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Winter is Coming: The environmental failings of tax law

It was nearly four decades ago that I first got involved in charity in a meaningful way. I was in the third grade at Pearl Ridge Elementary School and helped organize a recycling drive to collect newspapers and aluminum cans. This effort had the dual benefit of removing waste from the landfill stream as well as generating revenue for our school as we sold the recyclables to private vendors.

To that nine-year-old boy, spending my career in the nonprofit world was the furthest thing from my mind. Yet I have spent virtually the entirety of my adult life working for charitable and philanthropic organizations. I’ve helped create more than two-dozen new charities in places as varied as Ohio, Nevada, Hawaii and Wisconsin.

During the last few years on our beautiful little peninsula working for the Door County Community Foundation, I’ve been involved in administering the Door County Green Fund and helped found Healthy Water Door County. While I’m certainly no attorney, I’ve spent far more time than anyone ever should trying to understand the organizational structure of effective charities and the complexities of the tax code as it relates to charitable giving.

Yet even after decades of this work, it has become painfully obvious that, like Jon Snow, I know nothing. I was reading a November 2016 article on nonprofitlawblog.com when for the very first time I saw the reality of a simple truth in charitable tax law that had long been staring me in the face.

Preserving and protecting our environment is not inherently a charitable act.

For decades, we’ve managed to work around this omission in our nation’s tax laws, but inevitably, it is a growing menace that we eventually will have to confront. As the Jon Snow character from the television series Game of Thrones ominously likes to say, “Winter is coming.”

Section 501(c)(3) of the Internal Revenue Code (IRC) identifies seven exempt purposes that qualify an organization as a public charity. Specifically, the Internal Revenue Service (IRS) defines a charitable contribution as a gift to an entity “organized and operated exclusively” for religious, charitable, scientific, literary or educational purposes, or prevents cruelty to children or animals, or an organization that fosters amateur sports competition.

Yes, you read that correctly. The IRC says that promoting amateur sports is inherently charitable but that protecting the environment is not. To quote from that article, “Environmental as a 501(c)(3) Charitable Purpose,” I recently read on nonprofitlawblog.com, “there is no explicit mention of environmental purposes in the statutes or regulations defining what is charitable under Section 501(c)(3) of the Code.”

Of course, we all can name plenty of terrific environmental groups that have been recognized by the IRS as 501(c)(3) public charities. The problem is that to earn their tax-exempt status, they had to link their environmental mission to another purpose that the IRS would consider charitable.

Professor Edward Lloyd of Columbia Law School’s Environmental Law Clinic wrote about this issue in his 2015 paper, “Clarifying IRS’s View on Climate Change as a Charitable Purpose.”

Lloyd wrote, “There is no explicit mention of environmental protection in the statues governing what is charitable. The IRS does consider environmental preservation to be a charitable purpose, however the IRS often looks for additional charitable factors and justifies the environmental activities not as charitable because of their environmental protection, but as charitable because of other benefits they provide.”

To obtain recognition as a public charity by the IRS, you typically justify the organization’s charitable nature under labels such as “lessening the burdens of government” or “combatting neighborhood deterioration.”

Lloyd notes, “When these factors are absent, it seems much harder to get the activity considered as charitable.”

On the surface, it’s easy to dismiss this glaring omission as nothing more than bureaucratic gobbledygook. After all, isn’t what most environmental groups do inherently “educational” or “charitable” which should qualify them as tax-exempt under 501(c)(3) of the IRC?

Unfortunately, it’s not that simple. The Sustainable Economies Law Center provides guidance on its website, writing, “What you think is ‘educational’ or ‘charitable,’ may not be the same things the IRS considers to be ‘educational’ or ‘charitable.’ The only way to know with any certainty whether the IRS would accept your activity as tax exempt is to look at rulings where the IRS has examined similar activities. These rulings can be found in Private Letter Rulings, Revenue Rulings, and tax court decisions.”

Therein is the problem. Rather than a clear statement in the IRC that preserving and protecting the environment is inherently charitable, you need to parse individual rulings to see if what you’re trying to do will earn you the coveted designation as a 501(c)(3) public charity. Unfortunately, a patchwork system of legal reasoning that was adequate for the environmental challenges of the past is now beginning to fail us as we deal with the most pressing issues of today.

In the 1970s, the IRS issued a series of landmark rulings, which made clear that environmental preservation could be considered a charitable activity. IRS Revenue Ruling 76-204 and its precursor 75-207 provided the line of legal reasoning that begins with recognized charitable activities and eventually links us to the conclusion that preservation of ecologically significant land is a charitable purpose.

It’s this legal justification we use even today for such organizations as the Door County Land Trust, The Ridges Sanctuary, and even the Open Door Bird Sanctuary. These rulings led to an explosion of new environmental charities in the latter part of the 20th century dedicated to protecting environmentally sensitive areas and the wildlife that calls them home.

A key commonality among many of these organizations is that they deal with specific pieces of land that you could outline on a map. The environmental mission of organizations like the Door County Land Trust is direct and identifiable because you can point to the tracts of land that are now protected as a result of their charitable work.

Unfortunately, more recently the IRS has been less receptive to organizations that define the land they are trying to protect as the entire planet. The IRS has also explicitly questioned the value of incentivizing individual environmentally-friendly actions that have almost no individual impact, even if they collectively can change the world. I’m certainly no environmental expert, but this seems to be the essential strategy of organizations dedicated to combatting climate change — and it’s a strategy that has been recently questioned if not explicitly rejected on several occasions by the IRS.

In a Private Letter Ruling in 2012 (IRS PLR 201210044), the IRS determined that an organization providing solar panels to low- and middle-class households did not qualify as a 501(c)(3) public charity because its impact on the environment was “indirect and tangential.”

Similarly, another Private Letter Ruling (IRS PLR 201017066) in 2010 denied public charity status to an organization dedicated to reducing greenhouse gases and carbon emissions by providing down payment assistance to families that otherwise could not afford to purchase energy-efficient homes. Once again, the IRS found that the environmental benefits were too “non-specific and indirect.”

The IRS has also denied 501(c)(3) public charity status to organizations that are dedicated exclusively to promoting the use of more efficient environmental technologies. In 2013, the IRS ruled that an organization whose activities consisted of posting papers on the newest technology, providing demonstrations of how it works, and offering public presentations did not meet the standard for public charities. The IRS said that “these activities do not, in and of themselves, preserve or protect the environment in a manner that is sufficient for 501(c)(3) purposes (IRS PLR 201311028).”

Of course, there are many organizations addressing climate change that have passed muster with the IRS, but they typically do so by justifying their work by linking it to some other non-environmental purpose that is explicitly written into the IRC. This convoluted logic is the inevitable outcome of our nation’s failure to include environmental protection as one of the defined charitable activities.

This problem is only going to grow. As Lloyd writes, “This is especially an issue when dealing with climate change, as the links between emissions leakage and the resulting impacts on the environment may not be as clear as in other areas of the environment, and given how global and diffuse the problem is, it requires acting on individual emissions that may not of themselves be significant, but which together cumulatively add up to significant impacts.”

While it’s tempting to point the finger at the IRS for this failing, these government officials are merely trying to apply existing law to today’s environmental issues. Ultimately, the IRC is written and enacted by the United States Congress. Thus far our elected officials have failed to effectively address this problem with the tax code.

Lloyd notes a solution would be to simply have “environmental protection and climate change specifically added to Section 170(c)(2)(B) and 501(c)(3) of the [Internal Revenue] Code.”

Until a change is made, it appears likely that our tax law will increasingly hinder our ability to deal with today’s most pressing environmental concerns. Winter is coming.

Bret Bicoy is president and CEO of the Door County Community Foundation. Contact him at [email protected]

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