Friday, September 25, 2009
The International Journal of Not-for-Profit Law (ICNL) on
Thursday announced the release of two reports on the state of NGO law in Kenya. The reports are the product of two experts in Kenya
Ms. Jillio’s report analyzes the current NGO Coordination
Act in Kenya and compares it
to NGO law in other parts of Africa
Ms. Kisinga’s report calls for a more
inclusive reform process. She argues that broad participation by the various
stakeholders in Kenya
The World Bank, in a July press release, announced that it has banned two Bangladeshi NGOs and their executive directors from bidding to provide goods or services pursuant to contracts financed or executed by any member of the World Bank Group. The World Bank issued the bans because a World Bank investigation found evidence of fraud by the parties in relation to a project financed by the World Bank. The two NGOs concerned are the Organization of Rural Economic Development & Rehabilitation (OREDAR) and the Poverty Alleviation and Rural Development Organization (PARDO). OREDAR and its former executive director, Rezaul Karim, are banned for a period of two years; however, OREDAR may reduce this period to one year by instituting a compliance program acceptable to the World Bank. PARDO and its executive director, Mrs. Shamima, are banned for a period of three years. No mention was made of a potentially shortened period.
The findings of fraud were the result of investigations in
The press release quoted Leonard McCarthy, VP for Integrity for the World Bank, as stating “When we talk about integrity in Bank operations, it must apply equally to all the entities that implement our projects, whether they are large corporations or small NGOs.”
The U.S. Court of Appeals for the 9th Circuit issued an opinion, Warfield v. Alanniz, 569 F.3d 1015 (9th Cir 2009), recently that classified charitable gift annuities as security instruments. Defendants in the case promised investors that their investment would create an annuity with a high rate of return and that, upon their death, the remainder of their investment would go towards the charity of their choosing. Sadly, the investment scheme was just that, a scheme. The early investors were paid disbursements from the investments of later investors, the brokers skimmed off the top, and the entire structure collapsed in on itself. Litigation began with the filing of a civil complaint by the SEC and ended with the 9th Circuit’s ruling and a criminal sentence for at least one of the defendants.
While the Warfield case dealt specifically with a Ponzi scheme, the court's reasoning indicates that its holding applies to legitimate charitable gift annuities and fund advisers as well. The court applied a three-part test to determine that the gift annuities constituted investment contracts for the purposes of the Securities Acts. The test for what constitutes a “security” requires “(1) an investment of money (2) in a common enterprise (3) with the expectation of profits produced by the efforts of others.” This is the test that the Supreme Court expounded over 60 years ago in SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
The focus of the 9th Circuit’s analysis falls to
the third prong of the test. The
arguments and analysis boil down to one central question: whether the investors
expected to make a profit. The court
answered this question based on the marketing of the ‘charitable’
foundation. Specifically, the
foundation “marketed its gift annuities as investments, and not merely as
vehicles for philanthropy,” promising returns equivalent to stock investments
that pay dividends of 19.3%. Based on
the foregoing, the 9th
Circuit found that the charitable gift annuities were investment
contracts subject to federal securities regulation. The court also
held that the Philanthropy Protection Act of 1995 did not apply. The
Philanthropy Protection Act exempts charitable organizations that
collect funds for the issuance of charitable gift annuities, from the
registration requirements of the Securities Acts. The court held that
the fact that the sellers of the gift annuities at issue collected
commissions on the sales of the annuities precluded the application of
the Philanthropy Protection Act exemption.
The court's conclusions are in line with current
calls for tighter regulation of all investment instruments, (whether
issued by for-profit or nonprofit entities) and of those who create and
Thursday, September 24, 2009
In an an interview published by EurActive.com in August, Patrick de Bucquois of CEDAG, a European umbrella group for non-profit organizations, expressed concern regarding the EU Services Directive that is due to be implemented across Europe by the end of the year. Mr. de Bucquois's concerns focus on the failure of the Directive to clearly define who is a non-profit service provider; and to allow cross-border providers of services to have the provision of such services governed by the laws of their home country.
With respect to the definition of a non-profit service provider, the original goal was to pass a European Statute of Non-Profits. A lack of consensus, however, produced, instead, the European Statute for Co-operatives which was not quite on point. As a result, there is no clear recognition at the European level of what it means to be a non-profit service provider. This lack of clarity gives rise to concerns about implementation. European countries are not implementing the statute uniformly across, or even within, countries.
Mr. de Bucquois’s other major concern is the removal of the “country of origin” principle from the Directive. A service provider from one country is free to provide services in other countries. The inclusion of the "country of origin" provision in the Directive, however, was designed to allow a service provider providing cross-border services to be governed by the laws of its home country for a limited period. For instance, a French service provider providing services in the UK would generally be governed by French law. The removal of this principle undercuts one of the initial purposes of the Directive which was to create a unified service provider system for Europe.
The IRS has issued long-awaited proposed regulations relating to "Type III" supporting organizations. Earlier this decade Congress became concerned that certain charitable organizations were improperly avoiding private foundation status, and the relatively tight federal tax rules that come with that status, by taking undue advantage of the existing supporting organization rules. Supporting organizations avoid private foundation status based on having a close relationship with a public charity such as a school, hospital, church, or a charity that receives a significant amount of support from the public. In theory, this close relationship is supposed to eliminate the need for the tight rules that apply to private foundations. Congress concluded, however, that in practice at least some supporting organizations were asserting they had this close relationship without that relationship providing sufficient oversight over the activities of the supporting organizations. Congress was particularly concerned with so-called Type III supporting organizations, because while Type I and Type II supporting organizations demonstrate this close relationship by virtue of having substantial or complete governing body overlaps with the related public charity or by giving the public charity appointment authority with respect to that governing body, Type III supporting organizations faced a much more flexible, but also potentially subject to abuse, relationship test. The IRS issued the new proposed regulations as its interpretation of Congress statutory reaction to this concern, embodied in sections of the Pension Protection Act of 2006.
Consistent with Congress' statutory mandate, in the proposed regulations the IRS divides Type III supporting organizations into less-regulated "functionally integrated" Type III SOs and more-regulated non-functionally integrated Type III SOs. To be functionally integrated, the SO must either:
* engage in activities substantially all of which directly further the exempt purposes of the supported organization(s), by performing the functions of, or carrying out the purposes of, such supported organizations(s) and that, but for the involvement of the supporting organization, would normally be engaged in by the supported organization(s) OR
* be the parent of each of its supported organizations.
The latter category appears to be designed to accommodate the common structure for health care systems, where a parent supported organization provides management and coordination support to two or more hospitals or other care entities in the system. What this requirement does not accommodate are charitable trusts that under their governing documents are dedicated to supporting particular charities but do not meet either this requirement nor the requirements for Type I or Type II status, and may be subject to legally binding terms that are not consistent with the tighter, private foundation rules that apply to non-functionally integrated Type III SO. Before the Pension Protection Act, the SO regulations provided an accommodation for these types of trusts.
Comments regarding the proposed regs are due by December 23, 2009.
Wednesday, September 23, 2009
In July, the Chronicle of Philanthropy simultaneously applauded and questioned President Obama’s Social-Innovation Fund (SIF), a $50 million allocation for promotion of social innovation. The main issue debated at the time was implementation, with concern being expressed about how the fund would determine the “best” charities to support.
An article published by OMB Watch last week reiterates that concern by questioning whether the SIF’s resources (now reduced to $35 million) will reach the right target organizations. Only 10% of the funds are slated to go directly to community organizations who will have to match contributions dollar for dollar. The rest of the funding will be channeled through larger foundations down to community organizations.
Foundations, on the other hand, stand to benefit tremendously from the SIF. OMB Watch indicates that 85% of SIF resources will be disbursed in grants sized between $1 million and $5 million to 'grant making institutions.' The foundations will have to match the grant funds before they re-grant them but this requirement is unlikely to be an obstacle for large foundations.
The Washington Post reported that nearly 60 groups concerned with civil rights, labor, health and education urged Attorney General Eric H. Holder Jr. last Thursday to renounce a Bush-era memo allowing religious charities that receive federal grant money to discriminate in hiring.
The 2007 memo by the Bush Justice Department's Office of Legal Counsel permits the government to bypass laws against giving taxpayer money to groups that refuse to employ people of other faiths. The Bush administration had first asked Congress to change the anti-discrimination restrictions as part of its so-called “faith-based” initiative. The memo was published in response to Congressional pushback.
The New York Times reports that the memo said government officials could choose to disregard such restrictions because of the 1993 Religious Freedom Restoration Act. That Act permits some exceptions to federal laws if obeying them would impose a “substantial burden” on people’s ability to freely exercise their religion. The memo argues that the Act can override statutes that require recipients of taxpayer aid not to discriminate with that money. In accordance with the memo, for example, the Christian charity, WorldVision to receive a $1.5 million grant to prevent juvenile delinquency. The civil rights groups argue that the memo jeopardizes civil rights and religious liberty. WorldVision responds that interference with its hiring practices will damage its identity and its mission.
The New Zealand Charities Commission has updated its information sheet Charitable purpose and sports and recreation organisations. It sets out the current legal position on the charitable status of sport and recreation organisations. Sports and recreation organisations can qualify for registration as charitable entities under the Charities Act if their purposes are exclusively charitable. While the courts have not recognised the promotion of sport for its own sake as charitable, the law has recognised that sport can be the means by which charitable purposes are carried out.
Tuesday, September 22, 2009
“How much charity care must a hospital provide to get tax
breaks?” This was the question asked by
the Chicago Tribune on Monday, September 21, 2009. The question comes in anticipation of today’s
examination by the Illinois Supreme Court of a case raising just that issue. The case pits Provena Covenant, a
Catholic-run hospital, against the Illinois Department of Revenue. The high court’s answer may affect nonprofit
health service providers outside Illinois, health service consumers and
taxpayers in general.
The Tribune goes on to identify a key issue: “The state has no clear definition of how much charity care should be provided or whether unpaid medical bills and services that are offered for free, among other practices, should be included to determine whether a hospital receives a property tax exemption.”
While the Illinois Supreme Court does not have jurisdiction outside its state, many hospitals across the country are concerned about the impact of the court’s decision on legislators and courts nationwide. Nonprofit hospitals account for the majority of health facilities in the U.S.
Nonprofit hospitals provide services at no cost to patients without the ability to pay for services and those costs are passed on to the consumer. If nonprofit hospitals are stripped of their tax exempt status, consumers could face higher medical bills or see a reduction in health services.
The case arose in 2003 when the local tax review board stripped the hospital of its tax exemption because of concerns that the hospital was not providing enough free care. In response, Provena argues, as other hospitals do, that its resource expenditure in making up for shortfalls from government health programs like Medicaid and Medicare, as well as investments in education, research, and loss-generating trauma units more than justify its charitable status.
Third Sector recently reported that the Office of the Scottish Charity Regulator (OSCR) (which was established in 2006, as a non-ministerial department in the Scottish Administration) has called for changes in Scottish charity law.
OSCR's primary recommendation calls for the passing of a law to allow it greater flexibility in issuing, varying and revoking the formal directions that it imposes on charities. Currently, OSCR has no authority to vary its formal directions once they have been issued, and. ttherefore, it cannot take into account any changes or new evidence that emerge during the period of a formal direction. It seeks the power to vary its directions so as to take account of changes as they arise in a way which ffacilitates compliance rather than having to resort to a sanctions-based approach. In addition, OSCR wants the authority to direct trustees to take specific actions; and to require that charities on the Scottish register retain a continuing connection to Scotland.
The Scottish Government has responded positively to OSCR's recommendations.
We previously blogged about the pending Supreme Court case of Citizens United v. FEC that may result in the Court holding that all corporations, for-profit and nonprofit, must be allowed under the First Amendment to make unlimited independent expenditures relating to elections. While the decision in that case is still pending, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion last week declaring unconstitutional other rules limiting spending by nonprofit entities on elections. In Emily's List v. FEC, the well known political committee that promotes abortion rights and supports pro-choice Democratic women candidates challenged new Federal Election Commission rules that limited the amounts that any individual donor could give to the group to use for federal election-related activities. The rules provided that if a nonprofit group is an FEC registered political committee that both makes independent expenditures relating to elections and maintains a separate segregated fund - a "hard-money account" - from which it makes contributions to candidates and political parties, the group has to pay not only for the contributions but also for at least a significant part of its independent expenditures with hard money. Hard money is money raised from individual donors but subject to a limit of $5,000 per donor annually. Emily's List did not challenge the requirement that it only use hard money for contributions, but it did challenge the requirement that it pay for some or all of its independent expenditures with hard money. It asserted that individual donors should be able to give in unlimited amounts for those expenditures. It also challenged a rule that imposed the hard money limits on any response to a solicitation that indicated that donations would be used to support the election or defeat of a federal candidate.
The court agreed with Emily's List, with two of the three judges finding the hard money requirements for independent expenditures a violation of the First Amendment as it has been interpreted by the Supreme Court. The third judge concurred with the result, but he did so solely on the grounds that the rules at issue exceeded the FEC's authority. If the majority decision stands, Congress will be barred from limiting the amount that individual donors can give to nonprofit entities for independent, election-related expenditures - including 527 organizations and nonprofits registered as political committees(which are also usually tax-exempt under Internal Revenue Code section 527). There is no word yet on whether the United States will seek certiorari in this case. That decision is complicated by the pending Citizens Unitedcase, the Supreme Court's decision in which the appellate court may have been anticipating in reaching its conclusion that the FEC had overreached constitutionally. One interesting issue raised by this decision, if it survives, is it would leave nonprofit groups such as Emily's List in a better fundraising position than national political party committees such as the Democratic National Committee because such committees are currently limited to raising only hard money - i.e., contributions from individuals subject to the $5,000 per donor per year limit.
Monday, September 21, 2009
Senator Grassley Proposes Revoking Rebuttable Presumption, Clarifying IRS Authority to Ask About Governance
Last week, Senate Finance Committee Chair Max Baucus (D-Mont.) introduced a detailed description of his proposed America's Healthy Future Act of 2009. Among its many health care reform provisions was a requirement that all charitable hospitals both adopt a financial assistance policy meeting certain requirements and conduct a community health needs assessment at least once every three years (pages 211-13 of the proposal). Each hospital would have to widely publicize its financial assistance policy and publicly disclose that its community needs assessment to the IRS through the annual Form 990 filing requirement. Finally, the IRS would have to report annually to Congress regarding community benefits reported by charity hospitals (page 213). The proposal would also create tax-exempt health care cooperatives (pages 36-38).
Now the members of the Committee have responded with a lengthy list of amendments. At the bottom of the financing amendments proposed by Senator Chuck Grassley (R-Iowa), ranking member of the Committee, are two that impact ALL tax-exempt organizations. Designated Grassley Amendment #F-7 and #F-8, the first amendment would explicitly authorize the IRS to require such organizations to report about governance practices so as to head off any challenges to the IRS' existing attempts to gather such information through the annual Form 990. The second amendment would eliminate any protection from intermediate sanctions provided by following the "rebuttable presumption of reasonableness" procedures when considering transactions with senior executives, directors, and other insiders, while still requiring due diligence with respect to such transactions. This amendment would also require organizations to report to the IRS the comparable information used to set executive compensation.
The Chinese Ministry of Civil Affairs is in the process of writing China’s first “Charity Law” and “Social Aid Law.” According to the China Daily, the ministry submitted its first draft of the charity law to the State Council last month for review. Officials expect that the legislation will be passed by the State Council and the National People’s Congress, China’s top legislative bodies, within the next one to two years. Chinese authorities have not released the drafts for comment at this time, but they intend to do so later to allow for scholarly commentary prior to passing the laws. The law will cover the rules on charity organizations, donations, trusts, volunteers' services and awards.
China’s government is eager to pass the draft into law because “the mechanism, system and idea of China's charity sector has lagged far behind citizens' demand” according to Wang Zhenyao, director of the social welfare and charity promotion department under the Ministry of Civil Affairs.
The China Daily’s reports indicate that experts and practitioners have a number items that they hope to see in the new legislation. Among these hopes are a clear definition of the nature of charity organizations, standardization of tax policy and internal governance requirements for charities, and a provision that allows charities to register as non-profit organizations. Presently, charities in China must register as for-profit organizations. The president of China's largest philanthropic organization stated that he hopes that charities will be barred from affiliation with any particular government department so that they run independently.
The draft of the “Social Aid Law” has noted been reported as submitted to the legislation for review at this time. This law is intended to cover the aid system for low-income families, disaster victims, and beggars.