July 19, 2008
Keith Blair: Churches, Political Speech and Tax Exemption
Keith Blair will soon publish Praying for a Tax Break: Churches, Political Speech and The Loss of Section 501(c)(3) Tax Exempt Status. Here is the interesting abstract:
Churches in the United States, like individuals, are free to speak on any issue that they choose. However, if a church wishes to retain tax-exempt status, it must comply with the requirements of Section 501(c)(3) of the Internal Revenue Code. One of those requirements is that churches may not participate or intervene in political campaigns. Some churches, however, believe that their mission includes not just traditional religious teachings, but guidance on issue that affect the lives of their parishioners including politics. Those churches believe they are fulfilling their faith and mission when they offer this guidance.
This has caused a tension between the Internal Revenue Service, which must enforce the tax laws, and churches that feel that it is part of their mission to speak out on social issues of the day, which may include political issues. With the 2008 U.S. Presidential election already in full swing, this issue has become more visible and more contentious.
This paper examines the issues involved in churches, political speeches and tax-exempt status. It will propose that a limited exception be created for churches so that they may speak freely on all issues to their congregants, including politics, during regularly scheduled religious services.
Urban Institute Reports on the Peculiar Needs and Challenges Facing Mid-Size Nonprofits
Francie Ostrower recently wrote, "Boards of Mid-Size Nonprofits: Their Needs and Challenges" for the Urban Institute. The report discusses the peculiar needs and challlenges facing boards of mid-sized nonprofit organizations. Here is the Inroduction:
Nonprofit boards are increasingly a focus of those interested in nonprofit accountability and transparency, including policymakers, the media, researchers, and the public. Yet most of the research has focused on boards of large nonprofits. Likewise, policy proposals and best practice guidelines often seem designed with large organizations in mind, raising concern among representatives of smaller organizations who feel the proposals may be inappropriate for their institutions. This brief helps fill a major gap in our understanding by focusing on governance among midsize nonprofits, identifying certain problem areas and suggesting strategies that trustees, managers, and others engaged with midsize nonprofits may find helpful in strengthening their boards.
The discussion uses data from our Urban Institute National Survey of Nonprofit Governance, the first national representative survey of governance in the United States. This brief focuses on the subset of 1,862 organizations in that survey that have annual expenses between $500,000 and $5 million, hereafter referred to as “midsize” nonprofits. Nonprofits in this size range make up approximately one in five public charities that file the Internal Revenue Service Form 990 (Pollak and Blackwood 2007). This report was funded by the Evelyn and Walter Haas, Jr. Fund, who asked that we employ our survey data to examine this subset of nonprofits. We also refer at points to our survey data on 1,101 larger nonprofits for purposes of comparison.
Comparing midsize nonprofits with their larger counterparts, we find that their boards are less engaged in many basic stewardship responsibilities. Midsize nonprofits’ boards also have greater difficulty attracting new members. These comparisons underscore the need for efforts targeted at midsize nonprofits to help them strengthen their governance. This paper highlights areas in which that need seems greatest and suggests some strategies that may help. In particular, the brief addresses the following broad questions:
- How actively engaged are midsize nonprofits’ board members, and what factors promote greater engagement?
- How well do midsize nonprofits perform various responsibilities, and what factors promote stronger performance?
- Who serves on midsize nonprofits’ boards, and what populations might they target to expand their pool of potential members?
The paper also contributes to a recent discussion about the leadership crisis in the nonprofit sector sparked by the Daring to Lead study (Bell, Moyers, and Wolfred 2006). The study found that a high percentage of CEOs plan to leave their job and pinpointed frustration with board performance, particularly in the fundraising arena, as a key reason. Our findings on CEO ratings of their board’s performance in fundraising resonate with the study and highlight other areas where CEOs view boards poorly. More broadly, our study leads to a more general conclusion: discussions about nonprofit leadership challenges, now focused on CEOs, should be expanded to include boards. Our findings on levels of board engagement strongly suggest that unless measures are taken to strengthen boards and help them attract members—and unless boards start taking a more active role in monitoring their own performance—it is unlikely that they will be able to offer the assistance to CEOs and the effective oversight and governance that they are being called upon to give.
Dr. Ostower also wrote an interesting summary/op-ed piece for the Chronicle of Philanthropy. Both the report and the op-ed, entitled "A Better Way to Deal With the Leadership Crisis" are well worth reading.
July 18, 2008
OMB Watch Publishes Paper on Impact of War on Terror on Charities
OMB Watch has published a paper about the impact of the war on terror on charities worldwide. OMB Watch describes itself on its website as "a nonprofit government watchdog organization located in Washington, DC" with a mission "to promote open government, accountability and citizen participation." Here is the OMB Watch July 14, 2008, press release about the paper:
OMB Watch and Grantmakers Without Borders today released a paper that comprehensively documents the impacts that the war on terror is having on charities, foundations, and underserved populations around the globe. Titled Collateral Damage: How the War on Terror Hurts Charities, Foundations, and the People They Serve, the paper makes clear that shortsighted, undemocratic policies are constraining the critical activities of the charitable and philanthropic sectors, stifling free speech, and ultimately impeding the fight against terrorism.
According to OMB Watch and Grantmakers Without Borders, the current U.S. counterterrorism framework is not working well when it comes to U.S. nonprofits. Rather than recognizing the sector as a valuable ally in the war on terror, government unfairly characterizes nonprofits as conduits for terrorist funding and a breeding ground for aggressive dissent.
Kay Guinane, Director of Nonprofit Speech Rights at OMB Watch, noted that the current approach to counterterrorism as it relates to nonprofits and foundations is ultimately counterproductive. Guinane said, "Because of the federal government's outdated policy, U.S. nonprofits operate within a legal regime that harms charitable programs, undermines the independence of the nonprofit sector, and weakens civil society."
Vanessa Dick, Advocacy Coordinator at Grantmakers Without Borders, explained that the government is not targeting its counterterrorism efforts properly. She noted, "The counterterrorism framework set in place after the attacks of Sept. 11, 2001, has unfortunately been abused by the executive branch and some in Congress. Instead of focusing on reducing or eliminating poverty, inequality, oppression, strife, and other root causes of terrorism, the government has lobbed unfounded accusations at the nonprofit sector and has inaccurately claimed that charities are a significant source of terrorist funding."
Among the issues covered in the paper, the authors assert that current counterterrorism policies are based on a flawed legal regime and broad, vague definitions; the policies rely on flawed assumptions about terrorism and nonprofits; and the policies are abused by the government to engage in unconstitutional, political use of surveillance powers. The authors then provide a number of recommendations for how the government can both effectively combat terrorism and protect the ability of the nonprofit sector to carry out its crucial work throughout the world.
Jim Harper, Director of Information Policy Studies at the Cato Institute, said the paper offers valuable insight and perspective. " Terrorism is a strategy designed to elicit self-injurious over-reaction," noted Harper. " Collateral Damage makes the case that it’s having precisely that effect in the area of international charity. For only a remote chance of affecting terrorist activity, the U.S. counterterrorism regime may be interfering with charitable work that would weaken the impetus for terrorist activity in the first place. That’s penny-wise and pound-foolish."
Professor David Cole, a constitutional law expert at the Georgetown University Law Center, added, "The legal regime employed in the name of cutting off terror financing gives the executive branch a "blank check" to blacklist disfavored individuals and groups, imposes guilt by association, and lacks even minimal attributes of fair process. Yet it is probably the least understood of all our anti-terror initiatives. This report does a great service in shedding light on a critically important issue."
Guinane concluded, "In order to preserve the rights of all nonprofit organizations, and indeed, the rights of all people, all levels of government must conduct their counterterrorism activities in a way that consistently protects liberty and civil society. Otherwise, Americans and others lose safeguards that were designed to protect us all from creeping tyranny."
For the text of the paper, see "Collateral Damage: How the War on Terror Hurts Charities, Foundations, and the People They Serve" on the OMB website.
Israeli Crackdown on Charities with Suspected Hamas Links
On July 18, 2008, the Washington Post reported that Israeli forces are raiding charitable and social organizations suspected of having links to Hamas. Here is an excerpt from the article:
The operation was part of a much broader crackdown that Israel has recently initiated in the occupied West Bank against Hamas's extensive social services network. While Hamas is probably best known for its military wing -- which champions attacks against the Jewish state -- it is the group's sponsorship of schools, medical centers, orphanages and food banks that gives it much of its power and helped it sweep Palestinian elections in 2006.
With a fragile truce holding in Gaza, Israel has turned its attention to undercutting Hamas's charity work in the West Bank. The effort is needed there, Israel contends, to keep the group from seizing power from the more pragmatic Fatah-led Palestinian Authority, much as it did in Gaza last year.
But the raids have also sown resentment and have put the Palestinian Authority in an awkward spot: Although Hamas is seen by Fatah leaders as a mortal threat, it also provides valuable services that the Palestinian Authority can't easily replicate. Every time Israel cracks down and closes a school or a medical center, it leaves a void that makes people more dissatisfied with the Authority.
For the entire article, see "Unease Over West Bank Raids: Israeli Crackdown on Charities Problematic for Palestinian Authority" in the July 18, 2008, issue of the Washington Post.
New Jersey Supreme Court Defines "Hospital Purposes" with regard to exemption of Nonprofit Hospital's Offsite Wellness Center
Nonprofit hospitals are often characterized as greedy claimants of tax exemption for an expansive range of activities and facilities only loosely associated with their actual treatment facilities. Here, though, is a case where a hospital deserves credit for restraint with regard to its claim. In Hunterdon Medical Center v. Township of Readington (July 14, 2008), the New Jersey Supreme Court reversed and remanded an appellate court's decision that a hospital's off-site facility, at least one third of which housed a health center (with a pool, indoor track, a rock climbing wall, stairmasters, treadmills, and all sorts of aerobic equipment and weights) open to the public via membership dues, was not entitled to property tax exemption. The off-site facility also housed a physical therapy center and a cardio-pulmonary center used to treat hospital patients. The revocation of its property tax exemption cost the hospital $3.3 million and provided an opportunity for the Court to define "hospital purposes" as they relate to exemption of ancillary facilities. The Jersey Supreme Court stated that the following test should be applied in determining whether a hospital's ancillary facility is used for "hospital purposes:"
1. The nature and extent of the services provided at the off-site location;
2. The extent to which the activity conducted in the facility is under the control or supervision of the hospital medical staff, or personnel;
3. Whether the facility serves primarily hospital patients and employees or primarily members of the general public.
Two additional considerations should be included in the analysis under factor three above when the hospital’s off-site activity is not one for which the hospital has been licensed to perform off site by regulatory authorities. See, e.g., N.J.A.C. 8:43G-2.11(c). Although neither should be treated as dispositive, they are: (1) whether the facility competes with like commercial or privately owned facilities; and, even if the answer to (1) is in the affirmative, (2) whether the facility, or the particular disputed part, is actually used predominantly by patients and hospital employees or by commercial members.
The Court determined that the lower court's test to determine whether a hospital's off-site facility was actually used for "hospital purposes" was too restrictive for purposes of the state's property tax exemption for charitable activitiies, and did not sufficiently take into account modern day health care:
In our view, the analysis for “hospital purposes” must take into consideration the many medical pursuits permitted to the “modern” hospital in New Jersey. A hospital can no longer be restrictively equated with a nineteenth, or even twentieth,century vision of a monolithic building, in which is offered continuous inpatient care or emergency treatment, twenty-four hours per day, to the sick, disabled, and infirm. Licensing authorities have allowed hospital activities to evolve as inpatient stays have diminished. Today, treatment often is delivered on an outpatient basis at a hospital’s main facility, as well as at off-site facilities, backed up by the promise of ready inpatient care from the general, acute-care hospital when necessary. Thus, a fair definition of core “hospital purposes” must acknowledge the variety of activities that a modern hospital can be expected to perform for patients, be they inpatients or outpatients. That said, a hospital’s expansive view of its mission does not necessarily equate with “hospital purposes” in the tax exemption analysis.
All of this seems perfectly reasonable to me, at least in theory. But the application of a perfectly reasonable-sounding analysis with regard to health care, I think, has brought us to the present situation that seems to allow even altogether commercial fitness centers to attain tax exemption by association with a treatment facility, even as the market provides such services in more than sufficient supply. It would have been interesting, as a purely academic matter, to have seen how the appellate court applied the new analysis to the hospital's members-only fitness center occupying the first floor of the facility. In fact, the hospital might have argued for exemption for its fitness center. Other nonprofit hospitals have, haven't they? And successfully too. But the Court let stand that part of the lower court's opinion denying property tax exemption for the fitness center. Apparently, (and surprisingly too) this hospital's cert petition conceded the taxability of the fitness center (see footnote 17 of the opinion). We might speculate that the concession was motivated by the desire to maintain credibility with respect to its legal arguments. In any event, the hospital certainly deserves credit for the concession.
Horowitz and Meade on Volunteer Immunity Laws
Jill Horowitz and Joseph Meade have posted Letting Good Deeds Go Unpunished: Volunteer Immunity Laws and Tort Deterrence. Here is the abstract:
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.
July 17, 2008
Jennifer Lynn Bell Publishes "Terrorist Abuse of Non-profits and Charities: A Proactive Approach to Preventing Terrorist Financing"
Jennifer Lynn Bell (Goodwin Procter LLP) published "Terrorist Abuse of Non-profits and Charities: A Proactive Approach to Preventing Terrorist Financing," an article arguing that the government should adopt a more proactive role in monitoring terror financing via non-profit organizations. Here is an excerpt:
The Bush administration reports that more than $139.1 million in assets were frozen worldwide, including $36.7 million in the U.S., and an additional $64 million in terrorist related assets were seized by authorities globally between September 11, 2001 and January 2004. As of the Fall of 2002, $7.3 million was seized from charities that U.S. investigators believe were linked to al-Qaeda or other terrorist organizations and $5.7 million was frozen internationally by countries concerned that “spurious charitable organizations” were functioning within their borders. Based on figures from the Department of Justice, one scholar suggests that Al-Qaeda received approximately 30% of its financial resources from donations solicited in the United States and abroad. As of September 2006, the Treasury Department identified 43 charities worldwide and 29 associated individuals as Specially Designated Nationals (“SDN”) for their support of terrorist organizations and operations. The Treasury Report found that “these seventy-two charities and individuals comprise over fifteen percent of all U.S.-designated terrorist supporters or financiers, indicating the primary importance of charities as a critical means of support for terrorist organizations and activities.”
This article argues that the government should adopt a more active role in monitoring terror financing via non-profit organizations. Part I of this paper addresses the problem of non-profit organizations and terror financing while summarizing the purpose of tax exemption and advantages of operating as a non-profit organization. Additionally, it briefly defines terrorism and terror financing. Finally, it introduces the relationship between terror financing and non-profit organizations. Part II discusses the current government's counter-terrorism regulations most relevant to non-profit organizations and the flaws of these initiatives. Part III addresses the need for modification of existing regulations and proposes several proactive initiatives to reduce the revenue stream flowing through non-profits to finance terrorist operations without incapacitating legitimate charitable organizations.
For the entire article, see "Terrorist Abuse of Non-profits and Charities: A Proactive Approach to Preventing Terrorist Financing," 17 Kan. J.L. & Pub. Pol'y 450 (2008).
Chairman Rangel's Charity Fundraising Under Scrutiny
On Tuesday the Washington Post reported that Representative Charles B. Rangel, Chairman of the House Ways and Means Committee, used his congressional stationary to solicit donations from corporations and foundations for a center that will bear his name and house his papers when he retires. The center will be located at the City College of New York. Chairman Rangel responded to concerns that some of those solicited have business before the Ways and Means Committee but noting that he never discusses congressional matters with potential donors, and today's Washington Post reports that he has announced he would welcome an ethics committee investigation into his fundraising efforts.
Tying Donations to Political Causes
On July 17, 2008, the New York Times reported that a donation by a hotel owner (Doug Manchester) to support a ballot initiative to ban same sex marriage in California has resulted in a boycott of two of the donor's San Diego area hotels. Here is an excerpt from the article:
Fred Karger of Californians Against Hate, an organization he started to organize the boycott of Mr. Manchester’s two San Diego hotels, said his goal was to call attention to San Diego as a major source of money for supporters of Proposition 8 and to focus on Mr. Manchester as a formidable donor.
According to a report by Secretary of State Debra Bowen’s office, more than $750,000 of the $2.3 million raised by Proposition 8 supporters has come from San Diego donors.
“Our main beef is the exhaustive amount of money he contributed with glee to take away this brand-new right and to write discrimination into the California Constitution for the very first time,” Mr. Karger said.
Mr. Manchester said Wednesday: “This really is a free-speech, First Amendment issue. While I respect everyone’s choice of partner, my Catholic faith and longtime affiliation with the Catholic Church leads me to believe that marriage should be between a man and a woman.”
For the entire article see "Donation to Same-Sex Marriage Foes Brings Boycott Calls" in the July 17, 2008, issue of the New York Times.
Regulatory Trouble at Red Cross
On July 17, 2008, the New York Times reported that the Food & Drug Administration continues to have concerns about the American Red Cross' blood collection activities. Though the Red Cross is well known for its half a billion dollars per year in disaster aide, it actually generated more than $2 billion last year in revenue from its blood collection activities. In fact, according to the NYT, the Red Cross controls more than 43% of the nation's blood supply. Here is an excerpt from the article:
The problems, described in more than a dozen publicly available F.D.A. reports — some of which cite hundreds of lapses — include shortcomings in screening donors for possible exposure to diseases; failures to spend enough time swabbing arms before inserting needles; failures to test for syphilis; and failures to discard deficient blood.
In some cases, the lapses have put the recipients of blood at risk for diseases like hepatitis, malaria and syphilis. But according to the food and drug agency, the Red Cross has repeatedly failed to investigate the results of its mistakes, meaning there is no reliable record of whether recipients were harmed by the blood it collected.
For the entire article see "Problems Persist with Red Cross Blood Services" in the July 17, 2008, issue of New York Times.
July 16, 2008
Vision Service Plan Hires Ken Starr to Prepare Cert. Petition
The New York Times reports today that Vision Service Plan plans to file a petition for certiorari with respect to the 9th Circuit's unpublished opinion (Lexis access required) earlier this year affirming the IRS' revocation of its 501(c)(4) status. Click this: Download vision_service_plan_v. United States (District Court).rtf for a copy of the district court opinion. Click this: Download vision_service_plan_v. United States (9th Circuit, 2008).rtf for a copy of the 9th Circuit opinion. According to the Times article:
The proposed filing, by VSP Vision Care of Rancho Cordova, Calif., highlights a major debate in the nonprofit arena over what activities deserve tax exemption when most nonprofit groups charge fees for services and products to supplement their income from charitable donations. Nonprofit health care providers in particular have struggled to distinguish themselves from their for-profit counterparts in recent years as federal lawmakers have questioned why they deserve tax exemptions. State courts have also stripped exemptions from nonprofits, like substance abuse centers and nursing homes, saying they were no different from tax-paying companies providing similar services. “We think this case calls into question the tax-exempt status of a number of tax-exempt organizations,” VSP’s general counsel, Thomas Fessler, said Tuesday. “It’s not just VSP at risk here. It’s other hospitals, other health-maintenance organizations, nursing homes, clinics — there’s a lot of confusion out there.” Lawyers specializing in nonprofit legal matters agreed, but said they still doubted that the Supreme Court would hear the challenge.
Naturally, counsel for VSP overstates the importance of the case and, indeed, his client's legal position. According to one provocative online op-ed, VSP might have been the poster child for what's wrong with granting tax exempt status to health organizations exclusively engaged, or practically so, in fee for service health care. On the other hand, the VSP website states that the organization's community involvement is extensive, including "a national program that provides free eyecare services to low-income and uninsured children, to a paid volunteer program that enables our employees to support worthy causes." The organization claims that it has provided 410,000 low income children free eyecare since 1997. Counsel for VSP may very well have a point, then, in arguing that the case should not have been decided at the summary judgement stage. If their website can be believed, there seems to be as much community benefit derived from VSP as any other nonprofit, tax exempt health care organization. Of course, those mammoth salaries and bonuses -- and apparently unprepared depositions -- referred to in the online op-ed didn't help their case. It may very well be the case that the case was lost because the organization just didn't make a good record during the pretrial stage.
July 15, 2008
Grassley Demands From Nonprofit Association Accounting of its Financing from Pharmaceutical Industry
On July 12, 2008, the New York Times reported that Senator Grassley is asking for an accounting of financial and other arrangements between the nonprofit American Psychiatric Association and the pharmaceutical industry. Here is a quote from the article:
“I have come to understand that money from the pharmaceutical industry can shape the practices of nonprofit organizations that purport to be independent in their viewpoints and actions,” Mr. Grassley said Thursday in a letter to the association.
In 2006, the latest year for which numbers are available, the drug industry accounted for about 30 percent of the association’s $62.5 million in financing. About half of that money went to drug advertisements in psychiatric journals and exhibits at the annual meeting, and the other half to sponsor fellowships, conferences and industry symposiums at the annual meeting.
This weekend in Chicago, the psychiatry association’s board will meet behind closed doors, in part to discuss how to respond to the increasingly intense scrutiny and questions about conflicts of interest.
For the entire story, see Psychiatric Group Faces Scrutiny Over Drug Industry Ties in the July 12, 2008, issue of the New York Times.
New Study On Marketing by Nonprofits
A new study by Lipman Hearne and the American Marketing Association attempts to "provide the nonprofit industry with benchmark data on challenges, priorities, budgets, staffing, strategies and spending to guide decisionmaking about marketing." Beginning in May 2008, Lipman and AMA contacted marketing professionals at a number of different types of nonprofits. The results of the study show that nonprofit marketers are working "hard to build awareness and engage their constituents, often with limited resources and limited metrics. But as experienced marketers— often with years of for-profit marketing experience—they are doing so with creativity and an eye to ensuring that their missions get the attention they deserve." Here are the study's findings:
Finding #1: Building awareness, generating revenue, branding and acquiring and retaining members and customers are top marketing priorities for nonprofit organizations.
Finding #2: Public relations, community relations and customer and member relations are considered the most effective strategies to build awareness and visibility.
Finding #3: The nation’s nonprofit marketers are limited when it comes to measuring the effectiveness of marketing programs. They track event participation, overall revenue and member recruitment, but are less satisfied with their ability to measure the impact of advertising, search engine optimization, earned media and web traffic, among others.
Finding #4: Five years from now, marketers believe that they will be challenged to generate revenue, enter new markets and channels and leverage the web more effectively. Organizations with more than $20 million in operating budgets expect to focus on branding and positioning.
Finding #5: Marketing spending for half of nonprofits is small, reflecting the small size of most organizations.
Finding #6: Marketing departments share responsibility throughout the organization—even in areas of marketing priorities.
For the entire study, see "The State of Nonprofit Marketing: A Report on Priorities, Spending, Measurement and the Challenges Ahead" (available at http://www.lipmanhearne.com/nonprofitreport/).
Number of Car Donations Drops By Two Thirds After 2004 Law Change
On July 14, 2008, Grant Thornton announced in a press release that the number of car donations has dropped by two-thirds and the amount of deductions claimed from these donations has dropped by nearly 80% since the 2004 law change that restricted such donations to charity. Here is an excerpt from the press release:
Recently released IRS statistics reveal the 2004 law had an immediate and drastic affect on car donations. An analysis of the new numbers by Grant Thornton’s National Tax Office shows that between tax year 2004 and 2005, car donations of over $500 dropped by two-thirds.
Over 900,000 tax returns claimed deductions for donated automobiles in 2004. In 2005, the last year for which the IRS has detailed data, less than 300,000 tax returns included such claims.. The total amount deducted for all car donations declined from $2.4 billion in 2004 to just a half a billion dollars the following year, a decrease of over 80 percent.
For more information on the press release, see "New tax laws dry up car donations" on the Grant Thornton, LLP website.
HAT TIP to Tax Prof Blog for this.
Robertson v. Princeton Lead Plaintiff: "Its the [donor trust] economy stupid!"
William Robertson, the lead plaintiff in what has been termed the most import donor intent lawsuit ever to face the nonprofit community has penned an op-ed in today's Modesto Bee regarding the long term effects of the bear economy on nonprofits. In the editorial, Robertson notes that nonprofits -- like the rest of the economy -- will recover from cyclical economic downturns. On the other hand, the loss of donor trust provoked by mismanagement, poor governance and outright fraud may never be recovered:
Several prominent nonprofit organizations in recent years have acted in ways that undermine public confidence. Greed, mismanagement and in some cases outright dishonesty by officials of these organizations have created doubts in the minds of many donors whether charitable giving is the best way to use scarce resources. Eventually this growing unease will exact a price. While the economy will recover, recovering lost trust could prove a far-more difficult matter. While we are not yet at the crisis stage, recent survey data confirm the depth of the problem. An October 2007 Contribute Magazine/Harris Interactive survey of 3,040 adults showed a disturbing 59 percent more concerned today than they were a decade ago that their charitable donations are not being used effectively. A nearly equal number of respondents - 56 percent - expressed growing concern about the "misuse of funds." Nearly half of the respondents (49 percent) were worried about "unnecessary administrative overhead." And 46 percent said they are increasingly concerned about "fraud or theft of funds."
No doubt correct, even if Robertson uses the rest of the op-ed piece to argue his case against Princeton and a host of other educational institutions:
In higher education alone a long list of schools has been involved in "donor intent" disputes in recent years: Boston University, Harvard, Randolph College, Tulane University, Yale, UCLA, the University of New Mexico, the University of South Dakota, the list goes on. It's hard to tell what effect these kinds of incidents, and the resulting loss of trust, have had on fundraising. We have no way of knowing how many donors have dropped off the "major donors" lists or how many millions Princeton and other institutions didn't get that they otherwise would have gotten, but those numbers could not be inconsequential. After the shakeout from all of this, charity's bottom line will change. Income will no longer depend solely on the good deeds nonprofits claim to do, but whether the organizations have earned the public's trust. When they lose that trust, as Princeton is doing, they eventually will pay a significant price, good economy or bad.
The orignial complaint in Robertson v. Princeton, filed July 17, 2002, charges the University-Designated Trustees of the Robertson Foundation – and through them Princeton University – with ignoring the donors’ intent by failing to honor the Robertson Foundation’s mission, by using Robertson Foundation funds without the Family-Designated Trustees’ consent, and by trying to transfer management of Robertson Foundation investments to the Princeton Investment Co. The amended complaint, filed November 12, 2004, charges the University-Designated Trustees of the Robertson Foundation – and through them Princeton University – with wrongfully spending more than $100 million of the Robertson Foundation’s money on programs, projects, salaries and bonuses, buildings, equipment and “overhead” costs that have little or nothing to do with the Robertson Foundation mission, engaging in an elaborate cover-up scheme to hide the improper spending, and misusing other donors’ gifts. There have been several rulings issued in the still pending case, all of which are available from the plaintiff's website.
A lot has been written about the obligation, legal and practical, to maintain a donor's trust. What obligations do donors (and their spoiled entitled heirs) have to maintain the trust of the donee?! Or are nonprofits just to take the money, shut up and do what they are told? In what admittedly should not be described as a disinterested white paper, Victoria Bjorklund (whose firm is counsel to Princeton University) argues that the plaintiffs' ultimate objective is to regain control of the trust corpus in an effort to create a private foundation whose goals are more consistent with plaintiff's (rather than the university's) academic judgement. She states rather clearly that the case raises the issue of the extent to which a donor's gift ought to limit a university's academic freedom.
In truth, Plaintiffs’ objective is to convert the Robertson Foundation to a private foundation controlled by their family. The relief sought in their complaint is for the Court to amend “the Certificate of Incorporation and By-Laws of the Robertson Foundation . . . to make the Robertson Foundation a private foundation with all of its Trustees appointed by the Robertson Family. . . Many of the claims asserted by the Robertson Plaintiffs implicate the doctrines of “academic freedom” and “academic abstention.” Academic freedom, although somewhat vaguely defined in the case law, refers at its most basic level to the First Amendment right of colleges and universities to be free from unwarranted interference from outside parties into academic and educational endeavors. The four “essential freedoms” are “who may teach, what may be taught, how it shall be taught, and who may be admitted to study.”
The Bjorklund paper goes on to assert that Robertson wants to select the faculty, the terms of the faculty appointments, the curriculum, the students, and the Woodrow Wilson School's [that part of Princeton to which the gift was directed] research agenda.
This is a fascinating case, bound to make important legal headlines. In the meantime, I'll say this. If you want to buy and run your own dadgum charity, do it right in the first place. Start your own private foundation. Better yet, open your own private school. You can't invest in an ongoing venture (to use a term from the for-profit worl) and then expect it to bend to your will, the way a T-Boone Pickens shareholder can control a for-profit company. There is no such thing as a hostile takeover in the nonprofit world. Is there???
Maryland State Insurance Commission Nixes Nonprofit CEO's $18 Million Severance Package
The Maryland State Insurance Commission, in the wake of Richard Grasso's successful defense of his $180 million salary from the nonprofit New York Stock Exchange, has determined that the former CEO of Carefirst BlueCross BlueShield, a Maryland, state-chartered nonprofit health insurance organization, is not entitled to the $18 million severance package the nonprofit's board approved for him. Instead, according to an article in the Baltimore Sun, the former CEO is entitled to only $9 million.
Maryland's top insurance regulator ruled today that William L. Jews is only entitled to half of his almost $18 million retirement and severance package from Carefirst BlueCross BlueShield, saying the former chief executive abandoned the insurer's nonprofit mission during his final years as chief executive. In a 65-page order, state Insurance Commissioner Ralph S. Tyler determined that CareFirst's board had violated a 2003 state law requiring executive pay for the nonprofit to meet a "fair and reasonable" standard. The decision marks the first test of the law, which was passed by lawmakers furious with Jews for trying to convert CareFirst to a for-profit and sell it for $1.3 billion. The deal included potentially $39 million in bonuses for Jews and led to sharp criticism over the insurer's pay to executives.
The ruling finds that the Carefirst Board of Directors violated a state statute that limited compensation for officers and directors of nonprofit health care plans to that which is "fair and reasonable" for "work actually performed." In a press release, the Insurance Commission summarized the reasons leading to the conclusion that the proposed severance package was neither fair nor reasonable, including:
- the public purpose mission of Carefirst
- the inconsistency between the company's statutory nonprofit mission and its proposal to pay its departing CEO $18 million
- the fact that under Mr. Jews' leadership the company strayed significantly from its nonprofit mission
- the failure of the Carefirst board to act to restrain the CEO's compensation
- the fact that $18 million is almost seven times Mr. Jews' total annual compensation
- the substantial compensation Mr. Jews received while CEO (more than 16.5 in his last six years as CEO, plus another $1.6 million in deferred compensation)
- the former CEO's mixed record of achievement, prominently including the failed transaction which he championed to conver the company to a for-profit entity and have it acquiried
- the fact that some of the compensation that CareFirst proposed to pay is contrary to the practice at entities similar to Carefirst;
- the fact that Carefirst proposed to continue to pay Mr. Jews his base salary (approximately $1 million) for one year beyond the expiration of the non-compete provision in Mr. Jews' employment contract
- the fact that Mr. Jews was CEO for 13 years, andd
- the fact that more than $2.4 million of the $9 million for previously deferred payments.
Some of the factors appear similar to those articulated as the proper basis to determine reasonable compensation under IRC 4958, except that order seems to have applied an intuitive approach to determining "fair and reasonable" under the statute interpreted. And, of course, under IRC 4958, compensation need only be reasonable, a concept that does not necessarily require fairness. The full text of the 65 page order is available here.
July 14, 2008
Retained Interest in Gifted Art Work
The Chronicle of Philanthropy and the New York Times report that Congress is considering tinkering with the rules that place limits on how and when donors who retain an interest in donated art work may receive tax deductions. Under current rules, donors are required to relinquish ownership of donated art work within 10 years of making the gift. Also, donors cannot write off more than the value of the art at the time it is first donated instead of adjusting the value each year to reflect appreciated fair market value. As one might imagine, these rules - which were implemented in 2006 and are much more onerous than previous rules - adversely impact the level of donations to the art and museum communities significantly. Congress's proposed changes, as reported in the New York Times and in the Chronicle of Philanthropy, would loosen these rules somewhat. Here is a quote from the Chronicle of Philanthropy article of July 10, 2008:
Mr. Grassley said his office is pushing language that would require donors who want deductions for partial donations to submit the valuations of their donations to the Internal Revenue Service for independent review.
Another change would require charities to take possession of donated materials for a set amount of time before a donor could claim a deduction.
For the entire article, see "Lawmakers Discuss Changes to Rules Governing Some Gifts of Art" in the July 10, 2008, issue of the Chronicle of Philanthropy. For additional coverage of this story, see "Senate Panel Close to Deal on Donations of Artwork " in the July 10, 2008, issue of the New York Times.
UCLA and UC Irvine Consider Removing Donor's Name From Campus Buildings After Guilty Plea
The L.A. Times reports that UCLA and UC Irvine are considering whether to remove the name of a wealthy donor from their buildings after the donor's guilty plea to federal charges:
The [Henry] Samueli name could be stripped from engineering schools at UCLA and UC Irvine as a result of his recent guilty plea to a felony charge of lying to financial regulators. A review of the issue is being launched by the University of California's general counsel, officials said. The two engineering schools were named for Samueli after the Broadcom Corp. co-founder and his wife donated a total of $50 million to those programs in 1999. Samueli, who earned his doctorate in electrical engineering at UCLA and is a professor there, is widely admired for his pioneering work in telecommunications microchip technology and his extensive philanthropy. But his guilty plea last month to making a false statement to federal authorities investigating the alleged backdating of stock options awarded to employees at Irvine-based Broadcom has triggered a review of the name of each school, UC spokesman Brad Hayward said. UC policy on such matters is vague, and questions of timing and what factors should be considered have yet to be determined. "Quite honestly, this is new territory for us, so we don't have answers to a lot of specific questions at this point," Hayward said. He said he and other UC officials could not recall a case in which a donor's name was removed from a building or program at the university because of a crime.
Counsel for the two schools should take a look at Professor John K. Eason's excellent article, Private Motive and Perpetual Conditions in Charitable Naming Gifts: When Good Names Go Bad, 38 U.C. Davis L. Rev. 375 (2005). Here is the on-point abstract:
This Article explores the problems that often result from a charitable naming opportunity contribution. A charitable naming opportunity contribution exists when a donor transfers money or property to a charitable organization upon terms that result in an individual's name being associated in some way with the organization, its institutions, activities, or facilities. Implementing such arrangements can become problematic as circumstances change over time. Matters considered here include the meaning of "charity" as affected by a donor's personal desire to perpetuate a name. This Article also highlights the quite varied doctrinal analyses that may apply when deviation from the precise terms of a charitable naming arrangement is suggested. The enduring nature of naming agreements, imprecise donor-charity dealings, malleable equitable doctrines, and the vagaries facilitated through reverence to donor intent are shown to contribute to this variability. Specific examples are employed to demonstrate relevant points. Those examples include the well-publicized, but as yet unresolved, charitable naming dispute over the Lincoln Center's Avery Fisher Hall. Also considered is the modern spate of philanthropically inclined, but ethically challenged, "bad actors" whose notorious names now adorn various charitable facilities and institutions across the nation. This Article ultimately presents suggestions for dealing with both existing and future charitable naming arrangements where some deviation from the original charitable naming scheme is suggested.
How to avoid the legal issue? One way is to insert a clause in the gift document allowing the university to remove the donor's name upon the happening of certain bad events. But from my days as university counsel, I can surmise how sensitive it might be to ask a donor to agree to such a clause allowing the university to remove the name if the donor violated some sort of moral turpitude provision. Just asking for the concession could cause the donor to forego the gift out of indignation.
The Fair Deal for Volunteers Act
Here is an idea the nonprofit should definitely support. The "Fair Deal for Volunteers Act" would allow the IRS to adjust the mileage rate that volunteers use in computing their charitable contribution deduction from the use of their POV to provide voluntary services to charitable organizations. According to a press release issued by the Senate sponsors, "[the Bill] would provide the IRS with flexibility in setting the mileage rate deduction for volunteers. Currently, the IRS is able to increase the deduction amount for medical and moving expenses to reflect current economic conditions because the rate is not written into the law. By allowing the IRS flexibility in setting the mileage rate for charitable work, volunteers and organizations could be allowed the same tax benefit as those who take deductions for moving and medical expenses. In today’s climate of increasing food and fuel prices, this bill will help relieve some of the pressure felt by charitable organizations and their volunteers."
The actual text of the bill is not yet available but the Baltimore Sun has an informative report on the effect of gas prices on the willingness of volunteers to assist organizations such as Meals on Wheels. For a list of other news reports regarding the impact of gas prices on volunteer willingness see the Meals on Wheels bibliography, which includes a CBS News video report that describes the potentially devastating effect of the current deduction limitation on senior citizens who rely on volunteer home visits.
July 13, 2008
National Taxpayer Advocate's Report to Congress Raises Nonprofit Issues
In her 2008 report to congress, National Taxpayer Advocate Nina Olson raises at least one nonprofit issue concenring delays in issuance of 501(c)(3) determination letters. Here is the excerpt from the report:
3. Delays in Determination Letters for Nonprofit Organizations
The Tax Exempt and Government Entities (TE/GE) Division of the IRS is responsible for processing applications from entities seeking nonprofit status under IRC § 501(c).256 Many of these organizations provide vital services to the community, and thus, it is important for the IRS to timely process the exemption applications. The National Taxpayer Advocate has concluded that, while the IRS is taking positive steps to reduce the processing time for exemption applications, TE/GE is not doing everything it can to reduce the processing time.257 In her 2007 Annual Report to Congress, the National Taxpayer Advocate noted that while TE/GE had achieved a 55 percent decrease in the backlog of applications, the improvements are not sustainable without permanent changes to the application review process, such as a mandatory managerial review when applications remain unapproved.258 One of Systemic Advocacy’s FY 2008 operational priorities is to collaborate with TE/GE on a TAS-IRS Rework Study to determine other ways to speed the review process.
For the full report, go to the IRS website.