Nonprofit Law Prof Blog

California AG Begins Audit of Los Angeles Museum of Art

The New York Times reports that the Attorney General of California has begun an audit of the Los Angeles Museum of Contemporary Art.  The Museum has operated at a deficit for six of the past eight years, and the endowment has shrunk from $50 million to $6 million.  The Attorney General has expressed concern about whether restricted resources have been used inappropriately.  The Museum is seeking additional funding to stay afloat and is considering a merger with another museum, but it is unclear how the problems will be resolved.

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Australian High Court Reinstates Exempt Status for Feeder Corporation: VSP Revisited

Yesterday, we posted a comment regarding Vision Service Plan's petition before the U.S. Supreme Court.  As you may recall, VSP is a nonprofit, contract model HMO whose 40 year old (c)(4) tax exemption was suddenly revoked when the Service decided that it impermissably operates for the private benefit of its subscribers.  If we assume, as we must, that VSP funnels all of its "profit" into health care and that health care is indeed a charitable goal, then the revocation must ultimately rest on IRC 503 -- the "feeder" provision that codifies Mueller Macaroni.  In essence, an organization that operates a non-charitable business is not entitled to tax exempt status merely because all of its operating surplus is devoted to an irrefutably charitable goal.  If the Government is correct, VSP is not just a normal business operation but is, instead a feeder organization, since its operating surplus is not paid to investors but is instead devoted to the provision of charity by some other entity.  I make this point because we, in the United States, think calling something a feeder organization settles the matter.  And, in fact, it does as a matter of statutory law.  But what about good policy?  Not just a few commentators (I won't cite to any at the moment because I want to get to the broader point) have questioned the whole basis for the preclusion of tax exemption for feeder organizations.  Is it really true that if we allow tax exemption for normal businesses, the owners of whom disdain profit-taking and instead devote all profits to supporting someone elses charitable activities, we will undercut the tax base by encouraging all business owners to declare themselves nonprofit and therefore tax exempt?  In other words, does unrelated business really and truly threaten for-profit business with unfair competition.  I think not and here's why.  People will always want to get rich.  And tax exempt status precludes people from getting rich, at least its supposed to, by way of the nondistribution constraint (aka, the prohibitions against private inurement and excess benefit).  Let's set aside for the moment the argument that the prohibitions are enforced and therefore you can get rich operating a nonprofit.  The fact that you cannot get rich legitimately via a nonprofit organization is proof enough that unrelated business and feeder organizations are not to be viewed as threats to the capitalist marketplace.  It is just not true that without the unrelated business  income tax or the prohibition against feeder organizations, nonprofits will take over the world. 

Which brings me to Commissioner of  Taxation of the Commonwealth of Australia v. Word Investment Limited. Yesterday, the High Court of Australia ruled that an organization that existed solely to conduct funerals for profit was entitled to tax exempt status because it paid all of its operating surplus (i.e., its profit) to a religous organization.  In effect, the Australian High Court ruled that a feeder organization is indeed entitled to tax exemption under Australian law.  Unless we really believe that unrelated business threatens the tax base or, as a macro-economic matter, actually results in a nonprofit competitive advantage over profit-seekers, we should be unimpressed by the holding.  Indeed, we should not believe that a tax exempt VSP exists as a threat to the for-profit HMO world.  So long as VSP and other feeders devote all their profits to a charitable goal, according to the Australian High Court, they ought to be tax exempt.  Mind you, whether the fiduciaries of VSP are improperly enriching themselves at the expense of charity is a whole 'nother matter.

dkj

Gates to Obama: Don't Cut Spending on U.S. Schools, Overseas Health and Poverty Programs

The Chronicle of Philanthropy reports that in a talk at George Washington University today, Bill Gates urged president-elect Obama not to cut funding for U.S. schools or for health and poverty programs overseas. Gates recommended reducing waste and inefficiency while continuing to support proven programs. Nothing new there - Gates seems to be echoing themes from Obama's campaign so he should fine a receptive ear. Read the speech on the Gates Foundation website.

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Religious Freedom and Government Benefits

Thomas Berg has posted Religious Organizational Freedom and Conditions on Government Benefits.  Here is the interesting abstract:

More and more legal disputes about church and state in the coming years will involve conditions on government benefits - social services grants, educational vouchers, tax exemptions - that conflict with the tenets or practices of religious organizations that would otherwise be eligible for the benefits. The prospects for constitutional challenges to such conditions are uncertain: the Supreme Court has recognized that conditions on benefits can intrude on constitutionally protected decisions, but recently it has more and more upheld conditions on the ground that government is not penalizing an activity but is simply refusing to subsidize it. This Article makes the case that religious organizations ought to be able to challenge, in a number of important situations, conditions that exclude them from generally available benefits because of their religious character or practices important to their religious identity. Such exclusions implicate two important Religion Clause values: they pressure the organization to forego its choices in religious matters, and they undercut the ideal, based in church-state separation, of a religious sector operating without government interference or favoritism. The best understanding of church-state separation, I argue, calls not for excluding religious schools or social services from generally available aid, but for allowing them to receive aid for the services they provide without pressuring them to change their religious character. Conditions on benefits can place presumptively impermissible burdens on organizations' religious choices, and they can intrude on core organizational decisions protected by a proper understanding of church-state separation. I apply these arguments to challenge three actual or proposed conditions on benefits: (1) rules that bar government-funded education or social-service programs from considering religion in hiring staff; (2) restrictions on a tax-exempt organization's intervention in political campaigns to the extent they bar a clergy member from expressing moral-political views in her capacity as religious leaders; and (3) proposals, advanced by some commentators, to deny tax exemptions or funding to organizations that restrict clergy positions based on sex or other disapproved grounds.

dkj

Forbes Magazine on The Meaning of Charity and Nonprofit Health Maintenance Organizations

Forbes.Com has published Supreme Court Question:  What's A Charity?  Here is the introduction:

The U.S. Supreme Court will soon decide whether to take a case that could have a big impact on a wide array of tax-exempt organizations, including hospitals and health maintenance organizations. Vision Service Plan, the nation's largest provider of insurance plans covering eyeglasses and contacts, wants the high court to consider whether the Internal Revenue Service was right to revoke its status as a 501c4 tax-exempt social welfare organization in 2003--a status VSP had held since 1960.

The article quotes Dean Kenneth Starr (counsel to VSP) as predicting that if the Supreme Court lets the lower court opinion stand, it means "the death knell of the nonprofit HMO model."   Dan Zerbe, seems to agree, according to the article.  He is quoted, though, as supporting the denial of 501(c)(3) and (c)(4) status for nonprofit HMO's.  I try to avoid overblown rhetoric (really, I do!) but I have to agree with Starr.  The 9th Circuit upheld the revocation of tax exempt status for VSP on the sole basis that it provided benefits to member-subscribers and therefore conveyed an impermissable private benefit -- never mind that in doing so, VSP also expanded the health care pie to poor people.  The reasoning makes no sense because the subscriber model is the sole mechanism by which nonprofit HMO's can expand access to health care to those unable to purchase their own health care (by leveraging the subscriber group to bargain for lower capitation fees and ultimately expanding the health care pie to the poor).  In other words, the only way to benefit the community writ large is to benefit a few people in particular.  That's just the way it works in a capital market.  To lift all boats, a rising tide must lift yachts as well as row boats.  To deny tax exemption because an identifiable group benefits especially is simply to preclude community benefit.

dkj

Mandated Charity Care for Nonprofit Hospitals

Kathryn Fuehrmeyer has posted an interesting article:  Finding Answers to Our Health Care Prayers: Implementing Legislatively Mandated Charity Care Requirements for Nonprofit Hospitals.  Here is the abstract:

In November 2003, attorneys in Chicago, acting on research conducted by the Hospital Accountability Project, began to file class action suits on behalf of former patients against nonprofits hospitals for neglecting their duties to the community in which they operate, in particular to uninsured individuals. A Mississippi attorney took up the same crusade, filing at least 49 class action lawsuits between June and December 2004 charging approximately 370 nonprofit hospitals in 24 states with failing to provide adequate charity care. While federal judges have dismissed the majority of these cases, the issue of nonprofit hospitals providing charity care gains notoriety.

Although Senator Grassley argues otherwise, imposing more stringent requirements on hospitals in order to qualify for the federal tax exemption is unlikely. Thus, some states have begun to combat this problem through the enactment of state charitable care requirement statutes in order to force hospitals to examine the amount of charity care they provide. While some states have instituted statutorily mandated charitable care requirements, Illinois has yet to implement this requirement, though there is legislation pending. Part I of this Note looks at the tax-exemption received by hospitals, both at the federal and state level. Part II looks at the charitable care requirement as enacted in Texas. While many states have discussed a charity care requirement and some have gone so far as to implement one, the Texas statute provides a good benchmark for examining the analogous proposed Illinois statute. Part III examines the Provena case and the proposed legislation in Illinois which has garnered national attention and found a place in a national debate. Part IV examines the overarching policy questions of whether a charity care requirement is good healthcare policy and whether the various benefits should be linked to specific requirements.

dkj

Jail Time for Failure to File Nonprofit Forms

An Oregon circuit court judge sent Bill Sizemore to jail for contempt for failure to federal and state tax forms for a charitable organization, American Tax Research Foundation. Sizemore's problems are bigger than forgetting to file a few forms. Sizemore is well known in Oregon as "the most prolific ballot measure author in Oregon history." In this past fall's election the voters refused to approve all five Sizemore measures in the ballot. For a lot of people, knowing that Sizemore is behind a measure is enough to know which way to vote - against. Sizemore measures take on all sorts of things, but he has been in a long-running battle with the Oregon Education Association and the American Federation of Teachers in Oregon. In 2002 a jury awarded the two organizations $2.5 million plus attorney fees from two now-defunct organizations controlled by Sizemore. A judge in that case issued an injunction restricting Sizemore's ability to use tax-exempt organizations to advance his activities (which for federal tax purposes would be classified as lobbying rather than political campaigning). Sizemore has continued to violate the injunction, using money from the American Tax Research Foundation to pay personal bills and to finance ballot measures in 2006 and 2008. Before jailing Sizemore, Judge Judith Wilson read her findings for two hours, describing Sizemore as lying repeatedly under oath and using the Foundation's bank account as his "personal piggy bank." See the Portland Oregonian's story here.

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Bailout for Nonprofits?

Teresa DeCrescenzo wrote a compelling op-ed published in the L.A. Times today. She serves as executive director of GLASS Youth and Family Services, at least for now - the organization may have to file for bankruptcy protection and that will mean the loss of 200 jobs and the loss of services for hundreds of children served by the organization. Ms. DeCrescenzo notes that "unlike some of the executives whose companies are being bailed out, I have never received a bonus, although I did lend my pension to my agency a few years ago to stave off insolvency. That money is all gone now. Maybe I could serve as a role model for the guys getting the $20-million golden handshakes."

Ms. Decrescenzo concludes by noting that the bailout her organization needs is $3-4 million, significantly less than the amounts going to save financial institutions and potentially going to save the auto industry. Her organization has lived frugally, has done good work to improve the lives of countless children, and will likely fall victim to the economic failure brought on, at least in part, by those executives who took more than they should have and continue to take more than they should.

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Stanford Business Launches Social Entrepreneurship Fellowship (Press Release)

STANFORD, Calif., Dec 01, 2008 -- Commitment to social entrepreneurship by a growing number of Stanford Graduate School of Business students has inspired the School to create a new fellowship award that will provide substantial financial and strategic support to graduates starting social ventures.

Recipients of the first Social Innovation Fellowships will be selected by June 2009. The fellowships are part of a three-year pilot program developed by the Business Schools' Center for Social Innovation, which cultivates leaders to solve the world's toughest social and environmental problems.

The fellowship program is designed to help mission-driven MBAs create nonprofits that benefit society, particularly marginalized populations. The one-year fellowships carry a stipend of $80,000 per student, or $120,000 per two-member team that must be led by a graduating Stanford MBA. Fellowship winners must be committed to building a successful nonprofit venture or innovation that addresses a particular social or environmental challenge, and must work full-time for their ventures during the fellowship year.

Fellowship winners receive strategic assistance and entrepreneurship expertise deemed necessary by a team of senior staffers from the Business School's Center for Social Innovation. Faculty advisors for the program include Jim Phills, the Claude N. Rosenberg Jr. Director of the Center for Social Innovation, and James Patell, Herbert Hoover Professor of Public and Private Management.

"As a leadership development school, we want to empower people to pursue their dream," said Kriss Deiglmeier, Executive Director of the Center for Social Innovation. "This allows us to continue to develop leaders who want to contribute to important social change."

The demands of the MBA program and pressure to land a full-time job before graduation make it hard for even the mostly highly motivated students to find funding to bring their visions to life. As a result, many promising ideas that could benefit society are left on the drawing board. The new Social Innovation Fellows program aims to help solve this critical issue by providing would-be social entrepreneurs with the money and technical assistance they need to be successful.

Stanford MBA graduates who have launched social enterprises include Jessica Flannery MBA '07. She cofounded Kiva, a nonprofit microfinance group in San Francisco that seeks to overcome poverty by linking lenders with entrepreneurs operating very small businesses. And the social entrepreneurial duo of Sam Goldman and Ned Tozun, both MBA '07, together developed a low-cost, solar-powered light emitting diode lamp to sell to the millions of people worldwide who live in rural homes not supplied with electricity.

The Social Innovation Fellows program builds on Stanford's popular Public Management Program, which is part of the Center for Social Innovation. One in every four Business School students receiving an MBA also chooses to earn a Public Management Program Certificate, indicating the student is prepared to apply their management skills to a government agency, nonprofit enterprise, or socially responsible businesses.

For more information about the Social Innovation Fellows Program go to www.gsb.stanford.edu/csi/about/csifellows.html

The Center for Social Innovation at the Stanford Graduate School of Business cultivates leaders to solve the world's toughest social and environmental problems. Graduates from the Center's Public Management Program help corporations improve their sustainable practices and launch social enterprises that bring life-changing solutions such as loans to small businesses and safe lighting to the world's poorest places. The Center provides research, education and experiential programs that reach across the business, nonprofit, and government worlds. The Center promotes development of innovative solutions to build a more just, sustainable and prosperous world.

Learn about the Public Management Program at http://www.gsb.stanford.edu/pmp/about/

For more information about the Center for Social Innovation at the Stanford Graduate School of Business, please go to www.gsb.stanford.edu/csi/

Nonprofit Unrelated Business on the Rise?

Conventional wisdom suggests that when donations dry up, nonprofits start opening Macaroni factories and other unrelated businesses.  A story in this week's Nonprofit Times seems to confirm conventional wisdom.  The article reports that a Massachusettes based nonprofit, CMARC, recently purchased an advertising direct mail franchise and intends to start offering direct mail options to local business.

CMARC bought the franchise from Garden Grove, Calif.-based direct marketing firm Money Mailer. CMARC plans to turn one of the staff community contact people into a sales person who aids businesses with direct mail options.  The range of business franchises that nonprofits operate seems to be getting wider -- from the well-known Ben & Jerry's ice cream Partner Shops to nonprofits installing wheelchair ramps and delivering candy baskets. CMARC's deal will probably break even this year and managers hope it will bring in between $200,000 and $300,000 annually within five years Ð roughly one-third of the organization's current $9-million annual budget. CMARC serves more than 300 disabled people a day with vocational programs. Money Mailer deals with nearly 300 franchise locations nationwide. "Money is tight. We haven't received a cost of living increase in Massachusetts in 19 years," said Sheri McCann, CEO and president of CMARC. "We work with fundraising and are really having a difficult time meeting our needs, so we're looking for other options."

Here is the interesting kicker.  One of CMARC's charitable purposes is to provide job opportunities for disabled citizens (as part of a larger goal of allowing disabled persons to live independently).  Does operating a plain old business in furtherance of the job provision (as opposed to job training) charitable purpose take this out of the unrelated realm?  I recall some case law on the point but don't remember it right off hand. 

dkj

Connecticut AG Questions Virginia Nonprofit's Spending

Connecticut Attorney General Richard Blumenthal has sent a letter of inquiry to the Virginia based Law Enforcement Legal Defense Fund, asking it to explain why it spends less than 19 cents of every dollar collected on its charitable purpose.  According to the Hartford Courant:

Attorney General Richard Blumenthal said Monday that he sees "serious red flags" in the finances of the Law Enforcement Legal Defense Fund, a Virginia nonprofit that has collected millions from donors around the country, but has paid only pennies on the dollar to police officers facing charges.

The defense fund has paid at least $45,000 on behalf of Robert Lawlor, a Hartford police officer charged with manslaughter in the May 2005 shooting death of 18-year-old Jashon Bryant. Overall, however, a story in The Courant Sunday reported that only about 8 percent of the charity's spending last year went to legal fees or living expenses for officers — an amount less than the charity's two executives paid themselves in salary and benefits.

At the same time, the charity spent 81 cents for every dollar collected last year on fundraising, and has paid hundreds of thousands of dollars to conservative organizations with which the executives have ties.

No doubt, fundraising on behalf of cops, firefighters, soldiers, sailors, marines, and airmen can be quite the lucrative career.  In a United Cancer Council-esque type mimic, the Hartford Courant reported (see prior linked article) that LELDF collected more than $13 million over the last five years with $9 million going to the private fundraiser.  And it only takes one or two bad apple cases to spoil the whole lot of charities that actually look out for defenders of freedom.  Among some of the grants made from the 8% of donated funds collected by the LELDF was $100,000 to the Federalist Society -- I guess those bunch of well-heeled lawyers need legal help just like the cop on the beat.  In their defense, though, the organization legitimately points out the following:

In a telephone interview earlier this month, Martin said the charity is at the mercy of expensive mail solicitations. "It's hard to raise money through direct mail. Why? Because postage is so expensive," he said. "It's just a killer."

This was the same issue raised [unsuccessfully by the Service, I might add] in United Cancer Council.  Anyway, this set of facts will make for a good discussion (1) of the private benefit doctrine, (2) the role and/or necessity of private fundraisers collecting money -- and getting paid -- on behalf of exempt charities, and  (3) the role of state attorneys general in the enforcement of federal and state tax exemption laws.

dkj

Playwrights vs. Nonprofit Theatres

There was an interesting story in the Sunday edition of the Dallas Morning News.  It concerned the amount of royalties that nonprofit theatres charge when serving as the premier venue of a new play.  Essentially, nonprofit theatres charge 40% of all future earnings (aka, subsidiary rights) from a play that premiers at their theatre.  Here are the opening two paragraphs:

When Mr. Lucas agreed to make the off-Broadway premiere of his play Prayer for My Enemy part of the Roundabout Theater Company's 2008-09 season, he said he didn't realize that the Roundabout's standard contract would require him to sign over 40 percent of his subsequent author royalties for the play for 10 years. (In other words, if Mr. Lucas were to collect, say, $50,000 from Prayer over the next decade – a respectable sum for a well-received new play – the Roundabout would receive $20,000 of it.)

A veteran playwright, Mr. Lucas (Prelude to a Kiss) said he knew that nearly all nonprofit theaters exacted a percentage of an author's future earnings from a new play – known as subsidiary rights – in return for producing its premiere. What startled him was the 40 percent, standard for commercial productions but a figure he considered "far too high" for a nonprofit.

What struck me most was a quote attributed to playwrights to the effect that tax exempt nonprofit organizations "are supposed to serve the playwright" and therefore should not be taking such a big cut even if it is the nonprofit's initial efforts and risks that cause the play to really take off, thereby enriching the playwright (as is the argument of the nonprofits):

Many nonprofit theaters argue that they deserve a [big 40%] cut because they increase the value of a new play with a first-rate New York production. To many playwrights, however, including Richard Nelson, author of Goodnight Children Everywhere, that argument is too one-sided.

Not only that; this might be an argument better made quietly.  It seems to raise a private benefit issue, sort of like that in Aid to Artisans (though the government lost that one). 

dkj

 

ARNOVA Founder Challenges Scholars

David Horton Smith, speaking last week at the annual meeting of the Association for Research on Nonprofit Organizations and Voluntary Action, took on the "dark side of the nonprofit sector."  Smith urged scholars to take a more critical look at organizations.  Putnam Barber, an editor of ARNOVA's journal, countered that many scholars examine issues of accountability and governance.  He suggested that scholars of criminology might be better suited to examine the "deviant organizations" Smith described.  For a story about Smith's remarks in the Chronicle of Philanthropy go here.

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