Monday, December 17, 2007

More on Veteran Organization's Lack of Charitable Spending

An editorial in last Sunday's Washington Post called the fundraising and charitable spending activities of certain veteran's organizations an "intolerable fraud" and called on Congress to enact tax laws requiring charities to disclose their fundraising and spending practices:

At the very least, charities should be required to give a good, public accounting of how much of each dollar actually benefits the ostensible beneficiaries. As Congress studies what laws are needed, it also should clean up the government's house. The Combined Federal Campaign, which raises tens of millions of dollars from federal workers, should require any charity receiving those funds to meet high standards.

Notorious cases like this remind us of Justice Posner's statement regarding private benefit in United Cancer Council v. Commissiner, 165 F.3d 1173 (7th Cir. 1999).  Get the Closing Agreement in United Cancer Council here.  In that case, the government argued that the organization violated the private inurement prohibition when it spent over 92% of its raised funds on the fundraiser's overhead -- about $27 million of the nearly $29 million raised for cancer prevention went to the fundriaser.  Posner rejected the application of the private inurement prohibition, but suggested that the private benefit doctrine might be grounds to revoke tax exemption:

Suppose that UCC was so irresponsibly managed that it paid W&H twice as much for fundraising services as W&H would have been happy to accept for those services, so that of UCC's $ 26 million in fundraising expense $ 13 million was the equivalent of a gift to the fundraiser. Then it could be argued that UCC was in fact being operated to a significant degree for the private benefit of W&H, though not because it was the latter's creature. That then would be a route for using tax law to deal with the problem of improvident or extravagant expenditures by a charitable organization that do not, however, inure to the benefit of insiders.  Suppose that UCC was so irresponsibly managed that it paid W&H twice as much for fundraising services as W&H would have been happy to accept for those services, so that of UCC's $ 26 million in fundraising expense $ 13 million was the equivalent of a gift to the fundraiser. Then it could be argued that UCC was in fact being operated to a significant degree for the private benefit of W&H, though not because it was the latter's creature. That then would be a route for using tax law to deal with the problem of improvident or extravagant expenditures by a charitable organization that do not, however, inure to the benefit of insiders.

165 F.3rd at 1179.  Most Veteran's organizations use outside fundraisers who are not considered "insiders."  For a theoretical discussion of the private benefit doctrine as it relates to payments to non-insiders, see my recent article, Third-Party Profit-Taking In Tax Exemption Jurisprudence, 2007 B.Y. U. L. Rev. 977 (2007) (Lexis Access Required) and John Columbo's article, In Search of Private Benefit, 58 Fla. L. Rev. 1063 (2006) (Lexis Access Required).

dkj

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