Tuesday, March 11, 2014
Members of the Atlanta City Council will soon debate and vote on whether they should be able to donate taxpayer funds to nonprofit community organizations and charities. Critics take issue with the fact that the office budgets of Atlanta City Council members exceed $100,000 annually.
Should elected officials be permitted to use public dollars to contribute to and support charities? Why or why not? If so, should there be any limitations? Is there any other way for elected officials to support community charities without using taxpayer funds?
Last week the Chairman of the House Ways and Means Committee, Dave Camp, proposed a 2% floor on charitable deductions. The 2% floor means a taxpayer “would have to contribute at least 2% of their income to charity in order to claim a deduction.”
The proposal seems to be getting mixed reviews among those in the nonprofit world.
Steve Taylor, senior vice president of United Way Worldwide, explains, “[p]eople in America of all income levels donate to charity, and they donate what they can. This proposal is a proposal that would impact more people who are in the middle class.”
Jan Masaoka, CEO of the California Association of Nonprofits, claims the 2% floor could potentially encourage more charitable giving as some people near the floor give more money to reach the 2%.
With the charitable deduction costing the United States government about $44 billion a year, is a 2% floor an efficient reform proposal? How do arguments like Taylor’s and Masaoka’s affect the analysis?
Friday, March 7, 2014
On January 1, 2014, a North Carolina state law took effect and “expanded the sales tax to admission charges for entertainment and live events, such as concerts, plays, movies museums, and professional and college sports.”
Many North Carolina nonprofit organizations now worry that the new law, which will add 6.75% to the cost of admissions, will hurt ticket sales.
Richard Whittington, managing director of a local professional theatre located in downtown Greensboro says the new law is “definitely disappointing.” Whittington explains the newly imposed tax “is something that we are having to add that doesn't help us further our goals or achieve our mission, which is to provide top quality theatre at prices the entire community can afford.”
Are the fears of the North Carolina nonprofit organizations legitimate? Is Whittington correct in his assessment that the new tax law does nothing to help further the goals or achieve the mission of the nonprofit theatre?
Thursday, March 6, 2014
The Meridian International Center (MIC) is an eminent nonprofit organization whose mission is “to create innovative exchange, education, cultural, and policy programs that advance three goals:
1) Strengthen U.S. engagement with the world through the power of exchange;
2) Prepare public and private sector leaders for a complex global future; [and]
3) Provide a neutral forum for international collaboration across sectors.”
After enjoying a property tax exemption for 50 years, MIC lost it’s exemption after the Office of Tax and Revenue concluded the organization’s mission “does not directly benefit the residents of D.C. as the law requires.”
CFO Jeffrey DeWitt explains, “Meridian’s activities primarily focus on international affairs and strengthening international understanding through the exchange of people, ideas and culture between the United States and foreign countries….Based on a review of Meridian’s activities, OTR determined that Meridian did not meet the requirements for exemption as a public charity or school.”
However, in an attempt to distinguish MIC from other D.C. nonprofits whose tax exemptions were revoked for the same reasons, Ambassador Stuart Holiday argues that MIC does directly impact D.C. residents by working with school children, working with the D.C. government on international outreach, MIC’s museum is open to the people, it receives grants from the city, and it was chartered as an educational and cultural institution.
Are Holiday’s arguments persuasive?
Wednesday, March 5, 2014
The Committee on Nonprofit Organizations of the American Bar Association’s Business Law Section is calling for nominations for the “2014 Outstanding Nonprofit Lawyer Awards.” The Committee presents the Awards annually to outstanding lawyers in the categories of Academic, Attorney, Nonprofit In-House Counsel, and Young Attorney (under 35 years old or in practice for less than 10 years). The Committee will also bestow its Vanguard Award for lifetime commitment or achievement on a leading legal practitioner in the nonprofit field. Nominations are due by March 10, 2014.
For a nomination form, please go to the Nonprofit Lawyer Awards Subcommittee's webpage and scroll down to the bottom under "Nonprofit Lawyer Awards Documents." You will also find a list of prior award recipients. The Awards will be announced at the Business Law Section's Spring Meeting in April.
Send nomination forms by March 10, 2014 to:
William M. Klimon
Caplin & Drysdale, Chartered
One Thomas Circle, N.W.
Washington, D.C. 20005-5894
(202) 429-3301 (fax)
Last year, the Porter County Tax Assessment Board of Appeals brought up the religious exemption of Preachit for examination. Preachit is an Indiana organization whose website describes it as providing “resources for ministers by ministers.” The website further describes itself as “an Apostolic/Pentecostal resource web site with over 3900 manuscript and outlined sermons of various topics.” Preachit’s 2012 Form 990 lists its mission as “Scriptural/Ministry Evangelization.”
In 2009, Preachit received a religious exemption for part of its property and has not been paying taxes on any part of it since that time. The property is a facility with a “two-story home, several outbuildings, a pond, and more.” Additionally, the head of Preachit, Rev. James Smith, uses the building as his home along with his wife. However, Smith also uses it as the location for Preachit offices, meeting spaces, and a space to produce materials.
Porter County’s property tax exemption law mandates that the property owner be exempt from the federal income tax by section 501(c)(3) as an essential element of obtaining county property tax exemption. While § 501(c)(3) explicitly names religious purposes as one of the permissible purposes, neither § 501(c)(3) nor Treas. Reg. §1.501 defines the term “religious.” Instead, much of the law on this issue has been developed from case law.
Should Preachit qualify for tax-exempt status? What arguments can be made in support of and against granting Preachit tax-exempt status?
Tuesday, March 4, 2014
Last week Chairman of the U.S. House of Representatives Ways and Means Committee, Dave Camp, released the “Tax Reform Act of 2014.” The tax reform package “addresses a number of rules and laws applicable to tax-exempt organizations” and is described as having the potential to “impose significant new tax liabilities on nonprofits.”
The key aspects of the proposed legislation includes making changes to the Unrelated Business Income Tax, royalties, corporate sponsorships, UBIT deductions, excise taxes and intermediate sanctions, and penalties.
Another key aspect of the Act is that it would change the tax-exempt status of different types of nonprofits. For example, in addition to repealing tax-exempt status for professional sports leagues like the NFL, the proposed legislation would also repeal public charity status for Type II and Type III supporting organizations. Thus, supporting organizations would be limited to those organizations “operated, supervised, or controlled by their supporting organizations.”
What are the implications of proposing to repeal public charity status for Type II and Type III organizations? What are the arguments in support of and against this proposed change?
Sunday, March 2, 2014
Income From Charitable Organization’s Sale of Mitigation Bank Credits is not Unrelated Business Taxable Income
In Private Letter Ruling 201408031, the IRS ruled that (1) a § 501(c)(3) organization’s stream mitigation activities are substantially related to its exempt purpose and do not constitute an unrelated trade or business and (2) the income the organization will receive from the sale of mitigation credits is not unrelated business taxable income.
The exempt purposes of the organization, as set forth in its articles of incorporation, include “protecting the natural and scenic spaces of real property, protecting natural resources, and maintaining or enhancing water and air quality.” The organization partnered with a political subdivision of a state (the Commission) regarding the protection of certain land the Commission owns within a watershed and has covenanted to protect as stream buffers. The Commission conveyed a perpetual conservation easement with respect to the land to the organization, and the organization represented to the IRS that the perpetual easement will ensure that the land is kept undeveloped and its conservation values are preserved.
To raise the funds necessary to conduct stream remediation activities and address nonpoint sources of water pollution, the organization plans to form a stream mitigation bank with the support of the Commission. By conducting stream mitigation activities the organization will generate mitigation credits that can be sold to private developers or governmental entities that have projects that may cause stream disturbances somewhere else in the watershed. Once all the mitigation credits are sold, there will be no additional proceeds from the bank, but the owner/sponsor of the bank will be responsible for the monitoring and maintenance of the restored streams for seven years after the completion of the final phase and, in the case of the organization, it is charged with management of the water resources in perpetuity.
In ruling that the organization’s stream mitigation activities are substantially related to its exempt purpose, and that the income the organization will receive from the sale of mitigation credits will not be unrelated business taxable income, the IRS noted, in part, that:
The Commission covenanted to maintain a significant part of the land as stream buffers.
The Commission assigned its conservation obligations contained in the conservation easement to the organization, requiring the organization to maintain the land in essentially pristine condition and seek Commission's approval before making any capital improvements.
The Commission authorized the organization to negotiate the mitigation banking instrument and remediate the waterways, and delegated to the organization all responsibilities for the planning, funding, developing, and monitoring of the bank, as well as the authority to sell the credits generated by the bank.
By carrying out these activities, the organization will be fulfilling the Commission's conservation and legal obligations and lessening the government’s (the Commission's) burden.
A Private Letter Ruling is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. A PLR may not be relied on as precedent by other taxpayers or IRS personnel. PLRs are generally made public after all information has been removed that could identify the taxpayer to whom it was issued. See Understanding IRS Guidance – A Brief Primer.
Nancy A. McLaughin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Saturday, March 1, 2014
Route 231 v. Commissioner - Allocation to 1% Partner of 97% of Tax Credits Generated by Conservation Easement Donations Treated as Disguised Sale
In Route 231, LLC v. Commissioner, T.C. Memo. 2014-30, the Tax Court held that a partnership’s transfer to a 1% partner who had contributed $3.8 million to the partnership of 97% of the state tax credits the partnership received for making charitable contributions of conservation easements and land was a taxable disguised sale under IRC § 707. The partnership (Route 231) treated the transaction as a $3.8 milliion capital contribution by the partner followed by an ”allocation” of the tax credits to that partner. In holding that the transaction was, in substance, a disguised sale, the Tax Court relied on Virginia Historic Tax Credit Fund 2001 LP v. Commissioner, 639 F.3d 129 (4th Cir. 2011), which the court found to be “squarely on point.” The Tax Court also explained that IRC § 707 “prevents use of the partnership provisions to render nontaxable what would in substance have been a taxable exchange if it had not been ‘run through’ the partnership.”
In Virginia Historic, three individuals set up a web of partnerships for the purpose of passing Virginia historic rehabilitation tax credits to investors. The partnerships solicited investors who contributed money to the partnerships’ capital accounts in return for (i) small (generally 0.01%) partnership interests and (ii) the partnerships’ promise to provide them with a fixed amount of Virginia historic rehabilitation tax credits. The IRS determined that these transactions were disguised sales under IRC § 707 and the Fourth Circuit agreed.
The Tax Court found “compelling similarities” between the transactions at issue in Virginia Historic and the transaction at issue Route 231. Just as in Virginia Historic, Route 231 involved a contribution of money to a partnership in return for (i) a small (1%) partnership interest and (ii) the partnership’s promise to provide the contributor with a fixed amount of tax credits.
There were some factual differences between the transactions at issue in the two cases. Virginia Historic involved a complex web of partnerships with hundreds of investors, most of whom received a 0.01% interest in the partnerships, while Route 231 is a stand-alone partnership with only three partners, including the 1% partner. Unlike the investors in Virginia Historic, who were partners in the partnerships for only approximately five or six months (characterized by Route 231 as “grab the tax credits and run” cases), the 1% partner in Route 231 is still a partner in that partnership. In addition, in Virginia Historic the IRS argued that the investors were not valid partners, whereas in Route 231 the IRS did not question whether the 1% partner was a valid partner. The Tax Court was unmoved by these factual differences, finding that they did not detract from the compelling similarities between the two cases.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Wednesday, February 26, 2014
Though I didn't plan it this way, my series of blog posts this week seem to be taking a look at the commercialization of charities. So this story in the St. Louis Post Dispatch provides one more data point regarding my arguments from Monday: nonprofit hospitals do not have a "primary purpose" that is charitable; instead, their primary purpose is to provide high quality (and in some cases, more efficient) health services for a fee.
Ascension Health is a prototypical example of the hospital that was once a charitable organization and has now morphed into a multi-billion-dollar vertically-integrated health care business. The article details how Ascension, once run by a religious order with a mission to create schools for orphans and hospitals for the poor morphed into the multi-layer, multi-entity health-care giant that last year reported $17 billion in revenue, including over $2 billion in non-operating revenue from investments. To ice the cake, Ascension opened the first phase of a $2 billion "health city" complex in . . . the Cayman Islands, where they hope to better master the efficient delivery of heart surgery.
This, folks, is what passes today for "charity." Ascension notes that it spent about 3% of revenues on a variety of charity care and "community benefit" services. While I have long been skeptical of "community benefit" as the standard for tax exemption for nonprofit hospitals, even if I accept this test, 3% hardly seems to support the notion that Ascension has a primary purpose that is charitable. Providing schools for orphans and hospitals a majority of whose patients are poor would seem to me to be a primary "charitable" mission. But that isn't even close to what Ascension is anymore.
Again, I have no quibble with Ascension or any other health care system doing what they do best: pushing the envelope of high-quality health care; innovating in health care technique and delivery (e.g., the Cayman Island venture). That's a wonderful mission; when I get sick, I want to be treated by such a system. But that's not a charitable mission. It surely is a mission that is important to society; so is Apple Computer's mission to produce cutting-edge electronics devices that revolutionize communications (many of which, by the way, are now used routinely by doctors and other health care providers in providing health services), or Intel's mission to be on the cutting edge of computer processor design (also a key component in modern health care services), or BMW's mission to provide some of the safest cars on the road that also happen to be fun to drive (OK, I can't really link that one to health care; but BMW takes auto safety very seriously and also provides police cars to a lot of Europe; do they have a primary charitable mission of enhancing public safety? Obviously not).
So I'll end my recent troika of posts on the commercialization of charity with the same question I started with on Monday. Why is it so hard for us to accept that the mission of nonprofit hospitals has changed dramatically over the past century or even over the past 50 years? Why is it that when hospitals complained in the late 1960's that the newly-passed Medicare and Medicaid programs would eliminate the need for charity care (talk about hilariously-bad prediction of the future!) and thus make it impossible to meet the IRS's charity standard for exemption, the IRS responded by changing the standard, instead of saying "Well, guys, you know what? If that turns out to be true, then I guess you won't be charities any more!"
Is it really that hard to tie charitable tax-exemption to the way organizations run today, as opposed to how they ran 100 years ago? I guess so.
Tuesday, February 25, 2014
An article in the Nonprofit Quarterly notes that there is a bill in the Kansas legislature that would strip state property tax exemption from local YMCA's (the bill targets exemptions for any service provider that receives more than 40% of its revenues from "the sale of memberships or program services"). Meanwhile, at the same time Kansas is considering another bill to give tax breaks to for-profit gyms. Sigh . . .
The issues here are related to my post yesterday about charities that are essentially commercial businesses. As I noted in this post a couple of years ago, many Y's appear to be more like for-profit gyms than charities. I pointed out in that post that my local Y in Champaign, IL had recently moved into a brand new facility on the far west side of town from an older facility near the center of the city, and about as far as you can get from any minority or disadvantaged population and still be a part of the city of Champaign. The move was accompanied by an ad campaign touting the benefits of the move as "more value and flexibility for our members! For example, you can work out in the 9,000 square foot fitness center and then take your family to the indoor pool and water slide. Or, you can take advantage of some of our two facilities' specialized programs, like water aerobics or recreational gymnastics."
Now, just because charities compete in some way with for-profit enterprises doesn't make them a commercial business. The fact that the Salvation Army runs thrift stores doesn't make its primary mission one of selling used goods. But I noted yesterday that some organizations that might historically have had a charitable mission have essentially morphed into commercial businesses, because their real "primary" mission is no longer charitable. I think that many (not all) Y's have passed this rubicon just as surely as nonprofit hospitals, major college athletics, and the USOC.
The Nonprofit Quarterly article quotes the CEO of Topeka's Y saying that if they have to pay taxes, that will be the end of the Y. I wonder . . . I have a sneaking suspicion that if the Champaign Y lost tax exemption, it would soldier on with maybe a $50/mth membership, instead of $47/mth. Topeka, Kansas might have a different clientele . . . or maybe not.
Monday, February 24, 2014
In a recent column in Forbes, Howard Gleckman asked why the US Olympic Committee is tax-exempt. After all, he notes, "The law says tax exempt status is granted to groups that 'foster national or international amateur sports competition.' But do the hyper-marketed modern games even remotely fit the ideal of amateur sports?" A bit later, he follows with the observation that "By almost any standard, [the USOC] is a commercial enterprise. It exists primarily to help organize a bi-annual made-for-TV entertainment extravaganza. Yes, it provides some support for athletes (though surprisingly little). But its real business is marketing itself and playing its part in a two-week orgy of athletic commercialization."
Welcome, Howard, to the modern world of charitable tax-exemption. Substitute "college sports" in the quotations above and you would have an equally accurate description. And it would hardly be inaccurate to say "By almost any standard, private nonprofit hospitals are commercial enterprises." (And at least some research universities may be heading in that direction). So what might we do about the commercialization of the modern charity?
One thing we could do is take the "primary purpose" rule seriously and apply it with an honest recognition of the way certain organizations operate in the modern world. A charity is supposed to engage in activities that "primarily" futher a charitable purpose. Does anyone really believe that a typical private nonprofit hospital "primarily" pursues a charitable purpose? I certainly don't - private nonprofit hospitals' primary mission is to provide the highest-quality health care they can for a fee. That's an admirable mission, one I heartily support, and one that our nonprofit hospitals mostly excel at; but it is in no way, shape or form "charitable." I could say the same thing about the Olympics or college athletics - these activities, whatever their origins, are hardly about "amateur" athletics any more. The Olympics are a showcase for pros at their sports (men's hockey, anyone?) and big-time college athletics (Division I men's basketball and FBS football) are nothing more than minor leagues for the pros.
I don't know why it is so hard for tax policy to recognize that activities change over time, and things that may once have been charitable might not be today. Nonprofit hospitals were unquestionably charities in the 1800's, when they were essentially homeless shelters staffed by religious volunteers. That model no longer exists. The Olympics were at one time truly about amateur athletics, just as college sports at the enactment of the UBIT in 1950 mostly involved real student-athletes. No longer. Things change, but we refuse as a policy matter to re-examine charitable exemptions in light of changed circumstances. From time to time there have been proposals to require charities to "re-qualify" for exemption every so often (every 5 years, or 7 years or 10 years, for example). But these proposals won't "get it right" if we don't update our views about whether certain activities are charitable or not.
So, Howard, I have an answer to your question: analytical inertia. Our views of charitable activities seem frozen in time. Until we get over it, commercial activities will continue to dominate certain "charities" that are not charities at all.
Sunday, February 16, 2014
Should proposed definition of “candidate-related political activity” apply to 501(c)(3) public charities?
The Evangelical Council for Financial Accountability (ECFA) submitted comments to the U.S. Department of Treasury and to the IRS. Generally, the ECFA’s comments press for “more freedom and greater clarity in the rules governing political activity by tax-exempt organization.”
The comments are in response to the proposed guidance the Treasury and IRS gave last November. While the Treasury and IRS requested “comments from the public” the guidance given by the Treasury and the IRS was meant to help 501(c)(4) tax-exempt social welfare organizations “on political activities related to candidates that will not be considered to promote the social welfare.” The EFCA comments were based on recommendations from the Commission on Accountability and Policy for Religious Organizations.
President of ECFA Dan Busy offered the following four key comments on the proposed guidance:
1) "The Treasury and the IRS should proceed with great caution in applying the proposed 'candidate-related political activity' test to 501(c)(3) organizations."
2) "Replacing the 'facts and circumstances' approach with a clear-cut definition of political activity would benefit charities and the IRS."
3) "The proposed 'candidate-related political activity' test would silence charities from speaking out on issues with political significance."
4) "The Commission's recommendations strike a necessary balance of permitting charities to engage in communications that are relevant to their exempt purposes while ensuring that they expend funds in a manner consistent with their tax-exempt purposes."
If the Kansas legislature passes House Bill 2498 there would no longer be a property tax exemption for “organizations providing humanitarian services with more than 40 percent of revenue derived from membership sales.” The taxation of YMCAs seems to be a hot topic in Kansas because of Senate Bill 72, which would give a “property tax break to the for-profit fitness clubs across Kansas.”
The chief executive of Greater Wichita YMCA, Dennis Schoenebeck, claims leveling the playing field among nonprofit organizations and for-profit companies engaged in fitness programs ignores their diverse missions.
What arguments can me made to support Schoenebcek’s claims? Are YMCA organizations entitled to property tax-exemptions or have they become too much like for-profit corporations? What is troubling, if anything, about private gyms viewing YMCAs as competitors and not charities?
Tuesday, February 11, 2014
A new Nevada law is receiving a lot of praise for the transparency it provides potential donors. The law, Assembly Bill 60, went into effect on January 1 after the Nevada Legislature approved it last year. The new law is a charitable solicitation registration law that requires Nevada nonprofit corporations to register with the secretary of state before soliciting tax-deductible charitable contributions within Nevada.
In addition to the “exact name of the corporation registered with the Internal Revenue Service, the federal tax identification number…[and] the purpose” of the organization, the registry also includes the names and contact numbers of officers and the “name or names under which it intends to solicit charitable contributions.”
At least one fan of the law has said it provides transparency by giving potential donors the information they need to determine whether a nonprofit is a “legitimate nonprofit entity.”
Is this statement true? Do charitable solicitation registration laws like Nevada’s actually provide potential donors all the information they need to make this determination? What else might a potential donor need to know?
Monday, February 10, 2014
A Minneapolis news station received emails from viewers during last week’s Super Bowl asking, “What does it take to be a nonprofit?” The emails came from those viewers curious about the NFL’s nonprofit status.
The station’s response article quotes several people who each shed some insight on the characteristics and justifications of nonprofit organizations.
Jay Kiewdrowski, a nonprofit management teacher, explains “a nonprofit is an organization that exists to accomplish a mission that’s community oriented…They’re not in existence to make money, they’re not owned by shareholders, there are no shareholders.” Michaela Charleston of the Minnesota Council of Nonprofits is quoted stating nonprofits “provide people with services and assistance that are unmet by government and for-profit sectors.”
The article also quotes attorney for the NFL, Jeremy Spector, who explains that the tax-exempt status only applies to the NFL league office, not the “NFL that fans think of every Sunday.”
The NFL league office is funded by fees from all 32 NFL teams and is responsible for writing the rules of the game, scheduling games, negotiating collective bargaining agreements, hiring referees, and more. Spector also explains the NFL league office “does not receive income from game tickets, television contracts and the like.”
The article provides the IRS rule for tax-exempt business leagues like the NFL: “To be exempt, a business league’s activities must be devoted to improving business conditions of one or more lines of business as distinguished from performing particular services for individual persons.”
What justifications or theories of tax-exemption do Kiewdrwoski and Charleston advance? Are these theories consistent with Spector’s explanation of the role of the NFL league office and the IRS rule for tax-exempt business leagues?
Saturday, February 8, 2014
As noted by TaxProf Blog, David Cay Johnston (Syracuse) has written a piece in State Tax Notes that highlights the ability of certain high-income donors living in Arizona to combine Arizona tax credits with the federal charitable contribution deduction to actually make money by giving to charity. This is because each of the state tax credits reduce state income tax liability dollar-for-dollar, thereby allowing the taxes saved through the federal income tax deduction to be all profit. According to Johnston, a married couple in the top federal income tax bracket can make almost $1,300 off charitable contributions of just under $3,300, or almost a 40 percent return.
Brian Galle (Boston College) and David Walker (Boston University) have posted Sunshine, Stakeholders, and Executive Pay: A Regression-Discontinuity Approach on SSRN. Here is the abstract:
We evaluate the effect of highly salient disclosure of private college and university president compensation on subsequent donations using a quasi-experimental research design. Using a differences-in-discontinuities approach to compare institutions that are highlighted in the Chronicle of Higher Education’s annual "top 10" list of most highly-compensated presidents against similar others, we find that appearing on a top 10 list is associated with reduced average donations of approximately 4.5 million dollars in the first full fiscal year following disclosure, despite greater fundraising efforts at "top 10" schools. We also find some evidence that top 10 appearances slow the growth of compensation, while increasing fundraising and enrollment, in subsequent years. We interpret these results as consistent with the hypothesis that donors care about compensation and react negatively to high levels of pay, on average; but (absent highly-salient disclosures) are not fully informed about pay levels. Thus, while donors represent a potential source of monitoring and discipline with respect to executive pay in the nonprofit sector, significant agency problems remain. We discuss the implications of these findings for the regulation of nonprofits and for our broader understanding of the pay-setting process at for-profit as well as nonprofit organizations.
Alicia Plerhoples (Georgetown) has posted Delaware Public Benefit Corporations 90 Days Out: Who's Opting In? on SSRN. Here is the abstract:
The Delaware legislature recently shocked the sustainable business and social enterprise sector. On August 1, 2013, amendments to the Delaware General Corporation Law became effective, allowing entities to incorporate as a public benefit corporation, a new hybrid corporate form that requires managers to balance shareholders’ financial interests with the besat interests of stakeholders materially affected by the corporation’s conduct, and produce a public benefit. For a state that has long ruled U.S. corporate law and whose judiciary has frequently invoked shareholder primacy, the adoption of the public benefit corporation form has been hailed as a victory by sustainable business and social enterprise proponents. And yet, the significance of this victory in Delaware is premature. Information about the number and types of companies opting into the public benefit corporation form has been preliminary and speculative. This article fills that gap. In this article, I present original descriptive research on the 53 public benefit corporations that incorporated or converted in Delaware within the first three months of the amended corporate statute’s effectiveness. Based on publicly available documents and information, I analyze these first public benefit corporations with respect to the following characteristics: (1) year of incorporation as a proxy for corporate age, (2) industry, (3) charitable activities, (4) identified specific public benefit, and (5) adoption of model legislation options not required by the Delaware statute. My analysis returns the following results: 75% of public benefit corporations are likely new corporations in their early stages of operation; 32% of public benefit corporations provide professional services (e.g., consulting, legal, financial, architectural design), the technology, healthcare, and education sectors each represent 11% of public benefit corporations, 10% of public benefit corporations produce consumer retail products; approximately 40% of public benefit corporations could have alternatively incorporated as a charitable nonprofit exempt from federal income taxes. This article discusses these and other findings to assist in understanding the public benefit corporation and how it has been employed within the first three months of its adoption.
Matthew Rossman (Case Western Reserve University) has posted Evaluating Trickle Down Charity – A Solution for Determining When Economic Development Aimed at Revitalizing America's Cities and Regions is Really Charitable on SSNR (Brooklyn Law Review, forthcoming). Here is the abstract:
As our nation's philanthropic sector becomes more entrepreneurial, ambitious and influenced by the private sector, longstanding legal standards on what constitutes "charity" struggle to stay relevant. More and more often, organizations that seek classification by the Internal Revenue Service as a Section 501(c)(3) charity (and the substantial public subsidy that this status unlocks) are not the soup kitchens and homeless shelters of yesteryear, but highly sophisticated ventures which accomplish their missions in ways that are less obviously charitable. In no case is this more true than in the recent widespread emergence of nonprofit organizations whose primary activity is providing direct aid to for-profit businesses.
This Article examines this trend and coins the phrase “trickle down charity” to encapsulate the analytic challenge these organizations (which the article terms REDOs, short for “regional economic development organizations”) pose when they seek classification as a charity. REDOs hope that the privately-owned, profit-seeking ventures they aid will ultimately help those in need in the form of jobs and a flourishing economy. While influential and, in some cases, transformative to cities and regions in economic distress, REDOs turn the traditional charitable services delivery model on its head by advancing private interests first and betting that benefit to a charitable class will follow. By relying on standards designed for more conventional charities, current IRS scrutiny of this new model is outdated, inconsistent and mistimed. The most significant consequence of this imprecision is that the publicly funded subsidy American laws have created to incentivize charitable work may be misused to support organizations that are not really charitable while subtracting from the pool of funds available to those that clearly are.
To solve this problem, I propose that the IRS rely on the law of charity’s often overlooked and sometimes maligned “private benefit doctrine.” Specifically, this doctrine should inform new IRS procedures that (1) require all REDOs to make a more compelling demonstration of the nexus between their activities and the accomplishment of charitable purposes and (2) provide a system of ongoing accountability with respect to those claims. Enlivening, rather than ignoring, the private benefit doctrine in this way will not only address the problem of regulating REDOs but should also serve as a useful template for the IRS in examining other emerging forms of 21st century charity and, thus, in maintaining the overall integrity ofthe philanthropic sector.