Thursday, July 22, 2021
Thought I'd provide some quick reflections on the NCAA v. Alston a SCOTUS case handed down a month ago on June 21.
First a personal reflection. When I joined the IRS in the mid 2000s, I was told only somewhat in jest: there are two iron clad rules in exempt organizations -- preachers and college athletics ("hook em horns") always win. This latest case suggests that this iron clad rule may be beginning to subside in part at least.
Justice Gorsuch, writing for a unanimous Court affirmed the US 9th Circuit Court of Appeals in finding that the NCAA rules restricting educational benefits offered by colleges and universities to student athletes violated the Sherman Antitrust Act.
The Court affirmed the 9th Circuit that found that the NCAA limits on educational compensation violated the Antitrust Act only insofar as they involved educational benefits rather than other forms of compensation.
Probably the most significant aspect of the case that may have impact on other places for the NCAA and college athletics is that SCOTUS rejected the idea that the NCAA ought be treated differently because it deals with amateurs and is engaged in education rather than commercial activity.
This case does not change anything for how to think about universities and college athletics qualifying as charitable organizations under section 501(c)(3). John Colombo wrote an article The NCAA, Tax Exemption and College Athletics that is still relevant to this question today.
First, I would not expect this decision to effect college athletics entities like the NCAA or the university athletic activities to be found to be not charitable. This is because Congress amended the Code to provide that promoting amateur athletics is a purpose that meets the charitable requirement of section 501(c)(3). Perhaps, if universities start paying athletes and their amateurism is called into question, this would become an issue, but as of now, I do not see it threatening college athletics on the tax exemption angle.
Secondly, this ruling does not immediately impact the unrelated business income tax and college athletics either. The IRS and Courts have generally been favorable to college athletics. Just as Colombo concluded in his article some years ago, I think it still unlikely for that favorability to end because of the Alston holding.
However, as in the first matter, should the veneer of amateur begin to fall, and college athletics begin to compensate athletes, then the question of unrelated business income tax could become a real issue again for college athletics. The most dangerous possibility for college athletics and its expected tax treatment at least was raised in a concurrence by Justice Kavanaugh who suggested he would find the limitations on all forms of compensation to violate the Antitrust Act.
Tuesday, July 13, 2021
The past month has seen a number of significant developments relating to donor advised funds, including the introduction of the Accelerating Charitable Efforts Act ("ACE Act") in Congress, a study of Michigan community foundation DAFs, and media criticism of various uses of DAFs.
Senators Angus King (I-Maine) and Chuck Grassley (R-Iowa) announced the introduction of the ACE Act in early June. The legislation aligned with the priorities and some of the proposals by the Initiative to Accelerate Charitable Giving. Some organizations quickly expressed strong opposition, including the Council on Foundations and the Philanthropy Roundtable. Others reserved judgment, awaiting further study and input from their members, including Independent Sector and the United Philanthropy Forum, although they joined a letter from some critics expressing concerns about the Act. Coverage: Devex; MarketWatch.
Also last month, the Council of Michigan Foundations released a study titled "Analysis of Donor Advised Funds from a Community Foundation Perspective." Here are its Key Findings:
- DAFs compose a considerably smaller percentage of endowments of Michigan community foundations compared to community foundations nationwide. The median community foundation in the United States holds roughly one in four dollars of its endowment on behalf of a DAF — compared to one in ten for Michigan’s community foundations.
- The median Michigan DAF experienced investment returns consistent with the median Michigan community foundation. DAF gains were slightly higher, and losses slightly greater, than the median community foundation’s results — suggesting that the median DAF accepts more risk with the opportunity for higher return.
- The median payout rate of all Michigan DAFs during 2017–2020 is 2% lower than the median Michigan private or community foundation. However, when only including DAFs that made a payout during a given year, the median DAF payout rate moves to 2% or more higher than the median private or community foundation payout rate.
- In any given year included in this study (2017–2020):
- One in ten Michigan DAFs received inbound contributions but made no outbound distributions (grants).
- More Michigan DAFs made a distribution (more than 60%) than received an inbound contribution (roughly 40%).
- Although an average of one in four Michigan DAFs was quiet (inactive) in any single year, across the four study years less than 10% of all Michigan DAFs were quiet in every year. These quiet DAFs hold less than 5% of total DAF assets in the state.
- DAFs that were active in every year 2017 through 2020 — with a contribution, distribution, or both — comprised the majority of Michigan’s DAFs (59%), received nearly all of the contributions (96%), made nearly all of the distributions (88%), and held nearly all of the assets (82%).
- In 2020 (the most recent year available), just under half (43%) of Michigan’s DAFs paid out 5% or more of their balance, and almost a third (32%) paid out 9% or more.
- Looking at the type of DAF:
- Michigan’s DAFs are nearly evenly divided in both number and total assets between endowed and spendable DAFs, with endowed DAFs holding just over 50% of all assets. However, spendable DAFs comprise nearly three-quarters of all contributions and distributions.
- One-quarter of Michigan’s spendable DAFs distribute nearly half of their balance in any given year, and one in every ten spendable DAFs distributes almost all of the available balance (80% or more) in any given year.
- Out of the approximately 2,600 DAFs housed at Michigan’s community foundations, only 2% were established by a private foundation. Balances, contributions, and distributions were also all in single digit percentages. Therefore, private foundation-established DAFs are rare within Michigan’s DAF universe.
- There is evidence that DAFs responded to the crises in 2020.
- Two-thirds of all DAFs made distributions in both 2019 and 2020, with just over one-third (35%) increasing both the dollars distributed and the payout rate in 2020 compared to 2019.
- Nearly one in five distributed dollars in 2020 came from DAFs that made no distributions during 2019.
- The median distribution from a Michigan DAF rose from $8,500 in 2019 to $9,750 in 2020.
Finally, there have been several news stories and opinion pieces including criticism of DAFs. These included a N.Y. Times story "How Long Should It Take to Give Away Millions?", an L.A. Times editorial "Charitable donations are a form of influence-peddling. And they should be stopped" (use of DAFs to avoid California's legally required public disclosure of the sources for donations requested by politicians), and a Daily Beast story "Christian Billionaires Are Funding a Push to Kill the Equality Act" (focusing on donations from the DAF sponsor National Christian Charitable Foundation).
Monday, June 21, 2021
It is widely known that private schools in the South were used during the later part of the 20th century as a way to escape mandatory desegregation mandates. However, it may come as a surprise that many private schools in the South and across the country continue to engage in racially discriminatory practices today and still benefit from federal tax-exemption. In other words, as two of my tax colleagues pointed in their article “Subsidized Injustice,” tax money is used to subsidize or fund these discriminatory schools. If such schools faced the loss of tax-exemption for racially discriminatory policies and practices, the two-fold fall out effect would require them to change their harmful ways. First, a loss of tax-exemption would mean the schools would have to pay tax on their net income for a given year. Many private schools cost on average over $20,000 per student per year. At the same time, they tend to have numerous business deductions, including salaries, which would decrease their overall tax liability. Second, a loss of tax-exemption would mean such schools could no longer provide donors with a tax deduction for their contributions. Most private schools rely on donations from affiliated families and board members to support their programs. In addition, as observers have noted, a loss of tax-exempt status would "signal" to potential applicants and current families that a private school was engaging in racially discriminatory practices.
It is important to observe the history of private schools in the South, as it provides important insight as to the continued racially discriminatory practices today and how tax law can provide a solution. As the Southern Education Foundation explains, a large-scale exodus from public schools in the South started in the 1940’s, which resulted in an approximately 43% increase in private school enrollment. This exodus from public schools began in the 1940s, after US Supreme Court decisions forbidding segregation in graduate and professional schools in the South. Even though the Supreme Court decisions only dealt with higher education, they were a signal to Southern families that public elementary and secondary schools were next.
Once the Supreme Court destroyed the “separate but equal” doctrine, another road to staying “separate” emerged in the form of private school migration. Notably, from 1950-1965, private school enrollment grew at rapid rates across America, with the South having the highest rates. According to the Southern Education Foundation, by 1958, private school enrollment in the South increased by over $250,000 in an eight-year period, resulting in one million students by 1965.
To bolster this migration, Southern state legislatures enacted approximately 450 laws and resolutions between 1954 and 1964 to subvert desegregation, including by specifically authorizing the systematic transfer of public assets and monies to private schools. Although ultimately federal courts invalidated these laws, which also caused some Southern states to recant, many private schools still found more secretive ways to funnel public funds to private schools.
During the next wave of migration from the mid-1960s to 1980, as public schools in the Deep South began to slowly desegregate due to federal court orders, private schools increased their enrollment by more than 200,000 students. Approximately 67% of the growth occurred in the following six states: Alabama, Georgia, Louisiana, Mississippi, North Carolina, and South Carolina. At the same time, the issue of federal tax exemption for segregated private schools came to the forefront. In the early 1960s, the IRS temporarily suspended applications of self-professed “segregation academies” given the pressure from civil rights organizations. In 1970, the IRS announced a non-discrimination policy applicable to private schools, which due to continued resistance took eight years to implement.
Meanwhile, private school enrollment in the South grew at an alarming rate. During the beginning of the 1980’s, the eleven Southern states that had made up the Confederacy enrolled around 675,000 and 750,000 white students. The racial composition of these schools was startling, with an estimated 65 to 75 percent of enrolled students attending schools having a student body that was 90 percent or more white.
In the end, the IRS was successful in implementing its new policies, but faced criticism from religious private schools in the South. Eventually, this controversy led to the landmark 1983 case, Bob Jones University v. United States, 461 U.S. 574 (1983). In Bob Jones, the Supreme Court held that the Internal Revenue Service (IRS) may deny tax-exempt status to schools with racially discriminatory policies. Such policies were denounced as “contrary to established public policy,” despite allegedly being based on religious beliefs.
Due to the new IRS rules and the Bob Jones case, all private schools in the South adopted statements of non-discrimination in admission and began admitting at least a small number of black students and other students of color. The story should have ended back in 1983 of federally funded segregation in private schools and a new story of integration and opportunity should have started. Unfortunately, the racist practices in private schools simply took on more covert forms in the South and in other areas, and private schools have continued to reap the benefits of tax exemption.
Hoffman Fuller Associate Professor of Tax Law
Tulane Law School
Wednesday, May 19, 2021
In a case deep in the weeds of tax-exempt law, the United States Eighth Circuit Court of Appeals remanded Mayo Clinic v. United States, No. 19-3189 back to the District Court. Though deep in the weeds, the case has some potential big importance to tax exempt law.
Though it is technically about whether Mayo owes the unrelated business income tax associated with debt financed income, it has big importance because a loss here would potentially open up a simple way for charitable organizations to establish that they have a favored status of being a public charity rather than a private foundation by being an educational organization.
In order to be allowed an exemption under section 514 of the Code from the UBIT, Mayo claimed that it is a qualified organization under section 514(c)(9)(C)(i) because it is an "educational organization under section 170(b)(1)(A)(ii). That statute states: an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on." Note that without the "primary test" a charity could normally maintain faculty and curriculum and normally have a regularly enrolled body or pupils, as something less than a primary part of the organization's activity.
The IRS determined that Mayo was not such an educational organization based on its regulation interpreting the above language. The regulation Treas. Reg. 1.170A-9(c)(1) provides an organization is an educational organization "if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on."
Obviously Treasury and the IRS added the "primary function" test to what is provided for in the statute. The District Court held for Mayo on the basis that the primary function was not a part of the test Congress implemented. Mayo Clinic v. United States, 412 F. Supp. 3d 1038 1042 (D. Minn. 2019).
After applying the Chevron Two Step, the Appeals Court upheld the Treasury Regulation, but only in part, it says. It first finds that the District Court was right that the primary test added by Treasury was not reasonable. They find that the history and prior case law did not support this language. But then it suggests that the primary test should indeed apply but as to the idea of educational generally. Thus, the court determines that the test to apply is as follows: "The analysis normally unravels in three parts: (1) whether the taxpayer is “organized and operated exclusively” for one or more exempt purposes; (2) whether
the taxpayer is “organized and operated exclusively” for educational purposes; and (3) whether the taxpayer meets the statutory criteria of faculty, curriculum, students, and place."
One part of the history of charitable organizations that the Eighth Circuit fails to trace is the development of the idea of a publich charity under section 509 of the Code. There an organization is generally determined to be a private foundation unless it meets one of the requirements under (a)(1)-(4). Section 509(a)(1) includes these same educational organizations.
I think what this all means is that there is an easier end run around obtaining public charity status for "educational organizations." A well funded advocacy organization by one individual that mainly educates the world about their point of view in order to influence political choices need only hire some faculty, have them establish curriculum, and then regularly educate some pupils. This would meet the above test and would circumvent the private foundation rules. I doubt this was intended by Congress, but that I think is the practical result of the Courts ruling.
The Eighth Circuit remanded the case for further proceedings. It seems likely to me that Mayo will again win at the District Court. I would be surprised if the IRS appealed it further as they have lost the main issue on this one. Additionally, given the way they lost, I don't think the IRS can fix the regulation. The only way for the IRS to fight this one again would be to try to win in another Circuit. Given the trend of federal court cases going resoundingly against the IRS on interpretation issues like these lately, including most recently CIC Services at the Supreme Court, I suspect the only way to solve this mess is for Congress to take action.
May 19, 2021
Friday, May 14, 2021
In 2016, the rise of Donald J. Trump turned a spotlight on his purported charitable activities and made "self-dealing" and similar legal terms headline news. With his departure from office (and the dissolution of his family foundation in the face of a New York Attorney General lawsuit), it might be expected that such topics would once again return to news obscurity. But legal issues raised by the involvement of some of his supporters with nonprofits continue to garner new headlines.
Just in the past month, three prominent supporters have had that spotlight shine on them and their nonprofit-related activities. As reported by the Washington Post, federal authorities have indicated Brian Kolfage, who worked with Trump-advisor Stephen K. Bannon on the "We Build the Wall" crowdfunding campaign and then 501(c)(4) nonprofit, with filing a false tax return for allegedly failing to report hundreds of thousands of dollars he received from that effort and other sources. And as reported by the Associated Press, former Trump campaign lawyer Sidney Powell now faces accusations in the lawsuit brought against her by Dominion Voting Systems that she used Defending the Republic, which claims to be a 501(c)(4) nonprofit, to pay for her personal legal expenses, an accusation she denies. And the fallout for Jerry Falwell, Jr. continues as Liberty University has now sued him for breach of contract and breach of fiduciary duties based on his alleged cover up of a personal scandal that led to his resignation as president and chancellor of the university.
Finally, congressional democrats continue to push for more information about possible tax-exempt nonprofit organization involvement in the January 6th attack on the Capital. As reported by Tax Analysts (subscription required), at this past week's ABA Tax Section virtual meeting a senior advisor to the Senate Finance Committee noted that Chair Ron Wyden remains interested in ensuring the IRS looks into which tax-exempt organizations helped plan the riots and whether any of them incited violence, thereby undermining their tax-exempt status.
Thursday, May 13, 2021
As part of a report on Temporary Individual Tax Provisions ("Tax Extenders") released a couple of weeks ago, the Congressional Research Service discussed the temporary nonitemizer charitable contribution deduction and temporary increased limits for charitable contributions. In that discussion, CRS made two interesting points.
With respect to the nonitemizer deduction, CRS noted (page 5):
The $300 nonitemizer deduction is likely to have a limited effect on charitable contributions because of its relatively small cap. One study estimated that the induced charitable giving from the nonitemizer deduction would be $100 million, a relatively negligible effect, because most taxpayers who donate are already contributing amounts in excess of $300. [citing “New Charitable Deduction in the CARES Act, Budgetary and Distributional Analysis,” blog post, Tax Policy Center, Penn-Wharton Budget Model, March 27, 2020, https://budgetmodel.wharton.upenn.edu/issues/2020/3/27/charitable-deduction-the-cares-act.]
With respect to the increased contribution limits, CRS noted (page 6; citations omitted):
Lifting caps on the deductions for both individuals and businesses can provide an incentive for additional charitable giving. Evidence on the response of charitable giving by individuals has been widely studied with mixed results. A review of this evidence suggests that an enhanced charitable deduction is likely to increase charitable giving by less than the associated revenue loss. Lifting the limits affects a relatively small share of charitable giving, and the revenue pattern suggests that much of the initial revenue loss (77%) can be attributed to an accelerated realization of carryovers.21 With charitable giving estimated at $427.4 billion in 2018, if all of the permanent revenue loss led to an increase in charitable giving by the same amount (i.e., approximately $1 billion), additional giving would be 0.3% of expected giving prior to the current economic slowdown.
Thursday, April 22, 2021
Yesterday's NonProfitTimes reported that the rapid conviction by a criminal court jury in Minneapolis of former police officer Derek Chauvin in the death of George Floyd last year brought swift reactions from leaders across the nonprofit sector. According to the Times, the leaders not only backed the verdict, but many also voiced support for the George Floyd Justice in Policing Act of 2021 pending in Congress which would put federal law behind blocking tactics such as no-knock warrants and chokeholds when detaining a suspect.
Among the nonprofit leaders issuing statements in favor of the verdict were: Jody Levison-Johnson, president and CEO of The Alliance for Strong Families and Communities/Council on Accreditation; Tim Delaney, President & CEO of the National Council of Nonprofits; Daniel J. Cardinali, president and CEO, The Independent Sector; Derrick Johnson, President & CEO, The NAACP; Jason Williamson, deputy director of the ACLU’s Criminal Law Reform Project; and Matthew Melmed, Executive Director, ZERO TO THREE.
Among the many statements issued and comments made, this paragraph from the statement issued by The Alliance for Strong Families is noteworthy:
This verdict reflects the fact that our national reckoning on systemic racism in America is long overdue. Watching the Derek Chauvin trial unfold has been difficult for all Americans, and for people of color who have lost another father, mother, son, or daughter at the hands of law enforcement, this tragedy, played out daily on our television screens, has been especially hard to bear. Systemic racism and implicit bias are infused across too many of the systems that should support people, resulting too often in harm to those they are meant to protect. While we recognize the work that has taken place thus far to expand equity, diversity and inclusion, we must continue to build on it, and acknowledge that the road ahead of us is long, and that true systemic change is needed and required. We hope this verdict puts us on a path toward bringing about that needed change. …”
This hope lives deep within my heart.
Vaughn E. James, Professor of Law, Texas Tech University
Friday, March 26, 2021
The American Rescue Plan Act of 2021 signed into law on March 11, 2021 provides an additional $7.25 billion in funds to the Paycheck Protection Program (PPP). The application period for PPP Round 2 loans will end on March 31, 2021, unless extended by Congress.
In general, charities are eligible for a first-draw PPP loan if they employ fewer than 500 employees (full-time and part-time, who live in the United States) per the nonprofit's physical location of your nonprofit. The Act expanded PPP eligibility to an “additional covered nonprofit entity,” defined as any nonprofit described in section 501(c) of the Internal Revenue Code (other than organizations described in 501(c)(3), (c)(4), (c)(6), or (c)(19)) and exempt from tax under section 501(a) of the Code, that employs 300 or fewer employees per physical location and does not derive more than 15% of receipts or devote more than 15% of activities to lobbying. The nonprofit must certify on the PPP application that “[c]urrent economic uncertainty makes th[e] loan request necessary to support ongoing operations.”
Additional resources for nonprofits with respect to the Act can be found here:
- The American Rescue Plan Act: Analysis of Key Provisions Affecting Nonprofits and the People They Serve (National Council of Nonprofits)
- Summary of the American Rescue Plan Act of 2021 (Independent Sector)
Nicholas Mirkay, Professor of Law, University of Hawaii
Thursday, March 25, 2021
A Tax Policy Center study released on March 17, 2021 calls for a more universal charitable deduction that would incentivize incentive a much larger share of the population. Due to the effects of the Tax Cuts and Jobs Act of 2017 (TCJA) a huge drop in households that claim an itemized deduction for charitable contributions--from 26% to 9%--occurred in 2019. As a consequence, "the TCJA reduced the estimated average federal income tax subsidy for all dollars of giving by 30 percent, from about 20 cents a dollar to 14 cents a dollar. Put another way, the government took away about 6cents of subsidy on average across all charitable contributions." Although Congress devoted about $1.5 billion in the CARES Act to institute a one-year charitable deduction of $300, thus targeting the 90%v of taxpayers who claim the standard deduction, most donors already contribute more than that amount, according to the study, thus no extra incentive is given to make additional gifts beyond that amount.
The study makes a number of relevant points:
- [The] debate often is stated in terms of government costs and taxpayer benefits. However, there is third party to these transactions: charitable recipients. When a tax reform increases charitable contributions by the same amount as the government revenue loss, charitable beneficiaries are the net winners.
- A more universal charitable deduction can be designed that limits gains for higher-income taxpayers while still encouraging giving at other income levels. . . . [U]niversal deductions without floors provide substantial benefits to the highest-income taxpayers who already itemize, even when they give no more (and sometimes even when they give less) in response.
- We estimate that a universal deduction with a floor of 1.9 percent of AGI would be approximately revenue neutral relative to 2019 law and would raise charitable giving by about $2.5 billion a year. If revenue neutrality had been sought under the pre-TCJA law, a revenue-neutral floor would have been a smaller percentage of AGI than it would be today.
The study also proposes additional options in creating a universal deduction:
- [T]axpayers could be given the option of making charitable contributions up to the date of filing their income tax returns, or April 15, whichever comes first. Congress has offered this option to those making deposits to individual retirement accounts, and the House of Representatives passed this type of provision in the America Gives More Act of 2014. This timing option makes almost no difference in terms of incentive, but there is strong evidence that the provision would prove an effective marketing tool.
- Second, to avoid the threat of widespread tax cheating, Congress should consider adopting a provision for electronic reporting of charitable contributions to the IRS. Tax gap studies through the years have consistently demonstrated that third-party reporting significantly raises voluntary compliance. For instance, a significant increase in compliance for
interest and dividends occurred once they became subject to an information reporting system.
Ultimately, the study illustrates how money spent on a universal charitable deduction can significantly increase the goods and services provided to charitable beneficiaries in relation to forgone revenue if proper attention is focused on the efficiency and fairness of each dollar of subsidy.
Nicholas Mirkay, Professor of Law, University of Hawaii
Thursday, March 11, 2021
Earlier this year, this blog discussed legislative attacks on ‘dark money’ and the IRS regulations that allow shadowy donors of significant monetary amounts to 501(c)(3) organizations to cloak their identity. That battle is continuing among federal lawmakers as last week the For the People Act (H.R.1) passed in the House by a narrow ten vote margin and now advances to the Senate where it will quite possibly be similarly contested. The For the People Act, among other measures, seeks to repeal 2020 IRS regulations that ended the practice of collecting identifying information of donors to nonprofit organizations. The IRS maintained that requiring nonprofits to simply keep records of the amounts of donations made to their causes would be sufficient for the purposes of administering the tax code: in the wake of an especially tumultuous election, democratic legislators argue that more stringent record-keeping rules are necessary to promote transparency of organizations exercising political influence through donations. H.R. 1 passed largely along party lines in the House: it remains to be seen how the proposed law will fare in the Senate.
For this blog’s earlier post on the Spotlight Act, see here
The House’s For the People Act can be perused in its entirety here
David Brennen, Professor of Law at the University of Kentucky
Wednesday, March 3, 2021
The U.S. Government Accountability Office released a report titled IRS and Education Could Better Address Risks Associated with Some For-Profit College Conversions. Here are excerpts from the highlights:
What GAO Found
GAO identified 59 for-profit college conversions that occurred from January 2011 through August 2020, almost all of which involved the college's sale to a tax-exempt organization. In about one-third of the conversions, GAO found that former owners or other officials were insiders to the conversion—for example, by creating the tax-exempt organization that purchased the college or retaining the presidency of the college after its sale (see figure). While leadership continuity can benefit a college, insider involvement in a conversion poses a risk that insiders may improperly benefit—for example, by influencing the tax-exempt purchaser to pay more for the college than it is worth. Once a conversion has ended a college's for-profit ownership and transferred ownership to an organization the Internal Revenue Service (IRS) recognizes as tax-exempt, the college must seek Department of Education (Education) approval to participate in federal student aid programs as a nonprofit college. Since January 2011, Education has approved 35 colleges as nonprofit colleges and denied two; nine are under review and 13 closed prior to Education reaching a decision.
IRS guidance directs staff to closely scrutinize whether significant transactions with insiders reported by an applicant for tax-exempt status will exceed fair-market value and improperly benefit insiders. If an application contains insufficient information to make that assessment, guidance says that staff may need to request additional information. In two of 11 planned or final conversions involving insiders that were disclosed in an application, GAO found that IRS approved the application without certain information, such as the college's planned purchase price or an appraisal report estimating the college's value. Without such information, IRS staff could not assess whether the price was inflated to improperly benefit insiders, which would be grounds to deny the application. If IRS staff do not consistently apply guidance, they may miss indications of improper benefit.
Education has strengthened its reviews of for-profit college applications for nonprofit status, but it does not monitor newly converted colleges to assess ongoing risk of improper benefit. In two of three cases GAO reviewed in depth, college financial statements disclosed transactions with insiders that could indicate the risk of improper benefit. Education officials agreed that they could assess this risk through its audited financial statement review process and could develop procedures to do so. Until Education develops and implements such procedures for new conversions, potential improper benefit may go undetected.
* * *
What GAO Recommends
GAO is making three recommendations, including that IRS assess and improve conversion application reviews and that Education develop and implement procedures to monitor newly converted colleges. IRS said it will assess its review process and will evaluate GAO's other recommendation, as discussed in the report. Education agreed with GAO's recommendation.
The Congressional Research Service has updated its report on Temporary Enhancements to Charitable Contributions Deductions in the CARES Act to reflect extensions included in the Consolidated Appropriations Act, 2021. Here is a summary:
The CARES Act and the Consolidated Appropriations Act, 2021 provided for three enhancements to the
charitable deduction for 2020 and 2021. First, they provided a deduction for cash donations for
nonitemizers of up to $300 who take the standard deduction. Second, they eliminated the limit on cash
gifts of individuals to public charities (but not to donor advised funds, supporting organizations, or private
foundations). Third, they increased the limit on charitable contributions from corporations (including food
inventory) and individual contributions of food inventory to 25% of taxable income.
Friday, February 5, 2021
U.S. Senators and Representatives reintroduced the Spotlight Act again to repeal the regulations issued by Treasury and the IRS in 2020 that eliminated the requirement for many tax exempt organizations to have to disclose substantial donor names and addresses.
"U.S. Senators Jon Tester (D-Mont.) and Ron Wyden (D-Ore.) along with U.S. Rep. David Price (D-N.C.) today are reintroducing their Spotlight Act to shine a light on dark money political donors and hold the government accountable to enforce our nation's campaign finance laws. This legislation is also supported by Senators Bennet, Carper, Whitehouse, Blumenthal, Murray, Van Hollen, Merkley, Klobuchar, Hirono, King, Brown, Cortez Masto, Booker, Menendez, Casey, Warren and Baldwin.
The Spotlight Act would require certain political non-profit organizations to disclose their donors to the Internal Revenue Service (IRS), reversing a Trump-era rule that eliminated the requirement and allowed such organizations to keep their donors secret."
You can find the Act here.
Thursday, January 14, 2021
2020 was undoubtedly an unkind year to nonprofits in America, but there were at least a couple of positive developments for the industry: one of these was the IRS granting retroactive refunds for taxes nonprofit organizations paid for the “parking lot tax” which the legislature repealed in 2019. This tax, included in the 2017 Tax Cuts and Jobs Act, imposed a sizable unrelated business income tax on subsidized parking offered by these organizations to their employees. Many in the nonprofit industry objected to the parking lot tax on the grounds that it went too far in expanding the unrelated business income tax and placed an unfair burden on the often slim resources of nonprofit organizations. While the relevant legislation went into effect in 2019, the IRS has been issuing and updating guidance about getting a refund for parking lot taxes paid in prior years throughout 2020: for the IRS’s official statement, see https://www.irs.gov/forms-pubs/how-to-claim-a-refund-or-credit-of-unrelated-business-income-tax-ubit-or-adjust-form-990-t-for-qualified-transportation-fringe-amounts.
For additional reading on this topic see https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-authorizes-parking-benefit-tax-refunds-for-nonprofits.aspx.
David Brennen, University of Kentucky College of Law
Friday, January 8, 2021
Nonprofit hospitals are, along with all hospitals, struggling with the COVID-19 pandemic. But that role has not caused a let up in negative scrutiny of their activities by journalists, Senator Chuck Grassley, or state legislators. It also has not halted the continuing consolidation of health care entities.
For example, ProPublica reports that "Nonprofit Hospital Almost Never Gave Discounts to Poor Patients During Collections, Documents Show," describing the practices of Methodist Le Bonheur Healthcare, Memphis' largest health care system. And the N.Y. Times reports that "The largest hospital system in New York sued 2,500 patients for unpaid medical bills after the pandemic hit," describing the activities of state-run Northwell Health system, which consists primarily of 501(c)(3) tax-exempt nonprofits.
Responding to these and other concerns, Senate Finance Committee Chairman Chuck Grassley wrote a public letter to every member of the Senate Finance and Judiciary Committees about the need for new attention to the tax laws governing nonprofit hospitals. Senator Grassley is rotating off of the Finance Committee, having hit his term limit for that committee under Senate GOP rules, and of course his influence would have been reduced by the Democrats taking control of the Senate under any conditions. But he likely will still have influence over such matters in the new Congress, giving his longstanding interest in the rules for tax-exempt organizations.
In the states, the Philadelphia Inquirer reports that "New Jersey may be the first state to impose per-bed fees on nonprofit hospitals for municipal services." The $3 per day per licensed bed fee is paired with preservation of nonprofit hospital property tax exemption, which has been under increasing attack in New Jersey, with approximately two-thirds of the state's nonprofit hospitals having been taken to tax court. However, Governor Phil Murphy has not yet said if he will sign the bill.
Finally, consolidation of nonprofit health care providers also continues. For example, the Federal Trade Commission recently lost an appeal of a federal district court's denial of a motion for a preliminary injunction to block the merger of Thomas Jefferson University and Albert Einstein Healthcare Network in the Philadelphia area. And 501(c)(4) nonprofit health insurers Tufts Health Plan and Harvard Pilgrim Health Care have now completed their merger after having received federal and state approvals (after some divestment).
Saturday, November 21, 2020
The U.S. Government Accountability Office has published Opportunities Exist to Improve Oversight of Hospital's Tax-Exempt Status. Here are the highlights of the report:
What GAO Found
Nonprofit hospitals must satisfy three sets of requirements to obtain and maintain a nonprofit tax exemption (see figure).
Requirements for Nonprofit Hospitals to Obtain and Maintain a Tax-Exemption
While PPACA established requirements to better ensure hospitals are serving their communities, the law is unclear about what community benefit activities hospitals should be engaged in to justify their tax exemption. The Internal Revenue Service (IRS) identified factors that can demonstrate community benefits, but they are not requirements. IRS does not have authority to specify activities hospitals must undertake and makes determinations based on facts and circumstances. This lack of clarity makes IRS's oversight challenging. Congress could help by adding specificity to the Internal Revenue Code (IRC).
While IRS is required to review hospitals' community benefit activities at least once every 3 years, it does not have a well-documented process to ensure that those activities are being reviewed. IRS referred almost 1,000 hospitals to its audit division for potential PPACA violations from 2015 through 2019. However, IRS could not identify if any of these referrals related to community benefits. GAO's analysis of IRS data identified 30 hospitals that reported no spending on community benefits in 2016, indicating potential noncompliance with providing community benefits. A well-documented process, such as clear instructions for addressing community benefits in the PPACA reviews or risk-based methods for selecting cases, would help IRS ensure it is effectively reviewing hospitals' community benefit activities.
Further, according to IRS officials, hospitals with little to no community benefit expenses would indicate potential noncompliance. However, IRS was unable to provide evidence that it conducts reviews related to hospitals' community benefits because it does not have codes to track such audits.
Why GAO Did This Study
Slightly more than half of community hospitals in the United States are private, nonprofit organizations. IRS and the Department of the Treasury have recognized the promotion of health as a charitable purpose and have specified that nonprofit hospitals are eligible for a tax exemption. IRS has further stated that these hospitals can demonstrate their charitable purpose by providing services that benefit their communities as a whole.
In 2010, Congress and the President enacted PPACA, which established additional requirements for tax-exempt hospitals to meet to maintain their tax exemption.
GAO was asked to review IRS's implementation of requirements for tax-exempt hospitals. This report assesses IRS's (1) oversight of how tax-exempt hospitals provide community benefits, and (2) enforcement of PPACA requirements related to tax-exempt hospitals.
What GAO Recommends
GAO is making one matter for congressional consideration to specify in the IRC what services and activities Congress considers sufficient community benefit. GAO is also making four recommendations to IRS, including to establish a well-documented process to ensure hospitals' community benefit activities are being reviewed, and to create codes to track audit activity related to hospitals' community benefit activities. IRS agreed with GAO's recommendations.
Friday, November 20, 2020
There is some much continuing activity relating to to conservation easements that it is difficult to keep track of everything. Fortunately, fellow blogger Nancy McLaughlin (Utah) has recently updated her comprehensive summary of court decisions, Trying Times: Conservation Easements and Federal Tax law (Sept. 2020). It undoubtedly will need to be updated for many years, as just last month taxpayers filed at least 27 Tax Court petitions relating to claimed conservation easement deductions according to Tax Notes (subscription required).
The Department of Justice has also provided more information in its lawsuit against promoters of syndicated conservation easements, including identifying 42 additional such deals, again according to Tax Notes. The Internal Revenue Service this week issued a memo emphasizing the use of summons and summons enforcement in syndicated conservation easement cases, among others, and Chief Counsel recently issued a Notice providing further guidance about the settlement of such cases. Finally, Senators Grassley, Daines, and Roberts recently reintroduced the Charitable Conservation Easement Program Integrity Act targeting abusive conservation easement arrangements.
Additional Coverage: Washington Post ("Wealth investors seem to be exploiting land-conservation breaks, and the Senate is taking notice").
Monday, October 19, 2020
Figured readers would be interested in this look by Brian Mittendorf at the implications for Donor Advised Funds of Fairbairn v. Fidelity that appears in HistPhil.org.
"One way the concern that commercial DAFs are donor-centric arises is in the competition between sponsoring organizations. The lawsuit alleges that Fidelity Charitable differentiated itself from other charitable options by its “superior ability to handle complex assets,” even stating in correspondence about the possibility of receiving a gift of one particular type of asset that “Vanguard can’t do this but we do it frequently.” The general public may think of competition among charities as focusing on who can best put gifts to charitable use. It turns out this is an antiquated notion: the intense competition centering on seamlessly receiving and converting complex assets for donors presents a stark contrast.
A related issue is that DAFs increasingly are vehicles that provide disposal options to donors for illiquid assets. In the Fairbairn case, the assets donated were technically liquid (they were publicly traded) but the size of the donation would threaten share price if it were a sale instead of a donation, an eventuality that formed the basis for the lawsuit. However, donating such assets permits a tax deduction for the value, even though an outright sale at that value would be problematic. "
And, "A final issue that surfaces in the Fairbairn case is that some DAF sponsors may implicitly or even explicitly be beholden to their commercial affiliates. Legally speaking, Fidelity Charitable is a distinct entity from Fidelity Investments; as is the case for Vanguard Charitable and Vanguard; and so on. Yet, the shared names and logos underscore a nontrivial affiliation. Critics have argued that the commercial DAFs invest funds heavily in their affiliated investment companies and, as such, generate substantial fees for them. This, in turn, could create incentives to retain funds in investments rather than distribute them to charitable endeavors. The allegations in the Fairbairn case are consistent with this fear."
Thursday, September 17, 2020
Congress Update: Syndicated Conservation Easements, NRA, and Proposed Expansions of Above-the-Line Donation Deduction
More Slamming of Syndicated Conservation Easements: As the IRS continues its court battles and settlement program relating to syndicated conservation easements, the Senate Finance Committee released a lengthy bipartisan report criticizing these transactions. The introduction includes this passage:
The syndicated conservation-easement transactions examined in this report appear to be nothing more than retail tax shelters that let taxpayers buy tax deductions at the end of any given year, depending on how much income those taxpayers would like to shelter from the IRS, with no economic risk. Although the various offerings differ in their specifics, the general outcome is the same: for every dollar a taxpayer pays to a promoter to become an "investor" (or a "partner" or a "member") in a syndicated conservation-easement transaction, he or she commonly purchases a little more than four dollars' worth of tax deductions. For most taxpayers involved, this ultimately means that for every dollar paid to tax-shelter promoters, the taxpayers saved two dollars in taxes they did not pay.
Calls for IRS to Investigate the NRA: In the wake of the New York Attorney General seeking dissolution of the National Rifle Association, Democratic members of the House Ways & Means Committee have called for the IRS to also investigate the section 501(c)(4) organization and its related, section 501(c)(3) foundation. Of course it remains to be seen whether the IRS will do so, regardless of who wins the November presidential election. Additional coverage: Mother Jones (including a link to the letter).
Universal Giving Pandemic Response Act: A bipartisan group of nine Senators are sponsoring S.4032, which would expand in two ways the temporary above-the-line deduction for charitable contributions included in the CARES Act and codified in Internal Revenue Code section 62(a)(22). One expansion would be the amount, increasing it to half of the taxpayers standard deduction up from $300; the 2020 standard deduction is $12,400 for single taxpayers and $24,800 for married taxpayers filing jointly. The other would be the time window for contributions, extending it back from January 1, 2020 (for calendar year taxpayers) to January 1, 2019, with amended returns permitted for taxpayers who did not itemize their deductions in 2019. However, passage appears highly unlikely, especially with the apparent failure of new coronavirus relief legislation.
Friday, August 28, 2020
A bill introduced on the floor of Congress June 22nd is attracting bipartisan approval and could signal a significant change in how taxpayers choose to do their deductions this year. The Universal Pandemic Response Act, proposed by republican senator James Lankford of Oklahoma, would increase the limit for above-the-line charitable deductions to one third of the standard deduction. Breaking the matter down to hard numbers, this piece of legislation would increase the charitable deduction from $300 to $4,133 for individual taxpayers and $8,267 for taxpayers filing jointly. This proposal would be a significant expansion on what has traditionally been a relatively small available deduction for taxpayers: perhaps cognizant of this, the law is set to have a short lifespan and would only extend to the end of this tax year, though it will also allow for amended 2019 tax returns with contributions made before July 15th. Though the bill originated from the right side of the Senate, the bill has gained bipartisan support as democratic senator Chris Coons of Delaware allied with senator Lankford to rally both political parties to pass the bill. With the global financial turmoil which has followed in the wake of the COVID epidemic Americans nonprofits stand to suffer as much as, if not more than, their for-profit counterparts. Perhaps the passage of this proposed legislation will incentivize American taxpayers to lend some more support to nonprofit organizations during this time of crisis.
To view the proposed law, see the following official link from Congress: https://www.congress.gov/bill/116th-congress/senate-bill/4032
By David A. Brennen, Professor of Law at the University of Kentucky