Those of you who are avid environmentalists may well have shared my disappointment when I learned that the Nature Conservancy, a wealthy conservation group that purchases environmentally important land and then maintains it or arranges for its transfer to appropriate steward organizations, had been subject to an IRS audit.
The audit was triggered by a report in the Washington Post in 2003 about the conservation organization (followed by an entire series on the organization, here). The report startled members of the Conservacy by revealing that executives on the board of the Conservanccy had paid millions in environmental fines. It also revealed close ties to oil and mining companies and chemical manufacturers and mishandled profit-making activities by the Conservancy, including oil drilling and hotels. Land bought for conservation purposes might be preserved or it might be sold, in part, for development, with some restrictions. Even worse, the report revealed a tax dodge that the Conservancy had used in some of its land purchases. The charity would purchase a parcel of land but then sell it at a loss, based on some development restrictions, to a buyer, often one of its own trustees. The buyer would then make cash contributions to the Conservancy in an amount approximately equal to the Conservancy's loss on the sale. By arranging the sale and contribution in this way, the Conservancy would be essentially whole after the transaction, but the buyer would benefit by having a charitable tax deduction for the cash gift. The ultimate loser was the federal fisc. See more about these deals and the IRS's response to them in this Washington Post story from 2004.
The IRS's audit of the Conservancy ended in July 2005 and was reported at the ABA's September 2005 Tax Section meeting as having been "resolved favorably." 109 Tax Notes 300 (Oct. 17, 2005). The group made "substantial changes in its operations" that should prevent future transactions with board members and trustees and their families along the lines of the dodge initially reported by the Post.
It seems that many people who have at their fingertips a way to make more money by taking advantage of the tax system will do it, even if they are part of a charitable organization that ostensibly is working for the common good. See, e.g, this Washington Post story about various tax abuses in the non-profit sector.
"In some cases fraud and abuse are committed by the nonprofit itself, such as when a charity is established to benefit its main donor; in other cases, the nonprofit acts an enabler for tax-shelter promoters, such as when a municipality or union takes a fee to participate in a deal that allocates "profits" to it and losses to wealthy individuals. " Id.
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"We have found that certain promoters encourage individuals to establish purported donor-advised fund arrangements that are used for a taxpayer's personal benefit, and some charities that sponsor these funds may be complicit in the abuse," Everson said. Supporting-organization abuses include donations of money that is then lent back to the donor, and the possibility of donating assets and then buying them back at a discount, Everson and the CRS observed." Id.
Since it is the people who are extraordinarily wealthy who are able to make substantial charitable contributions and reap a tax benefit while receiving the personal satisfaction of helping their favored causes, it is especially important that there not be even an appearance of impropriety in the operations of the charities and the availability of charitable deductions. These organizations should meet the highest standards of ethical conduct, in order to merit our trust.
The Senate Finance Committee conducted a series of hearings on these issues last year. See, e.g., this story in the Chronicle of Philanthropy about hearings focussing primarily on the Nature Conservancy and this transcript of hearings. Those hearings led to Senate provisions in the Senate tax bill (S. 2020) passed by the Senate on November 18, 2005. Those provisions are not all commendable--one, for example, would permit writers and artists to deduct the full fair market value of their created works when donated, a provision that clearly violates basic concepts of income determination, while another would allow a donation of certain books and food at the lesser of fair market value or double the basis. Other provisions, however, do counter various abuses, including donor-advised funds and abuses of supporting organizations (such as essentially lending all assets back to the donor who received the charitable deduction for their contribution). For descriptions of the proposed Senate provisions on tax exempt organizations and charitable deductions, see here and here. For other details about the Senate bill, see here.
The House tax bill did not include the charity or tax shelter anti-abuse provisions. See this description of various differences. The Gulf Opportunity Zone provisions were enacted separately. See here. It remains to be seen what Congress will do with these tax-exempt organization/charitable contribution provisions and the other tax issues when it comes back this year.
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