June 21, 2008
Midwest Floods Leave the Red Cross in the Red
MSNBC and NBC News recently reported that the floods in the Midwest have left the Red Cross in the Red. It was reported that the charity's "domestic Disaster Relief Fund had been wiped out by flood relief expenses that had reached $15 million by Monday[, June 16, 2004]." It was further reported that "[w]ith a balance of zero in the fund, the Red Cross will now seek loans to support its 2,500 staff workers and volunteers on the ground in Wisconsin, Iowa, Illinois and Missouri, the officials said."
The floods have been historic. Some have even described the floods as the 100-year flood, or 500-year flood. “It’s unreal. It’s unreal. We were only hoping to get the 100-year [flood], and they hammered us with more than a 500-year,” said Jeff Gillick, a Cedar Rapids, Iowa, city employee. "
Last, "[t]he floods have been blamed for at least 22 deaths, 17 of them in Iowa, where state officials told NBC News that they expected damage in excess of $1 billion. President Bush was briefed on the damage and was scheduled to visit the area for a firsthand look later this week.
[President] Bush said he would seek emergency legislation in Congress to allocate disaster relief funds for the Midwest. But that process will take time, leaving the Red Cross as the primary resource for now." For the complete story, please click here.
The Chronicle of Philanthropy Hosts On-Line Discussion of the Economy and Charitiable Giving Trends
On Tuesday, June 24, at noon Eastern time, The Chronicle of Philanthropy will host "an online discussion exploring how the state of the American economy is affecting charity fund raising."
The Chronicle reports that "[e]xperts will be available to take questions about the current giving climate and analyze the trends unveiled in the new edition of Giving USA, the annual tally of American philanthropy, scheduled for release on Monday morning."
For the complete story, click here.
U.S. Government Freezes Assets of Islamic Foundation
On Thursday, June 19, 2008, the Washington Post reported that the United States Treasury Department froze U.S. based assets of the Islamic Charity, Al Haramain Islamic Foundation. The charity is headquartered in Saudi Arabia. Between the years 2002 and 2004, thirteen branches of the charity were so designated but, with Thursday's action, the charity in its entirety has been designated. See U.S. Treasury Press Release (announcing first designations of Somalia and Bosnia branches in March 2002).
In addition, the Treasury's action means that Americans are prohibited from making donations to the charity or otherwise doing business with the charity. The Post further reported that the Government of Saudi Arabia was fully cooperating with the United States to clamp down on the activities of this charity, which is believed to be funneling money and other support to al-Qaida. Below is an excerpt of the story:
The Bush administration moved Thursday to clamp down on a Saudi-based charity accused of funneling money and other support to al-Qaida.
The Treasury Department's action [see Treasury Department Press Release] covers "the entirety" of Al Haramain Islamic Foundation, including its headquarters in Saudi Arabia, the government said. The action means that any assets found in the United States belonging to the charity are frozen. Americans also are prohibited from providing donations or otherwise doing business with the charity.
The United States _ between 2002 and 2004 _ had previously taken action against 13 branches of the charity, including locations in the United States, Afghanistan and the Netherlands.
Saudi Arabia joined the United States in putting some of the charity's branches on an asset-blocking list. And actions by Saudi authorities have largely precluded the charity from operating under its own name, the department said. However, "despite these efforts, (Al Haramain) leadership has attempted to reconstitute the operations of the organization and parts of the organization have continued to operate," Treasury said.
For the full story, please click here.
In May 2004 (followed by the UN in June 2004), Al Haramain was designated as a charity providing financial and material support to al-Qaida and other terrorist organizations under Executive Order 13224. For a complete list of designated organizations, click here. The executive order was instituted within days of 9/11. The Treasury also provides that Al Haramain "represents itself as a private, charitable, and educational organization dedicated to promoting Islamic teaching throughout the world. It is one of the principal Islamic non-governmental organizations active throughout the world." The Foundation received "grants from other countries, individual Muslim benefactors, and special campaigns, which selectively target Muslim-owned business entities around the world as sources of donations." The initial crackdown on this charity came as a result of "evidence that [Al Haramain] field offices and representatives operating throughout Africa, Asia and Europe . . . provided financial and logistical support to the al Qaida network and other terrorist organizations designated by the United States, and, in some cases, included on the UN 1267 Committee’s consolidated list of individuals/entities subject to Security Council Sanctions. Some of these organizations include the Egyptian Islamic Jihad (EIJ), Jemaah Islamiyah, Al-Ittihad Al-Islamiya (AIAI), Lashkar E-Taibah, and HAMAS – all of which are designated terrorist organizations and all of which have received funds from AHF, its branches, or local intermediaries."
The head of the Foundation is reported to have direct ties to Osama Bin Laden.
FHA Seeks To Shut Down Seller-Funded Down Payment Assistance Charities
In a bone-headed, blame the victim move that follows the IRS' bone-headed blame the victim approach, the FHA has stated its opposition to charities that provide down-payment assistance to home buyers, according to a WaPo Article. According to a recent report, such programs typically work like this:
Say you want to buy a house, but you don't have the cash for a down payment. You sign up with a third-party intermediary, typically a tax-exempt charitable organization that advertises its specialty. The seller of the house sends a contribution to the organization roughly equal to the money you need. The intermediary pockets a fee of $400 to $600 and passes along the balance for the down payment.
Whatever happened to the free market and allowing the buyer to make her own decisions, rightly or wrongly, or is that just for rich people? In his June 9, 2008 speech before the National Press Club, FHA Commissioner Brian Montgomery essentially blamed the housing market meltdown on downpayment assistance charities helping lower and middle income buyers get into starter homes:
Second, legislation must address the risks associated with down-payment assistance that comes from the seller or any other person or entity that stands to benefit from the transaction financially. The IRS, GAO and our own Inspector General have previously expressed concerns with these circular financing schemes. Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments. No private mortgage insurance companies back these loans. They now account for one third of our portfolio. We are concerned about this business because the substantial losses affect FHA’s bottom line and FHA’s ability to serve American citizens who need access to prime-rate home loans. Given these concerns, we cannot just stand by – we must make our case again. So, today, I announce that we are reopening public comment on our proposed rule. Within hours, we will submit this rule to the Federal Register. It should be online at FHA.gov soon thereafter. The Department is eager to review all comments.
Bovine defecation! The IRS has already, in another blame-the-victim move, since 2005 engaged in a serious and largely effective offensive against down payment assistance programs under the guise of the "public benefit" doctrine -- a doctrines the Service couldn't distinguish from a hole in its own backside. THE IRS couldn't tell us what "improper public benefit" means as it relates to tax exemption if public benefit bit them in the butt! Anyway, the FHA proposed rule seeking to shut down down payment assistance charities is publisheed at 73 Federal Register 33941 and comments are due by August 8 2008. At least the notice of proposed regulation admits that at two courts have shot down this stupid proprosal. The only thing the rule will do is prevent lower and middle income taxpayers from buying a home.
Still, we can't have dangerous charities going around helping poor homebuyers get out of the rental trap, can we? I guess once we get rid of these nefarious down-payment assistance charities the housing market will suddenly and miraculously right itself and fat cats speculating in houses, oil futures, and peddling adjustable rate mortgages can once again make their Bentley payments.
Sidel on "Counter-Terrorism and the Enabling Legal and Political Environment for Civil Society: A Comparative Analysis of War on Terror” States
The latest issue of the online International Journal for Not For Profit Law contains Mark Sidel's article, "Counter-Terrorism and the Enabling Legal and Political Environment for Civil Society: A Comparative Analysis of “War on Terror” States". Here is the introduction:
This article focuses on the legal and political environment for civil society in an era in which counter-terrorism policy and law have challenged civil society and civil liberties in a number of countries. The ways in which counter-terrorism law and policy affect civil society can differ dramatically by country and region. So this article seeks to provide some comparative analysis of the impact of counter-terrorism policy and law on civil society in several countries in which the “war on terror” is being fought, emphasizing impacts on the enabling environment for civil society such as laws, regulations, policies, and practice influencing the existence, structure, activities, and ibrancy of civil society.
June 20, 2008
Commonwealth Catholic Charities Helps Illegal Immigrant Teen Get An Abortion in Apparent Violation of Hyde Amendment
According to a report in the Washington Times, a Richmond based Catholic Charity assisted an illegal immigrant, who is also a minor, obtain an abortion using federal funds in violation of the Hyde Amendment:
Workers with Commonwealth Catholic Charities helped the girl travel to and from the procedure in January and signed a consent form for the abortion, Joanne Nattrass, the charity's executive director, said in a statement Thursday. She declined further comment. Four of the Richmond-based charity's workers were fired, according to a letter by David Siegel, head of the U.S. Department of Health and Human Services' refugee resettlement program. The federal department is looking into the charity's actions and the role played by the United States Conference of Catholic Bishops. The conference receives $7.6 million a year in federal funds to place unaccompanied illegal immigrant children in foster care until they're reunited with relatives, sponsored, or returned to their homeland. The girl is from Guatemala but was living in Virginia when the abortion took place.
In a press release issued yesterday, the charity essentially admitted assisting the minor:
In January 2008, a minor in foster care in Richmond, procured an abortion while receiving support services from Commonwealth Catholic Charities (CCC). An investigation of this unfortunate event revealed that some members of CCC staff assisted the minor in preparations leading up to the abortion, and that one member of staff signed the consent form necessary for the minor to have the abortion. The minor was taken to and from the abortion facility by a person associated with CCC. Neither agency nor diocesan funds were used to pay for the procedure. A subsequent investigation also revealed that about two months prior to the abortion the minor had been assisted by CCC staff with implantation of a contraceptive device. Obviously, both the implantation of the contraceptive device and the abortion are contrary to basic teachings of the Catholic Church. This occurrence has also raised legal and other questions that have already been or are now being addressed.
The legal question raised by the charity's involvment revolve around the Hyde Amendment and similar state laws barring the use of federal or state laws for abortions. For more information on federal and state laws banning public funds for abortion see here. One supposes that even for people confidently opposed to abortion on a theoretical level, abortion is nevertheless a complicated issue when it gets personal.
More on Churches and Politics
Interesting article on the ABC News web site about certain church pastors openly defying the 501(c)(3) prohibition on intervention in a political campaign. Though I don't necessarily agree with the political activity ban in general, I find it exasperating that certain pastors apparently believe that tax-exemption is a natural (I'd say "God-given," but perhaps that's pushing the pun a bit far) right and that they should be immune from government regulation on this issue. If churches want to be active in politics, there's an easy way for them to do that: give up tax exemption under 501(c)(3) and the accompanying right to receive tax-deductible contributions. Ah, but the "let's eat the cake and have it, too" syndrome appears alive and well in certain churches (not all, mind you: there are many folks in the religious world who shun political participation as antithetical to their religious mission).
Looks like it's going to be a long five months for the IRS . . .
St. Olaf College Case Highlights Troubles with Restricted Gifts
Litigation over whether charities can change the use of restricted gifts is becoming more common and the legal issues involved more complex. The most visible of these cases over the past few years has been the litigation involving Princeton and the Robertson Foundation over the Woodrow Wilson School of Public and International Affairs. In this case, the Robertson family has argued that Princeton violated the terms of the gift that funded the Wilson School (originally $35 million, now almost $800 million, and more than 5% of Princeton's total endowment). The Robertson family has a whole website devoted to the litigation here; and of course Princeton has published rebuttals on its own web site here. See also the prior blog post regarding Professor Iris Goodwin's article about the Princeton litigation here.
Now a trial judge in Minnesota has taken both the Minnesota Attorney General and St. Olaf's College to the woodshed regarding St. Olaf's sale of WCAL, its public radio station (which St. Olaf sold to Minnesota Public Radio). St. Olaf's had sought to remove the restrictions on certain gifts to the college that were for the benefit of supporting WCAL, and the judge in this case refused St. Olaf's request with respect to several of the gifts in question (the judge did permit certain gifts to be used to support St. Olaf's production of certain radio shows that would continue to be broadcast over the MPR network).
In the opening part of his opinion, Judge Gerald Wolf stated,
The Minnesota Attorney General is the watchdog of all trusts throughout the state of Minnesota. Deplorably, when St. Olaf made the decision to sell WCAL, no one from the Attorney General's Office intervened to safeguard the trust. The Attorney General's Office was notified by SaveWCAL of the pending sale yet they failed to do anything. The undersigned is absolutely mystified as to why the State Attorney General did not become involved in a sale of trust assets valued at $12 million when it is its statutory obligation to do so.
The undersigned does recognize that there is a newly elected Attorney General who was not in office at the time of the sale. However, the office is painted with the same brush. Her office is tainted with this lapse of duty even though she did not hold her present position at the time. Regardless of who was serving as Minnesota Attorney General at the time of the sale, the office as an institution has a duty to the people of Minnesota to serve as guardian of all trusts created and operated in this state. The Minnesota Attorney General's Office failed in its duty in this case.
The opinion in the case is available here (fairly large PDF file with a fairly slow link, so give it time to load).
June 19, 2008
Congressman's Sister Pleads Guilty to Defrauding Nonprofits
We previously blogged the story involving the indictment of four of Congressman William Jefferson's relatives for acts relating to the use of nonprofit organizations to defraud people. This is particularly sad story regarding the gutting of nonprofits and donor funds designated to assist victims of one of the worst public education systems in the nation. Yesterday, according to a Reuters News Agency Report, Congressman Jefferson's sister pleaded guilty to the charges:
Brenda Jefferson, 52, helped defraud several nonprofit organizations by concealing and failing to report the activities of two of her siblings, Betty Jefferson and Mose Jefferson, and her niece, Angela Coleman, according to court documents. Federal prosecutors in New Orleans recently charged the three other relatives with conspiring to steal more than $600,000 from organizations they set up to help at-risk and disadvantaged youth. Brenda Jefferson, also known as Brenda Foster, performed clerical work for the nonprofits run by her relatives. According to prosecutors, she has admitted to receiving $90,000 in payments from the organizations.
The swiftness with which the guilty plea was entered (the indictment was handed down on June 4) suggests that the proverbial "race to the courthouse" applies even amongst kinfolk. Brenda Jefferson, facing three years in prison and a $250,000 fine, is no doubt seeking leniency. She has probably agreed to assist prosecutors against the other defendants so we can forget about anymore happy family reunions. Note that her status as a "clerical" assistant might have assisted her against a 4958 excise tax; but her relationship with her three relatives who apparently founded and directed the nonprofit agencies makes that an unlikely argument. See IRC 4958(f)(1)(B), 4958(f)(4). I wonder what the process is for including immunity from excise and penalty taxes in criminal plea deals.
More Debate About Charity Oversight (from the UK)
The Philanthropy|UK Newsletter has published this interesting exchange between Martin Brookes, New Philanthropy Capital’s (NPC) Director of Research and Stuart Etherington, Chief Executive of the National Council of Voluntary Organisations (NCVO) in the UK regarding whether there should be a governmental board to provide independent assessment of charities' effectiveness. The question of how one measures the performance of charities is a tough nut to crack; one can obviously measure things like program expenditures, the amount of donations actually spent on programs vs. fundraising overhead and so forth. For certain charities, moreover, one could measure the number of beneficiaries served (e.g., for poor-relief charities). But how, exactly, does one measure the "performance" of the Lincoln Center? The Chicago Symphony Orchestra? The Metropolitan Museum of Art? Has the Bill and Melinda Gates foundation "performed" well in its pursuit of international health issues? How should we measure how well Harvard accomplishes its educational mission? On the other hand, its not that folks aren't trying to develop performance measures; "outcomes assessment" has become a mantra of educational accreditation organizations (just ask any educational administrator who has gone through an accreditation cycle in the past decade). But I honestly don't think we're there yet, and the thought of some kind of government-sponsored assessment board gives me the complete willies.
American Express Starts Nonprofit Leadership Academy
In case we needed any additional evidence of the continued convergence of the nonprofit and for-profit worlds, American Express has just announced the formation of a nonprofit leadership academy. According to the press release,
The inaugural class of The American Express Nonprofit Leadership Academy will participate in a week-long program created in partnership with the Center for Creative Leadership (CCL). The Academy will feature sessions with New York City Mayor Michael Bloomberg, Chairman of the House Ways and Means Committee, Congressman Charles Rangel and American Express Chairman and Chief Executive Officer, Kenneth I. Chenault.
Twenty-four participants were selected from a competitive application process. They include managers from
Earthshare, International Rescue Committee, Jobs for American Graduates, National Urban Fellows, NPower National, Public Allies, and several local nonprofits based in American Express Service Center locations, including Valle del Sol (Phoenix), The Heard Museum (Phoenix), Hispanic Unity of Florida (Ft. Lauderdale), Urban League of Broward County (Ft. Lauderdale), Greensboro Ministry (Greensboro, NC), and Inclusion Center (Salt Lake City, Utah).
June 18, 2008
No Surprises at Provena Oral Argument
Well, I wish I could say that the Provena oral argument held this morning at the Illinois 4th District Court of Appeals in Springfield was riveting, or that it really illuminated some specific aspect of the case or the policy debate about hospital tax exemption, but it wasn't and didn't. I suppose I shouldn't be surprised; as I noted in my earlier blog post here, the issues in Provena have been hashed and rehashed for over 20 years at the state and federal levels without much progress, so I'm not sure there is anything new to say about tax exemption for nonprofit hospitals. Each attorney (Evan Siegel from the State AG's office for the State, Patrick Coffey of Lord Bissell & Brook for Provena) stuck to their main points: on the government side, these points were that Provena provided inadequate charity care and sent charity patients to debt collectors; on the Provena side, the main points were emphasizing the vast array of "community benefits" that Provena claims it offers and the testimony from its witnesses in the administrative record regarding its commitment to serving all patients without regard to ability to pay.
I was somewhat surprised at the relatively few questions asked by the 4th District panel (Judge Appleton, presiding, with Judges McCullough and Knecht); in fact the court asked only two questions in the State's opening argument, both pretty predictable (Judge Appleton asked how the court should "draw the line" regarding how much charity care was required for exemption about 15 seconds into oral argument and then toward the end of Siegel's opening argument he also asked whether the current standards for tax exemption outlined in a 40-year-old Illinois Supreme Court case could rationally be applied to modern health care). Patrick Coffey got a little more heat; when he claimed that the Provena case was "unprecedented," Judge Appleton interrupted him to note that the Illinois Court of Appeals had decided FOUR health care exemption cases fairly recently -- ergo, this case was not so "unprecedented." Coffey also got questions from Judges McCullough and Knecht about the size of Provena's charity care program and whether it was advertised to potential charity patients, but again these were pretty predictable questions. When Judge Knecht asked Coffey to pick out something that a marketing person would trumpet as a major benefit to the community, Coffey used Medicaid shortfalls as his example (undoubtedly because in the year in question, Provena claimed it suffered over $10 million in such shortfalls, while giving out only about $800,000 in outright charity care). In fact, it was only at the very end of the argument, in Siegel's rebuttal, that Judge Knecht asked the tough policy question, which was whether the various "community benefits" cited by Provena as grounds for its exemption (e.g., running an ambulance service, a men's shelter and a charity nursery) should "count" for exemption. I was a little disappointed in Siegel's response, which stuck to the technical argument that no activity should count that was not conducted on the property in question; though this may have been the right tactical move, I sort of wish he had taken on the policy question more directly and noted that many of the "community benefits" cited by Provena were in fact a way to get paying customers to their hospital (to his credit, he did make that point very briefly with respect to the ambulance service).
I also had hoped to gain more insight into how the appellate court might view Provena's claim to exemption as a religious institution, but the panel asked nary a question about that, and only Siegel mentioned it in argument (and his argument on that point was that Provena was really a commercial enterprise, not a religious organization).
So not much to say here other than we'll all wait for the court's opinion, and then what almost inevitably will be the next step no matter who wins this round: an appeal to the Illinois Supreme Court.
Why Is Government Afraid of Civil Society?
An interesting article in today's Wall Street Journal details the impact nonprofits have on the spread of democracy across the African continent. The article focuses on recent unrest in Zimbabwe but also talks about the influence of nonprofits in the spread of democracy in other African countries. Here is an excerpt:
In many ways, the unrest stirring Zimbabwe and other nations is coming because democracy has chalked up modest advances. Mr. Mugabe's ruling party lost its stranglehold on Parliament in the March 29 vote. And the president, whom international observers and the opposition accuse of rigging previous elections, was forced into an embarrassing run-off. Mr. Kututwa and the Zimbabwe Election Support Network -- the nonpartisan coalition of local nonprofit groups he heads -- played a crucial role in that defeat. Field workers at far-flung polling stations called in, faxed or text-messaged results to organizers in the capital of Harare. Working out of a command center at the capital's Holiday Inn, the group crunched the numbers and came up with Mr. Tsvangirai as the projected winner. Faced with an independent count, most of the international community accepted those numbers, making manipulation harder. These days, "it is very difficult for any dictator or any incumbent to falsify the results of an election and just get away with it," says Mo Ibrahim, a Sudanese telecom tycoon who has become a democracy advocate.
I suppose its not government, per se, that is afraid of civil society but rather those who have captured government for their own personal gain. And its not just in third world or developing countries that nonprofits have to watch their backs. A 2003 report by OMB Watch details (or alleges, depending on your point of view) efforts by the "current occupant" to silence nonprofit organizations inimical to his views:
There is now a growing litany of examples under each of these three categories, but because each proposal or action affects only limited numbers of nonprofits, they have not drawn significant attention. Yet the proposals and actions by the Bush administration and conservatives are already taking their toll. Even when proposals have been dropped, they leave a chill on speaking out on issues in their wake. Instead of a single legislative or regulatory proposal that would limit nonprofit speech, the Bush administration and conservative allies have proposed or begun implementing a number of proposals that are akin to a “death by a thousand cuts.” These “cuts,” which have suddenly accelerated in the last year, come in three areas:
Changes made by nonprofits resulting from fear of how laws such as the USA Patriot Act are being implemented.
· Attacks on nonprofit advocacy, particularly when there are disagreements with Bush administration policies;
· Limits imposed by government on other nonprofit speech, particularly targeted to those working on issues-- such as reproductive rights, HIV/AIDS, and international development activities, where there may be ideological differences with the administration-- are particularly singled out as targets to control their speech; and
Tricky Dick famously used his young attack dog in an effort to silence a nonprofit organization pursuing socially responsible investments via proxy battles. And just to be nonpartisan, a recent book, "The Power to Destroy: The Political Uses of the IRS From Kennedy to Nixon" (book review) details the efforts of presidents (and advisors) from Marilyn's Boys to Tricky Dick to use the IRS against exempt organizations. People also accused Slick Willy of using IRS audits of exempt organizations for political purposes. To be sure, the evidence suggests that the professionals at IRS resisted these efforts.
Prompted by White House officials in the Kennedy and Johnson administrations, the IRS investigated the activities of various nonprofits, with an eye toward revoking their exemptions. The effort focused on conservative organizations but also included a few left-wing groups. What's striking about the story is not the White House pressure, but rather the IRS's response. Tax exemptions thrust the IRS into dicey territory, forcing staff to make judgments about political organizations. This was not a role the IRS welcomed, but agency officials did their best to craft a fair and balanced approach. The IRS emerges from this account as generally well-intentioned. Andrew chides IRS officials for trying to fend off critics, noting the agency's instinct for protecting itself. That response seems reasonable given the political artillery often trained on the agency. Andrew points out, however, that protectiveness can sometimes shade into whitewash, especially when the agency is under intense scrutiny. There's some truth to that complaint; certainly, not every IRS official has been entirely forthcoming with agency critics over the past 40 years.
The answer to the title question, I think, is that civil society is as contrary to concentrated power as dogs are to cats. Democracy, to thrive, needs frequent dilution and nonprofits are always adding more water.
Tickets to Playboy Superbowl Party, Tony Soprano's Wardrobe highlight June Charity Auctions
The charity auction has a long an venerable history as a fundraiser and no wonder: the list of prime items for June charity auctions in the NYC area includes two tickets to the Playboy Superbowl party in Tampa and part of Tony Soprano's wardrobe. Story here.
June 17, 2008
Service Charities Facing Hard Times
Earlier this week I blogged about how foundations seemed to be weathering the economic storm pretty well. The other side of the coin (sorry for the pun) is that charities without large endowments, particularly ones that provide relief to the poor, are hurting. Story by Tatyanan Gershkovich in Business Week here.
How Much Should the IRS Regulate Nonprofit Governance?
The revised IRS Form 990, along with various comments from IRS TE/GE personnel (particularly Steve Miller), make clear that the IRS is delving ever deeper into issues of nonprofit governance. Not everyone, however, thinks this is a good idea. The former head of TE/GE, Marcus Owens, wrote a short piece in The Exempt Organizations Tax Review for June criticizing the IRS's intrusion in nonprofit governance in the Form 990; his article is available from Lexis here. Of course, Owens now represents nonprofit clients in private practice, so one might be tempted to take his current views with a grain of salt; but even the IRS's own advisory committee now urges caution by the IRS on the nonprofit governance front.
In a report issued on June 11 (available here, then scroll to page 82 of the PDF file), the TE/GE Advisory Council urges the IRS to be cautious in exercising regulatory authority over nonprofit governance. The beginning of its "Recommendations" section is an excellent summary of the Committee's views:
We begin our recommendations by again acknowledging the IRS’s longstanding stake and legitimate interest in governance issues as they relate directly to compliance with the laws under its jurisdiction. As we stated in the introduction, the IRS’s view that “a well-governed charity is more likely to obey the tax laws, safeguard charitable assets, and serve charitable interests than one with poor or lax governance” seems self evident. But efforts to promote good governance are fraught with complexity. While we may all agree that governance matters, the empirical evidence does not support the proposition that requiring specific governance practices results in greater compliance with the tax laws. Effective governance likely is much more a question of the attitude of responsibility and accountability of those in charge than the adoption of specific policies and practices. Given the diversity of the sector and the varying, and often unpredictable, challenges facing an organization, the organization’s governing board generally is in the best position to determine what the most appropriate practices are for its organization. We are very mindful of the fact that even the most modest level of prescription from a regulatory body such as the IRS regarding what constitutes “good” governance can undermine the fundamental and wholly legitimate authority of the organization’s governing board and can suggest a one-size-fits-all approach that can place undue burdens on an organization, divert the organization’s attention from meaningful governance to polices and procedures, and do damage to the uniquely diverse and vibrant charitable sector in this country. Accordingly, we believe that the IRS should approach the governance area with caution.
Very good advice, indeed, methinks.
June 16, 2008
Foundation Investments Grow Despite Economic Downturn
The Chronicle of Philanthropy has a story on a just-released study by the Commonfund Institute that shows that foundation investments grew at an annual rate of 9.9 percent in 2007, despite the difficult stock market conditions. That is less than the 13.7% reported in 2006, but still a hefty positive number. The average spending rate for foundations continues to be 5.5%, just a bit over the 5% required by I.R.C. Section 4942. There has been much debate over the past couple of years regarding whether foundations should be forced to spend more on charitable programs than the currently-mandated 5% and whether public charities, particularly universities that carry very large endowments should be subject to a mandated expenditure rule (see prior blog posts here and here). The ability of foundations and universities to garner substantial returns on their endowments even in times of economic distress is sure to add fuel to this debate.
Price of Named "Gifts" Going Up?
The quotation marks in the headline suggest my skepticism regarding "philanthropy" in the form of "gifts" that essentially buy one's name on a building - or, as this story by Michael Gross illustrates, one's name on four restrooms at the Museum of Contemporary Art in Manhattan. Gross's story recounts the fact that Jerome L. Stern donated (or should that be "paid") in excess of $100,000 for the benefit of having his and his wife's names "writ large" on the Museum's restrooms. Gross also notes that the "price" of such naming opportunities has risen steadily over the past decades; the minimum donation to become a benefactor of the Metropolitan Museum of Art has gone from $100,000 in 1967 to a minimum of $2,500,000 today. He also notes that the naming rights for business schools generally go for less than medical schools (hmmm . . . I guess that says something about the relative perception of business and medical schools in the public prestige department).
Way back in 2001, I wrote an article on whether "donations" for such naming rights should be tax deductible (I decided not; article available from Lexis here), and Gross's article highlights how these transactions have become big business for certain charities. Ian Ayres and Jeremy Bulow suggested in a 1998 article in the Stanford Law Review (The Donation Booth: Mandating Donor Anonymity to Disrupt the Market for Political Influence, 50 Stanford Law Review 837) that we should require political contributions to be anonymous in order to sever the link between contributions and political influence; I probably wouldn't go that far with respect to the Section 170 deduction for contributions, but I do wonder if we should prohibit a deduction for any donation that is accompanied by a "naming opportunity" (well, perhaps with the exception that we would permit a deduction if the donor uses the naming opportunity to honor someone other than herself, her business or her relatives . . . ). After all, is a payment really a "contribution or gift" if a large part of it buys immortality and prestige?
Congressman Questions Use of PILOTS to justify tax exempt bond financing for new sports stadiums
Have you ever been to Tropicana Field in St. Petersburg, Florida (pictured above, notice the lack of fans)? I am a baseball pursit. The Tampa Bay Rays (formerly the "Devil Rays") play home games in this dark, dank, place. After one game there, I vowed never to return. Baseball should be played outdoors on natural grass, period. Anyway, Tropicana Field is the worst place in the world to watch a baseball game. Its dark, even with the lights on, it has an echo like an old abandoned construction warehouse, its just a terrible place to watch and play a baseball game. I loved PNC Park in Pittsurgh -- now that is a place to watch a game!
Anyway, this is a blog about tax so I'll get to the point. The hated Yankees (I hate the Red Sox too!) -- may they never win another penant -- are building a new ballpark as we all know. As a matter of fact, the Rays are trying to get the taxpayers to help pay the $16 billion bill necessary for a new ballpark that will look sort of like the San Francisco Giants' waterfront stadium (a beautiful partk that is!). Here is an artist rendering of the proposed St. Petersburg beauty:
Now THAT is a stadium at which to watch a ballgame. Fruition, of course, depends on taxpayer support and no doubt a plain old hotdog will cost about $20.00 if the stadium is built. Recently, Representative Dennis Kucinich wrote a letter to the IRS a few weeks ago questioning the appropriateness of using tax exempt financing to support such quintessentially private activities. Like I said, I love baseball and hope the stadium in St. Petersburg gets built. But intellectually, one has to admit that tax exempt financing for sports stadiums cannot be described as anything but tax exemption for private benefit.
The issue with respect to taxpayer financing of sports stadiums -- via tax exempt bond financing -- is whether more than 10% of the payments on the bonds will come from private business proceeds. If more than 10% of the payments on the bonds come from private sources, that's a pretty good indication that the bonds are being used to an excessive extent to finance private benefit. The IRS has interpreted the so called "private payment test" to exclude PILOTs -- payments in lieu of taxes -- as private payments. In other words, if the Steinbrenners (and whoever owns the Rays) make payments in lieu of taxes towards the repayment of tax exempt bonds, those payments are not treated as payments from private business sources but essentially as taxes (and thus pubic sources, suggesting public rather than private benefit). The treatment of private payments as public taxes allows for the legal fiction that the subsidy embodied in tax exempt bonds are for public rather than private benefit. Kucinich has a point, though, when he argues that PILOTS are more like special assessments for individual private benefit than generally applicable taxes:
On March 29, 2007, the Domestic Policy Subcommittee held a hearing that looked at the promises of economic prosperity that are made to cities which finance professional sports stadiums. The first hearing revealed that no evidence has been found to suggest that professional sports stadiums create jobs, raise incomes, or raise local tax revenues. America’s infrastructure is crumbling while state and local officials approve taxpayer-financed professional sports stadiums. About 31 percent of the nation’s urban bridges are deemed structurally deficient, awaiting public investment. At the same time the public is paying about 80 percent of the costs for new professional sports facilities.
Like I said, Kucinich has a point. Mine is less sophisticated and perhaps less civically motivated: As long as ticket and hot dog prices are so outrageously high, the financial side of me hopes people admit the logic of Kucinich's argument. But I'll patronize the new stadiums even if they don't. I love real baseball better than logical tax policy -- hey, I'm just being honest about it!
For the full transcript on the hearing regarding public support for privately owned sports stadiums go here.
June 15, 2008
An interesting story in the Wall Street Journal about how some U.S. churches are expanding overseas through the use of satellite TV links, DVD's and "franchise marketing." Serious questions about whether churches should be tax-exempt already exist. Not an insubstantial number of folks who work and write in the nonprofit field believe that many (if not most) churches are nothing more than clubs for the faithful (contributions to which mostly directly benefit the congregation) and that they should not be tax-exempt at all (or if exempt, they should be treated like trade associations or social clubs, who don't get the benefit of tax-deductible contributions under I.R.C. Section 170). Another major debate concerns the role of churches in the political process and the seeming unending violations of the prohibition on political campaign activity in Code Section 501(c)(3). Add this story's component (the mass franchising techniques used by some mega-churches), and one begins to wonder if churches (at least some of them) are charities or slick mass entertainment. Another illustration of why the lack of agreement on the core definition of "charity" for tax-exemption purposes is a major policy problem.