Friday, November 20, 2020
There is some much continuing activity relating to to conservation easements that it is difficult to keep track of everything. Fortunately, fellow blogger Nancy McLaughlin (Utah) has recently updated her comprehensive summary of court decisions, Trying Times: Conservation Easements and Federal Tax law (Sept. 2020). It undoubtedly will need to be updated for many years, as just last month taxpayers filed at least 27 Tax Court petitions relating to claimed conservation easement deductions according to Tax Notes (subscription required).
The Department of Justice has also provided more information in its lawsuit against promoters of syndicated conservation easements, including identifying 42 additional such deals, again according to Tax Notes. The Internal Revenue Service this week issued a memo emphasizing the use of summons and summons enforcement in syndicated conservation easement cases, among others, and Chief Counsel recently issued a Notice providing further guidance about the settlement of such cases. Finally, Senators Grassley, Daines, and Roberts recently reintroduced the Charitable Conservation Easement Program Integrity Act targeting abusive conservation easement arrangements.
Additional Coverage: Washington Post ("Wealth investors seem to be exploiting land-conservation breaks, and the Senate is taking notice").
Tuesday, November 17, 2020
With the fading but still heated allegations about the 2020 election came at least two legal issues for Internal Revenue Code section 501(c)(3) charities seeking to be involved in the post-election litigation. One issue is to what extent charities can be involved in that litigation and related public debate without engaging in political campaign intervention. The Bolder Advocacy Program at the Aliiance for Justice provides helpful guidance on this point. But the other, perhaps more surprising issue, was whether 501(c)(3) Project Veritas may have put its tax-exempt status at risk during its attempts to find evidence of voter fraud. Fellow blogger Sam Brunson unpacks this issue over at The Surly Subgroup, concluding that if Project Veritas broke the law by helping and encouraging perjury by a Pennsylvania postal worker it may indeed have placed its tax-exempt status at risk.
But the bigger issue for most nonprofits is how the election may directly affect them or the positions they support. Before the election, the Chronicle of Philanthropy noted that the announced Biden tax plan "would steer aid to the poor but could deter some wealthy donors from giving." And in the wake of the election, the Chronicle of Philanthropy has collected a roundup of stories about how it is likely to affect philanthropy more generally. The consensus appears to be that incremental change is likely, with charities supporting more progressive policies cautiously optimistic but expecting a lot of hard work ahead.
UPDATE: The Chronicle of Philanthropy also just published an article with this headline: "Biden Transition Team Signals Big Role for Nonprofits Throughout Government." While that article is behind a paywall, the NonProfit Times has a list of over 40 nonprofit leaders that are among the 257 members of Biden's Agency Review Teams.
Monday, November 2, 2020
Surprising no one, there is a flurry of litigation in federal and state courts right now seeking various remedies regarding the right to vote. While some of these challenges are brought by political parties or candidates or individual voters, many of these challenges are brought by nonpartisan nonprofits asserting standing on their own behalf and/or their members to challenge state laws that impede ballot access. Drawn from the SCOTUSBlog Election Litigation Tracker, meet some of the nonprofit litigants shaping election litigation in the courts, and the interests that they represent (below the break).
Thursday, October 29, 2020
Further troubles continue to rain down upon the heads of the top authorities at the National Rifle Association. Earlier this month it was announced that the Internal Revenue Service is investigating the possibility of bringing criminal charges against Wayne LaPierre, the executive vice president of the organization since 1991. Given the extent of the civil charges brought against the organization and its leaders by New York Attorney General Letitia James, which have been discussed in this blog in several prior posts, it is perhaps unsurprising that criminal prosecution might follow.
The Wall Street Journal, which reported this development at the beginning of October, states that the IRS is investigating LaPierre in particular (as opposed to the NRA at large) for potential tax fraud. Possibly the agency is investigating LaPierre’s taxes for activities entirely outside his decades-long role as an executive for the powerful nonprofit: however, given the proximity of this news in relation to Attorney General James’ attempt to entirely dissolve the NRA for its alleged shady business dealings, the possibility seems remote. LaPierre was unquestionably a central piece in the high-level decision making of the large 501(c)(3) organization, and the New York Attorney General called LaPierre out by name when she brought suit. It would seem that the civil suit seeking its dissolution is only the beginning for the NRA, and whether leaders within its network besides LaPierre will draw the Internal Revenue Service’s ire remains to be seen.
For a discussion of the Wall Street Journal piece and the underlying facts, see this article by Nonprofit Quarterly.
David Brennen, Professor at the University of Kentucky College of Law
Monday, October 19, 2020
Figured readers would be interested in this look by Brian Mittendorf at the implications for Donor Advised Funds of Fairbairn v. Fidelity that appears in HistPhil.org.
"One way the concern that commercial DAFs are donor-centric arises is in the competition between sponsoring organizations. The lawsuit alleges that Fidelity Charitable differentiated itself from other charitable options by its “superior ability to handle complex assets,” even stating in correspondence about the possibility of receiving a gift of one particular type of asset that “Vanguard can’t do this but we do it frequently.” The general public may think of competition among charities as focusing on who can best put gifts to charitable use. It turns out this is an antiquated notion: the intense competition centering on seamlessly receiving and converting complex assets for donors presents a stark contrast.
A related issue is that DAFs increasingly are vehicles that provide disposal options to donors for illiquid assets. In the Fairbairn case, the assets donated were technically liquid (they were publicly traded) but the size of the donation would threaten share price if it were a sale instead of a donation, an eventuality that formed the basis for the lawsuit. However, donating such assets permits a tax deduction for the value, even though an outright sale at that value would be problematic. "
And, "A final issue that surfaces in the Fairbairn case is that some DAF sponsors may implicitly or even explicitly be beholden to their commercial affiliates. Legally speaking, Fidelity Charitable is a distinct entity from Fidelity Investments; as is the case for Vanguard Charitable and Vanguard; and so on. Yet, the shared names and logos underscore a nontrivial affiliation. Critics have argued that the commercial DAFs invest funds heavily in their affiliated investment companies and, as such, generate substantial fees for them. This, in turn, could create incentives to retain funds in investments rather than distribute them to charitable endeavors. The allegations in the Fairbairn case are consistent with this fear."
Saturday, September 19, 2020
First, in CREW v. FEC the U.S. Court of Appeals for the D.C. Circuit affirmed a district court decision that struck down the FEC's narrow interpretation of a statute relating to public disclosure of contributor information when the recipient organization makes independent expenditures, as defined by federal election law. The FEC had taken the position that the statute only required disclosure if a contribution was earmarked to support a particular independent expenditure. The court concluded that this position contradicted the plain terms of the statute, which at a minimum required disclosure if a contribution was made to generally support independent expenditures. However, the court did not resolve whether the statute could be interpreted by the FEC to only require disclosure of contributions with this general intent or instead required disclosure of all contributions (above a modest threshold set by the statute) given to an organization that makes independent expenditures. For further analysis, see the FEC summary. For coverage, see Politico. This ruling may be especially important as the use of so-called dark money increases on both sides of the aisle.
Second, the states of New Jersey and New York quietly ended their lawsuit against the Department of Treasury seeking documents relating to the Revenue Procedure (2018-38), which initially eliminated reporting of information about significant contributors to the IRS for tax-exempt organizations other than section 501(c)(3) and 527s. That Revenue Procedure was struck down by a federal district court and eventually replaced by regulations. According to Tax Notes, the parties filed a stipulation of voluntary dismissal that provides the states are satisfied Treasury and the IRS have produced the documents requested.
Third and finally, the Washington Post reports the FEC Chairman said during an interview earlier this week that a 2017 executive order freed churches to endorse political candidates. This was in the context of criticizing Catholic church leaders for admonishing priests who appear to do exactly that. He apparently acknowledged that the so-called Johnson Amendment, which prohibits section 501(c)(3) organizations, including churches, from supporting or opposing any candidate for elected office, is still good law, but asserted that it was unlikely to be enforced. Regardless of your views regarding the wisdom or even constitutionality of the Johnson Amendment, it is a bit shocking to hear a public official and lawyer say it is okay to break the law because it probably won't be enforced against you. (Not to mention the executive order he relies upon does not actually prohibit such enforcement.)
Thursday, September 17, 2020
DAF Donor Prevails: In Dickinson v. Commissioner, the Tax Court rejected an attempt by the IRS to recharacterize donations of appreciated stock in a privately-held company to a donor-advised fund followed by the redemption of that stock as a redemption of the stock from the donor followed by donations of the proceeds (resulting in taxable gain to the donors). The Tax Court granted summary judgment to the donor (and his spouse), and denied the government's motion for summary judgment, even though the donor and the board of directors of the privately-held company knew at the time the board authorized each donation that the DAF sponsoring organization (the Fidelity Investments Charitable Gift Fund) had procedures requiring the immediate liquidation of donated stock.
The court found that the uncontradicted evidence established that the donor had transferred all of his legal rights in the donated stock to the sponsoring organization. The court further held that the donor was not obligated to redeem the donated stock if the donations had not occurred, and also that the government did not allege that the donor had a right to redemption at the time of donation and so Revenue Ruling 78-197 was not applicable even if the court were to follow it. It therefore concluded that the form of the transaction controlled. For a detailed analysis of the case by Bryan Camp (Texas Tech School of Law), see this TaxProf Blog post.
Charitable Class Failure?: In The Korean-American Senior Mutual Association v. Commissioner, the Tax Court upheld the revocation of tax-exempt status under Internal Revenue Code section 501(c)(3) for failure to operate exclusively for exempt purposes. The organization (KASMA) offered paid memberships to anyone who was 55 to 90 years old residing in the New Your City area and in return paid a certain amount toward the member's funeral expenses when they died, along with a separate amount directly to the deceased's family according to a Korean tradition. Membership in the organization was not limited to Korean-Americans, despite its name.
The court concluded that while KASMA was formed to benefit the elderly, the elderly are not a recognized charitable class unless aid to them is designed for their special needs by, for example, providing goods or services at substantially below cost or without regard to an individual's ability to pay. Since KASMA only provided benefits to its dues-paying members, it did not satisfy this requirement or serve the distinct charitable class of the poor. This is an interesting analysis, since it would seem that the elderly (even limited to the NYC area) are an indefinite and large enough group to be considered a charitable class, so the lesson here is more along the lines that serving a charitable class by itself is not always sufficient to constitute operating to further a charitable purpose. The court also held that KASMA operated in a commercial manner and did not serve a public interest because it primarily benefited its members, and that the IRS was not equitably estopped from revoking KASMA's tax-exempt status because of the IRS' previous recognition of that status when KASMA first applied. The revocation was prospective from the date that the IRS Appeals Office issued a final adverse determination.
Wednesday, August 26, 2020
The 11th Circuit recently ruled on a case which might prove relevant on a far larger scale. On July 7th this summer, Judge William Thomas held that the Opa-Locka Community Development Corporation’s (Opa-Locka) right of first refusal could be exercised against the attempted sale of Aswan Village, an affordable housing project that Opa-Locka financed as a nonprofit corporation. The controversy of the case revolved primarily around whether an affiliate of HallKeen Management, the owner of Aswan Village, triggered Opa-Locka’s right of first refusal and thus had to allow Opa-Locka to purchase the housing project at well-below fair market value by sending a letter to Opa-Locka indicating their intent to sell Aswan Village to a third party. Under IRC 42(i)(7) of the United States Code, a qualified nonprofit corporation such as Opa-Locka can automatically insert itself into the sale of an affordable housing project ahead of other interested buyers. The 11th Circuit held that, absent more specific language in Opa-Locka’s contract containing its right of first refusal for Aswan Village, HallKeen’s indication of its intent to sell via a letter was sufficient to trigger Opa-Locka’s right of first refusal.
The immediate case is interwoven into a far broader national tapestry: demand for affordable housing options is high, and the availability of that housing could come under threat as for-profit companies seek to capitalize on market values for these areas which have risen steadily higher. Whether the 11th Circuit’s stance strongly favoring nonprofit corporations’ defense of these low or fixed income housing areas will stand remains to be seen, as the firm representing HallKeen filed a motion in Miami-Dade circuit court at the end of July to have the order set aside.
For information on the case and its potential broader implications, see: https://www.prnewswire.com/news-releases/local-court-win-is-a-victory-for-affordable-housing-communities-nationwide-301091845.html
By David A. Brennen, Professor of Law at the University of Kentucky
Tuesday, August 25, 2020
On August 6th, New York attorney general Letitia James filed suit to dissolve the National Rifle Association, a powerful nonprofit quartered in New York. A 501(c)(4) tax-exempt organization, the NRA has stood for the protection of American second amendment rights since 1871: today, its leadership stands accused of seriously abusing organizational coffers and fraudulently concealing their actions. Attorney general James alleges in her complaint that the NRA at large instituted a culture of backroom dealing and illegal behavior which has resulted in the complete waste of millions of dollars in assets. As a tax-exempt charitable corporation, the NRA is required to use its resources to serve its members’ interests and advance its mission. James further asserts that the NRA’s internal policing mechanisms and boards routinely failed to put a stop to this illegal behavior, which is part of the reason why the attorney general now calls for complete dissolution of the organization.
In addition to attacking the organization at large, attorney general James lists in her complaint four individuals in the NRA’s leadership: the organization’s executive vice president, former treasurer/CFO, former chief of staff, and general counsel. James’ complaint includes an impressive amount of evidence indicating that these men channeled colossal sums of NRA resources into lavishing benefits on themselves and those closest to them. If successful, the attorney general’s suit will serve as a powerful reminder that no nonprofit organization, no matter how venerable its history may be, is above the fiduciary duties it owes to its members or its reporting duties to federal and state governments alike.
By David A. Brennen, Professor of Law at the University of Kentucky
For the attorney general's press release see:
The IRS hinted in June at further modifying an excise tax on highly-compensated employees of for-profit companies who also volunteer a portion of their time for nonprofit organizations. Section 4960, added to the Code in late 2017, imposed a significant tax on excess compensation to the five highest-paid officers of a nonprofit organization. Interpretation of this statute became the subject of debate in 2019 with the IRS’ release of 2019-04 I.R.B. 403 - a guidance on how to calculate taxes or liability under §4960. In that guidance, the IRS stated that the for-profit business employing an executive officer who also volunteers with or works for a tax-exempt business could be liable for the excise tax if the for-profit and tax-exempt businesses were deemed “related.” Following concerns voiced by commenters, the IRS proposed on June 11th of this year a possible exception to the definition of the five highest-paid employees of a tax-exempt organization. The §4960 exception applies if someone working with a tax-exempt organization works a number of hours no more than 10% of their total hours worked with related organizations that year and isn’t paid for their work with the tax-exempt organization. It appears that the IRS heeded industry concerns. Indeed, if for-profit companies don’t fear being held liable for an unexpected excise tax, then those for-profit companies will be more likely to allow their highly compensated employees’ dedicate spare time lending their valuable skills to tax-exempt organizations.
For the IRS' published proposal regarding this rule, see: https://www.federalregister.gov/documents/2020/06/11/2020-11859/tax-on-excess-tax-exempt-organization-executive-compensation
By David A. Brennen, Professor of Law at the University of Kentucky
Tuesday, August 18, 2020
A few weeks ago a federal grand jury indicted the Speaker of the House of Representatives of the State of Ohio, Larry Householder, along with 4 other individuals and a social welfare organization called Generation Now, exempt under section 501(c)(4) of the Internal Revenue Code, for engaging in a bribery scheme to pass legislation regarding nuclear energy that was worth about $1 billion. It involved approximately $60 million in bribes.
I was not blogging at the time, so writing this up after the announcement, but in my opinion this was a major indictment of the decision of the IRS to eliminate donor disclosure for dark money organizations like 501(c)(4) and (6) organizations. Disclosure of these dollars that the indictment alleges to be bribes could have very well alerted the IRS to a potentially problematic scheme. Additionally, there would have been the potential of asserting a false statement on the Form 990 filed by the social welfare organization.
The evidence is particularly indicative that unscrupulous folk may see dark money organizations as an easy method of laundering money now: "In March 2017, Householder began receiving quarterly $250,000 payments from the related-energy companies into the bank account of Generation Now. The defendants allegedly spent millions of the company’s dollars to support Householder’s political bid to become Speaker, to support House candidates they believed would back Householder, and for their own personal benefit. When asked how much money was in Generation Now, Clark said, “it’s unlimited.”"
In the Criminal Complaint, U.S. v. Matthew Borges, Case No. 1:20-MJ-00526 (July 16, 2020) on page 15 there is the following evidence: “Clark discussed with Householder, the use of a 501(c)(4), controlled by Householder, to receive payments: “what’s interesting is that there’s a newer solution that didn’t occur in, 13 years ago, is that they can give as much or more to the (c)(4) and nobody would ever know. So you don’t have to be afraid of anyone because there’s a mechanism to change it.”
This one is worth following and contemplating as we conceive of better policy to govern our nonprofit tax exempt sector.
By: Philip Hackney
Thursday, July 2, 2020
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.
Wednesday, July 1, 2020
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:
Friday, June 12, 2020
One 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.
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.
Friday, April 24, 2020
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).
Saturday, April 18, 2020
IRS Guidance for Syndicated Conservation Easement Exams (and Another Federal Appellate Court Victory)
Late 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.
A 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
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.