Friday, August 12, 2011
The NY Times reports that the U.S. State Department is threatening to withdraw $100 million of spending in Gaza unless Hamas leaders drop their demand to audit American-financed charities operating there. According to the article, the trigger for the threat was the decision by Hamas officials to suspend the operation of International Medical Corps after it refused to submit to such an audit. The dispute is apparently only the latest controversy in what has become an increasingly tense confrontation between the Hamas authorities in Gaza and nongovernmental organizations operating there. Previously, Hamas demanded that all NGOs register with the government, pay a fee, and submit financial reports, demands that many NGOs initially resisted but eventually agreed to. The audits appear to have been a step too far for at least some NGOs, however.
We have blogged on numerous occasions about politicians, sometimes quite legally, using nonprofit organizations to steer public funds to charities tied to their friends, financial supporters, or even themselves. Most recently, we blogged about a civil lawsuit that the D.C. Attorney General had filed against D.C. Council member Harry Thomas Jr. based on allegations that Thomas had diverted more than $300,000 in public funds for his own benefit, in large party through a charity.
Now the Washington Post reports that Thomas and other Council members have used their influence over the same charity, the D.C. Council-created D.C. Children and Youth Investment Trust Corp., to direct $13 million to favored charities without going through the normal bidding process, even though the Trust Corp. is supposed to independently decide which local charities best address problems facing city youths. Those charities often had board members or other officials who made significant campaign contributions to city officials, including Council members, or who were former staff of Council members. The story is clear that unlike the allegations in the suit against Thomas, which the article notes has now been settled, there are no accusations here that any of the funds were diverted for the personal benefit of Council members, or that this past earmarking violated the law (as of the current year, such earmarking is now forbidden). Nevertheless, it is another troubling example of politicians using charities - with the apparent consent and possibly encouragement of well-connected charity leaders - to do more than serve the public good.
Thursday, August 11, 2011
The Boston Globe reports that Partners HealthCare System Inc., a section 501(c)(3) tax-exempt nonprofit organization that is the parent organization for a group of section 501(c)(3) organizations operating Massachusetts General Hospital, Brigham and Women's Hospital, seven other other hospitals, a physician network, community health centers, and other health related programs, has signed a letter of intent to acquire Neighborhood Health Plan, a section 501(c)(4) tax-exempt nonprofit managed care organization that insures more than 240,000, mostly low-income, residents of Massachusetts. The article does not address whether the tax classification of Neighborhood Health would be affected by the deal.
According to the article, in exchange for the acquisition the 50,000+ employee Partners would provide grants to more than 50 community health centers affiliated with Neighborhood Health and also strive to improve the provision of health care to the urban poor in Boston and other (presumably Massachusetts) cities. While this is apparently the first entry by Partners into the health insurance business, the article notes that other Massachusetts hospitals have or are likely in the near future to become affiliated with health insurance providers. Because this deal would represent a significant consolidation of health care in Massachusetts, the article notes that concerns relating to competition may lead to close scutiny by state and federal officials who must approve the transaction.
Wednesday, August 10, 2011
For years requesting IRS approval for activities subject to relatively clear requirements, such as private foundation scholarship procedures, has been a costly and time-consuming process since often the only route by which to make such requests had been to seek a private letter ruling. No more! The IRS just announced the issuance of new Form 8940 (Request for Miscellaneous Determination Under Section 507, 509(a), 4940, 4942, 4945, and 6033). According to the announcement, the form may be used for the following types of requests:
- Advance approval of certain private foundation set-asides
- Advance approval of private foundation voter registration activities
- Advance approval of private foundation scholarship procedures
- Exemption from Form 990 filing requirements
- Advance determination that a potential grant or contribution is an unusual grant
- Change in (or initial determination of) Type of a section 509(a)(3) supporting organization
- Reclassification of foundation status
- Termination of private foundation status
Tuesday, August 9, 2011
Writing on behalf of four anonymous clients, Marc Owens of Caplin & Drysdale sent a letter to the IRS requesting immediate guidance on whether or not the gift tax applies to contributions by individual donors to section 501(c)(4) organizations. The basis for the request is that the IRS decision to abandon already in-process gift tax audits of some such donors while leaving in place precedential guidance stating the gift tax applies to such donors leaves both donors and their legal advisers confused regarding the IRS position on this issue. The letter also states the unnamed clients are concerned that "[t]he clear implication" left by the IRS decision to abandon the pending gift tax audits "is that IRS enforcement activity can be curtailed by intervention from a handful of members of Congress, whatever their party affiliation, when political contributions are at risk." The letter also states that the clients "are particularly concerned . . . over indications that the decision to terminate the audits and suspend further enforcement action was motivated by concerns regarding the political implications of the decision, rather than by an allegiance to nonpartisan application of the tax laws."
Owens also made more pointed comments to the press regarding the IRS's decision. For example, in a NY Times story about the letter he is quoted as calling the decision to abandon the pending audits "a tumor on the integrity of the I.R.S. because it appears they just caved to political threats. This ought to be a subject for the Treasury inspector general. I cannot recall anything like it happening, at least not after Watergate." Similarly, in a Huffington Post article about the request, he is quoted as saying "Best as I can tell, the agency sort of made a snap decision under pressure from Republican members of Congress to just freeze everything in place. The problem is they reacted to political pressure and they shut down audits without any apparent justification other than it was irritating members of one political party. And that has a corrosive effect on tax law." (Disclosure: I am quoted in the Huffington Post article agreeing with Owens' concerns; I should also note that contrary to what one of my quotes in that article suggests, I do not completely agree with the IRS position on the gift tax and 501(c)(4) donors, although I do believe their position is a reasonable one and therefore, having been carefully adopted and long-held by them, they should not have abandoned it so readily in the face of political pressure.)
Additional coverage: Chronicle of Philanthropy.
Monday, August 8, 2011
Summer Court Update: 7th Circuit Applies Franchise Law to Girl Scouts; Pastor Housing Allowance Suit Dropped
There were two notable federal court developments recently.
In Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America, Inc., the U.S. Court of Appeals for the Seventh Circuit concluded the Wisconsin Fair Dealership Law applied with equal force to nonprofit organizations as well as for-profit organizations. Writing for a unanimous panel, Judge Posner rejected a First Amendment challenge to the application of the law and then stated, in concluding that the dissolution of the local chapter by the national Girl Scouts organization violated the law, the following:
"No gulf separates the profit from the nonprofit sectors of the American economy. There are nonprofit hospitals and for-profit hospitals, nonprofit colleges and for-profit colleges, and, as we have just noted, nonprofit sellers of food and for-profit sellers of food. When profit and nonprofit entities compete, they are driven by competition to become similar to each other. The commercial activity of nonprofits has grown substantially in recent decades, fueled by an increasing focus on revenue maximizing by the boards of these organizations, and this growth has stimulated increased competition both among nonprofit enterprises and with for-profit ones." He then reasoned: "Dealer protection laws are aimed at such abuses, though they also and perhaps predominantly reflect the political influence of local businessmen seeking advantages over franchisors likely to be located in other states. . . . . Either way the concerns that motivate the laws seem applicable to nonprofit enterprises that enter into dealership agreements as defined in the laws, and so, as in our previous opinion, we decline to read an exception for nonprofit enterprises into the Wisconsin law." (citations omitted) For a detailed commentary on this decision, see this Charity Governance blog post by Jack Siegel.
As for the other case, the Evangelical Council for Financial Accountability reported that the Freedom from Religion Foundation and other plaintiffs had voluntarily agreed with the defendant federal and state government officials to dismiss (without prejudice) their lawsuit challenging the constitutionality under the Establishment Clause and the California Constitution of the ministerial housing allowance exemptions found in Internal Revenue Code section 107 and a parallel state tax provision. The ECFA press release provided a link to the stipulation of dismissal. We previously blogged about the case, and about the Supreme Court's recent decision in Arizona Christian School Tuition Organization v. Winn that we predicated likely would lead to dismissal of this case because the Court sharply limited standing to bring Establishment Clause challenges to tax provisions. The Freedom from Religion Foundation has not yet updated its public listing of information regarding this lawsuit, however, so it is not clear if they will try to overcome this standing issue at some point in the future.
Summer IRS Update: 501(c)(4) Denials and Gift Tax, 501(c)(29) Guidance, and Expanded "Related Organization" Disclosure May Catch Some Churches
We previously blogged about the controversy surrounding the IRS's gift tax audits of donors to section 501(c)(4) tax-exempt social welfare organizations and about the IRS's denial of tax-exempt status for several nonprofit organizations seeking section 501(c)(4) status because of excessive private benefit to a political party and its candidates. In an update on the former topic,the IRS announced this summer that it was abandoning those audits because of "questions" (including from Republican Senators) that had arisen regarding the applicability of the gift tax in this context. In an update on the latter topic, the NY Times reported that the three groups at issue were units of Emerge America, a group that identifies itself as "the premier training program for Democratic women."
In less sensational but still important news, the IRS also issued initial guidance for the newly created section 501(c)(29) qualified nonprofit health insurance insurers, which were part of the federal health care reform legislation. The guidance addresses the requirements for tax exemption under this new category, as well as providing information regarding how such organizations may satisfy their annual filing requirements if they have not yet applied for recognition of their tax-exempt status (with guidance regarding how to make such an application still pending; the IRS stated it is not yet accepting applications).
Finally,in a little noticed (at least by this writer until it was brought to my attention by an more observant practitioner) and highly technical announcement relating to the redesigned Form 990, the IRS is asking for comment on whether its expanded requirements for reporting related organizations on Schedule R of Form 990 may be overly burdensome, including for organizations related to entities, such as churches, that are not required to file any version of the Form 990 themselves. The breath of the definition for related organizations, which includes not only parent and subsidiary entities but also brother/sister entities, raises the question of whether the existence of a single Form 990-filing entity in a group of religious organizations otherwise exempt from Form 990 filing requirements would lead to required, public disclosure of the entire structure and membership of the group and some of the transactions within the group. While an exemption from such reporting exists for a central organization and subordinate organizations covered by a group exemption, that exemption would not be available to all groups of religious organizations. It will be interesting to see what comments the IRS receives on this issue, and how it responds.
There have been a couple of international legal developments of particular significance to nonprofits this summer.
The NY Times reported that the Israeli Parliament passed legislation prohibiting public calls for a boycott against the state of Israel or its West Bank settlements, including by nonprofit organizations that would risk losing tax benefits if they violated the ban.
And according to the Charities Aid Foundation, the Russian government approved what is essentially a tax deduction for donors to charities and other tax improvements for such ororganizations that should both enhance charitable fundraising and reduce the operating costs for Russian charities.
Despite the summer heat and continuing fiscal crisises, some state officials still found time to consider additional regulation of charities. Here are updates on some of the most significant developments:
Massachusetts: We previously blogged about proposed legislation in Massachusetts that would have prohibited charities compensating directors without Attorney General approval. The Chronicle of Philanthropy reported last month that legislature in that state rejected the proposal, although its state Senate sponsor vowed to continue to pursue it in the future.
Oregon: We also previously blogged about proposed legislation in Oregon that would have given the Attorney General in that state authority to disqualify certain charities from receiving (Oregon) tax deductible contributions based on their level of program expenditures. The same Chronicle of Philanthropy article also reported that this legislation failed, although the Attorney General stated he planned to pursue this measure in the future.
New York: Attorney General Eric T. Schneiderman announced the creation of a "Leadership Committee for Nonprofit Revitalization" to develop a serious of recommendations "to reduce the regulatory burdens and costs on nonprofits while strengthening nonprofit accountability." More recently, Governor Andrew M. Cuomo announced a statewide review of executive compensation paid by taxpayer supported nonprofits, possibly triggered by news reports focusing on high compensation at nonprofits that provide Medicaid-financed services according to a NY Times article on the review.
We previously blogged about the draft version of this new uniform law. At its July 2011 annual conference, the National Conference of of Commissioners on Uniform State Laws approved the Model Protection of Charitable Assets Act and recommended its enactment by the states. Here is the Uniform Law Commission's description of the Act:
The Model Protection of Charitable Assets Act will articulate and confirm the role of the state Attorney General in protecting charitable assets. The Attorney General’s authority is broad and this Act will not limit or narrow that authority. The Act provides the Attorney General (the term is used in the act to mean the charity regulator in the state) with an inventory of basic information without overburdening the charities or the Attorney General with excessive reporting requirements. The Act specifies which transactions and legal proceedings require notice to the Attorney General and provides for registration and annual reports for some charities.
This summer has seen several articles posted on various international aspects of nonprofit law. Here are the authors, titles, and abstracts:
This essay is a contribution to a symposium on international NGO accountability. It distinguishes between "internal" accountability for NGOs (fiduciary standards, fiscal and internal governance controls, etc.) and "external" accountability (the legitimacy with which they act in the international world, and the legitimacy which they confer upon others, and why). The essay focuses upon the latter, external accountability, and argues that the transformation of international NGOs into "global civil society" signaled an ideological move with regards to legitimacy in the global community, one which asserted claims of "representativeness" and not merely interest or expertise. The essay criticizes this legitimacy move, suggesting that it arises from mutual interests on the part of international NGOs and public international organizations such as the UN to confer legitimacy upon each other in the interest of promoting a mutually congenial form of global governance. The essay offers this account and critique in the context of a quasi-historical examination of the rise of the human rights movement as the "apex" values of the international system, with a special "legitimacy" place in that system accorded to international human rights NGOs. The essay concludes by noting that this "auto-legitimation" between international NGOs and international organizations does not lead to greater external accountability, particularly in an increasingly multipolar world.
The federal law prohibiting the provision of material support to terrorist organizations has been no stranger to controversy. From its politically charged origins through its repeated amendment after September 11, 2001, it has remained an important, but often critiqued, weapon in the government’s legal response to terrorism. The most prominent legal challenge to the law lasted over a decade. It culminated in June 2010, when the United States Supreme Court upheld the constitutionality of the law in Holder v. Humanitarian Law Project. The Court’s opinion, however, correctly recognized that important questions remain unresolved.
One such question, which this note addresses, is the application of the law to Muslim charities. Muslim charities are a complex, often misunderstood phenomenon. The use of the law against groups such as the Holy Land Foundation has achieved limited success, but has also alienated significant numbers of Muslim Americans. Civil actions against the group based on the material support law have been particularly ineffective. Likewise, criminal prosecutions have met considerable difficulty. This note explores applications of the material support statute to Muslim charities and concludes by proposing several recommendations for reform in this important area.
The area of charitable contributions under the Foreign Corrupt Practices Act (“FCPA”) is an ambiguous area of law where liability for companies can be enormous. This article examines the challenges companies face under the FCPA when making charitable contributions. It provides an in-depth analysis of the Schering-Plough case, which illustrates how the Securities and Exchange Commission (“SEC”) applies the record-keeping provisions of the FCPA in a situation of charitable giving; it examines Department of Justice (“DOJ”) FCPA Review Opinion Procedure Releases that provide guidance on when companies’ charitable contributions will violate the anti-bribery provisions of the FCPA; it discusses the effect of “compelled giving” laws, which require that foreign companies must agree to invest an established percentage of the profits from each contract into the community in which it operates; and it provides hypothetical situations illustrating the broad array of problems arising under the FCPA for companies making charitable contributions.
The article also looks at corporate social responsibility (“CSR”) in the context of FCPA enforcement. It provides hypothetical situations illustrating companies’ use of CSR to disguise acts of bribery and examines any “chilling effect” that the FCPA has on companies’ charitable giving. This discussion is especially timely in light of the natural disasters in Haiti in 2010 and Japan in 2011. Most companies do not view charitable contributions as an area of risk in their respective FCPA and anti-corruption compliance programs. The article proposes a model FCPA compliance program for charitable contributions, including the creation of a Charitable Contributions Compliance Committee, and presents a roadmap for the due diligence required to minimize liability under the FCPA when making charitable contributions.
Dana Brakman Resier (Brooklyn) and Claire Kelly (Brooklyn), Linking NGO Accountability and the Legitimacy of Global Governance
Concerns are often raised over whether international government organizations suffer from a democracy deficit, and sometimes the participation of NGOs in these entities is offered as a cure for this ill. However, to serve such an ameliorative role, perhaps NGOs need to themselves be composed and governed transparently, deliberatively, participatorily. What should be done when these goals conflict? Current domestic nonprofit law, which forms the basis for how NGOs are structured internally, attempts to create an effective and enforceable regime of nonprofit accountability. This paper asks whether these governance and accountability frameworks offered by domestic law, particularly but not exclusively in the U.S., provide sufficient content to appropriately regulate and incentivize NGOs working internationally.
In the United Kingdom, and to a lesser extent the United States, an inter vivos gift, once given, cannot be reclaimed by the giver's heirs. In civil law countries the situation is quite different: Not only spouses, but issue and in some cases even ascendants, are entitled to a forced share of a decedent's estate, and these forced shares are assessed against a notional "estate" that includes the testator's inter vivos gifts. If the total of these forced shares exceeds the amount actually available in the decedent's estate at death, the recipients of the gifts, or their successors, may be forced to make up the missing amount.
Clawbacks of this nature might have remained relatively insignificant, but last year the European Union undertook, indirectly, to expand their reach dramatically. The EU proposal, in theory, addresses only conflict of law rules; in practice, if adopted, it will threaten not only existing trusts and charitable gifts in the US and UK, but may also reduce future philanthropic giving. The UK, to date, has opted out of the proposal, and the US is not directly affected; given the large number of US and UK citizens with assets in continental Europe, however, and vice versa, it remains a concern.
The recent European Union proposal to bring about a more uniform body of law governing choice of law and related issues in international inheritance cases is, perhaps, a necessary response to the increasingly international nature of the EU's (and the world's) inhabitants and their assets. As written, though, it is rather heavily tilted toward the civil law values of continental Europe and threatens to collide jarringly with common law traditions, in particular the Anglo-American fondness for trusts and charitable giving. This article provides a look at these different traditions, and then examines the relevant inheritance law provisions of EU member states, the UK, and the US before looking at the proposal itself.
This summer has seen several articles posted on various aspects of conservation easements. Here are the authors, titles, and abstracts:
This article reviews Kaufman and the Tax Court’s reconsideration of its summary judgment decision that rejected the taxpayers’ deduction for a facade easement charitable deduction. The issues newly considered are the deductibility of the taxpayers’ required cash payments to the charity in connection with obtaining a facade easement charitable deduction and the application of various penalties.
This article is the second of two companion articles. The first article analyzed the requirements in Internal Revenue Code section 170(h) that a deductible conservation easement be “granted in perpetuity” and its conservation purpose be “protected in perpetuity.” That Article concluded that section 170(h) and the Treasury Regulations should be interpreted as establishing uniform national perpetuity standards for tax-deductible conservation easement donations.
This second article surveys the over one hundred statutes extant in the fifty states and the District of Columbia that authorize the creation or acquisition of conservation easements. This article concludes that, to be eligible for the federal subsidy under section 170(h), conservation easement donors should be required to satisfy both federal tax law and any state enabling statute requirements relating to the transfer, release, modification, or termination of conservation easements. This article also recommends that the IRS issue guidance regarding satisfaction of the federal perpetuity requirements to promote more efficient and equitable review, interpretation, and enforcement of federally subsidized conservation easements.
Conservation easement use is growing rapidly, as is the number of organizations looking to the tool to meet land conservation needs. Until recently, tribes had not been involved in conservation easement transactions. This book chapter examines the most common way tribes have become involved in conservation easement transactions — tribes as conservation easement holders.
The chapter examines why tribes decide to hold conservation easements, looking at the choice to use conservation easements generally and then situating the decision in the evolution of property law in the United States both on and off tribal land. Conservation easements are a uniquely American form of property that emerge from Lockean roots and embrace a libertarian notion of property rights. In that light, tribal embrace of the tool may seem surprising as these notions of property have done harm to tribal sovereignty and may be at odds with some traditional tribal practices.
The chapter concludes by asking whether tribes should use conservation easements. Wrapped up in this question is an assessment of the conservation easement tool generally as a vehicle for long-term land protection. The strength of the conservation easement tool is that it gives government entities the ability to extend their land conservation and environmental stewardship roles beyond their jurisdictional boundaries. Tribes may not have the power to regulate land use in nearby communities, but they can acquire conservation easements over such land and obtain similar results. Thus, despite some discordance due to the anticommunitarian sentiments at the heart of conservation easements, the conservation easement tool may provide tribes with an avenue for furthering tribal goals of conservation and intergenerational equity.
The Internal Revenue Code and associated IRS regulations provide a myriad of federal tax benefits to the donors of conservation easements to non-profit organizations. The tax benefits are all deductions or exemptions. Their value thus varies with both the value of the easement donated, determining the magnitude of the deductions and exemptions, and the income and assets of the donor, determining the impact of the deductions and exemptions on the donor’s tax bill. This situation places two degrees of separation between the notional conservation “value” preserved by the easement and the amount “paid” by the federal government in the form of tax incentives: (1) the difference between the conservation value protected by the easement and the IRS’ development value-based valuation; and (2) the difference between the IRS’ development-based valuation and the NPV of the associated tax benefits to the donor.
Many commentators have focused on (1), proposing a variety of valuation models that quantify the value of ecosystem services or other benefits afforded by conservation easements. I focus on (2), showing that the value of the tax benefits relative to the value of the easement increases dramatically with income and assets of the donor, factors that have no bearing on the conservation value protected by the easement. I argue that such a scheme is not optimized to provide the maximum “additional” conservation benefit because the wealthy do not have a lesser appreciation for conservation and thus do not need a greater inducement. To the extent the government provides tax benefits to encourage the donation of conservation easements, it should pay the same amount for any two easements of the same value. The most obvious way to achieve this is to replace the multiple tax deductions and exemptions with a single refundable tax credit that is a fixed percentage of the value of the easement.
- From the Editor's Desk by Femida Handy, Jeffrey L. Brudney, and Lucas C. P. M. Meijs
A Sectoral Comparison of Wage Levels and Wage Inequality in Human Services Industries by Avner Ben-Ner, Ting Ren, and Darla Flint Paulson
Volunteering Versus Managerialism: Conflict Over Organizational Identity in Voluntary Associations by Karin Kreutzer and Urs Jäger
Exploring the Revenue Mix of Nonprofit Organizations: Does It Relate to Publicness? by Robert L. Fischer, Amanda Wilsker, and Dennis R. Young
Changes in the Determinants of Volunteering: Participation and Time Investment Between 1975 and 2005 in the Netherlands by Erik van Ingen and Paul Dekker
Reflections on Political Engagement and Voluntary Association Governance by Hindy Lauer Schachter
Josiah Royce’s Philosophy of Loyalty as Philanthropy by Nancy D. Goldfarb
In Times of Need: An Examination of Emergency Preparedness and Disaster Relief Service Volunteers by Thomas Rotolo and Justin Allen Berg
Some Econometric Issues in Studying Nonprofit Revenue Interactions Using NCCS Data by Daniel Tinkelman and Daniel G. Neely
Mission Mirroring: Understanding Conflict in Nonprofit Organizations by David Allyn
Small, M. L. (2009), Unanticipated Gains: Origins of Network Inequality in Everyday Life by Jo Anne Schneider
Edwards, M. (2010), Small Change:Why Business Won’t Save the World by Patricia Bradshaw and Madeline Toubiana
Sievers, B. R. (2010), Civil Society, Philanthropy, and the Fate of the Commons by Roger A. Lohmann
Buxton, W. J. (Ed.) (2009), Patronizing the Public: American Philanthropy’s Transformation of Culture, Communication, and the Humanities by Peter Simonson
Here is the Table of Contents (click on this link to access the listed items) for Volume 2, Issue 1 of the Nonprofit Policy Forum:
- Editor's Note by Dennis R. Young
- Building Microfinance Associations: Goals, Implementation and Policy Implications by Kristen Hudak
- A New Era of Collaborative Government-Nonprofit Relations in the U.S.? by John Casey
- What Makes a Successful Policy Research Organization in Transition and Developing Countries? byRaymond J. Struyk and Samuel R. Haddaway
- Tax Exemptions for Nonprofit Hospitals: Toward Transparency and Accountability by Tammy R. Waymire and Douglas J. Christensen
- The Importance of Corporation Law to Civil Society by Woods Bowman
- It's Civil Society, Stupid! A Review of Small Change: Why Business Won't Save the World by Michael Edwards by Michael Meyer
- ARNOVA's Symposium on Public Policy for Nonprofits by Thomas Jeavons