Friday, June 12, 2020
One helpful service that government agencies can provide is issuing reports summarizing their activities, saving researchers and practitioners the work of gathering such information piecemeal based on reviewing every pronouncement and ruling that is issued. Two recently issued summaries relating to nonprofit law are particularly helpful in this regard, one relating to state enforcement efforts and the other to federal charitable contribution deduction disputes.
First, the National Association of State Charity Officials (NASCO) has issued a report detailing the activities of state officials with respect to charities from January 2019 to March 2020. From the introduction:
The contents of this report are a representative sample of cases and other initiatives from January 2019 to March 2020 in the areas of: I. Deceptive Solicitation; II. Governance and Breach of Fiduciary Duties; III. Trust & Estate Issues; IV. Health Care; and V. Other, including Registration, Legislation, and Guidance. Descriptions were provided by the relevant state, and questions regarding particular cases should be directed to that state. Contact information for state regulators can be found at www.nasconet.org.
Second, the Office of Chief Counsel, Internal Revenue Service has released an internal memorandum (CCA 202020002) that summarizes the issues and holdings in 121 federal court decisions from 2012 through mid-April 2020 relating to the charitable contribution deduction under Internal Revenue Code Section 170.
First, the NCAA's Board of Governors announced that it supports "rule changes to allow student-athletes to receive compensation for third-party endorsements both related to and separate from athletics" and directed its divisions to begin developing such rules. This change in position is driven primarily by state and federal legislative efforts (see for example, this recently enacted California law) to require the NCAA to permit such compensation. At the same time, the Board stated that any such rules must follow certain guidelines, specifically:
- Ensuring student-athletes are treated similarly to nonathlete students unless a compelling reason exists to differentiate.
- Maintaining the priorities of education and the collegiate experience to provide opportunities for student-athlete success.
- Ensuring rules are transparent, focused and enforceable, and facilitating fair and balanced competition.
- Making clear the distinction between collegiate and professional opportunities.
- Making clear that compensation for athletics performance or participation is impermissible.
- Reaffirming that student-athletes are students first and not employees of the university.
- Enhancing principles of diversity, inclusion and gender equity.
- Protecting the recruiting environment and prohibiting inducements to select, remain at or transfer to a specific institution.
Second, the NCAA lost its appeal of a federal district court decision that enjoined the NCAA from enforcing its rules restricting the education-related benefits its members may offer students who play Football Bowl Subdivision football and Division 1 basketball. In In re NCAA Grant-in-Aid Cap Antitrust Litigation, the U.S. Court of Appeals for the Ninth Circuit held that the rules were unlawful restraints on trade under section 1 of the Sherman Act (15 U.S.C. section 1). This decision follows the NCAA's previous loss at the Ninth Circuit in O'Bannon v. NCAA, 802 F.3d 1049 (2015).
What exactly this developments will mean for student-athletes, college athletics, and the NCAA remains to be seen. For more coverage, see Marc Edelman at Forbes, Politico, Sports Illustrated, and The Wall Street Journal.
IRS Update: Executive Compensation Tax Proposed Regs, Donor Disclosure Final Regs, Silos & NOLs FAQs, and Group Exemptions
First is the Internal Revenue Service, which over the past month or so has been relatively productive even given remote working and COVID-19 related responsibilities:
- IRC 4960 (Tax on Excess Tax-Exempt Organization Executive Compensation) Proposed Regulations: Earlier this month the Service issued much-anticipated proposed regulations relating to this new tax. enacted by Congress in 2017. For the most part the regulations are consistent with earlier Notice 2019-19 that provided interim guidance for this section. This includes with respect to the tax not reaching many government-related entities, including most notably public universities and colleges, as Ellen Aprill has detailed. The most significant aspect of the proposed regulations is that they create a couple of exceptions to help related taxable organizations avoid being subject to the tax if their employees provide limited services to a covered tax-exempt organization but without any compensation being paid, directly or indirectly, by the tax-exempt organization. For more coverage, see The National Law Review and the numerous accounting and law firm summaries that can be found through a Google search.
- IRC 6033 Donor Disclosure Final Regulations: To probably no one's surprise, late last month the IRS issued final regulations relating to disclosure to the IRS of donor identifying information on Schedule B to the Form 990 & 990-EZ with no substantive changes from the proposed regulations. While the regulations address a variety of disclosure issues, the most (only) controversial issue was the elimination of the requirement that tax-exempt organizations other than 501(c)(3) and 527 entities report the names and addresses of their substantial donors to the IRS. For more coverage, see The Hill, The National Law Review, and The NonProfit Times.
- IRC 512(a)(6) Silos and Net Operating Losses FAQs: The CARES Act provision that temporarily allows the carrying back of net operating losses (NOLs) to earlier tax years raised a question for tax-exempt organizations with NOLs from their unrelated business activities - how does this provision interact with the siloing requirement of Section 512(a)(6), which going forward limits the use of NOLs generated in one unrelated business silo to future taxable income generated in that silo? The IRS has now answered the question in a series of FAQs: carried back NOLs can be applied against aggregate unrelated business taxable income (UBTI) in taxable years beginning before January 1, 2018, but for later years can only be applied against UBTI from the same silo that generated the NOL.
- Group Exemptions Proposed Revenue Procedure: In Notice 2020-36, the IRS provided a proposed revenue procedure that would modify and supersede Revenue Procedure 80-27 (as modified by Revenue Procedure 96-40 with respect to where group annual reports should be filed). The new revenue procedure is intended to be a comprehensive resource for the more than 440,000 organizations currently subject to the more than 4,000 outstanding group exemption letters, as well as future central and subordinate organizations. It reflects recent statutory changes, specifically the automatic revocation requirement for failure to file required annual returns and the section 501(c)(4) organization notice requirement. It also adds a number of new requirements, including that a new group exemption letter will be issued only if there are a least five subordinate organizations and will be maintained only if there is at least one subordinate organization, that subordinate organizations must both all be under the same 501(c) paragraph (which can be different from the central organization's classification) and if 501(c)(3)s must all be public charities, not private foundations, and that subordinate organizations must have both the same or similar purposes and a uniform governing instrument. Some of these requirements will not apply to existing subordinate organizations, but will apply to any future ones (including under existing group exemption letters). Comments are due by August 16, 2020.
Thursday, May 14, 2020
According to a study of more than 200 grant makers released by the Center for Effective Philanthropy on Wednesday, nine in 10 foundation leaders say their foundations seek to influence public policy through their grant making and other activities. Not only that, but almost 75% of those foundations have increased their policy efforts during the past three years, most frequently at the state and local levels.
Foundation leaders apparently find nothing wrong with the practice. The study relates that "These efforts are not new, but have increased in recent years." Moreover, "most foundation leaders view efforts to influence public policy as an important way to achieve their goals."
The study published a sample of views held by some foundation leaders:
- "Good public policy helps our grants go further, and bad public policy undermines our grant making."
- "Public policy can have significantly more impact on the issues we care about than our grant dollars alone can."
- "One cannot be serious about, for example, the health of the environment and ignore the importance of policy action on climate change."
The report maintains that "The primary way foundations pursue their policy agenda is through grant making. Almost three-fourths of foundations that engage in policy work support grantees’ policy efforts."
Yet, the survey found that many foundation leaders run into internal resistance to their policy work. According to the report, "Foundation leaders face some common challenges, particularly when it comes to building board support."
Monday, May 11, 2020
Writing in today's Chronicle of Philanthropy, Susan N. Dreyfus and John MacIntosh opine that during the current COVID-19 crisis and its aftermath, many medium-sized nonprofit organizations will not survive unless the federal government provides them more much-needed support. Dreyfus is CEO of the Alliance for Strong Families and Communities; MacIntosh is managing partner of SeaChange Capital Partners, an organization that helps nonprofits facing complex financial challenges. In their thought-provoking article in today's Chronicle, they argue that while
[n]onprofits of all kinds provide critical help to communities across the United States, . . . it is the medium-sized ones that make a critical difference — those with at least 500 employees. Their workers operate food pantries, and homeless and domestic-violence shelters. They manage and staff residential facilities for young people with mental illnesses. They offer in-home and residential services for older Americans and people with disabilities. During the Covid-19 pandemic, their work is more urgent than ever.
Yet, the authors state, even as these organizations face various challenges -- challenges as daunting as those faced by their smaller counterparts -- they "are not receiving the government support they need to survive." For example, the "federal Paycheck Protection Program excludes nonprofits with more that 500 employees from obtaining the forgivable loans that would allow them to retain and compensate their employees and continue to deliver essential services during this public-health crisis."
What, then, can we do? As the article points out, at "a time when many nonprofits are at a breaking point, we [cannot] afford to leave those with more than 500 employees out of support programs that are keeping smaller organizations afloat."
According to the article,
A new analysis of New York City’s larger nonprofits found that under normal circumstances, most have just two weeks of cash on hand. Without immediate assistance, the report projects that some won’t survive through May and that few, if any, will be in a position to continue services during the Covid-19 crisis and its aftermath. Most of these organizations lack meaningful endowments and have limited access to credit. Their operating margins are razor thin (an average of 1 percent), even before taking into account the reduction in revenue and increase in expenses associated with the pandemic. Most importantly, their philanthropy, which covers less than 5 percent of expenses, cannot make up for a reduction in funding and contracts during the health crisis.
The article continues:
This situation is not unique to New York. A 2018 report on the financial stability of community-based human-services organizations found that 40 percent of the larger nonprofits had less than one month of cash reserves. Those providing housing and shelter-related services faced significantly greater financial stress.
Critics may be quick to argue that the challenges confronting these nonprofits are the result of their own inefficiency and poor management. Not so, argue Dreyfus and MacIntosh. They specifically state that:
The challenges confronting these nonprofits are not the result of inefficiency or poor management. Most government funding and philanthropy traditionally does not cover the full cost of providing services. Government contracts for essential services also create cash-flow problems since, unlike with grants, payments are not made until after the work is completed and can be subject to long and unpredictable delays. Cash, as a consequence, is an ongoing issue. But unlike large for-profits, these organizations do not have access to capital markets, cannot easily unlock illiquid assets, and are unable to use bankruptcy to restructure while continuing to deliver services. Any increase in costs, reduction in revenue, or delay in cash receipts could put some of them permanently over the edge.
So just what is the solution? The authors call for Congressional action:
Friday, May 1, 2020
The Washington Post took a look at the age old battle of whether Foundations should dip into their endowments during a deep recession. They feature an ongoing battle at George Soros' Open Society Foundation where employees are angered that the Foundation is apparently not dipping into its endowment but using messaging to sound like it is.
From the Post: "The dispute between staff and leadership at Soros’s foundation touches on a broader discussion in America’s philanthropic community, where some industry leaders are calling for foundations with large endowments to ramp up spending in response to the covid-19 crisis. IRS rules require foundations to spend at least 5 percent of their assets annually, and many foundations hover around that spending figure, opting to preserve savings and endowment money.
On April 2, nine philanthropic membership and advocacy organizations published a joint statement urging foundations to boost spending this year and use endowment money if necessary.
“What nonprofits need most right now is more money. . . . Unprecedented challenges require unprecedented responses,” wrote the leaders of organizations including the Council on Foundations, the Center for Effective Philanthropy, and the National Committee for Responsive Philanthropy."
Thursday, April 30, 2020
The Independent Sector in an April 29, 2020 letter asked Congress to suspend the UBIT silo rule under section 512(a)(6) for 2019 and 2020. They estimate it would provide an average of $15,000 per impacted nonprofit.
"6. Suspend the “Siloing” Requirement for Unrelated Business Income for 2019 and 2020. Nonprofit organizations currently are struggling to comply with new, artificially strict accounting rules that prevent them from off-setting income with business losses. The CARES Act made it significantly easier for many for-profit businesses to reduce their taxes with losses while doing nothing to mitigate this unfair treatment of nonprofits. Suspending this provision will free-up an average of $15,000 per year in flexible funding that impacted nonprofits desperately need to keep their doors open and meet rising community needs."
In section 2203 of the CARES Act Congress suspended limits on net operating losses that it had imposed in the 2017 Tax Act. That has freed up capital for many wealthy individuals and businesses in a way that has been criticized in the popular press. Nonprofits too can take advantage of this relaxation to seek refunds from prior years where they were limited in taking NOLs against unrelated business taxable income. However, there is some difficulty in figuring out how to apply the UBIT siloing rules in this situation. Suspending those rules would give clarity to that problem and free up more dollars consistent with what Congress presumably intended in relaxing this rule for businesses.
Though it's not clear to me that this would free up money where it is desperately needed, because I was not a fan of the provision to begin with, I am inclined to think Congress ought to do this. It was not an essential addition to the taxation of exempt organizations, and it might free some money up that allows some nonprofits to make it to the other side of this health and financial crisis.
Still, I think the most important thing Congress can do is to get dollars to nonprofits through either the PPP or directly through grants where the nonprofits are carrying out important activities in helping Americans through this Pandemic.
They also urge Congress to increase the temporary universal charitable contribution deduction that Congress included in the CARES Act from $300 per taxpayer to $4,000 for single and $8,000 for married filing jointly above the line charitable contribution deduction. I am skeptical of these universal charitable contribution deductions. I fear the efficiency here is small. A Penn Wharton analysis of the $300 deduction suggested it would enhance charitable giving by only 5 cents on every tax dollar. Additionally, the IRS is not set up to police fraud. Though it might get some needed dollars to charitable institutions, I fear the extra deduction would be abused in way taxpayers would know and would undermine American belief in the honesty and fairness of our system.
The Independent Sector letter was similar but different than one put out by the National Council of Nonprofits signed by a broad group of nonprofits. Broadly though there is national agreement that nonprofits need the help of the federal government.
Wednesday, April 29, 2020
Thought today I would go over the unemployment provisions of the CARES Act. Though not necessarily focused on nonprofit organizations, some aspects open these provisions up to use by the nonprofit community. Additionally, like any business nonprofit leaders need to inform themselves of all the different sources of money out there to help patch us through this unprecedented crisis.
Most significantly for the nonprofit community Congress created Pandemic Unemployment Assistance in section 2102 of the Act. It is available to those not eligible for regular UI, such as the self-employed, the gig-economy, contract work or those who have already used up unemployment eligibility. It is available for 39 weeks, ending December 31, 2020.
This provision is important to the nonprofit community because charitable nonprofits, for instance, are exempt from the unemployment insurance system and often do not pay into the system. One that some have worried would not be covered include churches and clergy. But the Department of Labor seems to indicate clergy are covered.
The Department of Labor has stated: The CARES Act was designed to mitigate the economic effects of the COVID-19 pandemic in a variety of ways. The CARES Act includes a provision of temporary benefits for individuals who have exhausted their entitlement to regular unemployment compensation (UC) as well as coverage for individuals who are not eligible for regular UC (such as individuals who are self-employed or who have limited recent work history). These individuals may also include certain gig economy workers, clergy and those working for religious organizations who are not covered by regular unemployment compensation, and other workers who may not be covered by the regular UC [unemployment compensation] program under some state laws. To access this benefit, the individual needs to show some Covid-19 impact on their work history.
Ultimately though you will have to check with your state as to whether your nonprofit's situation is covered.
The other major change that makes the unemployment provision particularly useful at building a bridge to when we can get back to work is that the weekly benefit has been increased by $600. This is on top of whatever amount the state already paid. This increase as currently scheduled runs from as early as March 29th through July 31, 2020. Some Democrats are working on getting that end date extended. Note that the start date of these new benefits is dependent upon your state.
Also, significantly, the CARES Act extends unemployment insurance for 13 weeks. In most states this makes unemployment run 39 weeks - 26 weeks for regular + 13 extra weeks.
The CARES act also provides federal funds to support work-sharing arrangements.
If you are interested in looking further, I have looked at a lot of online descriptions of the unemployment provisions, I found this document by the Jewish Federations of North America to be particularly useful.
Monday, April 27, 2020
Because the new universal charitable contribution (above the line) deduction of $300 is per eligible individual, defined in Section 62(f) of the Code as an individual who does not elect to itemize deductions, some have suggested that married individuals might be able to deduct $600 rather than just $300. One of our longtime readers, NYU Professor Harvey P. Dale, pointed out there is strong reason to believe legislators did not intend that, and that the IRS and the Treasury Department will not likely interpret the Internal Revenue Code that way.
The Staff of the Joint Committee on Taxation released its “Description of the Tax Provisions of Public Law 116-136, the Coronavirus Aid, Relief, and Economic Security (‘CARES’) Act,” JCX-12R-20 (April 23, 2020). Footnote 76, on page 22, reads as follows: “The $300 limit applies to the tax-filing unit. Thus, for example, married taxpayers who file a joint return and do not elect to itemize deductions are allowed to deduct up to a total of $300 in qualified charitable contributions on the joint return.” In the text it also states that the universal deduction is only available in 2020. While neither of these statements is an ultimate legal authority, the Joint Committee description is a highly persuasive authority for the IRS and the Treasury Department. [N.B. I believe the temporary nature of the universal charitable contribution deduction is well textually supported as has been noted on here before because it is only available for tax years beginning in 2020.]
Also worth noting that in one study by the Penn Wharton Budget Model, very little of the tax dollars given up here are expected to spur charitable giving. They estimate that though the deduction will cost $2 billion, it will induce only an extra $110 million in charitable giving.
Friday, April 24, 2020
I'm going to end the week where I started it: with the Paycheck Protection Program.
Remember, the CARES Act created the PPP, which expands the SBA's loan program. Under the PPP the government can make or guarantee forgivable loans to small businesses--and, in an expansion or its previous mandate, small nonprofit organizations--provided those organizations use the funds for permissible purposes, including critically, for compensation.
The president signed the CARES Act into law on March 27. One week later, the SBA issued a FAQ dealing with the PPP and faith-based organizations. In essence, the FAQ clarified that the PPP was available to faith-based organizations under essentially the same terms as it was to any other nonprofit. That is, as long as the faith-based organization met the size limitations and used the money for purposes, it could participate in the PPP.
(It turns out that the SBA differentiated faith-based organizations from other nonprofits in one critical manner: while the law applies the same affiliation rules to nonprofits as it does to for-profit borrowers, the SBA announced that it will not look at the relationship between faith-based organizations where that relationship is based on religious teachings or other religious commitments. In regulations, the SBA went on to explain that applying the affiliation rules to religions that had doctrinal reasons for affiliating would impose a substantial burden on the organizations' free exercise, raising First Amendment and RFRA questions. Thus, the SBA said, it would take faith-based organizations at their word if they claimed their affiliation was based on religious requirements.)Ariz
Interestingly, in its April 3 FAQ, the SBA explicitly states that "loans under the program can be used to pay the salaries of ministers and other staff engaged in the religious mission of institutions" (emphasis mine).
Thursday, April 23, 2020
Some context: 2017's TCJA added section 512(a)(6) to the Code. That section says that, where a tax-exempt organization has multiple unrelated trades or businesses, it has to calculate unrelated business taxable income separately for each. Moreover, under that calculation, an organization's UBTI can't be negative. Effectively, then, the TCJA siloed UBTI losses. A tax-exempt organization could carry them forward to future years, but couldn't use them to offset UBTI from a separate trade or business.
The proposed regulations relax that siloing a little. Under the proposed regulations, a tax-exempt organization will determine the first two digits of the North American Industry Classification System for each of its separate unrelated trades or businesses.
Broadly speaking, the NAICS uses six-digit numbers to classify the economy hierarchically. The first two digits represent one of 20 sectors; the third digit designates the subsector, the fourth digit the industry group, etc. By focusing solely on the first two digits rather than digging deeper down the NAICS codes, the IRS lets tax-exempt organizations to treat a wider breadth of unrelated businesses as being the same, and thus makes it more possible for a tax-exempt organization to offset UBTI in one endeavor with losses from another.
Samuel D. Brunson
Wednesday, April 22, 2020
And the pandemic has been devastating to the arts world, a world that quite frequently relies on public performance both to raise revenue and to encourage donors. The novel coronavirus has devastated the jazz world (which is my love), killing jazz legends and shutting down performance spaces.
And then there's dance, an art form perhaps less-well-known and less appreciated than jazz. In Illinois alone, dance companies expect to lose $4.5 million in revenue through April 30, and more if (as is likely) the shutdown lasts longer. Hubbard Street Dance Company, for instance, ended up cancelling the last week of its Decadence tour in Italy in February and then, hours before it opened the performance in Chicago, Gov. Pritzker ordered closed gatherings of more than 1,000 people, closing the performance before it opened.
So how do arts organizations survive? Fortunately, the federal government has provided some help, including the Paycheck Protection Program and $75 million to be distributed by the National Endowment for the Arts.
State and local governments have been stepping up too. Chicago and Illinois have joined together with the Arts for Illinois Relief Fund, which provides grants to artists and arts organizations. The Fund is funded by the city, the state, and private philanthropy (of both the wealthy and the ordinary person type).
Still, the ability of arts organizations to weather this storm, while backstopped by state and philanthropic money, is, at best, tenuous. Once we get past the current crisis, arts organizations may need to rethink their funding models.
In the meantime, while I'm familiar with the steps Chicago and Illinois are taking to protect nonprofit arts organizations, I am less aware of what other cities and states are doing. Does anybody have examples of COVID-19-related support that their city or state is undertaking to protect and shore up the arts?
Samuel D. Brunson
Tuesday, April 21, 2020
Yesterday I blogged about the Paycheck Protection Program. In short, as part of the CARES Act, Congress expanded the SBA's loan-making authority. The SBA could, under the CARES Act, guarantee loans made to small businesses, loans that, if used for appropriate purposes, could potentially be forgiven. In addition, the CARES Act expanded the scope of borrowers to include not only small businesses, but also small nonprofit organizations.
Yesterday's discussion was largely academic, though. It turns out that in a short 13 days, borrowers had exhausted the full $349 billion Congress allocated to the PPP. With no money left, borrowers (for- or nonprofit) were out of luck.
But maybe they're not out of luck after all: The Hill is reporting that Congress and the president have reached a deal to provide more money to the PPP. While we don't have details yet, but expectations are that it will include another $310 billion, available to small businesses and nonprofits. That number will apparently include $75 billion for hospitals (and I'll be interested in seeing if there's any specific amount allocated to nonprofit hospitals, or if the $75 billion is for all hospitals).
Anyway, it's all questions for now, but this is good news for small nonprofits that hadn't yet gotten a PPP loan.
Samuel D. Brunson
Monday, April 20, 2020
Last week, Lloyd mentioned three sections of the CARES Act of particular interest to the nonprofit community. One of those three sections is the Paycheck Protection Program, created under section 1102 of the Act.
Broadly speaking, the PPP expands the Small Business Administration's authority to make loans to small businesses either directly or indirectly. Under the PPP, essentially, the SBA guarantees 100% of covered loans. A borrower can only use these loans for specific purposes, including (among other things) payroll costs, mortgage interest, rent, and utilities.
Critically, to the extent a borrower spends the borrowed money in qualifying ways (payroll costs, mortgage interest, rent, and utilities), the loan will be forgiven.
And, while the SBA loan program traditionally applied only to small for-profit businesses, the PPP explicitly includes nonprofits.
However, qualifying nonprofits face the same requirements as for-profit businesses, including a cap on the number of employees. Like a small business, a nonprofit only qualifies if it employs 500 or fewer people. And, like, a small business, nonprofits are subject to the SBA's affiliation rules.
Because SBA loans have historically only been available to for-profit entities, the affiliation rules focus largely on ownership and control (especially of stock). This is, at best, an imperfect match for nonprofits, which generally lack equity owners.
Presumably, in looking at affiliation in nonprofits, the SBA will look at the final two criteria: affiliation based on management or on identity of interest.
I'm hesitant to be too critical of a program thrown together quickly to deal with a worldwide pandemic. It inevitably is going to face unexpected problems, and grafting nonprofits onto a for-profit loan program seems almost built to raise those problems. As a result, I'll be interested in seeing how it ends up applying the affiliation rules to nonprofits. Still, this loan program will provide a lifeline to small nonprofits, making it easier for them to keep their employees and keep their physical spaces.
Samuel D. Brunson
Saturday, April 18, 2020
Thanks to Lloyd for the follow-up post explaining why the above the line deduction is only for one year.
I strongly agree that the provision is temporary and blog to emphasize that point as this has been raised as an issue in other forums.
As Lloyd notes, the confusion stems from the fact that the above the line deduction in § 2204 of the CARES Act is effective for taxable years beginning after December 31, 2019 and does not contain a sunset. Without more this would be a permanent provision.
But the operative terms of the provision provide the sunset. The statutory text allows a deduction “In the case of taxable years beginning in 2020” for “contributions made . . . during the taxable year.”
The text “in the case of taxable years beginning in 2020” indicates that the provision is temporary. For calendar year taxpayers, any contribution made after the year 2020 would not be eligible for the deduction for the simple reason that the contribution would not be made in a taxable year that began in 2020. For example, if a calendar year taxpayer made a contribution in the year 2021, the deduction would not be available because the taxpayer’s taxable year did not “begin in 2020” but rather began in 2021. This is a plain, straightforward, and fair reading of the text – it applies only with respect to taxable years “beginning in 2020” and not to contributions made in taxable years that begin in a year after 2020.
I suppose there is some room for ambiguity if the language “In the case of taxable years beginning in 2020” is read to be the equivalent of “in the case of taxable years beginning in 2020 and for taxable years thereafter” but that obviously is not what the statute says. Nor does the operative language track the effective date, i.e., the statute does not say contributions may be made “In the case of taxable years beginning after 2019,” which clearly would have been a permanent provision.
One could argue that the provision is ambiguous as compared to other provisions in the statute that are, arguably more explicitly, made temporary. For example, changes to the itemized charitable deduction (which are contained in the very next section of the bill, § 2205) have more direct language. The title of § 2205 is “Modification of Limitations on Charitable Contributions During 2020,” a point emphasized in the text of each subsection, to wit: a “temporary suspension of limitations on certain cash contributions” (from the heading to 2205(a)); “such contribution is paid in cash during calendar year 2020” (from the text of § 2205(a)(3)(A)(i); and “In the case of any charitable contribution of food during 2020” (from the text of § 2205(b)). This bolded language (my emphasis) is more direct than the language for the nonitemizer deduction (“in the case of taxable years beginning in 2020”) thus suggesting that Congress could have been a bit more clear about the temporary nature of the nonitemizer deduction. But even so, “taxable years beginning in 2020” has a pretty straightforward literal meaning. Further, § 2205, like § 2204, also is without an explicit sunset; and in fact both provisions have the same effective date of “taxable years ending after December 31, 2019.” In other words, the drafters relied on the operative text of both provisions to create a sunset and not the effective date itself.
An additional contextually important factor is that revenue estimate for the nonitemizer provision was scored as a temporary provision, which is very strong contemporaneous evidence of what the drafters were thinking.
In short, any concerns about this provision being permanent do not appear persuasive, notwithstanding the absence of a sunset.
In any event, Congress has more work to do here. The above the line deduction is poorly designed and will in all likelihood operate just as a tax cut for those who were going to give $300 to charity anyway, and so will not generate much in the way of new giving.
In existing news for nonprofit academics, Stanford University Press has published the third edition of the widely respected The Nonprofit Sector: A Research Handbook, edited by Walter W. Powell and Patricia Bromley. Here is the description:
The nonprofit sector has changed in fundamental ways in recent decades. As the sector has grown in scope and size, both domestically and internationally, the boundaries between for-profit, governmental, and charitable organizations have become intertwined. Nonprofits are increasingly challenged on their roles in mitigating or exacerbating inequality. And debates flare over the role of voluntary organizations in democratic and autocratic societies alike. The Nonprofit Sector takes up these concerns and offers a cutting-edge empirical and theoretical assessment of the state of the field.
This book, now in its third edition, brings together leading researchers—economists, historians, philosophers, political scientists, and sociologists along with scholars from communication, education, law, management, and policy schools—to investigate the impact of associational life. Chapters consider the history of the nonprofit sector and of philanthropy; the politics of the public sphere; governance, mission, and engagement; access and inclusion; and global perspectives on nonprofit organizations. Across this comprehensive range of topics, The Nonprofit Sector makes an essential contribution to the study of civil society.
IRS Guidance for Syndicated Conservation Easement Exams (and Another Federal Appellate Court Victory)
Late last month the IRS publicly released an Interim Guidance Memorandum for Syndicated Conservation Easement Examinations. The memo focuses on how IRS Small-Business/Self-Employed Division and Large Business and International Division employees working on such examinations should handle situations where the statute of limitations has less than eight months left to run. Hat tip: EO Tax Journal.
And just last week, the IRS had another court victory in a qualified conservation contribution deduction case, this time in the U.S. Court of Appeals for the Sixth Circuit. In Hoffman Properties II, LP v. Commissioner, the court upheld the disallowance of a $15 million claimed deduction because the contributor retained certain rights that allowed it to make changes to the facade and airspace at issue unless the recipient of the donation objected within 45 days. The court found that this provision meant the "perpetuity" requirement for a deductible contribution was violated and so the deduction failed.
A year ago, two posts by Professor Darryll K. Jones appeared in this space criticizing the decision by the IRS to revoke the tax-exempt status of the Panera Bread Foundation. One post focused on the commerciality doctrine, the other focused on private benefit. No sign if IRS officials read those posts, but late last month the IRS signed a stipulated decision in the Foundation's Tax Court declaratory judgment action, agreeing that the Foundation qualified as an organization described in Internal Revenue Code section 501(c)(3). Alas, the stipulated decision also reveals that the Panera Cares Cafes ceased to operate in February 2019 and the Foundation does not intend to renew their operations. It is not clear to what the extent that fact drove the IRS' decision to enter into the agreement, given that it was the operation of the Cafes that fueled the IRS' concerns.
Hat tip: Russell Willis
Friday, April 17, 2020
ANSWER FOUND: Why the $300 Above-the-Line Charitable Contribution Is Only Available for Tax Years Beginning in 2020
Thanks to a sharp-eyed reader of this blog (NYU Professor Harvey Dale), I now have the answer to why the $300 above-the-line charitable contribution deduction is only available for contributions made during taxable years beginning in 2020. The relevant section of the CARES Act (2204) adds a paragraph to Internal Revenue Code section 62(a) that says the following (emphasis added):
(22) CHARITABLE CONTRIBUTIONS.—In the case of taxable years beginning in 2020, the amount (not to exceed $300) of qualified charitable contributions made by an eligible individual during the taxable year.”.
So while the effective date language only says "shall apply to taxable years beginning after December 31, 2019," the above quoted language limits the deduction to taxable years beginning in 2020. For the vast majority of individuals, the taxable year that begins in 2020 will be the 2020 calendar year. However, individuals are in some circumstances able to choose a non-calendar fiscal year for tax purposes (see IRS Publication 538, p. 4). So the Joint Committee on Taxation scoring publication was not completely accurate in describing the deduction as "sunset 12/31/20".
Thursday, April 16, 2020
Coronavirus Nonprofit Law Additional Roundup: Chronicle on Philanthropy Coverage; JCT Scoring; DAFs & Private Foundations; State Guidance
Chronicle of Philanthropy Coverage: The Chronicle of Philanthropy is providing a series of articles to help nonprofits deal with the coronavirus crisis. Notable entries relating to legal topics include:
- How the New $300 "Universal" Deduction Works (flagging not only the uncertainty about how long the deduction is available but also whether a married couple filing jointly can claim a $600 deduction)
JCT Scoring of CARES Act: See the numbers below for the projected revenue effects of the CARES Act charitable contribution deduction provisions from Joint Committee of Taxation publication JCX-11-20. Perhaps most importantly, and as flagged by a commentator on my initial roundup, JCT takes the position that the $300, above-the-line charitable contribution deduction sunsets on 12/31/2020, although I still have not found statutory language to this effect.
Provision Effective 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2020-25 2020-30
4. Allowance of partial above
the line deduction for charitable tyba 12/31/19 -310 -1,241 --- --- --- --- --- --- --- --- --- -1,551 -1,551
contributions (sunset 12/31/20)
5. Modification of limitations
on charitable contributions tyea 12/31/19 -1,080 -3,748 2,403 741 367 45 179 --- --- --- --- -1,272 -1,093
[Millions of Dollars; Years are Fiscal Years; tyba = taxable years beginning after; tyea = taxable years ending after]
DAFs and Private Foundations: As many nonprofits and particularly charities brace for a sharp downturn in donations, numerous commentators are calling on advisers and sponsoring organizations for donor-advised funds and management for private foundations and other funders to increase and modify their giving. Examples from the Chronicle of Philanthropy include:
- David Biemesderfer, Grantmakers Must Put Equity at the Forefront of the Coronavirus Response
- Alan Cantor, Save Lives Now, Grant Makers and Donors
- Terry Mazany, The Coronavirus Outbreak Could Prove Why Donor-Advised Funds Serve Society
- Lauren Smith, How to Help the Most Vulnerable Through the Pandemic
State Guidance: The New York Attorney General's Charities Bureau has issued Guidance for Charitable Nonprofit Organizations Facing the Challenges of the COVID-19 Pandemic. Topics covered include:
- How the Charities Bureau Can Help
- Registration with the Attorney General's Charities Bureau
- Additional Extensions of Times to File
- IRS Extended IRS Form 990 Filing Date
- Reserves, Restricted Assets, and Use of Endowment Funds
- Filing a Complaint with the Charities Bureau
- Resources for Charities