Nonprofit Law Prof Blog

NY Attorney General Issues Annual Charitable Fundraising Report

 

From the NY Attorney General's annual Pennies for Charity report on fundraising and other things in the Empire State:

darryll k. jones

 

More on Fiscal Sponsorships: The Poorer Peoples' Donor Advised Fund

We posted last summer about a quick read on Fiscal Sponsorships.  New research out yesterday apparently confirms all the fuss about fiscal sponsors making charitable activities more do-able.  Remember when DAF's were advertised as the poor person's private foundation?  Fiscal Sponsorships are the poorer person's public charity.  The poor person who can afford a DAF but not a whole private donation is richer than a lot of folk I'll tell you that.  Consumer Reports says the bare minimum to open a DAF is between $5,000 and $25000, peanuts for some I guess.  I found a few online advertising no minimum at all, but why?  For some, even the $5000 bare minimum is too much.  So fiscal sponsors are to public charities what donor advised funds are to private foundations.  With fiscal sponsorships, there is no paperwork, no nothing except some simple agreement between a 501(c)(3) sponsor and some people too poor to afford their own (c)(3). By the way, I am pretty sure that a sponsor that does nothing other than administrative services for other real charities is itself not a real charity. That is, its not tax exempt. A couple of ex-NFL players are running one such operation. But see Treas. Reg. 1.502-1(b) and this article published about 100 years ago. 

But fiscal sponsorship can also be a useful for a larger public charity that is thinking of expanding its charitable reach into new activities.  It might sponsor a legally separate entity first, just to see how things work without committing itself to full fledged legal exposure.  

There is a fairly thorough background report out in yesterday's Chronicle of Philanthropy.  Here is an excerpt:

Fiscal sponsorship is a significant and rapidly growing part of the nonprofit world, according to a new report from Social Impact Commons and the National Network of Fiscal Sponsors. The report and experts involved in the sector indicate that the rise of fiscally sponsored projects appears to be both a response to the bureaucratic complexity of establishing and running a nonprofit and the increasing professionalization of the field. It’s being used as a way to pool resources, incubate new ideas, and provide oversight to organizations that are not yet charities.

The last 20 years have seen larger growth in the field than the previous 50, the report found, and demand for fiscal sponsors has surged since 2020. Seventy-one percent of survey respondents said demand for their services increased during the pandemic, and many are experiencing growing pains. The model, which has been around since at least 1959, when the Massachusetts Health Research Institute in Boston began offering a form of fiscal sponsorship for public and community health research efforts, has gained currency as a simpler way to organize charitable work at a time when the pandemic, racial reckoning, and other local and national concerns such as education and the environment are motivating people to quickly mobilize for social change.

The arrangement comes in many forms. Some sponsors centralize back-office support like accounting, human resources, and sometimes assistance with fundraising and leadership development for groups that don’t have nonprofit status. Others offer a purely financial relationship in which the sponsor receives the tax-deductible funds on behalf of a group that does not have charity status and passes the funds along. Most take a fee, which can vary widely depending on the sponsor and the services offered.

darryll k. jones

Ways and Means Witnesses Urge Revocation of Hate Groups' Tax Exemption

I am not yet convinced that Palestinian rights advocacy groups -- like the National Students for Justice in Palestinian -- are "hate groups." We too often conflate Palestinian rights group with Hamas these days.  Some of the witnesses at Ways and Means' hearing on tax exemption for universities and groups they host might be guilty of that conflation.  Two of them asserted that the First Amendment does not prevent the government from revoking tax exempt status for hate groups, an assertion with which I agree.  But overall, I thought the hearing was a missed opportunity because the witness list included no higher education law experts.  I used to be a member of the National Association of College and University Attorneys and can tell you that there are some very knowledgeable people in that group who could have taught us about campus speech codes, and how the First Amendment restricts university administrators' efforts to police campus speech.  Still, I was interested to hear the testimony from those witnesses.  The first, Jonathan Schanzer, stated that hate groups have no place in Congress, on campus, or in 501(c)(3).  Another witness, Jonathan Greenblatt stated categorically that the IRS can and should revoke tax exempt status for hate groups.  Neither witness, though, established a sufficient factual predicate nor did they engage in any sort of analysis towards a constitutional rule of law that would allow revocation.  They are both correct, but they essentially presented "there oughta be a law" type arguments. 

 

darryll k. jones
 

CCDH Anti-SLAPPs Elon, and Elon "Thermonuclear" SLAPPs Media Matters

As we easily predicted, the Center for Countering Digital Hate filed a 12(b)(6) motion against the social media platform formerly known as Twitter.  Elon sued CCDH a while back because CCDH complained about hate speech on X.  Our next prediction is that CCDH will win on that motion and Elon X will eventually pay CCDH's legal fees.  Life must great when have money to burn. 

Here is CCDH's mission statement:

The Center for Countering Digital Hate works to stop the spread of online hate and disinformation through innovative research, public campaigns and policy advocacy.  Through research, we expose the producers and spreaders of hate and disinformation, and demonstrate the offline consequences. Through campaigns, we galvanize support from the public and advertisers to pressure social media companies and tech platforms to reform. Through communications, we shape the debate to educate the public and key stakeholders about online harms. Through policy and partnerships, we persuade policymakers and collaborate with civil society leaders to demand reform of social media.

CCDH is not shy about calling out X or its main rival, Tic-Toc, for allegedly enabling and then tolerating hate speech on their separate platforms.  And its advocacy has been effective, apparently, because advertisers are sensitive to ESG, not because they are using stockholder money for their bleeding heart causes but because they understand that social injustice lowers their bottom line.  Word on the Street is that X is losing money and users faster than Mike Pence lost MAGA voters on January 6. 

Elon X is no less shy about filing SLAPP suits.  Last week he sued Media Matters America, another watch dog, for reporting on Elon's antisemitic comments on X.  It's so crazy that people who stretch the limits of free speech want everybody else to shut up. 

The Motion to Dismiss is beautifully written, heavily weighed down by authorities, and an easy read.  It will be interesting to read the response once it is filed.  Here is a bit from Motion:

Despite all the window dressing, this is fundamentally a case about speech. Plaintiff X Corp. is a multibillion-dollar, privately-held corporation that operates “X,” formerly known as Twitter— one of the world’s largest and most influential social media platforms. The CCDH Defendants are nonprofit organizations with the mission of protecting human rights and civil liberties online, founded after a white supremacist (radicalized online) murdered a colleague of their founder and CEO. The CCDH Defendants and other nonprofit groups have researched, authored, and published reports and articles documenting how major social media companies, including X Corp., protect or fail to protect against hate speech and false narratives relating to public health, climate change, and other topics of public concern. In turn, the companies, including X Corp., and their respective executives have spoken to defend their policies and critique these reports’ methodologies. Users, advertisers, and the public are obviously free to compare the arguments marshaled by both sides. And after evaluating each side’s speech, users and advertisers can decide for themselves whether and how to continue using the companies’ platforms.

I thought that paragraph brilliantly related the virtual "marketplace of ideas" to the real marketplace.  

darryll k. jones

Kaplow, Optimal Income Taxation and Charitable Giving

Louis Kaplow (Harvard) has posted Optimal Income Taxation and Charitable Giving, 38 Tax Policy and the Economy (forthcoming). Here is the abstract:

The philanthropic sector is highly consequential, particularly in the United States, and the most important policies directed toward this sector are tax policies. Yet most economic analysis of the optimal tax treatment of charitable giving is ad hoc, treating it as a subject unto itself. This article advances a different approach: integrating the tax treatment of charitable giving into the optimal income tax framework that has been developed over the past half century. The results supplement or overturn conventional wisdom. Notably, the analysis of revenue effects and the purported efficiency of subsidies to charitable giving is recast, focusing on the pertinent externalities rather than the direct revenue costs, which themselves are irrelevant in the basic case. Distributive concerns regarding donors are also misplaced because distributive effects can be offset by tax rate adjustments to the broader income tax and transfer system. These ideas are developed systematically, with an emphasis on intuition rather than technical formalism. The analysis also broadens and deepens the assessment of externalities from charitable giving, which are more numerous and heterogeneous than is generally recognized. Finally, refocusing our understanding of the optimal tax treatment of charitable giving identifies important subjects requiring further research.

Lloyd Mayer

Ryan, Cy Près and Religious Discrimination

C.J. Ryan (Louisville) has posted Nearer to Thee: Cy Près and Religious Discrimination. Here is the abstract:

In the law of charitable trusts, courts wield exceptional power with respect to two equitable remedies—cy près and the closely related doctrine of deviation—they can confer on trusts that have purposes or terms rendered ineffectual. Either doctrine allows the court to prolong the trust’s life, perhaps forever. Historically, the invocation of these remedies was anathema to American courts. But increasingly, they have contemplated the possibility of extending the life of charitable trusts through application of these doctrines. In many ways, the evolution of these doctrines is owing to the jurisprudence involving trusts created for the benefit of a religious congregation or charity. Yet, this connection and the implications of judicial decisions regarding the right to these remedies has not garnered academic attention until now.

In this study, I analyze the extent to which courts have applied these equitable remedies to religious purpose charitable trusts via an econometric analysis of a universe of cases with a published opinion from an American court from the nation’s founding through 2019. This study provides a novel analysis of these equitable remedies and the history of religious purpose charitable trusts along a considerable timeline in American history. First, it explores how the equitable remedies of cy près and deviation were shaped by and shaped the caselaw around religious purpose charitable trusts, elucidating the simultaneity of the recognition of each as valid remedy and trust. Second, it examines the possible bias of the courts in awarding these remedies to certain religious groups but not others, ultimately finding that trusts created for the benefit of Catholic churches and charities were deemed less worthy of these remedies by the courts, all else equal. These findings have implications not only for understanding the application of these equitable remedies more deeply but also for uncovering the implicit and overt bias of the courts in cases where it has no actual basis.

Lloyd Mayer

Silvia, Child & Witesman, A New Look at Hansmann’s Contract Failure Theory

Chris Silvia, Curtis Child, and Eva Witesman (all BYU) have published The Value of Being Nonprofit: A New Look at Hansmann’s Contract Failure Theory, Nonprofit and Voluntary Sector Quarterly (subscription required). Here is the abstract:

In his theory about the role of nonprofit enterprise, Henry Hansmann suggested that nonprofit status provides important information to consumers in low-information environments. In this article, we assess whether consumers use nonprofit status to form purchasing preferences as Hansmann predicted. Using choice-based conjoint analysis, we find that under different types of low-information circumstances, study participants prefer goods and services provided by nonprofits to those offered by businesses. In the absence of additional information (such as customer ratings and third-party certifications), nonprofit status serves as an important value signal to consumers. In the presence of additional information, nonprofit status is still relevant in some cases, although it becomes less so. The findings suggest that additional forms of information do not necessarily displace the value to consumers of information about organization type. We reflect on these findings in light of Hansmann’s thesis.

Lloyd Mayer 

Slenn, Fraudulent Donations to Charity: The Gifts That Keep on Giving

David J. Slenn (Akerman LLP) has published Fraudulent Donations to Charity: The Gifts That Keep on Giving, Business Law Today (November 2023). From the introduction:

This article examines what a charity should know about its exposure to liability as the transferee of a donation that turns out to be a fraudulent transfer by the donor. A charity can perform due diligence to manage most kinds of risk resulting from its receipt of a donated asset (e.g., hard-to-manage/risky assets, the risk of inadvertently participating in a tax shelter,[3] etc.), but a charity—even a large charity with sophisticated general counsel—faces a much more difficult challenge in attempting to mitigate the risk potentially posed by fraudulent transfer law. This article will also address how the law surrounding this intersection has evolved and how the courts have approached the issue of charity liability under fraudulent transfer law.

This article is especially timely given the recent federal bankruptcy court decision ordering a church to repay over $500,000 it had received, even though the church itself had acted in good faith and without knowledge that the funds originated from a fraudulent transfer (and even though the church had apparently already spent the contributed money).

Lloyd Mayer

Independent Sector, Health of the U.S. Nonprofit Sector Annual Review

Independent Sector has released its latest Annual Review of the Health of the U.S. Nonprofit Sector. Here is the overview:

Independent Sector regularly releases Health of the U.S. Nonprofit Sector reports – an evolving and growing resource of data, analysis, and recommendations about key areas powering more than 1.8 million U.S. nonprofits. Since 2020, when Independent Sector launched these reports, the focal points have included: Financial Resources, Human Capital, Governance and Trust, and Public Policy Advocacy. The reports make a broad set of measures easily accessible and present them side-by-side, so stakeholders and key decisionmakers can quickly see the most accurate snapshot of the state of civil society.

The 2023 Health of the U.S. Nonprofit Sector: Annual Review covers sector health data from 2021 through the second quarter of 2023. The report includes data from a range of sector research as well as Independent Sector’s analysis of nonprofits’ economic contributions and workforce demographics.

Lloyd Mayer

California AG Proposes Charitable Crowdfunding Regulations

The California Department of Justice just issued a Notice of Amendments to Regulations implementing Assembly Bill No. 488, which relates to charitable crowdfunding. Fellow blogger Darryll Jones summarized an earlier set of proposed regulations on this topic, which it appears that the new set of proposed regulations is superseding. 

I have not had time to parse through them to see what has changed from the initial proposed regulations - nor does it appear anyone else has, which is understandable given the upcoming Thanksgiving holiday - but in the interests of getting the news about them out as quickly as possible I am doing this initial post. Comments are due in 45 days, so early January 2024.

Lloyd Mayer

Founder of Christian Health Care Sharing Ministry Pleads Guilty to $8 Million Wire Fraud Conspiracy

Following up on an earlier post that reported federal authorities had shut down section 501(c)(3) Medical Cost Sharing Inc., the U.S. Department of Justice has announced that the founder of this charity has pleaded guilty to conspiracy to commit wire fraud and making false statements on a tax return. According to the press release:

[Craig Anthony] Reynolds admitted that he and his co-conspirators used false and fraudulent promises to market Medical Cost Sharing as a “Health Care Sharing Ministry” to defraud hundreds of “ministry members.” Reynolds and his co-conspirators collected more than $8 million in member “contributions,” yet paid only 3.1 percent in health care claims so that they could personally profit and take most of the members’ contributions for themselves

Of course health cost sharing ministries do not automatically qualify for section 501(c)(3) status, for the reasons discussed in the recent IRS ruling discussed by fellow blogger Darryll Jones earlier this week. But this case highlights that even when they do appear to qualify, problems can still arise from their actual operations.

Coverage: KMBC; Medium.

Lloyd

UCLA Sues Mattel for Allegedly Failing to Make Good on $49 Million Pledge

According to the L.A. Times (subscription required), UCLA and related entities have filed a lawsuit against Mattel for failing to make good on a 2017 pledge to donate $49 million to the UCLA children's hospital over 12 years. Mattel had previously given $25 million to support the children's hospital, in exchange for naming rights. While UCLA Health initially agreed to allow the company to suspend payments because of asserted financial issues, the company's profits in recent years and this year's Barbie movie success led to the lawsuit when payments did not resume. In defense, Mattel is asserting that the donation related to a new hospital tower that UCLA Health is no longer committed to building.

UPDATE: Thanks to fellow blogger Darryll Jones, I now have a link to the complaint in this case.

Additional coverage: CBS News; KTLA.

Lloyd Mayer

Church Ordered to Repay Over $500,000 to Bankruptcy Estate

As readers of this blog know, donations can bring with them a host of issues. These can include will disputes, naming rights conflicts, and of course donors seeking to perhaps unduly interfere with a charity's operations. The latter is illustrated by recent clashes between donors and universities relating to the Israel and Gaza; see, for example, the Philadelphia Inquirer story headlined  "Penn’s donor backlash raises questions about how much influence philanthropists should have" (subscription required).

A recent federal bankruptcy court case highlights another issue, and one that can result in the charity having to repay a major donation. In Arrowsmith v. First United Methodist Church Centre, Alabama (In re: Health Diagnostic Laboratory, Inc.), the Liquidating Trustee alleged to have traced between $550,000 and $850,000 as fraudulently transferred from the debtors to intermediaries and then from there to the defendant church (pictured here). After trial, the court ruled that the initial transfers were recoverable by the bankruptcy estate and that of those initial transfers $569,435 made its way to the church using accepted tracing methods.

Once that was proven, the main defense the church raised was an exception to recovery for a "transferee that takes for value, . . . in good faith, and without knowledge of the voidability of the transfer avoided." It was uncontested that the church had acted in good faith and without such knowledge, leaving the only open issue whether the church had provided anything of value in return for the funds it received. The church had issued the standard donation receipt stating it had not provided any goods or services in return for the donations, but the church argued that the donor had received intangible emotional benefits from contributing and, alternatively, that church members had provided (volunteer) services to  utilize the funds to further the churches charitable activities. The court found neither assertion demonstrated return value.

The church also argued that because it had spent the funds on its charitable activities, there were "changed circumstances" that should excuse the donations from recovery. However, the court noted that Congress has decided that the changed circumstances defense is not available when there has been a fraudulent convenience. The court also concluded the church could not invoke equity to allow this defense, since Congress had enumerated the available defenses.

Lloyd Mayer

 

Does OpenAI Prove that East is East and West is West?

Take a look at OpenAI's announcement of Altman's sacking.  Read it closely.  The whole crisis is about tax exempt status and whether profit making and doing good can co-exist, don't you see.  And it's not by coincidence that Microsoft -- a major profit-making partner in the OpenAI LP -- is mentioned prominently in a saga about the governance of OpenAI, Inc., the exempt organization that is supposed to be in charge of it all.  

The governance crisis at OpenAI is forcing me to reconsider my estrangement from the nonprofit doctrine of my earlier years.  Then, I wholeheartedly agreed with the "never the twain shall meet" mantra.  It’s an initial article of nonprofit catechism that charity and profiteering don't mix; that private inurement and private benefit are invariably, inevitably inconsistent with charity.  Over the years, even the Service has softened because charities exist in a ruthless capitalistic market.  Charitalists and capitalists are just gonna have to get along together.  I still thought the Service was being miserly in its nearly impossible barriers to non-profit joint ventures with for-profits.  And I have written that explicit profit sharing with capitalists in a whole [hospital or artificial intelligence] joint venture should not be so presumptively improper as to be nearly impossible to achieve.  I still think that’s true.  But doggonit, OpenAI is making the assertion harder and harder to defend.  Maybe it’s true after all that good works and profit-making can never really coexist on a tax-exempt platform.  I thought I was enlightened.

What OpenAI is doing regarding OpenAI’s governance and capped profit merger is about as revolutionary to tax law as its inventions are to artificial intelligence and the real world.  I initially thought that the “capped profit” joint venture was a bridge too far for tax exemption.  Because it gave private investors explicit rights in the charity’s profits.  It’s a literal violation of 501(c)(3), whether we call it private inurement, private benefit, or excess benefit.  It’s basic law that tax exempt profits must be plowed back into the charitable purpose and not diverted to private consumption.  On the other hand, exempt orgs are allowed and most of the time required to pay market rates for inputs – supplies, labor and even capital.  If the market, in an arms-length transaction to achieve OpenAI’s charitable mission, demands the sort of joint venture represented by OpenAI LP, then so be it.

The market safeguards against elevating profit over charity break down, though, when the charitable folks striking the deal are on both sides of the deal. Initially, the charitalists were on one side as the fiduciaries of OpenAI and the capitalists (Microsoft) were on the other.  Charitalists seek charity, profit takers seek profit.  If both sides bargained in good faith, we could assume that the joint venture was what the market dictated to achieve the charitable purpose.  Tax exemption remains appropriate.

But soon after the initial deal, the charitalists migrated to the capitalist side.  They took stock in the for-profit partner, Microsoft, by which they might share in the profits being shared with Microsoft via the joint venture.  The details of the charitalists’ personal investment in the for-profit partner are murky but the fundamental economics are clear.  The charitalists are on the verge of indirect private inurement and excess benefit.  Except the Service reserved that section of the excess benefit regulations that govern the insider profit sharing that the charitalists are now enjoying.  In any event, the OpenAI board members (the erstwhile charitalists) are now on both sides of the transaction defining and operating the joint venture; we can’t just assume the terms or operation will make charity of singular importance.  See, this I why charity can’t ever have anything nice.

That Altman is now working for Microsoft raises a whole bunch of other issues.  If he gets a profit-sharing deal – he’d be a fool not to – will his profit-sharing result in private inurement and excess benefit?  He’s probably gonna be a disqualified person for 5 years.  But even before Altman’s firing, board members and employees (all the techy guys who want to save the world – the alleged “charitalists”), had announced plans to cash in like plain old capitalists.  The employees took stock in OpenAI LP (probably through Microsoft, but I don’t have the details) and announced that they were going to offer that stock to the public.  WSJ speculated that the stock sale would bring in $90 billion.  Considering their potentially astronomical profit from the stock sale, the OpenAI charitalists now have as much interest in elevating profit over charity as any of the other profit-seeking partner. 

There are all sorts of speculation regarding the power struggle.  Some say that Altman’s ouster is a result of the conflict between his profit-making ideas and the board’s attempt to keep the charitable mission paramount.  Reportedly, Altman wanted to go to market with new stuff faster; the board thought doing so would sacrifice the charitable mission of releasing new technology only when safe and equitable to do so.  Just to state the conflict a different way, delaying the release of technology could cost somebody immense short-term profit. And since Altman and the rest of the OpenAI board members hold stock in OpenAI LP, they too lose money by delay.  Because delay could reduce the sale price of the stock they are holding right along with the other capitalists involved in the joint venture.  The board’s firing of Altman is thus sort of like the pot calling the kettle black, even if the Board has not yet gone all the way over to the capitalist dark side.

I initially thought the capped profit entity violated 501(c)(3).  But when I came to understand AI’s  incredible potential for both good and bad, I understood that original OpenAI had a legitimate charitable purpose for which it deserved tax exemption.  AI is like a nuclear bomb that we do not want monopolized neither by despots nor capitalists.  The only way to achieve that is through huge influx of public capital (directly or via the tax code).  So I reasoned that the capped profit deal was justifiable, but only if the details were negotiated with charitalists on one side and capitalists on the other. The charitalists have plenty of bargaining strength because they own the technology and have access to tax exemption and tax deductions.  The capitalists have the necessary capital.  But when the charitalists morph into capitalists the protections of equal loyal bargaining power evaporate.  Tax exemption is no longer appropriate.

 

darryll k. jones

Are Palestinian Rights Organizations and the Universities that Host Them Hateful Indoctrinators?

Everybody knows, by now, how I feel about revoking tax exemption for hate groups.  I have written that stochastic terrorists can be denied tax exemption without violating the First Amendment.  But my paper acknowledges the need to tread lightly and the government's evidentiary burden, lest it deny tax exemption simply because it does not like what the group is saying.  Only when a hate group is saying something government, itself, cannot say may government deny tax exemption based solely on what the group is saying.  Government may not say "Black people are dangerous," "Jews are greedy," and "women should be kept barefoot and pregnant."  Government can't punish hate speech but it sure as hell can't subsidize it either.  But look, it can and probably must subsidize charities that say "Black people commit a lot of crime," "Jews control a lot of Wall Street and Hollywood" and "Women cry wolf too often."  I don't like or agree with any of  it, but its a free country.  Anyway, its all right there in my paper.  

Another reason a hate group can be denied tax exemption is if its pedagogy cannot reasonably be described as education.  Big Mama Rag acknowledges the distinction between education and indoctrination, even if it held that the regulations don't sufficiently articulate the distinction to pass First Amendment muster.  My paper proposes a solution to that too.  

But nothing I say in my paper would justify revoking tax exempt status for universities that tolerate groups verbally sympathetic to Palestinian rights or the Palestinian rights groups themselves.  Those who advocate for revocation seem invariably to conflate Palestinian rights advocacy with Hamas murder and terror.  I don't buy that yet and can't imagine I ever will.  Groups like Students for Justice in Palestine are several shades different from . . . say, the Council of Conservative Citizens or the New Century Foundation who teach that Black people are dangerous, Jews are greedy, and both should be wiped from the face of the earth. No doubt some groups and individuals -- probably some Palestinians -- say those things about Jews and Israel, but universities and the Palestinian student advocacy groups they host don't. 

So I disagree with Leslie Lenkowsky, who fairly implies in a WSJ piece that universities and the groups they host on campus are close to the revocation line.  Hardly.  I agree, however, that it would be difficult to deny tax exemption to universities that host Palestinian Rights groups, or the groups themselves:

The U.S. has traditionally given charities and their supporters great leeway in handling controversial issues. Constitutional guarantees of free speech and assembly protect their activities and require government to demonstrate a strong reason for restricting them. But Congress and the Supreme Court—as well as nearly three dozen states—have agreed that providing aid to terrorist groups like Hamas is a justifiable reason to forbid donors from supporting them.

Mr. Smith’s statement suggests the tax exemptions of organizations backing Hamas—or tolerating such activity—may be in for congressional scrutiny. Virginia’s Attorney General Jason Miyares has launched an investigation of AJP Educational Foundation, aka American Muslims for Palestine. Mr. Miyares’s office said in a press release that it is looking into whether the group “used funds raised for impermissible purposes under state law, including benefitting or providing support to terrorist organizations,” as well as whether it was properly registered to solicit contributions in the state.

A law restricting gifts to American groups that engage in advocacy on behalf of terror groups would face tougher First Amendment scrutiny. But there is a difference between exercising free speech and receiving a tax break for doing so.

Courts and legislators have long tried to distinguish between “education,” which has traditionally been considered a charitable activity, and “propaganda”—intentionally transmitting biases and misinformation on behalf of a particular position—which hasn’t. In formulating tax policies, lawmakers have sought to encourage organizations providing education (and their supporters), while avoiding tax advantages for those involved in propaganda.

This is treacherous terrain. Not long ago, the IRS used a procedure for reviewing tax-exemption applications that singled out groups with words or phrases such as “tea party” in their names. It led to a scandal, congressional hearings, and ultimately a court ruling that outlawed the practice. Now, in determining if an organization’s activities are educational, the IRS is supposed to look not at the group’s views, but at its conduct, which should involve a fair and noninflammatory presentation of facts.

If Palestinian rights groups and the universities that host them really were hateful indoctrinators, there is a constitutionally sufficient means to revoke tax exemption.  But there is insufficient predicate for that.  

darryll k. jones

How to Design an Exempt Religious Health Share Plan

Private Letter Ruling 202346033 (Nov. 17, 2023) might make for a good take home exam project.  You could ask students to redesign the cost-sharing organization so that it qualifies for 501(c)(3) status.  I am not sure it can be done, actually.  Not without a wink and a nod.  The Service correctly concluded that a religiously affiliated Health Care Cost-Sharing Plan was not exempt mostly because of private benefit.  The Plan comprises paying members of a church, apparently, but the ruling does not much analyze the organization as though it were an integral part (legally and functionally, I mean) of member's spiritual beliefs.  Anyway, here are the interesting facts:

You state in your application that you are a sharing program based on the biblical principle to give to those in need. Subscribers to the program will share health care costs with other members as they have a need. You state that the vast majority of those participating in the program are uninsured as well and you would seek exemption for members from the shared responsibility payment under the Affordable Care Act.

Your program is not insurance but [members of a religious denomination] helping one another pay health care bills and fees. Those enrolled are still responsible for paying health care debts and costs. You cannot guarantee payment to those enrolled, but as resources provide you will share with each other until no longer able to do so.

To become a member, an individual must consent to the membership agreement and statement of faith. You must also agree to pay on time monthly so that all can share equally. You must confirm yearly that you are meeting the requirements above.

Basic Plan subscribers pay per month and share health care costs. The monthly fee is g dollars for adults under the age of D and h dollars for those over D. Married couples pay j dollars per month; a family plan for up to F members is k dollars; and a family plan for over F members is l dollars. The maximum shared for a maternity membership is M dollars Membership rates were decided on after comparing similar organizations and are based on what you project to be operating costs. You plan to give at least q percent of monthly revenue from enrollment directly for cost sharing. An initial amount of n dollars is not shareable, but beyond that, costs will be shared. The goal is to share the bill within [redacted data] days for quick payment. There are no networks like insurance. If the sharing needs exceed company revenue, it will be prorated and shared evenly across the outstanding need. You currently don't have a program for providing charity care but are open to adding this in the future.

Program members will submit the health care cost information online. The bills will be reviewed by your board or staff and subsequently funds will be dispensed from the sharing account. Payment will be made directly to the patient with a need. The same process of claims reimbursement is applied to every member.

You also currently don't have a website, but plan to have one soon. You target the general public via online advertising. You will also have local radio spots.

You expect to raise p dollars in public donations prior to launch. You will then have a month-long enrollment period before you go live with cost sharing. You expect subscription costs to be over r percent of your company revenue with donations accounting for the rest.

There is some muddled reasoning in the ruling about the organization not serving a charitable class because membership is open to everyone.  But then the ruling makes a pretty well supported conclusion that the organization operates for private benefit.  It should be able to operate as a (c)(4) but then donations would not be deductible.  

Here is a solution just off the top of my head.  Share costs for all members whether they pay or not, but limit membership to people who have been church members for a sufficient time.  The better to judge commitment and credit-worthiness without an explicit dues requirement.  Once someone is admitted, preach fire and brimstone down on those who do not "voluntarily" contribute.  Give those who do not "voluntarily" contribute the side-eye and in other manners shun them to the hot place.  They must contribute voluntarily, if at all, of course. Or just don't make a big fuss about it -- don't apply for recognition, and run the organization from within the Church anyway.  The Church Audit Procedures might reasonably and legitimately hold the Service off indefinitely and donors -- that must be why the organization applied -- could still get deductions.  

I know it sounds silly and as if I am making fun of church folk by suggesting they do something nefarious.  But isn't this really how so called "sophisticated" tax planning gets accomplished.  Identify the legal hurdle and then figure out a way to render a nefarious solution less nefarious.  Look, there are white laws in tax law and tax planning all the time. Deemed distributions, nonrecognitions, and phantom income all over the place. Substantial economic effect and stuff. "Sophisticated" tax planning relies on white lies in pretty much every case. I always tell my students to look for the white lies, preferably in the statute or regulations, but sometimes we make up our own in the transaction documents. Here, we just need to mandate voluntary payments in a way that passes the straight face test.  

darryll k. jones

 

A Hillbilly Objects to an IRS Audit

Glenn Close and Amy Adams in JD Vance' Hillbilly Elegy on Netflix

I tell you what, ol' JD sure has his boxer shorts bunched up somehow.  He's throwing a full on hissy fit about an IRS audit of a group called The American Accountability Foundation.  AAF is in on the righteous indignation too, but its courting donations instead of votes.  It characterizes the investigation into its 501(c)(3) status as just more proof of a vast left-wing conspiracy:  

Because of our success in frustrating the liberal agenda, the Radical Left is coming after us now. Senator Sheldon Whitehouse pressed the DOJ, IRS, and its 87,000 new IRS agents to target the American Accountability Foundation because we’re defending American rights—and winning. We’ve been hit with a politically motivated IRS investigation to slow us down. This fight is too important to give in, and AAF isn’t backing down.

"And while you are here, please donate," the website says. In bright black and red colors, a nod to Tom Jones' (no relation, but he's the top dog at AAF) alma mater probably.  There's other stuff on AAF's website about Obama weaponizing the IRS against the Tea Party, stuff like that.  Pretty good job if you can get it.  But then, so is mine, so I'm not mad at Tom or JD.  Anyway, JD sent a hot letter to Commissioner Werfel last Friday about the whole thing.  He, too, dredges up the ghost of Obama and Lerner in his press release.  Here is some of what his letter says:

In a letter dated September 14, your agency announced its intention to investigate whether AAF "[o]perates in accordance with section 501(c)(3) of the Internal Revenue Code.” Underneath the announcement was an implied threat to revoke AAF’s tax-exempt status if the investigation yields sufficient legal grounds. But, to date, the IRS has neither presented any evidence that AAF has failed to observe the requirements of section 501(c)(3) nor explained why AAF may be at risk of failing to observe those requirements.

Without an obvious legal rationale for this enforcement action, many will reasonably suspect a political one. Public reporting suggests that the IRS has been lobbied by Democratic Senators to investigate AAF’s tax-exempt status. And AAF asserts that Democratic interest in the organization’s tax compliance spiked only after the organization published 176 pages of correspondence between Senate Democrats and the administration, in which the IRS was encouraged to target conservative groups.

We do not need to remind you that the AAF audit follows on the heels of an ugly chapter in the IRS’s history, during which the agency unfairly targeted conservative groups for scrutiny on the basis of their views. In 2017, the IRS entered into a consent decree requiring that the agency admit and apologize for “heightened scrutiny and inordinate delays” in the processing of conservative groups’ applications for tax-exempt status. The ensuing scandal, which concerned IRS behavior beginning in the early 2010s, caused the agency’s “top echelons [to be] quickly cleaned out.” And this enforcement action is already drawing comparisons to the previous IRS targeting scandal.

Sheesh.  I hate it when people bring up dirty laundry.  

darryll k. jones

The Magic of Basis: Proposed Regs on the Limitation of Conservation Easement Deductions Hinge on New Types of Basis

Just what we need.  More types of basis.  Basis is the bedrock of tax law but it shows up under all sorts of names and disguises.  Today, Treasury proposed new regs implementing the restriction on qualified conservation easement deductions. Those regs, and the statute they implement, rely on "relevant basis"  and "modified basis."  Late last year, Congress enacted 170(h)(7) disqualifying conservation easement deductions "if the amount of such contribution exceeds 2.5 times the sum of each partner's relevant basis in such partnership."  The provision applies to other pass-through entities as well.  Is it just me, or does that provision create the proverbial "trap for the unwary?"  If I get allocated an conservation easement deduction of $1.1 million when my "relevant basis" is $400,000, do I get any of the deduction?  The provision does not read as though it disqualifies "so much of the deduction as exceeds basis times 2.5."  Its just not a qualified conservation easement.  None of it. I bet others noticed this already.  Why create such a trap?

As I mentioned, the provision introduces new types of basis:  "relevant" and "modified."  Here is a useful way to understand the importance of basis in tax law.  Have your students memorize this:

Anyway, like I was sayin', basis is the fruit of the Tax Code. You can deduct it, offset it, inflate it, transfer it, amortize it, depreciate it. Dey's uh, adjusted basis, recomputed basis, stepped up basis. Outside basis, inside basis, cost of goods sold basis, 754 basis adjustments, 745 basis adjustments.  There's special partnership inside basis, split basis, loss basis, gain basis, at-risk basis, previously taxed capital invested in property basis, basis equals fair market value, carry-over basis, relevant basis, modified basis, basis salad, basis and potatoes, basis burger, basis sandwich . . . That- that's about it.

darryll k. jones 

Top Heavy Philanthropy

Washington, D.C. — On November 15, the Institute for Policy Studies released a crucial new report revealing the true cost of billionaire philanthropy to taxpayers, the nonprofit sector, and our society.  The report comprehensively details how the ultra-wealthy use charitable giving to avoid taxes and exert influence, while ordinary taxpayers foot the bill.

As communities prepare to enter the season of giving and highlight charitable donations as a critical way to support communities’ urgent needs, this report reveals how the wealthiest donors in our society give differently than ordinary donors. 

• The ultra-wealthy claim the lion’s share of the hundreds of billions in annual tax subsidies to incentivize charitable giving.

• Yet most donations by the ultra-wealthy flow to private foundations and donor-advised funds (DAFs), intermediaries controlled by these donors (As our report shows, 41 cents of every dollar of individual giving in 2022 went to one of these intermediaries). At best, this delays the flow of funds to working nonprofit charities on the ground. At worst, it leads to a warehousing of charitable funds. Private foundations are only required to payout 5 percent of assets annually to charities and donor-advised funds (DAFs) have no payout requirement.  To make matters worse, some wealthy donors are playing shell-games to fulfill these minimal obligations.

• The most charitably-orientated billionaires in the U.S., those who have signed the Giving Pledge to donate half their wealth during their lifetime, are not immune from these trends.  At their current pace, most funds will end up in perpetual family foundations, not in the hands of active charities.

As wealth concentrates in fewer hands, the imbalance is having a corrosive impact on our nonprofit sector. U.S. nonprofit charities are currently experiencing a transition from broad-based support across a wide range of donors to an increasing reliance on a small number of ultra-wealthy people, a trend IPS has named “top-heavy philanthropy.”

 

darryll k. jones

Bill Would Allow Exempt Orgs to Provide De Minimis Support to Terrorists

 

IRC 501(p) already denies tax exemption to designated terrorist organizations. By limiting the law's effect to designated organizations, and because designated organizations must be foreign, the law does not necessarily apply (it does actually but through a very roundabout way) to domestic organizations, whose exemption can be revoked or denied under the broader "illegality" doctrine.  But now House Democrats and Republicans are joining forces in an effort to broaden the prohibition to "terrorist supporting organizations," defined as "any organization which is designated by the Secretary as having provided, during the 3-year period ending on the date of such designation, material support or resources to a [designated terrorist] organization in excess of a de minimis amount." So now, a domestic organization can be designated as supporting another terrorist organization and by that designation lose its tax exemption presumably with a lot less process since IRC 7428 does not apply.  Here is a press release announcing the bill.

I added the emphasis above because I am not sure the bill is saying what the sponsors intend.  Does it, by negative implication, condone small amounts of material support to terrorists?  Or is the de minimis language a built in escape hatch for organizations whose activities are characterized as supporting terrorists even if unintentionally?  I'm being an obnoxious law prof, aren't I, asking nit-picky aggravating questions?  But the question seems fair given the history of the material support prosecutions.   There was a lot of concern back in the day about how broad the definition of "material support" can be.  The United States indicted Mohammed Yousry just for translating a letter written by a terrorists.  He was a court appointed interpreter for the terrorist on trial, no less, and translated the letter at the request of the terrorist's court appointed attorney.  Still, he did a year and some months in federal prison.  "What are you in for?"  I translated a letter."  So there must be some kind of back story to the "de minimis" exception.  Anyway, here is the definition of material  support (incorporated by reference into the bill):

 (1) the term “material support or resources” means any property, tangible or intangible, or service, including   currency or monetary instruments or financial securities, financial services, lodging, training, expert advice or   assistance, safehouses, false documentation or identification, communications equipment, facilities, weapons, lethal   substances, explosives, personnel (1 or more individuals who may be or include oneself), and transportation, except   medicine or religious materials;

 

 (2) the term “training” means instruction or teaching designed to impart a specific skill, as opposed to general     knowledge; and

 

 (3) the term “expert advice or assistance” means advice or assistance derived from scientific, technical or other specialized knowledge.

 

darryll k. jones