August 22, 2008
Peace Corps Downsizing Amid Budget Woes
Though a government agency, rather than a private nonprofit, the Peace Corps certainly has long been a bastion of volunteerism since its creation by President Kennedy in 1961. Now, however, a story in today's Washington Post notes that the Peace Corps (which, as the story notes, President Bush once promised to double in size) is accepting fewer volunteers and cutting other costs as it faces a budget shortfall of $18 million during this and next fiscal year. Part of the problem has been a weak dollar; the Corps estimates that it endured over $9 million in foreign-currency-related losses during the past year. The other problem is the continued stalemate between the Bush administration and Congress on the budget for the new fiscal year.
Sale of Anheuser-Busch a Boon for Charity?
Press reports coming from Missouri give a glimpse into the operations and mindset of charitable fundraisers. This story in the St. Louis Post-Dispatch notes that charities are blitzing owners of A-B stock with information about the tax advantages of stock donations. As most readers will know, A-B recently agreed to a buyout by In-Bev, a Belgian company. The buyout is structured as a cash deal, which is going to result in a lot of capital gains taxes on A-B shareholders. Of course, as the charities note, if one is philanthropic-minded, one can contribute that stock to the charity of one's choice before the closing date and take a deduction for the full fair market value of the stock without paying any associated capital gains taxes. Even with the low capital gains rates in play today, that's a significant tax savings. Another story notes that cash acquisition deals such as the A-B/In-Bev buyout are known as "liquidity events" in philanthropic circles . . .
August 21, 2008
Does Nonprofit Status Drive College Tuition Higher?
A story in CNN Money on the rising costs of college speculates that nonprofit status might be part of the problem. To quote the article:
Colleges could help ease the pressure by adopting cost-containment practices that are standard in private business. But most schools are nonprofits. And without the pressure to produce earnings, they have little incentive to slash expenses or improve productivity.
The question of managerial efficiency in nonprofits is a perennial one and part of the overall debate regarding whether nonprofits' performance should be measured by "efficiency" or some other standard. See, for example, David Brennan's article A Diversity Theory of Charitable Tax Exemption: Beyond Efficiency, Through Critical Race Theory, Towards Diversity and Darryll Jones' blog post back in January about this issue. But the CNN article and other recent articles about nonprofit hospitals requiring up-front payments and building facilities to attract well-heeled patients (see, e.g., the blog posts here and here) continue to raise questions about managerial decisions in an environment where managers have little accountability.
IRS Releases Updated Tax Guide for Churches
The IRS has released an updated Tax Guide for Churches and Religious Organizations, IRS Publication 1828.
As one might expect, the revised publication spends a huge chunk of pages on prohibited political activity (private benefit, for example, gets one whole paragraph of explanation in the new publication, while political campaign activity garners 8 pages!), essentially copying the information provided in Revenue Ruling 2007-41 though with examples geared specifically toward churches and religious organizations. The publication also covers UBIT issues, employment taxes, and charitable contributions.
I've found most recent IRS publications exceptionally useful, and this one is no exception (though obviously the publication adheres to the IRS orthodoxy on whatever issue is at hand).
August 20, 2008
Senators Create Philanthropy Caucus
The Chronicle of Philanthropy reports that Sens. Charles Schumer, Democrat of New York, and Richard Burr, Republican of North Carolina have created a Senate Philanthropy Caucus to look at ways to help foundations and charities. The action follows the creation of a similar group in the House over a year ago. The letter that Schumer and Burr sent to their colleagues asked them to join the caucus to “support the long tradition of good works by the philanthropic and nonprofit sectors.”
We Interrupt Our Charitable Program to Bring You Some Issue Advocacy
It's an election year, meaning that nonprofit organizations of all sorts will try to toe the line between acceptable issue advocacy and unacceptable campaign activity. In an example of the former, the American Cancer Society web site reports that the American Cancer Society Cancer Action Network (ACS CAN), "the nonprofit, nonpartisan advocacy partner of the American Cancer Society," has joined with the American Hospital Association (AHA), the Catholic Health Association (CHA), Families USA, and the National Federation of Independent Business (NFIB) to sponsor a new series of ads featuring Harry and Louise, the couple that helped sink the Clinton health reform plan back in the 1990's. This time, though, apparently Harry and Louise have decided that health care reform is vital to America and will be pushing their newly-revised viewpoint during the upcoming national party conventions.
It's going to be a long 2 1/2 months until the election, folks. Fortunately, I have an excellent supply of Battlestar Galactica, The Closer and Saving Grace episodes on my DVR to get me through . . .
August 19, 2008
IRS Releases Final Instructions for Form 990
The IRS just released final instructions for the heavily-revised Form 990 that nonprofits will start using next year. The final instructions are available on the IRS web site here.
The final instructions contain numerous changes to the draft instructions that were released in April. The changes are detailed in this document.
The revised Form 990 is a major overhaul of the reporting form for nonprofit organizations. In effect, the IRS has turned the 990 into more of an SEC-like disclosure document than a "tax form" and the new form will provide a wealth of new information to the IRS and the public about the operations of nonprofit organizations. The issuance of the final instructions completes the re-design process, although the IRS will continue to study certain aspects of 990 reporting with the possibility of adopting additional changes in the future. The redesign effort was monumental, and my own opinion is that the IRS did a heck of a good job even though I might quibble with some of the choices made (particularly with respect to nonprofit hospital reporting). It will be interesting to see how the new 990 affects not only what gets reported in the media about nonprofits, but also how the new reporting will affect the internal operations of nonprofits.
Should Government Get More Involved with Nonprofits?
An interesting story today in the Washington Post regarding an effort by some nonprofit leaders to boost "strategic coordination" between government and the nonprofit sector. The apparent goal is to funnel more government money through the private nonprofit sector in order to address chronic societal problems. Not all (maybe even not most) nonprofit leaders think this is a good idea; governmental cooperation often becomes governmental control, as strings of one kind or another get attached to program funds. The next thing you know, nonprofits feel they can't exist without the government money and the strings that go with.
I'd give the nonprofit sector the same advice I always got from Grandma Della Colombo: be careful what you wish for. In this case, be VERY careful.
August 18, 2008
Nonprofit Manager Issues, then Violates, "Keep Your Yaps Shut!" Order: Just Tell the Whole Truth Now
The truth is out there and it will come out. Better to tell now and get it over with. A story in today's New York Times confirms that point. You may recall that we recently reported on how two prominent nonprofit organizations handled embezzlement/excess benefit cases within their organizations. One, ACORN, tried to handle the matter internally and secretly while the other, Points of Light, immediately contacted law enforcement. Both approaches have their advantages and disadvantages, particularly with regard to the harm done to an organization's reputation on which its fundraising success depends. Today's article is a follow-up to the one upon which our earlier post was based. It seems that the Times has uncovered who exactly it was that reimbursed ACORN for the money stolen by its founder's brother. The prior post described ACORN's decision to take the quiet approach and contrasted that with more forthright, though more immediately damaging approach. While the post generally agreed with the quiet approach in theory, it concluded as a practical matter that "resistance is futile" (particularly in this day and age); to think these bad news can ever be resolved quietly is what John Edwards was thinking too. It might therefore be better to disclose immediately and cut the losses, however painful, quickly!
Indeed, the Times story probably confirms, in ironic fashion, what we never seem to learn: the truth is out there and it will come out! One of ACORN's senior managers is quoted as expressing concern that the identity of the benefactor who reimbursed the embezzling insider will somehow be leaked to the press. He discusses it with other managers via email and guess what! Yep, the emails become the source of the leak! The email conversation about keeping the whole matter confidential is full of comic (if not tragic) irony:
But e-mail messages among Acorn’s senior executives discuss how to keep Mr. Pike’s identity secret, even as they acknowledge that some of the foundations and philanthropic advisers that have supported Acorn and its affiliates know that he bought the note. “Does Drummond [the confidential donor] know the word is out?” Steven Kest, the executive director of Acorn, wrote on July 4. “If not, shouldn’t someone tell him?” In a July 12 e-mail message to Mr. Kest, Acorn’s political director, Zach Pollett, wrote: “I talked to Drummond on this yesterday and had Beth Kingsley” — Acorn’s lawyer — “prepare a ‘keep your yaps shut’ confidentiality memo to people at Acorn and CCI.” Charles D. Jackson, a spokesman for Acorn, said the organization would not comment on the purchaser of the note. Acorn’s board members and senior executives have signed confidentiality pledges that forbid them from disclosing Mr. Pike’s identity or discussing the purchase agreement, according to three Acorn contributors who asked to see the agreement but were told they would have to similarly pledge confidentiality. They declined.
So while the board is bound by a confidentiality agreement and general counsel has ordered the rest of the workers to keep their stinking yaps shut, the person who recommended issuing the order is yapping about it via email. I guess you learn something new everyday! Now there will probably be an expensive and time consuming investigation concerning whether the secret benefactor, Drummond Pike, founder and board member of the Tides Foundation, used the Tides Foundation money to bail out ACORN's miscreant insider. There will be all sorts of interviews and lengthy memos regarding the private foundation exise taxes applicable to self-dealing, prohibited transactions and on and on ad infinitum. I don't think the Tides Foundation board members have much choice but to do so, if they understand their own fiduciary duties and potential liability.
Hindsight is always perfect. Points of Light was probably right to tell the truth sooner, though the truth hurt them sooner --though not as badly as the truth will hurt ACORN. As we opined in the earlier post on this topic, confidentiality is theoretically good but rarely achieved. This is the information age, after all. It is just better to tell the truth, the whole truth as soon as possible. Besides, unless there is a competitive business reasons (a phrase that seems inapposite to the nonprofit world), something that we don't want others to know about probably ain't right in the first place.
Leff Posts Sit Down and Count the Cost: A Framework for Constitutionally Enforcing the 501(C)(3) Campaign Intervention Ban
Benjamin Leff (Harvard) has posted Sit Down and Count the Cost: A Framework for Constitutionally Enforcing the 501(C)(3) Campaign Intervention Ban on SSRN. Here is the abstract:
Section 501(c)(3) of the Internal Revenue Code prohibits charities from intervening in a political campaign for or against a candidate for public office. The IRS currently interprets the campaign-intervention ban to absolutely prevent charities from communicating their views on candidates, even if such communications are completely financed by non-501(c)(3) affiliates.
This article argues that the current IRS enforcement paradigm is unconstitutional because it exceeds the government interest in preventing tax-deductible donations to be used for campaign-intervention. A constitutional interpretation exists under the current statutory framework, but it would require the IRS to shift its focus exclusively to campaign-intervention-related expenditures. The IRS could compel 501(c)(3) organizations to make all expenditures through a non-501(c)(3) affiliate using funds that were raised on a non-deductible basis, or receive reimbursement from a non-501(c)(3) for all such expenditures.
Enforcement of the ban under the proposed "expenditure" paradigm requires an ability to "value" campaign-intervention speech to provide a means for a non-501(c)(3) affiliate to pay for or reimburse the cost of such speech. This article evaluates competing valuation theories, and finds that campaign-intervention speech that communicates a charity's endorsement of a candidate (whether official or unofficial) may "cost" more than commentators have previously considered. Because an endorsement implicates the "goodwill" that an organization has built up using tax-deductible contributions, it may well be appropriate to take the cost of developing that goodwill into account in determining the cost of the campaign-intervention communication. The article proposes some guidelines for valuing the speech of charities, taking the cost of goodwill into account. It concludes that an "expenditure" paradigm that adequately valued the speech of charities may be more enforceable, and therefore more effective at limiting excessive or abusive campaign-intervention speech by charities, while staying within constitutional parameters.
New Jersey Blue Cross Converting to For-Profit
The New Jersey Star-Ledger reports that Horizon Blue Cross/Blue Shield, the state's largest health insurer, is seeking to convert to for-profit status. The conversion is regulated by state laws, and therefore needs several state approvals before it could move forward. An earlier attempt by Horizon to convert to for-profit status was abandoned three years ago in face of opposition by state governmental leaders.
The conversion attempt has raised the familiar arguments. Horizon asserts that conversion will allow it to access the private capital markets, a necessary step to remain competitive. Opponents argue that the result of conversion will be a loss of insurance options to poorer residents, as Horizon focuses on shareholder returns rather than serving the population.
The story of the various Blues is an interesting one. Congress repealed federal tax exemption for the Blues when it passed Section 501(m) as part of the Tax Reform Act of 1986. At the time, many wondered whether the Blues would then wholesale convert to for-profit status, but that did not happen immediately. Over time, however, several of the Blues have converted, and at least one study of the conversions has found that consumers have not been adversely affected by the conversion. See The Impact of Blue Cross Conversions on Accessibility, Affordability, and The Public Interest, 81 Milbank Q. 509-42 (2003), by Mark A. Hall and Christopher J. Conover.
August 17, 2008
Do Nonprofit Nursing Homes Provide Better Care?
With all the debate surrounding the tax-exempt status of nonprofit hospitals, the question of how ownership might affect services provided by nursing homes often gets ignored in the press. This article in today's Hartford Courant, however, explores the issue. Though placed in the context of nursing home services in Connecticut, the article explores the broader issues of ownership form in nursing homes, and suggests that staffing levels for nonprofit homes are higher than in for-profit chains, leading to better patient services. The story notes, however, that the percentage of Medicaid patients in a particular home might also be a major factor in predicting patient service levels in nursing homes.
Federal tax exemption law has been largely static in this area. The last major IRS ruling defining the requirements for a tax-exempt "home for the aged" was issued in 1972 (Revenue Ruling 72-124), and unlike nonprofit hospitals, there has been little written in the legal academy about exemption for nursing homes and the policy issues involved. One of our blog editors, David Brennen, has been among the few legal academics to explore tax-exemption policies as they apply to homes for the aged (see this article), though there are a fair number of empirical studies of the effects of nursing home ownership done by health care professionals and academics. Some of this empirical research is summarized by Mark Schlesinger and Bradford H. Gray in How Nonprofits Matter In American Medicine, And What To Do About It, 25 Health Affairs W287 (2006) (web exclusive; subscription required to retrieve full article).
The Changing Face of Corporate Philanthropy
An interesting short interview in Crain's Chicago Business with Melissa Brown, associate director of research at the Center on Philanthropy at Indiana University, on the changing nature of corporate philanthropy. As Professor Brown notes, corporate philanthropy has gone from being legally prohibited to an integral part of the corporate business image. This legal trend, of course, mirrors interest in corporate social responsibility, a topic that my colleague at Illinois, Cynthia Williams, has written numerous articles about.