Wednesday, November 17, 2021
Bloomberg Law is reporting on a number of nonprofit Christian schools, churches, and seminaries that are launching legal challenges to the OSHA test-or-vaccinate rules. (To add nonprofit on top of nonprofit, at least a handful of the cases are being handled by the nonprofit Alliance Defending Freedom.)
Essentially, the ADF's suit (and, I imagine, many of the others) assert that the OSHA mandate overreaches and represents a "serious intrusion on religious autonomy and free exercise that cannot withstand scrutiny under the First Amendment and the Religious Freedom Restoration Act."
I'm not a Religion Clauses scholar but I know enough to know that Religion Clause jurisprudence is kind of a mess. Enough of a mess that I wouldn't put money down on how these challenges turn out. Still, because the religious organizations challenging the test-or-vaccine mandate fit into the world of nonprofits, it's worth keeping an eye on how these challenges turn out.
Friday, November 12, 2021
Social media has been filled recently with criticism of the University of California at Santa Barbara and billionaire Charlie Munger for plans to build a massive dorm at the University following detailed plans provided by amateur architect Munger and paid for with a $200 million donation from him. A Washington Post headline summarizes the criticisms (Two doors, few windows, and 4,500 students: Architect quits over billionaire's mega dorm). Of course questions about the possible undue influence of major donors are not new, although usually they involve less prominent projects. For example, earlier this fall the N.Y. Times reported Leader of Prestigious Yale Program Resigns, Citing Donor Pressure (additional coverage: The Economist).
What is perhaps new, or at least newly prominent, are similar controversies relating to donations to governments. For example, over the summer NPR reported A GOP Donor is Funding South Dakota National Guard Troops In Texas, and this fall the Texas Tribune reported Texas has raised $54 million in private donations for its border wall plan. Almost all of it came from this one billionaire. But the biggest such recent gift was detailed in The Chronicle of Philanthropy: Should Philanthropy Fund Government? A $400 Million Gift Settles That Question in Kalamazoo, Mich., for Years to Come (subscription required, but also available from U.S. News/AP). The anonymous gift is almost double the city's annual budget.
Donations to governments raises additional issues, including whether they risk distorting government priorities that otherwise would be decided through the political process and whether they shift power to executive branch officials who solicit such donations and away from the legislatures that normally control government spending. Of course not all government agencies can accept donations. For example, GoFundMe shut down a campaign to raise funds for the federal government's border wall in part because it would have required congressional approval for the government to have accepted the funds. So it is unclear how widespread such donor influence can be on government actions, absent legislative action.
Perhaps driven by the sharpness of our current political divides, even the relatively few elections this year generated a steady stream of stories about nonprofits, politics, and possible violations of the federal tax laws. Here are some highlights:
- A video message from Vice President Kamala Harris that reportedly was played in more than 300 black churches in Virginia strongly supported gubernatorial candidate Terry McAuliffe and so appears to have violated the Internal Revenue Code section 501(c)(3) prohibition on tax-exempt charities, including churches, intervening in political campaigns. Demonstrating its consistent opposition to such activities, whether favoring Republican or Democratic candidates, the Freedom from Religion Foundation promptly filed a complaint with the IRS about churches airing the video and other pro-McAuliffe activities in Virginia churches.
- The Atlantic published a lengthy interview titled The Massive Progressive Dark-Money Group You've Never Head Of. The interview is with Sampriti Ganguli, the CEO of little known business-services group Arabella Advisors, which the interviewer asserts has played a major role in helping left-leaning "dark money" groups quietly pull ahead of right-leaning groups in total spending. Relatedly, OpenSecrets last spring published a report titled 'Dark money' topped $1 billion in 2020, largely boosting Democrats. Such groups are section 501(c)(4)s or other non-charities that are permitted to engage in a limited amount of political campaign intervention, so their activities may be in compliance with their federal tax status.
- Politico reported late last month that the new president of Liberty University said in a recorded phone call that one of the main goals so the University's Standing for Freedom Center is "getting people elected". In response to concerns that doing so would be problematic under Internal Revenue Code section 501(c)(3), President Jerry Prevo responded "I know how to work 50c3". The University official who raised the concerns was fired earlier last month, which he asserts was in part in retaliation for him doing so. Additional coverage: Forbes, Salon.
Wednesday, November 10, 2021
Politico reports that an indictment unsealed today reveals federal prosecutors have charged three individuals with conspiracy to commit wire fraud and lying to the Federal Election Commission. The allegations relate to the raising of approximately $3.5 million during the 2016 election, with almost none of those funds going to any political cause. Instead a large portion of the funds allegedly went to organizers personally. The two PACs involved were bipartisan - one claimed to raise funds to support Donald Trump, and the other claimed to raise funds to support Hillary Clinton.
While the indictment relates to activities back in 2016, the Daily Beast and OpenSecrets have been investigating a network of alleged scam PACs that has been operating since then, as detailed in this report from last month. The latest twist appears to involve organizations that register as section 527 political organizations with the IRS but not as political committees with the FEC, presumably in order to take advantage of the harder to access IRS-collected data and lesser IRS enforcement resources. The FBI views these activities as serious enough to warrant a public warning last April.
Tuesday, November 9, 2021
We have been slow in blogging about the Treasury Department's 2021-2022 Priority Guidance Plan and the latest Tax Exempt & Government Entities Program Letter, in part because neither document tells us anything new. Given the pandemic-related backlog of returns and other matters the IRS is currently trying to resolve, this is not surprising. Nevertheless, it is to be hoped that future years will be more productive, especially if more funding is provided to the IRS.
Starting with the Priority Guidance Plan, for Exempt Organizations (page 7) it only repeats items from previous plans, some of which are getting quite dated:
- Guidance revising Rev. Proc. 80-27 regarding group exemption letters. Notice 2020-36 was published on May 18, 2020.
- Guidance on circumstances under which an LLC can qualify for recognition under §501(c)(3). [Now provided in Notice 2021-56.]
- Final regulations on §509(a)(3) supporting organizations. Proposed regulations were published on February 19, 2016.
- Regulations under §512 regarding the allocation of expenses in computing unrelated business taxable income and addressing how changes made to §172 net operating losses by section 2303(b) of the CARES Act apply for purposes of §512(a)(6).
- Guidance under §4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners.
- Regulations regarding the excise taxes on donor advised funds and fund management.
- Regulations under §6104(c). Proposed regulations were published on March 15, 2011.
- Regulations designating an appropriate high-level Treasury official under §7611. Proposed regulations were published on August 5, 2009.
Exempt organizations items in other sections include guidance under section 501(c)(9) relating to welfare benefit funds, final regulations relating to the fractions rule under section 514(c)(9)(E), and partnership loss regulations relating to charitable contributions under section 704(d).
Similarly, most if not all of the priorities listed in the Program Letter (page 2) appear to repeat previously announced priorities or are obvious needs (e.g., the "Develop Our Workforce" priorities). Perhaps the most significant development mentioned is the hiring of a Chief Taxpayer Experience Officer and the opening of a Taxpayer Experience Office, but that is an agency-wide development and so probably will have limited (if any) impact on TE/GE operations.
Last month the IRS issued Notice 2021-56, providing the first formal guidance regarding under what conditions limited liability companies can qualify for tax exemption under section 501(a) because they are described in section 501(c)(3). The guidance is generally consistent with previous, informal guidance, found in now twenty year old continuing professional education articles (first published in the 2000 EO CPE text and updated in the 2001 EO CPE text).
More specifically, the Notice imposes the following requirements:
3.02 Required provisions of LLC articles of organization and operating agreement
Except as set forth in section 3.04 of this notice, the IRS will issue a determination letter recognizing an LLC as exempt from tax and described in section 501(c)(3) only if both the LLC’s articles of organization and its operating agreement each include:
(1) Provisions requiring that each member of the LLC be either (i) an organization described in section 501(c)(3) and exempt from taxation under section 501(a) or (ii) a governmental unit described in section 170(c)(1) (or wholly-owned instrumentality of such a governmental unit).
(2) Express charitable purposes and charitable dissolution provisions in compliance with § 1.501(c)(3)-1(b)(1) and (4).
(3) The express chapter 42 compliance provisions described in section 508(e)(1), if the LLC is a private foundation.
(4) An acceptable contingency plan (such as suspension of its membership rights until a member regains recognition of its section 501(c)(3) status) in the event that one or more members cease to be section 501(c)(3) organizations or governmental units (or wholly-owned instrumentalities thereof).
3.03 Representation on enforceability
The LLC must represent that all provisions in its articles of organization and operating agreement are consistent with applicable state LLC law and are legally enforceable.
3.04 States with limitations on articles provisions
If an LLC is formed under a state LLC law that prohibits the addition of provisions to articles of organization other than certain specific provisions required by the state LLC law, the requirements of section 3.02 of this notice will be deemed satisfied if the LLC’s operating agreement includes the provisions set forth in section 3.02 of this notice and if the articles of organization and operating agreement do not include any inconsistent provisions.
The Notice also asks for public comments on a variety of issues, mostly relating to the effects of variations in state laws relating to limited liability companies. The deadline for comments in February 6, 2022.
The Notice does not address what conditions would apply to an LLC seeking to qualify for exemption by being described in other paragraphs of section 501(c).
Sunday, October 24, 2021
In prior scholarship, I have addressed how the specific metrics used in the impact investing sector may be used to measure and report social good in the charitable sector to increase transparency and accountability about how donated funds are used. The issue of incomplete reporting in the nonprofit sector is highlighted in a recent ProPublica article about the shortcomings of reports by state school districts on how they have used federal aid funds disbursed to remedy educational fallout from the pandemic. Specifically, the ProPublica article addresses the gap between federal governmental aid to schools during the pandemic and measurable results from state school districts. According to the article, the federal government gave around $190 billion in aid to help schools reopen and to address the effects of the pandemic. In the year and a half since school doors were closed to millions of children, the Education Department has done only limited tracking to determine how the funds were used. As a result, Washington, D.C. is in the dark about the effectiveness of the aid, especially in terms of those communities that have struggled the most during the pandemic.
State education agencies were required to submit provisional annual reports to the federal government. However, their reports only utilized six very broad categories, including technology and sanitation, to disclose how funds were used. ProPublica analyzed more than 16,000 of such reports for the period March 2020 to September 2020 and found that billions of dollars were categorized as funding “Other.” For example, some of the largest school districts in the country categorized all of their aid under the “Other” category, including Los Angeles Unified, which spent $49.5 million, and New York City’s schools, which spent $111.5 million.
ProPublica points out that since there is not a centralized and detailed federal tracking system, monitoring of how the relief funds given to over 13,000 school districts has been up to individual states. Some school districts have expended the funds in a way that it is not at all consistent with the federal aid program, such as by using the funds for track and field facilities and bleachers. The article cited both a school district in Iowa (Creston Community School District) and one in Pulaski County, Kentucky as engaging in such spending.
Importantly, the federal aid program delineated at least one very clear goal. The funds were to be used to re-open schools to maximize in-person learning. Broadly speaking, the funds were to be used to address the impact of the pandemic. There have been numerous articles that have detailed the educational and emotional fallout from remote learning. It is surprising to learn that there have not been directed efforts to help students make a smooth transition back to in-person learning and to recover from any lapses in their educational and/or social, emotional development as a result of the pandemic. Instead, for example, in Texas, the McAllen Independent School District spent $4 million of its relief funds to build a 5-acre outdoor learning environment associated with a local nature and birding center owned by the city. Although the concept may be a good one in theory, it fails to address “the urgent learning needs of children who have been directly impacted by the pandemic.” Critics have pointed out that the outdoor area will not even be completed before 2024, so half of the children there will not benefit from the outdoor center at all.
Perhaps it is not too late for school districts to make the right choices in terms of spending federal aid. Although most of the aid was dispensed from March 2020 to March 2021, the school districts have until 2024 to budget how the funds will be utilized. Given the federal government has started to request basic information from states about how their school districts have used their funds, hopefully, the school districts will re-calibrate their spending and set forth goals consistent with the overall aim of the relief program.
Hoffman Fuller Associate Professor of Tax Law, Tulane Law School
Friday, September 3, 2021
University of Louisville Settles Legal Dispute with ex-President for $800,000 Paid by Insurance Company
The Associated Press and The Courier Journal report that afters years of litigation and spending more than $6 million in taxpayer funds, the University of Louisville and its affiliated foundation have agreed to resolve their legal dispute with ex-President James Ramsey for $800,000 paid under the foundation's directors and officers insurance policy. President Ramsey served for 14 years, but his tenure ended in turmoil after allegations arose relating to improper spending by both the university and the foundation, including allegedly excessive compensation paid to Ramsey and his then chief of staff. The original complaint filed by the University and the foundation can be found here.
An earlier news report stated that the IRS was auditing the foundation, presumably based at least in part on the public allegations of wrongdoing. The most recent report states that the foundation has released its tax claims against Ramsey as part of the settlement. But it is unclear to me how that agreement could prevent the IRS from imposing self-dealing or other excise tax penalties, if it chooses to do so.
Wednesday, September 1, 2021
- The 11th Circuit upheld the denial of a conservation easement deduction and imposition of accuracy-related penalties in TOT Property Holdings, LLC v. Commissioner. For an analysis of the decision, see Peter J. Reilly, TOT Property Holdings Highlights Fundamental Flaw In Conservation Syndications.
- In Hancock County Land Acquisitions v. United States, 2021 U.S. Dist. LEXIS 143312, 2021 WL 3197336 (N.D. Ga. July 7, 2021) (all Internet-accessible copies of the decision appear to be behind a paywall, including I assume PACER), a Federal district court rejected an attempt by a partnership and its tax matters partner to require the IRS Appeals Office to consider its conservation easement deduction dispute before forcing them to pursue litigation, even though the IRS had already issued a Final Partnership Administrative Adjustment (FPAA) notice. The court found that given the procedural poster of the case, it had to grant the government's motion to dismiss because it lacked federal subject matter jurisdiction. The dispute therefore will instead proceed in U.S. Tax Court, where the partnership and its tax maters partner have already filed a petition for readjustment of the FPAA.
- In perhaps the most ominous development for individuals involved with these claimed deductions, the Department of Justice announced the First Federal Indictment in Cases Involving Syndicated Conservation Easements. The first paragraph of the June 9, 2021 press release states:
A federal grand jury sitting in Atlanta, Georgia, returned an indictment today charging an Atlanta certified public accountant with one count of conspiracy to defraud the United States; 24 counts of wire fraud; 32 counts of aiding or assisting in the preparation of false federal tax returns; and five counts of filing false federal tax returns relating to a wide-ranging, abusive tax shelter scheme.
Tuesday, August 31, 2021
IRS Requires Division Counsel Consultation for Some Public Charity Status Claims in Wake of Mayo Clinic Decision
The IRS has issued a memorandum providing "Interim Guidance on Processing a Request for Public Charity Classification under IRC Sections 509(a)(1) and 170(b)(1)(A)(ii) when Applicant’s Primary Function is not the Presentation of Formal Instruction". The guidance comes in the wake of the Eighth Circuit's Mayo Clinic decision relating to the definition of "educational organization". As provided in the memo:
Because of ongoing litigation in the Eighth Circuit Court of Appeals regarding Treasury Regulation Section 1.170A-9(c)(1), the specialist must coordinate with TEGE Division Counsel when:
- An applicant is seeking classification or reclassification of public charity status as an educational organization under IRC Sections 509(a)(1) and 170(b)(1)(A)(ii), and
- The applicant’s primary function is not the presentation of formal instruction.
Of course the most interesting but unanswered question is to what extent the IRS will choose to follow that appellate court decision in making these determinations, including outside of the Eighth Circuit.
Hat tip: EO Tax Journal
The IRS Statistics of Income program has reported on its Domestic Private Foundation and Charitable Trust Statistics webpage the calendar year 2020 excise taxes reported by charities of all types on Form 4720, not just private foundations and trusts.. The largest amount by far is for the section 4960 tax on excess executive compensation, totaling more than $96 million. That figure represents almost 90 percent of all excise taxes reported, which totaled slightly more than $107 million. While more entities (524 versus 302) reported the section 4942 excise tax on private foundation undistributed income, the total amount of that tax reported was only a little over $5 million.
Interestingly, the section 4968 tax on the net investment income of private colleges and universities was paid by so few entities, and was such a small amount, that it is not separately listed but instead aggregated with three other excise taxes to prevent disclosure of specific taxpayer data. Only 9 entities reported any of those four excise taxes, which also included the tax on taxable distributions of sponsoring organizations, the tax on failure by hospitals to meet the section 501(r) requirements, and the tax on premiums paid on personal benefit contracts. The total tax reported for all four taxes was only a little over $3 million. While college and university endowments struggled in the fiscal year ending in June 2020, they still experienced positive returns. I wonder whether most colleges and universities with large endowments potentially exposed to this tax have found ways to minimize the investment income subject to tax or to avoid the tax entirely.
Friday, July 30, 2021
White House Announces New Religions Affairs Leaders, Including First Islamic Religious Freedom Ambassador
The White House announced Friday (July 30) a slate of nominations and appointments for top religious affairs roles, including the first Muslim American nominated to be the U.S. Ambassador-at-Large for International Religious Freedom.
According to a report by the Religious News Service (RNS), President Biden will select Rashad Hussain as his nominee for that post, filling a State Department slot vacant since former Kansas governor and U.S. Senator Sam Brownback left at the close of the Trump administration. Hussain, who would need to be confirmed by the Senate, currently works as director for Partnerships and Global Engagement at the National Security Council.
Mr. Hussain previously served as White House counsel under President Barack Obama, as well as U.S. special envoy to the Organization of Islamic Cooperation and U.S. special envoy for the Center for Strategic Counterterrorism Communications, among other roles.
Commenting on the upcoming nomination, Saeed Khan, an expert on American Muslim communities at Wayne State University, stated: “Rashad’s appointment demonstrates not only the importance the Biden administration places on religious freedom, it also shows the importance of the Muslim world to the administration both in terms of combatting Islamophobia and also promoting religious freedom in Muslim majority countries. Rashad’s background will allow him to have a frank discussion with Muslim majority countries about religious freedom.”
Anila Ali, a co-founder of the American Muslims and Multifaith Women’s Empowerment Council Iftar who has worked with Hussain in the past, also celebrated his nomination. “As AMMWEC, and as a woman leader, I look forward to working with him because women play an important role in peace-making,” Ali said. “He has worked with Muslim communities during the Obama period and we hope his relevant experience is going to make him a voice for all of us.”
According to the RNS report, President Biden is also expected to nominate Deborah Lipstadt as the next U.S. special envoy to monitor and combat antisemitism. Lipstadt is a professor at Emory University in Atlanta and a prominent Holocaust historian. She is the author of Antisemitism: Here and Now and is known for successfully defeating a libel suit brought against her by Holocaust denier David Irving.
Commenting on the expected nomination of Prof. Lipstadt, Mark (Moishe) Bane, president of the Orthodox Union, had this to say: “She is a leader with great moral courage; her dedicated work, clear voice in fighting Holocaust denial and preserving the memory of the attempted destruction of the Jewish people make her an exemplary choice for this role.”
In addition, President Biden plans to appoint two new commissioners to the United States Commission on International Religious Freedom: Khizr Khan and Rabbi Sharon Kleinbaum.
Khan became famous in 2016 when he and his wife, Ghazala, spoke during the Democratic National Convention as “Gold Star” parents, discussing their son, Humayun, a U.S. Army captain who died in Iraq in 2004. Mr. Khan, the founder of the Constitution Literacy and National Unity Project, runs his own law practice and has authored three books, including This is Our Constitution: Discover America with a Gold Star Father.
Kleinbaum, for her part, already served as a USCIRF commissioner in 2020 and leads the Congregation Beit Simchat Torah in New York City, a community that centers LGBTQ people. A human rights advocate, she also sits on Mayor de Blasio’s Faith Based Advisory Council and serves on New York City’s Commission on Human Rights. In addition, she is a board member of the New York Jewish Agenda and the New Israel Fund.
Prof. Vaughn E. James, Texas Tech University School of Law
Thursday, July 22, 2021
Thought I'd provide some quick reflections on the NCAA v. Alston a SCOTUS case handed down a month ago on June 21.
First a personal reflection. When I joined the IRS in the mid 2000s, I was told only somewhat in jest: there are two iron clad rules in exempt organizations -- preachers and college athletics ("hook em horns") always win. This latest case suggests that this iron clad rule may be beginning to subside in part at least.
Justice Gorsuch, writing for a unanimous Court affirmed the US 9th Circuit Court of Appeals in finding that the NCAA rules restricting educational benefits offered by colleges and universities to student athletes violated the Sherman Antitrust Act.
The Court affirmed the 9th Circuit that found that the NCAA limits on educational compensation violated the Antitrust Act only insofar as they involved educational benefits rather than other forms of compensation.
Probably the most significant aspect of the case that may have impact on other places for the NCAA and college athletics is that SCOTUS rejected the idea that the NCAA ought be treated differently because it deals with amateurs and is engaged in education rather than commercial activity.
This case does not change anything for how to think about universities and college athletics qualifying as charitable organizations under section 501(c)(3). John Colombo wrote an article The NCAA, Tax Exemption and College Athletics that is still relevant to this question today.
First, I would not expect this decision to effect college athletics entities like the NCAA or the university athletic activities to be found to be not charitable. This is because Congress amended the Code to provide that promoting amateur athletics is a purpose that meets the charitable requirement of section 501(c)(3). Perhaps, if universities start paying athletes and their amateurism is called into question, this would become an issue, but as of now, I do not see it threatening college athletics on the tax exemption angle.
Secondly, this ruling does not immediately impact the unrelated business income tax and college athletics either. The IRS and Courts have generally been favorable to college athletics. Just as Colombo concluded in his article some years ago, I think it still unlikely for that favorability to end because of the Alston holding.
However, as in the first matter, should the veneer of amateur begin to fall, and college athletics begin to compensate athletes, then the question of unrelated business income tax could become a real issue again for college athletics. The most dangerous possibility for college athletics and its expected tax treatment at least was raised in a concurrence by Justice Kavanaugh who suggested he would find the limitations on all forms of compensation to violate the Antitrust Act.
Monday, July 12, 2021
The recently released 2020 IRS Data Book (for the fiscal year ending 9/30/20) contains the usual high-level statistics for exempt organizations, including:
- Number of tax-exempt organizations and certain trusts (1,907,711) (Table 14), with most (1,753,824) tax-exempt organizations under section 501(c), including 1,404,170 under section 501(c)(3).
- Applications for tax-exempt status closed (95,864) (Table 12), with 85,509 approved, 94 disapproved, and 10,261 resolved in other ways (withdrawn, lacked required information, otherwise incomplete applications, etc.). Most (89,477) of the applications were under section 501(c)(3).
- Notices of intent to operate under section 501(c)(4) (3,219) (Table 13), with 2,796 acknowledged and 423 rejected (because, for example, not required as the organization filed a Form 990 series return before 7/8/16, already exempt under another IRC provision, or the IRS was unable to confirm the submitted employer identification number).
- Number of returns and other forms filed by tax-exempt organizations (1,360,719) (Table 2), down from fiscal year 2019 as were returns and other forms filed by most other types of entities, which likely reflects delayed processing of returns and other forms caused by the pandemic. Of the returns and other forms filed by tax-exempt organizations, 1,138,931 were filed electronically (Table 4).
- Examinations of tax-exempt organizations (Table 21), including
- 1,417 Forms 990, 990-EZ, and 990-N;
- 178 Forms 990-PF, 1041-A, 1120-POL, and 5227;
- 427 Forms 990-T; and
- 356 Forms 4720.
In addition, the Statistics of Income program recently released its Annual Extract of Tax-Exempt Organization Data for calendar year 2020, drawn from Form 990, Form 990-EZ, and Form 990-PF. It provides granular data from these returns; for example, the Form 990 extract has 273,972 rows (one for each employer identification number) and 220 columns.
Sunday, June 27, 2021
In a 2000 EO CPE article entitled Private Schools, the Service stated, “private schools have long been of concern to the Service.” As stated therein, the Service’s determinations of whether private schools qualify for exemption under IRC 501(c)(3) were addressed in many of the CPE texts from 1979 through 1989. In Private Schools, the Service provided an important historical review, a discussion on the requirements of Rev. Proc. 75-50, 1975-2 C.B. 587, and a summary of the various filing requirements that apply to private schools.
In recounting the history of this problem, the CPE article notes the background and current status of an injunction (still in effect) that requires the Service to deny tax-exempt status to racially discriminatory private schools in Mississippi. The injunction resulted from a 1970 class action filed to prevent the Service from recognizing the tax-exempt status of or allowing IRC 170 deductions to private schools that engage in racial discrimination against black students. See Green v. Connally, 330 F. Supp. 1150 (D. D.C. 1971), aff'd sub nom., Coit v. Green, 404 U.S. 997 (1971). It is interesting to examine the injunction in place for Mississippi in considering how to handle the systemic problem of racially discriminatory private schools today. The CPE article states the following regarding Mississippi private schools:
These so-called “Paragraph (1) Schools” must demonstrate that they have adopted and published a nondiscriminatory policy. They must also provide certain statistical and other information to the Service to establish that they are operated in a nondiscriminatory manner. Most importantly, they must overcome an inference of discrimination against blacks.
As of now, the injunction from Green only applies to Mississippi schools. Clearly, Green provides a model for how to implement the restriction against private schools’ engaging in racial discrimination. The focus on “statistical” information is really the key. As we all know, numbers do not lie. If private schools were free and open to all, the student body at private schools would not be 90% or more white. The same is true regarding the bleak number of black teachers at private schools. The injunction from Green could cure some of the prevalent and pervasive problems of racial discrimination in private schools throughout the South.
Hoffman Fuller Associate Professor of Tax Law
Tulane Law School
Saturday, June 26, 2021
Last month, Forbes published an article entitled The Racist History of “School Choice.” The article underscores yet another way that racially discriminatory private schools are subsidized. Raymond Pierce points out that for equitable education to exist, public schools need true reform, such as more funding for faculty development and other support systems necessary for nurturing high-quality learning environments. Given the need for greater investment into public schools, the last thing that should be done is to take money from public schools that are struggling and give it to largely segregated private schools, but that is what is happening under a common practice referred to as “school choice.” Not surprisingly, “school choice” has its underpinnings in a racist history. Pierce states, “We are less than six months into 2021, and to date, ‘school choice’ legislation has been introduced in at least 20 states, half of which are in the South.” Generally, the legislation involves tax credits, school vouchers, or “education savings accounts.” A common thread is that these bills take money from “underfunded, under-resourced public schools” and give it to private schools. While some proponents maintain that the bills will provide better education opportunities for Black and Brown students and those from low-income families, the reality is they do not according to Pierce.
The article traces the roots of “school choice” legislation to a history of racism and school segregation that is important to understand. Interestingly, public education in the South emerged during Reconstruction. When the Fourteenth Amendment was passed, education in the South was mostly privatized and available only to white children from wealthy families. Black children and poor white children typically were not educated at all. The Southern Education Foundation (SEF), which was featured in the June 21, 2021 post, was one of the first proponents of public education. The Peabody Fund (which preceded SEF), provided funding as well as drafted and promoted legislation calling for funding of public education through taxes. Former slaves strongly supported public education initiatives because they viewed education as essential to true freedom and had a strong desire to have their children educated. As a result of public schools, literacy among both Black and white students increased tremendously. Additionally, starting in 1913, the Anna T. Jeanes Fund (another precursor of SEF), supported “Jeanes Teachers” who traveled across the South to strengthen curriculum and instruction in rural schools that Black students attended. They taught students and community members how to excel independently and economically and how to overcome the challenges of the Jim Crow South. From 1910 through 1940, public education in the South grew dramatically.
However, in the 1940’s, Southern white students began leaving public schools to attend private schools to avoid integration after it was clear that the “separate but equal doctrine” from the 1896 Plessy v. Ferguson Supreme Court ruling would be dismantled. After the Supreme Court’s landmark decision in Brown v. Board of Education in 1954, segregation was no longer constitutional, and school vouchers became a means for subverting integration. During the 1950’s, Southern politicians passed legislation establishing tuition voucher or grant programs that were used to annihilate completely the public school systems, instead of desegregate. Pierce goes on to provide an illustrative example from Prince Edward County, Virginia where public schools were closed for five years until the Supreme Court intervened. Ultimately, the Supreme Court ruled in Griffin v. School Board of Prince Edward County that the county’s transferring of public funds to private white schools, instead of supporting public schools, was a violation of the equal protection clause of the Constitution. The Court stated that private school tuition assistance covered up as “school choice” was a tool to “systematically exclude Black children from the educational process.”
Despite the prohibition against this approach, Southern legislatures used it as a “blueprint” in an attempt to circumvent integration. From 1954 to 1964, Southern legislatures passed at least 450 laws and resolutions to prevent public school desegregation, many of which permitted the transfer of public funds to private schools. From 1958 to 1980, private school enrollment in the South increased by over half-a-million students. Indeed, hundreds of private segregated schools were established. At the same time, schemes to fund private schools at the expense of public schools, by using vouchers or tax credits to cover large portions of student tuition and operating costs, also increased. By the 1980’s, the 11 states that made up the former Confederacy had enrolled 675,000 - 750,000 white students. Of these students, 65 to 75% attended schools where 90% or more of the student body was white.
Today, school vouchers still are used to support segregated private schools and to continue de facto segregation. The numbers speak for themselves. In the United States, public schools have a student body that is comprised of 51 % white children and 48.3% children of color (mainly Black and Latino). In stark contrast, almost three out of every four private school students are white. As Pierce notes, this is part of a historical pattern.
The question becomes whether tax funding and subsidizing of a directed, intentional system of inequality, namely segregation, should be tolerated. As I recounted in the June 22, 2021 post, private schools are required to publicize their policies disavowing racially discriminatory practices. However, the numbers show that there are unspoken policies and practices that are being used to perpetuate both segregation and unfair treatment. One solution is to develop a better way of reporting racially discriminatory treatment so that private schools engaging in such practices would lose their tax-exempt status. Another solution is to re-examine the concept of “school choice” programs and school vouchers in their proper historical context and to require some form of accountability for the low numbers of minority enrollment in the private schools benefiting from these programs.
Hoffman Fuller Associate Professor of Tax Law
Tulane Law School
Wednesday, June 23, 2021
Historically, since private schools have not received federal funds, they have not been subject to civil rights laws, including Title VI of the Civil Rights Act of 1964 (“Title VI”), which prohibits discrimination on the basis of race, color, or national origin. However, loans associated with the Paycheck Protection Program (“P.P.P. loans”) have changed this landscape. The $659 billion program was intended to help, among others, nonprofits who needed assistance with making payroll by using loans backed by the Small Business Administration. Perhaps surprisingly, in the words of The New York Times, it was private schools who “cashed in” on the P.P.P. loans. See Private Schools Cashed in on P.P.P. Funding.
While public schools were ineligible for P.P.P. loans, private and charter schools could and did apply for loans, despite their multi-million dollar endowments. When P.P.P. funding dissipated quickly, the Small Business Administration revised its guidelines to clarify that those with other financing options should stop submitting applications. Yet, in order to stem the tide, additional rule tightening was required. Minority focused lenders and watchdog organizations raised concerns about equity and loopholes in terms of the loans.
Nevertheless, there may be a silver lining to private schools’ cashing in on P.P.P. loans. Perhaps unknowingly, the private schools have made themselves subject to Title VI requirements by virtue of receiving federal funds. The P.P.P. loan application specifically states that borrowers must comply with several civil rights laws, such as Title VI. As noted above, Title VI prohibits discrimination on the basis of race, color, or national origin. This means that private schools cannot engage in racial discrimination against employees, students, parents, or other participants. This includes in terms of employment, admissions, enrollment, and other treatment.
An interesting question is whether Title VI imposes prohibitions against racial discrimination not covered by section 501(c)(3). One definite difference is that private schools who have accepted P.P.P. loans now may have to pay compensatory damages to individuals who prove intentional discrimination in lawsuits against the schools. In addition, injunctive relief may be awarded to such individuals. At the very least, due to the receipt of P.P.P. loans, some private schools now are subject to causes of action from individuals and families who have faced racial discrimination at their hands. Over the years, organizations such as the ACLU have despaired that no such actions were possible, but that has now changed.
Hoffman Fuller Associate Professor of Tax Law
Tulane Law School
Tuesday, June 22, 2021
Tax-exempt private schools are required to have and to publish a racially nondiscriminatory policy. In 2019, the IRS released Rev. Proc. 2019-22, which allows private schools to use their Internet websites to publicize such policies, a requirement for exemption under section 501(c)(3) of the Internal Revenue Code. By way of background, Rev. Proc. 75-50 outlines the guidelines and recordkeeping requirements for determining whether a private school has a racially nondiscriminatory policy and in fact operates in accordance with such policy. Rev. Proc. 75-50 applies to private schools that are applying for tax-exemption and to private schools that already are tax-exempt.
Specifically, Rev. Proc. 75-50 requires, inter alia, a private school to include a statement acknowledging it has a racially nondiscriminatory policy “and therefore does not discriminate against applicants and students on the basis of race, color, and national or ethnic origin.” The statement must be included in one of the listed governing documents and in its brochures, catalogues, and other written ads for prospective students. Moreover, the school must make the policy “known to all segments of the general community served by the school.” Newspaper circulation and certain broadcast media are listed as acceptable means of doing so.
Rev. Proc. 2019-22 modified Rev. Proc. 75-50 by naming a third means of making a racially nondiscriminatory policy known in the manner prescribed: the school’s Internet homepage. Generally, the policy must be displayed on the school’s publicly accessible Internet homepage throughout the taxable year. Rev. Proc. 2019-22 even sets forth a sample notice for a private school’s homepage:
NOTICE OF NONDISCRIMINATORY POLICY AS TO STUDENTS
The M school admits students of any race, color, national and ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. It does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs.
There are also enumerated factors used to determine whether the notice is “reasonably expected to be noticed” by homepage viewers, such as the size, color, and graphics used; whether the notice is unavoidable, etc.
Form 1023 is used to apply for tax-exemption under section 501(c)(3). Schedule B pertains to Schools, Colleges, and Universities. On Form 1023, there are a number of questions concerning the requirement of a racially nondiscriminatory policy for private schools. Moreover, private schools applying for tax-exemption are informed that they will need to file an annual certification regarding their policy. (Interestingly, there are also a number of questions under Schedule B that deal with racial discrimination, including whether the private school was established to subvert integration and the racial composition of the student body, faculty, and administrative staff).
Generally, tax-exempt organizations, including numerous private schools, must file an annual reporting return (Form 990 or 990-EZ). The return includes a question allowing private schools to satisfy the aforementioned annual certification requirement. Many of the other questions permit a private school to self-report and answer “yes” or “no” in regard to whether it maintains records regarding racial composition, engages in discriminatory practices in terms of admission policies and scholarships, etc. This comes as no surprise since our tax system is based largely on self-reporting. However, self-reporting depends on the overall honesty of taxpayers. Every year a tax student asks the inevitable question midway through the material on gross income (or sometimes earlier during the Cesarini/treasure trove lecture): How would anyone ever know? I respond by saying that I am there to teach them what the law says and how to abide by the law, and then I remind them that God will know. Many students who are facing or who have faced racial discrimination at private schools undoubtedly ask whether anyone will ever know about the systemic challenges they face in applying or almost daily while engaging in the necessary and noble pursuit of acquiring an education.
Perhaps one way the IRS could gain valuable insight into the true encounters of racial discrimination is to require private schools also to publish on their Internet homepages a number or a link to a nonprofit organization that would report such incidents to the IRS once a threshold number was reached. If amendable, the National Association of Independent Schools (NAIS) could serve in this role as it has already publicly announced that it plans to release initiatives to stop systemic racism. See NAIS Statement on Addressing Anti-Blackness and Systemic Racism.
Hoffman Fuller Professor Tax Law
Tulane Law School
Monday, May 31, 2021
Philip Hackney (Pittsburgh) has posted Dark Money Darker? IRS Shutters Collection of Donor Data, which will be published in the Florida Tax Review. Here is the abstract:
The IRS ended a long-time practice of requiring most nonprofits to disclose substantial donor names and addresses on the nonprofit annual tax return. It is largely seen as a battle over campaign finance rather than tax enforcement. Two of the nonprofits involved, social welfare organizations and business leagues, are referred to as “dark money” organizations because they allow individuals to influence elections while maintaining donor anonymity. Many in the campaign finance community are concerned that this change means wealthy donors can avoid campaign finance laws and have no reason to fear being discovered. In this Article, I focus on whether the information is needed for the enforcement of the tax law and/or to support ancillary legal goals. I contend the IRS ought to collect this substantial donor information as it did for over 79 years. Though the collection of donor information may not be essential for groups such as social clubs, fraternities and sororities, and mutual ditch companies, the collection of this information non-publicly by the IRS is important in both enforcing tax-exempt requirements and in enforcing the tax law generally. Tax law prohibits the distribution of earnings from a nonprofit to those who control the organization. Substantial donors are classic suspects for seeking such improper receipts through their control. Thus, the information is key to IRS auditors. Considering the deficient budget of the IRS to ensure a properly enforced Code, the failure to collect that information puts the IRS in a disadvantaged position. While as a democratic matter, there may be some modest benefit from alleviating donors from the worry that the government will know about their political contributions, the harm to those who are not able to make use of these structures, the harm to those who are deprived of information regarding the biases associated with particular political activity, and the harm to the belief that the tax, campaign finance, and nonprofit law will be enforced equally upon all, is more significant. With these considerations in mind, the IRS and Treasury ought to rescind its most recent guidance on this matter. If not, Congress ought to require this information be disclosed by law.
Samuel D. Brunson
Wednesday, May 19, 2021
In a case deep in the weeds of tax-exempt law, the United States Eighth Circuit Court of Appeals remanded Mayo Clinic v. United States, No. 19-3189 back to the District Court. Though deep in the weeds, the case has some potential big importance to tax exempt law.
Though it is technically about whether Mayo owes the unrelated business income tax associated with debt financed income, it has big importance because a loss here would potentially open up a simple way for charitable organizations to establish that they have a favored status of being a public charity rather than a private foundation by being an educational organization.
In order to be allowed an exemption under section 514 of the Code from the UBIT, Mayo claimed that it is a qualified organization under section 514(c)(9)(C)(i) because it is an "educational organization under section 170(b)(1)(A)(ii). That statute states: an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on." Note that without the "primary test" a charity could normally maintain faculty and curriculum and normally have a regularly enrolled body or pupils, as something less than a primary part of the organization's activity.
The IRS determined that Mayo was not such an educational organization based on its regulation interpreting the above language. The regulation Treas. Reg. 1.170A-9(c)(1) provides an organization is an educational organization "if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on."
Obviously Treasury and the IRS added the "primary function" test to what is provided for in the statute. The District Court held for Mayo on the basis that the primary function was not a part of the test Congress implemented. Mayo Clinic v. United States, 412 F. Supp. 3d 1038 1042 (D. Minn. 2019).
After applying the Chevron Two Step, the Appeals Court upheld the Treasury Regulation, but only in part, it says. It first finds that the District Court was right that the primary test added by Treasury was not reasonable. They find that the history and prior case law did not support this language. But then it suggests that the primary test should indeed apply but as to the idea of educational generally. Thus, the court determines that the test to apply is as follows: "The analysis normally unravels in three parts: (1) whether the taxpayer is “organized and operated exclusively” for one or more exempt purposes; (2) whether
the taxpayer is “organized and operated exclusively” for educational purposes; and (3) whether the taxpayer meets the statutory criteria of faculty, curriculum, students, and place."
One part of the history of charitable organizations that the Eighth Circuit fails to trace is the development of the idea of a publich charity under section 509 of the Code. There an organization is generally determined to be a private foundation unless it meets one of the requirements under (a)(1)-(4). Section 509(a)(1) includes these same educational organizations.
I think what this all means is that there is an easier end run around obtaining public charity status for "educational organizations." A well funded advocacy organization by one individual that mainly educates the world about their point of view in order to influence political choices need only hire some faculty, have them establish curriculum, and then regularly educate some pupils. This would meet the above test and would circumvent the private foundation rules. I doubt this was intended by Congress, but that I think is the practical result of the Courts ruling.
The Eighth Circuit remanded the case for further proceedings. It seems likely to me that Mayo will again win at the District Court. I would be surprised if the IRS appealed it further as they have lost the main issue on this one. Additionally, given the way they lost, I don't think the IRS can fix the regulation. The only way for the IRS to fight this one again would be to try to win in another Circuit. Given the trend of federal court cases going resoundingly against the IRS on interpretation issues like these lately, including most recently CIC Services at the Supreme Court, I suspect the only way to solve this mess is for Congress to take action.
May 19, 2021