FY 2018 Appropriations Bill and the IRS

Last Thursday, the House passed an appropriations bill by a vote of 211 to 198. At this point, it’s anybody’s guess how much of the appropriations bill will survive the Senate, but, just in case, it’s worth taking a look at it. And, it turns out, the House really wants to use the appropriations bill to regulate the IRS. Some of the provisions strike me as warranted. Some innocuous. Some strike me as bizarre, payback, perhaps, for long-held grudges. And some strike me as downright insidious. In this post I’m going to focus on the last two categories because frankly, they’re more fun to write about.

The provisions that regulate IRS behavior can be found in sections 101-116 of the appropriations bill. And what provisions are bizarre payback or downright insidious? Continue reading “FY 2018 Appropriations Bill and the IRS”

House Appropriations Bill

By: David Herzig

With all the diversions this week, it was easy to miss that the House Committee on Appropriations posted on June 28th the Appropriations Bill for FY 2018.  The bill seems to include a couple items that not many were expecting.  So, I thought I would highlight some of the key provisions.  Since it is Friday before a Holiday weekend, I’ll keep it short for now.  There are four main provisions I will address: (1) IRS Targeting/Johnson Amendment; (2) ACA Penalties; (3) Conservation Easements; and (4) 2704 (Estate/Gift Tax).

I. IRS Targeting/Death of Johnson Amendment

First, is a clear response to the “targeting” of groups from the Lois Lerner Administration. In three separate sections (107, 108 and 116), the bill attempts to regulate the IRS, not Continue reading “House Appropriations Bill”

About the ACLU’s [Update: FFRF’s] Challenge to the Promoting Free Speech and Religious Liberty EO

By Sam Brunson

Trump signed his Promoting Free Speech and Religious Liberty executive order earlier today. The EO was expected to order the IRS to stop enforcing the so-called Johnson Amendment against religious organizations. As Ben explained, by its language, it may have done significantly less—it appears to merely reaffirm the status quo for enforcement. Whatever its substantive effects, though, the existence of the order is no surprise, and, as has happened with any number of Trump’s previous EOs, the ACLU Freedom From Religion Foundation has already announced that it will challenge the EO in court. [Update: the ACLU looked at the EO and agreed with Ben that there was nothing there, and decided not to sue. The FFRF, otoh, decided to sue. So it’s the FFRF that will face these procedural hurdles before it has to face the substantive (or rather, lack of substance) ones.]

Leaving aside the question of whether this EO actually does anything substantive, it’s worth remembering that any judicial challenge to the executive order faces two significant hurdles: standing and administrative discretion.[fn1] It’s also possible that the Trump administration inadvertently made those hurdles easier to pass. Continue reading “About the ACLU’s [Update: FFRF’s] Challenge to the Promoting Free Speech and Religious Liberty EO”

Trump’s Johnson Amendment Executive Order Does Not Say What He Said it Said

By Benjamin Leff

Trump issued an Executive Order (EO) today, the text of which was a complete shock (at least to naive little me). I had written a thousand-word blog post based on reporting before the release of the EO that Trump would direct the Internal Revenue Service to “exercise maximum enforcement discretion to alleviate the burden of the Johnson amendment which prohibits religious leaders from speaking about politics and candidate from the pulpit[.]” Then I watched the whole signing ceremony and Trump confirmed that he was planning to clearly open the door for religious leaders to communicate their views on candidates from the pulpits of their houses of worship.

The pre-prepared post argued that the IRS should issue some guidance explaining how it would enforce the Johnson Amendment in light of the EO, especially (1) whether it would create a “safe harbor” only for the speech of the organization, or also for the organization’s money and (2) whether it would extend the “safe harbor” to all 501(c)(3) organizations, or just houses of worship. The general consensus among advocates of changing the Johnson Amendment is that any liberalization of the rule should apply equally to all 501(c)(3) organizations and that it should permit speech but not spending.

Then, after a couple of hours, the White House released the actual text of the Executive Order. Unless I’m blind, what it says is literally nothing like what the Trump Administration said it would say, and even less like what Trump said it said when he signed it in the Rose Garden ceremony just a few hours ago. Continue reading “Trump’s Johnson Amendment Executive Order Does Not Say What He Said it Said”

The Surly Subgroup Turns One!

Time flies when you’re having fun, I guess. Today is the one-year blogiversary of the Surly Subgroup. What started off as a group-blogging experiment hatched at last year’s Critical Tax Conference at Tulane Law School has provided quite a bit of entertainment for Surly bloggers and our guest bloggers, and hopefully for our readers as well.

It’s obviously been a big year on tax and other fronts. Since our inception, we’ve published 206 blog posts on a variety of topics. And we’ve drawn readers from 140 different countries.

Surly regulars and guest bloggers have covered various tax-related issues surrounding politics and the 2016 election—including disclosure of presidential tax returns, the Emoluments Clause, the Trump Foundation, and the Clinton Foundation. We’ve written about churches, 501(c)(3)s and the IRS treatment of non-profits. We’ve discussed the tax reform proposals of the 2016 presidential candidates and the #DBCFT. We’ve written several administrative law posts about Treasury Regulations and rulemaking.

Politics aside we’ve also covered other important issues in tax policy—including taxation and poverty, healthcare, tax policy and disabilities, tax compliance, and tax aspects of the Puerto Rico fiscal crisis. We’ve discussed several issues in international and cross-border taxes, touching on the EU state aid debate, the CCCTB, taxation and migration, the Panama Papers, tax leaks more generally, and tax evasion in China.

We hosted our first ever online Mini-Symposium on Tax Enforcement and Administration, which featured posts by ten different authors on a variety of tax administration topics. The Mini-Symposium was spearheaded by Leandra Lederman. Leandra had organized and moderated a discussion group on “The Future of Tax Administration and Enforcement” at the 2017 AALS Annual Meeting, and many of the discussion group participants contributed to the online symposium. We hope to organize future online symposia on other topics.

We’ve blogged about various conferences, workshops, and papers, both tax related and not-so-much tax related. We’ve also had lots of fun writing about taxes in popular culture – Surly bloggers and guest bloggers have written about the tax aspects of Pokémon Go, tax fiction, music-related tax issues (Jazz Fest! Prince! “Taxman”!), soccer players, dogs, Harry Potter fan fiction, Star Trek, and John Oliver. Surly bloggers even recorded a few tax podcasts!

In short, it’s been a busy year, and we’ve had a lot of fun with the Surly platform. We hope you have as well. Going forward, we’re going to keep the blog posts coming. We also hope to draw more regular and guest bloggers and to organize other online symposia.

Thanks for reading!

Satan, Tea Parties, and the IRS

By Sam Brunson

Did you hear that the IRS granted a Satanic cult tax-exempt status in ten days?!? Meanwhile, Tea Party groups’ exemption applications languished for months or even years?!?

I know, it sounds pure conspiracy theory: the IRS loves Satan and hates conservatives. But it’s true! Or, at least, kind of! But it needs to be contextualized, because comparing the exemption application of Reason Alliance, Ltd. (the putative Satanic cult) and Tea Party groups is inapposite.[fn1] Continue reading “Satan, Tea Parties, and the IRS”

When a Tax Strategy Benefits a Subnational Government

2014-polo-ao5-1-million-lineBy: Leandra Lederman

Usually we think of tax shelters and other tax strategies as the province of private parties. These shelters may involve accommodation parties, even foreign government infrastructure, such as transportation systems, but we tend to think of private parties as getting the tax benefits. We may not think as often about a subnational government bolstering its tax revenues at the expense of the national government, particularly via a cooperating private party’s transaction structure. But that’s what happened a few years ago in Spain.

There is a Volkswagen (VW) plant in Pamplona, a city in the autonomous community of Navarra. From 2007-2011, Navarra reportedly collected approximately 1.5 billion Euros in value-added tax (VAT) from Volkswagen for its cars manufactured at the plant there. If VW-Navarra (which is a subsidiary of SEAT) had shipped the cars directly from Navarra to Germany, presumably Navarra would have had to refund that VAT. (Cars shipped to Germany leave Spain “clean of VAT* (translation mine)).

Instead, according to an interview with Prof. Fernando de la Hucha in this El Diario article, the basic structure was that VW-Navarra sold the cars (although without physically moving them there) to a related Barcelona company, VAESA (Volkswagen-Audi España S.A.), which is located in the Catalunya region, not Navarra. VAESA then sold them to SEAT with the very low mark-up of 5 Euros per car. SEAT, which is also in Catalunya, then sold them to VW-Germany—the transfer abroad triggering entitlement to a refund. But because the cars were sold from a city outside the Navarra region, VW’s refund claim did not go to Navarra. Instead, the Spanish national government was the one that issued the refund, which is how Navarra benefitted. (Catalunya did not issue the refund because, unlike Navarra, does not have a fiscal agreement with Spain that allows it to administer and collect taxes—only Navarra and the Basque regions do). The result was that Volkswagen was refunded the taxes it paid but Navarra profited at the expense of the Spanish government. (Spain has a credit-invoice VAT. Technically, the amount that Navarra retained was the VAT that VW-Navarra paid, which was the VAT on its sales to VAESA minus the VAT its suppliers had paid.)

Here is a simple diagram of the transaction, along with a map of Spain’s regions. (Navarra is in the north, bordering France; Catalunya—that’s the Catalan spelling—is in the northeast, also bordering France.)
Spain Tax Blog Post Diagram--LLmap_spain

Continue reading “When a Tax Strategy Benefits a Subnational Government”

What Would Happen if the Johnson Amendment Were Repealed?

By Benjamin Leff

Donald Trump recently repeated his campaign promise to “totally destroy” the Johnson Amendment. The Johnson Amendment is that portion of Section 501(c)(3) of the Internal Revenue Code that forbids tax-exempt charities (including most churches) from “interven[ing] in … any political campaign on behalf of (or in opposition to) any candidate for public office.” Only Congress can change the Tax Code, and, as Daniel Hemel recently pointed out, congressional Republicans just re-introduced the Free Speech Fairness Act, a bill to permit some limited campaign-related speech by the leaders of 501(c)(3) organizations, including churches. I’ve written previously in support of this legislation as an “adequate solution” to provide a little extra wiggle room to protect the speech rights of charities without making significant changes to the way campaigns are currently financed. Hemel points out that the Free Speech Fairness Act doesn’t come close to totally destroying the Johnson Amendment, but is more like a “de minimis carveout.”

But, rather than talk about the relatively sensible Free Speech Fairness Act, I want to predict what would happen if Donald Trump actually succeeds in “totally destroying” the Johnson Amendment. In other words, what would happen if Congress simply repealed the portion of section 501(c)(3) quoted above?

Because a charity must be organized and operated primarily for charitable purposes (although the word used in the statute is “exclusively”[1]), and intervening in campaigns is not a charitable purpose, new charities could not be created for the purpose of engaging in campaign speech or making political contributions. But existing charities could divert a significant quantity of their funds to political campaigns if they so chose. The question of how much is hard to answer without new guidance, but it would be plausibly reasonable (though aggressive[2]) for a charity to make 49% of its expenditures in any year as campaign contributions, since that leaves 51% of its activities to satisfy the requirement that it is engaged “primarily” in activities that accomplish its exempt purposes.

How would that change the way campaigns are financed in the US? Well, if people could find charities willing to accept their contributions and then spend them on political contributions, taxpayers could transform political campaign contributions from nondeductible expenditures to tax-deductible charitable contributions. This would work for corporations as well as individuals. The charities would then have to limit their political spending to 49% of their overall spending. The charities best suited for this type of intermediation of campaign spending are large existing public charities.[3] For example, a university, like the one I work for, could choose to make political contributions on behalf of its donors, if it wanted.

If I were involved in fundraising at my university, I would immediately suggest that it create a fund called the Alumni for Kamala Harris for President Fund and the Alumni for Paul Ryan for President Fund (just a guess for 2020). For every tax-deductible contribution of $100 to the fund, $60 would go to the candidate or to an independent PAC that supports the candidate, and $40 would go towards scholarships at the University. There are some legal issues that the University would have to maneuver to make this program work, and there might be some blowback from stakeholders who were upset about the University getting involved in politics, but the program would not be illegal or impossible.   As discussed below, for donors in the 39.6% tax bracket, a tax-deductible contribution of $100 costs about the same to them as a non-tax-deductible contribution of $60, so why not send $40 to scholarships at your alma mater, if it’s free (or, technically, paid for by the government)?

In the 2016 presidential election, total spending by Hilary Clinton, Donald Trump, the Democratic and Republican parties, and all Super PACS was just over $2 billion. There are almost certainly enough public charities in this country that would be tempted to raise funds in the manner described above that all $2 billion could be funneled through them, making all campaign spending tax-deductible for the donor.

So, would that be good or bad? Obviously, it has very little to do with whether churches or their leaders can or cannot endorse candidates from the pulpit. The question is whether it would be good or bad policy to permit all campaign contributions — whether to candidates directly or to independent PACs or political parties — to be made on a tax-deductible basis. Generally, a tax deduction functions like a government subsidy. On the one hand, subsidizing all campaign spending doesn’t seem so bad. Campaigns are important for democracy; why shouldn’t the government subsidize them? Under current law, the playing field is made level by denying tax deduction to everyone who makes a political contribution or spends money to elect a candidate. At first glance, it seems like the playing field would be equally level if everyone gets a tax deduction for similar spending. As long as everyone is treated the same, it seems like a fair system.

But everyone is not treated the same when political campaign contributions and campaign spending is tax deductible. First of all, most political campaign contributions are made by very wealthy taxpayers, and so subsidizing political spending is a subsidy for the wealthiest taxpayers. For example, the conservative Koch brothers were reported to have planned to spend almost 900 million dollars in the 2016 presidential election. The liberal donor Thomas Steyer reportedly spent over 86 million dollars. Even if the government subsidized such spending in an equal way, say 10 cents for every dollar spent, this subsidy would be unfair. The government would magnify the Koch brothers’ voice by 90 million dollars, Steyer’s voice by 8.6 million dollars and most Americans voice by nothing or almost nothing, simply because they make small contributions. Most people would think that even a subsidy that was delivered proportional to spending would probably be bad policy.

But a tax deduction is not proportional to money spent, because our Tax Code is not proportional. Tax deductions (including the deduction for charitable contributions) treat wealthier donors better than less wealthy donors. First, deductions for charitable contributions are only available to taxpayers who “itemize” their deductions. Under the current income tax system, 70 percent of taxpayers do not itemize; instead they take the standard deduction or do not owe any tax. If you take the standard deduction, your taxes remain exactly the same whether you make charitable contributions or not. If campaign contributions could be deducted like charitable contributions, then non-itemizers would not have any tax benefit from making campaign contributions, while itemizers would. Itemizers are disproportionately found among the highest-income taxpayers.

Second, the amount of benefit one receives from a deduction is equal to one’s marginal tax rate. Since tax rates are progressive, that means that higher-income taxpayers get more benefit from deductions than lower-income taxpayers. For example, single taxpayers who have taxable income over $415,050 pay tax at a 39.06% rate on their income that exceeds that threshold. That means that the ability to deduct a political contribution is worth 39.06 cents for every dollar contributed. It is like a federal subsidy of almost 40 percent to wealthy political donors. For single taxpayers (who itemize) with taxable income under $9,275, the comparable subsidy is only 10 cents for every dollar contributed. That’s what tax scholars generally call an “upside down” subsidy.

So, not only is deductibility a government subsidy for political spending that would go disproportionately to wealthy taxpayers, it would go to them in disproportionate amounts, providing a greater subsidy per dollar contributed to wealthier taxpayers than to less wealthy ones. It’s hard to imagine that there are many people who would interpret that dramatic tilt of the playing field in favor of wealthy donors a good thing. Not even Trump could sell a policy like that with a straight face.

[1] See Treas. Reg. 1.501(c)(3)-1(c)(1)(“An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3).” emphasis added.)

[2] It’s an aggressive position at least in part because the second sentence of Treas. Reg. 1.501(c)(3)-1(c)(a) states, “An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.” A lot of negatives in that sentence, but it appears to interpret the opposite of “primarily” as “an insubstantial amount.” The idea that 49% of an organization’s activities is “an insubstantial part” is an aggressive position, to say the least.

[3] This post has been modified from its original form. It was originally published proposing that donor-advised funds would be the simplest vehicle for making tax-deductible campaign contributions. But, thanks to post-publication feedback about the likelihood that such use of donor-advised funds would still be improper even after a full repeal of the Johnson Amendment, I have changed the proposed vehicle for tax-deductible campaign contributions to existing public charities that are not donor-advised fund hosts.

Newspapers and the Total Destruction of the Johnson Amendment

By Sam Brunson

Yesterday at the National Prayer Breakfast, Donald Trump promised to “get rid of and totally destroy the Johnson Amendment.”

In case you’re unfamiliar with the name “Johnson Amendment” (and I kind of hope you are—it’s a stupid name), that refers to the phrase in section 501(c)(3) that prohibits tax-exempt organizations from endorsing or opposing candidates for office. It was proposed by Senator Lyndon Johnson in 1954, and inserted into the tax code with little fanfare and no legislative history.

There’s a lot that can (and, in fact, has) been said about Trump’s proposal, which follows up on a campaign promise he made, apparently repeatedly. I wouldn’t doubt if we return to it a few times here at Surly. But I just wanted to point out one potential consequence: Continue reading “Newspapers and the Total Destruction of the Johnson Amendment”

More on Hate Groups and Tax Exemptions [Updated]

On the Cooking the Books Podcast, Phil Hackney and I discussed Michael Kunzelman’s story (that we both spoke to him about) on white nationalist groups that are tax exempt. Over at the Volokh Conspiracy, Eugene Volokh asserts that the IRS cannot constitutionally deny tax exemptions to “hate groups” based on their views, abhorrent that they may be.

Since he name-checks me and fellow Surly blogger Phil Hackney, I figured it was worth responding to his piece. (It’s worth noting that we’ve generated a fair amount of Twitter discussion already; you can catch that in a number of threads, including this one and this one.)

I don’t intend to be comprehensive here, but I want to make five main points:  Continue reading “More on Hate Groups and Tax Exemptions [Updated]”