Thursday, January 29, 2009
Thanks to Professor Harvey Dale for sending me the following citation to an article related to my post yesterday regarding the possible increase in "Indian giver" lawsuits: Mary Francis Budig, Gordon T. Butler & Lynne M. Murphy, Pledges to Non-Profit Organizations: Are They Enforceable and Must They Be Enforced?, 27 U.S.F.L. Rev. 47 (1992)
Recent news reports indicate that nonprofit hospital charity care is again under scrutiny. Increased scrutiny is, in part motivated by states greedily eyeing what they view as deep pockets and in part by watchdog groups pushing for more accountability and transparency from nonprofit hospitals. A January 26, 2009 Houston Chronicle article, for example, states:
Scrutiny could increase for Texas' nonprofit hospitals as the state and the IRS try to determine the true value of uncompensated care the hospitals provide. State Sen. Jane Nelson wants the hospitals to submit data about the care they provide and the way state and federal indigent-care reimbursement funds are spent. Nelson, R-Flower Mound, was behind legislation that created a work group to study and redefine charity-care terms, the Fort Worth Star-Telegram reported in its Monday's editions. "We need to be reimbursing our hospitals fairly for the uncompensated care they provide. But we also have a responsibility to the taxpayer, which means more transparency and consistency is needed," she said in a statement. The work group appointed by Texas legislators has devised a standard way of defining and calculating the cost of charity care. The group says that right now, it's hard to get a clear pictures of how the system is working. For instance, Texas nonprofit hospitals report up to six different calculations of the charity care they provide.
A January 28, 2009 article in the Wisconsin State Journal states:
Nonprofit hospitals will have to file a new report next year with the Internal Revenue Service — for the first time accounting for the free health care and other benefits they provide to justify their tax breaks. The move is one of several measures being taken by federal, state and local governments to make nonprofit hospitals prove they deserve their tax-free status or pay up. The pressure could increase in Wisconsin and elsewhere this year because of budget shortfalls stemming from the economic recession, observers say. "I expect a resurgence of interest among municipalities in extracting payments in lieu of taxes," said Alan Zuckerman, a health-care consultant in Philadelphia. "Municipal budgets are going to be strained. Not-for-profits are a logical target." . . . Nationally, a bill to be introduced in Congress soon would require nonprofit hospitals to spend at least 5 percent of their budgets on charity care. Meanwhile, a decision in Illinois to strip a hospital of its tax exemption is headed for the state Supreme Court. The state says the hospital provided too little charity care. Hospitals are closely following the Illinois case as a possible sign of challenges to come, said James Orlikoff, a health-care consultant in Chicago.
Meanwhile, class action lawsuits against nonprofit hospitals based on their failure to provide adequate charity care are winding their way through courts. In Illinois, hospitals appear eager to enter into settlement agreements in the wake of the state's denial of tax exemption to Provena Health Care System. For example, Ressurection Health Care Corporation, a Catholic based tax exempt hospital, recently entered into this class action settlement agreement requiring it to increase and document the amount of its charity care, as well as to change its billing procedures with respect to uninsured patients.
The January 28, 2009, issues of the Chronicle of Higher Education and The Boston Globe report that upset Brandeis University donors are looking at ways to stop the university's planned sale of artwork to cover university losses as a result of the economic downturn and the Bernard Madoff scandal. Here is an excerpt from the CHE article:
The decision has raised complicated legal questions over donor intent and the university’s use of money given to the museum and of the donated artwork, especially restricted donations that require the art to be publicly shown.
“Had I had any idea when I donated work that there was a chance they would be sold to benefit the university, I never would have donated them,” Jonathan Novak, a museum overseer and Brandeis graduate who has donated money and art to the museum, told the newspaper.
For the entire story, see "Upset Brandeis U. Donors Look for Ways to Keep Art Museum Open" in the January 28, 2009, issue of the Chronicle of Higher Education and "Museum backers seek halt to selloff" in the January 28, 2009, issue of The Boston Globe.
Wednesday, January 28, 2009
In what he says will be an annual event, Bill Gates (pictured above in a 1977 mugshot from New Mexico) has penned a letter describing his views on philanthropic giving. Page 16 (reproduced below) contains an interesting discussion of the "Role of Foundations." Foundations, by which I assume Gates to be talking generically about nonprofit organizations whether they be classified under federal law as private foundations or public charities ought to respond to market failure and should not be judged based on bottom line accounting. Of course, readers can pick and choose phrases from most any written argument to support their own prejudices and I am no exception. I think the letter supports the notion that the law ought to at least push tax exempt organizations towards intentionally (not just incidentally) helping the poor. Anyway, here is page 8 of the letter. The full letter is available from the link above.
A key question for Melinda and me is, Where are foundations uniquely suited to causing positive change? Foundations are not needed in areas where capitalistic market signals work well and the poorest aren’t left out. If someone told you there was a foundation looking into what kind of restaurants should be started and helping them get started, you would rightly wonder why nonprofit dollars were being spent in that way. Foundations provide something unique when they work on behalf of the poor, who have no market power, or when they work in areas like health or education, where the market doesn’t naturally work toward the right goals and where the innovation requires long-term investments. These investments are high-risk and high-reward. But the reward isn’t measured by financial gain, it’s measured by the number of lives saved or people lifted out of poverty.
Foundations are unusual because they don’t have to worry about being voted out at the next election or board meeting. But I do not hold them out as a panacea. Another way that running a foundation is not like running a business is that you don’t have customers who beat you up when you get things wrong or competitors who work to take those customers away from you. You don’t have a stock price that goes up and down to tell you how you’re doing. This lack of a natural feedback loop means that we as a foundation have to be even more careful in picking our goals and being honest with ourselves when we are not achieving them.
We work hard to get lots of feedback. Each of our three divisions has gotten great people to participate in an advisory panel that reviews their strategies. In addition, every significant grant is reviewed by a number of outside experts. And as we execute our strategies, we need to share what we learn, because the biggest leverage is in getting many others to adopt best practices. Since we are in this for the long run, we need to develop credibility by the strength of our evidence, and by not claiming to know more than we do.
Every year, Melinda and I want to make sure we are taking a hard look at where the foundation should get involved and where it should stay out. In the areas we work in, we want to make sure the foundation is drawing in other players in the best way we can. Given the business sector’s broad expertise and resources, we particularly need to get more of its innovation power focused on our issues. I have spoken a lot in the past year about “creative capitalism,” which outlines the incentives and benefits to make this happen. Next year I hope to have some examples of how this has made a difference.
2008 was actually a good year for big donations, according to the Chronicle of Philanthropy. But, the article points out, most of those gifts were made when donors thought they really were getting 11% and 12% percent returns from the likes of Madoff and others:
Even in a year in which the stock market swallowed up nearly $7-trillion in assets, America's wealthiest donors promised greater amounts to charitable organizations than in 2007: $15.5-billion in 2008, compared with $7.3-billion the previous year, according to The Chronicle's annual ranking of the 50 most generous philanthropists.
But most gifts from the donors on the list came from decisions made long before the market plunge that began in September. (In fact, nearly two-thirds of the total given by the 50 biggest donors was the result of two bequests.) And 2009 appears to be a far more challenging time for raising multimillionand billion-dollar donations.
Some of the country's richest philanthropists say the bleak economy has led them to put off making new gifts, and fund raisers at organizations that have previously won eightand nine-figure donations say it's much harder now to seek big gifts.
"We're seeing many conversations that were in progress either slowing down or being deferred, and fewer people willing to begin conversations about gifts at that level," says Brian J. McDonald, vice president for development at Princeton University. His institution received two gifts from donors on The Chronicle's list: a $100-million pledge from the investment manager Gerhard R. Andlinger (tied for No. 17), and a $25-million commitment from Dennis J. Keller, founding chairman of DeVry University, and his wife, Constance Templeton Keller (No. 47).
The article notes that 2008 saw a lot of "promised" gifts and that makes me think about the etymology of the phrase "Indian giver," a phrase used to describe a person who gives something and then wants to take it back. What are the legal consequences when a donor, particularly one who has somehow already claimed a charitable contribution deduction (if that is possible), who then fails to fund the gift? I remember some time ago when it suddenly became common for Universities (like Northwestern) to sue donors who had made and then reneged on promised donations. As a university attorney I had a very nice CLE outline on the topic but I surely can't find it now. Still, I'm sure there is case law on the topic. As I recall the enforceability of the promised gift hinges on estoppel, but I could be wrong; contract lawyers and professors will likely have lots to talk about in the coming few years as donors who "promised" donations are forced by economic circumstances to rethink their promises.
Last fall, we reported that the National Heritage Foundation, a Virginia based charity that aggressively marketed split dollar life insurance policies, had been backslapped with a $9 million jury verdict for allegedly misleading donors regarding the tax benefits of the charitable schemes (among other allegations.) The post noted that as charities get on the slippery slope that leads to commercialization, they should expect that "donors" will act less like benevolent patrons and more like malevolent (or at least self-interested) consumers. Now comes word that the National Heritage Foundation has filed for bankruptcy protection under Chapter 11. The organization says that the filing is necessary because of dwindling donations, losses in its investment portfolio and the costs of reorganizing its donor advised funds to prevent donors from engaging in self-dealing:
Donations to the organization had dropped by more than half from 2006 to 2007, and probably dropped by another 25 percent last year, Ms. Ridgeley estimated. Losses in the group’s investment portfolio due to the poor economy are stacking up, too, she says, and the group took at least a $1-million hit reorganizing many of its donor-advised funds to comply with new federal rules in the Pension Protection Act of 2006. National Heritage Foundation’s financial statements for 2007, the latest available, show the organization had $232-million in assets and less than $24-million in liabilities. But Ms. Ridgeley says that liquidity became an issue. The group is now trying to renegotiate the terms of a $6.5-million loan it took from a Virginia bank, and to extend its $1-million line of credit with the bank to $2-million. The organization is also, she says, trying to push up the payback schedule for a $14-million loan it made as an investment in a private company.
Donor advised funds, by the way, are sort of the modestly rich person's version of the private foundation and typically suffer from the same sort of abuse potentials found in private foundations, while avoiding the onerous regulatory oversight provisions applicable to private foundations. Donors get a tax deduction to funds donated essentially to their own control, and "advise" the fund to spend the money in certain ways (including the hiring of what the Private Foundation rules refer to as "disqualified persons," meaning the donor's son or daughter or wife or husband). What sponsor of a donor advised fund is going to ignore its benefactor's "advice"? Please! Anyway, While the donor enjoys an immediate tax deduction and (before the Pension Protection Act) the objects of her affection get an immediate new paycheck (in many cases -- I know I am painting with a broad brush today), the donated funds may just sit there for a good while, benefitting nobody except the donor and the objects of the donor's affections.
This rules exploited in the NHF case demonstrates the type of systemic changes needed but that stimulus packages naturally disdain. Stimulus, as I understand it, (see the earlier post on the Senate Appropriations' Nonprofit Stimulus bill) is like giving aspirin to a cancer patient who continues to smoke three or four packs of cigarettes a day!
Professors Nancy A. McLaughlin and W. William Weeks Post "In Defense of Conservation Easements: A Response to 'The End of Perpetuity'"
Professor Nancy A. McLaughlin (Utah) and W. William Weeks (Indiana - Bloomington) posted "In Defense of Conservation Easements: A Response to 'The End of Perpetuity'" on SSRN's Nonprofit and Philanthropy Law Abstracting Journal, an abstract of their forthcoming article in the Wyoming Law Review. Here is the abstract:
This article critiques the arguments offered in favor of treating donated conservation easements as unrestricted charitable gifts (that is, as fungible or liquid assets in the hands of their government or land trust holders). It also discusses the practical and potential constitutional problems associated with proposals to change state law to permit government entities and land trusts to sell, trade, release, extinguish or otherwise terminate the conservation easements they hold outside of judicial cy pres proceedings.
The Chronicle of Philanthropy reports that the Senate Appropriations Committee approved ortions of an economic-stimulus package that includes help specifically for nonprofit organizations. The Appropriation Committee's press release can be found here. According to the COP articlel, the bill includes:
- $2.1-billion for Head Start and Early Head Start, the early-education programs.
- $2-billion for Child Care and Development Block Grants, which help states provide child-care services to low-income families.
- $400-million for Social Services Block Grants, to help states provide services to unemployed and low-income people.
- $200-million to AmeriCorps, the national-service program, to create positions to help nonprofit groups hit by increased need and shrinking donations.
- 150-million for food banks.
- Money for YouthBuild USA, a nonprofit group in Somerville, Mass., which trains low-income young people to do construction work. (The exact amount is not listed, but the House version of the bill proposes $50-million.)
These are all worthy causes and if I were in Congress I would vote for the provisions. But I have this nagging feeling that none of the measures above or any other that I have heard of thus far address systemic problems faced by nonprofits -- such as lack of regulatory oversight or the inability to predict revenues from year to year. The stimulus bill seems to be an effort to simply pour more money into a system that needs overhauling (whether in the for profit or nonprofit world). Perhaps there will be more systemic type measures when the bill is finally released -- or, as with the TARP appropriations, the Congress will use the opportunity to impose even the most modest of fundamental changes while its throwing buckets of money on the raging fire.
The January 28, 2009, issue of the New York Times reports that the $825 billion economic stimulus bill that Congress is scheduled to vote on today would significantly increase federal spending on education, including increasing support for student loans and more than doubling the Department of Education's discretionery budget. Here is an excerpt from the article:
One provision, which was sought by the student lending industry and went unmentioned in early Congressional summaries of the stimulus package, would temporarily increase subsidies to banks in the guaranteed student loan program by tying them to a new index, partly because recent federal intervention in the credit markets has invalidated the previous index. A spokesman for Sallie Mae, one of the largest student lenders, said the change was needed to keep student loan markets fluid. Critics said it represented a potential new windfall for lenders.
. . .
The Department of Education’s discretionary budget for the 2008 fiscal year was about $60 billion. The stimulus bill would raise that to about $135 billion this year, and to about $146 billion in 2010. Other federal agencies would administer about $20 billion in additional education-related spending.
“This really marks a new era in federal education spending,” said Edward Kealy, executive director of the Committee for Education Funding, a coalition of 90 education groups.
For the entire story, see "Stimulus Plan Would Provide Flood of Aid to Education" in the January 28, 2009, issue of the New York Times.
Monday, January 26, 2009
Nebraska Supreme Court Reverses Denial of Property Tax Exemption to Church that Leased Property to Local School Board: Creighton University Law Student Argued Case
The Nebraska Supreme Court recently held (scroll down a bit to get to the opinion heading) that a Church that leased part of its property to a local school board deserved full (i.e., 100%) property tax exemption in that portion of its property leased to the school board for educational purposes. This, despite the fact that the Church leased the property out at market rates." Significantly, especially in light of the immediately previous post, the Court specifically rejected the argument that since the Church leased the property at market rates it was not entitled to property tax exemption. A law student from Creighton University School of Law (scroll down to "points of Pride) successfully argued the case as part of Creighton's Community Economic Development Clinic. You can hear the student's very superb argument here (scroll down to November 6 and click on the audio icon next to "Fort Calhoun Baptist Church v. Washington County Board of Equalization"). Its nice to learn things from students and though I don't know this student, I felt a sense of pride when listening to his argument. It is even more fascinating to hear the interchange between the Supreme Court judges, the law student and opposing counsel regarding whether below market prices are necessary to achieve charitable, tax exempt status. Needless to say, the opinion cuts against the argument I make in my immediately previous post. I still say, though, that tax exempt status ought to be presumptively denied to organizations that do not inevitably or necessarily benefit the poor (e.g., through below market rates for their goods and services).
NC Court of Appeals Denies Tax Exemption to 501(c)(3) Summer Educational Camp: Should Below Market (or Cost) Fees Be Required for Tax Exempt Status?
In what seems like a continuing trend, a North Carolina court recently ruled that an educational summer camp exempt under IRC 501(c)(3) was still not entitled to property tax exemption as a charitable organization under state law. Here is the sum and substance of the Court's analysis:
“The first step in an analysis under section 105-278.7(a) is to determine that the entity seeking an exemption qualifies as oneof the types of agencies entitled to an exemption pursuant to section 105-278.7(c).” Totsland, 180 N.C. App. at 164, 636 S.E.2d at 295. Relying exclusively on Totsland, the Foundation argues that it is an agency entitled to an exemption because its articles of incorporation and bylaws state that the Foundation is to “use its funds exclusively for . . . charitable purposes[,]” and because the Foundation is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. Although the Totsland Court concluded that the taxpayer in that case was a charitable institution based in part on the purposes stated in the taxpayer's organizational documents and on the fact that the taxpayer was a 501(c)(3) organization, the Totsland Court also noted that the taxpayer provides day care services to the children of low-income individuals. The day care services are offered at significantly reduced rate[s] to the parents, all of whom qualify for government subsidies. The parents are required only to pay a small portion of the cost of the day care services, and the county Department of Social Services (“DSS”) provides subsidies for the remaining portion of the cost of care. Totsland's services are not limited to a specific segment of the community, and are available to parents in three counties. Totsland does not have any control over how much it charges for day care services, or how much each parent is required to pay, as the cost of its day care services is set by DSS. In addition, Totsland does not operate its child care center for the purpose of making money, and it is not engaged in commercial competition with other area child care centers. Id. at 166, 636 S.E.2d at 297. In the case at bar, by contrast, the Foundation operates a semester-long school for select highschool students, charging each student approximately $15,000.00 per semester. The Foundation also operates a camp which, according to the Foundation's executive director, charged campers “[m]arket rate[.]” Furthermore, the Commission found that the Camp charged its campers $150.00 per day and that, from the Camp's revenue of $390,108.07, the Foundation provided only about $20,000.00, or approximately 2% of the Camp's revenues, to campers in the form of financial aid. Finally, although neither “charitable association” nor “charitable institution” are defined in Section 105-278.7, “charitable purpose” is defined as a purpose “that has humane and philanthropic objectives; it is an activity that benefits humanity or a significant rather than limited segment of the community without expectation of pecuniary profit or reward.” N.C. Gen. Stat. § 105-278.7(f)(4) (2005). The Commission's conclusion that the Foundation did not meet its burden of proving that it is a charitable association or institution is supported by substantial evidence in the record. The Foundation, therefore, is not entitled to a property tax exemption under Section 105-278.7.
The interesting part of the opinion is that it seems to suggest that even an educational organization -- though not a formal educational institution -- must offer services at less than market rates in order to obtain tax exemption. Note too that the organization apparently had no problem achieving federal income tax exemption as a charitable organization. The trend, not an entirely new one, is that federal examiners rather routinely grant tax exempt status so long as the 1023 is properly completed and does not touch on any hot button issues (such as joint ventures). By contrast, the states seem to be restricting the definition of "charity" to suit whatever economic conditions prevail (though in this case the denial originally issued in 2006 when the party was still going on). I wonder if the states will ultimately force a reconsideration of the term "charity." I agree that "charity" is a fluid concept that ought not to require any single factor in every case but I can't disagree with the notion that charging market rates is a factor that makes an organization less deserving of tax exempt status. In fact, until I see the tragic case that proves otherwise, I have no problem at all with a trend that returns the concept of charity to that which inevitably and primarily assists the poor (as in, charging less than market or cost for services).
The January 23, 2009, issue of the Journal of Higher Education has an interesting story about states that plan to hold firm on last year's level of spending on higher education despite the current financial downturn. The catch is that these state universities must agree not to raise tuition. The states highlighted in the article as "friendly" to higher education include Missouri, Maryland and Oregon. What's interesting are the many comments to the story on the Chronicle of Higher Education website. For example, one comments opines that states with Democratic governors are more inclined to be forward-looking and maintain or increase higher education spending , while states with Republican Governors are more likely to be less friendly to higher education and cut spending on universities in some cases by as much as 50%.
For the entire story (and the comments of readers) see "Some States Propose Plans to Spare Higher Education From Budget Cuts" in the January 23, 2009, issue of the Chronicle of Higher Education.
Sunday, January 25, 2009
A story in yesterday's Wall Street Journal detailed the struggles of one New York Charity, Harlem Children's Zone, in the wake of the Bernie Madoff scandal and the economic crisis. Here is a short excerpt:
Geoffrey Canada has spent decades building a strategy for saving poor children from crime-ridden streets and crumbling public schools. His "Harlem Children's Zone" now serves thousands of kids, some of whom are showing impressive test scores. He has attracted the attention of the new White House because of his charity's model: Instead of tackling problems here and there, the program envelops an entire neighborhood, with services ranging from parenting classes to health clinics to charter schools. But Wall Street's meltdown and money manager Bernard Madoff's alleged financial fraud threaten the donor base that bankrolls Mr. Canada's work. Facing declining revenues, he's had to lay off staff and cancel plans to expand. He says he doesn't yet "have a Plan B" for replacing his Wall Street support, which had reached upwards of $15 million annually. Mr. Canada's difficulties show how dependent nonprofits can become on certain steady donors, and how their plans can be derailed when those revenues dry up. It underscores the challenges facing nonprofits, which grew and proliferated amid the bull-market earlier this decade. Today, the U.S. boasts more than one million nonprofits, up from about 774,000 ten years ago. Their biggest donations come from corporations, foundations and the ultra-wealthy. Many have been hit hard by the deepening recession. A drop in charitable contributions could shutter as many as 100,000 nonprofits over the next year, says Paul Light, a professor at New York University's Wagner School of Public Service.
A recent op-ed in the Chronicle of Philanthropy set forth three tax proposals to aid charities:
- Allow people to claim a double deduction for any increase in the amount they give to charity this year and next.
- Expand the number of people eligible to give charities money from their individual retirement accounts without paying taxes.
- Make grants of $3,000 to charities for each new job they create.
I've not seen details of Obama's economic stimulus plan yet so I can't say whether there are provisions specifically designed to stimulate and/or rescue the nonprofit sector. If anyone has a link to the detailed proposal please send it in!