Friday, April 11, 2008
The Chronicle of Philanthropy reports that George and Laura Bush donated $165,660, nearly 18% of their income, to charity last year. That amount included an advance on a children's book Laura Bush co-authored with their daughter, Jenna. Donations went to the Crawford Texas Volunteer Fire Department, a soup kitchen called Martha's Table, Susan G. Komenfor a Cure, and the Malaria No More Fund, as well as their church in the District.
The Cheyneys contributed $166,547 of their $3.05 million income.
Thursday, April 10, 2008
Two British charities, Friends of the Earth and Help the Aged, are asking for judicial review of the British government's fuel poverty policy. The charities are asking the government to set out its plans to meet its legal responsibility to eradicate fuel poverty. The government had responded to concerns about households that had to spend more than 10% of their income on heating and lighting. The government set two targets, one to erase fuel poverty for the most vulnerable households by 2010 and the other to address fuel poverty in all households by 2016. The two charities are asking the government to impose a minimum standard of energy efficiency for households facing fuel poverty.
The idea of the “non-profit” hospital is really the dodo-bird of our time. Extinct, yet not discussed. Today’s hospitals are tax-exempt business entities that are operated by business executives who have fully divested themselves of even the vocabulary of the non-profit world. They typically speak of their hospitals as “health systems,” and internally they call it “the company.” They speak of their profit-centers and their loss-leaders and their payor-mix. They operate business entities that simply deliver a product, in this case, it’s “health care.” They no longer have patients, they now have customers or consumers. Imagine the dilemma faced by the (proportionately well compensated) development officers who have to make the “charitable” case in support of “the company.” It is quite the disingenous objective.
— Jay maloney Apr 9, 04:09 PM
There are lot more comments available on the website.
The very informative April 2008, International Journal of Civil Society Law Newsletter is now available from the International Center for Civil Society Law Website. The ICCSL also reports that on April 16, 2008 Dr. Leon Irish and Prof. Karla Simon will be speaking to the Washington Foreign Law Society about their role in the development of a better legal environment for civil society in China. This should be an interesting talk, particularly in light of the upcoming Olympic events in China and the protests regarding Tibet. To register, go here.
Wednesday, April 9, 2008
Massachusetts will consider a bill, Senate, No. 2559, to cap salaries of nonprofit executives. The bill will impose a cap of $500,000 on compensation paid to any director, trustee, officer or senior manager of any charity with annual gross revenues of $1 million. The bill defines compensation to include salary, bonuses, deferred compensation, below-market rate loans, vehicle rental, and other sorts of compensation.
The Boston Herald reports that a reason behind this bill is a concern over executive compensation at Bay State hospitals. Fourteen executives at Bay State hospitals now earn more than $1 million each, and that number has increased significantly in the past few years (the number was one in 2004). The increase in the amount of compensation has also been significant, with CEOS at Boston hospitals receiving increases of between 13 and 46 percent between 2004 and 2006.
A hearing on Senate, No. 2559 is scheduled for tomorrow.
District Court for the District of Columbia Reinstates 501(c)(4) Organization's Exempt Status in Face of Private Benefit Challenge
In Democratic Leadership Conference v. United States, the United States District Court for the District of Columbia rejected the Service's efforts to revoke the 501(c)(4) status of the Democratic Leadership Council. The case was decided on the issue of whether the IRS had the authority to retroactively revoke the Leadership Council's (c)(4) status. One has to wonder how it got that status in the first place. According to the opinon,
The Democratic Leadership Council is so named because it was founded by federal and state elected officials who are Democrats and who were concerned with the direction of the policy debate within their party, as well as within the country as a whole. Through the establishment of DLC, these officials and others with similar interests and goals expected to improve the overall contribution to Democratic leaders, in the federal and state government, to national policy debate, and to urge upon both the party and the general public new and innovative approaches to policy.
What is really interesting about this case is that it never once mentions American Campaign Academy v. Commissioner, 92 T.C. 1053. The American Campaign Academy was an educational organization that, according to the tax court operated essentially to benefit the Republican party. The Tax Court found impermissable private benefit because of the apparent purpose to benefit the Republican party. Here we have an organization, like the American Campaign Academy, founded, funded and operated to benefit persons belonging to a particular political party and American Campaign Academy is never once mentioned! The Democratic Leadership Council's website makes it very clear that the organizatioin exists to support the Democratic party. Does the failure to mention American Campaign Academy mean, as some have argued that American Campaign Academy is simply one of the worst cases ever decided? Or is there a different private benefit standard applicable to (c)(4) than to 501(c)(3)'s? That might be the case since (c)(4)'s cannot be supported by deductible contributions (though the tax exemption is still a government subsidy). Personally, I find the primary and secondary benefit rationale in American Campaign Academy entirely perusasive, but here is one of the best critique's I've read of the case:
A recent Tax Court opinion suggests another dimension to the private benefit analysis. In American Campaign Academy, the court considered whether the operation of a school to train individuals to function in key campaign functions could qualify as a section 501(c)(3) educational activity and upheld the Internal Revenue Service's conclusion that the school operated for the substantial nonexempt purpose of benefiting private interests of the Republican entities and candidates who hire the program's graduates. While the Tax Court's result may be sound, its analysis is indefensible. In holding that "Republicans" are too definite a class of secondary beneficiaries to support exemption, the court baldly stated, but failed to explain why, training people to work for Republican organizations and campaigns provides a more definite secondary benefit to private interests than does training people for work in the banking industry. 29 T.C. at 1073-75 (purporting to distinguish Rev. Rul. 68-504, 1968-2 C.B. 211); see also Rev. Rul. 72-1-01, 1972-1 C.B. 144 and Rev. Rul. 67-72, 1967-1 C.B. 125 (each granting section 501(c)(3) status to a program to train individuals, working or desiring to work in a particular industry and funded by industry employers). Properly analyzed, the American Campaign Academy result has little bearing on the question of the proper treatment of specific election-related activity by section 501(c)(3) organizations. The opinion repeatedly mentions the partisan focus of the Academy, but except to say that "Republicans" comprise a finite, albeit large, class, does not explain the significance of the observation. In fact, the partisan focus of the Academy provides a legitimate ground for denial, although it is a ground the court overlooks. At common law, trusts to promote the fortunes of a particular political party are not charitable. See infra notes 163-64 and accompanying text. Because consistency with common law notions of charity is a threshold for qualification as a section 501(c)(3) organization, see Bob Jones Univ. v. Simon, 416 U.S. 725 (1983), the I.R.S. and Tax Court denial of exempt status to the American Campaign Academy is justified, although the court's explanation of the result is highly problematic. Common law concepts of charity do encompass situations where the objectives of a group or a gift are described in terms of furthering an otherwise charitable cause rather than promoting the success of a particular political party. See infra notes 166-67 and accompanying text. Thus, the correct result in American Campaign Academy, reached via the correct analysis, would have no impact on the evaluation of the activities under consideration in this Article.
Laura Brown Chisolm, Politics and Charity: A Proposal for Peaceful Coexistence, 58 Geo. Wash. L. Rev. 308, footnote 159 (1990). I'm not so sure that I agree that when an organization intentionally directs its secondary benefit to a particular industry, it should lose tax exemption. This, I think, is the fallacy in Chisolm's argument, though I agree that the opinion could have been better written. There is nothing wrong in directing a secondary benefit to an industry (like training doctors, lawyers, or any other group of laborers who will benefit a particular industry) if doing so is necessary to achieve the charitable goal (like medical or legal education); there is something wrong, as in American Campaign Academy and Democratic Leadership Council, when the organizations unnecessarily direct their secondary benefit to a particular industry participant. Law schools, for example, direct secondary benefits to legal service providers, though not to just one particular legal service provider within the legal industry.
Tuesday, April 8, 2008
The Red Cross announced today that Gail J. McGovern will take over as President and CEO of the organization. Ms. McGovern was a corporate executive with AT&T and Fidelity Investments for many years, is currently a professor teaching marketing at the Harvard Business School, and is a trustee of Johns Hopkins University. The Red Cross announcement describes her as "business leader" and "nonprofit volunteer." She has a strong record as a fundraiser for a number of charities, and those skills were likely of particular interest to the Red Cross.
The IRS announced yesterday that it has posted draft Instructions to the new form 990. The comment period is open until June 1, 2008. The IRS has prepared "highlights lists," available with the instructions, that identify items in the instructions about which the IRS would particularly like to receive comments.
The IRS says that the instructions contain a number of tools that should make the new 990 easier to understand and easier for an organization to complete: a glossary, a sequencing list, a compensation table, and illustrative examples. The IRS also hopes to promote more uniform reporting through the changes.
Just two days ago we blogged about a hospital in the Chicago area that had to close. Now from Georgia comes a New York Times story about another struggling hospital. Grady Memorial Hospital in Atlanta, reported to be one of the country's largest charity hospitals, has been on the brink of financial failure. Last year the hospital operated with a deficit of $48 million. The hospital serves Medicaid and Medicare patients (40% of its patients) and uninsured patients (30%). It provides the region's only Level 1 trauma center.
The Woodruff Foundation has announced a $200 million gift to the hospital, the largest gift ever to a public hospital. Grady has been managed by the Fulton-DeKalb Hospital Authority, but management of the hospital has now been turned over to a new nonprofit organization. Without the help from the Woodruff Foundation and a one-time appropriation from the Georgia legislature to support trauma care, the hospital would not be able to continue. How it will manage going forward is still uncertain. One hope is that the new nonprofit entity will provide more efficient management, but given that inpatients cost, on average, nearly two times the amount of the reimbursements the hospital receives, it's hard to imagine how the hospital will survive without continued support from foundations and government.
More on Nefarious, "Guilt-Free" Motives for Giving and the Complexity of Private Foundation Excise Taxes
David Yermak recently posted "Deductions Ad Absurdum: CEO's Donating Their own Stock to their Own Family Foundations." Here is the abstract:
I study large charitable gifts by Chairmen and CEOs of public companies using their own company stock as the donation currency. Unlike open market sales, gifts of stock are not subject to insider trading law and have very lenient disclosure requirements. Consistent with their exemption from insider trading law, I find that CEOs' stock gifts occur just prior to significant drops in their firms' stock prices, a pattern that enables the donors to obtain increased personal income tax benefits. This timing is more pronounced when executives donate their own shares to their own family foundations, which I identify using foundations' IRS tax returns posted on Internet databases. Stock gifts are also strategically timed to occur prior to unfavorable quarterly earnings announcements and after positive earnings announcements. Evidence related to reporting delays and seasonal patterns suggests that some CEOs backdate stock gifts to their own family foundations in order to increase personal tax benefits. CEOs' family foundations hold donated stock for long periods rather than diversifying, permitting CEOs to continue voting the shares but violating standard prudent investor principles of risk reduction through diversification. These results highlight an odd juxtaposition of motives, suggesting that while making charitable contributions to support good works in society, CEOs use aggressive and perhaps fraudulent tax evasion strategies.
Here is another one of my "gratuitous remarks." I keep trying to make the case that the overly detailed private foundation excise taxes (like IRC 4943 relating to excess business holdings) are an unnecessary intrusion on the free market and the good motives but then research like this makes me wonder whether the market is free and the motives good? At least the article proves that some donors are totally without guilt, as a few readers have suggested. Actually, those who take apparent offense to my association of giving with anything but real altruism may be right that guilt does not motivate giving, at least not amongst the very wealthy. Here is what Yermak surmises regarding the motives for giving:
In giving away part of their wealth, executives respond to a wide range of motives (Auten, Clotfelter, and Schmalbeck, 2000). In addition to the psychic value of altruism, somedonors seek public recognition both for themselves (Harbaugh, 1988) and their companies. Other donors use charitable contributions to achieve membership in elite social circles such as prestigious non-profit boards, which may provide not only public visibility but also access to lucrative business relationships.5 More prosaically, philanthropic decisions also depend upon income tax incentives, estate planning considerations, disclosure requirements, and even aspects of corporate voting and control. While finance research has closely studied how CEOs dispose of stock via sale (insider trading), exchange (mergers and acquisitions), and intergenerational bequest (family business groups), our knowledge about CEOs’ stock gifts is limited to two recent working papers by Johnson and Moorman (2005) and Jung and Park (2007). Johnson and Moorman (2005) study a large sample of stock gifts by CEOs of U.S. companies between 1989 and 2003. Consistent with the results below, the authors find evidence of opportunistic gift timing near local stock price maximum points, suggesting that donor CEOs use private information to increase personal income tax benefits. They do not, however, identify the recipients of individual gifts, study the role of family foundations, or consider the hypothesis that some gifts might be fraudulently backdated. Jung and Park (2007) study transfers of stock by controlling shareholders of South Korean companies to other family members. In Korea such transfers create gift tax liability based upon the average value of the shares over a certain time interval around the gift. The paper’s results suggest that companies depress their stock prices around the dates of these transfers by disclosing bad news and withholding good news from the market in order to reduce the donor CEOs’ gift taxes.
Don't get it twisted. Guilt [not greed], my friends, is good. As I've mentioned to at least one reader who has taken umbrage regarding my attribution of giving to guilt, the poor givers amongst us -- those who occasionally give to panhandlers or drop a few coins in the Salvation Army bucket around Christmas are acting out of guilt. Its hard to just walk right by without giving anything and rarely is it that we are giving out of the goodness of our hearts. And indeed, we ought to be guilty. What with most of the world starving and here we are living in the lap of luxury -- buying all kinds of junk for Christmas (my wife and I do it ourselves)!
Two public policy scholars from the Andrew Young School of Policy Studies, Georgia State, Taehyun Jung (web page unavailable) and Dennis Young, have posted a fascinating article, Mission-Market Tensions and Nonprofit Pricing regarding an age-old question: to what extent do nonprofit managers make decisions based on maximizing their charitable mission or generating profit for the organization. Here is the abstract:
Private not-for-profit organizations combine characteristics of a public sector agency with those of a private, proprietary firm. In particular, nonprofits are required to address designated social missions while breaking even financially. This structure underlies the difficulty that nonprofit organizations face in making decisions with important resource implications. Specifically, choices that would achieve maximal mission impact may differ from choices that reward the organization in purely financial terms. As a result, nonprofit managers face a variety of trade-offs between mission responsive and financially rewarding actions. This paper considers some of these tradeoffs in the context of pricing decisions by nonprofit organizations. In particular, the paper draws on alternative theories of nonprofit pricing from the literature. In one theory, nonprofits are viewed as revenue maximizers, pricing their services to garner as much net revenue as possible to support their organizations. In an alternative theory, nonprofits are conceived as mission maximizers, pricing their services to achieve maximum mission impact within the constraint of financial solvency. The efficacy of these theories is explored through five case studies of organizations offering a variety of services within the context of a local social services federation. Evidence from these cases suggests that the forgoing theories apply in some combination for any given nonprofit organization. Several different behavioral patterns are found, including nonprofits seeking to balance financial and mission impacts in the pricing policies for each of their service offerings and others pursuing a strategic mix of pricing policies for profitable and mission-impacting services. It is clear from all cases observed that nonprofit managers struggle with mission-market tensions as they relate to pricing and that they can benefit from metrics to help them sort through these decisions in ways that resolve these tensions.
Pork-barrel spending has been all over the news lately so I decided to go to the website to see the actual report. The nonprofit, Citizens Against Government Waste, publishes a list of legislative appropriations it considers examples of pork-barrel politics. Here is a representative ham sample
The Pig Book Summary profiles the most egregious examples, breaks down pork per capita by state, and presents the annual Oinker Awards. All 11,610 projects are listed in a searchable database on CAGW’s website www.cagw.org. Examples of pork in the 2008 Pig Book include:
$3 million for The First Tee;
$1,950,000 for the Charles B. Rangel Center for Public Service;
$460,752 for hops research;
$211,509 for olive fruit fly research in Paris, France;
$196,000 for the renovation and transformation of the historic Post Office in Las Vegas;
$188,000 for the Lobster Institute in Maine; and
$148,950 for the Montana Sheep Institute.
“Americans do not send their hard-earned tax dollars to Washington so that Sen. Daniel Inouye can bring home $173 million in defense pork and receive the Pacific Fleeced Award or get sapped by $4.8 million going to wood utilization research, on which the government has spent $91 million since 1985,” concluded Schatz.
At least half of the recipients in the representative samples are nonprofits. But then, I've visited the websites of First Tee, the Charles B. Rangel Center for Public Service, the Lobster Institute and the Montana Sheep Institute, and really, I can't see why spending on those programs as opposed to any other types of social spending is bad. Not even the Lobster Institute! I will admit that if Rangel wants naming rights he ought to donate his own dadgum money, but other than that the institutional beneficiary seems legit. Three million for a golf institute, $2 million for a college department, $200,000 for a university department that studies lobsters and $150,000 for a college department that studies sheep don't seem all that objectionable to me. These are all legitimate educational endeavors, whose to say teaching one thing is better than another. Anyway, here are the criteria that must be met in order for an appropriation to be considered "pork:" The appropriation must . . .
- Requested by only one chamber of Congress;
- Not specifically authorized;
- Not competitively awarded;
- Not requested by the President;
- Greatly exceeds the President’s budget request or the previous year’s funding;
- Not the subject of congressional hearings; or
- Serves only a local or special interest.
I am all for curbing wasteful spending (lack the war in the desert -- spare me the hate mail, there are plenty of patriotic conservatives who think the war is a waste -- and you know who you are!) but I am not so sure that the seven criteria have anything to do with "wasteful" spending. One person's pork is another person's filet mignon, after all. Here is just one example. The group includes the following appropriations as pork:
$36,900,000 for four projects funding chapels, including: $11,600,000 by Rep. Nancy Boyda (D-Kan.) for phase I of the chapel complex at Fort Leavenworth; $10,400,000 by Rep. Ike Skelton (D-Mo.) for a chapel at Fort Leonard Wood; $9,000,000 by Senate Military Construction Appropriations Subcommittee member Mitch McConnell (R-Ky.), House appropriator Zach Wamp (R-Tenn.), Rep. Marsha Blackburn (R-Tenn.), Rep. John Tanner (D-Tenn.), and Rep. Edward Whitfield (R-Ky.) for a chapel center at Fort Campbell; and $5,900,000 by Rep. Randy Forbes (R-Va.) for a unit chapel at Fort Lee.
$6,700,000 for two projects funding fitness centers: $5,800,000 by Rep. Mike Conaway (R-Texas) for an addition to a fitness center at Goodfellow Air Force Base and $900,000 by House Military Construction Appropriations Subcommittee member Patrick Kennedy (D-R.I.) for a fitness center at Naval Station Newport.
$5,200,000 by House appropriator Ciro Rodriguez (D-Calif.) for a student activity center and library at Laughlin Air Force Base.
$4,800,000 by House Appropriations Committee Ranking Member Jerry Lewis (R-Calif.) for air conditioning at Vista Del Sol, Twentynine Palms.
$1,500,000 by Sen. Bill Nelson (D-Fla.) for a dining facility at Camp Rudder.
$750,000 by Senate Military Construction Appropriations Subcommittee member Jack Reed (D-R.I.) for a bachelor quarters addition at Naval Station Newport. According to its website, Newport’s Bachelor Housing is a “Zumwalt Award winning 5-star facility with a state-of-the-art waterfront Conference Center.” In December, 2005 the facility received the Performance Plus Gold Pineapple Achievement Award for excellence in training and guest satisfaction from the American Hotel and Lodging Association Educational Institute.
I just don't see pork in paying for chapels on military bases, air conditioning in the desert or a fitness center at a military installation at which young people train for war, for crying out loud!
Monday, April 7, 2008
Last year, the American Idol tv show sponsored a fundraiser, Idol Gives Back, and raised pledges of $76 million. The New York Times reports that money raised in the first year is being distributed over two years to nine charities that seek to reduce poverty in the US and in Africa. Although financial statements will not be released until May, Charity Projects Entertainment Fund, the entity that oversaw the fundraisning and distribution, says that administrative costs were about 7% of the total raised, a low percentage for overhead. The organization says that the financials will be made public after the audit is completed. Charity Projects Entertainment Fund, developed in conjunction with Comic Relief, had a lot of experience with this sort of fundraising and helped the project get off the ground. This year a new charity, Idol Gives Back (also the name of the fundraising event ), will handle everything. The next Idol Gives Back event will be held this week.
In the immediately previous post, I discussed the private foundation excise taxes using the Clintons' tax returns as useful context. The returns are available on-line via this New York Times article. The article makes the point that of the nearly $10 million given to their family foundation since 2001, more than half of the distributions were made in 2007. Before that, the Clintons released relatively litle, while still reaping pretty sizeable deductions.
The pace of the Clintons’ own charitable giving, which peaked last year at $3 million, has not always kept up with their income, and by at least one measure, has sometimes fallen short of the spirit of the 5 percent goal, which is to get money into the hands of charities that do good works. In 2002, for instance, they reported income totaling $9.5 million and $115,000 in gifts to charity. In other years, they have given much larger amounts to their family foundation, but it has yet to disburse all of the money. The Clintons took a tax deduction in 2004 for $2.5 million in charitable gifts, $2 million of which went to their family foundation, which as a tax-exempt nonprofit is considered a charity under the tax code. That same year, the foundation gave away just $221,000 to charitable groups, according to its tax return. A representative of the Clintons said that when they and their foundation filed their 2007 tax returns, the records would show that all of the $3 million they gave to the foundation last year had been passed on to other charities. That will account for more than half of all the charitable donations that the foundation has made since 2001, according to a review of its tax returns.
As I suggested in my post regarding whether conservatives are more giving than liberals, people give primarily for self-serving reasons -- including and most probably guilt. As long as they are redistributing some of their wealth, it matters not the reason, I suppose. Nobody has a "come to Jesus" moment out of the pure goodness of their heart.
Does the Clinton Family Foundation Prove the Necessity of the Convoluted PF Excise Taxes? Paul Caron Comments on Clinton Use of Private Foundation "Loophole"
President and wishful President-to-be Clinton released their tax returns for the years 2000 - 2007 last Friday, just in time for me to allow their use in my tax exempt organizations class this Tuesday. Tomorrow we wrap up our overview of the private foundation excise taxes. I've been teaching and complaining about IRC 4940 through 4945 all last week, apologizing to my students all along for the overwrought detail. Here is my favorite quote regarding the regulatory morass regarding private foundations:
On the basis of the congressional enactment, 26 U. S. C. §501, et seq., the Internal Revenue Service has drafted fantastically intricate and detailed regulations in an attempt to thwart the fantastically intricate and detailed efforts of taxpayers to obtain private benefits from foundations while avoiding the imposition of taxes.
Windsor Foundation v. United States of America, 77-2 U.S. Tax Cas. (CCH) 9709 (E.D. Va. 1977). According to a February 27, 2008 Washington Post article, the Clintons donated about $5 million to charity, most of it to the Clinton Family Foundation, operated from their kitchen table with Bill and Hillary serving as the only Foundation executives. According to that article, "the foundation has enabled the Clintons to write off more than $5 million from their taxable personal income since 2001, while dispensing only $1.25 million in charitable contributions over that period." Some of the private foundation excise taxes are designed to prevent charitable organizations from funneling tax exempt funds, for which a charitable contribution has previously been granted, to their own use or to favorite political causes or persons. Others are designed to prevent the use of family foundations to generate donations for charitable expenditures that will not be made for years to come. Those laws seem hardly effective, though I would not argue for more detail -- an increased payout requirement would be appropriate, but even do-gooders have their effective lobby. A few years ago, the Congress tried to increase the annual payout requirement by what would have amounted to a mere pittance and was shouted down. The February 27 article notes, for example, that at least one Clinton Family Foundation grant went to a Clinton political supporter. Yesterday's Washington Post article allows a further implication:
The family foundation also gave $25,000 to to support the McGovern Library and Center for Leadership and Public Service in Mitchell, S.D, in early 2007. Later in the year the center's eponym, the former Democratic presidential nominee George S. McGovern, said he would endorse Clinton for president. " It was the furthest thought when I decided to endorse Hillary last October," McGovern said yesterday. The Clintons also gave $5,000 to the Jon Michael Moore Trauma Center at West Virginia University, which was named for the late grandson of Hillary Clinton's Senate colleague, Robert C. Byrd (D-W.Va.). Byrd, a superdelegate, has not yet endorsed a candidate for president.
I am willing to believe these donations were entirely conicidental to Senator Clinton's run for the White House. If the donations were for endorsements, they certainly came cheap. Mitchell or Byrd ought to have demanded a lot more for their superdelegate votes. The article also states:
Between 2001 and 2006, the years for which tax records are available, the family put nearly $6 million into the foundation. The Clintons took a tax write-off for that money even though the foundation gave away less than half that amount -- about $2.5 million. A Clinton campaign official said that trend did not continue in 2007 -- the family moved $3 million through the foundation to other charities. Paul Caron, a tax expert at the University of Cincinnati College of Law, said the Clintons did not take full advantage of the loophole that allows taxpayers to capitalize on exemptions even when the money is not distributed. The family foundation was legally required to give away [only] 5 percent of its money to qualify for tax-exempt status, Caron said.
Did Caron really say "loophole"? Anyway, these types of stories, taken out of context of course, usually become rallying cries for more regulation of charitable organizations, as similar anecdotal accounts did in 1969 when the Congress enacted the statutes giving rise to the "fantastically intricate" regulations of private foundations. See generally S. Report 91-552, 91st Cong. 1st Sess., 1969-3 C.B. 423. And, to be sure, the Clintons have brought needed attention and financial largess to causes as diverse as the rehabilitation of the gulf coast after Hurrican Katrina to cheaper and more widely available HIV medication. When I first read the story, I thought something was wrong with this picture. On second thought, though, I suppose so long as a taxpayer permenantly sets aside part of her wealth to charitable causes she should be entitled to a charitable contribution deduction even if the charitable goal is not felt for years to come. In any event, the taxpayer's divestment of wealth ought to reduce her taxes. When that wealth is finally devoted to charitable purposes is another issue. We certainly cannot say that the taxpayer is getting a deferral benefit; deferral requires use of money now and tax liability later. Donors to private foundations immediately give up the use of the money.
For a thoroughly informative discussion of the history leading to the extensive and probably unnecessary regulation of private foundations see William H. Byrnes' excellent article The Private Foundation's Topsy Turvy Road in the American Politicial Process.
Sunday, April 6, 2008
Earlier today, I reported on a Wall Street Journal article describing the big profits earned by some nonprofit hospitals. The WSJ article generally left the impression that nonprofit hospitals were using tax exemption to reap huge profits. A story in today's Chicago Tribune, though, paints the opposite picture of a nonprofit hospital that will soon be closing its doors because of the financial strain caused by charity care. According to the report:
St. Francis said it was losing tens of millions of dollars in recent years because of the rising number of uninsured patients it was treating. That threatened the 410-bed hospital's ability to provide service even to those who could pay, it said. The situation was so bad that when SSM offered St. Francis to another provider for free, no one stepped up. "If anyone thinks we would walk away from this lightly, that is just not the case," Platt said. "It is having an enormous impact on Blue Island, but we serve a lot of other indigents in our communities and we had to look at our ability to serve and this ultimately was undermining our ability." SSM, which announced its plans to close St. Francis last week, said 28 hospital operators, mostly non-profits, rejected the hospital.
The Chicago Tribune article describes the ease with which hospitals can obtain tax exemption and contrasts the state of St. Francis with that of Northwestern Memorial Hospital (where two of my daughters were borrn, incidentally). Perhaps we ought to continue tax exemption for hospitals but then yank that exemption (as Cook County has done for some hospitals in the Chicago area) when those hospitals start looking like for profit operations. That, in a nutshell, is what the "commerciality" doctrine is about. A primary criterion for taking this action would be the percentage the "nonprofit" hospitals spent on charity care (excluding research which is often the subject of a research hospital's technology transfer efforts resulting in still lmore millions in untaxed royalties). The jeopardy to tax exemption might apply only after the nonprofit earns a hurdle rate of aggregate profits either in one year or over a definite period of time. If nothing else, the Chicago Tribune article and the Wall Street Journal article proves that one size does not fit all with regard to tax exemption.
The Wall Street Journal ran a front page story on Friday April 4, 2008 concerning nonprofit hospitals complete with nice tables and interactive video. Not much new in the report, just more evidence that nonprofit hospitals are "nonprofit" in name only. One could even argue that tne nondistribution constraint (i.e., the prohibition against private inurement) does nothing to distinguish nonprofit hospitals from for-profit hospitals. Given the amounts of compensation and other perks paid to those who would otherwise be considered "top hats" in the for-profit world, and the paltry sums devoted to health care for the indigent, it would even be economically illogical to form a for profit hospital when the nonprofit model looks so similar and can provide the same amount of financial returns -- and the same small amount of charity care -- as for profits. It would appear the market already knows this, given the fact that most hospitals in the United States are nonprofit rather than for-profit. The founders and operators of these large, wealthy institutions surely cannot be oblivious to this fact. I really would appreciate some feedback from readers in defense of tax exemption for nonprofit hospitals. The Journal's Health Blog contains some discussion but none of it seems convincing. I think the only legitimate defenses must those added values that for profits cannot provide. Thus, increasing the availability of jobs, and contributing to the local economy cannot qualify since every profitable business does those things. Perhaps the research gains might legitimately stand in defense on tax exemption for nonprofit hospitals but I even have to wonder whether for-profit hospitals do just or nearly as well. Anyway, here is an excerpt from the article:
Nonprofit hospitals, originally set up to serve the poor, have transformed themselves into profit machines. And as the money rolls in, the large tax breaks they receive are drawing fire. Riding gains from investment portfolios and enjoying the pricing power that came from a decade of mergers, many nonprofit hospitals have seen earnings soar in recent years. The combined net income of the 50 largest nonprofit hospitals jumped nearly eight-fold to $4.27 billion between 2001 and 2006, according to a Wall Street Journal analysis of data from the American Hospital Directory. AHD, an information-service company, compiles data that hospitals report to the federal government.
The last line of the article states, ""Nonprofit is a misnomer -- it's nontaxable," says Sacred Heart Hospital's Mr. Novak. "When you're making hundreds of millions of dollars a year, how can you call yourself a not-for-profit?"