Saturday, July 5, 2008
Food and Energy Shortages: "A Man-Made Castrophe"; What, If Anything Has NonProfit Law Got To Do With It?
On the eve of the 34th G8 Summit, which will take place in Tokyo, Japan, July 7-9, 2008. World Bank Group President, Robert Zoellick, and U.S. President George W. Bush are calling on the G8 countries to follow through with their promises to help alleviate poverty and disease in Africa and to address the devastating effects of food and fuel shortages in the developing world. Responding to these calls will require overcoming both political and legal obstacles.
Promises have been made, but not of a legally binding nature. For example, President Bush's plan to renew the global AIDS initiative, pledging $50 billion over the next five years, is being challenged by some Republican senators as being too expensive. Further, there is speculation that the G8 countries may back out on their promise to double development assistance to Africa by 2010 for an increase of $25 billion. The New York Times reports that the communiqué being prepared for this year’s meeting in Japan says the G8 countries are “firmly committed” to doubling the assistance, but does not mention the $25 billion amount.
Concerned about this backsliding, on Wednesday, World Bank Group President Robert Zoellick sent a letter to the head of the 2008 G8 Summit calling on the G8 countries to follow through with the commitment they made in 2005 to increase overall development aid, particularly to Africa, which accounts for two thirds of the countries most affected by the food and energy crises. Mr. Zoellick also called on major oil producers to deal with rising food and energy prices, warning that the world is now "entering a danger zone." The World Bank, World Food Program and International Monetary Fund estimate that $10 billion is needed to provide short term help to those hit hardest by the food and energy crises.
"What we are witnessing is not a natural disaster - a silent tsunami or a perfect storm: It is a man-made catastrophe, and as such must be fixed by people," Mr. Zoellick wrote in his letter.
The law cannot create the political will to address these catastrophies but, where that will exists, the law plays a crucial role in providing mechanisms to facilitate solutions. Since these crises developed, Mr. Zoellick's letter reports that the World Bank has provided 12 countries with funding from a $200 million grant fund, which is part of a $1.2 billion rapid financing facility to provide immediate assistance. New requests from 31 countries for almost $400 million have poured in. These are beyond the Bank's available grant resources but, according to Mr. Zoellick, the Bank has a multi-donor trust fund in place that donors can use to provide immediate help.
Enter the role of non-profit and charitable trust law. The gaping needs created by these crises appear far beyond what sovereign donors alone will be able (for political or other reasons) to fill. This mandates looking to other sources of funding such as foundations, charities, philanthropists and the private sector. A diverse group of sources are desperately needed to fund the kind of multi-donor trust fund and rapid financing facility to which Mr. Zoellick's letter refers. Yet the legal principles and framework for creating and governing such pooled financing mechanisms for international development aid are hopelessly under-developed. What law would govern a public-private trust fund to address world hunger?; who would have standing to police it?; and in what forum would such standing be exercised? Some food for thought for the charitable trust/nonprofit law scholar as the developing world starves .......
Friday, July 4, 2008
Happy Birthday America!
NPR Radio recently ran a story (audio version) (print version) in yesterday's Morning Edition on the effort in Congress to shut down downpayment assistance charities. The story recounts the FHA assertion that donwpayment assistance charities contribute to the growing foreclosure rate. On the other hand, the story quotes a Republican Congressman's and an downpayment assistance industry representative's assertions that the FHA is engaging in hypocritical turf protection (not to mention "beside-the-pointism"):
There are too many questions that are not answered here," says Rep. Gary Miller (R-Calif.). Miller, a former homebuilder, argues that the FHA's data on defaults is suspect and says the agency has refused to provide adequate documentation. He also argues the FHA is trying to imitate nonprofit assistance through its own program called The American Dream Downpayment Initiative. "What they've said to us is, 'Let's continue the American Dream Downpayment Assistance program and that's using taxpayer dollars to give to somebody, but let's exclude the private sector, which doesn't cost the taxpayer anything from participating in the same program,'" Miller says. "That's a problem I'm having." Scott Syphax, CEO of Nehemiah Corporation of America, the originator of the non-profit down-payment model, sees the conflict as bureaucrats flexing their muscles. "HUD has never forgiven the fact that we have been more successful at bringing people to FHA and creating new homeowners through their programs than they've been themselves," Syphax says. "And that's the reason that they want to take over the program and do it themselves … they feel essentially we're operating their franchise."
As some readers may be aware, I have been involved in a running debate with an anonymous reader regarding the issue. (see comments to the linked post). One question raised by the NPR report is that if it is the downpayment assistance that is causing the housing mess, why does the FHA maintain its own such program (with taxpayer dollars, no less), while simultaneously seeking to prohibit privately funded programs? Granted, the law is clear that "contributions," the benefits of which are earmarked for the donor (any any other specifically identified individual, for that matter), generally do not and should not generate a charitable contribution; but the question of tax exemption for the downpayment assistnce charity is slightly to the left (or right) of that assertion. That is, denying the charitable contribution deduction for a seller who makes a "donation" to a downpayment assistance charity does not necessarily imply that the charity is not entitled to tax exempt status. And singling out the beneficiaries of downpayment assistance grants as the special causes of the housing mess is ridiculous.
Thursday, July 3, 2008
Today, Forbes Magazine reports that wealthier Americans are donating larger sums of money to the nation's charities. See story excerpt below:
The Police Athletic League. The Alzheimer's Association. The Boy Scouts of America. The list of charities and other non-profits that John Catsimatidis supports runs for 57 more names.
This year isn't the best one on record to be sending out 60 checks, even if they are going to worthy causes. The sputtering economy and soaring food prices are just a couple of concerns for a supermarket magnate like Catsimatidis. The Greek-born New Yorker is also planning a run for mayor, which could cost him $100 million.
So is Catsimatidis going to temper his generosity? "I don't have any plans on cutting back," he says. He actually expects to give slightly more this year than he has previously.
Catsimatidis isn't alone. America's wealthiest are upping their contributions to charity, even with the country on the brink of recession. A new survey by the private wealth-research firm Prince & Associates found that six in 10 Americans with net worths over $30 million intend to give more this year than they did last.
And they're following through with their intentions. According to the Center on Philanthropy at Indiana University, big gifts are climbing. Individuals made 267 gifts of more than a million dollars during the first quarter, up 43% from 186 the previous year.
For the full story, click here.
The Chronicle of Philanthropy Reports that Catholic Leaders in Viriginia Apologize for Helping Teen Get An Abortion
Today, the Chronicle of Philanthropy reports that "Catholic leaders in Richmond, Va., are apologizing after a teenage immigrant in a Catholic charity’s care obtained an abortion with help from charity staff members, reports the Associated Press." It is reported that four of the staff members were fired for helping the teen. For the full story and a link to the Associated Press, please click here.
Democratic Presidential Candidate Barack Obama Calls for the Creation of a Social Investment Fund Network to Support the Nonprofit Sector
The Washington Post reports today that Democratic Presidential Nominee Barack Obama, campaigning in Colorado (highly thought favor Republicans) called for all Americans irrespective of party-affiliation "'to step into the strong currents of history' and volunteer for service to their country, pledging to dramatically expand opportunities for those accepting his challenge."
The newspaper further reports that Senator Obama pressed the "themes of values, faith and patriotism." In addition to calling for all Americans to volunteer for service to their country, Senator Obama, to support this proposal, laid out his $3.5. billion a year service plan that would "would expand the AmeriCorps program established by President Bill Clinton by 250,000 slots, double the size of the Peace Corps by 2011, expand the Foreign Service, and create an Energy Corps to conduct renewable-energy and environmental-cleanup projects. Veterans would be enlisted to help other veterans find jobs and support, and a Social Investment Fund Network would support the nonprofit sector." Here is a link to an Obama Policy Paper explaining the Social Investment Fund Network. Also, click here to view an earlier article that appeared in the Chronicle of Philanthropy in December 2007 when Senator Obama first introduced the idea of Social Investment Fund Networks. The earlier article provides a larger discussion of Senator Obama's views on the nonprofit sector.
In addition, he called for "[a]n American Opportunity Tax Credit [that] would offer $4,000 to college students for 100 hours of public service. A planned expansion of the Army and Marines by 92,000 would be fostered with pay raises, more family-friendly policies and an end to recruiting impediments such as "stop-loss" decrees that prevent service members from leaving on schedule."
For the full article, click here.
We have recently posted a rash of stories about insiders caught with their hands in the proverbial cookie jars. And, truth be told, I have had clients who wanted to start a business and get rich using nonprofits to get seed money from grants available only to 501(c)(3) organizations. These would-be entrepreneuers usually assume that they can pay themselves handsomely, directly or through fringe benefits, to get around the prohibition against private inurement. My stock advice is that you might get away with it for awhile, but greed has a way of taking over and soon enough the cards will come crashing down.
Greed amongst wayward nonprofit insiders is not only "not good" but it also seems quite universal. Two researchers from Prague, Petra Brhlikova and Andreas Ortmann recently posted The Impact of the Nondistribution Constraint and its Enforcement On Entrepreneurial Choice, Price, and Quality. Here is the interesting abstract:
We study the conditions under which it is rational for a representative entrepreneur to start a nonprofit firm. Taking as point of departure a model of entrepreneurial choice proposed by Glaeser and Shleifer (2001), we analyze consequences of weak enforcement of the non-distribution constraint on entrepreneurial choice and price and quality of the product. We find that the nonprofit organizational form becomes unequivocally more attractive to entrepreneurs if enforcement of the non-distribution constraint is weak. We also find that the quality delivered by nonprofit firms is lower under weak enforcement than that of the nonprofit firm under strict enforcement, but higher than the quality delivered by a for-profit firm. We discuss the implications and limitations of our results.
Interesting. The abstract suggests that for-profit wolves in nonprofit clothing guage the extent to which they can "get away with it" in deciding whether to use a nonprofit or for-profit to get rich. I guess that's just rational "economic" behavior.
According to a weekend article in the Concord Monitor, CEO's in New Hampshire make the least to the most amoungst hospital administrators:
Pay for nonprofit hospital executives in New Hampshire ranges widely, from a salary less than that of a pediatrician to one higher than the best-paid surgeons, according to a review of tax records for the state's 25 acute care hospitals. Those records reveal that Concord Hospital's Mike Green is among the best-paid hospital executives in the state. According to a filing made in 2007, he earned more than $730,000 in combined salary and benefits. On the low end of the scale is Louise McCleery, the CEO of the state's smallest hospital in Colebrook. McCleery makes just more than $125,000, and said she's grateful for what she gets.
The best part of the article is a data chart showing the wide variation in nonprofit hospital CEO salaries. To the extent the hospitals themselves vary widely in characteristics, I suppose the larger salaries may be somewhat bullet-proof against an excess benefit challenge. On the other hand, to the extent the variatins in salaries are based on the variations in hospital revenues, that seems a different story. The 4958 excess benefit regs say that nonprofit CEO salaries are to be judged by looking to like organization in like circumstances (or something like that). Does that mean the profitability of like for-profit hospitals are also relevant?
Wednesday, July 2, 2008
The American Council on Education recently formulated a 501(c)(3) "Due Diligence" checklist that should prove helpful for nonprofits preventive law programs. Here is the introduction:
The Internal Revenue Service recently redesigned the Form 990. As a result, non-profit organizations will be required to disclose, under penalty of perjury, whether they have in place various polices and procedures, some of which are mandatory under the Internal Revenue Tax Code or Sarbanes-Oxley. Other policies and procedures are voluntary but may become mandatory over time or may expose a non-profit to adverse publicity if absent. Below is a checklist of these rules, based primarily on the reporting requirements in the new Form 990. The rules become effective for returns filed for the applicable deadline in 2009 for organizations with tax years beginning on or after Jan. 1, 2008.
The comprehensive checklist was prepared by the law firm Arent Fox and contains lists of (1) suggested or required policies, (2) suggested procedures, and (3) suggested committees geared towards schools and hospitals. It is designed for use in complying with the revised form 990.
Ranjani Krishnan and Michelle Yetman have posted Strategic Cost Shifting by Nonprofit Hospitals. Here is the abstract:
This paper examines cost shifting behaviors by nonprofit hospitals in their publicly reported tax statements. We explore the following questions: first, do nonprofit hospitals shift costs towards patient-related program services and away from administrative and fundraising categories to improve their financial ratios to appear more efficient? Second, do economic incentives such as ability to procure future donations influence the extent of such cost shifting behavior? Third, do institutional constraints and pressures such as membership in a church system and level of charity care influence the extent of cost shifting. Finally, does the likelihood of detection influence cost shifting behaviors? We conduct an empirical test by merging two datasets: the IRS 990 forms and regulatory reports from California hospitals (OSHPD data) and test our hypotheses using 727 hospital-year observations. We find that nonprofit hospitals that obtain higher donations revenue shift costs to a greater extent, as do hospitals that face higher institutional pressures. Hospitals that face higher likelihood of detection shift costs to a lesser extent. Our results show that economic, institutional, as well as regulatory pressures drive nonprofit hospitals' cost shifting behaviors.
The findings suggest that nonprofit hospitals in California, already beleagured by accusations that they do not provide enough charity care to justify tax exemption, crunch their numbers in a way that increases the perceived levels of charity care they provide.
Insidehighered.com reports that the Supreme Court of Louisiana has ruled donors and their heirs have standing to sue charities regarding alleged failures to comply with the terms of their gifts. The lawsuit at issue arose out of Tulane University's decision, in the wake of Hurricane Katrina, to merge its women's college and other undergraduate units into one unified college.
The court's opinion is available through a link in the court's press release from July 1, 2008 under the name Pamra Matthis Howard and Jane Matthis Smith v. Administrators of the Tulane Educational Fund (no. 2007-C-2224). It details that the gifts at issue were from Josephine Louise LeMonnier Newcomb and were allegedly intended to be used to establish and maintain the women's college, named after Mrs. Newcomb's deceased daughter. Mrs. Newcomb made the first gift of $100,000 in 1886 (yes, in the nineteenth century), and continued to make donations to support the college for the rest of her life and through her estate. She died in 1901.
While the court found standing for donors or their heirs under Louisiana law, it noted that the plaintiffs had failed in their pleadings to establish that they were the "would-be heirs and legatees" of Mrs. Newcomb under Louisiana law. The court therefore remanded the case to allow the plaintiffs an opportunity to amend their pleadings to address this issue.
The impact of the decision outside of Louisiana is unclear, as it relied upon an extensive review of Louisiana's Civil Code and the Napoleon Code upon which it is based, and so not on common law principles.
Crain's Detroit Business reports that the Michigan State Legislature has passed a bill that requires nonprofit corporations formed in that state to follow certain modest new governance requirements. HB 5681 amends Michigan's Nonprofit Corporation Law to (1) require nonprofit corporations to have at least three directors on their governing boards (previous law only required a single director), (2) prohibit such corporations from making loans to or loan guarantees for officers or directors, and (3) require "charitable purpose" nonprofit corporations to notify the Michigan Attorney General and not to dispose of any assets without the AG's written approval if they are dissolved by the state's Corporations Division for failure to file annual information returns. It also makes a number of minor changes, including to the procedures for amending a Michigan nonprofit's articles of incorporation and, in order to implement the third change listed above, creating a definition of "charitable purpose corporation" that includes but is not limited to organizations that are tax-exempt under section 501(c)(3) of the Internal Revenue Code.
The bill is currently awaiting Michigan Governor Jennifer Granholm's signature. The article does not indicate whether there have been any statements from her office regarding her willingness to sign the bill, although given the relatively modest changes it is difficult to see what about the bill would be objectionable to either her or the nonprofit community.
We previously blogged that Richard Grasso, the former chairman and chief executive of the then not-for-profit New York Stock Exchange, had convinced New York's highest court to affirm the dismissal of four of the six counts brought against him by the New York Attorney General relating to Grasso's allegedly excessive compensation. The Associated Press and the New York Times now report that the Attorney General has decided to drop the case after another New York court threw out the remaining two counts.
According to the New York Appellate Division's opinion, the authority of the Attorney General to bring the last two statutory counts lapsed when the NYSE merged with a for-profit company, as the sole relief sought for any excessive compensation was repayment of the excess, which in this case would be paid to a now for-profit entity and so inure to its private owners. While not completely clear from the opinion, it appears that court may also have dismissed the only other remaining claim against Mr. Grasso, relating to whether he breached his fiduciary duty to keep the board informed about his pay, especially since the AP article indicates that the AG's office believes the case against Mr. Grasso is at an end. The full opinion can be found by going to the Appellate Division's appeals and motion calendar for July 2008, clicking on the "Appeals" link for July 1, 2008, and then scrolling to the 22nd page of the resulting PDF file, where the opinion begins.
Yesterday we blogged about presumed Democratic presidential nominee Barack Obama's comments criticizing President Bush's faith-based initiatives but also promising to expand the cooperation between the federal government and faith-based groups, including the funding available. Today's press is reporting the reactions to his comments, including positive and negative comments from former officials of President Bush's Office of Faith-Based and Community Initiatives and various religious leaders. Articles can be found in the Los Angeles Times, the New York Times, and the Wall Street Journal (subscription required).
Tuesday, July 1, 2008
Nina J. Crimm (St. John's University) has posted The Moral Hazard of Anti-Terrorism Financing Measures: A Potential to Compromise Civil Societies and National Interests, which will be published in the Wake Forest Law Review. The abstract is as follows:
Radical, fundamentalist Islamic terrorists have targeted civil societies for attack, in the course of which they are using and abusing philanthropic structures and charitable institutions. In the wake of the 9/11 attacks, the global war on terrorism took shape. President George W. Bush issued Executive Order 13,224 in which he declared a national emergency to deal with the threat of future terrorism. Congress responded with a powerful weapon, the USA Patriot Act, that provided measures aimed to detect, prevent, and suppress terrorist financing. The U.N. Security Council unanimously adopted Resolution 1373, and the intergovernmental Financial Action Task Force (F.A.T.F.) released Nine Special Recommendations that have influenced numerous countries across the globe in structuring their responsive anti-terrorism financial regulatory schemes. Although countries reactive regulatory regimes would be intended to serve the extremely important national interest of protecting security within their borders, such legal systems may simultaneously constrain philanthropic aid structures and nongovernmental organizations crucial to healthy civil societies. In so doing, anti-terrorism finance regulatory regimes ironically may compromise essential national interests, including national security. This effect perhaps may be particularly pronounced within some predominantly Muslim countries.
As Islam places a high value on compassion, wealth redistributions, social justice, and supporting and enhancing fellow humans, both philanthropy and charity play crucial roles for Muslims and their civil societies. The flow of such funds is economically essential to, and provides critical building blocks for, Muslim civil societies. By adopting, implementing, and enforcing strict and comprehensive anti-terrorism laws modeled on the F.A.T.F. standards, countries could alter the legal landscape for philanthropic and charitable giving by Muslim-Americans, as well as other Muslims, and effectively cut off financial support for needy Muslims and Muslim civil societies actors. By doing so, the same destabilizing factors that vigorous civil societies work to alleviate relative economic, social and political inequalities within a society, such as structured educational deprivations, lack of civil liberties, and political alienation could be aggravated. Because these are several troubling factors touted as key causes of terrorism, I suggest that their exacerbation could compromise national security interests, as well as other national interests, of the U.S. and other countries around the globe. Such possible costs are high and should not be overlooked as countries are prodded to adopt comprehensive and strict anti-terrorism finance legal regimes. I conclude that now, nearly seven years after the U.S., U.N., F.A.T.F., and some countries around the world adopted anti-terrorism finance strategies in the first reactive wave to the 9/11 tragedies, it may be time to rethink them. Perhaps more nuanced, targeted, and tailored approaches could be developed to mitigate the moral hazard of the current anti-terrorism finance tactics.
Jill R. Horwitz (Michigan) and Joseph Mead (Michigan) have posted Letting Good Deeds Go Unpunished: Volunteer Immunity Laws and Tort Deterrence, which will be published in the Journal of Empirical Legal Studies. The abstract is as follows:
Does tort law deter risky behavior in individuals? We explore this question by examining the relationship between tort immunity and volunteering. During the 1980s and 1990s, nearly every state provided some degree of volunteer immunity. Congress followed with the 1997 Volunteer Protection Act. This article analyzes these acts, identifying three motivations for them: the chilling effects of tort liability, limits on liability insurance, and moral concerns. Using data from the Independent Survey's Giving and Volunteering surveys, we then identify a large and positive correlation between immunity and volunteering. We next consider the implications of the findings for tort theory and nonprofit law.
In the wake of a two day White House Conference on President Bush' Community and Faith-Based Initiative and the President's weekly radio address on the topic last weekend, Senator Obama today announced his intention to extend the program should he be elected President:
Now, I know there are some who bristle at the notion that faith has a place in the public square. But the fact is, leaders in both parties have recognized the value of a partnership between the White House and faith-based groups. President Clinton signed legislation that opened the door for faith-based groups to play a role in a number of areas, including helping people move from welfare to work. Al Gore proposed a partnership between Washington and faith-based groups to provide more support for the least of these. And President Bush came into office with a promise to "rally the armies of compassion," establishing a new Office of Faith-Based and Community Initiatives.
But what we saw instead was that the Office never fulfilled its promise. Support for social services to the poor and the needy have been consistently underfunded. Rather than promoting the cause of all faith-based organizations, former officials in the Office have described how it was used to promote partisan interests. As a result, the smaller congregations and community groups that were supposed to be empowered ended up getting short-changed.
Well, I still believe it's a good idea to have a partnership between the White House and grassroots groups, both faith-based and secular. But it has to be a real partnership - not a photo-op. That's what it will be when I'm President. I'll establish a new Council for Faith-Based and Neighborhood Partnerships. The new name will reflect a new commitment. This Council will not just be another name on the White House organization chart - it will be a critical part of my administration.
Now, make no mistake, as someone who used to teach constitutional law, I believe deeply in the separation of church and state, but I don't believe this partnership will endanger that idea - so long as we follow a few basic principles. First, if you get a federal grant, you can't use that grant money to proselytize to the people you help and you can't discriminate against them - or against the people you hire - on the basis of their religion. Second, federal dollars that go directly to churches, temples, and mosques can only be used on secular programs. And we'll also ensure that taxpayer dollars only go to those programs that actually work.
With these principles as a guide, my Council for Faith-Based and Neighborhood Partnerships will strengthen faith-based groups by making sure they know the opportunities open to them to build on their good works. Too often, faith-based groups - especially smaller congregations and those that aren't well connected - don't know how to apply for federal dollars, or how to navigate a government website to see what grants are available, or how to comply with federal laws and regulations. We rely too much on conferences in Washington, instead of getting technical assistance to the people who need it on the ground. What this means is that what's stopping many faith-based groups from helping struggling families is simply a lack of knowledge about how the system works.
Well, that will change when I'm President. I will empower the nonprofit religious and community groups that do understand how this process works to train the thousands of groups that don't. We'll "train the trainers" by giving larger faith-based partners like Catholic Charities and Lutheran Services and secular nonprofits like Public/Private Ventures the support they need to help other groups build and run effective programs. Every house of worship that wants to run an effective program and that's willing to abide by our constitution - from the largest mega-churches and synagogues to the smallest store-front churches and mosques - can and will have access to the information and support they need to run that program.
Senator McCain also supports the making of federal grants to religious groups, according to The Pew Forum on Religion and Public Life, but has not yet spoken out on the issue in any great detail. It seems to be a no-brainer, at least from a political perspective. Recall that the proposal is to allow religious charities to compete for federal grants and contracts previously reserved for nonprofit organizations. Opponents, including some religious organizations, have argued that federal grants to religious charities violate the Establishment Clause of the First Amendment. Without sufficient Congressional support, the President instituted the program on a smaller scale via executive order that prohibited the use of the federal monies for proselytizing. I think it is difficult, if not impossible, to meet that standard. The White House's seven year report on the program is available online (click on "The Quiet Revolution" in the right hand column). According to a WSJ article, Obama alluded to criticisms leveled against President Bush's proposal by Bush's previous Director of the Faith Based and Community Initiative Program.
Remember back in 2000 when the IRS issued weak and spineless regulations pertaining to the taxation (or not) of revenues that nonprofits -- primarily colleges and universities -- generate from essentially running travel agencies under the guise of tax exempt educational tours. The commercial travel industry fought tooth and nail to get the new regulation, thinking it would finally put them on an even playing field with those tax free travel agencies run by colleges and universities offered to alumni in hopes of getting even more tax free donations. Those alumni were likely to go on vacations anyway, why not give them a team jersey, a few seminars and collect the cash? The commercial industry had to have been sorely disappointed when the regs were finally issued. Here, in all its glory is the rule (1.513-7):
(a) Travel tour activities that constitute a trade or business, as defined in §1.513-1(b), and that are not substantially related to the purposes for which exemption has been granted to the organization constitute an unrelated trade or business with respect to that organization. Whether travel tour activities conducted by an organization are substantially related to the organization's exempt purpose is determined by looking at all relevant facts and circumstances, including, but not limited to, how a travel tour is developed, promoted and operated. Section 513(c) and §1.513-1(b) also apply to travel tour activity. Application of the rules of section 513(c) and §1.513-1(b) may result in different treatment for individual tours within an organization's travel tour program.
I doubt that there has been a single dollar of tax imposed either before or after the regulation. After all, under those regulations, the nonprofit need only include a few more "mandatory" (wink, wink) educational seminars to make travel to the Great Barrier Reef, for example, distinguishable from taxable Travelocity.com. I remember getting a good chuckle when, as a university counsel, I first read the regulation and the accompanying helpful (to college and universities) examples. Anyway, the WSJ recently ran an article describing the new generation of nonprofit travel tours referred to as "voluntourism:"
Voluntourism -- a trip to an exotic destination combined with charitable work -- is booming. The group Greenforce offers a $2,150 penguin rescue-and-rehabilitation program in South Africa with accommodations and a "meal allowance" during six weeks of catching, feeding and cleaning up after penguins and other seabirds. But there also are mountain-biking and wine tours available for visitors' two days off per week.
Some first-generation voluntourism programs were criticized as being less-than-fun for participants. And organizations such as London watchdog group Tourism Concern question the wisdom of dispatching unskilled volunteers for stints so short they're just disorienting. The group also questions projects where voluntourists displace locals on routine work, "as if local people weren't able to cook things or clean things or teach," says Tricia Barnett, the group's director. As a result, a growing number of charities and tour groups are returning to the idea that tourists should just be tourists. Groups that want to funnel aid to poor communities now are appealing first to visitors' desire for a good experience, ahead of their work ethic and sense of sympathy. The rationale is that more tourists doing less produces more sustainable income and aid for local economies.
If I understand the article correctly, the nonprofit charges the "voluntourist" a nice fee (in this case $2,150) to catch and bathe penguins in between biking and wine tasting. I wonder if voluntourism would be considered an unrelated business and therefore taxable under the previously mentioned joke of a regulation. No classes being offered, just a chance to pay the organization for travel to a place at which to perform "charitable services," perhaps while also taking in the sights and doing what tourists do. We could whip out our handy dandy all purpose tax tool -- bifurcation -- and tax the part of the fee alloted to biking and wine tasting. But the examples to the regulation quoted above don't seem to anticipate use of that tool. I suppose if the "voluntourism" industry includes enough fun community building "work" -- perhaps some salmon or trout fishing to help wean the overpopulated rivers and streams -- in the "voluntour" to Alaska, the hills of North Carolina, or the Austrailian Outback (no salmon, but surely lots of Kangaroos to observe scientifically), that $2,150 fee is just entirely tax free. But I am in a cynical mood these days.
In 2004, the IRS launched its Political Activity Compliance Initiative or PACI targeting alleged political activity by section 501(c)(3) nonprofit organizations. As detailed on the IRS website, such organizations are prohibited by federal tax law from engaging in any activities that support or oppose a candidate for elected public office. While the IRS is not allowed to release information about specific audits, it did report the overall results of its efforts both in 2004 and in 2006. In each year the program resulted in approximately 100 examinations, with approximately two-thirds of those examinations resulting in the IRS determining that a violation had occurred. Most violations were, however, apparently minor and/or inadvertent, based on the fact that the IRS only issued warning letters in the vast majority of cases.
Apparently because PACI is now a regular IRS program and is ongoing for the current election year, the IRS Commissioner asked the Treasury Inspector General for Tax Administration (TIGTA) to review it. In its just-released June 18, 2008 audit report (no. 2008-10-117), available on TIGTA's FY2008 audit report website, TIGTA reviewed its findings and recommendations, as well as the IRS' planned responses. One of the most significant of these was TIGTA's conclusion that the IRS did not always meet its own timetables for reviewing referrals, which led to delays in contacting offending nonprofits. TIGTA specifically urged that such contacts occur before the election at issue, so as to prevent continuing violations, although it is unclear that the IRS has the authority to begin an audit before an organization has filed its return for a given tax year in the absence of "flagrant" political activity (see Code sections 6852 and 7409, which provide special authority to assess tax and seek an injunction before the filing of the return for a year in the case of such activity). The IRS in response agreed to start its 2008 effort earlier in the election cycle and train an additional 30 agents to be part of the program. This response raises the issue of whether the IRS will be forced to ignore or at least delay actions in other areas, since overall IRS Exempt Organization Division staffing continues to remain flat. To address TIGTA's concerns about creating a consistent understanding of what activities are prohibited, the IRS also promised to ensure that all employees involved in PACI receive the same training and also receive feedback regarding why particular referrals are not selected for examination.
The IRS' planned responses to this report indicates that 2008 will be at least as active a season for enforcement of the political activity prohibition as were 2004 and 2006. It will therefore be an interesting year for political active exempt organizations for more reasons than just the presidential campaign.
The June issue of the Nonprofit and Voluntary Sector Quarterly is now available on that journal's website. Excluding book reviews, the articles are:
- Lehn M. Benjamin,
- Nancy Strichman, W.E. Bickel, and Fathi Marshood,
- Dag Wollebæk and Kristin Strømsnes,
- Patricia Hughes and William Luksetich,
- Tone Alm Andreassen,
- Scott R. Swanson, J. Charlene Davis, and Yushan Zhao,
- Michael Moody,
- Jacqueline Jacobs Caster,
Yesterday we blogged about a Wall Street Journal op-ed piece defending the growth of for-profit microfinance companies in Mexico. In its most recent edition, The Economist takes a similar position. It argues that for-profit microfinance lenders such as Mexico's publicly traded CompartamosBanco can grow faster and so achieve greater economies of scale than their nonprofit counterparts, plus if they are successful the for-profit lenders will attract new investors to the microfinance field. To support this last point, The Economist notes that since Compartamos started to pursue a profit, seven new regulated microfinance providers have begun to compete with it in Mexico. Compartamos itself has provided a more detailed defense of its activities through an 11-page "Letter to Our Peers" available on its homepage.