Saturday, July 12, 2008

Eason Posts "The Restricted Gift Life Cycle, or, What Comes Around Goes Around"

Professor John Eason (Tulane) posted an abstract of his draft Fordham Law Review article about donor control of gifted property on SSRN's Nonprofit and Philanthropy Law Abstracting Journal.  The article is entitled "The Restricted Gift Life Cycle, or, What Comes Around Goes Around."  Here is the abstract:

The conflict regarding enduring donor control over property gifted for charitable uses implicates issues of current relevance to donors and nonprofit charitable organizations, and to those who represent them. Not surprisingly, these issues, and the possible ways of both addressing and accounting for their resolution, vary by circumstance. In this Article, I frame the issues and explore the relevant circumstances by reference to the particular stage in the lifecycle of a donor's restricted gift at which conflict might arise. That lifecycle spans the time from initial negotiation of the gift to its potential modification or termination due to unanticipated circumstances. In between, of course, is the period during which the charitable organization is actively engaged in managing the restricted gift in pursuit of the organization's broader mission.

Framing the issues in this manner permits an exploration of several important ideas and offers insights into the concerns that affect restricted giving and the management of restricted gifts. First among these is the question of whether restricted gifts can, in fact, be viewed as having a particular lifecycle comprised of discrete stages. The answer, not surprisingly, is yes, as elaborated upon in Part II of this Article. Second, acknowledging this restricted gift lifecycle focuses attention on specific influences driving the noted dead hand dynamic at various stages in that evolution, with resulting implications for both the donor and recipient organization. These influences and implications are the subject of Parts III and IV, with particular emphasis in Part IV upon the fiduciary duties attendant a charitable organization's management of a restricted gift.

Finally, the forced effort to evaluate a given influence as relevant to only one stage in the noted lifecycle is difficult to maintain. It is, in other words, impossible to isolate a particular consideration as playing a limited role at a single, finite point in the evolution of a charitable organization's ongoing efforts to accommodate donor directives. This evaluative effort, however, ultimately highlights the pervasive relevance of each such influence throughout the organization's dealings with the donor and her enduring demands. This, in turn, suggests that a more comprehensive donor and organizational perspective towards their restricted gift dealings might at all times illuminate more mutually advantageous choices and opportunities, thus reducing the overall level of conflict throughout the life of that gift. Demonstrative of these points is the ongoing dispute between Princeton University and certain descendants of Charles and Marie Robertson, which dispute is explored more fully in Parts V and VI.


July 12, 2008 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Meghaan McElroy Posts "Private Religious Hospitals: Limitations Upon Autonomous Moral Choices in Reproductive Medicine"

Meghaan McElroy (William & Mary Law School) posted an abstract of her forthcoming William & Mary Law Review article about division of church property in Virginia on SSRN's Nonprofit and Philanthropy Law Abstracting Journal.  The article is entitled "Possession is Nine Tenths of the Law: But Who Really Owns a Church's Property in the Wake of a Religious Split within a Hierarchical Church?"  Here is the abstract:

Courts across the country face a perplexing legal issue regarding the ownership of church property. In the wake of the ordination of an openly gay bishop in 2003, local congregations have broken away from the Protestant Episcopal Church in the United States of America, leading to contentious property disputes over both the real and personal property of the churches. The problem that arises in adjudicating this legal issue is the sparse continuity in court decisions addressing property ownership in the wake of a religious "divorce." With limited guidelines articulated by the Supreme Court, the states are free to craft their own arsenal for handling church property disputes. Virginia provides a perfect starting point for crafting a bright-line rule that all states should eventually follow, considering the existence of a post- Civil War statute meant to handle such religious property disputes.

Beginning in December 2006, fifteen traditionalist Virginia Episcopal parishes voted to break away from the Episcopal Diocese of Virginia and the Episcopal Church of the United States. The decision to disaffiliate with the Diocese and Episcopal Church stemmed from a disagreement over the Episcopal Church's position on homosexuality, representing what the Diocese considered a deeper affront to the teachings of the Christian faith. The parishes voted to affiliate themselves with the Convocation of Anglicans in North America. As a result of the separation, the local parishes and the Episcopal Church, along with the Diocese, have both claimed ownership of the real and personal property presently occupied and held by the parishes' trustees.

In order to settle the present dispute among the eleven Virginia Episcopal parishes, as well as any future disputes among congregations and the hierarchical church to which they belonged, this Note proposes that courts within the Commonwealth of Virginia should adopt a bright-line rule for interpreting Virginia Code section 57-9. Specifically, "division" as used in section 57-9 should mean a factional separation within the hierarchical church between the national church and an aggregate of congregations, determined on a macro level. Such an approach will be beneficial for the judicial system because it will enable courts to resolve church property disputes expeditiously by addressing the sole question of whether a division existed within the church.


July 12, 2008 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Friday, July 11, 2008

Some Charities In Uganda Alleged To Fund Rebels

At the Fourth International NGO Accountability Conference on Tuesday, Uganda's Internal Affairs State Minister, Matia Kasaija, stated that intelligence reports have shown that some charities in Uganda fund rebels.

“This is very dangerous. We have enough evidence on this. We shall hit them hard. No one challenges the security of our country and is left unchallenged,” the minister warned.

Kasaija urged the charities to account for the funds they got from donors because “this helps us eliminate bad elements and avoid double allocation of resources.”

Kasaija made the remarks after receiving a petition from the participants from 12 countries urging the ministry to speed up the adoption of the draft NGO policy, The NGO Quality Assurance Certification Mechanism, which aims at promoting NGO adherence to generally accepted ethical standards and operational norms. The policy sets principles and standards of behavior for responsible practice to protect the credibility and integrity of certified NGOs and their networks in Uganda.

Click here for a June 10th article reporting on the opening of Uganda's national stakeholders' conference on the draft NGO policy.


July 11, 2008 in International | Permalink | Comments (0) | TrackBack (0)

The Charitable Deduction: Who Really Benefits and Who Really Pays?

In Wednesday's New York Times Op-Ed Section, Boston College Law School Professor Ray D. Madoff criticizes the charitable deduction's role as a mechanism allowing people to donate as much of their assets as they like for charitable purposes without paying tax.

Using Leona Helmsley's recent charitable bequest that $8 billion be used for the care and welfare of dogs as an example, Madoff argues that because a charitable deduction constitutes a subsidy from the federal government, the government becomes a partner in every charitable bequest and taxpayers are the ones who end up paying. In Mrs. Helmsley’s case, since her fortune warranted an estate tax rate of 45%, her $8 billion donation for dogs is really a gift of $4.4 billion from her and $3.6 billion from taxpayers.

Because the law has very loose standards for what constitutes "charitable status," donors only need to direct their assets be used for some type of charitable purpose and they are relieved from paying tax on their donations. Professor Madoff comments that had Mrs. Helmsley limited her beneficence even more narrowly, for, example, to the Maltese breed of dogs she favored, the bequest would still have qualified as being a “charitable” purpose.

Mrs. Helmsley chose to disburse her bequests through the Leona M. and Harry B. Helmsley Charitable Trust, a type of foundation that typically performs no charitable work but only gives money to organizations that do. The law requires foundations to spend a minimum of just 5% of their assets a year, thus helping ensure their perpetual existence, and as Madoff labels: "their donors’ immortality." In meeting this requirement, foundations are allowed to count fees paid to their trustees and other administrative expenses. According to Madoff, "we should also stop subsidizing immortality. Private foundations should be required to spend more of their assets on charitable work, even if it threatens their perpetual existence."

After noting that Congress' 2003 bill requiring private foundations to devote the full 5% to charitable expenditures failed to pass after foundations complained it would threaten their perpetual existence, Madoff criticizes the perpetual charitable trust as an effective mechanism "because a dollar spent today is worth more than a dollar spent several years from now, in many cases, the sum of payments made over time — even in perpetuity — never equals the value of the original principal." Since perpetual trust funds tie money up and are based on the flawed assumption that we know the best way to use resources far into the future, "we deprive ourselves of resources for addressing the obvious and compelling needs of today."

Madoff appeals to Congress to change the tax code and also offers a way to compromise: "There should be a limit — a dollar amount or a percentage of the estate — on the estate tax charitable deduction. People could still give to charity as they like, but after a point they would be giving after-tax dollars. The deduction should be lower for bequests to private foundations than for money given directly to good causes."


July 11, 2008 in In the News | Permalink | Comments (0) | TrackBack (0)

NGO Sues Kenya's Public Health Minister for Failing to Bring the HIV/AIDS Prevention and Control Act into Operation

The NGO AIDS Law Project and an AIDS patient filed suit against Kenya's Public Health Minister, Beth Mugo, for failing to bring the HIV/AIDS Prevention and Control Act into operation. The Act is to provide measures for prevention, management and control of HIV/AIDS.

The suit claims that Mugo failed to set a date when the Act, aimed at alleviating discrimination of those affected or infected with AIDS, would begin. The plaintiffs will be seeking leave to apply for an order directed at the minister to provide reasons why she has not set a date for the commencement of the law. Kenya's last Parliament enacted the Act in 2006 and President Kibaki agreed to it on December 30th, 2006. AIDS has been declared a national disaster in Kenya.

The judge ordered that the case be heard on July 24th, 2008.


July 11, 2008 in International | Permalink | Comments (0) | TrackBack (0)

Senate Panel Will Likely Loosen Strict Tax Deduction Rules for "Partial Gift" Art Donations

Members of the Senate Finance Committee have agreed in principle to loosen the strict limits on "partial gifts" to museums, in which collectors claim tax deductions for donating artwork in increments to museums even though the art may remain in the donors' private homes.

In making a partial gift, a donor gives a percentage of interest in an artwork to a museum, receiving a tax deduction for an equivalent percentage of the work’s value. The museum has the right to exhibit the artwork for a period of each year proportionate to the interest it owns, but, in reality, the art rarely enters the museums.

The practice of "partial gifts" was common until almost two years ago, when Senator Charles E. Grassley added provisions to the Pension Protection Act of 2006 requiring donors to turn over both the artwork itself and full ownership within ten years of donating the first part. Because art tends to appreciate in value after being displayed in museums, another provision capped the deduction at the value prevailing when the donor gave away the first fraction or subsequent fractions, whichever was lowest, to limit the amount of tax deductions available.

However, The New York Times reports that it now appears that Senator Grassley is willing to allow donors to claim deductions for subsequent donations that reflect increases in the value of the portion of the artwork they still own. Many of the proposed changes would impose greater accountability on donors, such as requiring that all partial gifts be subject to binding written contracts to prevent heirs from reneging on the gifts after a donor’s death.

The changes could be attached to tax-related legislation sometime next week or as an independent bill.


July 11, 2008 in Federal – Legislative | Permalink | Comments (0) | TrackBack (0)

Thursday, July 10, 2008

Uzbekistan Parliament Creates Public Fund to Support NGOs

The International Center for Not-for-Profit Law (ICNL) reports that on July 3, the Parliament of Uzbekistan passed a resolution establishing a public fund to support NGOs.  The full text of the resolution may be downloaded from ICNL's website.


July 10, 2008 in International | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 9, 2008

Two Recent Case Studies on How to Respond to Embezzlement/Excess Benefit Transactions

I have occasionally been asked how a nonprofit organization should react when it (i.e., responsible people within the organization) learns that an insider has engaged in some serious excess benefit type behavior -- ok, just plain old embezzlement or overspending.  There are, of course, two options.  One is to handle the matter in-house and quietly, no matter how mad the board and certain other key employees are at the miscreant.  The benefit to that approach is that past, present, and future donors don't find out that their money has, is being, or might be mispent in the future.  Private inurement and excess benefit scandals typically result in a serious decline in donor revenues.  And yet, punishment is often appropriate and necessary and  damn well deserved.  I once advised a nonprofit that immediately informed a private foundation that the grant the foundation made had been misspent -- the board sent the letter to the foundation before I got involved.  Even though the public charity had sufficient funds to  make up the  short-fall and  had reported the matter to local district attorney, the private foundation demanded and eventually received a refund of the grant despite our contractural right to keep the grant, in my opinion.  No good deed goes unpunished, I suppose.  Had we insisted that we were not liable for the refund of the grant we might have won the legal battle but lost the donor and volunteeer war.  Therein lies the rub.  In cases of embezzlement, (which is not private inurement but probably is excess benefit), the nonprofit is in a catch-22.  If it reports the matter, the nonprofit might die from lack of future donations.  If it does not report the matter, several negative consequences apply.  Board members and other managers risk being treated as complicit or negligent with regard to the excess benefit transaction; they too are subject to excise penalties.  In the shorter term, the nonprofit reduces its legal leverage to seek repayment by the greedy insider.

The New York Times ran a story today that describes two "case studies."  In one, the insider skimmed about a million dollars and the nonprofit decided to handle the matter in-house.  In another, the nonprofit immediately reported the matter to law enforcement even before it determined the full extent of the wrong doing.  Ironically, both cases ended up in the press anyway so perhaps the lesson to be learned is "disclose, disclose, disclose" in any event.  Still, in the case I was involved in the amount was relatively small (less than $50,000) and had I been asked, I might have said let's handle this quietly to protect our reputation in the donor  community.  Here is an excerpt from the Times article describing how one nonprofit decided to handle the matter quietly (until a whistleblower went public):

The [founder's] brother, Dale Rathke, embezzled nearly $1 million from Acorn and affiliated charitable organizations in 1999 and 2000, Acorn officials said, but a small group of executives decided to keep the information from almost all of the group’s board members and not to alert law enforcement.  Dale Rathke remained on Acorn’s payroll until a month ago, when disclosure of his theft by foundations and other donors forced the organization to dismiss him. “We thought it best at the time to protect the organization, as well as to get the funds back into the organization, to deal with it in-house,” said Maude Hurd, president of Acorn. “It was a judgment call at the time, and looking back, people can agree or disagree with it, but we did what we thought was right.” The amount Dale Rathke embezzled, $948,607.50, was carried as a loan on the books of Citizens consulting Inc., which provides bookkeeping, accounting and other financial management services to Acorn and many of its affiliated entities. Wade Rathke said the organization had signed a restitution agreement with his brother in which his family agreed to repay the amount embezzled in exchange for confidentiality.

Hmmmm.  I wonder what the accounting firm's exposure is, and to whom, from its cooperation.  Clearly the decision whether to report the matter to law enforcement is the board's so the "small group  of executives" messed up from the start.  They should and had an obligation to inform the board and let the board decide how to proceed.  This points to another consequence of insider bad behavior (at least at sub-board level).  If I had been on or advised someone on that board, I would probably consider or advise stepping down immediately and perhaps indignantly (though not necessarily loudly) with a CYA letter.  The other significant point to be made about this case is that the "embezzlement" occured eight years before it came to light, suggesting that the "disclose, disclose, disclose" rule is most prudent because bad things will eventually come out.  Here is how the second organization handled the problem.  Notice the concern voiced regarding the effect on the donor and volunteer community:

Officials at Points of Light began looking into complaints about a store the organization operated on eBay and by late June had discovered what its president and chief executive, Michelle Nunn, called “abnormalities” in the business practices of an independent contractor hired to run the store, which did a brisk business auctioning travel packages and items donated to the organization. The travel auctions were stopped immediately, Ms. Nunn said, and the store was shut down a short time later. Points of Light also posted a statement on its Web site last weekend about the problems and contacted the United States Attorney’s Office in Washington, as well as people who had bought the travel packages.  Two people who have been involved in the internal investigation at Points of Light, who spoke on the condition of anonymity because it is incomplete, said it appeared that Maria Herrmann, a former Points of Light fund-raiser who was hired as an independent contractor to manage the eBay store operation, may have been auctioning off bogus trip packages.  Ms. Herrmann did not respond to a message left at her home on Tuesday, and phone and e-mail messages to the office were answered by automated responses from the service Points of Light has hired to process reimbursement applications for the packages.  The organization is making good on trips scheduled through next Tuesday, Ms. Nunn said, and hopes to repay consumers for the rest of the packages that were sold. She said Points of Light began alerting donors last week about the problem, and some have agreed to help it repay customers who bought the packages.  Ms. Nunn also said she did not know how much the group would lose. “Our hope is that this is an isolated event, and that the actions of what we believe to be a single individual at this point doesn’t jeopardize the work of millions of volunteers,” she said.

[emphasis  added].  Lies and cover-ups have a way of making things that much worse, and then you are always waking up in the middle of the night wondering when you will get caught.  I suppose the damage to an organization's donor and volunteer support is inevitable, and  even worse when stakeholders learn that the nonprofit tried to hide the matter.  Better to come clean right away.  Still, being the human that I am, I might advise keeping things on the down low when the amount is relatively small; once it hits a certain amount, I think nonprofits are better off biting the bullet now rather than later.  Points of Light  will probably come out of this better than Acorn.  A criminal scholar of mine once opined that there are cases where you just what to "take the bastard out back and shoot him."  The emotion applies to nonprofit embezzlement, but cooler heads must prevail. 


July 9, 2008 in Federal – Legislative, In the News | Permalink | Comments (0) | TrackBack (0)

Zimbabwe's Ban on NGOs Cited As A Contributing Cause of Serious Food Shortage

Zimbabwe's communal farmers blame the current ban on NGO activities as they encounter the worst food shortages in history.

Alleging political bias, the government suspended all NGO activities, but the opposition Movement for Democratic Change (MDC) claims the ban was instituted to try to hide the political violence unleashed against its supporters after the March 29th general elections, in which President Robert Mugabe's ZANU-PF lost control of parliament for the first time since the country gained independence from Britain in 1980.  Neither Mugabe nor MDC leader Morgan Tsvangirai was able to win 50% plus one vote in the first round of voting to elect Zimbabwe's president, necessitating a second round of voting on June 27th, from which Tsvangirai withdrew after more than 80 MDC supporters were murdered and tens of thousands of people displaced by violence, allegedly by ZANU-PF militia.

Zimbabwe's poor harvest is being blamed on a combination of heavy rains at the beginning of the planting season, followed by a prolonged dry spell, as well as the lack of agricultural inputs, such as fertilizers and seed, leaving farmers without food to feed themselves or any surplus to produce an income.

British cabinet minister Douglas Alexander, the Secretary of State for International Development, which promotes poverty alleviation and development in poor countries, has promised US$18 million to the World Food Programme (WFP)to provide for the millions of people expected to require food assistance. Alexander also called on Zimbabwe to lift the ban on NGOs, so that aid could reach those in need and facing starvation. The bulk of the funding will be used to provide food, but a proportion will be used to strengthen WFP monitoring systems to prevent political interference and ensure that the food is received by all those who require it.

The Food and Agricultural Organisation (FAO) and WFP crop assessment forecast, released in June 2008, projects that about 5.1 million Zimbabweans will suffer food insecurity.


July 9, 2008 in International | Permalink | Comments (0) | TrackBack (0)

Charity Sues Charity for Theft of Donor Database

A Texas-based charity, American Syringomyelia Alliance Project (ASAP), is suing two former employees and a former board member alleging theft and conversion of trade secrets for taking a copy of ASAP's database of donors. The former employees recently started a new nonprofit, Chiari and Syringomyelia Foundation, sharing the same mission as ASAP.

ASAP argues it has specific and explicit evidence that the foundation obtained possession of its property violating the Texas Theft Liability Act. ASAP is seeking an injunction ordering the foundation to return all of the proprietary and trade secret documents and information and that the foundation cease from contacting donors listed in the database.

ASAP claims the database was a closely guarded asset and is proprietary in nature. The password protected database contains donors' private personal information that is highly confidential and "invaluable for fundraising and communication to interested parties," the suit states. ASAP maintains there is no adequate remedy at law due to the nature of donation solicitations and the difficulty of connecting donations and of quantifying any change in donations.

ASAP argues it has specific and explicit evidence that the foundation obtained possession of its property violating the Texas Theft Liability Act. ASAP is seeking an injunction ordering the foundation to return all of the proprietary and trade secret documents and information and that the foundation cease from contacting donors listed in the database.

Starting 20 years ago as a grass-roots organization, ASAP helps people suffering from syringomyelia and Chiari malformations, which are conditions that affect the lower brain and spinal cord.

ASAP's website:
Chiari and Syringomyelia Foundation's website:


July 9, 2008 in In the News | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 8, 2008

Proposed Ethopian "Charities and Societies Proclamation Law" Raises Concerns

AFROL NEWS (an independent news agency dedicated to Africa) reports that Ethiopia's government has drafted a Charities and Societies Proclamation law, which it claims is a "benign attempt to promote financial transparency." However, fearing that the law is really intended to enable Ethiopia's government to monitor, restrict, and punish NGOs at its discretion, Human Rights Watch and Amnesty International released a joint statement that sought to raise awareness and spark a global response to this proposed law.

"Ethiopia's government has already made meaningful public engagement in governance impossible in many areas by persecuting its critics and cracking down on freedom of expression and assembly," said Georgette Gagnon, Africa director at Human Rights Watch.

"The clear intention of this legislation is to consolidate that trend by taking the ‘non' out of ‘nongovernmental' and putting civil society under government control."

The law would apply to every NGO operating in Ethiopia except religious organizations and those foreign NGOs that the government agrees to exempt. Many of the key provisions of the draft law would violate Ethiopia's obligations under international human rights law and fundamental rights guaranteed in its own constitution, including the right to freedom of association and freedom of expression.

Once operational, the law would impose "stiff criminal penalties" on anyone participating in "unlawful" civil society activity, accord government agencies nearly "unfettered discretion" in deciding whether to register individual NGOs, as well as define any unregistered civil society "unlawful".

It would also impose fines and prison sentences of up to 15 years for a range of new offences including participation in any meeting held by an "unlawful" organisation, subject all civil society groups to intrusive government control and surveillance and even disband legally recognised NGOs through an established Charities and Societies Agency.

The full text of the article may be read here.


July 8, 2008 in International | Permalink | Comments (0) | TrackBack (0)

NGO Forum Urges G8 to Take Immediate Action

People's Summit 2008 opened in Japan with NGO leaders asking the G8 nations to take immediate action on development and climate change.  The two fora brought together about 220 NGOs based in Japan.

During the first session, themed "To Make Poverty History," four people from Africa and Central America discussed their perspectives on development issues.  The Global Call to Action Against Poverty in South Africa pointed out that 50,000 people in the world die from preventable causes each day, and that in Africa alone, 6000 people die per day from HIV/AIDS and 7000 from malaria.  The AIDS Support Organization founder, Noerine Kaleeba, highlighted the importance of recognizing women's rights in conjunction with achieving the United Nations Millennium Development Goals, which include, among others, reducing child mortality, improving maternal health, and achieving universal primary education .

At the second session, titled "For a Sustainable Global Society," four NGO leaders from Japan, Germany, India and the Philippines addressed the need for Japan to base its political discussions about climate change on science - not sectoral interests.  This was the first time Japanese NGOs have organized fora on this scale to convey messages to G8 leaders.


July 8, 2008 in International | Permalink | Comments (0) | TrackBack (0)

L.A. Times Reincarnates United Cancer Council Issue

One of the most provocative opinions ever written regarding tax exemption, I think, is United Cancer Council v. Commissioner.  Posner -- a Supreme Court wannabe, except that he can't be pigeon-holed as conservative or liberal (i.e., he is unpredictable), waxed eloquently on the application of law and economics to the particularly non-capitalist world of nonprofit organizations.  Who'da thunk that a judge could convince us, the way Hannsman did, that nonprofit organizations ("nonprofit"!) could be explained by reference to the ways of the capitalist market.  Anyway, Posner's opinion was instrumental not only in convincing the IRS to delineate a more limited definition of "insiders" or "disqualified persons," but also the "first bite rule" under 53.4958-4(a)(3). 

Anyway, the L.A. Times recently reported on the extent to which profit-seeking professional fundraisers benefit from the operation of charities in California:

The fundraising business is growing. More than 300 fundraisers have registered in California. Since 2000, the number of campaigns and amounts raised by for-profit firms has risen by about two-thirds.  Among the charities that netted little from such campaigns were the Humane Society of the United States, the American Breast Cancer Foundation, the Christian social-action group Concerned Women for America, the National Right to Life Committee and Students Against Destructive Decisions.   Among The Times' findings:

* More than 100 charities raised $1 million or more from commercial appeals but netted less than 25 cents per dollar. Fundraisers got the rest.

* In 430 campaigns, charities got nothing: All $44 million donated went to fundraisers. In 337 of those cases, charities actually lost money, paying fees to fundraisers that exceeded the amount raised.

* In hundreds of other campaigns, charities apparently entered into contracts that limited their share of donations to 20% or less, no matter how successful the campaign.

* Groups with strong emotional or patriotic appeal -- those supporting animals, children, veterans and public safety workers, for instance -- often fared worst. Missing-children charities received less than 15% of more than $28 million raised on their behalf.

Posner's opinion in UCC v. Commissioner (law and economics sophistry, I call it) nixed the application of the private inurement/excess benefit transaction to independent contractor/fundraisers, requiring instead that the IRS rely on the amorphous and difficult to define private benefit doctrine to police nonprofits that exist primarily to benefit commercial fundraisers.  If for no other reason than to protect donor trust, the law needs to better police the relationship between professional fundraisers and the nonprofits on whose behalf those PFR's incessantly call our houses.  The charitable community should join in this effort.

Hat tip to Nonprofit Board Crisis Blog.


July 8, 2008 in In the News | Permalink | Comments (0) | TrackBack (0)

Senator Grassley's Memorandum Re Investigation of MegaChurches

Last night Senator Charles Grassely released a lengthy and detailed memorandum regarding his ongoing investigation of certain church financial practices.  In brief, the memorandum describes Grassley's concerns, his support of self-regulation of the nonprofit sector, cooperative and uncooperative responses from some churches, witness intimidation by others, lavish parties by other tax exempt organizations, "foot-dragging" Washington D.C. law firms employed by some of the churches and Grassley's intent to press on with the investigation until satisfactory responses are obtained.  The witness intimidation is said to have occured because some churches have called employees to remind them they are subject to confidentiality agreements and that legal action would be taken in case those employees violated those agreements. 


July 8, 2008 in Federal – Legislative | Permalink | Comments (0) | TrackBack (0)

Monday, July 7, 2008

California squares off for bingo fight

A federal judge last week permitted California charities and nonprofits to operate electronic bingo machines while litigation occurs to nail down their legal status. The nonprofits and charities say the electronic bingo machines are needed to gain the audience and income lost when Indian casinos opened in the 1990s.

Although Indian gaming has grown rapidly into an $8 billion industry in California, the potential for electronic bingo may be even greater for two reasons – an almost unlimited number of charities and nonprofits could operate downtown bingo halls.

“It's an extremely dangerous development, because if it's not stopped in its tracks soon, it's going to lead to slot machines in urban areas,” said Howard Dickstein, an attorney who represents several big gaming tribes including Pala of San Diego County.

Any nonprofit or charity could seek to establish a bingo operation, he said.

“There could be hundreds, if not thousands, of them in urban areas across the state.”

In contrast, Indian gaming is restricted for the most part to the remote reservations of California's 108 federally recognized tribes.

The judge granted a preliminary injunction, which was based on the fact that the law has not been interpreted yet. He also questioned the motives of the attorney general. “This is all about a political process that is pushing the attorney general to enforce its interpretation of the law,” according to U.S. District Judge John A. Mendez.

The full text of the article may be read here.


July 7, 2008 in In the News | Permalink | Comments (0) | TrackBack (0)

Habitat for Humanity of San Antonio Settles Lawsuit Against Habitat for Humanity International

Habitat for Humanity of San Antonio settled its lawsuit against the international organization, Habitat for Humanity, agreeing to remain under the housing charity's umbrella for at least the next three years.

Habitat for Humanity of San Antonio sued the international organization in January, afraid that a new affiliate agreement being imposed on more than 1,600 U.S. chapters could give the international group the power to force local chapters to give up larger portions of their donations. The San Antonio chapter agreed to remain part of the international group for the next three years and will be exempt from any changes to the affiliate agreement, including imposition of larger fees or tithes, during that time.

Each Habitat chapter operates as an independent nonprofit raising money, organizing volunteers and selecting families for low-income housing. The homes, sold to families with no-interest loans, are mostly built by volunteers.

The chapters share the name, grant and training programs, and are asked to give 10% of their revenues to Habitat affiliates overseas. But the 10% tithe has been only a guideline, and the San Antonio affiliate historically has given about 1% to the overseas groups, allowing it to build more houses locally.

Even if the San Antonio group ends its relationship with the international group, the San Antonio group will still retain the title to all its property and assets and keep control of its donor list.

Duane Bates, a spokesman for the international organization, said it has no plans to change the existing affiliate agreement and that most affiliates have signed it.  For prior coverage of the suit, including a copy of the complaint see here.


July 7, 2008 in In the News | Permalink | Comments (0) | TrackBack (0)

Another State Supreme Court, Massachusettes, tackles definition of "charitable" when an organization charges fees for service

In New Habitat, Inc. v. Tax Collector of Cambridge (Jul 3, 2008), the Massachusettes Supreme Court reversed a lower court's denial of tax exemption to an organizations whose services were made available solely to those who paid fees for services.  The interesting discussion essentially concludes that the closer an organization's purposes are to traditional charity (whatever that is), the less important it is that the organization offers no free or reduced costs goods or services:

To determine whether an organization is charitable, the court weighs a number of  determinative factors.  These factors include, but are not limited to, whether the organization provides low-cost or free services to those unable to pay, see New England Legal Found. v. Boston, supra at 610; whether it charges fees for its services and how much those fees are, see Assessors of Boston v. Garland Sch. of Home Making, 296 Mass. 378, 390 (1937); whether it offers its services to a large or "fluid" group of beneficiaries and how large and fluid that group is, see New England Legal Found. v. Boston, supra at 612; Cummington Sch. of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 601 (1977); whether the organization provides its services to those from all segments of society and from all walks of life, see Harvard Community Health Plan, Inc. v. Assessors of Cambridge, 384 Mass. 536, 544 (1981); and whether the organization limits its services to those who fulfil certain qualifications and how those limitations help advance the organization's charitable purposes, see Western Mass. Lifecare Corp. v. Assessors of Springfield, supra at 103-104; Boston Symphony Orchestra, Inc. v. Assessors of Boston, supra at 256.  The significance of these factors depends in no small part on the dominant purposes and methods of the organization.  The closer an organization's dominant purposes and methods are to traditionally charitable purposes and methods, the less significant these factors will be in our determination of the organization's charitable status under G. L. c. 59, § 5, Third.  See Boston Chamber of Commerce v. Assessors of Boston, supra at 718. 

The farther an organization's dominant purposes and methods are from traditionally charitable purposes and methods, the more significant these factors will be.  See id. ("the more remote the objects and methods become from the traditionally recognized objects and methods the more care must be taken to preserve sound principles and to avoid unwarranted exemptions from the burdens of government"); Institute of Gas Tech. v. Department of Revenue, 289 Ill. App. 3d 779, 787-788 (1997) (court considers "the remoteness of the nature of [organization's projects] from traditional notions of charities" in determining organization's tax exempt status).

Consistent with these principles, we consider the charging of fees to be more significant the farther the organization's dominant purposes and methods are from traditionally charitable ones.  See Western Mass. Lifecare Corp. v. Assessors of Springfield, supra at 104-106 (organization was not charitable where it charged fees and did not have traditionally charitable purposes and methods); Boston Symphony Orchestra, Inc. v. Assessors of Boston, supra at 256 (same).  On the other hand, we consider the charging of fees to be less significant the closer the organization's dominant purposes and methods are to traditionally charitable ones.

The opinion is most significant because it concerns a residential health care organization that provides long term assisted living goods and services to persons who have suffered serious brain injury.  That the case considers health care "traditionally charitable", even when provided exclusively to those able to pay, has implications for tax exempt hospitals, some of whom have huge endowments and provide relatively little free or reduced cost goods and services.  The court even went on to specifically disavow previous opinions that suggested that free or reduced cost goods and services is a significant factor in defining charitable.

Previous cases contain language suggesting that the charging of a substantial fee, in itself, might render an organization not charitable under G. L. c. 59, § 5, Third.  To the extent that those cases can be read to support such a proposition, we decline to follow them.  It should be noted, however, that the results in those cases are fully in line with the result reached here and with the principles articulated in this decision.

I suppose there are certain activities enjoyed exlcusively by those able to pay that can still be considered charitable (though I find it hard to imagine what those activities are); eventually, we are going to have to satisfactorily explain the logic of granting a tax subsidy to an activity involving the provision of goods and services exclusively at market rates.  Reliance on an alleged definition of those things "traditionally charitable" seems unsatisfactory and circular because "traditional charity" necessarily involves alms to the poor.


July 7, 2008 in State – Judicial | Permalink | Comments (0) | TrackBack (0)

Sunday, July 6, 2008

Channeling Compassion and Enlightened Self-Interest To Help The Bottom Billion

In a talk given for TED in February 2008, Paul Collier - director of the Centre for the Study of African Economies at Oxford (and former director of the World Bank’s Development Research Group) – discusses ways in which the gap between the developed world and the “bottom billion” can be closed.

His thesis for the bottom billion is that a billion people are stuck in economies which have been stagnant for 40 years. He believes by channeling compassion and “enlightened self-interest” we may offer hope to these people and avoid giving future generations a “nightmare.” “We need compassion to get ourselves started, and enlightened self-interest to get ourselves serious,” says Collier. “That’s the alliance that changes the world.”

As part of his discussion, he looks at some of the decisions which prevent commodity-rich countries from making sustained economic progress. In addition, he discusses the impact of democracy and governance in developing countries, and proposes solutions to help guide international assistance. The full talk may been seen here.


July 6, 2008 in International | Permalink | Comments (0) | TrackBack (0)

Putin Cuts Tax Benefits for Foreign NGOs

Last Thursday, Prime Minister Vladimir Putin reduced the number of foreign non-profit organizations eligible for tax benefits on grants.  As the Kommersant newspaper reports, a list of 101 privately-funded organizations has been cut down to only 12 groups. The resolution may mean fewer grants and programs in Russia, and may force some organizations to close their offices entirely.  Groups will now have to pay a steep tax on foreign funding given as grants.  NGOs in Russia say they are already hobbled by a 2005 law requiring burdensome reporting and registration practices.

The decree is set to take effect on January 1st, 2009.


July 6, 2008 in International | Permalink | Comments (0) | TrackBack (0)