Wednesday, March 4, 2020
Lloyd Hitoshi Mayer (Notre Dame) and Zachary B. Pohlman (JD Candidate, Notre Dame) have posted What Is Caesar's, What Is God's: Fundamental Public Policy for Churches. Before I post the abstract, just let me say: I saw this on Twitter about a week ago. While the topic has been addressed before, this is a pretty comprehensive look at at least one theory for exempting churches and what that theory has to say about the prohibition on churches endorsing or opposing candidates. I've written notes all over my copy. And here's the abstract:
Bob Jones University v. United States is both a highly debated Supreme Court decision and a rarely applied one. Its recognition of a contrary to fundamental public policy doctrine that could cause an otherwise tax-exempt organization to lose its favorable federal tax status remains highly controversial, although the Court has shown no inclination to revisit the case and Congress has shown no desire to change the underlying statutes to alter the case’s result. That lack of action may be in part because the IRS applies the decision in relatively rare and narrow circumstances.
The mention of the decision during oral argument in Obergefell v. Hodges raised the specter of more vigorous and broader application of the doctrine, however. It renewed debate about what public policies other than racial discrimination in education might qualify and fundamental and also whether and to what extent the doctrine should apply to churches, as opposed to the religious schools involved in the original case. The IRS has taken the position that churches are no different than any other tax-exempt organizations in this context, although it has only denied or revoked the tax-exempt status of a handful of churches based on this doctrine.
The emergence of the Bob Jones University decision in the Obergefell oral argument, along with developments over the past several decades both with respect to the legal status of churches and what arguably could be considered fundamental policy, render consideration of these issues particularly timely. This Article therefore explores whether there are emerging conflicts between a significant number of churches and what could be considered fundamental public policy, not only with respect to sexual orientation discrimination but also with respect to sex discrimination, sanctuary churches, and other areas. Finding that there are several current or likely future such conflicts, it then explores whether there are philosophical and legal grounds for treating churches differently from other tax-exempt organizations for purposes of applying the contrary to fundamental policy doctrine and the related illegality doctrine. Drawing on both the longstanding concept of “sphere sovereignty” and emerging work in the area of First Amendment institutions, the Article concludes that churches should not be subject to the former doctrine while still being subject to loss of their tax benefits if they engage in or encourage significant criminal illegal activity. The Article then concludes by applying this conclusion to the identified areas of current or likely future conflict to demonstrate how the IRS and the courts should apply the Bob Jones University decision to churches.
Samuel D. Brunson
Monday, March 2, 2020
Happy March! To start my week here at the Nonprofit Law Prof Blog, I'm going to do some shameless self-promotion. I recently posted God Is My Roommate? Tax Exemptions for Parsonages Yesterday, Today, and (if Constitutional) Tomorrow to SSRN. I'll copy the abstract below, but a little non-abstract information first:
I wrote this in response to the Seventh Circuit's decision in Gaylor v. Mnuchin. In that case, the court held that section 107(2), which allows "ministers of the gospel" to receive a tax-free housing allowance, did not violate the Establishment Clause. It based its ruling on two tests: the Lemon test and, in the alternative, what it called the "historical significance test." The second of these tests, it said, essentially provides that if something was accepted at the time of the Framers and has continuously been accepted since, it doesn't violate the Establishment Clause.
The big problem? Well, the income tax hasn't been around nearly that long. The court held that the property tax exemption for parsonages had no substantive difference (n.b.: the two differ substantially, both substantively and constitutionally), and instead looked at that. Or, rather, looked at a caricature of the history of property tax exemptions for parsonages.
Friday, February 7, 2020
Oonagh B. Breen (University College Dublin) and Patricia Quinn (Benefacts) have posted Philanthropic Giving in Ireland: A Scoping Project. Here is the abstract:
For a developed country, with a reputation for generosity towards the needy, Ireland has a very limited profile in structured, persistent philanthropic giving. At €120m, institutional philanthropic giving (as defined) represents a tiny proportion of Ireland’s €11bn turnover in the non-profit sector. Philanthropists need evidence of need and potential impact if their donations are to be well informed; the public needs to witness and approve of the effects of philanthropy if philanthropy is to be recognised as creating social goods; policymakers need tangible evidence to support decision-making including tax regulation.
Recognising the growing coalition of interest in measuring philanthropy and the lack of any Irish equivalent to the annual surveys produced overseas, this paper sets out to close the knowledge gap by identifying the factors necessary to make Irish philanthropy more transparent and better understood.
Supported by Benefacts, a leading non-profit research body in Ireland, the researchers aim to conduct a multi-annual research project 2018–21 to set out for the first time an agreed definition of ‘philanthropy’ in the Irish context and to provide a comparative basis for the study of Irish philanthropy by third party researchers. This paper is the first step towards facilitating valid international philanthropic comparisons between Ireland and other similar countries. Identifying the available data sources on, and gaps in knowledge about, philanthropy in Ireland, focusing specifically on gifts and receipts, it assesses the discernible trends in philanthropic giving in Ireland.
Kathryn Chan (University of Victoria) has posted Constitutionalizing the Registered Charity Regime: Reflections on Canada Without Poverty v. Canada (AG), Canadian Journal of Comparative and Contemporary Law (forthcoming 2020). Here is the abstract:
In Canada Without Poverty v Canada (AG), the Ontario Superior Court of Justice struck down provisions of the federal Income Tax Act that limited the political activities of charitable organizations, on the ground that the provisions violated the freedom of expression of the registered charity before the court. This paper addresses the decision's complex legacy, reflecting on the promise and the perils of charity law’s increasing encounters with public law. I address some of the difficult questions raised by the decision: (1) What types of associations are rights-holders under the Canadian Charter of Rights and Freedoms? (2) What are the constitutional limitations on the government’s ability to set the outer bounds of the registered charity regime? (3) What is the rationale for limiting the political advocacy of charities? While Canada Without Poverty has generated significant improvements to the registered charity regime, I argue, the Ontario Superior Court of Justice missed an important opportunity to draw constitutional law and charity law into closer conversation.
Dupuy & Prakash, Why Restrictive NGO Foreign Funding Laws Reduce Voter Turnout in Africa’s National Elections
Kendra Dupuy (Chr. Michelsen Institute) and Aseem Prakash (University of Washington) have published Why Restrictive NGO Foreign Funding Laws Reduce Voter Turnout in Africa’s National Elections in the Nonprofit and Voluntary Sector Quarterly. Here is the abstract:
Laws that restrict foreign funding to nongovernmental organizations (NGOs) can depress voting through two mechanisms. First, they can signal a democracy recession. Consequently, citizens might fear rigged elections where their vote will not influence who forms the next government. Second, by denying funding to NGOs, these laws can undermine NGOs’ ability to generate social capital, which is crucial to mitigate collective action problems associated with voting. Since 1990, 13 of Africa’s 54 states have enacted laws restricting foreign funding for NGOs. Drawing on the 2016 Afrobarometer survey (36 countries, 53,936 respondents), we find support for the argument that restrictive NGO laws reduce citizens’ electoral participation in national elections probably by signaling democracy recession, and not by undermining social capital that foreign-funded NGOs are supposed to generate. In fully democratic countries, respondents are around 94% more likely to report having voted in a recent national election even after controlling for restrictive NGO laws.
Yu et al., Understanding the Effect of Central Government Funding on the Service and Advocacy Roles of Nonprofit Organizations in China
Jianxing Yu (Zhejiang University), Yongdong Shen (Zhejiang University), and Yong Li (Tsinghua University) have published Understanding the Effect of Central Government Funding on the Service and Advocacy Roles of Nonprofit Organizations in China: A Cross-Regional Comparison, inthe Nonprofit and Voluntary Sector Quarterly. Here is the abstract:
This research examines the effects of government funding on the service and advocacy roles of nonprofit organizations in China through a cross-regional comparison. Based on a nationwide survey of 2,058 nonprofits and in-depth interviews with 65 nonprofit executives from the same sample in 2013–2017, we find that a higher level of central government funding leads to stronger organizational capacity for service provision through leveraging matching funds and to more intensive administrative advocacy and media advocacy. Furthermore, a cross-regional comparison shows that, in contrast to those in nonwestern regions, nonprofit organizations with higher levels of central government funding in the western region engage in more administrative advocacy but less in media advocacy. Taken together, these findings highlight the importance of the government’s leverage strategy and selective empowerment in shaping nonprofits’ service and advocacy roles through government funding in China.
The Nonprofit Policy Forum published a Special Issue on INGO Governance and Public Policy: Implications of the Oxfam Scandal. From the Editor's Note for the issue:
This special issue of Nonprofit Policy Forum contains a set of papers derived from a roundtable panel discussion at the 2018 ARNOVA annual conference, organized by special editor Aseem Prakash and his colleagues, to examine the recent Oxfam sexual exploitation scandal and its implications for governance of international NGOs, nonprofit theory and public policy. Prof. Prakash’s insightful introductory essay opens the issue by providing background on the scandal itself, the organizational and historical context in which it, and other NGO scandals, have occurred, and the questions that these events raise for policy, practice, nonprofit theory and future research. No need to summarize that content on this page, as Prof. Prakash’s essay provides a well-crafted yet compact overview of the symposium papers.
Lauren Rogal (Vanderbilt University) has published Executive Compensation in the Charitable Sector: Beyond the Tax Cuts and Jobs Act, 50 Seton Hall Law Review 449 (2019). Here is the abstract:
This Article examines charity executive compensation in light of the reforms enacted by the Tax Cuts and Jobs Act of 2017. Charities receive preferential tax treatment under Section 501(c)(3) of the Internal Revenue Code because they provide humanitarian, educational, and other services that benefit the public. The payment of excessive compensation undermines the policy purpose of charitable tax status by diverting resources from the public good to private gain. The costs are borne by the intended charitable beneficiaries, the subsidizing taxpayers, and the charitable sector as a whole, which requires public confidence to sustain its work.
The Tax Cuts and Jobs Act reformed charity compensation laws for the first time in decades, imposing an excise tax on compensation over $1 million. With its enactment, there are now three legal constraints on charity compensation that together provide piecemeal accountability. This Article deconstructs the three mechanisms, assessing their enforceability and metrics for appropriate compensation. It argues that the excise tax is the mechanism best tailored to the goals of Section 501(c)(3), but that it is impaired by a blunt and arbitrary metric. This Article then explores alternative metrics that may better align with the policy objectives of 501(c)(3) status and proposes avenues for further investigation.
The HistPhil blog has a series of in-depth posts reflecting on the Tax Reform Act of 1969 and its effects on tax-exempt nonprofit organizations and more broadly. Here are the titles and authors:
Karen Ferguson (Simon Fraser University), Parallel Confrontations: The Ford Foundation And the Limits of Racial Liberalism, 1968 And 2019
Ellen Aprill (Loyola-Los Angeles), Penalty or Tax: Reconsidering The Constitutionality Of The Private Foundation Excise Taxes
Lila Corwin Berman (Temple University), The Private Charity Lacunae: The Tax Reform Act Of 1969 And The Rise Of Donor-Advised Funds
James Fishman (Pace University), The Private Foundation Rules At Fifty: How Did We Get There?
The initial results of the 2019 NACUBO-TIAA Study of Endowments, released late last month, reported that the 774 U.S. colleges, universities, and affiliated foundations reporting had an average annual endowment return of 5.3% (net of fees) from July 1, 2018 through June 30, 2019. This was a decline from the previous fiscal year's 8.2% average. Here is more information from the press release announcing the results:
Data gathered from 774 U.S. colleges, universities, and affiliated foundations for the 2019 NACUBO-TIAA Study of Endowments® (NTSE) show that participating institutions’ endowments returned an average of 5.3 percent (net of fees) for the 2019 fiscal year (July 1, 2018 – June 30, 2019).
Despite posting a lower return than FY18’s one-year average of 8.2 percent, the average 10-year endowment return reached 8.4 percent, surpassing institutions’ long-term average return objective of 7 percent for the first time in a decade. This reflects the strong stock market recovery since the 2008 financial crisis as well as solid management practices.
Due in part to strong 10-year returns, three quarters of institutions increased spending from their endowments to support students and faculty, with an average increase of more than $2 million. Participating institutions put 49 percent of their endowment spending dollars to student financial aid, 17 percent to academic programs, 11 percent to faculty, and 7 percent to campus facilities.
“The jump in spending from endowments last year shows once again the value of college and university endowments in supporting students and their access to a high-quality education,” said NACUBO President and CEO Susan Whealler Johnston. “These endowments help make opportunity available to college and university students and ensure the strength of academic programs that prepare them for work and life.”
“Endowments continue to play a significant role in institutions’ operations and financial strength, making it essential to take advantage of a wide range of investment options and strategies,” said Kevin O’Leary, Chief Executive Officer of TIAA Endowment and Philanthropic Services. “Endowment asset allocations and returns varied across different size endowment cohorts. Considering larger endowments generally have greater access to certain asset classes, such as private equity and venture capital, which were some of the highest performing asset classes in FY19, they again outperformed their smaller cohorts.”
One current hot topic with respect to higher education endowments is whether institutions should divest from fossil fuel holdings. C.J. Ryan (Roger Williams University School of Law) and Christopher Marsicano (Davidson College) have posted Examining the Impact of Divestment from Fossil Fuels on University Endowments. Here is the abstract:
Between 2011 and 2018, 35 American universities and colleges divested, either partially or completely, their endowments from fossil-fuel holdings, marking a shift toward sustainability in university endowment investment. However, the decision by these universities to divest was often marred by controversy, owing to conflicts between student- and faculty-led coalitions and the university board. Principally, endowment fiduciaries are averse to divestment decisions because they think that it will hurt the endowment's value, but this concern, motivated by a narrow interpretation of fiduciary law, can be empirically examined.
To date, the academic study of the effect of divestment on endowment values has focused on the top university endowments and has produced mixed results. Our study is different from the extant but limited literature in this area in that we examine holistically the impact of total or partial divestment on endowment values for all universities as well as a select group of institutions that are illustrative of their peers by endowment size. More importantly, we evaluate the assumption that divestment does injury endowment values through legal and empirical lenses.
Results from our difference-in-differences analyses of the effect of full and partial divestment suggest that either form of divestment does not yield discernible consequences--either positive or negative--for endowment values, at statistically significant levels. However, we do find evidence that divestment improved the value for three of four universities that we examined through synthetic control analysis, with the greatest increase in value at a university with a very large endowment (Stanford University) and modest increases at two universities with mid-sized and large endowments, respectively (University of Dayton and Syracuse University). Thus, the negative consequences of divestment may be overstated in the near-term. This challenges the assumption that divestment yields negative returns to endowments and cracks open the door for endowment fiduciaries to divest without violating duties of loyalty and prudence. We hope that this study both grounds and advances the debate about endowment divestment with empirical evidence and a reasoned discussion of its costs and benefits.
Wednesday, January 29, 2020
Ellen Aprill (Loyola-LA) posted The Private Foundation Excise Tax on Self-Dealing: Contours, Comparisons, and Character (forthcoming, Pittsburgh Tax Review) to SSRN. Here is the abstract:
This paper considers section 4941, the private foundation excise tax on self-dealing, on the occasion of its fiftieth anniversary. Part I gives background on section 4941. Part II compares the rules of section 4941 to the parallel ones applicable to public charities, including the special rules for supporting organizations and donor advised funds. The fiftieth anniversary of the private foundation excises taxes is also an appropriate time to confront two foundational questions, and Part III does so. It first asks whether we can view the private foundation taxes in general and section 4941 in particular as constitutional exercises of Congress’s taxing power under the tests announced in National Federation of Independent Businesses v. Sibelius. Second, it considers whether we should characterize the section 4941 excise tax as a Pigouvian tax – a hot category among economists but less familiar to lawyers. It answers “maybe not” to the first and “yes but” to the second.
Inconsistent Congressional treatment of self-dealing by section 501(c)(3) organizations and the low level of enforcement lead me to question the effectiveness of our current self-dealing rules. Thus, this examination concludes by suggesting a number of possible changes to the excise taxes applicable to tax-exempt organizations. The conclusion not only considers in detail a relatively small but potentially significant change – expanding abatement rules for first-tier excise taxes to section 4941, but also endorses a large one – the suggestion that approaches outside of the Internal Revenue Service be considered for regulating the charitable sector.
Monday, January 6, 2020
The Section on Nonprofit and Philanthropy Law of the AALS hosted a panel at #AALS2020 on Sunday January 5 entitled Charitable Giving and the 1969 Act: 50 Years Later. Roger Colinvaux of the Catholic University of America, Columbus School of Law moderated the session. Professor Colinvaux provided an excellent synopsis of the Act and the historical milieu in which it took place. He also did a nice job of presenting the stakes involved then and now.
Dana Brakman Reiser of Brooklyn Law School presented her article in progress Charity Regulation in the Age of Impact. It considers the ways in which the 1969 Tax Reform Act hinders types of investing that Professor Brakman believes are natural fits for private foundations. She explores novel ways of modifying the Act in order to allow private foundations to make more mission related investments (MRIs) and program related investments (PRIs).
Khrista McCarden of Tulane University Law School presented her article in progress on Private Operating Foundation Reform & J. Paul Getty. She argues that private operating foundations that operate as art museums are too often providing little in the way of public benefits because they tend to systematically exclude lower income and minority populations. She also believes these private operating foundations are particularly subject to self-dealing abuses that neither the IRS nor states attorney general respond to in an appropriate way.
Finally, Ray D. Madoff, of Boston College Law School, presented her article in progress The Five Percent Fig Leaf examines some of what she perceives as the failure of the private foundation regime to ensure an appropriate payout amount of five percent from private foundations. She argues the allowance of three types of expenditures to count towards payout is too lenient: administrative expenses (that allow donor children to be paid well into the future for often little work), payments to donor advised funds, and PRIs.
There was active questioning and participation from the audience. These issues clearly resonate at a high level of society. These papers will be published in the Pittsburgh Tax Review in Spring 2020 along with two other papers by Ellen P. Aprill and James J. Fishman The five papers were presented at the University of Pittsburgh on November 1, 2020 as part of a symposium.
Next years AALS will be in San Francisco. I will be the chair this coming year and would be interested in any thoughts on panel ideas for next years session. The theme of the general conference is the Power of Words. Also very interested in highlighting new professors in the field. Would love to put together a new voices panel in addition to a regular panel.
Wednesday, November 27, 2019
The past couple of months have been a busy time for reports, articles, and litigation relating to charitable contributions.
With respect to reports, three studies highlighted trends in charitable giving. The CAF World Giving Index 2019 reported that levels of individual giving in the world's wealthiest countries - particularly the United States, Canada, Ireland, the Netherlands, and the United Kingdom - have declined over the past ten years since the 2008 financial crisis. In the United States, the Center for Effective Philanthropy reports that declining support from small- and medium-gift givers means that charities that rely on the $428 billion (in 2018) in donations from individual donors are increasingly dependent on major donors. Finally, the National Philanthropic Trust reports that in 2018 grants from donor-advised funds totaled $23.42 billion, or roughly 5 percent of all individual giving, with $37.12 billion flowing into DAFs. (Hat tip for all three of these reports to the Philanthropic News Digest.)
With respect to articles, the Urban Institute/Brookings Institution Tax Policy Institute published a chartbook on Tax Incentives for Charitable Contributions that "explores the implications of current-law income tax incentives for charitable donations along with several alternatives for tax deductions that are more universally available." And Eric A. Kades (William & Mary Law School; pictured here) posted The Charitable Continuum, which argues that "[g]ranting a 100% deduction only for donations to the desperately poor, along with 50%, 25%, and 0% for gifts yielding progressively fewer efficiency, fairness, pluralism, and institutional competence benefits promises to deliver a socially more desirable charitable deduction."
With respect to litigation, taxpayers continue to fight (and generally lose) substantial charitable contribution deduction cases. In Presley v. Commissioner, the U.S. Court of Appeals for the 10th Circuit affirmed the Tax Court's denial of over $300,000 in claimed charitable contribution deductions based on several failures, including trying to deduct land improvement expenses in one tax year that were actually incurred in a different tax year, failure to separately list a donated mower as required on Form 8283, and failure to obtain a qualified appraisal for a donated house. In Coal Property Holdings, LLC v. Commissioner, the Tax Court denied a claimed $155.5 million conservation easement deduction on the grounds that the conservation purpose was not protecting in perpetuity, as required by statute, because the complicated transaction that created the easement meant "the charitable grantee was not absolutely entitled to a proportionate share of the proceeds in the event the property was sold following a judicial extinguishment of the easement." Finally, another conservation easement Tax Court case currently on appeal to the 11th Circuit (Pine Mountain Preserve, LLLP v. Commissioner) has attracted interest in the form of an amicus brief filed by a number of prominent academics and practitioners (including contributors to this blog Roger Colinvaux and Nancy A. McLaughlin (pictured)), as reported by Tax Analysts and Law360 (both of which require subscriptions). For the most recent summary of the many conservation easement cases, see Trying Times: Conservation Easements and Federal Tax Law (October 2019), by Nancy A. McLaughlin (Utah). The IRS also recently announced that it is increasing its enforcement actions relating to syndicated conservation easement transactions.
Monday, November 4, 2019
Where are we on the regulation of charity fifty years after Congress passed the Tax Reform Act of 1969? My colleague Tony Infanti and I along with our Pitt Law Students of the Pitt Tax Review hosted six scholars and two practitioners as commenters on Friday November 1 to consider that question. The symposium was entitled The 1969 Tax Reform Act and Charities: Fifty Years Later
Natural questions arise: (1) What was that act’s goal with respect to Charity? With respect to tax? (2) Did it accomplish these goals? (3) Are those goals still relevant today? (4) What goals might suggest themselves today? (5) Do we have the ability to make those changes that are needed? In our conversations we did not answer all of those questions, but we sure tried.
Pittsburgh as a city strikes me as a fit and proper place to ask these questions. Why do I say this? Pittsburgh, city of the rust belt, but also city of Carnegie, Frick, Mellon, Heinz, city of steel, coal, banking, and ketchup and now city of higher ed, tech, and cutting edge health care. It provides the natural and social landscape for investigating private wealth and its philanthropic use. At the beginning of the 20th Century Pittsburgh generated an enormous amount of the GDP of the US particularly through its manufacture of steel. That industrial choice brought great wealth to a few, and supported the careers of many, but also caused great damage to the environment for the long term. Pittsburgh as a city crashed in the 1980s (I have heard different dates, but place it there as that is when many of the steel mills seem to have closed down), and it has struggled to come back from the loss of the steel industry ever since.
However, today the city has transformed itself with Carnegie Mellon and Pitt driving a high tech economy, UPMC engaging in cutting edge health care connected with the University of Pittsburgh, and a robust provision of higher education. It almost surely survived to another day as a result of major philanthropic capital from the robber barron days from the likes of the Mellon, Heinz, Pittsburgh, and Hillman foundations. These private foundations led an effort to clean up the city and transform it into the more vibrant place that it is today.
Congress in the 1969 Tax Reform Act responded to a concern about the type of wealth harnessed in foundations like those in Pittsburgh. In fact, as discussed by Jim Fishman in his presentation about the history of the 1969 Tax Act the Mellon Foundation played a big role. Congress at the time was deeply concerned that wealthy individuals were abusing money put into charitable solution and decided it was important to stop those abuses. These papers consider both the origins of these rules and whether these rules still have relevance today.
The first panel considered the topic of Investing for Charity. Ray Madoff presented The Five Percent Fig Leaf critiquing the five-percent payout rule that the 1969 Tax Act imposed on private foundations. Professor Madoff's paper was paired with Dana Brakman Reiser's contribution Foundation Regulation in Our Age of Impact. Professor Brakman considered the placement of program related investments and mission related investments within the current regulatory context and found the rules wanting in many ways.
The second panel was entitled Origins of Private Foundation Rules and their Meaning for Today. Jim Fishman provided great historical insight leading up to the Act in Does the Origin of the 1969 Private Foundation Rules Suggest a Match for Current Regulatory Needs? Interestingly, Professor Fishman thinks the Act really helped in creating the positive attitude many feel towards private foundations today. He thinks there is a real problem though with smaller private foundations where compliance is likely low. Khrista McCarden focused on a category we had not yet considered that of private operating foundations, which are treated a little better than typical private foundations in her piece entitled Private Operating Foundation Reform & J. Paul Getty. She is concerned about private art museums particularly because of their lack of broad community access.
Finally panel 3 considered Regulating Charitable Actors. Ellen P. Aprill presented The Private Foundation Excise Tax on Self Dealing: Contours, Comparison and Character. It usefully compares the general ethic of the different self-dealing rules that exist within the charitable context particularly that of section 4941 and 4958. However, more interestingly she considers both whether NFIB v. Sebelius might suggest that the 4941 excise tax is a penalty rather than a tax, and whether the tax might be able to serve as a Pigouvian tax. Finally, Elaine Wilson presented her paper Is Consistency Hobgoblin of Little Minds? Co-Investment under Section 4941. The paper focuses on certain PLRs that allow private foundation donors to "co-invest" with their related private foundation, seemingly in violation of the section 4941 self-dealing rule. It then shows why it is valuable from a securities regulation perspective for the private foundations to be provided this leeway from the IRS, and asks why the IRS would have twisted the seemingly clear meanings of the self-dealing exise tax.
I hope to blog about each panel in more depth the rest of this week.
Monday, October 28, 2019
By: Philip Hackney
The University of Pittsburgh School of Law's Pittsburgh Tax Review hosts a symposium this Friday November 1, 2019 entitled: "The 1969 Tax Reform Act and Charities: Fifty Years Later.” It will offer experts in the taxation of charities, and those working in the nonprofit field, the opportunity to reflect upon and discuss the impact of the changes made by the 1969 Tax Reform Act 50 years after the law’s enactment. It will be held at The University Club in the Gold Room, located at 123 University Place on Pitt's campus. You can RSVP here. If you are in the area, please join us.
The event is free and open to the public. CLE of 4.5 hours is available for $90. It will be livestreamed at this youtube link.
Here is the schedule and the speakers:
8-9 Registration/continental breakfast
9 – 9:15 Introduction
Panel 1: Investing for Charity 9:15 – 10:45
Ray Madoff, The Five Percent Fig Leaf
Dana Brakman Reiser, Foundation Regulation in Our Age of Impact
Commenter: Carolyn D. Duronio, Partner, Reed Smith LLP
10:45 -11 Break
Panel 2 Origins of Private Foundation Rules and their Meaning for Today 11 – 12:30
Jim Fishman, Does the Origin of the 1969 Private Foundation Rules Suggest a Match for Current Regulatory Needs?
Khrista McCarden, Private Operating Foundation Reform & J. Paul Getty.
Commenter: Penina K. Lieber, Partner of Counsel, Dinsmore & Shohl LLP
Panel 3 Regulating Charitable Actors 1:30 -3:00
Ellen P. Aprill, The Private Foundation Excise Tax on Self Dealing: Contours, Comparison and Character
Elaine Waterhouse Wilson, Is Consistency the Hobgoblin of Little Minds? Co-Investment under Section 4941
Commenter: Philip Hackney, Associate Professor, University of Pittsburgh School of Law
Tuesday, October 1, 2019
An August 22 deadlock by the Federal Election Commission regarding a request for an advisory opinion highlights the complicated role that tax law plays in regulating campaign finance. It underscores important differences between section 501(c)(3) and (c)(4) organizations not only under section 501(c), but also under section 527. Moreover, because the resignation of the FEC vice chair has left the commission without quorum and thus unable to act, tax regulation of campaign finance has increased importance.
On May 31 the Price for Congress committee (the Price committee) filed a request with the FEC for an advisory opinion regarding transfer of remaining campaign funds from former legislator Price’s campaign committee. The committee asked for approval to transfer some, although not all, of its remaining almost $1.8 million to a section 501(c)(4) social welfare organization (the 501(c)(4)). The request prompted passionate debate and deep division but no resolution by the FEC commissioners when it was discussed on July 25 and again on August 22.
As proposed, the 501(c)(4) would “engage in research, education, presentation, and publications with respect to health, budget, and other public policy matters.” Although unlike section 501(c)(3) organizations, a 501(c)(4) is permitted to lobby without limit and to engage in considerable campaign intervention, the request stated that this 501(c)(4) “will not attempt to influence legislation nor participate or intervene in any political campaign.” The Price committee also proposed that any transferred funds be placed in a separate account and not be commingled with other assets of the 501(c)(4). To comply with applicable election law regarding private use by former candidates, neither the transferred funds in this special account nor income generated from these funds would be used to provide Price, any members of his family, or former employees of the Price committee or of Price’s government offices with compensation, gifts, or material reimbursement, or “to influence any election.” Price, however, would serve as the organization’s president and chief executive officer, albeit without any compensation. The Price committee anticipates that he would “speak, write, publish, or otherwise make appearance to present the work” of the 501(c)(4).
Under election law, campaign funds can be contributed “to an organization described in section 170(c) of the Internal Revenue Code” as well as “for any other lawful purposes.” Under tax law, a 501(c)(4) would not be described in section 170(c) because that provision describes organizations that are eligible to receive tax-deductible charitable contributions, and a 501(c)(4), unlike a 501(c)(3), is not such an organization.
In responding to the Price committee request, however, FEC draft advisory opinion 19-33-A, issued on July 17, did not read the reference to section 170(c) as limiting transfers to organizations eligible to receive deductible charitable contributions. The draft opinion explains that if an organization engages in educational activity and constrains itself from lobbying and campaign intervention, it is described in section 170(c) for purposes of campaign finance law, even if it is not eligible to receive tax-deductible contributions.
At the July 25 FEC meeting, Chair Ellen L. Weintraub objected strongly: “If we were to approve this advisory opinion, it would extend the ‘personal use’ exemption to 501(c)(4) organizations in a way that the commission has not done before.” Republican members disagreed, and the FEC postponed its decision. . . .
At its meeting on August 22, however, the FEC “was unable to render an opinion by the required four affirmative votes and concluded its consideration of the request.” The Price committee will now have to decide whether to proceed without an FEC advisory opinion. The commission’s lack of sufficient commissioners for a quorum, however, prevents any possible enforcement action.
Whatever the Price committee decides, its choice of a 501(c)(4) rather than a 501(c)(3) raises several issues under applicable tax law and its interaction with election law. In short, transfers to a 501(c)(4) rather than a 501(c)(3) offer advantages regarding IRS transaction costs and oversight, but also involve some income tax risks to the former candidate. The Price committee request also reminds us of some of the inadequacies of our regulation of campaign financing, both through tax law and election law. . . .
Friday, September 27, 2019
Afik, Benninga & Katz on Grantmaking Foundations' Asset Management, Payout Rates and Longevity Under Changing Market Conditions
Zvika Afik (Ben-Gurion University), Simon Benninga, and Hagai Katz (Ben-Gurion University) have published Grantmaking Foundations' Asset Management, Payout Rates, and Longevity Under Changing Market Conditions: Results From a Monte Carlo Simulation Study in the Nonprofit and Voluntary Sector Quarterly. Here is the abstract:
Today’s uncertain financial markets could affect foundations’ future grantmaking capacities. We review foundations’ financial decision-making patterns and their effect on foundations’ assets, longevity goals, and payouts. Using three fictional foundations with different longevity goals and grantmaking preferences, we demonstrate the delicate balance and tight nexus between asset management strategies, payout rates, and longevity. To do so, we perform stochastic Monte Carlo simulations of multiple foundation life cycles, conducted under diverse capital market scenarios. The findings suggest that foundations should (a) readjust their return expectations to today’s less favorable markets; (b) reduce their reliance on past portfolios’ investment returns or unique “success stories” in making decisions; (c) appreciate the strong interdependence between portfolio-mix, payout rates, and longevity; (d) consider effects of their particular mission/problem area on these parameters; and (e) use tailored projection analyses that simulate various investment strategies, payouts rates, and longevity to meet their grantmaking goals.
Carolyn Cordery (Aston University Business School) (pictured) and Dalice Sim (University of Otago) have published Regulatory Reform: Distinguishing Between Mutual-Benefit and Public-Benefit Entities in the Journal of Public Budgeting, Accounting & Financial Management. Here is the abstract:
The purpose of this paper is to analyse nonprofit regulation through comparing and contrasting mutual-benefit and public-benefit entities. It ascertains how these entities differ in size, publicness, tax benefits and whether these differences might suggest regulatory costs should be differentiated.
This mixed-methods study utilises financial data, submissions and interviews.
There are stark differences in these two types of regulated nonprofit entities. Members should be the primary monitoring agency/ies for mutual-benefit entities, but financial reports should be understandable to these members. Nevertheless, the availability of tax concessions, combined with the benefits of limited liability, suggest mutual-benefit entities should be regulated and monitored by government in a way sympathetic to their size.
As with most research, a limitation is this study’s focus on a single jurisdiction.
The differences in these entities’ characteristics are important for designing regulation.
Better regulation is likely to require a standard set of financial reporting standards. Government has the right to demand disclosures due to benefits mutual-benefit entities enjoy.
In comparison to studies utilising only public-benefit data, this study uses unique data sets to compare public-benefit and mutual-benefit entities and presents nonprofit sector participant’s perceptions of these differences in context. This enables analysis of how better regulation could be achieved.
Robert DeYoung (Kansas School of Business), John Goddard (Bangor Business School), Donal G. McKillop (Queen's University Management School), and John O.S. Wilson (University of St. Andrews) have posted Who Consumes the Credit Union Tax Subsidy? on SSRN. Here is the abstract:
Credit unions are exempt from paying income taxes, and these tax savings are supposed to subsidize the provision of financial services to credit union members. In this paper, we investigate whether the entire credit union tax subsidy is being passed along to credit union members — in the form of increased quantities of financial services and/or better-than-market interest rates — or whether some of the credit union tax subsidy is being consumed by inefficient credit union operations. We estimate a structural model of profit inefficiency for US commercial banks between 2005 through 2017, and use the estimated parameters to evaluate the relative performance of US credit unions and commercial banks. When inputs and outputs are valued in terms of market prices, profit inefficiencies at credit unions exceed those at similar commercial banks by an economically significant order. About half of this inefficiency gap can be attributed to legally mandated credit union activities — such as producing loans and issuing deposits — while the remainder can be attributed to operational inefficiencies at credit unions relative to banks. When inputs and outputs are valued in terms of the prices that credit unions actually pay, our results suggest that over nine-tenths of the tax subsidy is simply passed through to credit union members in the form of higher deposit interest rates.
Young Joo Park and Shuyang Peng (both at the University of New Mexico School of Public Administration) have published Advancing Public Health Through Tax-Exempt Hospitals: Nonprofits' Revenue Streams and Provision of Public Goods in the Nonprofit and Voluntary Sector Quarterly. Here is the abstract:
Nonprofit organizations play an essential role in the provision of collective goods. Focusing on a unique subsector in the United States, this study examines the extent to which nonprofit hospitals’ provision of community benefits is related to their revenue streams. Building on existing theories, we postulate that as the proportion of a certain revenue source (i.e., government grants, private contributions, and program fees) increases, its corresponding benefits also increase. Using data from the Internal Revenue Service (IRS) 990 filed by tax-exempt hospitals nationwide, we performed panel data analysis with year and id fixed effects using robust standard errors. The findings show that the proportion of private donations is positively associated with community benefits, whereas that of program income is negatively related to community benefits. Overall, nonprofits’ decision to serve disadvantaged groups and larger communities is associated with their income sources. The study raises implications that are pertinent to nonprofit management, public administration, and health administration.