Nonprofit Law Prof Blog

With "Taxmageddon" Looming, Latest EO Excise Tax Info and Future Plans

With legislative uncertainty and possibly significant change on the horizon, it is a good time to take stock of where changes made in 2017 now stand as well as stated IRS Exempt Organization Division plans for the future.

First and most directly relevant to the 2017 tax law changes, the IRS recently provided figures for calendar year 2023 excise taxes reported for charities, private foundations, and split-interest trusts on Form 4720. These figures included the section 4960 tax on excess executive compensation, which collected $570 million from 1,274 organizations and the section 4968 tax on net investment income of private colleges and universities, which collected $381 million from 56 organizations. While both provisions are permanent and therefore do not need to be renewed, Congress certainly could modify them in 2025, especially the latter tax given current political rhetoric surrounding universities. 

Recent data is unfortunately not available for the unrelated business income tax, so the effects of the 2017 section 512(a)(6) UBTI silo rule are still unknown. But Congress does not appear to be any interest in revisiting this permanent rule change.

The Treasury 2024-2025 Priority Guidance Plan indicates that guidance relating to the 2017 tax changes has been completed, as the mostly continuing guidance projects all relate to other topics (including many that pre-date 2017). The one significant new item that could be relevant in 2025 is section 501(r) guidance, particularly given the continuing bipartisan interest, exemplified by the recent letter to the IRS from Senators Warren and Grassley, in the activities of charitable nonprofit hospitals.

And of course all this activity is against the backdrop of the ongoing attempts by the Tax Exempt & Government Entities to continue to improve its operations and modernize, as detailed in its Fiscal Year 2025 Program Letter. How those plans will be affected by the election results and hostility of both the incoming Trump Administration and the Republicans majorities in Congress remains to be seen.

Lloyd Mayer

 

Great podcast on political activity by nonprofits including through donor-advised funds

I’ve recommended the podcast Taxes for the Masses on this blog before. The hosts, Lisa De Simone and Bridget Stomberg, are accounting professors who break down tax issues for those without a tax background, and I really value that project. They occasionally talk about issues related to tax-exempt nonprofits, as was the case two weeks ago when they released an episode about restrictions on political activity by charities and a little about donor-advised funds.

The bulk of the episode is an overview of the political-activity restrictions on charities. They do a good job of explaining why deductions for charitable giving are so much more valuable to wealthier taxpayers, especially for donations of appreciated property, and the connection between that and the political-activity restrictions.

The part on donor-advised funds first provides a very brief explanation of what a donor-advised fund is. As always, I could find things to quibble with, like I think they imply that a donor to a donor-advised fund loses control of the timing of the distributions from that fund, which is not really true, but I understand from personal experience how hard it is to give an overview without simplifying sometimes in ways that are misleading. But then they move quickly into a description of a paper by Helen Flannery and Brian Mittendorf, which finds that grants to “politically engaged charities” are made through donor-advised funds more often than they are made through other giving methods. Flannery and Mittendorf theorize that donors may prefer giving through donor-advised funds to charities that do significant lobbying or have politically-engaged 501(c)(4) affiliates, because donor-advised funds provide greater donor privacy protection than private foundations. I’m not sure I agree 100% with De Simone’s and Stomberg’s takeaways from the paper, but I think it’s wonderful to have podcasts that present serious academic work on exempt organizations “to the masses.”

--Benjamin Leff

Ninth Circuit Rejects DOE's Analysis of Grand Canyon University's Tax-Exempt Status

It’s a shame the semester is almost over, because that means it’s too late for me to assign the Ninth Circuit’s recent opinion in Grand Canyon University v. the Department of Education to my students. If you can follow the court’s logic in the case, you probably should get an “A” in my class, whether the court is right or wrong. That’s because at the heart of the opinion is the distinction between “private benefit” and “private inurement,” a distinction that bedevils contemporary federal tax-exemption law and, by extension, my students. One of the most important cases on “private inurement” is American Cancer Council v. Commissioner, in which the Seventh Circuit held that whatever was going on (very high fees to a for-profit fundraising company) was not private inurement, though it might be private benefit, and it remanded the case for an application of the private benefit standard. The parties settled the case before we could get any analysis of the private benefit issue. In the Grasnd Canyon University case, the Ninth Circuit does the reverse, holding that it doesn’t matter whether whatever is going on (very high fees to a for-profit management company) are private benefit, because the DOE should have only been asking about private inurement, not private benefit. And the court remanded the case for analysis of the private inurement question. Private benefit, private inurement, potato, potato … what’s going on?

GCU is a university that was formerly owned and operated by a for-profit company, Grand Canyon Education, Inc. (GCE). The board of GCU determined that it would be preferable to convert to a nonprofit, at least in part in order to be subject to the more favorable DOE regulations that apply to nonprofit universities. In 2018, GCE sold GCU to a nonprofit that later changed its name to GCU for $853 million dollars, which GCE loaned to GCU. After the transaction, GCU was a nonprofit, but it both owed GCE the $853 million it had borrowed, and owed substantial quantities of its revenue to GCE under a management agreement in which GCE provides management services to GCU. The agreement is complicated, but whether GCU qualifies as a 501(c)(3) organization despite the very close connection to for-profit GCE, and the fact that so much of its revenue goes to GCE, is a question normally addressed principally under the private benefit doctrine.

Why is the court saying that the private benefit doctrine doesn’t matter in this case? It’s not because the parties satisfied the private benefit standard. Instead, this case arises out of a finding by the DOE found that Grand Canyon University (GCU) fails to qualify as a tax-exempt 501(c)(3) organization because it serves a substantial private benefit. The court is holding that the DOE doesn’t get to make that determination, not that it is wrong. According to the court, the IRS is the only agency who can make a determination on that particular question. The court held that under the Higher Education Act, the DOE should evaluate (1) whether the school is “owned and operated” by a nonprofit corporation, and (2) whether any part of the net earnings inure to the benefit of any private shareholder or individual. So, it is proper for the DOE to determine whether GCU violated the private inurement doctrine rather than rely on the IRS for that. But it is not proper for the DOE to independently determine if GCU met the other requirements of section 501(c)(3) – specifically whether the organization is organized and operated exclusively for one or more tax-exempt purpose. That “purposes” clause of section 501(c)(3) is the origin of the private benefit doctrine, which holds that tax-exempt purposes must be public rather than private, and therefore an organization fails to meet the standard if it serves a substantial private benefit. The court held, as a matter of statutory interpretation, that it is irrelevant to the DOE’s analysis whether a school improperly advances a substantial private purpose, although it is relevant whether its earnings inure to any private person. By the way, the other requirements in section 501(c)(3), not relevant to this case, are the limitation on lobbying and the prohibition on intervening in an election. Presumably, under the court’s analysis, the HEA also excludes these from the purview of the DOE in its determination of whether a school should be considered nonprofit for its purposes.

So, what should happen on remand? Presumably, the DOE should develop its case about private inurement. The opinion contains several facts that suggest that GCU might have a private inurement problem, but of course not enough to make that determination. The most important analytical distinction between private benefit doctrine and private inurement is that private inurement only applies when a financial benefit flows to a person who exercises some degree of control over the nonprofit – an insider, often called a “disqualified person.” The most likely disqualified person in this case is Brian Mueller, the President of GCU, who is also the CEO of the for-profit company that manages the school (GCE). Or it is possible that GCE itself is a disqualified person with respect to GCU. In either case, the DOE would have to show that the payments made to GCE (directly) or to Brian Mueller (either directly or indirectly through GCE) are not only very high, but are excessive. Excessive payments to a disqualified person are at the heart of private inurement analysis.

Unfortunately, I’m guessing we’ll never hear the outcome of that analysis, and not just because Trump has promised we won’t have a DOE to administer the Higher Education Act. Even a fully functional DOE will likely settle this case on remand. We’ll have to wait for some other for-profit to non-profit university conversion to see how the DOE applies the private inurement rule. By the way, if GCU failed the private benefit standard, why didn’t the IRS deny it tax-exempt status? I think the answer is probably that the IRS has extremely limited resources for exempt-organizations enforcement, and it made a determination not to use those resources in this case. Because of the court’s reading of the HEA, the IRS cannot pass the cost of determining this important issue to the DOE.

--Benjamin Leff

Nonpartisan Nonprofit Election Administration Assistance

There's a great article over at the Chronicle of Philanthropy about the rapid growth in philanthropic funding for nonpartisan election administration and integrity. The range of support provided is extremely broad.  For example, the article says,

    "Funders and nonprofits threw support behind election offices, which are often underfunded and under siege. They provided     equipment, technical assistance, and pro bono legal support to fight lawsuits, and even bulletproof windows and parking lot     lights."

Of course, there's so much election misinformation these days, it's hard to judge which philanthropic interventions improve elections and which could possibly undermine them. As the article points out,

    "While many organizations stress their nonpartisan status, they are often viewed as working on behalf of a     political candidate. As philanthropy dollars flow in, fears of partisan motivations could erode the very trust in elections     that groups seek to fortify, says Hale of the Election Center. 'There’s real suspicion that private funds are being used to design     what is a public process.'"

I recommend the whole article.

--Benjamin Leff

Government $ + Nonprofit Lax Internal Controls = Theft Waiting to Happen

This hypothesis is based only on anecdotes, but it appears that there are an increasing number of reported high-dollar thefts from charities that involve a mix of government funding - and so potentially lots of money - and lax internal controls that unfortunately are all too common at nonprofits. In this space we have reported on perhaps the largest such instance, which is the Feeding Our Future scandal in Minnesota that allegedly added up to at least $250 million. But there have been a number of other, alleged multi-million dollar scandals that involve similar fact patterns, including:

• The FBI is investigating an Orange County, California nonprofit that the County is suing based on claims that it misused more than $13 million in COVID-19 relief funds. The daughter of a County Supervisor works for the nonprofit, Viet America Society, and has also been named in the lawsuit. Additional coverage: L.A. Times (subscription required); N.Y. Times (subscription required); Orange County Register.

• The U.S. Attorney's Office in the Eastern District of Missouri announced late last month the indictment of a St. Louis nonprofit executive who allegedly fraudulently obtained "more than $2 million in funds intended to feed low-income Missouri children, both before and during the coronavirus pandemic." Coverage: St. Louis Post-Dispatch (subscription required).

• The CFO of the Detroit Riverfront Conservancy pled guilty late last month to stealing nearly $15 million from the nonprofit. As an earlier Detroit Free Press article detailed, the theft raised serious questions about the nonprofit's internal controls, including not only with respect to its privately provided funds but also the at least $15 million in direct government grants received over the past decade and the $3 million per year provided by the city of Detroit for operating costs.

• In August the U.S. Attorney for the Southern District of New York announced the conviction of the "shadow executive director" of a nonprofit for stealing millions of dollars from the federal Head Start Program. Apparently the defendant lied to the U.S. Department of Health and Human Services when forms he submitted claimed the nonprofit had an independent board of directors and controls in place to guard against fraud, waste, and abuse.

And I could keep going, especially if I included smaller dollar amount cases that state and local authorities are investigating or prosecuting. As Professor Nicolas Duquette (USC) commented for the Detroit Free Press article about the Detroit Riverfront Conservancy, reliance on nonprofits to handle public business can present a “fundamental problem” for accountability. These examples raise the concern that a perhaps not sufficiently appreciated downside of governments farming out the provision of public services to nonprofit organizations is that this farming out often comes with substantial funds but not sufficient internal control requirements.

Lloyd Mayer

TIGTA Report on TEGE Compliance Checks

In August the Treasury Inspector General for Tax Administration (TIGTA) issued a report titled Improvements to the Tax-Exempt Compliance Unit Could Reduce Mistakes and Unproductive Examination Referrals. While I doubt anyone is surprised that TIGTA found room for improvement, what I found most interesting about the report is its window into details of the compliance check program.

According to the report: "A compliance check is a review to determine whether a TE/GE taxpayer is compliant with their Federal tax return filing(s), reporting, and payment requirements. A compliance check is not an examination, and the taxpayer may legally choose not to participate. A compliance check does not directly relate to determining a tax liability for any period. It is instead a tool intended to help educate TE/GE taxpayers, practitioners, plan sponsors, and participants as well as encourage voluntary compliance. In addition, a compliance check is not a discussion, inspection, or a request/review of books and records."

With respect to exempt organizations, workstreams of particular interest include ones focused on:

• hospital financial assistance policies (as required by section 501(r)(4);
• the section 4960 excise tax on excess executive compensation;
• the Form 990-T; and
• the Form 1023-EZ streamlined application under section 501(c)(3).

Lloyd Mayer

TCJA Excise Taxes Hit Their Stride: $244 Million from University Investment Income & $671 Million from Excess Exec Comp (for 2022)

Last month the IRS released the 2022 excise tax collections from charities, private foundations, and split-interest trusts. The tax on net investment income of private colleges and universities (section 4968) hit 58 institutions (up from 33 in 2021) and collected $248 million (up from $68 million in COVID pandemic year 2021). This matches the $0.2 billion per year revenue estimate from the Joint Committee on Taxation in December 2017.

And the tax on excess executive compensation (section 4960) saw an even more dramatic jump. In 2021 only 516 organizations paid the tax, for a total of $210 million. But in 2022, those figures jumped to 1,710 organizations paying almost $671 million.  That greatly exceeded the JCT's revenue estimate, which had been for $0.2 billion per year.

Lloyd Mayer

Private Foundations (Remember Those?): Still 100,000+ Strong, With Almost $1.1 Trillion in Assets (as of 2020)

Over the summer the IRS posted the latest spreadsheet summarizing figures from private foundation annual returns (Form 990-PF), providing information for Tax Year 2020. Highlights include:

• There were over 103,000 returns filed by almost 95,000 nonoperative foundations and over 9,000 operating foundations.
• Almost $1.1 trillion in assets.
• Over $172 billion in revenues, including $95 billion from contributions, gifts, and grants.
• Over $117 billion in expenses, including $92 billions contributions, etc. paid.

This includes almost 1,600 private foundations (1.5%) with assets of $100 million or more, which collectively accounted for $748 billion of the assets (69%), $104 billion of the revenue (60%), and $72 billion of the expenses (61%).

These figures, which are not greatly changed from the 2019 tax year amounts, indicate that private foundations remain a significant part of the charitable sector and philanthropic giving even as donor advised funds continue to grow in importance. By comparison, the National Philanthropic Trust reported for 2020 that the approximately 1 million individual DAFs its report covered (housed at 976 charities) had $160 billion in assets, received $48 billion in contributions, and made $35 billion in grants in aggregate.

Lloyd Mayer

The Corporate Transparency Act (CTA) and Tax-Exempt Organizations

This year, a new congressional act has drawn a good deal of attention in the corporate world: the Corporate Transparency Act (CTA). But what does it have to do with tax-exempt organizations? Potentially, a lot. After all, many nonprofits are organized as LLCs or corporations—just the do-good kind. :) In this post, I’ll attempt to explain what the CTA is and what it may require of nonprofits.

Effective from January 1, 2024, the CTA introduces new beneficial ownership reporting requirements aimed at increasing transparency in the corporate landscape. The legislation primarily targets entities at risk for financial crimes. While the CTA predominantly applies to for-profit entities, tax-exempt organizations are subject to nuanced exemptions that require careful attention.

Exemptions for Tax-Exempt Entities

Tax-exempt organizations are generally exempt from CTA reporting requirements—and exemption which applies to entities recognized under Section 501(c) of the Internal Revenue Code—provided they maintain their tax-exempt status. Notably, it appears that tax-exempt entities do not need to report to FinCEN that they qualify for an exemption if they have always been exempt, reducing administrative burdens for longstanding tax-exempt organizations. However, tax-exempt entities that lose their exempt status after January 1, 2024, must file beneficial ownership information (BOI) reports with FinCEN if they do not regain their tax-exempt status within 180 days. This creates a narrow window for organizations to restore their exempt status before they are subject to reporting obligations.

Implications for Newly Formed Tax-Exempt Entities

Organizations formed after the January 1, 2024, effective date of the CTA face different challenges. These newly established entities typically do not receive recognition of tax-exempt status from the IRS within the 90-day window that FinCEN grants for submitting an initial BOI report. All this to say that newly formed entities pursuing tax-exempt status potentially may be subject to BOI reporting requirements before receiving an IRS determination letter.

Subsidiaries of Tax-Exempt Entities

Subsidiaries wholly controlled by tax-exempt organizations are also exempt from BOI reporting requirements under FinCEN’s guidance and the statute. This exemption applies to subsidiaries wholly owned by tax-exempt entities, such as a C corporation or an LLC where the tax-exempt entity is the sole shareholder or member.

However, FinCEN’s guidance on what constitutes "control" of a subsidiary is somewhat limited. FinCEN adds the term “wholly” to modify “control” in its guidance, but that modifier isn’t present in the statute. From this, one could reason that the tax-exempt parent must entirely control the ownership interests in the subsidiary. But it raises questions in joint ventures where ownership is shared between a tax-exempt entity and a for-profit entity. Whether these partially owned entities qualify for an exemption from the reporting requirements—and what proportion of ownership must be met to exempt it—is not entirely clear.

In Summary

While many tax-exempt entities are potentially shielded from the reporting obligations, maintaining exempt status is crucial to avoid falling into the purview of the CTA’s BOI requirements. Even though current legal challenges as to the constitutionality of the CTA could impact the viability of the act, organizations should still implement careful monitoring processes to stay compliant, particularly if their status changes or they enter into joint ventures. For more detailed information on the CTA's requirements, visit FinCEN's BOI FAQ page.

 

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law

Tax Effects of Crowdfunding Distributions – Charitable and Otherwise

The IRS recently posted guidance on its website about the tax implications of distributions from online crowdfunding. With some regularity I have conversations with students or others who have raised money online for some cause outside the context of any existing 501(c)(3) organization. Sometimes, they want to create 501(c)(3) organizations for future activities, but they have already had online funding platforms distribute funds to them individually, which they have then either transferred to the intended beneficiaries of the fundraising campaign or used for the purposes described in the fundraising campaign. They want to know what the tax implications are. I usually tell them to go back in time and not to put themselves in the middle of a charitable contribution or gift without some sound legal advice, but that’s because of state charitable solicitation law reasons as much as federal tax reasons.

As for the tax implications, the IRS helpfully explains that crowdfunding payments “may be includible in the gross income of the person receiving them depending on the facts and circumstances.” In general, if someone gets money, it is taxable income unless some exception applies. In this case, the IRS mentions two exceptions: gifts and charitable donations. But also, another important principle is at play because, as the IRS notes, money raised by crowdfunding may be “on behalf of other people or businesses.” That principle is the fact that a person who receives money as an agent of someone else, and dutifully delivers that money to the principal, does not have taxable income.

With regard to charitable contributions, the question of whether a distribution is taxable should be relatively simple: either the recipient of the distribution is a charity (no income) or the recipient dutifully delivered the distribution to a charity (no income). There could be a hiccup if the recipient received the income in one year and delivered it to a charity in the next, but that shouldn’t be an insurmountable hiccup; it just might take some explaining.

The more difficult analysis has to do with whether the distribution is a gift. Here, the question is not who got the funds, but whether they were given out of detached and disinterested generosity, and (as anyone who has ever taken a law school tax class knows), that can be hard to assess. If the recipient of the crowdfunding distribution spent the money on behalf of a charitable purpose, instead of distributing money to an intended beneficiary, the question of whether it could be a “gift” is even harder to assess.

The difficulty in assessing the tax treatment of crowdfunding distributions is at the heart of the real purpose of the IRS’s website guidance, which is to explain the reporting regime, not the tax treatment. Congress required crowdfunding websites starting in 2024 to report all taxable distributions over $600 to the IRS on a Form 1099-K, although that rule has not yet been implemented by the IRS.  The problem with the rule is that crowdfunding websites are not well situated to assess all the relevant facts and circumstances, and so good faith efforts to comply with the reporting requirements will likely produce substantial reporting of non-taxable distributions on Forms 1099-K – distributions that are really gifts or charitable contributions. So, what does the recipient of such erroneous 1099-Ks do? The IRS website guidance explains how to report these distributions on one’s tax return, and urges the taxpayer to “keep complete and accurate records of all facts and circumstances surrounding the fundraising and disposition of funds for at least three years.” Seems like good advice.

--Benjamin Leff

While I Wait for Women’s Single Sculls Repechages…. Exemption and the Olympics!

So … I never thought I’d see a concert lineup that included the metal band Gojira (complete with bloody severed heads in the background- BOLD!), Lady Gaga doing the can-can, and Celine Dion.   But here we are…. The 2024 Paris Summer Olympics opening ceremony.  And I’m down for it.  All of it.

I am an Olympics nerd. I have already watched Norway v. Sweden in Women’s Team Handball.  I’m disappointed I can’t find the Archery ranking rounds that happened yesterday streaming on Peacock.  I will wake up at 5 am to watch doubles badminton tomorrow.  I’m that person.

So, it seems only appropriate to do a little review of the tax-exempt status of the Olympics for the blog today, because there are no other competitions to watch on opening ceremony day and I’ve already watched all the available Rugby 7s replays (five stars – will watch again.)  So here’s a deep dive (pun intended) into the Olympics.

Section 501(c)(3) and Section 501(j)

If you are reading the Nonprofit Law Prof Blog, you probably already know that Section 501(c)(3) describes organizations that “foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment)…”   If, however, you are a “qualified amateur sports organization” under Section 501(j), you are exempt from the prohibition on providing athletic equipment.

Prior to 1976, the IRS would grant exempt status to athletic organizations if they could show that they were charitable or educational.   But those were pretty narrow buckets.   The amateur sports language was added to Section 501(c)(3) in 1976, but the IRS apparently took the provision of equipment provisions seriously – From a 1987 EO CPE Text: 

For example, an organization which, as part of its coaching program, made videotapes of athletes for the purpose of analyzing their performance could not be granted exemption as an amateur athletic organization under IRC 501(c)(3), since the use of videotape equipment was considered the provision of equipment.

As we all know from watching Cool Runnings, bobsleds are really expensive, so this simply could not stand. Section 501(j) wasn’t added until 1982.  While the definitions of a “qualified amateur sports organization” and the general 501c3 language are close, they aren’t completely co-terminus.  But it is clearly intended to cover Olympic-type organizations.   See e.g., GCM 39459, finding as exempt the organization for USA women’s bowling even though they supplied uniforms and equipment.

Bowling is not an Olympic sport but recognized by the US Olympic Committee and eligible for the Pan Am games, which is enough.  Apparently, bowling was a demonstration sport at the 1988 Seoul Summer Olympics and has lobbied to be added, making the short list for the 2020 Tokyo Summer Olympics but missing the cut to surfing, skateboarding, and sport climbing.  BUT I DIGRESS.

Your organization needs to be organized primarily to cater to serious athletes, so hosting running events open to all levels and not at Olympic distances didn’t get exempt status – it was deemed more recreational in nature. 

US Olympic & Paralympic Committee

So the USOPC is recognized by the International Olympic Committee as the National Olympic Committee for United States.  According to its website, it’s a “federally chartered nonprofit corporation” – you might remember my Veterans’ Day post on the USO, which is the same thing.  It’s a 501c3 and a public charity under 170(b)(1)(a)(vi) - the USOPC’s most recent Form 990 is in fact available on its website. It lists itself as a corporation formed in 1950 with a legal domicile in Washington DC but an HQ in Colorado Springs, Colorado.  A really interesting supplemental note on its Schedule D – wasn’t able to find a lot on this, does anyone have any details???

INSTALLMENTS FOR THE BROADCAST MEDIA RIGHTS, FOR THE OLYMPIC AND WINTER OLYMPIC GAMES, ARE HELD BY USOPC IN TRUST. THESE PAYMENTS ARE RECORDED ON THE STATEMENT OF FINANCIAL POSITION AS ASSETS HELD ON BEHALF OF OTHERS UNTIL THE GAMES OCCUR AND CERTAIN REQUIREMENTS ARE MET, THEN THE CASH WILL BE RELEASED AND THE AMOUNT WILL BE RECORDED AS REVENUE.

As a final note on related entities, there is a US Olympic and Paralympic Foundation, which “generates philanthropic support to empower Team USA athletes to achieve sustained competitive excellence and well-being.”  It appears that the USOPC doesn’t support athletes directly; athlete support comes from the USOP Foundation.  Formed in 2013 out of Colorado, it lists itself as a 170(b)(1)(A)(vi) on its Form 990.  The Foundation reports a management agreement with the USOPC on its Part VI and Schedule R.

National Governing Bodies.

If you look on the lists of grants made by the USPOC, it includes the national governing bodies for the various sports.  The list includes, USA Artistic Swimming,  the United States Curling Association (which is so much fun – try it if you can) and the Unites States Amateur Confederation of Roller Skating (OMG can we have roller derby in the Olympics?  I mean this year, breaking is an Olympic sport, so why not?  It does make me feel bad for bowling…) They are all listed as separate Section 501c3 organizations.

Because I had to, obviously, I did check out the US Amateur Confederation of Roller Skating, which is d/b/a USA Roller Sports (way better) and headquartered in that hotbed of roller sports, Nebraska (why Nebraska?  Any roller skaters out there know?)  Its 990s are also available, although curiously they report that they are a 509(a)(2) public charity.  

Apparently, rink hockey played on skates was a demonstration sport in the Olympic Games in Barcelona in 1992.  They tried for the 2016 Rio Summer Olympics but lost out to rugby 7s (I see why though – super fun) and golf.  BUT I DIGRESS.

International Olympic Committee. 

I would be remiss if I didn’t mention them.  It is an association under Swiss law, but many international organizations get exempt status from the IRS if they are worried about US source income – so I figure I’d check on the IRS’ website.  Et Voila!!!! And here’s its Form 990.  Interestingly, the list themselves as a Section 501(c)(4) organization, formed in 1894.  I immediately wondered if there is a US Friends of the IOC, or something like that, to take US-based charitable contributions (since 170 deductions are limited to domestic gifts… and they are a 501(c)(4) anyway). 

A quick check of the IOC’s website didn’t show anything that looks like a US fundraising arm, so if anyone has an info, let me know.   I’d keep looking, but it’s getting kind of late and I need to get some sleep before doubles badminton qualifying rounds at 5 am.

Frenziedly, eww

Christian Charity Violates the Johnson Amendendment ... Or Does It?

Saturday, ProPublica published a story about Ziklag, a charity created to marshal the power of wealthy conservative Christian donors to effect dramatic political and cultural change in America. The article references “six nonpartisan lawyers and legal experts” who “[a]ll expressed concern that Ziklag was testing or violating the law” (including our own Lloyd Hitoshi Mayer, Phil Hackney, Roger Colinvaux, as well as nonprofit-law giant Marcus Owens). 

The main concern appears to be campaign intervention in violation of IRC 501(c)(3) (what is nowadays called “the Johnson Amendment”). Violations of the Johnson Amendment are notoriously fact specific, and in my view, the article doesn’t describe a clear “smoking gun” violation. Much of the focus is on Ziklag’s “Steeplechase” project, which is an effort to get out the vote in swing states with the intention of turning out Trump-leaning voters to swing the election to Trump. As probably everyone reading this blog knows, according to IRS guidance, charities are permitted to conduct voter registration, voter education, and get-out-the-vote drives, so long as they are “carried out in a nonpartisan way.” But, as everyone probably also knows, the question of what it means for such drives to be nonpartisan is also quite complex. For example, my understanding is that the leaders of an organization can have an opinion about who is the better candidate, and while the IRS does not permit express targeting of sympathetic voters, there is room for play in the joints. Ironically, Republicans have recently ramped up their criticism of get-out-the-vote drives by charities, presumably under the belief that it is Democrats who use “nonpartisan” voter education for partisan ends more often or more effectively than Republicans.

Another “gray area” in Johnson Amendment law is the status of an internal “confidential” communication of a charity. Pro Publica obtained a video of an internal communication of Ziklag members that seemed to be intended to be kept confidential – the leader said, “You almost hate to put it out this clearly … because if somebody else gets ahold of this, they’ll freak out.” He then went on to say that Biden was “an empty suit with an agenda that’s written and managed by someone else.” The content of that message presumably constitutes campaign intervention since it disfavors a candidate in an upcoming election. But it is not at all clear that the medium of the message constitutes intervention: it was intended to be an internal communication between a relatively small number of members of the organization. It’s hard to imagine that the Johnson Amendment should be used to police every conversation between the leaders of charities and their members or staff. IRS guidance specifies that communications by organizational leaders at “official meetings” or “publications” are to be attributed to the organization and therefore must be free of electoral content, but there is no authority to help one decipher whether a confidential video constitutes an official meeting or publication.

In the end, I trust the opinions of the six experts that ProPublica cite in their report, since the ones named are the leading scholars in the field. And I strongly support ProPublica’s efforts to educate the public about campaign intervention by charities. But it is worth pointing out how elusive clear conclusions about campaign intervention often are, and how much is still left ambiguous in the law itself. While the experts cited are probably right that Ziklag is “across the line,” it may well be that Ziklag is conducting its affairs in conformance with the law, or at least with a genuine effort to conform. An intention to observe the law is entirely consistent with an intention to use 501(c)(3) status to advance the electoral interests of one’s preferred candidate. And, in my view, a diligent intention to observe the letter of law, even combined with a strong intention to distort the law’s spirit, is far better than contempt for the law. It is the difference between liberal society and an illiberal one. But maybe that’s just the tax lawyer in me talking.

--Benjamin Leff

Federal Prosecutions of Alleged Charity Fraud: Casa Ruby, Feeding Our Future, and Modest Needs

The wheels of justice may turn slowly, but they do tend to catch up with those who allegedly steal from charities, particularly when government funds are involved. Three recent examples, the first two of which have been covered in this space previously, are the founder of D.C.'s Casa Ruby, various people associated with Minnesota's Feeding Our Future, and the founder of New York's Modest Needs.

The Washington Post reports that Casa Ruby's founder is set to plead guilty on July 17th to federal wire fraud arising from an allegation that she stole $150,000 of pandemic relief funds. As detailed by the Washingtonian last year, the organization closed in 2022 after the D.C. government ended its support. The DC Superior Court also appointed a receiver to sort out the organization's finances.

The N.Y. Times has the latest on the Feeding Our Future scandal, which involves allegations of tens of millions of dollars in pandemic relief being stolen. The most recent development is that federal prosecutors have charged five people with conspiring to bribe a juror in a recently completed criminal trial of several people associated with Feeding Our Future; those five include three of the defendants (two of whom were convicted and one of whom was acquitted). For more comprehensive coverage, see the numerous stories in the (Minnesota) Star Tribune.

Finally, the N.Y. Times also recently reported on federal prosecutors charging the founder of Modest Needs, a charity that used crowdfunding to raise donations to help working families. According to prosecutors, he diverted $2.5 million of the charity's funds over eight years to cover personal expenses, including rent, cosmetic surgery, and expensive meals out. 

Lloyd Mayer

 

IRS Finalizes Conservation Easement Disallowance Regulations

Earlier this week the IRS issued final regulations implementing section 605 of the SECURE 2.0 Act of 2022, enacted as Division T of the Consolidated Appropriations Act, 2023, Public Law 117-328, 136 Stat. 4459, 5393 (Dec. 29, 2022). That provision amended Internal Revenue Code section 170 to limit the amount of a qualified conservation contribution by a partnership or S corporation to 2.5 times the basis in the relevant real property with certain exceptions, including if the pass-through entity had held the real property for more than three years. That provision also made certain related modifications to penalty and reporting requirements. Coverage: Journal of Accountancy; Law360 (subscription required).

Lloyd Mayer

 

 

11th Circuit Rules That IRS Conservation Easement Listing Notice Is Invalid

The U.S. Court of Appeals for the Eleventh Circuit affirmed a federal district court decision that IRS Notice 2017-10 is invalid because the IRS failed to comply with the Administrative Procedure Act's public notice and comment requirements. The Notice identified certain syndicated conservation easement transactions as tax avoidance "listed transactions" and so subject to disclosure and other requirements. The case is Green Rock LLC v. IRS (No. 23-11041, June 4, 2024). The 11th Circuit joins the 6th Circuit (Mann Construction, Inc. v. United States, 27 F.4th 1138 (2022)) and the Tax Court (Green Valley Investors, LLC v. Comm'r, 159 T.C. No. 5 (2022)) in reaching this conclusion.

Reacting to the earlier decisions, in Announcement 2022-38 Treasury and the IRS stated they had published proposed regulations to address the asserted APA deficiencies in the previous Notice. While the announcement said Treasury and the IRS intended to finalize the proposed regulations in 2023, to date they have not yet done so.

Lloyd Mayer 

 

On this Memorial Day: An Introduction to the USO

As I sat to write a blog post on this Memorial Day, I was Googling recommendations for charities that support current service members, veterans, and their families.  As the USO repeatedly appeared as the first entry on a numbers of searches, I realized that I actually know very little about it.  I think we’ve all probably seen pictures of movie stars and famous singers visiting the troops out in the field from time to time (there’s a great collection of vintage photos here), but I never really thought about the organization that made that happen.

Until now. 

“USO” stands for the United Service Organizations, which reflects its origins as a collaboration among a variety of existing charities that were serving military members and families during World War II.  The USO is not part of the Department of Defense; rather it is one of a handful of federally chartered corporations in existence (see 36 USC 2201 et. seq.) – although its statute provides “the Corporation shall maintain its status as a corporation incorporated under the laws of New York, another State, or the District of Columbia.”  The 2022 Form 990 reports its state of legal domicile as the District of Columbia.

Per its organizing statute, the USO was designed, in party, to   

accept the cooperation of, and provide an organization and means through which, the National Board of Young Men's Christian Associations, the National Board of Young Women's Christian Associations, the National Catholic Community Service, the Salvation Army, the National Jewish Welfare Board, the Travelers Aid-International Social Service of America, and other civilian agencies experienced in specialized types of related work, which may be needed adequately to meet the particular needs of the members of the Armed Forces, may carry on their historic work of serving the religious, spiritual, social, welfare, educational, and entertainment needs of men and women in the Armed Forces and be afforded an appropriate means of participation and financial assistance,

According to its 2022 Form 990, the USO is a private organization that is tax-exempt under Code Section 501(c)(3) and a public charity under Code Section 170(b)(1)(a)(vi).

By statute, the USO is a membership organization overseen by a Board of Governors.  The Board consists of six members appointed by the President, the Secretary of Defense (or designed), and representatives of the organizations listed above (or the public at large) that have the power to appoint the board of directors.  It is a membership organization, but the voting members are the six appointees of the President. According to its 2022 Form 990, it has a 38-person board, of which 37 are reported as independent (the one person who is not independent is the current President & CEO – he is also the only compensated member of the Board of Directors).

It’s hard to summarize all that the USO does for our military service members and their families. In addition to the well-known entertainment tours, the organization provides care packages for service members, transition services for soldiers re-entering private life, and various support services for military spouses, among other things.  It operates in a number of foreign countries as well in order to provide services to our military service members stationed overseas.   I strongly recommend visiting its website or, for the tax nerds among us, reading the details of its program services on Form 990 Schedule O.

There is a separate USO Foundation, which the USO lists on its Form 990 as a directly controlled entity within the meaning of Code Section 512(b)(13).  It was formed in 2007 as a fundraising arm.  The USO Foundation’s Form 990 indicates that it is a Type I supporting organization of the USO and covered under the USO’s group exemption letter.

If you wish to read more: uso.org

To review the USO’s Forms 990 and financial statements, see here:  https://www.uso.org/about/financial-statements

If you wish to donate, link is here.

Thankfully and in remembrance,

eww

IRS EO Statistics & Compliance Priorities Update

Recent months have seen the usual steady flow of IRS data releases and compliance updates that reflect both the continuation of past trends (e.g., very limited enforcement, continued growth of giving to DAFs) and new developments (e.g., scrutiny of tax-exempt NIL collectives). Here are some highlights:

• The 2023 IRS Data Book (for the fiscal year ended 9/30/23) reports:
  • Of 109,482 applications for tax-exempt status under section 501 closed, the IRS approved 103,069 (86.3%), disapproved 88 (0.07%), and otherwise disposed of 16,325 (13.7%). As usual, the bulk of these applications were under section 501(c)(3) (114,073 closed, 98,417 approved, 62 disapproved, 15,594 otherwise disposed), with only 501(c)(4), (c)(6), and (c)(7) have more than 1,000 applications each (and less than 2,000 each). (Table 12)
  • There were 3,025 notices of intent to operate under section 501(c)(4) received and 587 rejected. The Data Book notes "[e]xamples of notices that would be rejected include notices from organizations not required to file Form 8976 (e.g., organizations that filed [a Form 990 series return] or Form 1024 on or before July 8, 2016, or organizations already exempt under other Internal Revenue Code subsections) or where the IRS cannot confirm an organization’s Employer Identification Number." (Table 13)
  • There were 1,999,457 tax-exempt organizations, nonexempt charitable trusts, and split-interest trusts, of which 1,847,501 were tax-exempt under section 501(c) and 1,514,558 under section 501(c)(3). (Table 14)
  • The IRS examined 1,029 Forms 990, 990-EZ, and 990-N (Table 21). Since these are past year returns there is not a directly comparable number of such forms filed provided in the Data Book, but it likely fair to say this figure reflects a continuing examination rate of less than 0.2% and probably closer to 0.1%.
  • Chief Counsel reported receiving 1,000 new tax law enforcement and litigation cases in TEGE Division Counsel, as well as closing 1,128 cases and having 845 cases pending as of 9/30/23. (Table 30)

• The EO Tax Journal reported (subscription required) that as 1/26/24 the average processing time for closed Form 1023s was 105 days, for closed Form 1023-EZs 22 days, and for closed Form 1024s 178 days. For Fiscal Year 2024 as of the same date, the 637 closed exams had a 74.4% change rate.

• The IRS Statistics of Income Division posted noncash charitable contributions data for 2021. The OneSheet summary notes that donor-advised funds were the largest beneficiaries, receiving 3.7.0 billion or 31.7% of the total amount donated, with foundations receiving $35.5 billion.

• The current TEGE Compliance Strategies now include tax-exempt NIL collectives with this explanation: "The focus of this strategy is to ensure that exempt organizations identified as supporting athletes through the use of their name, image, or likeness, for compensation, disclosed their activities in their application for exempt status and that those activities are in full compliance with the existing legal requirements under Internal Revenue Code Section 501(a). The treatment stream for this strategy is examinations."

• Last but not least, the current IRS Dirty Dozen list now includes art donation deductions, CRATs, and fake charities.

Lloyd Mayer

Potential Self-Dealing in the Conservative Partnership Institute

Last week my co-blogger posted about a recent New York Times article by David Farenthold about the Conservative Partnership Institute (“CPI”), a 501(c)(3) charity. In my view, Farenthold does a remarkable job of reporting on the nonprofit sector, but the article illustrates the limits of public knowledge on nonprofit spending. He reports on numerous insider transactions at CPI, involving millions of dollars flowing to for-profit entities formed by CPI leaders. Farenthold correctly notes that, “[w]hile hiring insiders is permitted when certain safeguards are in place, the payments moved money out of daylight and into opaque entities that the nonprofit’s leaders helped control.”

The obvious question, of course, is whether those “safeguards” were in place in CPI's case; safeguards that would presumably be described in a robust conflict-of-interest policy. Farenthold was at the mercy of CPI, which declined to provide details about its processes. There are many legitimate charities that legitimately pay for services from companies that their founders or directors own or control. There is no law against that; nor should there be in my opinion. But, of course, such payments produce risk. Farenthold quotes non-profit law scholar Linda Sugin, who correctly notes that CPI “could have reduced its risk by soliciting bids from competing firms to gauge whether insiders were charging market rates [and it] could have asked its leaders to recuse themselves from the decision to hire their own companies[.]” But because CPI refused to comment, we just don’t know whether they did. I’m guessing that they had good enough lawyers that they probably did have those procedural safeguards in place and make use of them. That doesn’t mean that they didn’t manage to overpay the companies that are connected to insiders anyway; it also doesn’t mean that they did pay too much. That’s a question that we the public are extremely unlikely to be able to judge accurately.

So, who should police whether payments from charities to insiders are excessive? That burden falls on the IRS and state charity regulators. It’s important for two different reasons. First, donors receive a tax deduction for charitable contributions, and that tax deduction is not warranted when the money is diverted from its charitable use. But even more important is that charitable donors generally rely on the regulation of nonprofits to enable them to trust that their donations will be used for their intended purpose. The one donor who would talk to Farenthold explained that he didn’t need that legal protection because of his personal relationship with the leaders of CPI, saying, “I’ve known them a long time …. They’re good people.” But most charitable donors don’t have that luxury, and the charitable sector would be much smaller (and able to do much less good) if every donor had to personally know the directors of every charity they want to support. And, obviously, the donor who talked to Farenthold could be wrong in his trust of CPI.

--Benjamin Leff

Illegality Doctrine and Cannabis Advocacy Organizations

Last week, my co-blogger posted about PLR 202417022, which revoked tax-exempt status from an organization that apparently hosts street festivals that promote cannabis businesses and educate participants about cannabis use. The IRS held that this organization does not qualify for tax-exempt status for numerous reasons, one of which is that it “advocate[s] and engage[s] in activities that contravene federal law[.]” In holding that this activity is inconsistent with tax-exempt status, the IRS relied on a 1975 Revenue Ruling that held that an organization could not qualify for tax-exempt status if its primary activity was encouraging its members to engage in civil disobedience acts contrary to local law. As my co-blogger points out, this position – that an organization that advocates for or engages in civil disobedience cannot qualify for tax-exempt status – has the potential to be applied in nefarious ways.

In 2014, I wrote an article criticizing the use of the illegality doctrine in the cannabis context, especially for 501(c)(4) organizations. In 2016, I expanded the analysis to state and local government entities, arguing that the illegality doctrine does not apply to them. The history of the IRS’s use of the illegality doctrine makes it clear how dangerous the doctrine can be when an organization has the purpose of educating the public that something that is currently illegal is nonetheless good. The organization NORML fought for years with the IRS about the line between advocating illegal cannabis use (which the IRS argued would cause their tax-exempt status to be revoked) and advocating use of cannabis if and when it is made legal (which would not). When an organization is educating the public that an illegal substance is actually good for you, the line can be blurry.

The IRS’s attempts to apply the rule to organizations “serving homosexuals” makes it even more clear how problematic this line-drawing is. For example, a 1971 General Counsel Memorandum addressed an organization that sought to educate the public about homosexuality with the goal of attaining “complete public acceptance of homosexuals as one type of normal human[] being[].” The IRS denied tax-exempt status because of state laws criminalizing sodomy. In 1973, the IRS granted tax-exempt status to an organization that provided social services to the gay community, but noted that the organization qualified for tax exempt status at least partially because, “[t]he organization expressly disavows … seeking to alter the community’s attitudes toward homosexuals” and noting that “[t]he maladaptive and at least potentially offensive nature of homosexual activities is also borne out by the continuing prohibition of substantially all forms of sodomy by the criminal laws of the District of Columbia and all but three of the several states.” Even as late as 1977, in a GCM that reversed the IRS’s position denying tax-exempt status to organizations that seek to change the public’s perception of homosexuality, the IRS cautioned that “[i]f an organization directly fostered or promoted homosexual practices, it would not be entitled to exemption [at least in part because] in many jurisdictions homosexual practices are illegal.” I bring this all up not only to remind us all how long ago the nineteen-seventies were, and how bad they were in some respects, but to illustrate how hard it is to draw the line between advocating for something that is illegal (like same-sex love, cannabis, or civil rights) and having a purpose that is illegal.

The 2024 PLR about the organization hosting a cannabis street festival simply does not provide enough facts to know where that line is drawn or whether it is appropriate in that case. It should have relied instead on other reasons the organization did not qualify for tax-exempt status, like the fact that it failed to provide financial records or file an informational return.  

 

--Benjamin Leff

Nonprofit NIL Collectives are All Over the Place - Literally and Figuratively...

I'm updating some of the prior reporting by my co-bloggers, Benjamin Leff and Darryll Jones, on the issue of the exempt status of nonprofit NIL collectives - see Darryl's posts here and here, and Benjamin's response here.   I'm going to shamelessly block quote Benjamin's description here:

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

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

With the Men's and Women's college basketball tournaments in full swing,  NIL collectives are again all over the place - literally, in the news.   A March 27 article in The New York Times has a full run down on the collectives of the men's Sweet Sixteen teams.  In it's breakdown, the Times noted that a number of these teams are nonprofit, or maybe are partially nonprofit, or maybe used to be nonprofit.   As I said in the title, they seem to be legally all over the place:

• Illinois ICON Collective is "a nonprofit, which says it gives 90% of donations to athletes for performing charity work."
• Alabama has "both a for-profit and nonprofit side."   The article then quotes a nonprofit board member on how it spends it funds, which the board member later walked back as      it appears to violate NCAA rules.   Oops. 
• Clemson "used to have a large nonprofit collective" which is has now shut down.  The Times goes on to say that  the IRS' position that pay athletes isn't charity, noting that position is "a warning many collectives have seemed to ignore."
• While it is unclear whether Purdue's collective is nonprofit, it has "lined up agreements with three Canadian charities" to work with its center, Zach Edey, who is Canadian.
• Gonzaga and Arizona are fun:  "Gonzaga’s collective is run by the B.P.S. Foundation, a tax-exempt charity that puts donor money at the disposal of for-profit collectives, letting the for-profit entities determine how money is given out. (Arizona also has a collective run by the B.P.S. Foundation.)"

The BPS Foundation angle was new to me, so I tried to look up more information on their website, here,  which says about as close to absolutely nothing as you can while still having a Donate Now button.   Here's a great article/expose from January (quoting another Nonprofit Law Prof Blogger, Phil Hackney) on BPS Foundation, describing it as "[i]n effect... serve[ing] as a donor advised fund for college sports boosters..."  BPS is affiliated with Blueprint Sports and Entertainment, a for profit organization that receives "around" a 10% service fee from the Foundation.  According to that article, BPS Foundation's exemption is from July, 2022 - I note that the Chief Counsel Memorandum discussed above is from May, 2023. (As an aside, can we look at that commercially-related DAF ruling again... ?  I'm not sure the proposed regs cover it.  It's still bad.)

From The New York Times' brief rundown, it seems clear that colleges just don't know what to do with these things, although they seem loathe to give them up (kudos to Clemson on that, I guess).  I have to say that I'm in the Darryll Jones camp in that I can't see how most of these aren't private benefit violations (I can't define it but I know it when I see it - Justice Stewart, or something...).   Back in my practice days, anytime we had private benefit or unrelated income or lobbying approaching double digits, I'd worry about the exclusively test and start talking to clients about remedial action.   I can't think of any other precedent for allowing much over that amount in non-charitable stuff before exemption becomes an issue - there's no good reason why NIL Collectives should be any different.   

With madness, outside of March, eww