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.
Other Nonprofit Scandals You May Have Missed: $37 Million Class Action Settlement; "Sham" Police Charities
In a story that appeared to attract very little attention, Gospel for Asia settled a federal class action lawsuit brought against it for $37 million (!) according to a report in a Canadian news outlet. According to that report, the charity - now known as GFA World - "had been accused of diverting donations intended for India's poor to build a lavish headquarters in Texas, personal residences, and purchase for-profit businesses, including a rubber plantation and a professional soccer team." The charity also agreed to remove the wife of the charity's founder from the board of directors, and to add the lead plaintiff in the suit to the board. It is not clear whether the Canada Revenue Agency, the Internal Revenue Service, or any other government agencies are investigating. According to a report in Christianity Today, Gospel for Asia helped found the Evangelical Council for Financial Accountability, but was expelled from that organization in 2015 "after ECFA concluded that GFA misled donors, mismanaged resources, had an ineffective board, and violated most of the accountability group’s core standards." Gospel for Asia did not acknowledge any wrongdoing as part of the settlement, as it noted in a related press release.
In other news, states continue to pursue and shut down alleged "sham" police charities. In Missouri, the St. Louis Post-Dispatch reports that the Federal Trade Commission and Missouri Attorney General Eric Schmitt forced the Disabled Police and Sheriffs Foundation Inc. to shutdown after raising close to $10 million, almost all of which went to fundraising costs or the organization's executive director. The charity and the executive director did not admit to any wrongdoing, however. And in Maryland, the Baltimore Sun reports that a retired Baltimore police sergeant "has agreed to cease soliciting money for a police charity [CopStress] that the Maryland Attorney General’s Office says misled the public about its operations." The retired police officer involved contested the accusations, however, saying he was only agreeing to shut the charity down after collecting minimal donations because otherwise he faced a $30,000 fine.
Tuesday, April 9, 2019
The Center for Public Integrity recently posted, "The Trump Tax Law Has Its Own March Madness" on its website. The article highlights many of the issues with the TCJA that we have previously discussed on this blog, but specifically puts the new excessive compensation excise tax square in the context of the NCAA Men's Basketball Tournament:
The coaches who made the final four are being paid the following this year by their universities: Tom Izzo, Michigan State University, $3.7 million; Tony Bennett, the University of Virginia, nearly $3.2 million; Chris Beard, Texas Tech University, $2.8 million; Bruce Pearl, Auburn University, $2.6 million. John Calipari, whose Kentucky team also made the Elite Eight, earned compensation of nearly $8 million in 2018-2019.
The Article goes on to highlight the fact that these coaches may all be treated differently despite having similar salaries. Because some of the coaches work at public universities, they may escape the excise tax due to the drafting issue identified by Ellen Aprill previously (and discussed on this blog here), who is quoted in the article. In addition, John Calipari particularly receives significant third party revenue that may or may not be captured by the controlled organization rules.
Friday, March 29, 2019
As the Washington Post details, the end of the Mueller investigation is far from the end of law enforcement actions relating to President Trump. Among those investigations are several tied to nonprofit organizations, specifically the continuing litigation in New York relating to the Trump Foundation and investigations into the President's inaugural committee.
Turning first to the inaugural committee, in late February the District of Columbia Attorney General's office subpoenaed the committee for documents relating to its finances according to several media reports (CNN; NY Times; Politico; Wall Street Journal; Washington Post). This followed subpoenas on the same topic from the New Jersey Attorney General's Office and from the U.S. Attorney's Office for the South District of New York, both earlier that month. The latter subpoena identified a number of possible federal crimes under investigation, including conspiracy against the United States, mail and wire fraud, money laundering, and accepting contributions from foreign nations and straw donors. The DC and NJ subpoenas are more focused on nonprofit-related matters, such as possible private benefit and whether the committee complied with laws relating to soliciting contributions.
As for the Trump Foundation litigation in New York, Courthouse News Service reports that New York Attorney General Letitia James requested judgment against the Foundation, Donald J. Trump, Donald J. Trump Jr., Ivanka Trump, and Eric F. Trump for $2.8 million in restitution and $5.6 million in penalties, as well as injunctive relief. The filing, technically a Reply Memorandum of Law in Further Support of the Verified Petition, argues that the evidence provided by the Attorney General has not been challenged by the respondents or countered by any admissible evidence provided by them, and that it demonstrates breach of fiduciary duties, wasting of charitable assets, and improper use of the foundation for political purposes. Hat tip: Nonprofit Quarterly.
Thursday, March 28, 2019
The IRS Tax Exempt & Government Entities (TE/GE) Business Operating Division recently released its Fiscal Year 2019 Program Letter, reviewing its accomplishments for both fiscal year 2018 and the first quarter of fiscal year 2019. Here is the Table of Contents:
Fiscal Year 2019 Compliance Program:
TE/GE delivers a compliance platform that is divided into six portfolio programs: Compliance Strategies; Data-Driven Approaches; Referrals, Claims, and Other Casework; Compliance Contacts; Determinations; and Voluntary Compliance and Other Technical Programs. Data is used to identify and address existing and emerging high-risk areas of non-compliance, and steers the decisions on how best to apply optimal resources.
Compliance Strategies are issues approved by TE/GE’s Compliance Governance Board to identify, prioritize and allocate resources within the TE/GE filing population. Using a web-based portal, TE/GE employees submit suggestions for consideration by the Board. Once approved, these issues are considered to be priority work. As more issues are developed and approved, those with a higher priority may potentially replace Compliance Strategies currently set forth in this document.
Data-Driven Approaches use data, models, and queries to select work based on quantitative criteria, which allows TE/GE to allocate resources that focus on issues that have the greatest impact. TE/GE is committed to integrating data into its processes and procedures, and will use return data and historical information to identify the highest risk areas of non-compliance.
Referrals, Claims, and Other Casework
Referrals allege non-compliance by a TE/GE entity and are received from sources within and outside the IRS. Claims are requests for refunds or credits of overpayments of amounts already assessed and paid; they can include tax, penalties, and interest or an adjustment of tax paid or credit not previously reported or allowed.
Compliance Units are employed to address potential noncompliance, primarily using correspondence contacts known as “compliance checks”, which allow TE/GE to establish a presence in the taxpayer community in a manner that reduces the cost to the IRS, while limiting the burden on each taxpayer contacted.
Determination letters are issued to exempt organizations on exempt status, private foundation classification, and other determinations relating to exempt organizations, and to retirement plans that satisfy the qualification requirements of Federal pension law.
Voluntary Compliance and Other Technical Programs
The Voluntary Correction Program (VCP) enables a plan sponsor (at any time before audit) to pay a fee and receive IRS approval for correction of plan failures. Knowledge Management works to ensure the quality and consistency of technical positions, provide timely assistance to employees, and preserve and share TE/GE’s knowledge base.
UPDATE: Rep. Mike Thompson, Chair of the House Ways and Means Subcommittee on Select Revenue Measures and Rep. Mike Kelly have introduced the Charitable Conservation Easement Program Integrity Act of 2019 in the House. Senator Steve Daines previously introduced a bill with the same name in the Senate.
Senators Chuck Grassley and Ron Wyden, Chairman and Ranking Member of the Senate Finance Committee, respectively, have announced an investigation into the potential abuse of syndicated conservation easement transactions. While stating general support for the availability of charitable contribution deductions for conservation easements, they cited a need to preserve the integrity of the conservation easement program by preventing "a few bad actors" from wrongly gaming the tax laws relating to conservation easements. They have requested information from fourteen named individuals relating to such transactions, drawing on a 2017 Brookings report on conservation easements.
This announcement follows a Department of Justice complaint filed in December 2018 against certain promoters of "an allegedly abusive conservation easement conservation easement syndication tax scheme" and a 2017 IRS Notice targeting such schemes by declaring them "listed transactions."
At the heart of all these actions are allegedly false valuations based on inflated appraisals that sharply increase the tax benefits from the conservation easements.
Friday, March 15, 2019
In today's Chronicle of Philanthropy, Lloyd Hitoshi Mayer (Notre Dame) authored an opinion piece questioning whether a better funded IRS could have discovered and ended sooner the college admissions scandal discussed in several prior blog entries this week (here, here and here). Here are some highlights of the opinion:
- There were certainly enough yellow flags in IRS filings of the nonprofit at the center of the scam to signal something was wrong. The Internal Revenue Service would have needed the capacity to review those filings carefully and to pursue those flags.
- In addition to more funding for the IRS oversight of nonprofits, Congress could consider possibly moving that oversight out of the IRS.
- One significant red flag: In its tax-exempt application, the Key Worldwide Foundation articulated that it would be using materials developed by a for-profit company owned by one of the organization’s directors, which also employed the foundation’s chief financial officer and treasurer.
- In its annual Form 990 returns, the Foundation reported it had three directors and none of them met the IRS’s definition of “independence,” indicating they all had financial ties to the foundation or related entities.
- The Foundation also stated in its annual returns that none of the grant recipients were tax-exempt charities. While charities can make grants to businesses and governments in limited cases, the complete lack of charity recipients raises the issue of how KWF ensured that its grants would be used only for charitable purposes.
- The Foundation's organizers and maybe some of the parents participating in the admissions scam knew that the IRS is mostly asleep at the switch with respect to audits.
- There is only so much that technology and public disclosure of information can do to uncover such misdeeds without more funding of IRS oversight.
- It is, therefore, not surprising that an apparently unrelated FBI investigation led to the discovery of this scheme instead of an IRS investigation, given this lack of resources and resulting low audit coverage.
Thursday, February 28, 2019
While the media and public understandably focused mostly on other aspects of Michael Cohen's testimony before Congress yesterday, the information he provided raised two significant issues relating to the soon-to-be-dissolved Donald J. Trump Foundation.
First, in his opening statement Cohen mentioned (on pages 3 and 12) that the Foundation had been involved in the purchase of a third portrait of Mr. Trump from a charity auction, this time through reimbursing the winning bidder the $60,000 purchase price, which portrait was then hung in one of Mr. Trump's country clubs. If these statements are true, this is a clear case of self-dealing in violation of Internal Revenue Code section 4941 (and comparable state law requirements as well), as was the case with the previously reported charity auction purchases of two other portraits that also ended up hanging in Trump business properties. It should be noted that the Foundation's annual IRS return for 2013 (available from GuideStar) does not show such a reimbursement and the only $60,000 payment it includes is to the American Cancer Society, although the Foundation has inaccurately reported distributions before. For coverage of this aspect of Cohen's testimony, see CNN, The Guardian, and this Surly Subgroup post by Ellen Aprill.
Second, he confirmed previous reports that Mr. Trump had steered a $150,000 payment from a Ukrainian billionaire, Victor Pinchuk to the Foundation in lieu of it being paid to Mr. Trump as a speaking fee. As Ellen Aprill and I discussed back in 2016, such arrangements raise a possible assignment of income issue in that depending on the exact circumstances Mr. Trump may have been required to include that fee in his gross income for both federal and state income tax purposes (although there may have been a full or partial offsetting charitable contribution deduction to reflect the transfer of those funds to the Foundation). Of course without seeing Mr. Trump's personal federal and state income tax returns, we can't be sure whether he included this amount in his income or not. For coverage of this aspect of Cohen's testimony, see Time.
Friday, February 1, 2019
The Tax-Exempt and Government Entities (TE/GE) Division of the Internal Revenue Service released its accomplishments for Fiscal Year 2018 (see here). Here are a few highlights:
- Exempt Organizations (EO) implemented several changes to better serve EO customers and assist employees with processing applications more efficiently for tax-exempt status.
- Employee Plans (EP) implemented several program and processing changes to better serve its customers and assist TE/GE’s employees with their cases.
- Indian Tribal Governments (ITG) assists Indian tribes with addressing their federal tax matters, while Tax Exempt Bonds (TEB) administers federal tax laws applicable to tax-advantaged bonds. ITG/TEB implemented several program and procedural improvements.
- TE/GE employed its Compliance Units to address potential noncompliance, primarily using correspondence contacts known as “compliance checks,” which limited the burden of each taxpayer contacted and allowed TE/GE to establish a presence in the taxpayer community in a manner that reduced the cost to the IRS.
- TE/GE made a significant hiring push in FY18, partnering with the Human Capital Office to select a total of 111 employees, including new hires, promotions, and laterals.
The letter also describes the Fiscal Year 2018 Compliance Program, which was divided into six portfolio programs:
- Compliance Strategies
- Data-Driven Approaches
- Referrals, Claims & Other Casework
- Compliance Contacts
- Voluntary Compliance & Other Technical Programs
Thursday, January 31, 2019
John Tyler (Ewing Marion Kauffman Foundation), Hillary Bounds, and Edward Diener posted to SSRN an article published in the September/October 2018 edition of Taxation of Exempts entitled Identifying and Navigating Impermissible Private Benefit in Practice. Here is the abstract:
Organizations and people from within the charitable sector are increasingly engaging in historically non-traditional activities and with other than 501(c)(3) organizations in their efforts to generate revenue and investment/donations and to more aggressively pursue their charitable mission objectives. Examples include ventures with or from other than charitable-oriented businesses and investors, combined public-private fund arrangements, pay-for-success, impact investing, opportunity zones, micro-lending for business, and other finance-oriented relationships. These efforts are changing the ways in which 501(c)(3) organizations must identify and manage against impermissible private benefit.
One aspect of many of these activities is intentional awareness that the brand and reputation of many 501(c)(3) organizations can have independent value on which others might want to trade, with or without providing commensurate value. Another area in which private benefit problems arise is within more garden-variety, day-to-day operations. Consider operation-oriented pursuits such as contracting for delivery of goods and services, which might require increased attention to the financial and non-monetary values of data collected and the tools used to collect, store, secure, and analyze that data. Finally, “new” philanthropists and social change actors are engaging in historically non-traditional activities by structuring these activities without regard to (or at least with much less regard for) the incentives of tax deductions and exemptions.
All of these implicate and require thoughtful consideration of and management to protect against impermissible private benefit while still allowing for enthusiastic pursuit of mission objectives.
Philip Hackney (Pittsburgh) posted to SSRN his Written Testimony for the Hearing on Oversight of Nonprofit Organizations: A Case Study on the Clinton Foundation (House Committee on Oversight, December 13, 2018). Here is the abstract:
This is written testimony offered to the House Committee on Oversight's Subcommittee on Government Operations on December 13, 2018: Our nation has tasked the IRS with the large and complex responsibility for regulating the nonprofit sector, but has failed to provide the IRS with resources commensurate with that task. This is important work. Nonprofits constitute a large and growing part of our economy, and they are granted a highly preferential tax status. An organization that abuses that preferential status will obtain a significant and unfair advantage over the organizations and individuals who play by the rules. If we are to grant such a substantial advantage to nonprofits, and if we are going to rely on the IRS to oversee regulation of these entities, it is essential that the IRS have the resources it needs to ensure that this preferential status is not abused.
Lloyd Mayer previously discussed the hearing on this blog (here).
Monday, January 28, 2019
Allison M. Whelan (Covington & Burling, Washington D.C), Denying Tax-Exempt Status to Discriminatory Private Adoption Agencies, 8 UC Irvine L. Rev. 711 (2018):
This Article ... argues that the established public policy at issue here is the best interests of the child, which includes the importance of ensuring that children have safe, permanent homes. In light of this established public policy, which all three branches of the federal government have recognized and support, this Article ultimately argues that, consistent with the holding in Bob Jones, private adoption agencies that refuse to facilitate adoptions by same-sex parents, thereby narrowing the pool of qualified prospective parents and reducing the number of children who are adopted, act contrary to the established public policy of acting in the best interests of the child.
This Article proceeds in five Parts. Part I first provides general information about the child welfare system, adoption, private adoption agencies, and the “best interests of the child” standard. Part II describes the emergence of state laws that allow private agencies to refuse to facilitate adoption by same-sex couples. Part III provides an overview of federal income tax exemptions and then summarizes the Supreme Court’s decision in Bob Jones University v. United States. Part IV applies the analysis and holdings of Bob Jones to private adoption agencies that discriminate against same-sex couples, and ultimately argues that such policies are contrary to the established public policy of the best interests of the child. As a result, this Article argues that the IRS should conclude that these agencies do not qualify for exemption from federal income tax. Part V concludes by offering a potential compromise and additional policies the government should consider.
(Hat tip: TaxProfBlog )
Tuesday, December 18, 2018
Earlier this month the U.S. Department of Justice announced that Actelion Pharmaceuticals US, Inc., a subsidiary of Johnson & Johnson, had "agreed to pay $360 million to resolve claims that it illegally used a [section 501(c)(3) charitable] foundation as a conduit to pay the copays of thousands of Medicare patients taking Actelion's pulmonary arterial hypertension drugs, in violation of the False Claims Act." More specifically, the DOJ alleged that Actelion only donated enough to the foundation to cover the copays of patients prescribed its drugs in an effort to generate revenue from Medicare and induce purchases of its drugs. The announcement also noted that Johnson & Johnson acquired Actelion after the alleged misconduct occurred.
An analysis by HealthLeaders states that this is the third time in the past year that a drugmaker has settled a similar claim, joining a $24 million settlement by Pfizer last April and a $210 million settlement by United Therapeutics Corp. a year ago. The same analysis identified the foundation in the Actelion case as Caring Voice Coalition, Inc. (CVC), and noted that CVC both objected to providing information requested by Actelion and ultimately withdrew from providing financial assistance for drug copays (in part because of the withdrawal of an Advisory Letter from the U.S. Department of Health and Human Services Office of Inspector General that presumably related to providing such assistance). The DOJ settlement agreement in the United Therapeutics case states that CVC was also the charity involved in that case, while the DOJ settlement agreement in the Pfizer case states it was the Patient Access Network Foundation (PANF) in that case. There is no public indication that IRS has raised any issues regarding the tax-exempt status of either CVC or PANF in the wake of these developments.