Saturday, January 24, 2015
Elizabeth A.M. Searing (School of Policy Studies, Georgia State University) has published Charitable (Anti)Trust: The Role of Antitrust Regulation in the Nonprofit Sector, 5 Nonprofit Policy Forum 261 (2014). Here is the abstract:
The purpose of this study is to address the ambiguities in the application of anti-trust regulations to the nonprofit sector. We first survey policy tools and their diverse historical usage in nonprofit and mixed markets, specifically in professional associations, hospitals, and education. This analysis informs the development of a typology of anti-competitive nonprofit markets which is used to classify the three historical examples into eight traits. Finally, this typology is applied to three new markets – animal shelters, thrift stores, and soup kitchens – which have less in common with purely for-profit markets and have little or no discussion in antitrust literature. We find that the nonprofit form per se does not indicate an absence of anticompetitive practices or antitrust concerns; however, certain combinations of attributes – such as purely donative revenues and an absence of pricing ability – make the threat of anticompetitive practice less oppressive.
Kate Cooney (School of Management, Yale), Justin Koushyar (Business School, Emory), Matthew Lee (INSEAD (Singapore)), and Haskell Murray (Belmont) have posted the results of their research titled Benefit Corporation and L3C Adoption: A Survey at the Stanford Social Innovcation Review blog. Here is the introduction:
A major challenge for social enterprises pursuing both a social mission and financial profit has been the absence of clear legal guidance about their responsibilities to investors and other stakeholders. In the United States, a number of new legal forms specific to social enterprise have emerged over the last decade to fill this gap. The two most common, the low-profit limited liability company (L3C) and the benefit corporation, modify traditional business legal structures to clearly enable and mandate the pursuit of social and environmental as a for-profit business enterprise. This is no small matter—the last major legal form to be created in the United States was the LLP in 1991.
The success of a new regulatory infrastructure for social enterprise depends heavily on the extent to which state legislators, then companies, adopt these forms. To date, a lack of good data has made it difficult to evaluate progress. To address this, we worked over the last year with Secretary of State offices and Intersector Partners to develop systematic, nation-wide data on adoption of these forms.
Hemphill & Cullari: The Benefit Corporation: Corporate Governance and the For-profit Social Entrepreneur
Thomas A. Hemphill and Francine Cullari (both School of Management, Michigan-Flint) have published The Benefit Corporation: Corporate Governance and the For-profit Social Entrepreneur, 119 Business and Society Review 519 (2014). Here is the abstract:
The adoption by 19 states and the District of Columbia of a new variant of the business corporation form—known as the benefit corporation—presents several issues for legislatures, for entrepreneurs electing to organize as benefit corporations, for existing corporations that are converting to the new form, and for the stakeholders (other than shareholders) who are intended to be considered in benefit corporation governance. The article presents the history and structure of the new business form and a discussion of what has become its predecessor—the constituency statute. The model benefit corporation statute provisions are reviewed, which many states have adopted in toto. The authors address the obstacles that should be overcome by legislatures, businesses, and stakeholders before further legislative adoptions occur, as well as considerations for effective implementation by government, corporations, and stakeholders under existing and proposed variations of the statute.
Samuel D. Brunson (Loyola-Chicago) has posted Dear I.R.S., It Is Time to Enforce the Campaigning Prohibition, Even Against Churches. Here is the abstract:
In 1954, Congress prohibited tax-exempt public charities, including churches, from endorsing or opposing candidates for office. To the extent a tax-exempt public charity violated this prohibition, it would no longer qualify as tax-exempt, and the I.R.S. was to revoke its exemption.
While simple in theory, in practice, the I.R.S. rarely penalizes churches that violate the campaigning prohibition, and virtually never revokes a church’s tax exemption. And, because no taxpayer has standing to challenge the I.R.S.’s inaction, the I.R.S. has no external imperative to revoke the exemptions of churches that do campaign on behalf of or against candidates for office.
This argument makes the normative case that, notwithstanding the I.R.S.’s administrative discretion and the inability of taxpayers to challenge its nonenforcement in court, the time has come for the I.R.S. to begin enforcing the campaigning prohibition. Failing to do so harms the Rule of Law, the taxpaying public, and churches themselves. Moreover, the moment is correct for enforcement, as Pulpit Freedom Sunday has virtually eliminated the I.R.S.’s search costs, people are more aware than ever that churches are violating the prohibition, and, in the aftermath of the Supreme Court’s Citizens United decision, the campaigning prohibition may represent the final regulatory barrier between charities and politicking.
Even if enforcing the campaigning prohibition is the right thing to do, it would potentially be unpopular, and could provoke a backlash against the I.R.S. After making the normative case for enforcement, then, this Article provides a strategy for enforcement that will allow the I.R.S. to explain what it is doing and why to the general taxpaying public, and will further permit the I.R.S. to avoid the appearance of partisanship. Ultimately, enforcement will allow the I.R.S. to responsibly administer the tax law, will permit the question of the prohibition’s constitutionality to get in front of the judiciary, and will demonstrate dedication to the Rule of Law.
To this day, the law of charity is often thought of as a matter for the states. In fact, the crucial law relating to charity is now almost always federal. For certain purposes, state law still determines whether a given entity is “charitable.” It also determines the propriety of a charitable fiduciary’s conduct when someone who has standing sues. But federal law determines whether an entity qualifies for various tax incentives, such as exemption from the federal income tax and eligibility to receive tax-deductible gifts, and qualification for these incentives generally determines whether the entity comes into existence and, if so, whether it survives. Federal law also wields a bewildering array of draconian penalties against both charities and their fiduciaries for failure to comply with federally specified rules of behavior. This Article examines both of these and other ways in which federal law has essentially taken over the law of charity. The point is not whether federalization of the law of charity is good or bad. The point is simply this: During the last century, Congress and the federal courts federalized the law of charity.
Friday, January 23, 2015
In recent years, a conservative majority of the U.S. Supreme Court, over vigorous dissents, has developed circumventions to the Establishment Clause of the First Amendment that allow state legislatures unabashedly to use public tax dollars increasingly to aid private elementary and secondary education. This expansive and innovative legislation provides considerable governmental funds to support parochial schools and other religiously-affiliated education providers. That political response to the perceived declining quality of traditional public schools and the vigorous school choice movement for alternative educational opportunities provokes passionate constitutional controversy. Yet, the Court’s recent decision in Arizona Christian School Tuition Organization v. Winn inappropriately denies taxpayers recourse to challenge these proliferating tax funding schemes in federal courts. Professors Winer and Crimm clearly elucidate the complex and controversial policy, legal, and constitutional issues involved in using tax expenditures - mechanisms such as exclusions, deductions, and credits that economically function as government subsidies - to finance private, religious schooling. The authors argue that legislatures must take great care in structuring such programs and set forth various proposals to ameliorate the highly troubling dissention and divisiveness generated by state aid for religious education.
NPR and ProPublica report that Senator Chuck Grassley is not letting his departure from the Senate Finance Committee deter him from continuing to challenge the practices of tax-exempt nonprofits. Responding to earlier stories from these two outlets that some nonprofit hospitals have been seizing the wages of low-income patients, Senator Grassley is now demanding that those hospitals explain their actions and challenging them on whether those actions are consistent with their tax and nonprofit status. He is also invoking the provision included in the Affordable Care Act and codified in Internal Revenue Code section 501(r)(6) requiring section 501(c)(3) hospitals to make "reasonable efforts" to determine if an individual is eligible for financial assistance before engaging in extraordinary collection actions as a condition of maintaining their tax-exempt status.
The Center for Public Integrity reports that it has obtained new information detailing how rare it is for the IRS to audit a tax-exempt organization for alleged excessive political activity. CPI states that according to the IRS itself the Service has "only begun auditing 26 organizations specifically for political activity since 2010." CPI blames the lack of audits, even as hundreds of millions of dollars have been spent by such organizations for political activity, on a mix of factors, including a reduced Exempt Organizations Division staff, a lack of clarity in the rules governing such activity, and an understandable wariness to address such issues given the continuing aftershocks from the 501(c)(4) application controversy . CPI obtained this information through a Freedom of Information Act request filed late in 2013.
The Oklahoman reports that the Humane Society of the United States has sued Oklahoma Attorney General Scott Pruitt for allegedly slandering and persecuting the organization for political reasons under the guise of enforcing Oklahoma's charitable solicitation laws. The group and the AG released dueling statements, with the Humane Society claiming that the AG has engaged in a "nearly yearlong campaign of political harassment and public vilification" and the AG demanding that the Humane Society disclose documents relating to its solicitation practices, which practices may be misleading. Besides being the rare case of a well-funded and sympathetic charity challenging a state's regulation of charitable fundraising, the litigation also will likely be interesting because the attorney representing the Humane Society is former Oklahoma Attorney General Drew Edmondson.
The San Francisco Chronicle reports that the ten-year old charity Architecture for Humanity closed its door at the start of this year. A statement from the Board of Directors on the group's website states that the organization is filing for Chapter 7 bankruptcy, having laid off all of its staff as of January 1st and closed its physical office in San Francisco. The closure apparently came as a shock to many, given that the group had at its peak more than 60 chapters and was the recipient of a number of prestigious awards. Its 2012 IRS Form 990, for the year that ended June 30, 2013, reported over $12 million in income, almost all from contributions and grants. Nevertheless, the article indicates that at the end it was a lack of funding that doomed the organization.
Thursday, January 22, 2015
Completing a previously announced realignment, the IRS formally reassigned responsibility for most rulings relating to tax-exempt organizations to the Office of Associate Chief Counsel (Tax Exempt and Government Entities) ("TEGE Counsel") as of January 2, 2015. In Announcement 2014-34, the IRS shifted responsibility away from the Tax Exempt and Government Entities Division of the IRS ("TE/GE") for revenue rulings, revenue procedures, technical advice, and letter rulings relating to exempt organizations (other than certain letter rulings relating to employee plans that will remain with TE/GE). With respect to exempt organizations, TE/GE will only retain responsibility for determination letters, including exemption determination letters and determination letters issued in response to an IRS Form 8940 (Request for Miscellaneous Determination).
Wednesday, January 21, 2015
National Taxpayer Advocate Recommendations: In her 2014 Annual Report to Congress, Nina Olson called on Congress ot create an optional "safe harbor" election for section 501(c)(4) organizations that would give such organizations a numerical test they could use to ensure that their level of political campaign activity is permissible given their tax-exempt status (similar to the existing section 501(h) election for section 501(c)(3) organizations with respect to lobbying) (Legislative Recommendation #5). Ms. Olson also recomended that Congress give groups seeking section 501(c)(4), (c)(5), or (c)(6) status the ability to seek a declaratory judgement in the same manner as groups seeking section 501(c)(3) status now enjoy, and that the IRS adopt administrative review procedures for groups that have had their tax-exempt status automatically revoked (Legislative Recommendation #12).
IRS Modification of Section 501(c)(4) Expedited Application Process: In a memo released just before Christmas, the Acting Director, EO, Rulings and Agreements provided revised and clarified previously issued procedures for applicants seeking recognition under section 501(c)(4) that are given the option of choosing an expedited application process. The new procedures only apply to applicants that are given this option after the issue date (12/23/14) for the memo. Applicants who were told they were eligible for this option before that date are subject to slightly different procedures (included as Appendix B to the memo).
Omnibus Spending Bill Again Limits (?) IRS: As was the case a year ago in Public Law 113-76 (see "Cryptic Legislation" section of this post), Congress has once again included with the funding of the IRS the following limitations (Hat Tip: EO Journal):
SEC. 107. None of the funds made available under this Act may be used by the Internal Revenue Service to target citizens of the United States for exercising any right guaranteed under the First Amendment to the Constitution of the United States.
SEC. 108. None of the funds made available in this Act may be used by the Internal Revenue Service to target groups for regulatory scrutiny based on their ideological beliefs.
It is still unclear what exactly the effect, if any, of these provisions actually is.
House Oversight & Government Reform Committee Staff Report: Released by outgoing Chairman Darrell Issa, the report, not surprisingly, slams the IRS and the Obama Administration, and also promises more fact-finding.
The Shrinking IRS: As numerous news outlets have reported, the IRS faces a shrinking budget - likely at least in part because of the 501(c)(4) mess - even as the demand for its services from taxpayers continues to increase. According to Taxpayer Advocate Nin Olson, the decline is 17.5 percent since 2010, taking inflation into account (see NPR). IRS Commissioner John Koskinen has even said the agency might have to shut down for two days, with employees put on unpaid furlough (see The Hill). For other examples of the flood of coverage, see Forbes, NBC News, the NY Times, and the Washington Post.
It is too soon to make a final call, but at least some positive changes may result - clarification of the standards for political activity by noncharitable 501(c) organizations and clearance of the exemption application backlog come to mind. At the same time, the damage to the Service and the tax system seems greater - trading speed for accuracy in the application process, damaged morale among the remaining IRS employees and greater difficulty in recruiting future such employees, and a collapsing budget even as the tax law continues to become more complex.
Tuesday, January 20, 2015
As part of the continuing blurring of lines between nonprofits and for-profits, the Wall Street Journal reported last month on the increasing efforts by universities to be incubators for innovative startup companies that take advantage of university resources, including faculty expertise and intellectual property. The article notes that according to the Association of University Technology Managers the number of new university and other research institution startups is approaching 1,000 a year. At the same time, the article highlights the many obstacles that such startups face, many of which stem from the very university environment that also supports them. These obstacles include faculty focused on research and publishing, not entrepreneurship, and limited access to markets and venture capitalists. Nevertheless, in an era of flat tuition universities will undoubtedly continue to try to leverage their assets in new ways, including through such ventures.
A number of years ago we reported on the rescue of Oral Roberts University from looming bankruptcy by a generous (to the tune of $70 million) donor after the resignation of the University's President. I recently came across a detailed account of the circumstances that led up to this dramatic event, published by This Land Press, an Oklahoma based media company. While not focused on legal issues, the story provides some fascinating details regarding how the University's Board of Regents - populated by a whose who of televangelists - learned about and reacted to accusations that the University's President, who was also Oral Roberts' son, had received improper personal financial benefits from the institution. It also provides a detailed - and contestable - narrative about the motivations that led Oral Roberts to found the University and other, even less successful nonprofit ventures, and to try to keep leadernship of the Universithy within his family.
I recently was looking for some examples of nonprofit colleges and universities becoming for-profits and noticed what appears to an interesting trend - for-profit colleges and universities becoming nonprofits. The most prominent example is Grand Canyon University (GCU), which informed shareholders late last year that it may buy them out and convert to a nonprofit college according to a Bloomberg News article. GCU, which has both a physical campus in Arizona and a strong online presence, is currently worth over $2 billion (based on the market value of its publicy traded parent company). Its stated reason for considering this change is the stigma associated with being a for-profit, which apparently affects its relationships not only with prospective students but also with other institutions of higher education and regulators. For example, it claims that some schools have refused to play sports against them even though it is an NCAA Division I school. One particularly interesting aspect of its history - it was a nonprofit until 2004, when financial struggles led it to become a for-profit entity, while still apparently maintaining its reputation as a strong Christian institution.
GCU is the most prominent example, but not the only one. The Milwaukee-Wisconsin Journal Sentinal recently reported that Herzing University, described as a for-profit career college, has just completed a conversion to nonprofit status. And a July 2014 Inside Higher Ed article noted four other for-profit to nonprofit conversions, although all of those involved relative small institutions that were closely held and so presumable were easier to convert. According to the article, unidentified sources said another four such institutions were considering such a move. The most common mechanism is for the institution to be sold to an existing nonprofit, with valuation and financing being the key issues in such a scenario. And of course there are numerous accreditation, property ownership, and other other regulatory and legal issues to address. Given this complexity, it is not surprising that according to a recent Arizona Republic article GCU officials only give themselves a 50 percent chance of successfully converting GCU to nonprofit status. It also not surprising that the same article highlights how much GCU's current executives would take home (tens of millions of dollars) if the conversion happens.
Monday, January 19, 2015
The Nebraska Supreme Court last week faced the issue of whether records held by Falls City Economic Development and Growth Enterprise, Inc. (EDGE), a Nebraska nonproit corporation, were "public records" within the meaning of Nebraska's disclosure laws because of the relationship EDGE has with the City of Falls City, Nebraska and other governmental entities. In a unanimous decision, the court concluded EDGE's records were not public records and so were not subject to disclosure, reversing a state trial court.
Citing an earlier opinion as well as similar tests applied by courts in other states, the Nebraska Supreme court stated that records held by a private party are public records if: "(1) The public body, through a delegation of its authority to perform a government function, contracted with a private party to carry out the government function; (2) the private party prepared the records under the public body’s delegation of authority; (3) the public body was entitled to possess the materials to monitor the private party’s performance; and (4) the records are used to make a decision affecting public interest." Finding that EDGE was not controlled by government officials, although two city officials served among the 21 voting members of EDGE's board of directors and another official served in a non-voting, ex-officio capacity, that the government funding provided to EDGE was under the control of its board, and that EDGE had separate financial records, separate offices, and separate employees from the governments with which it worked, the court concluded that EDGE was not the functional equivalent of a government agency and so its records were not public records subject to legally required disclosure. If, as the court suggested, the test it applied represents a growing consensus among state courts regarding how to approach this issue, this decision likely has ramifications beyond the State of Nebraska.
In the wake of U.S. Court of Appeals for the Seventh Circuit dismissing on standing grounds a lawsuit challenging the minister housing allowance available under IRC section 107, the U.S. District for the Western District of Wisconsin revisited its 2013 decision finding standing to challenge the church exemption from having to file annual information returns (Form 990) with the IRS. Following the Seventh Circuit's lead, the District Court concluded that the plaintiffs in the Form 990 case (one of which, the Freedom from Religion Foundation, is common to both cases) lacked standing because they had never sought and been denied an exemption from having to file Form 990 for themselves (as opposed to objecting to other organizations emjoying an exemption). Indeed, the District Court noted that the plaintiffs stated in their complaint that they intended to continue to file the Form 990 and did not seek to amend their complaint in this regard even afer the defendant identified this issue in its motion to dismiss.
Therefore while it appears the Seventh Circuit left open a way for plaintiffs to obtain standing in this case and similar cases - claim the exemption or tax benefit that churches enjoy and then file suit if and when the IRS denies that claim - it is not clear that at least the plaintiffs in this case are willing to make such a claim. This path appears to still be available for others with similar concerns about the provision of such exemptions and benefits to churches to the exclusion of other types of nonprofits, however.
In 2012 the nonprofit Avera Marshall Regional Medical Center's board of directors unilaterally decided to repeal and replace the hospital's medical staff bylaws. Two individual physicians and the Medical Staff as a whole objected, eventually filing a lawsuit against the hospital that reached the Minnesota Supreme Court on two important governance issues for nonprofit hospitals. First, did the Medical Staff, as an unincorporated association, have the legal capacity to sue? Second, did the medical staff bylaws constitute an enforceable contract between the hospital and the Medical Staff? In a December 31, 2014 opinion, the Minnesota Supreme Court answered both questions in the affirmative.
With respect to the first question, the court acknowledged that the common law rule in Minnesota is that unincorporated associations are not legally distinct from their members and so do not have legal capacity to sue or be sued in their own right. The court found, however, that the Minnesota legislature had overridden this rule when it enacted Minnesota Statute section 540.151, reading that statute as granting an unincorporated association that met the criteria described in the statute the capacity to sue and to be sued. Those criteria are having two or more persons associate and act under a common name, criteria that the court found the hospital's "Medical Staff" satisfied.
With respect to the second question, the Minnesota Supreme Court concluded that even though the hospital had a legal obligation under Minnesota administrative rules and the hospital's corporate bylaws to adopt medical staff bylaws, both sides still provided consideration. More specifically, the hospital granted privileges at the hospital in exchange for the prospective Medical Staff member agreeing to abide by the bylaws. The court therefore concluded that there was a bargained-for exchange of promises and mutual consent to the exchange, creating an enforceable contract. The court therefore remanded the case for consideration of the plaintiffs' claims that the repeal and and replacement of the medical staff bylaws violated the terms of that contract.
The result in this case, which may be significant to many hospitals, for-profit and nonprofit, was not a foregone conclusion as both the state trial court and the state appellate court had reached the opposite result on both questions. Indeed, two members of the Minnesota Supreme Court dissented from the five justice majority's opinion.
Thursday, January 15, 2015
With a hat tip to the Chronicle of Philanthropy, see this note on these billboards springing up around the Boston area, sponsored by the Charity Defense Council. The article notes that the head of the Charity Defense Council, Dan Pallota, is at the fore in the debate over the use of administrative costs as a measure of charitable outcomes. Speaking of effectivenss... how effective is a billboard on I-90 on a complicated policy issue? Anyone in the Boston area spot one?
Tuesday, January 13, 2015
Over the weekend, The New York Times published the next great exposé in the tax habits of the rich and famous, entitled Writing Off the Warhol Next Door: Art Collectors Gain Tax Benefits from Private Museums. The article seems to be getting some play elsewhere, having been picked up by outlets like the Huffington Post and of course, that leader in Journalism, the Tax Prof Blog! (Some of you may recall one of this article’s predecessors-in-kind at The Washington Post in 2005, Big-Game Hunting Brings Big Tax Breaks: Trophy Donations Raise Questions in Congress, which lead to the passage of Section 170(f)(15) – Special Rule for Taxidermy Property – effective for contributions made after 7/25/2006).
The article discusses the growing phenomenon of the “private museum.” Although this term has no technical definition, the article uses it to refer to a collection of art that is given to a tax-exempt charitable organization controlled by the donor of the collection and located in close physical proximity to the donor. This trend is arguably the offshoot of the enactment of Section 170(o) in 2006, which used to allow an individual to give only a fractional interest in a piece of art to a museum, and maintain possession of the art proportional to the fractional interest retained.
One problem that I have with the article is that it talks about collectors getting a tax subsidy for their investments in art. At no time is it really made clear that in order for this to work from a tax perspective, the collector has probably given ownership of the art to the charity forever. Thus, it is no longer the “collector’s investment”, and when the collector dies, that art (or the proceeds therefrom) remain in the public sphere in perpetuity. The benefit is that he or she gets to go look at the art whenever they want to do so, as opposed to having to make an appointment on every other Tuesday at 1:43 p.m.
After culling through all the Sturm und Drang in the article, I think the article has three possible issues with the concept of the private museum, although I don’t think these arguments are made very clearly:
- Is collecting and preserving art, in and of itself, “charitable” in a tax-exempt context?
- Is it really the public educational component of the collection of art the thing that makes it tax-exempt?
- Assuming it is charitable activity in one manner or another, is the ease of access of the original donor so significant as to overwhelm the otherwise charitable benefit afforded by having the collection in the public sphere (in other words, private benefit and/or private inurement)?
I wish the article had been a little more methodical on the law, and a little less TMZ, but I guess that wouldn’t make a very interesting piece for anyone other than … well, those of us who regular the Nonprofit Tax Prof Blog!
Of course, one should always follow the Internet axiom “Never Read the Comments,” but the most disturbing part of the article is that portion of the comments that see the private museum as just another tax loophole for the wealthy, adding to a continuing stream of de-legitimization of the tax code and the IRS, but that’s another blog post…
(P.S. As a general marketing matter, one should never use the term “have your cake and eat it, too” publicly with respect to a tax planning matter unless you really are trying to flag down the IRS and/or Woodward & Bernstein. Just a thought.)
(P.P.S. Special shout out to our own Lloyd Mayer, who is quoted in the NYT piece.)