Saturday, May 3, 2008
DEFENDING CIVIL SOCIETY, a recently released report of The World Movement for Democracy (co-authored by the International Center for Not-for-Profit Law and the World Movement for Democracy Secretariat) calls for the removal of legal barriers to the existence and operations of civil society organizations worldwide and the adoption of a set of international principles protecting civil society.
In recent years, the report notes, there has been a change in the form of government opposition to civil society organizations in many countries. Such opposition has shifted from outright repression to more subtle forms of restrictions such as imposing barriers to entry to discourage or prevent the formation of organizations, and barriers to resources to restrict the organizations' ability to secure the resources they need to carry out their activities.
The report outlines the various legal impediments used to constrain civil society and exposes and refutes the rationales with which regimes seek to legitimize them. The set of principles the report promulgates are rooted in international law. They are intended to inform proper government-civil society relations and protect civil society organizations.
Commissioned by an Eminent Persons Group, including former Czech President Vaclav Havel and former Malaysian Deputy Prime Minister Anwar Ibrahim, amongst others, the report draws upon legal and political analysis done by the International Center for Not-for-Profit Law (ICNL) and consultations with democracy, human rights and civil society activists at several regional forums.
Friday, May 2, 2008
Updated Status of Cases Involving Lawyers for Islamic Charity Who Were Apparently Subject to Government Surveillance
A New York Times article from earlier this week relating to federal government monitoring of lawyers for persons suspected of financing terrorism cited the case of lawyers for an Islamic charity as involving the only physical evidence of such monitoring. The article states that in August 2004 the government mistakenly provided lawyers for the Oregon offices of the Saudi Arabian charity Al-Haramain Islamic Foundation with a logbook of intercepted telephone calls between the lawyers in Washington, DC and clients in Saudi Arabia. When the government realized its mistake, it demanded return of the logbook, which was stamped "top secret," and warned the lawyers that they could face prosecution if they disclosed its contents. According to the article, this is believed to be the only case in which nongovernment lawyers may have seen physical evidence of the National Security Agency's warrantless wiretapping program. The article also cites two senior Justice Department officials, speaking on the condition of anonymity, who said they knew of a handful of terrorism cases since 9/11 in which the government may have monitored attorney-client conversations. Their understanding is that such conversations were not shared with front-line prosecutors, in order to avoid any violation of attorney-client privileged.
The U.S. Treasury Department designated the U.S. branch of the Al-Haramain Islamic Foundation as a terrorist-linked group in September 2004 based on evidence showing direct ties with Osama bin Laden and hidden transfers of funds to Chechnya. Numerous other branches of the Foundation have received similar designations by the U.S., the United Nations, and Saudi Arabia. A federal grand jury indicted the U.S. branch and two of its officers in 2005 on charges of conspiring to defraud the U.S. government , filing a false tax return, and related crimes arising out of the alleged transfer of a $150,000 donation from an Egyptian to Chechnya, according to a U.S. Department of Justice press release. The false tax return charge relates to falsely reporting that the donation was used to purchase a building in Missouri. It appears that the criminal case has yet to go to trial.
The U.S. branch of the Foundation is also involved in a civil proceeding arising out of the alleged intercepts. It and two of its attorneys sued the federal government in 2006 based on the allegedly unconstitutional intercepts of the calls between the Foundation's director and its U.S. lawyers, according to a Washington Post article. That lawsuit led to a U.S. Court of Appeals for the Ninth Circuit decision last fall regarding whether the state secrets privilege bars reliance by the plaintiffs on the accidentally disclosed logbook, which is essential to the plaintiffs' case. The appellate court found that the privilege did apply, but remanded the case to a federal district court to determine whether the Foreign Intelligence Surveillance Act preempted the privilege.
Third Sector reports that the Office of the Scottish Charity Regulator (OSCR) has concluded that an 11 million pounds per year Scottish charity went under financially in January 2007 in large measure because of failed oversight by its board. The OSCR report on the 20-year old One Plus: One Parent Families charity found that the organization tried to take a holistic approach to providing services for single parents, including through a wholly owned for-profit subsidiary that operated nursing facilities (that itself went into liquidation in December 2006). OSCR traced the failure of the charity to over 2 million pounds of debt, which OSCR's investigation found arose because of both poor governance and a failed response to changes in the funding environment.
With respect to poor governance, OSCR found several issues. First, it found that the charity's Board did not adequately access or fill the range of skills needed among the Board members, particularly the need for business and financial-related abilities. Second, the Board regularly did not receive financial information in advance of Board meetings, that information was routinely at least several months out-of-date, and Board members did not know the scale or appreciate the severity of the charity's cash flow problems. The lack of a complete and adequately resourced finance team at the charity during much of 2006 appears to have compounded this problem. Third, the Board also lacked an audit committee, did not apparently receive the outside auditors' final management letters, had little contact with the outside auditors generally, relied too heavily on a long-time Chief Executive who served from 1989 to July 2006 as opposed to seeking independent third party advice from the outside auditors or other professionals, and did not hold either the Chief Executive or his management team to account. Fourth, both the Board and the management team failed to address the charity's financial problems when they came to light. These governance problems apparently led to the Board's inability to identify aspects of the charity's revenue and expense streams that placed it at significant financial risk, including receiving a substantial proportion of funding in arrears and continuing to operate loss making activities without sufficient other revenue sources to cover those losses.
USA Today has published an Associated Press article on Israel's decision to close all operations of the Islamic Charitable Association. According to the article, Israel asserts that the Association is a front for the Islamic militant group Hamas. The Association, which is the largest Islamic charity in Hebron, West Bank, denies any links to Hamas.
The Israeli military took the first step to implement the closure decision this week when it closed a sewing workshop run by the Association, seizing both sewing machines and bolts of cloth. The Association also operates a boarding school for 600 children, mostly with single parents, a number of day schools and nurseries that serve 6,400 more children, a bakery, a cattle farm, and apartments. It's total assets are approximately $10 million, and it has a $635,000 per month operating budget.
A lawyer for the Association has appealed the closure order to the Israeli Supreme Court, but the Court has not yet set a hearing date. Officials of Palestinian President Mahmoud Abbas' government have also stated they are trying to block the closure. American and Canadian volunteers from the pacifist group Christian Peacemaker Teams are sleeping in the boarding school dormitory in an attempt to deter the Israeli military from shutting that facility.
The New York Times reports that foundations had a record year in 2007, giving away almost $43 billion according to estimates by the Foundation Center. The Center also estimates that foundation assets grew to $669.5 billion last year, up from $614.7 billion in 2006, in part based on a record $36.6 billion in new donations. The Center further reports that new grant-making foundations continue to be created, with approximately 1,400 being established in 2006, although that is fewer than half the number established in 2005.
Thursday, May 1, 2008
The Chronicle of Philanthropy reports that Steven T. Miller, Commissioner of the IRS' Tax-exempt and Government Entities Division, stated at a recent conference that the IRS will continue to inquire about management and governance policies and also plans to be more aggressive in monitoring the efficiency and effectiveness of charitable organizations. While acknowledging that both areas are not expressly within the IRS' jurisdiction, he cited congressional and public interest that at a minimum supports an IRS push for increased transparency and disclosure with respect to these issues by expanding the information sought on the Form 990 annual return. This expanded scope is illustrated by many new questions on the revised Form 990 that will be effective for tax year 2008 (to be filed in 2009 and later years). He also said the IRS plans to re-energize the application of the commensurate test to create a standard for spending by charitable organizations based on their resources, including assets such as endowments.
The IRS released written copies of Mr. Miller's comments on April 23rd and April 24th at the annual Georgetown University conference on tax-exempt organizations. His April 23rd comments focused on governance, which he stated matters to the IRS because "a well-governed organization is more likely to be compliant, while poor governance can easily lead to trouble." He noted that efforts to date have focused on disclosure on the Form 990, particularly with respect to board composition, but stated that future efforts will also extend to education about governance not only through education programs but also through both the initial determination process and the examination process. With respect to the latter, the IRS also hopes to develop further data about the relationship of good governance practices and legal compliance.
In his April 24th comments, Mr. Miller reiterated the governance points he had made the day before but also discussed the IRS role in encouraging efficiency and effectiveness. He stated that transparency and disclosure is the main IRS approach to this area currently, but also that the IRS is looking at the commensurate test as a legal standard that it can invoke in this area. He noted that the IRS plans both to develop a program initiative focusing on the commensurate issue over the next 18 months and to consider this issue as part of its study of colleges and universities that it will begin later this year.
The Chronicle of Philanthropy reports the IRS plans to introduce an amnesty program later this year for tax-exempt organizations that otherwise could lose their exempt status for failing to file the required information return, the Form 990 or Form 990-EZ. The article states that the program is a response to the new requirement, enacted as part of the Pension Protection Act of 2006, that revokes the tax-exempt status of any organization that fails the required return for three consecutive years. This new requirement is codified at section 6033(j) of the Internal Revenue Code and is effective for returns for years beginning after 2006.
The program will permit tax-exempt organizations to file their late forms without penalty upon the payment of a small fee based on their size. Late filing penalties accumulate at a rate of $20 per day up to a maximum of $10,000 per return for smaller organizations, while organizations with annual gross receipts of more than $1 million face penalties of $100 per day up to $50,000 per return. The IRS can abate the penalties if the organization has a reasonable cause for its failure to file.
Jason Kall, manager of the IRS' Exempt Organizations Compliance Strategies and Critical Initiatives group, is cited in the article as saying that the key to the program's success will be informing tax-exempt organizations about their filing obligations and the new revocation rule. The IRS found in a 2006 study that in almost one-quarter of the cases where an organization did not file a required return the person responsible for the organization's books and records was simply unaware of the filing obligation.
The article does not state whether the program will also extend to the Form 990-PF filed by private foundations and to the new Form 990-N electronic notice that must be filed by small tax-exempt organizations that fall at or below the $25,000 in annual gross receipts threshold for having to file Form 990 or Form 990-PF. The latter notice is only required for tax years ending on or after December 31, 2007 and is further described on the IRS website. The new revocation provision also applies to these filings, so hopefully the program will encompass them as well.
Yesterday I blogged about a New York Times article reporting on former U.S. Senator Robert G. Torricelli's decision to direct his now dormant campaign account to transfer $1.6 million of its remaining funds to a charity he created and controls. Further coverage of this story is available from the Washington Post and the Washington Times. The Washington Post story also notes that Trent Lott, who left the Senate in December, transferred the remaining almost $200,000 in funds from his political action committee, the New Republican Majority Fund, to the University of Mississippi but still has $1.1 million left in his former re-election account.
Wednesday, April 30, 2008
A report issued by the Brookings Institution finds that Americans' confidence in charities has not recovered from low levels reached after the American Red Cross Liberty Fund controversy in the wake of 9/11. Authored by Paul C. Light and based on a survey conducted on behalf of the Organizational Performance Initiative at New York University's Robert F. Wagner Graduate School of Public Service, the report made the following findings based on responses in March 2008:
Confidence in Charitable Organizations: 34 percent of Americans stated they have "not to much" confidence in charitable organizations or "none at all," essentially equal to the percentage with that response in September 2002; responses for Americans who had a "great deal" (16 percent) or a "fair amount" (48 percent) of confidence in charitable organizations also remained essentially unchanged from September 2002 although there was some variation in the intervening period
Helping People: only 25 percent said charitable organizations did "very good" in helping people, a drop of 9 percent from October 2003
Spending Money: 70 percent stated that charitable organizations waste "a great deal" or a "fair amount" of money, an increase of 10 percent since October 2003
The report concludes that the surveys suggest three options for rebuilding confidence in charitable organizations: improving administrative systems to manage money wisely; promoting the charitable sector's commitment to helping people, as opposed to just leaving it to individual groups to promote themselves; and demonstrating progress toward solving the problems that marginalize certain segments of society.
(hat tip: Tax Prof blog)
The New York Times reports that the Montana Supreme Court dismissed the board of the Charles M. Bair Family Museum. According to the court's opinion, Alberta M. Bair caused the creation of the Charles M. Bair Family Trust upon her death in 1993. Her estate funded the trust with assets then worth approximately $23.5 million, including her personal residence which the trust agreement stated should be used to establish the Charles M. Bair Family Museum. The agreement also made the First Trust Company of Montana, since succeeded in interest by U.S. Bank,the sole trustee, but granted the exclusive authority to make charitable distributions from the trust's income to a Board of Advisors. The five-member Board consisted of the president or president's nominee of the First Trust Company of Montana, of the First Bank in Billings, and of the Billings' law firm of Moulton, Bellingham, Long & Mather, P.C., with the other two members to be appointed by the trustee from three local counties.
Under the direction of the Board of Advisors, the Museum opened to the public in 1996 with a collection of unique Native American Art, European furniture and other items, Edward S. Curtis photographs, and various paintings and watercolors by noted artists. The first year saw over 14,000 visitors, but by 2002 the number of annual visitors had declined to slightly over 4,000. The Board therefore decided to at least temporarily close the Museum pending a review of its continuing operations. A group of local residents, the Friends of the Bair, objected to the continuing closure of the museum and when the trustee sought court guidance in 2004 regarding the authority of the Board under the trust agreement, Friends of the Bair successfully intervened in the case that eventually made its way to Montana Supreme Court. The Attorney General also eventually intervened in the case. While the case was pending, the Board decided to permanently close the museum based on its claim that continuing to operate the museum was not feasible.
The Montana Supreme Court, overruling a lower court decision, concluded that the primary purpose of the trust agreement was to establish the museum. It also concluded that the Board breached its fiduciary duty to administer the trust with the care, skill, prudence, and diligence of a prudent person when it failed to pay for significant improvements to the Blair residence recommended by the museum consultants it had hired, when it failed to make funding the museum the first priority for the trust's income, and by deciding to close the museum. The court ordered the trustee, U.S. Bank, to appoint two new Board members for the two Board positions over which it had appointment power, and the three presidents of the institutions named in the trust agreement to appoint nominees as Board members in their place. The court also ordered the new Board to meet within six months of the decision and to take all necessary steps to comply with the trust agreement, as interpreted by the court.
The Wall Street Journal reports that some nonprofit hospitals have adopted a payment policy used by many for-profit hospitals: requiring payments up front for patient care. The hospitals are apparently responding to sharp increases in unpaid bills for patients who are not indigent but rather uninsured or underinsured. While major for-profit hospital chains, such as Tenet Healthcare and HCA, have established policies of asking patients to pay before being admitted, it is unclear how far the practice has spread among nonprofit hospitals. The focus of the story is a single hospital, the M.D. Anderson Cancer Center in Houston, and the experience of one chemotherapy patient there. The article also cites a recent IRS report in which 14 percent of the 481 responding nonprofit hospitals stated they required either payment or making an arrangement to pay before providing inpatient services. The IRS report notes in its methodological appendix, however, that the data it reports cannot be projected to the entire universe of tax-exempt hospitals because of certain data gathering limitations. Nevertheless, the article continues the ongoing public scrutiny of nonprofit hospital billing practices.
The New York Times reports that in December 2007 former U.S. Senator Robert G. Torricelli directed his now dormant campaign account to transfer $1.6 million in remaining funds to a charity he created. The funds are left over from his 2002 re-election race, which he quit amid allegations of ethical misconduct. The charity is the Rosemont Foundation, which Mr. Torricelli started last year to advance cancer research, open-space preservation, prevention of child abuse, and prevention of cruelty to animals. The charity has not apparently announced any specific plans for using the funds. Federal election law permits campaign committees to transfer extra funds to charities.
Tuesday, April 29, 2008
The Nonprofit and Voluntary Quarterly recently published a report on fraud in nonprofits authored by Janet Greenlee (University of Dayton), Mary Fischer (University of Texas at Tyler), Teresa Gordon (University of Idaho), and Elizabeth Keating (Harvard Law School and the Hauser Center for Nonprofit Organizations). The report begins by noting that if an Association of Certified Fraud Examiners (ACFE) estimate that all organizations lose an average of 6 percent of their revenue to fraud each year, the fraud loss in the nonprofit sector would be approximately $40 billion. The report then analyzes 2004 data on actual fraud cases at nonprofits reported by ACFE members and involving almost $30 million in losses. Based on this review, it concludes with a series of recommendations for how nonprofits can protect against fraud, including strengthening internal controls, creating a board audit committee, improving board quality and oversight generally, better vetting and education of employees, and providing an easy means for employees and others to confidentially report suspected fraud.
(hat tip: Alice Thomas)
We previously blogged about the IRS' issuance last month of final regulations clarifying and providing examples of when revocation of tax-exempt status under section 501(c)(3) of the Internal Revenue Code is appropriate because of private inurement even when intermediate sanctions under Code section 4958 also apply. The regulations also provided several examples of when an organization serves a private interest instead of a public interest and so provides a prohibited private benefit. Yesterday the IRS issued the following corrections to three of the examples, one relating to private benefit and the other two to private inurement. The full text of the corrections is provided below with the changed provisions show in bold and italics. The most significant correction is the clarification that if a "principal," as opposed to the sole, activity of an organization serves private interests then the organization will not qualify for tax-exempt status under section 501(c)(3). No guidance is provided, however, regarding how to measure whether a particular activity is a principal activity of an organization.
§ 1.501(c)(3)-1 [Amended]
Par. 2. Section 1.501(c)(3)-1 is amended as follows:
1. In paragraph (d)(1)(iii) Example 2. (ii), in the second sentence, the language "As a result, the sole activity of O serves the private interests of these artists." is removed and the language "As a result, the principal activity of O serves the private interests of these artists." is added in its place.
2. In paragraph (f)(2)(iv) Example 2. (iii), in the sixth sentence, the language "Beginning in Year 4, however, as O's exempt function activities grow, the size and scope of the excess benefit transactions that occurred in Year 3 become less and less significant as compared to the size and extent of O's regular and ongoing exempt function activities." is removed and the language "Beginning in Year 4, however, as O's exempt function activities grow, the size and scope of the excess benefit transactions that occurred in Year 3 become less and less significant as compared to the size and scope of O's regular and ongoing exempt function activities." is added in its place.
3. In paragraph (f)(2)(iv) Example 4. (iii), in the fourth sentence, the language "By adopting a conflicts of interest policy and significant new contract review procedures and by terminating C, O has implemented safeguards that are reasonably calculated to prevent future violations." is removed and the language "By adopting a conflicts of interest policy and new contract review procedures and by terminating C, O has implemented safeguards that are reasonably calculated to prevent future violations." is added in its place.
We previously blogged about ongoing investigations into the funding of various nonprofits by the New York City Council. The New York Post, which broke the original story about Council members using fictitious groups to store funds in order to avoid budget procedures, reports that the freeze subsequently imposed by the New York City Comptroller on all accounts tied to "member items" has left at least two apparently legitimate nonprofits short of funds. Both the Incarcerated Veterans Consortium and the AIDS Community Research Initiative of America (ACRIA) reported that hundreds of thousands of dollars they had been expecting are caught in the freeze. ACRIA's executive director stated that the group has already spent $650,000 of its own funds in anticipation of receiving a $1 million council grant that is now on hold and so faces a financial crisis, leading him to invoke the "throw out the baby with the bath water" metaphor.
Monday, April 28, 2008
The TaxProf blog reports on the charitable contribution deduction issue raised by the recent auction of a #34 David Ortiz Red Sox jersey that a construction worked had buried in the concrete of the new Yankee Stadium in hopes of cursing the ballpark. The Yankees have agreed to use the $175,100 closing eBay bid to benefit the Red Sox' Jimmy Fund, a charity that supports cancer research and care at the Dana-Farber Cancer Institute. Further discussion of this issue can be found in a later post on the same blog.
The New York Times reports that the board of the American Civil Liberties Union voted overwhelmingly over the weekend to take over the management and operations of its South Carolina affiliate. The decision apparently grew out of a decade of troubles at the affiliate, including financial difficulties, an empty executive director position, a divided board, and embezzlement by the last executive director. The affiliate's board president and others asserted, however, that the take over instead reflected retaliation for the affiliate's private and public criticism of the national organization given that other affiliates with similar problems have not faced such an action.
Pursuant to the ACLU's internal guidelines, its board president will appoint a receiver to develop a plan to reconstitute the affiliate, including hiring new leadership, finding new board members, and taking control of its assets. The receiver may be a committee or an individual. According to the ACLU's vice president, this is the first time that the ACLU will have a contested receivership. Previous receiverships involved affiliates in Texas and Mississippi that voluntarily agreed to the process.
The Hartford Courant reports that the Wesleyan University student government has created an endowment to reduce and perhaps eventually eliminate the annual activity fee charged to students and used to fund student groups. In what may be the first of its kind, the endowment will be managed solely by students, both with respect to its investments and its expenditures. This will permit it to be more responsive both to student concerns about possible investments and to student demands for help with ever increasing high education costs. That said, it will be many years before the endowment reaches a level where it will significantly reduce the $270 per student activity fee that provides approximately $750,000 a year. The Wesleyan Student Assembly plans to begin funding the endowment with its current year surplus, estimated to be between $25,000 and $35,000, and to dedicate future surpluses to the endowment. Expenditure of a small percentage will begin once the fund reaches $100,000 and increase to 4 percent per year once the fund passes $200,000.
The New York Times reports on the unfolding investigations of the New York City Council's funding for nonprofit groups. It states the trigger for increased scrutiny from both city and federal officials was the revelation last month that the Council had been parking money that it would then spend outside of the normal budget process by using the names of fictitious groups. Council members also appear to have funded nonprofits that are staffed by their aides and serve at least in part to pass city funds through to organizations chosen by those members.
The article focuses primarily on "Libre" or the Latino Initiative for Better Resources and Empowerment Inc., which it linked to Council member Hiram Monserrate from Queens. Libre is not registered with the New York Attorney General as a charity and has not filed a return with the IRS for at least two years, although its long-time Treasurer and now executive director said the required IRS returns would be filed by the end of May. Libre claims to provide recreation and education programs as well as other assistance to Queens residents, but most of its expenditures appear to have been for rent, utilities, and printing. It also has a city contract to distribute $32,000 to other community groups.
The article also cites the recent indictment of two aides to Councilman Kendall Stewart of Brooklyn. The indictment alleges they embezzled $145,000 from a city-funded nonprofit group that they ran. One city agency denied Councilman Stewart's request for funding for the group, named the Donna Reid Memorial Education Fund, when it noticed that it was based at the home of his chief of staff. But another city agency approved a subsequent request for funds.
Sunday, April 27, 2008
The Times Union of Albany, New York has an interesting article about the legal and accountability issues raised by small nonprofits, often formed in the wake of a particular tragedy. It cites numerous small nonprofits founded either to help a particular individual who is injured or missing or to help others in the memory of some specific person or tragedy. It correctly states that the former type of nonprofit is not a charity under New York state law or eligible to receive tax deductible charitable contributions under federal tax law, but notes that such groups may still receive a significant number of donations because of sympathy for the individual who will be helped. It also reports that many of these nonprofits are exempt from state or federal filing requirements because of their small size, limiting accountability for how they spend the funds they raise.
For example, it describes the Joshua Szostak Search Fund, created to help the search for a State University of Plattsburgh student who disappeared just before Christmas in 2007 and whose body was recovered from the Hudson River last week. The fund did not claim charity status but according to Joshua Szostak's father, Bill Szostak, used the proceeds of two fundraisers to charter a helicopter, buy binoculars and other search equipment, and pay for various search expenses. The fund is not registered with either the New York Attorney General or the IRS, and Bill Szostak declined to discuss how much it had received from donors.
The IRS will soon, however, be at least aware of the existence of even the smallest nonprofits if they claim exemption from federal income taxes because of the new requirement that such nonprofits file the Form 990-N, also known as the e-Postcard. This form is due for the first time in 2008 for tax years ending on or after December 31, 2007. More information about this requirement is available on the IRS website.