Thursday, May 23, 2019
We have previously blogged about the sudden and increasing use of Form 13909 (Tax Exempt Organization Complaint (Referral)) to bring complaints from left or right leaning organizations against exempt organizations generally considered right or left leaning, respectively. We've blogged about complaints against the Southern Poverty Law Center and the NRA. The latest complaint, filed by the right leaning National Legal and Policy Center against the left leaning Center for Global Policy Solutions (CGPS), asserts that Maya Rockeymoore Cummings, wife of Representative Elijah Cummings (D-MD) and a principal fiduciary of CGPS, is the beneficiary of illegal private benefit and prohibited campaign intervention by CGPS. Here is a summary of the complaint from the Washington Examiner:
Rockeymoore runs two entities, a nonprofit group called the Center for Global Policy Solutions and a for-profit consulting firm called Global Policy Solutions, LLC, whose operations appear to have overlapped, according to the IRS complaint filed by watchdog group the National Legal and Policy Center on Monday. The complaint states that the arrangement may have been used to derive "illegal private benefit." Global Policy Solutions received more than $6.2 million in grants between 2013 and 2016, according to tax records. Several of the nonprofit group’s financial backers — which included Google, J.P Morgan, and Prudential — have business interests before the House Committee on Oversight and Government Reform. Cummings has served as Democratic chairman of the committee since January and previously served as ranking member. The largest contributor to the nonprofit organization was the Robert Wood Johnson Foundation, a company that is regulated by Cummings’ committee. The foundation, which gave a total of $5.5 million to Rockeymoore’s consulting firm and $5.2 million to her nonprofit group, ceased supporting her groups in 2017 . . . The complaint asked the IRS to investigate the “shared leadership,” “integrated operations,” and “shared address and physical facilities” of her two companies. Rockeymoore’s nonprofit and the LLC have mutual clients, donors and projects, and were located at the same address and share a phone number. According to its website, the Center for Global Policy Solutions is a nonprofit group that seeks to “create healthier communities, strengthen Social Security, and close racial wealth disparities." The for-profit consulting firm, Global Policy Solutions LLC, describes itself as “a social change strategy firm dedicated to making policy work for people and their environments.” The complaint states that they “appear to operate almost as a single entity, allowing for an illegal private benefit for Maya Rockeymoore Cummings and her husband."
Today, the Washington Post published a story in which Maya Rockeymoore Cummings and Representative Elijah Cummings pushed back against the complaint:
“It appears a conservative front group and a news outlet . . . are pushing a hit piece filled with faulty research, lies and innuendo in an attempt to tarnish my personal reputation, professional work and public service as well as that of my spouse,” Rockeymoore Cummings said in a statement, calling the effort a “distasteful attempt to intimidate my family into silence at such a pivotal moment in our nation’s history.” Cummings echoed his wife’s remarks in a statement of his own, dismissing the claims as “a fabricated distraction from the important work being done on behalf of Americans, such as lowering the skyrocketing prices of prescription drugs.”
The indications of improper private benefit and campaign intervention, according to the complaint include:
- Shared leadership between CGPS and GPS, LLC
- Integrated operations of CGPS and GPS, LLC
- Shared address and physical facilities
- Lack of physical facilities despite million-dollar government contract
- Website URLs, linked websites and similar design
The complaint seems obviously politically motivated -- Rep. Cummings is leading the House efforts to get at President Trump's tax returns and is a leading proponent, according to some, of impeaching the President. His wife is Chairperson of the Maryland Democratic Party and a former candidate for Governor of Maryland. Even so, the complaint makes a prima facie case (that is, it states facts which, if true support a finding of private benefit), it seems to me. I wonder how the Service is dealing with all of these complaints. After what the folks at TaxProf Blog called the "IRS Scandal" every single day for nearly 5 years, I gotta think the Service is probably not assigning anybody to seriously delve into any of the culture war complaints.
Darryll K. Jones
Our own Lloyd Hitoshi Mayer recently posted "When Soft Law Meets Hard Politics: Taming the Wild West of Nonprofit Political Involvement." Here is the abstract:
Beginning in the 1990s and continuing to today, many of the legal and psychological barriers to nonprofits becoming involved in electoral politics have fallen. At the same time, political divisions have sharpened, causing candidates, political parties, and their supporters to scramble ever more aggressively for any possible edge in winner-take-all political contests. In the face of these developments, many nonprofits have violated the remaining legal rules applicable to their political activity with little fear of negative consequences, especially given vague rules and a paucity of enforcement resources. Such violations include underreporting of political activity in government filings, fly-by-night organizations that exist only for one election cycle in order to avoid penalties, and even organized campaigns that encourage nonprofits to break these rules. The increasingly visible disregard of these rules threatens not only to damage the public reputation of the nonprofit sector as a whole but also to undermine public respect for the rule of law more generally.
Many scholars, journalists, and others have documented the increasing involvement of nonprofits in politics, including numerous apparent violations of the remaining rules governing such activity. Commentators have proposed a variety of piecemeal solutions, ranging from overhauling the existing rules to repealing those rules in part or completely, sometimes with a focus on tax laws, sometimes with a focus on election laws, and sometimes with a focus on state nonprofit laws. What is needed, however, is a comprehensive approach to this issue that considers the various ways nonprofits can be involved in politics, the positive as well as negative effects of such involvement, and the interaction between these different bodies of law at both the federal and state level that relate to such involvement.
This article takes such a comprehensive approach. Drawing on the now extensive information regarding nonprofit political involvement, and where such involvement appears to have repeatedly violated the existing legal rules, this article will first provide a roadmap of such involvement and the points where political pressures are overwhelming the existing legal rules and the agencies charged with enforcing them. Next, this article will describe the various solutions proposed by commentators, highlighting the incomplete nature of those solutions but also the insights they provide regarding the strengths and weaknesses of the various legal approaches for addressing such involvement. These insights include ones relating to the historical reasons for why the legal rules have developed in the manner they have, as well as ones relating to the relative institutional competencies of the agencies charged with interpreting and enforcing those rules.
Finally, this article will propose an overall approach to modifying the existing legal rules that relieves the identified pressure points without compromising the important public policies underlying the current legal rules, including ensuring the continuing ability of nonprofits to contribute to political debates in the United States. This approach involves revising the federal tax rules for tax-exempt nonprofits to clarify what constitutes prohibited political activity for charities, to loosen the unnecessary (from a tax policy perspective) restrictions on political activity by non-charitable, tax-exempt nonprofits, and, most controversially, to permit churches and other houses of worship to engage in political activity in the context of internal, in-person communications to members. It also involves shifting public disclosure rules relating to political activity from federal tax law to federal and state election law, refocusing such public disclosure on a broader range of such activity, and increasing the donation amounts that trigger such disclosure with respect to donor identities.
This comprehensive approach recognizes the importance of maintaining the current tax policy of not subsidizing efforts to support or oppose candidates for elected office while at the same time not unduly burdening the free speech, free association, and free exercise of religion rights of individuals who collectively engage in political activity through nonprofits. It also recognizes the institutional limitations of the Internal Revenue Service when it comes to enforcing tax rules relating to political activity, particularly given the breakneck pace of electoral politics, by placing greater emphasis on the federal and state laws, and their related agencies, that specifically regulate elections. By doing so, this approach recognizes and anticipates the dynamic nature of political involvement by nonprofits and so seeks not to prohibit but instead to channel that involvement in a manner that furthers overall democratic participation goals.
Darryll K. Jones
Wednesday, May 22, 2019
Its commencement season and the biggest story thus far is Mr. Smith's announcement that he would pay off the student loans of the Class of 2019 at Morehouse College ("The House"). The New York Times published a teaser about the tax consequences to all involved:
On Morehouse’s Atlanta campus and beyond, administrators, students and parents — and no shortage of tax and philanthropy experts — have spent the last few days wondering how, exactly, Robert F. Smith, a titan tech investor, would fulfill his promise to 396 graduates. The surprise announcement was both an extraordinary gift — and a complicated one.
I read the article thinking it would address Sections 61(a)(11), 102, 108, 117, 501(c)(3) and all the gift tax provisions the details of which I have spent my time since tax school trying never to have to deal with. But it did not. Some of the comments to the article speculate that a billionaire would not be so unsophisticated that he would not have consulted a tax attorney before deciding to pay off the student loans -- I was available, he coulda just flown me to some island resort and we coulda talked it over after a couple of rounds of golf! I would have reported the income even!
Anyway, here is my starting hypothesis. The students do not have COD because the payment or discharge of their debts was simply the vehicle by which Mr. Smith demonstrated his "detached and disinterested" generosity. It is a gift under 102. An article in Forbes agrees. This was not like Oprah hollering on national TV (from which she received advertising revenue) that "you get a car, you get a car, and you get a car!" If not a gift, much of the payments would be excluded as qualified scholarships under IRC 117. If its income, no doubt the students' have fewer assets than liabilities -- they were broke students, after all! -- so 108 would provide exclusion. As for the gift tax consequences, Mr. Smith might have avoided that (if they even apply) by making a charitable contribution (instead of a gift directly to the students) to The House, a 501(c)(3) organization no doubt, with the stipulation that it be used to pay the expenses of the class of 2019. As to the latter assertion, I suppose I would want to research whether targeting the gifts to a particular class strips the "contribution" of its deductibility just to make sure, but I doubt it. Comments?
Darryll K. Jones
Zelinsky recently posted "Applying the First Amendment to the Internal Revenue Code: Minnesota Voters Alliance and the Tax Law's Regulation of Nonprofit Organizations' Political Speech." Here is the abstract:
On its face, Minnesota Voters Alliance v. Mansky is about which T-shirts, hats and buttons voters can wear at the polls. However, the U.S. Supreme Court’s First Amendment analysis in Minnesota Voters Alliance extends beyond apparel at polling places. That decision impacts the ongoing debate about the Johnson Amendment, the now controversial provision of the Internal Revenue Code which forbids Section 501(c)(3) organizations from intervening in political campaigns. Minnesota Voters Alliance also affects the proper construction of Section 501(c)(3)’s ban on lobbying by tax-exempt entities as well as other provisions of the tax law taxing and precluding campaign intervention by tax-exempt organizations.
In contrast to current law, Minnesota Voters Alliance requires that these provisions of the tax law be construed to comply with the First Amendment mandate that restrictions on speech be reasonable, objective, workable and determinate. After Minnesota Voters Alliance, the Johnson Amendment should be interpreted as only proscribing 501(c)(3) entities from expressly endorsing or opposing particular candidates, political parties or ballot questions or from engaging in the “functional equivalent” of such express advocacy. Under this test, tax-exempt entities would not be precluded from engaging in more general issue advocacy.
The other provisions of the tax law preventing tax-exempt entities from participating in political campaigns and taxing such participation should be construed in the same say. These other features of the tax law should now be understood as precluding and taxing only express advocacy of or opposition to particular candidates, parties or ballot questions, or as prohibiting and taxing the “functional equivalent” of such explicit expression.
For purposes of applying Minnesota Voters Alliance to the Johnson Amendment and these other provisions of the Internal Revenue Code, the applicable test should be the standard articulated by Chief Justice Roberts in FEC v. Wisconsin Right to Life, Inc. Under this standard, the functional equivalence of express advocacy would be defined restrictively as a statement “susceptible of no reasonable interpretation other than as an appeal to vote for or against a specific candidate.”
The Internal Revenue Code need not be amended to fashion these statutory provisions to comply with Minnesota Voters Alliance, though modifying the language of the Code is one way that the Code’s current restrictions on the political speech of tax-exempt entities could be brought into compliance with the First Amendment. Alternatively, such compliance could be achieved administratively by revoking the portions of Rev. Rul. 2007-41 pertaining to issue advocacy under the Johnson Amendment and by amending the regulations under Section 501(c)(3) to clarify that forbidden lobbying occurs only when the a tax-exempt entity explicitly supports or calls for defeat of a particular legislative proposal pending before a public lawmaking body or before the electorate. Similarly, the IRS can modify Rev. Rul. 2004-06 to bring it into compliance with the First Amendment standard of determinacy announced in Minnesota Voters Alliance. Likewise, the Treasury can by regulation clarify that, for purposes of Internal Revenue Code Sections 527 and 501(c)(4), campaign intervention means explicit endorsement of or opposition to a candidate, not more generalized discussion of issues and legislation. The Treasury would thereby interpret those Code-based restrictions on political activity in a manner which satisfies the First Amendment signposts of reasonability and determinacy articulated in Minnesota Voters Alliance.
Darryll K. Jones
Monday, May 20, 2019
WaPo gives Trump Four "Pinnochios" for his repeated claim that His Administration Repealed Prohibition Against Campaign Intervention
Shakespeare's MacBeth, having been asked in tax class to summarize the impact of Section 2, Executive Order 13798, described it ruefully, as "a tale told by an idiot, full of sound and fury, signifying nothing:" Here is the provision about which he might have spoken::
Sec. 2. Respecting Religious and Political Speech. All executive departments and agencies (agencies) shall, to the greatest extent practicable and to the extent permitted by law, respect and protect the freedom of persons and organizations to engage in religious and political speech. In particular, the Secretary of the Treasury shall ensure, to the extent permitted by law, that the Department of the Treasury does not take any adverse action against any individual, house of worship, or other religious organization on the basis that such individual or organization speaks or has spoken about moral or political issues from a religious perspective, where speech of similar character has, consistent with law, not ordinarily been treated as participation or intervention in a political campaign on behalf of (or in opposition to) a candidate for public office by the Department of the Treasury. As used in this section, the term “adverse action” means the imposition of any tax or tax penalty; the delay or denial of tax-exempt status; the disallowance of tax deductions for contributions made to entities exempted from taxation under section 501(c)(3) of title 26, United States Code; or any other action that makes unavailable or denies any tax deduction, exemption, credit, or benefit.
If, by his comment, Mr. MacBeth might have intended that the provision is a slick piece of legalese doing nothing to change the status quo ante, I agree. Of course, if you consider the larger context, the provision is not so much a work of legal idiocy as it is a work of political genius. It has, as the Washington Post pointed out a week or so ago, allowed the President to proclaim in about ten different campaign speeches that he has repealed the "Johnson Amendment," including this assertion at the National Day of Prayer event earlier this month: "They took away your voice politically and these are the people I want to listen to politically but you weren't allowed to speak. They would lose their tax-exempt status.That's not happening anymore so we got rid of the Johnson Amendment. That's a big deal." To the willfully mis- or uninformed -- most of the elctorate, I mean -- the provision proves the President's religious and political bona fides. The real genius is that somebody in Treasury gave the President what he wanted without doing greater harm to the Constitutional order of things -- Congress makes the laws and only Congress can repeal a law. The Wapo piece gives a nicely concise discussion of the prohibition against campaign intervention. One that makes me wonder who, really, is the idiot in all of this. After all, and at least when applied to houses of worship, the prohibition against campaign intervention is so obviously unconstitutional that the Service cringes from its enforcement like Superman from kryptonite.
We all know at least one intolerably obnoxious judge, partner, associate, or faculty colleague who we can't stand agreeing with but who we secretly know is right most of the time. Its just the damnable way they go about being right that makes us want to disagree when we know they are probably right as a matter of substance. And the continued insistence that we are right, when we know we are wrong, only engenders disrespect for the institution of our selves. But I digress. As much as I hate the way the President's laughing smugness sounds like fingernails on a chalkboard -- you have to be pretty old to even know what fingernails on a chalkboard feel and sound like and I can't believe how old I am getting -- I gotta admit that my instinct to defend the "Johnson Amendment" is based more on my . . . well, "disdain" for the messenger, than out of a disagreement with the message. By the way, we all know that LBJ had the prohibition inserted because he wanted to shut down a nonprofit political opponent, but was it called the "Johnson Amendment" before the Oangefuhrer started using that phrase? The prohibition against campaign intervention might just be defensible as a substantive matter, particularly if we think of tax exemption as public subsidy. The public, the argument might assert, should not be forced to subsidize political speech with which even a minority of people disagree. A weak argument, in my view, but worth considering. Deep down inside, though, we know the prohibition against campaign intervention as it applies to religious worship is unconstitutional. The best evidence of that is that the Service is loathe to enforce it against worship leaders. Something about that First Amendment, free exercise thing, a government employees pledge to "support and defend the Constitution.". So the four Pinnochios awarded to the President are well-deserved, but let's admit that the President's exploitation of the executive order's "sound and fury" is bottomed on his innate ability to recognize when a legal doctrine is no more than a house of cards. So it is that the prohibition against campaign intervention continues to engender disrespect for the IRS (through no fault of its own) and the law itself. Its stupid and we should get rid of it, insofar as religious organizations are concerned.
Darryll K. Jones
Friday, May 17, 2019
The long-standing debate about the purpose and role of business firms has recently regained momentum. Business firms face growing pressure to pursue social goals and benefit corporation statutes proliferate across many U.S. states. This trend is largely based on the idea that firms increase long-term shareholder value when they contribute (or appear to contribute) to society. Contrary to this trend, this essay argues that the pressing issue is whether policies to create social impact actually generate value for third-party beneficiaries — rather than for shareholders. Because it is impossible to measure social impact with precision, the design of legal forms for firms that pursue social missions should incorporate organizational structures that generate both the incentives and competence to pursue such missions effectively. Specifically, firms that have a commitment to transacting with different types of disadvantaged groups demonstrate these attributes and should thus serve as the basis for designing legal forms.
While firms with such a commitment may be created using a variety of control and contractual mechanisms, the related transaction costs tend to be very high. This essay develops a social enterprise legal form that draws on the legal regime for Community Development Financial Institutions (“CDFIs”) and European legal forms for work-integration social enterprises (“WISEs”). This form would certify to investors, consumers and governments that designated firms have a commitment as social enterprises. By obviating the need for costly social impact measurement, this form would facilitate the provision of subsidy-donations to social enterprises from multiple groups, particularly investors (through below-market investment) and consumers (via premiums over market-prices). Thus, this social enterprise form would be to altruistic investors and consumers what the nonprofit form is to donors.
Moreover, the proposal could facilitate the flow of investments by foundations in social enterprises (known as program-related investments, “PRIs”) because it would help foundations verify the social impact of their investees, which could help them avoid potential tax penalties. In addition, by giving subsidy-providers greater assurance that social enterprises pursue social missions effectively, the proposed legal form could facilitate public markets for social enterprises.
Jianlin Chen (University of Melbourne) and Junyu Loveday Liu (London School of Economics & Political Science; K&L Gates) have published Managing Religious Competition in China: Regulating Provisions of Charitable Activities by Religious Organizations, in Regulating Religion in Asia: Norms, Modes and Challenges (Cambridge University Press 2019). Here is the abstract:
Drawing on the Law & Religious Market theory, this Chapter utilizes the case study ofChina to explain 1) how regulation of ostensibly non-economically motivated activities(i.e., religion and charity) can be properly conceived as a form of market regulation; and, 2) how such a conception can add a valuable dimension to the discourse. In particular, this Chapter situates China’s regulation of charitable activities by religious organizationsin the context of recent major legal reform on charity law and highlights the contradictory treatment where, on one hand, the law recognizes the self-interested motivation of participants and donors of charitable activities and accommodates their co-opting of charitable activities to promote or advance commercial interests but, on the other hand, specifically prohibits religious organizations from any religiouspropagation during provisions of charitable services. This Chapter argues that from the perspective of market regulation, such denial of religious “self-interest” hampers the purported policy objectives of promoting greater religious participation in charitableactivities but may be justified on the grounds that it promotes religious competition that is normatively desirable.
Charitable Contribution Cases: An Alleged $151 Million Conservation Easement; Tens of Millions in Bogus Contributions
In Battelle Glover Investments, LLC v. Commissioner (link to petition available from Tax Analysts; subscription required), a partnership is challenging a $151 million charitable contribution deduction disallowance arising out of a conservation easement donation. According to the petition, the conservation easement was on approximately 97.8 acres of limestone mining property donated to the Southeast Regional Land Conservancy, Inc. The petition indicates the Internal Revenue Service is disallowing the deduction on multiple grounds, including that the partnership failed to satisfy all of the requirements of Internal Revenue Code section 170 and that the correct valuation of the conservation easement was zero. The IRS is also seeking to impose a 40% valuation misstatement penalty. This case is of course only the latest, high-dollar conservation easement dispute, as the IRS has brought hundreds of cases challenging charitable contribution deductions in this area, as documented by co-blogger Nancy A. McLaughlin (University of Utah).
In United States v. Meyer, the federal government successfully sought injunctive relief against an attorney who promoted the "Ultimate Tax Plan," also sometimes referred to as a "Charitable LLC" or "Charitable Limited Partnership." According to the complaint filed last year in federal district court, the scheme involved sham donations to purported charities controlled by Mr. Meyer and his advice to the participants that as a result of those donations they could take unwarranted charitable contribution deductions. The complaint stated that the total cost to the Treasury was more than $35 million in lost tax revenue. Each of the three charities involved were based in Indiana and had successfully applied for IRS recognition of exemption under Code section 501(c)(3). However, in recent years Mr. Meyer had entered into agreements with the IRS that retroactively revoked the tax-exempt status of all three charities based on either inurement grounds or their use in the alleged scheme. Mr. Meyer made money off this scheme by charging various fees related to the purported donations. The case apparently has had significant ripple effects, in that it appears to have triggered audits of many of the scheme's participants, and possibly investigations into the financial planners and CPAs to whom Mr. Meyer marketed it (and sometimes paid for referrals). Coverage: Bloomberg Tax; Forbes.
Both these cases illustrate the potential for abuse of the charitable contribution deduction, to the significant detriment of the federal treasury.
Thursday, May 16, 2019
New Jersey is the latest state to compel disclosure of significant donors in the wake of the federal government's decision to eliminate reporting to the IRS by tax-exempt organizations (other than 501(c)(3)s) of their significant donors. NJ Attorney General Gurbir S. Grewal and the NJ Division of Consumer Affairs announced a new rule earlier this week that will require both charities and social welfare organizations that have to file annual reports with the Division's Charities Registration Section to include the identities of contributors who have given $5,000 or more during the year. (Like a number of states, New Jersey apparently defines "charitable organization" broadly for state registration purposes, so as to encompass not only Internal Revenue Code section 501(c)(3) organizations but also Internal Revenue Code section 501(c)(4) social welfare organizations.) According to statements accompanying the new rule, the donor information will not be subject to public disclosure. This announcement was in the wake of New Jersey and New York suing the federal government for failing to comply with Freedom of Information Act requests submitted by those states relating to that earlier decision, and New Jersey joining a lawsuit brought by Montana challenging the decision.
Interestingly, however, last week New Jersey's governor vetoed a bill (S1500) that would have compelled donor disclosure by organizations engaged in independent political expenditures, among other measures. Governor Philip D. Murphy's 20-page explanation raised both constitutional concerns with the legislation as enacted and policy concerns that the bill did not go far enough in certain respects. The constitutional concerns included ones relating to the bill's application to legislative and regulatory advocacy, not just election-related expenditures. The policy concerns includes ones related to a failure to extend pay-to-play disclosures and to require certain disclosures from recipients of economic development subsidies.
In other disclosure news, the U.S. Court of Appeals for the Ninth Circuit rejected petitions fo rehearing en banc of the earlier three-judge panel decision in Americans for Prosperity Foundation v. Becerra, turning away an as applied challenge to the California Attorney General's requiring that the foundation provide a copy of its Form 990 Schedule B (which identifies significant donors) to that office. The rejection is notable because it was over a lengthy dissent by five judges, to which the three judges on the initial panel responded.
I think it can be safely predicted that in this era of "dark money" we will continue to see state level compelled disclosure developments, and litigation in response, for the foreseeable future.
Wednesday, May 15, 2019
Details continue to emerge about the ongoing crisis at the National Rifle Association and government investigations are just starting to build up steam, so it is way too early to try to comprehensively identify nonprofit law lessons arising from this situation. That said, here are two early takes.
Boards Matter (Eventually). The NRA has a huge Board of Directors, with more than 70 members. While presumably its members are strong supporters of the NRA's agenda, they also have a legal role that gives them both access to information and credibility when making criticisms. While details about the NRA's recent problems emerged in a mid-April New Yorker story, they were given added visibility when they became the apparent basis for a leadership challenge by a faction of board members, including then-President Oliver North. That challenge failed, as did apparently earlier, quieter attempts by board members to rein in possibly problematic behavior, as explored in the New Yorker story. But that may not be the end, as the N.Y. Times reported yesterday that board member and former congressman Allen B. West has now publicly called for NRA Chief Executive Officer and Executive Vice President Wayne La Pierre to resign. One of the many board members may also have been the source of recently leaked internal memos that support many of the concerns now coming to light.
Success Does Not Excuse All Wrongdoing. Wayne LaPierre has been with the NRA since 1977, and been its head since 1991, during which time he has led the NRA to increasing prominence and influence. But despite that success, he now appears vulnerable. Indeed, in an apparent pattern that many who work with nonprofits will recognize, that success and long tenure may have led him to engage in the very transactions that could prove to be his undoing. For example, while far from the most significant questionable transaction financially or probably legally, his alleged spending of more than $200,000 for wardrobe purchases charged to an NRA vendor is, if true, a classic example of an unnecessary, self-inflicted wound (and possible excess benefit transaction for federal tax purposes). For the rank-and-file NRA member, paying him over a million dollars in compensation annually presumably can be justified by the organization's success; but then he should buy his own clothes (and who spends over $200,000 on clothes?).
With the continuing New York Attorney General, congressional, and possibly Internal Revenue Service interest, we will hopefully learn much more about how the crisis developed in the coming months. And of course this is on top of previous congressional interest in alleged Russian ties to the NRA in the time leading up to the 2016 election.
Following up on previous coverage in this space, Baltimore Mayor Catherine Pugh's nonprofit-related problems led to her resignation earlier this month in the wake of FBI and IRS agents raiding her homes and mayoral office. The issue that led to her downfall: alleged self-dealing, arising from the $500,000 purchase of a book she wrote by a nonprofit on the board of which she sat. Additional coverage: Baltimore Sun (which broke the original story); CNN; Washington Post.
Other Nonprofit Scandals You May Have Missed: $37 Million Class Action Settlement; "Sham" Police Charities
In a story that appeared to attract very little attention, Gospel for Asia settled a federal class action lawsuit brought against it for $37 million (!) according to a report in a Canadian news outlet. According to that report, the charity - now known as GFA World - "had been accused of diverting donations intended for India's poor to build a lavish headquarters in Texas, personal residences, and purchase for-profit businesses, including a rubber plantation and a professional soccer team." The charity also agreed to remove the wife of the charity's founder from the board of directors, and to add the lead plaintiff in the suit to the board. It is not clear whether the Canada Revenue Agency, the Internal Revenue Service, or any other government agencies are investigating. According to a report in Christianity Today, Gospel for Asia helped found the Evangelical Council for Financial Accountability, but was expelled from that organization in 2015 "after ECFA concluded that GFA misled donors, mismanaged resources, had an ineffective board, and violated most of the accountability group’s core standards." Gospel for Asia did not acknowledge any wrongdoing as part of the settlement, as it noted in a related press release.
In other news, states continue to pursue and shut down alleged "sham" police charities. In Missouri, the St. Louis Post-Dispatch reports that the Federal Trade Commission and Missouri Attorney General Eric Schmitt forced the Disabled Police and Sheriffs Foundation Inc. to shutdown after raising close to $10 million, almost all of which went to fundraising costs or the organization's executive director. The charity and the executive director did not admit to any wrongdoing, however. And in Maryland, the Baltimore Sun reports that a retired Baltimore police sergeant "has agreed to cease soliciting money for a police charity [CopStress] that the Maryland Attorney General’s Office says misled the public about its operations." The retired police officer involved contested the accusations, however, saying he was only agreeing to shut the charity down after collecting minimal donations because otherwise he faced a $30,000 fine.
Friday, May 10, 2019
Ways And Means Committee Member Calls on IRS to Investigate National Rifle Association's Exempt Status, grills Treasury IG on Lack of IRS Enforcement at Hearing Yesterday
We have previously reported on how advocates on both the right and the left have sought to enlist the IRS in cultural wars against exempt organizations considered to be enemies, respectively, of those on the left or the right. We reported on efforts to have the Service revoke the exempt status of the Southern Poverty Law Center's exempt status here. And on another group's effort to have the Service revoke the exempt status of the National Rifle Association here. In the latest salvo, House Ways and Means Committee Member Bradley Schneider (Democrat, Illinois) sent a letter to the Service yesterday "strongly encouraging" the Service to investigate wrongdoing by the NRA. Here is an excerpt from the letter:
As a Member of the Ways and Means Committee, I take very seriously my role and responsibility in conducting oversight of our nation's federal tax laws and ensuring the federal tax code is working as intended. It is with this duty in mind that I am writing to strong encourage you to investigate recent reports of possible wrongdoing by the National Rifle Association (NRA), which enjoys status as a tax-exempt organization under 501(c)(4) of the Internal Revenue Code (IRC). The allegations against the NRA reported in The New Yorker on April 17, 2019, including instances of egregious self-dealing, deceptive billing practices, and preferences in contracting are most troubling.
. . .
As you well know, Section 501 of the IRC lays out the types of organizations that qualify for tax-exempt status, as well the rules and regulations such organizations must follow. It is a basic assumption that active oversight and enforcement will improve compliance. However, in 2018, the Treasury Inspector General for Tax Administration issued a report that found the further processing of multiple legitimate referrals alleging improper political activity by tax-exempt organizations were not pursued. This report finding raises questions about the IRS's enforcement of our federal tax laws.
I am concerned about the potential long-term harm that diminished enforcement will have on the many nonprofit organization that do follow the rules and take their charitable and social welfare purpose seriously. The alleged NRA operating practices also raise the question of whether current rules and procedures are adequate to guard against abuse.
For a video of Rep. Schneider questioning the IG on the lack of IRS enforcement of tax laws regulating exempt organizations, with specific references to alleged abuses by the NRA see this:
You can also read a partial transcript of Rep. Schneider's question and answer session yesterday with the Inspector General below the fold.
Darryll K. Jones
Wednesday, May 8, 2019
NY Attorney General Challenges Revenue Procedure 2018-38 (regarding donor disclosure by non-501(c)(3) organizations). Full text Complaint
"which dropped the requirement that section 501(c) organizations report the names and addresses of substantial contributors to the IRS. This reporting had been done on Schedule B to the annual Form 990, 990-EZ, or 990-PF, with the information only available to the IRS and not subject to public disclosure (unlike the rest of Form 990/990-EZ/990-PF). This change is effective for tax years ending on or after December 31, 2018. The reporting requirement still applies to section 501(c)(3) organizations, however, as for those organizations there is a statutory requirement (found in section 6033(b)(5)) of such reporting."
The stated reason for the change was: the IRS does not need personally identifiable information of donors to be reported on Schedule B of Form 990 or Form 990-EZ in order for it to carry out its responsibilities. The requirement to report such information increases compliance costs for some private parties, consumes IRS resources in connection with the redaction of such information, and poses a risk of inadvertent disclosure of information that is not open to public inspection.
Two days ago, the NY Attorney General's Office filed suit implicitly challenging the procedures to adopt Revenue Procedure 2018-38. The full text of the complaint is also available via the link in the in the press release below the fold. The complaint seems carefully worded, actually, not as a direct challenge to Rev. Proc. 2018-38 but rather as a demand to comply with a FOIA request seeking all documents and records relating to the decision to issue the Revenue Ruling. It would appear that the NY AG is seeking to prove improper political motives resulted in the Revenue Procedure's issuance. This might prove interesting later on.
Darryll K. Jones
Tuesday, May 7, 2019
Council on American Islamic Relations (CAIR): "Hijacked by Hate: American Philanthropy and the Islamophobia Network"
From CAIR's website:
Anti-Muslim bigotry is a common and widespread feature of our country’s mainstream cultural and political landscape. However, it is important to remember that Islamophobic attitudes and policies are propagated by special interest groups with deep sources of funding. This decentralized group of actors is known as the Islamophobia Network, a closeknit family of organizations and individuals that share an ideology of extreme anti-Muslim animus, and work with one another to negatively influence public opinion and government policy about Muslims and Islam.
To provide a better understanding of how the Islamophobia Network operates, CAIR's Islamophobia report Hijacked by Hate maps the flow of funding from charitable organizations to anti-Muslim special interest groups, and their destructive impact on public life.
Hijacked by Hate finds that the Islamophobia Network has been drawing upon mainstream American philanthropic institutions for financial and political support for years. CAIR researchers have found 1,096 organizations responsible for funding 39 groups in the Islamophobia Network between 2014 and 2016. The report also reveals the total revenue capacity of the Islamophobia Network during this period to reach at least $1.5 billion. This money has been channeled into politics, media, law enforcement, educational institutions, lobbying groups, and a whole assortment of industries to advance anti-Muslim and anti-Islam animus in America.
It may come as no surprise that well-known anti-Muslim groups, such as ACT for America or the Middle East Forum, despite once being considered fringe voices in the public sphere, have enjoyed rapid growth in funding and infuence in the current political moment. What is less known and more shocking is that the Islamophobia Network is strongly supported by mainstream American philanthropic institutions.
Data compiled and analyzed by CAIR researchers demonstrates that despite the well-known racist and xenophobic attitudes of Islamophobic organizations, reputable philanthropic institutions have funneled hundreds of millions of dollars into the activities of the Islamophobia Network. These include household names such as Fidelity and Schwab, as well as community-centered, faith-based charities such as the Jewish Communal Fund and the National Christian Charitable Foundation. Together, the expansive funding network revealed in this report demonstrates that the Islamophobia Network cannot be considered a marginal or passing phenomenon in American society. Rather, it is a prominent and shameful institutional feature of American philanthropy.
These foundations have donated across a wide range, from the miniscule amount of $20 to the staggering sum of $32 million. They are divided into three categories: 1) Donor Advised Funds, 2) Faith-Based Donor Advised Funds, and 3) Private Family Foundations.
While some funds and foundations are ideologically aligned with the interests of the Islamophobia Network, most mainstream foundations are more than likely being exploited or used by donors who seek to anonymize their contributions to anti-Muslim special interest groups. This report allows stakeholders to determine whether they are directly or indirectly connected to the Islamophobia Network. By mapping the flow of funding from charitable organizations to anti-Muslim advocacy groups, and their negative impact on public life, this report asks, “Should the American philanthropic community divest from the Islamophobia industry?”
Darryll K. Jones
Monday, May 6, 2019
Friday, May 3, 2019
Happy Friday! Our bloggers have been busy with final exams so you may have noticed some dead "air space" on our network this week. But the biannual rite of weeping and gnashing of teeth is coming to a close so hopefully we can get back to regular blogging. In that regard, I invite you to take a look at a wide ranging article on the makings and unintended consequences of "nonprofit tax policy," authored by Tim Delaney of the National Council on Nonprofits. Here is a brief excerpt from Nonprofit Tax Policy -- A Game of Three Dimensional Chess which was recently published in the Nonprofit Quarterly:
It would be comforting if tax and other public policies were made rationally, based on logic and irrefutable facts. For instance, utilitarians—both classical (Jeremy Bentham, John Stuart Mills) and modern—would have policy makers conduct a cost-benefit analysis to identify what laws (including tax laws) would promote the greatest benefits and do the least harm. Applying this view, calculations could be made on how increasing this element and altering that one on the Rubik’s Cube of tax policy should deliver a particular result.
Occasionally, it can work that way. But at the end of the day, tax policy is an exercise of power. Some interest group (a business, industry, unit of government, economic or political class, and the like) simply wants more money. Does it have enough power to alter tax policy? If its desire for more money is strong enough, a political tug-of-war between the status quo and those wanting more money will ensue—regardless of whether “more money” in a given case is for the common good or for special interests. It’s about who has sufficient power to win the tug-of-war.
It started that way in 1601, when England’s ruling class—seeing “their” tax revenues and attendant power being taken by religious institutions—exerted power to secure the Charitable Uses Act. It continues through modern times. The federal Tax Cuts and Jobs Act that passed in December 2017 provides three graphic examples of how the exercise of power fueled by desire for more money can override everything else when tax policy is involved.
- The Republican majorities in the House and Senate developed and passed the most comprehensive rewrite of the federal tax code since 1986, without a single hearing for public input and without a single supporting vote from the Democratic minority in either chamber. (Note: Not the first case of one-sided congressional action. For example, Democrats passed the Affordable Care Act without a Republican voting in support. The point here is not to ascribe blame but to show—with a recent example—that those who hold power can and will bypass procedural fairness and logic to achieve what they want.)
- Lobbyists for corporate America and the wealthy demanded “more money” for their clients in the form of cuts in corporate and individual income taxes. To slightly counterbalance the revenue the federal government would lose by cutting those taxes, the chair of the House Committee on Ways and Means at the time, Representative Kevin Brady (R-Texas), needed to create or increase taxes on other items. He did that in part by imposing a 21 percent unrelated business income tax on nonprofits for their expenses providing parking and transit passes to their employees. The concept of imposing an income tax on outflow of expenses is baffling, but the chairman did it because he had the power to get more money for corporations and the wealthy. (He has since agreed—after intense lobbying—that this parking and transit provision should be repealed.)
- The House majority stuck language into its version of the bill regarding an issue that had already been defeated (and was opposed almost universally by charitable nonprofits, houses of worship, and foundations): evisceration of the long-standing Johnson Amendment, which protects nonprofit nonpartisanship. Had they prevailed, partisan elites would have flooded churches and charities with about $20 billion in dark money—not only to secretly influence elections but also to provide about $7 billion in tax relief via charitable tax deductions to those making hidden political donations, according to calculations by Congress’s Joint Committee on Taxation. Fortunately, that language did not get through the Senate, so the protections of the Johnson Amendment remain firmly in place.
The lesson of each of these examples is that the power game frequently takes precedence over logic, the ethics of cost-benefit analyses, regular processes, and/or fundamental fairness on matters concerning tax policy issues. This places a heavy burden on the nonprofit sector to be present in tax debates at every level of government and monitor tax proposals in every branch of government. This sounds quite daunting, but coordinated and cross-informed action has proved successful, as can be seen below.
I may have to read the article another time before I can make a reasoned comment. But it seems provocative.
Darryll K. Jones
Friday, April 26, 2019
There is a short piece in yesterday's WAPO describing the Satanic Temple's recently acquired determination letter confirming its status as a tax exempt church. On its website, the Satanic Temple declares that "for the very first time in history, a satanic organization has been recognized by the United States federal government as being a church. The Satanic Temple recently received notice from the IRS affirming our status." Ok so if Satan, at least as conceptually understood in the Judeo-Christian tradition, can establish a tax exempt charity, then surely the whole notion that exempt organizations not violate "clearly established public policy" is another one of Satan's jurisprudential deceptions. Fortunately for those of us who continually seek rhyme or reason in tax exemption jurisprudence, the Satanic Temple is more benevolent than its name sounds. By its mission statement, the group seems intent on presenting a kinder and gentler "Satan" who only wants to rescue humankind from its own folly:
The mission of The Satanic Temple is to encourage benevolence and empathy among all people, reject tyrannical authority, advocate practical common sense and justice, and be directed by the human conscience to undertake noble pursuits guided by the individual will. Politically aware, Civic-minded Satanists and allies in The Satanic Temple have publicly opposed The Westboro Baptist Church, advocated on behalf of children in public school to abolish corporal punishment, applied for equal representation where religious monuments are placed on public property, provided religious exemption and legal protection against laws that unscientifically restrict women's reproductive autonomy, exposed fraudulent harmful pseudo-scientific practitioners and claims in mental health care, and applied to hold clubs along side other religious after school clubs in schools besieged by proselytizing organizations.
So I guess Satan isn't such a bad guy after all. Or is that just what Satan wants me to believe . . .
Have a great weekend!
Darryll K. Jones
"Analysis of the law Relating to Public Benefit" by the Charity Commission for England and Wales (and one more short comment on Panera Cares)
Happy Friday! I was thinking about the extent to which other countries have charitable definition and enforcement "challenges" and thought I would use the wonders of the internet to explore the question. Since American laws of charity are derived in large part from the UK, I started there. Of course, I have known about the Charity Commission for England and Wales for a long time but I have only visited [virtually] sporadically. I don't want to assert that somehow the folks in jolly old England do it better than us because there is a wealth of guidance on the "Charities and Nonprofits" section of IRS.gov. I would have to do a much more comparative analysis, but the Charity Commission has some interesting resources, especially for practitioners and scholars who want to inject historical policy perspectives into their advocacy. Anyway, the Commission has a page entitled "What Makes A Charity" which "outlines what the law in England and Wales says a charity is." By the way, a report commissioned by the British Parliament concluded that the Charities Act of 2006's articulation of the "public benefit" doctrine was "critically flawed so it sounds like the Brits have as much difficult as we do in defining the public benefit doctrine. The problems do not appear to have been solved by the Charities Act of 2011, which largely supplanted the 2006 Act. That particular page has about five white papers on the topic. Here is an excerpt from a publication entitled "Analysis of the Law Relating to Public Benefit:"
Public benefit not a static concept
31. The legal concept of charity, including the concept of public benefit in charity law, is not static. Charity law is not “frozen at some time in the past”; “it must be remembered that the concept of what is and is not for the public benefit (as seen by society generally, and as reflected in judicial recognition of the views of society) changes over time. As we will see, changing social perceptions have, in the past, resulted in changes in what is seen as for the benefit of society and, accordingly, of what is properly to be accorded
charitable status.”12 A purpose which was formerly recognised as being for the public benefit may cease to be recognised as such, and purposes which were not formerly recognised as being for the public benefit may be recognised as such. Thus in National Anti-vivisection Society v IRC Lord Simonds said: “If to-day a testator made a bequest for the relief of the poor and required that it should be carried out in one way only and the court was satisfied by evidence that that way was injurious to the community,
I should say that it was not a charitable gift, though three hundred years ago the court might upon different evidence or in the absence of any evidence have come to a different conclusion.”
. . .
The two aspects of public benefit
39. In the modern law, the concept of public benefit as integral to a charitable purpose is regarded as having two principal aspects, namely that, for a purpose to be charitable:
a. it must be beneficial, and any detriment or harm that results from the purpose must not outweigh the benefit (‘the benefit aspect’); and
b. it must benefit the public in general, or a sufficient section of the public (‘the public aspect’).
40. In addition, a charitable purpose may only benefit individuals or other legal entities to an extent that is no more than incidental to the furtherance of the charitable purpose. This principle can be regarded as part of one or other of the two aspects described above or as a separate requirement. The Commission’s public benefit guidance deals with it as part of the second aspect.
The entire paper is about 20 pages but its paragraph 40, I think, that might trip up the folks at Panera Cares, about which we blogged a last week.
Darryll K. Jones
Thursday, April 25, 2019
Roger Colinvaux (Catholic University) has just published "Fixing Philanthropy: A Vision for Charitable Giving and Reform." Here is the interesting abstract:
Philanthropy means to give for the benefit of others. Unfortunately for philanthropy and civil society, the laws supporting philanthropy are in a state of crisis. More by happenstance than design, the law now caters overwhelmingly to the whims of wealthy donors to the detriment of those in need. We find ourselves with a legal framework ostensibly designed to promote broad-based philanthropic activity, but which is better described as one where the wealthiest get tax benefits that are unavailable to others; claim those (sometimes questionable) benefits while retaining effective control over donated funds; and use the system to advance their policy preferences, avoid scrutiny, and undermine the centuries-old faith and trust that our nation’s charities represent the public good. Although the trends are dire, the article explains how Congress can restore credibility to philanthropy with a number of legislative initiatives, including by broadening the base for charitable giving with an expanded and reformed giving incentive, improving the flow of money to working charities with new rules for donor advised funds (DAFs), strengthening and supporting IRS oversight, and by revisiting some of the rushed through ideas of recent tax legislation (the TCJA).
Darryll K. Jones