Lloyd H Mayer
Lloyd Hitoshi Mayer's areas of research interest and expertise include advocacy by nonprofit organizations, the growing intersection of election law and tax law with respect to lobbying and other political activity, and the role of nonprofits both domestically and internationally. He joined the faculty at the University of Notre Dame as an associate professor of law in 2005. He was promoted to professor of law in 2011. He also served as the Associate Dean for Academic Affairs from 2011 to 2015. He earned his A.B., with distinction and honors, from Stanford University in 1989 and his J.D. from Yale Law School in 1994.
Phone: 574-631-8057
Address: Notre Dame Law School
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Notre Dame, IN 46556-4639
Phone: 574-631-8057
Address: Notre Dame Law School
1100 Eck Hall of Law
Notre Dame, IN 46556-4639
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That lack of attribution is important because different types of nonprofit corporations receive different tax benefits and face different restrictions on their political activity under federal tax law. For example, a charitable nonprofit corporation that is tax-exempt under Internal Revenue Code section 501(c)(3) and eligible to receive tax deductible charitable contributions is limited with respect to lobbying and is prohibited from supporting or opposing candidates for elected public office. In contrast, a social welfare nonprofit corporation that is tax-exempt under Internal Revenue Code section 501(c)(4) but not eligible to receive tax deductible charitable contributions can engage in unlimited lobbying related to its social welfare purpose and can also support or oppose candidates as long as doing so is not its primary activity. And a political organization that is tax-exempt under Internal Revenue Code section 527, although only with respect to contributions received for political purposes, can engage entirely in supporting or opposing candidates. Yet a section 501(c)(3) organization, a section 501(c)(4) organization, and a section 527 organization can have overlapping boards, collaborate about their respective activities, and share resources, as long as they reasonably allocate their expenses and avoid spending directly on political activity that is limited or prohibited given their specific exemption category. There are therefore many groups of nonprofit organizations that consist of affiliated organizations with different federal tax categorizations but a common political purpose.
This lack of attribution is in tension with an aspect of federal election law and the election laws of many states. Under these election laws, if an individual or entity coordinates its activities with a candidate committee or political party, that activity is considered a contribution to the benefitted candidate or party. This result means that any spending on that activity is subject to existing source and amount limits on such contributions. In effect, the activity is attributed to the candidate or party because of the coordination even though the candidate or party does not legally control that activity. This is a common sense approach because if it did not exist it would be easy for individuals and other entities to evade contribution limits by engaging in activities not only designed to benefit a candidate or party but done at the specific request of that candidate or party. This reasoning also provides the basis for Supreme Court decisions concluding that this approach is constitutional under the First Amendment.
This essay explores the tension created by federal tax law’s respect for separate entity status on one hand and the coordination rules of federal and state election law on the other hand. It also revisits whether, given this tension, the Supreme Court was correct to constitutionalize the former approach when it comes to tax-exempt nonprofits. I conclude that whether this difference is appropriate as a policy matter depends on the policy justification for the political activity limits on section 501(c)(3) charities. If the only such justification is to support the broader federal tax policy prohibiting the deduction of expenditures for political activities, then the lack of attribution is appropriate. If instead the justification is that political activity is inconsistent with status as a section 501(c)(3) charity for broader reasons, then there is a policy argument for attributing the political activity of noncharitable nonprofit corporations to closely affiliated charitable nonprofit corporations and so subjecting that activity to the section 501(c)(3) limits. I also conclude that this latter justification could provide a basis for revisiting the Supreme Court precedents that bar this attribution as a constitutional matter.
At the same time churches enjoy special tax benefits not afforded to other section 501(c)(3) organizations, not even other kinds of tax-exempt religious organizations. These special benefits make church status appealing. Such benefits include exemption from filing with the IRS Form 990, an annual information return that, with the exception of the names and addresses of major donors, is also publicly available. In addition, the IRS cannot begin any audit of a church unless it complies with several procedures.
These advantages limit oversight of churches by the IRS, the media, and the public. They create an incentive for religious organizations that share some traits commonly found in churches to seek status as a church. Two recent IRS grants of church or association of churches status have attracted sharp criticism from the media and members of Congress. At the same time, a number of developments, such as loss of membership, expansion of virtual worship, and recent Supreme Court Free Exercise jurisprudence, have created new challenges for churches and their tax treatment.
In response to all these developments, this article recommends changes to the longstanding IRS approaches for defining “church” and certain church-affiliated entities. These changes would substitute a definition for church developed by courts and limit the definition for conventions or associations of churches to those of a single denomination. The definitional changes will clarify the distinction between non-church religious organizations and churches. Updating the understanding of “church” to reflect the twenty-first century realities of virtual participation and the increasing diversity of faith communities will also improve IRS oversight.
This article also recommends that the GAO undertake a renewed study of campaign intervention by section 501(c)(3) organizations generally. This study will clarify whether all section 501(c)(3) organizations, including churches, are in fact violating this prohibition in ways that go beyond sporadic, minor, and usually inadvertent footfalls.
In the authors’ view the recommended changes would benefit churches and the public because they take into account both current realities and current concerns. In so doing, they would not only give churches welcome guidance but also increase public trust that churches are not abusing the special privileges they enjoy under federal tax law.
This question is particularly vexing today with respect to new assets facilitated by blockchain technology. These new assets include cryptocurrencies, non-fungible tokens (NFTs), and ownership interests in decentralized autonomous organizations (DAOs). Commentators have written about how certain laws, particularly securities law, apply to these new assets. However, there is one legal area that commentators have yet to fully address: charity law, especially the federal tax laws relating to charities. Charities and donors are increasingly involved in transactions involving these new assets, with little guidance about how this law applies to those transactions.
This Article considers how existing charity law applies to these new assets and, to the extent that application is either uncertain or inconsistent with the policy goals underlying charity law, how charity law should be modified to accommodate these new assets. It concludes that existing law provides sufficiently certain answers regarding its application to these new assets and that application is consistent with the goals underlying that law. But two areas may require further guidance or modification of existing law in the foreseeable future: first, should certain cryptocurrencies be treated as readily valued for charitable contribution tax deduction purposes if sufficiently reliable cryptocurrency exchanges emerge; and second, if charities increasingly use blockchain technology, and particularly DAO governance structures, to further their exempt purposes, when is that use consistent with exemption under federal tax law.
This Article explores the existing and proposed limitations on speech by tax-exempt nonprofits given the constitutional restrictions on such limitations and the policy justifications for existing nonprofit tax benefits. It explains why the current limits on political campaign intervention and lobbying by charities are both justified given the subsidy provided to charities and their supporters under existing federal tax law and existing and longstanding constitutional case law. It further concludes that any expansion of these limits on charities to cover other types of speech, including hate speech and fake news, would be inconsistent with the existing broad definitions of the purposes that charities can pursue as well as, in some circumstances, constitutionally suspect. The Article also concludes that limits on speech by non-charitable tax-exempt nonprofits, including the existing limit on political campaign intervention for some of these nonprofits, are both unwise as a policy matter and, in some circumstances, constitutionally suspect given the lack of a subsidy for such speech by these nonprofits.
The IRS takes the position that these limitations apply with equal force to all tax-exempt charities, including religious organizations. Some \= religious organizations have challenged the application of the lobbying, political campaign intervention, illegality, and fundamental public policy limitations on religious liberty grounds, invoking the Free Exercise of Religion Clause of the First Amendment and, more recently, the federal Religious Freedom Restoration Act (RFRA). To date, however, federal courts have rejected these challenges, concluding that they are permissible conditions on the tax benefits enjoyed by religious organizations.
This essay reconsiders this conclusion and the arguments in support of it. One such argument is that tax law is somehow different from other legal contexts for purposes of applying the unconstitutional conditions doctrine to religious organization. The consistent refusal of the courts to allow free-exercise-of-religion-based exemptions from generally applicable federal tax laws suggests this may be the case. This difference could be viewed as a strand of the increasingly disfavored view sometimes referred to as “tax exceptionalism.” But I argue that this difference instead fits within the more traditional compelling governmental interest and least restrictive means analysis codified in RFRA and that arguably applied in the Free Exercise of Religion Clause context before the Supreme Court’s decision in Employment Division v. Smith.
More specifically, tax law is different because of its complex rules applicable to all individuals and entities relating to expenditures for lobbying, political campaign intervention, and illegal activity. The complexity of these rules, and the risk that granting exemptions from them for any reason would undermine their uniform and consistent application, support the conclusion that the government has a compelling interest in not allowing exemptions, and that the existing limitations imposed on
tax-exempt charities, including religious organizations, are the least restrictive means to do so. As a result, constitutional and RFRA free exercise of religion rights do not require exemptions for religious organizations from these existing limitations even when such organizations are motivated by their religious beliefs to engage in the limited activities. Furthermore, while this argument does not apply to the contrary to fundamental public policy limitation, the Supreme Court has correctly concluded that in the instances where there is a fundamental public policy, ensuring that tax-supported charities do not undermine that policy is also a compelling governmental interest and prohibiting them from doing so is the least restrictive means of furthering that interest.
Existing laws relating to charitable solicitations and charities more generally have either uncertain or limited application to charitable crowdfunding. Broader fraud and money laundering laws may apply to the worst abuses, but these usually criminal statutes are rarely invoked. The challenge faced by government regulators is therefore whether and how to modify existing laws to address the downsides of this new activity without unduly inhibiting the generosity that charitable crowdfunding encourages. This challenge is made more difficult by the lack of information regarding the positive effects as well as the downsides of crowdfunding. Finally, existing scholarship relating to charitable crowdfunding focuses on either the motivations of donors or tax implications instead of addressing this regulatory problem, even as some governments are beginning to develop proposals to address this activity.
This Article fills this gap by reviewing the existing, incomplete information regarding charitable crowdfunding and theories for regulating in the face of uncertainty to develop recommendations for addressing this new and growing phenomenon. Given we know very little about the positive and negative effects of charitable crowdfunding, and given that any harms are likely modest, purely financial, and often readily cured, I recommend that governments should at this time only take two steps. First, governments should require notification of designated beneficiaries to help ensure funds raised reach those beneficiaries. Second, governments should require notification of regulators, but only for the small subset of campaigns that cross a relatively high threshold, to both provide information about the scale and growth of charitable crowdfunding and deter problems with the largest campaigns. Additionally, I disagree with initial steps taken by some governments to impose more comprehensive consent and administration requirements on many or all charitable crowdfunding campaigns because such requirements are unnecessary hindrances on this new and innovative way of encouraging generosity, given there is little evidence of widespread problems and given that any potential harm is almost certainly relatively small and easily remedied if it occurs.
Two common threads emerge from this consideration. First, we do not know much about the extent to which each set of legal rules inhibits charity entrepreneurship because of a paucity of relevant data. More research is therefore needed to determine how significant these legal barriers are in practice to determine how important it is to change them. Second, while academics and practitioners often call for more legal certainty and bright line rules, individuals and organizations challenging prevailing concepts of charity and how charities should function may be better able to mount such challenges in an environment of legal uncertainty. As highlighted by other contributors to this volume, legal uncertainty can provide greater freedom for entrepreneurs engaged in new types of activities.
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.
Many scholars, journalists, and others have documented the increasing involvement of nonprofits in politics, including numerous apparent violations of the remaining rules governing such activity. Commentators have proposed a variety of piecemeal solutions, ranging from overhauling the existing rules to repealing those rules in part or completely, sometimes with a focus on tax laws, sometimes with a focus on election laws, and sometimes with a focus on state nonprofit laws. What is needed, however, is a comprehensive approach to this issue that considers the various ways nonprofits can be involved in politics, the positive as well as negative effects of such involvement, and the interaction between these different bodies of law at both the federal and state level that relate to such involvement.
This article takes such a comprehensive approach. Drawing on the now extensive information regarding nonprofit political involvement, and where such involvement appears to have repeatedly violated the existing legal rules, this article will first provide a roadmap of such involvement and the points where political pressures are overwhelming the existing legal rules and the agencies charged with enforcing them. Next, this article will describe the various solutions proposed by commentators, highlighting the incomplete nature of those solutions but also the insights they provide regarding the strengths and weaknesses of the various legal approaches for addressing such involvement. These insights include ones relating to the historical reasons for why the legal rules have developed in the manner they have, as well as ones relating to the relative institutional competencies of the agencies charged with interpreting and enforcing those rules.
Finally, this article will propose an overall approach to modifying the existing legal rules that relieves the identified pressure points without compromising the important public policies underlying the current legal rules, including ensuring the continuing ability of nonprofits to contribute to political debates in the United States. This approach involves revising the federal tax rules for tax-exempt nonprofits to clarify what constitutes prohibited political activity for charities, to loosen the unnecessary (from a tax policy perspective) restrictions on political activity by non-charitable, tax-exempt nonprofits, and, most controversially, to permit churches and other houses of worship to engage in political activity in the context of internal, in-person communications to members. It also involves shifting public disclosure rules relating to political activity from federal tax law to federal and state election law, refocusing such public disclosure on a broader range of such activity, and increasing the donation amounts that trigger such disclosure with respect to donor identities.
This comprehensive approach recognizes the importance of maintaining the current tax policy of not subsidizing efforts to support or oppose candidates for elected office while at the same time not unduly burdening the free speech, free association, and free exercise of religion rights of individuals who collectively engage in political activity through nonprofits. It also recognizes the institutional limitations of the Internal Revenue Service when it comes to enforcing tax rules relating to political activity, particularly given the breakneck pace of electoral politics, by placing greater emphasis on the federal and state laws, and their related agencies, that specifically regulate elections. By doing so, this approach recognizes and anticipates the dynamic nature of political involvement by nonprofits and so seeks not to prohibit but instead to channel that involvement in a manner that furthers overall democratic participation goals.
More specifically, after briefly reviewing the very limited legislative history of this provision I survey these other types of organizations and, as best as can be determined, why they have claimed this status and how they have managed to do so successfully. I will then critique these myriad uses of section 501(c)(4). Based on this review, I conclude that not only is the “catchall” nature of section 501(c)(4) not inconsistent with its language and limited legislative history, but that nature is generally defensible as the appropriate tax classification for these various entities. The only exceptions are the relatively rare instances where Congress intended to create a different, exclusive exemption category for a particular type of organization with specific restrictions. In those situations, allowing that type of organization to instead qualify for exemption under section 501(c)(4) permits it to avoid the restrictions Congress intended to place on that type as a condition for exemption. This appears to be the case with respect to two types of entities: charitable organizations that federal tax law would classify as private foundations if they were exempt under Internal Revenue Code section 501(c)(3); and electric and water cooperatives that Congress intended to receive exemption exclusively under section 501(c)(12).
There is, however, a growing web of international investment treaties designed to protect cross-border flows of funds, leading some supporters of cross-border funding for NGOs to argue that NGOs can instead use these investment treaties to protect such funding. In this Article, I provide the most thorough consideration of this proposal to date, including taking into account not only the legal hurdles to invoking investment treaty protections in this context but also the practical hurdles based on recently gathered information regarding the costs to parties who pursue claims under these treaties. I conclude that while it may be possible to overcome both sets of hurdles in some situations, these hurdles are higher than previous commentators have acknowledged. In particular, overcoming the high costs of bringing claims under these treaties would at a minimum require a concerted effort to fund or reduce such costs through either securing substantial third party financing or recruiting significant pro bono assistance.
Given these obstacles to invoking the protections of international investment treaties, I then explore the insights that the remarkable growth in such treaties provide regarding the conditions that would need to exist for countries to be convinced to enact a similar set of agreements to protect cross-border funding of NGOs. I conclude that such conditions are currently absent and that it will take many years to see if they could develop, even assuming that many countries continue to increasingly restrict or effectively prohibit such funding. In the meantime, both recipients and providers of cross-border funding for NGOs will need to consider alternate strategies that do not rely on international law to counter such restrictions.
This chapter considers some of the initial answers to this question and places them within a larger, tax theory framework in order to advance consideration of this emerging issue. As preliminary matters, I first consider how best to define the term “social enterprise” for purposes of addressing this issue and then describe some of the existing and proposed tax law provisions specifically relating to social enterprises. I dedicate the remainder of the chapter to exploring whether a high-level, theoretical consideration of possible tax provisions focused on such enterprises provides any insight into what provisions may be worth pursuing. Relying primarily on a tax subsidy approach, I conclude that while tax law could be used to incentivize investment in, commitment by, or selection of legal form by social enterprises, limited data and uncertain prospects for designing specific tax provisions that would be likely to achieve the desired goals caution against significant changes at the federal level at this time. Instead, I recommend pursuing experimentation at the state and local level with such provisions to help determine how best to achieve these goals through tax law.
One of the latest such initiatives suggests a new approach, however. In 2014 the IRS introduced the much shorter and simpler Form 1023-EZ application for nonprofit organizations that claim exempt charitable status and expect to have only modest financial resources, accompanied by faster procedures for handling all applications for recognition of exemption. These innovations represent the first significant permanent reduction in the level of oversight the IRS provides in this area since the introduction of a shorter version of the annual information return required for most exempt organizations. The questions they raise are whether such a reduction of oversight is in fact prudent, and whether other reductions might also be advisable. Part II of this Article draws on tax compliance literature to explore how the current level and methods of oversight for exempt organizations could be modified to improve compliance even given the existing resource constraints. It concludes that while marginal improvements in oversight are possible, there is no silver bullet to counter the IRS’s growing inability to oversee this area.
Part III of this Article therefore turns to more radical proposals that would move the locus of oversight for exempt and particularly charitable organizations out of the IRS. The proposal that shows the most promise, but also is the most risky, would shift much of this role to a private, self-regulatory body overseen by the IRS. The current crisis highlights the need to pursue this proposal now.
Since the first hybrid enabling law was passed in Vermont in 2008, the number of states offering hybrid forms has grown steadily, as has the number of entrepreneurs choosing statutory hybrids as a middle road between the for-profit and the nonprofit. Plaudits for and criticism of the hybrid form have also proliferated. Proponents have lauded their ability to facilitate socially conscious enterprise. Detractors have questioned the viability of the hybrid form and have suggested that they create more fiduciary conflicts than they resolve. To date, however, there has been no serious scholarly publication addressing the appropriate tax treatment of hybrid entities even though some supporters of hybrids have asserted that these forms deserve beneficial tax treatment. In this Article, we intend to close that gap by thoroughly examining the arguments for tax preference and the likely consequences that would flow from offering such preference.
We accept the fact that hybrid forms have gained a firm foothold in the legal landscape and expect that they will increase in prominence and influence. We contend, however, that offering nonprofit-like tax benefits to hybrid entities will likely have a deleterious effect, not only on the charitable sector and the public fisc, but possibly even on hybrids themselves. The Article concludes with some proposals for possible modifications to existing tax laws that would acknowledge hybrids’ virtues while not exacerbating their potential weaknesses. "
This Article’s approach contrasts with the current approach of the Supreme Court in this area, which in its various attempts to resolve disputes centering on such conditions has left courts, governments, and private parties understandably confused about the applicable constitutional standards. This tendency is illustrated in particular by the Court’s recent Agency for International Development v. Alliance for Open Society International opinion. This framework also has two broader ramifications. First, it may prove useful for resolving constitutional disputes relating to other speech-related conditions, such as campaign finance limits tied to government funding or other government benefits. Second, it demonstrates that by drawing on the extensive unconstitutional conditions literature to create an approach customized to a particular constitutional context it may be possible to salvage the unconstitutional conditions doctrine even given its widely acknowledged incoherence. Salvaging the doctrine is particularly important in a world where government benefits both permeate almost every type of activity and are often accompanied by constitutionally suspect restrictions.
Now, however, a number of public debates raise the issue of whether this right to know should extend beyond government-government and private-government interactions to also reach private-private interactions that indirectly attempt to influence government officials. For example, should the right to know extend to public identification of "bundlers" who successfully encourage others to make substantial campaign contributions? Similarly, should the right to know require the public disclosure of all significant funders for election-related spending done independently of candidates and political parties? Should the right to know also extend to significant funders behind grassroots lobbying efforts?
This Article explores these questions. Part I briefly describes the history of the public’s right to know in the United States. Part II explains and critiques the reasons commonly asserted to support the public’s right to know, considering whether they in fact support a right to know about government-related activities and actors on the part of the public, including when it comes to private-private political interactions. Finally, Part III considers the extent to which the public’s right to know should extend to certain specific types of private-private interactions that have political ramifications.
That lack of attribution is important because different types of nonprofit corporations receive different tax benefits and face different restrictions on their political activity under federal tax law. For example, a charitable nonprofit corporation that is tax-exempt under Internal Revenue Code section 501(c)(3) and eligible to receive tax deductible charitable contributions is limited with respect to lobbying and is prohibited from supporting or opposing candidates for elected public office. In contrast, a social welfare nonprofit corporation that is tax-exempt under Internal Revenue Code section 501(c)(4) but not eligible to receive tax deductible charitable contributions can engage in unlimited lobbying related to its social welfare purpose and can also support or oppose candidates as long as doing so is not its primary activity. And a political organization that is tax-exempt under Internal Revenue Code section 527, although only with respect to contributions received for political purposes, can engage entirely in supporting or opposing candidates. Yet a section 501(c)(3) organization, a section 501(c)(4) organization, and a section 527 organization can have overlapping boards, collaborate about their respective activities, and share resources, as long as they reasonably allocate their expenses and avoid spending directly on political activity that is limited or prohibited given their specific exemption category. There are therefore many groups of nonprofit organizations that consist of affiliated organizations with different federal tax categorizations but a common political purpose.
This lack of attribution is in tension with an aspect of federal election law and the election laws of many states. Under these election laws, if an individual or entity coordinates its activities with a candidate committee or political party, that activity is considered a contribution to the benefitted candidate or party. This result means that any spending on that activity is subject to existing source and amount limits on such contributions. In effect, the activity is attributed to the candidate or party because of the coordination even though the candidate or party does not legally control that activity. This is a common sense approach because if it did not exist it would be easy for individuals and other entities to evade contribution limits by engaging in activities not only designed to benefit a candidate or party but done at the specific request of that candidate or party. This reasoning also provides the basis for Supreme Court decisions concluding that this approach is constitutional under the First Amendment.
This essay explores the tension created by federal tax law’s respect for separate entity status on one hand and the coordination rules of federal and state election law on the other hand. It also revisits whether, given this tension, the Supreme Court was correct to constitutionalize the former approach when it comes to tax-exempt nonprofits. I conclude that whether this difference is appropriate as a policy matter depends on the policy justification for the political activity limits on section 501(c)(3) charities. If the only such justification is to support the broader federal tax policy prohibiting the deduction of expenditures for political activities, then the lack of attribution is appropriate. If instead the justification is that political activity is inconsistent with status as a section 501(c)(3) charity for broader reasons, then there is a policy argument for attributing the political activity of noncharitable nonprofit corporations to closely affiliated charitable nonprofit corporations and so subjecting that activity to the section 501(c)(3) limits. I also conclude that this latter justification could provide a basis for revisiting the Supreme Court precedents that bar this attribution as a constitutional matter.
At the same time churches enjoy special tax benefits not afforded to other section 501(c)(3) organizations, not even other kinds of tax-exempt religious organizations. These special benefits make church status appealing. Such benefits include exemption from filing with the IRS Form 990, an annual information return that, with the exception of the names and addresses of major donors, is also publicly available. In addition, the IRS cannot begin any audit of a church unless it complies with several procedures.
These advantages limit oversight of churches by the IRS, the media, and the public. They create an incentive for religious organizations that share some traits commonly found in churches to seek status as a church. Two recent IRS grants of church or association of churches status have attracted sharp criticism from the media and members of Congress. At the same time, a number of developments, such as loss of membership, expansion of virtual worship, and recent Supreme Court Free Exercise jurisprudence, have created new challenges for churches and their tax treatment.
In response to all these developments, this article recommends changes to the longstanding IRS approaches for defining “church” and certain church-affiliated entities. These changes would substitute a definition for church developed by courts and limit the definition for conventions or associations of churches to those of a single denomination. The definitional changes will clarify the distinction between non-church religious organizations and churches. Updating the understanding of “church” to reflect the twenty-first century realities of virtual participation and the increasing diversity of faith communities will also improve IRS oversight.
This article also recommends that the GAO undertake a renewed study of campaign intervention by section 501(c)(3) organizations generally. This study will clarify whether all section 501(c)(3) organizations, including churches, are in fact violating this prohibition in ways that go beyond sporadic, minor, and usually inadvertent footfalls.
In the authors’ view the recommended changes would benefit churches and the public because they take into account both current realities and current concerns. In so doing, they would not only give churches welcome guidance but also increase public trust that churches are not abusing the special privileges they enjoy under federal tax law.
This question is particularly vexing today with respect to new assets facilitated by blockchain technology. These new assets include cryptocurrencies, non-fungible tokens (NFTs), and ownership interests in decentralized autonomous organizations (DAOs). Commentators have written about how certain laws, particularly securities law, apply to these new assets. However, there is one legal area that commentators have yet to fully address: charity law, especially the federal tax laws relating to charities. Charities and donors are increasingly involved in transactions involving these new assets, with little guidance about how this law applies to those transactions.
This Article considers how existing charity law applies to these new assets and, to the extent that application is either uncertain or inconsistent with the policy goals underlying charity law, how charity law should be modified to accommodate these new assets. It concludes that existing law provides sufficiently certain answers regarding its application to these new assets and that application is consistent with the goals underlying that law. But two areas may require further guidance or modification of existing law in the foreseeable future: first, should certain cryptocurrencies be treated as readily valued for charitable contribution tax deduction purposes if sufficiently reliable cryptocurrency exchanges emerge; and second, if charities increasingly use blockchain technology, and particularly DAO governance structures, to further their exempt purposes, when is that use consistent with exemption under federal tax law.
This Article explores the existing and proposed limitations on speech by tax-exempt nonprofits given the constitutional restrictions on such limitations and the policy justifications for existing nonprofit tax benefits. It explains why the current limits on political campaign intervention and lobbying by charities are both justified given the subsidy provided to charities and their supporters under existing federal tax law and existing and longstanding constitutional case law. It further concludes that any expansion of these limits on charities to cover other types of speech, including hate speech and fake news, would be inconsistent with the existing broad definitions of the purposes that charities can pursue as well as, in some circumstances, constitutionally suspect. The Article also concludes that limits on speech by non-charitable tax-exempt nonprofits, including the existing limit on political campaign intervention for some of these nonprofits, are both unwise as a policy matter and, in some circumstances, constitutionally suspect given the lack of a subsidy for such speech by these nonprofits.
The IRS takes the position that these limitations apply with equal force to all tax-exempt charities, including religious organizations. Some \= religious organizations have challenged the application of the lobbying, political campaign intervention, illegality, and fundamental public policy limitations on religious liberty grounds, invoking the Free Exercise of Religion Clause of the First Amendment and, more recently, the federal Religious Freedom Restoration Act (RFRA). To date, however, federal courts have rejected these challenges, concluding that they are permissible conditions on the tax benefits enjoyed by religious organizations.
This essay reconsiders this conclusion and the arguments in support of it. One such argument is that tax law is somehow different from other legal contexts for purposes of applying the unconstitutional conditions doctrine to religious organization. The consistent refusal of the courts to allow free-exercise-of-religion-based exemptions from generally applicable federal tax laws suggests this may be the case. This difference could be viewed as a strand of the increasingly disfavored view sometimes referred to as “tax exceptionalism.” But I argue that this difference instead fits within the more traditional compelling governmental interest and least restrictive means analysis codified in RFRA and that arguably applied in the Free Exercise of Religion Clause context before the Supreme Court’s decision in Employment Division v. Smith.
More specifically, tax law is different because of its complex rules applicable to all individuals and entities relating to expenditures for lobbying, political campaign intervention, and illegal activity. The complexity of these rules, and the risk that granting exemptions from them for any reason would undermine their uniform and consistent application, support the conclusion that the government has a compelling interest in not allowing exemptions, and that the existing limitations imposed on
tax-exempt charities, including religious organizations, are the least restrictive means to do so. As a result, constitutional and RFRA free exercise of religion rights do not require exemptions for religious organizations from these existing limitations even when such organizations are motivated by their religious beliefs to engage in the limited activities. Furthermore, while this argument does not apply to the contrary to fundamental public policy limitation, the Supreme Court has correctly concluded that in the instances where there is a fundamental public policy, ensuring that tax-supported charities do not undermine that policy is also a compelling governmental interest and prohibiting them from doing so is the least restrictive means of furthering that interest.
Existing laws relating to charitable solicitations and charities more generally have either uncertain or limited application to charitable crowdfunding. Broader fraud and money laundering laws may apply to the worst abuses, but these usually criminal statutes are rarely invoked. The challenge faced by government regulators is therefore whether and how to modify existing laws to address the downsides of this new activity without unduly inhibiting the generosity that charitable crowdfunding encourages. This challenge is made more difficult by the lack of information regarding the positive effects as well as the downsides of crowdfunding. Finally, existing scholarship relating to charitable crowdfunding focuses on either the motivations of donors or tax implications instead of addressing this regulatory problem, even as some governments are beginning to develop proposals to address this activity.
This Article fills this gap by reviewing the existing, incomplete information regarding charitable crowdfunding and theories for regulating in the face of uncertainty to develop recommendations for addressing this new and growing phenomenon. Given we know very little about the positive and negative effects of charitable crowdfunding, and given that any harms are likely modest, purely financial, and often readily cured, I recommend that governments should at this time only take two steps. First, governments should require notification of designated beneficiaries to help ensure funds raised reach those beneficiaries. Second, governments should require notification of regulators, but only for the small subset of campaigns that cross a relatively high threshold, to both provide information about the scale and growth of charitable crowdfunding and deter problems with the largest campaigns. Additionally, I disagree with initial steps taken by some governments to impose more comprehensive consent and administration requirements on many or all charitable crowdfunding campaigns because such requirements are unnecessary hindrances on this new and innovative way of encouraging generosity, given there is little evidence of widespread problems and given that any potential harm is almost certainly relatively small and easily remedied if it occurs.
Two common threads emerge from this consideration. First, we do not know much about the extent to which each set of legal rules inhibits charity entrepreneurship because of a paucity of relevant data. More research is therefore needed to determine how significant these legal barriers are in practice to determine how important it is to change them. Second, while academics and practitioners often call for more legal certainty and bright line rules, individuals and organizations challenging prevailing concepts of charity and how charities should function may be better able to mount such challenges in an environment of legal uncertainty. As highlighted by other contributors to this volume, legal uncertainty can provide greater freedom for entrepreneurs engaged in new types of activities.
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.
Many scholars, journalists, and others have documented the increasing involvement of nonprofits in politics, including numerous apparent violations of the remaining rules governing such activity. Commentators have proposed a variety of piecemeal solutions, ranging from overhauling the existing rules to repealing those rules in part or completely, sometimes with a focus on tax laws, sometimes with a focus on election laws, and sometimes with a focus on state nonprofit laws. What is needed, however, is a comprehensive approach to this issue that considers the various ways nonprofits can be involved in politics, the positive as well as negative effects of such involvement, and the interaction between these different bodies of law at both the federal and state level that relate to such involvement.
This article takes such a comprehensive approach. Drawing on the now extensive information regarding nonprofit political involvement, and where such involvement appears to have repeatedly violated the existing legal rules, this article will first provide a roadmap of such involvement and the points where political pressures are overwhelming the existing legal rules and the agencies charged with enforcing them. Next, this article will describe the various solutions proposed by commentators, highlighting the incomplete nature of those solutions but also the insights they provide regarding the strengths and weaknesses of the various legal approaches for addressing such involvement. These insights include ones relating to the historical reasons for why the legal rules have developed in the manner they have, as well as ones relating to the relative institutional competencies of the agencies charged with interpreting and enforcing those rules.
Finally, this article will propose an overall approach to modifying the existing legal rules that relieves the identified pressure points without compromising the important public policies underlying the current legal rules, including ensuring the continuing ability of nonprofits to contribute to political debates in the United States. This approach involves revising the federal tax rules for tax-exempt nonprofits to clarify what constitutes prohibited political activity for charities, to loosen the unnecessary (from a tax policy perspective) restrictions on political activity by non-charitable, tax-exempt nonprofits, and, most controversially, to permit churches and other houses of worship to engage in political activity in the context of internal, in-person communications to members. It also involves shifting public disclosure rules relating to political activity from federal tax law to federal and state election law, refocusing such public disclosure on a broader range of such activity, and increasing the donation amounts that trigger such disclosure with respect to donor identities.
This comprehensive approach recognizes the importance of maintaining the current tax policy of not subsidizing efforts to support or oppose candidates for elected office while at the same time not unduly burdening the free speech, free association, and free exercise of religion rights of individuals who collectively engage in political activity through nonprofits. It also recognizes the institutional limitations of the Internal Revenue Service when it comes to enforcing tax rules relating to political activity, particularly given the breakneck pace of electoral politics, by placing greater emphasis on the federal and state laws, and their related agencies, that specifically regulate elections. By doing so, this approach recognizes and anticipates the dynamic nature of political involvement by nonprofits and so seeks not to prohibit but instead to channel that involvement in a manner that furthers overall democratic participation goals.
More specifically, after briefly reviewing the very limited legislative history of this provision I survey these other types of organizations and, as best as can be determined, why they have claimed this status and how they have managed to do so successfully. I will then critique these myriad uses of section 501(c)(4). Based on this review, I conclude that not only is the “catchall” nature of section 501(c)(4) not inconsistent with its language and limited legislative history, but that nature is generally defensible as the appropriate tax classification for these various entities. The only exceptions are the relatively rare instances where Congress intended to create a different, exclusive exemption category for a particular type of organization with specific restrictions. In those situations, allowing that type of organization to instead qualify for exemption under section 501(c)(4) permits it to avoid the restrictions Congress intended to place on that type as a condition for exemption. This appears to be the case with respect to two types of entities: charitable organizations that federal tax law would classify as private foundations if they were exempt under Internal Revenue Code section 501(c)(3); and electric and water cooperatives that Congress intended to receive exemption exclusively under section 501(c)(12).
There is, however, a growing web of international investment treaties designed to protect cross-border flows of funds, leading some supporters of cross-border funding for NGOs to argue that NGOs can instead use these investment treaties to protect such funding. In this Article, I provide the most thorough consideration of this proposal to date, including taking into account not only the legal hurdles to invoking investment treaty protections in this context but also the practical hurdles based on recently gathered information regarding the costs to parties who pursue claims under these treaties. I conclude that while it may be possible to overcome both sets of hurdles in some situations, these hurdles are higher than previous commentators have acknowledged. In particular, overcoming the high costs of bringing claims under these treaties would at a minimum require a concerted effort to fund or reduce such costs through either securing substantial third party financing or recruiting significant pro bono assistance.
Given these obstacles to invoking the protections of international investment treaties, I then explore the insights that the remarkable growth in such treaties provide regarding the conditions that would need to exist for countries to be convinced to enact a similar set of agreements to protect cross-border funding of NGOs. I conclude that such conditions are currently absent and that it will take many years to see if they could develop, even assuming that many countries continue to increasingly restrict or effectively prohibit such funding. In the meantime, both recipients and providers of cross-border funding for NGOs will need to consider alternate strategies that do not rely on international law to counter such restrictions.
This chapter considers some of the initial answers to this question and places them within a larger, tax theory framework in order to advance consideration of this emerging issue. As preliminary matters, I first consider how best to define the term “social enterprise” for purposes of addressing this issue and then describe some of the existing and proposed tax law provisions specifically relating to social enterprises. I dedicate the remainder of the chapter to exploring whether a high-level, theoretical consideration of possible tax provisions focused on such enterprises provides any insight into what provisions may be worth pursuing. Relying primarily on a tax subsidy approach, I conclude that while tax law could be used to incentivize investment in, commitment by, or selection of legal form by social enterprises, limited data and uncertain prospects for designing specific tax provisions that would be likely to achieve the desired goals caution against significant changes at the federal level at this time. Instead, I recommend pursuing experimentation at the state and local level with such provisions to help determine how best to achieve these goals through tax law.
One of the latest such initiatives suggests a new approach, however. In 2014 the IRS introduced the much shorter and simpler Form 1023-EZ application for nonprofit organizations that claim exempt charitable status and expect to have only modest financial resources, accompanied by faster procedures for handling all applications for recognition of exemption. These innovations represent the first significant permanent reduction in the level of oversight the IRS provides in this area since the introduction of a shorter version of the annual information return required for most exempt organizations. The questions they raise are whether such a reduction of oversight is in fact prudent, and whether other reductions might also be advisable. Part II of this Article draws on tax compliance literature to explore how the current level and methods of oversight for exempt organizations could be modified to improve compliance even given the existing resource constraints. It concludes that while marginal improvements in oversight are possible, there is no silver bullet to counter the IRS’s growing inability to oversee this area.
Part III of this Article therefore turns to more radical proposals that would move the locus of oversight for exempt and particularly charitable organizations out of the IRS. The proposal that shows the most promise, but also is the most risky, would shift much of this role to a private, self-regulatory body overseen by the IRS. The current crisis highlights the need to pursue this proposal now.
Since the first hybrid enabling law was passed in Vermont in 2008, the number of states offering hybrid forms has grown steadily, as has the number of entrepreneurs choosing statutory hybrids as a middle road between the for-profit and the nonprofit. Plaudits for and criticism of the hybrid form have also proliferated. Proponents have lauded their ability to facilitate socially conscious enterprise. Detractors have questioned the viability of the hybrid form and have suggested that they create more fiduciary conflicts than they resolve. To date, however, there has been no serious scholarly publication addressing the appropriate tax treatment of hybrid entities even though some supporters of hybrids have asserted that these forms deserve beneficial tax treatment. In this Article, we intend to close that gap by thoroughly examining the arguments for tax preference and the likely consequences that would flow from offering such preference.
We accept the fact that hybrid forms have gained a firm foothold in the legal landscape and expect that they will increase in prominence and influence. We contend, however, that offering nonprofit-like tax benefits to hybrid entities will likely have a deleterious effect, not only on the charitable sector and the public fisc, but possibly even on hybrids themselves. The Article concludes with some proposals for possible modifications to existing tax laws that would acknowledge hybrids’ virtues while not exacerbating their potential weaknesses. "
This Article’s approach contrasts with the current approach of the Supreme Court in this area, which in its various attempts to resolve disputes centering on such conditions has left courts, governments, and private parties understandably confused about the applicable constitutional standards. This tendency is illustrated in particular by the Court’s recent Agency for International Development v. Alliance for Open Society International opinion. This framework also has two broader ramifications. First, it may prove useful for resolving constitutional disputes relating to other speech-related conditions, such as campaign finance limits tied to government funding or other government benefits. Second, it demonstrates that by drawing on the extensive unconstitutional conditions literature to create an approach customized to a particular constitutional context it may be possible to salvage the unconstitutional conditions doctrine even given its widely acknowledged incoherence. Salvaging the doctrine is particularly important in a world where government benefits both permeate almost every type of activity and are often accompanied by constitutionally suspect restrictions.
Now, however, a number of public debates raise the issue of whether this right to know should extend beyond government-government and private-government interactions to also reach private-private interactions that indirectly attempt to influence government officials. For example, should the right to know extend to public identification of "bundlers" who successfully encourage others to make substantial campaign contributions? Similarly, should the right to know require the public disclosure of all significant funders for election-related spending done independently of candidates and political parties? Should the right to know also extend to significant funders behind grassroots lobbying efforts?
This Article explores these questions. Part I briefly describes the history of the public’s right to know in the United States. Part II explains and critiques the reasons commonly asserted to support the public’s right to know, considering whether they in fact support a right to know about government-related activities and actors on the part of the public, including when it comes to private-private political interactions. Finally, Part III considers the extent to which the public’s right to know should extend to certain specific types of private-private interactions that have political ramifications.