September 10, 2010
Seattle Foundation Connects Nonprofits and Donors with Information
The Seattle Times reports (a related piece is in The New York Times) on The Seattle Foundation's new program, launched on Wednesday, that provides financial data and other information on approximately 700 local nonprofits groups to potential donors. Previously, the information was only available to clients who maintained accounts, or donor-advised funds, with the Foundation. The Foundation seeks to more fully engage both present and potential donors with information that will aid them in making their charitable giving decisions. As discussed in the New York Times article, such programs can offer more alternatives to donors who would otherwise default to a larger, national charity, instead of a lesser known local charity. Although other databases exist that provide information on charities in an effort to connect them with donors, what makes the Seattle Foundation's program unique is that it offers "snapshot evaluations" based on the Foundation's own research. As the Seattle Times article concludes, the Foundation's efforts reflect "the importance of connecting donors and recipients, and allowing philanthropy to be more personalized, transparent and direct."
September 9, 2010
Should Medical-Related Charities Increase Disclosure of Their Donors?
The Chronicle of Philanthropy raises this issue in a recent article revealing that the National Alliance on Mental Illness (NAMI) discloses quarterly on its website the names of all corporations and foundations that donated more than $5,000 to NAMI, the amount given, and how NAMI spent the contribution. According to the Chronicle, NAMI began disclosing this information last year after Senator Charles Grassley, the ranking minority member of the Senate Finance Committee, initiated an investigation into NAMI's financial relationships with pharmaceutical companies. NAMI's actions have given Grassley further impetus to force 33 other nonprofit medical associations to follow NAMI's lead. In a related article, the Chronicle reports that Grassley's inquiry into these other groups represents a "broader effort by the senator and others to expose and curtail corporate influence on the medical field." Grassley commented that "[t]hese organizations have a lot of influence over public policy, and people rely on their leadership. There's a strong case for disclosure and the accountability that results."
Grassley's efforts challenge the longstanding practice of charities to respect donors' rights to confidentiality. But supporters of Grassley's viewpoint argue that he is rightfully concerned about the influence of corporate donors on the medical advice ultimately rendered by doctors, academic researchers, and organizations that receive such monies. In December 2009, Grassley sent a letter to 33 such nonprofit associations requesting information on the amount of funds received from pharmaceutical, medical-device and insurance companies from 2006 to 2009, the identity of the donors and how their money was spent by the medical group, and additional information on the outside income earned by the groups' top executives and board members. In his letter, Grassley referenced the decision of H. Richard Lamb, a professor emeritus of psychiatry at USC and contributing founder of NAMI, to resign from NAMI's board due to the organization's "financial dependency" on pharmaceutical support. Dr. Lamb commented that organizations that receive money from pharmaceutical companies should "take no position on psychopharmaceutical matters." Grassley is expected to disclose his findings from the groups' responses by early Fall.
The Chronicle acquired more than half of the solicited groups' responses to Grassley's letter, finding that such groups receive aggregately more than $100 million annually from medical-related companies via "donations, advertising revenues, exhibit fees, corporate memberships, and support for continuing medical education." For some groups, this can represent as much as 78% of their revenue, while for others it only represents a small percentage of their total receipts. This effort is further evidence of Grassley's commitment to increased transparency of tax-exempt nonprofits.
Al Sharpton's Civil Rights Group in Financial Jeopardy
The New York Post reports that Revered Al Sharpton's civil-rights group, National Action Network (NAN), a nonprofit organization exempt from federal income tax under Section 501(c)(4), is in financial peril that threatens its future. According to an audit performed by accounting firm KBL on the organization's 2008 financial records, NAN suffers from "recurring decreases in net assets - and has been dependent upon advances from related parties and the nonpayment of payroll tax obligations - to maintain continuity." KBL further warned NAN's board that because of "inadequacies" in the organization's accounting records, it could not offer an opinon as to the accuracy of such records, ultimately concluding that "[t]hese circumstances create substantial doubt about the organization's ability to continue."
In addition to federal tax problems encountered by Sharpton and NAN that were were avoided by a settlement with federal prosecutors, NAN has approximately $1.348 million in overdue state and local, and federal, taxes and penalties according to KBL's audit. NAN has responded by assuring that the problems are being addressed, including NAN's solvency, which is being temporarily resolved by "seven-figure" contributions from Sharpton and other NAN board members.
Tax-Exempt Trade Groups to Increase Political Spending in 2010
USA Today reports that certain large publicly-traded corporations do not plan to directly support the political advertising of their affiliated trade groups via contributions. Notwithstanding, these same companies will not restrict the political spending of such nonprofit trade associations, which are permitted to spend their funds on advertising targeting candidates for public office. One of the largest trade associations, the U.S. Chamber of Commerce, has publicly announced its intention to spend $75 million in the 2010 elections. The Chamber, which represents over 3 million businesses, reportedly spent nearly $1 million in one day's worth of television advertising focusing on the U.S. Senate seat in New Hampshire. In the article, the president of the non-partisan Center for Political Accountability opined that, "[m]ore and more trade associations are the vehicles for company political spending and activity."
Of the 40 Fortune 500 companies that responded to the Center's survey, not one responded that it would use its own corporate funds to run political advertising supporting or opposing a candidate for public office, although companies are allowed to do just that on an unlimited basis following the Supreme Court's January decision in Citizen's United v. FEC, as previously blogged. Most companies, opined one political expert in the USA Today article, do not want to be directly associated with a certain candidate. The use of nonprofit trade groups ostensibly allows companies to affect a particular election without any public retribution.
September 7, 2010
Milton Hershey School Trust - Excessive Trustee Compensation?
WITF, the Harrisburg NPR affiliate, reports that Protect the Hersheys' Children (PHC), a Pennsylvania not-for-profit corporation, submitted a nine-page letter to the Internal Revenue Service, the Pennsylvania Department of Banking, and the two senior members of the Sentate Finance Committee alleging excessive compensation practices at the Milton Hershey School Trust (MHS Trust) and its sole beneficiary, the Milton Hershey School (MHS). The trustee of the MHS Trust is the Hershey Trust Company, a for-profit Pennsylania corporation the entire stock of which is owned by the MHS Trust. MHS is a cost-free, private, coeducational home and school for children from families of low income, limited resources, and social need. PHC is a self-proclaimed "watchdog group that monitors MHS and apprises oversight officials of conduct that we believe warrants action."
In the letter, PHC alleges that the MHS Trust's trustee (the Hershey Trust Company and, therefore, its board of directors) is excessively compensated and exerts poor governance, thereby dissipating the funds available to achieve the MHS Trust's mission of supporting children in need. With supporting newspaper articles, PHC asserts the Hershey Trust Company pays its board in excess of $1.1 million annually. MHS has responded to the allegations by stating that the board members are subject to a high standard of fudiciary responsibility as to investment and management decisions affecting the MHS Trust. PHC also alleges that the Pennsylvania Attorney General has failed to effectively exercise its oversight responsibility with respect to the trust. The attorney general responded to the allegations as "borderline political attacks," affirming that his office ensures that charitable trusts are properly administered, but does not "micromanage" the trusts.
Beth Israel - A Case Study in Board Governance and AG Oversight
The Boston Globe reports that Massachusetts Attorney General Martha Coakley released results of a four-month investigation by her office of the actions of the board of Beth Israel Deaconess Medical Center in response to an anonymous complaint alleging Chief Executive Paul Levy's inappropriate relationship with a former female employee. In an eleven-page letter, the attorney general's office ultimately concluded that the hospital did not misappropriate charitable funds in compensating the former employee and further found that the board "responded and acted consistent with its fiduciary obligations" in conducting its investigation. The employee in question, concluded the office, was not excessively compensated for the positions that she held with the hospital. Notwithstanding, the letter does criticize board members and senior management who knew of the relationship for years for not having disclosed it to the entire board when they discovered it.
The whole incident began when certain board members received a complaint alleging improper conduct by Levy with the former employee. The board immediately began an internal review of the allegations in the complaint, creating an ad-hoc committee and retaining outside counsel (with questionable independence). The ad-hoc committee ultimately recommended Levy's retention as CEO, coupled with a public statement disapproving of his conduct. The full board accepted this recommendation and further decided to impose a $50,000 sanction on Levy. The Board Chair further concluded that an "independent review of the Board's actions might better provide assurance to the public that the Board had carried out its responsibilites," ultimately contacting the attorney general's office to conduct such a review.
Coakley stated in the article that she did not think the hospital board's work was yet complete with respect to the incident. The Board should continue to monitor Levy's leadership: "There should be heightened scrutiny on his judgment going forward." She concluded by stating that the incident was an "eminently teachable moment" on the importance of board independence and rigorous management oversight.
Congressional Charities - True Philanthropy or Political Vehicles?
The New York Times reports that at least two dozen charitable organizations created or operated by Congressional members and their families regularly receive millions of dollars in contributions from local businesses and major corporations. Currently, special interests laws do not limit corporate donations to charitable organizations affiliated with members of Congress. Although the article suggests that the pattern of donations correlates, in some instances, to legislation affecting the donor, both the Congressional members and their corporate donors deny that the fundraising events and donations are anything more than support for worthy causes that benefit their communities. However, the corporate donations usually exceed the amount that would be allowed if given to the Congressional member's campaign. At least one former Congressman acknowledges that a corporation's donation to a member's charity or cause "can create expectations that the lawmakers will return the favor."
Congressional ethics rules require corporations employing lobbyists to report donations to charitable organizations created by a member of Congress. Based on its review of public records, however, the New York Times found at least a dozen violations of such reporting requirements. In addition to Congressional ethics rules concerns, the arguable quid pro quo nature of the donation may raise deductibility concerns.
Should Credit Unions Remain Tax-Exempt?
As reported in The Capital Times, banks are again questioning the federal and state income tax exemptions granted to credit unions. Credit unions have long enjoyed both federal and state exemption based on their status as mutual benefit organizations. The banking industry is basing its newest challenge on one of numerous recommendations set forth in The Report on Tax Reform Options issued by the President's Economic Recovery Advisory Board - specifically, to eliminate the federal income tax exemption for credit unions, which is projected to cost the federal government approximately $19 billion for fiscal years 2008-2017. As the report states, the income tax exemption "puts them at a competitive advantage relative to other financial institutions for tax reasons. Eliminating this exemption would raise revenue and level the playing field, but would clearly raise taxes on credit unions." As reported in the article, former IRS Commissioner Kevin Brown reported to the Senate Finance Committee in 2007 that "many tax-exempt credit unions may be hard to distinguish from for-profit banks."
To further fuel the contentious debate between banks and credit unions, the Advisory Board's Report also mentions as potentially "appropriate," the impostion of corporate income tax on very large banks organized as S Corporations.
September 6, 2010
Religious Nondiscrimination Provision in Pending Federal Legislation Sparks Controversy
The New York Times reports that numerous religiously-affiliated organizations are protesting a religious nondiscrimination provision in pending legislation (H.R. 5466) to reauthorize the Substance Abuse and Mental Health Services Administration. One provision (Sec. 1947) states that any block funds received under the legislation constitute "federal financial assistance" under certain Civil Rights laws and are subject to the following nondiscrimination requirement as to recipients of services:
(2) Prohibition. No person shall on the ground of sex (including, in the case of a woman, on the ground that the woman is pregnant), or on the ground of religion, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under, any program or activity funded in whole or in part with funds made available under section 1911 or 1921 [of the legislation].
In effect, recipients of federal funding under this legislation must provide social services free of any religious bias or restriction.
The more controversial provision of the pending legislation deals with religious preference in hiring (H.R. 5466, section 2(a), amending Title V, Part A, section 501 (m)(2)), which provides:
(2) CONSIDERATION OF RELIGION IN EMPLOYMENT DECISIONS- With respect to any activity to be funded (in whole or in part) through an award of a grant, cooperative agreement, or contract under this title or any other statutory authority of the Administration, the Administrator, or the Director of the Center involved, as the case may be, may not make such an award unless the applicant agrees to refrain from considering religion or any profession of faith when making any employment decision regarding an individual who is or will be assigned to carry out any portion of the activity. This paragraph applies notwithstanding any other provision of Federal law, including any exemption otherwise applicable to a religious corporation, association, education institution, or society.
This particular provision would trump the exemption provided to religious organizations under Title VI of the Civil Rights Act of 1964 that permits them to discriminate on the basis of religion in employment. As reported in the New York Times article, both Christian and Jewish organizations alike are concerned about the impact of the pending legislation on their ability to hire and administer their missions consistent with their faiths and beliefs. In contrast, the Coalition Against Religious Discrimination (including the ACLU, Hindu American Foundation, and NAACP) support such restrictions and desire that Congress eliminate federal funding of faith-based providers all together.
The debate over religious nondiscrimination in federal funding of social service programs administered by religiously-affiliated nonprofits is anything but new. Both Presidents Clinton and Bush supported such federally financed programs provided they were administered on a religiously-neutral basis. However, until this legislation, there was no attempt to impose religious nondiscrimination in hiring on faith-based providers as a prerequisite to federal funding.
(Hat tip: Jack Siegel at Charity Governance Consulting, LLC)
Cauble: Reforming the Tax Treatment of Investment Income Earned by Tax-Exempt Entities
Emily Cauble (University of Illinois at Urbana-Champaign) published her article,"Harvard, Hedge Funds, and Tax Havens: Reforming the Tax Treatment of Investment Income Earned by Tax-Exempt Entities," in Volume 29 of the Virginia Tax Review. Here is the abstract:
Educational endowments, private employer-sponsored pension plans, and other tax-exempt organizations (collectively, “tax-exempt entities”) invest a substantial amount of capital in various sectors of the economy, and tax consequences can determine whether or not a tax-exempt entity, like any other entity, makes a potential investment. Consequently, the tax treatment of investment income earned by tax-exempt entities can affect significantly the manner in which capital is allocated on an economy-wide basis.
The current tax system applies different effective rates of tax to income earned by tax-exempt entities from otherwise comparable investments. This inconsistent tax treatment distorts investment decisions made by such entities which, given the amount of capital invested by such entities, can result in a less than optimal allocation of capital. In some contexts, the distortion can be mitigated by tax structuring. However, if Congress were to enact legislation currently proposed as part of the Stop Tax Haven Abuse Act, the ability to engage in this tax structuring would be eliminated. Thus, enactment of the proposed legislation would exacerbate the current distortions without providing any offsetting benefits.
In lieu of reforms suggested by Congress, this paper proposes reforms to the manner in which tax-exempt entities are taxed on their investment income. In particular, this paper proposes that a tax-exempt investor would generally not be subject to tax on income earned from an entity whose business decisions are not controlled by the tax-exempt investor. The proposed reforms would result in a better allocation of capital among various investment opportunities. The reforms would not subvert any of the other goals of taxing income earned by tax-exempt entities. Finally, the reforms would modernize the tax rules in a way that takes into account changes to investment portfolios held by tax-exempt entities that have occurred since the rules were enacted.
(Hat tip: TaxProf blog)