312, 2021 WL 3197336 (N.D. Ga. July 7, 2021) (all Internet-accessible copies of the decision appear to be behind a paywall, including I assume PACER), a Federal district court rejected an attempt by a partnership and its tax matters partner to require the IRS Appeals Office to consider its conservation easement deduction dispute before forcing them to pursue litigation, even though the IRS had already issued a Final Partnership Administrative Adjustment (FPAA) notice. The court found that given the procedural poster of the case, it had to grant the government's motion to dismiss because it lacked federal subject matter jurisdiction. The dispute therefore will instead proceed in U.S. Tax Court, where the partnership and its tax maters partner have already filed a petition for readjustment of the FPAA.
- In perhaps the most ominous development for individuals involved with these claimed deductions, the Department of Justice announced the First Federal Indictment in Cases Involving Syndicated Conservation Easements. The first paragraph of the June 9, 2021 press release states:
A federal grand jury sitting in Atlanta, Georgia, returned an indictment today charging an Atlanta certified public accountant with one count of conspiracy to defraud the United States; 24 counts of wire fraud; 32 counts of aiding or assisting in the preparation of false federal tax returns; and five counts of filing false federal tax returns relating to a wide-ranging, abusive tax shelter scheme.
Tuesday, August 31, 2021
IRS Requires Division Counsel Consultation for Some Public Charity Status Claims in Wake of Mayo Clinic Decision
The IRS has issued a memorandum providing "Interim Guidance on Processing a Request for Public Charity Classification under IRC Sections 509(a)(1) and 170(b)(1)(A)(ii) when Applicant’s Primary Function is not the Presentation of Formal Instruction". The guidance comes in the wake of the Eighth Circuit's Mayo Clinic decision relating to the definition of "educational organization". As provided in the memo:
Because of ongoing litigation in the Eighth Circuit Court of Appeals regarding Treasury Regulation Section 1.170A-9(c)(1), the specialist must coordinate with TEGE Division Counsel when:
- An applicant is seeking classification or reclassification of public charity status as an educational organization under IRC Sections 509(a)(1) and 170(b)(1)(A)(ii), and
- The applicant’s primary function is not the presentation of formal instruction.
Of course the most interesting but unanswered question is to what extent the IRS will choose to follow that appellate court decision in making these determinations, including outside of the Eighth Circuit.
Hat tip: EO Tax Journal
The IRS Statistics of Income program has reported on its Domestic Private Foundation and Charitable Trust Statistics webpage the calendar year 2020 excise taxes reported by charities of all types on Form 4720, not just private foundations and trusts.. The largest amount by far is for the section 4960 tax on excess executive compensation, totaling more than $96 million. That figure represents almost 90 percent of all excise taxes reported, which totaled slightly more than $107 million. While more entities (524 versus 302) reported the section 4942 excise tax on private foundation undistributed income, the total amount of that tax reported was only a little over $5 million.
Interestingly, the section 4968 tax on the net investment income of private colleges and universities was paid by so few entities, and was such a small amount, that it is not separately listed but instead aggregated with three other excise taxes to prevent disclosure of specific taxpayer data. Only 9 entities reported any of those four excise taxes, which also included the tax on taxable distributions of sponsoring organizations, the tax on failure by hospitals to meet the section 501(r) requirements, and the tax on premiums paid on personal benefit contracts. The total tax reported for all four taxes was only a little over $3 million. While college and university endowments struggled in the fiscal year ending in June 2020, they still experienced positive returns. I wonder whether most colleges and universities with large endowments potentially exposed to this tax have found ways to minimize the investment income subject to tax or to avoid the tax entirely.
Friday, July 30, 2021
White House Announces New Religions Affairs Leaders, Including First Islamic Religious Freedom Ambassador
The White House announced Friday (July 30) a slate of nominations and appointments for top religious affairs roles, including the first Muslim American nominated to be the U.S. Ambassador-at-Large for International Religious Freedom.
According to a report by the Religious News Service (RNS), President Biden will select Rashad Hussain as his nominee for that post, filling a State Department slot vacant since former Kansas governor and U.S. Senator Sam Brownback left at the close of the Trump administration. Hussain, who would need to be confirmed by the Senate, currently works as director for Partnerships and Global Engagement at the National Security Council.
Mr. Hussain previously served as White House counsel under President Barack Obama, as well as U.S. special envoy to the Organization of Islamic Cooperation and U.S. special envoy for the Center for Strategic Counterterrorism Communications, among other roles.
Commenting on the upcoming nomination, Saeed Khan, an expert on American Muslim communities at Wayne State University, stated: “Rashad’s appointment demonstrates not only the importance the Biden administration places on religious freedom, it also shows the importance of the Muslim world to the administration both in terms of combatting Islamophobia and also promoting religious freedom in Muslim majority countries. Rashad’s background will allow him to have a frank discussion with Muslim majority countries about religious freedom.”
Anila Ali, a co-founder of the American Muslims and Multifaith Women’s Empowerment Council Iftar who has worked with Hussain in the past, also celebrated his nomination. “As AMMWEC, and as a woman leader, I look forward to working with him because women play an important role in peace-making,” Ali said. “He has worked with Muslim communities during the Obama period and we hope his relevant experience is going to make him a voice for all of us.”
According to the RNS report, President Biden is also expected to nominate Deborah Lipstadt as the next U.S. special envoy to monitor and combat antisemitism. Lipstadt is a professor at Emory University in Atlanta and a prominent Holocaust historian. She is the author of Antisemitism: Here and Now and is known for successfully defeating a libel suit brought against her by Holocaust denier David Irving.
Commenting on the expected nomination of Prof. Lipstadt, Mark (Moishe) Bane, president of the Orthodox Union, had this to say: “She is a leader with great moral courage; her dedicated work, clear voice in fighting Holocaust denial and preserving the memory of the attempted destruction of the Jewish people make her an exemplary choice for this role.”
In addition, President Biden plans to appoint two new commissioners to the United States Commission on International Religious Freedom: Khizr Khan and Rabbi Sharon Kleinbaum.
Khan became famous in 2016 when he and his wife, Ghazala, spoke during the Democratic National Convention as “Gold Star” parents, discussing their son, Humayun, a U.S. Army captain who died in Iraq in 2004. Mr. Khan, the founder of the Constitution Literacy and National Unity Project, runs his own law practice and has authored three books, including This is Our Constitution: Discover America with a Gold Star Father.
Kleinbaum, for her part, already served as a USCIRF commissioner in 2020 and leads the Congregation Beit Simchat Torah in New York City, a community that centers LGBTQ people. A human rights advocate, she also sits on Mayor de Blasio’s Faith Based Advisory Council and serves on New York City’s Commission on Human Rights. In addition, she is a board member of the New York Jewish Agenda and the New Israel Fund.
Prof. Vaughn E. James, Texas Tech University School of Law
Thursday, July 22, 2021
Thought I'd provide some quick reflections on the NCAA v. Alston a SCOTUS case handed down a month ago on June 21.
First a personal reflection. When I joined the IRS in the mid 2000s, I was told only somewhat in jest: there are two iron clad rules in exempt organizations -- preachers and college athletics ("hook em horns") always win. This latest case suggests that this iron clad rule may be beginning to subside in part at least.
Justice Gorsuch, writing for a unanimous Court affirmed the US 9th Circuit Court of Appeals in finding that the NCAA rules restricting educational benefits offered by colleges and universities to student athletes violated the Sherman Antitrust Act.
The Court affirmed the 9th Circuit that found that the NCAA limits on educational compensation violated the Antitrust Act only insofar as they involved educational benefits rather than other forms of compensation.
Probably the most significant aspect of the case that may have impact on other places for the NCAA and college athletics is that SCOTUS rejected the idea that the NCAA ought be treated differently because it deals with amateurs and is engaged in education rather than commercial activity.
This case does not change anything for how to think about universities and college athletics qualifying as charitable organizations under section 501(c)(3). John Colombo wrote an article The NCAA, Tax Exemption and College Athletics that is still relevant to this question today.
First, I would not expect this decision to effect college athletics entities like the NCAA or the university athletic activities to be found to be not charitable. This is because Congress amended the Code to provide that promoting amateur athletics is a purpose that meets the charitable requirement of section 501(c)(3). Perhaps, if universities start paying athletes and their amateurism is called into question, this would become an issue, but as of now, I do not see it threatening college athletics on the tax exemption angle.
Secondly, this ruling does not immediately impact the unrelated business income tax and college athletics either. The IRS and Courts have generally been favorable to college athletics. Just as Colombo concluded in his article some years ago, I think it still unlikely for that favorability to end because of the Alston holding.
However, as in the first matter, should the veneer of amateur begin to fall, and college athletics begin to compensate athletes, then the question of unrelated business income tax could become a real issue again for college athletics. The most dangerous possibility for college athletics and its expected tax treatment at least was raised in a concurrence by Justice Kavanaugh who suggested he would find the limitations on all forms of compensation to violate the Antitrust Act.
Monday, July 12, 2021
The recently released 2020 IRS Data Book (for the fiscal year ending 9/30/20) contains the usual high-level statistics for exempt organizations, including:
- Number of tax-exempt organizations and certain trusts (1,907,711) (Table 14), with most (1,753,824) tax-exempt organizations under section 501(c), including 1,404,170 under section 501(c)(3).
- Applications for tax-exempt status closed (95,864) (Table 12), with 85,509 approved, 94 disapproved, and 10,261 resolved in other ways (withdrawn, lacked required information, otherwise incomplete applications, etc.). Most (89,477) of the applications were under section 501(c)(3).
- Notices of intent to operate under section 501(c)(4) (3,219) (Table 13), with 2,796 acknowledged and 423 rejected (because, for example, not required as the organization filed a Form 990 series return before 7/8/16, already exempt under another IRC provision, or the IRS was unable to confirm the submitted employer identification number).
- Number of returns and other forms filed by tax-exempt organizations (1,360,719) (Table 2), down from fiscal year 2019 as were returns and other forms filed by most other types of entities, which likely reflects delayed processing of returns and other forms caused by the pandemic. Of the returns and other forms filed by tax-exempt organizations, 1,138,931 were filed electronically (Table 4).
- Examinations of tax-exempt organizations (Table 21), including
- 1,417 Forms 990, 990-EZ, and 990-N;
- 178 Forms 990-PF, 1041-A, 1120-POL, and 5227;
- 427 Forms 990-T; and
- 356 Forms 4720.
In addition, the Statistics of Income program recently released its Annual Extract of Tax-Exempt Organization Data for calendar year 2020, drawn from Form 990, Form 990-EZ, and Form 990-PF. It provides granular data from these returns; for example, the Form 990 extract has 273,972 rows (one for each employer identification number) and 220 columns.
Sunday, June 27, 2021
In a 2000 EO CPE article entitled Private Schools, the Service stated, “private schools have long been of concern to the Service.” As stated therein, the Service’s determinations of whether private schools qualify for exemption under IRC 501(c)(3) were addressed in many of the CPE texts from 1979 through 1989. In Private Schools, the Service provided an important historical review, a discussion on the requirements of Rev. Proc. 75-50, 1975-2 C.B. 587, and a summary of the various filing requirements that apply to private schools.
In recounting the history of this problem, the CPE article notes the background and current status of an injunction (still in effect) that requires the Service to deny tax-exempt status to racially discriminatory private schools in Mississippi. The injunction resulted from a 1970 class action filed to prevent the Service from recognizing the tax-exempt status of or allowing IRC 170 deductions to private schools that engage in racial discrimination against black students. See Green v. Connally, 330 F. Supp. 1150 (D. D.C. 1971), aff'd sub nom., Coit v. Green, 404 U.S. 997 (1971). It is interesting to examine the injunction in place for Mississippi in considering how to handle the systemic problem of racially discriminatory private schools today. The CPE article states the following regarding Mississippi private schools:
These so-called “Paragraph (1) Schools” must demonstrate that they have adopted and published a nondiscriminatory policy. They must also provide certain statistical and other information to the Service to establish that they are operated in a nondiscriminatory manner. Most importantly, they must overcome an inference of discrimination against blacks.
As of now, the injunction from Green only applies to Mississippi schools. Clearly, Green provides a model for how to implement the restriction against private schools’ engaging in racial discrimination. The focus on “statistical” information is really the key. As we all know, numbers do not lie. If private schools were free and open to all, the student body at private schools would not be 90% or more white. The same is true regarding the bleak number of black teachers at private schools. The injunction from Green could cure some of the prevalent and pervasive problems of racial discrimination in private schools throughout the South.
Hoffman Fuller Associate Professor of Tax Law
Tulane Law School
Saturday, June 26, 2021
Last month, Forbes published an article entitled The Racist History of “School Choice.” The article underscores yet another way that racially discriminatory private schools are subsidized. Raymond Pierce points out that for equitable education to exist, public schools need true reform, such as more funding for faculty development and other support systems necessary for nurturing high-quality learning environments. Given the need for greater investment into public schools, the last thing that should be done is to take money from public schools that are struggling and give it to largely segregated private schools, but that is what is happening under a common practice referred to as “school choice.” Not surprisingly, “school choice” has its underpinnings in a racist history. Pierce states, “We are less than six months into 2021, and to date, ‘school choice’ legislation has been introduced in at least 20 states, half of which are in the South.” Generally, the legislation involves tax credits, school vouchers, or “education savings accounts.” A common thread is that these bills take money from “underfunded, under-resourced public schools” and give it to private schools. While some proponents maintain that the bills will provide better education opportunities for Black and Brown students and those from low-income families, the reality is they do not according to Pierce.
The article traces the roots of “school choice” legislation to a history of racism and school segregation that is important to understand. Interestingly, public education in the South emerged during Reconstruction. When the Fourteenth Amendment was passed, education in the South was mostly privatized and available only to white children from wealthy families. Black children and poor white children typically were not educated at all. The Southern Education Foundation (SEF), which was featured in the June 21, 2021 post, was one of the first proponents of public education. The Peabody Fund (which preceded SEF), provided funding as well as drafted and promoted legislation calling for funding of public education through taxes. Former slaves strongly supported public education initiatives because they viewed education as essential to true freedom and had a strong desire to have their children educated. As a result of public schools, literacy among both Black and white students increased tremendously. Additionally, starting in 1913, the Anna T. Jeanes Fund (another precursor of SEF), supported “Jeanes Teachers” who traveled across the South to strengthen curriculum and instruction in rural schools that Black students attended. They taught students and community members how to excel independently and economically and how to overcome the challenges of the Jim Crow South. From 1910 through 1940, public education in the South grew dramatically.
However, in the 1940’s, Southern white students began leaving public schools to attend private schools to avoid integration after it was clear that the “separate but equal doctrine” from the 1896 Plessy v. Ferguson Supreme Court ruling would be dismantled. After the Supreme Court’s landmark decision in Brown v. Board of Education in 1954, segregation was no longer constitutional, and school vouchers became a means for subverting integration. During the 1950’s, Southern politicians passed legislation establishing tuition voucher or grant programs that were used to annihilate completely the public school systems, instead of desegregate. Pierce goes on to provide an illustrative example from Prince Edward County, Virginia where public schools were closed for five years until the Supreme Court intervened. Ultimately, the Supreme Court ruled in Griffin v. School Board of Prince Edward County that the county’s transferring of public funds to private white schools, instead of supporting public schools, was a violation of the equal protection clause of the Constitution. The Court stated that private school tuition assistance covered up as “school choice” was a tool to “systematically exclude Black children from the educational process.”
Despite the prohibition against this approach, Southern legislatures used it as a “blueprint” in an attempt to circumvent integration. From 1954 to 1964, Southern legislatures passed at least 450 laws and resolutions to prevent public school desegregation, many of which permitted the transfer of public funds to private schools. From 1958 to 1980, private school enrollment in the South increased by over half-a-million students. Indeed, hundreds of private segregated schools were established. At the same time, schemes to fund private schools at the expense of public schools, by using vouchers or tax credits to cover large portions of student tuition and operating costs, also increased. By the 1980’s, the 11 states that made up the former Confederacy had enrolled 675,000 - 750,000 white students. Of these students, 65 to 75% attended schools where 90% or more of the student body was white.
Today, school vouchers still are used to support segregated private schools and to continue de facto segregation. The numbers speak for themselves. In the United States, public schools have a student body that is comprised of 51 % white children and 48.3% children of color (mainly Black and Latino). In stark contrast, almost three out of every four private school students are white. As Pierce notes, this is part of a historical pattern.
The question becomes whether tax funding and subsidizing of a directed, intentional system of inequality, namely segregation, should be tolerated. As I recounted in the June 22, 2021 post, private schools are required to publicize their policies disavowing racially discriminatory practices. However, the numbers show that there are unspoken policies and practices that are being used to perpetuate both segregation and unfair treatment. One solution is to develop a better way of reporting racially discriminatory treatment so that private schools engaging in such practices would lose their tax-exempt status. Another solution is to re-examine the concept of “school choice” programs and school vouchers in their proper historical context and to require some form of accountability for the low numbers of minority enrollment in the private schools benefiting from these programs.
Hoffman Fuller Associate Professor of Tax Law
Tulane Law School
Wednesday, June 23, 2021
Historically, since private schools have not received federal funds, they have not been subject to civil rights laws, including Title VI of the Civil Rights Act of 1964 (“Title VI”), which prohibits discrimination on the basis of race, color, or national origin. However, loans associated with the Paycheck Protection Program (“P.P.P. loans”) have changed this landscape. The $659 billion program was intended to help, among others, nonprofits who needed assistance with making payroll by using loans backed by the Small Business Administration. Perhaps surprisingly, in the words of The New York Times, it was private schools who “cashed in” on the P.P.P. loans. See Private Schools Cashed in on P.P.P. Funding.
While public schools were ineligible for P.P.P. loans, private and charter schools could and did apply for loans, despite their multi-million dollar endowments. When P.P.P. funding dissipated quickly, the Small Business Administration revised its guidelines to clarify that those with other financing options should stop submitting applications. Yet, in order to stem the tide, additional rule tightening was required. Minority focused lenders and watchdog organizations raised concerns about equity and loopholes in terms of the loans.
Nevertheless, there may be a silver lining to private schools’ cashing in on P.P.P. loans. Perhaps unknowingly, the private schools have made themselves subject to Title VI requirements by virtue of receiving federal funds. The P.P.P. loan application specifically states that borrowers must comply with several civil rights laws, such as Title VI. As noted above, Title VI prohibits discrimination on the basis of race, color, or national origin. This means that private schools cannot engage in racial discrimination against employees, students, parents, or other participants. This includes in terms of employment, admissions, enrollment, and other treatment.
An interesting question is whether Title VI imposes prohibitions against racial discrimination not covered by section 501(c)(3). One definite difference is that private schools who have accepted P.P.P. loans now may have to pay compensatory damages to individuals who prove intentional discrimination in lawsuits against the schools. In addition, injunctive relief may be awarded to such individuals. At the very least, due to the receipt of P.P.P. loans, some private schools now are subject to causes of action from individuals and families who have faced racial discrimination at their hands. Over the years, organizations such as the ACLU have despaired that no such actions were possible, but that has now changed.
Hoffman Fuller Associate Professor of Tax Law
Tulane Law School
Tuesday, June 22, 2021
Tax-exempt private schools are required to have and to publish a racially nondiscriminatory policy. In 2019, the IRS released Rev. Proc. 2019-22, which allows private schools to use their Internet websites to publicize such policies, a requirement for exemption under section 501(c)(3) of the Internal Revenue Code. By way of background, Rev. Proc. 75-50 outlines the guidelines and recordkeeping requirements for determining whether a private school has a racially nondiscriminatory policy and in fact operates in accordance with such policy. Rev. Proc. 75-50 applies to private schools that are applying for tax-exemption and to private schools that already are tax-exempt.
Specifically, Rev. Proc. 75-50 requires, inter alia, a private school to include a statement acknowledging it has a racially nondiscriminatory policy “and therefore does not discriminate against applicants and students on the basis of race, color, and national or ethnic origin.” The statement must be included in one of the listed governing documents and in its brochures, catalogues, and other written ads for prospective students. Moreover, the school must make the policy “known to all segments of the general community served by the school.” Newspaper circulation and certain broadcast media are listed as acceptable means of doing so.
Rev. Proc. 2019-22 modified Rev. Proc. 75-50 by naming a third means of making a racially nondiscriminatory policy known in the manner prescribed: the school’s Internet homepage. Generally, the policy must be displayed on the school’s publicly accessible Internet homepage throughout the taxable year. Rev. Proc. 2019-22 even sets forth a sample notice for a private school’s homepage:
NOTICE OF NONDISCRIMINATORY POLICY AS TO STUDENTS
The M school admits students of any race, color, national and ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. It does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs.
There are also enumerated factors used to determine whether the notice is “reasonably expected to be noticed” by homepage viewers, such as the size, color, and graphics used; whether the notice is unavoidable, etc.
Form 1023 is used to apply for tax-exemption under section 501(c)(3). Schedule B pertains to Schools, Colleges, and Universities. On Form 1023, there are a number of questions concerning the requirement of a racially nondiscriminatory policy for private schools. Moreover, private schools applying for tax-exemption are informed that they will need to file an annual certification regarding their policy. (Interestingly, there are also a number of questions under Schedule B that deal with racial discrimination, including whether the private school was established to subvert integration and the racial composition of the student body, faculty, and administrative staff).
Generally, tax-exempt organizations, including numerous private schools, must file an annual reporting return (Form 990 or 990-EZ). The return includes a question allowing private schools to satisfy the aforementioned annual certification requirement. Many of the other questions permit a private school to self-report and answer “yes” or “no” in regard to whether it maintains records regarding racial composition, engages in discriminatory practices in terms of admission policies and scholarships, etc. This comes as no surprise since our tax system is based largely on self-reporting. However, self-reporting depends on the overall honesty of taxpayers. Every year a tax student asks the inevitable question midway through the material on gross income (or sometimes earlier during the Cesarini/treasure trove lecture): How would anyone ever know? I respond by saying that I am there to teach them what the law says and how to abide by the law, and then I remind them that God will know. Many students who are facing or who have faced racial discrimination at private schools undoubtedly ask whether anyone will ever know about the systemic challenges they face in applying or almost daily while engaging in the necessary and noble pursuit of acquiring an education.
Perhaps one way the IRS could gain valuable insight into the true encounters of racial discrimination is to require private schools also to publish on their Internet homepages a number or a link to a nonprofit organization that would report such incidents to the IRS once a threshold number was reached. If amendable, the National Association of Independent Schools (NAIS) could serve in this role as it has already publicly announced that it plans to release initiatives to stop systemic racism. See NAIS Statement on Addressing Anti-Blackness and Systemic Racism.
Hoffman Fuller Professor Tax Law
Tulane Law School
Monday, May 31, 2021
Philip Hackney (Pittsburgh) has posted Dark Money Darker? IRS Shutters Collection of Donor Data, which will be published in the Florida Tax Review. Here is the abstract:
The IRS ended a long-time practice of requiring most nonprofits to disclose substantial donor names and addresses on the nonprofit annual tax return. It is largely seen as a battle over campaign finance rather than tax enforcement. Two of the nonprofits involved, social welfare organizations and business leagues, are referred to as “dark money” organizations because they allow individuals to influence elections while maintaining donor anonymity. Many in the campaign finance community are concerned that this change means wealthy donors can avoid campaign finance laws and have no reason to fear being discovered. In this Article, I focus on whether the information is needed for the enforcement of the tax law and/or to support ancillary legal goals. I contend the IRS ought to collect this substantial donor information as it did for over 79 years. Though the collection of donor information may not be essential for groups such as social clubs, fraternities and sororities, and mutual ditch companies, the collection of this information non-publicly by the IRS is important in both enforcing tax-exempt requirements and in enforcing the tax law generally. Tax law prohibits the distribution of earnings from a nonprofit to those who control the organization. Substantial donors are classic suspects for seeking such improper receipts through their control. Thus, the information is key to IRS auditors. Considering the deficient budget of the IRS to ensure a properly enforced Code, the failure to collect that information puts the IRS in a disadvantaged position. While as a democratic matter, there may be some modest benefit from alleviating donors from the worry that the government will know about their political contributions, the harm to those who are not able to make use of these structures, the harm to those who are deprived of information regarding the biases associated with particular political activity, and the harm to the belief that the tax, campaign finance, and nonprofit law will be enforced equally upon all, is more significant. With these considerations in mind, the IRS and Treasury ought to rescind its most recent guidance on this matter. If not, Congress ought to require this information be disclosed by law.
Samuel D. Brunson
Wednesday, May 19, 2021
In a case deep in the weeds of tax-exempt law, the United States Eighth Circuit Court of Appeals remanded Mayo Clinic v. United States, No. 19-3189 back to the District Court. Though deep in the weeds, the case has some potential big importance to tax exempt law.
Though it is technically about whether Mayo owes the unrelated business income tax associated with debt financed income, it has big importance because a loss here would potentially open up a simple way for charitable organizations to establish that they have a favored status of being a public charity rather than a private foundation by being an educational organization.
In order to be allowed an exemption under section 514 of the Code from the UBIT, Mayo claimed that it is a qualified organization under section 514(c)(9)(C)(i) because it is an "educational organization under section 170(b)(1)(A)(ii). That statute states: an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on." Note that without the "primary test" a charity could normally maintain faculty and curriculum and normally have a regularly enrolled body or pupils, as something less than a primary part of the organization's activity.
The IRS determined that Mayo was not such an educational organization based on its regulation interpreting the above language. The regulation Treas. Reg. 1.170A-9(c)(1) provides an organization is an educational organization "if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on."
Obviously Treasury and the IRS added the "primary function" test to what is provided for in the statute. The District Court held for Mayo on the basis that the primary function was not a part of the test Congress implemented. Mayo Clinic v. United States, 412 F. Supp. 3d 1038 1042 (D. Minn. 2019).
After applying the Chevron Two Step, the Appeals Court upheld the Treasury Regulation, but only in part, it says. It first finds that the District Court was right that the primary test added by Treasury was not reasonable. They find that the history and prior case law did not support this language. But then it suggests that the primary test should indeed apply but as to the idea of educational generally. Thus, the court determines that the test to apply is as follows: "The analysis normally unravels in three parts: (1) whether the taxpayer is “organized and operated exclusively” for one or more exempt purposes; (2) whether
the taxpayer is “organized and operated exclusively” for educational purposes; and (3) whether the taxpayer meets the statutory criteria of faculty, curriculum, students, and place."
One part of the history of charitable organizations that the Eighth Circuit fails to trace is the development of the idea of a publich charity under section 509 of the Code. There an organization is generally determined to be a private foundation unless it meets one of the requirements under (a)(1)-(4). Section 509(a)(1) includes these same educational organizations.
I think what this all means is that there is an easier end run around obtaining public charity status for "educational organizations." A well funded advocacy organization by one individual that mainly educates the world about their point of view in order to influence political choices need only hire some faculty, have them establish curriculum, and then regularly educate some pupils. This would meet the above test and would circumvent the private foundation rules. I doubt this was intended by Congress, but that I think is the practical result of the Courts ruling.
The Eighth Circuit remanded the case for further proceedings. It seems likely to me that Mayo will again win at the District Court. I would be surprised if the IRS appealed it further as they have lost the main issue on this one. Additionally, given the way they lost, I don't think the IRS can fix the regulation. The only way for the IRS to fight this one again would be to try to win in another Circuit. Given the trend of federal court cases going resoundingly against the IRS on interpretation issues like these lately, including most recently CIC Services at the Supreme Court, I suspect the only way to solve this mess is for Congress to take action.
May 19, 2021
Friday, May 14, 2021
In 2016, the rise of Donald J. Trump turned a spotlight on his purported charitable activities and made "self-dealing" and similar legal terms headline news. With his departure from office (and the dissolution of his family foundation in the face of a New York Attorney General lawsuit), it might be expected that such topics would once again return to news obscurity. But legal issues raised by the involvement of some of his supporters with nonprofits continue to garner new headlines.
Just in the past month, three prominent supporters have had that spotlight shine on them and their nonprofit-related activities. As reported by the Washington Post, federal authorities have indicated Brian Kolfage, who worked with Trump-advisor Stephen K. Bannon on the "We Build the Wall" crowdfunding campaign and then 501(c)(4) nonprofit, with filing a false tax return for allegedly failing to report hundreds of thousands of dollars he received from that effort and other sources. And as reported by the Associated Press, former Trump campaign lawyer Sidney Powell now faces accusations in the lawsuit brought against her by Dominion Voting Systems that she used Defending the Republic, which claims to be a 501(c)(4) nonprofit, to pay for her personal legal expenses, an accusation she denies. And the fallout for Jerry Falwell, Jr. continues as Liberty University has now sued him for breach of contract and breach of fiduciary duties based on his alleged cover up of a personal scandal that led to his resignation as president and chancellor of the university.
Finally, congressional democrats continue to push for more information about possible tax-exempt nonprofit organization involvement in the January 6th attack on the Capital. As reported by Tax Analysts (subscription required), at this past week's ABA Tax Section virtual meeting a senior advisor to the Senate Finance Committee noted that Chair Ron Wyden remains interested in ensuring the IRS looks into which tax-exempt organizations helped plan the riots and whether any of them incited violence, thereby undermining their tax-exempt status.
Thursday, May 13, 2021
Last month the IRS issued a press release announcing eight new compliance initiatives for the Tax Exempt and Government Entities Division, which are now reflected on its Compliance Program and Priorities webpage. Of particular interest to exempt organizations are the following three new initiatives:
- Form 990-N Filers/Gross Receipts Model: The purpose of this strategy is to determine if an exempt organization was eligible to file Form 990-N where related filings indicate the $50,000 gross receipts threshold was not met. The treatment stream for this strategy is examinations.
- Officers Treating EO as Schedule C Business: The purpose of this strategy is to determine if officers and insiders of exempt organizations are claiming expenses of exempt organizations as Schedule C business deductions. Issues of focus are potential private benefit and inurement related to the exempt organization and potential adjustments to Forms 1040. The treatment stream for this strategy is examinations.
- Small EOs that Sponsor Retirement Plans: The focus of this strategy is to review retirement plans of small exempt organizations to determine whether the plan investments are properly administered, whether there are any party-in-interest transactions in the plan trust and whether any participant loans violate Internal Revenue Code (IRC) Section 72(p). Improper transactions between the plan and its participants can result in prohibited transactions under IRC Section 4975, deeming distributions as taxable income, or result in IRC Section 72(t) early distribution penalties. The treatment stream for this strategy is examinations.
Hat tip: KPMG.
The Treasury Inspector General for Tax Administration published earlier this month Fiscal Year 2019 Statistical Trends Review of the Tax Exempt and Government Entities Division. The report confirms that the Division has experienced both budget and staff reductions in recent years, although that trend started to reverse in fiscal year 2019. Here is the summary:
What TIGTA Found
The TE/GE Division is comprised of seven distinct functions: Employee Plans; Shared Services; Compliance Planning and Classification; and Exempt Organizations/Government Entities, which is comprised of the Exempt Organizations, Indian Tribal Governments, Tax-Exempt Bonds, and Federal, State, and Local (Governments)/Employment Tax functions. According to the IRS, the entities that the TE/GE Division serves employ almost 25 percent of the American workforce.
In May 2017, the TE/GE Division realigned the issue identification, planning, classification, and case delivery processes that were previously embedded within five functions into the consolidated Compliance Planning and Classification function. The reorganization has affected these five functions’ examinations units’ staffing, budget, and processes. In addition, in October 2018, the TE/GE Division established five new compliance groups, referred to as the TE/GE Compliance Unit, which in FY 2019 completed 4,863 compliance checks for three of the functions resulting in a 72 percent change rate.
New legislation often affects IRS operations and may require significant operational changes to implement it. Two new laws significantly affected the TE/GE Division’s operations during the years 2015 to 2019: the Tax Cuts and Jobs Act of 2017, and the Taxpayer First Act of 2019. In addition to legislative changes, the Federal Government had a lapse in appropriations from December 22, 2018, to January 25, 2019, that shut down most IRS operations for 35 days. As a result, the TE/GE Division experienced inventory backlogs in processing applications for tax-exempt status and timely completing compliance cases. However, IRS management stated that mitigation actions taken, such as allowing temporary overtime and detailing examination agents from one unit to another, addressed the backlogs of applications.
Over the FYs 2015 to 2019, the TE/GE Division’s budget decreased by more than $22.5 million (9 percent), although the FY 2019 budget increased by approximately $7.7 million (4 percent) over FY 2018’s appropriations. Along with the decrease in the budget, the TE/GE Division’s staffing level also decreased by 12 percent from FY 2015 to FY 2019, although hiring efforts in FY 2019 have started improving staffing levels. At the end of FY 2019, the TE/GE Division had approximately 1,500 employees, which was 2 percent of the IRS’s total staffing level of just over 78,000 employees.
What TIGTA Recommended
TIGTA made no recommendations in this report. IRS officials were provided an opportunity to review the draft report and did not provide a formal response
Friday, April 2, 2021
A number of commentators have recently posted articles addressing conservation easement deductions. Several of these articles were originally published in 2020 in a Tax Notes publication, but for readers who may not have access to Tax Notes publications they are now available on SSRN and so I am including them in this list:
- Jessica Jay, Down the Rabbit Hole with the IRS' Challenge to Perpetual Conservation Easements, Part Two, in the Environmental Law Reporter.
- Nancy Ortmeyer Kuhn, The Eleventh Circuit Court of Appeals: The Current Focus for Conservation Easements, in Bloomberg Tax.
- Douglas L. Longhofer and Katherine Jordan, Eroding Conservation, Preserving Abuse — A Flawed IRS Strategy, originally published in Tax Notes Federal.
- Nancy A. McLaughlin, Amendment Clauses in Easements: Ensuring Protection in Perpetuity, originally published in Tax Notes.
- Nancy A. McLaughlin and Ann Taylor Schwing, Conservation Easements and Development Rights: Law and Policy, originally published in Tax Notes.
In addition, the only exempt organizations issue that appears to have been raised by the National Taxpayer Advocate in her latest report to Congress focused on conservation easements. The report identified syndicated conservation easements as being at the center of the "most significant cases" involving a charitable contribution deduction issue, which was in turn identified as the ninth most litigated issue. The report notes that perpetuity, as opposed to valuation, has become the focus of recent conservation easement cases. See pages 216-219 of the report for more details.
Finally, Tax Notes reports that the DOJ has reached a settlement with a consultant who was one of the targets of the DOJ's investigation of syndicated conservation easements. Without admitting any wrongdoing, the consultant agreed to be permanently enjoined from promoting or arranging a qualified conservation easement contribution in the future (and to pay an amount that was not specific in the court filing).
UPDATE: Tax Notes reports that taxpayers involved in syndicated conservation easement deals have now filed a class action lawsuit against promoters of those deals.
Solicitation Update: States & FTC Crack Down on Fraud; Crowdfunding Grows; Donors Test Their Influence
There has been a steady drumbeat of news stories reporting that state authorities and, on occasion, the FTC continue to scrutinize and prosecute individuals who allegedly engage in fraudulent charitable solicitation. Some of the cases involve tried-and-true techniques, such as purporting to raise funds to help veterans, while others reflect more recent events, such as attempting to capitalize on support for the Black Lives Matters movement. Here are recent examples from just last month:
- The FTC, 38 States, and the District of Columbia shut down a fraudulent charity telefunding operation that raised more than $110 million, almost all of which went to pay fundraising costs and very little of which went to actual charitable services.
- The Florida AG shut down a "sham" wounded veterans charity named Healing Heroes Network that used very little of the contributions it received to actually help veterans.
- The Minnesota AG is suing a company that allegedly posed as a charity for service members, using the name Contributing 2 Combatants and Coast 2 Coast Marketing, but instead allegedly used the donations to enrich the company's owner.
- In Ohio, the U.S. Attorney's Office reported an indictment against a man for allegedly using a fake nonprofit Facebook page with the Black Lives Matter name to rob donors of more than $450,000.
- In Oregon the Douglas County Sheriff's Office arrested a man accused of using fake nonprofits to obtain donations, including the Impossible Roads Foundation that purpotedly built tiny homes for disabled veterans.
- In Utah, the Davis County attorney general is investigating whether Operation Underground Railroad made misleading statements in its fundraising appeals, even as Vice reports broader concerns about the anti-child sex trafficking charity's operations.
It is not surprising that there is fraud in this area, as it has been increasingly easy to raise funds quickly for a variety of legitimate causes. Again just in the past month. Facebook and Instagram announced that users had donated more than $5 billion over five years to nonprofits through campaigns on those platform, and the AP reports that millions of dollars have poured in through crowdfunding campaigns to aid the families of the Atlanta shooting victims. Crowdfunding can also be used for more controversial causes, as illustrated by The Guardian's report that far-right extremists have raised millions of dollars via social media, among other channels.
Finally, some prominent donors are trying to use their influence to affect the charities they support. The Washington Post reports that James Huntsman has filed a federal lawsuit against the LDS Church, alleging it misused millions of dollars of his family's donations by using them for commercial purposes. And some wealthy supporters of the University of Texas have waded into the controversy over the school's fight song (Eyes of Texas), vowing to pull their donations unless the school retains it.
UPDATE: In another case of a disgruntled donor, a Sinclair anchor is demanding $20 million from the WE charity that has been at the center of a charity scandal in Canada. The amount is in addition to a demand for return of donations the anchor made, and is for "destruction of [the donor's] character and marketability as a journalist, public speaker, filmmaker, and author."
Friday, March 26, 2021
The American Rescue Plan Act of 2021 signed into law on March 11, 2021 provides an additional $7.25 billion in funds to the Paycheck Protection Program (PPP). The application period for PPP Round 2 loans will end on March 31, 2021, unless extended by Congress.
In general, charities are eligible for a first-draw PPP loan if they employ fewer than 500 employees (full-time and part-time, who live in the United States) per the nonprofit's physical location of your nonprofit. The Act expanded PPP eligibility to an “additional covered nonprofit entity,” defined as any nonprofit described in section 501(c) of the Internal Revenue Code (other than organizations described in 501(c)(3), (c)(4), (c)(6), or (c)(19)) and exempt from tax under section 501(a) of the Code, that employs 300 or fewer employees per physical location and does not derive more than 15% of receipts or devote more than 15% of activities to lobbying. The nonprofit must certify on the PPP application that “[c]urrent economic uncertainty makes th[e] loan request necessary to support ongoing operations.”
Additional resources for nonprofits with respect to the Act can be found here:
- The American Rescue Plan Act: Analysis of Key Provisions Affecting Nonprofits and the People They Serve (National Council of Nonprofits)
- Summary of the American Rescue Plan Act of 2021 (Independent Sector)
Nicholas Mirkay, Professor of Law, University of Hawaii
The Internal Revenue Service provided the following update on the mandatory electronic filing of Form 990-Ts:
The Taxpayer First Act requires certain exempt organizations to file information and tax returns electronically for tax years beginning after July 1, 2019. Pending conversion of Form 990-T, Exempt Organization Business Income Tax Return, to electronic format, the IRS has continued to accept the 2019 tax-year versions of this return on paper.
The 2020 Form 990-T and its instructions have been updated for e-filing of returns with due dates on or after April 15, 2021. As of the beginning of March 2021, several providers have made software available to file Form 990-T electronically. Information about software providers supporting electronic filing of Form 990-T can be found on the Exempt Organizations Modernized e-File (MeF) Providers page.
Any 2020 Form 990-T with a due date on or after April 15, 2021, must be filed electronically and not on paper. A limited exception applies for 2020 Form 990-T returns submitted on paper that bear a postmark date on or before March 15, 2021.
Nicholas Mirkay, Professor of Law, University of Hawaii