Friday, February 7, 2020
Speakers List For Today's Hearing on Eliminating Schedule B Identification of Donors for Non-Charitable 501(c)s
Today is the public hearing on the proposed regulations (REG-102508-16) that would eliminate the requirement that non-charitable section 501(c) organizations provide certain identifying information annually to the IRS on Schedule B to the Form 990/990-EZ for significant donors. The hearing is scheduled to be held in the IRS Auditorium at 1111 Constitution Avenue NW in DC, starting at 10:00 a.m. The second link provided above is to the regulations.gov website that includes not only the text of the proposed regulations but also all of the 8,387 comments received to date on them. Finally, here is the list of speakers from the agenda for the hearing:
- Noah Wall, Freedom Works Inc.
- Allen Dickerson, Institute for Free Speech
- Hans A. von Spakovsky, The Heritage Foundation
- Jenny Beth Martin, Tea Party Patriots Action
- James Bopp, Jr., James Madison Center for Free Speech
- Ryan Mulvey, Americans for Prosperity
- Carol Platt Liebau, Yankee Institute for Public Policy
- Catherine Suvari, State of New York Office of the Attorney General
- Brendan Fischer, Campaign Legal Center
- Scott Walter, Capital Research Center
- Eric Peterson, Pelican Institute for Public Policy
- Ann Stillman, Church Alliance
- G. Daniel Miller, Conner & Winters, LLP
- Mark Brnovich, Office of the Arizona Attorney General
- Ashley Varner, Freedom Foundation
- Robert Alt The Buckeye Institute
Thursday, February 6, 2020
Even though President Trump appears to have finally settled the legal issues arising out of his private foundation with the payment of the $2 million in damages owed late last year, other charity-related issues have arisen for organizations and individuals associated with him. These include renewed allegations that one of the President's impeachment lawyers and his family improperly benefitted from a network of charities to the tune of $65 million, a lawsuit by the District of Columbia Attorney General against the section 501(c)(4) 58th Presidential Inaugural Committee and for-profit entities owned by Mr. Trump and his family for alleged private inurement, reports that a section 501(c)(3) charity is giving away amounts totaling tens of thousands of dollars to hoped-for African American Trump supporters, which may not be a charitable activity, and a megachurch hosting a Trump political rally, raising questions about whether doing so violated the section 501(c)(3) prohibition on political campaign intervention.
But President Trump and those around him are far from the only political actors to engage in allegedly questionable behavior when it comes to charities, as Jack Siegel documented more than 10 years ago in The Wild, The Innocent, and the K Street Shuffle: The Tax System's Role in Policing Interactions Between Charities and Politicians (subscription required). Here is an undoubtedly incomplete list of such stories from across the political spectrum:
- As Florida House Starts Investigating Domestic Violence Nonprofit, Exec Has No Answers (Miami Herald): This investigation grew out of earlier reports questioning the high compensation paid to the CEO of this politically connected charity, which state law requires be contracted with by the Florida Department of Children and Families.
- Lawmaker Accused of Theft From Charity Announces Resignation (U.S. News/AP): A Pennsylvania state representative stepped down in the wake of the state Attorney General filing criminal charges against her, alleging that she stole more than $500,000 from a charity she operated.
- Minnesota Attorney General's Suit Accuses Former Ramsey County Commissioner of Mismanaging Charity's Funds (Star Tribune): The lawsuit alleges that the former Commissioner and others at a now-defunct veterans charity had mismanaged government funds, including through engaging in self-interested, related party transactions.
- Sloppy Accounting, Funding Debts: A Look at Maya Rockeymoore Cummings's Charity (Washington Post): This story documents a close financial relationship between a charity run by the widow of Elijah Cummings (and now candidate for his congressional seat) and her for-profit consulting firm, a relationship that was apparently not fully reported on the charity's IRS returns.
- State AG Probes Lawmakers' Charity Over Failed Minority Student Scholarships (N.Y. Post): The New York Attorney General's office has reportedly launched an investigation into whether a charity associated with a number of state lawmakers failed to pursue its stated mission of providing scholarships to needy minority students, instead focusing on events for its lawmaker members and other activities.
Wednesday, February 5, 2020
One almost certainly unintended casualty of the cap on state and local tax (SALT) deductions contained in the 2017 tax reform legislation were the numerous pre-existing state and local tax credit programs designed to favor a number of initiatives, but primarily school choice efforts (as identified in this paper). While Treasury and the IRS have taken certain steps to limit the impact of the cap on these programs, as detailed in the background and explanation of the most recent set of proposed regulations implementing the cap, the relief provided has been far from complete.
Which brings us to last night's State of the Union address. In it, President Trump touted a proposal long-supported by Education Secretary Betsy DeVos: establishing a program to allow states to provide federal tax credits to individuals and businesses that contribute to K-12 scholarship organizations. (See U.S. News coverage.) As proposed in the Education Freedom Scholarships and Opportunity Act, donations to state-identified scholarship-granting section 501(c)(3) organizations that satisfy certain requirements would give the donor a federal tax credit equal to the amount of their donation, up to 10% of their adjusted gross income for individuals and up to 5% of taxable income for corporations.
While the chance of Congress enacting this proposal during the current session, especially given the Democratic control of the House, is almost certainly negligible, the high profile support of this measure appears to be at least in part an attempt to mollify the school-choice supporters who were blindsided by the effect of the SALT cap. And of course a future Congress could enact a tax credit along these lines.
Electronic Filing for Applications and Returns Moves Forward, Even as More Form 1023-EZ Issues Emerge
The IRS Exempt Organizations division is rapidly moving into the digital age when it comes to required filings. First, in mid-December the IRS provided details on how it will implement the new congressional requirement that annual information returns and related forms be filed electronically for tax years beginning after July 1, 2019. However and as allowed by Congress, the IRS decided to postpone this requirement for Form 990-EZ filers until tax years ending July 31, 2021 or later. It also will delay until 2021 electronic filing for certain other forms that are not yet available in electronic format, including Form 990-T (for reporting unrelated business taxable income) and Form 4720 (for reporting certain excise taxes).
Second, the IRS has issued guidance on its new requirement that the Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) also be filed electronically. In Revenue Procedure 2020-8 it made clear that electronic submission is the exclusive means of submitting this form after January 31, 2020, except for submissions eligible for a 90-day transition relief period, as well as modifying other aspects of the application process to reflect the electronic filing requirement. The IRS also issued a news release summarizing the changes made by the Revenue Procedure.
But at the same time as the IRS was moving forward with electronic filing, the Acting National Taxpayer Advocate included in her Annual Report to Congress a highly critical Study of the Extent to Which the IRS Continues to Erroneously Approve Form 1023-EZ Applications. Here are the Study's key findings:
In 2015, 2016, and 2017, TAS studied representative samples of articles of incorporation for corporations from 20 states that make articles of incorporation viewable online at no cost and whose Form 1023-EZ had been approved by the IRS during the preceding year. The studies found that between 26 percent and 42 percent of the time, the approved organizations did not meet the organizational test and thus did not qualify for the exempt status the IRS had conferred. In 2019, TAS repeated the study and found that 46 percent of the approved organizations did not qualify for IRC § 501(c)(3) status.
The 2019 study also found that some states provide form, or template, articles of incorporation. Depending on the template, corporations that use the template are virtually guaranteed to meet, or fail to meet, the organizational test. A review of other information that applicants provide on Form 1023-EZ, such as their websites, may provide useful insight about whether the organization qualifies for exempt status.
Form 1023-EZ was revised in 2018 to require applicants to provide a description (in 255 characters or less) of their mission or most significant activities. However, according to IRS procedures, the described mission or activities need only be “within the scope of IRC § 501(c)(3)” to be deemed sufficient. According to the 2019 study results, the IRS made erroneous determinations more frequently after it added the description field.
Another week and another IRS victory in a conservation easement deduction dispute. This week the losing taxpayers were the individuals in Carter v. Commissioner, T.C. Memo. 2020-21. A partnership donated an easement but retained certain rights as to specific parts of the covered property that were inconsistent with the easement's conservation purposes, causing the individual taxpayers who owned the partnership to lose their claimed deductions, which in the aggregate were in the millions of dollars. (The IRS' attempt to impose penalties failed because of a procedural error, however.)
UPDATE: And on Wednesday, the IRS won another conservation easement in Tax Court. In Railroad Holdings, LLC v Commissioner, T.C. Memo 2020-22, the court found that an extinguishment provision failed to ensure that the easement was protected in perpetuity and so the claimed $16 million charitable contribution deduction failed.
This decision came in the wake of an IRS news release late last year that touted the agency's successful challenge of a syndicated conservation easement transaction in TOT Property Holdings, LLC v. Commissioner (U.S. Tax Court, Dec. 13, 2019). In the news release, the IRS "urged taxpayers involved in designated syndicated conservation easement arrangements to consult with their tax advisors following a recent U.S. Tax Court decision and agency plans to continue enforcement efforts in this area."
Yet all may not be as rosy for the IRS as it appears. Last month ProPublica published an article focusing on syndicated conservation easements titled The IRS Tried to Crack Down on Rich People Using an "Abusive" Tax Deduction. It Hasn't Gone So Well. According to the article, the DOJ, IRS, and congressional crackdown on these vehicles "seems to be having, at best, a limited effect." It noted that IRS Commissioner Chuck Rettig testified last April that the deals had not declined. It also reported that there are now three IRS divisions engaged in coordinated examinations relating to 125 identified "high-risk cases" and more than 80 Tax Court cases pending. In addition, the article cited evidence that large-scale deals were still in process as recently as last fall. It therefore remains to be seen whether the IRS' continuing war against improper deductions relating to conservation easements, whether syndicated or otherwise, will in fact be won.
Thursday, January 30, 2020
IR-2020-23, January 28, 2020
WASHINGTON – The Internal Revenue Service wants tax-exempt organizations to know about recent tax law changes that might affect them. The Taxpayer Certainty and Disaster Tax Relief Act, passed on December 20, 2019, includes several provisions that may apply to tax-exempt organizations' current and previous tax years.
Repeal of "parking lot tax" on exempt employers
This legislation retroactively repealed the increase in unrelated business taxable income by amounts paid or incurred for certain fringe benefits for which a deduction is not allowed, most notably qualified transportation fringes such as employer-provided parking. Previously, Congress had enacted this provision as part of the Tax Cuts and Jobs Act, effective for amounts paid or incurred after December 31, 2017.
Tax-exempt organizations that paid unrelated business income tax on expenses for qualified transportation fringe benefits, including employee parking, may claim a refund. To do so, they should file an amended Form 990-T within the time allowed for refunds. More information on this process can be found at IRS.gov.
Tax simplification for private foundations
The legislation reduced the 2% excise tax on net investment income of private foundations to 1.39%. At the same time, the legislation repealed the 1% special rate that applied if the private foundation met certain distribution requirements.
The changes are effective for taxable years beginning after December 20, 2019.
Exclusion of certain government grants by exempt utility co-ops
Generally, a section 501(c)(12) organization must receive 85% or more of its income from members to maintain exemption.
Under changes enacted as part of the Tax Cuts and Jobs Act, government grants are usually considered income and would otherwise be treated as non-member income for telephone and electric cooperatives. Under prior law, government grants were generally not treated as income, but as contributions to capital.
The 2019 legislation provided that certain government grants made to tax-exempt 501(c)(12) telephone or electric cooperatives for purposes of disaster relief, or for utility facilities or services, are not considered when applying the 85%-member income test. Since these government grants are excluded from the income test, exempt telephone or electric co-ops may accept these grants without the grant impacting their tax-exemption.
This legislation is retroactive to taxable years beginning after 2017.
Friday, January 10, 2020
The Treasury Inspector for Tax Administration issued a report on January 6, 2020 raising concerns that organizations are not properly filing notice with the IRS of their plans to operate as a section 501(c)(4) social welfare organization. TIGTA said as many as 9,774 organizations should have filed this notice but did not. The IRS disputes the problem is as significant as alleged by TIGTA, and generally did not believe it ought to pursue TIGTA's remedy of the IRS working with states to find out organizations that needed to file.
Congress promulgated new law in 2015 under section 506 of the Internal Revenue Code that requires a section 501(c)(4) organization to notify the IRS within 60 days after it has been established. Organizations must file a Form 8726 to give this notice.
A number of outlets have discussed this report so I don't want to spend much time on this. But it's hard to read these reports without thinking about TIGTA reports past. TIGTA tells IRS where it is failing. IRS admits to some, but disagrees with much, including some complex solutions that it could not possibly carry out. This is because the underlying failure has to do with a vastly underfunded IRS. The IRS must make terrible choices about where to utilize its resources. The budget simply does not allow it to operate at anywhere near an ideal level. TIGTA is an important organization, but it has blinders put on it that make it impossible for it to identify the true culprit - a Congress that will not provide the IRS the funds it needs to fairly enforce the tax laws.
Thursday, January 9, 2020
In a tax package agreed to on December 17, 2019, last year, Congress repealed a provision of the code widely known as the church parking tax. I wrote about it on Surly Sub Group when it was enacted in 2017 concerned about its massive probably unintended effect on nonprofits. It caused massive havoc in that world, and nonprofits, led by churches mounted a massive effort to get the provision repealed. It took two years, but they were successful.
Thus, even though the IRS spent significant time providing guidance on how to comply, and presumably large nonprofits around the country adjusted their parking situation dramatically, nonprofits and the IRS must now act as if none of that ever happened. Many nonprofits like universities and hospitals likely paid large 21% rate taxes on parking fringe benefits that they continued to provide to their employees.
What now? IRS needs to figure out how to expeditiously issue refunds.
Congress members just issued a letter to the IRS asking it to issue guidance as quickly as possible to let nonprofits know how to obtain these refunds.
Monday, January 6, 2020
The Section on Nonprofit and Philanthropy Law of the AALS hosted a panel at #AALS2020 on Sunday January 5 entitled Charitable Giving and the 1969 Act: 50 Years Later. Roger Colinvaux of the Catholic University of America, Columbus School of Law moderated the session. Professor Colinvaux provided an excellent synopsis of the Act and the historical milieu in which it took place. He also did a nice job of presenting the stakes involved then and now.
Dana Brakman Reiser of Brooklyn Law School presented her article in progress Charity Regulation in the Age of Impact. It considers the ways in which the 1969 Tax Reform Act hinders types of investing that Professor Brakman believes are natural fits for private foundations. She explores novel ways of modifying the Act in order to allow private foundations to make more mission related investments (MRIs) and program related investments (PRIs).
Khrista McCarden of Tulane University Law School presented her article in progress on Private Operating Foundation Reform & J. Paul Getty. She argues that private operating foundations that operate as art museums are too often providing little in the way of public benefits because they tend to systematically exclude lower income and minority populations. She also believes these private operating foundations are particularly subject to self-dealing abuses that neither the IRS nor states attorney general respond to in an appropriate way.
Finally, Ray D. Madoff, of Boston College Law School, presented her article in progress The Five Percent Fig Leaf examines some of what she perceives as the failure of the private foundation regime to ensure an appropriate payout amount of five percent from private foundations. She argues the allowance of three types of expenditures to count towards payout is too lenient: administrative expenses (that allow donor children to be paid well into the future for often little work), payments to donor advised funds, and PRIs.
There was active questioning and participation from the audience. These issues clearly resonate at a high level of society. These papers will be published in the Pittsburgh Tax Review in Spring 2020 along with two other papers by Ellen P. Aprill and James J. Fishman The five papers were presented at the University of Pittsburgh on November 1, 2020 as part of a symposium.
Next years AALS will be in San Francisco. I will be the chair this coming year and would be interested in any thoughts on panel ideas for next years session. The theme of the general conference is the Power of Words. Also very interested in highlighting new professors in the field. Would love to put together a new voices panel in addition to a regular panel.
Wednesday, November 27, 2019
In a significant set back for a former for-profit university, the U.S. Department of Education has decided that Grand Canyon University is not a nonprofit for the purposes of Title IV funding even though it has been recognized by the IRS as tax-exempt under Internal Revenue Code section 501(c)(3). The University had also (eventually) secured approval from its accreditor for the terms of its conversion from for-profit to nonprofit status, even given a continuing and extensive financial relationship with a for-profit company. The Department of Education found that relationship to be particularly troubling, concluding that the primary purpose of the relationship "was to drive shareholder value" for the for-profit "with GCU as its captive client - potentially in perpetuity." The University has responded with a detailed statement and a lengthy letter, signaling it plans to aggressively fight this adverse decision.
Tuesday, November 26, 2019
Last week former Baltimore Mayor Catherine Pugh pled guilty to four counts of conspiracy and tax evasion relating to her self-published books series, Healthy Holly. Concerns arose about her sales of the books when it was reported that the University of Maryland Medical System had agreed to pay $500,000 to buy them when Mayor Pugh was on the UMMS board. Details of the federal charges brought against Mayor Pugh can be found in the DOJ press release announcing her indictment. The actual indictment is available here.
The Baltimore Sun has provided extensive, in-depth coverage of not only Mayor Pugh's dealings but also other apparent governance lapses at UMMS, including:
- Other transactions with board members.
- Disregard of term limits for board service.
- Complaints from state auditors that UMMS has "hindered" their investigation.
The scandal has led to the Maryland governor appointing 11 new members to the board, the resignation of four executives, and additional, state-imposed governance requirements, including public financial disclosures by board members.
Saturday, November 9, 2019
On November 7, New York Supreme Court Judge Saliann Scarpulla ordered President Trump to pay $2 million in resitution to charity for his breach of his fiduciary duties as an officer and director of the Trump Foundation. The link attached to ordered above is the Judge's actual order. Since this is written up a lot in other places, like here by David Fahrenthold who has been the best chronicler of the Foundation, I only provide resources here for digging deeper into the case.
To fully comprehend what has happened to the Trump Foundation, President Trump, and his children, you have to read more than the order. They all entered into a series of stipulations with the NY AG Letitia James. The stipulations spell out a series of significant admissions of wrongdoing made by President Trump and his three children who sat on the board. The press release issued by the NY AG does a nice job of summarizing all that has taken place. I recommend reading all three.
If interested in seeing all of the evidence held by the NY AG you can go to the NY Supreme Court and search in the case index for the index number of the case (451130/2018). That should take you here, which if it works would save you the time of searching the case index. More information can be found from CREW who did a FOIA search that yielded the Form 4720s and checks filed by the Foundation with the IRS.
I have written about the matter on The Conversation here. In that piece I try to grapple with whether there are any situations in history that place this occurrence in proper historical context. If you get a chance to look at that, and have thoughts about the choice, let me know what you think.
Friday, October 4, 2019
In a follow-up to a March blog entry regarding Congressional scrutiny of syndicated conservation easements, Senate Finance Committee Chairman Chuck Grassley and Ranking Member Ron Wyden announced in mid-September that subpoenas were issued for documents relevant to their bipartisan investigation of syndicated conservation-easement transactions. Wyden stated in the announcement:
As we’ve both said all along, conservation easements have very legitimate purposes. We need to protect those purposes and protect the American taxpayer. If a handful of folks can game the system for profit, then we’re all left holding the bag. We expect fulsome cooperation with our investigation, and it’s unfortunate we’ve had to resort to compulsory process. Ultimately, when Congress makes an inquiry, it needs to be answered. It’s not optional.
Let’s say a man named John donates a conservation easement on his farm to a land trust. His appraiser valued the farm at $3 million before the easement and $2 million after the easement. Therefore, the easement is worth $1 million, which would be the amount of the tax deduction available for the donation. John doesn’t have sufficient income to use this deduction. He wants to sell the deduction to someone who can use it.
Federal tax law does not allow the donor of a conservation easement, or of any other property for that matter, to transfer the deduction generated by the donation to someone else. A federal tax deduction is personal to the donor. If the donor can use the deduction, fine; if not, it disappears. In other words, John can’t sell his deduction.
This is simple. However, some legitimate conservationists, and some not-so-legitimate tax shelter “facilitators,” are using limited liability companies and other so-called “pass-through” entities to try to “syndicate” tax deductions — in essence, to sell them — in ways that an individual, such as John, cannot accomplish. These deals are anything but “simple.”
Lindstrom acurrately points out that not all syndications are "shams," but advocates for syndications that allocate tax deductions to be scrutinized. Syndications that fail to comply with complex allocation rules for pass-through entities and/or utilize inflated easement appraisals, according to Lindstrom, threaten "the viability of the tax benefits for conservation easements and the credibility of the voluntary land conservation effort."
In a follow-up to a previous post this week The NRA and Russia: How a Tax Exempt Organization Became a Foreign Asset, Senate Minority Leader Chuck Schumer and Senate Finance Committee ranking member Ron Wyden called for an IRS examination of the NRA's ongoing tax-exempt status in a October 2nd letter to IRS Commissioner Chuck Rettig. The request comes on the heels of the Senate Finance Democrats' release last week of a report on the organizations's interactions with Russian nationals. Schumer and Wyden stated in the letter: "Given this report's concerning findings and other allegations of potential violations of tax exempt law by the NRA, it is incumbent on the IRS to fully investigate the organization's activities to determine whether the NRA's tax exemption should be disallowed."
The NRA is a tax-exempt under section 501(c)(4) of the Internal Revenue Code as a social-welfare organization. The organization also has affiliated entities that are tax-exempt under sections 501(c)(3) and 527 of the Code.
Schumer and Wyden assert in their letter that the findings of the report raise concerns of whether the NRA's activities violated the statutory social welfare requirements, including the use of tax-exempt resources for non-tax-exempt purposes. "In light of the continued efforts of Russia to undermine American democracy, IRS must use its full authority to prevent foreign adversaries from again exploiting tax-exempt organizations to undermine American interests," Wyden and Schumer wrote. The NRA and Senate Republicans take issue with the report and its findings.
As we previously blogged, the New York and District of Columbia attorneys general are conducting their own investigations about whether the NRA is complying with state tax laws.
Tuesday, October 1, 2019
An August 22 deadlock by the Federal Election Commission regarding a request for an advisory opinion highlights the complicated role that tax law plays in regulating campaign finance. It underscores important differences between section 501(c)(3) and (c)(4) organizations not only under section 501(c), but also under section 527. Moreover, because the resignation of the FEC vice chair has left the commission without quorum and thus unable to act, tax regulation of campaign finance has increased importance.
On May 31 the Price for Congress committee (the Price committee) filed a request with the FEC for an advisory opinion regarding transfer of remaining campaign funds from former legislator Price’s campaign committee. The committee asked for approval to transfer some, although not all, of its remaining almost $1.8 million to a section 501(c)(4) social welfare organization (the 501(c)(4)). The request prompted passionate debate and deep division but no resolution by the FEC commissioners when it was discussed on July 25 and again on August 22.
As proposed, the 501(c)(4) would “engage in research, education, presentation, and publications with respect to health, budget, and other public policy matters.” Although unlike section 501(c)(3) organizations, a 501(c)(4) is permitted to lobby without limit and to engage in considerable campaign intervention, the request stated that this 501(c)(4) “will not attempt to influence legislation nor participate or intervene in any political campaign.” The Price committee also proposed that any transferred funds be placed in a separate account and not be commingled with other assets of the 501(c)(4). To comply with applicable election law regarding private use by former candidates, neither the transferred funds in this special account nor income generated from these funds would be used to provide Price, any members of his family, or former employees of the Price committee or of Price’s government offices with compensation, gifts, or material reimbursement, or “to influence any election.” Price, however, would serve as the organization’s president and chief executive officer, albeit without any compensation. The Price committee anticipates that he would “speak, write, publish, or otherwise make appearance to present the work” of the 501(c)(4).
Under election law, campaign funds can be contributed “to an organization described in section 170(c) of the Internal Revenue Code” as well as “for any other lawful purposes.” Under tax law, a 501(c)(4) would not be described in section 170(c) because that provision describes organizations that are eligible to receive tax-deductible charitable contributions, and a 501(c)(4), unlike a 501(c)(3), is not such an organization.
In responding to the Price committee request, however, FEC draft advisory opinion 19-33-A, issued on July 17, did not read the reference to section 170(c) as limiting transfers to organizations eligible to receive deductible charitable contributions. The draft opinion explains that if an organization engages in educational activity and constrains itself from lobbying and campaign intervention, it is described in section 170(c) for purposes of campaign finance law, even if it is not eligible to receive tax-deductible contributions.
At the July 25 FEC meeting, Chair Ellen L. Weintraub objected strongly: “If we were to approve this advisory opinion, it would extend the ‘personal use’ exemption to 501(c)(4) organizations in a way that the commission has not done before.” Republican members disagreed, and the FEC postponed its decision. . . .
At its meeting on August 22, however, the FEC “was unable to render an opinion by the required four affirmative votes and concluded its consideration of the request.” The Price committee will now have to decide whether to proceed without an FEC advisory opinion. The commission’s lack of sufficient commissioners for a quorum, however, prevents any possible enforcement action.
Whatever the Price committee decides, its choice of a 501(c)(4) rather than a 501(c)(3) raises several issues under applicable tax law and its interaction with election law. In short, transfers to a 501(c)(4) rather than a 501(c)(3) offer advantages regarding IRS transaction costs and oversight, but also involve some income tax risks to the former candidate. The Price committee request also reminds us of some of the inadequacies of our regulation of campaign financing, both through tax law and election law. . . .
Thursday, September 19, 2019
Ray Madoff (Boston College) and Roger Colinvaux (Catholic University) published Charitable Tax Reform for the 21st Century in the September 16th issue of Tax Notes. The following are the introductory paragraphs of the article:
Charitable organizations play a fundamental role in American society, fulfilling functions that would otherwise fall to government, providing creative solutions to society’s most pressing problems, and serving our highest ideals. The federal government has long provided generous tax incentives for charitable donations, with current benefits reaching up to 74 percent of the amount of the gift. Unfortunately, however, the design of the tax incentives is now woefully out of step with their purpose and the realities of charitable fundraising today, resulting in a system that is incoherent, ineffective, and on the verge of failure.
Taking a broad view, we believe that there are two overarching policy goals of the charitable tax incentives. The first is to promote actual charitable work and the second is to foster a strong culture of charitable giving with broad participation.
The fundamental purpose of providing charitable tax benefits is to support charitable work. If the good work of charities never gets done, tax benefits are wasted, costing the government significant revenue but providing no benefit to the public. In order to encourage actual charitable work, Congress based the giving incentive on donors giving up dominion and control of their donations. Only when donors give up control are funds fully available for charities to deploy in support of their mission. . . .
To summarize our concerns, the system of charitable tax benefits is failing on three main fronts: (1) current rules provide no giving incentive for 90 percent of American taxpayers, leaving charities reliant on a shrinking and narrow base of support; (2) current rules no longer provide any assurance that tax-benefited donations will ever be made available for charitable use; and (3) long-standing rules designed to promote the public good (for example, on payout, disclosure, and lobbying) are easy to avoid through the use of DAFs.
Both of us have written numerous articles and opinion pieces on ways to improve the tax rules to make them fairer and work better for the people who rely on charitable efforts, and there are many ways to approach these complex issues. In this article, we outline five proposals that we believe provide the best ways to fix the problems facing the charitable sector:
1. replace the current charitable deduction with a credit for charitable giving available for all taxpayers who give more than a designated floor;
2. reform the rules applicable to DAFs so that some tax benefits are conferred upon transfer to a DAF while others are deferred until the donation is no longer subject to the donor’s advisory privileges;
3. reform private foundation payout rules to close the loophole that allows a charity to avoid private foundation status by funding the charity through a DAF;
4. prohibit private foundations from counting a grant to a DAF as satisfying their 5 percent payout requirement, require disclosure of foundation to DAF grants, and bar foundations from counting payments to insiders (such as travel and compensation) as payments for charitable purposes; and
5. reform the excise tax applicable to private foundations to provide incentives for them to increase their charitable expenditures. . . .
Janene R. Finley (St. Ambrose University) has published Reforming the Charitable Contribution Tax Deduction: Accounting for Random Acts of Charity, 10 Wm. & Mary Bus. L. Rev. 479 (2019). The abstract:
Concern for the tax treatment of charitable contributions has increased as a result of the Tax Cuts and Jobs Act of 2017. Although the new law increased the limitation of deductible charitable contributions to 60 percent of adjusted gross income, the standard deduction was also increased. Increasing the standard deduction is expected to reduce the number of taxpayers who are able to itemize their deductions in the next tax year, which is expected to reduce charitable giving in the future. This Article discusses proposals to amend the Internal Revenue Code to promote charitable giving, including a non-itemizer deduction.
In addition, random acts of charity are explained, and consideration of those acts as charitable contributions for purposes of the charitable contribution tax deduction is proposed.
[Hat tip: TaxProf Blog]
Friday, September 6, 2019
Treasury just released Proposed Regulations under Code Section 6033 regarding donor disclosure (technically, it is filed but not yet published - it is scheduled to be published on September 10), which addresses the issue of what information an exempt organization must disclose about its donors.
If you are late to the story, a little recap is in order:
- Section 6033(b)(5) provides Section 501(c)(3) organizations must provide donor information for "substantial contributors."
- Treasury Regulation 1.6033-2(a)(2)(ii)(f) states that any organization required to file an annual information return must provide information regarding donors who give more than $5,000 during the year.
- On July 17, 2018, Treasury issued Revenue Procedure 2018-38, which states that, effective as of Dec. 31, 2018, exempt organizations that are not exempt under Section 501(c)(3) do not have to file the Schedule B with donor information, but they should keep the information and make it available upon IRS request. Section 501(c)(3) organizations must still provide this information as required by Section 6033(b)(5). See a more detailed description from KPMG here.
- Not everyone was particularly pleased about this and, not surprisingly, litigation ensued.
- On July 30, 2018, in Bullock v. IRS, the U.S. District Court for Montana (Bullock being the Governor of Montana; the state of New Jersey also was a plaintiff) determined that Treasury did not follow proper procedure under the APA in issuing the Rev Proc. The District Court held that the Rev. Proc. was really an amendment to Treasury Regulation 1.6033-2(a)(2)(ii)(f), and therefore was a "change in existing law or policy" (i.e., it was a legislative rather than interpretive rule) that required APA notice and comment. Accordingly, it was set aside.
- These new regs specifically respond to the Bullock v. IRS (in fact, it mentions it by name on page 10) by issuing these Proposed Regulations, which are subject to notice and comment.
While I've not held the proposed regulations and the Rev Proc up to each other side by side quite yet, it does appear that the Proposed Regulations are essentially similar to the Rev. Proc, expect for the request for notice and comment. Because the Proposed Regs are not yet officially published, there is no official due date for the comments, other than 90 days from the date of publication. If they hold true to their word, it would be 90 days from Sept. 10.
Monday, August 19, 2019
The Economist had an interesting story this past week on some of our largest charities - charities associated with drugmakers.
Perhaps you have also noticed the tendency that when you go to buy an expensive brand drug that despite the fact that you have insurance, there is still an expensive co-pay involved. However, there are sometimes charities that can help you with that co-pay depending on your circumstances. You might have wondered why they do that.
Well, the Economist has investigated.
From the story: "According to public tax filings for 2016, the last year for which data are available, total spending across 13 of the largest pharmaceutical companies operating in America was $7.4bn. The charity run by AbbVie, a drugmaker that manufactures Humira, a widely taken immuno-suppressant, is the third-largest charity in America. Its competitors are not far behind. Bristol-Myers Squibb, which makes cancer drugs, runs the fourth-largest. Johnson & Johnson, an American health conglomerate, runs the fifth-largest. Half of America’s 20 largest charities are affiliated with pharmaceutical companies.
Not everyone qualifies for their help. Unsurprisingly, pharma-affiliated charities fund co-payments only on prescriptions for drugs that they manufacture. There is often an income threshold, too, which excludes the richest Americans—though it is usually set quite high, at around five times the household poverty line. They are prohibited from funding co-payments for those on Medicaid (which helps the poor) and Medicare (which helps the elderly) by the anti-kickback statute, which prevents private companies from inducing people to use government services. Those patients can accept co-pay support from independent charities, such as the Patient Advocate Foundation."
I am a bit troubled by the idea of the IRS granting and maintaining exemption for a charity that is associated with a for-profit that only pays for drugs that the for-profit provides. I have not investigated any of these enough to come to any conclusion. However, the fact that this is now a significant part of the charitable environment, and it is associated with a major public policy suggests to me that Congress needs to give real thought to how this system fits in with charity and with prescription drugs generally. More reasoned thought is needed. The IRS needs to do its best job in assessing whether these organizations meet the requirements of charity, but given the significant policy domains this issue crosses, it's probably not the best place to answer such questions.
As it is now, it appears that Pharma has cobbled together a financial solution to a problem they faced as a business, that happens to involve "charity," rather than that Pharma is seeking to do charitable things that deserves the moniker.
I have not personally seen any guidance or determ letters from the IRS on this matter. If anyone has one, would love to see what the IRS has concluded on the matter.
Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law
Wednesday, August 14, 2019
Slow Summer for IRS on EO Issues: 4968 Proposed Regs, Final 501(c)(4) Notice Regs, 2018 EO Return Data
- Proposed Section 4958 Regulations: Darryll Jones previously blogged in this space about both the proposed regs and the perhaps inadvertent affect those regs could have on Berea College, located in Senator Mitch McConnell's home state. Now Alexander Reid and Kensington Wolgamott, the latter a former student of mine, have written an analysis of those proposed regs titled For Colleges, IRS' Endowment Tax Proposal is Overly Taxing in Law360. In addition, James Fishman (Pace) has posted a critique of the underlying statute and a proposed alternative, titled How Big Is Too Big: Should Certain Higher Educational Endowments' Net Investment Income Be Subject to Tax? Here is the abstract:
Section 13701 of the 2017 Tax Reform Act created new Internal Revenue Code § 4968 that imposes a 1.4% excise tax on the net investment income of certain large private college and university endowments. The affected institutions must have at least 500 tuition-paying students during the preceding taxable year, provided more than 50% of its students are located in the United States, plus assets (other than assets used directly in carrying out the institution’s exempt purpose) with an aggregate fair market value at the end of the preceding taxable year equal to at least $500,000 per full-time or full-time equivalent student. Approximately twenty-seven to thirty-five colleges and universities are affected.
This paper argues that the legislation as enacted is politically motivated and fatally flawed. The “assets per student” ratio that triggers the tax is both over and under-inclusive, and irrelevant and arbitrary as a guide to excessive endowment accumulation. The legislation serves to exempt multi-billion dollar endowments of many universities yet ensnare smaller colleges that may have more limited resources, but the endowment to student ration exceeds $500,000.
The growing income inequality in American society is reflected in the inequality of access to elite schools with billion dollar endowments. While large endowment schools have increased financial aid, the percentage of students from lower income families has remained the same. A student whose parents come from the top one percent of income distribution is 77 times more likely to attend an Ivy League college than one from the bottom income quintile. Among “Ivy League Plus” colleges (the eight Ivy League colleges plus Chicago, Stanford, MIT and Duke), more students come from families in the top 1% of income distribution (14.5%) than the bottom half of the income distribution (13.5%).
Recommended is that the investment income tax be triggered for all billion dollar endowment institutions when the endowment earns $75 million in net investment income ($150 million for public school billion dollar endowments). The endowment per student ratio should be jettisoned. Schools could offset the net income investment tax on a one dollar to one dollar basis by increasing financial assistance to the student body. If the school increases the admission of students from underrepresented constituencies, the tax offset would be two dollars for each dollar spent in expanding the number of such students.
- Final Section 506 Regulations: Last month the IRS issued final regulations implementing the notice requirement for new section 501(c)(4) organizations, codified in section 506 of the Internal Revenue Code. The final regs are little changed from the previously issued temporary regs and notice of proposed rulemaking, as the IRS generally rejected changes proposed by the few parties who submitted comments, as detailed in the comments and explanation of provisions section that accompanies the final regs. The final regs do clarify that a subordinate organization included in a group exemption letter is still subject to the notice requirement.
- 2018 EO Financial Data: The IRS Statistics of Income Division has released selected financial data from exempt organization returns (Forms 990 and 990-EZ) filed in calendar year 2018. These data are available in two large Excel spreadsheets, which should be helpful for empirically minded nonprofit researchers.