Effort to Expand Contraceptive Mandate Exemption Rejected

• Published date: 01 October 2017
• Date: 01 October 2017
• DOI: http://doi.org/10.1002/npc.30377

Bruce R. Hopkins’ NONPROFIT COUNSEL

October 20174THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

Facts

A limited liability company in which three individuals

were members owned 355 acres of land that it leased

for use as farmland. The LLC conveyed a conservation

easement restricting development rights attached to the

property to a public charity in exchange for $1.5 mil-

lion. The individuals reported the bargain element of the

transaction, allegedly $1.3 million, as a noncash chari-

table contribution. Thereafter, the LLC sold its interest in

the property for nearly $2 million.

These donors classified themselves as qualified farm-

ers, for the purpose of claiming the highest charitable

contribution deduction for gifts of conservation property.

Law

Generally, a donor of a qualified conservation ease-

ment is limited as to annual deductibility to an amount

equal to 50 percent of the donor’s contribution base

(IRC § 170(b)(1)(E)(i)). A person who is a qualified farmer,

however, may deduct the value of a qualified conserva-

tion contribution in an amount up to 100 percent of the

contribution base (IRC § 170(b)(1)(E)(iv)(I)). A qualified

farmer is a person whose gross income from the business

of farming is greater than 50 percent of the person’s gross

income for the year of the gift (IRC § 170(b)(1)(E)(v)).

The activities that constitute the business of farming

include cultivating the soil or raising or harvesting any

agricultural or horticultural commodity on a farm (IRC §

2032A(e)(5)). The revenue derived from these activities is

farming income.

Analysis

The court acknowledged that the donors are, gener-

ally, farmers. But that, said the court, does not make

them qualified farmers. The court differed from the

donors in holding that sale of land and the sale of

rights to develop land (here, the conservation easement

bargain sale) are not among the activities constituting

farming under the federal tax law. Thus, proceeds from

these sales are not forms of farming income for purposes

of determining whether a person is a qualified farmer.

The Tax Court stated: “We will not broaden the

scope of activities listed in section 2032A(e)(5) beyond

that ordinarily associated with them because our sole

duty is to interpret the law as written by Congress.”

The court invoked another reason why these donors can-

not prevail. The partnership tax law states that the character

of income or gain of a partnership (here, the LLC) included

in a partner’s distributive share is determined as if the item

were realized by the partnership (IRC § 702(b)). The LLC

was not engaged in the business of farming; it was in the

business of leasing real estate. Consequently, the charac-

terization of income from the sale of property by the LLC

flowed through to the donors, again forming the basis for

the conclusion in law that the sales proceeds in their hands

do not constitute income from the business of farming.

The Tax Court also stated: “We recognize that the

statute makes it difficult for a farmer to receive a maximum

charitable contribution deduction by disposing of a portion

of property in a year in which he/she donates a conserva-

tion easement, especially in a [s]tate with high land values.

But it is not our task to rewrite a statute.” [7.12A, 7.12B] ◆

EFFORT TO EXPAND

CONTRACEPTIVE MANDATE

EXEMPTION REJECTED

The US Court of Appeals for the Third Circuit, on

August 4, held that the houses-of-worship exemption

to the contraceptive mandate of the Patient Protection

and Affordable Care Act does not have to be expanded

by equal protection principles to embrace single-issue

“ethical” groups and is not a substantial burden on the

exercise of religion in contravention of the Religious

Freedom Restoration Act (Real Alternatives, Inc. v. Secre-

tary, Department of Health and Human Services).

Facts

Real Alternatives is a nonprofit, anti-abortion organiza-

tion. It has not adopted any religious views or positions. Its

primary purpose is to provide “life-affirming alternatives

to abortion services,” offering pregnancy and parenting

support programs as well as abstinence education services.

This organization avers that its views on human life

are based on science, reason, and nonreligious philo-

sophical principles. It opposes the use of all contracep-

tives, considering them morally wrong.

Originally, Real Alternatives excluded contracep-

tive care from the health insurance plan it offers its

employees. In 2014, because of the mandate, its insurer

stopped omitting contraceptive care from coverage; a

new plan was offered to employees. Were it not for the

ACA, the insurance provider would be willing to provide

a plan that does not include contraceptive coverage.

Law

Law created by the Affordable Care Act imposes

the contraceptive mandate, which requires coverage by

employer-provided health insurance plans of Food and Drug

Administration–approved contraceptives, at no cost to par-

ticipating employees. This body of law provides an exemp-

tion for houses of worship and their integrated auxiliaries.

Analysis

Real Alternatives challenged the constitutionality of the

houses-of-worship exemption, arguing that it violates its

right to equal protection. The contention was that the Fifth

Amendment precludes exemption only for religious employ-

ers, also requiring exemption for secular entities, such as

itself, that oppose the requirements of the mandate. It