Nonprofit Law Prof Blog

Anonymous Giving Up During Recession

This story in the Chronicle of Philanthropy notes that as the recession has deepened, anonymous donations have risen. The Chronicle's analysis comes on the heels of recent reports detailing $75 million in gifts from an anonymous donor to several different colleges and universities headed by women (see prior blog post here).  The Chronicle story suggests that some donors may want to hide the fact that they have done well financially while the economy has tanked, either because putting one's name on a building is "gauche" in bad times, or for the usual worry about increased solicitations from other charities or fending off questions about the gift from family (who would otherwise inherit?) and friends.

I've often wondered what would happen to donation levels if the tax code permitted a deduction only for anonymous gifts.  My theory on this has been that we do not need the tax laws to "incentivize" donations already recognized by having one's name on a building or on a large plaque inside the main doors; the recognition is incentive enough, and indeed most charities have "price lists" that tie the level of recognition to the amount of a donation (want a named chair at the University of Illinois?  It's yours for a mere $1.5 million, but a professorship will only cost $750,000).  Most people think my idea would gut donations, particularly major capital gifts; but maybe large donors are more amenable to anonymous giving than we think . . .  

JDC

More on PILOTs

Yesterday I posted about an article in the Princetonian reporting that a citizens' group is pressuring Princeton U. to make more voluntary payments in lieu of taxes to the city of Princeton local government. Today, the mayor of Boston provides a column about PILOTs in that city.  The column notes that Boston's property tax assessment department recently completed a study of property owned by large exempt nonprofits (e.g., universities and medical centers):

The report finds that in fiscal year 2009, the tax-exempt property owned by the educational institutions was valued at $7.0 billion, which, if taxable, would have generated $190.2 million in property taxes for the City of Boston. Tax-exempt property owned by the medical institutions was valued at $5.7 billion, which, if taxable, would have generated $154.8 million in property taxes for the City of Boston. 

Under current PILOT agreements, educational institutions will pay Boston $8.7 million in fiscal year 2009, or 4.6 percent of their estimated tax liability if taxable. Medical institutions will pay an estimated $5.8 million, which represents 3.8 percent of what they would pay if taxable.   Not surprisingly, the mayor concludes that maybe these institutions should be doing more . . . 

JDC

New IRS Workplan Offers Clues About Priorities for Exempt Orgs

The IRS's strategic plan for 2009-2013 offers some clues about where the agency is headed with regard to oversight of tax-exempt organizations (it's a very spiffy publication, by the way).  Here is the text of the IRS's "Objective 5: Continue focused oversight of tax-exempt sector":

More than $15 trillion in assets are currently controlled by tax-exempt organizations or held in tax-exempt retirement programs and financial instruments. The massive size of this sector requires us to provide more careful oversight and advisory support than ever before.

Tax-exempt and government entities often find it difficult to navigate the complicated, specialized and changing tax rules that apply to them. The IRS will provide guidance and information to help tax-exempt and government entities understand their responsibilities and comply with the law. We will also discourage those who abuse tax-exempt status by actively seeking them out and addressing wrongdoing, making it clear that violations carry a high risk of meaningful punishment.

Certain segments of the tax-exempt sector, such as hospitals and universities, are especially large, complex and growing. For example, university endowments grew by 17 percent to $411 billion in 2007, with the largest nearing $35 billion. Due to their size and complexity, and consequent risk to the tax base, the IRS will continue to monitor compliance and enforce the rules applicable to universities, hospitals and other major segments of the tax-exempt community.

Translated, the IRS seems to be warning tax-exempts that the agency will be paying ever closer attention to this sector, particularly the "heavyweights": hospitals and universities.  But that ever closer attention should also include more IRS published guidance, workshops and seminars.  Noticeably absent from the workplan is any suggestion that the IRS might reconsider the substantive basis for exempting nonprofit hospitals, something that Steve Miller, former commissioner of TE/GE, has intimated is long overdue, but perhaps not something the IRS should undertake without Congressional intervention.  And I suppose there is some sense in the notion that any attempt to revisit substantive exemption standards for hospitals should await health care reform, which everyone thinks really, truly will happen this time around.  

Meanwhile, I'm beginning to wonder whether big universities ought to be exempt, as well.  While perhaps not as ruthlessly bottom-line oriented as modern nonprofit hospitals, universities increasingly are beginning to look like business conglomerates, with an abundance of joint ventures with for-profit companies in areas of research and development, large real estate holdings for research parks and other for-profit ventures, and ever-increasing tuition as their largest source of revenue (and don't get me started on Division I athletics . . .).  Just as nonprofit hospitals today bear no resemblance to the institutions we routinely exempted in the early 1900's, universities today bear little resemblance to the ivy towers of an earlier age.  These institutions (hospitals and universities) are dynamic, changing enterprises.  Is it too much to ask that the law of tax-exemption try to keep up with the changes??

JDC

Saving The N.Y. Times

A very provocative and interesting article by Penelope Muse Abernathy, the Knight Chair in Journalism ant UNC Chapel Hill, examines four strategies for "saving" the N.Y. Times (assuming it needs saving).  Three of these strategies rely either exclusively or primarily on nonprofit philanthropy (converting the Times to a nonprofit and raising a $5 billion endowment to pay operating costs; creating a nonprofit foundation to cover some or all news-gathering costs while leaving the Times itself as a for-profit company; and a purchase of the paper by a large nonprofit institution or consortium of institutions, such as universities, which would run it as part of the educational enterprise).  But if I'm reading the paper correctly, she seems to favor a for-profit approach, with some "white knight" (Mayor Bloomberg?) buying the Times, paying off its debt, and positioning it for success in the new digital media age (hence her suggestion/speculation on Bloomberg, who has made his considerable fortune by distributing financial news via various media, including on-line, TV, radio, etc.).  She mentions the possibility of using the new L3C (low-profit limited liability company) form for this last alternative.

The paper is only 23 pages long, and is well worth a read by anyone interested in the nonprofit sector and the recent speculation regarding converting newspapers to nonprofit form to insure their future viability.

JDC

More Pressure for PILOTS?

This story in The Daily Princetonian discusses efforts of a local citizens' group to pressure Princeton University to contribute more money to the local government.  Over the past decade or so, many municipalities have cut deals with large nonprofits for "payments in lieu of taxes" (PILOTs) to offset at least some of the lost revenue from tax exemption.  The article in the Princetonian notes that Princeton contributed over $1 million to the Princeton local government under a PILOT agreement, and choose to pay another $8.9 million in taxes on property that they could have requested exemption for.

The article is a very nice summary of the debate over PILOTs and tax exemption for large nonprofits in urban communities.  On the one hand, Princeton would pay as much as $35 million in taxes if it were not exempt.  Exemption pushes up taxes on non-exempt property, making homes less affordable and potentially driving out older and working-class residents.  On the other hand, Princeton claims, probably correctly, that it brings a huge amount of economic activity to the area - and, after all, it is an educational organization, which have traditionally been exempt from taxes.

With the economy in the shape it's in, the debates over PILOTs and what contributions large, exempt nonprofit institutions should and/or do make to their local communities will likely rage on, and I suspect we'll see a lot more arguments over PILOTs, as well as possibly some narrowing in the grounds for exemption under state laws.

JDC

Ruminations on Nonprofit CEO Compensation

This story in the Triangle Business Journal, like many other stories in the press over the past several years, raises the specter of tax-exempt nonprofits (in this case, hospitals), losing exemption because of "excessive" CEO compensation.  Unfortunately, the stories almost uniformly misinterpret the law, present the facts in the most sensational manner possible, and generally "get it wrong."  I understand that reporters are busy, that they believe they need to inform the public about issues, that particularly in this era of TARP, executive salaries are a "hot" issue, and that this area is complex.  But you'd think that after several years of this, someone would put in the effort to learn the issues, and quit writing the same wrong stuff time after time after time.

The story in the Triangle, like virtually all the press stories, get their sensationalistic spin from both the absolute amount of compensation (in the case of the two hospitals mentioned in the story, WakeMed and Duke, over $1 million annually for each CEO) and the comparison to other nonprofit CEO salaries (which are almost always lower; those who study nonprofit organizations understand that salaries for nonprofit hospital administrators outpace every other nonprofit salary, which shouldn't surprise anyone: many nonprofit medical centers are huge businesses, generating hundreds of millions or billions in revenue and employing thousands of people).

But the law in this area quite clearly states two things.  First, it is not the absolute amount of compensation that is the issue.  The issue is whether the compensation package as a whole is "reasonable."  And second, "reasonable" in these cases is measured not by just a comparison to other nonprofit salaries, but also a comparison to salaries in the for-profit sector.  The regulations could not be clearer on this point: 

“The value of services is the amount that would ordinarily be paid for like services by like enterprises (whether taxable or tax-exempt) under like circumstances (i.e., reasonable compensation).  Section 162 standards apply in determining reasonableness of compensation . . . .”  Treas. Reg. § 1.4958-4(b)(1)(ii) (italics added).  

In fact, the regulations under Section 4958 provide a safe-harbor provision for compensation arrangements if the arrangement is approved by an independent board or compensation committee of the board that relies on “appropriate data as to comparability prior to making its determination” and documents the basis for its decision.  Treas. Reg. § 1.4958-6(a).

There is a legitimate theoretical issue regarding whether nonprofit executive compensation should be measured against for-profit compensation.  The arguments here are not hard to understand.  On one hand, some assert that keeping charitable management salaries below those of the for-profit sector helps insure that managers retain the “special ethic” of charities as serving their constituents rather than making a buck, and makes sure the maximum amount of money is used for services to the beneficiaries of the charity, whomever they may be (e.g., more free or discounted care for the uninsured poor, in the case of hospitals).  The counter-argument is that such limitations artificially condemn charities to hiring “second rate” management since they will be unable to compete with for-profit firms for the top managerial talent.  Put more starkly, would you rather have your quadruple-bypass surgery done by the head of cardiology who makes $1 million per year, or by a heart surgeon whose salary has been artificially limited to $100,000 per year?  Yeah, I thought so.

But these theoretical arguments about what the law should be do not alter what the law is today.  And under the law as it exists, most of the press stories about nonprofit executive compensation give a false impression that the salary in question violates legal standards.  And that, folks, is both sloppy reporting and not very helpful to the real issues at hand, which in the case of nonprofit hospitals, have more to do with the underlying tests for exemption and whether nonprofit hospitals should be exempt at all, than what hospital executives get paid.  

JDC

Nonprofit Low-Income Housing Losing Exemptions in Wisconsin

This story in the Wisconsin State Journal details how low-income housing organizations are facing the loss of property tax exemption in Wisconsin due to an interpretation of state law by the Wisonsin Supreme Court.  The issues involved apparently started in 2003, when the Wisconsin Supreme Court decided Columbus Park Housing Corporation v. City of Kenosha.  At the time, Wisconsin state law provided that rental property would be exempt only if two requirements were met: (1) the property would be exempt in the hands of the lessee if the lessee owned it and (2) all rental income had to be reinvested in the property or used for debt reduction.  Obviously, low-income housing did not meet requirement (1), since the renters were individuals, not tax-exemption charities. And the case in question affirmed that these requirements applied to low-income housing units, which accordingly failed the exemption test.  The Wisconsin legislature then passed a law clarifying that requirement (1) did not apply to low income housing.    But the law did not address requirement (2), and in fact many low income housing organizations use rental funds for other purposes, such as to subsidize care provided to others served by those organizations, to refinance debt, to offset Medicaid losses and to purchase new properties for low-income housing development (see this article for an excellent discussion of the background to this issue).

The Wisconsin legislature apparently has considered fixes for this problem, but has not yet enacted them into law.  And given the current economic/budget situation at the state and local level, one wonders whether fixing this issue is going to be a political problem . . .

JDC

N. Carolina Legislature Debates Limiting Sales Tax Exemption for Some Charities

According to this story in the Winston-Salem Journal, some state senators in North Carolina have proposed limiting the current sales tax exemption for nonprofits by capping the exemption at $5 million per year.  The proposal would hit some large nonprofit hospitals and universities, and is (naturally) causing some nonprofit hospital executives to hyperventilate over potential loss of their exempt status for other (e.g., property and income tax) purposes.  They should probably be more worried about health care reform and potential universal coverage; if that happens, charity care, which is the core of the argument in favor of exemption for nonprofit hospitals, will certainly decline if not cease to exist (there may still be some charity cases - for example, illegal aliens not covered by any new government program, and there may still be some argument about whether reimbursements, particularly from government programs such as an expansion of Medicaid, fully cover costs).   I can't wait to see how the nonprofit hospital industry makes its arguments for continued tax exemption in a universal-coverage world . . .

JDC

RHIO's Get 501(c)(3) Status from IRS

After a two-year moratorium, the IRS has begun issuing favorable exemption determinations to Regional Health Information Organizations (RHIO's) like this one in rural California. RHIO's are a relatively new development in health care; according to this article, the organizations enable health care providers and community residents to conveniently share and access patients’ clinical data, such as a patient’s electronic health records (EHR) and may act as a central health data collection agency. The activities of a RHIO may also include education and research projects, as well as creating and operating secure communication systems that support the exchange of health information, data and studies.

The IRS has posted a very short FAQ on RHIO's, which indicates that it's decision to begin issuing favorable determinations was prodded by the recent stimulus legislation and is based on the theory that these organizations "relieve government burdens," one of the bases for exemption laid out in Treasury Regulations 1.501(c)(3)-1(d).

The exemption of RHIO's is a relatively significant development, particularly given that the organizations typically charge fees for their service.  Indeed, one "how to" manual for RHIO's states 

Crucial to the sustainability of a RHIO is the ability to collect fees that accurately reflect the value that each stakeholder receives from participating.(9) To achieve this, RHIOs should consider as many different business models as possible, including service-fee models and transaction-fee models. 

In short, RHIO's essentially are businesses in their operating models.  The IRS apparently has not yet released the actual private rulings on RHIO's (at least, a Lexis search did not turn any up, and I haven't seen any listed in the usual places, such as the Exempt Organizations Tax Review's monthly review of EO rulings).  It will be interesting to see how the IRS handled the commercial activity aspect of these organizations in its rulings.

JDC

IRS Lists Abuse of Nonprofits in Its "Dirty Dozen" Tax Scams List

From IRS Release IR-2009-41:

The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets, including easements on property, closely-held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

JDC