Thursday, July 2, 2020

Espinoza and Scholarship Tax Credits

On Tuesday, the Supreme Court released a second opinion of interest to the nonprofit world. In Espinoza, the Court looked at the constitutionality of excluding private religious schools from a scholarship program.

Broadly speaking, the scholarship program worked like this: the state created a tax credit for donations to “student scholarship organizations.” A to qualify as a student scholarship organization, an organization must be exempt under section 501(c)(3) of the Code, must allocate 90% of its annual revenue to scholarships, and those scholarships couldn’t be limited to a single school. Student scholarship organizations also have to comply with certain reporting and audit requirements. The scholarships are meant to help pay for grade school—they can only be given to students who are at least 5, but not older than 18.

Scholarship money must be paid directly to the school; it’s the school’s job to inform parents that their child received a scholarship.

So far, so good, right? This is a scholarship program administered by private nonprofit entities, so there’s no state action to invoke the Constitution. But it’s the next step that implicates constitutional questions: the state provided a dollar-for-dollar tax credit to Montanans who donated to student scholarship organizations, for a credit of up to $150. (Note that, to get the tax credit, the donor can’t designate the parent or private school that will receive scholarship assistance.)

And that intersected with Montana’s Blaine Amendment. The Montana constitution prohibits “any direct or indirect appropriation or payment from any public fund or monies… to aid any church, school, academy, seminary, college, university, or other literary or scientific institution, controlled in whole or in part by any church, sect, or denomination.” Believing that a tax credit represented indirect aid to schools that received scholarship money, the Montana Department of Revenue promulgated a rule that religious schools were not “qualified education providers,” eligible to receive these scholarship funds. The Montana Supreme Court ultimately agreed that the scholarship program violated the state constitution and invalidated the whole scholarship program.

Continue reading

July 2, 2020 in Federal – Judicial | Permalink | Comments (0)

Wednesday, July 1, 2020

Agency for International Development and Corporate Separateness

This week, the Supreme Court released a couple opinions of interest in the nonprofit world. The first was Agency for International Development. 

Background on the case: in 2003, Congress allocated billions of dollars to U.S. and foreign NGOs to combat HIV/AIDS abroad. That money was conditioned, however, on an organization having an explicit policy opposing prostitution and sex trafficking.

Some organizations that would otherwise qualify for these grants have found that a neutral stance toward prostitution is more helpful in their work, and oppose the policy requirement. Some U.S. NGOs filed suit and, in 2013, the Supreme Court held that the requiring that an organization have an explicit policy against prostitution to qualify for grant money violated the First Amendment. As a result, U.S. NGOs do not have to have an explicit policy opposing prostitution and sex trafficking.

But that left foreign NGOs. And it's worth noting that at least some of the foreign NGOs pursing this grant money are affiliated with U.S. NGOs that aren't subject to the policy requirement

In Agency for International Development, the Supreme Court held that the policy requirement is valid with respect to non-U.S. organizations. It based that conclusion on two grounds:

Continue reading

July 1, 2020 in Current Affairs, Federal – Judicial | Permalink | Comments (0)

Friday, June 12, 2020

State Enforcement Efforts and Federal Charitable Contribution Cases

Cropped-Black-and-Tan DownloadOne helpful service that government agencies can provide is issuing reports summarizing their activities, saving researchers and practitioners the work of gathering such information piecemeal based on reviewing every pronouncement and ruling that is issued. Two recently issued summaries relating to nonprofit law are particularly helpful in this regard, one relating to state enforcement efforts and the other to federal charitable contribution deduction disputes.

First, the National Association of State Charity Officials (NASCO) has issued a report detailing the activities of state officials with respect to charities from January 2019 to March 2020. From the introduction:

The contents of this report are a representative sample of cases and other initiatives from January 2019 to March 2020 in the areas of: I. Deceptive Solicitation; II. Governance and Breach of Fiduciary Duties; III. Trust & Estate Issues; IV. Health Care; and V. Other, including Registration, Legislation, and Guidance. Descriptions were provided by the relevant state, and questions regarding particular cases should be directed to that state. Contact information for state regulators can be found at www.nasconet.org.

Second, the Office of Chief Counsel, Internal Revenue Service has released an internal memorandum (CCA 202020002) that summarizes the issues and holdings in 121 federal court decisions from 2012 through mid-April 2020 relating to the charitable contribution deduction under Internal Revenue Code Section 170.

Lloyd Mayer

June 12, 2020 in Federal – Executive, Federal – Judicial, State – Executive | Permalink | Comments (0)

The NCAA, Antitrust, and Paying Student-Athletes for Use of Names, Images, and Likenesses

DownloadThere have been two recent major developments with respect to the NCAA and student-athletes.

First, the NCAA's Board of Governors announced that it supports "rule changes to allow student-athletes to receive compensation for third-party endorsements both related to and separate from athletics" and directed its divisions to begin developing such rules. This change in position is driven primarily by state and federal legislative efforts (see for example, this recently enacted California law)  to require the NCAA to permit such compensation. At the same time, the Board stated that any such rules must follow certain guidelines, specifically:

  • Ensuring student-athletes are treated similarly to nonathlete students unless a compelling reason exists to differentiate. 
  • Maintaining the priorities of education and the collegiate experience to provide opportunities for student-athlete success. 
  • Ensuring rules are transparent, focused and enforceable, and facilitating fair and balanced competition. 
  • Making clear the distinction between collegiate and professional opportunities. 
  • Making clear that compensation for athletics performance or participation is impermissible. 
  • Reaffirming that student-athletes are students first and not employees of the university. 
  • Enhancing principles of diversity, inclusion and gender equity. 
  • Protecting the recruiting environment and prohibiting inducements to select, remain at or transfer to a specific institution.

Second, the NCAA lost its appeal of a federal district court decision that enjoined the NCAA from enforcing its rules restricting the education-related benefits its members may offer students who play Football Bowl Subdivision football and Division 1 basketball. In In re NCAA Grant-in-Aid Cap Antitrust Litigation, the U.S. Court of Appeals for the Ninth Circuit held that the rules were unlawful restraints on trade under section 1 of the Sherman Act (15 U.S.C. section 1). This decision follows the NCAA's previous loss at the Ninth Circuit in O'Bannon v. NCAA, 802 F.3d 1049 (2015).

What exactly this developments will mean for student-athletes, college athletics, and the NCAA remains to be seen. For more coverage, see Marc Edelman at Forbes, Politico, Sports Illustrated, and The Wall Street Journal.

Lloyd Mayer

June 12, 2020 in Federal – Judicial, In the News, Sports | Permalink | Comments (0)

Friday, April 24, 2020

The Paycheck Protection Program and Faith-Based Organizations

I'm going to end the week where I started it: with the Paycheck Protection Program.

Remember, the CARES Act created the PPP, which expands the SBA's loan program. Under the PPP the government can make or guarantee forgivable loans to small businesses--and, in an expansion or its previous mandate, small nonprofit organizations--provided those organizations use the funds for permissible purposes, including critically, for compensation.

The president signed the CARES Act into law on March 27. One week later, the SBA issued a FAQ dealing with the PPP and faith-based organizations. In essence, the FAQ clarified that the PPP was available to faith-based organizations under essentially the same terms as it was to any other nonprofit. That is, as long as the faith-based organization met the size limitations and used the money for purposes, it could participate in the PPP.

(It turns out that the SBA differentiated faith-based organizations from other nonprofits in one critical manner: while the law applies the same affiliation rules to nonprofits as it does to for-profit borrowers, the SBA announced that it will not look at the relationship between faith-based organizations where that relationship is based on religious teachings or other religious commitments. In regulations, the SBA went on to explain that applying the affiliation rules to religions that had doctrinal reasons for affiliating would impose a substantial burden on the organizations' free exercise, raising First Amendment and RFRA questions. Thus, the SBA said, it would take faith-based organizations at their word if they claimed their affiliation was based on religious requirements.)Ariz

Interestingly, in its April 3 FAQ, the SBA explicitly states that "loans under the program can be used to pay the salaries of ministers and other staff engaged in the religious mission of institutions" (emphasis mine).

Continue reading

April 24, 2020 in Current Affairs, Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (0)

Saturday, April 18, 2020

IRS Guidance for Syndicated Conservation Easement Exams (and Another Federal Appellate Court Victory)

Https___blogs-images.forbes.com_kellyphillipserb_files_2016_11_IRSLate last month the IRS publicly released an Interim Guidance Memorandum for Syndicated Conservation Easement Examinations.  The memo focuses on how IRS Small-Business/Self-Employed Division and Large Business and International Division employees working on such examinations should handle situations where the statute of limitations has less than eight months left to run.  Hat tip: EO Tax Journal.

And just last week, the IRS had another court victory in a qualified conservation contribution deduction case, this time in the U.S. Court of Appeals for the Sixth Circuit. In Hoffman Properties II, LP v. Commissioner, the court upheld the disallowance of a $15 million claimed deduction because the contributor retained certain rights that allowed it to make changes to the facade and airspace at issue unless the recipient of the donation objected within 45 days. The court found that this provision meant the "perpetuity" requirement for a deductible contribution was violated and so the deduction failed. 

Lloyd Mayer

April 18, 2020 in Federal – Executive, Federal – Judicial | Permalink | Comments (0)

IRS Settles with Panera Bread Foundation - Agrees to 501(c)(3) Status

DownloadA year ago, two posts by Professor Darryll K. Jones appeared in this space criticizing the decision by the IRS to revoke the tax-exempt status of the Panera Bread Foundation. One post focused on the commerciality doctrine, the other focused on private benefit. No sign if IRS officials read those posts, but late last month the IRS signed a stipulated decision in the Foundation's Tax Court declaratory judgment action, agreeing that the Foundation qualified as an organization described in Internal Revenue Code section 501(c)(3). Alas, the stipulated decision also reveals that the Panera Cares Cafes ceased to operate in February 2019 and the Foundation does not intend to renew their operations. It is not clear to what the extent that fact drove the IRS' decision to enter into the agreement, given that it was the operation of the Cafes that fueled the IRS' concerns.

Hat tip: Russell Willis

Lloyd Mayer

April 18, 2020 in Federal – Executive, Federal – Judicial | Permalink | Comments (0)

Friday, February 7, 2020

The Costs and Benefits of Being a Tax-Exempt Church

114281There 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.

Lloyd Mayer

February 7, 2020 in Federal – Judicial, In the News | Permalink | Comments (0)

Wednesday, February 5, 2020

IRS is Winning the Conservation Easement War - Or Is It?

DownloadAnother 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.

Lloyd Mayer

February 5, 2020 in Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (0)

Wednesday, November 27, 2019

Reports, Articles, and Litigation on Charitable Contributions

The past  couple of months have been a busy time for reports, articles, and litigation relating to charitable contributions. 

Download (2)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.)

EakadeWith 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."


ImageWith 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.

Lloyd Mayer

November 27, 2019 in Federal – Judicial, In the News, Publications – Articles | Permalink | Comments (0)

Litigation Update: NY Disclosure Law Struck Down; Challenge to Church Form 990 Exemption Dismissed

Download (1)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.

Lloyd Mayer

November 27, 2019 in Federal – Judicial, In the News | Permalink | Comments (0)

Thursday, September 26, 2019

Courts Dismiss Two Lawsuits Brought By SPLC-Designated Hate Groups

DownloadWhile 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.

Coverage: AL.com; South Florida Sun Sentinel.

Lloyd Mayer

September 26, 2019 in Federal – Judicial, In the News, Religion | Permalink | Comments (0)

Monday, July 22, 2019

The Parsonage Allowance: Back to Court(?)

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

July 22, 2019 in Church and State, Federal – Judicial, Religion | Permalink | Comments (0)

Thursday, June 20, 2019

SCOTUS: Nonprofits, State Action, and the First Amendment

Supreme CourtIn 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. 

Additional Coverage: PrawfsBlawg; SCOTUSblog.

Lloyd Mayer 

June 20, 2019 in Federal – Judicial | Permalink | Comments (1)

Friday, May 17, 2019

Charitable Contribution Cases: An Alleged $151 Million Conservation Easement; Tens of Millions in Bogus Contributions

6a00d8341bfae553ef01b7c9166523970b-320wiTwo recent cases highlight ongoing issues with the federal charitable contribution deduction.

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.

Lloyd Mayer

 

May 17, 2019 in Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (0)

Thursday, May 16, 2019

Donor Disclosure Update: New NJ Rule; Veto of NJ Proposed Statute; 9th Circuit Divided

DownloadNew 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.

Lloyd Mayer

 

May 16, 2019 in Federal – Executive, Federal – Judicial, State – Executive, State – Legislative | Permalink | Comments (0)

Wednesday, May 15, 2019

Other Nonprofit Scandals You May Have Missed: $37 Million Class Action Settlement; "Sham" Police Charities

Download 2In 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. 

Lloyd Mayer 

May 15, 2019 in Federal – Executive, Federal – Judicial, In the News, State – Executive | Permalink | Comments (0)

Thursday, March 28, 2019

Church Tax Benefits: Does 7th Circuit Ruling on Cash Parsonage Allowance Exclusion Protect Other Church-Specific Benefits?

ImagesIn 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).

Lloyd Mayer

March 28, 2019 in Federal – Judicial, In the News, Religion | Permalink | Comments (0)

Thursday, January 31, 2019

Partnership Not Entitled to Charitable Contribution Deduction for Two of Three Easements, Conservation Purpose Not Protected in Perpetuity

Conservation easement
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

January 31, 2019 in Federal – Judicial | Permalink | Comments (0)

Monday, January 28, 2019

Denying Tax-Exempt Status to Discriminatory Private Adoption Agencies

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 )

Nicholas Mirkay

January 28, 2019 in Federal – Executive, Federal – Judicial, Publications – Articles, Religion | Permalink | Comments (1)