February 16, 2008
A New Approach in France?
Two years ago, this writer made a presentation at a Religious Freedom conference at the Universidad de Alcala de Henares in Spain. The presentation centered on the political activity of churches and religious organizations in the United States of America. In responding to the presentation, one of the conference participants -- a member of the French Constitutional Court -- expressed his shock and dismay that religious organizations in America were engaging in such activity. According to the learned jurist, in France separation of Church and State is strictly observed; matters of state are dealt with by the State, and matters of religious import are addressed by the Church; the two entities do not interfere with each other's role in French society.
It appears, though, that French President Nicholas Sarkozy is prepared to revisit this issue and possibly relax the strict separationist policy. In a recent article in Christian Today, President Sarkozy is quoted as saying:
"We should accept both sides - accept the Christian roots of France ... while defending secularism. We don't want to change the law separating church and state. The French don't want that and the religions don't want it either."
Sarkozy then went on to state that France needed "convinced Catholics who are not afraid to say who they are and what they believe." He did point out, however, that he welcomed outspoken believers of all faiths, and that "those who do not believe should be protected from all forms of intolerance and proselytism. But," the article quotes the French President as saying, "a person who believes is a person who hopes. The republic has an interest in having many men and women who hope."
As the United States of America goes through another election season and Jefferson's "Wall of Separation" between Church and State sometimes looks like a plain, President Sarkozy's apparent break with French tradition is, to say the least, interesting and thought-provoking.
February 15, 2008
Journalism's Contribution to Protecting the Nonprofit Sector
We previously blogged about the importance of not claiming to be tax exempt without being able to show your tax exemption letter. Well, it seems that the subject of the prior post, H. Lamar Willis, may have failed to produce an exemption letter because none existed. According to the February 14, 2008, Atlanta Journal Constitution, a very sharp reporter discovered that some big name companies like AirTran, Comcast and Coca-Cola contributed money to a charity that did not exist. Here is an excerpt from the article:
The Georgia Department of Revenue this week placed liens of more than $53,000 against Atlanta City Councilman H. Lamar Willis for unpaid personal and corporate taxes.
. . .
Willis has said the foundation gave away scholarships to Atlanta public high school students.
In response to a reporter's questions last year, Willis, an attorney, did not explain why the foundation never sought tax-exempt status. Willis has declined to explain how much money he raised or how he spent it.
The Revenue Department filed liens Monday in Fulton County against the H. Lamar Willis Foundation for $42,355 and against Willis himself for $11,308. Both were for tax years 2002 through 2006.
Revenue Commissioner Bart Graham said the news articles triggered the investigation. He declined to comment on the investigation's findings.
"The number of people and private organizations that have decided under their own discretion that they are going to be tax-exempt amazes me," Graham said.
To see the entire article, go to "PROBE'S RESULT: Willis, charity face big tax bills State puts liens against Atlanta city councilman, foundation that wasn't nonprofit" in the February 14, 2008, AJC.
February 14, 2008
Potential US Supreme Court Case on Legality of Kamehameha Schools Hawiians-First Admissions Policy Settles for $7 Million
On February 8, 2008, the Honolulu Advertiser reported that the potential US Supreme Court case involving the Kamehameha Schools Hawaiians-First admissions policy settled in May for $7 million. Here is an excerpt from the article:
There are about 70,000 school-age children with Hawaiian blood, and 5,400 students were enrolled at Kamehameha's various schools last year. Kamehameha served 30,000 other children and adults through outreach programs and through its support of charter schools.
Lawyers for Kamehameha Schools then asked that all members of the appellate court review the matter and the full court reversed the three-judge panel's decision by an 8-7 vote in December 2006. Grant then petitioned the U.S. Supreme Court to hear the case, and last May, on the eve of the high court announcement on whether it would take the case, the matter was settled out of court. Hawai'i federal Judge Alan Kay initially dismissed the John Doe lawsuit in November 2003, upholding the schools' argument that the admissions policy helped address cultural and socio-economic disadvantages that have beset many Hawaiians since the 1893 overthrow of the Hawaiian monarchy.
The plaintiffs appealed that decision to the 9th U.S. Circuit Court of Appeals, which overturned it in a three-judge decision in 2005. That ruling prompted protest rallies, prayer vigils and other gatherings around the state in support of the schools.
To see the entire article, go to "Kamehameha Schools settled lawsuit for $7M" in the February 8, 2008, Honolulu Advertiser. For Scholarly Discussion of the issues involved in this case, see the book Broken Trust by Randall Roth and various law review articles in the 1999 symposium issue of the University of Hawaii Law Review and elsewhere.
United States Conference of Catholic Bishops Provides Guidance on Political Activities
The United States Conference of Catholic Bishops has posted on its website a document entitled "2007 Political Activity Guidelines for Catholic Organizations." Here is the introductory paragraph from the web pamphlet:
The following document is provided by the USCCB Office of General Counsel in order to assist (arch)dioceses, parishes, and other Catholic organizations ("Catholic organizations") that are exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code ("IRC") in distinguishing activities that are permitted during election campaigns from activities that are prohibited. This guidance focuses primarily on section 501(c)(3) of the IRC, because it contains a prohibition, which has been interpreted as absolute, against participation or intervention in a political campaign on behalf of or in opposition to any candidate, as a condition of maintaining federal income tax exemption.
To see the full set of guidelines, go to "2007 Political Activity Guidelines for Catholic Organizations" on the USCCB website.
Noted Tax Prof and Nonprofit Law Prof Blog Editor Critical to Virginia Supreme Court Tax Exemption Case
According to the Roanoke Times, the Virginia Supreme Court yesterday heard argument regarding whether what is described by county tax officials as an "upscale retirement community" operated by the nonprofit organization, Virginia Baptist Homes, should retain its state tax exemption as a religous and benevolent organization:
Lawyers representing Virginia Baptist Homes, The Glebe's parent company, are scheduled to make oral arguments at 2 p.m. today in Richmond before a panel of three Supreme Court justices. The panel could rule today or make its ruling known at a later date on whether the case will be heard by the full court. The crux of the argument is this: Botetourt County says The Glebe is a resort for wealthy retirees that doesn't provide charitable or religious services to its residents. Virginia Baptist Homes says a religious and benevolent tax exemption it has held for more than 30 years applies to all of its properties, including startups such as The Glebe that someday will offer reduced rates.
A lower court ruled that the retirement community, known as The Glebe, was not entitled to tax exemption. Various news reports indicate that residents pay 100% of the retirement home's fees, but that the retirement home (only just established in 2005) is working towards creating a financial aid program. In the meantime, the crux of the issue in the court below apparently was whether the religiously operated retirement community should be viewed as charitable even if it does not presently provide free or reduced cost services. An earlier Roanoke Times article reports:
In dueling testimony Wednesday, a tax law professor called by attorneys for Virginia Baptist Homes testified that he believes The Glebe meets the federal guidelines for a nonprofit organization and operates in a benevolent manner." The care it provides is considered benevolent," said University of Georgia law professor David Brennen of the housing, assisted living and nursing care that The Glebe provides its residents. But an accountant called by the county later in the day testified that from a financial standpoint, The Glebe provides no services to its residents that aren't paid for by them through entrance fees or monthly fees.
Officials with Virginia Baptist Homes testified that The Glebe initially could only accept residents who had the ability to pay for their entire stay at the facility in order to satisfy the terms of $55.5 million in bonds received from the Roanoke County Industrial Development Authority to build the facility. By those terms, reservations for at least 70 percent of The Glebe's beds had to be purchased by current and future residents who can afford to live there before the facility can accept residents who may need financial assistance. With that condition met, The Glebe began to accept residents last fall whose life expectancy may exceed their ability to pay.
I think it was Judge Posner in United Cancer Council who expressed sympathy for nonprofit start-ups that must rely almost exclusively on fees before arriving at a point that they can actually offer free or reduced cost services. The catch-22, of course, is that if free or below cost services are required from the start as a condition for tax exempt status, very few nonprofits will get tax exempt status. More globally once again, the question of what is "charity" seems like a relative who just won't go home. No doubt, health care is very nearly "charitable, per se" under federal law -- see Revenue Ruling 69-545 -- but on the other hand, there is a palpable trend towards restricting the term "charitable" to those activities that are offered for free or below cost. The "commerciality" doctrine seems geared towards requiring some form of subsidy for people unable to pay the cost of certain goods or services. See, e.g., Federation Pharmacy Services v. Commissioner, 625 F.2d 804 (1980) (An organization which does not extend some of its benefits to indivduals financially unable to make the required payments reflects a commercial activity rather than a charitable one). For more on the commerciality doctrine as it relates to old folks homes see, David A. Brennen, The Commerciality Doctrine as Applied to the Charitable Tax Exemption for Homes for the Aged -- State and Local Perspectives.
We will be looking for the opinion. In the meantime . . . make it do what it do, David!
February 13, 2008
Nonprofit Finance Fund Compiles Economic Data for Nonprofits During Recessionary Times
The Nonprofit Finance Fund today released data and recommendations advising nonprofits on how to survive during periods of recession. The data were obtained for the years 2001-2005. NFF's five recommendations are listed below. For charts summarizing data from the study, see here.
FIVE RECOMMENDATIONS FOR NONPROFITS IN A RECESSION
1. Nonprofits heading into recession need to avoid “strong, silent behavior” and sustained spending, which has been a hallmark of the industry for more than a decade, and continues to make nonprofits weaker, not stronger. Miller explained: “We are entering a period of financial crisis, and we can’t afford to ‘fake it until we make it.’ This heroic type of behavior does no one any good in the long run. Nonprofits need to share worries with boards and funders, and enlist their support in getting ready for a possible recession. Organizations need to try to get by on decreased revenue and programmatic spending for a year or two in light of new financial indicators, before moving forward with challenging expenses.”
2. Nonprofits should engage with board members and funders in contingency planning on what is likely to happen to clients and funders during a recession. Clara Miller said: “The end clients are especially important, and face the greatest risk: many of the populations served by nonprofits are fragile, needy people, whose need increases in times of financial stress. The goal of surviving a recession or economic recession is not to stay afloat for the sake of staying in business, but rather to make sure you’re around to keep serving the public, particularly in times of increased demand for services. It’s important to get board members and funders to go public with that message -- that the organization’s survival is important because of the clients it serves.”
3. Nonprofits should avoid large investments in fixed assets and infrastructure (i.e., a building purchase, new hires or expansion of services), and if change (growth or retrenchment) is likely, then nonprofits need to work with funders and board to build a cushion to allow flexibility and course corrections. Miller explained: “As economist Peter Bernstein put it, ’Risk means not having cash when you need it.’ And that is particularly true for nonprofits, which often have liquidity problems in the best of times. Liquidity becomes even more of an issue during a downturn, when there is a temptation to maintain or increase services, and hence expenses, even if revenue is declining.”
4. Nonprofits need to get a firm handle now on their revenue patterns. Clara Miller said: “Organizations can examine revenue cycles to see if they're contra-economy or not. In some cases, the revenues of nonprofits actually rise during a recession. If that's true, nonprofits can build growth funding to allow rapid expansion to meet needs. If the opposite is true, nonprofits can take actions in step with cushion-developing approaches.”
5. If they offer services (e.g., job retraining, food kitchens and housing services) that will lessen the negative impact of an economic downturn, nonprofits should approach government funders more aggressively. Clara Miller noted: “Nonprofits should propose revenue-neutral changes if the government can assist it with expansion during a recession or improving its practice within the context its mission. Nonprofits can also band together around quality-adequate pricing, and consider shared platform investigations, using already-scaled ones available.”
Another way nonprofits are helping people cope with mortgage crisis
According to an article in todays Wall Street Journal, credit unions -- nonprofit, mutual benefit, cooperative institutions owned by their members -- are becoming an unlikely hero for many Americans who are foreclosing on mortgage loans. It reports that credit unions did not invest as heavily as large investment companies in subprime loans that have shaken American banks. Since credit unions have not taken the same financial hits that the banks have, they are able to offer loans to borrowers that the banks will not take risks on. And because their mission is to benefit their members, not impersonal shareholders, they are likely more flexible in meeting their members' needs.
Religious Liberty groups offer legal guidance to pastors in election season
According to a coalition of religious liberty advocacy groups, "[a]s the 2008 elections approach, various groups have launched intimidation tactics in an effort to silence churches and pastors about the great social and moral issues of our time." These alleged tactics include threats by the IRS to revoke a church's tax-exempt status. "Churches and pastors need clear guidelines for permissible political activities to answer to these attacks." In response to that need, this coalition is offering such guidelines -- "Constitutional Protections for Pastors: Your freedom to speak Biblical truth on the moral issues of the Day" --- it says, "to ensure that pastors and churches are not silenced during this next campaign cycle." These guidelines focus on the separate rights that pastors as individuals have to address issues raised in elections. In addition, two of these coalition groups -- the Alliance Defense Fund and the James Madison Center for Free Speech -- have offered to respond free of charge to inquiries by churches, pastors and priests on permissible political activities.
February 12, 2008
Nonprofit group helps overextended mortgage borrowers renegotiate with lenders
The New York Times reports that ACORN Housing, a nonprofit 501(c)(3) organization, is working with borrowers and mortgage lenders in order to help borrowers avoid foreclosure. Countrywide Financial Corp., Washington Mutual Inc., Wells Fargo & Co., Bank of America Corp., JPMorgan Chase & Co., and Citgroup, Inc. are prepared to offer borrowers in default a grace period of 30 days to negotiate new loan terms, rather than immediately foreclose on the property. The lenders hope that borrowers will be willing to reach out to nonprofit groups such as ACORN Housing to work out solutions before foreclosure proceedings begin. According to its website, ACORN Housing provides free housing counseling to low and moderate income homebuyers, including through its Home Equity Loss Prevention Program (HELP). Its GuideStar profile says that "[o]ur program emphasizes the one-on-one approach to counseling that has proven to be most effective at giving clients the information and tools they need. We counsel clients on the full range of housing finance needs: pre-purchase, delinquency, refinance, home equity, subprime, and predatory rescue." It would be interesting to compare and contrast this organization's activities with those of formerly-charitable credit card counseling agencies.
Some nonprofit hospitals use ERs as loss-leaders to gain new clients and improve bottom line
In an article entitled "City Hospitals Reinvent Role of Emergency," The New York Times reports that some hospitals in NYC are spending millions of dollars to renovate and expand their emergency rooms (ERs), in some cases adding such things as private rooms with flat screen TVs and art therapists to entertain waiting children. There is an economic logic to these expenditures. We typically think of ERs as a money-losing service that hospitals provide in order to meet standards for tax exemption. And while it's true that most ERs lose money for hospitals, they are also vital sources of paying patients: "the insured patients who do come through the same doors and who wind up being admitted for surgery and other care are their economic lifeblood. In fact, a majority of inpatient admissions at New York hospitals come through the emergency room." In these instances, more humane charity makes good business sense.
What is Charity?
In my tax exempt organizations class today, we tackled the imponderable question, "What is Charity"? To assist our discussion (we only had 85 minutes, mind you), we considered a few sources, including a 2005 New York Times op-ed piece, a wikipedia entry on charity, an online source from somebody named Dr. Wilson, an entry from the Catholic encyclopedia, the meaning of the Jewish word Tzedakah, Zakat, the concept of charity in Islam, and then just our own notions of charity. All very unscientific, of course, but it made for pretty good discussion. After reviewing the precedents pertaining to tax exemption of hospitals, we concluded that charity for U.S. tax purposes is almost any activity that complies with the nondistribution constraint and, more recently, the public benefit admonition. Yep, we pretty much nailed that down.
Nonprofit Newspapers Fill a Gap Left by For-profit Journalists
The Christian Science Monitor reported on February 12, 2008, about how nonprofit newspapers are filling a gap left by for-profit newspaper outfits. Here is an excerpt from the story:
It provides "the best coverage of city politics that we've had in years," raves Dean Nelson, a journalism professor at San Diego's Point Loma Nazarene University.
The success of the tightly focused Voice, which relies on donors, offers a ray of hope for a troubled industry. Plagued by shrinking circulations and advertising, newspapers are shedding staff and downsizing their offerings. Even the pages have gotten smaller.
By contrast, several nonprofit newspapers – though rare and often tiny – have sprung up in recent years both online and in print, funded largely by foundations and individual donors.
The strategy of nonprofits like the Voice "may be one of the ways to preserve the integrity of journalism," says Mr. Nelson.
For the full article, see "Nonprofit Journalism on the Rise" in the February 12, 2008, Christian Science Monitor.
February 11, 2008
What Drives Foundation Compensation and Expenses?
The Urban Institute, the Foundation Center, and Philanthropic Research Inc. have published the results of an intensive, three-year study regarding the factors that determine the levels of compensation and expenses of some of the largest private foundations. Here is a excerpt from the executive summary:
This report presents final results from the Foundation Expenses and Compensation Project—the first large-scale, long-term, systematic study of independent, corporate, and community foundations’ expense and compensation patterns and the factors behind them. Documenting the varying characteristics of the 10,000 largest U.S. grantmaking foundations, the study finds these differences—including foundation type, size, and operating activities—essential for understanding foundation finances. Not surprisingly, hiring staff and taking on staff-intensive activities raise charitable administrative expenditures relative to charitable distributions, while relying on unpaid board and family members and engaging in less staff-intensive activities lower them. Most foundation operations, however, are somewhere between these poles.
Accurately Measuring the Economic Impact of Civil Society
A recently released study provides fascinating insight into the real economic impact of nonprofits. The Center for Civil Society Studies recently released "Measuring Civil Society and Volunteering." The publication contains useful empirical data in an effort to more accurately measure the nonprofit sector's real economic impact around the world. Here is the introductory section of the report:
Recent years have witnessed a significant growth of interest in the role that nonprofit institutions (NPIs) and the volunteers they help to mobilize play in addressing social needs, promoting civic involvement, and improving the quality of life in countries throughout the world. However, efforts to understand this set of institutions and to fashion policies supportive of its development have long been impeded by a lack of basic information on its scope, finances, and role. One important reason for this has been the way nonprofit institutions are treated in the System of National Accounts (SNA), which guides official economic data-gathering and reporting internationally. Although the SNA makes provision for a “Nonprofit Institutions Serving Households,” or NPISH, sector, the rules for allocating economic units among sectors leads to the assignment of many of the economically most significant nonprofit institutions not to this NPISH sector, but to the corporations or government sectors based largely on the source of their revenues. This means that only a relatively small fraction of all NPI economic activity is visible in the SNA’s NPISH sector. Partly as a result, few countries have bothered to report on NPISH at all. The report contains data from eight different countries and states that 20 other countries have agreed to provide additional data. dkj
Recent years have witnessed a significant growth of interest in the role that nonprofit institutions (NPIs) and the volunteers they help to mobilize play in addressing social needs, promoting civic involvement, and improving the quality of life in countries throughout the world. However, efforts to understand this set of institutions and to fashion policies supportive of its development have long been impeded by a lack of basic information on its scope, finances, and role. One important reason for this has been the way nonprofit institutions are treated in the System of National Accounts (SNA), which guides official economic data-gathering and reporting internationally. Although the SNA makes provision for a “Nonprofit Institutions Serving Households,” or NPISH, sector, the rules for allocating economic units among sectors leads to the assignment of many of the economically most significant nonprofit institutions not to this NPISH sector, but to the corporations or government sectors based largely on the source of their revenues. This means that only a relatively small fraction of all NPI economic activity is visible in the SNA’s NPISH sector. Partly as a result, few countries have bothered to report on NPISH at all.
The report contains data from eight different countries and states that 20 other countries have agreed to provide additional data.
UT Board of Regents to increase spending from endowment to 5%
The Dallas Morning News reports that the University of Texas Board of Regents voted to increase the amount spent from an $11.7 billion endowment from 4.75% to 5%, or approximately $27 million more dollars next year. This move should allow the UT System to reduce the size of tuition increases. The decision comes amid growing national pressure for wealthy universities to spend more of their endowments. Last year, universities spent an average of 4.6 percent of their endowments. Last month, U.S. Sens. Charles Grassley and Max Baucus sent letters to the 136 colleges and systems with endowments worth at least $500 million, asking why they don't use more of that money to help students afford college. In general, private foundations must make an annual payout toward charitable purposes that meets or exceeds five percent of the market value of its total assets. Some members of Congress and critics say that with soaring tuition and fees and swelling endowment sizes, schools should be paying out at least 5 percent. Many colleges object to spending more than that, saying they need to keep a large pot for future downturns or emergencies.
Carter Bishop (Suffolk) Posts "The Deontological Significance of Nonprofit Corporate Governance Standards: A Fiduciary Duty of Care Without a Remedy"
Carter Bishop (Suffolk) posted an abstract of his Catholic University Law Review article entitled "The Deontological Significance of Nonprofit Corporate Governance Standards: A Fiduciary Duty of Care Without a Remedy" on SSRN's Nonprofit and Philanthropy Law Abstract Journal. Here is the abstract:
Given the diverse charitable mission and high rate of unpaid donor and volunteer service to the charitable nonprofit board of directors, few would seriously suggest that a nonprofit corporate director‘s fiduciary "duty" of care to oversee management should exceed that of a for-profit corporate director counterpart. Most for-profit corporate directors duty of care breaches are protected by the business judgment rule and statutory exculpation clauses. However, systemic abdication of directorial duties can result in ruinous unprotected "liability" to for-profit directors through shareholder derivative suits. Unfortunately, abdication and dereliction are far more common on volunteer nonprofit charitable boards. Except in the largest charitable nonprofit corporations, directors often view their role as advisory rather than supervisory. Consequently, one might expect parallel duties of care to have even more ruinous effects in the charitable nonprofit corporate sector. In fact, this is not true because most charitable nonprofit corporations do not have shareholders, donors lack standing to bring fiduciary duty suits, and while state attorney general offices have standing, they lack resources and interest to enforce the duty of care. So, while for-profit director abdication is far more common, it is far less likely to result in director liability.
So, what is the significance of a charitable nonprofit director fiduciary "duty" of care if it does not result in any liability consequences? First and foremost, the duty properly explained, is eventually internalized tending to create aspirational care behavior in spite of a lack of breach liability. Secondly, every charitable nonprofit corporation is classified either as a private foundation or a public charity for federal tax purposes. These classifications attach monetary liability significance to management engaged self-dealing and excess benefit transactions that become monstrous if uncorrected after detection. Moreover, these self-dealing and excess benefit transactions create potential monetary liability to charitable nonprofit directors who "knowingly participate" in such transactions. Specifically, even though charitable nonprofit directors are not directly involved in the culpable manager‘s behavior, the charitable directors will incur monetary penalties if they had a "duty" to act. The failure must be due to deliberate inattention but the intent may be inferred from the fact that knowledge of the improper behavior would have likely developed had the director not been systematically absent from regular directors meetings.
The 2008 revision draft of the Model Nonprofit Corporation Act creates fiduciary duties of care for charitable nonprofit corporate directors comparable to those in for-profit corporations. The 2008 draft of the American Law Institute Principles of the Law of Nonprofit Organizations adopts a similar approach. While neither drafting project offers compelling reasons for creating and imposing largely symbolic fiduciary "duties" of care, this Article suggests that philosophical, moral and legal liability bases do exist and indeed depend upon the existence of such a duty. Absent the duty, not only would charitable nonprofit corporate director management oversight behavior likely deteriorate, scandalous management behavior would also likely expand unchecked. The unique combination of state law duty with federal liability detection and liability appears the most efficient and best model as it seldom embroils the finances of the nonprofit corporation for enforcement such as shareholder derivative suits.
An assorted array of other solutions to charitable directorial abdication are in process as well but all have critical defects examined in the context of the charitable nonprofit corporation. Following the Enron-era scandals, the federal Sarbanes-Oxley Act was enacted in 2002 to increase publicly traded for-profit corporate director independence from management, management accountability to the board, and information transparency regarding director management oversight. These measures add superficial luster to the state law fiduciary duties by making objectionable management activity and lax board oversight more apparent to shareholders and the public. But those provisions do not apply to charitable nonprofit corporations without members or shareholders, the primary target of this Article and the largest group of nonprofit organizations. While a few states have adopted similar provisions and a few large national charitable nonprofit corporations have voluntarily elected to comply with Sarbanes-Oxley, the enforcement paradox continues to plague directorial accountability for lax charitable management oversight.
Notwithstanding federal charitable director liability, the system could be vastly improved, particularly at the management level. While the same federal tax law creates even more monstrous liability against participating managers for uncorrected self-dealing and excess benefit transactions, the initial penalty is low and lacks deterrence effect because of low detection rates. Higher initial penalties would discourage transactional misbehavior even if not detected. Finally, managers are flatly prohibited from self-dealing transactions in the context of private foundations but only prohibited from "excess benefit" transactions in the context of public charities. Given the scandalous behavior in several notorious charitable management abuse cases, the absolute prohibition applicable to private foundations ought to be extended to public charities. Finally, greater public information transparency would mobilize the press to examine readily accessible documents for violations. News stories can alert the IRS to otherwise undetected violations. So both private foundations and public charities of an identified minimum size should be required to post charitable exemption applications and annual IRS filings on their own websites.
This version of the article is a submission draft and does not reflect any law review edits.
Von Maur victims fund beneficiaires must establish need to avoid private benefit
On Wednesday, December 5, 2007, a gunman entered a Von Maur store in Omaha, Nebraska, and killed eight people and injuring five others before killing himself. In response to the shooting, the company set up a victims fund through the local United Way. This fund has raised $1.17 million. The committee administering the fund must determine how to distribute the funds in a manner consistent with charitable purposes, in order to avoid subjecting payouts to taxes. According to an article in today's Omaha World-Herald, the IRS has informed the committee overseeing the fund that only after victims document their need for assistance (e.g., medical expenses, counseling, education for children left behind), can tax-free payouts be made.
This is a recurring issue. Following the Columbine shootings and the Virginia Tech massacre, donors poured millions of dollars to establish funds to compensate families of the dead and injured. After 9/11, Congress created and funded a special Victims Compensation Fund to the same end. Unlike those other funds, however, the Von Maur Victims Fund may not be permitted to make tax-free payments to victims and their survivors based on either: (a) dividing the total sum raised equally (as occurred to some extent with the Columbine, 9/11, and Virginia Tech massacres) or (b) based on projections of lost future income (as occurred in the 9/11 Victims Compensation Fund).
Although disaster relief has long been recognized as a charitable purpose, the IRS suggested prior to 9/11 that payouts from victims funds might violate the private benefit doctrine if not made to those traditionally classified as poor or under some other specific financial need. Tax-free payments could not based "solely on an individual’s involvement in a disaster or without regard to meeting the individual’s particular distress or financial needs..." After the 9/11 attacks, however, the IRS issued Notice 2001-78 stating that it would treat payments made by charities to disaster victims and their families as related to the charity’s exempt purpose as long as such grants were made “in good faith using objective standards," and Congress enacted legislation that specifically provided that cash grants to 9/11 victims would be considered as made for an exempt purpose. Because Virginia Tech was a state instrumentality, it obtained special authority from Virginia's governor to distribute the money to victims. In any event, Congress and the Virginia Legislature later passed bills to ensure that victims wouldn't have to pay federal and state taxes on the payouts.
Washington attorney Kenneth Feinberg, who handled both the 9/11 and Virginia Tech funds, advocates making equal payments to the families of those who die in such tragedies, to avoid the perception that some victims' lives are worth more than others. Yet the current IRS position on disaster relief has returned to the proposition that the charity must make some kind of “needs” assessment when appropriate and to document the basis for its grants. This is as it should be, as Professor Robert Katz argued in two articles published in 2003: A Pig in a Python: How the Charitable Response to September 11 Overwhelmed the Law of Disaster Relief, and Too Much of a Good Thing: When Charitable Gifts Augment Victim Compensation. Katz argued that both state charity law and the federal tax private benefit doctrine should be read to prohibit charities from conferring excessive financial benefits on their beneficiaries in the context of disaster relief. Katz distinguished between the objectives tort law and charity law, noting that while tort law strives to make a person whole, there is nothing inherently charitable about that objective, and that by contrast, “loss alleviation ceases to be charitable . . . if it disburses more cash than necessary to relieve the victim’s financial distress.” Accordingly, the charitable purpose of disaster relief must necessarily focus on simply relieving financial distress of victims, not granting them compensatory tort damages. Professor John Colombo (a mentch who deserves all good things) incorporated this situation into a broader theory of private benefit in In Search of Private Benefit (2006).
Stay tuned to whether Congress will enact special legislation to exempt the Von Maur fund from the private benefit doctrine. The 9/11 tragedy was a hard case, and it continues to generate new laws.
February 10, 2008
Specter Introduces Bill Concerning Copyright Exception for Nonprofit Churches and Other Religious Organizations to Show Super Bowl Game
On February 4, 2008, Senator Arlen Specter introduced legislation, Senate Bill 2591, that would provide an exemption for churches and other religious organizations from copyright laws that currently prevent religious entities from showing the Super Bowl Game for free on large screen televisions. Here is an excerpt from the Congressional Record, 154 Cong Rec S 602, of Senator Specter's statement in support of the new legislation:
Mr. President, I rise to introduce legislation which would modify the limitations on churches showing the Super Bowl under the NFL copyright franchise. Churches across the country were notified by the NFL not to show the Super Bowl on a big screen because it infringed their copyright. There is an exception under the copyright laws for bars. It is anomalous that you can go to a bar and see the Super Bowl, but you cannot go to a church for a social gathering and do the same. This legislation will correct that.
The bill is Senate Bill No. 2591, introduced in the 110th Congress. The full text of Specter's statement is available on Lexis.
Bush Includes Charitable Giving Incentives in Proposed Budget
The Chronicle of Philanthropy reported on February 4, 2008, that President Bush included several charitable giving incentives in his proposed Fiscal Year 2009 federal budget. The entire budget is available on-line at http://www.treasury.gov/offices/tax-policy/library/bluebk08.pdf. Here is an excerpt from the Chronicle of Philanthropy story:
In his administration’s newly released 2009 budget, President Bush proposed making permanent a number of temporary incentives for charitable giving. He also proposed eliminating the two-tier structure of taxes that private foundations must pay on their investment income, replacing it with a flat rate of 1 percent instead.
For the entire story, see "President Bush Includes Charitable-Giving Incentives in Budget Proposal" in the Chronicle of Philanthropy.