Saturday, March 8, 2008
With perfect timing from the point of view of a rookie blogger, today's New York Times Magazine is devoted to philanthropy. It includes articles on celebrity philanthropy, self-made philanthropists, foundations' use of metrics to determine whether their gifts are working, the value-added of gimmicks like matching grants, challenge grants and rewards, the pros and cons of billionaires' philanthropic interventions in school systems; and the giving age. Worthwhile reading for anybody teaching non-profit law.
2008 David Stevenson and William Diaz Faculty Fellowships
The Nonprofit Academic Centers Council is now accepting applications for the 2008 David Stevenson and William Diaz Faculty Fellowships. These Fellowships are awarded to faculty of color teaching and conducting research in the field of philanthropic and nonprofit sector studies. 2008 Fellowships must be completed between August 1, 2008 and July 31, 2009. The application deadline is March 31, 2008. Application information is available online. For additional information, contact the Nonprofit Academic Centers Council at (216) 368-0969
Good morning millions of loyal and enraptured readers! Last night the NBC Nightly News reported on the rising costs of tuition and recent congressional pressure on colleges and universities (you have to listen to a 30 second commercial first) to spend more of their tax free endowments to help middle income students. Its a mere "sound bite" report but it does include a statement from a Stanford spokesperson denying that Congressional pressue has had anything to do with Harvard, Yale, or Stanford's recent efforts to make it easier for the less wealthy to gain access to what are supposed to be quintessentially "charitable" services. Go figure! Charitable services -- subsidized by tax exemption -- that anybody making less than say, $250,000, (i.e., a quarter million a year) doesn't qualify for!
Friday, March 7, 2008
In case you have not already read or seen enough about the faux controversy regarding Barack Obama's speech last June at the United Church of Christs 50th Anniversary General Synod, here is the NPR report on the topic, including excerpts from the speech and an interview with Church officials. So now I have finally done it. I have written a story critical of the media, of which I have become a part, for continuing to report on a non-story, of which my own reporting is part and parcel. Yes, I am now a real reporter! Ahh, but there is one redeeming quality to this report. A spokesperson for Americans United for Separation of Church and State -- the virtual pit bulldogs growling about houses of worship and campaign intervention -- even admits in the NPR report that the story is a non-story. In summary, this report is about a story that is a non-story! Have a great weekend.
The Chronicle of Higher Education reports (subscription or Web pass required) that the Roy F. and Joann Cole Mitte Foundation has informed several universities that it can no longer support scholarships it had committed to, apparently because of financial difficulties at the Foundation. Officials at three universities, Indiana University, Ohio State, and Penn State, confirmed that they were told last month that the promised scholarship money for undergraduate business programs would not be forthcoming from the Foundation. Each of these schools indicated that they were stepping up to provide the scholarship funds from other sources so as not to leave students without expected funds.
The letter informing the universities of this development cited both the effect on the Foundation of the recent downtown in financial markets and a desire to focus its available funds on a single school, Texas State University, which was the alma mater of the Foundation's founders. Both of those founders passed away last year. The Foundation was also the subject of reports in 2003 of lavish expenditures by Scott Mitte, the son of the founders and the Foundation's current President, reports that the Foundation denied.
IRS Issues Proposed Regulations and Request for Comments on UBIT Consequences to Charitable Remainder Trusts
The IRS yesterday issued proposed regulations concerning the effect of unrelated business activities on Charitable Remainder Trusts. Here is the summary of the proposed regulations:
SUMMARY: This document contains proposed regulations that provide guidance under Internal Revenue Code (Code) section 664 on the tax effect of unrelated business taxable income (UBTI) on charitable remainder trusts. The proposed regulations reflect the changes made to
section 664(c) by section 424(a) and (b) of the Tax Relief and Health Care Act of 2006. The proposed regulations affect charitable remainder trusts that have UBTI in taxable years beginning after December 31, 2006. This document also provides notice of a public hearing on these proposed regulations . . .
The proposed regulations amend the regulations under section 664(c) to provide that charitable remainder trusts with UBTI in taxable years beginning after December 31, 2006, are exempt from Federal income tax, but are subject to a 100-percent excise tax on the UBTI of the charitable remainder trust. The proposed regulations provide that the excise tax is reported and payable in accordance with the appropriate forms and instructions. Currently, the appropriate form to report and pay the excise tax on charitable remainder trusts with UBTI is Form 4720, ``Return of Certain Excise Taxes Under Chapters 41 and 42 of the
Internal Revenue Code.'' The rules that apply with respect to charitable remainder trusts that have UBTI in taxable years beginning before January 1, 2007, are contained in Sec. 1.664-1(c) as in effect for taxable years beginning before January 1, 2007. (See 26 CFR part 1 Sec. 1.664-1(c) revised as of April 2, 2007).
According to the Associated Press, a Tennessee Chancellor ruled yesterday that financially strapped Fisk University can keep its collection of Georgia O'Keeffe artwork obtained via a testamentary gift. The Court ruled that Fisk violated the terms of the gift but rebuffed efforts by the Georgia O'Keeffe Museum to take position of the works. Fisk had previously failed in its efforts to obtain judicial permission to sell the artwork for $30 million. After the initial opinion, the court held further hearings on the Museum's argument that Fisk should forfeit the artwork because it violated the terms of the gift.
Kentucky Judge Rules Appropriation to Religious University for Pharmacy Building Violates State Constitution
In PennyBacker v. Beshear, a Kentucky Circuit Court Judge ruled on March 6, 2008 that the Kentucky legislature's appropriation of $10 million to the University of the Cumberlands violated the state's ban on direct support of religous organizations. The University of the Cumberlands is a private university affiliated with the Kentucky Baptist Convention, but the appropriation was for the construction of a pharmacy building. Simliar to the arguments in support of the Faith and Community Based Initiative, the defendants argued (according to aMarch 7, 2009 Inside Higher Education Article) "that as long as Cumberlands pledged to keep the pharmacy school secular, there were no church-state implications, and that Kentucky legislators needed the flexibility to use private religious colleges, as well as public ones, to advance state [secular] goals." In rejecting that argument, the Kentucky Court stated, "there is no question that the appropriation of $10 million tax dollars to the University to construct a pharmacy building is a direct payment to a non-public religious school for educational purposes. This type of direct expenditure is not permitted by the Constitution of Kentucky."
I can't tell from the opinion whether the judge rejected the legal argument -- that appropriations to religious [nonprofit] groups are permissable for secular purposes -- or whether he concluded as a matter of fact in this particular case that the government appropriation violated First Amendment type restrictions against church-state entanglement. The former interpretation seems more likely and would, if applied on a national level, call into question direct grants to religous nonprofits for secular purposes. A comment posted to the Inside Higher Education website captures the church-state concerns relating to direct grants to religious organizations: "do you really think this university could keep the pharmacy school secular? I am sure they would indoctrinate students into not dispensing birth control or the morning after pill because that is what God told them to do." On the other hand, sentiments like those expressed in the Amherst Student Newspaper suggest that it is possible and efficient to provide government funding to religous organizations in support of their secular activities.
Another interesting point about this case is that there is usually not sufficient opposition to whatever social service the religious organization is providing to force a judicial confrontation. But in this case, according to the Inside Higher Education Article, the Kentucky Fairness Alliance, a nonprofit that argues against discrimination based on sexual preference, brought suit only after the University expelled an openly gay student.
The Chronicle of Philanthropy reports that charities across the country are struggling with how to help the hundreds of thousands of families who are facing foreclosure. And there is no end in sight; the Center for Responsible Lending estimates that another 2.2 million or more families will face foreclosure over the next few years. The Open Society Institute has granted $2 million to help establish the Center for New York City Neighborhoods in cooperation with the City of New York, which will focus on foreclosure solutions, and a previous blog entry describes the work of ACORN Housing in this area, but most other charities are still trying to determine how best to respond. Possible options include seeking additional government funding to expand services to help families facing foreclosure and legislative changes. At the same time, charities that already do work in the foreclosure area are seeing demand for their services skyrocket, as previously blogged with respect to legal services in Maryland.
In the run-up to this week's presidential elections, Human Rights Watch reported that the Russian government continues to stifle disfavored NGOs. Rather than resorting to outright bans or forced closures, government officials have used a 2006 law giving them far-reaching authority over NGOs to impose crippling paperwork requirements and fines. For example, the Information Center of the NGO Council, a group that provides bulletins on the situation in Chechnya and Ingushetia, was threatened with dissolution unless it paid a US$20,000 fine for improper registration and back taxes. It is currently fighting the imposition of that fine. The full report details numerous additional examples.
An article on tradingmarkets.com states the South China Morning Post has reported the Bill & Melinda Gates Foundation is in talks with global bank HSBC Holdings and New Hope Group, China's largest animal feed producer, aimed at establishing rural credit firms. The firms would provide financing to Chinese farmers who are unable to obtain bank loans so they could upgrade their equipment and production techniques. Other banks and international charities are also involved in the discussions. New Hope Group already has three partially government-funded rural credit firms and plans to invest 100 million yuan ($14 million US dollars) to establish seven more. The discussions are presumably part of the Gates Foundation's Global Development Program, which seeks to work with other organizations to create opportunities to lift the world's poorest people out of poverty and hunger.
The Fort Worth Star-Telegram reports that Americans United for Separation of Church and State has filed a complaint with the IRS regarding Pastor Steve Riggle's letter endorsing Shelley Sekula Gibbs to fill Tom DeLay's former congressional seat. Pastor Riggle is the Senior Pastor of Grace Community Church in Houston, which has 12,000 members. Dr. Sekula Gibbs is in an April runoff to determine the Republican Party nominee for the congressional seat.
Pastor Riggle responded to the complaint by stating that the letter did not violate any law as he wrote it on his personal stationary, he did not discuss his endorsement in the church, and the church did not distribute the letter. The letter states it was paid for and authorized by the Shelley Sekula Gibbs for Congress Campaign Committee. The only apparent connection to the church is that the letter identified Pastor Riggle as the Senior Pastor of Grace Community Church. Americans United stated in its press release regarding the complaint that it is exactly this aspect of the letter that it found problemmatic, noting that the letter twice identifies Pastor Riggle in this fashion without any indication that he is speaking solely as a private citizen.
Thursday, March 6, 2008
The Chicago Tribune reports that World Vision, a Christian poverty relief charity operating in nearly 100 countries, is operating stores located around the country that sell and give away donated classroom supplies, clothing, building materials, and other excess inventory to charities and schools. If sold, the prices charged can be as much as 75 percent below the usual cost. Among the beneficiaries have been the Chicago Public Schools, with 80 schools receiving free supplies. These "Storehouses" also serve as convenient locations to collect donations that World Vision then distributes as part of its various relief efforts. For example, last month World Vision announced it was sending relief supplies from its 43,000 square foot Mississippi Storehouse to help victims of tornadoes in the South. The same announcement says that the Storehouses have in total received $32 million in donated goods. Other Storehouses are located in Albany, Chicago, Dallas, Detroit, Los Angeles, Minneapolis, New York, Seattle, Washington DC, and West Virginia.
The Chicago Tribune article cites a Chicago Public Schools official as stating that for-profit suppliers to city schools have not raised concerns because the amounts purchased at the Chicago Storehouse have been relatively low. The article does not discuss the possible tax consequences to World Vision of operating the Storehouses, which World Vision began in 1995. But Internal Revenue Code section 513(a)(3) excludes the selling of merchandise, substantially all of which has been received by a charity as gifts or contributions, from the definition of an unrelated trade or business, so the operation of the Storehouses probably does not result in any federal income tax liability.
What do Sen. Barack Obama, commentator Bill Moyers, actress Lynn Redgrave, Nobel Prize-winning scientist Charles Townes and novelist Marilynne Robinson have in common? All are members of the United Church of Christ, and all spoke to the UCC General Synod last June in Hartford. Now the presence of one of those speakers, Sen. Obama, has resulted in the Internal Revenue Service investigating the tax-exempt status of the denomination.
So what is going on here? As a condition for tax exemption, the IRS expects nonprofits to abstain from endorsing candidates for office. This we accept, and this we did. The United Church of Christ bent over backward to ensure that we did not violate the regulations.
Our purpose in inviting Sen. Obama in the spring of 2006 — long before he was a candidate for the presidency — was to ask him to address the connection between his Christian faith and his public service, to speak to us of the challenges for people of faith in the public square today. And he did so with eloquence. As a prominent member of our church, his was a natural invitation, just as the others were.
The editorial goes on to explain what the Church did to avoid campaign intervention and why IRS investigations of houses of worship can have "chilling effects on the engagement of communities of faith with public officials." Here is a bold prediction: The IRS will wag its finger and send a "don't you dare do that again" letter to the UCC and all will be forgotten. Though the Service will not admit it, the purpose of any such "investigation" is precisely to make houses of worship "chill out." The intended effect is achieved merely by the publicity, further enforcement action is always unnecessary. We do this dance every four years!
Though I disagree with the writer's sentiment, here is the full text of today's letter to the editor in response to UCC's op-ed:
The Rev. Davida Foy Crabtree laments that the Internal Revenue Service might be intruding on her free exercise of religion [Commentary, March 2, "IRS Investigation: A Test Of Church's Faith?"].
Perhaps the Rev. Crabtree would be willing to abandon her church's tax-exempt status in order to freely invite selected political candidates to speak before her congregation. She certainly has the freedom to do so. All she need do is pay taxes on the money her church collects. Surely if the Rev. Crabtree feels strongly about presenting political candidates to her flock, she would be willing to pay her share of taxes like any other for-profit organization that would support a candidacy.
However, should the Rev. Crabtree choose to enjoy the monetary privileges of her church's tax-exempt status, her church, like any other nonprofit organization, must be willing to accept the provisions that come with the tax exemption, including that of not supporting the campaigns of political candidates. The choice is hers, and she is free to choose.
The Chief Financial Officer of a San Francisco Nonprofit has admitted to diverting $3.6 million to his own use, investing and then losing it all in the stock market. According to the San Francisco Chronicle:
The chief financial officer for the nonprofit that runs the recently opened, 800-car underground garage next to the M.H. de Young Memorial Museum in Golden Gate Park has been fired as investigators probe the disappearance of $3.6 million in garage funds - money that may have been flushed on the stock market. The missing millions came to light a couple of weeks back when a vendor called the chairman of the Music Community Concourse Partnership board to complain that he hadn't been paid for his work on the garage, which opened in 2005, said Sam Singer, a spokesman for the nonprofit. When garage chief financial officer Greg Colley was called in to explain, he asked for a little time to sort things out, Singer said. The next day, Colley turned up with an attorney and said he had borrowed the money to play the stock market, Singer said. Colley said he had fully intended to return the money, but then the market took a nosedive. With that, the nonprofit fired him, Singer said.
You big knucklehead! Anyway, there is caselaw supporting the notion that embezzlement is not private inurement, but does embezzlement constitute an excess benefit transaction? I told my class today that IRC 4958 essentially codifies and better articulates the caselaw with respect to the private inurement prohibition but this case probably provides an example of how 4958 expands a bit on the private inurement doctrine.
The New York Times reports that Margaret Seltzer, the author who confessed this week to fabricating her memoir "Love and Consequences," appears to have also have created a phantom charity. The memoir, written under the pseudonym of Margaret B. Jones, described the author's experience growing up as a foster child in the gang violence of South-Central Los Angeles. Her book-flap biography referred to her involvement with the International Brother/SisterHood, and her agent set up a website to describe this purported charity as well as promote the book. The New York Times found no record of such a charity in IRS filings or state filings in Oregon, where the author lives, or California. Neither her agent nor her publisher apparently verified its existence, and leaders of groups combating gang violence in Los Angeles interviewed by the New York Times had never heard of either the organization or the author.
The website did not solicit donations, according to Ms. Seltzer's agent, and there is no indication that Ms. Seltzer otherwise sought contributions for it. Nevertheless, it is another example of the need for donors to verify that purported charities in fact exist and are in good legal standing. The ability to search for charities on the IRS website, review IRS filings by charities on Guidestar, and growing access to state filings on the Internet, makes this task increasingly easier, but it still requires at least a modest amount of effort on the part of potential supporters.
The Washington Post reports that the Maryland legislature is considering a ban on electronic gambling machines throughout the state. Some counties currently allow the machines if they are operated by nonprofit organizations. These has led to some nonprofits relying on the machines as significant sources of revenues. For example, Alternatives for Youth and Families, a charity that provides mental health services, received about $25,000 in two months from a machine it operates in a local liquor store in exchange for paying the store $50 per day. The charity Center for Children, which also provides mental health services, reported similar revenues.
Supporters of the ban argue that the nonprofit operators do not receive enough of the proceeds from the machines, plus the availability of the machines has sharply cut into state lottery revenue. They cite the fact that while state lottery revenue rose about 9 percent statewide over the past two months, it decreased by 5.39 percent in one county where the machines recently appeared in significant numbers, and decreased by 19 percent in establishments that feature the lottery but then added the machines.
Wednesday, March 5, 2008
The newest event in reality TV was the lauch this past weekend of "Oprah's Big Give," a show that challenges contestants to give away the most cash to help total strangers. Not that the amount given away is the only measure. The 10 contestants will also be judged on their creativity, leadership, presentation and accomplishment, according to a Chicago Sun-Times article. Similar to other contest reality shows, the judges are three celebrities - Malaak Compton-Rock (comedian Chris Rock's wife), Kansas City Chiefs tight end Tony Gonzalez. and Jamie "The Naked Chef" Oliver - in this case selected in part because of their involvement in various philanthropic organizations themselves. The contestants stand to win a $1 million prize, but apparently do not know this (or at least did know this when the show was filmed). The show's launch was very popular, attracting an audience of 15.7 million, which was the largest audience in prime-time last week for any program not named "American Idol" according to a Los Angeles Times report.
One fascinating aspect of the show is there is not a nonprofit in sight. The money is provided by Harpo Productions, Oprah's production company, or possibly by ABC, which is airing the series. The contestents apparently give it directly to needy individuals or families, such as a homeless family that received a home and car. While presumably this does not raise a deduction issue for Harpo since the funds look like an ordinary and necessary expense associated with the show, it does raise concerns about whether there is anyone considering the larger picture for those being helped. For example, the Chicago Sun-Times article asks how will the now formerly homeless family pay the property taxes and other bills that come with their new home? Or will they find themselves with an unexpected financial burden that they may not be able to meet, such as may have happened to some of the guests on The Oprah Winfrey Show who received cars back in 2004 (see this TaxProf Blog post for more on that story).
The Boston Globe reports that a number of nonprofits, particularly hospitals and universities, are facing the possibility of having to pay significantly higher interest rates on their outstanding variable rate bonds because of automatic rate resets when no one bids on their bonds at rate setting auctions. The article lists various Massachusetts nonprofits as examples, including Brandeis and Tufts universities, the parent of Beth Israel Deaconess Medical Center, and Southcoast Hospitals Group in New Bedford. Several members of Congress, concerned about these nonprofits as well as government agencies facing the same problem, are asking the SEC to allow affected nonprofits and agencies to bid on their own bonds without creating a risk that the SEC will view such bidding as improper market manipulation. Absent the ability to make such bids, many nonprofits and government agencies with variable rate bonds may interest rates on these bonds of up to 20 percent.
According to an earlier Bond Buyer article, the concern about adverse SEC action arises from a 2006 $13 million settlement and cease-and-desist order that came out of alleged market manipulation practices the SEC maintained violated federal securities laws. Absent reassurance the SEC would not view bids by nonprofits and government agencies on their own bonds as involving similarly prohibited market manipulation, broker-dealers are refusing to accept such bids. Statements by SEC officials quoted in the article indicate the SEC remains at best undecided regarding whether to provide such reassurances, however. This ambivalence on the part of the SEC may explain why members of Congress are now making direct appeals to the SEC on this issue, as reported in the Boston Globe article.
The Financial Times reports that Margaret McKenna, the president of Wal-Mart's company foundation, has announced a shift in the foundation's giving strategy. Wal-Mart gave away more than $290 million last year in the United States, second only to Bank of America in corporate philanthropy. Ms. McKenna stated the foundation would be making larger, more focused grants in the United States and considering enhancing its international giving. In a shift from its previous strategy of often making many small, several hundred dollar grants to local schools and groups as well as larger multi-million dollar grants to national charities, the foundation will now establish state-level mechanisms to make grants of $25,000 or more. The foundation also plans to hire program officers to better identify giving opportunities and assess the effectiveness of grants.
The foundation's new focus will include three funding priorities: healthcare, environmental sustainability, and education and training for 12 to 30-year-olds. The article reports that two of these goals match recent re-branding efforts by Wal-Mart. While it only identifies healthcare specifically, Wal-Mart has also been criticized in the past for its environmental practices. As for the the foundation's new international efforts, they will feature a partnership with UNICEF to fulfill Wal-Mart's pledge to support the United Nation's millennium development goals.
Companies have often treated philanthropy as primarily another marketing tool, but the use of company foundations for these purposes raises interesting private benefit issues. When, if ever, does the link between a company foundation's philanthropic priorities and the related company's re-branding or other priorities become too close and so violate the requirement that the foundation serve public, not private interests? Efforts by Wal-Mart and others to more closely link the activities of their foundations to their corporate priorities may require the IRS and eventually the courts to answer this question.