June 25, 2010
State Action Update: Stevens Institute and US Navy Veterans
We previously blogged about the New Jersey Attorney General's lawsuit against the Stevens Institute of Technology and the series of stories raising questions about the U.S. Navy Veterans Association. Some of this information is a bit dated, but I thought our readers would appreciate learning how those cases turned out or are progressing):
- Stevens Institute Settles: Bloomberg reported that the Stevens Institute quietly settled its dispute with the Attorney General only a few months after it began, agreeing to to numerous governance changes and the resignation of its long-time president. The president will, however, remain a consultant to the institute. For more details, see the AG's press release and the final consent judgment.
- Florida Orders US Navy Veterans Association to Cease Operations Immediately; Ohio Attorney General Seeks Restraining Orders: In its latest story on this group, the St. Petersburg Times reports that the Florida's Department of Agriculture and Consumer Services, which has jurisdiction over charities in that state, has filed an emergency order ordered the Association to cease operations in the state immediately, including solicitation of contributions. The article also reports that seven other states have launched investigations into the group, and U.S. Senator Jim Webb has asked both the Department of Veterans Affairs and the IRS to examine the organization. Separately, the Ohio Attorney General announced that he is seeking emergency court orders to stop solicitations of contributions from residents of his state by this organization because it has been unable to locate any of the claimed Ohio officers of the group and the organization's counsel, who is based in Ohio, has stated the group does not have to comply with that office's cease and desist orders.
Vision Service Plan Subsidiaries Lose Bid for 501(c)(4) Status
We previously blogged about Vision Service Plan's quixotic quest to be recognized as tax-exempt under Internal Revenue Code section 501(c)(4), up to and including hiring Ken Starr to petition for certiorari after losing in the U.S. Court of Appeals for the Ninth Circuit. Still not willing to abandon the fight, six VSP subsidiaries sought to revisit the issue again in a different circuit. The U.S. District Court for the Southern District of Ohio ruled, however, that these VSP-related entities are collaterally estopped from claiming such recognition based on "their operational model of delivering vision care services to subscribing members" because of their parent's previous loss on this issue. The Court, did, however, consider whether these VSP entities provided sufficient individual charity and community outreach efforts to support such recognition. But that consideration was in vain for VSP, as the court found that "the undisputed evidence demonstrates that those efforts are so minimal in relation to plaintiffs' overall operations that plaintiffs cannot be said to be operating 'exclusively for the promotion of social welfare.'"
Aprill: An Overview of Tax Issues for Synagogues (and Other Religious Congregations)
Ellen P. Aprill (Loyola - Los Angeles) has posted An Overview of Tax Issues for Synagogues (and Other Religious Congregations). Here is the abstract:This 9 page document discusses the issues that most often have (or should have) been asked in the many years that I have been giving pro bono advice to synagogueslocally and nationally: (a) requirements for setting compensation; (b) lobbying and political activities; (c) substantiation of charitable contributions, (d) charitable fundraising, (e) payroll taxes and withholding for clergy, (f) parsonage and housing allowances, and (g) discretionary funds. The summary of the applicable rules is designed to help guide lay leaders and congregational staff, whether volunteer or professional. Each topic appears on a single page, so that a page or pages can easily be distributed to those who have need of or interest in a particular topic; congregations have my permission to do so.
Two versions of the document follow. The first speaks specifically of “synagogues” and includes some discussion, such as the treatment of cantorial soloists, limited to that context. The second version, developed after a reader asked permission to adapt the guide for use at his church, speaks more generally of “religious congregations” rather than “synagogues.”
Bray on Conservation Easements
Zachary Bray (soon to be at Houston - see this Dean's Note) has published Reconciling Development and Natural Beauty: The Promise and Dilemma of Conservation Easements in the Harvard Environmental Law Review. Here is the abstract:
Local and regional private land trusts are among the most important and most numerous conservation actors in contemporary
June 23, 2010
Corporate Philanthropy Trends, Predictions, and Recommendations Report
The Committee Encouraging Corporate Philanthropy (CECP) has issued a report titled Shaping the Future: Solving Social Problems through Business Strategy. The report seeks to answer two questions:
1. What will the next decade look like, and what are the implications for corporate involvement in solving social issues.
2. How can corporations position themselves now to maximize their profitability and societal impact?
CECP created the report in collaboration with McKinsey & Company, which interviewed CEOs and thought leaders as well as polling CEOs who attended CECP's annual conference. Report highlights include:
- Global Forces. McKinsey has identified five game-changing trends that will affect the future of the global economy: talent shortages, shifting centers of economic activity, a new era of government action, increased scarcity of natural resources, and new levels of technological interconnectivity.
- Key Uncertainties. At the same time, business leaders face two key uncertainties about the future: the level of proactive action on behalf of companies and the expectations that are placed upon the private sector.
- Scenarios for the Future. These certainties and uncertainties combine to create four possible scenarios for 2020: the optimal being “Sustainable Value Creation” and the worst being the “Vicious Circle”. Sustainable Value Creation is a self-reinforcing state of trustworthy, pro-social corporate behavior that simultaneously delivers bottom-line results, provides competitive advantage, and leads to community benefits. The consequences for inaction are severe for both business and society.
- Capturing the Opportunities. Both business and society have responsibility for which scenario ultimately is realized; both have ownership over the future. Sustainable Value Creation requires new forms of collaboration across sectors to achieve results. This report shows how corporations are shifting their view on globalization and economic development – they will work in partnership with nonprofits and government in the future, taking a leadership role on ethical and moral issues for positive business and societal outcomes.
According to CECP's website, Paul Newman and others helped found the now the ten-year old organization, its Board of Directors include numerous CEOs of well-known companies, and its initial funders included a number of major private foundations.
Hines, Horwitz & Nichols: The Attack on Nonprofit Status
James R. Hines, Jr. (Michigan), Jill R. Horwitz (Michigan), and Austin Nichols (Urban Institute) have posted The Attack on Nonprofit Status: A Charitable Assessment, 108 Michigan Law Review (forthcoming 2010). Here is the abstract:American nonprofit organizations receive favorable tax treatment, including tax exemptions and tax-deductibility of contributions, in return for their devotion to charitable purposes and restrictions not to distribute profits. Recent efforts to extend some or all of these tax benefits to for-profit companies making social investments, including the creation of the new hybrid nonprofit/for-profit company form known as the Low-Profit Limited Liability Company, threaten to undermine the vitality of the nonprofit sector and the integrity of the tax system.
Reform advocates maintain that the ability to compensate executives based on performance and to distribute profits when attractive investment opportunities are scarce makes for-profit entities more efficient than nonprofit counterparts. Offering more favorable tax treatment to for-profits engaging in charity would encourage greater charitable entrepreneurship, the argument goes, and provide worthwhile competition for the nonprofit sector. As matters stand, however, nonprofits can and occasionally do reward executives with performance-based compensation, and their nondistribution rules impose no obligation to make subpar investments. The existing nonprofit sector is extremely competitive, and the charitable activities of for-profits already receive favorable tax treatment. Going further and offering socially active for-profits the tax benefits equivalent to those available currently to nonprofits would create opportunities for tax arbitrage by providing tax deductions to high-bracket donors and taxable income for lightly taxed recipients. The difficulty of policing lines between nonprofit and for-profit activities of the same business entities would entail significant administrative complexity and is unlikely ultimately to succeed. And even should it succeed, the costs of offering new tax benefits to for-profit charities include not only foregone tax revenues, but also spillover effects on the charitable activities of nonprofits.
Sugin: Lifting the Museum's Burden from the Backs of the University
Linda Sugin (Fordham) has posted Lifting the Museum's Burden from the Backs of the University: Should the Art Collection Be Treated as Part of the Endowment?, 44 New England Law Review (forthcoming 2010). Here is the abstract:A few universities in economic straits have recently attempted to sell artwork to address their financial woes, causing much consternation in the museum community. This article relates the stories of some institutions’ attempts to deaccession artworks, and explains why universities may suddenly perceive their art collections as important assets to monetize. It contends that the universities and their critics have fundamentally divergent conceptions of the role of the art collection in the university, which explains why they cannot agree on the legal responsibilities of universities vis-à-vis their art. The critics have a strong cultural-property conception that privileges art, while these universities see their collections as similar to other property they use in carrying out their programs. This article advocates a contextual approach for choosing among these conceptions.
The legal regime that governs the responsibilities of university fiduciaries in managing and selling property generally depends on categorization as endowment or program-related property. Unfortunately, there is no clear law determining whether university art collections should be treated as endowment property subject to the statutory rules of investment responsibility, program-related property governed by fiduciary duties, or cultural property subject to its own unique standards. The article concludes that university art collections are hybrid cultural-instrumental property, and that universities should be subject to a more flexible standard than museums in making deaccessioning decisions. It argues that university trustees would be faced with too great a fiduciary-duty conflict if subject to the stricter museum standard. To accommodate the cultural-property concerns, it proposes that trustees exercise a heightened level of attention when selling art, but retain their discretion to act in the best interests of the university.
Delaney: The NFL and its Undeserved Tax-Exempt Status
In an apparently somewhat light-hearted consideration of the issue, Andrew Delaney, Technology Editor at the Vermont Law Review, has posted Taking a Sack: The NFL and its Undeserved Tax-Exempt Status. Here is the abstract:This is an article about the NFL's tax status with some humor thrown in. Enjoy. I've tried to make it readable. Here's the mandatory roadmap: Part I of this article discusses the NFL’s current tax status. Part II attempts to put the NFL’s tax and antitrust exemption in proper context. Part III analyzes the NFL business model from a critical perspective, asking whether the NFL’s nonprofit status is deserved. More importantly, Part III begins with a great Dave Barry quote. This piece concludes, more or less, that the NFL should stop blowing smoke up a certain orifice of the American taxpayer and start paying its taxes.
MONTENEGRO—COUNCIL FOR GO-NGO COOPERATION FOUNDED
The Balkan Civil Society Development Network has reported that on 15th April 2010, the Government of Montenegro adopted a decision to found the Council for Cooperation between the Government and NGOs. The Council acts as an advisory body to the Government. Its aim is to follow the government’s Strategy with NGOs as determined by the Action Plan for the implementation of the Strategy for the period 2009-2011. The Council is composed of a chairperson and 24 members, i.e. 11 representatives of Ministries and the Head of the Office for Cooperation with NGOs and 12 representatives of different sectors of civil society. The chairperson of the Council is a representative from the Government. The chairman and the members of the Council are appointed by the Government, for a period of 3 years. The decision also included the procedure for election of representatives of civil society by way of public announcement.
CHINA—ANALYSIS OF RECENT DEVELOPMENTS PUBLISHED
Karla Simon gave a speech on developments with regard to CSOs in China at the European China Law Studies Association meeting in Copenhagen on June 18, 2010. She presented a paper that she and Hang Gao, a former CUA Research Fellow, are working on, entitled “Opening the Space: New Developments for China’s Civil Community Organizations,” which is available on her SSRN page(and which has made several recent SSRN top-ten download lists). That paper and an earlier one published in the Fordham International Law Journal were featured by Stanley Lubman in his influential WSJ blog last month. Prof. Simon has also posted an analysis of other recent developments regarding the regulation of CSOs in China to the ICCSL website.
INDIA—NEW REVISIONS TO DIRECT TAX CODE PROPOSED
Under the latest proposal from the Finance Ministry, a Revised Discussion Papersuggests the following changes affecting charities and NPOs will be made in the Direct Tax Code (DTC).
· NPOs already registered under the Income-tax Act, 1961 and holding valid registration on the date on which DTC comes into effect, would not be required to apply for fresh registration under the DTC. However, they would be required to provide additional information to facilitate the administration of the new provisions;
· Up to 15% of the surplus or 10% of gross receipts, whichever is higher, will be allowed to be carried forward to be used within three years from the end of the relevant financial year. In other words, indefinite accumulation of up to 15% of gross receipts as is prevalent will not be allowed;
· The term “charitable purpose” will be retained in place of “permitted welfare activity” proposed earlier;
· Donations by an NPO out of its accumulated surplus to another NPO will not be considered as an application for “charitable purpose;”
· A basic exemption limit will be provided and the surplus in excess of such limit will be subject to tax;
· The cash method of accounting will be retained since it is simple to follow and easy to administer;
· The Central Government will be empowered to notify any non-profit organization of public importance as an exempt entity;
· Currently NPOs are allowed unlimited carry forward of unspent balance to the next financial year. It is proposed not to allow this;
· NPOs will no longer be allowed to accumulate funds for up to 5 years;
· Donors will not be able to enjoy 100% deduction for donations made to projects approved under section 35AC; and
· Business activity, even if incidental, will not be allowed for NPOs established for a “charitable purpose” but falling under the category, “advancement of any other object of general public utility.”
June 22, 2010
Supreme Court Upholds Application of "Material Support" of Terrorist Organizations to Humanitarian and Political Support
The Supreme Court of the United States ruled in Holder v. Humanitarian Law Project that the law prohibiting providing material support or resources to designated "foreign terrorist organizations" was constitutional as applied to the provision of support for lawful, nonviolent purposes such as humanitarian and political activities in that the statute neither was unconstitutional vague (under the Fifth Amendment) nor infringed on freedom of speech and association (under the First Amendment). The Court reasoned both that statutory terms such as "training," "expert advice or assistance, "service, and "personnel" were sufficiently clear to provide fair notice of what is prohibited and that even innocuous and legal support raised legitimate risks of both diversion of that support to terrorist activity and the freeing up of other resources for such activity. The plaintiffs included six nonprofit organizations, including the Humanitarian Law Project.
Fed Courts Update: ACORN, Credit Union, and Charity Subject to Terrorism Investigation Win
We previously blogged about ACORN's lawsuit challenging Congress attempt to defund it, Bellco Credit Union's UBIT battle with the IRS, and KindHearts' struggle to regain control of its assets, frozen when the U.S. Treasury Department's Office of Foreign Assets Control opened an investigation into whether that group should be designated as a terrorist organization. Some of this information is a bit dated, but I thought our readers would appreciate learning how those cases turned out (short story: all three groups won, at least to some extent):
- The Center for Constitutional Rights, which represented ACORN, announced that a federal district court issued a permanent injunctionblocking the defunding, based on its opinionthat Congress' action represented an unconstitutional bill of attainder. The victory is Pyhrric, however, given that ACORN announced its decision to disband shortly thereafter.
- As covered extensively in the credit union press (see Credit Union Magazine, Credit Union Times), Bellco Credit Union(mostly) won its case challenging the IRS' determination that certain income streams were subject to unrelated business income tax. More specifically, a federal district court concluded in a bench trial that UBIT did not apply to credit insurance income or royalties from accidental and death and dismemberment insurance. The court hadpreviously concluded that UBIT also did not apply to financial services income from the provision of products and services to Bellco's members, although it did apply to such income from non-members and certain other income from other entities. In its most recent decision, the court also concluded that UBIT applied to credit insurance sales income that came through another entity. The decision is unfortunately not available for free, but is available through electronic databases such as Westlaw.
UPDATE: A reader notes that "The Bellco decisions are readily accessible through PACER. The ruling on cross motions for summary judgment, back in November of 2009, is 35 pages, and the final ruling in April of 2010 is 38 pages. Usually final decisions are free [although the read is not positive they are for the court that issued these rulings], and anything else is eight cents a page."
- The ACLU, which represents KindHearts for Charitable Humanitarian Development, Inc., announced that a federal district court confirmed its earlier ruling that the Treasury Department's freezing of KindHearts' assets violated the Constitution and ordered that the government must obtain a warrant based on probable cause before seizing an organization's assets, even when the organization is suspected of supporting terrorism. The court's opinionrejected government criticism of its earlier ruling, but concluded both that the government would be given an opportunity to make a post-hoc probable cause showing (to remedy the Fourth Amendment violation) and to produce sufficient evidence to give KindHearts adequate notice and opportunity to respond (to remedy the Fifth Amendment violation). The court also remandedto the Office of Foreign Assets Control (OFAC), with specific instructions, the issue of the amount of assets that should be released to pay KindHearts' attorney fees, and left in place its previous stay preventing the government from proceeding with terrorist organization designation proceedings against the group.
Brunson: Rethinking Public Charities and Political Speech
The debates have not, however, provided any significant certainty to public charities or to policymakers. Without legislative history or debate, public charities can only guess at the purposes underlying the prohibition. The arguments used to defend the prohibition are met by equally compelling counterarguments, while the arguments for why the prohibition should be eliminated are equally countered.
As this debate occurs, the penalty for violation of the prohibition is the loss by a public charity of its tax-exempt status. In light of the draconian nature of the penalty, the IRS underenforces the prohibition, as some public charities routinely flout the prohibition and others self-censor more than is necessary in order to stay on the right side of an uncertain line. Neither reaction leads to the efficient administration of the tax law.
The problem, this Article argues, is that all of the arguments surrounding the prohibition on public charities’ political campaigning takes place in the shadow of the current language of IRC § 501(c)(3), to which commentators and policymakers must ascribe purpose. Rather than argue the benefits and deficiencies of the current regime, the discussion of the role of public charities in political campaigns needs to start anew, without taking as a given the benefits and burdens of the current system. Whatever the result of the new discussion, however, the Article argues that is necessary to provide the IRS with the option to impose intermediate penalties on public charities that violate a prohibition on campaigning.
Cowan: Nonprofits and the Sales and Use Tax
States vary in the application of their sales and use tax regimes to nonprofit organizations. Some states grant broad exemptions, others limit exemptions to an enumerated list of organizations, and others treat nonprofits much like they would any other taxpayer. The purpose of this Article is to analyze ways that states might review, rationalize, and reform the way they apply their sales and use taxes to nonprofit organizations. The Article addresses the key issues of whether sales/use tax exemptions should be used to subsidize nonprofits and whether such subsidies create unfair competition. The Article analyzes the issues from a sales/use tax point of view and a nonprofit point of view – drawing on the practical realities and the theories underlying both areas of the tax law. The analysis highlights longstanding, well-known problems in the broader state sales/use tax systems, but also reveals issues that are unique to nonprofits. For good measure, the political issue of the taxation of Girl Scout Cookies, which seems to arise at nearly every turn, is addressed.
June 21, 2010
Expanding Electioneering Disclosure - Except for AARP, NRA & Sierra Club?
Normally I would wait for the legislative dust to settle, but the most recent developments with respect to the DISCLOSE Act (how would like to be the congressional staffer that had to come up with a name to fit that acronym) are too good to skip. For those of you who have not been following this bill, or rather bills since there is a House version (H.R. 5175) and a Senate version (S. 3295), it is Congress' attempt to counter the effects of the Supreme Court's Citizens United decision striking down long-standing bans on corporations spending their general funds on certain types of election-related communications. As the name suggests, a major component of the bill is required disclosure of who pays for such communications, including significant donors to any organization that engage in such communications.
While more knowledgeable commentators than me have predicted that passage of the bill is unlikely, the interesting recent development is the attempt to carve out an exception for certain powerful nonprofit organizations so they would not actively oppose the bill. In a nutshell and as reported widely in the press, the House Democrats sought to blunt threatened opposition from the National Rifle Association by creating an exception for section 501(c)(4) organizations that have existed for at least 10 years, derive no more than 15 percent of their funding from corporate or union sources, have a presence in all U.S. states, and have more than 1 million dues-paying members - a description that appears to only match the NRA and possibly the AARP. A change to reduce the members threshold to 500,000 may have expanded the exception to include the Sierra Club (which still opposes the bill even with this expansion). Nevertheless, press reports indicate that the proposed exception may have created as many opponents as it eliminated, dooming whatever chances the bill had for passage in the House, much less the Senate where passage was already highly uncertain.
Berg: Population Health and Tax-Exempt Hospitals
Jessica Wilen Berg (Case Western) has posted Population Health and Tax-Exempt Hospitals: Putting the Community Back into the 'Community Benefit' Standard, which will be published in the Georgia Law Review. Here is the abstract:Disputes about tax-exemption are occurring all over the country. The IRS and CBO are engaged in national studies of non-profit hospitals and community benefits. State governments are considering whether to legislate minimum amounts of charity care in exchange for tax-exemption. Congress is debating whether hospitals should remain a part of the non-profit sector at all. At the same time, uninsured individuals are suing hospitals for unfair billing and collection practices. Creative accounting and expansive definitions of "free" care have led to a variety of non-ideal practices by hospitals in order to balance their bottom line, while at the same time maintain tax-exempt status. This article argues that the longstanding focus on providing individual charity care to meet the community benefit standard for tax-exemption is misguided. Instead, I determine that there are conceptual and practical arguments for requiring hospitals to provide population or public health benefits. I offer a detailed analysis for implementing a new standard, and a framework for quantifying community benefit under that standard. The suggestions set forth should result in better, more expansive benefits for communities; clearer guidance for health care institutions and tax authorities; and fewer problematic incentives for tax-exempt hospitals attempting to meet their community benefit obligations.
Capps et al.: Antitrust Treatment of Nonprofits: Should Hospitals Receive Special Care?
Cory S. Capps (Bates White, LLC), Guy David (University of Pennsylvania - The Wharton School) and Dennis W. Carlton (University of Chicago - Booth School of Business) have posted Antitrust Treatment of Nonprofits: Should Hospitals Receive Special Care? Here is the abstract:Nonprofit hospitals receive favorable tax treatment in exchange for providing socially beneficial activities. Extending this rationale suggests that nonprofit hospital mergers should be evaluated differently than mergers of for-profit hospitals because suppression of competition may also allow nonprofits to cross-subsidize care for the poor. Using detailed California data, we find no evidence that nonprofit hospitals are more likely than for-profit hospitals to provide more charity care or offer unprofitable services in response to an increase in market power. Therefore, we find no empirical justification for different antitrust standards for nonprofit hospitals, as some courts have suggested.