Saturday, January 8, 2011

Regulating Charities: Should the How (and Who) Be Changed?

The St. Petersburg Times, using the U.S. Navy Veterans Association scandal (see previous post) and a recent Stanford study (see previous posts here and here) as starting points, is calling for reconsideration of how charities are regulated, and by whom.  The U.S. Navy Veterans Association appears to have been the creation of a single individual, who created the false impression of a long-established organization with numerous members and state chapters and then used that vehicle to raise tens of millions of dollars in contributions and gain access to powerful politicians during the past decade.  The Stanford study found that almost all applications for tax-exempt status sent to the IRS are approved, although as noted in an earlier post, that approval rate did not take into account the over 30 percent of applications that are withdrawn, never completed, or not processed because of a lack of a required filing fee, with the former two conditions occurring in many cases because of pointed IRS questionning of the applicant based on my personal experience.  The St. Petersburg Times articles cite a proposal by Marc Owens (Caplin & Drysdale) to ceate a new public-private agency to oversee nonprofits.  For a more comprehensive list of suggestions, including a new proposal for federal funding of state oversight, see Regulating Charities in the Twenty-First Century: An Institutional Choice Analysis, authored by Brendan Wilson (Akin Gump) and me and published in the Chicago-Kent Law Review.  Finally, for critical commentary on the St. Petersburg Times article, see Jack Siegel's blog post ("We Get the Government That We Fund").

LHM

January 8, 2011 in Federal – Executive, In the News, State – Executive | Permalink | Comments (0) | TrackBack (0)

Did Orange Bowl Committee Violate Its Charitable Tax-Exempt Status?

Speaking of regulating charities, the Chronicle of Higher Education reports that Playoff PAC, a group that opposes the Bowl Championship Series, filed a complaint with the IRS alleging that the Committee improperly funded a Caribbean cruise for athletic directors, conference commissioners, and spouses.  (Full disclosure:  I am of Of Counsel with the firm that filed the complaint on behalf of Playoff PAC.)  The complaint follows an earlier complaint critical of three of the BCS Bowl committees, including the Orange Bowl Committee. 

LHM

January 8, 2011 in In the News | Permalink | Comments (0) | TrackBack (0)

Friday, January 7, 2011

Senator Grassley's Staff Issues Recommendations for Churches; ECFA to Form Independent Commission

Senator Chuck Grassley has issued a press release and staff memo reporting on the result of his investigation of six high-profile television ministries and making recommendations for possible tax law changes relating to churches and ministries.  The memo, available through a link at the bottom of the press release, is particularly interesting because it covers almost every possible hot topic in this area, including disclosure, compensation, housing allowances, love offerings, and electioneering.  On the last item, the memo calls for limiting or eliminating the electioneering prohibition on churches.

In response to a related invitation from Senator Grassley, Christian news sources are reporting that the Evangelical Council for Financial Accountability (ECFA) will be holding a press conference today to announce the formation of an independent commission to consider major accountability and policy issues affecting churches and other religious organizations.  According to Paul Streckfus of the EO Tax Journal, Matt Batts, CPA will chair the commission, and Dan Busby, ECFA President, will serve in an ex-officio capacity, with the other members still to be determined.

UPDATE:  ECFA press release announcing commission.

UPDATE:  NY Times "Tax-Exempt Ministries Avoid New Regulation"

LHM

 

January 7, 2011 in Federal – Legislative, In the News | Permalink | Comments (0) | TrackBack (0)

NYT: "Microlenders, Honored with Nobel, Are Struggling"

The New York Times reports that in many developing countries microfinance is experiencing a political backlash.  In the wake of reports that for-profit microcredit businesses are using strong-arm tactics to obtain loan repayments and possible over or poor lending that fail to create businesses capable of repaying the loans, governments from Asia to Latin America are imposing new restrictions on such businesses and urging borrowers not to repay their loans.  In part these developments may reflect the tension between nonprofit microcredit organizations that, without a profit motive, may be more careful in targeting loans and working with borrowers but lack access to sufficient capital to meet the borrowing demand, and for-profit microcredit businesses that have access to that capital but then face the profit-making pressures that can lead to unwise lending practices and excessive growth.  Article, anyone?

LHM

January 7, 2011 in In the News, International | Permalink | Comments (0) | TrackBack (0)

Chronicle of Philanthropy: "The New Congress and Charities"

The Chronicle of Philanthropy reports on new Congress and its likely impact on nonrpfits.  Highlights include:

  • The 93 new House members may not know much about nonprofits - nonprofit advocates are already stepping in to try to educate this large freshman class.
  • As early House actions already suggest, the new Congress will ilkely cut back significantly on federal spending, particularly in the social services area, as the primary if not only means of addressing the federal deficit and debt.  Even with Democratic opposition, nonprofits therefore face an era of greater uncertainty about federal funding.
  • As another post today indicates, Senator Chuck Grassley still plans to stay on the Senate Finance Committee and keep an eye on tax-exempt organizations, even as he surrenders the senior Republican spot on that committee to Senator Orrin Hatch.  That said, Senator Grassley will have a reduced staff and budget for such oversight, while Senator Hatch may very well have other priorities.
  • Representative David Camp, new Chair of the House Ways and Means Committee, has in the past supported greater tax incentives for charities, which may translate into such support in the new Congress.
  • Also on the House side, the House oversight committees and subcommittees may be taking a closer look at nonprofits that have, in the views of the new chairs of those committees, may have departed from their charitable or other nonprofit mission.

Interesting times for nonprofits in Washington.

LHM

January 7, 2011 in Federal – Legislative, In the News | Permalink | Comments (0) | TrackBack (0)

Thursday, January 6, 2011

Taxpayer Advocate Calls for Limit on Retroactive Effect of Revocation

In her annual report to Congress, National Taxpayer Advocate Nina E. Olson including one item of particular interest to nonprofit organizations - creating a statute of limitations to limit the retroactive effect of revocation of an organization's tax-exempt status.  Here is the relevant section from her report:

Problem
No statute of limitation governs the revocation of tax-exempt status for charities and non-profit organizations. This situation creates a procedural loophole through which the IRS can revoke exempt status even for past years when assessment of tax is already timebarred. Potentially, an organization could face revocation and assessment in current years based on audited activities in closed years.

Analysis
Under initial and annual filing requirements, the IRS receives timely notice of a charity’s claim to exempt status and honors deductions claimed by donors until announcement of a revocation, so it is unclear whose interests could be protected by an indefinite period for revocation. Meanwhile, exempt status generates numerous consequences, such as qualification for certain bond financing or participation in certain programs, which potentially could affect third parties. Given the far-reaching impact of revocation, procedural safeguards should apply.

Recommendation
The National Taxpayer Advocate recommends that Congress enact a statute of limitation on revocation of a charity’s tax-exempt status, to run concurrently with the existing period of limitation on assessment in general. Thus, revocation may occur for up to three or, in case of substantial omission of items from a return, up to six years after the filing of the return. In case of fraud, tax evasion, or non-filing, no period of limitation on revocation would apply. The time-bar would apply not only to the effective date but also to past facts as a reason for revocation.

LHM

January 6, 2011 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Governments Increasingly Competing with Charities for Contributions?

The Washington Post reports that in Fairfax County, Virginia, one of the largest (by population) and richest counties in the country, the public school system is expanding its efforts to attract private contributions.  Going well beyond the traditional bake sale model, the system has established a second education foundation aimed at obtaining donations from local businesses.  The first foundation, the Fairfax Education Foundation, is limited to supporting technology initiatives, particularly at the highly selective and acclaimed Thomas Jefferson High School for Science and Technology, and only raised $330,000 in 2009.  The new foundation, the Fairfax County Chamber of Commerce Public Schools Education Foundation, formed in cooperation with the county's largest business association, has a mandate to support the entire system, which has an enrollment of more than 175,000 students and a budget of $2.2 billion.  This development raises the question of whether local governments will begin competing more aggressively with charities on the revenue side, as well as increasingly reducing exemptions from fees and taxes on the expense side.

LHM

January 6, 2011 in In the News, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Missouri Baptist Convention Regains Control of Charitable Agencies

The St. Louis Post-Dispatch reports that a local judge has ruled in favor of the Missouri Baptist Convention, rejecting an attempt by the Missouri Baptist Foundation to prevent Convention leaders from controlling the Foundation's board (and through that board, the Foundation's $140 million in assets).  The dispute apparently arose because of differences between the increasingly conservative Convention, which is the state arm of the Southern Baptist Convention, and Foundation leaders.  The court found that the Convention had the right to approve or object to all amendments to the Foundation's Charter, including amendments relating to Convention authority over the Foundation's board.  The Convention has not, however, been as successful with respect to similar disputes with other Baptist charities in Missouri.  The Windermere Baptist Conference Center successfully amended its Bylaws to make its board self-perpetuating, without Convention approval required, as lower state courts upheld the amendment and the Missouri Supreme Court denied the Convention's appeal of that decision.  The Convention also dropped a similar lawsuit agains the Word & Way newspaper.  Litigation is still pending with respect to Missouri Baptist University and the Baptist Home, a network of senior residences and nursing homes.  These cases may provide an interesting case study in how differences in governing documents can have a significant affect on future disputes between affiliated charities.

LHM

January 6, 2011 in In the News, State – Judicial | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 5, 2011

For Profit/Nonprofit Media Joint Ventures: The Comcast-NBC Merger and Nonprofit Media

Undoubtedly, many of our readers are much better informed on the issues regarding the role of the media in society than I am.  I have a general understanding that the media in a free society should not be monopolized either by private concerns or government.  Nonprofits play a role in ensuring the independence of the media, broadcast or otherwise, to include the internet, by making media content and creation more accessible to the proverbial "voiceless" people in society.  So a recent NY Times article regarding the proposed acquisition of NBC by Comcast caught my eye.  The headline states that "Nonprofit News May Thrive in Comcast Takeover."  Without having the qualifications to really analyze the headline, I can only rely on the generally intuitive notion that news controlled by neither capitalists nor government is a good thing.  The article generally touts the increased access to news and information brought about by the nonprofit sector:

Cooperative arrangements such as this advance the commission’s interest in ensuring that all Americans have access to vibrant, diverse sources of news and information as well as promoting the positive effects of the digital revolution on news-gathering, journalism and information dissemination,” the company stated in the letter. It said it would keep the arrangements with the nonprofits in place for at least three years.

The article is not very useful though in describing the importance of maintaining media diversity, including a media that generates access to low-income or marginalized (for whatever reason) communities and also including efforts to expand internet access to low-income homes.  But in a letter to the FCC, Comcast generally described the initiatives it seeks to accomplish via partnerships with nonprofit media.  The letter includes a committment by Comcast to make internet access available to low-income homes at a cost of $9.95 per month, provide computer hardware for low-income families at a cost of less than $150, and provide free installation of internet service.  Incidentally, these are the types of concrete committments to serving the poor I think were missing from early joint ventures involving nonprofit and for profit health care. 

Within 12 months of the closing of the transaction, at least half of the 10 owned-andoperated NBC stations will have in place cooperative arrangements with locally focused non-profit news organizations that provide reporting on issues of particular concern toeach such station’s market and/or region (“Online News Partners”). The selection of appropriate Online News Partners will be made by NBCU in its discretion, taking into account such factors as the initial and continuing availability of a viable Online News Partner in each NBC O&O market; adherence by the Online News Partner to standards of journalism compatible with those of NBCU, including accuracy, fairness, and independence; and the overall level of professionalism exhibited by the Online News Partner. The cooperative arrangements are intended to be similar in approach and level of involvement to the arrangement in place as of the date of the adoption of this Order between NBC O&O station KNSD-TV, San Diego, and the website “Voice of San Diego,” including, as appropriate: story development, sharing of news footage and other content resources, financial support, in-kind contributions, shared use of technical facilities and personnel, on-air opportunities, promotional assistance, and cross-linking/embedding of websites.

Comcast has a plan to substantially increase broadband adoption in low-income homes throughout Comcast’s service area. In households in Comcast’s service areas with annual incomes below $20,000, broadband adoption rates are at approximately 40 percent. More than a quarter of those homes include students who are eligible for free lunches under the National School Lunch Program (“NSLP”), a commonly accepted indicator of need. (Qualifying homes have annual incomes of less than 130 percent of the poverty level.)

To increase access to the anytime, anywhere future that this transaction will deliver, we believe that a comprehensive plan that addresses three key barriers to adoption identified in the National Broadband Plan – reducing the cost of broadband access for low-income homes, the lack of a computing device in the home, and the absence of digital literacy – will give us the opportunity to boost the number of low-income homes using broadband in Comcast service areas.

Its reassuring to see this sort of concern by the FCC.  I wonder, too, whether the IRS (or the tax code in general) should have a role.  I am not quite sure if all the chaos regarding for profit/non-profit partnerships (generally applicable to hospitals) is relevant to the discussion of partnerships between for profit and nonprofit media.  The joint venture rulings are so very idiosyncratic to the health care industry.  But for the sake of academic argument I can think of some concerns that should be addressed with regard to the potential request for tax exempt status made by future nonprofit media outlets who want to partner with Comcast.  Essentially, those concerns relate to whether Comcast or other for-profit content providers unduly benefit from a relationship with nonprofit, tax exempt media content providers and whether a joint venture can be justified by increasing access to underserved communities.  I don't think this is an area previously explored -- and maybe we don't need to slow down the process by raising the issue until there is evidence of abuse.  Lord knows, the regulation of joint ventures in the health care arena seems to have impeded the provision of health care to poor people, even if as a result of legitimate concerns.  But joint ventures between for-profit and nonprofit media seems an interesting area of exploration.

dkj

January 5, 2011 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 4, 2011

January 7th Deadline for Stanford Post-Doc Fellowship Relating to Philanthropy and Civil Society

Stanford University's Center on Philanthropy and Civil Society is offering a one or two-year post-doctoral fellowship beginning on September 1, 2011.  Possible research areas include philanthropy, social innovation, civic engagement and civic society.  For more details, see the announcement.

LHM

January 4, 2011 in Other | Permalink | Comments (0) | TrackBack (0)

WSJ: "Strapped Cities Hit Nonprofits With Fees"

Over the holiday break, a Wall Street Journal online article surveyed the numerous examples of financially struggling cities hitting nonprofits with new fees.  Those examples included Houston, where voters recently enacted a "drainage fee" to improve flood-prone roads that does not exempt charities, schools, or churches, and Minneapolis, where a "street-light" fee (that also pays in part for elevator safety and fire inspection) applies to nonprofits as well as residents.  While much of the nonprofit world's focus has been on threats to property tax exemptions and aggressive payment-in-lieu-of-taxes (PILOT) plans, such municipal fees may cumulative also be a significant concern for many nonprofits.  Death by a thousand cuts, anyone?

LHM

January 4, 2011 in In the News, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Forbes: "New Estate Tax Law Could Hurt Charity"

A Forbes article by lawyer and journalist Deborah L. Jacobs outlines how the increased estate tax exemption and lower estate tax rate will likely reduce incentives for moderately wealthy families to leave significant bequests to charities.  The article also explains the IRA charitable rollover, extended by Congress through 2011 (not 2012) and why, given the possibility of converting traditional IRAs to Roth IRAs, this extension may not be as great a tax benefit as it first appears.

LHM

January 4, 2011 in Federal – Legislative, In the News | Permalink | Comments (0) | TrackBack (0)

Monday, January 3, 2011

Charles Clotfelter and College Football

From the "no-brainer (but worth saying anyway)" department:  Or, "another reason why tenure is good" department:  Professor Clotfelter's New Year's Eve op-ed piece in the Washington Post reminds us that taxation is ultimately about political capture or compromise, not equity and efficiency.  This is not to condemn anybody.  We should all be reminded every once in awhile that the "principles" that underlie our tax code are, after all is said and done, not immutable truths pulled from the sky but rather the result of power and influence.  Its fun, and still necessary, to talk about efficiency and equity in tax law but law is nothing more than compromise or capture and most of us are self-serving in one way or another.  But I digress.  Here is an excerpt from what I must honestly say is Clotfelter's lonely plea destined to be chuckled about:

With the exception of the 80 percent rule for gifts that enable a donor to buy tickets, all these donations are subject to the same tax subsidy we reserve for charitable and educational institutions like hospitals, food pantries, arts organizations and universities. When a taxpayer at the 35 percent tax rate makes a donation of $10,000, he ends up shouldering only $6,500 of the cost, since his tax bill is trimmed by $3,500. That savings to the taxpayer amounts to reduced tax collections by the Treasury. Considering that the top college athletic programs collected a total of more than a billion dollars in 2008, the revenue hit from making these gifts tax deductible is not inconsequential. Big-time college sports is rarely mentioned in universities' published mission statements but is higher education's most thoroughly commercial activity. With the nation facing gigantic federal deficits for years to come, isn't it time for major college sports programs to get by without this subsidy?

Let's just say its a good thing Clotfelter has tenure at Duke, otherwise he might get his season ticket yanked.  

dkj 

January 3, 2011 | Permalink | Comments (0) | TrackBack (0)

IF PILOTS ARE NORMATIVE IS PROPERTY TAX EXEMPTION NON-NORMATIVE?

The Georgia Alliance of Community Hospitals recently issued a report attempting to head off any efforts by the Georgia legislature to tamper with or even repeal the property and or sales tax exemption provided to large nonprofits.  The report takes the bait, as it were, with regard to PILOTS and property tax exemption.  The bait, I think, is the notion that nonprofits should quantify the benefit they provide in exchange for property tax exemption.  Its bait because nonprofits can't possibly win in a cost/benefit contest.  The Chattanooga Times Free Press reports on a growing trend that is hardly good news for large, commercialized nonprofits:

All Georgia tax credits and exemptions are in the spotlight this year.The Georgia Legislature created the Special Council on Tax Reform last year and charged it with examining the tax credits and exemptions, said Sarah Beth Gehl, with the Georgia Budget and Policy Institute.  The state has hundreds of tax exemptions on the books, some decades old, that haven't been evaluated recently for effectiveness, she said.  "Often we put these credits and exemptions in place and we never look at them again," she said. "We need to go back and evaluate and examine these and make sure we're getting the return on investment. ... That doesn't mean we're going to cut all of them, but it means we're going to really hold them accountable."  Perdue spokesman Bert Brantley said the attention to exemptions represents a new level of budgetary scrutiny.

Right before Christmas, Professor Mayer authored an interesting post concerning Boston's task force on Payments in Lieu of Taxes (PILOTS).  The task force had recently issued a 130 page report.  I have not read the report yet but I am in the midst of asking myself why and whether states should exempt large land-owning nonprofits (i.e., hospitals and universities) from property taxes at all.  The question was slightly different when it first occured to me.  Why should large commercialized nonprofits be exempt from any taxes, income, property or otherwise?  I am sludging my way through a paper on the topic and have at least determined that the justification for property and income tax exemption are not necessarily the same.  The initial question was too broad because justifications for income tax exemption do not necessarily work for other exemptions and yet if the question is accurate one can comfortably stop once the case for income tax exemption is made. 

Comfortable but probably wrong.  The cost/benefit analysis relating to income and property tax exemption give dissimilar results.  And as a result, we might easily and more accurately conclude that income tax exemption is justifiable but property taxation is not.  That is where my paper is stuck.  So far I have spent a lot of time wondering whether property tax exemption is defensible using the mindset of federal income tax exemption.  For one, though, the cost of income tax exemption is so much lower.  Hence, the benefit necessary to justify income tax exemption need not be so readily apparent or quantifiable.  As costs increase, and perhaps there is a tipping point at which property taxation can no longer be justified, the benefits must increase too.  Stereotypically, nonprofit stakeholders disdain cost/benefit analysis not because they can never win but because it is difficult to quantify the intangible benefits provided by nonprofits and therefore nonprofit stakeholders who fall into the trap of cost/benefit, law and economics analysis . . . well, can never win.  Unlike me, they should not take the cost/benefit bait, thinking they can win and thereby justify property tax exemption.  The battle may be won with respect to income tax exemption and even then the losers are not satisfied that the battle should be over. 

If you take a look at the Boston PILOT task force websight you will find presentations such as this one, wherein the task force is provided with cost/benefit data regarding nonprofit hospitals and universities within their midst.  Its fair to say, probably, that the train has left the station with regard to PILOTS, a fact which worries me because once PILOTS become normative, it does not take much more to conclude that property tax exemption is no longer justifiable, at least once a nonprofit reaches a certain level of ownership or wealth.  Once PILOTS are normative, aren't property tax exemptions "non-normative?"  My problem is that I have been resisting this notion by reference to income tax exemption and the rationale usually offered to support that exemption.  Doesn't work with regard to property taxation though.  My real point, though, is that is probably too late to stop the PILOT train and so now colleges and universities have to deal with the 800 pound gorilla in the room.  Why should you be exempt from property taxes at all, especially if you meekly comply when chastised and made to pay back that which you have "stolen" from the cookie jar.  The Boston PILOT task force website is essentially a record of the sophisticated ways large cities have been able to chastise large commercialized nonprofits for their apparently unjustified tax exemption.  Brief nods are given to efforts to quantify the benefits generated by colleges and universities but one is only fooling oneself to think that nonprofits can ever win in a cost/benefit, law and economics playing field. Make no mistake, though, the cost/benefit analysis will never cut the mustard.  Large, commercialized nonprofits have already wasted too much time thinking PILOTS would remain limited to larger northeastern cities and even if they don't, nonprofits can always be show enough benefit to justify the cost of property tax exemption.  The Georgia Alliance's report is evidence of how Utopian the former notion (that PILOTS will largely be confined to big cities in the northeast); more importantly, it is an effort that cannot save property tax exemption anywhere.  The lesson to be learned from law and economics is we better think again or soon admit that property tax exemption -- once the "tipping point"  arrives -- is unjustifiable.

dkj

 

January 3, 2011 in Studies and Reports | Permalink | Comments (0) | TrackBack (0)