Friday, February 7, 2020
There has recently been an eclectic set of stories about churches and their federal tax status. In its January/February 2020 issue, Christianity Today's cover story was The Hidden Cost of Tax Exemption (subscription required) with the sub-title "Churches may someday lose their tax-exempt status. Would that be as bad as it sounds?" The story concludes:
It might not be such a bad thing to lose tax-exempt status. We should consider, at the very least, the cost of maintaining this kind of cultural privilege. The true church of God, after all, is not reliant on its special status in the tax code. We can walk by faith and not by government largess.
At the other end of the spectrum, the Washington Post had a recent story titled Major evangelical nonprofits are trying a new strategy with the IRS that allows them to hide their salaries. The story cited several religious organizations, including the Billy Graham Evangelistic Association and Focus on Family, that had successful sought church status from the IRS. The implication of the story was that they sought this status not for the tax benefits (which they already enjoyed) but for the ability to hide financial details, and particularly salary information, from government and public scrutiny because of the church exemption from filing the Form 990 series annual information returns. The religious charity rating organization MinistryWatch has also been critical of this trend.
Relatedly, the U.S. District Court for the District of Columbia has now released its reasons for dismissing the lawsuit brought by a section 501(c)(3) organization associated with the Freedom from Religion Foundation that challenged the church exemption from Form 990 filings. Perhaps not surprisingly, the court found standing to be a problem (citations omitted):
NonBelief Relief alleges in its proposed amended complaint that “[t]he Defendant’s unequal treatment of the Plaintiff is ongoing and will continue as long as churches continue to be exempted from the information filing requirements of § 6033.” The Court disagrees. The injury it alleges occurred when it had to file a Form 990, a requirement from which churches and religious organizations are exempt. But as discussed above, this alleged unequal treatment is not ongoing or imminent because NonBelief Relief faces no current or future prospect of having to fill out a Form 990. See And while it is true that the loss of its tax-exempt status is, in a sense, ongoing, NonBelief Relief has not based its standing argument on that loss, and for good reason. The relief it seeks—a declaration that the church exemption is unlawful and an injunction prohibiting the Commissioner from enforcing it—will not redress that loss. And as explained above, in any event, the Anti-Injunction Act and Declaratory Judgment Act deprive the Court of jurisdiction to reinstate NonBelief Relief’s tax-exempt status.
The Freedom from Religion Foundation has promised to continue challenging the church exemption from Form 990 filing, presumably by having NonBelief Relief pay some taxes, file a claim for refund, and then going to court when the IRS refuses to grant that claim (an option described by the court in its decision).
Finally, there is some interesting pressure on classification as a church from a different. non-tax direction. The N.Y. Times had a story late last year titled Inside the War for California's Cannabis Churches (hat tip: TaxProf Blog). The story highlights the emerging conflict between such churches and California authorities seeking to enforce the various rules regulating marijuana dispensaries in that state. The key issue is whether enforcement of those rules discriminates on the basis of religion, assuming that the members of these churches can demonstrate that they beliefs relating to use of marijuana are sincerely held.
Wednesday, February 5, 2020
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.
Wednesday, November 27, 2019
The past couple of months have been a busy time for reports, articles, and litigation relating to charitable contributions.
With respect to reports, three studies highlighted trends in charitable giving. The CAF World Giving Index 2019 reported that levels of individual giving in the world's wealthiest countries - particularly the United States, Canada, Ireland, the Netherlands, and the United Kingdom - have declined over the past ten years since the 2008 financial crisis. In the United States, the Center for Effective Philanthropy reports that declining support from small- and medium-gift givers means that charities that rely on the $428 billion (in 2018) in donations from individual donors are increasingly dependent on major donors. Finally, the National Philanthropic Trust reports that in 2018 grants from donor-advised funds totaled $23.42 billion, or roughly 5 percent of all individual giving, with $37.12 billion flowing into DAFs. (Hat tip for all three of these reports to the Philanthropic News Digest.)
With respect to articles, the Urban Institute/Brookings Institution Tax Policy Institute published a chartbook on Tax Incentives for Charitable Contributions that "explores the implications of current-law income tax incentives for charitable donations along with several alternatives for tax deductions that are more universally available." And Eric A. Kades (William & Mary Law School; pictured here) posted The Charitable Continuum, which argues that "[g]ranting a 100% deduction only for donations to the desperately poor, along with 50%, 25%, and 0% for gifts yielding progressively fewer efficiency, fairness, pluralism, and institutional competence benefits promises to deliver a socially more desirable charitable deduction."
With respect to litigation, taxpayers continue to fight (and generally lose) substantial charitable contribution deduction cases. In Presley v. Commissioner, the U.S. Court of Appeals for the 10th Circuit affirmed the Tax Court's denial of over $300,000 in claimed charitable contribution deductions based on several failures, including trying to deduct land improvement expenses in one tax year that were actually incurred in a different tax year, failure to separately list a donated mower as required on Form 8283, and failure to obtain a qualified appraisal for a donated house. In Coal Property Holdings, LLC v. Commissioner, the Tax Court denied a claimed $155.5 million conservation easement deduction on the grounds that the conservation purpose was not protecting in perpetuity, as required by statute, because the complicated transaction that created the easement meant "the charitable grantee was not absolutely entitled to a proportionate share of the proceeds in the event the property was sold following a judicial extinguishment of the easement." Finally, another conservation easement Tax Court case currently on appeal to the 11th Circuit (Pine Mountain Preserve, LLLP v. Commissioner) has attracted interest in the form of an amicus brief filed by a number of prominent academics and practitioners (including contributors to this blog Roger Colinvaux and Nancy A. McLaughlin (pictured)), as reported by Tax Analysts and Law360 (both of which require subscriptions). For the most recent summary of the many conservation easement cases, see Trying Times: Conservation Easements and Federal Tax Law (October 2019), by Nancy A. McLaughlin (Utah). The IRS also recently announced that it is increasing its enforcement actions relating to syndicated conservation easement transactions.
A federal district court struck down as unconstitutional a New York state ethics law that would have required the disclosure of donors to section 501(c)(3)s that contributed more than $2,500 to a 501(c)(4) that engages in lobbying and $1,000 or more donors to section 501(c)(4)s that spent more than $10,000 on grassroots lobbying. The law had been on hold during the three years the litigation was pending. Numerous nonprofit groups challenged the law, including Americans for Prosperity, Citizens Union (joined by its affiliated foundation), Citizens United, Lawyers Alliance for New York (joined by the Nonprofit Coordinating Committee of New York), and the New York Civil Liberties Union (joined by its affiliated foundation and the ACLU Foundation),. Coverage: Law.com; National Law Review; Times Union.
In other litigation news, a federal district court dismissed the lawsuit brought by Nonbelief Relief and supported by the Freedom from Religious Foundation challenging the exemption that churches enjoy from having to file the annual Form 990 series information return with the IRS. The grounds for the dismissal are not yet available, however, nor has the time begun to run on filing an appeal, as the court has yet to issue its final order or a memorandum opinion explaining its reasoning.
Thursday, September 26, 2019
While the recent House Ways and Means Oversight Subcommittee hearing focused on whether current tax benefits provided to charities also subsidize hate speech, readers may remember that a different controversy arose a couple of years ago when several groups identified as "hate groups" by the Southern Poverty Law Center (SPLC) filed lawsuits challenging that identification. Federal district courts recently dismissed two of those lawsuits, one against SPLC and the other against Amazon for using the SPLC labels.
In Center for Immigration Studies v. Cohen et al., the nonprofit Center for Immigration Studies (CIS) filed suit against two SPLC leaders, Richard Cohen (now former SPLC President) and Heidi Beirich (currently SPLC Intelligence Project Director), alleging a RICO violation. The U.S. District Court for the District of Columbia dismissed the lawsuit earlier this month, concluding that "plaintiff has
not sufficiently alleged a predicate offense or a pattern of racketeering." More specifically, the court found that while SPLC's designation of CIS as a hate group was "debatable" under the facts alleged in the complaint, it was not fraudulent and so did not constitute wire fraud, the asserted RICO predicate offense. The court also found that the complaint only alleged a single scheme, which was insufficient to constitute a pattern of racketeering.
Coverage: Yahoo! News.
In Coral Ridge Ministries Media, Inc., d/b/a James Kennedy Ministries v. Amazon.com, Inc. et al., the nonprofit (Coral Ridge) sued not only SPLC but also Amazon.com, Inc. and AmazonSmile Foundation because they allegedly excluded Coral Ridge from receiving donations through the AmazonSmile charitable-giving program because of the SPLC's "hate group" designation. The U.S. District Court for the Middle District of Alabama in a lengthy opinion dismissed the lawsuit earlier this month for several reasons. First, the court dismissed the state defamation claim and federal Lanham Act claims against SPLC because it concluded that Coral Ridge was a public figure (which Coral Ridge conceded) and given the debatable meaning of the term hate group Coral Ridge could not prove it was false as assigned to Coral Ridge, much less that the designation actually was false, or that SPLC had made the designation with actual malice, as required under the First Amendment for the claims to be sustained. (The court also rejected the Lanham Act claims on statutory grounds.) Second, the court dismissed the Civil Rights Act Title II claims of religious discrimination against the Amazon defendants. While the court found that whether the Amazon defendants were places of public accommodation within the meaning of Title II to be a difficult issue of first impression, it ultimately did not reach that issue. Instead, it concluded that even if they were places of public accommodation the denial of Coral Ridge's ability to receive donations through the AmazonSmile program was not a denial of "goods, services, facilities, privileges, advantages, [or] accommodations" within the meaning of Title II because the AmazonSmile program is not open to the public because the program is limited to certain section 501(c)(3) organizations. The court also concluded that Coral Ridge failed to plead sufficient facts to support either a claim of intentional discrimination or a claim of disparate impact on religious or Christian groups.
Monday, July 22, 2019
Over the past several years, the Freedom From Religion Foundation has been litigating over the constitutionality of the parsonage allowance. (The parsonage allowance, codified in section 107 of the Code, provides that "ministers of the gospel" can exclude in-kind housing or cash housing allowances from their income.)
In March, the Seventh Circuit ruled against FFRF, holding that tax-free housing allowances available exclusively to clergy didn't violate the Establishment Clause. Then, a month ago or so, FFRF announced that it wouldn't seek review by the Supreme Court.
But the battle isn't over, it turns out. Last week, the Humanist Society of Greater Phoenix announced that it was going to challenge the constitutionality of the parsonage allowance.
The article doesn't provide a ton of details, but it looks to me like it's going to follow the FFRF's playbook by designating a portion of its executives' salary as a housing allowance. (Note that, contrary to its assertion, the Humanist Society wouldn't claim any kind of exemption: the exemption belongs to the minister.) Because the Humanist Society is both a nonprofit and tax-exempt, it's in a similar position to FFRF vis-à-vis the parsonage allowance.
I assume that it believes that the IRS will reject the claim, giving it standing to challenge the provision's constitutionality in court.
I've said before that I'm not completely convinced that this grants standing, the Seventh Circuit notwithstanding. Even if it does, though, the Humanist Society may face hurdles not faced by the FFRF. Specifically, according to the article, leaders of the Humanist Society are broadly recognized as clergy. By contrast, the FFRF expressly denied by religious or quasi-religious, and rejected the IRS's assertion that maybe its executives were clergy. Because the Humanist executives are recognized as clergy, it's not clear to me that they don't qualify as "ministers of the gospel" for purposes of section 107. And, if they qualify as clergy, they're going to have a hard time getting standing to challenge the allowance.
Samuel D. Brunson
Thursday, June 20, 2019
In a relatively unnoticed decision earlier this week, the Supreme Court of the United States reached a decision that could provide an additional reason for governments to outsource activities to nonprofits. Manhattan Community Access Corp. v. Halleck involved whether a nonprofit organization was a state actor subject to the First Amendment when New York City delegated the operation of public access cable channels to it. In a 5-4 decision, the Court concluded that it was not because managing public access channels is not "a traditional, exclusive public function." (The City also did not compel the nonprofit to take the alleged action at issue or act jointly with the nonprofit, either of which could have been alternate grounds for finding the nonprofit was a state actor for these purposes.) The majority held that very few functions are traditional, exclusive public functions, and the function at issue was not one of those few. The dissent's very different take was that the public access channels are a public forum and the City could not avoid the First Amendment's application to the forum by delegating management of it to a private entity, here the nonprofit.
This decision creates an additional incentive for governments to delegate the management of activities to private entities, including nonprofits. If the activity is speech-related, and the government is careful not to direct the nonprofit regarding its speech-related decisions, those decisions may often not be subject to First Amendment limits. Presumably if the government delegated that management to a private entity with a known, speech-related bias with the intent of seeing that bias implemented even though the First Amendment would prevent the government from doing so directly, that would be problematic. But of course proving intent along these lines could often be very difficult, even if it exists.
Friday, May 17, 2019
Charitable Contribution Cases: An Alleged $151 Million Conservation Easement; Tens of Millions in Bogus Contributions
In Battelle Glover Investments, LLC v. Commissioner (link to petition available from Tax Analysts; subscription required), a partnership is challenging a $151 million charitable contribution deduction disallowance arising out of a conservation easement donation. According to the petition, the conservation easement was on approximately 97.8 acres of limestone mining property donated to the Southeast Regional Land Conservancy, Inc. The petition indicates the Internal Revenue Service is disallowing the deduction on multiple grounds, including that the partnership failed to satisfy all of the requirements of Internal Revenue Code section 170 and that the correct valuation of the conservation easement was zero. The IRS is also seeking to impose a 40% valuation misstatement penalty. This case is of course only the latest, high-dollar conservation easement dispute, as the IRS has brought hundreds of cases challenging charitable contribution deductions in this area, as documented by co-blogger Nancy A. McLaughlin (University of Utah).
In United States v. Meyer, the federal government successfully sought injunctive relief against an attorney who promoted the "Ultimate Tax Plan," also sometimes referred to as a "Charitable LLC" or "Charitable Limited Partnership." According to the complaint filed last year in federal district court, the scheme involved sham donations to purported charities controlled by Mr. Meyer and his advice to the participants that as a result of those donations they could take unwarranted charitable contribution deductions. The complaint stated that the total cost to the Treasury was more than $35 million in lost tax revenue. Each of the three charities involved were based in Indiana and had successfully applied for IRS recognition of exemption under Code section 501(c)(3). However, in recent years Mr. Meyer had entered into agreements with the IRS that retroactively revoked the tax-exempt status of all three charities based on either inurement grounds or their use in the alleged scheme. Mr. Meyer made money off this scheme by charging various fees related to the purported donations. The case apparently has had significant ripple effects, in that it appears to have triggered audits of many of the scheme's participants, and possibly investigations into the financial planners and CPAs to whom Mr. Meyer marketed it (and sometimes paid for referrals). Coverage: Bloomberg Tax; Forbes.
Both these cases illustrate the potential for abuse of the charitable contribution deduction, to the significant detriment of the federal treasury.
Thursday, May 16, 2019
New Jersey is the latest state to compel disclosure of significant donors in the wake of the federal government's decision to eliminate reporting to the IRS by tax-exempt organizations (other than 501(c)(3)s) of their significant donors. NJ Attorney General Gurbir S. Grewal and the NJ Division of Consumer Affairs announced a new rule earlier this week that will require both charities and social welfare organizations that have to file annual reports with the Division's Charities Registration Section to include the identities of contributors who have given $5,000 or more during the year. (Like a number of states, New Jersey apparently defines "charitable organization" broadly for state registration purposes, so as to encompass not only Internal Revenue Code section 501(c)(3) organizations but also Internal Revenue Code section 501(c)(4) social welfare organizations.) According to statements accompanying the new rule, the donor information will not be subject to public disclosure. This announcement was in the wake of New Jersey and New York suing the federal government for failing to comply with Freedom of Information Act requests submitted by those states relating to that earlier decision, and New Jersey joining a lawsuit brought by Montana challenging the decision.
Interestingly, however, last week New Jersey's governor vetoed a bill (S1500) that would have compelled donor disclosure by organizations engaged in independent political expenditures, among other measures. Governor Philip D. Murphy's 20-page explanation raised both constitutional concerns with the legislation as enacted and policy concerns that the bill did not go far enough in certain respects. The constitutional concerns included ones relating to the bill's application to legislative and regulatory advocacy, not just election-related expenditures. The policy concerns includes ones related to a failure to extend pay-to-play disclosures and to require certain disclosures from recipients of economic development subsidies.
In other disclosure news, the U.S. Court of Appeals for the Ninth Circuit rejected petitions fo rehearing en banc of the earlier three-judge panel decision in Americans for Prosperity Foundation v. Becerra, turning away an as applied challenge to the California Attorney General's requiring that the foundation provide a copy of its Form 990 Schedule B (which identifies significant donors) to that office. The rejection is notable because it was over a lengthy dissent by five judges, to which the three judges on the initial panel responded.
I think it can be safely predicted that in this era of "dark money" we will continue to see state level compelled disclosure developments, and litigation in response, for the foreseeable future.
Wednesday, May 15, 2019
Other Nonprofit Scandals You May Have Missed: $37 Million Class Action Settlement; "Sham" Police Charities
In a story that appeared to attract very little attention, Gospel for Asia settled a federal class action lawsuit brought against it for $37 million (!) according to a report in a Canadian news outlet. According to that report, the charity - now known as GFA World - "had been accused of diverting donations intended for India's poor to build a lavish headquarters in Texas, personal residences, and purchase for-profit businesses, including a rubber plantation and a professional soccer team." The charity also agreed to remove the wife of the charity's founder from the board of directors, and to add the lead plaintiff in the suit to the board. It is not clear whether the Canada Revenue Agency, the Internal Revenue Service, or any other government agencies are investigating. According to a report in Christianity Today, Gospel for Asia helped found the Evangelical Council for Financial Accountability, but was expelled from that organization in 2015 "after ECFA concluded that GFA misled donors, mismanaged resources, had an ineffective board, and violated most of the accountability group’s core standards." Gospel for Asia did not acknowledge any wrongdoing as part of the settlement, as it noted in a related press release.
In other news, states continue to pursue and shut down alleged "sham" police charities. In Missouri, the St. Louis Post-Dispatch reports that the Federal Trade Commission and Missouri Attorney General Eric Schmitt forced the Disabled Police and Sheriffs Foundation Inc. to shutdown after raising close to $10 million, almost all of which went to fundraising costs or the organization's executive director. The charity and the executive director did not admit to any wrongdoing, however. And in Maryland, the Baltimore Sun reports that a retired Baltimore police sergeant "has agreed to cease soliciting money for a police charity [CopStress] that the Maryland Attorney General’s Office says misled the public about its operations." The retired police officer involved contested the accusations, however, saying he was only agreeing to shut the charity down after collecting minimal donations because otherwise he faced a $30,000 fine.
Thursday, March 28, 2019
Church Tax Benefits: Does 7th Circuit Ruling on Cash Parsonage Allowance Exclusion Protect Other Church-Specific Benefits?
In a much anticipated decision, the U.S. Court of Appeals for the Seventh Circuit concluded that the exclusion from gross income of cash parsonage allowances under Internal Revenue Code section 107(2) is constitutional, reversing a federal district court decision to the contrary. (Full disclosure: I signed an amicus brief arguing that the provision is constitutional.) Since the decision leaves the exclusion in place and there are no contrary federal appellate court decisions, it is highly unlikely that the Supreme Court will take up the case even if the plaintiffs file a cert petition. The Freedom from Religion Foundation, which instigated the challenge, or others could of course try to raise this issue in a different circuit in order to try to create a circuit split, especially since the plaintiffs here managed to overcome the standing issue that had frustrated an earlier challenge. At least one panel of the U.S. Court of Appeals for the Ninth Circuit indicated in an earlier case an interest in reaching the constitutional issue by appointing an amicus law professor who was skeptical of the provision's constitutionality (an issue that had not been raised by any party in that case). But such a split is likely years down the road, if it ever materializes.
A larger question is whether the decision provides broader protection for other tax benefits provided to churches, other religious groups, and ministers. Perhaps the most important holdings of the court in this respect are its conclusion that Congress had the secular purpose of avoiding excessive entanglement with religion when it enacted the provision (citing Taxing the Church, authored by Edward Zelinsky (Cardozo), on this point), its narrow reading of the Supreme Court's Texas Monthly decision as part of its reasoning for why the primary effect of section 107(2) is not to advance religion, and its stated deference to Congress in determining whether the provision causes excessive government entanglement with religion. (These conclusions reflect the much criticized by still applicable Lemon test.) These conclusions are not accepted by all; for a thoughtful critique of them, see this TaxProf Blog op-ed by Adam Chodorow (Arizona State), who argued against the constitutionality of section 107(2). And of course the decision only directly applies to that provision and is only precedential in the Seventh Circuit. But they likely foreshadow a difficult path for any other challenges to tax benefits enjoyed by religious groups or ministers, including the exemption from the annual information return filing requirement for churches currently being challenged by the Freedom from Religion Foundation (in the District of Columbia, not the Seventh Circuit).
Thursday, January 31, 2019
Partnership Not Entitled to Charitable Contribution Deduction for Two of Three Easements, Conservation Purpose Not Protected in Perpetuity
In Pine Mountain Preserve, LLLP v. Commisioner, the Tax Court's 116 page opinion determined that (cribbing from CCH):
A partnership was not entitled to charitable contributions deductions for two easement deeds because the conservation purpose of their donated easement was not protected in perpetuity and, consequently, was not a qualiﬁed conservation contribution. The IRS argued that the easements did not protect conservation purposes in perpetuity because the easement deeds permitted the property to be used in ways inconsistent with the conservation purposes of the easements. Further, the two easements deeds did not restrict a speciﬁc, identiﬁable piece of real property because they allowed supposedly conserved land to be taken back and used for residential development. Because neither easement constituted a restriction (granted in perpetuity) on the use which may be made of the real property, neither easement constituted a "qualiﬁed real property interest" that could give rise to a charitable contribution deduction under Code Sec. 170(h)(1)(A). Therefore, the partnership was not entitled to a deduction for conservation easements for the two tax years at issue. However, the easement deed for the third tax year did not contain a reserved-right provision allowing the landowner to construct houses. Although the third easement deed allowed the landowner to use the land in various other ways, these uses were consistent with the conservation purposes of the easement. Further, the third easement covered a speciﬁc, identiﬁable piece of real property, was "granted in perpetuity" under Code Sec. 170(h)(2)(C) and was made "exclusively for conservation purposes." Moreover, the inclusion in the easement of a provision allowing amendments, provided that they were "not inconsistent with the conservation purposes of the donation," did not prevent that easement from satisfying the granted-in-perpetuity requirement of Code Sec. 170(h)(2)(C). Therefore, the partnership could get a deduction for the donation of the easement for the third tax year at issue.
Darryll K. Jones
Monday, January 28, 2019
Allison M. Whelan (Covington & Burling, Washington D.C), Denying Tax-Exempt Status to Discriminatory Private Adoption Agencies, 8 UC Irvine L. Rev. 711 (2018):
This Article ... argues that the established public policy at issue here is the best interests of the child, which includes the importance of ensuring that children have safe, permanent homes. In light of this established public policy, which all three branches of the federal government have recognized and support, this Article ultimately argues that, consistent with the holding in Bob Jones, private adoption agencies that refuse to facilitate adoptions by same-sex parents, thereby narrowing the pool of qualified prospective parents and reducing the number of children who are adopted, act contrary to the established public policy of acting in the best interests of the child.
This Article proceeds in five Parts. Part I first provides general information about the child welfare system, adoption, private adoption agencies, and the “best interests of the child” standard. Part II describes the emergence of state laws that allow private agencies to refuse to facilitate adoption by same-sex couples. Part III provides an overview of federal income tax exemptions and then summarizes the Supreme Court’s decision in Bob Jones University v. United States. Part IV applies the analysis and holdings of Bob Jones to private adoption agencies that discriminate against same-sex couples, and ultimately argues that such policies are contrary to the established public policy of the best interests of the child. As a result, this Article argues that the IRS should conclude that these agencies do not qualify for exemption from federal income tax. Part V concludes by offering a potential compromise and additional policies the government should consider.
(Hat tip: TaxProfBlog )
Conservative Organization Denied 501(c)(4) Status Lacks Standing to Challenge Revenue Ruling 2004-6, According to Fifth Circuit
In 2011, Freedom Path, a would-be social welfare organization sought exempt status under 501(c)(4). In 2013, the Service notified Freedom Path that it was not operated "exclusively for the promotion of social welfare." The Service relied, in part, on the facts and circumstances test in Revenue Ruling 2004-6 to support its conclusion that the organization engaged in too much political campaign intervention and therefore was not primarily engaged in the promotion of social welfare. Freedom Path brought an action seeking to declare Revenue Ruling 2004-6 facially unconstitutional because it's vagueness "chilled" the exercise of rights guaranteed under the First Amendment. A Federal District Court in Dallas found that Freedom Path had standing but that Revenue Ruling 2004-6 was not unconstitutional. Freedom Path appealed. In a January 16, 2018 opinion, the reasoning of which I found somewhat muddled, the Fifth Circuit Court stated that Freedom Path lacked standing:
Freedom Path asserts there is standing to make a facial challenge to the “Facts and Circumstances Test” of the Revenue Ruling because the test is vague, overbroad, and chills its speech. A specific allegation in the complaint is that Freedom Path decided not to air “Leader,” a television advertisement, because this test made it unclear whether airing the ad would be viewed as an exempt function activity or non-taxable issue advocacy. “Chilling a plaintiff's speech is a constitutional harm adequate to satisfy the injury-in-fact requirement.” Houston Chronicle Publ'g Co. v. City of League City, 488 F.3d 613, 618 (5th Cir. 2007).
Even if Freedom Path has made a sufficient claim of chilled speech, the injury must be traceable to the allegedly vague provision. For Freedom Path to have standing, we must be convinced that a supposedly vague Facts and Circumstances Test is what chills Freedom Path's speech.
Freedom Path emphasizes that the IRS relied in part on the Revenue Ruling in its proposed denial of Freedom Path's Section 501(c)(4) status, and consequently the Revenue Ruling was the agent of its injury. Further, Freedom Path argues its status as a 501(c)(4) organization could be threatened if the IRS determines that too many of its expenditures were for exempt functions rather than issue advocacy.
The problem we see with this argument is that the plaintiff is not arguing that the law in question is invalid because of how that directive affects its tax liability — which is the determination that is the purpose of the Revenue Ruling. Instead, Freedom Path's argument is that the IRS uses this Revenue Ruling for other purposes as well, and specifically as one of the tests for determining whether an applicant is entitled to recognition as a 501(c)(4) organization.
This argument leaves the facial terms of the Revenue Ruling behind and moves into the arena of an as-applied challenge. To find the unconstitutionality Freedom Path claims requires that we go beyond the language of the Revenue Ruling and analyze the way in which the IRS applies it beyond the text. On a facial challenge, however, we do not look beyond the text. See Washington State Grange v. Wash. State Republican Party, 552 U.S. 442, 449-50 (2008). We agree that “[a] ‘facial challenge’ to a statute considers only the text of the statute itself, not its application to the particular circumstances of an individual.” Field Day, LLC v. Cnty. of Suffolk, 463 F.3d 167, 174 (2d. Cir. 2006). The Revenue Ruling does not even facially apply to determinations of an organization's Section 501(c)(4) status. Instead, the purpose of the Revenue Ruling 2004-6 is to determine whether particular expenditures of funds by a 501(c)(4), 501(c)(5), or 501(c)(6) organization were for an exempt function “as described in [Section] 527(e)(2).” Rev. Rul. 2004-6, 2004-1 C.B. at 329.
We cannot conclude based on Freedom Path's arguments that its alleged injury of chilled speech is traceable to the text of Revenue Ruling 2004-6. Indeed, whatever vagueness it may have does not lead to uncertainty about the tax liability of organizations like Freedom Path when they have no investment income. That is because, as we earlier discussed, an organization is taxed under Section 527 for exempt function activity only to the extent the organization has net investment income. I.R.C. §527(f)(1). Freedom Path admittedly has no such income and no tax obligation.
Darryll K. Jones
Wednesday, November 28, 2018
In yesterday's NY Times, two physicians published a provocative op/ed regarding the inefficiency and regressivity of the charitable contribution deduction, particularly after the TCJA. Here are few excerpts:
We suspect that funding tuition at one expensive New York City medical school, constructing another cancer treatment center in a city already rich with them or building even more research capacity at one of the nation’s best-endowed universities is not at the top of most voters’ priority lists. It is, instead, mainly the very, very wealthy who pass on the costs of their causes. In 2016, half of all the tax dollars deducted as a result of charitable gifts in New York State were deducted by the top 0.5 percent of tax filers, who earned $1 million or more. The bottom 60 percent of tax filers were responsible for 5 percent. . . .
The wealthier the donor, the more taxpayers lose out. According to the Tax Policy Center, in 2017, a $1 donation from someone in the top 1 percent of earners reduced the government’s funds by 32 cents, while a $1 donation from someone in one of the bottom two income quintiles reduced it by less than 5 cents. This is because higher earners are in higher tax brackets, which means that giving them a pass on those taxes costs the country more. It is also because wealthy individuals often have appreciated stock that they can donate, which lets them avoid paying the capital gains taxes that they would otherwise owe if they cashed in on that stock themselves. Finally, you have to itemize deductions to get almost any reduction in taxes from giving. Nearly all wealthy people do so, but it’s rare among lower-income people. The new tax law will make it even rarer; the Tax Policy Center predicts that it will reduce the number of households that take the charitable deduction to 16 million from 37 million. Eliminating the tax deduction for charitable giving would not be politically viable. But we could limit it, either through lowering the cap on how much of a gift can be deducted or setting a flat percent of each donated dollar that can be used as a credit against one’s tax bill. We could also call on the philanthropists who are making these enormous contributions to voluntarily forgo the deduction. Many megawealthy individuals have followed Bill Gates's and Warren Buffett's lead and pledged to give away half of their accumulated wealth. Perhaps they could also pledge that through their funding of the causes they hold dear, they will neither reduce the ability of our government to fund its priorities, nor shift some of the cost of their gifts onto other taxpayers.
Friday, November 2, 2018
Brunson on Freedom from Religion Foundation's Challenge to Church Exemption from IRS Form 990 Filing
Sam Brunson (Loyola-Chicago) has posted NonBelief Relief and Form 990 on The Surly Subgroup. In this post he describes and analyzes the latest legal challenge from the Freedom from Religion Foundation to the tax benefits enjoyed by churches and other houses of worship. More specifically, this just-filed lawsuit claims that the exemption for such entities from the annual information return requirement applicable to almost all other entities that are exempt from federal income tax under section 501 of the Internal Revenue Code is a violation of the Establishment Clause of the Constitution. The vehicle for this challenge is a secular charity established by the Foundation, NonBelief Relief, that (presumably intentionally) failed to file a Form 990 for three consecutive years and so has now had its exemption revoked by the IRS. Cutting to the chase (see the post for more details), Brunson thinks there is a case here but that "it seems like Congress could enact an exemption like this to avoid the risk of impermissible entanglement" and the exemption is "at least a viable candidate" for a constitutionally permissible accommodation of religion.
Sixth Circuit Holds "Hobby Loss" Factors Can Help Determine if Money-Losing Nonmember Events are a Trade or Business
In Losantiville Country Club v. Commissioner, the U.S. Court of Appeals for the Sixth Circuit had to consider whether the U.S. Tax Court properly denied a section 501(c)(7) social club's attempt to apply losses from its nonmember events to offset its investment income and so avoid tax on that income. While the nonmember events had lost money during each of the 14 previous years (2002 to 2015), the Sixth Circuit held that the Tax Court had improperly treated that fact as conclusively establishing that those events did not constitute a trade or business. The Sixth Circuit instead held that the key issue is "intent to profit," for which profitability (or the lack thereof) is relevant but not determinative. Instead, the court looked to the factors listed in the "hobby loss" regulations under section 183 as providing relevant other considerations to the extent they applied to a tax-exempt nonprofit. Although normally this legal standard error would require remand, here the Sixth Circuit found that the factual record was complete and uncontested and so it could simply apply the correct legal standard to that record. When it did so, it found the lengthy history of losses combined with no evidence of attempts to stem those losses or of any other countervailing facts demonstrated a lack of the necessary profit motive. The Sixth Circuit also affirmed the imposition of the 20 percent accuracy-related penalty, finding no grounds for holding that the club relied on its accountants in a manner that was either objectively reasonable or in good faith.
The enactment of section 512(a)(6) (requiring siloing of unrelated trades or businesses in order to prevent use of losses from one such trade or business to offset income of another such trade or business) will make determination of whether a given, loss-generating activity is a trade or business less important in the future for tax-exempt organizations. Nevertheless, this decision may still be important to country clubs because Notice 2018-67 (see Section 7) asks for comments regarding how both nonmember activities and investment income for such clubs should be treated under that new section.
Bryan Camp (Texas Tech) has written a TaxProf Blog post commenting on an interesting case out of the U.S. Tax Court. In Wayne R. Felton and Deondra J. Felton v. Commissioner, the court concluded that funds given by parishioners directly to their minister were additional taxable compensation to him and not nontaxable gifts. It also found that penalties applied, given the failure of the taxpayers to show they acted with reasonable cause and in good faith. For more details, see Camp's detailed analysis.
Friday, September 28, 2018
According to the Center for Responsive Politics, one emerging issue for both the 2018 midterm elections and the Kavanaugh confirmation battle is the flow of funds from so-called "dark money" groups - generally tax-exempt nonprofits that are not required to publicly disclose their donors. This issue has also been in the news recently because of both recent action by the IRS and a couple of significant court decisions.
In July the IRS issued Revenue Procedure 2018-38, which dropped the requirement that section 501(c) organizations report the names and addresses of substantial contributors to the IRS. This reporting had been done on Schedule B to the annual Form 990, 990-EZ, or 990-PF, with the information only available to the IRS and not subject to public disclosure (unlike the rest of Form 990/990-EZ/990-PF). This change is effective for tax years ending on or after December 31, 2018. The reporting requirement still applies to section 501(c)(3) organizations, however, as for those organizations there is a statutory requirement (found in section 6033(b)(5)) of such reporting. The stated reason for the change was:
The IRS does not need personally identifiable information of donors to be reported on Schedule B of Form 990 or Form 990-EZ in order for it to carry out its responsibilities. The requirement to report such information increases compliance costs for some private parties, consumes IRS resources in connection with the redaction of such information, and poses a risk of inadvertent disclosure of information that is not open to public inspection.
Some commentators saw a political motive in the change, however, as it relieves politically active "dark money" nonprofits from having to disclose their substantial donors to the IRS. Coverage: NPR; Politico; ProPublica. And Montana Governor Steve Bullock sued to challenge the change, asserting that Treasury failed to follow required processes under the Administrative Procedure Act. Coverage: N.Y. Times.
Supporters of donor disclosure, particularly for politically active groups, were more successful in the courtroom recently. California Attorney General Xavier Becerra successfully appealed to the Ninth Circuit the granting of as applied challenges by the Thomas More Law Center and the Koch brothers-affiliated Americans for Prosperity Foundation that had exempted the Center and APF from the state requirement to provide an unredacted copy of its Schedule B to the Attorney General's office (but not for public disclosure). The Ninth Circuit in 2015 had rejected a facial challenge to this requirement. Of course with the above change by the IRS, only section 501(c)(3) organizations (such as the Center and APF) will have Schedule Bs to submit. Coverage: ABA Journal (collecting links to coverage by major news outlets).
Possibly of even greater consequence, the U.S. District Court in the District of Columbia in CREW v. FEC vacated a longstanding FEC regulation that had permitted organizations that are not political committee but make independent expenditures (defined as expenditures to pay for communications that expressly advocate the election or defeat of a federal candidate and which are not done in coordination with any federal candidate or political party) to avoid disclosure of their significant donors to the FEC as long as the donors had not earmarked their donation to support a particular, reported independent expenditure. The court reasoned that the relevant statute instead required such disclosure if the funds provided were for the purpose of supporting independent expenditures generally. The court stayed the vacator for 45 days from the date of the decision (August 3, 2018) to give the FEC time to issue an new, interim regulations, although it is far from clear the FEC can or will do so in that time period. Attempts to obtain a further stay of the District Court's order from the Supreme Court failed, however, leaving it somewhat uncertain what rules would apply to groups making such independent expenditure in the run-up to the 2018 general election. Coverage: The Atlantic; Politico. According to Election Law expert Rick Hasen, the ruling may not have as dramatic an effect as some seem to think, however.
Tuesday, July 3, 2018
I previously blogged about the lawsuit by the Pearson Family Members Foundation and Thomas L. Pearson against the University of Chicago relating the University's alleged failure to abide by the terms of a grant agreement for the creation and funding of The Pearson Institute for the Study and Resolution of Global Conflicts and The Pearson Global Forum. The United District Court for the Northern District of Oklahoma has now ruled on the University's motion to dismiss. Applying New York law, as required by the agreement, the court granted the motion with respect to a fiduciary duty claim because a fiduciary relationship did not exist between the grantor and the grantee and with respect to a fraudulent concealment claim because it was superseded by a breach of contract claim. The court did, however, allow not only the breach of contract claim but also a breach of duty of good faith and fair dealing claim and an anticipatory retaliation claim to proceed. Stay tuned for further developments.