Friday, February 15, 2019
Ellen Aprill's Review of Hamburger's "Liberal Suppression: Section 501(c)(3) and the Taxation of Speech"
Ellen Aprill (Loyola-LA) recently posted a review of Professor Philip Hamburger's (Columbia) "Liberal Suppression: Section 501(c)(3) and the Taxation of Speech" at HistPhil.org. HistPhil, which is "a web publication on the history of the philanthropic and nonprofit sectors, with a particular emphasis on how history can shed light on contemporary philanthropic issues and practice." Prof. Hamburger's book argues that, as a constitutional law matter,
... theopolitical fears about the political speech of churches and related organizations underlay the adoption, in 1934 and 1954, of section 501(c)(3)’s speech limits. He thereby shows that the speech restrictions have been part of a broad majority assault on minority rights and that they are grossly unconstitutional.
Thursday, February 7, 2019
In the wake of the recent sexual assault scandal involving Olympic athletes, Senate Finance Committee Chairman Senator Chuck Grassley sent a letter to the United States Olympic Committee asking for details regarding how the organization would comply with its congressional expanded purpose that now includes providing a safe environment in sports. He based his inquiry on the need for the organization to comply with its purpose in order to maintain its tax exempt status under Internal Revenue Code section 501(c)(3).
The USOC has now responded through the Covington & Burling law firm, detailing its planned activities, which include:
- Providing $6.2 million to fund the Center for SafeSport in 2019, double the amount of its 2018 support for the Center, and continuing to work with the Center on various initiatives.
- Surveying athletes regarding USOC's policies, programs, services, and priorities and considering other ways to increase the influence of athletes within the organization.
- Conducting a governance review focusing on USOC's relationship with the fifty national governing bodies and athletes more generally.
- Continuing with proceedings to revoke the status of USA Gymnastics as the national governing body for gymnastics, although that process is currently stayed because of the pending bankruptcy of that organization.
Thursday, January 31, 2019
Philip Hackney (Pittsburgh) posted to SSRN his Written Testimony for the Hearing on Oversight of Nonprofit Organizations: A Case Study on the Clinton Foundation (House Committee on Oversight, December 13, 2018). Here is the abstract:
This is written testimony offered to the House Committee on Oversight's Subcommittee on Government Operations on December 13, 2018: Our nation has tasked the IRS with the large and complex responsibility for regulating the nonprofit sector, but has failed to provide the IRS with resources commensurate with that task. This is important work. Nonprofits constitute a large and growing part of our economy, and they are granted a highly preferential tax status. An organization that abuses that preferential status will obtain a significant and unfair advantage over the organizations and individuals who play by the rules. If we are to grant such a substantial advantage to nonprofits, and if we are going to rely on the IRS to oversee regulation of these entities, it is essential that the IRS have the resources it needs to ensure that this preferential status is not abused.
Lloyd Mayer previously discussed the hearing on this blog (here).
Thursday, December 20, 2018
Just in time for Christmas, the Joint Committee on Taxation released its General Explanation of Public Law 115-97 (commonly known as the Tax Cuts and Jobs Act). Here are some gleanings from the provisions particularly applicable to tax-exempt organizations. Note that the Explanation, uncharacteristically, is missing "Reasons for Change" sections throughout; perhaps JCT found trying to read the collectively mind of Congress too difficult this time around.
- Clarification re Application of Section 170 Increased Percentage Limit for Cash Contributions: The Explanation clarifies that the new, higher limit is applied after (and reduced by) the amount of noncash contributions, and provides this example:
For example, assume an individual with a contribution base of $100,000 for taxable year 2018 makes two contributions to public charities: unappreciated property with a fair market value of $50,000 and $10,000 in cash. The individual makes no other charitable contributions in 2018 and has no charitable contribution carryforwards from a prior year. The cash contribution limit under new section 170(b)(1)(G) is determined after accounting for noncash contributions. Thus, the $50,000 contribution of unappreciated property is accounted for first, using up the individual’s entire 50- percent contribution limit under section 170(b)(1)(A) (50 percent of the individual’s $100,000 contribution base), and leaving $10,000 in allowable cash contributions under the 60-percent limit ($60,000 (60 percent of $100,000) reduced by the $50,000 in noncash contributions allowed under section 170(b)(1)(A)).
- "Technical Correction" May Be Needed to Reach State Colleges & Universities Under New Section 4960 Excise Tax on Excess Executive Compensation: The Explanation states "Applicable tax-exempt organizations are intended to include State colleges and universities." but then drops a footnote saying "A technical correction may be necessary to reflect this intent." For more on this topic, see this previous post citing an article by Ellen Aprill (Loyola L.A.).
- New Section 4968 Excise Tax on Investment Income of Private Colleges & Universities: Nothing surprising in the Explanation for this provision.
- Investments & New Section 512(a)(6) Siloing Provision: The Explanation provides that "it is intended that the Secretary consider whether it would be appropriate in certain cases to permit an organization that maintains an investment portfolio to treat multiple investment activities as one unrelated trade or business."
- Charitable Contributions & New Section 512(a)(6) Siloing Provision: A footnote addresses an issue I have not seen raised before: "An exempt organization that makes charitable contributions generally is permitted to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with an unrelated trade or business. It is not intended that an exempt organization that has more than one unrelated trade or business be required to allocate its deductible charitable contributions among its various unrelated trades or businesses." The limit on corporate charitable contribution deductions (usually 10% of a modified version of unrelated business taxable income) would apply, however.
- "Technical Correction" May Be Needed to Ensure New Section 512(a)(7) is Consistent with Section 274: The Explanation provides that "The determination of unrelated business taxable income associated with providing qualified transportation fringes, including parking facilities used in connection with qualified parking, is intended to be consistent with the determination of the deduction disallowance under section 274." but then drops the following footnote that states in part: "A technical correction may be needed to reflect this intent." I am not sure what the possible inconsistency is that is referred to here, although it may be buried in the recent IRS Notice relating to section 512(a)(7).
Tuesday, December 18, 2018
Congress Lives Up to "Lame Duck" Label: Failed Attempt to Reverse Schedule B Change & Clinton/Trump Foundation Hearing
While Congress may actually keep the government funded during the current lame duck session, its efforts relating to nonprofits appear doomed to amount to nothing. First, with much fanfare the Senate narrowly passed legislation to reverse the IRS decision to no longer require reporting of contributor information for tax-exempt organizations other than 501(c)(3)s and 527s, but that legislation is almost certain not to advance in the House (or survive a trip to the White House, if it came to that). Second, the House Subcommittee on Government Oversight held a hearing on the Clinton Foundation (and, at the insistence of Democratic members, the Trump Foundation). I have not watched the C-SPAN recording, but by all accounts it was a last gasp attack on Hillary Clinton, with even the Washington Examiner calling it "a fiasco" as Republicans clashed with their own witnesses. The only relative bright spot was the testimony of Professor Philip Hackney (Pittsburgh), who used the platform to highlight the congressionally created resource constraints hindering the ability of the IRS to effectively oversee tax-exempt organizations.
There is also the lame duck tax bill (H.R. 88, the Retirement, Savings, and Other Tax Relief Act of 2018), which in its latest iteration would repeal new section 512(a)(7) (includes the costs of certain fringe benefits, most notably parking provided to employees, in unrelated business taxable income), modify the section 4943 rules for excess business holdings with respect to certain purchases of employee-owned stock, relax the Johnson Amendment by not applying it to statements "made in the ordinary course of the [501(c)(3)] organization's regular and customary activities in carrying out its exempt purpose" that do not result in more than de minimis incremental expenses, permit section 501(3) organizations to make collegiate housing and infrastructure grants, and relax some of the section 170 limitations with respect to disaster relief. But it seems that passage of that bill is unlikely.
Tuesday, November 27, 2018
[Questionable] Strategies to Avoid the IRC 4960 Excise Tax on Nick Saban's, Urban Meyer's, Jim Harbaugh's and Jimbo Fisher's Salaries.
Nick Saban will make $8.3 million this year, Urban Meyer $7.6 million, Jim Harbaugh and Jimbo Fisher will each make $7.5 million and Gus Malzahn $6.7 million. They are all football coaches for public universities, which typically don't bother applying for 501(c)(3) status (although some of their constituent organizations often get determination letters). Many public universities avoid federal tax under IRC 115 instead. Nevertheless, and in all likelihood, all those coaches' employers (a typical college football coaching contract is made between the coach, the university, and an athletic foundation; the foundation usually pays the bulk of the enormous salaries to avoid state law salary caps) are looking at ways to comply with or legitimately avoid the new excise tax under IRC 4960. According to this article in the National Law Review, exempt organizations are considering a number of options to avoid the new excise tax under IRC 4960. Those options include:
- There are those who believe that public universities and colleges could use their political subdivision status to be exempt from not only this tax, but also federal taxes in general.
- Some universities are looking into having portions of the covered employee’s compensation paid by an organization that is not related to that university. Such an arrangement could allow the compensation paid by the university or college to stay under the $1-million threshold. “Not related” is the key term here. As stated above, for purposes of determining the compensation for the taxable year, monies paid from all related entities are included.
- Split-dollar life insurance policies may become popular again. Organizations have long used split dollar policies as part of the compensation packages for many of their highest-paid individuals. Although this is not a new idea, the addition of Section 4960 may bring split-dollar policies to the mainstream due to the perceived flexibility such policies provide. The theory is that an organization would buy a split-dollar policy and have the policy allow loans against the life insurance. The policy would loan monies to the covered employee, and the loan proceeds would not be included for purposes of determining the $1-million threshold under Section 4960. Although some split-dollar policies are legitimate, employers may want to carefully consider the ones that seem too good to be true, as the Internal Revenue Service (IRS) is likely to eventually tighten the rules on these policies.
None of those options seem very promising to me. I am especially unsure about the first option, particularly in light of IRC 4960(c)(1)(C), which includes 115(1) organizations [relating to income derived from the exercise of an "essential governmental function and accruing to the state or any political subdivison thereof"] within the definition of exempt entities subject to the tax. Perhaps the author is implying some sort of constitutional challenge under the murky "intergovernmental tax immunity" doctrine. Richard Epstein has a good recent article out on that topic entitled Dual Sovereignty Under the Constitution: How Best to Protect States Against Federal Taxation and Regulation.
Wednesday, November 7, 2018
Thanks to my co-bloggers Lloyd Mayer and Darryl Jones for the excellent posts yesterday on Election Day related material. Reading their posts got me thinking about yesterday’s results, and specifically how they might impact charities. Clearly, I think we will see some impact on the tax side of the charitable world. With the new Democratic majority in the House of Representatives, it appears that Richard Neal of Massachusetts will take over as the Chairman of the House Ways & Means Committee. In addition, apparently a number of Republicans who were on the Committee who wrote the TCJA either retired or were defeated, which should result in significant turn over on the Committee.
Most news coverage this morning is centering on whether the House will now request President Trump’s tax returns, but it is easy to forget that Tax Reform 2.0 is pending, as well as the potential for additional middle-class centered tax cuts. For example, it appeared that the House was strongly considering making permanent some of the individual tax cuts that sunset in 2026 under the TCJA – specifically including the changes to the standard deduction, the personal exemption, and the SALT cap – that potentially impacted the tax incentives for charitable giving. One guess is that the SALT cap (see my brief post on this from Monday) might be ripe for change and politically popular, even among some Republicans. My gut tells me there probably won’t be changes to the executive compensation excise tax, but maybe to the college and university endowment tax – those may be a matter of making the numbers work. And finally, although it didn’t make it into the TCJA, I also wonder if this stops any momentum to change the Johnson Amendment. I’ll be curious to see if some of the recent language that has made it into the annual budget acts limiting IRS authority with regard to enforcing the Johnson Amendment will remain in future acts.
But these are just my Wednesday random musings over my first (and second) cups of coffee (and of course, your results may vary and these are my own thoughts, etc. etc.) – I’m wondering if anyone see the potential for any other, especially non-tax, impacts.
Tuesday, October 23, 2018
As discussed in a previous post, the Treasury and IRS issued proposed regulations to address the attempts by states to create a way for their residents to get around the recently enacted cap on the state and local tax (SALT) deductions by facilitating charitable contributions that would qualify the donors for state tax credits. The proposed regulations would treat the state tax credits as return benefits, thereby requiring a reduction in any otherwise available charitable contribution deduction. Andy Grewal (Iowa), who has been at the center of this debate, has published another article on this topic in the Iowa Law Review Online (103 Iowa Law Review Online 75 (2018)) entitled The Proposed SALT Regulations May Be Doomed. Here is a description of the article:
The IRS recently followed through on its promise to address state strategies designed to avoid the new state & local tax deduction limits. Although programs adopted by blue states sparked the IRS’s interest, the proposed regulations address both blue and red state programs. This has, predictably, led to IRS criticism from all sides. But the IRS was right to step in here. Revenue and policy concerns easily justify administrative guidance on the state strategies.
Unfortunately, the proposed regulations suffer from some significant technical and conceptual flaws. Those flaws, if left unaddressed, may jeopardize the validity of any final regulations, especially as they apply to red state programs. This essay discusses the flaws in the proposed regulations and offers recommendations for improvement.
Thursday, October 11, 2018
My dad had four sons. I have four daughters. The one athlete amongst them used to ask me all the time, when she was 9 or 10 years old, if she could tag along with me whilst me and some buddies tried to shoot in the 90's on some expensive Orlando golf course. "No, baby girl," I'd say, "Daddy is playing with a buncha old men and, well, you just wouldn't have any fun." Times have certainly changed. When she's home from college, where she's golfing everyday with her D-I teammates, watching the golf channel, partying, watching more golf channel, and . . . oh yeah, going to class and the "study hall" that is mandatory for all "student-athletes," the last thing she wants to do is wait around watching me shoot a triple bogey while she is on the green in regulation. I shoulda had her out on the course at 3 or 4 years old. I chuckled about that as I watched HBO's new documentary last night entitled, "Student-Athlete." Life could be worse, I suppose. My third daughter has a real competitive streak and as a "he" my "son" might have spent untold hours in the gym, on the court, or on the football field, all places much more dangerous than the golf course. Instead of in class. Or maybe in class but the coach probably would not have approved of "too" much time away from practice. HBO likely overstates the case (but not by much) when it claims that athletes get nothing out of the deal. Sure, a lot of former student athletes hardly earn more than if they had skipped college altogether. The documentary does a good job of portraying the stereotypically exploited student athlete, who now finds himself out of eligibility and sleeping in his car. But, then, a lot of "student-athletes" would never ever have stepped on a college campus if it were not for the NCAA. All that is so much besides the real point, though.
There are a few more provocative soundbites from the documentary (more precisely linked below) that I wish were included in the actual episode. On the recent academic front, Schmalbeck and Zelenack, two familiar experts, have a good paper coming out soon (if its not already out) proving at least four ways the NCAA is more business than charity. But alas, the paper only nibbles around the edges of the real problem. You can read the abstract over on Taxprof. The paper only suggests what is obvious. The NCAA is BIG business and ought to be taxed as such, just like professional sports teams. Its no longer just a story about taxing the NCAA around the edges of its "unrelated business;" the whole thing is unrelated. And, it's racial injustice, it's CEO coaches earning millions and who damn well better make sure his or her "employees" know the play-book never mind the textbook, its worthless degrees, and its billions of dollars for everybody except the "student-athlete." Professor Anne Marie Lafaso's recent article Groomed for Exploitation! "matriculates" the ball further down the field, if we are being honest about it. And we are aren't we? Honest, I mean. Anyway, here is her abstract:
In this article, I examine the connection between the exploitation of college football players and the persistence of the student-athlete myth. The argument that exploitation is enabled by this myth is presented in five parts. First, I briefly define the concept of exploitation, distinguish between two types of exploitation (transactional and structural), and posit that, while there may be some transactional exploitation in dealings between college football players and their schools, this situation poses the problems associated with structural exploitation.
Second, I describe an important part of the sociological context in which this story is unfolding; that these young athletes are groomed for exploitation as high school students and then further exploited as college athletes. To that end, I briefly review six aspects of that exploitation: (1) the sport is brutal; (2) there is a low financial payoff for a sport so high in health and safety risks; (3) college football has been commercialized for some time with Power Five universities and the NCAA having much at stake; [emphasis added] (4) the student-athlete ideal is a myth perpetuated by those who have a financial stake; [emphasis added] (5) Power Five universities hold monopsony power; and (6) lawmakers have been unwilling to recognize this vulnerability, thereby exacerbating the exploitation.
Third, I position this discussion in the context of two recent news stories: the case of the Frostburg State football player who died in practice because of a concussion that his coach allegedly ignored; and the Northwestern case, in which the football players attempted to form a union. By placing this controversy within the context of two specific cases, one which represents the brutality of the sport and the other which represents players’ unsuccessful attempt at self-help, the reader should gain insights into the horrific exploitation of our young people all in the name of commercialization.
Fourth, I argue that the National Labor Relations Board should have found that the Northwestern football players were employees for purposes of collective bargaining and mutual aid or protection. Finally, I explain that cognitive dissidence results from the fact that college student athletes often meet the statutory definition of employee and our intuition that college athletes should not be employees of the very university that allegedly has an interest in educating that young person.
"Monopsony power!" And completely untaxed. Anyway, Go Gators!
Friday, September 28, 2018
According to the Center for Responsive Politics, one emerging issue for both the 2018 midterm elections and the Kavanaugh confirmation battle is the flow of funds from so-called "dark money" groups - generally tax-exempt nonprofits that are not required to publicly disclose their donors. This issue has also been in the news recently because of both recent action by the IRS and a couple of significant court decisions.
In July the IRS issued Revenue Procedure 2018-38, which dropped the requirement that section 501(c) organizations report the names and addresses of substantial contributors to the IRS. This reporting had been done on Schedule B to the annual Form 990, 990-EZ, or 990-PF, with the information only available to the IRS and not subject to public disclosure (unlike the rest of Form 990/990-EZ/990-PF). This change is effective for tax years ending on or after December 31, 2018. The reporting requirement still applies to section 501(c)(3) organizations, however, as for those organizations there is a statutory requirement (found in section 6033(b)(5)) of such reporting. The stated reason for the change was:
The IRS does not need personally identifiable information of donors to be reported on Schedule B of Form 990 or Form 990-EZ in order for it to carry out its responsibilities. The requirement to report such information increases compliance costs for some private parties, consumes IRS resources in connection with the redaction of such information, and poses a risk of inadvertent disclosure of information that is not open to public inspection.
Some commentators saw a political motive in the change, however, as it relieves politically active "dark money" nonprofits from having to disclose their substantial donors to the IRS. Coverage: NPR; Politico; ProPublica. And Montana Governor Steve Bullock sued to challenge the change, asserting that Treasury failed to follow required processes under the Administrative Procedure Act. Coverage: N.Y. Times.
Supporters of donor disclosure, particularly for politically active groups, were more successful in the courtroom recently. California Attorney General Xavier Becerra successfully appealed to the Ninth Circuit the granting of as applied challenges by the Thomas More Law Center and the Koch brothers-affiliated Americans for Prosperity Foundation that had exempted the Center and APF from the state requirement to provide an unredacted copy of its Schedule B to the Attorney General's office (but not for public disclosure). The Ninth Circuit in 2015 had rejected a facial challenge to this requirement. Of course with the above change by the IRS, only section 501(c)(3) organizations (such as the Center and APF) will have Schedule Bs to submit. Coverage: ABA Journal (collecting links to coverage by major news outlets).
Possibly of even greater consequence, the U.S. District Court in the District of Columbia in CREW v. FEC vacated a longstanding FEC regulation that had permitted organizations that are not political committee but make independent expenditures (defined as expenditures to pay for communications that expressly advocate the election or defeat of a federal candidate and which are not done in coordination with any federal candidate or political party) to avoid disclosure of their significant donors to the FEC as long as the donors had not earmarked their donation to support a particular, reported independent expenditure. The court reasoned that the relevant statute instead required such disclosure if the funds provided were for the purpose of supporting independent expenditures generally. The court stayed the vacator for 45 days from the date of the decision (August 3, 2018) to give the FEC time to issue an new, interim regulations, although it is far from clear the FEC can or will do so in that time period. Attempts to obtain a further stay of the District Court's order from the Supreme Court failed, however, leaving it somewhat uncertain what rules would apply to groups making such independent expenditure in the run-up to the 2018 general election. Coverage: The Atlantic; Politico. According to Election Law expert Rick Hasen, the ruling may not have as dramatic an effect as some seem to think, however.
Saturday, July 7, 2018
The much discussed attempts by high-tax states to find a way for their residents to continue to contribute to state and local coffers without running smack into the new $10,000 limit on deducting state and local taxes (SALT) raises an important issue relating to the charitable contribution deduction - when, if ever, is a SALT reduction a return benefit that reduces or eliminates the deduction for the "charitable" contribution that triggered the SALT reduction? While the Treasury Department has expressed its disapproval of such workarounds, its task is complicated by the fact that there were more than a 100 state charitable tax credit provisions in place across 33 states before the recent federal tax legislation.
For the arguments in favor of permitting the charitable contribution deduction under these circumstances (and a list of the previously existing state charitable tax credits), see Joseph Bankman et al., State Responses to Federal Tax Reform: Charitable Tax Credits, published in Tax Notes, April 30, 2018. Here is the abstract:
This paper summarizes the current federal income tax treatment of charitable contributions where the gift entitles the donor to a state tax credit. Such credits are very common and are used by the states to encourage private donations to a wide range of activities, including natural resource preservation through conservation easements, private school tuition scholarship programs, financial aid for college-bound children from low-income households, shelters for victims of domestic violence, and numerous other state-supported programs. Under these programs, taxpayers receive tax credits for donations to governments, government-created funds, and nonprofits.
A central federal income tax question raised by these donations is whether the donor must reduce the amount of the charitable contribution deduction claimed on her federal income tax return by the value of state tax benefits generated by the gift. Under current law, expressed through both court opinions and rulings from the Internal Revenue Service, the amount of the donor’s charitable contribution deduction is not reduced by the value of state tax benefits. The effect of this "Full Deduction Rule" is that a taxpayer can reduce her state tax liability by making a charitable contribution that is deductible on her federal income tax return.
In a tax system where both charitable contributions and state/local taxes are deductible, the ability to reduce state tax liabilities via charitable contributions confers no particular federal tax advantage. However, in a tax system where charitable contributions are deductible but state/local taxes are not, it may be possible for states to provide their residents a means of preserving the effects of a state/local tax deduction, at least in part, by granting a charitable tax credit for federally deductible gifts, including gifts to the state or one of its political subdivisions. In light of recent federal legislation further limiting the deductibility of state and local taxes, states may expand their use of charitable tax credits in this manner, focusing new attention on the legal underpinnings of the Full Deduction Rule.
The Full Deduction Rule has been applied to credits that completely offset the pre-tax cost of the contribution. In most cases, however, the state credits offset less than 100% of the cost. We believe that, at least in this latter and more typical set of cases, the Full Deduction Rule represents a correct and long-standing trans-substantive principle of federal tax law. According to judicial and administrative pronouncements issued over several decades, nonrefundable state tax credits are treated as a reduction or potential reduction of the credit recipient’s state tax liability rather than as a receipt of money, property, contribution to capital, or other item of gross income. The Full Deduction Rule is also supported by a host of policy considerations, including federal respect for state initiatives and allocation of tax liabilities, and near-insuperable administrative burdens posed by alternative rules.
It is possible to devise alternatives to the Full Deduction Rule that would require donors to reduce the amount of their charitable contribution deductions by some or all of the federal, state, or local tax benefits generated by making a gift. Whether those alternatives could be accomplished administratively or would require legislation depends on the details of any such proposal. We believe that Congress is best situated to balance the many competing interests that changes to current law would necessarily implicate. We also caution Congress that a legislative override of the Full Deduction Rule would raise significant administrability concerns and would implicate important federalism values. Congress should tread carefully if it seeks to alter the Full Deduction Rule by statute.
For a contrary view, see Roger Colinvaux, Failed Charity, Taking State Tax Benefits into Account for Purposes of the Charitable Deduction, Buffalo Law Review (forthcoming). Here is the abstract:
The Tax Cuts and Jobs Act (TCJA) substantially limited the ability of individuals to deduct state and local taxes (SALT) on their federal income tax returns. Some states are advancing schemes (CILOTs) to allow taxpayers a state tax credit for contributions to a 501(c)(3) organization controlled by the state. The issue is whether CILOTs are deductible as charitable contributions on federal returns. Under a general rule of prior law – the full deduction rule – state tax benefits were ignored for purposes of the charitable deduction. If the full deduction rule is applied to CILOTs, then the SALT limitation can successfully be avoided. This article explains that after the TCJA, state tax benefits are more valuable and it no longer makes sense to ignore them for purposes of determining whether a taxpayer has made a charitable contribution. To allow a charitable deduction for payments that make a taxpayer better off would undermine a fundamental purpose of the charitable deduction: that it is meant to encourage personal sacrifice, not tax avoidance. Thus, CILOTs likely fail as charitable contributions. Further, by changing the economics of state tax benefits, Congress inadvertently has called into question the deductibility of a variety of other payments that trigger state tax benefits and that previously have been deducted as charitable contributions.
The recently enacted federal excise tax on private college and university endowments may not be the last congressional word relating to such endowments. Research relating to such endowments, including a recent Congressional Research Service report and a recent report out of the Federal Reserve Bank of Cleveland therefore may have important policy implications.
The CRS report is titled College and University Endowments: Overview and Tax Policy Options. Here is the Summary:
Colleges and universities maintain endowments to directly support their activities as institutions of higher education. Endowments are typically investment funds, but may also consist of cash or property. Current tax law benefits endowments and the accumulation of endowment assets. Generally, endowment fund earnings are exempt from federal income tax. The 2017 tax revision (P.L. 115-97), however, imposes a new 1.4% excise tax on the net investment earnings of certain college and university endowments. Taxpayers making contributions to college and university endowment funds may be able to deduct the value of their contribution from income subject to tax. The purpose of this report is to provide background information on college and university endowments, and discuss various options for changing their tax treatment.
This report uses data from the U.S. Department of Education, the National Association of College and University Business Officers (NACUBO) and Commonfund Institute, and the Internal Revenue Service to provide background information on college and university endowments. Key statistics, as discussed further within, include the following:
In 2017, college and university endowment assets were $566.8 billion. Endowment assets have been growing, in real terms, since 2009. Endowment asset values fell during the 2007-2008 financial crisis, and took several years to fully recover.
Endowment assets are concentrated, with 12% of institutions holding 75% of all endowment assets in 2017. Institutions with the largest endowments (Yale, Princeton, Harvard, and Stanford) each hold more than 4% of total endowment assets.
The average spending (payout) rate from endowments in 2017 was 4.4%. Between 1998 and 2017, average payout rates have fluctuated between 4.2% and 5.1%. In recent years, institutions with larger endowments have tended to have higher payout rates.
In 2017, endowment assets earned a rate of return of 12.2%, on average. Larger institutions tended to earn higher returns. Larger institutions also tended to have a larger share of assets invested in alternative strategies, including hedge funds and private equity.
Changing the tax treatment of college and university endowments could be used to further various policy objectives. Current-law tax treatment could be modified to increase federal revenues. The tax treatment of college and university endowments could also be changed to encourage additional spending from endowments on specific purposes (tuition assistance, for example).
Policy options discussed in this report include (1) a payout requirement, possibly similar to that imposed on private foundations, requiring a certain percentage of funds be paid out annually in support of charitable activities; (2) modifying the excise tax on endowment investment earnings; (3) a limitation on the charitable deduction for certain gifts to endowments; and (4) a change to the tax treatment of certain debt-financed investments in strategies often employed by endowments.
The Federal Reserve Bank report is authored by one the Bank's Senior Research Economists and titled simply College Endowments. Here are the first three paragraphs (footnotes omitted):
The Tax Cuts and Jobs Act (Public Law 115-97) was signed into law by President Trump on December 22, 2017. Among the law’s numerous provisions is a new 1.4 percent tax on the investment income of private colleges and universities enrolling at least 500 students and with assets of at least $500,000 per student.
Opinions on this “endowment tax” vary. Some commentators argue that it makes it more difficult for colleges and universities to fulfill their educational missions, while others feel that it rightly incentivizes them to spend endowment funds on beneficial research and teaching rather than receiving tax advantages to invest their endowments in risky assets.
No matter what the case may be, now is an opportune time to take a deeper look at college endowments. What are endowments, and what is their purpose? How have the values of endowments at US colleges fluctuated over time, and what is their distribution currently? How many colleges will be affected by the new law? I consider these questions using data on college endowments from the National Center for Education Statistics’ Integrated Postsecondary Education Data System.
Two important recent reports provide information regarding trends in charitable giving, the annual Giving USA report and a report from the American Enterprise Institute on the likely effects of the recent federal tax legislation on charitable giving.
The Giving USA 2018 report shows continued growth in charitable giving, by 5.2 percent (3.0 percent adjusted for inflation) over 2016 to an estimated $410.02 billion in 2017. Individuals continue to provide most of the giving (70 percent), although foundation giving has increased by an annualized average of 7.6 percent over the past five years. Religious organizations continue to receive the largest proportion (31 percent) of giving among types of charities. These numbers mask at least two interesting trends, however. One is the well-known growth in donor-advised funds (see, e.g., this Atlantic article and this ThinkAdvisor article, both gathering data about such growth). The other is a decline in the number of donors, even as the total amount of donations has increased, as documented in data collected by the Indiana University's Lilly School of Philanthropy showing that from 2000 to 2014 the share of Americans donating dropped from 66.2 percent to 55.5 percent. See Chronicle of Philanthropy article.
The Giving USA report almost certainly does not reflect much impact from the recent federal tax legislation, given its passage in December 2017, but the AEI report fills that gap by trying to predict how the legislation as enacted will affect charitable giving. It concludes that the tax law changes will reduce charitable giving by 4.0 percent or $17.2 billion in 2018 under a static model and by $16.3 billion if the changes also provide a modest boost to growth. Four-fifths of this effect is driven by the increased number of taxpayers who will claim the enhanced standard deduction and so will no longer benefit from the itemized charitable contribution deduction.
Thursday, July 5, 2018
In its 2018 Report of Recommendations, the Exempt Organizations Subgroup of the Advisory Committee on Tax Exempt and Government Entities (ACT) reiterated its strong support for e-filing of Form 990 series returns, which the 2015 ACT report also had supported. As detailed in that earlier report, increased e-filing would increase the ability of the IRS to review such returns, improve the completeness and accuracy of such returns, and provide greater public access to return data. While there are security and technology issues raised by e-filing as detailed in the 2018 report, these exist for the currently e-filed returns and appear to be manageable.
As ACT recognizes, mandatory, universal e-filing would require legislative action. While legislative proposals along these lines have been around for a number of years, including a bill introduced in the current session of Congress, it is far from clear that such legislation will become law. In the absence of legislation, the 2018 report urges the IRS to pursue various other measures, including eliminating the $10 million threshold for requiring e-filing and so require all exempt organizations that are required to file at least 250 returns (e.g., Forms W-2, 1099-Misc) to e-file. More controversially, the report suggests that Treasury should consider either exempting e-filers from having to file Schedule B (identifying relatively large donors) or eliminating that schedule altogether since it creates concern about public release of such information (the schedule is not subject to public disclosure under current law, but there have been rare instances when it has become public).
Wednesday, May 9, 2018
Yesterday I wrote about the discretion New Zealand gives to administrators to assess the benefit of policy views, and I mentioned that this is not usually the approach we follow in the United States. But this has not always been the case. Indeed, governments in the US have a long history of abusively denying incorporation or the right to solicit donations to unpopular causes. Perhaps the best known/most egregious example is the outlawing of the NAACP in southern states in the 1950s. But there are many examples, including several that attempted to exclude organizations advocating for the decriminalization of LGBT people such as a bill that outlawed gay rights organizations that passed the US House. [Note: this post quotes materials that are offensive.]
Friday, February 23, 2018
Ellen Aprill (Loyola-LA) previously pointed out that there is an apparent glitch in the newly enacted excise tax on compensation over $1 million dollars for tax-exempt organization employees, in that new section 4960 does not appear to apply to public universities even though the public and maybe Congress thought that it would. Now Bloomberg Law reports that a Joint Committee on Taxation official has stated that a correction is needed to make it clear that public universities are within the ambit of this excise tax. More specifically, she said that the provision "requires a statutory technical correction" to resolve this issue. Whether such a correction will be forthcoming, or indeed any corrections to the recent tax reform legislation, remains to be seen.
Wednesday, February 21, 2018
Last week the U.S. Court of Appeals for the Second Circuit issued an opinion rejecting federal constitutional and other challenges to New York regulations requiring "charitable organizations" to disclose the identities of their significant donors to the state's Attorney General by submitting copies of Schedule B from the annual information returns (Form 990) they file with the IRS. In Citizens United and Citizens United Foundation v. Schneiderman, the section 501(c)(3) Citizens United Foundation and the section 501(c)(4) Citizens United organizations challenged the regulations on First Amendment, Due Process, federal preemption, and state constitutional grounds.
With respect to the First Amendment challenge, the court rejected the organizations' arguments that the required disclosure would intimidate potential donors from contributing and operated as a presumptively unconstitutional prior constraint. Disagreeing with the organizations' argument that strict scrutiny applied, the court instead applied exacting scrutiny and concluded that the state's interests in preventing fraud and self-dealing in charities were sufficient to support the limited chilling effect of the required disclosure to the Attorney General, especially given that the disclosure did not go beyond that office. The court also found that regulations did not constitute the sort of prior restraint that is presumed to be unconstitutional.
With respect to the other claims, the court found that the Due Process claim was ripe for consideration (contrary to what the District Court had concluded), but rejected the claim on its merits. The court also rejected the federal preemption argument and the state constitutional claim that the Attorney General lacked the authority to include organizations classified as social welfare organizations under section 501(c)(4) of the Internal Revenue Code within the ambit of "charitable organizations" for purposes of the AG's authority under state law.
Presumably the organizations will seek certiorari, so the final chapter has yet to be written in this developing case.
Thursday, February 15, 2018
Section 41110 of the Bipartisan Budget Act of 2018 includes the so-called Newman’s Own provision – an amendment to Code Section 4943 (the private foundation excise tax on excess business holdings) that would allow a private foundation to own a significant stake in an operating business under certain circumstances. By all reports, the foundation that owns Newman’s Own is subject to Code Section 4943, and would need to liquidate its holdings in the company in short order without legislative changes to Code Section 4943.
As you may know, Code Section 4943 provides that a private foundation may not own an “excess” holding in a operating business. Very generally, the excess holding for an operating business in corporate form is equity having 20% of the corporation's voting power reduced by the voting power held by “disqualified persons” – typically, substantial contributors, foundation managers, and their family and related entities under Code Section 4946. If a foundation holds an excess business holding by gift or inheritance (e.g., Paul Newman dies and leaves all his stock to his foundation), the foundation has five years to dispose of the excess holding. If the foundation could demonstrate that it could not dispose of the holding despite its efforts during that five year period, the Service could grant a discretionary additional five years.
New Code Section 4943(g) would allow a private foundation to hold 100% of the voting stock of an operating business if it acquires those interests by gift, it receives the net operating income of from the business annually, and the business and the foundation are operated independently, as determined by certain board composition rules. Presumably, this would allow Paul Newman's foundation to continue to own Newman's Own and receive the proceeds from operation.
I am not going in to the details of the actual language of the statute (yet…) – there are some questionably drafted provisions (shocking…) that raise some issue I’m still thinking about. No worries, I’m here all week.
That being said, I am troubled by this provision as a general matter. First, the idea of changing statutes for specific taxpayers, no matter how well-intentioned and deserving (I love the salsa….), is always distasteful to me. Now, I’m not so naïve that I don't know that it happens all the time (I’m looking at you, motorsports facilities and the Orange Bowl and race horses…) but it doesn’t mean it’s good practice and one that should be lauded.
More to the substance, however, this new provision really flies in the face of the whole purpose of Code Section 4943. If you read the legislative history (which I have and have helpfully summarized for you here: (shameless plug): Better Late Than Never: Incorporating LLCs Into Section 4943)), you find that the original intent behind Code Section 4943 was not really about prohibiting self-dealing. After all, Code Section 4941 (the self-dealing prohibition) was passed at the same time. Code Section 4943 is about focus: is the foundation focusing on its charitable endeavors, or it is spending a more than insubstantial amount of its time running a business? It is, to some degree, understandable that the foundation would pay close attention to the primary source of its income. That being said, the source of the private foundation’s exemption is its charitable program, and if that program suffers in the shadows of operation of a substantial business subsidiary, what is the point of exemption? Do we still believe that the destination of income test is not a thing? In my mind, none of the requirements of new Code Section 4943(g) address this concern directly.
I suspect my discomfort will grow as my estate planner hat takes over, but in the meanwhile, pass the tortilla chips.
P.S. I know “It’s In There” was Prego – you try making a pithy headline involving tax and pasta sauce.
Tuesday, February 13, 2018
I’m scrolling through the Bipartisan Budget Act of 2018 (the “BBA”)(P.L. No. 15-123 signed on February 9, 2018 – enrolled bill from Thomas.gov here) in my leisure time. It appears that there are two provisions that directly impact exempt organizations, as follows:
- Section 41109 of the BBA clarifies the application of the investment income excise tax for private colleges and universities. As you may recall, Section 13701 of the legislation formerly known as the Tax Cuts and Jobs Act (TCJA) added new Section 4968, which imposes an excise tax on the investment income of certain private colleges and universities. This new excise tax only applies to private colleges and universities that have at least 500 students, more than 50% of which are located in the U.S. The BBA clarifies that this refers to “tuition paying” students only – but of course, it didn't actually give us a statutory definition of “tuition paying.” Full tuition? External scholarship? Internal scholarship? Tuition waiver? Work study? Have fun with the counting, university admin types.
- Section 41110 of the BBA contains the Newman’s Own provisions by adding Code Section 4943(g) (h/t to Evelyn Brody for the CT Mirror article). These provisions were originally in the TCJA but were struck by the Senate Parliamentarian for having insufficient budget impact. I will have more to say about Section 4943(g) in another post.
Unless I missed it (let me know if I did!), absent from the BBA are the following: (1) the Johnson Amendment provisions that were also struck from the TCJA by the Senate Parliamentarian, and (2) the technical fix to the exempt organization excess compensation excise tax found in new Code Section 4960 that would actually make it applicable public universities - as apparently was originally intended but, as discussed by Professor Ellen Aprill, there was a significant drafting fail. (I heard a rumor that someone from the IRS agreed at the ABA Tax meeting that the technical fix was, in fact, necessary - can anyone confirm?) If only there were a process by which Congress could talk to experts like Ellen before it finalized draft legislation…
Tuesday, January 2, 2018
James Fishman, Stephen Schwarz, and I have written supplemental update memos for our Nonprofit Organizations casebook reflecting the recently passed federal tax legislation. One update is for students and the other is for teachers. Foundation Press should make them available shortly, but for those of you who need them urgently please email any of us and we can send them directly to you.