Friday, November 12, 2010
As part of its ongoing series on philanthropic giving, the NY Times reports on the decision of many modern day philanthropists to front load their gifts rather than creating private foundations designed to exist in perpetuity. Such articles in the past have tended to focus on politically conservative foundations, such as the John M. Olin Foundation that closed its doors in 2005, whose founders were reacting in large part of the perceived liberal drift of the Ford Foundation and other long-lived foundations. In contrast, the NY Times article focuses on wealthy donors who are motivated primarily by a concern to do more now instead of later. The individuals identified include Bill and Melinda Gates, whose foundation plans to close with in 50 years after their death, Charles F. Feeney, whose Atlantic Philanthropies plans to close by 2020, and Tim Gill, whose foundation is reported as planning to close within 20 years of his death.
The function, indeed the very existence, of nonprofit corporations is under-theorized. Recent literature suggests that only preferential tax treatment adequately explains the persistence of the nonprofit form. This answer is incomplete. Drawing on psychology’s social identity theory, this Article posits that the nonprofit form can create a special "warm-glow" identity that cannot be replicated by the for-profit form. For example, a local nonprofit food cooperative is selling more than the free-range eggs or organic strawberries that Whole Foods and other for-profits market so effectively. The co-op offers community participation and an investment in local farms, a distinctive ethos that is incompatible with the profit motive. Ascribing a special meaning to the nonprofit form allows us to view afresh a variety of issues regarding the appropriate legal treatment of nonprofits.
Thursday, November 11, 2010
The National Commission on Fiscal Responsibility and Reform released its draft CoChairs' Proposal in the form a 50-slide PowerPoint presentation and a 24-page illustrative savings list totaling $200 billion in 2015. With tax reform as one of the five basic recommendations made, and no apparent sacred cows, it is not surprising that the current tax benefits enjoyed by charities are among the many targeted tax provisions. Here is how the three proposed tax reform options would affect those benefits:
- Option 1 (The "Zero Plan"): Would eliminate all tax expenditures or, alternatively, preserve only a few such tax benefits in exchange for higher marginal rates. Using the most recent Joint Committee on Taxation Tax Expenditures List (from January of this year), eliminated provisions would include not only the charitable contribution deduction but also tax-exempt bonds, low-income housing credits, and other tax benefits that charities commonly use to advance their mission, such as the exclusion of scholarship and fellowship income, numerous other education-related tax benefits, the credit for rehabilitation of historic structures, the exclusion of certain foster care payments, and similar benefits. With respect to other types of nonprofits, the list also includes tax exemption for credit union income. And this summary does not include those benefits not unique to nonprofits that are nevertheless utilized by them, such as the exclusion from gross income of employer-provided health insurance.
- Option 2 ("Wyden-Gregg Style Reform"): Would modify the charitable contribution deduction by establishing a 2 percent AGI floor.
- Option 3 ("Tax Reform Trigger"): Would create an across-the-board "haircut" for all itemized deductions as well as certain other tax benefits if reform not enacted as of 2013. The size of the haircut would be set at a level sufficient to reduce the deficit by $80 billion in 2015, which roughly translates in about a 15% reduction in such deductions, including the charitable contribution deduction. This proposal would also require the haircut to increase over time in the absence of comprehensive tax reform.
The list of illustrative savings also has some items of interest to nonprofits, including the proposals to have the Smithsonian start charging fees and to eliminate Corporation for Public Broadcasting funding.
These proposals only represent the views of the co-chairs, former Senator Alan Simpson and former Clinton Chief of Staff Erskine Bowles. The final Commission report is due to be released no later than December 1, 2010, but it must receive the approval of at least 14 of the Commission's 18 members.
The NY Times reports that the combination of this year's hiatus for the federal estate tax and uncertainty regarding whether and in what form the Bush tax cuts will be extended into 2011 and beyond is creating headaches for charities working with estates and wealthy donors. For example, the article notes that disputes have arisen when individuals who died this year left the residue of their estate beyond the amount exempt from estate tax to charities, because there is no such residue even though the decedents clearly intended to benefit the named charities. Similarly, certain common planned giving techniques such as charitable remainder trusts can have unexpected consequences this year. The article also describes the use of "virtual endowments," where donors keep their assets during their lifetime but agree to make an annual payout to the charity of their choice as if the charity was holding assets as an endowment. Finally, uncertainty regarding future tax rates is complicating charitabel giving planning for both donors and charities.
Wednesday, November 10, 2010
Studies of financial support for nonprofits have become a growing industry, as evidenced by the following slew of reports:
- The Chronicle of Philanthropy reported last month that donations to the nation's 400 largest charities by private funding dropped 11 percent in 2009 from the previous year. As for 2010, of the more than 25 percent of groups that provided a prediction, the median estimate was an increase of only 1.4 percent over 2009 amounts.
- Not all charities have been hit equally, however. The Evangelical Counsel for Financial Accountability issued its 2010 Annual State of Giving Report yesterday, which found that among ECFA members giving declined only by 0.7 percent in 2009 as compared to 2008. At the same time, the report found significant differences depending on activity type, with, for example, members involved in child sponsorship seeing a significant increase in giving while members involved in education seeing a substantial decline.
- Focusing on high net worth individuals, Bank of America Merrill Lynch issued its 2010 Study of High Net Worth Individuals in cooperation with Indiana University's Center on Philanthropy. That study found that while such individuals continued to give at high rates, the amounts given declined from 2007, with overal average gift amounts falling by 35 percent after adjusting for inflation. As a percentage of income, giving declined to 9 percent from 11 percent in 2007. For additional coverage of this study, see the Los Angeles Times.
- College and university endowments have also been the subject of a recent report. The Commonfund Institute reports that based on data from 80 such institutions, the July 1, 2009 to June 30, 2010 fiscal year saw an average return of 12.6 percent. Interestingly and contrary to some past trends, the smaller endowments showed on average higher returns. The Institute relied on preliminary data for the 2010 NACUBO-Commonfund Study of Endowments, which will be released in late January.
Continuing its coverage of the unfolding U.S. Navy Veterans Association (yes, the group's website is still active) scandal (previously blogged about in April and June of this year), a St. Petersburg Times editorial highlights the fact that while Ohio Attorney General Richard Cordray has launched a high-profile investigation of the group and successfully indicted its founder, the home state of the organization (Florida) has been less zealous in its pursuit. According to the editorial, the Ohio investigation has found that not only was the group a "sham charity" and an "elaborate hoax," but also that the group and its founder may have been involved in election fraud by making political contributions in the names of people who do not exist. Eight states other than Ohio, presumably including Florida, have also opened investigations but Ohio has been the most aggressive, including issuing a national warrant for its founder, who operated under a false identity ("Bobby Thompson") and has apparently disappeared.
For additional coverage, see the Washington Post.
Tuesday, November 9, 2010
Pablo Eisenberg (Georgetown) has written a column for the Chronicle of Philanthropy (subscription required) calling for both more resources - funding and staff - for the IRS and state charity offices and greater political will and courage to go after politically powerful nonprofits. Unfortunately, this call is likely to fall on deaf ears for at least reasons.
First, such calls have been made by everyone from academics to members of Congress for decades, yet have been met with only modest (if any) response at either the federal or state level. To see how little has changed, one need only look at the concluding chapter of Marion Fremont-Smith's landmark 1965 book Foundations and Government, where she makes recommendations for improving federal and state regulation of nonprofits that will sound eerily familiar. While some of the problems she identifies have been addressed in the intervening 45 years, many of them have not, particularly with respect to enforcing the legal rules governing nonprofits and especially charities.
Second, as the plight of the Charity Commission in the UK highlights (see separate blog post on that topic), budget pressures at both the federal and state level as well as competing policy priorities such as the economy and the ongoing wars make it unlikely that members of Congress will heed Eisenberg's call. More thought may therefore need to be given to how to improve enforcement without either additional financial resources or greater political attention.
The BBC reports that a 27 percent cut in the budget for the Charity Commission that registers and regulates charities in England and Wales has led the Commission's chief executive to state publicly that he is considering ignoring some reports of charity fraud. More specifically, the Commission might ignore reports where the amount of charitable funds at risk is relatively small, leaving such investigations to the regular police (who face budget cuts of their own). Last year the Commission investigated 450 reports of fraud and mismanagement (as compared to 180,000 registered charities), and the articles states the Commission regards that number as significantly underestimating the fraud and mismanagement problems within the charitable sector.
Stephen Schwarz (UC Hastings) presented Navigating the Charity/Business Border: Structures, Strategies and Solutions at the University of San Diego School of Law's Tax Law Speaker Series yesterday. The paper builds on the draft he presented in 2008 at the National Center on Philanthropy and the Law's annual conference that year, The Architecture of Charities: Commercial Activities, Structural Reactions: Basic Structures. For more information, see this TaxProf Blog entry.
Monday, November 8, 2010
The Campaign Finance Institute issued a report last week titled Non-Party Spending Doubled in 2010 But Did Not Dictate the Results. At the same time, Public Citizen issued a report titled Outside Job: Winning Candidates Enjoyed Advantange in Unregulated Third-Party Spending in 58 of 74 Party-Shifting Contests.
What accounts for the difference in these early views of non-party, nonprofit spending in the 2010 election? Both reports relied on independent expenditure and electioneering communications reports filed with the Federal Election Commission, although the Campaign Finance Institute used data through November 4th while Public Citizen used data through October 31st, and Public Citizen excluded expenditures by political committees that did not accept contributions of more than $5,000 from any given donor. The big difference between the reports is that while Public Citizen focused solely on non-party (i.e., nonprofit) spending, the Campaign Finance Institute also considered candidate receipts and party spending. This larger perspective led the Campaign Finance Institute to conclude that in many races differences in non-party spending were relatively small when compared to overall financial resources devoted to each candidate from all sources. Indeed, the Campaign Finance Institute went so far as to conclude:
"It appears as if the one set of candidates most helped by a balance non-party spending favoring their side were the Republican candidates who lost with 45% of the vote or more. Based on their own receipts ($931,000), these could well have been candidates who would have lost by much more in a normal election year. However, the Republican non-party groups had said they were interested in helping to 'expand the playing field,' and these figures (along with the nine undecided races) suggest that they did."
We previously blogged this summer (and in 2009, and in 2008) about the ongoing state court dispute involving Fisk University and its attempts to sell a 101-piece art collection donated to the school by Georgia O'Keefe. The Tennessee Chancery Court has now issued an order clearing the way for the University to sell an undivided one-half interest in the collection for $30 million to the Crystal Bridges Museum of American Art. The University may, however, only use $10 million of the proceeds for its general purposes, with the remaining $20 million dedicated to establishing an endowment fund solely for covering the costs of displaying and maintaining the art. According to coverage in the Tennessean, the decision has the classic attribute of a compromise - neither the University nor the Tennessee Attorney General is happy with it. For the University's reaction, see its statement. For all of the filings and orders in this case, see the Tennessee Attorney General's Fisk University webpage.
(Hat Tip: Charity Governance Blog)
Micah Burch (University of Sydney; aslo an Acting Assistant Professor of Tax Law at NYU) has posted National Funding for the Arts and Internal Revenue Code § 501(c)(3) on SSRN (forthcoming, Florida State University Law Review). Here is the abstract:
For the large number of U.S. arts organizations whose existence depends on private charitable donations, qualification for federal tax exemption under I.R.C. § 501(c)(3) is effectively a requirement for survival. The federal tax rules directly affect the vitality and direction of arts in the United States by determining which organizations qualify for exemption and life-giving tax deductible contributions. These tax rules are arguably the largest single component of U.S. national arts policy, but because they are tucked away in provisions of the federal tax code that do not even use the word “art,” they remain somewhat insulated from the otherwise vigorous public discourse regarding arts funding. § 501(c)(3) generally requires arts organizations to meet the definition of “educational” in order to qualify for tax exempt status. This is a problem because an exclusive focus on the demonstrably “educational” aspects of art undermines (or at least fails to address) the important democracy-enhancing justifications for publicly supporting art in the first place. In particular, the requirement that tax-exempt arts organizations meet the tax law’s definition of educational prevents the type of diversity - and subversiveness - that a successful arts policy should encourage and fosters the type of conservatism that renders direct support for the arts an incomplete policy. Part II of this Article discusses the justifications for public financial support for the arts and the two alternatives for delivering that support - directly (exemplified by the National Endowment for the Arts) and indirectly (as exemplified by the tax subsidy that is the subject of this Article). Part III examines the current interpretation of § 501(c)(3) as it applies to arts organizations and identifies its inadequacies in light of the reasons for publicly supporting art. Part IV recommends explicitly adding arts organizations to the list of those eligible for tax exempt status under § 501(c)(3). An explicit statutory identification of arts organizations as deserving of tax exempt status (by virtue of being artistic rather than educational) would better protect arts funding from changing political winds and free arts organizations to fulfill their role in our democracy - resisting the tyranny of the status quo and providing a counterbalance to headlong scientific and technological advancement. In this way, federal tax law can better do its part in implementing national arts policy.