Monday, November 4, 2019
Where are we on the regulation of charity fifty years after Congress passed the Tax Reform Act of 1969? My colleague Tony Infanti and I along with our Pitt Law Students of the Pitt Tax Review hosted six scholars and two practitioners as commenters on Friday November 1 to consider that question. The symposium was entitled The 1969 Tax Reform Act and Charities: Fifty Years Later
Natural questions arise: (1) What was that act’s goal with respect to Charity? With respect to tax? (2) Did it accomplish these goals? (3) Are those goals still relevant today? (4) What goals might suggest themselves today? (5) Do we have the ability to make those changes that are needed? In our conversations we did not answer all of those questions, but we sure tried.
Pittsburgh as a city strikes me as a fit and proper place to ask these questions. Why do I say this? Pittsburgh, city of the rust belt, but also city of Carnegie, Frick, Mellon, Heinz, city of steel, coal, banking, and ketchup and now city of higher ed, tech, and cutting edge health care. It provides the natural and social landscape for investigating private wealth and its philanthropic use. At the beginning of the 20th Century Pittsburgh generated an enormous amount of the GDP of the US particularly through its manufacture of steel. That industrial choice brought great wealth to a few, and supported the careers of many, but also caused great damage to the environment for the long term. Pittsburgh as a city crashed in the 1980s (I have heard different dates, but place it there as that is when many of the steel mills seem to have closed down), and it has struggled to come back from the loss of the steel industry ever since.
However, today the city has transformed itself with Carnegie Mellon and Pitt driving a high tech economy, UPMC engaging in cutting edge health care connected with the University of Pittsburgh, and a robust provision of higher education. It almost surely survived to another day as a result of major philanthropic capital from the robber barron days from the likes of the Mellon, Heinz, Pittsburgh, and Hillman foundations. These private foundations led an effort to clean up the city and transform it into the more vibrant place that it is today.
Congress in the 1969 Tax Reform Act responded to a concern about the type of wealth harnessed in foundations like those in Pittsburgh. In fact, as discussed by Jim Fishman in his presentation about the history of the 1969 Tax Act the Mellon Foundation played a big role. Congress at the time was deeply concerned that wealthy individuals were abusing money put into charitable solution and decided it was important to stop those abuses. These papers consider both the origins of these rules and whether these rules still have relevance today.
The first panel considered the topic of Investing for Charity. Ray Madoff presented The Five Percent Fig Leaf critiquing the five-percent payout rule that the 1969 Tax Act imposed on private foundations. Professor Madoff's paper was paired with Dana Brakman Reiser's contribution Foundation Regulation in Our Age of Impact. Professor Brakman considered the placement of program related investments and mission related investments within the current regulatory context and found the rules wanting in many ways.
The second panel was entitled Origins of Private Foundation Rules and their Meaning for Today. Jim Fishman provided great historical insight leading up to the Act in Does the Origin of the 1969 Private Foundation Rules Suggest a Match for Current Regulatory Needs? Interestingly, Professor Fishman thinks the Act really helped in creating the positive attitude many feel towards private foundations today. He thinks there is a real problem though with smaller private foundations where compliance is likely low. Khrista McCarden focused on a category we had not yet considered that of private operating foundations, which are treated a little better than typical private foundations in her piece entitled Private Operating Foundation Reform & J. Paul Getty. She is concerned about private art museums particularly because of their lack of broad community access.
Finally panel 3 considered Regulating Charitable Actors. Ellen P. Aprill presented The Private Foundation Excise Tax on Self Dealing: Contours, Comparison and Character. It usefully compares the general ethic of the different self-dealing rules that exist within the charitable context particularly that of section 4941 and 4958. However, more interestingly she considers both whether NFIB v. Sebelius might suggest that the 4941 excise tax is a penalty rather than a tax, and whether the tax might be able to serve as a Pigouvian tax. Finally, Elaine Wilson presented her paper Is Consistency Hobgoblin of Little Minds? Co-Investment under Section 4941. The paper focuses on certain PLRs that allow private foundation donors to "co-invest" with their related private foundation, seemingly in violation of the section 4941 self-dealing rule. It then shows why it is valuable from a securities regulation perspective for the private foundations to be provided this leeway from the IRS, and asks why the IRS would have twisted the seemingly clear meanings of the self-dealing exise tax.
I hope to blog about each panel in more depth the rest of this week.
Friday, October 4, 2019
In a follow-up to a March blog entry regarding Congressional scrutiny of syndicated conservation easements, Senate Finance Committee Chairman Chuck Grassley and Ranking Member Ron Wyden announced in mid-September that subpoenas were issued for documents relevant to their bipartisan investigation of syndicated conservation-easement transactions. Wyden stated in the announcement:
As we’ve both said all along, conservation easements have very legitimate purposes. We need to protect those purposes and protect the American taxpayer. If a handful of folks can game the system for profit, then we’re all left holding the bag. We expect fulsome cooperation with our investigation, and it’s unfortunate we’ve had to resort to compulsory process. Ultimately, when Congress makes an inquiry, it needs to be answered. It’s not optional.
Let’s say a man named John donates a conservation easement on his farm to a land trust. His appraiser valued the farm at $3 million before the easement and $2 million after the easement. Therefore, the easement is worth $1 million, which would be the amount of the tax deduction available for the donation. John doesn’t have sufficient income to use this deduction. He wants to sell the deduction to someone who can use it.
Federal tax law does not allow the donor of a conservation easement, or of any other property for that matter, to transfer the deduction generated by the donation to someone else. A federal tax deduction is personal to the donor. If the donor can use the deduction, fine; if not, it disappears. In other words, John can’t sell his deduction.
This is simple. However, some legitimate conservationists, and some not-so-legitimate tax shelter “facilitators,” are using limited liability companies and other so-called “pass-through” entities to try to “syndicate” tax deductions — in essence, to sell them — in ways that an individual, such as John, cannot accomplish. These deals are anything but “simple.”
Lindstrom acurrately points out that not all syndications are "shams," but advocates for syndications that allocate tax deductions to be scrutinized. Syndications that fail to comply with complex allocation rules for pass-through entities and/or utilize inflated easement appraisals, according to Lindstrom, threaten "the viability of the tax benefits for conservation easements and the credibility of the voluntary land conservation effort."
In a follow-up to a previous post this week The NRA and Russia: How a Tax Exempt Organization Became a Foreign Asset, Senate Minority Leader Chuck Schumer and Senate Finance Committee ranking member Ron Wyden called for an IRS examination of the NRA's ongoing tax-exempt status in a October 2nd letter to IRS Commissioner Chuck Rettig. The request comes on the heels of the Senate Finance Democrats' release last week of a report on the organizations's interactions with Russian nationals. Schumer and Wyden stated in the letter: "Given this report's concerning findings and other allegations of potential violations of tax exempt law by the NRA, it is incumbent on the IRS to fully investigate the organization's activities to determine whether the NRA's tax exemption should be disallowed."
The NRA is a tax-exempt under section 501(c)(4) of the Internal Revenue Code as a social-welfare organization. The organization also has affiliated entities that are tax-exempt under sections 501(c)(3) and 527 of the Code.
Schumer and Wyden assert in their letter that the findings of the report raise concerns of whether the NRA's activities violated the statutory social welfare requirements, including the use of tax-exempt resources for non-tax-exempt purposes. "In light of the continued efforts of Russia to undermine American democracy, IRS must use its full authority to prevent foreign adversaries from again exploiting tax-exempt organizations to undermine American interests," Wyden and Schumer wrote. The NRA and Senate Republicans take issue with the report and its findings.
As we previously blogged, the New York and District of Columbia attorneys general are conducting their own investigations about whether the NRA is complying with state tax laws.
Tuesday, October 1, 2019
In September 25 letters to the presidents of Duke, Harvard, and Villanova universities and Sarah Lawrence College, Senate Finance Committee Chair Chuck Grassley raised concerns and sought information on the current culture of academic freedom on their respective campuses. In a recent op-ed published by the Wall Street Journal, Grassley raised concerns about the current state of academic freedom in higher education, opining that students' demand for "safety" from "harm" is eroding academic freedom and the very point of higher education. In each of the letters Grassley elaborated further:
Unfortunately, over the past year I have read a variety of media reports discussing incidents in higher education involving faculty suffering difficulties with or expressing concerns about teaching or researching topics that might challenge or encourage critical thinking about the conventional wisdom or a popular ideology of the day. . . Students who can work and think critically for themselves are best equipped to tackle the most difficult challenges we face and participate fully and effectively in our democracy.
A fundamental piece of this democracy-enabling purpose is that college and university professors should be free to teach and research – and students should be free to learn – to the best of their abilities in defiance of an undiscerning "instinct to believe what others do." The United States’ higher education has long been the envy of the world for its ability to do just that. This letter respectfully requests information regarding the university’s commitment to creating such an educational environment in which its faculty can teach topics and take positions on matters that defy conventional wisdom and challenge orthodoxies in necessary but perhaps uncomfortable ways. . . .
With respect to tax-exempt status, Grassley quoted Bob Jones University vs. United States: "Charitable exemptions are justified on the basis that the exempt entity confers a public benefit -- a benefit which the society or community may not itself choose or be able to provide, or which supplements and advances the work of public institutions already supported by tax revenues." He further agreed with a description of tax-exempt purpose as to higher education being "fundamental to fostering the productive and civic capacity of [the Nation's] citizens."
The requested responses from the four institutions are due by October 25, 2019.
[See also Tax Notes dated September 30, 2019, Tax-Exempt Higher Ed Must Allow Academic Freedom]
Thursday, September 26, 2019
The Congressional Research Service has updated its Tax Issues Relating to Charitable Contributions and Organizations report (R45922). Most notable is this passage from the Summary, reflecting the possible impact of the 2017 tax law changes:
Comparing giving levels in 2017 and 2018 provides some insight into the possible impacts of the 2017 tax revision on charitable giving and the charitable sector. Compared to 2017, 2018 contributions from individuals and bequests declined as a percentage of GDP (by 6% and 5%, respectively), while corporate contributions were virtually unchanged and foundation contributions rose by 2%. In 2017, an estimated 80% of individual contributions benefited from the tax subsidy for itemized deductions. Surveying the literature can also provide some insight regarding the effect of tax subsidies on charitable giving. Based on statistical estimates of the responsiveness of individual giving to tax subsidies, a decrease in individual giving of around 3% to 4% might be expected from the 2017 tax revision. Limitations in the data make the effect on estates difficult to estimate, but it could be a decrease of up to 8%; the small share of bequests in total giving, however, would lead even that effect to reduce overall charitable giving by less than 1%.
Thursday, September 19, 2019
The September 16th edition of Tax Notes included an interesting article entitled Tax History: Charity Deductions Are for the Rich -- and That Was Always the Plan. The article reviews an article published by economist Nicolas Duquette in the Business History Review on the history of the charitable contribution deduction (see here). The following are introductory paragraphs of the Tax Notes piece:
In 1917 Congress created an income tax deduction for charitable gifts. The provision was itself a gift — to the nation’s wealthiest philanthropists. And in the century since, it has remained a rich person’s benefit, subsidizing charitable giving by a relatively small slice of the taxpaying public.
That’s the takeaway of a new article on the history of the charitable deduction, published last month by the Business History Review. In “Founders’ Fortunes and Philanthropy: A History of the U.S. Charitable-Contribution Deduction,” economist Nicolas J. Duquette traces the deduction’s creation and evolution, emphasizing its focus on the nation’s economic elite. “The philanthropy of the very rich has always been the object of the tax deduction, and the modern conception of it as an incentive for giving more broadly is a new element of our discourse,” Duquette writes.
What’s less new, however, are other conceptions that helped spur the creation of the deduction and shaped its development over the past century. In particular, the deduction has drawn strength from a durable anti-government strain in American political culture that often prefers private to public forms of social welfare.
“We trust one another, and not just the government, to make important decisions and to take action,” observed Yale economist Robert J. Shiller in a 2012 New York Times article. “We don’t rely on government to set all of our goals — even our social goals, our wishes for the nation’s future. The essential question we all must answer is how we can achieve the good society.” . . .
[See also TaxProf Blog]
Ray Madoff (Boston College) and Roger Colinvaux (Catholic University) published Charitable Tax Reform for the 21st Century in the September 16th issue of Tax Notes. The following are the introductory paragraphs of the article:
Charitable organizations play a fundamental role in American society, fulfilling functions that would otherwise fall to government, providing creative solutions to society’s most pressing problems, and serving our highest ideals. The federal government has long provided generous tax incentives for charitable donations, with current benefits reaching up to 74 percent of the amount of the gift. Unfortunately, however, the design of the tax incentives is now woefully out of step with their purpose and the realities of charitable fundraising today, resulting in a system that is incoherent, ineffective, and on the verge of failure.
Taking a broad view, we believe that there are two overarching policy goals of the charitable tax incentives. The first is to promote actual charitable work and the second is to foster a strong culture of charitable giving with broad participation.
The fundamental purpose of providing charitable tax benefits is to support charitable work. If the good work of charities never gets done, tax benefits are wasted, costing the government significant revenue but providing no benefit to the public. In order to encourage actual charitable work, Congress based the giving incentive on donors giving up dominion and control of their donations. Only when donors give up control are funds fully available for charities to deploy in support of their mission. . . .
To summarize our concerns, the system of charitable tax benefits is failing on three main fronts: (1) current rules provide no giving incentive for 90 percent of American taxpayers, leaving charities reliant on a shrinking and narrow base of support; (2) current rules no longer provide any assurance that tax-benefited donations will ever be made available for charitable use; and (3) long-standing rules designed to promote the public good (for example, on payout, disclosure, and lobbying) are easy to avoid through the use of DAFs.
Both of us have written numerous articles and opinion pieces on ways to improve the tax rules to make them fairer and work better for the people who rely on charitable efforts, and there are many ways to approach these complex issues. In this article, we outline five proposals that we believe provide the best ways to fix the problems facing the charitable sector:
1. replace the current charitable deduction with a credit for charitable giving available for all taxpayers who give more than a designated floor;
2. reform the rules applicable to DAFs so that some tax benefits are conferred upon transfer to a DAF while others are deferred until the donation is no longer subject to the donor’s advisory privileges;
3. reform private foundation payout rules to close the loophole that allows a charity to avoid private foundation status by funding the charity through a DAF;
4. prohibit private foundations from counting a grant to a DAF as satisfying their 5 percent payout requirement, require disclosure of foundation to DAF grants, and bar foundations from counting payments to insiders (such as travel and compensation) as payments for charitable purposes; and
5. reform the excise tax applicable to private foundations to provide incentives for them to increase their charitable expenditures. . . .
Janene R. Finley (St. Ambrose University) has published Reforming the Charitable Contribution Tax Deduction: Accounting for Random Acts of Charity, 10 Wm. & Mary Bus. L. Rev. 479 (2019). The abstract:
Concern for the tax treatment of charitable contributions has increased as a result of the Tax Cuts and Jobs Act of 2017. Although the new law increased the limitation of deductible charitable contributions to 60 percent of adjusted gross income, the standard deduction was also increased. Increasing the standard deduction is expected to reduce the number of taxpayers who are able to itemize their deductions in the next tax year, which is expected to reduce charitable giving in the future. This Article discusses proposals to amend the Internal Revenue Code to promote charitable giving, including a non-itemizer deduction.
In addition, random acts of charity are explained, and consideration of those acts as charitable contributions for purposes of the charitable contribution tax deduction is proposed.
[Hat tip: TaxProf Blog]
Monday, August 19, 2019
The Economist had an interesting story this past week on some of our largest charities - charities associated with drugmakers.
Perhaps you have also noticed the tendency that when you go to buy an expensive brand drug that despite the fact that you have insurance, there is still an expensive co-pay involved. However, there are sometimes charities that can help you with that co-pay depending on your circumstances. You might have wondered why they do that.
Well, the Economist has investigated.
From the story: "According to public tax filings for 2016, the last year for which data are available, total spending across 13 of the largest pharmaceutical companies operating in America was $7.4bn. The charity run by AbbVie, a drugmaker that manufactures Humira, a widely taken immuno-suppressant, is the third-largest charity in America. Its competitors are not far behind. Bristol-Myers Squibb, which makes cancer drugs, runs the fourth-largest. Johnson & Johnson, an American health conglomerate, runs the fifth-largest. Half of America’s 20 largest charities are affiliated with pharmaceutical companies.
Not everyone qualifies for their help. Unsurprisingly, pharma-affiliated charities fund co-payments only on prescriptions for drugs that they manufacture. There is often an income threshold, too, which excludes the richest Americans—though it is usually set quite high, at around five times the household poverty line. They are prohibited from funding co-payments for those on Medicaid (which helps the poor) and Medicare (which helps the elderly) by the anti-kickback statute, which prevents private companies from inducing people to use government services. Those patients can accept co-pay support from independent charities, such as the Patient Advocate Foundation."
I am a bit troubled by the idea of the IRS granting and maintaining exemption for a charity that is associated with a for-profit that only pays for drugs that the for-profit provides. I have not investigated any of these enough to come to any conclusion. However, the fact that this is now a significant part of the charitable environment, and it is associated with a major public policy suggests to me that Congress needs to give real thought to how this system fits in with charity and with prescription drugs generally. More reasoned thought is needed. The IRS needs to do its best job in assessing whether these organizations meet the requirements of charity, but given the significant policy domains this issue crosses, it's probably not the best place to answer such questions.
As it is now, it appears that Pharma has cobbled together a financial solution to a problem they faced as a business, that happens to involve "charity," rather than that Pharma is seeking to do charitable things that deserves the moniker.
I have not personally seen any guidance or determ letters from the IRS on this matter. If anyone has one, would love to see what the IRS has concluded on the matter.
Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law
Wednesday, August 14, 2019
We all know how hard it can be for the federal government to enact new laws. It appears to be equally hard to repeal existing law, even when no one now thinks it is a good idea. The current example in the exempt organizations world is Internal Revenue Code section 512(a)(7), a/k/a the parking tax. By my count (and the JCT's) six bills have been introduced in the current Congress that specifically target this provision for repeal, three in each chamber, with sponsors ranging across the political spectrum from Representative James Clyburn to Senator Ted Cruz. (H.R. 513, H.R. 1223, H.R. 1545, S. 501, S. 632, and S. 1282). All six bills are currently in the respective tax writing committees. These bills are in addition to activity in the last Congress, which included to five bills plus a manager's amendment that would have also repealed the provision and was part of a bill that passed the House but not the Senate. The Joint Committee on Taxation also issued a report specifically on this provision earlier this summer.
To be fair, I exaggerate when I say no one likes the parking tax. At least the Tax Foundation supports it for bringing parity between exempt organizations and for-profit businesses, although that reasoning ignores the disparate administrative burden created by many exempt organizations now having to newly file a additional tax form (Form 990-T) and adopt administrative procedures they did not have previously in order to comply with their obligations under the new tax.
Previous 2019 blog coverage of this topic includes: Ways and Means Channels Its Inner Emily Litella on Parking: Never Mind; Much Ado About Parking (House Committee hearing); Renewed Calls to Repeal "Nonprofit Parking Tax"; IRS Issues Guidance Aimed at Limiting Impact on Nonprofits' Parking Expenses; House Majority Whip Renews Push to Repeal Taxation of Qualified Fringes as UBIT.
Monday, August 12, 2019
We have previously blogged about congressional, DOJ, and IRS scrutiny of conservation easement donations, as well as academic coverage of this topic led by our contributing editor, Nancy A. McLaughlin (Utah). This scrutiny shows no signs of abating, with the following developments just in the past couple of months:
- Senators Chuck Grassley and Ron Wyden, Chair and ranking member of the Senate Finance Committee, sent three letters in June asking for further answers to their questions relating to syndicated conservation easements. Hat tip: Tax Analysts (Fred Stokeld) (subscription required).
- The Joint Committee on Taxation issued a report last month concluding that enactment of the Charitable Conservation Easement Program Integrity Act of 2019 (S. 170), which is designed to end abusive conservation easement tax breaks would raise $6.6 billion over several years. The JCT letter is available from Tax Analysts (subscription required).
- That followed a June report (revised slightly in July) from the Congressional Research Service describing the concerns regarding abuse of conservation easement tax breaks.
- It also coincided with three recent publications relating to conservation articles, including from the ABA Real Property Trust and Estate Conservation Easement Task Force (Recommendations Regarding Conservation Easements and Federal Tax Law), attorney Jenny L. Johnson Ware of the Johnson Moore LLC firm (Valuing Conservation Easements: An Empirical Analysis of Decided Cases), and Professor McLaughlin, who posted an updated version of Trying Times: Conservation Easements and Federal Tax Law (last revised June 2019).
With organizations that support appropriate tax breaks for legitimate conservation easements, such as the Land Trust Alliance, trying to avoid having Congress throw the baby out with the bath water, while DOJ and the IRS battle promoters and contributors of allegedly abusive conservation easement donations in the courts, it will be interesting to see how this issue ultimately shakes out both legislatively and in litigation.
Friday, August 9, 2019
Ellen Aprill (Loyola LA Law) posted Revisiting Federal Tax Treatment of States, Political Subdivisions, and their Affiliates to SSRN (Florida Tax Review, forthcoming). Here is the abstract:
Several provisions of the 2017 tax legislation, known as Tax Cuts and Jobs Act (TCJA), focused attention on federal taxation of states, their political subdivisions and their affiliates. Most prominently, TCJA limited the federal income tax deduction for state and local taxes to $10,000. States have sued and attempted work-arounds. Another provision, which imposes an excise tax of 21% on “excessive compensation” paid by certain entities not subject to income tax, inadvertently failed to subject to tax entities that are integral parts of states or political subdivisions or are themselves political subdivisions. Calls for a technical correction have so far gone unheeded.
More than twenty years ago, I wrote two articles about federal taxation of state governments, political subdivisions, and their affiliates. The Teacher’s Manual to a leading casebook on nonprofit organizations describes these two articles as “as much as anyone knows about this confusing patchwork and its ramifications.” The passage of time, changes in my own thinking and new developments call for my returning to this topic. I do so here. Moreover, far more than in my earlier work, I examine the applicable rules regarding charitable contribution deductions to these entities as well as discuss the special rules applicable to governmental charities and the category of charities that lessen the burdens of government.
In light of the 2017 tax legislation, I not only renew recommendations made long ago, but also extend them to the criteria for exempting entities that lessen the burdens of government, a category that has received little scholarly attention. I also call for establishing a system by which states, political subdivisions, and their affiliates could receive determination letters, like those issued to section 501(c) organizations and thus familiar to potential donors. Such an approach would avoid the distortion of the rules applicable to section 501(c)(3) that arises from the current special treatment of governmental charities. Treating governmental entities as a distinct category under the Internal Revenue Code, with their own criteria and their own determination letter, would also acknowledge and honor their role in our federalist system.
Thursday, August 8, 2019
Mae Quinn (Florida-Levin College of Law) posted Wealth Accumulation at Elite Colleges, Endowment Taxation, and the Unlikely Story of How Donald Trump Got One Thing Right to SSRN (Wake Forest Law Review, forthcoming). Here is the abstract:
President Donald Trump has declared war on immigrants, diversity, and those who dare to dissent. Rooted in resentments about who people are, where they were born, and what they believe, these executive-led assaults are dangerous developments in the modern era. However, in the course of Trump's many retrograde tirades, he has somehow managed to get one thing right-too many elite private colleges in the United States, considered nonprofit entities, have amassed way too much wealth.
This Article recounts this unlikely story, including how the Trump Administration's 2017 endowment tax could work to advance diversity. The new endowment tax penalizes private colleges for stockpiling assets. In response, potentially impacted universities have argued they are victims of an unfair conservative conspiracy intended to target liberal ideology. But the data demonstrates that this is not true. And concerns about rich colleges hoarding their resources have come from both the right and the left.
Moreover, Trump's endowment tax could be seen as an opportunity and invitation to increase egalitarianism and equity in this country. If rich colleges simply utilize more of their massive savings to further social justice, impact poverty, and enhance public good-particularly in their own at-risk communities-they will not only avoid federal taxation but also begin to address critiques about their elitism and greed. In doing so such universities would not only thwart Trump and his tax but stand with vulnerable groups who are the true victims of the Trump Administration's ever-expanding conservative attacks.
Monday, July 8, 2019
Emily Litella (played by Gilda Ratner) was cranky old woman who always showed up to complain about something on the Weekend Update in the early years of Saturday Night Live. In every case, she was complaining about something she failed to hear correctly – she couldn’t understand, for example, why everyone was so upset about violins on television. When informed that people were, in fact, upset about violence on television, she would pause and then just say, “Oh, Never Mind.”
Congress clearly didn’t hear all the complaints about the parking tax way back when (or about any other part of the TCJA for that matter: “The Games They Will Play,” anyone?) Now in the face of complaints from the nonprofit sector, the House Ways and Means Committee had a “Never Mind” moment with the parking tax in the extenders package that passed out of committee at the end of June. According to The Hill, the bill retroactively repeals the parking tax and extends some other tax provisions, notably the EITC, the child tax credit. and the dependent care credit.
For those of you not following the parking tax in excruciating detail, Section 132(f) excludes qualified transportation fringes (QTFs) from income for an employee BUT new Section 274(a)(4) prohibits a Section 162 deduction for “the expense of providing” a QTF, regardless of the fair market value of the fringe. Because nonprofits don’t care about deductions, new Section 512(a)(7) imposes the UBIT on non-deductible expenses under Section 274. (Which totally puts nonprofits and for-profits on the same footing, right? Right?)
Probably the most common QTF is the qualified parking fringe under Section 132(f)(1)(C). The cost of providing a parking QTF is relatively simple if you are paying a third-party vendor for a parking space for an employee. But for a hospital that runs a parking garage, it isn’t so easy. For a university that has many different parking facilities, some of which are open to the public, it’s even more difficult. A quick perusal of Notice 2018-99 demonstrates just how much of an administrative nightmare it can be; my sister, who is a tax accountant for a state university, backs that up anecdotally. And that’s the tale for large organizations that have the accounting resources to deal with such things – consider the burden for a small organization with a part-time bookkeeper and a pro bono accountant.
Although The Hill reports that Republicans support the parking tax repeal, they opposed the other tax provisions, citing the uncertainty to taxpayers. In addition, the bill seems to be short on revenue offsets, which may cause political issues with a variety of legislator, so the future of this bill may be uncertain.
Friday, June 28, 2019
Propublica has been doing great investigative work where they team up with local reporters to do some in depth reporting. They provide a nice recent look at Methodist Le Bonheur Healthcare, a nonprofit tax-exempt hospital, in Memphis Tennessee.
The story documents the collection practices that Senator Grassley might be interested in as he starts up an investigation into nonprofit hospitals again.
The story states: "From 2014 through 2018, the hospital system affiliated with the United Methodist Church has filed more than 8,300 lawsuits against patients, including its own workers. After winning judgments, it has sought to garnish the wages of more than 160 Methodist workers and has actually done so in more than 70 instances over that time, according to an MLK50-ProPublica analysis of Shelby County General Sessions Court records, online docket reports and case files."
The primary focus of the story seems to be on the hospital's efforts to collect from its own employees: "It’s not uncommon for hospitals to sue patients over unpaid debts, but what is striking at Methodist, the largest hospital system in the Memphis region, is how many of those patients end up being its own employees. Hardly a week goes by in which Methodist workers aren’t on the court docket fighting debt lawsuits filed by their employer."
Furthermore, they look at the hospital's financial assistance policies. It's not clear whether they meet the Internal Revenue Code CHNA rules in section 501(r) applicable to nonprofit hospitals after the Affordable Care Act: "Methodist’s financial assistance policy stands out from peers in Memphis and across the country, MLK50 and ProPublica found. The policy offers no assistance for patients with any form of health insurance, no matter their out-of-pocket costs. Under Methodist’s insurance plan, employees are responsible for a $750 individual deductible and then 20% of inpatient and outpatient costs, up to a maximum out-of-pocket cost of $4,100 per year."
Thursday, June 27, 2019
President Trump talked about the so called "Johnson Amendment" again the other day. The Johnson Amendment, as probably most of the readers of this blog know, is the language contained in section 501(c)(3) of the Internal Revenue Code that prohibits a charity hoping to maintain its status as exempt from federal income tax from intervening in any political campaign. I say so called as it was not called that on its entry to the Code, though this article does suggest it was LBJ who was the author of the language added to the Code in 1954.
The President, speaking before the Faith and Freedom Coalition conference in Washington stated: “Our pastors, our ministers, our priests, our rabbis . . . [are] allowed to speak again . . . allowed to talk without having to lose your tax exemption, your tax status, and being punished for speaking." He then apparently jokingly cautioned that if a pastor spoke against him “we’ll bring back that Johnson Amendment so fast,” the president said to laughter, adding, “I’m only kidding.”
President Trump signed an executive order back in May. The law of course is still found within section 501(c)(3) and thus is a duly enforceable law. In my opinion, the executive order did not do anything to change the actual state of affairs of the meaning of the law or its interaction with other laws, such as the Religious Freedom Restoration Act, or constitutional rights. If anything, the current state of the law should work to protect those he jokingly threatened to use the state of the law against.
The news article I cite to above unfortunately wrongly states the following: "The president has not undone the law, like he sometimes claims he has, but rather told the Treasury Department it can enforce at its own discretion — leaving the possibility that the Trump administration could only penalize churches that oppose the president."
Although the President has not undone the law, as the article correctly states, I say wrongly in two senses: (1) he has not told the Treasury Department that it can enforce at its own discretion - he only directs Treasury to apply the law with due regard to allowing individuals and organizations to speak when speaking from a religious perspective "where speech of similar character has, consistent with law, not ordinarily been treated as participation or intervention in a political campaign", and (2) it would be unlawful for the administration to penalize churches that oppose the president, and his executive order did not create that possibility of such unlawful action. If you have interest in more detail on the (obvious) legal problems associated with (2), I wrote about the legal reasons why it would be unlawful for the IRS to unequally enforce the law in such a way in a longer scholarly article here considering the claims that the IRS violated conservative organizations rights when it specifically used names of groups like the Tea Party in managing its application system.
Wednesday, June 19, 2019
Congress has passed the Taxpayer First Act (H.R. 3151), and President Trump is expected to sign the bill. Almost at the very end of the bill, after numerous other improvements to tax procedures, is a section that will require tax-exempt organizations to electronically file their Form 990 series returns and the IRS to publicly release the data from these returns in machine readable format "as soon as practicable." The Secretary of the Treasury, or his delegate, may delay the mandatory electronic filing for up to two years for financially smaller organizations if not doing so would cause an undue burden. The bill also requires the government to notify organizations that fail to file a required annual return for two years in a row, if a third consecutive missed filing will lead to automatic revocation of the group's tax-exempt status.
As detailed in (shameless plug) my article on Big Data and nonprofits, these changes will provide researchers, journalists, and other members of the public with an enormous amount of information about tax-exempt organizations. While these data will require a significant amount of work to be usable, there is already a Nonprofit Open Data Collective in place to do this work. The much easier access to this information that this legislation will provide holds the promise of greatly expanding the ability to research most organizations in the nonprofit sector.
Wednesday, June 12, 2019
The Independent Sector recently released research on the relationship between federal tax policy and individual charitable giving. The study attempts to quantify the lost individual charitable revenue from the 2017 tax changes, and the effect that these five new policies would have on charitable giving:
- Deduction identical to itemizers’ tax incentive;
- Deduction with a cap in which gifts over $4,000 or $8,000 do not receive an incentive;
- Deduction with a modified 1% floor, in which donors can deduct half the value of their gift if it is below 1% of their income and the full amount of the donation above 1%;
- Non-refundable 25% tax credit; and
- Enhanced deduction that provides additional incentives for low- and middle-income taxpayers
The study concludes that "all five policies could bring in more donor households and four of the five policies could bring in more charitable dollars than could be lost due to recent tax changes[, and f]our of the five tax policies could generate more giving than cost to the government."
Wednesday, May 15, 2019
Details continue to emerge about the ongoing crisis at the National Rifle Association and government investigations are just starting to build up steam, so it is way too early to try to comprehensively identify nonprofit law lessons arising from this situation. That said, here are two early takes.
Boards Matter (Eventually). The NRA has a huge Board of Directors, with more than 70 members. While presumably its members are strong supporters of the NRA's agenda, they also have a legal role that gives them both access to information and credibility when making criticisms. While details about the NRA's recent problems emerged in a mid-April New Yorker story, they were given added visibility when they became the apparent basis for a leadership challenge by a faction of board members, including then-President Oliver North. That challenge failed, as did apparently earlier, quieter attempts by board members to rein in possibly problematic behavior, as explored in the New Yorker story. But that may not be the end, as the N.Y. Times reported yesterday that board member and former congressman Allen B. West has now publicly called for NRA Chief Executive Officer and Executive Vice President Wayne La Pierre to resign. One of the many board members may also have been the source of recently leaked internal memos that support many of the concerns now coming to light.
Success Does Not Excuse All Wrongdoing. Wayne LaPierre has been with the NRA since 1977, and been its head since 1991, during which time he has led the NRA to increasing prominence and influence. But despite that success, he now appears vulnerable. Indeed, in an apparent pattern that many who work with nonprofits will recognize, that success and long tenure may have led him to engage in the very transactions that could prove to be his undoing. For example, while far from the most significant questionable transaction financially or probably legally, his alleged spending of more than $200,000 for wardrobe purchases charged to an NRA vendor is, if true, a classic example of an unnecessary, self-inflicted wound (and possible excess benefit transaction for federal tax purposes). For the rank-and-file NRA member, paying him over a million dollars in compensation annually presumably can be justified by the organization's success; but then he should buy his own clothes (and who spends over $200,000 on clothes?).
With the continuing New York Attorney General, congressional, and possibly Internal Revenue Service interest, we will hopefully learn much more about how the crisis developed in the coming months. And of course this is on top of previous congressional interest in alleged Russian ties to the NRA in the time leading up to the 2016 election.
Tuesday, April 9, 2019
The Center for Public Integrity recently posted, "The Trump Tax Law Has Its Own March Madness" on its website. The article highlights many of the issues with the TCJA that we have previously discussed on this blog, but specifically puts the new excessive compensation excise tax square in the context of the NCAA Men's Basketball Tournament:
The coaches who made the final four are being paid the following this year by their universities: Tom Izzo, Michigan State University, $3.7 million; Tony Bennett, the University of Virginia, nearly $3.2 million; Chris Beard, Texas Tech University, $2.8 million; Bruce Pearl, Auburn University, $2.6 million. John Calipari, whose Kentucky team also made the Elite Eight, earned compensation of nearly $8 million in 2018-2019.
The Article goes on to highlight the fact that these coaches may all be treated differently despite having similar salaries. Because some of the coaches work at public universities, they may escape the excise tax due to the drafting issue identified by Ellen Aprill previously (and discussed on this blog here), who is quoted in the article. In addition, John Calipari particularly receives significant third party revenue that may or may not be captured by the controlled organization rules.