Nonprofit Law Prof Blog

Politics & Nonprofits: Déjà Vu All Over Again

Anyone who tracks legal developments relating to the involvement of nonprofits in politics would be forgiven if they felt they were in a particularly drawn out version of the movie Groundhog Day. That is because it appears everything that is new is something we have seen before. Here are some recent examples:

• DISCLOSE Act Introduced (again): U.S. Senator Sheldon Whitehouse (D-RI) and Representative David Cicilline (D-RI), along with 162 colleagues, reintroduced the Democracy Is Strengthened by Casting Light On Spending in Elections (DISCLOSE) Act in the new Congress. As noted in the press release, "Senate Majority Leader Chuck Schumer first introduced the DISCLOSE Act in the wake of the disastrous Citizens United decision in 2010, and Whitehouse has led the introduction of the legislation in every subsequent Congress."

• Treasury/IRS Barred From Issuing 501(c)(4) Guidance (again): The Consolidated Appropriations Act, 2023 (Pub. L. No. 117-328) continues the now longstanding prohibition on the Treasury Department, including the Internal Revenue Service, using any funds to develop guidance "relating to the standard which is used to determine whether an organization is operated exclusively for the promotion of social welfare for purposes of section 501(c)(4)" (Division E, Title I, Section 123, under Administrative Provisions - Department of the Treasury). The Act also continues now longstanding prohibitions on the IRS using any funds "to target citizens of the United States for exercising any right guaranteed under the First Amendment" or "to target groups for regulatory scrutiny based on their ideological beliefs." (Division E, Title I, Sections 106 & 107, under Administrative Provisions - Internal Revenue Service).

• A Politician Benefitting from a Friendly 501(c)(4) (again): Politico reports that "A new nonprofit group is helping DeSantis go national." The new nonprofit, named And to the Republic, is reportedly a section 501(c)(4) organization that "is supporting Ron DeSantis’ national political activity."

• A Politician Accused of Misusing a Nonprofit (again): The Arizona Republic reports that a former Democratic primary candidate for Secretary of State Reginald Bolding is facing allegations of wrongdoing relating to a nonprofit he founded and helped lead ("Bolding, his nonprofit, referred to AG for investigation of connections, donations"). The referral from Arizona Secretary of State Katie Hobbs states there "is reasonable cause to believe [Bolding]  violated campaign finance law" based on a complaint filed by a Phoenix resident. The nonprofit is named Our Voice Our Vote, and according to IRS records it is a section 501(c)(4) organization.

Lloyd Mayer

Legislators Continue Scrutiny of Tax-Exempt Hospitals; Article Examines Their Finances

Last month three U.S. Senators focused their attention on tax-exempt hospitals. Two of them, Senator Elizabeth Warren (D-Mass.) and Senator Ron Wyden (D-Ore.) directed their ire toward McKinsey & Company, asking it to explain its role in helping nonprofit hospitals "take financial advantage of low-income patients." The other, Senator Tammy Baldwin (D-Wisc.) focused on the Ascension Health system, asking its CEO to explain activities at some of its hospitals that recent press reports highlighted , including patient safety concerns, the closure of a labor and delivery unit, and sizeable for-profit investment activities.

And a recent article by Brian D. Cadman and Elena Patel (both at the University of Utah, the former in the School of Business and the latter in the Department of Finance) focuses on nonprofit hospital finances. It is titled Nonprofit Regulation and Earnings Distribution: Nonprofit Hospital. Here is the abstract:

Organizing as a nonprofit amplifies agency problems through limited ownership and restricted earnings distribution. We examine how these agency problems influence the distribution of economic profits by nonprofit hospitals, which dominate the population of tax-exempt organizations and account for a large fraction of the US economy. Using detailed hospital-level financial data, we find that nonprofit hospitals earn large economic profit. We also show that these hospitals hold five times more cash and 85% more retained earnings than for-profit hospitals. In addition, we document that general and administrative labor expenses are 60% larger, physician labor expenses are 32% larger, and expenses for drugs provided to patients are 31% larger for nonprofit hospitals. Finally, we find that nonprofit hospitals invest more in land improvements and buildings. The evidence suggests that nonprofit hospitals distribute economic profits through wages and capital expenditures.

Lloyd Mayer

Debating the Wisdom of Federal Tax Benefits for Charities

The past couple of months have seen several commentators questioning whether the federal tax benefits for charities should continue to exist, either in their current form or at all. Here are some examples:

• As reported by Peter J. Reilly in Forbes, in December EO Tax Journal editor Paul Streckfus floated the idea that calling for repeal of Code section 170 in its entirety could be used by a presidential candidate to help separate themselves in what may be a crowded field. Reilly further reports that Streckfus made it clear in response to a follow-up inquiry that he supports this proposal, given that the deduction in its current form primarily if not almost exclusively benefits the wealthy who tend to give to the organizations that the wealthy themselves are interested in, such as their alma maters and, if they are very wealthy, their own foundations.

• Shortly thereafter, Peter Coy wrote an Opinion for the N.Y. Times titled The Thorny Questions Raised by Charitable Giving (subscription may be required). He flagged important issues, including the relative roles of government and philanthropy, whether to give locally or globally, and the balancing of giving fish with trying to teach someone to fish. He also noted that philanthropic priorities tend to be set by people with money, citing the effective altruism approach championed by Sam Bankman-Fried as an example, and the fact that the charitable contribution deduction is no longer available to most people of moderate means.

• Then in the Chronicle of Philanthropy, Jeff Cain wrote an Opinion titled End the Charitable Tax Exemption and Remove the Conflict of Interest Baked Into Big Philanthropy. He highlights the bipartisan opposition to the Accelerating Charitable Efforts Act among private foundations, and argues that "philanthropists can use their tax-advantaged funds to advocate for greater tax-incentivized charitable laws through the tax-exempt nonprofits they support. And they do." He refers to this trend as "Big Philanthropy" and argues that the way to address it is "ending charitable tax exemptions and deductions of every kind."

• Finally, Business Insider published an article titled How the Rich Have Their Cake and Eat It Too by Using Trusts to Give to Charity, Collect Cash, and Save on Taxes at the Same Time (subscription required), critically highlighting the tax advantages provided for donors to charitable remainder trusts. 

An interesting recent example of how philanthropy favors the wealthy, including through tax benefits, is the Bloomberg News article Billionaire Donates $1.9 Billion to Art Museum Where He Lives (subscription required). The story notes the tax benefits that come with a donation along these lines, although often creating a legacy is more important to the donors.

Lloyd Mayer

National Taxpayer Advocate: Congress Should Remove the Contemporaneous Aspect of Written Acknowledgements for Charitable Contributions

One nightmare of donors and tax advisors alike is having a sizeable charitable contribution deduction disallowed for failure to meet the substantiation requirements imposed by Congress, which the IRS and the courts strictly construe. Often these errors arise for complex reasons, such as a failure to obtain a an required appraisal that is "qualified" (see, for example, the recent U.S. Tax Court memorandum opinion in Lim v. Commissioner). But these errors also sometimes arise for a simple failure to obtain the  Code section 170(f)(8) "contemporaneous written acknowledgement" (CWA) from the recipient charity that both has the required information and is obtained by the taxpayer by the earlier of the date they file the relevant return or the due date of that return.

Now the National Taxpayer Advocate is urging Congress to relax the contemporaneous aspect of the CWA requirement in her 2023 Purple Book: Compilation of Legislative Recommendations to Strengthen Taxpayer Rights and Improve Tax Administration. Legislative Recommendation #58 recommends that Congress "[e]liminate the 'contemporaneous written acknowledgment' requirement and replace it with an 'adequate written documentation' requirement." The new AWD requirement would be the same as the CWA requirement with respect to the information required, but the timing aspect would be removed. This would allow a charity to issue the required acknowledgement, or correct a defective acknowledgement, at any time, including presumably after the IRS on audit identified the absence or deficiency.

Hat tip: EO Tax Journal.

Lloyd Mayer

Name, Image and Likeness (NIL) Nonprofit Organizations

I am glad student athletes can be paid for their game, but I swear, the whole NIL infection has pretty much ruined everything from a fan standpoint.  Before NCAA v. Alston, when everybody made money except players, and players were locked into their team (economically, if not legally) like indentured servants or baseball players before free agency, you could watch a kid for at least three years.  You kinda felt like you "knew" the kid and the team, and that feeling contributed to your rabid affinity for your team.  But the market is amoral and doesn't care about your stinking feelings!  So I guess we better get used to student athletes acting just like the head coaches who condemn NIL money have been acting for years.  Go where the money is, forget team loyalty.  

 

Anyway, here is an excerpt from an interesting Forbes article regarding NIL money being funneled through nonprofit organizations:

Across the country, groups known as collectives have sprung up to channel money to high school and transfer-willing superstars looking to finally get their cut of the multibillion-dollar enterprise that is college athletics. Some of the groups — at least five by Forbes’ count — do so as IRS-approved, tax-exempt organizations. Rather than stuffing paper bags with cash in the hopes of luring a can’t-miss prospect to campus, donors can make “charitable” gifts that, after a bit of transmogrification, are every bit as tax deductible as a check sent to St. Jude. Think of it. For decades, college football’s legions of followers have shown they’re not only willing to pay for game tickets and jerseys, they’ll fork over cash just for the remote possibility their team might beat State, or whomever their rival is, with no other return on investment expected.

That’s where non-profit collectives come into play. “The primary purpose for the tax-exempt collectives was to enable individuals to make tax-deductible charitable contributions,” Larry Mohr, a tax partner at Baker Tilly, told Forbes. “The key with the tax-exempt organizations is making sure they have a charitable mission.” Rather than raising money from the local car dealership or fireworks store, it’s coming from donors. But there’s a rub. For a collective to be a nonprofit, contributions can’t go directly to players.

The workaround involves a bit of theater. Donations to the nonprofit collective are said to be a gift to a charitable organization (which may or may not be directly affiliated with the collective itself). But rather than, you know, give the money to the charity to do its good deeds, the money is earmarked to pay players to, at least on paper, serve as fundraisers. The arrangement leads to a whole host of other questions. Unlike a business, charities can’t pay people whatever they feel like. To keep their tax-free privileges, charities must pay compensation considered “fair value.” And if players are essentially being paid to do charitable work, is it even charity? Stepping afoul of either guideline could put the player and the charity in jeopardy with the IRS.

“A commonly cited example of an appropriate payment is the payment of a ‘fair market value’ appearance fee at a fundraiser for a nonprofit organization,” attorneys Tom Molins and Ethan Sanders from Stinson LLP told Forbes in an email. “On the other hand, just paying a student-athlete a large sum to sign autographs may not be viewed as fulfilling a collective's charitable purpose. Similarly, paying student-athletes to donate their time working at a soup kitchen or homeless shelter probably will also not suffice. While those are clearly charitable endeavors, paying a student-athlete to do volunteer work is really not serving a public good that justifies payment.”

Something stinks, alright, but I think both points made in the article are incorrect and I sent a note to the author about it.  Here is the email I sent:

I just finished reading your interesting article “Looking for A Tax Break?  Buy Your Alma Mater Its Next Football Star.”  A few important quibbles:  (1) Actually, charities can indeed pay employees whatever they want.  That is, charities can pay “going rate,” and they are allowed to use for-profit business to determine going rate.  That’s why the head of Red Cross or some big nonprofit hospital can earn as much as the head of American Airlines or a for profit hospital.  So if the going rate for celebrity endorsements – broadly defined – is $13 million, a charity hiring a college football or basketball player to endorse it can pay whatever for-profits would have to pay for the same endorsement from a pro football or basketball player.  (2) People who work for charities – even just to appear at a “volunteer event” – are entitled to be paid the “going rate.” 

Once these two issues are understood, the only real (and real big) issue in your article is whether the charitable collectives are operating for a “public” rather than “private” purpose.  Clearly, there is a strong legitimate question whether these organizations deserve or qualify for tax exempt status.  I don’t think the article makes this point strong enough though it does quote a practitioner who says “charitable mission is key.”  And even that is a bit imprecise.  A hospital, for example, that dispenses health care might be deemed charitable, but if it does not distribute its beneficial impact to a broad swath of people, without regard to ability to pay in some instances, it is operating for a private purpose (that of those who can pay) rather than a public purpose.  It’s all right there in the easily accessible, fun to read (oh boy, oh boy!) tax regulations.  The collectives are likely operating for private benefit and therefore not entitled to charitable tax exemption. 

Besides, donors can get a trade or business expense deduction for the amount paid for NIL licenses, easy enough, and with a little creative or not so creative planning (form an LLC that does "something" business, and pay the kid to use his or her pic on a billboard or mailer!)  I am not quite clear what benefits are derived from funneling the money through a nonprofit but there must be something there because according to the article, two senators -- a Democrat and a Republican -- have sponsored a bill that would deny the charitable contribution deduction for NIL payments.  Here is how the bill was described in the Senators' press release:

“In this new NIL era, we want to ensure that the opportunities available for student athletes to benefit from their own name, image and likeness are protected,” said Senator Cardin. “We also have an obligation to protect taxpayer funds, which means that charitable deductions should be reserved for charitable activities. Purposefully blurring the line between private expenses and charitable contributions dilutes both these efforts.” 

“College athletes have the ability to benefit from opportunities related to their own name, image, and likeness, but outside organizations and collectives should not be able to write contributions off their taxes that are used to compensate athletes,” said Senator Thune. “This common-sense legislation would prohibit these entities from inappropriately using NIL agreements to reduce their own tax obligations. These basic taxpayer guardrails would protect athletes, strengthen NIL, and uphold the responsible stewardship of taxpayer dollars.”   

The bill proposes a new IRC 170(p).  Here is the gist of it:

(p) CONTRIBUTIONS FOR CERTAIN PURPOSES RELATING TO COLLEGE ATHLETICS.—

‘(1) IN GENERAL.—No deduction shall be allowed for any contribution any portion of which is used by the donee to compensate 1 or more secondary or post-secondary school athletes for the use of their name, image, or likeness by reason of their status as athletes.

 (2) EXCEPTION.—Paragraph (1) shall not apply to any contribution made directly to an organization which is an eligible educational institution (as defined in section 25A(f) (2)).’’

I suppose a nonprofit can be structured to work, as suggested in this interesting On3 NIL article on the topic:

Winter says there is a way collectives can operate within the 501(c)(3) world, especially if the groups are paying the student-athletes for work that is serving a charitable purpose. For example, Winter said paying a student-athlete fair-market value to make an appearance on behalf of the charity at a fundraiser would probably “pass muster.” “But if you’re just paying guys for serving soup, I don’t see how that necessarily aligns with the charitable mission of the collective,” Winter said. “How does that serve the public good by paying to do volunteer work?”

Sure it works, even if you pay a celebrity to serve soup.  The celebrity is paid for the association of her name, image and likeness with the charity while serving soup.  Not for serving soup!  The celebrity endorsement need only be reasonably conducive to the accomplishment of the charitable purpose, it seems to me.  A celebrity endorsement -- like a commercial or billboard featuring a college athlete asking for donations to Save the Children or Ronald McDonald House -- seems reasonably conducive.  Maybe the issue is whether exempt organizations should even be paying for celebrity endorsements, particularly when the payment for the endorser is millions more than the cost of the soup.  Ahh, yes, now we have the private benefit issue cornered.  Read Judge Posner's opinion in United Cancer Council for an explanation of the private benefit issue when we suspect that the costs of charitable operations outweighs the charitable benefits derived by several multiples.  Anyway, all of this gnashing of teeth makes me ask the question, why?  What is the benefit derived from using a nonprofit? 

 

darryll jones

 

 

 

Fair Tax Eliminates Political Activity Restrictions, Taxes Unrelated Business Consumption

 

In a consumption tax system, charities are typically exempt from paying taxes when buying, and collecting taxes when selling, as long as either transaction relates to the charitable mission.  Charity as buyer or seller signals the absence of personal consumption, I guess, thereby making exemption appropriate.  Here is how the House Republicans' national sales tax proposal ("The Fair Tax Act") would define and treat exempt organizations:  

SEC. 706. NOT-FOR-PROFIT ORGANIZATIONS.

(a) Not-For-Profit Organizations.—Dues, contributions, and similar payments to qualified not-for-profit organizations shall not be considered gross payments for taxable property or services for purposes of this subtitle.

(b) Definition.—For purposes of this section, the term ‘qualified not-for-profit organization’ means a not-for-profit organization organized and operated exclusively—

(1) for religious, charitable, scientific, testing for public safety, literary, or educational purposes,

(2) as civic leagues or social welfare organizations,

(3) as labor, agricultural, or horticultural organizations,

(4) as chambers of commerce, business leagues, or trade associations, or

(5) as fraternal beneficiary societies, orders, or associations no part of the net earnings of which inures to the benefit of any private shareholder or individual.

(c) Qualification Certificates.—Upon application in a form prescribed by the Secretary, the sales tax administering authority shall provide qualification certificates to qualified not-for-profit organizations.

(d) Taxable Transactions.—If a qualified not-for-profit organization provides taxable property or services in connection with contributions, dues, or similar payments to the organization, then it shall be required to treat the provision of said taxable property or services as a purchase taxable pursuant to this subtitle at the fair market value of said taxable property or services.

(e) Exemptions.—Taxable property and services purchased by a qualified not-for-profit organization shall be eligible for the exemptions provided in section 102.

Interestingly, the definition omits any requirement that nonprofits restrict or entirely avoid political activities.  This doesn't surprise me since Republicans are generally opposed to restrictions on entity political speech, and certainly the prohibition against campaign intervention is of recent and murky vintage. The proposal also maintains "social welfare" organizations as a classification.  I don't see a purpose, though, in the absence of political restrictions in the proposal. 

Right now donations to social welfare organizations are not deductible.  The proposal would effectively make donations deductible because sales taxes would not be collected for donations to social welfare organizations, nor would social welfare organizations be required to collect sales tax on related sales, apparently.  As it relates to politics, the proposal might be superior to what we have now since, as the Judicial Watch post yesterday suggests, it is nearly impossible to enforce political restrictions given the Gordian knot that comprises campaign speech law.  Fair Tax proposals also claim to divorce taxation from any purpose other than revenue collection and therefore disdain anything not germane to that goal.  Legitimate positions to take, I suppose.

Part (d) above captured my attention, too.  I wonder if that provision means that any transfer of goods or services by a nonprofit, whether in connection with dues or donations (and "the like") or not would be subject to sales tax.  Is the proposal seeking to limit exemption to organizations that do not engage in sales or compensated services? Maybe some state tax/nonprofit experts can shed some light.  Anyway, as relates to UBIT, a sales tax exemption can be a subsidy alone, or simultaneously a subsidy from and a threat to taxable business:

1.  A subsidy because the nonprofit can sell a widget for the same price as a for-profit and retain the entire amount, while the for-profit would have to remit a portion of the price to the taxing agency.  In that case, the purchaser is essentially making a charitable contribution equal to the tax the nonprofit keeps for its charitable mission.  But assuming the goods are of equal value, the transaction does not undercut sales by the for profit except in an appropriately competitive way (i.e., without government subsidy).  Does it?  Maybe the stamp of "government approved tax exempt" is an unfairly competitive endorsement.  

2.  A subsidy and a threat because the nonprofit could sell the same product as its for-profit competitor at a discount equal to the amount of tax from which the nonprofit is exempt.  In this instance, maybe we are extracting a charitable contribution not from the purchaser, but from the for-profit competitor in an amount equal to the expected for-profit volume loss caused by the nonprofit's competitive advantage. The nonprofit retains the same amount per purchase as the for-profit, the purchase is not appropriately labeled a "donation" because purchaser gets quid pro quo while the for-profit competitor subsidizes the non-profit's volume by (1) sacrificing some of its volume to the nonprofit's lower price or (2) lowering its prices (while still paying taxes) to the same price as that offered by the nonprofit.  In other words, the burden of tax deduction is felt most acutely by direct for profit competitors.

I don't know a lot of about how the unrelated business concern would impact or be implicated by a national sales tax.  But this January 4, 2023 Indiana Revenue Ruling applying the unrelated concept to what looks like an Indiana chapter of the Boy or Girl Scouts is worth reading if you want to get into the topic.  It concludes that sale of uniforms, achievement badges etc. to scouts would be tax free because those items are related to the charitable mission.  Its careful to note that the sale of unrelated goods would be subject to tax, meaning the Scouts must collect sales tax on those items.  The difference in the Indiana statute and the federal proposal is that there is specific provisions regarding what sales are related to the charitable mission.  The federal proposal appears silent on the issue.  Write about this if you are looking for a paper topic.  I didn't look too hard but I didn't find any deep scholarship on the question whether charities would fare better under an income or sales tax.  

 

darryll jones

 

 

House Democrats Propose Constitutional Amendment Overruling Citizens United

Last week, House Democrats proposed a constitutional amendment (reprinted below) that would overrule Citizens United v. Federal Elections Commission.  In other news, scientists have discovered the theoretical possibility that Hell might freeze over. 

 

 

darryll jones

 

 

 

Does the Respect for Marriage Act create "clearly defined public policy" under Bob Jones University?

Bob Jones University stands for the proposition that every organization exempted under IRC 501(c)(3) must be charitable, in the legal sense, and that racial discrimination is not charitable.  The Supreme Court found that racial discrimination violated a "clearly defined," "fundamental," "established," super duper, holy grail type public policy.  But we all know that the holding is sui generis, resulting in no real precedential value outside of its factual context.  The case has not been relied upon since to revoke or deny exemption.  Still, there was enough concern that Congress specifically disclaimed the establishment of a fundamental public policy sufficient to deny tax exemption to religious organizations that refuse to recognize same-sex marriage or perform same-sex marriage ceremonies.  Here is a brief PSA discussing (its a free video only if you agree to sit through a 30 second sales pitch -- and BTW, never accept free lodging or meals from a time-share company or you will sit through more than a 30 second commercial):

 

 

 

dkj

Coach Prime, Excess Benefit and Revenue Sharing

I can't believe how old and fatter I am getting.  I was reminded of my age while reading a sports story about Deion Sanders' contract with Jackson State University.  The contract is, of course, terminated because Coach Prime has moved up to big time college football, having recently accepted the Head Coaching gig at Colorado.  What caught my attention was clause 4(g) of the Jackson State University Contract.  I should note, first, that JSU is a 501(c)(3) charity according to Publication 78, Guidestar and Charity Navigator.  This is an important preliminary fact because the excess benefit prohibition of IRC 4958 applies only to charities recognized under IRC 501(c)(3).  There are many state universities that have not applied for 501(c)(3) recognition and thus are not subject to the excise tax for excess benefit transactions.  State colleges and universities are generally exempt under the "intergovernmental tax immunity doctrine" and IRC 115 (gross income does not include income derived from the exercise of any essential governmental function and accruing to a state or political subdivision) and do not need to apply for exemption under 501(c)(3).  Some public institutions nevertheless apply, typically to give potential big donors greater assurance that their donations will be deductible (though I hardly see that as necessary but some universities do so anyway just to avoid having to explain to big donors who want to see their beneficiary's name in Publication 78 before writing the check).  Anyway, a public university that has applied and received IRC 501(c)(3) recognition, like JSU, becomes an "applicable" organization for purposes of IRC 4958.  And while revocation of exempt status for an excess benefit transaction would change little (because the public institution would still be entitled to exemption under IRC 115 and intergovernmental immunity), being an applicable exempt organization subjects disqualified persons and managers to two tiered excise taxes.  Thus, Coach Prime and the JSU officials could potentially be hit with excise taxes even if JSU's tax exempt status is safe.  Why?  Take a look at clause 4(g) of Prime's contract with JSU:

Ticket Sales. If at the conclusion of any football game during the term of this Agreement, the number of tickets sold for such game is greater than 30,000 tickets (the gross revenue generated from any tickets sold in excess of 30,000 tickets, the Game Ticket Sales Revenue ), the University shall pay to Head Coach an amount equal to ten percent (10%) of the Game Ticket Sales Revenue. The Game Ticket Sales Revenue shall be deemed earned upon the conclusion of the applicable game, and shall be reconciled and payable in one lumpsum within thirty (30) days of the conclusion of the applicable football season of said games. If at the conclusion of any football season during the term of this Agreement, the number of season tickets sold for such season is greater than 10,000 season tickets (the gross revenue generated from any season tickets sold in excess of 10,000 season tickets, the Season Ticket Sales Revenue ), the University shall pay to Head Coach an amount equal to ten percent (10%) of the Season Ticket Sales Revenue. The Season Ticket Sales Revenue shall be deemed earned as of the conclusion of the applicable football season or the date upon which this Agreement is earlier terminated (provided on the date of such termination, the benchmark above has been exceeded pursuant to this Section), whichever is earlier, and shall be payable in one lump sum within thirty (30) days of the conclusion of the applicable season.

 

So, Coach Prime was entitled to 10% of revenue from tickets sold in excess of 30,000.  And if JSU sold more than 10,000 season tickets, Coach Prime was entitled to 10% of that revenue.  Sounds like revenue sharing to me.  What does this have to do with my age and waist size?  Well, I am too fat to ever play football again and I was just a young pup in the academy when "intermediate sanctions" were enacted under IRC 4958.  Back then, revenue sharing was all the rage.  You couldn't go to an exempt org conference without hearing about revenue sharing and whether it constituted a "per se" violation of the private inurement prohibition.   Here I am with plenty of gray hair (in my moustache since the hair on my head is about gone) and revenue sharing regulations have still not been enacted.  Everyone thought Treasury would resolve the mystery under the authority IRC 4958(c)(4) which gave Treasury authority to determine by regulation when or if revenue sharing constituted private inurement and an excess benefit transaction.  Treasury punted in the eventual regulations.  Instead, Treasury Regulation 53.4958-5 "reserves" the issue for another day and that day doesn't seem any closer than when the law and final regulations were adopted.  

 

I would bet that Coach Prime and the JSU managers are safe from excise taxes even if the notion never occurred to them and they didn't seek tax advice on that particular provision.  The relatively low amount of compensation possible under the contract (basically $300K base plus 10% of ticket sales at a small HBCU) would probably not have even broken the $1 million mark and makes the issue not worth pursuing for one.   And secondly, the IRS would have PR problems going after Coach Prime while the big time coaches are pulling down exponentially larger buckets of money.  The revenue sharing bonus doesn't kick in without some indication of superior performance, and certainly didn't put Coach Prime in a position to benefit at the University's expense or at the expense of the charitable mission (assuming we can still call college football part of a charitable mission).  Coach Prime is now one of those big time well paid coaches and I hope his new contract was properly vetted if it contains a clause 4(g). But the contract makes for good classroom discussion when discussing private inurement and excess benefit transactions.

 

dkj   

Eds Update: Rep. Pascrell on College Coaching Salaries; Grand Canyon University Not a Nonprofit (for DOE purposes)

I previously noted the interest of Representative Bill Pascrell (D-NJ) in salaries paid by colleges to sports coaches, as demonstrated by the letters he sent to several of them. He has now released an official House Ways and Means Committee Subcommittee on Oversight report on this topic, including both the text of his letter and the responses of the nine addressees. In releasing the report, he stated:

Universities’ tax-exempt status is an important pillar of our higher education system, but it is not a blank check from taxpayers to dole out gargantuan coaching contracts with lavish benefits. The committee should consider reforming the excise tax on salaries over one million to apply to all colleges and universities. This would close a loophole that may enable some state universities to avoid the tax. It is also worth exploring whether profitable, multimillion dollar college athletics programs should be subject to the Unrelated Business Income Tax. We must consider whether tax-exempt educational activities and lucrative athletics programs should be treated differently. Certainly we can see that American students and American taxpayers deserve better

The report also includes as an Appendix a four and a-half page memo from the Congressional Research Service providing "Information on the Tax-Exempt Status of Colleges and Universities and Sections 4960 and 4958 of the Internal Revenue Code." It is uncertain whether his yet-to-be-determined Republican successor as Oversight Subcommittee Chair will have any interest in this topic or the proposed reforms.

In other news, the U.S. District Court for the District of Arizona upheld the decision by the U.S. Department of Education refusing to recognize Grand Canyon University as a nonprofit. As posted previously, the Department decided the University, which had legally converted from for-profit to nonprofit status under state law and obtained tax exemption under section 501(c)(3), did not qualify as a nonprofit for purposes of Title IV funding. The basis for the decision is reported to be that the University has an agreement that continues to generate revenue for its former owner. (I have not been able to find a publicly available copy of the court's decision; if any reader identifies one, please let me know and I will add a link to it.)

Lloyd Mayer

Politics Update: More Coverage of Mega-501(c)(4)s; Senator Whitehouse Criticizes 501(c)(3) CPI

I previously reported on commentary stimulated by recent reports of multi-billion dollar donations to 501(c)(4)s. Bloomberg Law (subscription required) has now published Ray Dalio, Koch Family Wield Powerful Tool to Give Fortunes Away highlighting additional instances of mega-501(c)(4)s controlling billions of dollars.  Here are the opening paragraphs for the story:

Ray Dalio , founder of the world’s largest hedge fund, has one. The Koch family, sitting atop a $137 billion fortune, has at least two. Still another entity, with unknown backers, owns a big stake in one of Wall Street’s fastest-growing financial technology startups.

The vehicle, long deemed a dumping ground for nonprofits like low-income housing developers, Rotary International and even the AARP, drew controversy in the past decade as a “dark money” political giving tool. Now it’s attracting billionaires who realize it offers far more.

The most important quality of the so-called 501(c)(4) organization boils down to one word: control.

Control over their business. Control over political influence. Control over disclosure. Control over taxes. And, of course, control over the crucial soft power of charitable giving.

All in one place.

In other politics and nonprofits news, U.S. Senator Sheldon Whitehouse, Chairman of the Senate Finance Taxation and IRS Oversight Subcommittee, publicly criticized the section 501(c)(3) Conservative Partnership Institute for possible political campaign intervention and private benefit. This follows an NPR report on CPI's activities (full disclosure: I am quoted in this report as saying CPI's reported activities raise yellow flags). It also comes at the same time as a Daily Signal report that Senator Whitehouse pressured the IRS and DOJ to investigate conservative groups.

Lloyd Mayer

Texas Tribune & ProPublica Investigate Churches Politicking

The Texas Tribune and Propublica published an investigation into churches, politicking and lack of IRS enforcement and quote a couple members, including myself, of this blog. From the article:

"At one point, churches fretted over losing their tax-exempt status for even unintentional missteps. But the IRS has largely abdicated its enforcement responsibilities as churches have become more brazen. In fact, the number of apparent violations found by ProPublica and the Tribune, and confirmed by three nonprofit tax law experts, are greater than the total number of churches the federal agency has investigated for intervening in political campaigns over the past decade, according to records obtained by the news organizations." . . . 

"Among the violations the newsrooms identified: In January, an Alaska pastor told his congregation that he was voting for a GOP candidate who is aiming to unseat Republican U.S. Sen. Lisa Murkowski, saying the challenger was the “only candidate for Senate that can flat-out preach.” During a May 15 sermon, a pastor in Rocklin, California, asked voters to get behind “a Christian conservative candidate” challenging Gov. Gavin Newsom. And in July, a New Mexico pastor called Democratic Gov. Michelle Lujan Grisham “beyond evil” and “demonic” for supporting abortion access. He urged congregants to “vote her behind right out of office” and challenged the media to call him out for violating the Johnson Amendment."

Though the story is perhaps not news to those who follow this topic closely, it's a good piece, documenting pretty clear violations of the prohibition on charities from intervening in a political campaign. It has some nice history on the adoption of the amendment that I found useful alone. It also gives nice context for the PACI project where the IRS actually began actively looking at political activities in general, where many of the charities were indeed churches.

Though it is true that the IRS has barely enforced this provision over the years, the fact that there is a large effort among some churches to vigorously move into the politicking space today that is documented in this story is of concern. The biggest policy reason to focus in on this issue is summarized pretty well by the following quote by Andrew Seidel, vice president of strategic communications for the advocacy group Americans United for Separation of Church and State: “If you pair the ability to wade into partisan politics with a total absence of financial oversight and transparency, you’re essentially creating super PACs that are black holes.” 

Philip Hackney

 

S Corporations and Charitable Contributions

In light of the recent changes to the AGI limitations for charitable contributions, it is interesting to explore charitable giving in the S Corporation context.  In 2019, a CPA Journal article noted that unique planning opportunities exist for charitably minded S corporation shareholders.  For example, the rule that limits the pass-through deduction to the shareholder’s basis in S corporation stock and debt is not applicable when the S corporation donates appreciated property to a charity.  Thus, even if a shareholder has a zero basis in his/her S corporation stock, appreciated property donated to a charity would pass through as a charitable contribution.  In effect, the deduction becomes the portion limited by (and reducing) basis, plus the appreciation in the donated property. This interesting article addresses the incentives Congress has provided since 2006, which are still applicable under the TCJA.

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law

Tulane Law School 

California Governor Vetoes Tax Exemption & Insurrection Bill

Late last month, California Governor Gavin Newsom vetoed a bill (SB 834) that would have revoked the tax-exempt status of nonprofit in California that the state Attorney General determined engaged in treason, insurrection, conspiracy, government overthrow, or mutiny by members of the military as defined under federal law. Here is the governor's explanation for the veto:

Without question, extremist groups that participate in anti-government acts such as those that took place during the insurrection on January 6, 2021 should be renounced and investigated for their participation. However, these are issues that should be evaluated through the judicial system with due process and a right to a hearing.

The legislature has 60 days (excluding joint recess days) to override the veto by a two-thirds vote in both houses. And in the unlikely event that occurs (the best information I could find states there has not been an override for over 40 years), the law would almost certainly face constitutional challenge.

Coverage: CBS News/Bay City News Service; California Globe;  Law360.

Patagonia Billionaire Commits Company Stock to Trust/Nonprofit

Sept. 15, 2022

The NYTimes published an article yesterday describing how Yvon Chouinard and his family have transferred all ownership of Patagonia, the company they own to a Trust and to a nonprofit organization that is organized and operated as a social welfare organization exempt from tax under section 501(c)(4) of the Internal Revenue Code. The intent is described as "to combat climate change and protect undeveloped land around the globe."

Apparently, the family transferred two percent of shares to the Patagonia Purpose Trust, controlled by the family while they transferred 98 percent to an organization called Holdfast Collective that the story states is organized as a social welfare organization. 

I sure like conservation efforts, but have concerns about the way the NYTimes seems to treat this contribution less critically than it did a recent one by Barre Seid. It even compares the two. In that process, the author makes a number of claims that are off or sometimes wrong, at least in implication.

For instance, from the article: "Because the Holdfast Collective is a 501(c)(4), which allows it to make unlimited political contributions, the family received no tax benefit for its donation." They later compare the contribution by Barre Seid to a 501(c)(4) as well and claim the same.

It is incorrect that there is no tax benefit and it is also wrong to say that a section 501(c)(4) can make unlimited political contributions.

First, a clear tax benefit is that there is no gift tax owed on the transfer to a social welfare organization. The article properly noted that there was such a gift tax paid on the transfer to the family trust. Second, just like in Barre Seid, the transfer does not trigger a gain for income tax purposes on the contribution of highly appreciated assets - the Patagonia stock in this case. We don't know that appreciation, but given this is the founder, it is likely that the realized gain that no tax is paid upon here is large. Point is both Barre Seid and Chouinard obtained tax benefits. 

Second, while it is true that a social welfare organization is not prohibited from intervening in a political campaign as tax law prohibits of a charity, such activity does not further a social welfare purpose. The article seems to suggest that Holdfast could only support political campaigns, but it could not. It must engage primarily in social welfare activity. It is possible that the reporter was using that term loosely and intending to include lobbying within the conception of "political contributions". A social welfare organization can spend 100 percent on lobbying as long as that lobbying furthers its social welfare purpose.

Also, posting the breathless comments of the person who helped Chouinard set the transfer in motion uncritically is below what I would expect from the NYTimes. See for instance: "“There was a meaningful cost to them doing it, but it was a cost they were willing to bear to ensure that this company stays true to their principles,” said Dan Mosley, a partner at BDT & Co., a merchant bank that works with ultrawealthy individuals including Warren Buffett, and who helped Patagonia design the new structure. “And they didn’t get a charitable deduction for it. There is no tax benefit here whatsoever.” 

Again, that last statement is just not true.

It appears the difference that the reporter may be referring to between Seid and Chouinard is that in Seid, (1) Seid did not give all his fortune and (2) immediately upon the transfer of stock in Seid the social welfare organization sold the stock; Chouinard no longer personally holds Patagonia stock and the social welfare organization in this case is going to continue to hold the stock of Patgonia rather than selling it off. 

The difficulty in seeing the tax benefit here may be in that essential fact. It may be that some assume that as long as you haven't sold stock in some cash transaction there is no tax due. But that is not how things work. Any transfer of stock for any value can trigger tax. In fact, had Mr. Chouinard transferred the stock to a section 527 political organization, under section 84 of the Code, it would have had to pay tax on the difference between his basis and the stock's current FMV.  Many have argued that section 84 ought to be extended to contributions of appreciated assets to social welfare organizations. 

I think the case of the Chouinards suggests that section 84 should be so extended to a social welfare organization. Though Chouinard gave up a charitable contribution deduction, he also gains lots of ability to continue to control the use of that money as the article itself acknowledges. At the same time, he faces no gift tax and any sales of the stock will go without taxation. While there are some guard rails, they simply are nowhere near what would have happened had he transferred it to a charitable private foundation and face the rules under 501(c)(3) and 4940-4946. Thus, he can use these dollars earned at the nonprofit level tax free to accomplish purposes he and his family want to accomplish without any charitable limitations, including as the article notes political purposes. Note that Patagonia still is a for profit corporation that should still be paying tax at the corporate level.

Philip Hackney

 

Newman's Own Tax Provision

I'm pretty sure it was the salsa (mild, because my parents don't do spice), though it may have been the ranch dressing (a break from our usual Hidden Valley Ranch), that introduced me to Paul Newman. It was only later that I fell in love with The Sting and Butch Cassidy and the Sundance Kid. First, though, came the Newman's Own brand.

In the early 1980s, Newman started making and selling food. Initially, he wanted 100% of the company's profits to go to charity. When he died in 2008, Newman left the stock in his for-profit company to the Newman's Own Foundation, a private foundation (that, as I discussed yesterday, is the target of a lawsuit by two of Paul Newman's daughters).

Continue reading

Miami Herald Story on FPL Supporting Spoiler Democratic Candidate Through Dark Money

The Miami Herald has an interesting look at how Florida Power and Light used different means to support candidates in a Florida state senate race, including PACS and social welfare organizations. 

From the story:

"A strong Democratic challenger was threatening to unseat a friendly Republican incumbent in a Gainesville-area state Senate race in 2018. FPL, one of the country’s largest utilities, needed to make sure the GOP held onto the seat.

So FPL used a shadowy nonprofit group to secretly bankroll a spoiler candidate, a longtime Democrat named Charles Goston, according to new documents obtained by the Miami Herald. Running as a no-party candidate in the general election, Goston helped split the liberal vote, siphoning off enough votes from the Democratic challenger to swing the race to the GOP incumbent.

The documents show that FPL sent $200,000 to the nonprofit, a Washington D.C.-based group called Broken Promises, in the fall of 2018. Within five weeks, Broken Promises had donated $20,000 to Goston’s political committee and spent roughly $115,000 on mailers and advertising supporting him. Best of all for FPL: Because of its nonprofit status, Broken Promises didn’t have to disclose its donors — meaning the cash was untraceable. No one would know that FPL had paid to secretly manipulate a state election in favor of Republicans. Voters were in the dark about who funded Goston and why."

Read more at: https://www.miamiherald.com/news/politics-government/state-politics/article264196761.html#storylink=cpy 

Philip Hackney

Representatives Ask IRS About Church Status of Family Research Council

Propublica reported a few weeks ago that the IRS had granted church status to a right-wing think tank, the Family Research Council. Sam Brunson blogged on here about why FRC might be interested in obtaining this special status.

Now, 40 Democratic representatives from the US House have sent a letter to the Treasury Department and the IRS asking them to explain this decision. Here is the letter.

"We are writing to express concern regarding the Family Research Council’s (FRC) tax-exempt status as an “association of churches.” In addition, we request a review of the existing Internal Revenue Service (IRS) guidance related to political advocacy organizations self-identifying as “churches” to obtain the status of churches, integrated auxiliaries, and conventions or associations of churches.

As you know, Congress has enacted many special tax rules that apply to churches and religious organizations. Under Section 501(c)(3) of the Internal Revenue Code (Code), churches are tax exempt organizations and are not required to file IRS Form 990, which provides transparency on tax-exempt organizations’ board members, key staff salaries, donations, and large payments to contractors. Further, there are special limitations on how and when the IRS can conduct an
examination of churches. In accordance with section 7611 of the Code, the IRS cannot conduct tax inquiries of churches without approval from a “high-level Treasury official.”

Philip Hackney

Representative Introduces Bill to Replace Form 1023EZ

Representatives Betsy McCollum and Fred Upton introduced a bill on Tuesday to replace the Form 1023EZ. The bill is entitled the Nonprofit Sector Strength and Partnership Act of 2022.

The bill, among other things, would create a White House Office on Nonprofit Sector Partnership and an Interagency Council on Nonprofit Sector Partnership. 

From Rep. McCollum's press release: 

Congresswoman Betty McCollum (MN-04) and Congressman Fred Upton (MI-06) have introduced the Nonprofit Sector Strength and Partnership Act of 2022 to strengthen the nonprofit sector and its relationship with the federal government. The legislation will improve access to data about the nonprofit sector, and leverage the mission, knowledge, and impact of thousands of nonprofits to work together more effectively in pursuit of shared goals.

“In my home state of Minnesota, the nonprofit sector makes up nearly 14 percent of our workforce and generates $66 billion in annual revenue – which is why it is so important that the sector has a seat at the table when it comes to federal lawmaking,” Rep. Betty McCollum said. “Federal government, state, and local governments rely on the nonprofit sector and its ability to harness and direct the generosity, service, and volunteerism of the American people. Just as small businesses have the Small Business Administration (SBA) to facilitate access to federal resources, the nonprofit sector should be afforded this same level of support. I’m grateful to Independent Sector and other nonprofit leaders who have helped shape this idea into the legislation we’ve introduced today. Together, we can establish mechanisms that will enable nonprofits to better serve our communities.”

Philip Hackney

Laws and Enforcement Governing the Political Activities of Tax Exempt Entities Hearing

The Senate Finance Committee's Subcommittee on Tax and IRS Oversight, chaired by Senator Whitehouse, is holding a hearing on May 4 on entitled Laws and Enforcement Governing the Political Activities of Tax Exempt Entities. 

It's a little odd to report on this one, because I am one of the witnesses who will present testimony.

The witness list includes

Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law, Pittsburgh, PA

Bradley A. Smith, Chairman and Founder, Institute for Free Speech, Washington, D.C. 

Ann M. Ravel, Former Chair (2015), United States Federal Election Commission, Los Gatos, CA

Scott Walter, President, Capital Research Center, Washington, D.C. 

I will be posting my testimony soon. I will try to post the other written testimony as well.

Philip Hackney