Thursday, January 13, 2011
The Association of Governing Boards of Universities and Colleges, in conjunction with the Commonfund Institute has issued a very informative report regarding the effects of the Uniform Prudent Management of Institutional Funds Act on college, university and institutionally related foundations. Key findings include:
On average, underwater funds accounted for 22.4 percent of the total value of endowment funds held by colleges and universities at the end of the 2009 fiscal year ending June 30, 2009 (NCSE data). Under UPMIFA, institutions and affiliated foundations have adopted new spending practices yielding greater ongoing distributions from underwater endowments as well as adopting a variety of more flexible methods for determining distributions from underwater endowments. AGB’s survey findings include (as seen in Table 4):
• 46.9 percent are continuing distributions in keeping with their normal spending rule, an increase of 8.7 percentage points over practice prior to the enactment of UPMIFA;
• 25.1 percent are discontinuing all distributions from underwater funds, a decrease of 16.4 percentage points from practice prior to UPMIFA;
• 9.7 percent are distributing only interest and dividends, a decrease of 7.2 percentage points from practice prior to UPMIFA;
• 12.5 percent employ a threshold or tiered approach to spending or some other flexible methodology; and
• 6.8 percent of institutions described a flexible process for determining distributions from underwater funds that was used in lieu of or in conjunction with the spending practices listed above.
After the enactment of UPMIFA, 47.1 percent of institutions and foundations which previously discontinued all distributions or distributed only interest and dividends from underwater endowments adopted a new spending approach likely to yield grater ongoing distributions supporting endowment purposes.
College, university, and affiliated foundation boards are actively involved in making decisions about spending from underwater funds. Survey findings include:
• 75.8 percent of boards approve decisions regarding spending from underwater funds;
• 68.2 percent of institutions have some formal policy addressing spending from underwater funds; and
• 48.3 percent of boards document decisions regarding underwater funds in their minutes.
Only 14.5 percent of institutions and foundations have made use of provisions in UPMIFA allowing charities to modify restrictions on smaller and older funds that have become impracticable or wasteful.
Institutions and foundations have also made changes to endowment-management practices not immediately related to spending from underwater funds but in keeping with UPMIFA’s updated prudence standard for investment and management of charitable funds. Nearly one-third (28.5 percent) of institutions have changed their approach to portfolio construction to focus on factors such as risk reduction, inflation protection, and liquidity; 11.6 percent have made changes in their due diligence and risk management procedures; and 19.3 percent have made changes in investment management staffing and support.
AGB’s recent Statement on Conflict of Interest has advocated heightened conflict-of-interest standards for board members involved in investment decision making. While 97 percent of boards have some type of conflict-of-interest policy, only 60.9 percent of institutions and foundations have conflict-of-interest policies that apply to all volunteers responsible for investment decision making; 15.9 percent have policies which include especially rigorous provisions applicable to investment decision makers; and 13.5 percent have policies addressing board members’ parallel or “side-by-side” investments.
Tuesday, January 11, 2011
Melanie Leslie has published "The Wisdom of Crowds? Groupthink and Nonprofit Governance". Here is the interesting abstract:
Scandals involving nonprofit boards and conflicts of interest continue to receive considerable public attention. Last month, for example, Wyclef Jean’s Yele Haiti charity became the target of intense criticism after the charity disclosed that it had regularly transacted business with Jean and entities controlled by Jean and other directors. Although scandals caused by self-dealing undermine public confidence in the charitable sector, they continue to erupt. Why do charitable boards sanction transactions with insiders?
This article argues that much of the blame lies with the law itself. Because fiduciary duty law is currently structured as a set of fuzzy standards, it facilitates groupthink. Groupthink occurs when directors place allegiance to fellow board members ahead of the nonprofit’s best interests, and it can undermine social norms that facilitate sound governance procedures. Groupthink blinds directors to conflicts of interest, and may also induce directors to refrain from adequately monitoring ongoing business relationships with board members. When groupthink occurs, boards can convince themselves that their conduct falls within the law’s murky limits. As a result, charitable assets are diverted from the charities’ intended beneficiaries and into directors’ pockets.
Social norms against self-dealing are the primary tool for combating harmful groupthink. The law should be reformulated to support and reinforce fiduciary duties as social norms. Restructuring laws against self-dealing as a set of clear rules would give needed direction to confused boards and would entrench social norms against self-dealing. A flat prohibition on self-dealing and conflict of interest transactions would be the most effective way to ensure that fiduciaries place the best interests of the nonprofit ahead of self-interest. Short of that, clear directives requiring disclosure of conflicts, investigation of alternatives and proof that inside transactions are clearly below market would do much to counter the damaging impact of groupthink.
Monday, January 10, 2011
Punishing Good Deeds: 2010 RMD's Cannot Be Re-Directed Towards Charitable Contributions, IRS Spokesman Says
The Service recently missed an easy opportunity to correct a Congressional mistake by not allowing taxpayers who had previously received a required minimum distribution from their IRA an opportunity to re-do the distribution to the benefit of taxpayers and charities. The Wall Street Journal explained the problem in a January 7, 2011 article:
The questions arose after lawmakers tucked a provision into the giant December tax package that retroactively extended the IRA charitable donation. This highly popular rule, which had expired at the beginning of 2010, allows taxpayers who are 70½ or older to donate up to $100,000 a year of IRA assets directly to a charity. There isn't a deduction for the gift, but it doesn't count as income and it can satisfy the Required Minimum Distribution, or RMD. (See Tax Report, Dec. 18, 2010.) Lawmakers, recognizing that their own delays had caused problems, gave taxpayers until Jan. 31 of this year to make 2010 donations. But the law didn't address the predicament of those who wanted to make IRA donations last year but took required payouts instead, often at the last minute, because they were afraid Congress wouldn't extend the law.
Surely, the Service would allow a do-over for those taxpayers who took an RMD to avoid any penalties but who otherwise would have avoided taxation by making a charitable contribution instead. Yes, Congress should have said so, but this would not be the first time Congress left the details to the Service, thinking the Service would take the reasonable route. Alas, according to IRS spokesperson Eric Smith, (whose statement was issued on January 5, 2011):
"Required minimum distributions (RMD) from an IRA received by a taxpayer cannot be rolled over to an IRA. As noted on page 24 of the 2009 IRS Publication 590, Individual Retirement Arrangements, "Amounts that must be distributed during a particular year under the required distribution rules are not eligible for rollover treatment." Moreover, there's no provision in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act Of 2010, nor any hint in the Committee report for such RMD recontribution."
Of course, nobody is talking about a rollover. The issue is whether the extension to January 31, 2011 will do any good for what has got to be the majority of taxpayers who decided not to wait until the last minute to get their tax house in order, only to find that being prudent and timely will cost them (and charities) money). Here, a case of no good deed goes unpunished!
One would think that in an age of severely restricted donations and government funding, nonprofits would logically step up their unrelated business activities in an effort to generate funds for their charitable goals. Now, though, one researcher finds that doing so only exacerbates the problem. According to a recent report authored by Rebecca Tekula of the Wilson Center for Social Entrepreneurship at Pace University, nonprofits that engage in unrelated business activity do so at the expense of their charitable goal.
By pursuing income-related activities such as selling donors' contact information to third-party marketers and running online shops, nonprofits have diverted income away from service activities, says Rebecca Tekula, the report's author.
"Organizations that spend money and divert resources to other activities do so at the detriment of the homeless, domestic violence victims and people who need these services," says Ms. Tekula, executive director at the Wilson Center for Social Entrepreneurship at Pace University. "Social enterprise may be an innovation," she says, but it is one that can tempt nonprofits into a substantial "mission distraction."
The Wall Street Journal wrote about the report (subscription required) in its November 4, 2010 issue. If the report is correct, engaging in unrelated business activities not only jeopardizes tax exempt status (if the activity is substantial enough) but it also accomplishes exactly the opposite of what is intended. Rather than funneling money into charitable causes, unrelated business activities divert funding from charitable causes. The UBIT has always been justified as a tool to level the playing field between for-profit and tax exempt entities. Now, it seems the UBIT might also be effective in ensuring the more effective accomplishment of the chartiable goal.
Sunday, January 9, 2011
Ellen Aprill (Loyola - L.A.), Roger Colinvaux (Catholic), and I have posted papers examining different ways that the Supreme Court's Citizens United v. FEC decision affects - or does not affect - speech by nonprofit organizations. We initially presented these papers at the National Center on Philanthropy and the Law's Annual Conference last fall, which focused on nonprofit speech in the 21st century. Richard Briffault (Columbia) also presented a paper on this topic at that conference, but that paper is not yet publically available. Here are the abstracts and links for our three papers in the order they were presented:
Roger Colinvaux, Citizens United and the Political Speech of Charities
The Supreme Court’s decision in Citizens United v. Federal Election Commission makes a Supreme Court challenge to the tax law rule that prohibits charities from involvement in political activities likely, and a reexamination of the political speech of charities necessary. Part I of the Article surveys the history of the political activities prohibition in order to emphasize that it was not a reactionary policy but quite considered, and that there are strong State interests supporting it. Part II of the Article analyzes Citizens United in detail and argues that if the Supreme Court considers a challenge to the political activities prohibition, Citizens United is distinguishable: the purpose of the political activities prohibition is not to suppress speech but to define charity; the legal setting is tax and not campaign finance; unlike the campaign finance rule, violation of the political activities prohibition is not criminal; and the political activities prohibition is by nature a rule associated with a tax status rather than a ban on corporate speech. Accordingly, the political activities prohibition, unlike the campaign finance rule, is not a burden on speech and therefore is constitutional. Part III of the Article discusses cautionary notes to the analysis of Part II, and explains that even if there is a constitutional defect to the political activities prohibition, the political activities limitation on the charitable deduction nonetheless would survive. Regardless of the constitutionality of the political activities prohibition, Part IV examines a number of possibilities for a charitable tax status in which political activity is allowed, and concludes that the current rule is the best option. Part V concludes that the prohibition represents the evolution of a century of wrestling with the subject of political activity and charity, and the wisdom that the two are not compatible. Such wisdom should not be contravened.
One of the many aftershocks of the Supreme Court’s landmark decision in Citizens United v. FEC is that the decision may raise constitutional questions for the long-standing limits on speech by charities. There has been much scholarly attention both before and after that decision on the limit for election-related speech by charities, but much less attention has been paid to the relating lobbying speech limit. This article seeks to close that gap by exploring that latter limit and its continued viability in the wake of Citizens United. I conclude that while Citizens United by itself does not undermine the limit on lobbying by charities, the decision does reinforce the constitutional requirement that the government allow charities to easily form a non-tax favored alternative for engaging in unlimited lobbying. Some post-Citizens United proposals for regulating speech-related activity may in fact run afoul of this requirement. More importantly, the intersection of Citizens United and this tax-based limit on charity speech may be a catalyst for renewed consideration of whether the unconstitutional conditions doctrine could be successfully refined in the subsidy context through an approach that considers the purpose of the subsidy and how important the speech-related limit is to the accomplishment of that purpose.
The role of noncharitable exempt organizations was perhaps the key feature of this year’s election. Senator Baucus as Chairman of the Senate Finance Committee, for example, sent a letter calling upon the IRS to survey major noncharitable 501(c) organizations to ensure that they are obeying the rules regarding political activity, including limits on politicking. In Citizens United, however, the Supreme Court decreed that “[n]o sufficient governmental interest justifies limits on the political speech of nonprofit or for-profit corporations.” Nowhere does Citizens United acknowledge the tax limits on political speech or address their constitutionality. Supreme Court cases predating Citizens United have justified these tax limits on the grounds that government has no duty to subsidize political speech. To the extent that “no duty to subsidize” is and remains the justification, nothing in Citizens United explicitly threatens the current tax regime. Nonetheless, we must ask whether the reasoning of Citizens United has undermined Regan v. Taxation with Representation of Washington (“TWR”), the key ”no duty to subsidize” case. In addition, the rules regarding politicking by tax exempt entities have changed significantly since TWR. As a result, the standards as announced in the case and interpreted by its progeny may call for a different conclusion today.
Furthermore, this piece will explore both the tax rules that are, and some that might be, applicable to the political speech of noncharitable tax exempt organizations. Part I will review TWR, its ancestors and its progeny as well as Citizens United. Part II will describe the current tax rules regarding lobbying and politicking applicable to exempt organizations that can engage in unlimited lobbying and politicking as part, but not the primary purpose, of their activities: section 501(c)(4) social welfare organization, section 501(c)(5) labor organizations, and section 501(c)(6) trade associations. The discussion will include consideration of treatment of contributions to such organizations for gift tax purposes and the special tax that may be applicable to membership dues because of lobbying and politicking by such organizations. Part II will also review the history of section 527, the section governing political organizations, with particular attention to the 2000 amendments that added registration and disclosure requirements. Part III examines the possible impact of Citizens United on the tax law’s current approach to political speech. It highlights the difference between the definitions of lobbying provided in the Internal Revenue Code and Treasury regulations and the uncertain “facts and circumstances” approach employed by the Internal Revenue Service (“IRS” or “Service”) in identifying politicking. It offers a reconciliation of seemingly contradictory language in Taxpayers With Representation and Citizens United regarding use of affiliates to conclude that Citizens United has not sub silentio overturned TWR’s “no duty to subsidize” holding. It defends, albeit unenthusiastically, the 2000 amendments to section 527. Part IV proposes a number of possible additional disclosure requirements for noncharitable exempt organizations engaged in lobbying and politicking. They include requiring applications for exemption, establishing a new category of exempt organizations for organizations primarily engaged in lobbying and expanding disclosure of contributors for all or for some noncharitable exempt organizations. It also explores the possibility of taxing the politicking expenditures of noncharitable tax exempt organizations not conducted through a separate segregated fund, whether or not the organization has investment income. The piece concludes by reminding us that the tax law regulation cannot substitute for campaign finance regulation.
The February issue of the Nonprofit and Voluntary Sector Quarterly is now available. Here is the table of contents:
- Sandra Verbruggen, Johan Christiaens,and Koen Milis, "Can Resource Dependence and Coercive Isomorphism Explain Nonprofit Organizations’ Compliance With Reporting Standards?"
- Tracey Chadwick-Coule, "Social Dynamics and the Strategy Process: Bridging or Creating a Divide Between Trustees and Staff?"
- Juan L. Gandía, "Internet Disclosure by Nonprofit Organizations: Empirical Evidence of Nongovernmental Organizations for Development in Spain"
- Yuko Suda and Baorong Guo, "Dynamics Between Nonprofit and For-Profit Providers Operating Under the Long-Term Care Insurance System in Japan"
- Thomas Perks and Michael Haan, "Youth Religious Involvement and Adult Community Participation: Do Levels of Youth Religious Involvement Matter?"
- David Campbell, "Reconsidering the Implementation Strategy in Faith-Based Policy Initiatives"
- Luca Bagnoli and Cecilia Megali, "Measuring Performance in Social Enterprises"
- José Juan Vázquez, "Attitudes Toward Nongovernmental Organizations in Central America"
- Kate Cooney, "An Exploratory Study of Social Purpose Business Models in the United States"
- Jullet A. Davis,Louis D. Marino, Joshua R. Aaron, and Carl L. Tolbert, "An Examination of Entrepreneurial Orientation, Environmental Scanning, and Market Strategies of Nonprofit and For-Profit Nursing Home Administrators"
- Robert D. Herman, "Book Review: John Tropman and Thomas J. Harvey. Nonprofit Governance: The Why, What, and How of Nonprofit Boardship"
- Patsy Kraegerm, "Book Review: Uluorta, H. M. The Social Economy: Working Alternatives in a Globalizing Era (Rethinking Globalizations)"
Discussion of Hammack & Anheier's American Foundations: Roles and Contributions Hosted by Hudston Institute
On Tuesday, January 25th in Washington, DC, the Hudson Institute will be hosting a book discussion of American Foundations: Roles and Contributions, edited by David Hammack (Case Western Reserve) and Helmut Anheier (UCLA). According to the announcement, the panelists will include co-editor David Hammack, as well as Leslie Lenkowsky of Indiana University, Steven Rathgeb Smith of Georgetown University, and Susan Ostrander of Tufts University. Bradley Center Director William Schambra will moderate the discussion.