Nonprofit Law Prof Blog

NBC News Report on Tuition Costs and College Endowment Spending

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!

dkj

NPR Report on Obama Speech to United Church of Christ: Just in Case You Haven't Heard Enough!

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.

dkj

Foundation's Financial Troubles Lead To Dropping Scholarships

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.

lhm

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).

dkj

Fisk Can Keep Georgia O'Keeffe Art Collection Despite Violating Gift Terms

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.

dkj

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. 

dkj

Charities Struggle to Address Foreclosure Crisis

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.

lhm

Human Rights Watch Reports Russia's Stifling of NGOs Continues Unabated

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.

lhm

Gates Foundation Seeking to Jump Start Rural Credit in China

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.

lhm

Another Day Another Church Political Activity Complaint

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.

lhm

World Vision's Storehouses Sell and Give Excess Inventory to Other Charities and Schools

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.

lhm

UCC Explains Why Obama Speech Was Not Campaign Intervention

In an March 2 op-ed piece in the Hartford Courant, the United Church of Christ explained why Obama's June speech to the 50th anniversary UCC General Synod did not constitute campaign intervention:

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.

dkj

CFO of San Francisco Nonprofit Embezzles $3.6 Million, Loses it all in the Stock Market

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.

dkj

Phantom Memoir's Author Also Apparently Had Phantom Charity

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.

lhm

Nonprofits and State Government Fight Over Gambling Proceeds

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.

lhm

Encouraging Giving the Oprah Way

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).

lhm

Credit Crunch Hitting Nonprofits with Variable Rate Bonds

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.

lhm

Wal-Mart Strengthens Ties Between Giving and Brand Positioning

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.

lhm

When Charities Collide: Conservation versus Fundraising

The New York Times reports that an innovative fundraising technique has raised environmental conservation concerns in northwest England.   The "Three Peaks Challenge" involves hiking to the top of the highest mountains in England, Scotland and Wales.  While not necessarily a charitable activity, a number of charities encourage their supporters to do the Challenge as a fundraising event, including CARE International.  The Challenge has proven so popular it has raised concerns at the National Trust, a major conservation group.  The National Trust urges participants to follow a code of practice developed in cooperation with the Institute of Fundraising, a UK group that represents professional fundraisers. The Code contains a section specifically addressing the Challenge, which suggests avoiding peak tourist times including the summer and certain holidays and limiting the total number of walkers per event to no more than 200.  The Code is not, however, legally binding, and it is unclear whether it has had any significant effect.  There is no indication in the NY Times article that the National Trust or any other group is seeking to create legal limits on climbing the three peaks.

lhm

California Bill Pending to Force Disclosure of Large Foundation Staff, Board and Grantee Demographics

Inside Bay Area reports on the continuing battle over the bill (Assembly Bill 624, as amended in the Senate) originally introduced by California Assemblyman Joe Coto, D-San Jose that would require California's largest foundations to post the composition of their staffs and boards on their Web sites.  The postings would be required to include racial, gender, and sexual orientation demographics.  If enacted, the new requirement would only apply to foundations with assets of more than $250 million, but this group would include such well known foundations as the William and Flora Hewlett Foundation, the David and Lucile Packard Foundation, and the Gordon and Betty Moore Foundation. Covered foundations would also have to provide information about the number of grants and percentage of grant dollars awarded to organizations with members of minority groups on their boards or staffs.  The article credits the nonprofit Greenlining Institute with sponsoring and writing the first draft of the bill in response to research that found less than 4 percent of grant dollars from the nation's top 24 private foundations went to minority-led organizations in 2006.  The bill passed the California Assembly and is now pending in a California Senate committee after being amended last month.  For more information, see the complete legislative history to date.

lhm

Schizer on the Charitable Contribution Deduction

Dean David Schizer of Columbia Law School has posted on SSRN an article analyzing the reasons for the charitable contribution deduction and discussing the possible implications of those reasons.  The article is titled "Subsidizing Charitable Contributions: Incentives, Information, and the Private Pursuit of Public Goals."  Here is the abstract:

"The charitable deduction has enjoyed relatively little support in the legal academy. Many commentators have asked what it adds to the tax system and, as critics have observed, the deduction obviously does not itself collect tax revenue. Defenders respond that the deduction helps measure income and keeps taxpayers from inefficiently substituting leisure for work, but these points are, of course, contested. Instead of revisiting debates about what the deduction adds to the tax system, this Article focuses on the broader question of what it adds to the pursuit of public goals. The deduction - and any other government subsidy that matches charitable contributions through the tax system (here called "subsidized charity") - enlists private individuals to pursue public goals in a somewhat unique manner. While in other settings the government delegates implementation but still specifies the goal to be pursued, charitable donors are allowed to select the goal as well. Is it desirable to pursue public goals in this way?

This Article analyzes three reasons to subsidize charitable contributions, each responding to a different information or incentive problem that is inherent in the pursuit of public goals. First, the subsidy can counter free-riding by encouraging donors to be more generous. A second objective is to measure and respond to popular preferences about public goals. Subsidized charity can encourage experimentation and competition and can empower minority perspectives that are underrepresented in the political process. Yet subsidized charity also disproportionately represents the views of wealthy donors. The third goal, which is new to the academic literature, is to recruit private donors to monitor the quality of nonprofits, so that the government can piggyback on these quality-control efforts.

Since there are three competing rationales for the subsidy, its institutional design can vary depending upon which has priority - an insight that is new to the literature. To encourage generosity, the subsidy should focus on wealthy donors, giving them broad discretion about which causes to support and targeting marginal contributions. Recruiting these wealthy donors as monitors is largely compatible with this program. Yet by focusing on wealthy donors, the subsidy may fail to reflect broad popular preferences. In response, one option is to compensate with other policy instruments, such as government programs, to address the preferences of low-income nondonors. While I find this approach appealing, others could reasonably want subsidized charity itself to be more representative. Toward that end, we can go to extra lengths to persuade low income taxpayers to contribute more (e.g., through extra-generous matches) or, for that matter, to induce wealthy donors to contribute less (e.g., through caps on giving) or to support causes that reflect broad popular consensus (e.g., through limits on which causes are subsidized). Yet the cost of making the subsidy more representative in this way is that it will be less effective at advancing our other goals of encouraging generosity and recruiting monitors."

lhm

Yermack on Possible Issues with Charitable Stock Gifts by Executives of Publicly Traded Companies

David Yermack, Professor of Finance at New York University's Stern School of Business, has written an interesting paper on charitable donations of company stock by Chairmen and CEOs of publicly traded companies.  The title is "Deduction ad absurdum: CEOs Donating Their Own Stock to Their Own Family Foundations."  Here is the abstract:

"I study large charitable stock gifts by Chairmen and CEOs of public companies. These gifts, which are not subject  to insider trading law, often occur just before sharp declines in their companies' share prices. This timing is more pronounced when executives donate their own shares to their own family foundations. Evidence related to reporting delays and seasonal patterns suggests that some CEOs backdate stock gifts to increase personal income tax benefits. CEOs' family foundations hold donated stock for long periods rather than diversifying, permitting CEOs to continue voting the shares."

On the last point, while Professor Yermack does not directly address the federal tax limitations on private foundation investments, it does not appear those limitations would significantly deter the activity he describes.  The excess business holdings limitations of IRC § 4943 would normally require family foundations to eventually reduce their holdings to 20 percent of the company's voting stock less any voting stock owned by disqualified persons, but for publicly traded companies even a 20 percent voting stock position may be sufficient to continue to exercise significant influence over the company.  The IRC § 4944 rules governing potentially jeopardizing investments would not require sale of the donated stock even given the diversification concern raised by Professor Yermack because the applicable regulations provide that those rules do not apply to an investment that is made by another person and then gratuitously given to a private foundation (Treas. Reg. § 53.4944-1(a)(ii)(a)).

lhm

White House Releases Comprehensive Report on Faith-Based And Community Initiative

The White House has issued a 122 page report regarding President Bush' Faith-Based And Community Initiative (FBCI). The report, entitled "The Quiet Revolution: The President's Faith-Based and Community Initiative: A Seven-Year Progress Report" details the seven year effort to regularize the making of direct grants to religious nonprofit organizations engaged in secular social welfare activities.  I suppose I am generally in favor of the FBCI, as I believe we can find a way to support the secular activities of religious nonprofits without the establishment or entanglement of religion the founders sought to avoid.  I haven't read the response yet from American United for Separation of Church and State -- assuming the group has written a response (nor have I even had time to read this report).  When I do, I will certainly convey my more thorough reactions.  In the meantime, readers should feel free to submit their own comments.  Chapter 3 of the report, by the way, is entitled "Strengthening America's Nonprofit Sector" and includes a very informative schedule showing federal funding to faith-based and secular organizations in 2006. 

2006 Federal Funding by State for Faith-Based and Secular Nonprofits*

STATE	Faith-Based Nonprofits (FBOs)	Secular Nonprofits (CBOs)	TOTAL
Alabama	$16,766,813	$154,152,216	$170,919,029
Alaska	$4,811,083	$44,088,456	$48,899,539
Arizona	$18,497,786	$169,402,997	$187,900,783
Arkansas	$17,063,601	$115,418,841	$132,482,442
California	$105,392,127	$988,618,994	$1,094,011,120
Colorado	$19,052,313	$119,252,107	$138,304,420
Connecticut	$10,287,635	$101,860,915	$112,148,550
Delaware	$4,452,412	$32,174,637	$36,627,049
District of Columbia	$29,797,765	$116,719,034	$146,516,799
Florida	$119,235,683	$385,030,855	$504,266,538
Georgia	$57,670,105	$233,606,451	$291,276,557
Hawaii	$5,713,770	$54,187,076	$59,900,846
Idaho	$3,086,585	$53,815,242	$56,901,827
Illinois	$125,066,344	$329,867,663	$454,934,008
Indiana	$9,390,705	$142,111,216	$151,501,921
Iowa	$7,700,130	$91,096,999	$98,797,129
Kansas	$9,746,760	$66,074,233	$75,820,993
Kentucky	$24,417,053	$128,858,950	$153,276,003
Louisiana	$28,275,411	$170,392,366	$198,667,777
Maine	$2,493,906	$92,114,749	$94,608,655
Maryland	$57,975,652	$153,965,074	$211,940,726
Massachusetts	$14,915,497	$289,160,844	$304,076,341
Michigan	$54,729,102	$300,479,780	$355,208,881
Minnesota	$16,113,173	$173,881,681	$189,994,854
Mississippi	$6,056,782	$275,356,980	$281,413,762
Missouri	$69,150,836	$170,694,770	$239,845,606
Montana	$1,017,680	$47,256,275	$48,273,955
Nebraska	$11,371,266	$61,208,475	$72,579,741
Nevada	$12,376,515	$50,275,096	$62,651,611
New Hampshire	$308,481	$35,153,923	$35,462,404
New Jersey	$29,637,041	$176,927,422	$206,564,463
New Mexico	$19,690,374	$93,479,044	$113,169,418
New York	$151,637,410	$681,791,969	$833,429,379
North Carolina	$24,911,589	$210,660,181	$235,571,770
North Dakota	$1,080,375	$18,832,426	$19,912,801
Ohio	$45,237,805	$388,301,896	$433,539,700
Oklahoma	$5,531,270	$137,867,500	$143,398,770
Oregon	$10,789,980	$129,136,913	$139,926,892
Pennsylvania	$56,309,681	$332,206,407	$388,516,088
Rhode Island	$1,810,801	$54,181,999	$55,992,800
South Carolina	$7,346,866	$166,083,683	$173,430,549
South Dakota	$8,475,635	$37,085,546	$45,561,181
Tennessee	$26,603,659	$144,043,684	$170,647,343
Texas	$74,831,081	$612,043,559	$686,874,639
Utah	$2,417,073	$57,770,327	$60,187,399
Vermont	$6,321,046	$37,367,100	$43,688,146
Virginia	$26,705,507	$187,612,973	$214,318,480
Washington	$16,887,030	$192,820,199	$209,707,229
West Virginia	$1,998,292	$96,399,216	$98,397,508
Wisconsin	$10,610,910	$144,929,470	$155,540,380
Wyoming	$1,691,512	$24,085,246	$25,776,758

Here is an executive summary of the report, including the ten "innovations" the White House argues have come about as result of FBCI. 

Chapter 1: Determined Attack on Need

At the heart of the President's FBCI is a shift from the large, distant, and impersonal transaction of Federal programs to the small, local and individualized care of effective faith-based and neighborhood organizations. Chapter 1 features a series of priority programs launched by President Bush, as well as agency-driven initiatives designed to test new public-private partnerships that address society's most challenging problems, including homelessness, addiction, unemployment, school dropout rates, and lack of access to health care. This chapter offers windows into the FBCI at work in eleven Federal agencies.

Chapter 2: Transforming Government

The FBCI was not designed to be an "add-on" to existing Federal programs, but rather to fundamentally alter the way government addresses human need. This work required identifying and then removing barriers to partnership between government and grassroots nonprofits. Chapter 2 describes the barriers identified in the FBCI's 2001 "Unlevel Playing Field Report" and the actions taken to address them. These changes were completed through policy reforms and the adoption of new regulations at each of the eleven Federal agencies operating the FBCI, positioning nonprofit organizations as a central player to address problems from prisoner reentry to HIV/AIDS in Africa. Finally, since all FBCI actions have been guided by established legal and Constitutional principles, this chapter also addresses the case law undergirding the FBCI and the Equal Treatment regulations adopted to set clear, legal guidelines for government partnership with faith-based and community organizations.

Chapter 3: Strengthening Faith-Based and Community Organizations

As the capabilities of nonprofits grow, their ability to solve community problems and meet needs expand. Promoting the growth of charitable organizations has been central to the FBCI, from increasing their access to Federal funds to in-depth training on specific operations issues such as outcomes tracking or board development. Chapter 3 explores these capacity-building efforts, including national and regional White House FBCI Conferences and training events hosted by FBCI Centers, as well as a series of technology-based trainings and other resources. To date, more than 100,000 of America's social entrepreneurs have received in-person training through these efforts, and countless more through other mediums, ranging from webinars and teleconferences to on-site technical assistance.

Chapter 4: Measurement Matters

Each of the FBCI's efforts point toward a single, overarching goal: enabling real results for people in need. Chapter 4 describes the objectives and accountability enforced across government to advance this goal, as well as the measurement mechanisms to evaluate its success. The chapter explains how the President's Management Agenda sets standards for the FBCI and holds agencies accountable for their implementation. It also describes the annual FBCI grant data collection to evaluate progress toward a "level playing field" in competitive Federal grants. One form of this effort will be an FBCI National Conference on Research, Outcomes & Evaluation, scheduled for June 2008, where an expansive range of studies, evaluations, and reports on the outcomes achieved through the FBCI will be presented. In addition, this chapter highlights a number of programs and policy issues of major focus for the FBCI along with portraits of their outcomes to date.

Chapter 5: Taking Root in the Heartland

While placing primary focus on the Federal Government, the FBCI has also worked aggressively to expand implementation of the FBCI vision at the State and local level. Today, 35 governors—19 Democrats and 16 Republicans—have offices or liaisons dedicated to strengthening faith-based and community organizations and extending their work within the community. More than 100 mayors have established similar offices or liaisons, as well. Chapter 5 describes how these chief executives from across the political spectrum have embraced the FBCI vision as a practical way to solve real-world problems. This activity is thriving even in states without a formal FBCI office. For example, California doesn't yet have an official FBCI; yet, in 2006, its nonprofits won more than 1,550 competitive Federal grants totaling nearly $1.1 billion dollars to serve their neighbors in need including implementation of a number of the President's signature FBCI initiatives (e.g., Prisoner Reentry). This chapter reveals how all States have implemented core elements of the FBCI, as well as the remarkable progress and diversity of State-led action.

Innovation #1: Leveling the Playing Field

President Bush's Executive Orders required his cabinet agencies to identify and remove all unwarranted barriers inhibiting government partnerships with faith-based and grassroots charities. Such barriers were identified in comprehensive audits completed by agency FBCI Centers and engaged through a combination of 16 rule changes and a myriad of smaller-scale policy reforms affecting virtually all human service programming in the Federal Government. These changes brought virtually all Federal programs and policies in line with modern First Amendment jurisprudences and "Charitable Choice" principles that protect the rights and integrity of religious charities as well as the rights of recipients of services. Today, faith-based charities are welcomed as respected and equal partners in all Federal programs, and clear Constitutional guidelines guide their use of public funds.

Innovation #2: Expanding Partnership with Grassroots Organizations

FBCI audits identified barriers to the participation of small and new charities, as well. In addition to extensive policy changes to minimize these barriers, the Administration has harnessed a portfolio of program models including vouchers, mini-grants, and intermediary grantees to vastly increase the number of grassroots organizations partnering with government. For example, the Compassion Capital Fund has used sub-granting through intermediaries and mini-grants to provide $264 million to over 5,000 neighborhood-based groups. Mini-grants administered by the U.S. Department of Labor have demonstrated that smaller grants of $25,000 to $75,000 enable grassroots organizations to win grant competitions for the first time, while leveraging strong results in return. Vouchers have been applied successfully through the President's Access to Recovery (ATR) program, which has served nearly 200,000 clients (60 percent over goal).

Early evaluations suggest results that outpace traditional service models. The strong results were achieved through the holistic approach to recovery provided by the 5,494 partners engaged through ATR's voucher mechanism. Nearly one-third of ATR providers were faith-based organizations, and large percentages were first-time partners with government (e.g. 40 percent in Connecticut; 70 percent in Louisiana). These and other innovative models are being used across a wide range of programs, from the fight against HIV/AIDS in Africa to domestic violence prevention in the U.S.

Innovation #3: Implementing the FBCI through cabinet agencies

Rather than establishing the FBCI as a simple communications strategy or stand-alone program, President Bush embedded the Initiative within Federal agencies that administer human service programs. The result has been new and strengthened partnerships that further each agency's mission on issues ranging from economic development in distressed neighborhoods (U.S. Department of Commerce), education outcomes (U.S. Department of Education), crime reduction (U.S. Department of Justice), employment opportunity (U.S. Department of Labor), homelessness (U.S. Department of Housing and Urban Development), substance abuse (U.S. Department of Health and Human Services), and food security (U.S. Department of Agriculture).

Innovation #4: Building Mutually-Reinforcing Clusters of Service

Many social ills are so intertwined they cannot be resolved by addressing just one isolated problem. Reflecting on this reality, FBCI programs often form a "cluster" of efforts directed at interconnected issues. One signature domestic application of the FBCI is a justice cluster of initiatives aimed at decreasing crime among adults, improving life outcomes for ex-offenders, and preventing criminal behavior by at-risk youth. President Bush announced the Prisoner Reentry Initiative (led by DOL and DOJ), the Mentoring Children of Prisoners program (led by HHS), and related efforts in State of the Union addresses, and his Administration has supported their implementation with hundreds of millions of dollars in new funding. These, and related initiatives, place special focus on recruitment of mentors from religious organizations and other community groups to provide life coaching and support to adults and youth. Early results from these initiatives indicate that ex-offenders participating in the program are half as likely to return to crime as the national average; separately, more than 70,000 individuals have answered the call to serve as mentors for children of prisoners in order to break the cycle of crime in families.

Innovation #5: Applying the FBCI Vision to International Aid and Development

The President's Emergency Plan for AIDS Relief (PEPFAR) stands among the very best successes of the FBCI vision. First, it reflects a massive-scale response to the President's call for a "determined attack on need," saving lives and renewing communities ravaged by HIV/AIDS in Africa and around the globe. PEPFAR is structured to treat those afflicted with HIV/AIDS, care for the dying or orphaned, and prevent the spread of HIV/AIDS —and it establishes rigorous performance outcomes in each category. Second, despite its unprecedented scope and funding, PEPFAR centers its prevention, treatment, and care efforts around local community- and faith-based partners. Aggressive new partner strategies, such as a cap of 8 percent on the funding any one grantee can receive within focus countries, and other innovative policies translated into more than 80 percent of PEPFAR partners being indigenous faith- and/or community based organizations. Other major international efforts, such as the President's Malaria Initiative, also model these principles in action.

Innovation #6: Growing Key Elements of the FBCI in All 50 States

The FBCI is not merely a Federal initiative, but also a nation-wide vision taking root in all 50 States. Nonprofits in each state won a collective $14 billion in direct, competitive Federal funding in 2006, ranging from nearly $20 million in North Dakota to over $1 billion in California. Many of these organizations are leading implementation of key FBCI programs, from prisoner reentry services to tutoring of at-risk youth. Meanwhile, even larger flows of Federal funds are provided to State and local government through formula and block grants. Governors increasingly recognize faith-based and community organizations as key allies in addressing their states' most pressing needs, and more than two-thirds of state executives now seek to leverage such partnerships through state FBCI offices or liaisons. Even in states where a formal FBCI office does not yet exist, states are active, with demonstration projects, training for nonprofit leaders, Charitable Choice reforms, and expansion of public-private partnerships.

Innovation #7: Building the Capacity of Nonprofit Sector Leaders through Training and Technology

The FBCI provides a host of training opportunities, technical assistance services, and other resources to social entrepreneurs that bolster the vitality of America's nonprofit sector. This, in turn, enables communities to benefit from strengthened private charities and the cross-sector collaboration that follows. The Compassion Capital Fund, alongside small grants for capacity-building, also provides grassroots grantees with intensive coaching on how to support growth and sustainability. Many small and new grantees of other programs also receive intensive technical aid and training. Additionally, the White House OFBCI and Federal agencies have provided in-person training to over 100,000 social entrepreneurs in skills such as competing for Federal grants, fund raising from private sources, building a stronger board of directors, recruiting volunteers, and performing outcome-based evaluations.

Innovations #8: Expanding Public-Private Partnerships

Just as equipping nonprofits with tools and resources benefits communities beyond any government-sponsored program's reach, so too does the FBCI's focus on increasing private capital for faith-based and community organizations. The most direct application of this strategy are Bush Administration-supported changes to tax policy, such as the 2006 changes allowing individual retirees to make tax-free donations to charities from their IRAs. The National Committee on Planned Giving reports that within the first year this option was available, 6,330 individual gifts were donated through IRA rollover, totaling $111 million to the nonprofit sector. Public-private partnerships forged domestically by the U.S. Department of Commerce and internationally by the United States Agency for International Development have combined to deliver $8 billion in private funds that have been directed to revitalizing distressed regions for job creation, economic development, and small business enterprise.

Innovation #9: Forge a United Strategy with the President's Call to Service

When President Bush formally launched his Faith-Based and Community Initiative in January 2001, he announced a partnership to give the FBCI reach into government and community service simultaneously. The FBCI partners with the Corporation for National and Community Service (CNCS) to administer the FBCI into ongoing CNCS programs. CNCS formed the Faith and Communities Engaged in Service (FACES) initiative to enhance the development of social capital and service infrastructure in communities across the country. Following 9/11, President Bush created USA Freedom Corps to build on the compassion of all Americans serving a cause greater than self and to coordinate domestic and international volunteer efforts. He also established the President's Council on Service and Civic Participation. The FBCI collaborates with all of these entities to fulfill the President's Call to Service and to more effectively manage volunteers at faith-based and community organizations.

Innovation #10: Catalyze the Compassion Agenda

The President's FBCI serves as a vehicle for the White House's compassion agenda. White House and Federal agency FBCI staff are instrumental in planning the budget for compassion agenda programs and extending related policies into existing programs. The Initiative sponsors monthly "Compassion in Action" events to heighten awareness of the greatest social crises of our day (e.g., prisoner reentry, school dropout rates, malaria) and profiles public and private strategies offering effective solutions to those same problems. These events feature interagency planning efforts that further collaborations across government as well as between government and civil society.

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The Growing Nonprofit Leadership Crisis

A Washington Post article summarizes a new report on leadership in the nonprofit sector that underscores the difficulty the nonprofit sector will have in retaining the next generation of potential leaders.  The report, titled "Ready to Lead?  Next Generation Leaders Speak Out," is the product of a partnership between CompassPoint Nonprofit Services, a charity that provides management training and other resources to nonprofits, the Annie E. Casey Foundation, the Eugene and Agnes E. Meyer Foundation, and Idealist.org, a nonprofit networking cite sponsored by Action Without Borders.  Based on a survey of 6,000 emerging nonprofit leaders, the report finds that many members of this next generation of nonprofit leadership face barriers in the form of insufficient compensation, lack of support and mentorship from incumbent executives, and overwhelming responsibilities.  At the same time, many still aspire to higher leadership roles in the future and view the nonprofit sector as a desirable place to work.  The report builds on an earlier report by CompassPoint and the Meyer Foundation, "Daring to Lead 2006," that surveyed nearly 2,000 nonprofit executive directors and found that three out of four of them were likely to leave their jobs within five years in large part because of the financial and personal sacrifices their jobs entailed.

These reports highlight the leadership challenges that will be faced by nonprofits in both the short and long-term.  Possible legal ramifications of these challenges include whether the need to offer significantly greater amounts of compensation and benefits to attract sufficient numbers of qualified leaders will raise any legal concerns, especially if comparable data is based on lower, historical levels of compensation, and also whether the growing emphasis on governance and accountability will contribute to the burnout of potential and current nonprofit leaders.  To address these concerns will require nonprofits to systematically address the barriers to retaining emerging leaders, including ensuring that these leaders have the legal resources and answers needed to satisfy the increasing emphasis on good governance and transparency.  For example, last fall I taught the legal portion of a course designed by Volunteers of America and the Notre Dame Mendoza College of Business as part of a program designed to train and support promising potential and current leaders within VOA.  These reports indicate that more nonprofits should consider such programs.

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Control of Hospital Shifts from Government to Nonprofit

The Atlanta Journal-Constitution reports that the board of struggling Grady Memorial Hospital, part of the Grady Health System, gave final approval over the weekend to a lease agreement that shifted management of the 953-bed public hospital to a new nonprofit corporation.  The members of the new nonprofit's board have yet to be announced, and the nonprofit has yet to obtain federal recognition of its tax-exempt status, which may delay its actual assumption of management responsibilities for the hospital.  The change was driven in part by offers from the local business community of hundreds of millions of dollars in support if the management shift occurred, as well as the possibility of millions more from the Georgia state government.

While this changes represents a shift in contol over only slightly more than 0.1% of the nation's community hospital beds, it indicates that the longer-term decline in the proportion of community hospital beds owned by state and local governments continues.  The Kaiser Family Foundation has reported that over the past two decades the proportion of such beds owned by nonprofits has remained relatively constant at approximately 70%, although the total overall number of such beds has declined, but the proportion owned by state and local governments has declined by 5%, from 21% to 16%, while the proportion owned by for-profits had increased to 14% through 2003.

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Art Donations the Next Target for Tighter Rules?

The L.A. Times reports based on an analysis it conducted that inflated valuations of donated art are probably costing the federal government millions of dollars in tax revenues.  It cited both a 2006 Treasury Inspector General for Tax Administration (TIGTA) report and recent federal raids on thirteen locations in California to seize art objects.  The report noted that in a single recent year the IRS Office of Art Appraisal Services recommended $62 million in adjustments to the values of artwork with a claimed value of nearly $218 million, while over five years it had recommended over $341 million in adjustments on nearly $954 million in claimed value artwork.  This adjustments were both to overvalued charitable donations and undervalued estate or gift assets.  The report also noted that it appeared only a few thousand returns each year claim art donations valued at $20,000 or more.

The federal raids involved four Southern California museums: Los Angeles County Museum of Art, the Pacific Asia Museum in Pasadena, the Bowers Museum of Cultural Art in Santa Ana, and the Mingei International Museum in San Diego.  The L.A. Times article reports that the federal government seized more than 10,750 objects in January as part of an investigation into the donation of overvalued Asian and Native American artifacts.  While responsibility for valuing donated art lies with the donor, not the recipient museum, the U.S. attorney's office in Los Angeles is investigating whether museum officials may have knowing accepted donations of overvalued art and so aided the overvaluation scheme.

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For-Profit Subsidiaries Key to Nonprofit Insurer's Finances

The Detroit Free Press reports that Blue Cross Blue Shield of Michigan managed to report positive net earnings for 2007 despite $245 million in losses on its individual insurance lines because of the financial strength of the nonprofit insurer's for-profit subsidiaries.  According to the article, individual insurance lines are "those bought by adults without workplace coverage or to supplement Medicare coverage" and include both supplemental Medicare policies known as Medigap and conversion policies for individuals who once had workplace coverage.  The profitable subsidiaries included the workers' compensation insurance provider Accident Fund and the dental plan provider DenteMax.  According to the nonprofit's related press release, it's almost $1.5 billion in monthly payments for medical and pharamacy claims makes it the largest payor for health care in the state of Michigan.  The company also attributes its positive 2007 net earnings in part to its investment returns.  The nonprofit noted its reserves had declined as measured against its risk exposure for the third straight year, but those reserves remained comfortably above the minimum capital requirement imposed by the Blue Cross and Blue Shield Association.  While a nonprofit corporation under Michigan law, Blue Cross Blue Shield of Michigan is not exempt from federal income taxes according to its 2006 financial statements, available on its website.

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