Supreme Court Perspective

• Published date: 01 May 2020
• DOI: http://doi.org/10.1002/npc.30722
• Date: 01 May 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

6 May 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

that organizations seek to avoid being classified as a

private foundation is not for the purpose of entering into

self-dealing transactions.” Rather, “it is simply to ensure

that the organization remain[s] a public charity for fund-

raising purposes.” That is, “most organizations will seek

to avoid classification of private foundation status only

to ensure that they can continue to effectively fundraise

to fulfill their charitable mission.” Thus, the institute con-

cluded: “Unless there is good evidence that organiza-

tions are being misclassified for the purpose of violating

the private foundation rules, the IRS and Treasury should

avoid imposing this type of onerous regulation on the

charitable sector.”

The institute also concludes that Treasury and the

IRS “have not sufficiently documented any alleged harm

resulting from misclassification of private foundations

as public charities through the use of donor advised

funds.” “Despite this failure,” the institute continues,

the proposal “would impose new restrictions that will

create several serious new problems for the charitable

sector.” The “administrative burden of the proposal will

create a compliance burden for all recipient organiza-

tions, but for small and innovative organizations that

happen to be funded with contributions from one or

more donor advised funds, the compliance burden will

be especially heavy or impossible.” These organizations,

the institute wrote, “facing uncertainty in securing

sources of contributions will be required to attempt to

collect donor information from donor advised funds to

ensure sources of public support, even though there is

no guarantee the sponsoring organization will provide

the information.”

Commentary: Although the institute’s constitutional

law argument is not persuasive, the organization makes

some good points, two of them being lack of evidence

as to abuse and any law revision in this area should be

by statute.

The institute’s submission, however, overlooks two

persuasive arguments. One is that the term indirect con-

tribution is statutory (IRC § 170(b)(1)(A)(vi)) (since 1964).

The present-law definition of this term, which the notice

indicates will be reversed in the case of donor-advised

funds, has been part of the tax regulations for decades.

Congress has passed many tax laws, large and small,

over the ensuing years and has never even contemplated

overriding the regulation’s interpretation of the term.

Thus, this definition may be presumed to have congres-

sional imprimatur (e.g., Davis v. United States (Sup. Ct.

1990)).

The other argument is the restraint on government

agencies when it comes to changes in policy. To survive

review under the Administrative Procedure Act, by not

being arbitrary and capricious, however, an agency in

this position must, as the US Supreme Court directed,

“provide a reasoned explanation for the change” (Encino

Motorcars, LLC v. Navarro (2016)). That is, the agency

must at least “display awareness that it is changing

position” and “show that there are good reasons for the

new policy” (id.), not just speculate about hypotheticals.

As a federal district court stated, “Unexplained incon-

sistencies in agency position are arbitrary and capricious

and therefore unlawful” (Steele v. United States (DDC

2017)). ◆

SUPREME COURT PERSPECTIVE

Bloomberg Tax’s Daily Tax Report, in its February 20

issue, offered a perspective on the second half of the US

Supreme Court’s current term, predicting it will be “con-

tentious.” The analysis predicts “blockbuster opinions,”

based on over 20 cases pending before the Court. Six of

these cases will have an impact on nonprofit law.

Four of these cases are in the realm of religion. Three

of them are summarized in the March 2020 issue. One

concerns state funding of religious schools and whether

it was constitutional for a state supreme court to strike

down the funding program because of a ban in the

state’s constitution; arguments were held on January

22 (Espinoza v. Montana Department of Revenue). Two

other cases involve employment discrimination in reli-

gious schools; arguments are set for April 1 (Our Lady of

Guadalupe School v. Morrissey-Berru; St. James School v.

Biel). [10.1(a)(i), 10.3(c)] A third case concerns the scope

of the religious exemption in the Patient Protection and

Affordable Care Act regarding contraceptive coverage

for employees (Little Sisters of the Poor v. Pennsylvania).

This latter case may be heard in late April, although the

Court’s hearing schedule was shifting as this issue went

to press.

Two cases concern administrative law. The principal

one will address the constitutionality of the governance

structure of the Consumer Finance Protection Bureau;

argument was held on March 3 (Seila Law v. CFPB).

Another case will address the scope of the authority of

the Securities and Exchange Commission; argument was

also held on March 3 (Liu v. SEC).

In addition to the foregoing, the Court, on March

2, agreed to hear a case addressing the constitutionality

of the Patient Protection and Affordable Care Act, in

the wake of a zeroing out of the shared-responsibility

payment, which was cast as a tax supporting the con-

stitutionality of the Act (California v. Texas). A federal

district court and court of appeals have found the

payment — the individual mandate — to be unconstitu-

tional (see the February 2019 and March 2020 issues).

The Court has thus agreed to hear this issue, in advance

of normal scheduling in the other case. These arguments

will take place in the Court’s next term, which begins in

October. ◆