April 23, 2010
This article explores a phenomenon that might be called “gift-form generosity”: people earning similar amounts of income are more willing to part with a dollar’s worth of one kind of property than another. Among all income groups, the form of property with which charitable donors are most willing to part is the “conservation easement.” Data show, for example, that the average charitable easement donation is more than 100 times greater in value than the total, annual charitable contribution made by the average American taxpayer. Why are donors so willing to part with conservation easements? The answer may lie in donors’ ability to engage in what I call “donative arbitrage,” that is, the opportunity to profit, in tax-benefit terms, from the difference between the donor’s subjective valuation of the property and the value a hypothetical “willing buyer” would pay for it. To the extent that this hypothesis is correct, donors may in many cases be willing to sell their easements for less than the amount they currently receive as a tax benefit. Overpaying for conservation easements reduces the amount of public money that would otherwise be available for much needed conservation on private land. Allowing deductions for easement donations also creates individual incentives that are opposite of those that would produce optimal results. Specifically, landowners who most prefer to keep their land in its current condition (and who would thus give up very little in agreeing to land-use restrictions) will be the most likely to donate conservation easements. On the other hand, because similar restrictions would be expensive to them, landowners who are most interested in developing their property will be the least likely to donate. Thus, easement subsidies are spent protecting the land that is least in need of the protection afforded by easements. The article concludes by suggesting several ways that Congress might change the law so as to improve the efficiency of conservation easement subsidies.
Tax-Exempt Organizations News from the Georgetown Law Conference
At the annual Georgetown University Law Center conference on "Representing & Managing Tax-Exempt Organizations," TE/GE Commissioner Sarah Hall Ingram announced that the IRS will soon be issuing an interim report on its study of colleges and universities and their reporting of unrelated business income tax, endowments, and executive compensation. According to the BNA Daily Tax Report, the IRS study encompassed approximately 400 colleges and universities.
IRS Director of Exempt Organizations Lois Lerner reported that the EO Division workplan, which was not released this fiscal year, will return next year.
Begininng this week, the IRS is mailing postcards to more than 4 million small businesses and tax-exempt organizations to raise awareness and educate such organizations with respect to the benefits of the recently enacted small business health care tax credit. The credit, which takes effect this year, is designed to encourage small employers, including tax-exempt organizations, to offer health insurance coverage for the first time or maintain their current coverage. To be eligible for the credit, an exempt organization must have less than the equivalent of 25 full-time employees and pay an average annual wage of less than $50,000. In addition, the organization must pay for at least 50% of the cost of health care coverage for some of its employees.
As also reported today by the New York Times, the May 15th deadline is looming for tax-exempt organizations to avoid revocation of their exempt status for failure to file a Form 990 for three consecutive years. The IRS has been issuing notices to organizations since the law was enacted as part of the Pension Protection Act of 2006. Prior to the Act, only organizations with gross revenues of $25,000 or more were required to file an annual information return. Since the Act, all organizations must file some type of annual return, including the Form 990-N for organizations with annual gross receipts of $25,000 or less. The New York Times estimates that one-fifth to one-fourth of the 1.6 million charities will lose their exemptions due to this law at midnight on May 15, 2010.
April 22, 2010
Form 990 Assists IRS in Avoiding Nonprofit Audits
At yesterday's conference entitled "Top Issues in Nonprofit Governance" sponsored by the Independent Sector, the Internal Revenue Service and Georgetown University Law Center, Sarah Hall Ingram, TE/GE Commissioner, stated that the IRS will be using the Form 990 to "figure out who needs our attention and who doesn't." As a consequence, exempt organizations will be reviewed more often and contacted about particular issues arising from their annual reports, ultimately resulting in fewer in-person audits. As reported in the BNA Daily Tax Report, Ms. Ingram did state that any audits will not include issues pertaining to a nonprofit's governance policies. However, the IRS will inquire into a particular organization's failure to answer the new questions and schedules pertaining to governance in the revised Form 990. Although some disagreement exists as to the IRS's proper purview with respect to nonprofit governance, Ms. Hall stated that the IRS is confident of the relationship between competent governance and compliance with the tax exemption laws. She further stated that early reports reveal that the new Form 990 questions both encourage and yield better governance of nonprofits.
Other participants at the conference, namely the chief of the New York state Charities Bureau, seem to support Ms. Ingram's observations on good governance, recounting that most of the New York Bureau's current investigations involve lack of proper governance. The New York chief propounded that deficient governance results in increased waste, misuse of assets, and charitable inefficiency.
Massachusetts Municipalities Join Others Seeking PILOTs
As previously blogged, cities and towns throughout the country are looking to local nonprofits for funds to cover continued operating deficits. The Boston Globe reports that Concord, Massachusetts town officials issued letters to 34 local nonprofits in January requesting voluntary payments in lieu of property taxes (or PILOTs). In the letters, the officials delineated the town's fiscal challenges, how nonprofits benefit from the town's services, and how residents bear nearly the entire tax burden. Essentially, the letters asked the nonprofits to contribute their "fair share" to the town's operational budget. Only one nonprofit has responded to date with a modest payment. Other nonprofits responded with demonstrations of other contributions they make to the town's finances and operations. The town is separately negotiating an agreement with its largest nonprofit landowner, Harvard University. The nonprofits located in Concord own property worth $935 million, from which the town would otherwise generate $12.2 million in property taxes.
The article also mentions that other Massachusetts communities, including Boston and Belmont, are considering or requesting PILOTs from nonprofits located in their communities. Specifically, a Boston mayoral task force recently recommended a "uniform payment formula" to be applied to nonprofit organizations, gradually attaining 25 percent of what would be the organizaton's property tax assessment. As municipalities continue to battle decreasing tax revenues and increasing operational costs, the necessity and propriety of PILOTs will continue to be discussed by such municipalities across the nation.
April 21, 2010
Mississippi Asserting Tighter Control Over Its Nonprofits
As reported by the Associated Press, Mississippi Secretary of State Delbert Hosemann is pursuing a review of the state's nearly 38,000 nonprofit organizations with the ultimate goal of ensuring that these organizations continue to earn their nonprofit status. His office will mails letters over the next several weeks requesting information about each organization's activities and fundraising. In 2009, Mr. Hosemann was instrumental in the drafting and passage of new state laws pertaining to nonprofits. That legislation simultaneously reduced "regulatory burdens" on charities while fortifying his office's ability to enforce laws against defunct or dishonest charitable organizations, including a subpoena power and the ability to bring suit in the chancery court to address illegality and past due fines as well as revoke charitable status.
NY Attorney General Strikes Again - State Senator and a Puppet Nonprofit
The New York Attorney General and the corrupt use of charitable organizations are in the news again. The New York Times reports that Attorney General Andrew Cuomo filed a civil suit against New York Senate majority leader Pedro Espada Jr., alleging that he and his family misappropriated funds from a network of nonprofit clinics located in the Bronx that Mr. Espada found several decades ago. The suit charges Mr. Espada and others with taking more than $14 million from the nonprofit health care network, Comprehensive Community Development Corporation (CCDC), to pay for extravagant meals, vacations, a Mercedes-Benz, and state office campaign expenses. In addition, the lawsuit alleges that the CCDC board approved a $9 million severance package to Mr. Espada, which is greater than the value of its net assets. Similar to our previous blog entry on a misutilized New York nonprofit, CCDC's board was overflowing with Mr. Espada's family members and current and former Senate employees, thus lacking any independent oversight. In the civil lawsuit that names 19 current and former directors of CCDC, Attorney General Cuomo requests removal of Mr. Espada as president as well as the entire board of the nonprofit. Although CCDC receives millions of dollars annually from federal and state agencies for providing health care to the poor, its failure to pay hundreds of thousands in payroll taxes recently led the state to cancel additional funds to build a new clinic. The alleged private benefit and private inurement in this nonprofit's operations have left it in a precarious financial position, potentially resulting in the loss of health care services to numerous needy recipients.
April 20, 2010
NY Attorney General Sues to Shutdown Charity
New York Attorney General Andrew Cuomo announced a lawsuit filed by his office to eliminate a "sham" charity, Coalition for Breast Cancer Cures, Inc. A temporary restraining order was issued by a state judge ordering the charity to cease all solicitations, collections, and any document destruction. The charity is operated by a husband and wife and includes other members of their family. The lawsuit claims that the couple spent over $500,000 of the charity's donations on extravagant shopping, travel, restaurants and other personal expenditures. The lawsuit further alleges that the couple, along with their for-profit fundraising firm, falsely made solicitations and charged donors' credit cards without authorization on numerous occasions. The couple was not authorized to solicit charitable solicitations in New York. Despite their representations to the contrary, the purported charity was not properly registered under New York law or with the Internal Revenue Service as a tax-exempt organization under Section 501(c)(3).
As with other charity scams, this case reinforces the importance of donors verifying that their donations are being legally solicited under the state's law and that the charity is properly created and registered both with the the state and the Internal Revenue Service.
Maryland First State to Create New "Benefit Corporation"
The Chronicle of Philanthropy reports that Maryland Governor Martin O'Malley signed into law legislation that creates a new "benefit corporation," a new type of entity that confers benefit both to its shareholders and the society as a whole. Also described as "socially responsible," these corporations' directors must consider how their decisions and the corporation's activities will affect constituencies other than its shareholders, which includes employees, the environment, and the local community. As reported by the Chronicle, Vermont's Senate recently passed a bill to create a "for-benefit corporation," with similarities to the new Maryland corporation. According to the Philadelphia Inquirer, similar legislation is being considered in six states other than Vermont.
Although these new corporations are not nonprofit or not-for-profit corporations with a statutory nondistribution constraint, they do blur the lines somewhat on choice-of-entity considerations. These benefit corporations clearly provide entrepreneurs with the ability to achieve some of the societal benefits of nonprofit corporations while retaining the profit potential of business corporations.
U.S.—MUSEUM OF CONTEMPORARY ART (MOCA) ORDERED TO REVAMP BUDGET PRACTICES; TRUSTEES TO RECEIVE FIDUCIARY TRAINING
The Los Angeles Times reported that the California Attorney General’s office determined that the Museum of Contemporary Art skirted state law for years, on its way to financial meltdown in late 2008, and ordered the museum to hire a consultant to help improve its financial management. The attorney general also required MOCA board members to receive special training in their fiduciary duties. The findings and “required corrective actions” were included in a two-page letter to MOCA last November. The Attorney General”s office provided it to The Times after repeated inquiries. Overspending and investment losses drained MOCA’s investment portfolio from a peak of $38.2 million in mid-2000 to $5 million in December 2008. It has rebounded to $14.2 million as of March 31, museum officials said, fueled largely by fresh donations. Belinda Johns, senior assistant attorney general for charitable trusts, concluded that “unreasonably enthusiastic expectations” by museum management led to overspending and that the board apparently was not informed in time to act when budget deficits loomed. Johns also found that MOCA did not follow the law when it paid general expenses from endowment funds that were restricted for specific uses.
April 19, 2010
Palin Contract Sought by California Nonprofit
The San Francisco Chronicle reports that Californians Aware, a nonprofit open government advocate, filed suit against California State University Stanislaus to obtain information regarding the confidential contract terms pertaining to Governor Sarah Palin's upcoming speech at the University's campus in June. The nonprofit argues that under California's Public Records Act it has a right to know the details of the contract with Palin. However, like many other public universities, California State has an associated tax-exempt foundation, the CSU Stanislaus Foundation, which contends that its activities are exempt from the Act. Californians Aware disagrees, stating the Foundation and the University are virtualy "intertwined" and that several University officers reviewed the Palin contract. In a 2001 case, the California state appeals court determined that university foundations are not subject to the Act's disclosure requirements unless the foundation's documents are also in the associated university's possession.
Family Connections - A Case Study in Nonprofit Governance
The American-Statesman reports on the closing of Family Connnections, an Austin, Texas nonprofit that provided family-oriented programs supporting children and their parents. The nonprofit ceased all operations last week due to considerable financial difficulties and a criminal investigation of its recently-suspended executive director. The executive has been criminally charged for filing fraudulent audits with state governmental agencies overseeing approximately $1 million in funding to the Texas nonprofit from 2006 to 2010. As Board members and former employees are trying to determine exactly what led to the nonprofit's collapse, several red flags point to inadequate board governance and a complete lack of internal controls. First, the executive director had a criminal history about which neither the former executive director nor the board members appear to have known. Second, the executive director always presented the financial audits to the board, with no board member having ever directly met or dealt with the purported outside auditor. It is only when the Texas state auditor's office began a routine review of the nonprofit's finances, including its annual audits, did it become clear that no outside auditor was ever engaged by the nonprofit, thereby leading to the filing of fraudulent reports with the state. In addition, the executive director was the only employee with access to the nonprofit's finances and bookkeeping and did not store any accounting records on the office computers but only on a portable drive brought home every evening. Board members that inquired about additional financial or budgetary information were delayed or given an excuse about the complexity of operations. As always, in the end, the over 32,000 people served by the nonprofit last year lose most by its closing.
Baltimore Seeking Revenue from Local Nonprofits
As reported in recent posts to this blog, Baltimore is joining other cities pursuing payments in lieu of taxes (or PILOTs) to generate much needed revenue during continued budgetary crises. The Baltimore Sun reports that the mayor is seeking a "bed tax" on John Hopkins University as well as other hospitals and universities that is directly related to dorm and hospital capacity. Baltimore previously obtained PILOTs from John Hopkins and other local nonprofits in the early 2000s, but the negotiated payments lasted only four years. The bed fee is being criticized as overly burdensome on nonprofits with large bed capacity but relatively less real estate. The Baltimore Sun article argues for PILOTs "proportional to property ownership."