Saturday, November 21, 2009
Non-profit organizations (NPOs), whether registered as charitable trusts, temples, churches or mosques, NGOs, educational institutions or societies, etc. will not only have to disclose the sources of their funds, but also will be scrutinized for large monetary transactions. This change in the law has been introduced by an amendment to the Prevention of Money Laundering Act (PMLA) 2002, notified in the Official Gazette on November 12, 2009 to bring NPOs within the purview of the law. Earlier, the entities that fell under the ambit of the law included only fund companies, banking companies, financial institutions, and housing finance companies. The amendment now says any company registered under section 25 of the Indian Companies Act, 1956, and/or as a trust or society under the Societies Act, 1860, or any similar state legislation, will be brought within the purview of PMLA. “Money laundering in India was rampant through NGOs and charitable trusts. The majority of industrialists and even some top politicians were using NGOs to launder their black money back into the country. The amendment would prove an effective tool in the hands of authorities and would take the veil off the racket,” said Mumbai-based lawyer Bhushan Bahal.
Friday, November 20, 2009
James Fishman (Pace) has posted Stealth Preemption: The I.R.S.'s Nonprofit Corporate Governance Initiative (Virginia Tax Review, forthcoming) on SSRN. Here is the abstract:
The Internal Revenue Service, the primary federal regulator of charities, has initiated a corporate governance initiative. The intervention by the Internal Revenue Service into an area traditionally the preserve of state nonprofit corporate law has little relationship to issues of tax compliance. This corporate governance initiative has been accomplished in the face of IRS acknowledgement that it has no statutory authority relating to these issues. Yet, the power of the Service to recognize tax exempt status and the method it has used to ensure it vision of correct corporate governance practices through a series of questions when an organization applies for recognition of tax exempt status and on the annual information return, the latter available on the Internet for public scrutiny, has resulted in substantial compliance. This article casts a skeptical eye on the IRS’s corporate governance initiative from the perspective of federalism. Its thesis is that the Service’s regulation of nonprofit corporate governance is a kind of stealth preemption, which undermines the principles of our federal system. The issues of preemption described herein relating to the IRS’s corporate governance initiative are at least one degree separated from traditional constitutional analysis. There is no question of an agency regulation, pursuant to direct or indirect Congressional authorization to supersede state legislation. Essentially, the Service has interpreted the scope of its own jurisdiction, expanding its authority at the expense of the states. The article argues the corporate governance initiative is inefficient from a cost/benefit basis, and diverts nonprofit organizations from their charitable mission. At a time when many charities are struggling to survive and maintain their level of activity, when there are pressures to reduce administrative expenses, the corporate governance initiative is an unwelcome, unnecessary distraction. It increases administrative costs, diverts boards and staff from the focus on the charity’s mission, and has no empirically verified relationship to tax compliance.
Joshua C. Tate (SMU) has posted Should Charitable Trust Enforcement Rights Be Assignable? (Chicago-Kent Law Review, forthcoming) on SSRN. Here is the abstract:
In recent years, scholars have given much attention to the problem of charitable trust enforcement. Departing from the common law, section 405(c) of the Uniform Trust Code provides that “[t]he settlor of a charitable trust, among others, may maintain a proceeding to enforce the trust.” This Article addresses the question of whether, and to what extent, a settlor’s right to enforce a charitable trust should be assignable to third parties. Should the law permit the settlor of a charitable trust to assign her enforcement rights after the creation of the trust, or should assignments be recognized only if they are spelled out in the trust instrument? How many potential assignees may the settlor properly select? Once the right has been assigned to a third party, should that third party also retain the right of assignment, so that the right can potentially be passed from one individual to the next in perpetuity? What would be the ramifications of granting a right of assignment to the settlor’s personal representative? Any resolution of these issues must protect the interests of charitable beneficiaries, but also be fair to trustees and not overwhelm the courts with frivolous litigation.
Wendy Gerzog (Baltimore) has posted The Times They are Not A-Changin': Reforming the Charitable Split Interest Rules (Again) (Chicago-Kent Law Review, forthcoming) on SSRN. Here is the abstract:
The article reviews the history of the tax treatment of charitable split interest gifts, explains the inequities that Congress both cured and generated in its 1969 reforms, and proposes solutions that are consistent with the goals of the 1969 legislation. The article discusses variations in the 1969 definition of a charitable split interest, which, because of the enacted statutory language, applies in instances where there is no abuse potential. The inequity produced by that definition penalizes the donor and flouts the rationale behind the 1969 legislation. By contrast, the creation of some required statutory forms of charitable split interests in trust, enacted to prevent abuse, have themselves created new opportunities for donors to evade taxes in ways unanticipated by the 1969 Act. In the spirit of the 1969 law, the article makes several recommendations, including proposals: (1) to modify the statutory definition of charitable split interest to provide an exception from the statutory requirements where there is no statutory mandate to calculate value by means of the actuarial tables under section 7520 and no abuse potential; and (2) to eliminate, or to restrict the tax avoidance aspects of, some of the charitable split interest in trust devices created in the 1969 legislation.
Courtesy of the newsletter for the Aspen Institute's Program on Philanthropy and Social Innovation, here are two recent non-legal scholarly articles relating to how long private foundation leaders choose to have their charitable institutions exist:
- John R. Thelin, Richard Tollinger, Time is of the Essence: Foundations and the Policies of Limited Life and Endowment Spend-Down (Aspen Institute)
- Loren Renz, David Wolcheck, Perpetuity or Limited Lifespan: How Do Family Foundations Decide? (Foundation Center)
- Richard A. Sundeen, Cristina Garcia, and Sally A. Raskoff,
- Femida Handy and Itay Greenspan,
- Richard K. Caputo,
- Jessica E. Sowa,
- Russell N. James, III,
- Jill Nicholson-Crotty,
- Melissa M. Stone and Jodi R. Sandfort,
- Mary Tschirhart, Kira Kristal Reed, Sarah J. Freeman, and Alison Louie Anker,
- Ronald Austin Wells,
- Anita Casey-Reed,
- Darlene Xiomara Rodriguez,
- Thomas Adam,
- Thomas H. Jeavons,
We previously reported that a federal district court judge concluded the federal government had violated the constitutional rights of KindHearts for Charitable Development, a Muslim charity, when the government froze the charity's assets in 2005 and so prevented it from adequately defending itself against allegations of ties to terrorism. USA Today reportedlate last month that the same judge has ordered the federal government to halt its investigation into whether KindHearts should be deemed a terrorist organization, apparently effectively preventing the government from labeling the charity a "specially designated global terrorist."
Late last week, besieged ACORN launched a legal counter-attack by filing a lawsuit in the federal district court for the Eastern District of New York. Represented by the Center for Constitutional Rights, ACORN argues that Congress's decision to deny ACORN and related entities federal funding is an unconstitutional bill of attainder, citing among other sources a Congressional Research Service report that addressed this issue.
Charities Line Up to Support Incentives for Charitable Giving and Oppose Limit on the Charitable Contribution Deduction
Yesterday the Subcommittee on Oversight of the House Ways and Means Committee held a hearing on "Food Banks and Front-Line Charities: Unprecedented Demand and Unmet Need." The one common theme of both the statements from the Subcommittee members and the testimony of charity leaders, including from Catholic Charities USA and United Way, was the need to preserve the existing federal tax law incentives for charitable giving. For many of the speakers, this included opposing the Obama Administration's proposal to limit the tax rate applicable to the charitable contribution deduction (along with all other itemized deductions) to 28 percent. For previous coverage of this proposal, see John Colombo's comments, Harvey Dale's response, and Martin Feldstein's views.
Deadline Approaching for Revocation of Tax-Exempt Status for Failure to File Required IRS Annual Returns
A little over three years ago Congress passed a little-noticed amendment to the annual return filing requirement for most tax-exempt organizations. That amendment added an additional penalty for such organizations that fail to meet their filing requirements, including not only the well-known Form 990 and Form 990-EZ but also the relatively new Form 990-N required for organizations that fall below the annual gross receipts filing threshold of $25,000 for the first two forms (see IRS explanation). The new penalty is automatic revocation of tax-exempt status, although organizations that have their status revoked may apply for reinstatement based on reasonable cause for the failure to file. The first three year period is 2007 through 2009, which means that once the 2010 filing deadline passes for these forms (May 15th for tax-exempt organizations with calendar fiscal years), organizations that failed to file such forms for those three years will automatically lose their tax-exempt status. It will be interesting to see whether this new penalty results in a substantial reduction in the number of tax-exempt organizations, as there are hundreds of thousands of such organizations on the IRS list that at least until the imposition of the Form 990-N requirement did not file an annual return with the IRS.
Thursday, November 19, 2009
Late yesterday the Senate leadership released its version of the health care bill. While I cannot claim to have read all 2,074 pages, quick searches revealed two provisions of particular relevance to nonprofits:
- Nonprofit Health Insurance Coops: Section 1322 of the bill provides a number of provisions to support the creation of a "Consumer Operated and Oriented Plan" (CO-OP) program, with the stated purpose "to foster the creation of qualified nonprofit health insurance issuers to offer qualified health plans to the individual and small group markets in the States in which the issuers are licensed to offer such plans." The federal government would provide grants and loans to support such nonprofit entities, and such entities would be tax exempt under new Internal Revenue Code section 501(c)(29) if they met various requirements.
- Nonprofit Hospitals: Section 9007 of the bill incorporates the additional requirements for Code section 501(c)(3) hospitals that were also in the Senate Finance Committee approved version of the bill. These requirements include (1) conducting a community health needs assessment at least once every three years and adopting an implementation strategy to meet those needs, (2) establishing and publicizing a financial assistance policy relating to free or discounted care, and (3) satisfying certain limitations on charges and billing and collection requirements. The Treasury Department would be required to review at least once every three years the community benefit activities of such hospitals and to report annually to Congress regarding the levels of charity care and related items for all hospitals (not only tax-exempt ones).
Probably not coincidentally, the Congressional Research Service last week released an updated report on 501(c)(3) Hospitals and the Community Benefit Standard (Tax Analysts; subscription required). The report is an update of a July 2008 report on the same subject.
(Side Note: For anyone else who is annoyed by the fact that CRS reports are not readily available to the public, see this helpful summary of the so far unsuccessful battle to force CRS to release such reports directly to the public and where such reports can usually be found. Hattip: Sarah Lawsky.)
We previously blogged about the governance dispute at Feed the Children, a Christian ministry that is among the ten largest recipients of charitable contributions (over $1.1 billion in 2008) according to the Chronicle of Philanthropy. While that dispute appeared to have been close to resolution last spring, recent public developments reveal that it has only moved into a new phase. According to local news reports in Oklahoma City, where Feed the Children is headquartered, the organization's Board of Directors fired President and founder Larry Jones on November 6th. The firing may have been triggered by Jones' alleged placement of microphones in the offices of several board members, although apparently the recording system connected to those microphones was never operational. Jones has responded by filing a lawsuit against the charity and its board demanding reinstatement. The Oklahoman is providing ongoing coverage of the dispute and related developments through a dedicated webpage.
Lawsuit Challenging Minister Rental Allowance Could Foreshadow Broader Assault on Religious Nonprofit Benefits
Last month the Freedom from Religion Foundation and several of its members filed a lawsuit in federal district court in California against Treasury Secretary Geithner, IRS Commissioner Shulman, and California Franchise Tax Board Executive Officer Stanislaus challenging the exclusion from income provided for the value of parsonages and rental allowances provided to a "minister of the gospel" under Internal Revenue Code section 107. While normally such suits would have a taxpayer standing problem - i.e., the long-standing federal court holding that merely being a taxpayer provides insufficient grounds for standing to challenge a tax benefit provided to another taxpayer - the U.S. Court of Appeals for the Ninth Circuit has indicated a willingness to depart from that holding when the Establishment Clause is at issue (see Winn v. Arizona Christian School Tuition Organization (slip. op. pages 4596-4602), rehearing en banc denied). The attorney representing the Foundation is the well-known atheist Michael Newdow, who previously challenged the constitutionality of "under God" in the Pledge of Allegiance used in public schools.
The lawsuit is significant not only because of the plausible threat it provides to Code section 107, which is of significant financial value to religious leaders and their congregations, but also because if it overcomes the standing issue it may open the door to challenges to the many other tax and non-tax legal benefits provided only to religious bodies. While many and perhaps most of those benefits are defensible on avoiding entanglement grounds, it is far from clear that all of them could be so defended.
Wednesday, November 18, 2009
New York Attorney General Andrew M. Cuomo announced this week both the release of his office's now well-known annual Pennies for Charity report on charity fundraising by professional telemarketers and an online database that potential donors can use to learn how much of what they give to charities through such fundraisers actually goes to the charity. The report involves 444 charities that raised $204.8 million through telemarketing campaigns conducted in New York and other states in 2008. The reports key findings are:
One of the most interesting aspects of the database is to see what search terms generate the largest number of charities listed. For example, perhaps not surprisingly searches for "police" or "veteran" yield long lists, but so also do "child" or "cancer." The database includes information not only for 2008 but also for 2005 through 2007.
The Congressional Research Service (CRS) has recently issued An Overview of the Nonprofit and Charitable Sector (BNA, subscription required) (CRS Report R40919), written by Molly F. Sherlock and Jane G. Gravelle. The report provides updated figures regarding the size of the nonprofit sector's economic footprint in the United States, the sources of charity revenues, and the relationship of the charitable sector with the government. The report concludes by discussing various policy options, including "(1) increasing government grants and subsidies to charitable organizations; (2) creating an oversight agency within the federal government to gather data, conduct research, and advocate for the charitable sector; (3) implementing policies designed to help charities and foundations in economic downturns; (4) changing the itemized deduction for charitable contributions by limiting, converting to a credit, or making the deduction more widely available; and (5) a variety of other tax issues."
CRS does not make its reports publicly availables o copies of the reports are only currently available from paid sources such as BNA. Hopefully, however, the report will shortly be available on one of the many sites that provide free access to CRS reports as they obtain copies of them.
UPDATE: A commentator notes the report is now available for free on the Partnership for Philanthropic Planning website.
Attorneys General in New Jersey and Connecticut are pursuing lawsuits against two very different charities but based on similar allegations relating to the handling of money.
New Jersey Attorney General Anne Milgram announced in mid-September that she had filed a complaint against the Stevens Institute of Technology alleging that the president and board chairman of the 5,700-student institution of higher education had engaged in financial mismanagement, including excessive spending of endowment gains, mishandling of other endowment and investment funds, and paying excessive compensation to the school's president. The Institute's Board of Trustees promptly responded that the AG had overstepped her authority by questioning the business judgment of the private school's management. The AG's suit is currently pending the Superior Court of New Jersey, Chancery Division, County of Hudson. And for those who are wondering, the alleged cash compensation awarded by the Institute's Compensation Committee to the President reached $1,089,780 for fiscal year 2008, which amount does not include other benefits provided, including substantial and allegedly below-market interest loans (page 70 of the complaint).
Connecticut Attorney General Richard Blumenthal announced in early October that he had filed a lawsuit against Ahava Kids, Inc., a charity that purportedly helps victims of human trafficking. Like the New Jersey case, the lawsuit alleges financial mismanagement, including diversion of almost half of the charity's revenues to personal expenses of its founder and president and to the founder's for-profit companies. According to a local news report, an attorney for the founder denied the charges and asserted that any inaccurate financial disclosures had been rectified. Another report states that the Attorney General first received information about the alleged diversions from a whistleblower who had been hired to work on the organization's website.
Tuesday, November 17, 2009
The IRS recently released Private Letter Ruling 200942068, which denied recognition of exemption under Code section 501(c)(3) for an organization dedicated to improving the quality of health care by gathering and distributing information about health care services. Such organizations are commonly known as health information exchanges (HIEs) or regional health information organizations (RHIOs). The ruling provides a road map of how such an organization, which Congress has indicated it believes should generally qualify for tax exemption, can still fail to pass IRS muster. The organization at issue's fatal flaw was that it limited distribution of the information it gathered and the results of its analysis of that information to its members, which were both employers and health plans (those members also provided all of its revenues). The IRS found that limited distribution demonstrated the organization functioned primarily to benefit its members and not the general public, and so the organization was both operating for a non-exempt purpose and providing a substantial private benefit. The fact that the organization was arguably promoting health and providing education through its activities was not compelling in the IRS' view, again because of the limited distribution of the information gathered and the results of analysis performed.
The Center for Civil Society Studies at John Hopkins University released the results of surveyof nonprofit human service, community development, and cultural organizations designed to provide a snapshot of retirement plan conditions for these entities. The survey confirmed both the importance of retirement plan benefits for staff compensation and the stress a sizable majority of such plans are under both with respect to maintaining funding levels for defined benefit plans and with respect to providing employer matching contributions for defined contribution plans. While the economic downturn was a major contributing factor to this financial stress, respondents also pointed to new requirements contained in the federal Pension Protection Act of 2006 as also contributing to their current problems. Most nonprofit retirement plans are not at such risk that the government will have to step in, as happened with the Jane Addams Hull House's pension fund earlier this year according to the report, but both the freezing of many defined benefit plans and the reduction of employer matching contributions for many defined contribution plans are likely.
Local governments facing financial pressure from shrinking tax revenues because of the economic downturn are with increasing frequency looking to tax-exempt nonprofits for financial support. Some of the most recent developments include:
Boston: Boston City Councilor and PILOT Task Force member Steve Murphy is cited in the Jamaica Plain Gazetteas saying he expects a big next year increase from the current $15 million PILOT (payments-in-lieu-of-taxes) from Boston colleges, universities, and other nonprofit organizations. The Task Force is working both to standardize the amounts of PILOT payments based on not only on property owned but also on community benefits provided as well as to increase the total amount of PILOT paid. It is not clear, however, how the Task Force will sell its plan given that the city cannot legally require any PILOT deals and so must rely on political pressure and the goodwill of the nonprofits targeted.
Cleveland: Consultants hired by the City of Cleveland have proposed imposing an annual fee on nonprofit organizations, including hospitals, universities, and museums, according to the Cleveland Plain Dealer. Cleveland Mayor Frank Jackson appeared wary of the idea, however, saying only that he was open to it but refusing to commit to supporting it. Not surprisingly, representatives of local nonprofits that provided comments expressed concern about the fairness and wisdom of such a fee given the jobs and other benefits Cleveland's many nonprofits, including the well-known Cleveland Clinic, provide.
Pittsburgh: Just days after Allegheny County Executive Dan Onorato vetoeda bill that would have imposed county fees on nonprofits other than churches and schools, the Pittsburgh Post-Gazettereports that Pittsburgh Mayor Luke Ravenstahl plans to propose a 1 percent college-education privilege tax. It is estimated tax would raise approximately $16 million a year and presumably would at least partially replace voluntary payments from the Pittsburgh Service Fund, an umbrella group of tax-exempt institutions. The Fund donated $14 million to the city from 2005 through 2007, but then only offered %5.5 million for 2008 through 2010, which the city rejected. The proposal has, however, run into troublewith the Intergovernmental Cooperation Authority that must approve city budgets, which is apparently questioning the ability of the city to collect such a tax in the next budget year given anticipated legal challenges.
British Columbia: These developments are not limited to the United States. In British Columbia, the District of Sechelt Council voted to taxhalf of Camp Olave, a property owned by Girl Guides of Canada (Canada's equivalent of the Girl Scouts). The property had been completely tax-exempt before the vote, which it is estimated will result in a more than C$100,000 tax bill in 2010. As the camp only has an operating budget of $250,000, the Girl Guides have stated that it will likely have to sell the camp. The tax bill is so high apparently because the waterfront property on which the camp rests has been assessed at C$26 million. In supporting the Council's decision, Sechelt Mayor Darren Inkster stated that compared to other, similar-sized municipalities his town has an above-average level of nonprofits with tax exemptions.