Friday, March 29, 2019
Proving that issues with politicians and nonprofits are truly bipartisan (and not limited to President Trump), the dust continues to fly over various financial transactions involving Baltimore Mayor Catherine Pugh (a Democrat), her inaugural committee, and the University of Maryland Medical System. According to media reports, the Mayor, who was then a UMMS board member, had a $500,000 deal with UMMS to purchase her self-published children's books, a deal that she now says was a "regrettable mistake" and for which she has apologized. (Washington Post; WBAL-TV) She also resigned from the UMMS Board of Directors after the deal came to light.
The possible legal troubles do not stop there, however. According to reports last week, the Mayor's inaugural committee failed to file its required IRS annual information returns (Form 990). In addition, UMMS failed to report on its returns that it gave $20,000 to that committee. UMMS is taking the position that the payment was not a grant, which it would have had to report, because it received in return 28 tickets to inaugural events. It made this argument even though in an earlier filing it had reported a contribution to support the inauguration of another public official.
As the Washington Post details, the end of the Mueller investigation is far from the end of law enforcement actions relating to President Trump. Among those investigations are several tied to nonprofit organizations, specifically the continuing litigation in New York relating to the Trump Foundation and investigations into the President's inaugural committee.
Turning first to the inaugural committee, in late February the District of Columbia Attorney General's office subpoenaed the committee for documents relating to its finances according to several media reports (CNN; NY Times; Politico; Wall Street Journal; Washington Post). This followed subpoenas on the same topic from the New Jersey Attorney General's Office and from the U.S. Attorney's Office for the South District of New York, both earlier that month. The latter subpoena identified a number of possible federal crimes under investigation, including conspiracy against the United States, mail and wire fraud, money laundering, and accepting contributions from foreign nations and straw donors. The DC and NJ subpoenas are more focused on nonprofit-related matters, such as possible private benefit and whether the committee complied with laws relating to soliciting contributions.
As for the Trump Foundation litigation in New York, Courthouse News Service reports that New York Attorney General Letitia James requested judgment against the Foundation, Donald J. Trump, Donald J. Trump Jr., Ivanka Trump, and Eric F. Trump for $2.8 million in restitution and $5.6 million in penalties, as well as injunctive relief. The filing, technically a Reply Memorandum of Law in Further Support of the Verified Petition, argues that the evidence provided by the Attorney General has not been challenged by the respondents or countered by any admissible evidence provided by them, and that it demonstrates breach of fiduciary duties, wasting of charitable assets, and improper use of the foundation for political purposes. Hat tip: Nonprofit Quarterly.
Thursday, March 28, 2019
The IRS Tax Exempt & Government Entities (TE/GE) Business Operating Division recently released its Fiscal Year 2019 Program Letter, reviewing its accomplishments for both fiscal year 2018 and the first quarter of fiscal year 2019. Here is the Table of Contents:
Fiscal Year 2019 Compliance Program:
TE/GE delivers a compliance platform that is divided into six portfolio programs: Compliance Strategies; Data-Driven Approaches; Referrals, Claims, and Other Casework; Compliance Contacts; Determinations; and Voluntary Compliance and Other Technical Programs. Data is used to identify and address existing and emerging high-risk areas of non-compliance, and steers the decisions on how best to apply optimal resources.
Compliance Strategies are issues approved by TE/GE’s Compliance Governance Board to identify, prioritize and allocate resources within the TE/GE filing population. Using a web-based portal, TE/GE employees submit suggestions for consideration by the Board. Once approved, these issues are considered to be priority work. As more issues are developed and approved, those with a higher priority may potentially replace Compliance Strategies currently set forth in this document.
Data-Driven Approaches use data, models, and queries to select work based on quantitative criteria, which allows TE/GE to allocate resources that focus on issues that have the greatest impact. TE/GE is committed to integrating data into its processes and procedures, and will use return data and historical information to identify the highest risk areas of non-compliance.
Referrals, Claims, and Other Casework
Referrals allege non-compliance by a TE/GE entity and are received from sources within and outside the IRS. Claims are requests for refunds or credits of overpayments of amounts already assessed and paid; they can include tax, penalties, and interest or an adjustment of tax paid or credit not previously reported or allowed.
Compliance Units are employed to address potential noncompliance, primarily using correspondence contacts known as “compliance checks”, which allow TE/GE to establish a presence in the taxpayer community in a manner that reduces the cost to the IRS, while limiting the burden on each taxpayer contacted.
Determination letters are issued to exempt organizations on exempt status, private foundation classification, and other determinations relating to exempt organizations, and to retirement plans that satisfy the qualification requirements of Federal pension law.
Voluntary Compliance and Other Technical Programs
The Voluntary Correction Program (VCP) enables a plan sponsor (at any time before audit) to pay a fee and receive IRS approval for correction of plan failures. Knowledge Management works to ensure the quality and consistency of technical positions, provide timely assistance to employees, and preserve and share TE/GE’s knowledge base.
UPDATE: Rep. Mike Thompson, Chair of the House Ways and Means Subcommittee on Select Revenue Measures and Rep. Mike Kelly have introduced the Charitable Conservation Easement Program Integrity Act of 2019 in the House. Senator Steve Daines previously introduced a bill with the same name in the Senate.
Senators Chuck Grassley and Ron Wyden, Chairman and Ranking Member of the Senate Finance Committee, respectively, have announced an investigation into the potential abuse of syndicated conservation easement transactions. While stating general support for the availability of charitable contribution deductions for conservation easements, they cited a need to preserve the integrity of the conservation easement program by preventing "a few bad actors" from wrongly gaming the tax laws relating to conservation easements. They have requested information from fourteen named individuals relating to such transactions, drawing on a 2017 Brookings report on conservation easements.
This announcement follows a Department of Justice complaint filed in December 2018 against certain promoters of "an allegedly abusive conservation easement conservation easement syndication tax scheme" and a 2017 IRS Notice targeting such schemes by declaring them "listed transactions."
At the heart of all these actions are allegedly false valuations based on inflated appraisals that sharply increase the tax benefits from the conservation easements.
Church Tax Benefits: Does 7th Circuit Ruling on Cash Parsonage Allowance Exclusion Protect Other Church-Specific Benefits?
In a much anticipated decision, the U.S. Court of Appeals for the Seventh Circuit concluded that the exclusion from gross income of cash parsonage allowances under Internal Revenue Code section 107(2) is constitutional, reversing a federal district court decision to the contrary. (Full disclosure: I signed an amicus brief arguing that the provision is constitutional.) Since the decision leaves the exclusion in place and there are no contrary federal appellate court decisions, it is highly unlikely that the Supreme Court will take up the case even if the plaintiffs file a cert petition. The Freedom from Religion Foundation, which instigated the challenge, or others could of course try to raise this issue in a different circuit in order to try to create a circuit split, especially since the plaintiffs here managed to overcome the standing issue that had frustrated an earlier challenge. At least one panel of the U.S. Court of Appeals for the Ninth Circuit indicated in an earlier case an interest in reaching the constitutional issue by appointing an amicus law professor who was skeptical of the provision's constitutionality (an issue that had not been raised by any party in that case). But such a split is likely years down the road, if it ever materializes.
A larger question is whether the decision provides broader protection for other tax benefits provided to churches, other religious groups, and ministers. Perhaps the most important holdings of the court in this respect are its conclusion that Congress had the secular purpose of avoiding excessive entanglement with religion when it enacted the provision (citing Taxing the Church, authored by Edward Zelinsky (Cardozo), on this point), its narrow reading of the Supreme Court's Texas Monthly decision as part of its reasoning for why the primary effect of section 107(2) is not to advance religion, and its stated deference to Congress in determining whether the provision causes excessive government entanglement with religion. (These conclusions reflect the much criticized by still applicable Lemon test.) These conclusions are not accepted by all; for a thoughtful critique of them, see this TaxProf Blog op-ed by Adam Chodorow (Arizona State), who argued against the constitutionality of section 107(2). And of course the decision only directly applies to that provision and is only precedential in the Seventh Circuit. But they likely foreshadow a difficult path for any other challenges to tax benefits enjoyed by religious groups or ministers, including the exemption from the annual information return filing requirement for churches currently being challenged by the Freedom from Religion Foundation (in the District of Columbia, not the Seventh Circuit).
Wednesday, March 27, 2019
A federal judge in the Northern District of California ruled last week that the NCAA regulations concerning the compensation of Division I football and basketball athletes "lacks any coherent definition of amateurism" and therefore rules limiting "the compensation [athletes] may receive in exchange for their athletic services" violate federal antitrust law. The Court issued an injunction prohibiting the NCAA from "fixing or limiting compensation or benefits" provided to Division I football and basketball athletes. Commentators, such as Ronald Katz writing in The Nation immediately recognized the tax and tax exemption implications:
The court’s opinion was particularly critical of this lack of a definition, stating that the NCAA offered “no stand-alone definition of amateurism either in the NCAA rules or in argument. The ‘Principle of Amateurism,’ as described in the current version of the NCAA’s constitution, uses the word ‘amateurs’ to describe the amateurism principle, and is thus circular. It does not mention compensation or payment.”
As the court sternly pointed out, it would be impossible for the NCAA to take the position that compensating athletes could not be part of amateurism, because the NCAA permits student-athletes to be compensated, by the court’s count, in at least 17 ways. The prime example would be an athletic scholarship, which is worth tens of thousands of dollars, but the other methods of compensation are not trivial. For example, cash equivalent or in-kind awards for post-season bowl or championship play can amount to thousands of dollars. Also, the NCAA disburses money to athletes from two funds, the Student Assistance Fund and the Academic Enhancement Fund, to, as described by the court, “assist student-athletes in meeting financial needs, improve their welfare or academic support, or recognize academic achievement.” The amounts that the NCAA makes available to these funds for distribution are noteworthy: In 2018, the NCAA handed out $84 million from the Student Assistance Fund and $48 million from the Academic Enhancement Fund.
In light of the above facts, the court concluded that the NCAA rules “that permit, limit, or forbid student-athlete compensation and benefits do not follow any coherent definition of amateurism.” Although the judge’s conclusion came in the context of an antitrust case, the opinion has major tax implications.
Here is the inescapable logical conclusion, according to Mr. Katz:
Right now, the NCAA falls under the charitable exemption in the Internal Revenue Code for educational institutions. But if the entertainment provided by the NCAA is not provided by amateurs, it is really no different from entertainment provided by media companies like ESPN or Amazon, which are not tax exempt. [Emphasis added].
Darryll K. Jones
Tuesday, March 26, 2019
It almost feels voyeuristic to read the complaint in United States of America v. Michael Avenatti. The conversations depicted in the complaint are so sleazy one almost feels like taking a long shower after reading them. And yet, I couldn't help reading the entire 11 pages. The one thing that really caught my attention is paragraph 8, which describes the gist of the alleged extortion attempt against Nike (the writer is FBI Special Agent Christopher Harper):
8. Based on my involvement in this investigation, and set forth in greater detail below, I have become aware of a multi-million extortion scheme in which MICHAEL AVENATTI, the defendant, and [Co-Conspirator 1, identified in the media as Mark Garagos and in the complaint as CC-1] used threats of economic and reputational harm to extort Nike, a multinational corporation engaged in, among other things, the marketing and sale of athletic apparel, footwear, and equipment. Specifically, AVENATTI threatened to hold a press conference on the eve of Nike's quarterly earnings call and the start of the Annual National Collegiate Athletic Association ("NCAA") tournment at which he would announce allegations of misconduct by employees of Nike. AVENATTI stated that he would refrain from holding the press conference and harming Nike only if Nike made a payment of $1.5 million to a client of AVENATTI's in possession of information damaging to Nike, i.e., Client-1, and agreed to "retain" AVENATTI and CC-1 to conduct an "internal investigation" - an investigation that Nike did not request -- for which Avenatti and CC-1 demanded to be paid, at a minimum, between $15 and $25 million. Alternatively and in lieu of such a retainer agreement, AVENATTI and CC-1 demanded a total payment of $22.5 million from Nike to resolve any claims Client-1 might have and additionally to buy AVENATTI's silence.
"Client 1" is identified elsewhere in the complaint as an AAU basketball coach who facilitated alleged bribes to promising high school players from Nike, presumably to catch young "LeBron" type players before they enter college or go pro, and then later sign those future phenoms to lucrative endorsement contracts. I can't quite put my finger on what is bothering me about the allegation quoted above, but it has something to do with what we all know. When it comes to March Madness and College football bowl games, we know that the entire process is awash with cash, maybe not on the same level as the NBA and the NFL but certainly up in the stratosphere. And everybody except the kids are getting seriously paid. Granted the NCAA is not mentioned much, if at all, in the rest of the complaint but I can't help but think that this whole thing is cut throat big business, not charity. I know this is a case about a couple of greedy and power hungry attorneys, if the complaint is true, and has no direct connection to the NCAA's tax exempt status. Still, I can't help wondering how this all might not have happened without tax exempt and NCAA regulations. Regulations that effectively allow "charities" to monopolize player-generated revenue exclusively for the tax exempt entities that profit so astronomically from the skills of the "amateur athletes" participating in the "charitable events" that I, admittedly, pay good money to watch. What if the kids whose skills generate all this money for just about everybody except the kids themselves were granted the right to sell their labor? Avenatti and Garagos would have had nothing with which to attempt extortion. And one more thing while I am ranting. I am just not sure Avenatti and Garagos are the only people in this indirectly "charitable" saga with unclean hands.
In 2009, John Colombo wrote a great article about the NCAA and tax exemption that might help me sort out my thoughts. More recently, Lawrence Zelnack and Richard Smalbeck wrote about tax exemption and college sports. Re-reading those might help me understand what's irritating me from a tax standpoint about this case.
Darryll K. Jones
Friday, March 15, 2019
In today's Chronicle of Philanthropy, Lloyd Hitoshi Mayer (Notre Dame) authored an opinion piece questioning whether a better funded IRS could have discovered and ended sooner the college admissions scandal discussed in several prior blog entries this week (here, here and here). Here are some highlights of the opinion:
- There were certainly enough yellow flags in IRS filings of the nonprofit at the center of the scam to signal something was wrong. The Internal Revenue Service would have needed the capacity to review those filings carefully and to pursue those flags.
- In addition to more funding for the IRS oversight of nonprofits, Congress could consider possibly moving that oversight out of the IRS.
- One significant red flag: In its tax-exempt application, the Key Worldwide Foundation articulated that it would be using materials developed by a for-profit company owned by one of the organization’s directors, which also employed the foundation’s chief financial officer and treasurer.
- In its annual Form 990 returns, the Foundation reported it had three directors and none of them met the IRS’s definition of “independence,” indicating they all had financial ties to the foundation or related entities.
- The Foundation also stated in its annual returns that none of the grant recipients were tax-exempt charities. While charities can make grants to businesses and governments in limited cases, the complete lack of charity recipients raises the issue of how KWF ensured that its grants would be used only for charitable purposes.
- The Foundation's organizers and maybe some of the parents participating in the admissions scam knew that the IRS is mostly asleep at the switch with respect to audits.
- There is only so much that technology and public disclosure of information can do to uncover such misdeeds without more funding of IRS oversight.
- It is, therefore, not surprising that an apparently unrelated FBI investigation led to the discovery of this scheme instead of an IRS investigation, given this lack of resources and resulting low audit coverage.
Thursday, March 14, 2019
Lloyd Hitoshi Mayer (Notre Dame) has posted his article, The Promises and Perils of Using Big Data to Regulate Nonprofits, to SSRN (forthcoming in the Washington Law Review). Here is a brief abstract:
For the optimist, government use of “Big Data” involves the careful collection of information from numerous sources and expert analysis of those data to reveal previously undiscovered patterns and so revolutionize the regulation of criminal behavior, education, health care, and many other areas. For the pessimist, such use involves the haphazard seizure of information to generate massive databases that render privacy an illusion and result in arbitrary and discriminatory computer-generated decisions. The reality is of course more complicated, with government use of Big Data presenting on one hand the promises of greater efficiency, effectiveness, and transparency, and on the other hand the perils of inaccurate conclusions, invasion of privacy, unintended discrimination, increased government power, and violations of other legal limits on government action.
Until recently, these issues were theoretical for nonprofits in the United States given that the federal and state regulators overseeing them did not use a Big Data approach. But nonprofits can no longer ignore these issues, as the primary federal regulator is now emphasizing “data-driven” methods to guide its audit selection process, and state regulators are moving forward with plans to create a single, online portal to collect required filings. And both federal and state regulators are making or plan to make much of the data they collect available in machine-readable form to researchers, journalists, and other members of the public. The question now is therefore whether regulators, researchers, and nonprofits can learn from the Big Data experiences of other agencies and private actors so as to fully realize Big Data’s promises while avoiding the numerous perils it presents.
This Article explores the steps that nonprofit regulators have taken toward using Big Data techniques to enhance their ability to oversee the nonprofit sector. It then draws on the Big Data experiences of government regulators and private actors in other areas to identify the potential promises and perils of this approach to regulatory oversight of nonprofits. Finally, it recommends specific steps those regulators and others can take to ensure that the promises are achieved and the perils avoided.
Was the IRS Asleep at the Wheel in College Admission Scandal? Chronicle of Philanthropy Asks Nonprofit Law Prof Blog Contributor, Roger Colinvaux
In response to Nicholas Mirkay's post this morning Jessica remarked, "[t]he Form 990 for 2016 states that $825,000 was paid to an independent contractor, [Gordon] Ernst, for consulting services. This should have been a huge red flag to the IRS, and I wonder why it wasn't investigated." Gordon Ernst is the first named defendant in the indictment and is described as the head coach of men's and women's tennis at Georgetown University. The Chronicle of Philanthropy, noting that Senator Chuck Grassley is monitoring the investigation and reading the charging documents, asks the same question in today's edition. One of our contributing editors, Roger Colinvaux, provided insight to the Chronicle:
The Key Worldwide Foundation college-admissions bribery scandal threatens public faith in nonprofits and underscores how ill equipped the IRS is to uncover fraud and other illegal activities at the more than 1 million tax-exempt organizations in the United States, nonprofit advocates and watchdogs said.
Paul Streckfus, a former IRS attorney and editor of the EO Tax Journal, which covers tax policy for the nonprofit world, said Congress bears a lot of responsibility for letting the IRS’s nonprofit oversight capacity erode. He noted that the Key Worldwide scandal was foreshadowed by the Obama-era fights over the tax-exempt status of Tea Party-related organizations. Scrutiny from House Republicans and years of budget cuts have had the intended effect of forcing the IRS to curtail its regulation of nonprofits. "Congress doesn’t seem to care that there’s a great deal of abuse in the tax-exempt area," said Streckfus in an interview. "The House Republicans succeeded in basically beating down the IRS." Rick Cohen, chief communications officer and chief operating officer at the National Council of Nonprofits, agreed, saying it’s gotten to the point where only "screaming red flags" are sufficient to draw the attention of the IRS. "The reality is that for many years, we’ve seen the IRS be underfunded, particularly the section that regulates the nonprofit sector," he said.
According to tax documents on file with the California Attorney General’s office, Key Worldwide Foundation was set up in 2013. That year, it reported total assets of $54,797 and revenue of $451,600. On paper, at least, it did well for itself. By 2016, the most recent available tax documents filed by the nonprofit show it reported total assets of $2.1 million and revenue of $3.7 million.
Roger Colinvaux, a nonprofit tax law professor at Catholic University of America, said in an email that Key Worldwide appeared to be operating as though it had no fear of getting audited or getting caught. "The case also reinforces the continued need for disclosure of donors to the IRS, which some in Congress have been arguing to get rid of," Colinvaux said. "If the IRS had been looking at the donors, it might have noticed large donations and perhaps connected the dots to a pay-to-play scheme."
Darryll K. Jones and Easter Floyd-Clarke
Private Inurement, Private Benefit, Excess Benefit and Faux Charitable Contributions All Over the Place in the College Admissions Scandal
OMG, pigs turn into hogs and hogs get slaughtered! There must be a whole buncha people sitting around a whole buncha conference tables, scratching a whole buncha heads wondering how deep their exempt organization is into, and how to get out of this big mess. The Key World Foundation, Inc. is a 501(c)(3) organization smack dab in the middle of the college admissions scandal that broke in the news two days ago. Other exempt organizations implicated include the ACT, Inc., the College Board, the NCAA, Georgetown, Stanford, UCLA, USC, University of San Diego, UT Austin, Wake Forest, University of Miami, and Yale. Let's just conclude that life is 'bout to get real busy for a whole buncha lawyers. I just hope there is a nonprofit tax person sitting at each of those conference tables. Anyway, there is virtually no information -- no determination letter, no 990's -- on Guidestar about the Foundation, though the organization received its determination letter in 2012. Here is the pitch from the organization's webpage:
The Key Foundation’s mission is to provide guidance, encouragement, and opportunity to disadvantaged students around the world.
Since its founding in 2014, the Key Foundation, a 501(c)3 non-profit organization, has touched the lives of hundreds of students that would never have been exposed to what higher education could do for them. Many of these students have only known life on the streets, surrounded by the gang violence of the inner-city. The Key Foundation, directly or partnered with other organizations, have met these students where they live, to encourage them, and open doors for enriching opportunities beyond their wildest imaginations. More than just donating funds, the Key Foundation often donates the time of the very experts that coach and train some of the most affluent students in the world, to give the same opportunity to those that have none. Each year, the Key Foundation provides 30 disadvantaged students with a full scholarship to the Key’s Premium College Coaching program.
According to one (of many) unsealed indictments, William Rick Singer used the Key Foundation to accept and make bribes to agents, officers, and employees of each of the named nonprofits. The bribes were sometimes funded by payments disguised as donations that payors then deducted as charitable contributions from their gross income. Pigs turning into hogs are about to get slaughtered. Here is a snippett from one of the indictments:
31. Between approximately 2011 and 2018, parents paid CW-1 approximately $25 million to bribe coaches and university administrators to designate their children as purported recruited athletes, or as members of other favored admissions categories, thereby facilitating the children’s admission to those universities. The recruitment scheme typically worked as follows:
a. CW-1 told parents, in sum and in substance, that he could facilitate their children’s admission to certain universities via what he termed the “side door.” He described the side door scheme as a quid pro quo, pursuant to which the parents would purport to make charitable donations to KWF. CW-1, in turn, would funnel those payments to particular athletic coaches, or to university programs designated by those coaches, using KWF to disguise the nature and source of the payments. CW-1 typically explained to parents that, in exchange for the payments, the coaches would designate their children as recruited athletes—regardless of their athletic abilities—thereby facilitating their admission to the universities.
b. CW-1 typically explained to his clients, in substance, that the scheme was a tried-and-true method of gaining admission to colleges, and that many other families were participating or had already participated in it, leveraging connections CW-1 had developed at multiple universities over years of work with prior clients.
Most of the charging documents are available from the USDOJ (Massachusetts). Rick Singer, aka "Cooperating Witness -1 or "CW-1") has already flipped, pleaded guilty, and is singing like a bird. I hope his counsel remembers to include resolution of the excise taxes he (and maybe the Board members) are facing. All those donors too.
Darryll K. Jones
Wednesday, March 13, 2019
One would be hard pressed to find a news source that is not covering the recently unearthed college admissions scandal. The focus of particular articles vary, but the central theme is consistent--a tax-exempt, nonprofit organization was used to perpetrate the fraud. The Key Worldwide Foundation was founded by Rick Springer, with a mission "to provide guidance, encouragement, and opportunity to disadvantaged students around the world." In reality, KWF was used primarily as a conduit to solicit funds from parents eager to get their children into elite universities and then use those funds to bribe both test administrators and university administrators and coaches to effect those admissions. As Sam Brunson discusses in his entry on The Surly Subgroup blog, not only were parents' contributions laundered through KWF, but added insult to injury, they also were entitled to deduct those payments as charitable contributions.
As discussed in one of many articles by the Los Angeles Times, KWF boasts on its website and tax filings that it provides grants to assist needy Cambodians and after-school programs for children across the country. According to another news source, one purported grant recipient, Friends of Cambodia, never received any of the money reported by KWF. Rather, as reported by the Times' pursuant to its review of KWF's "federal tax records" (presumably their Forms 990), a vast majority of the Foundation's grants went directly to elite, private and public universities and their athletic programs (USC, Yale, University of Texas).
Notwithstanding the gross misuse of the tax-exempt, nonprofit sector and tax incentives for contributions to charities, this scandal sheds even more light on a persistent issue making a lot of headlines lately--unprecedented wealth inequality in America. Even with tax proposals being floated to effectively tax wealth accumulation, this scandal proves that the privilege conferred by wealth can be boundless.
Tuesday, March 12, 2019
As reported by The Washington Post and other news outlets, the Fundraising Effectiveness Project's most recent report announced an unimpressive 1.6 percent increase in charitable giving for calendar year 2018. Donations from general donors (gifts under $250) and mid-level donors (gifts between $250 and $999) each dropped by 4 percent from the prior year. On the other hand, donations from major donors (gifts of $1,000 and more) rose by 2.6 percent. The report also revealed that the number of donors decreased by 4.5 percent from the prior year. Although not conclusive evidence, the report does lend some credence to the conclusion that the TCJA and the resulting decrease in taxpayers itemizing their deductions (which includes the charitable contributions deduction) has negatively affected charitable giving.
Brian Galle (Georgetown) has authorized a research paper entitled, "The Tax Exemption for Charitable Property: An Empirical Assessment," which he recently presented at Duke's Tax Policy Workshop Series. Here is his brief abstract:
I offer the first multi-jurisdictional assessment of the balance-sheet effects of the property-tax exemption for charitable property. I combine a manually-assembled dataset of property tax rates in over 4,000 municipalities with three large samples of firm-level administrative data, as well as hand-coded variations in the legal details of different states’ exemption regimes, to assemble a panel of more than 1 million firm-years.
As expected, exemption causes charities to utilize more real property as tax rates rise. I offer new theoretical contributions showing that this effect, previously described as an unwanted distortion, may be second-best efficient in the presence of an income tax with accelerated depreciation, and confirm empirically the predictions of this new theory.
Exemption also increases managerial compensation while crowding out efforts to raise revenue through donations and commercial activity. Lastly, exemption eases liquidity constraints on colleges and universities, allowing them to expand enrollment while holding per-student costs level.
[Hat tip: TaxProf Blog]
H. Daniel Heist (University of Pennsylvania, School of Social Policy and Practice) and Danielle Vance-McMullen (University of Memphis, Public and Nonprofit Administration) have authored a research paper entitled "Understanding Donor-Advised Funds: How Grants Flow During Recession." Here is a short abstract:
Donor-advised funds (DAFs) are becoming increasingly popular. DAFs receive a growing share of all charitable donations and control a sizable proportion of grants made to other
nonprofits. The growth of DAFs has generated controversy over their function as intermediary philanthropic vehicles. Using a panel data set of 996 DAF organizations from 2007 to 2016, this article provides an empirical analysis of DAF activity. We conduct longitudinal analyses of key DAF metrics, such as grants and payout rates. We find that a few large organizations heavily skew the aggregated data for a rather heterogeneous group of nonprofits. These panel data are then analyzed with macroeconomic indicators to analyze changes in DAF metrics during economic recessions. We find that, in general, DAF grantmaking is relatively resilient to recessions. We also find payout rates increased during times of recession, as did a new variable we call the flow rate.
In a novel, if not bizarre legal move, Arizona Attorney General Mark Brnovich is suing his own client, the Arizona Board of Regents, claiming that the BOR is lending its tax exempt status to developers for the developers' private benefit. The gist of the complaint is that the Arizona Board of Regents and Arizona State University hold title to various unimproved properties in the state. The university leases those properties to private developers who then build a conference center, for example, on the property for use by the University. The University maintains title to the property after the improvements are made. The University leases the improved property back to the private developer which then operates the conference center. The AG's objection, according to the complaint, is that private developers are essentially allowed to operate businesses on improved property that generates no tax revenue for the state:
1. This case is about ending the Arizona Board of Regents ("ABOR") and Arizona State University ("ASU")'s practice of using ABOR's tax-exempt status to facilitate special property deals for favored businesses. These deals are designed to shield selected companies from property taxes while generating revenue for ABOR and ASU, at the expense of the taxpaying community.
2. Because of these unauthorized actions, some of the largest existing and planned construction projects in Tempe will be build by private developers, leased back to private tenants, and yet produce no property tax revenue. This is because ABOR has offered to step in and hold bare legal title. These construction projects are therefore not included in the property tax base available to local schools and governments, even as ASU receives substantial income for its straw-man role.
3. ASU is a public university, not a commercial enterprise or an urban development authority. It is inappropriate for this educational institution to pick winners and losers in teh highly competitive property development industry by negotiating for the use of ABOR's tax shielding status. The Arizona Constitution, relevant statutes, and longstanding historical practice establish that ABOR is not authorized to act in this capacity. With anohter mega-deal in the works, this Court must now hold ABOR and ASU accountable and require both to adhere to their enumerated powers as provided by the Constitution and Legislature.
The Board of Regents is incredulous in it's response, calling the lawsuit a "senseless perpetuation of false narratives" and a waste of time and resources, noting that the AG is suing his own client:
“For decades, the Arizona courts have made clear the Attorney General does not have statutory authority and free purview to file suit against whomever he wants,” said ABOR Chair Ron Shoopman. “Yet, once again, we are called to respond to a senseless lawsuit perpetuating false narratives. This lawsuit wastes time and resources at the board and universities, and detracts us from the crucial work we do to serve the students and families of Arizona.” The ABOR motions state that the Attorney General has no statutory authority to bring this suit. Further, the motions state, “even if the AG has the statutory authority to sue his own client…he cannot force the taxing authorities to assess and collect property taxes against tax exempt property.” The Arizona Constitution provides that land owned by Arizona public universities is exempt from taxation by law.
In its 3rd Motion to Dismiss, the Board states the matter thusly:
Even if the AG had the statutory authority to sue the Board (which he does not, as shown in Motion to Dismiss Number 1 (AG’s Lack of Authority)), he cannot force the taxing authorities to assess and collect property taxes against tax-exempt state property. The AG alleges that a proposed transaction in which the Board would lease land that it owns now—and has owned for over 35 years—to Omni Tempe, LLC (“Omni”) for building and operating a hotel and conference center near ASU’s main campus would violate article IX, section 2(12) of the Arizona Constitution and A.R.S. § 15-1625(B)(4). [Compl. ¶¶ 60–66, 81–82, 98–101, 110–12]. But even if the transaction is ultimately closed, the lease is executed, and the hotel and conference center is built, the Board will continue owning the property as it has for decades. Because the Board is a state entity and because article IX, section 2(1) of the Arizona Constitution and A.R.S. § 42-11102(A) exempt state property from taxation, the taxing authorities cannot impose property taxes against the Board. As a result, the Court should dismiss count I of the AG’s complaint.
The most ironic thing about the case is that the ABOR has requested that the prevailing party be awarded fees. Even if fees are not awarded, Arizona will ultimately pay the attorneys on both sides, since both sides are separate arms of the same government body. See here and here for press coverage.
Darryll K. Jones
Monday, March 11, 2019
There is an interesting article in the March 9 issue of Modern Healthcare. The article describes the history of Grassley's nonprofit health care efforts, the IRS's revamping of Form 990's Schedule H, and the continuing efforts to ensure health care for the poor. The excerpt below picks up at the event triggering Senator Grassley's long held interest:
Dean Zerbe, former senior counsel to the Senate Finance Committee, recalled the pivotal moment nearly 15 years ago for panel Chairman Chuck Grassley’s scrutiny of not-for-profit hospitals. It was when Mark Everson, then commissioner at the Internal Revenue Service, wrote in a March 2005 letter to the committee that “some tax-exempt health care providers may not differ markedly from for-profit providers in their operations, their attention to the benefit of the community, or their levels of charity care.” “That was a pretty blatant moment,” Zerbe said. What happened next still reverberates today. As the powerful committee conducted its investigation, the IRS ran its own parallel, three-year study into not-for-profit hospitals. The IRS ultimately redesigned its Form 990 tax document for not-for-profit organizations with a special Schedule H section—H for hospitals—and released the final version in 2008. It required tax-exempt providers to answer a slate of questions about how they give back to their communities. Significantly, hospitals had to start tallying the hard cash they spend treating poor patients and disclose how their community benefit stacks up as a percentage of spending. The Iowa Republican didn’t let up on his oversight on the issue. When the Affordable Care Act came around, Grassley secured a provision expanding Schedule H to gain even more insight into hospital operations. Fast-forward to 2019. Grassley is back chairing the Finance Committee following a stint at the helm of the Judiciary Committee. His concern over tax-exempt status hasn’t waned and coincides with the increased focus in Washington on transparency. Due to Senate Republican rules, Grassley has two more years chairing the committee, leaving little time to make sure one of his signature oversight accomplishments is doing what he intended: make sure not-for-profit hospitals are providing the right level of care to poor patients and that they’re not playing pricing games or threatening debt collection. “This is the time for activists who care about the poor; this is very meaningful,” Zerbe said. “When we have had hospitals change, it made a big difference. I know people get excited about this election or that election, but if people want to see something tangible for the poor, now’s the time.”
To see a copy of the letter Senator Grassley recently sent to the IRS, responses to which are due April 1, click here.
Darryll K. Jones
Friday, March 8, 2019
Two Views on Nonprofits From TED: Economic Efficiency vs. Social Equity (or a little of both maybe)?
Happy Friday. Spring break can't get here soon enough! Its amazing, really, the content you can find on the internet (some good, some very bad), especially in online fora like TED Talks, that have built brand loyalty based on the perceived levels of intelligence of its speakers. The two speakers in the the TED Talks posted above come from two entirely different theoretical worlds. The first speaker focuses on "economic efficiency" as the measure of the Independent Sector's value to society. The other focuses on "social justice" as the measure of the Independent Sector's value to society. The talks remind me that the content of our tax and non-tax laws relating to nonprofit organizations is very largely determined by our theoretical starting points.
Darryll K. Jones
Thursday, March 7, 2019
Mark Whitaker was Assistant Pastor at New Bethel Baptist Church and also running for local office when the sign depicted above appeared at his church shortly before the election last November, according to an article in the Virginian-Pilot. Mr. Whitaker's felony trial was pending and he was eventually convicted, which would have made him ineligible to serve had he won the election -- he did not so that issue was moot. There was some question regarding whether votes cast for Mr. Whitaker would even be counted since his conviction was expected before election day. As a literal matter, the sign only informs voters that votes for Mr. Whitaker would be not be automatically disregarded. Campaign intervention or no? Whether it is or isn't, is beside the point, according to an op-ed in RealClear Policy today:
Tax exemptions are the equivalent of government subsidies under the commonly accepted “tax-expenditure theory,” relied upon by the U.S. Supreme Court. Legally, under the theory, tax exemption is considered as much a benefit as an outright grant or the tax-deductibility of contributions to nonprofit organizations.
Under this reasoning, the government can attach certain conditions to its subsidies — to a grant, to tax exemption, to eligibility for tax deductions. It does this all the time, of course. If nonprofit organizations do not want to voluntarily consent to a condition, they don’t have to do so; they can decide to simply forego the benefit. The state can bargain about that with them. According to the “unconstitutional-conditions doctrine,” however, “even if a state has absolute discretion to grant or deny an individual a privilege or benefit,” as summarized by New York University Law School professor Richard A. Epstein’s 1993 “Bargaining with the State,” “it cannot grant the privilege subject to conditions that improperly ‘coerce,’ ‘pressure,’ or ‘induce’ the waiver of that person’s constitutional rights.” Conditions can’t be used to coerce corporations’ rights, either, including nonprofit ones.
In other news affecting Houses of Worship, it seems the effort to repeal the "Nonprofit Parking Tax," about which Houses of Worship seem more concerned than other nonprofits, is picking up bipartisan support. Lawmakers from both sides of the isle and in both Houses of Congress signed on to the reintroduction of the Lessening Impediments From Taxes (LIFT) for Charities Act two days ago. Fortunately, this is one tax proposal about which it cannot be said lawmakers are being paid by the word:
SECTION 1. REPEAL OF INCLUSION OF CERTAIN FRINGE
BENEFIT EXPENSES IN UNRELATED BUSINESS TAXABLE INCOME.
(a) IN GENERAL.—Section 512(a) of the Internal Revenue Code of 1986 is amended by striking paragraph (7).
(b) EFFECTIVE DATE.—The amendment made by this section shall take effect as if included in the amendments made by section 13703 of Public Law 115–97.
Darryll K. Jones
In her article, Sarah Ellsworth explores the key provisions of the Tax Cuts and Jobs Act that may affect nonprofit organizations. The changes include an increased standard deduction for individuals, increased estate.gift tax exclusions, increased limit on charitable contributions, imposing tax certain fringe benefits, lower corporate tax rate on UBTI, lower tax rates on political activities from 501(c)(4), (5), and (6) organizations, and new taxes on high compensation and higher education endowments. Many nonprofit organizations are concerned about these tax changes because they are expected to be terrible for nonprofits. As we enter 2019, many questions still remain about the long-term fallout of this tax reform. To learn more about why nonprofit organizations are worried about the new tax reform, click here.