Tuesday, July 8, 2008
One of the most provocative opinions ever written regarding tax exemption, I think, is United Cancer Council v. Commissioner. Posner -- a Supreme Court wannabe, except that he can't be pigeon-holed as conservative or liberal (i.e., he is unpredictable), waxed eloquently on the application of law and economics to the particularly non-capitalist world of nonprofit organizations. Who'da thunk that a judge could convince us, the way Hannsman did, that nonprofit organizations ("nonprofit"!) could be explained by reference to the ways of the capitalist market. Anyway, Posner's opinion was instrumental not only in convincing the IRS to delineate a more limited definition of "insiders" or "disqualified persons," but also the "first bite rule" under 53.4958-4(a)(3).
Anyway, the L.A. Times recently reported on the extent to which profit-seeking professional fundraisers benefit from the operation of charities in California:
The fundraising business is growing. More than 300 fundraisers have registered in California. Since 2000, the number of campaigns and amounts raised by for-profit firms has risen by about two-thirds. Among the charities that netted little from such campaigns were the Humane Society of the United States, the American Breast Cancer Foundation, the Christian social-action group Concerned Women for America, the National Right to Life Committee and Students Against Destructive Decisions. Among The Times' findings:
* More than 100 charities raised $1 million or more from commercial appeals but netted less than 25 cents per dollar. Fundraisers got the rest.
* In 430 campaigns, charities got nothing: All $44 million donated went to fundraisers. In 337 of those cases, charities actually lost money, paying fees to fundraisers that exceeded the amount raised.
* In hundreds of other campaigns, charities apparently entered into contracts that limited their share of donations to 20% or less, no matter how successful the campaign.
* Groups with strong emotional or patriotic appeal -- those supporting animals, children, veterans and public safety workers, for instance -- often fared worst. Missing-children charities received less than 15% of more than $28 million raised on their behalf.
Posner's opinion in UCC v. Commissioner (law and economics sophistry, I call it) nixed the application of the private inurement/excess benefit transaction to independent contractor/fundraisers, requiring instead that the IRS rely on the amorphous and difficult to define private benefit doctrine to police nonprofits that exist primarily to benefit commercial fundraisers. If for no other reason than to protect donor trust, the law needs to better police the relationship between professional fundraisers and the nonprofits on whose behalf those PFR's incessantly call our houses. The charitable community should join in this effort.
Hat tip to Nonprofit Board Crisis Blog.