Friday, September 17, 2010
The Washington Post has published an interesting story on the response of China’s aristocrats to the coming visit of Bill Gates and Warren Buffet, now widely known for their challenge to wealthy Americans to give their fortunes to charity. According to the Post, although Chinese magnates were initially excited by the prospect of meeting Gates and Buffet, they began discretely to try to discover if they, too, would be pressured to pledge their fortunes to philanthropy. A few even reportedly declared that they could not attend the event that will feature the donating duo because of schedule conflicts. China reportedly now boasts many billionaires, second in number only to the United States. But most have not yet embraced the role of philanthropy. While part of the reason may stem from personal preferences by some (but certainly not all) to hold on to wealth, the Post identifies another reason:
While the Chinese government has been eager to compete with the United States and the rest of the world in other fields, philanthropy is one sector in which it remains hesitant. China's leaders have not fully embraced the idea of handing over to individuals or groups the power to help the nation's people - a role traditionally reserved for the Communist Party. "One thing holding back philanthropy may be the reluctance among the rich. But the other is the worry of the government," said Li Huafang, a researcher for the Shanghai Institute of Finance and Law. "They don't want other entities competing with them for the people's hearts.”
Enter the need for changes in governmental regulation that dramatically alter the nature of nonprofit law in China. Says the Post:
Even if philanthropy becomes popular among China's rich, most experts believe a change in government regulation is necessary. China has no inheritance tax. Individuals can donate only cash, not stocks or securities. And private foundations are required to partner and register with a government ministry, which has hindered their creation.
This article should impress upon its readers the important role that nonprofit law serves in philanthropy. Or, perhaps better phrased, the article should remind us that a major purpose of nonprofit law is precisely to serve philanthropy – to facilitate, and even encourage, the efforts of those with privately-owned resources to meet the vast needs of others – even in the face of a government that may be somewhat jealous of its resources and successes.
As reported in the New York Times, this week the New York State Board of Regents voted to let stand the looming October 8 expiration of emergency regulations that enjoin museums from selling art to fund operating costs. State Education Commissioner David Steiner said that no consensus among the state’s museums had emerged concerning the advisability of extending the emergency regulations governing such “deaccessioning.” The story states that the Board’s decision follows the stalling in the state legislature of a bill that would have prohibited cultural institutions from selling portions of their collections to meet operating expenses. For more coverage of the bill and why it lost momentum, see this story in the New York Times. For Fordham Law Professor Linda Sugin’s article on deaccessioning by university museums, see Lifting the Museum's Burden from the Backs of the University: Should the Art Collection Be Treated as Part of the Endowment?
Thursday, September 16, 2010
According to a story in the New York Times, Cecilia Chang, formerly the dean of the Institute of Asian Studies at St. John’s University, was arrested Wednesday on charges of embezzling about $1 million from the school. A routine audit of expenses that she had submitted for reimbursement eventually led to her suspension in January and her termination in June, says the story. She reportedly entered a plea of not guilty at her arraignment in State Supreme Court in Queens on Wednesday, where she was ordered to be held on $1 million bail. The Times reports that if she is convicted, Ms. Chang could be sentenced to as many as 25 years in prison.
As reported in the Boston Globe, a group of community hospitals that compete with Caritas Christi Health Care in Massachusetts has asked the state attorney general to insist on numerous conditions before consenting to the proposed sale of several Caritas hospitals to its for-profit buyer, Cerberus Capital Management. The group, consisting of Lawrence General Hospital, Signature Healthcare Brockton Hospital, and Southcoast Hospitals Group in New Bedford, maintains that the conditions are necessary to sustain their viability and to ensure that low-income patients have affordable access to health care services. The Globe reports that the following conditions were proposed in a letter from the group’s legal counsel to the attorney general:
* Prohibit the Cerberus holding company, Steward, from raising the prices it charges patients and insurance payers for three years.
* Bar Steward from entering exclusive health plan contracts that exclude competing hospitals.
* Restrict the new owner from entering into joint ventures with health insurance carriers.
* Require Steward to disclose all insurance contracts to the attorney general’s office.
* Forbid Steward from “improperly inducing physicians away from the coalition hospitals’’ and require Caritas to file quarterly reports listing doctors who have admitting privileges.
* Extend Steward’s commitment to hold Caritas to seven years.
* Appoint a monitor to oversee Caritas hospitals and require notice of any future sale.
Jack Siegel, nonprofit law attorney, familiar face in the nonprofit law speaking circuit, and author of A Guide for Non-Profit Directors, Officers and Advisors: Avoiding Trouble While Doing Good, has an interesting post on his Charity Governance web blog. Siegel observes that Section 9006 of the Patient Protection and Affordable Care Act (the “Act”) extends Form 1099 reporting requirements to payments representing the purchase price of goods bought from any vendor whose sales to the payor exceed $600 for the year. Many business entities are fretting the new law. However, Siegel cautions that the new law should also concern tax-exempt entities. Although he recognizes that the expanded reporting provision does not apply to payments to vendors that are exempt from federal income tax under Internal Revenue Code section 501(a) (e.g., tax-exempt charities and other entities described in Code section 501(c)), Siegel believes the provision applies (or at least is being interpreted to apply) to tax-exempt nonprofit payors. Siegel opines that the costs of collecting the required information will be very high and impose a great burden on nonprofit payors. He therefore favors repeal of the provision.
For similar concerns reported on this blog, see here.
Background note: Whether the new provision should concern nonprofits depends upon the proper interpretation of Section 9006(a) of the Act, the relevant portion of which adds a new subsection (h) to Code section 6041, and which reads as follows:
h) APPLICATION TO CORPORATIONS.—Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection, for purposes of this section the term ‘person’ includes any corporation that is not an organization exempt from tax under section 501(a).
Code section 6041(a), prior to the effective date of the amendments made by the Act to reach payments for property, reads as follows:
All persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income (other than payments to which section 6042 (a)(1), 6044 (a)(1), 6047 (e), 6049 (a), or 6050N (a) applies, and other than payments with respect to which a statement is required under the authority of section 6042 (a)(2), 6044 (a)(2), or 6045), of $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment.
Wednesday, September 15, 2010
The Boston Globe reports that William O’Brien of Framingham, Massachusetts was sentenced to state prison for stealing over $780,000 from Harvard Hillel, a religious nonprofit organization. O’Brien had been responsible for maintaining the nonprofit’s financial records and assisting in paying its bills while employed by a financial management firm, according to the state attorney general’s office. O’Brien pled guilty to three counts of larceny over $250 and one count each of forgery and making false entries in corporate books. He was sentenced to two to three years in state prison, followed by ten years of probation, and was ordered to pay $783,489 in restitution.
Tax Notes Today reports that the Internal Revenue Service has determined that an entity making numerous loans to disqualified persons and entities connected with disqualified persons failed to qualify as a tax-exempt charitable supporting organization. The organization, ostensibly formed to support a public charity, was governed by a board, the initial members of which consisted of five trustees. Two of the five trustees were identified as founders of the entity (and, presumably, were substantial contributors). Two other trustees were unrelated to the founders and appointed by the supported organization. A fifth trustee, who was a business partner of one of the founders, was appointed by joint action of the other four trustees. The entity made numerous under-collateralized loans to corporations, the financial interests in which were held by one or more of one of the founder-trustees, his business partner-trustee and other business partners of these persons. Additionally, the entity extended one unsecured loan to a founder-trustee.
The IRS first determined that the entity was formed to operate for the benefit of disqualified persons and related entities on account of the numerous loan transactions not engaged in at arm’s length. Accordingly, the entity’s “primary purpose results in private benefit and inurement,” and it therefore served “a private rather than public purpose.”
The IRS also determined that the entity failed to qualify as a supporting organization on several grounds. Most interestingly, the letter concludes that the entity was indirectly controlled by disqualified persons, thereby disqualifying it from supporting organization status. The letter reasons as follows:
While you were not directly controlled by [the founders] at the time you were formed, you were indirectly controlled by [them] since [one of the founders] had substantial influence over [the fifth trustee] through their business relationship. Accordingly, [the founders] indirectly controlled you.
In addition, the loans evidenced control by disqualified persons, especially co-founder “M”:
From your creation … to the present you have been effectively "controlled" by M by virtue of the loans you have made to his business interests or to his wife, N, also a disqualified person. We deem the loans to his business interests as direct evidence of M's control of you within the meaning of section 1.509(a)-4(j) of the regulations. Any exempt charity operating at arm's length is not going to make 22 loans to businesses or investments in which the creator and donor has a substantial interest or to such persons' wife, unless they are controlled by the donor/creator. Due to the large number of loans, the lack of meaningful collateral, the period for which the loans were outstanding, and the disruption or interruption such loans caused to the carrying out of your charitable purpose all constitute convincing evidence of M's control of you.
For the full determination letter, see 2010 TNT 176-29.
Georgetown University has announced its receipt of an $87 million gift under a charitable trust created under the will of Harry J. Toulmin. His widow, Virginia B. Toulmin, a Dayton, Ohio, businesswoman and philanthropist, astutely managed the trust assets after her husband’s death. According to the Georgetown University website, the late Mr. Toulmin “was an international patent attorney and owner and director of Central Pharmaceuticals.” After his death, Mrs. Toulmin “ignored the advice of the company’s attorney to sell Central Pharmaceuticals for $1 million and instead ran it for 30 years.” She later sold the company for $178 million. Georgetown received the gift upon the death of Mrs. Toulmin, who passed away on June 13. The gift will fund an endowment to support medical research at the university’s medical center.
The Chronicle of Philanthropy reports that the Toulmin fortune also has enriched another nonprofit, the Dayton Foundation, which has received $26-million from Mrs. Toulmin’s estate. According to the Dayton Foundation’s website, the gift creates an unrestricted fund, “to be utilized by the Foundation where community need or opportunity is greatest in the Greater Dayton Region today and in perpetuity.”
Tuesday, September 14, 2010
IRS Releases Draft Form for Calculating Health Care Tax Credit by Small Businesses and Tax-Exempt Entities
As announced on its website, the Internal Revenue Service has recently released a draft version of the form that small businesses and tax-exempt organizations will use to calculate the small business health care tax credit next year. Tax-exempt organizations will claim the credit on a revised Form 990-T, the form used to pay tax on unrelated business taxable income. The credit may be claimed even if no unrelated business income tax is due. For answers to frequently asked questions concerning the credit, click here.
Exemption of Private School Denied for Failure to Comply in Good Faith with Racially Nondiscriminatory Policy
The Internal Revenue Service has denied an application for federal income tax exemption filed by a private school because the school failed to establish that it maintained a racially nondiscriminatory policy as to students. The letter, reported in Tax Notes Today, is available at 2010 TNT 176-28. The gist of the rationale for denying exemption is set forth in the following excerpt:
While you have adopted a racially nondiscriminatory policy and even created an outreach committee, your school operation, however, failed to show enrollment of black students … [Further, your school] stated that the failure to "entice" them to become students at your school [w]as not yours. Instead, you suggested putting the blame on the black students themselves and their parents -- black students do not want your offered good education; they prefer schools where they are not held accountable for making good grades, and that it provided free lunches, transportation and where they do not have to pay. You even suggested that it is a traditional choice in the area that black students go to one school and the white students go to another school. We believe, however, that the lack of black students, and also that of teachers and administrative staff, in your school is because of your failure to make intensive, comprehensive and good faith efforts to reach the black community for their enrollment and employment. You have not provided us sufficient evidence supporting any such efforts in your submitted materials. … Therefore, although you have adopted a policy of nondiscrimination and … created an outreach committee, it appears that your adoption of a nondiscriminatory policy and creation of an outreach committee are merely done for compliance in form … and not in good faith. Also, any efforts toward outreach to the black community are minimal. … [W]e conclude that you failed to demonstrate that you have taken sufficient steps to overcome [an] inference of racial discrimination [as set] … forth in the court cases cited herein. As a school without a nondiscriminatory policy to students, as such term is defined in Rev. Rul. 71-447, you are not considered operated exclusively for exempt purposes under section 501(c)(3) of the Code.
This determination letter reminds me of the counsel I received from my parents from the time I was a child: Actions speak louder than words. Private schools seeking to obtain or maintain federal income tax exemption would do well to heed this determination letter and act like they mean what they say in their official policies of racial nondiscrimination.
Monday, September 13, 2010
A group called U.S. Chamber Watch (“Chamber Watch”) has asked the Internal Revenue Service to audit the Starr Foundation, the National Chamber Foundation (“NCF”) and the Chamber of Commerce of the USA, also known as the U.S. Chamber of Commerce (the “Chamber”). The Chamber is an organization exempt from federal income tax and described in Section 501(c)(6) of the Internal Revenue Code, and NCF is a tax-exempt affiliate of the Chamber described in Code section 501(c)(3). In its letter to the IRS, Chamber Watch asserts that the Starr Foundation, a private foundation established by AIG founder Cornelius Vander Starr, appears to have acted contrary to the requirements of Code section 501(c)(3) by making $19 million in grants to NCF, which then used the money to “finance NCF’s transfer of at least $18 million” to the US Chamber of Commerce. The letter further states that “it appears that charitable funds” were eventually used to support the Chamber’s “lobbying and electoral agenda.” As reported in the New York Times, the Chamber’s chief financial officer, Stan Harrell, maintains that the Chamber's legal and accounting advisors have reviewed the Starr Foundation funding and found that it complied with all relevant tax law. He is further reported as saying, “Chamber Watch, which was created by a federation of five unions called Change to Win, was simply trying to create trouble for the chamber because of its opposing political views.”
In Announcement 2010-55, 2010-37 I.R.B. 346 (Sept. 13, 2010), the Internal Revenue Service announced that it has revoked its determination that the organizations listed below qualify as organizations described in Code sections 501(c)(3) and 170(c)(2):
The Buyer’s Fund, Inc.
Salt Lake City, UT
Unicorn Development Corporation
Saint Joseph, MI
Ameri-Home Foundation, Inc.
Credit Counseling Bureau of San Diego County
San Diego, CA
Exegetical Institute, Inc.
Family Home Foundation, Inc.
Home Downpayment Gift Foundation, Inc.
Xelan Foundation, Inc.