June 18, 2010
Bishop: The Low-Profit LLC (L3C)
Carter G. Bishop (Suffolk) has posted "The Low-Profit LLC (L3C): Program Related Investment by Proxy or Perversion?" on SSRN, which will be published in the Arkansas Law Review. Here is the abstract:
Since 2008 several states have adopted or are considering statutory amendments permitting an LLC to become an L3C when organized for a business purpose and operated to significantly further charitable purposes but without a significant purpose to produce income or asset appreciation. The L3C hybrid is designed to brand the hybrid entity as a business enterprise with a social conscience. But given that the LLC form preexisted and can be operated for any lawful purpose including low-profit, what is the advantage of the L3C statutory operating form? The L3C statutory elements can easily be incorporated in an LLC operating agreement. Closer inspection reveals that, beyond modest branding assertions, the L3C is configured to attract untapped private foundation capital. Given the risky tranche investment scheme targeted for the L3C, the private foundation must be assured its investment in the L3C will be classified as a program related investment (PRI) to avoid prohibitive excise taxes. To date that requires advance federal tax authority approval and it is unlikely the L3C statutory restrictions will serve as a proxy for federal approval. Even if so, additional excise taxes require the foundation to monitor the investment to assure it is appropriately used by the L3C. This requires approval over L3C expenditures and significant accounting reports that will be detailed in the operating agreement. Finally, it is open to question whether tranche investing will threaten the foundation’s exemption through private inurement to the other investors that results from using foundation assets without reasonable compensation.
Private Inurement Alleged in Sale of NY Church-owned Seniors Complex
An article in today's New York Times questions the sale of a 300-unit seniors apartment complex by its owner, Greater Allen African Methodist Episcopal Cathedral of New York, to a partnership comprised of the church's pastor, Rev. Floyd Flake, a former church CFO, and two real estate developers. In acquiring ownership of the complex, the Rev. Flake and his partners allegedly purchased the property for approximately $3 million less than the church's board-approved selling price. The partnership made no cash investment in the purchase, but rather financed the deal, including proposed renovations, with $21.3 million in loans and cash incentives from government programs, specifically a federal program that makes it expedient to refinance old HUD loans used to build low-income senior apartment complexes. Although described as refinancings, these transactions typically involve a sale that not is not listed for open bids in the market. Despite the relatedness of the parties in the transaction, the sale was approved by the New York state attorney general's office and State Supreme Court. The article postulates that Rev. Flake and his partners stand to retain millions of dollars in the deal and raises questions as to whether the proposed renovations ever materialized. The general contractor on the improvements was a construction company owned by the two real estate developers that are partners in Rev. Flake's partnership.
Feds Report Volunteering Surge in 2009 as Well as Other Volunteering Data
The federal Corporation for National & Community Service issued its annual Volunteering in America reportthis week, finding that 63.4 million Americans volunteered in 2009 by contributing 8.1 billion hours of service. These figures represented an increase of 1.6 million volunteers over 2008, the largest single-year increase since 2003, and repesenting an increase in the volunteer rate from 26.4 to 26.8 percent. For purposes of the report, volunteers are defined as "adults ages 16 or older who performed unpaid volunteer activities for or through an organization." The report provides either directly or through its website a wealth of information regarding volunteer demographics, geographic locations, and organizations served, including the ability to download the available data in multiple formats.
Thinking About $600 Billion
Fortune reports that a May 2009 dinner of billionaires Bill Gates and Warren Buffett launched a campaign to encourage the richest Americans to give away at least 50 percent of their net worth. Based on the wealth guestimates for the members of the Forbes 400 list (all billionaires), full participation would result in $600 billion of donations. This is essentially double the total annual estimated giving by all Americans. Attendees at the initial dinner included Oprah Winfrey, Ted Turner, Michael Bloomberg, and George Soros. Gates and Buffett did not suggest any particular target for this giving, other than charitable causes generally.
The possibility of such generosity raises a number of interesting issues. Will the pattern of giving usually attributed to the wealthy, such as favoring institutions of higher education and the arts over other types of charities, also hold true for this super-rich group? Will they tend to create endowments, thereby reducing the increase in annual charitable expenditures to perhaps only 5 percent of the amount given, or follow in Warren Buffett's footsteps by requiring quick expenditure of their gifts? Will such a surge in giving, if it materializes, lead to greater or reduced calls for tightening the definition of what qualifies as "charitable" for federal tax purposes? Based just on the hundreds of comments already posted on the Fortune story that appeared a little more than 48 hours ago, people are certainly interested in what will happen if this effort is successful.
NY Times on Richard Berman and the Center for Consumer Freedom
The New York Times reports that Richard B. Berman has created a network of nonprofits, including the Center for Consumer Freedom, to criticize groups including the Humane Society, Mothers Against Drunk Driving, and the Physician's Committee for Responsible Medicine. He and his groups have themselves come under criticism both for their apparent support by industries that are hurt by the efforts of his targets and for their relationships with his for-profit communications firm, Berman and Company. According to the article, Berman's nonprofits are closely tied to Berman and Company, with overlapping employees and consultants as well as payments flowing from the nonprofits to the for-profit firm often representing more than 50 percent of the nonprofits' revenues. Berman defends the nonprofits and his firm, however, noting that at least two of them have been subject to IRS audit but retained their exemptions. According to the article, the other nonprofits include the Employment Policies Institute, and according to the Center for Media and Democracy they also include the Center for Union Facts, the Employment Roundtable (which appears to no longer be active), and ActivistCash.com (self-identified as a project of the Center for Consumer Freedom).
June 17, 2010
Boston Globe Reports on University Presidents' Housing Thanks to 990 Disclosures
The Boston Globe reports that Boston-area universities used a variety of methods to estimate the value of housing provided to their presidents and reported on their IRS Forms 900. For example, some schools reported the fair market rental value of the entire house occupied by their president, while others only reported the rental value for the "private" portion of the house. These differences lead to variations such as Boston University president Robert Brown having a reported benefit of $21,000 per month, based on the rental value for the entire house, while Harvard University reported a benefit of only $8,000 per month based on the "private" area of president Drew Faust's residence, as compared to the estimated $12,000 per month rental value for the entire property. The article also noted that Suffolk University does not provide university-owned housing to its president, David Sargent.
IRS Advisory Committee Recommends Online Guide for Setting Executive Compensation
In its latest Report of Recommendations, the IRS Advisory Committee on Tax Exempt and Government Entities (ACT) recommended that the IRS provide additional assistance to charities, that is Internal Revenue Code section 501(c)(3) organizations, with respect to setting executive compensation. The Committee developed an online instructional guide to provide this assistance, including "step-by-step, plain language advice for managers, boards and advisors of charities to assist them in a wide range of areas, including: developing internal procedures and compensation comparables, reporting salary information in their IRS Form 990 filings, and maintaining appropriate records necessary to meet the rebuttable presumption of reasonableness and comply with the regulations promulgated pursuant to Section 4958." IRS officials have not, as of yet, made any commitment to follow this recommendation.
A complete list of ACT's reports is available on the IRS website.
Reports Present Differing Views of Foundation Grantmaking in Response to the Great Recession
Two recent reports present sharply divergent views regarding whether and to what extent grantmaking foundations have stepped up to the plate in response to the recent economic downturn.
The Philanthropic Collaborative, a new coalition of charities, foundations, and elected officials, released Responding in Crisis: An Early Analysis of Foundations' Grantmaking During the Economic Crisis. Based on a non-representative sample of approximately 2,700 grants totaling $472 million, this report concludes that foundations have "quietly, expertly, and quickly . . . supported American individuals, families, and communities in need," including by sending more grants to states experiencing relatively more severe mortgage delinquency problems and an increasing proportion of grants and overall grant amounts to states with high unemployment.
In contrast, the Center for Philanthropy released A Time of Need: Nonprofits Report Poor Communication and Little Help from Foundations During the Economic Downturn. This report on 6,000 grantees of 37 foundations from across the country concluded that the grantees both "do not perceive funders to have communicated their responses to the economic downturn clearly, if at all" and "report that funders have offered them little useful help in responding to the challenges of the downturn."
Given the different study methods and subjects, not to mention their limited data, the studies are not necessarily inconsistent but instead may reflect two very different perspectives, that of grantors versus that of existing grantees, on what is broadly the same issue. The key questions are therefore which perspective is the better one, and is their an even better, third perspective from which to look at this issue
Hudson Institute Releases 2010 Index of Global Philanthropy and Remittances
The Hudson Institute's Center for Global Prosperity released the 2010 version of its annual Index of Global Philanthropy and Remittances (executive summary (4+ MB); full report (13+ MB)). The report reviews financial support from the United States and other countries to developing countries in 2008, including government aid, private aid, and remittances, as well as investment. Among its findings, the report notes that U.S. private philanthropic support held steady in 2008 at $37.3 billion, as compared to $36.9 billion in 2007, and was $10 billion more than U.S. government official development assistance. Both figures were dwarfed by remittances from people in the U.S. to relatives and friends in the developing countries, which reached its highest level ever in 2008 at $96.8 billion.
White House Social Innovation Fund Annnounces $50 Million of Private Support
The Social Innovation Fund announced that private philanthropy groups had committed $50 million to the Fund. An accompanying fact sheetidentifies five private foundations that pledged $45 million over the next two years. The Council on Foundations also released a letter of support for the Fund signed by more than 130 community foundations. The 2009 Edward M. Kennedy Service America Act created the Fund to promote social innovation through nonprofit organizations. The Fund is housed in the federal Corporation for National and Community Service.
June 16, 2010
Giving USA 2010 Report Shows First Decline Since 1987
USA Today reports that the annual report on charitable contributions in the United States shows such giving declined by 3.6 percent in 2009 to $304 billion. The decline is the first reported since 1987 and only the second since the report began in 1956. The report is available for purchase from the GivingUSA Foundation and from the Center on Philanthropy at Indiana University.
UPDATE: A Wall Street Journal blog entry notes that besides showing a decline in giving, the report also shows a number of shifts in giving, most notably away from public-society benefit organizations and toward international aid. Whether these shifts reflect long-term trends, however, is not discussed.
June 15, 2010
Study of Donors Reveals Relative Performance Has Little ImpactHope Consulting of San Francisco, supported by the Aspen Network of Development Entrepreneurs, the Metanoia Fund of Boston, the Rockefeller Foundation, and the William and Flora Hewlett Foundation, recently issued a report on charitable giving. Titled Money for Good: The US Market for Impact Investments and Charitable Gifts from Individual Donors and Investors, the report explored three key questions through a study of donors with incomes over $80,000:
1. How can nonprofits more effectively obtain donations from individuals?
2. How can a greater share of donations go to the highest performing nonprofits?
3. What is the market potential for impact investing and how can it be realized?
As noted in a Chronicle of Philanthropy article about the report, one of the more interesting findings is that while these donors say they want to support more effective charities, they are rarely willing to to either research or base their giving decisions on performance. These results suggest that simply requiring more disclosure of information about nonprofits is not enough to better inform donors; instead, it is also important to determine how such information can be delivered to donors such that they receive and use it.
Johns Hopkins Civil Society Center Issues Innovation & Performance Measurement Report
The Johns Hopkins University Center for Civil Society Studies recently issued a report on innovation and performance measurement by nonprofits in four fields: children and family services; elderly housing and services; community and economic development; and the arts. Here are the key findings and recommendations:
I. Innovation Extensive but Facing Impediments
• The vast majority (82 percent) of all Sounding respondents reported implementing at least one innovative program or service over the past five years.
• Although innovation is widespread within the nonprofit sector, it is not as widespread as it could be. Thus:
- More than two-thirds of the organizations reported having at least one innovation in the past two years alone that they wanted to adopt but were unable to.
- The vast majority of all respondents attributed their inability to adopt a proposed innovation to lack of funding.
- Especially problematic was respondents’ inability to move promising innovations to scale due to lack
of “growth capital,” narrow governmental funding streams, and the tendency of foundations to encourage
innovations but then not sustain support for them.
II. Performance Measurement Widespread but Limited
• A striking 85 percent of all Sounding respondents reported measuring the effectiveness of at least a portion of their programs/services on at least an annual basis, and two-thirds do so for at least half of their programs or services.
• Although output measures are the most common measurement technique (used by 95 percent of groups doing any type of performance measurement), nearly 70 percent of organizations that measure program effectiveness reported using outcome measures, the measurement type increasingly promoted by experts in the field.
• Still, only minorities of respondents noted using the kinds of techniques that assessment experts insist are needed to make such measures truly convincing such as random assignment comparisons and social rate of return estimates.
• The major barriers limiting more extensive use of performance measurements are resource constraints—notably, lack of staff time and expertise and the high cost associated with good evaluation.
III. Recommendations for Moving Forward
Respondents offered a range of ideas to help overcome the remaining barriers to nonprofit innovation and adoption of performance measurement:
• The vast majority of respondents called for better tools to measure qualitative impacts, less time-consuming measurement tools, tools with clearer definitions, additional resources to support their measurement and research functions, greater help from intermediary organizations in fashioning common evaluation tools, and training for personnel in how to use them.
• Sizable proportions of respondents also urged the new White House Office of Social Innovation to reduce barriers to funding including burdensome reporting requirements on federal programs, the lack of coordination
among federal agencies and departments, the lack of long-term financial support, and the lack of funds for program evaluation.
June 14, 2010
Federal Court Allows Challenge to Minister Housing Allowance to Proceed
The U.S. District Court for the Eastern District of California ruled that the Freedom from Religion Foundation, Inc. and a number of its California members could proceed with a lawsuit challenging the constitutionality of the minister housing allowance income tax exclusion found in Internal Revenue Code section 107 and a parallel California state income tax provision. The court rejected the government's argument that the plaintiffs lacked standing, finding that there is an exception for Establishment Clause claims to the general rule that taxpayers lack standing to challenge federal tax rules that benefit other taxpayers. In reaching this conclusion, the court relied in part on Winn v. Arizona Christian School Tuition Organization, 562 F.3d 1002 (9th Cir., 2009), a decision for which the Supreme Court recently granted certiorari. The district court also found that plaintiffs had stated sufficient facts supporting a claim that these provisions violated the second prong Lemon v. Kurtzman, 403 U.S. 602 (1971), which relates to whether Congress' action has a principal or primary effect that advances or inhibits religion. It therefore denied the government's motion to dismiss with respect to these provisions, allowing plaintiffs' Establishment Clause challenge to proceed. Given the reliance of religious congregations of all types on this tax provision and the firestorm (for example, see this Baptist Press story) that erupted when the U.S. Court of Appeals for the Ninth Circuit tried to consider the constitutionality of Code section 107, this case could lead to significant controversy.
Cert. Granted in Medical Resident FICA Case
The Supreme Court of the United States granted certiorari in Mayo Foundation v. United State, a challenge to the government's position that compensation paid to medical residents is subject to FICA taxation. The U.S. Court of Appeals for the Eighth Circuit held that FICA taxation does apply because the regulation limiting the student FICA exception to students who are not full-time employees was a permissible interpretation of the relevant statute, reversing a federal district court decision to the contrary. The regulation at issue was effective as of April 1, 2005, and the IRS has taken the position that medical residents were excepted from FICA taxes before that date.
Antitrust and Exempt Organizations: The NFL Case
Since the National Football League is a tax-exempt organizations (see Internal Revenue Code section 501(c)(6)), I would be remiss if I did not at least mention the Supreme Court's recent decision finding that the NFL's 32 members could engage in "concerted action" that is covered by section 1 of the Sherman Act. I am far from being an antitrust expert, but the decision does at least raise some interesting questions regarding the extent of coordinated activity in which members of a nonprofit association can engage. For example, does this case have any ramifications for the NCAA and its members, including for the pending antitrust lawsuit challenging the unpaid status of college athletes? What about the various college sports conferences? Of course colleges and universities have long had to live with the reality that the antitrust laws, to some extent, apply to them (see the successful government antitrust challenge to the "Ivy Overlap Group" in United States v. Brown University, 5 F.3d 658 (3d Cir. 1993)).
June 13, 2010
Junior Tax Scholars Workshop Exempt Organizations Papers
For the last two days I helped Notre Dame Law School host the fifth annual Junior Tax Scholars Workshop. Among the papers presented by the attending, pre-tenure law school faculty were the following on exempt organizations topics. Since these papers are works in progress, public copies are not yet available, but we can expect to see most if not all of them eventually in law reviews.
Perry Fleischer (
Leff (American), The Case Against
For-Profit Charity: An Agency Cost Analysis
Mayer (Notre Dame), Charities and
Lobbying: Institutional Rights in the Wake of Citizens United
Samuel Brunson (Loyola-Chicago), Rethinking Public Charities and Political Speech
BP Oil Spill Washes Into the Nonprofit Sector
The devastating Gulf of Mexico oil spill continues to have collateral effects, including in the nonprofit sector. Here are a couple of highlights:
- Tainted Money: BP gave money to many environmental charities that now have to consider whether the only problem with "tainted" donations is there 'taint enough of them. For example, the Washington Post reports that the Nature Conservancy faces a potential backlash because of the nearly $10 million of support it has received from BP and affiliated corporations over a number of years (see also the Conservancy's description of its work with BP). The article also reports that Conservation International has received significant financial support from BP, and that a number of other prominent environmental groups, including the Environmental Defense Fund and the Sierra Club, have worked with BP on various projects. Professor Paul Dunn (Brock University, Canada) has published a Globe and Mail opinion piece discussing this issue.
- When There is Disaster, There Will be New Charities (and Paperwork): The St. Petersburg Times reports what experienced EO attorneys know but most people do not - forming a new charity involves a lot of paperwork. Citing the newly created Friends of Florida, an organization specifically created to help combat the effects of the spill on Florida's shores and wildlife, the article notes the need not only for incorporation and an IRS exemption application, but also in Florida to register with the state Department of Agriculture and Consumer Services to solicit charitable contributions. The article also raises some yellow flags regarding the credentials of the group's founder. Regardless of the merit of this particular group, disasters are also breeding grounds for fraud, including through fraudulent charities, as the article notes.
UPDATE: Additional coverage of this issue is available in The Economist (Business and NGOs: Reaaching for a Longer Spoon").LHM
Questions Regarding Turkish Charity that Organized Gaza Flotilla
Almost two weeks ago, the world was shocked by the news of the fatal confrontation between a Gaza aid flotilla and Israeli security forces. The Turkish and Islamic charity that helped organize the flotilla, the Foundation for Human Rights, Liberties, and Humanitarian Relief (known by its Turkish initials of IHH), continues to face questions regarding its role and history. For example, the Los Angeles Times reports that Israeli Prime Minister Benjamin Netanyahu accuses the group of having supported terrorist organizations, and that a 2006 Danish Institute for International Studies paper detailed IHH's role in supporting militant causes around the world. A Washington Post editorial also highlighted IHH's links to the government of Turkish Prime Minister Recep Tayyip Erdogan, as well as its involvement with the Union of Good, a coalition designated a terrorist entity by the United States in 2008.