Saturday, October 15, 2011
Much has been made in recent years of for-profits moving into areas traditionally dominated by nonprofits such as education and health care. What has been less noticed has been the trend of governments and even occasionally for-profits turning over organizations and activities to nonprofits, although not always without controversy. Here are several recent developments along those lines:
- California State Parks: The Bay Citizen reports that Governor Jerry Brown signed a bill (A42) earlier this month authorizing the California Department of Parks and Recreation to enter into agreements with nonprofits to keep open up to 70 state parks scheduled to close this summer because of the state's budget crisis.
- Florida For-Profit University Becomes a Nonprofit: The Sun Sentinel reports that Keiser University began its 35th year by converting from for-profit to nonprofit status after having been bought out by the nonprofit Everglades University. Keiser currently has 16,500 students on 15 campuses offering both associate's and bachelor's degrees. According to its website Keiser is now a section 501(c)(3) organization as well.
- Massachusetts Blue Cross to Remain a Nonprofit Public Charity: The Boston Globe reports that Blue Cross Blue Shield of Massachusetts has decided to remain a nonprofit public charity under state law after reviewing other possible legal structures. The review was triggered by public and government official outrage over a multi-million payment to the organization's former chief executive and five-figure annual fees paid to its directors, the latter of which have been suspended indefinitely.
- Miami-Dade Proposal to Turn Public Hospital Into Nonprofit Dies, At Least for Now: The Miami-Dade Herald reports that a task force proposal to change control of the Jackson Health System from Miami-Dade County to a newly created nonprofit is apparently dead in the face of vigorous union opposition. The task force arose after a grand jury report sharply criticized the operation of the System, including meddling by county commissioners.
- New Orleans Nonprofit Faces Cut-Off of Government Funds: The New Orleans Times-Picayune reports that the New Orleans Federal Alliance, a nonprofit created to steer the conversion of the former Naval Support Activity location into a mixed-use development, is in a financial crisis because the local Algiers Development District board is withholding promised funds in an attempt to gain control of the project.
- Washington, DC Charities Face Loss of Fannie Mae and Freddie Mac Support: The Washington Post reports that the now government-controlled housing financing giants are reducing and may eventually totally eliminate their funding of local nonprofit organizations. Fannie Mae, which shut down its foundation in 2007 and since has providing funding to nonprofits directly, and the Freddie Mac Foundation have together given nearly $100 million to 500 local organizations over the past four years, even after sharply cutting their donations since 2008.
News stories continue to highlight how politicians and charities do not mix well even when the issue is not political campaign activity. Here are a couple of recent examples:
- Nonprofit Biggest Investor in Politically Connected Solar Company: The Washington Post reports that the George Kaiser Family Foundation is the biggest investor in Solyndra, the solar company much touted by President Obama that is now at the center of a political dispute over the federal government's decision to restructure its loans to the now bankrupt company. The article highlights the foundation's supporting organization structure, which permitted it not only to own significant interests in businesses but also to give away significantly less than 5 percent of its over $4 billion in assets. The biggest fallout from this relationship for the foundation may not be allegations of improper political influence but instead the spotlight shown on its ability to avoid the private foundation federal tax rules through its supporting organization role for the Tulsa Community Foundation.
- Chicago Inspector General Questions Contributions to Charity Founded by Former Mayor's Wife: The Chicago Tribune reports that Chicago's internal watchdog has raised concerns about more than $900,000 in contributions from companies to After School Matters, a charity founded by former Chicago first lady Maggie Daley. According to the Inspector General's report, the concerns arise because the contributions can be traced to fine print in tax increment finance district agreements negotiated by city officials without any indication that the funding was awarded based on established guidelines or its use overseen by the city.
- Company's Nonprofit Arm Funds Free Trips for Government Officials: The NY Times reports that the Pearson Foundation, the charitable arm of a major educational publisher, routinely has paid for international trips by state education commissioners to such destinations as Rio de Janeiro, London, Singapore, and Helsinki. The articles also notes that at least one state (Iowa) has opened an investigation into a trip by its commissioner. The trips were coordinated by the nonprofit Council of Chief State School Officers but funded by a grant from the Foundation.
As reported by Miller Thompson and other Canadian law firms and charity advisers (see, e.g., McMillan's report on the same topic) all federally incorporated non-share capital corporations in Canada will be required to transition into compliance with the new Not-for-Profit Corporations Act over the next three years or face dissolution. Miller Thompson previously summarized the major changes under the new Act, including stricter governance requirements for "soliciting corporations" and the elimination of the requirement that a corporation limit its activities to those specific objects provided in its Letters Patent. It is estimated that nearly 19,000 organizations will be covered by the new Act.
Oonagh B. Breen (Dublin) has posted on SSRN Through the Looking Glass: European Perspectives on Non-Profit Vulnerability, Legitimacy and Regulation (36 Brooklyn Journal of International Law 948). Here is the abstract:
"To what extent is it acceptable in the interests of the greater public good for national or international regulatory regimes to affect the manner in which international charities achieve their missions?" Policymakers may argue that competing public interests demand regulatory oversight of charities. Nonprofits may concede the argument in favour of regulation if two conditions are met – first, that the reality of the supposed threat is supported by empirical evidence; second, that the measures are proportional to the likelihood of the alleged threat occurring.
This paper explores these issues in the context of EU regulation of nonprofits, outlining the still-evolving European policy on non-profit regulation and tracing the emergence of the European response in the aftermath of 9/11 and the issuance of FATF Special Recommendation VIII. The paper reviews recent moves by the European Commission away from initiatives linked to the war on terror towards a policy grounded in broader accountability and transparency goals inspired by financial propriety, and considers the impact of these developments from the perspective of affected NGOs and national regulatory authorities.
The purpose of this Article is to examine nonprofit organizations from such an international perspective, and to cross-pollinate the fields of third-sector research and international law. A law review article can provide only a broad introduction to this genre, but is an important step in the integration of these fields. My hope is that this Article will provide a glimpse for these groups into each others‘ worlds such that (1) scholars and students of international law might recognize the important role of the third sector, and (2) scholars and students of nonprofit studies might recognize the contribution of a comparative legal approach.
This Article is novel in its breadth, and intentionally so. Most comparative law articles choose depth over breadth, focusing on the details of how one or two countries‘ approaches to a legal issue are distinguishable from the American system.18 Although this technique is useful, it is only through the cumulative impact of many different approaches that true idiosyncrasies become obvious. This Article therefore provides a window into not one, but nine alternative international approaches to nonprofit law. It is against this relief that American distinctiveness glares.
This Article begins with an introduction to the colorful variety of approaches to nonprofit regulation that the international community affords, analyzing the nonprofit sector in several countries in Europe (France, Germany, Italy, and Sweden) and in Asia (India, Bangladesh, Pakistan, Nepal, and Sri Lanka). The Article next explains the basics of American nonprofit law, first discussing state regulation, and then federal regulation. The American approach is then contrasted with the systems of nonprofit regulation in other countries, and two distinctive themes of American law emerge. First, American nonprofit law has a different primary relational focus: it regulates the relationship between the nonprofit and its donors and leaders, rather than the relationship between the nonprofit and the government. Second, American nonprofit law is unusually tax-centric in its regulatory scheme: the Treasury is a questionable locus of regulation for nonprofits, and most other countries use tax only as a supplemental, rather than central, regulatory force. The Article concludes with a call for greater attention to international and interdisciplinary approaches to the third sector.
This Article explores the concept of philanthrocapitalism - an emerging model for charitable giving intended to enhance the practice of philanthropy through the application of certain business techniques, particularly envisioned as being deftly carried out by a subset of ultra-rich, experienced business people. During the past fifteen years, but most strikingly in the past five, private foundations influenced by philanthrocapitalism and its forbearers have become increasingly directive, controlling, metric focused, and business oriented with respect to their interactions with grantee public charities in an attempt to demonstrate that the work of the foundations is “strategic” and “accountable.” Combining empirical analysis and theoretical critique, this Article challenges the prevailing wisdom that philanthrocapitalism offers a better, smarter philanthropy, thereby strengthening the entire nonprofit sector. In fact, after observing and documenting the tenets of and rhetoric associated with philanthrocapitalism, there is a serious risk that the shift to business-like, market-driven giving may change the nature of philanthropy in ways we will come to regret. Moreover, this Article links concerns about philanthrocapitalism to a broader disquiet about the blurring lines between the public and the private. I argue that nonprofit scholars and advocates should pay greater attention to this movement and what its “success” might mean for the social sector.
Jesse D. Lecy (Georgia State), Hans Peter Schmitz (Syracuse), and Haley Swedlund (Radboud) have posted on on SSRN Non-Governmental and Not-for-Profit Organizational Effectiveness: A Structured Literature Review (forthcoming Voluntas: International Journal of Voluntary and Nonprofit Organizations) Here is the abstract:
While the issue of NGO/NPO effectiveness remains a prominent topic for scholars and practitioners, the literature on this topic is increasingly fragmented along disciplinary lines. We address this issue by presenting a comprehensive and interdisciplinary review of the literature on NGO and NPO effectiveness using citation analysis. In order to uncover communalities across disciplines concerned with questions of NPO/NGO effectiveness, we deploy a structured literature review using snowball sampling within citation networks. This approach limits author biases, fosters an interdisciplinary perspective, and adds a different methodological approach to conventional content-based literature reviews. Our review uncovers three trends: (1) there is broad scholarly consensus that uni-dimensional measures of effectiveness are not useful – even though such measures are commonly used by NGO/NPO rating agencies; (2) the scholarship on NGO/NPO effectiveness is dominated by conceptual works, while empirical studies remain rare; (3) a consensus on how to operationalize effectiveness remains elusive. These results suggest that progress in our understanding of NGO/NPO effectiveness requires crossing disciplinary divides, adding more empirical analyses, and increasing efforts to develop shared categories and methodologies.
Friday, October 14, 2011
The Chronicle of Philanthropy reports that three nonprofit news operations seeking IRS recognition of section 501(c)(3) tax-exempt status have been told that their applications have been bundled with similar requests by other nonprofit publishers, resulting in their applications still being pending more than year after they filed them. The organizations are the Investigative News Network (which identifies itself as a membership group of 60 nonprofit watchdog journalist organizations), The Lens (an online nonprofit "journalism venture" in New Orleans), and SF Public Press of San Francisco (a "startup nonprofit news organization"). According to the article, an IRS spokesman said the IRS is "working them centrally to ensure consistent treatment."
ThirdSector reports that the United Kingdom's Upper Tribunal has rejected in part an attempt by the Charity Commission for England and Wales to require schools seeking classification as a charity to admit students who are unable to pay the schools' fees. While the Upper Tribunal accepted that given the public benefit requirement for charities "it is necessary that there must be more than a de minimis or token benefit for the poor," it rejected any brightline fee reduction or scholarship requirement, instead concluding that "once that low threshold is reached, what the trustees decide to do in the running of the school is a matter for them, subject to acting within the range within which trustees can properly act" (para. 229 of the opinion). At the same time, it noted that the more than de minimis benefit for the poor is not by itself sufficient to demonstrate public benefit; rather, the test "is to look at what a trustee, acting in the interests of the community as a whole, would do in all the circumstance of the particular school under consideration and to ask what provision should be made once the threshold of benefit going beyond the de minimis or token level had been met" (para. 215 b; see also para. 216). The Upper Tribunal acknowledged that its decision "will not, we know, give the parties the clarity for which they were hoping" but left it to Parliament to adopt more brightline standards, if it so chose (para. 260). While the Charity Commission is attempting to paint the decision as a victory, it appears its attempt to focus primarily if not exclusively on requiring fee-charging schools to provide significant access on a reduced or zero fee basis to those of lesser economic means when determining whether such schools provide sufficient public benefit has been dealt a major setback.
Yesterday I did a post about a news article questioning the reported political activity of one prominent section 501(c)(4) organization, Americans for Prosperity. Two groups that support campaign finance legislation have filed a complaint with the IRS challenging the section 501(c)(4) status of several other politically active groups, Crossroads GPS, Priorities USA (no website apparently, but see FactCheck.org's recent description), American Action Network, and Americans Elect. in their complaint, Democracy 21 and the Campaign Legal Center also challenge the position that a section 501(c)(4) organization can spend up to 49 percent of its total expenditures on political campaign activity and still qualify for that status, arguing instead that the correct legal standard is whether such activity is more than insubstantial based on all of the facts and circumstances.
Ellen Aprill (Loyola-L.A.) has posted Why the IRS Should Want to Develop Rules Regarding Charities and Politics on SSRN (forthcoming Case Western Reserve Law Review). Here is the abstract:
Organizations tax-exempt under section 501(c)(3) of the Internal Revenue Code, often referred to as charities, cannot, at risk of loss of exemption, “participate in, or intervene in (including the publishing or distributing of statements) any political campaign on behalf of (or in opposition to) any candidate for public office.” That is, they are subject to a campaign intervention prohibition. These organizations cannot endorse or oppose a candidate for public office or contribute to the candidate’s campaign. The IRS has long interpreted this campaign intervention prohibition broadly. An applicable regulation, for example, refers to violating the prohibition “directly or indirectly.” Revenue Ruling 2007-41, the most recent and comprehensive official IRS pronouncement on the subject, explains that “[w]hether an organization is participating or intervening, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office depends upon all of the facts and circumstances of each case.”
How the IRS interprets, communicates, and enforces the campaign intervention prohibition, particularly indirect intervention, has been - and continues to be - a matter of controversy. Representatives from the charitable community, both before and after the publication of Revenue Ruling 2007-41, have urged greater clarity regarding the criteria for campaign intervention. A number of commentators have suggested that current rules may be unconstitutionally vague and that, to avoid this problem, violation of the campaign intervention prohibition be limited to activities involving express advocacy.
This difference between the IRS and the charitable community rehearses the difference between rules and standards. As Louis Kaplow has explained in an influential article, Rules Versus Standards: An Economic Analysis, the choice between rules and standards involves “the extent to which a given aspect of a legal command should be resolved in advance or left to an enforcement authority to consider.” By asking the IRS for clarity and bright lines in defining the prohibition, the charitable community emphasizes a key ex ante consideration, the impact of guidance on appropriate charitable behavior. By offering a multifactor approach dependent on the particular situation, the IRS stresses an equally important ex post consideration, the impact of guidance on enforcement. Both set of considerations, of course, have a place in any calculus. Kaplow’s article, however, sets out a framework to help those that must give content to legal commands guidance on how to decide whether to frame such content as rules or standards. This article argues that, under Kaplow’s analysis, the IRS’s own concern for encouraging compliance by those subject to the law should lead it to develop more rules in this area. That is, this article emphasizes why the IRS itself should want to promulgate rules.
Part I sets forth Kaplow’s analytical framework, which demands consideration not only of levels of enforcement but also how the affected community will choose to learn about the legal command in any decision between embodying legal commands as rules or as standards. Part II describes the legal commands at issue. Part III considers aspects of Kaplow’s analysis related to enforcement. It examines the available sanctions, the numbers of parties subject to enforcement actions, and the kinds of sanctions in fact imposed. Part IV discusses the nature of the affected community and how members of the community will seek legal advice. Part V addresses a question Kaplow mentions frequently, but only in passing - the underlying norms a statutory command reflects. This part discusses both the legislative purpose in enacting the prohibition and attitudes toward its constitutionality. Part VI considers arguments against rules, both generally and as applied to tax law. Part VII applies the Kaplow analysis to all these considerations and concludes that the IRS should invest the time to develop a set of rules. Part VIII concludes.
Donald Tobin (Ohio State) has posted Campaign Disclosure and Tax-Exempt Entities: A Quick Repair to the Regulatory Plumbing on SSRN. Here is the abstract:
This article argues that the are some quick regulatory fixes the Treasury can implement to ensure that tax-exempt organizations (especially 501(c)(4) social welfare organizations) are operating within the rules and that aggressive tax planning is not being used as a way to obfuscate rules designed to require disclosure of contributions and expenditures of political organizations. The article recommends that Treasury promulgate new regulations to require disclosure of contributions and expenditures in excess of $25,000 by tax-exempt entities. The article also proposes that Treasury institute procedures to require tax-exempt organizations to file for exempt status, and to provide procedures for ensuring that these organizations meet the requirements in the statute and are not being used as a mechanism to avoid disclosure provisions in the Internal Revenue Code.
Thursday, October 13, 2011
Legislation creating legal frameworks for "benefit corporations" (AB 361) and "flexible purpose corporations" (S201) is now law. See the bill texts for more details regarding these new hybrid entities that combine the ability to return profits to investors with an overriding public benefiting purpose. For more information about benefit corporations, see the B Corp website (noting that several states in addition to California have enacted benefit corporation legislation and others are considering it), and for information about flexible purpose corporations see the explanation on the CharityLawyer blog.
Hattip: Nonprofit Law Blog.
According to an article posted on the NY Times website, the section 501(c)(4) Americans for Prosperity reported spending $1.3 million on electioneering communications to the Federal Election Commission during 2010 (see FEC filings) but reported no political activity expenditures on its IRS Form 990 for the same period. Form 990 filings for the previous three calendar years (2007 thru 2009) available on Guidestar also report no direct or indirect political campaign activities on behalf of or in opposition to candidates for public office (Part IV, Question 3 of the 2008 and 2009 forms, Part VI, Question 81 of the 2007 form). As noted in the article, I reviewed three publicly available Americans for Prosperity ads from 2010, and all of them are in my judgment clearly political campaign activity as defined for federal tax purposes. According to the article, a spokeswoman for Americans for Prosperity asserts that the group "is in full compliance with its tax reporting requirements."
CNN reports that Pastor Robert Jeffress, of Mormonism is a "cult" fame, may have gotten his church and not just himself into hot water. That is because he has posted on the First Baptist Church of Dallas website videos of his various media appearance, which videos include clips of his endorsement of Texas Governor Rick Perry for President. The ever vigilant Americans United for Separation of Church and State has asked the IRS to investigate the church as a result. According to the CNN article, Americans United is also expecting to file ten times as many complaints as it did in 2008.
The NY Times reports on the current state of "hybrid" legal forms that combine investor ownership with pursing the public good. Such entities include the recently adopted flexible-purpose corporation in California, the low-profit limited liability company or L3C, and the British community interest company or CIC. The article also describes various active entities that have chosen these new forms, including MOO Milk of Vermont (a L3C) and Frontline SMS (a CIC that facilitates text messaging by NGOs).
The Senate Finance Committee will hold a hearing on "Tax Reform Options: Incentives Charitable Giving" on Tuesday, October 18th. Scheduled witnesses are Dr. Frank Sammartino (Congressional Budget Office), Elder Dallin H. Oaks (The Church of Jesus Christ of Latter-day Saints and former president of BYU), Dr. Eugene Steuerle (Urban Institute), Brian A. Gallagher (United Way), and Roger Colinvaux (Catholic).
The IRS has released its 2008 unrelated business income statistics. Based on a quick review, the data appears to relatively consistent with previous years, including slightly over 40,000 unrelated business income returns (Form 990-T), approximately $10 billion in gross unrelated business income reported, and $1 billion in net taxable income yielding approximately a third of a billion dollars in taxes. Section 501(c)(3) organizations reported approximately half of the taxable income, with the rest spread among a variety of other types of tax-exempt organizations.
The University of Kentucky College of Law hosted yesterday a conference on the recent book Politics, Taxes, and the Pulpit: Provocative First Amendment Conflicts authored by Nina J. Crimm (St. John's) and Laurence H. Winer (Arizona State). Commentators were Dean David A. Brennen, Joshua A. Douglas (Kentucky), Rev. Nancy Jo Kemper (Transylvania University) and Paul E. Salamanca (Kentucky). The book is a comprehensive consideration of the constitutional and federal tax issues raised by religious leaders preaching politics from the pulpit and includes thought-provoking proposals for lessening the constitutional tensions in this area.
Wednesday, October 12, 2011
The Alliance Defense Fund recently supported the fourth edition of Pulpit Freedom Sunday, its ongoing effort to challenge the application of the Internal Revenue Code section 501(c)(3) prohibition on political campaign intervention to churches and other houses of worship. As reported on an ADF supported blog by ADF's President and in various news outlets, including the NY Times, this year's effort involves hundreds of pastors, a significant increase over the 30 or so pastors who participated in the first such event in 2008. There is still no indication that the IRS has begun church tax inquiries based on the actions in 2008 or later years, so it remains to be seen whether it will pick up the gauntlet thrown by ADF.