Nonprofit Law Prof Blog

Searchable 990s!

I had a substantive post I was going to write today about a recent PLR. It was going to be fascinating, and I was going to raise a question about why the IRS drafted the PLR the way it did.

And then I opened Twitter. And saw this:

New: Search the full text of nearly 3 million nonprofit IRS filings, including investments and grants given to other nonprofits.https://t.co/LyCBYe6evq

— ProPublica (@propublica) June 6, 2019

And there went my productivity for the day.

I love GuideStar. I love the access it gives to tax-exempt organizations' 990s, and all the information I can get from that. The one thing that has always kind of annoyed me, though, was that the 990s weren't searchable. And that wasn't Guidestar's fault--it merely posted the 990s it received, which, I assume, the organizations didn't provide in an OCR manner.

But now, ProPublica has provided a searchable database of 990s, going back as far as 2011. (Full-text search is here; advanced search is here.) I don't know the best way to use the database, but I did do a search for "Loyola University Chicago" to see whose 990s we show up in. Turns out about 304 990s mention us. (I say about because the search isn't perfect: I couldn't find Loyola mentioned in the DePaul Schedule I that came up in the search.) A lot of the mentions are from private foundations, or from matching grants. There's even a mention in the 2010 Form 990 for the Charles Koch Foundation, though there the university is giving back about $1,200 in unused funds from a 2009 grant.

Samuel D. Brunson

 

MacKenzie Bezos and the Giving Pledge

About a week and a half ago, MacKenzie Bezos signed the Giving Pledge, promising to give away at least half of her almost $37 billion wealth either over the course of her life or in her will. With her signature, she's joined more than 200 other people, from around the world, in making this promise.

In the first instance, I think this commitment to philanthropy is tremendously laudable. She recognizes that she has a disproportionate share of assets, and that she has a moral obligation to share those assets with those who don't have her fortune:

We each come by the gifts we have to offer by an infinite series of influences and lucky breaks we can never fully understand. In addition to whatever assets life has nurtured in me, I have a disproportionate amount of money to share. My approach to philanthropy will continue to be thoughtful. It will take time and effort and care. But I won’t wait. And I will keep at it until the safe is empty.

Still, I have a couple questions. The first is, as a practical matter, how she'll give. After all, the bulk of her wealth is in Amazon stock. And she gave her ex-husband voting control over her Amazon stock. I don't know exactly what that looks like, but I imagine there are some limitations on her ability to liquidate (or donate) that stock.

The second is, how quickly will she give? Half of $37 billion is $18.5 billion. If she donates to a private foundation, she can only deduct up to 30% of her contribution base (which is, roughly, her adjusted gross income). If she gives directly to a public charity, she can still only deduct up to 50% of her contribution base (or 60% if she gives cash before 2026). In other words, to fully deduct her charitable contributions, she would have to earn at least roughly roughly $37 billion.

Now, it absolutely may be that she's not worried about fully deducting her contributions. (Facebook founder Zuckerberg and Priscilla Chan certainly don't seem to be.) Or maybe she'll wait until her death, when charitable donations are excluded from her estate, to fully make her contributions. (Of course, actuarial tables put her expected death about 34 years in the future, so that would be charity delayed.)

Which brings us, briefly, to yesterday's Chronicle of Philanthropy, which reports that the Giving Pledge has not, contrary to its original expectations, turbocharged charitable giving. While more than 200 people have signed, the vast majority of the wealthy have not. Nor has it inspired increased generosity by non-wealthy Americans. Charitable giving stood at about 2% of GDP before the introduction of the Giving Pledge, and it has continued there since.

That's not to say, of course, that Bezos's pledge is insincere, that she's not actually planning on giving away more than half her money, or that she won't do it during her lifetime. It is to say that, while the Giving Pledge is theoretically nice, though, if we want to increase charitable giving, or if we want to reduce income inequality, the Giving Pledge isn't the solution.

Samuel D. Brunson

Controlling a Donor-Advised Fund

A couple months ago, I presented a work-in-progress on donor-advised funds to my colleagues at Loyola (a work-in-progress I hope to finish and post on SSRN soon). That evening, I got an email from one of those colleagues. It turned out that that same night, some donor-advised fund sponsored a bunch of the programming on WBEZ, our local NPR station, and the words donor-advised fund now meant something to my colleague.

Fast-forward to last Friday. A New York Times story popped up on my phone which, serendipitously, was about donor-advised funds. More specifically, it was about a lawsuit that, according to the Times, may cool donor enthusiasm for DAFs.

As a quick summary: commercial DAFs are essentially low-cost replacements for private foundations. They're often run by big mutual fund companies, which established a public charity. Donors donate to the charity, and the charity keeps their donations in separate accounts. The donor has given up ownership and control over the donation (and thus gets a deduction), but can advise the sponsoring organization about how to invest and distribute her donation.

And, as a legal matter, it's clear that the donor has given up the ownership and control. As a practical matter, though, I assume that donors have a lot of influence over their donations. If the sponsoring organization were to start going rogue, it's probably fair to assume that donors would be less excited to give their money to that particular sponsoring organization.

But, again, as a legal matter, the sponsoring organization, not the donor, has control. And that's where the lawsuit the Times mentions comes in. According to the Fairbairns' complaint, in 2017, they donated 1.93 million shares of Energous stock--which is publicly traded on the NASDAQ--to Fidelity Charitable. They wanted Fidelity to eventually distribute their donation to charities that combat Lyme disease.

The Fairbairns allege that Fidelity promised them four things to induce the donation:

1. Fidelity would use state-of-the-art methods for liquidating large blocks of the stock;
2. It wouldn't trade more than 10% of the daily trading volume of Energous shares;
3. It would allow the Fairbairns to set a floor on the price it would accept; and
4. It wouldn't start selling Energous shares until 2018.

Fidelity didn't do, well, any of those things. According to the complaint (which Fidelity admits is true), it sold all of the shares on December 29, 2017. The Fairbairns claim that the sale drove the value of the stock down by 30%. And why do they care?

The complaint gives two reasons:

It turns out, according to the complaint, that the 2017 changes to the tax law meant that the Fairbairns couldn't defer a sizeable tax hit any longer. Moreover, a couple days before the donation, the value of Energous stock jumped 39%. By making this donation, they managed to avoid paying taxes on the appreciation, and could, at the same time, offset their deferred income.

Now here's the thing about the lawsuit: by donating to Fidelity (rather than donating directly to their Lyme disease charity or donating to a private foundation), the Fairbairns had given up their legal right to control both the investment decisions and the distribution decisions. So instead, the complaint alleges that Fidelity misrepresented what they would do to induce the Fairnairns' investment, that it breached an enforceable agreement about how it would deal with their donation, that it was estopped from doing what it did, and that it was negligent in the manner it liquidated the stock.

Will this affect donors' willingness to provide charity through donor-advised funds? I honestly don't know. Frankly, investors should be aware that their right to advise is limited. On the other hand, large donors prefer to have control and, while a private foundation is more costly and provides a lower ceiling on deductibility, if they really want the control, perhaps they should give through foundations (or, heaven forbid, directly to active charities).

Samuel D. Brunson

 

Buchanan's 5 Mistakes of Mega Donors

I saw the following tweet today (and yes, I really should get off Twitter ....) from Phil Buchanan about an article published today on Wired.com entitled "5 Mistakes MacKenzie Bezos and other Mega-Donors Should Avoid":  

	Phil Buchanan (@philxbuchanan)
5/31/19, 9:39 AM 5 mistakes MacKenzie Bezos & other mega tech donors should avoid -- just out in ⁦‪@WIRED⁩ wired.com/story/5-mistak…

You may remember Phil from my Wednesday post as the current President of The Center for Effective Philanthropy.  First of all, I didn't realize that Jeff Bezos was getting divorced, but that being said, apparently his ex-wife took the Gates/Buffett Giving Pledge and as a result has scads of money to give to charity.  Accordingly, Mr Buchanan has some helpful advice to give to Ms. Bezos as she contemplates her philanthropy.   I won't give away all five (so that you'll read his article), but here's the first few:

    1.   "Thinking a single, quick-fix 'innovation' will solve complicated social problems

    2.   "Looking for one-size-fits-all performance measures"

Read the article for 3. 4 and 5.   I personally would add two more mistakes, however:

    6.   Not funding overhead costs, and

    7.   Bribing your favorite nonprofit into mission creep.

If you've bee in the nonprofit grant-making world for even five minutes, then I don't need to explain 6.   I recognize it isn't sexy to pay for employee health care coverage or the light bill, but work - even charity work - does not get done by sick people in the dark.     Seven is related, however - all too often I've seen charities take on large projects that monopolize their time, assets, and people to the detriment of their core mission, including diverting resources to overhead to support donor vanity projects that can't be paid out of the grant funds.   

What would you all add to the list?

EWW

Thinking Big Thoughts: Nonprofits and Democracy… on Twitter….

With summer here and the day-to-day craziness mostly (!) under control, I have the luxury of a few moments of just … thinking.   It’s easy to get wrapped up in the text of the Code, the most recent case law, or the scandal du jour (I’m looking at you, NRA).   But I rarely have the time to step back and take a wider scope on things.   

At this particular moment, it is courtesy of Twitter, which seems somewhat antithetical to big thoughts (literally, given the word count), but one never knows from whence inspiration may come. In the matter of just a few days, a number of Twitter posts came across my feed that connect indirectly in my mind to a larger questions of the role of charity in a democracy. 

Twitter post number 1.  Nonprofit Quarterly posted an article on its website entitled “The Road Less Traveled: Establishing the Link between Nonprofit Governance and Democracy.”

https://twitter.com/npquarterly/status/1133559834203308033?s=20

This article discusses how best practices in nonprofit board governance increase the representation of the various communities served by a nonprofit.  The failure to follow these best practices results in a “’democratic deficit’ in board governance- that is, an absence of democratic structures and processes.” Addressing the democratic deficit doesn’t just benefit the charity – it benefits our democracy writ large: “Wider constituent participation in nonprofit governance will not only help citizens develop civic skills and democratic values … .”  

Twitter post number 2.   The second Twitter post links to a Nonprofit Quarterly podcast that discusses “No White Saviors,” a movement that discusses the impact of race on hierarchy and power in the international charitable economic development space.  

https://twitter.com/npquarterly/status/1132662674855202817

This links a Nonprofit Quarterly podcast that discusses “No White Saviors,” a movement that discusses the impact of race on hierarchy and power in the international charitable economic development space.   “Those with power hav[e] the resources and capability to make decisions on what should the outcome should be for vulnerable populations.” Podcast at 6:42.

Twitter post number 3. The third post is an interview with Phil Buchanan of The Center for Effective Philanthropy, posted on vox.com, where he responds to criticism of that wealthy philanthropy is undemocratic (set for the more fully in his book, Giving Done Right).

https://twitter.com/voxdotcom/status/1132995143378845697?s=20

In the interview, Buchanan is quoted as saying:

The structural critiques are important and they play out in our democratic politics. But in the meantime, here we are. We have significant wealth that’s been accumulated in this country. We have endowed private foundations that don’t even have a connection on the board to the original donor. These are institutions that are focused on a mission. They’re focused on the public good. I like working in the day to day, in the practical reality, where there are people with decision-making power to allocate these resources. I want to help them to do it effectively.

I think all of these pieces raise interesting views on the role of power and money and the role of the charitable sector in a democracy.  At the end of the Buchanan interview, he specifically asks if we should be subsidizing all of this through the tax code, and specifically the Section 170 charitable deduction (spoiler alert: he says yes, and expand it to non-itemizers).

I’m more interested, however, in the Section 501(c)(3) implications on all of this.  Since Section 501(c)(3) is the section that creates the boundaries between that which is charitable (at least, charitable in tax terms) and that which is not, does it make sense for those rules to play a role in policing this issue.   One could view the 1969 passage of the private foundation excise taxes as the historical pre-cursor for this discussion, as at least part of the background of that legislation was to minimize the benefit to and the influence of the most wealthy through charitable vehicles.  My thoughts aren’t fully formed on this, but I found it an interesting crossing of the Twitter streams in a very short 48 hour period.  Any musings and other big thoughts are, of course, most welcome.

EWW

Charitable Contribution Cases: An Alleged $151 Million Conservation Easement; Tens of Millions in Bogus Contributions

Two recent cases highlight ongoing issues with the federal charitable contribution deduction.

In Battelle Glover Investments, LLC v. Commissioner (link to petition available from Tax Analysts; subscription required), a partnership is challenging a $151 million charitable contribution deduction disallowance arising out of a conservation easement donation. According to the petition, the conservation easement was on approximately 97.8 acres of limestone mining property donated to the Southeast Regional Land Conservancy, Inc. The petition indicates the Internal Revenue Service is disallowing the deduction on multiple grounds, including that the partnership failed to satisfy all of the requirements of Internal Revenue Code section 170 and that the correct valuation of the conservation easement was zero. The IRS is also seeking to impose a 40% valuation misstatement penalty. This case is of course only the latest, high-dollar conservation easement dispute, as the IRS has brought hundreds of cases challenging charitable contribution deductions in this area, as documented by co-blogger Nancy A. McLaughlin (University of Utah).

In United States v. Meyer, the federal government successfully sought injunctive relief against an attorney who promoted the "Ultimate Tax Plan," also sometimes referred to as a "Charitable LLC" or "Charitable Limited Partnership." According to the complaint filed last year in federal district court, the scheme involved sham donations to purported charities controlled by Mr. Meyer and his advice to the participants that as a result of those donations they could take unwarranted charitable contribution deductions. The complaint stated that the total cost to the Treasury was more than $35 million in lost tax revenue. Each of the three charities involved were based in Indiana and had successfully applied for IRS recognition of exemption under Code section 501(c)(3). However, in recent years Mr. Meyer had entered into agreements with the IRS that retroactively revoked the tax-exempt status of all three charities based on either inurement grounds or their use in the alleged scheme. Mr. Meyer made money off this scheme by charging various fees related to the purported donations. The case apparently has had significant ripple effects, in that it appears to have triggered audits of many of the scheme's participants, and possibly investigations into the financial planners and CPAs to whom Mr. Meyer marketed it (and sometimes paid for referrals). Coverage: Bloomberg Tax; Forbes.

Both these cases illustrate the potential for abuse of the charitable contribution deduction, to the significant detriment of the federal treasury.

Lloyd Mayer

 

Two Way Too Early Lessons from the Mess at the NRA

Details continue to emerge about the ongoing crisis at the National Rifle Association and government investigations are just starting to build up steam, so it is way too early to try to comprehensively identify nonprofit law lessons arising from this situation. That said, here are two early takes.

Boards Matter (Eventually). The NRA has a huge Board of Directors, with more than 70 members. While presumably its members are strong supporters of the NRA's agenda, they also have a legal role that gives them both access to information and credibility when making criticisms. While details about the NRA's recent problems emerged in a mid-April New Yorker story, they were given added visibility when they became the apparent basis for a leadership challenge by a faction of board members, including then-President Oliver North. That challenge failed, as did apparently earlier, quieter attempts by board members to rein in possibly problematic behavior, as explored in the New Yorker story. But that may not be the end, as the N.Y. Times reported yesterday that board member and former congressman Allen B. West has now publicly called for NRA Chief Executive Officer and Executive Vice President Wayne La Pierre to resign. One of the many board members may also have been the source of recently leaked internal memos that support many of the concerns now coming to light.

Success Does Not Excuse All Wrongdoing. Wayne LaPierre has been with the NRA since 1977, and been its head since 1991, during which time he has led the NRA to increasing prominence and influence. But despite that success, he now appears vulnerable. Indeed, in an apparent pattern that many who work with nonprofits will recognize, that success and long tenure may have led him to engage in the very transactions that could prove to be his undoing. For example, while far from the most significant questionable transaction financially or probably legally, his alleged spending of more than $200,000 for wardrobe purchases charged to an NRA vendor is, if true, a classic example of an unnecessary, self-inflicted wound (and possible excess benefit transaction for federal tax purposes). For the rank-and-file NRA member, paying him over a million dollars in compensation annually presumably can be justified by the organization's success; but then he should buy his own clothes (and who spends over $200,000 on clothes?).

With the continuing New York Attorney General, congressional, and possibly Internal Revenue Service interest, we will hopefully learn much more about how the crisis developed in the coming months. And of course this is on top of previous congressional interest in alleged Russian ties to the NRA in the time leading up to the 2016 election.

Lloyd Mayer

Feds Investigate, Baltimore Mayor Resigns

Following up on previous coverage in this space, Baltimore Mayor Catherine Pugh's nonprofit-related problems led to her resignation earlier this month in the wake of FBI and IRS agents raiding her homes and mayoral office. The issue that led to her downfall: alleged self-dealing, arising from the $500,000 purchase of a book she wrote by a nonprofit on the board of which she sat. Additional coverage: Baltimore Sun (which broke the original story); CNN; Washington Post.

Lloyd Mayer

Other Nonprofit Scandals You May Have Missed: $37 Million Class Action Settlement; "Sham" Police Charities

In a story that appeared to attract very little attention, Gospel for Asia settled a federal class action lawsuit brought against it for $37 million (!) according to a report in a Canadian news outlet. According to that report, the charity - now known as GFA World - "had been accused of diverting donations intended for India's poor to build a lavish headquarters in Texas, personal residences, and purchase for-profit businesses, including a rubber plantation and a professional soccer team." The charity also agreed to remove the wife of the charity's founder from the board of directors, and to add the lead plaintiff in the suit to the board. It is not clear whether the Canada Revenue Agency, the Internal Revenue Service, or any other government agencies are investigating. According to a report in Christianity Today, Gospel for Asia helped found the Evangelical Council for Financial Accountability, but was expelled from that organization in 2015 "after ECFA concluded that GFA misled donors, mismanaged resources, had an ineffective board, and violated most of the accountability group’s core standards." Gospel for Asia did not acknowledge any wrongdoing as part of the settlement, as it noted in a related press release.

In other news, states continue to pursue and shut down alleged "sham" police charities. In Missouri, the St. Louis Post-Dispatch reports that the Federal Trade Commission and Missouri Attorney General Eric Schmitt forced the Disabled Police and Sheriffs Foundation Inc. to shutdown after raising close to $10 million, almost all of which went to fundraising costs or the organization's executive director. The charity and the executive director did not admit to any wrongdoing, however. And in Maryland, the Baltimore Sun reports that a retired Baltimore police sergeant "has agreed to cease soliciting money for a police charity [CopStress] that the Maryland Attorney General’s Office says misled the public about its operations." The retired police officer involved contested the accusations, however, saying he was only agreeing to shut the charity down after collecting minimal donations because otherwise he faced a $30,000 fine. 

Lloyd Mayer 

March Madness: Tax Edition

The Center for Public Integrity recently posted, "The Trump Tax Law Has Its Own March Madness" on its website.   The article highlights many of the issues with the TCJA that we have previously discussed on this blog, but specifically puts the new excessive compensation excise tax square in the context of the NCAA Men's Basketball Tournament:

The coaches who made the final four are being paid the following this year by their universities:  Tom Izzo, Michigan State University, $3.7 million; Tony Bennett, the University of Virginia, nearly $3.2 million; Chris Beard, Texas Tech University, $2.8 million; Bruce Pearl, Auburn University, $2.6 million. John Calipari, whose Kentucky team also made the Elite Eight, earned compensation of nearly $8 million in 2018-2019.

The Article goes on to highlight the fact that these coaches may all be treated differently despite having similar salaries.   Because some of the coaches work at public universities, they may escape the excise tax due to the drafting issue identified by Ellen Aprill previously (and discussed on this blog here), who is quoted in the article.   In addition, John Calipari particularly receives significant third party revenue that may or may not be captured by the controlled organization rules.   

EWW

 

Baltimore Mayor, University of Maryland Medical System, and Form 990

Proving that issues with politicians and nonprofits are truly bipartisan (and not limited to President Trump), the dust continues to fly over various financial transactions involving Baltimore Mayor Catherine Pugh (a Democrat), her inaugural committee, and the University of Maryland Medical System. According to media reports, the Mayor, who was then a UMMS board member, had a $500,000 deal with UMMS to purchase her self-published children's books, a deal that she now says was a "regrettable mistake" and for which she has apologized. (Washington Post; WBAL-TV) She also resigned from the UMMS Board of Directors after the deal came to light.

The possible legal troubles do not stop there, however. According to reports last week, the Mayor's inaugural committee failed to file its required IRS annual information returns (Form 990). In addition, UMMS failed to report on its returns that it gave $20,000 to that committee. UMMS is taking the position that the payment was not a grant, which it would have had to report, because it received in return 28 tickets to inaugural events. It made this argument even though in an earlier filing it had reported a contribution to support the inauguration of another public official.

Lloyd Mayer

Now With the Mueller Report Done, We Can Get to the Important Trump-Related Investigations

As the Washington Post details, the end of the Mueller investigation is far from the end of law enforcement actions relating to President Trump. Among those investigations are several tied to nonprofit organizations, specifically the continuing litigation in New York relating to the Trump Foundation and investigations into the President's inaugural committee.

Turning first to the inaugural committee, in late February the District of Columbia Attorney General's office subpoenaed the committee for documents relating to its finances according to several media reports (CNN; NY Times; Politico; Wall Street Journal; Washington Post). This followed subpoenas on the same topic from the New Jersey Attorney General's Office and from the U.S. Attorney's Office for the South District of New York, both earlier that month. The latter subpoena identified a number of possible federal crimes under investigation, including conspiracy against the United States, mail and wire fraud, money laundering, and accepting contributions from foreign nations and straw donors. The DC and NJ subpoenas are more focused on nonprofit-related matters, such as possible private benefit and whether the committee complied with laws relating to soliciting contributions.

As for the Trump Foundation litigation in New York, Courthouse News Service reports that New York Attorney General Letitia James requested judgment against the Foundation, Donald J. Trump, Donald J. Trump Jr., Ivanka Trump, and Eric F. Trump for $2.8 million in restitution and $5.6 million in penalties, as well as injunctive relief. The filing, technically a Reply Memorandum of Law in Further Support of the Verified Petition, argues that the evidence provided by the Attorney General has not been challenged by the respondents or countered by any admissible evidence provided by them, and that it demonstrates breach of fiduciary duties, wasting of charitable assets, and improper use of the foundation for political purposes.  Hat tip: Nonprofit Quarterly.

Lloyd Mayer

Grassley, Wyden, and DOJ Scrutinize Syndicated Conservation Easement Transactions

UPDATE: Rep. Mike Thompson, Chair of the House Ways and Means Subcommittee on Select Revenue Measures and Rep. Mike Kelly have introduced the Charitable Conservation Easement Program Integrity Act of 2019 in the House. Senator Steve Daines previously introduced a bill with the same name in the Senate.

Senators Chuck Grassley and Ron Wyden, Chairman and Ranking Member of the Senate Finance Committee, respectively, have announced an investigation into the potential abuse of syndicated conservation easement transactions. While stating general support for the availability of charitable contribution deductions for conservation easements, they cited a need to preserve the integrity of the conservation easement program by preventing "a few bad actors" from wrongly gaming the tax laws relating to conservation easements. They have requested information from fourteen named individuals relating to such transactions, drawing on a 2017 Brookings report on conservation easements.

This announcement follows a Department of Justice complaint filed in December 2018 against certain promoters of "an allegedly abusive conservation easement conservation easement syndication tax scheme" and a 2017 IRS Notice targeting such schemes by declaring them "listed transactions." 

At the heart of all these actions are allegedly false valuations based on inflated appraisals that sharply increase the tax benefits from the conservation easements. 

Media coverage: Accounting Today; Law360; Wall Street Journal.

Lloyd Mayer

Church Tax Benefits: Does 7th Circuit Ruling on Cash Parsonage Allowance Exclusion Protect Other Church-Specific Benefits?

In a much anticipated decision, the U.S. Court of Appeals for the Seventh Circuit concluded that the exclusion from gross income of cash parsonage allowances under Internal Revenue Code section 107(2) is constitutional, reversing a federal district court decision to the contrary. (Full disclosure: I signed an amicus brief arguing that the provision is constitutional.)  Since the decision leaves the exclusion in place and there are no contrary federal appellate court decisions, it is highly unlikely that the Supreme Court will take up the case even if the plaintiffs file a cert petition. The Freedom from Religion Foundation, which instigated the challenge, or others could of course try to raise this issue in a different circuit in order to try to create a circuit split, especially since the plaintiffs here managed to overcome the standing issue that had frustrated an earlier challenge. At least one panel of the U.S. Court of Appeals for the Ninth Circuit indicated in an earlier case an interest in reaching the constitutional issue by appointing an amicus law professor who was skeptical of the provision's constitutionality (an issue that had not been raised by any party in that case). But such a split is likely years down the road, if it ever materializes.

A larger question is whether the decision provides broader protection for other tax benefits provided to churches, other religious groups, and ministers. Perhaps the most important holdings of the court in this respect are its conclusion that Congress had the secular purpose of avoiding excessive entanglement with religion when it enacted the provision (citing Taxing the Church, authored by Edward Zelinsky (Cardozo), on this point), its narrow reading of the Supreme Court's Texas Monthly decision as part of its reasoning for why the primary effect of section 107(2) is not to advance religion, and its stated deference to Congress in determining whether the provision causes excessive government entanglement with religion. (These conclusions reflect the much criticized by still applicable Lemon test.) These conclusions are not accepted by all; for a thoughtful critique of them, see this TaxProf Blog op-ed by Adam Chodorow (Arizona State), who argued against the constitutionality of section 107(2). And of course the decision only directly applies to that provision and is only precedential in the Seventh Circuit. But they likely foreshadow a difficult path for any other challenges to tax benefits enjoyed by religious groups or ministers, including the exemption from the annual information return filing requirement for churches currently being challenged by the Freedom from Religion Foundation (in the District of Columbia, not the Seventh Circuit).

Lloyd Mayer

Mayer: Could a More Robust IRS Have Nipped the Varsity Blues Scandal in the Bud?

In today's Chronicle of Philanthropy, Lloyd Hitoshi Mayer (Notre Dame) authored an opinion piece questioning whether a better funded IRS could have discovered and ended sooner the college admissions scandal discussed in several prior blog entries this week (here, here and here).  Here are some highlights of the opinion:

• There were certainly enough yellow flags in IRS filings of the nonprofit at the center of the scam to signal something was wrong.  The Internal Revenue Service would have needed the capacity to review those filings carefully and to pursue those flags.
• In addition to more funding for the IRS oversight of nonprofits, Congress could consider possibly moving that oversight out of the IRS.
• One significant red flag:  In its tax-exempt application, the Key Worldwide Foundation articulated that it would be using materials developed by a for-profit company owned by one of the organization’s directors, which also employed the foundation’s chief financial officer and treasurer.
• In its annual Form 990 returns, the Foundation reported it had three directors and none of them met the IRS’s definition of “independence,” indicating they all had financial ties to the foundation or related entities.
• The Foundation also stated in its annual returns that none of the grant recipients were tax-exempt charities. While charities can make grants to businesses and governments in limited cases, the complete lack of charity recipients raises the issue of how KWF ensured that its grants would be used only for charitable purposes.
• The Foundation's organizers and maybe some of the parents participating in the admissions scam knew that the IRS is mostly asleep at the switch with respect to audits.  
• There is only so much that technology and public disclosure of information can do to uncover such misdeeds without more funding of IRS oversight.
• It is, therefore, not surprising that an apparently unrelated FBI investigation led to the discovery of this scheme instead of an IRS investigation, given this lack of resources and resulting low audit coverage.

 

Nicholas Mirkay

Nonprofits Are Front & Center in College Admissions Scandal

One would be hard pressed to find a news source that is not covering the recently unearthed college admissions scandal.  The focus of particular articles vary, but the central theme is consistent--a tax-exempt, nonprofit organization was used to perpetrate the fraud. The Key Worldwide Foundation was founded by Rick Springer, with a mission "to provide guidance, encouragement, and opportunity to disadvantaged students around the world."  In reality, KWF was used primarily as a conduit to solicit funds from parents eager to get their children into elite universities and then use those funds to bribe both test administrators and university administrators and coaches to effect those admissions.  As Sam Brunson discusses in his entry on The Surly Subgroup blog, not only were parents' contributions laundered through KWF, but added insult to injury, they also were entitled to deduct those payments as charitable contributions. 

As discussed in one of many articles by the Los Angeles Times, KWF boasts on its website and tax filings that it provides grants to assist needy Cambodians and after-school programs for children across the country.  According to another news source, one purported grant recipient, Friends of Cambodia, never received any of the money reported by KWF.  Rather, as reported by the Times' pursuant to its review of KWF's "federal tax records" (presumably their Forms 990), a vast majority of the Foundation's grants went directly to elite, private and public universities and their athletic programs (USC, Yale, University of Texas).  

Notwithstanding the gross misuse of the tax-exempt, nonprofit sector and tax incentives for contributions to charities, this scandal sheds even more light on a persistent issue making a lot of headlines lately--unprecedented wealth inequality in America.  Even with tax proposals being floated to effectively tax wealth accumulation, this scandal proves that the privilege conferred by wealth can be boundless.

 

(Hat tip:  The Surly Subroup, TaxProf Blog)

Nicholas Mirkay

Effect of TCJA on Charitable Giving: "Sluggish" Growth in 2018

As reported by The Washington Post and other news outlets, the Fundraising Effectiveness Project's most recent report announced an unimpressive 1.6 percent increase in charitable giving for calendar year 2018.  Donations from general donors (gifts under $250) and mid-level donors (gifts between $250 and $999) each dropped by 4 percent from the prior year.  On the other hand, donations from major donors (gifts of $1,000 and more) rose by 2.6 percent.  The report also revealed that the number of donors decreased by 4.5 percent from the prior year.  Although not conclusive evidence, the report does lend some credence to the conclusion that the TCJA and the resulting decrease in taxpayers itemizing their deductions (which includes the charitable contributions deduction) has negatively affected charitable giving. 

 

Nicholas Mirkay

Trump Foundation Redux: Cohen Testimony Raises Self-Dealing and Assignment of Income Issues

While the media and public understandably focused mostly on other aspects of Michael Cohen's testimony before Congress yesterday, the information he provided raised two significant issues relating to the soon-to-be-dissolved Donald J. Trump Foundation. 

First, in his opening statement Cohen mentioned (on pages 3 and 12) that the Foundation had been involved in the purchase of a third portrait of Mr. Trump from a charity auction, this time through reimbursing the winning bidder the $60,000 purchase price, which portrait was then hung in one of Mr. Trump's country clubs. If these statements are true, this is a clear case of self-dealing in violation of Internal Revenue Code section 4941 (and comparable state law requirements as well), as was the case with the previously reported charity auction purchases of two other portraits that also ended up hanging in Trump business properties. It should be noted that the Foundation's annual IRS return for 2013 (available from GuideStar) does not show such a reimbursement and the only $60,000 payment it includes is to the American Cancer Society, although the Foundation has inaccurately reported distributions before. For coverage of this aspect of Cohen's testimony, see CNN, The Guardian, and this Surly Subgroup post by Ellen Aprill.

Second, he confirmed previous reports that Mr. Trump had steered a $150,000 payment from a Ukrainian billionaire, Victor Pinchuk to the Foundation in lieu of it being paid to Mr. Trump as a speaking fee. As Ellen Aprill and I discussed back in 2016, such arrangements raise a possible assignment of income issue in that depending on the exact circumstances Mr. Trump may have been required to include that fee in his gross income for both federal and state income tax purposes (although there may have been a full or partial offsetting charitable contribution deduction to reflect the transfer of those funds to the Foundation). Of course without seeing Mr. Trump's personal federal and state income tax returns, we can't be sure whether he included this amount in his income or not. For coverage of this aspect of Cohen's testimony, see Time.

Lloyd Mayer

 

What's Wrong with "Behested" Payments to Charity? (Part I)

There was an interesting article in yesterday's L.A. Times regarding something the left coasters call "behested payments."  On the right coast, the practice is probably more often referred to as "pay to play."  Anyway, yesterday's L.A. Times article described left coast politicians' habit and history of soliciting charitable donations to their favored causes.  Sounds ok so far.  "These payments are not considered campaign contributions or gifts," the state's political watchdog explains, "but are payments made at the 'behest' of elected officials to be used for legislative, governmental or charitable purposes."  The more sinister implication is that the donors are doing two bad things.  First, they are avoiding campaign donation limitations by steering campaign contributions to a candidate's favorite charity, through which the candidate receives some sort of implicit benefit associated with the donation.  Secondly, the donor is buying access to city hall.  Los Angeles Councilman Mitchell Englander has caused many a donor to contribute, at Councilman Englander's "behest," to a charity at whose well attended events Councilman Englander is a frequent and featured guest speaker.  For federal tax purposes the implication is that in exchange for benefitting from a politician's fundraising prowess, charities are providing focused and featured face-time and feel good associations for the candidate.  In other words, the candidate who can steer donations to a charity by sending out personal "behests' [sic], is treated as the charity's favorite son or daughter, though the charity never implicitly tells its stakeholders to "vote for so and so because he supports us."  A 2017 article graphically illustrated the potential in this graphic regarding behested payments solicited by Mayor Eric Garcetti:

 

 

Mayor Garcetti has raised a boat load of money mostly for the Mayor's Fund of Los Angeles, a 501(c)(3) he set up himself and which generally does its good works in partnership with L.A. city government, especially the incumbent Mayor.  One commentator describes Garcetti's success with behested payments thusly:

Garcetti has raised more than twice as much in behested payments as California Gov. Jerry Brown and more than 40 times the amount of Lt. Gov. Gavin Newsom over the same time period, according to a KPCC analysis of reports filed by the politicians.  Most of the donations Garcetti raised went to a charity he helped create after his election, the Mayor's Fund for Los Angeles, according to reports he filed with the Los Angeles City Ethics Commission.  Other contributions given at his request benefited other efforts, including two that are dear to his heart: L.A.'s Olympic bid and The GRYD Foundation, which runs a summertime park program Garcetti has supported for years.  “It strikes me that he’s taking advantage of the law more than anybody else has ever done,” said Bob Stern, a former California Fair Political Practices Commission general counsel who helped write the state's 1974 Political Reform Act.

 

 

 

California has disclosure rules that require politicians to disclose "behested payments."  I suppose transparency in politics is a good thing so I don't have a philosophical bent against campaign disclosure laws.  But what exactly is the public to conclude from, for example, the disclosure that a political incumbent has generated -- "behested" -- millions of dollars for a charity whose glow benefits everybody with whom the charity associates, including its political incumbent rainmaker?  The answer to that question begs the question what exactly is the politician purchasing from the charity who benefits from behested payments and what implication does that expectation have for charitable organizations prohibited from campaign intervention.  I will talk about that in my next post.

 

Darryll K. Jones

 

 

 

 

 

Pennsylvania AG Challenges the University of Pittsburgh Medical Center's Public Charity Status

Pennsylvania Attorney General Josh Shapiro announced yesterday that he is seeking to modify consent decrees governing the relationship between the University of Pittsburgh Medical Center (UPMC) and Highmark (a health insurer and health care provider), with the support of Highmark's leadership. According to the AG "UPMC is not fulfilling its obligation as a public charity." More specifically, in the petition his office filed he is asking the Commonwealth Court to:

• Enable open and affordable access to UPMC’s health care services and products through negotiated contracts with any health plan;
• Require last, best-offer arbitration – commonly known as “baseball arbitration” – when contract negotiations between insurers and providers fail; and
• Protect against UPMC’s unjust enrichment by prohibiting excessive and unreasonable billing practices inconsistent with its status as a non-profit charity providing healthcare to the public.

Alleged violations of UPMC's charitable obligations include "[w]ithholding access to doctors for patients in Williamsport, Pennsylvania whose employers have contracts with a competing health plan" and "[r]efusing to negotiate reasonable payment terms with self-insured employers, resulting in UPMC's unjust enrichment through excess reimbursements for the value of its services."

Press coverage: Pittsburgh Business Times; Pittsburgh Post-Gazette.

Lloyd Mayer