Friday, July 23, 2021
A couple more recent papers of note in the nonprofit sphere:
Andrew Hayashi & Justin Hopkins
In an era characterized by inequalities of income and influence, political polarization, and the segregation of social spaces, the income tax deduction for charitable contributions would appear to abet some of our worst social ills because it allows wealthy individuals to steer public funds to their preferred charities. But we argue that now is the time to expand and refocus—not abolish—the tax subsidy for charitable giving. Previous assessments of the charitable deduction have focused on how it helps charities but ignored an essential benefit of giving: its effect on the donor. We show that the charitable deduction increases volunteerism along with financial giving, and we report new evidence that volunteerism is associated with broader civic and political engagement, including engagement with people of different cultures, races, and ethnicities. Since people tend to undervalue the social and relational goods that flow from civic participation, the charitable deduction is a helpful corrective. We also report evidence that civic engagement is unequally distributed and propose a new refundable tax credit that turns low- and middleincome households from clients of charities to donors, which can both empower them and help remedy inequalities in civic and political participation.
The Tax Cuts and Jobs Act provided the most comprehensive update to the tax code in two decades. Born of it was the federal opportunity zone legislation that facilitates economic development in historically distressed areas by offering tax incentives. But does this “catalyst of economic growth” provide the needed relief and opportunity to the communities which it’s aimed to serve? This piece is an analysis of opportunity zones—the good, the bad, and the yet to be defined and their effect on actually curbing (or accelerating) gentrification. By considering the TCJA in general, this work evaluates stipulations regarding “Opportunity Zones,” and the concept of geographically-targeted tax policy. First, an analogization of supply-side tax policy and place-based incentivization programs; following the analysis of supply-side economics and its influence on a rising inequality; and a two-fold assessment of the factors most germane to this analysis: a historical overview of the ideological, legislative, and social factors most pivotal to the passage of TCJA, reforms are shown to have culminated not only in sky-high levels of wealth and income inequality in the U.S., but also an increasing distance and isolation between the wealthy ‘investor class’ targeted by ‘Opportunity Zone’ legislation, and the economically-distressed communities which such tax-based legislative incentives were designed to bring relief. Notably, this work will consider the impact of such legislation upon poor areas, both in terms of the apparent impact it has had upon local development and with respect to the phenomenon known as gentrification. After examining the shortfalls of the legislation, this paper offers recommendations on a robust, comprehensive response toward equitable growth for the communities intended to be served.
Tuesday, July 20, 2021
Here are a few recent articles or writings of interest to the nonprofit world.
Ellen Aprill, Americans for Prosperity and the Future of Schedule B, Letter to the Editor in Tax Notes
"Before the July 1 decision of the Supreme Court in Americans for Prosperity,1 the California Attorney General had for a number of years required all section 501(c)(3) organizations operating in the state to file with it a full copy of its federal Form 990, the annual information return for exempt organizations. The required filing included an unredacted Schedule B, listing the donations, with names and addresses, of substantial contributors. The Supreme Court held California’s requirement to be facially unconstitutional. The Court determined that the California requirement failed an exacting scrutiny standard of review under which, to avoid violating the First Amendment, any compelled disclosure to government must be “narrowly tailored” to an asserted and substantial government interest. The Court concluded that California’s asserted need for an unredacted Schedule B in order to investigate fraud did not meet this standard."
Jennifer Bird-Pollan, Taxing the Ivory Tower, Pepperdine Law Review
The Tax Cuts and Jobs Act of 2017 introduced the first ever excise tax imposed on the investment income of university endowments. While it is a relatively small tax, this new law is a first step towards the exploration of taxing non-profit entities on the vast sums of wealth they hold in their endowments. In this Essay I take the new tax as a starting place for investigating the justification for tax exemption for universities and thinking through the consequences of changing our approach, both in the form of the new excise tax and possible alternatives. There remain reasons to be skeptical both about the design of the current tax and its ability to withstand the political efforts of the powerful set of universities who will be subject to it. Nonetheless, this new tax opens the door to a discussion of whether it is time to treat universities’ endowments more like the private equity funds they increasingly resemble.
Beckett Cantley, Ground Zero: The IRS Attack on Syndicated Conservation Easements, William & Mary Law & Policy Review
On June 25, 2020, the Internal Revenue Service (“IRS”) announced a settlement initiative (“SI”) to certain taxpayers with pending docketed cases involving syndicated conservation easement (“SCE”) transactions. The SI is the current culmination of a long series of attacks by the IRS against SCE transactions. The IRS has recently found success in the Tax Court against SCEs, but the agency’s overall legal position may be over- stated. It is possible that the recent SI is merely an attempt to capitalize on leverage while the IRS has it. Regardless, the current state of the law surrounding SCEs is murky at best. Whether a taxpayer is contemplating the settlement offer, is currently involved in an unaudited SCE trans- action, or is considering involvement in an SCE transaction in the future, the road ahead is foggy and potentially treacherous.
This Article attempts to shed light on the obstacles that face SCE transactions. This Article: (1) provides an overview of SCE transactions and the main attacks against them; (2) analyzes each of the IRS’s main attacks and the relevant issues that arise; (3) illustrates the relevant pro-taxpayer and anti-taxpayer cases on each issue; (4) discusses the subsequent considerations that taxpayers need to take into account and the future outlook of SCE; and (5) concludes with a summary of the Article’s findings.
J. Haskell Murray, The History and Hope of Social Enterprise Forms, Tennessee Journal of Business Law
This Article sketches the history of social enterprise legal forms in the United States and provides suggestions regarding their continued evolution. Social enterprises—companies that blend profit and social purpose—have a long history in the United States, but not until 2008 did a state pass a social enterprise specific statute. In that year, Vermont passed a statute allowing for formation of L3Cs, low-profit limited liability companies. The L3C was aimed primarily at funding issues for social enterprises and attempted to unlock program related investments (PRIs) for that purpose. Following the L3C form were a number of variations on a corporation-based social enterprise: social purpose corporations, benefit corporations, and public benefit corporations. These forms evolved over the past decade to address the issues of corporate purpose and social accountability. Lastly, a small handful of states passed benefit limited liability company (BLLC) statutes for companies that desired a form similar to the benefit corporation but built on an LLC framework.
Monday, May 31, 2021
Philip Hackney (Pittsburgh) has posted Dark Money Darker? IRS Shutters Collection of Donor Data, which will be published in the Florida Tax Review. Here is the abstract:
The IRS ended a long-time practice of requiring most nonprofits to disclose substantial donor names and addresses on the nonprofit annual tax return. It is largely seen as a battle over campaign finance rather than tax enforcement. Two of the nonprofits involved, social welfare organizations and business leagues, are referred to as “dark money” organizations because they allow individuals to influence elections while maintaining donor anonymity. Many in the campaign finance community are concerned that this change means wealthy donors can avoid campaign finance laws and have no reason to fear being discovered. In this Article, I focus on whether the information is needed for the enforcement of the tax law and/or to support ancillary legal goals. I contend the IRS ought to collect this substantial donor information as it did for over 79 years. Though the collection of donor information may not be essential for groups such as social clubs, fraternities and sororities, and mutual ditch companies, the collection of this information non-publicly by the IRS is important in both enforcing tax-exempt requirements and in enforcing the tax law generally. Tax law prohibits the distribution of earnings from a nonprofit to those who control the organization. Substantial donors are classic suspects for seeking such improper receipts through their control. Thus, the information is key to IRS auditors. Considering the deficient budget of the IRS to ensure a properly enforced Code, the failure to collect that information puts the IRS in a disadvantaged position. While as a democratic matter, there may be some modest benefit from alleviating donors from the worry that the government will know about their political contributions, the harm to those who are not able to make use of these structures, the harm to those who are deprived of information regarding the biases associated with particular political activity, and the harm to the belief that the tax, campaign finance, and nonprofit law will be enforced equally upon all, is more significant. With these considerations in mind, the IRS and Treasury ought to rescind its most recent guidance on this matter. If not, Congress ought to require this information be disclosed by law.
Samuel D. Brunson
Saturday, May 15, 2021
Eric Franklin Amarante (Tennessee) has posted States as Laboratories for Charitable Compliance: An Empirical Study, which will be published in the George Washington Law Review. Here is the abstract:
Each year, the IRS awards 501(c)(3) status to thousands of unworthy organizations. As a result, these undeserving organizations do not have to pay federal taxes and donations to these entities are tax-deductible. This is because the IRS, facing increasingly severe budget cuts, adopted a woefully inadequate application process that fails to identify even the most obvious of unworthy applicants. The result of this regulatory failure may prove to be catastrophic. As unworthy charities proliferate, the public will lose faith in the entire charitable regime. As trust dissipates, donations are certain to follow, and the charitable sector will lose a vital revenue stream. It is not an exaggeration to say that the loss of donations represents an existential threat to the entire charitable sector.
With a change in budgetary priorities unlikely in the foreseeable future, it would be unwise to wait for the IRS to curb this threat. Rather, it would be prudent to identify another way to increase regulatory compliance in the charitable sector. This article proposes a cost-efficient mechanism for states to fill the regulatory void left by the IRS. To identify this mechanism, this study reviewed 500 formation documents in five different states, identifying the state procedures that resulted in the highest level of regulatory compliance. By replicating the procedures identified in this article, individual states will not only ensure higher levels of regulatory compliance, but also help restore the public’s trust in the charitable sector.
Ilona Babenko (Arizona State), Benjamin Bennett (Tulane), and Rik Sen (University of New South Wales) have posted Regulating CEO Pay: Evidence from the Nonprofit Revitalization Act. Here is the abstract:
Using compensation data for 14,765 nonprofit organizations during 2009-2017, we find that CEO pay dropped by 2-3% when new legislation adopted in New York reduced the ability of CEOs to influence their own pay. Despite cuts in pay, CEOs did not exert less effort. Further, nonprofit performance improved after the legislation, as reflected in larger donor contributions, more volunteers, and greater revenues. We show that these results are consistent with the predictions of a simple principal-agent model with compensation rigging. Overall, our results suggest that regulation that targets the pay-setting process can be effective at improving organizational outcomes at nonprofits.
Jessica Jay (Conservation Law, P.C.) has published Down the Rabbit Hole with the IRS' Challenge to Perpetual Conservation Easements, Part Two in the Environmental Law Reporter. Here is the abstract:
When the Internal Revenue Service began disallowing gifts of perpetual conservation easements for claimed failures of perpetuity requirements, it tumbled land trusts, landowners, and the U.S. Tax Court down the rabbit hole to a baffling land below. The Service’s drop into matters beyond valuation and into elements intended and necessary for easement durability and flexibility has caused a confusing array of Tax Court decisions.
Part One of this Article examined how the Service lures the land conservation community and the Tax Court into Wonderland distortions, and the precarious tower of cards upon which its legal theories rest. Part Two, here, identifies the fundamental elements of law and the process of law to topple the Service’s card construct, and awaken and return everyone to the world above ground.
Oderah C. Nwaeze (Faegre Drinker) has published Public Benefit Corporations: There's No Public Benefit to Breaching Fiduciary Duties in the Emory Corporate Governance and Accountability Review. Here is the abstract:
During the spring and summer of 2020, in the midst of the COVID-19 pandemic, the United States witnessed large, public protests and activism reminiscent of the 1950s and 60s. Following the death of George Floyd, a Black man, at the hands of Minneapolis police, the American public once again mobilized to fight the ills and inequities of racism and discrimination. A significant number of nonprofit organizations and government departments have been created to resolve the social and political issues that plague Americans. Even Corporate America has been called to act, given that seventy percent of consumers are interested in the social justice efforts taken by the corporations they patronize. By the third quarter of 2020, plenty of companies answered the call. For example, Bank of America and PNC Bank each have committed $1 billion to address economic and racial inequality. Google’s parent Alphabet pledged $12 million to further racial equality. Target Corp. has committed $10 million to civil rights organizations and 10,000 hours of consulting services to small businesses owned by people of color. Comcast Corp. also announced that it will allocate $75 million to organizations including the National Urban League, the Equal Justice Initiative, and the NAACP, along with $25 million in media over the next three years. Recognizing that corporate activism could be inconsistent with the duty of directors and officers to secure and retain value for the company, some commentators have suggested that corporations committed to activism should create or convert to a Public Benefit Corporation (“PBC”). While the core trait of a PBC is that it must pursue public benefit, that charge is not superior to directors’ and officers’ responsibility to generate and preserve value for the company’s stockholders. Thus, while PBCs provide legal cover for corporate activism, corporate management must weigh that interest against the obligation to satisfy traditional fiduciary duties of due care and loyalty, as well as the obligation to avoid waste. This balance is not difficult to strike; it simply requires that directors and officers carefully evaluate the anticipated conduct to ensure the action considered appears likely to provide corporate benefit, reasonable for the resources expended. As part of that due diligence process, directors and officers also must make certain any transaction that benefits a director or officer is entirely fair to the corporation. Furthermore, directors and officers must ensure that the resources committed to a social cause are reasonable given the company’s size and value, as well as the benefits of the philanthropy.
Papa, Not-For-Profit Hospitals and Managed Care Organizations: Why the 501c)(3) Tax-Exempt Status Should Be Revised
Andrew C. Papa (Young Conaway) has published Not-For-Profit Hospitals and Managed Care Organizations: Why the 501c)(3) Tax-Exempt Status Should Be Revised in the DePaul Journal of Health Care Law. Here is the abstract:
Healthcare organizations abuse the 501(c)(3) tax-exempt status—reaping tax benefits but failing to give back to their local communities in return. Congress created the 501(c)(3) tax-exempt status to benefit the poor and impoverished. Yet, not-for-profit hospitals and managed care organizations are neither required to offer services to the poor nor required to offer emergency care services to their local communities. Instead, they charge higher prices in their increasingly concentrated markets. Therefore, consumers subsidize the same not-for-profit healthcare systems that charge them higher prices.
This Article analyzes government-placed incentives under the 501(c)(3) tax-exempt status, demonstrating how not-for-profit hospitals unfairly compete with for-profit hospitals. Studies show that not-for-profit hospitals have larger profit spreads than their for-profit counterparts. This Article will also demonstrate how the government encourages not-for-profit healthcare entities to increase their market power and extract rents from consumers. Today, the out-patient care business model fractionalizes the healthcare industry. Subsequently, not-for-profit healthcare entities can now acquire assets or firms in a piecemeal fashion, resulting in highly concentrated markets.
The third-party payor system and the Affordable Care Act exacerbate the issue, destroying traditional market forces. The third-party payor system creates a disconnect between the true provider and true consumer of healthcare treatment. The Affordable Care Act imposed additional requirements on not-for-profit hospitals—intending to incentivize charitable giving. Instead, the Affordable Care Act’s additional requirements incentivize profit-maximizing behavior at the expense of charitable giving. Because the healthcare industry suffers from a misalignment of pecuniary incentives and public health needs, creating clout on who the actual winners and losers are, the tax-exempt status should be revisited.
Friday, May 14, 2021
Last week the Boston College Law School Forum on Philanthropy and the Public Good released a report by James Andreoni (U.C. San Diego) and Ray Madoff (Boston College ) titled Impact of the Rise of Commercial Donor-Advised Funds on the Charitable Landscape 1991-2019. Here is the conclusion:
This report has examined existing data about changes in the charitable landscape since the creation of the first commercial donor-advised fund. The following are the key findings of this analysis:
- There is no evidence that the proliferation of donor advised funds has resulted in an increase in individual charitable giving as individual giving has remained largely constant as a percentage of disposable income, and is currently at the low-end of the range.
- While individual giving has remained largely constant, there has been a substantial shift in this giving toward donations to private foundations and donor-advised funds and away from direct giving to charities. Combined giving to donor-advised funds and private foundations has increased from 5% in 1991 to 28% in 2019, an increase of 460%.
- The value of assets in donor advised funds and private foundations have increased
significantly over the past thirty years.
- Though more funds are flowing into, and growing in, private foundations and donor advised funds, there is no evidence that charities have benefitted from this trend.
- In the five-year period prior to 1991, charities received on average 94.1% of all
individual giving. By contrast in the years 2014-2018 (the most recent years for which data is available), total donations received by charities (including grants from private foundations and donor-advised funds as well as direct giving) equaled between 71-75% of total individual giving.
- If charities had received donations at the rate of 94.1% of individual giving (the average rate that they received in the 5-year period before commercial donor-advised funds), they would have received an additional $300 billion over those 5 years.
Coverage: Chronicle of Philanthropy.
The Minnesota Council of Nonprofits also recently posted a paper presented at a conference a year ago titled Private Foundation Grants to DAFs: Attorney General Charitable Trust Oversight Calls for Disclosure of Use of Funds. Here is the abstract:
$3 billion was transferred from over 2,200 U.S. private foundations to five donor advised fund (DAF) sponsors between 2010 and 2018. Within this universe, a growing number of private foundations have made a single grant during a reporting year to a commercial DAF. Looking just at transfers to the top five commercial DAF sponsors, 35 foundations transferred the entirety of their annual grantmaking to DAFs between 2010 and 2018.
These transactions offered no tax benefit, but in effect excused private foundations from two legal requirements for U.S.-based private foundations derived from the Tax Reform Act of 1969: reporting grant recipients1 and the 5 percent annual payout requirement.2 Such grantmaking, while facially charitable and in-line with the requirements put forth in the 1969 legislation, not only risks breaches of restrictions established by the foundations’ founding documents but also obscures all aspects of the recipients of private foundation funding by providing no context for when or where the charitable dollars will be used.
Private foundation-to-DAF transfers frustrate state attorneys general’s ability to fulfill their supervisory duties to monitor and ensure that charitable dollars held by charitable trusts are used for their intended purpose.
This paper examines the governing authority and practices of state attorneys general offices as relating to a special problem of charitable trust enforcement: private foundation grantmaking to commercial DAFs. The authors examine the regulatory challenges based on interviews with both current and former attorneys from nine attorney general offices, as well as interviews with commercial DAF sponsors. Charities regulators’ ability to fulfill their supervisory duties related to private foundation-to-DAF grantmaking is blocked by the lack of transparency on the use of funds transferred to DAFs. Thus, charities regulators cannot ensure that private foundations’ grantmaking fulfills restrictions on their charitable giving, and the public is unable to see charitable activity ordinarily subject to public inspection.
In order to equip charity regulators to effectively enforce state charitable trust requirements, the paper concludes with two recommendations:
1. Charitable trusts should be required to report to state attorneys general all grants made or approved for future payment from DAF accounts to which they have transferred funds, subject to public inspection, and
2. Attorney General’s offices should respond to the growth of charitable funds held in trust by devoting increased resources to monitoring charitable trusts and donor advised funds.
Saturday, April 3, 2021
Benjamin Soskis (Urban Institute) has posted Norms and Narratives That Shape US Charitable and Philanthropic Giving. Here is the first paragraph of the abstract:
The past few decades have brought about a profound shift in the norms and narratives surrounding smaller-scale charitable giving and larger-scale philanthropic giving. In this report, I analyze some of the most significant of those norms and narratives—that is, the rules governing accepted or valued charitable and philanthropic behavior and the replicable, archetypal stories that have developed to make sense of that behavior. I also examine how those norms and narratives have been shaped by and have shaped responses in the United States to the COVID-19 pandemic and to the mass protests after the killing of George Floyd. This analysis focuses on two clusters of giving norms and narratives: one surrounding the relationship between large-scale and small-scale giving, and one surrounding time-based considerations in giving.
Americans lead the world in supporting charitable activities (both in the U.S. and abroad). For foreign charitable activities, two key questions arise:
1. Should tax benefits support charitable activities outside the U.S.?
2. Should the U.S. tax system treat contributions to foreign charities differently from contributions to domestic charities?
U.S. tax law imposes remarkably low barriers to cross-border philanthropy. Contributions to U.S. charities are deductible even if all charitable activity takes place outside the U.S. Nominally, direct contributions to foreign charities are generally not deductible for income tax purposes. Practically, donors can easily work around this restriction (at relatively low costs and complexity) by transmuting non-deductible contributions to foreign charities into deductible contributions to domestic charities.
The hard question is normative: what should the law be? This chapter provides a framework for examining the desirability of the current regime and the different factors policy-makers may find useful in considering options to either reduce or increase barriers to cross-border philanthropy.
Friday, April 2, 2021
A number of commentators have recently posted articles addressing conservation easement deductions. Several of these articles were originally published in 2020 in a Tax Notes publication, but for readers who may not have access to Tax Notes publications they are now available on SSRN and so I am including them in this list:
- Jessica Jay, Down the Rabbit Hole with the IRS' Challenge to Perpetual Conservation Easements, Part Two, in the Environmental Law Reporter.
- Nancy Ortmeyer Kuhn, The Eleventh Circuit Court of Appeals: The Current Focus for Conservation Easements, in Bloomberg Tax.
- Douglas L. Longhofer and Katherine Jordan, Eroding Conservation, Preserving Abuse — A Flawed IRS Strategy, originally published in Tax Notes Federal.
- Nancy A. McLaughlin, Amendment Clauses in Easements: Ensuring Protection in Perpetuity, originally published in Tax Notes.
- Nancy A. McLaughlin and Ann Taylor Schwing, Conservation Easements and Development Rights: Law and Policy, originally published in Tax Notes.
In addition, the only exempt organizations issue that appears to have been raised by the National Taxpayer Advocate in her latest report to Congress focused on conservation easements. The report identified syndicated conservation easements as being at the center of the "most significant cases" involving a charitable contribution deduction issue, which was in turn identified as the ninth most litigated issue. The report notes that perpetuity, as opposed to valuation, has become the focus of recent conservation easement cases. See pages 216-219 of the report for more details.
Finally, Tax Notes reports that the DOJ has reached a settlement with a consultant who was one of the targets of the DOJ's investigation of syndicated conservation easements. Without admitting any wrongdoing, the consultant agreed to be permanently enjoined from promoting or arranging a qualified conservation easement contribution in the future (and to pay an amount that was not specific in the court filing).
UPDATE: Tax Notes reports that taxpayers involved in syndicated conservation easement deals have now filed a class action lawsuit against promoters of those deals.
- Craig Kennedy and William Schambra published Conservatives Should Applaud — Not Fight — Efforts to Change Philanthropic Giving Rules in The Chronicle of Philanthropy, criticizing opposition to the Initiative to Accelerate Charitable Giving's proposed reforms.
- Dan Petegorsky published DAF Numbers Obscure Who’s Giving and How Much in InsidePhilanthropy, also criticizing opposition to the proposed reforms.
- Edward Zelinsky (Cardozo) published A Response to the Initiative to Accelerate Charitable Giving in Tax Notes, "agreeing with much (but not all) of its perspective and arguing that the rules applied to private foundations should also govern donor-advised funds."
At the same time, data about DAF contributions and donations continues to emerge (some from sources with a stake in the reform debate), including:
- AEI and The Philanthropy Roundtable released a new paper titled Appreciation in Donor-Advised Funds: An Analysis of Major Sponsors, describing how DAFs "have become the fastest-growing vehicle for charitable giving in recent years."
- The Community Foundation Public Awareness Initiative reported that For Every Dollar Contributed to Community Foundation DAFs in 2019, Donors Granted $1.08 in 2020, with the $6.7 billion donated by community foundation DAFs to nonprofits in 2020 representing an increase of 41 percent over 2019 donations.
- The National Philanthropic Trust published its 14th annual Donor-Advised Fund Report, reporting continued rapid growth of contributions to DAFs and donations from DAFs to charities through 2019.
- The Nonprofit Quarterly published COVID-19 and Donor-Advised Funds in 2020: What Do the Numbers Tell Us?, reporting data regarding disbursements by DAFs in 2019 and 2020.
- The Nonprofit Times reported that the largest DAF sponsor organizations reported significant increases in distributions from DAFs to charities in 2020, including a 24% increase at Fidelity Charitable, a 171% increase at the National Philanthropic Trust, and a 35% increase at Schwab Charitable.
Despite this debate and new information, it is unclear at this point whether there is any interest in Congress for changing the rules for DAFs. And the IRS is still considering comments it received in response to Notice 2017-73 relating to various issues involving DAFs.
Thursday, March 25, 2021
A Tax Policy Center study released on March 17, 2021 calls for a more universal charitable deduction that would incentivize incentive a much larger share of the population. Due to the effects of the Tax Cuts and Jobs Act of 2017 (TCJA) a huge drop in households that claim an itemized deduction for charitable contributions--from 26% to 9%--occurred in 2019. As a consequence, "the TCJA reduced the estimated average federal income tax subsidy for all dollars of giving by 30 percent, from about 20 cents a dollar to 14 cents a dollar. Put another way, the government took away about 6cents of subsidy on average across all charitable contributions." Although Congress devoted about $1.5 billion in the CARES Act to institute a one-year charitable deduction of $300, thus targeting the 90%v of taxpayers who claim the standard deduction, most donors already contribute more than that amount, according to the study, thus no extra incentive is given to make additional gifts beyond that amount.
The study makes a number of relevant points:
- [The] debate often is stated in terms of government costs and taxpayer benefits. However, there is third party to these transactions: charitable recipients. When a tax reform increases charitable contributions by the same amount as the government revenue loss, charitable beneficiaries are the net winners.
- A more universal charitable deduction can be designed that limits gains for higher-income taxpayers while still encouraging giving at other income levels. . . . [U]niversal deductions without floors provide substantial benefits to the highest-income taxpayers who already itemize, even when they give no more (and sometimes even when they give less) in response.
- We estimate that a universal deduction with a floor of 1.9 percent of AGI would be approximately revenue neutral relative to 2019 law and would raise charitable giving by about $2.5 billion a year. If revenue neutrality had been sought under the pre-TCJA law, a revenue-neutral floor would have been a smaller percentage of AGI than it would be today.
The study also proposes additional options in creating a universal deduction:
- [T]axpayers could be given the option of making charitable contributions up to the date of filing their income tax returns, or April 15, whichever comes first. Congress has offered this option to those making deposits to individual retirement accounts, and the House of Representatives passed this type of provision in the America Gives More Act of 2014. This timing option makes almost no difference in terms of incentive, but there is strong evidence that the provision would prove an effective marketing tool.
- Second, to avoid the threat of widespread tax cheating, Congress should consider adopting a provision for electronic reporting of charitable contributions to the IRS. Tax gap studies through the years have consistently demonstrated that third-party reporting significantly raises voluntary compliance. For instance, a significant increase in compliance for
interest and dividends occurred once they became subject to an information reporting system.
Ultimately, the study illustrates how money spent on a universal charitable deduction can significantly increase the goods and services provided to charitable beneficiaries in relation to forgone revenue if proper attention is focused on the efficiency and fairness of each dollar of subsidy.
Nicholas Mirkay, Professor of Law, University of Hawaii
Sunday, March 7, 2021
Louis Eguzo (Ph.D. candidate at the University of Maryland) has posted Governance and Accountability: A Systematic Review to Examine Its Impact on Social Mission in Nonprofit Organizations. Here is the abstract:
This qualitative review examines the impact of governance and accountability on social missions in nonprofit organizations (NPOs). The purpose of this research is to conduct a systematic review of the literature to identify the impact of governance and accountability on social missions. The research explored 25 extant works of literature leveraging stakeholder theory to identify the impact of governance and accountability. The author suggests that this research may contribute to the body of knowledge related to governance, accountability, and conflict of interest in NPOs. The implication of this review will inform recommendations for NPOs on how to measure outcomes, be accountable, and practice governance that is devoid of crisis. The articles are relatively recent and appeared between 2000-2020.
Nancy McLaughlin (University of Utah) has posted Conservation Easements and the Proceeds Regulation (forthcoming Real Property Trusts & Estate Law Journal). Here is the abstract:
This article provides an in-depth look at Treasury Regulation § 1.170A-14(g)(6)(ii), known as the proceeds regulation. The proceeds regulation is intended to protect the public investment in conservation if a perpetual conservation easement that was the subject of a charitable deduction under Internal Revenue Code § 170(h) is later extinguished. A proper understanding of the proceeds regulation is critical because the public investment in deductible easements is significant—billions of dollars are being invested in such easements annually—and the regulation has recently been subject to challenges regarding its interpretation and validity. This article examines the history and operation of the proceeds regulation as well as possible alternatives. It explains that the proceeds regulation provides a simple and easy-to-implement rule that avoids a host of future valuation difficulties. It demonstrates that the proceeds regulation is neither irrational nor inherently unfair to donors or subsequent property owners, and serves to temper the perverse incentive that property owners may have to seek to extinguish easements. This article concludes that the proceeds regulation provides a reasonable solution to the difficult problem of ensuring that the conservation purpose of a contribution will be protected in perpetuity as required by § 170(h)(5)(A).
Mary Scott Polk (J.D. candidate at the University of Mississippi) has posted What to Do With Leftovers: Collecting Earmarked Donations Through Mobile Payment Apps. Here is the abstract:
With the rise in mobile payment applications, charitable donations using these platforms are increasing; equally, the use of a conduit between a donor and a charity to solicit and collect donations for the charity's benefit is growing. If a charity is overfunded or the charitable purpose is no longer available, the conduit is caught holding a pool of designated donations without the ability to contact the donors for permission for a similar or alternate use. Using the Internal Revenue Code requirements, the authority and regulations are not apparent for a charitable contribution through a conduit, particularly not for a conduit’s use of a mobile payment application. Part I of this Comment provides an overview of the conduit situation and the complications that arise. Part II introduces the requirements of a charitable contribution and the services that mobile payment applications offer. Part III analyzes three donation methods: a contribution directly to a 501(c)(3) organization, a contribution to an individual, and a contribution to a 501(c)(3) organization through an individual. Part IV examines the potential solutions to the issue of overfunded charities and the motivations behind each. Finally, Part V offers a brief overview of the prevalence of the issue and the future of mobile payment applications. The interaction of the detailed requirements of the Internal Revenue Code for a charitable contribution and mobile payment applications’ privacy policies, without clear authority or direction on the specific conduit situation, has the potential to be problematic and challenging for the contributor, conduit, charitable organizations, and mobile payment applications.
Int'l Developments: Ten Cases That Shaped Charity Law in 2020, European Legal Philanthropy Environment, Global Philanthropy, and Tax Incentives for Cross-Border Giving
- Ten Cases that Shaped Charity and Nonprofit Law in 2020 And Ten Trends to Consider by Myles McGregor-Lowndes and Frances Hannah (both Queensland University of Technology): Based on a review of over 200 cases.
- Legal Environment for Philanthropy in Europe (2020) by Philanthropy Advocacy, a joint project of the Donors and Foundations Network in Europe (DAFNE) and the European Foundation Centre (EFC).
- Global Philanthropy: Does Institutional Context Matter for Charitable Giving? (Nonprofit and Voluntary Sector Quarterly) by Pamela Wiepking (Lilly Family School of Philanthropy), Femida Handy (University of Pennsylvania), Sohyun Park (Yonsei University), and others. Here is the abstract:
In this article, we examine whether and how the institutional context matters when understanding individuals’ giving to philanthropic organizations. We posit that both the individuals’ propensity to give and the amounts given are higher in countries with a stronger institutional context for philanthropy. We examine key factors of formal and informal institutional contexts for philanthropy at both the organizational and societal levels, including regulatory and legislative frameworks, professional standards, and social practices. Our results show that while aggregate levels of giving are higher in countries with stronger institutionalization, multilevel analyses of 118,788 individuals in 19 countries show limited support for the hypothesized relationships between institutional context and philanthropy. The findings suggest the need for better comparative data to understand the complex and dynamic influences of institutional contexts on charitable giving. This, in turn, would support the development of evidence-based practices and policies in the field of global philanthropy.
- Tax Incentives for Cross-Border Giving in an Era of Philanthropic Globalization: A Comparative Perspective (Canadian Journal of Comparative and Contemporary Law) by Natalie Silver (University of Sydney) and Renate Buijze (Erasmus University Rotterdam). Here is the abstract:
The 21st century has ushered in an era of philanthropic globalization marked by a significant rise in international charitable giving. At the same time, cross-border philanthropy has raised legitimate fiscal and regulatory concerns for government. To understand how donor countries have responded to this changed global philanthropic landscape, we use comparative tax methodology to develop a spectrum of approaches to the tax treatment of cross-border giving and apply tax policy criteria to critically evaluate the divergent approaches of Australia and the Netherlands, located at opposing ends of the spectrum. Findings from the comparative analysis reveal that in the current global environment for philanthropy there is a strong case to be made for allowing tax deductible donations to cross borders.
Tuesday, January 12, 2021
An article written by Joshua Rosenberg of Law360 last month provides interesting insight for persons not intimately familiar with the oftentimes intricate subject area of tax-exempt organization regulation. Where once the IRS led the way in prosecuting potential tax infractions by nonprofit organizations, it now seems that state governments have stepped to the fore in that arena. As illustration, Rosenberg points to events such as the recent victory by New York’s attorney general in bringing a case against the National Rifle Association which made headlines nationwide last year. Developments such as this, says the article author, “have set the tone at the state level for policing charities, even though they’re unable to directly adjudicate the tax-exempt status of those organizations.”
Balanced against this upswing in the vigilance of state governments is a certain amount of apathy by the Internal Revenue Service in policing nonprofit organizations. This is likely due in no small part to dramatic funding cuts in 2013 when the Agency faced criticism (and indeed was ultimately found liable in the matter) for subjecting to strict scrutiny a number of conservative groups applying for charitable organization status
For Rosenberg’s succinct and informative discussion of the topic including what this means for nonprofit tax infraction enforcement moving forward, see: https://www-law360-com.ezproxy.law.uky.edu/articles/1336984/states-not-irs-lead-in-policing-tax-exempt-organizations
David Brennen, University of Kentucky College of Law
Saturday, January 9, 2021
Michael Kopel (University of Graz) and Marco A. Marini (Ph.D. student, University of Rome La Sapienza) have posted Mandatory Disclosure of Managerial Contracts in Nonprofit Organizations on SSRN. Here is the abstract:
Nonprofit organizations have been recently mandated to disclose the details of their executives’ compensation packages. Contract information is now accessible not only to current and prospective donors, but also to rival nonprofit organizations competing for donations in the fundraising market. Our aim is to investigate the impact of publicly available contract information on fundraising competition of nonprofit organizations. We argue that, although such provision makes contract information available to multiple stakeholders and increases the transparency of the nonprofit sector, it also induces nonprofits to use managerial incentive contracts strategically. In particular, we find that the observability of incentive contracts relaxes existing fun draising competition. This is beneficial in terms of nonprofits’ outputs, in particular when these organizations are trapped in a situation of excessive fundraising activities. However, we show that publicly available contract information distorts nonprofits’ choice of projects, thus potentially inducing socially inefficient project clustering.