Thursday, April 28, 2022
Representatives Betsy McCollum and Fred Upton introduced a bill on Tuesday to replace the Form 1023EZ. The bill is entitled the Nonprofit Sector Strength and Partnership Act of 2022.
The bill, among other things, would create a White House Office on Nonprofit Sector Partnership and an Interagency Council on Nonprofit Sector Partnership.
From Rep. McCollum's press release:
Congresswoman Betty McCollum (MN-04) and Congressman Fred Upton (MI-06) have introduced the Nonprofit Sector Strength and Partnership Act of 2022 to strengthen the nonprofit sector and its relationship with the federal government. The legislation will improve access to data about the nonprofit sector, and leverage the mission, knowledge, and impact of thousands of nonprofits to work together more effectively in pursuit of shared goals.
“In my home state of Minnesota, the nonprofit sector makes up nearly 14 percent of our workforce and generates $66 billion in annual revenue – which is why it is so important that the sector has a seat at the table when it comes to federal lawmaking,” Rep. Betty McCollum said. “Federal government, state, and local governments rely on the nonprofit sector and its ability to harness and direct the generosity, service, and volunteerism of the American people. Just as small businesses have the Small Business Administration (SBA) to facilitate access to federal resources, the nonprofit sector should be afforded this same level of support. I’m grateful to Independent Sector and other nonprofit leaders who have helped shape this idea into the legislation we’ve introduced today. Together, we can establish mechanisms that will enable nonprofits to better serve our communities.”
The Senate Finance Committee's Subcommittee on Tax and IRS Oversight, chaired by Senator Whitehouse, is holding a hearing on May 4 on entitled Laws and Enforcement Governing the Political Activities of Tax Exempt Entities.
It's a little odd to report on this one, because I am one of the witnesses who will present testimony.
The witness list includes
Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law, Pittsburgh, PA
Bradley A. Smith, Chairman and Founder, Institute for Free Speech, Washington, D.C.
Ann M. Ravel, Former Chair (2015), United States Federal Election Commission, Los Gatos, CA
Scott Walter, President, Capital Research Center, Washington, D.C.
I will be posting my testimony soon. I will try to post the other written testimony as well.
Wednesday, April 13, 2022
Cherry picking an issue flagged by the IRS in 2017 (Notice 2017-73) and addressed by one provision of the pending ACE Act (section 5), the Biden Administration's FY2023 Budget includes a provision (see page 132) that would bar private foundations from counting distributions to donor advised funds toward their minimum payout requirement under IRC 4942, except in limited circumstances (for more details, see pages 58-59 of the General Explanations of the Administration's revenue proposals). While passage of this provision is of course uncertain, it is important because it indicates that the Administration is at least tipping its toe into the DAF reform area. At the same time, 12 bipartisan members of the 43-member Ways and Means Committee issued a letter supporting DAFs and opposing recent DAF reform proposals. (Hat tip: Chronicle of Philanthropy (but incorrectly identifying the signers as all Republicans, when 7 of the 12 are Democrats)).
At the same time studies of DAFs continue to accumulate. The Institute of Policy Studies recently issued the results from two studies:
- Private Foundation Giving to Commercial Donor-Advised Funds based on the IRS returns of private foundations that filed electronically from 2016 to 2018 and a list of the 45 largest commercial DAF sponsors, with the following findings:
- Private foundation giving to these commercial DAFs averaged $737 million per year from 2016 to 2018.
- From 2016 to 2018, gifts from DAF-giving private foundations to these commercial DAFs averaged about $605,000 each, while their gifts to other recipients averaged just under $119,000 each.
- 229 foundations gave $1 million or more to these commercial DAFs from 2016 to 2018.
- Grants to these commercial DAFs made up one hundred percent of all charitable distributions for 157 foundations from 2016 to 2018.
- Larger Community Foundations Have Become Heavily Reliant on Donor-Advised Funds based on the electronically filed IRS returns of 206 community foundations that participated in Candid's 2019 Columbus Survey, with the following findings:
- DAFs accounted for a median 24 percent of assets.
- A median 41 percent of all incoming contributions consisted of contributions to DAFs.
- A median 42 percent of all outgoing grants were grants from DAFs.
- Larger community foundations tend to be much more heavily reliant on DAFs for their incoming revenue streams; DAFs account for a much larger proportion of their outgoing grants; and DAFs make up a much larger proportion of their total assets.
The Donor Advised Fund Research Collaborative also recently made available the result of this study:
- Donor-Advised Fund Account Patterns and Trends (2017-2020) based on 13,000 DAF accounts from 2017 to 2020 at 21 community foundations and religiously-affiliated DAF sponsors in the United States (but not including national, commercial DAFs), with findings including:
- While 11% of DAFs had over $1 million in assets, the typical DAF is equally likely to be a small-sized DAF with assets under $50,000 or a medium-sized DAF with assets between $50,000 and $1 million.
- The median four-year average payout rate among all accounts was 11%; among spendable DAFs, the median payout rate was 13%.
- Large accounts over $1 million were 11% of all accounts and represented at least 85% of the assets in the DAFRC sample.
- The majority of DAF contributions were received in the fourth quarter, including approximately 55% of dollars contributed and 42% of contribution transactions.
The Chronicle of Philanthropy also reported that giving from two of the largest sponsors of donor-advised funds grew slower in 2021 than in 2020.
Tuesday, March 22, 2022
Last week, the Senate Committee on Finance held a hearing on trends in charitable giving; the Committee heard from four witnesses. And over the next couple days I plan to look at (and, of course, blog about) what those witnesses said. But I thought the opening statements of Sen. Wyden, the Chair of the Committee, and Sen. Crapo, the Ranking Member, were interesting and worth a quick glance.
Both highlighted the work that nonprofits during the pandemic. Sen. Crapo praised nonprofits for "adapt[ing] to the COVID-19 situation incredibly well, often fulfilling their missions with fewer resources and volunteers or even cancelled events, all while ensuring the communities they serve were being helped." And Sen. Wyden found that "Americans stepped up when their neighbors needed help. Charitable giving reached new highs."
Both Senators set the stage for the government helping the charitable sector--from the Senators' introductions, it does not look like this was at all a critical hearing. Both Senators said that supporting the nonprofit sector has the bipartisan support of the whole committee. Sen. Crapo explained that his goals include using the tax policies to encourage giving while looking forward at new challenges (including crypto and crowdfunding).
And Sen. Wyden mentioned the fact that the doubling of the standard deduction had eliminated the tax benefits of charitable giving for a substantial portion of taxpayers. He seems to want to focus on extending the small above-the-line charitable deduction as well as provide direct aid to help nonprofit organizations keep their doors open.
It will be interesting to see what the witnesses said and where the federal government goes from here.
Samuel D. Brunson
Monday, March 14, 2022
Today's NonProfitTimes reminded us that postal reform legislation gained U.S. Senate approval by a wide margin last week, setting up President Joe Biden to quickly sign the measure.
The Postal Service Reform Act of 2022 (H.R. 3076) passed last month by a vote of 342-92 in the House of Representatives. Sponsored by Carolyn Maloney (D-N.Y.), the measure gained approval from all 222 Democrats and 120 Republicans. Following House approval of the postal reform bill in February, Sen. Rick Scott (R-Fla.) objected, blocking the bill because of an apparent technicality.
Last Tuesday, however, the Senate approved its version of the legislation (S. 1720), by a vote of 79-19. The Senate’s 48 Democrats were joined by the two Independents and 29 Republicans in voting for the measure, sponsored by Chairman Gary Peters (D-Mich.), chairman of the Homeland Security and Government Affairs Committee.
So what is the legislation all about?
According to the Times,
The Postal Service Reform Act is expected to save USPS $22.6 billion over 10 years by requiring new postal retirees to use Medicare as their primary insurance. Another $27 billion would be saved by the repeal of a pre-funding requirement for projected retiree healthcare costs that was included in the 2006 Postal Enhance and Accountability Act (PAEA). In addition to bipartisan support, the legislation had the backing of the National Association of Letter Carriers (NALC).
The new legislation comes with some costs for consumers:
New Consumer Price Index (CPI) data released last week is likely to push mailing rates higher than first envisioned. The Alliance of Nonprofit Mailers (ANM) estimates the average caps for each class of mail will increase between 6.789% and 8.789%. Actual increases will vary according to how USPS distributes the increase across rate cells and an organization’s mix of mail, according to Stephen Kearney, ANM’s executive director.
“If USPS uses all the authority, it will lead to a second round of increases in less than a year,” Kearney said in an email to members on Friday. The ANM is advocating that the USPS defer at least some of the authorized rate increases given that it has $24 billion in cash, received a $10 billion grant for COVID relief last year, and will benefit from $107 billion in relief from the Postal Reform Act of 2022.
According to Kearney, USPS is expected to file in April with the Postal Regulatory Commission (PRC) no later than the next CPI release on April 12, and plans to use six months of CPI authority to raise rates again in January.
Prof. Vaughn E. James, Texas Tech University School of Law
Friday, February 25, 2022
UPDATE: Fellow blogger Roger Colinvaux (Catholic) also responded to Katherine Enright's OpEd discussed below, in a Letter to the Editor titled The Status Quo Is Not Acceptable When It Comes to Donor-Advised Funds. And as previously noted in this space, he has written an article on the ACE Act, Speeding Up Benefits to Charity: Donor Advised Fund and Foundation Reform, Boston College Law Review (forthcoming).
Even as we await congressional action on the Accelerating Charitable Efforts (ACE) Act, studies, recommendations, and dueling opeds continue to emerge.
In terms of studies, Howard Husock at the American Enterprise Institute has posted a recent study on anonymous giving through DAFs that makes these points:
- A review of grant data from the five largest sponsors of donor-advised funds—including the independent public charities, serviced by financial firms Fidelity, Vanguard, and Schwab—shows that anonymous grants comprise only 4.3 percent of all grants. It also shows that grants in the anonymous category that may include support for public policy matters include a small minority (12 percent) of that small group.
- Most anonymous giving supports well-known and noncontroversial organizations, including American Red Cross, Doctors Without Borders, and Salvation Army.
- Any regulation designed to limit anonymous giving risks discouraging charity by donors that may choose anonymity for various reasons, including fear of public criticism, unwanted solicitation, or religiously motivated reasons.
Coverage: Chronicle of Philanthropy (including criticism of the study; subscription required). At the same time, Hayden Ludwig at the Capital Research Center posted a short report critical of the Silicon Valley Foundation, titled The Gilded Left’s Favorite Bay Area Bankroller.
The Council on Foundations's Strengthening Community Philanthropy Ad Hoc Working Group also recently issued a set of recommendations for community foundations that hold donor-advised funds. The recommendations address the following issues:
- Standardizing Community Foundation Inactive Funds Policy
- Aggregate DAF Annual Distribution Requirement
- Private Foundation Distributions to Donor-Advised Funds
- Donation of Complex Gifts
- Expanding Charitable Giving
Finally, Katherine Enright of the Council of Foundations wrote an OpEd titled Donor-Advised Funds Are Essential to Democratizing Philanthropy, which led to a response from a former director development titled Donor-Advised Funds Don’t Pass the Democracy Smell Test. And at the Wall Street Journal, Jeremy D. Tedesco of the Alliance Defending Freedom wrote a commentary pushing back the Unmasking Fidelity movement titled Cancel Culture Targets Charity: Left-wing political activists want to destroy America’s long tradition of private philanthropy.
It seems the DAF debate is quickly becoming a vehicle for a number of political arguments and divides.
Wednesday, February 23, 2022
Members of Congress Raise Concerns About Coach Compensation, Formerly For-Profit Florida Universities
Members of Congress have flagged two areas of concern relating to colleges and universities: the ever increasing salaries of FBS football head coaches; and for-profits converting to nonprofit status while still maintaining financial ties to insiders.
Rep. Bill Pascrell (D-NJ), Chairman of the House Ways and Means Subcommittee on Oversight, has expanded his probe of college coaching salaries by sending letters to Stanford University and Rutgers University about their compensation of head football coaches. These letters follow ones to Michigan State University and University of Miami last month, and to LSU and USC late last year. All of the letters ask about highly compensated university employees generally as well as about the compensation of football and basketball coaches. They also ask about the contribution of athletics to the universities' educational missions, student financial aid, and the revenues, expenses, governance, and facilities of athletic departments. Hat tip: EO Tax Journal.
Separately, the Washington Post reports that House Committee on Education and Labor is investigating payments relating to nonprofits Keiser University and Everglades University after they took over operation of previously for-profit institutions. The focus of the investigation is on millions of dollars received by Arthur Keiser, his family, and related businesses for various services, including chartered air travel and rent for properties used by the schools. See Committee Press Release (linking to a Letter from the Committee's Chairman to Education Secretary Miguel Cardona (incorrectly dated 2021)). The investigation is in the wake of a GAO report on the almost 60 conversions of for-profit colleges to nonprofit status from January 2011 to August 2020. Hat tip: Chronicle of Philanthropy.
Wednesday, February 9, 2022
Late last week the NonProfit Times reported that Congressional representatives had introduced companion legislation that would set timelines on when donations to donor-advised funds (DAFs) would have to be distributed to working charities.
According to the Times, the Accelerating Charitable Efforts (ACE) Act, introduced by Rep. Chellie Pingree (D-Maine) and Rep. Tom Reed (R-N.Y.) with Rep. Ro Khanna (D-Calif.) and Rep. Katie Porter (D-Calif.), is similar to a measure introduced in the Senate last June by Senators Angus King (I-Maine) and Chuck Grassley (R-Iowa).
The legislation would update regulations for private foundations and set timelines for distributions from DAFs. The full text of the ACE Act can be accessed here.
In a prepared statement announcing the legislation, Rep. Pingree said: “For countless Mainers and people across the country, charitable organizations are life-changing and lifesaving,” yet $1 out of every $8 donated to charities goes to DAFs, giving generous tax breaks for charitable contributions but not ensuring that the funds help anyone in need. “Our half-century old philanthropy laws must be reformed to correct this fundamental flaw in our current system.”
The Initiative to Accelerate Charitable Giving (IACG), led in part by billionaire philanthropist John Arnold and Boston College law professor Ray Madoff, helped to develop the basis for the proposals. In a statement, IACG leaders noted that they were “pleased that policymakers continue to seek a legislative solution to restore the connection between charitable tax benefits and direct contributions to charities.” They labeled the bill “a step toward getting more resources to our nation’s charities faster. . . a thoughtful and pragmatic approach that takes the policy ideas outlined in the coalition’s statement of principles and puts them into action at a time when charities across our communities need more help than ever.”
According to the Times report,
Proponents of the federal reform estimate some $160 billion is set aside for future charitable gifts. While the funds are dedicated to charities once the contributions are made, there is no requirement to ever distribute them. Commercial DAFs, such as Fidelity Charitable and Schwab Charitable, have ballooned over the past decade, in part due to increasing contributions as well as appreciated assets to become some of the largest charities in the nation with tens of billions of dollars in assets.
As regards substance, the legislation would create two new types of DAFs:
- 15-year DAFs would allow donors to receive upfront tax benefits as they do under current law but only if funds are distributed within 15 years of the donation.
- 50-year DAFs would allow donors to elect an “aligned benefit rule,” continuing to receive capital gains and estate tax benefits upon donations but not the income tax deduction until all donated funds are distributed to charity. All funds would be required to be distributed to charities no later than 50 years after their donation.
Donors would be allowed to hold up to $1 million in DAF funds at any community foundation without being subject to payout rules. For amounts of more than $1 million, a donor would still receive up-front tax benefits if the DAF requires a 5% annual payout, or if donations must be distributed within 15 years of contribution.
For private foundations, salaries and travel expenses to a donor’s family members, or distributions to DAFs, could not be included in annual 5% payout obligations.
Opponents of the legislation have said that the measures to increase DAF distributions are solutions in search of a problem, noting that DAFs typically distribute at a higher annual rate than the 5% required of private foundations.
The NonProfit Times quotes Elizabeth McGuigan, director of policy at Philanthropy Roundtable, as saying in response to the House bill's introduction: “When people have the flexibility to give how, when and where they choose, it spurs even more generosity and uplifts those who we all wish to help. A bill that disincentivizes giving is tone deaf at best and at worst hurts communities around the country who rely upon their fellow Americans’ generosity.”
We shall see how the legislation fares this time.
Vaughn E. James, Judge Robert H. Bean Professor, Texas Tech University School of Law
Wednesday, January 19, 2022
Reps. Michael Waltz (R-Fla.) and Jennifer Wexton (D-Va.) introduced a measure today intended to revoke the International Olympic Committee's exempt status in the United States.
From Politico: "Waltz and Wexton’s legislation, dubbed the Irresponsible Olympic Collaboration Act, specifically targets the IOC’s status as a 501c(4) tax-exempt organization by revoking that privilege for any international “multi-sport” organization that has revenues of more than $100 million." Wexton argues that social welfare organizations ought not host sporting events in China with ongoing genocide.
Have not found the text of the proposed legislation yet. However, you can see a resolution introduced on the issue back in December here. Be interested to see it, as the Politico story seems to suggest the bill was written neutrally yet would appear to apply to only one organization.
Update: Here is the link to the proposed bill. H/t to Sam Brunson
Tuesday, January 18, 2022
Senator Wyden, chair of the Senate Finance Committee, announced recently that the committee would begin an investigation into Opportunity Zones. The announcement begins:
"Senate Finance Committee Chair Ron Wyden, D-Ore., today launched an investigation into the Opportunity Zone Program and whether it has delivered on Republican promises to create jobs and drive investment in low-income communities, rather than just create a loophole for wealthy investors to avoid paying taxes.
In letters to SkyBridge Capital, Baker Tilly US, LLP, Cresset Partners, LLC, Hatteras Sky, PTM Partners, LLC, Related Group, Shopoff Realty Investments, Wyden wrote, “I have long been concerned that the Opportunity Zone program may permit wealthy investors another opportunity to avoid billions of dollars in taxes without meaningfully benefitting the distressed communities the program was intended to help. A report released by the Government Accountability Office (GAO) heightened my concern about the effects of the Opportunity Zone program. The GAO report notes that representatives of several Opportunity Funds indicated that they would have proceeded with projects in what are now designated zones without the tax incentives provided by the Opportunity Zone program…Currently, there are no safeguards or transparency measures in place to ensure taxpayers are not simply subsidizing high-end real estate investments by billionaires without demonstrating the benefit they are providing to low income-communities they claim to help.”
Monday, January 17, 2022
New Article: Who’s Afraid of Bob Jones?: 'Fundamental National Public Policy' and Critical Race Theory in a Delicate Democracy
Professor Lynn Lu has a new interesting article forthcoming in CUNY L. Rev. looking at the broader impact of Bob Jones all these years later entitled Who's Afraid of Bob Jones?: 'Fundamental National Policy' and Critical Race theory in a Delicate Democracy. Here is the abstract:
In Summer of 2021, Republican legislators across the United States introduced a host of bills to prohibit government funding for schools or agencies that teach critical race theory (“CRT”), described by the American Association of Law Schools not as a single doctrine but a set of “frameworks” to “explain and illustrate how structural racism produces racial inequity within our social, economic, political, legal, and educational systems[,] even absent individual racist intent.” Characterizing such an explicitly race-conscious analysis of legal and social institutions as “divisive,” opponents of CRT, such as former Vice President Mike Pence, labeled it “nothing short of state-sponsored and state-sanctioned racism.”
The political campaign to “Stop CRT,” as articulated by strategist Christopher Rufo, seeks to redirect the time-honored civil-rights strategy of defunding racially discriminatory social institutions for use against race-conscious efforts to remedy the ongoing disparate racial, economic, and other social effects perpetuated by the same institutions. The movement to Stop CRT thus seeks to freeze civil rights progress where it stood decades ago, as when the Supreme Court acknowledged a “fundamental national public policy” against racial segregation in its 1983 decision in the notorious case of Bob Jones University v. United States, while leaving unresolved vital questions about whether and how to allocate public resources affirmatively to foster diversity, equity, inclusion, and accessibility in democratic society.
In Bob Jones, the Court upheld the federal taxation of private schools that excluded Black students because their religious beliefs allegedly mandated “racial separation.” Specifically, the Court ruled that the Internal Revenue Service (IRS) properly withheld federal tax-exempt status to otherwise qualifying entities to enforce “fundamental national public policy” (“FNPP”), as expressed by all three branches of the federal government, against racial segregation in schools, and deemed desegregation a compelling government interest that outweighed any burden on religion. As a private tax dispute, Bob Jones stands alongside legions of other complaints brought by taxpayers aggrieved by IRS actions. But as a case involving an educational institution raising a religious liberty claim against antidiscrimination regulation, Bob Jones raised broader public law issues involving constitutional and federal statutory interpretation, as well as judicial review of administrative action.
This article assesses the legal and symbolic influence of Bob Jones not to relitigate the case or to rewrite history, but to highlight the case’s lasting symbolic impact and lessons for future civil rights advocacy, especially as informed by CRTs that developed alongside the federal courts’ retreat from enforcing existing antidiscrimination norms. Part I examines the case of Bob Jones to show how its political and legal context shaped its unique posture and path to the Supreme Court. Part II examines the afterlife of Bob Jones and its symbolic importance to conservatives motivated to prevent its expansion, even as the decision limits its own impact by leaving crucial substantive questions unresolved: namely, the role of pluralism in enforcing civil rights against First Amendment claims, the viability of race-conscious remedies for racial discrimination, and the visibility of redistributive economic justice concerns. Finally, Part III shows how CRT’s insistence on confronting those same questions reveals persistent inequities sustained by U.S. social and legal institutions, drawing the fire of efforts to Stop CRT. Part III assesses the prospects for moving the difficult questions left unresolved in Bob Jones back to the center of analysis, even with the current Supreme Court in a polarized and partisan political climate. The Article ultimately concludes that the legal reorientation demanded by Bob Jones and initiated by critical theorists, whatever their fate in the Court’s jurisprudence in the near term, remains crucial for identifying and challenging ongoing power disparities in and through every level of democratic government and society.
Thursday, December 9, 2021
In November, the IRS issued an Action on Decision in the case of Mayo Clinic v. United States, 997 F.3d 789 (8th Cir. 2021),
rev’g, 412 F.Supp.3d 1038 (D. Minn. 2019). They will follow the precedent in the 8th Circuit, but refuse to accept the interpretation of the 8th Circuit reading out the Treasury regulation requiring formal instruction to be a primary function of an educational organization under section 170(b)(1)(a)(ii). I previously wrote about this case here.
It involves whether Mayo Clinic may use an exception to the unrelated business income tax provided to educational organizations under section 514(c)(9)(C)(i). Mayo Clinic claims to be "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." The IRS, relying upon Treasury regulations, that require that an educational organization must have as "its primary function . . . the presentation of formal instruction," did not allow Mayo the exception.
The district court held that the primary function test was not a legitimate interpretation of the statute. While the Appeals court disagreed in part, it held that the IRS was wrong in its application of a primary function test. It remanded the case to the district court with instructions to ensure that Mayo Clinic primarily promotes education.
I expressed concern regarding the case because I think it provides an easy path to public charity status for any organization that is primarily educational by normally having 1 faculty and some students. I did not expect the IRS to appeal, but thought they may choose to fight the case in other circuits. They have expressly taken this latter path.
In supporting its reasons the IRS stated: "We disagree with the Eighth Circuit’s invalidation of the long-standing regulatory requirement that the primary function of an educational organization described in section 170(b)(1)(A)(ii) must be formal instruction (the formal instruction requirement). First, in concluding that the formal instruction requirement “has no long history of congressional acceptance,” the Eighth Circuit did not consider the numerous times Congress has amended section 170(b), increasing the percentage of the allowable deduction and adding to the categories of organizations eligible for the preferential allowable deduction, since the regulations under section 170(b)(1)(A)(ii) were published in 1958, which is persuasive evidence of Congressional acceptance of such regulations. See, e.g., CFTC v. Schor, 478 U.S. 833, 846 (1986) (“It is well established that when Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the ‘congressional failure to revise or repeal the agency’s interpretation is persuasive evidence that the interpretation is the one intended by Congress.’”). Second, the Eighth Circuit did not consider that the faculty-curriculum student-place requirement provides a statutory basis for the formal instruction requirement in the regulations. Finally, the Eighth Circuit did not consider the Government’s arguments regarding over one dozen Code sections cross-referencing section 170(b)(1)(A)(ii) (many of which predated the regulation’s 1958 publication), which further support the position that the purpose of the formal instruction requirement is to ensure that section 170(b)(1)(A)(ii) “could not reach very far, if at all, beyond schools, colleges, and universities in its coverage.” Brundage v. Commissioner, 54 T.C. 1468, 1474 (1970)."
Thursday, September 9, 2021
Writing for today's edition of Religion News Service (RNS) news, Kathryn Post states that the Supreme Court’s August 26 decision to end the federal eviction moratorium brings new challenges for religious leaders and organizations working to aid those at risk for homelessness. Post cites to recent data from the U.S. Census Bureau indicating that more than 3.6 million Americans say they could face eviction in the next two months.
This startling statistic has brought the following response from Sarah Abramson, vice president of strategy and impact at Combined Jewish Philanthropies in Boston: "We’re very, very nervous. There is already a tremendous housing shortage in Boston. And we know from our data, and from the experience of our partners who do this work, just how difficult it was for somebody who has been evicted in the past to get housing.”
Jerrel T. Gilliam, executive director of Light of Life Rescue Mission in Pittsburgh, also shared concerns: “We are going to need to be very creative, and to think outside the box in order to prepare for what could be a potential onslaught of people needing assistance in a short amount of time.”
In its August 26 decision, the Court ruled that the Centers for Disease Control and Prevention lacked the authority to establish a federal eviction moratorium. According to the Court, such a moratorium requires congressional approval. The decision comes as renters and landlords face a backlog of promised funds. According to Census Bureau data, the government has thus far distributed only about $5.1 billion of the $46.5 billion in federal rental assistance funds intended to prevent eviction.
“We definitely have to work hard to make sure that money reaches people,” said Shams DaBaron, a New York activist who also goes by “Da Homeless Hero.” “We have to cover both sides: these small landlords that need it, and those who are extremely poor.”
DaBaron is currently living in an apartment with the support of a voucher program, but he says the city is behind on three months of rent. An eviction moratorium is one measure that can help buy more time while such funds face bureaucratic delays.
DaBaron gained national attention as unofficial spokesperson for the residents of the Lucerne, a hotel-turned-shelter during the pandemic in Manhattan’s Upper West Side that became the center of New York’s “homeless hotel” debate. When he was not advocating for his fellow residents, DaBaron partnered with local group Open Hearts to develop a program called Soulful Walk and Talks. The program provided hotel shelter residents the opportunity to walk to the nearby Riverside Park with local faith leaders from a range of religious traditions who provided a safe space for spiritual reflection.
“We didn’t want to make it a religious thing, but we understand the value of spirit, of soul, of that deep essence within everybody,” said DaBaron. “One of the things that came out of it, from talking to many of the faith leaders, is that many of them were transformed, just as many of us were transformed.”
“It was definitely very impactful,” said Rabbi Lauren Herrmann of the Society for the Advancement of Judaism, who joined in the Walk and Talks and organized other clergy participants. “For one thing, I really understood for the first time in my life the issues surrounding the shelter system, and why people choose to be on the streets instead of being in shelters. … The shelter system is deeply broken, and some of the stories I heard were deeply upsetting.”
Herrmann and DaBaron see the Soulful Walk and Talks as tending to the essential spiritual needs of those facing homelessness. They hope to continue and expand the program as the federal eviction moratorium lifts. Yet, DaBaron and Herrmann also pointed to structural changes that need to take place. New York state implemented a new eviction moratorium on Sept. 1 that extends until January 2022. However, the moratorium does not address the city’s lack of affordable housing, the income cliffs that foster dependence on government programs and the health and safety risks facing those in congregate shelters, where many former Lucerne residents are finding themselves since the hotel shelter closed this summer.
In Pittsburgh, Light of Life Rescue Mission takes a multifaceted approach to homelessness by providing a range of services including case management, education, unemployment services and accommodations for those facing housing insecurity.
Gilliam, the Christian organization’s executive director, is concerned the end of the eviction moratorium will mean a sudden, sharp increase in the number of residents facing evictions. At one point during the pandemic, evictions in Pittsburgh slowed to a complete halt — in a typical year, according to Gilliam, Pittsburgh sees 14,000 evictions.
Gilliam suggested implementing preventive measures that would allow landlords to receive rent payments while enabling those at risk for evictions to find suitable housing.
“We’re pleading with everyone,” said Gilliam. “Let’s try to get people help while they’re still in the home and help the landlord have another month or two of rent, so that we can find a place for them without them having to pass through homelessness to get assistance.”
The pandemic has not been as kind to all religious organizations working to serve those facing housing insecurity. Chaplain Asma Inge-Hanif, founder and executive director of Muslimat Al Nisaa, has been serving the Baltimore community for 30 years. The organization provides health, education and social services to all, regardless of their ability to pay, and its Home Shelter is especially designed to meet the needs of Muslim women. She says her organization has served thousands of people over the years.
In the last year and a half, Inge-Hanif almost died from COVID-19 and lost her organization’s signature location. “I couldn’t pay the rent anymore, even though they claim there was an eviction moratorium,” she said. Now, Inge-Hanif is working to keep the shelter open on a small scale so she can help meet housing needs, especially those of people arriving from Afghanistan.
“I’m getting so many requests all the time from people who are getting evicted,” she said. “It’s often people who have no status and people of color. Everyday I get seven to 10 requests for shelter and housing. And I can’t help them.”
As the federal eviction moratorium ends, Inge-Hanif is hoping to raise money for an apartment building so she can house more people. She also says governments need to make rental assistance and other services more accessible.
“That’s why people are being evicted. They can’t get through the paperwork,” said Inge-Hanif. “The people who need the help are not in a position to maneuver through all the red tape. … The way the system is set up prevents the people who are most in need from actualizing success and being self-sufficient.”
That, indeed, appears to be the sad truth.
Prof. Vaughn E. James, Texas Tech University School of Law
Monday, August 16, 2021
I'll admit off that bat that I haven't read through all of the 2,700-page infrastructure bill that the Senate passed last week. But on Twitter, Deseret News religion reporter Kelsey Dallas called my attention to a provision about halfway through the bill.
Section 40542 would create what it terms an "energy efficient materials pilot program." Specifically, it directs the Secretary of Energy to create a pilot program to help tax-exempt organizations increase the energy efficiency of buildings they own (and specifically it targets roofs, lighting, windows, doors, and HVAC systems).
The legislation is light on details about the program. But it appropriates $50 million for the pilot program, which is to run from 2022-2026. Organizations that are exempt under section 501(c)(3) can apply for grants of up to $200,000. The specific criteria by which the Secretary will choose which grants to award aren't established in the legislation but the legislation creates a broad structure for qualification. Grants are to be based on the energy savings the project achieves, the cost-effectiveness of the use of energy-efficient materials, the tax-exempt's plan for evaluating, measuring, and verifying energy savings, and the tax-exempt's financial need.
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.