Nonprofit Law Prof Blog

AALS 2025 Programming

Greetings from SF! While there isn't much on tap for Nonprofit Law Profs at this year's AALS Annual meeting, the Section on Taxation has two fabulous programs planned, the earlier of which I want to highlight in this post.

On Friday (from 4:30 - 6:00 pm PT), the Section holds its main program, "The Expiration of the TCJA and the Future of Tax Policy." Here's the summary of the program:

"As the expiration of several provisions of the TCJA looms and as a new administration takes over, there is a potential for significant tax policy changes in the coming years. The experts on this panel will bring their experience in government, studying the history of tax law, and their years of work as scholars of tax to help us think through what might be coming in the world of federal tax policy."

The panelists include: 

• Kimberly Clausing (UCLA)
• Christopher H. Hanna (SMU)
• Ajay K. Mehrotra (Northwestern)
• Phyllis C. Taite (Oklahoma)

It promises to be an essential discussion in a critical year for tax. Don't miss it!

 

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law

HR 9495: The Good, the Bad?, and the (Potential) Ugly

Previously in this space fellow blogger Darryll Jones has covered contentious bill H.R. 9495, which has now passed the House of Representatives. Setting aside the provisions not relating specifically to tax-exempt organizations, H.R. 9495 (section 4) would amend Internal Revenue Code section 501(p). Currently section 501(p) suspends the tax-exempt status and eligibility to receive tax deductible contributions for an organization described in paragraph two of that section, which are organizations designated or individually identified under several federal laws or an Executive Order as a terrorist organization, an organization subject to sanctions relating to terrorism, or otherwise supporting or engaging in terrorism or terrorist activity. The section also currently denies an affected organization the right to bring any any administrative or judicial challenge to the suspension. The legislation would add a new paragraph extending section 501(p) to "terrorist supporting organizations," subject to certain procedural requirements and the ability to challenge designation as a terrorist supporting organization in federal district court.

The Good. As Darryll pointed out in his post, the new paragraph has procedural protections for affected organizations that are sorely lacking from existing section 501(p). Those protections include a notice requirement prior to the designation, a 90-day period from the mailing of the notice for the organization to challenge the proposed designation either as incorrect or as corrected with a commitment not to provide further support or resources to organizations described in paragraph two of section 501(p), administrative review of any designation by the IRS Independent Office of Appeals, and the ability to seek review in federal district court. While these procedural rules do not extend to the rest of section 501(p), they are a welcome protection for organizations subject to designation under the proposed new paragraph.

The Bad? As good as the procedural provisions are, there may be serious issues raised by the substantive rule that brings an organization within the reach of the new paragraph. The paragraph defines as terrorist supporting organization as "any organization which is designated by the Secretary as having provided, during the 3-year period ending on the date of such designation, material support or resources (within the meaning of section 2339B of title 18, United States Code) to an organization described in paragraph (2) (determined after the application of this paragraph to such organization) in excess of a de minimis amount." Three aspects of this rule raise concerns:

• The three-year look-back, especially since it appears to include support provided to a group that at the time of the provision of the support was not described in paragraph two but subsequently came to be so described.

• The incorporation of 18 U.S.C. 2339B, which in turn incorporates the definition of "material support or resources" from 18 U.S.C. 2339A.  That latter provision defines this term broadly to include "any property, tangible or intangible, or service, including currency or monetary instruments or financial securities, financial services, lodging, training, expert advice or assistance, safehouses, false documentation or identification, communications equipment, facilities, weapons, lethal substances, explosives, personnel (1 or more individuals who may be or include oneself), and transportation, except medicine or religious materials." 

• Unlike the two above criminal statutes, there is no requirement in the proposed new paragraph of section 501(p) that the material support or resources be provided "knowingly" (section 2339A(a)) or "knowing or intending" (section 2339B(a)) it would be used to violate certain federal criminal laws.

My understanding is that critics have also raised concerns that if Organization A provides support - say a grant - to Organization B that in turn independently provides support (without using any of the support provided by Organization A to do so) to Organization C and it then turns out that Organization C is described in paragraph two, Organization A will fall afoul of the new paragraph, and that this chaining effect could extend to an indefinite number of organizations. I have not, however, been able to confirm that this is the case or how the above criminal statutes interpret material support or resources in this respect. (For more about those statutes, see this recent Congressional Research Service report.)

The (Potential) Ugly. My understanding is that perhaps the greatest concern critics have raised is that the designation under this new paragraph is no longer with other agencies that specialize in terrorism investigations (or the President via Executive Order) but instead with the Secretary of the Treasury. While I am not familiar enough with the designation processes listed in current section 501(p)(2) and so how politicized they are or could be, the concern with this new designation power appears to be that the Secretary is a politically appointee who could - either directly or through reliance on a politically motivated underling - target the new designation against politically disfavored tax-exempt organizations. And while the procedural provisions described above are available to try to prevent or challenge any incorrect designation, invoking them of course can be costly and time consuming process, which many tax-exempt organizations may not realistically be able to afford. 

The bottom line is that the legislation raises many questions that do not appear to have been addressed much if at all in the run-up to the House's passage. Hopefully therefore the Senate will not take up the bill but instead leave it to the next Congress, perhaps with more deliberation, to consider.

Lloyd Mayer

 

Musk Seeks Injunction Against OpenAI(c)(3) Sale to PBC

We've followed OpenAI (c)(3) at least since it announced a joint venture with Microsoft.  Not just because the people involved are wealthy nerd celebrities.  There are just so many tax exemption and nonprofits lessons to be learned. For example, we previously reported that Elon Musk, an early supporter/investor in OpenAI (c)(3), has added 15 new counts to his original complaint against OpenAI (c)(3), including derivative actions against board members.  Now Musk has filed a motion for preliminary injunction.  Here are assertions made in Musk's Motion, filed November 29, 2004:

Plaintiffs seek an order enjoining Defendants, as well as their officers, agents, servants, employees, attorneys, and all other persons in active concert or participation with Defendants, during the pendency of this litigation, from: (1) directly or indirectly undertaking any action for the purpose of, or tending to have the effect of, making, enforcing, or furthering agreements not to invest in OpenAI’s competitors, such as xAI; (2) directly or indirectly undertaking any action for the purpose of, or tending to have the effect of, interlocking directorates or benefitting from wrongfully obtained competitively sensitive information or coordination via the Microsoft-OpenAI board interlocks; (3) directly or indirectly undertaking any action for the purpose of, or tending to have the effect of, furthering the conversion of OpenAI, Inc. to a for-profit enterprise or transferring any material assets, including intellectual property owned, held, or controlled by OpenAI, Inc., its subsidiaries, or affiliates; and/or (4) directly or indirectly undertaking any action for the purpose of, or tending to have the effect of, causing OpenAI, Inc. to contract or do business with any entity in which any Defendant has a material financial interest.

This Motion is made on the grounds that: (1) Plaintiffs will be irreparably harmed if Defendants are not so enjoined; (2) Plaintiffs are likely to succeed on the merits of their claims or their claims raise serious questions going to the merits; (3) the balance of hardships weighs strongly in Plaintiffs’ favor; and (4) the public interest supports the issuance of a preliminary injunction.

. . . 

Plaintiffs and the public need a pause. OpenAI’s path from a non-profit to for-profit behemoth is replete with per se anticompetitive practices, flagrant breaches of its charitable mission, and rampant self-dealing. Allowing this course of conduct to continue until final disposition will seriously harm Plaintiffs and the public at large, whether as competitors, FAC ¶ [First Amended Complaint] ¶ 201, 227, 330-89, as donors and early members, id. ¶¶ 237-39, 416-83, as investors facing a complex and costly unwinding, id. ¶¶ 113, 124, 387(f), as consumers, id. ¶¶ 330-415, as taxpayers, id. ¶¶ 183, 312, 387(d)-(e), as citizens concerned about violations of California and federal law, id. ¶387(a)-(i), or simply as people, concerned about rushed, unsafe AI products, id. ¶¶ 186, 401.

darryll k. jones

The Corporate Transparency Act (CTA) and Tax-Exempt Organizations

This year, a new congressional act has drawn a good deal of attention in the corporate world: the Corporate Transparency Act (CTA). But what does it have to do with tax-exempt organizations? Potentially, a lot. After all, many nonprofits are organized as LLCs or corporations—just the do-good kind. :) In this post, I’ll attempt to explain what the CTA is and what it may require of nonprofits.

Effective from January 1, 2024, the CTA introduces new beneficial ownership reporting requirements aimed at increasing transparency in the corporate landscape. The legislation primarily targets entities at risk for financial crimes. While the CTA predominantly applies to for-profit entities, tax-exempt organizations are subject to nuanced exemptions that require careful attention.

Exemptions for Tax-Exempt Entities

Tax-exempt organizations are generally exempt from CTA reporting requirements—and exemption which applies to entities recognized under Section 501(c) of the Internal Revenue Code—provided they maintain their tax-exempt status. Notably, it appears that tax-exempt entities do not need to report to FinCEN that they qualify for an exemption if they have always been exempt, reducing administrative burdens for longstanding tax-exempt organizations. However, tax-exempt entities that lose their exempt status after January 1, 2024, must file beneficial ownership information (BOI) reports with FinCEN if they do not regain their tax-exempt status within 180 days. This creates a narrow window for organizations to restore their exempt status before they are subject to reporting obligations.

Implications for Newly Formed Tax-Exempt Entities

Organizations formed after the January 1, 2024, effective date of the CTA face different challenges. These newly established entities typically do not receive recognition of tax-exempt status from the IRS within the 90-day window that FinCEN grants for submitting an initial BOI report. All this to say that newly formed entities pursuing tax-exempt status potentially may be subject to BOI reporting requirements before receiving an IRS determination letter.

Subsidiaries of Tax-Exempt Entities

Subsidiaries wholly controlled by tax-exempt organizations are also exempt from BOI reporting requirements under FinCEN’s guidance and the statute. This exemption applies to subsidiaries wholly owned by tax-exempt entities, such as a C corporation or an LLC where the tax-exempt entity is the sole shareholder or member.

However, FinCEN’s guidance on what constitutes "control" of a subsidiary is somewhat limited. FinCEN adds the term “wholly” to modify “control” in its guidance, but that modifier isn’t present in the statute. From this, one could reason that the tax-exempt parent must entirely control the ownership interests in the subsidiary. But it raises questions in joint ventures where ownership is shared between a tax-exempt entity and a for-profit entity. Whether these partially owned entities qualify for an exemption from the reporting requirements—and what proportion of ownership must be met to exempt it—is not entirely clear.

In Summary

While many tax-exempt entities are potentially shielded from the reporting obligations, maintaining exempt status is crucial to avoid falling into the purview of the CTA’s BOI requirements. Even though current legal challenges as to the constitutionality of the CTA could impact the viability of the act, organizations should still implement careful monitoring processes to stay compliant, particularly if their status changes or they enter into joint ventures. For more detailed information on the CTA's requirements, visit FinCEN's BOI FAQ page.

 

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law

Information Costs, Section 179D, and the Slow Uptake of “Greening” Nonprofit Buildings

The Inflation Reduction Act brought about a host of incentives aimed at catalyzing a shift to renewable energy. Yet, the response from nonprofits to retrofit their physical spaces to accommodate renewable energy sources appears to be lagging other sectors. So, why aren’t more nonprofits taking advantage of incentives to turn their physical spaces “green”? Amy Turner (Columbia) has an excellent and informative blog post on the Climate Law Blog in which Section 179D is framed as the culprit. Here’s a snippet:

“Under the IRA, clean electricity technologies like distributed solar and wind, battery storage, and geothermal energy, along with electric vehicles and charging stations, are the subject of tax credits that cover between 30 and 70 percent of eligible project costs. In contrast, the IRA’s main tax tool for building decarbonization is a tax deduction that nontaxable entities can transfer to a limited set of other parties but cannot use directly. Section 179D offers a $0.50 to $5.00 per square foot tax deduction (inflation-adjusted) for whole-building energy efficiency retrofits that achieve a 25 to 50 percent reduction in energy costs as compared to the ASHRAE 90.1 Reference Standard or a 25 to 50 percent reduction in building energy use intensity (a measure of energy use per square foot) as compared to the building’s own baseline. In either case, the deduction is capped at the cost of qualifying equipment and retrofits: interior lighting systems, HVAC and water heating equipment, and improvements to the building envelope.

Though the 179D deduction is not eligible for elective pay, it is available to local governments and other nontaxable entities in that a public or nonprofit building owner can transfer the deduction to the designer (specifically an architect, engineer, contractor, or subcontractor) of the building improvements underlying the deduction. Thus, they can offer the deduction to a designer in the hopes of negotiating down the designer’s price. In this way, Congress allowed for the broad applicability of the 179D deduction in the public and nonprofit sectors, but these sectors face significant practical challenges in taking advantage of it.

In particular, nontaxable entities are acting with imperfect information when transferring the 179D deduction, as the project designer will almost certainly balk at disclosing the sensitive business information – taxable income and tax rate – that would help the parties properly value the deduction and use it to negotiate price. The transaction costs associated with negotiating the value of the deduction can be significant, with the municipal representative or nonprofit building owner either using internal capacity or hiring outside advisors to assess the value of the deduction and ensure that qualifying costs are spent in connection with whole-building energy reductions – a more difficult endeavor than a simple percentage or set deduction amount with no performance requirement.”

In other words, the business realities of passing on the deduction could create frictions for nonprofits in simply trying to avail themselves of the incentives Congress intended them to use. Information costs, a particularly pernicious transaction cost, are getting in the way. So, what can be done? Turner observes:

“In an ideal scenario for nontaxable entities, Congress would enact a building decarbonization tax credit payable directly to nontaxable entities via elective pay. Absent such a solution, support will be needed help nontaxable entities value their 179D deductions, negotiate with designer counterparties, document their agreements in contract and ensure designers are properly reporting 179D transfers with the IRS. As the elective pay process for tax credits begins to hit its stride, 179D is a natural place for the IRS, technical assistance providers, and advocates to next turn their attention.”

Hear, hear!

 

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law

The Great DAF Debate

On Tuesday, Paul Streckfus reported in his newsletter (EO Tax Journal) about a panel at the Western Philanthropy Conference way back in May called “The Great DAF Debate.” I thought it was worth sharing the concise and illuminating way that the panelists summarized the debate. Andrew Shulz, of counsel at Adler Colvin in San Francisco and generally pro-DAF, characterized the issues relating to DAFs as, “three tax policy debates that we have been having for decades.” First, an “endowment debate” about whether donating money for use in the future should be treated as tax-favorably as donating money for use now. Second, a debate about whether “working charities [should be preferred to] organizations that merely fund other charities.” I see this second one as the question of whether there is value to charitable intermediaries. The final debate is “about scandals, about abuse, about the fleecing of America.” Here the question is how much abuse-reducing regulation is optimal, given that anti-abuse regulation generally imposes some costs on compliant taxpayers, and at a certain point there are “diminishing returns in terms of the costs to the compliant relative to what is the abuse.” Of course, too little regulation undermines trust in the system (and rewards bad actors), and so the question of how to hit the optimal level is an ever-present one.

The other panelist, Roger Colinvaux, a professor at Catholic University’s Columbus School of Law and a leading expert on (and critic of) DAFs, characterized the debate as being comprised of similar categories. (Roger couldn’t attend the conference live and so sent written comments). About timing, he said, “Congress did not intend for the charitable giving incentive to be an incentive to earmark contributions for future charitable gifts.” He doesn’t directly address the question of whether there is value in charitable intermediaries, but his framing of the timing issue suggests that he does not think there is substantial value at least. He says, “As intermediaries, DAFs fundamentally clog the flow of funds and delay charitable benefits.” Though he does acknowledge that Community Foundations (as opposed to commercially-affiliated DAFs) argue that they provide benefits despite being largely intermediaries. Finally, as to abuses, he helpfully gives a “sampling” of potentially abusive uses of DAFs under current law:

“•  Private foundations can use DAFs to satisfy their payout obligation, and yet not actually advise that the funds come out of the DAF. 

•  Private foundations can use DAFs to avoid disclosure requirements. 

•  DAFs can be used as artificial public support for charities that should be classified as private foundations, essentially rendering the public support test meaningless. 

•  DAFs are not transparent. DAFs do not file Form 990s on their own behalf. DAF sponsors do not have to report on a DAF account basis, making it impossible for the public to know how individual DAFs operate.”

With the exception of the last comment about transparency, I think it’s hard to argue that these potential abuses are not real and harmful. While there may be some debate about how exactly to best close these loopholes, it’s hard to imagine a cogent argument that they shouldn’t be closed. And in fact, even the strongest DAF boosters tend to agree that some method should be used to prevent these abuses.

-- Benjamin Leff

Proposed Amendment to University Endowment Tax

My co-blogger Daryll Jones already shared the news that the Ways and Means Committee reported to the House H.R. 8913, which is an amendment to IRC 4968(b), the tax on the endowments of the largest American universities. The endowment tax is modest in size (1.4% of “net investment income”), and only applies to schools with endowments of more than $500,000 per student (according to the chart previously posted, only 23 schools total). The amendment changes the calculation of which schools are subject to the tax by only counting students who are U.S. citizens or permanent residents in the numerator of the calculation, excluding any students in the U.S. on a student visa. In other words, under current law, a school with a $500 million endowment with 1,001 students (here permanently or temporarily) would not be subject to the tax. If the amendment passes, the school would need 1,001 U.S. citizen or permanent resident students to avoid the tax. The effect of the amendment, presumably, is to expand the number of schools subject to the tax, and the JCT estimates that the revenue from the amendment would be $26 million in 2027, the first full year of its effect. Obviously, schools could expand their student body to avoid the tax, just like they can now, but under the proposed change they would need to increase the number of U.S. citizen and permanent resident students, not the number of temporary residents.

Unlike many of my colleagues in the nonprofit-o-sphere, I’m a fan of taxing large endowments, since I think it’s generally fair to tax major accumulations of investment income to spread the burden of taxation more broadly, whether those accumulations are held by individuals, corporations, or charities. I wish we would do it more consistently. So, in theory I would support an amendment that increased the number of schools subject to the tax (not that I get a vote on it). But it seems perverse to link this expansion to two symbolic meaning of the amendment: hostility to universities and hostility to foreign students. Given that I’ve devoted my professional life to educating students in universities, it shouldn’t be surprising that I think they are a force for profound good in American society. And given how many students I have educated from around the world, here on student visas, it should be unsurprising that I feel strongly that America’s role as the world’s greatest university system is a profound benefit both to the country and the world. So, I’m a university booster for sure. But that doesn’t mean that universities with very large endowments shouldn’t pay some modest tax on their investment income to share the burden of the cost of running this country of ours. Sometimes the (intended!) symbolic meaning of a tax rule gets in the way of what might otherwise be good policy.

--Benjamin Leff

Aprill on Procedural Elements of Anti-Terrorism Bill H.R. 6408

Ellen Aprill (Loyola L.A.) has posted Comparison of Procedures in Current Section 501(p) and H.R. 6408. Here is the abstract:

H.R. 6408 would amend Internal Revenue Code section 501(p) to suspend the tax-exempt status not only of terrorist organizations, as under present law, but also terrorist supporting organizations. That is, it adds a new category to section 501(p).

This short memo describes the procedural elements of H.R. 6408. It considers only the procedural provisions, not the definition of the new category of “terrorist supporting organizations.” To best do so, it contrasts current procedures with those provided in H.R 6408. This comparison is needed because current procedures are not specified in section 501(p) itself but by cross-reference to provisions of law outside of the Internal Revenue Code. Only by detailing current procedures can both the strengths and weaknesses of the procedures provided in H.R. 6408 be understood.

As explained in the memo, the particular strength of H.R. 6408, as compared to current section 501(p), is that it permits an organization to seek pre-designation review. Its key weakness is that it relies solely on the discretion of the Secretary of Treasury. In contrast, the non-law provisions that trigger designation under current section 501(p) require consultation among various cabinet departments, including the Department of Treasury, the Department of State, the Secretary of Homeland Security, and the Attorney General. The Congressional Research Service Legal Sidebar, “Suspending the Tax-Exempt Status of Terrorist and Terrorist Supporting Organizations,” https://crsreports.congress.gov/product/pdf/LSB/LSB11176, as useful as it is, does not discuss this important difference between current section 501(p) and H.R. 6408.

Lloyd Mayer

Reports from AMT/EITC Continued - All.The.Politics.

Or should I say, electioneering....

It's a unique and polarizing election year and we have a very active Supreme Court on a variety of First Amendment topics,  so it's no suprise that we had two important presentations on the Johnson Amendment's prohibition on the politicial campaign intervention. 

Ben Leff presented a project that he is working on with Sam Brunson are working on some public interest litigation in this space.   As many of you may know, and as blogged about most recently here just a couple of days ago,  SAFE SPACE v. Commissioner s a test case in the works challenging the Johnson Amendment, a project that Ilya Shapiro had a hand in.   SAFE SPACE takes an all-or-nothing approach to the problems, clearly stating that the organization intends to do both electioneering and lobbying directly.

Ben and Sam intend to do something similar, in that they are filing with the intent of developing a test case.  Ben discussed their project on the blog previously - see here.  With the latest report that SAFE SPACE has been dismissed and returned to the administrative stage to develop additional facts,  Ben and Sam's project may be able to catch up procedurally.   Their project is very different from SAFE SPACE, however, as it will continued to utilized an affiliate organizations in their structure:

This Article describes the actions that Sam and I plan to take to create our own nonprofit organizations to endorse candidates in November 2024 using our
“alternate means” strategy that is explicitly distinguished from the marginal cost paradigm advanced by SAFE SPACE.  While it is likely that noting will happen to our application prior to the 2024 election, we believe that engaging in Constitutional self-help using an alternate means strategy is urgent given the existence of SAFE SPACE and its case pending in Tax Court.

The paper walked its way throught the Constitutional analysis of Branch Ministries and Taxation Without Representation, and why their alternative structure works to address the First Amendment speech issues while also protecing the charitable sector from being overrun.  Look for more updates on all of this - I'm sure Nonprofit Law Prof Blog will have the scoop, since both Ben and Sam are contributors here.

Phil Hackney, yet another of our bloggers and one who has been very active on this issue, presented his paper "The Political in Taxation."   Phil says that the motiviation for the article was "the House Ways and Means recent suggestion that spending on voter registration and get out the vote efforts ought to be prohibited."  It takes a wider view of how the tax code view political (again, in the electioneering sense) expenditures.   The article is a wonderful take on the artifical and overlapping distinctions among electionerring, lobbying, issue advocacy, and straight up personal consumptions that we deal with regularly in the Code.    As nonprofit types, we are used to these silos, but the are really artificial to the rest of the world.   Phil's project is really important as we try to think through an issue that threatens the legitimacy of our sector.

Speaking of Phil... he takes over blogging this week so be sure to ask him about it!

Thoughtfully, eww

 

 

 

Greetings from Chicago and the AMT/EITC Conference!

Hi all from near the campus of the Northwestern Pritzker School of Law, which is hosting the AMT/EITC Conference - a workshop for mid and senior level tax profs.   Some of the ideas being presented are fully baked - mine is only half baked but I am looking forward to getting some wonderful feedback.

I'm super excited for this conference becuase many of the superstars of Nonprofit Law Prof World are here, including Sam Brunson, Ben Leff, Miranda Perry Fleisher, Brian Galle, David Walker, and Phil Hackney.  So many really great discussions about to happen about the tax-exempt world!  I'm going to try to catch up with some of my fellow profs and get permission to talk about their projects in the works.  Since I have my own permission, I can tell you a bit about my work in progress, which we will discuss tomorrow.

You may have heard about the Trust-Based Philanthropy Project - you can find the project's website here: www.trustbasedphilanthropy.org.    They describe themselves as follows:

The Trust-Based Philanthropy Project is a five-year, peer-to-peer funder initiative to address the inherent power imbalances between foundations and nonprofits. At its core, trust-based philanthropy is about redistributing power—systemically, organizationally, and interpersonally—in service of a healthier and more equitable nonprofit sector. On a practical level, this includes multi-year unrestricted funding, streamlined applications and reporting, and a commitment to building relationships based on transparency, dialogue, and mutual learning.

Having worked with many private foundations over the years, the first thing that immediately came to mind as I explored the Project is "What about 4945?  and 4942??"   Typical tax lawyer, I know.   But the reality is that the private foundation excise taxes are rooted in distrust... a deep, deep Congressional distrust of private foundations, their donors, and their governing bodies.  One need only take a spin through the transcript of the Patman Hearings to know that Code Section 4945 does not come from a place of partnership and equity.   The sad fact is that distrust is baked into private foundation grant-making through the tax code.  Can we look at all of the private foundation excise taxes, but especially 4945, through the lens of trust based philanthropy and see if we can't make some changes for the better?  That's my goal in this project.

Coming to a law review near you... TBD!

Hopefully, more reporting from on the ground tomorrow!

Excitedly, eww

 

 

 

Tax-Exempt Organizations and Antisemitism

Naturally, Darryll beat me to the punch. Yesterday, he blogged about a letter from the Ways and Means Committee to the IRS asking primarily about tax-exempt organizations with ties to the Chinese Communist Party.

But then, in the middle, as Darryll notes, there's a strange diversion into questions of antisemitism and tax-exempt organizations. In one paragraph in the middle of the letter, the House writes,

Continue reading

Legislative Inquiry into Nonprofit Litigation Decisions

Sunday night, Senators Warren and Whitehouse sent a letter to the U.S. Chamber of Commerce, demanding the Chamber answer questions about its litigation challenging a CFPB rule capping late fees at $8.

The Chamber is a nonprofit membership organization claiming to "represent[] the unified interests of U.S. business before Congress, government agencies, and the courts," but the Senators' question whether the Chamber "is not adequately representing its membership." The Senators doubt that the lawsuit is, in fact, representative of "the broad range of Main Street businesses, or their customers," suggesting that, "[i]nstead, the 'Chamber is again doing the dirty work of its big bank members,' such as JPMorgan, Citi, and Bank of America." Thus, the Senators ask the Chamber: "Did the Chamber conduct a vote or otherwise receive input from its members before deciding to file this lawsuit? a. If so, how did it do so? b. What did the opinions received by the Chamber indicate about members' opposition or support for the rule?"

Of course, concepts of representation for a nonprofit organization--even a membership-based organization--are rarely straightforward, as members rarely weigh in directly on specific policy positions, and members come and go for reasons that often have little to do with a single piece of litigation. (Counterexamples do exist: thousands of AARP members quit the organization after its support for the Affordable Care Act, and thousands of ACLU members left the organization due to objections to representation of Nazis in a free speech case although in both instances the nonprofit stood by its principles/stubbornly defied accountability to its members). "Who do we represent?" is a tough question that nonprofit leaders should constantly be asking themselves; it's much less clear that Congress has (or should have) much to say on the question.

The Senators' letter makes two further criticisms of the Chamber's litigation. First, it argues that the claims are frivolous. Second, it calls the Chamber out for being caught forum-shopping: adding a local chamber of commerce with dubious standing to file in a court believed to be advantageous to the challenge. (The district court granted a motion to transfer the case to the District of Columbia, only to have the Fifth Circuit issue a mandamus preventing transfer for the time being). Forum-shopping in cases challenging federal agency decisions is not novel, but it has come under consistent and increasing criticism--from across the political spectrum--with special attention being paid to forum-shopping in Texas federal courts specifically.

My two cents: Publicly criticizing a nonprofit for its litigation choices (especially when it is caught engaging in rather transparent forum-shopping) is one thing, but demanding details of the nonprofit's internal decisionmaking related to that litigation is quite another.

-Joseph Mead

More on SAFE SPACE v. Commissioner

Yesterday, I blogged about SAFE SPACE’s declaratory judgment suit, in which they are seeking recognition of tax-exempt status despite the fact that they plan to endorse candidates on their website. I mentioned that I had been planning (with Sam Brunson) to create a 501(c)(3) organization that would endorse a candidate on an affiliate 501(c)(4) organization’s website. And I said that the difference between our approach and theirs “may seem like a difference without a distinction” but that it is “probably quite significant.” So, why is it significant?

First, important to both approaches are two ideas: (1) the Constitution protects charities’ right to endorse candidates, while also (2) the government has a legitimate interest in preventing charities from using their government-provided subsidies to pay for such endorsements. As I mentioned yesterday, the tension between these two ideas – and the solution to vindicating them both – comes from the Supreme Court’s Taxation With Representation case and the DC Circuit’s Branch Ministries case, both of which affirmed both ideas. The solution described in those cases is the one Sam and I planned to adopt in our “test case” organization: have the 501(c)(3) charity use a 501(c)(4) affiliate to pay the costs of publicizing the endorsement. This structure has sometimes been called the “Alternate Channel Doctrine,” because the use of a 501(c)(4) affiliate was described in Taxation With Representation as an “alternate means” for the charity to communicate its views. If all the expenses are paid for by the 501(c)(4) affiliate, then the case is strongest that the charity is not using its subsidized funds to intervene in a campaign. It permits the government to fulfil its legitimate purpose of “nonsubvention.”

SAFE SPACE has chosen not to use this “alternate means” to communicate its endorsements, but instead to publicize them on the charity’s own website. It concedes that the website will “be developed and hosted for a low, flat fee” and that there will be no “additional expense for developing and hosting additional pages or materials on its website.” (emphasis added). It then claims that, “[t]he cost to SAFE SPACE of endorsing candidates and publishing its endorsements will be zero.” Well, which is it? A “low, flat fee” or “zero”? These two apparently inconsistent statements can be made consistent by adopting a specific theory of what it means for the cost of an endorsement to be zero. In my 2009 article, I called that theory a “marginal cost” paradigm, explaining that proponents of that paradigm argue that speech or action has no cost if it can be accomplished without making any additional expenditures beyond those already being made for other purposes. If the organization is already developing and hosting a website for its educational purposes, and no additional cost is required to post an endorsement, then the cost of endorsing candidates is zero.

As I mentioned yesterday, SAFE SPACE argued that it couldn’t use the affiliate-organization structure because that would impose “insurmountable” administrative burdens on the fledgling charity. SAFE SPACE therefore is taking the position that (1) the affiliate organization structure is unnecessary because a government subsidy has only been used when there is a marginal cost to the organization, and (2) forcing an organization to create an affiliate is such a substantial administrative obstacle that it constitutes an undue burden on the charity’s speech rights.

If SAFE SPACE could persuade the Tax Court to adopt its marginal cost theory of campaign expenditures, that could be very important for 501(c)(3) organizations going forward. Over a decade ago, at the request of Senator Charles Grassley, the Commission on Accountability and Policy for Religious Organizations (CAPRO) proposed legislative reform to permit 501(c)(3) organizations to engage in low-cost electoral speech, like the endorsement SAFE SPACE proposes. Republicans in Congress have repeatedly proposed the Free Speech Fairness Act, modeled on CAPRO’s recommendations, but it has never been adopted. But scholars like Ellen Aprill have pointed out that in an “age of cheap speech,” permitting all low or no-cost political speech under a marginal cost paradigm would open the floodgates to extensive use of charitable funds (and therefore government subsidy) in electoral speech. Under this theory, as long as the organization was promoting its charitable message, it could include its electoral message so long as that message had no marginal cost. In addition to the website that SAFE SPACE plans to operate, charities could use newsletters, email blasts, paid social media posts, television advertisements, and paid door-to-door educators to promote their views. Scholars like Sam Brunson, Roger Colinvaux, Edward Zelinsky, Nina Crimm, and Laurence Winer have all attempted to address the same problem. There’s no easy answer, but I think the use of an affiliated 501(c)(4) organization does a better job of balancing speech rights with our collective interest in nonsubvention, and that the administrative burden that imposes on a small charity like SAFE SPACE is therefore warranted.

I think that’s what’s at stake in this tiny organization’s declaratory judgment case.

-Benjamin Leff

Trifecta Follow-up to Title IX, NIL Collectives, and NRA Trial

This fine Friday, I have follow-up mini posts about all three of the things I blogged about this week: Title IX, NIL collectives, and the NRA trail. So, in reverse chronological order, here they are:

Yesterday, I wrote about the suit against Hillsdale college asserting that it was subject to Title IX regulation on account of its tax-exempt status. My colleague Darryll Jones alerted me to a press release from Senator Marco Rubio on Wednesday announcing proposed legislation to clarify that tax exemption is not “Federal financial assistance” for the purpose of Title IX. Obviously, if the legislation passes, that clarifies the law. But our legislative branch is not designed to easily pass legislation, and (it sure seems like) that the problem is worse these days, so I think it’s likely courts will probably have to make up their own mind what the original statute means.

On Wednesday, I wrote about NIL collectives, and got a very good series of questions from a commenter that I think are worth answering. A reader commented, “How do they determine the amount of the payments to avoid them being classified as excess benefit payments?  Do equal payments have to be paid to all players on the team?  How do you determine if one player's NIL is more valuable than another? I heard that Univ. of Texas is paying $50,000 to new football linemen; can they pay this to certain players and not to others?”

The answer to the first question is easy: “excess benefit” payments (if this is meant in its technical sense to refer to “excess benefit transaction” penalties in the Tax Code) occur between an organization and “disqualified persons” (people who have some level of control over the organization). Players are unlikely to be disqualified persons, so payments between NIL collectives and players will probably never be “excess benefit” payments. That’s why the question for NIL collectives is whether there too much private benefit, not whether there is any “inurement.” Honestly, if I were to try to identify the five most important things to understand about nonprofit law (for the students who take my introductory class, for example) this line between inurement and private benefit is definitely on the list, and so I can’t help point it out, even at the risk of fetishizing the phrase “excess benefit.”

But charities still have an obligation not to make excessively large payments to private persons who are not “disqualified persons,” notwithstanding the fact that “excess benefit” is technically the wrong word for such payments. As a state law matter, this obligation is found somewhere in the duty of care or the duty of obedience, the concept of “waste,” or in statutes that try to clarify this obligation. Some people (including the IRS) think that this duty is also reflected in the Federal-law concept of “excess private benefit.” Jurist Richard Posner famously proposed that idea (in dicta) in his opinion in the United Cancer Council case. This is also plausibly what the IRS means when it says that private benefit can be excessive either quantitatively or qualitatively. As I mentioned on Wednesday, Hail! Impact (the charitable NIL collective that has received IRS approval of tax-exempt status) solves the quantitative problem by only using 30% of its fund expenditures to pay NIL fees to athletes and uses the other 70% for truly charitable expenditures. But that 30/70 solution doesn’t solve the “qualitative” problem.

So, how should a charitable NIL collective make sure that it is not providing an excessive private benefit to athletes qualitatively through the wrong structure of its individual payments? The answer is: hard to know. The theory should be that it’s pretty safe if it pays them “fair market value” for the rights. That’s what American University (my employer, a charity) does when it decides how much to pay me. It tries to figure out what the market would bear, and then (if my economic theory serves me in this case) pays me the lowest it can get away with to keep me from jumping ship and to motivate me to do whatever it is that it wants me to do. So, as to the question of whether the NIL collective must (or can) pay the same amount to all players or must (or can) pay each player based on the value of their individual NIL, the default answer should be that it makes more sense to pay them based on an evaluation of their individual NIL value. But, of course, if the collective thinks that it can get away with paying all players the same amount, and if it thinks that’s good for the team or school, I can’t think of an argument for why that would violate the “private benefit” doctrine (or the directors’ state-law duty of care or obedience). But because the “qualitative” aspect of the private benefit doctrine is so under-developed as a legal matter, I’m not sure there is a clear answer to how it would apply in this case. Now that the IRS Chief Counsel’s office is focused on NIL collectives (as evidenced by the pretty quick and excellent Memorandum), I could imagine them using this opportunity to provide some guidance on their interpretation of the question. But, just like with Congress clarifying the scope of Title IX, I wouldn’t hold my breath. They’ve got a lot of other legitimate priorities, to say the least.

On Tuesday, I wrote about the expert testimony given by Jeffrey Tenenbaum in the NRA case. It was pointed out to me that there is some tension in what I wrote (that I wasn’t really aware of) about the purpose of Mr. Tenenbaum’s testimony: whether it was to establish “customary” practices among nonprofits or “best” practices. As I pointed out in the first paragraph, the court permitted his testimony about “what is regular and customary in the nonprofit sector.” But then in that same paragraph, I said he testified that “best practices” counsel against boards of more than 30 members because large boards make it “impossible [for individual board members] to fulfill their duties.” That’s a confusing quote because “best practices” is a quote of my source, NRA Watch, which said that “Tenenbaum said that best practices typically dictated an ideal non-profit board size of between 12 and 20 people.” But it did not quote him as using the term “best practices.” Instead it quoted him as saying that if a board has more than 30 people, it “becomes impossible [for individual board members] to fulfill your duties.” Anyway, in case it was confusing at all, I changed my own sentence in my final paragraph to clarify that I think it is valuable for juries to be educated about customary practices in the nonprofit sector, and that I’m glad Mr. Tenenbaum did that in this case. Although, obviously, it is still true that the jury will have to apply the legal standard, not whether NRA practices are “customary” or not.

Benjamin Leff

Taxpayer Advocate Proposes Repeal of IRC 170 Contemporaneous Substantiation Requirement

The National Taxpayer Advocate publishes a list of legislative recommendations each year in a publication called the Purple Book.   This year's version contains "a concise summary of 66 legislative recommendations that the National Taxpayer Advocate believes will strengthen taxpayer rights and improve tax administration. Most of the recommendations have been made in detail in prior reports, but others are presented in this book for the first time. The Advocate believes that most of the recommendations presented in this volume are non-controversial, common-sense reforms that the tax-writing committees, other committees, and other members of Congress may find useful."  Here is recommendation number 59:

darryll k. jones

 

 

 

Pell Grants and Wealthy Universities

This morning, Inside Higher Ed reported on a bipartisan House bill that would allow students in short (8-14- week) career training programs to receive Pell Grants. There has been some controversy over the idea--questioning, for example, whether the short-term training would pay of and whether students at for-profit programs should have access--but support for the move has been growing.

But the House's "Bipartisan Workforce Pell Act" (which honestly, what a disappointing name: "BWPA" doesn't spell anything; I'm old enough to remember when Congress came up with an acronym and then awkwardly stuck in words that would spell that acronym!) included one surprise: its funding mechanism.

See, the expansion is potentially expensive. So the House decided that, to fund it, the bill would remove eligibility for Pell Grants from any student attending a school subject to the excise tax on university endowments (basically, any school that has an endowment of $500,000 or more per student; it applies to an estimated 50 schools). 

I'm not going to give a blow-by-blow of reasons different groups support or oppose the bill--Inside Higher Ed's article does an excellent job with that. I will note, though, that it faces a steep climb when it arrives at the Senate. And also, that it seems to reflect a bipartisan skepticism of the value of elite higher education. Where will this go? We'll have to watch.

Samuel D. Brunson

Oversight Hearing on the Growth of The Tax Exempt Sector and Politics Tomorrow

No word yet on who the witnesses might be, but its probably worth tuning into tomorrow's Oversight hearing on the growth of civil society and the impact on politics.  Here is the announcement:

Chairman Smith and Oversight Subcommittee Chairman Schweikert Announce Subcommittee Hearing on Growth of the Tax-Exempt Sector and the Impact on the American Political Landscape

House Committee on Ways and Means Chairman Jason Smith (MO-08) and Oversight Subcommittee Chairman David Schweikert (AZ-01) announced today that the Subcommittee on Oversight will hold a hearing to examine the tax-exempt sector and its impact on American politics. The hearing will take place on Wednesday, December 13, 2023, at 2:00 PM in 1100 Longworth House Office Building.

Members of the public may view the hearing via live webcast available at https://waysandmeans.house.gov. The webcast will not be available until the hearing starts.

In view of the limited time available to hear the witnesses, oral testimony at this hearing will be from invited witnesses only. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note: Any person(s) and/or organization(s) wishing to submit written comments for the hearing record can do so here: [email protected].

Please ATTACH your submission as a Microsoft Word document in compliance with the formatting requirements listed below, by the close of business on Wednesday, December 27, 2023.  For questions, or if you encounter technical problems, please call (202) 225-3625.

FORMATTING REQUIREMENTS:

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission but reserves the right to format it according to guidelines. Any submission provided to the Committee by a witness, any materials
submitted for the printed record, and any written comments in response to a request for written comments must conform to the guidelines listed below. Any submission not in compliance with these guidelines will not be printed but will be maintained in the Committee files for review and use by the Committee.

All submissions and supplementary materials must be submitted in a single document via email, provided in Word format and must not exceed a total of 10 pages. Please indicate the title of the hearing as the subject line in your submission. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official hearing record. All submissions must include a list of all clients, persons and/or organizations on whose behalf the witness appears. The name, company, address, telephone, and fax numbers of each witness must be included in the body of the email. Please exclude any personal identifiable information in the attached submission. Failure to follow the formatting requirements may result in the exclusion of a submission. All submissions for the record are final.

 

darryll k. jones

 

A Very Bad Day For Civil Society

Don't "over lawyer" your witness.  I learned that the hard way as an Army JAG years ago.  I don’t know about the other branches but if you want to be a military litigator, or just a litigator, go Army.  You study, train and practice every small detail of trial practice.  Still, the most painful lessons are learned on the fly. In actual trial, when something bad happens. Like when a witness you prepped, rehearsed, and prepared several times over freezes, explodes or disintegrates.  Its true, you really can over lawyer a witness.   You can drill her testimony with so much detail and script that the witness ends up stumbling over all that detailed script you drilled.  Or worse. If your witness is a type A overachiever all her life she won't stumble at all.  She will nail the script.  If she is accustomed to getting As, she will stick to the script long after the script is exposed as absurd.  The script drilled so deeply into the witness' brain that she doesn't perceive the absurdity because she's intent on articulating the string of words in your script.  Instead of just answering the question, in this case with a simple "yes." That must be what happened to the presidents from Harvard, Penn, and MIT last week.  They had to be the three smartest witnesses assembled in one place since Oppenheimer and colleagues before the House Un-American Activities Committee.  And yet . . . well, we all saw it.  I cringed because their good-enough-for-law-school answers – “it depends” -- told me right away they had been over lawyered.

And I'll tell you what.  That over lawyered testimony -- just a few minutes of 5 hours of testimony -- did incalculable damage to any effort towards preventing the hysterical shutting up of civil society.  It was a real setback.  Civil society got slaughtered.

darryll k. jones

A Follow-Up on Late Night Musings: More on The Charitable Act

Lo and behold, I opened up Tax Notes Today (subscription required) this morning and found an article on the Charitable Giving Coalition’s position on the renewal of the above the line charitable deduction, which I discussed in my post yesterday.

The Tax Notes article notes that the Charitable Giving Coalition sent a letter to the House Ways and Means Committee and Senate Finance Committee in support of The Charitable Act. The Charitable Act reinstates the above the line charitable deduction, increases the limitation from $300 to one-third of the then standard deduction, and permits gifts to donor advised funds.  In support of the need for the Act, the Charitable Giving Coalition noted in its letter (cited in Tax Notes) that

Giving trends from 2020 and 2021, when the temporary non-itemizer charitable deduction was in place, indicate the deduction works. According to the Fundraising Effectiveness Project, charitable gifts of $300 — the cap of the temporary deduction in 2020 — increased by 28 percent on the last day of the year. Furthermore, interim Internal Revenue Service data for tax year 2021 shows 47 million households used the non-itemizer charitable deduction for donations totaling around $18 billion. A higher deduction cap, as included in the Charitable Act, would encourage even more charitable giving in communities across the country.

While I am generally in favor of reviving the above the line deduction, I’m dubious that this thinking holds. The primary beneficiaries of the above the line deduction are lower and middle income tax payers, If the “universal” deduction (which isn’t universal because it’s not available to those who itemized…) is increased, then the question is whether individuals who don’t itemize have the financial ability to make significantly larger contributions.  There is a marked difference in $300 and $4600, the estimate for the higher deduction.  I’d also be curious to know how much of the $300 giving is giving that’s already occurred and is just being captured for the first time in tax statistics – things like the weekly contributions to the church plate and such not.  Maybe the last $25 dollars given on Giving Tuesday, but I’d be curious where the incentive effect of increase in the universal deduction tails off.  Probably an interesting project to look at…

Curiously, eww

Some Late Night Reflections on Giving Tuesday

If you are like me, your inbox today is filled with emails from nonprofits looking for donations – Giving Tuesday has been in full swing.  I’ll admit to being somewhat cynical about Giving Tuesday.   I support the charities I support during the year and I don’t need a special day to do it.  I suppose one could see it as a day of penance for the twin orgies of commercialism known as Black Friday and Cyber Monday.  I am, however, without shame and feel no need to buy any indulgences on Giving Tuesday for my recent overconsumption.

But it would appear that I’m alone in my cynicism and that’s a good thing – no one needs curmudgeons like me grumbling about such things!   GivingTuesday.org tracks the impact of Giving Tuesday on charitable donations.   There are a number of interesting observations in the information collected in their Data Commons about giving trends, including the impact of Giving Tuesday.   According to one of their reports, Giving Tuesday enhances giving among supporters, grows existing relationships, and importantly, engages younger volunteers.

Givewp.com, citing the 2022 GivingTuesday.com study, states that

• In 2022, donors in the United States gave $3.1 billion on Giving Tuesday, 15% more than in 2021

• More than 20 million people gave, with 6% more donors in 2022 than in 2021

• 82% of nonprofits that participated in Giving Tuesday tried something new

• #GivingTuesday trends annually on social media

• More than $1 billion of U.S. Giving Tuesday donations were contributed online

That lead me to think about a potentially tax law significant change that occurred between 2022 and 2021 – that being the sunset of the $300 above the line deduction for cash charitable gifts from the CARES Act.  It seems like that particular deduction would be beneficial to the folks that Giving Tuesday targets – smaller, younger, and online donors.  That deduction hasn’t been in effect for 2022 and 2023, but there is at least some noise about trying to bring it back.  There have been a number of bills trying to revive and maybe even increase the deduction – you can find a summary of them at the Charitable Giving Coalition website here.   The most recent bill would reinstate the deduction for 2023 and 2024 but increase the limit to 1/3 of the standard deduction.

Who knows what the future of the above the line deduction is, given that all of the tax cuts that are facing sunset will be revisited here in due time.   In a world where the increased standard deduction remains and fewer people itemize, the above the line charitable deduction has its merits, especially among younger and less wealthy donors.   That being said, Roll Call reports that the Joint Committee on Taxation estimates that the above the line charitable deduction cost $2.9 billion in 2021, which is a pretty significant chunk of change.

While we wait to see what the tax writers will do… it’s now 11 pm eastern on Giving Tuesday – there’s still time to support your favorite charity, even if you won’t get an above the line deduction for it.

Grumpily guilted into generosity, eww