March 16, 2012
International Sports Charity Focus of State Police Investigation
The Hartford Courant reports that Rhode Island State Police are looking into a variety of financial transactions engaged in by the Institute for International Sport that may have improperly benefited Executive Director Daniel Doyle Jr. Among the transactions at issue are tuition payments for one of the Mr. Doyle's children, $80,000 of "reimbursed expenses" over two years, and millions of dollars in land purchases on an island where Mr. Doyle and an investment partner also owned property. According to the Institute's website, Mr. Doyle founded the Institute in 1986 and has organized programs involving thousands of student-athletes around the world. The Institute's most recent Form 990 available on Guidestar shows an annual budget that was $2.3 million in 2008 and $1.1 million in 2009, net assets of approximately $2 million, and annual reportable compensation paid to Mr. Doyle of $72,000 from the Institute, another $72,000 from related organizations, and $25,151 in other compensation from the Institute and related organizations. The investigation apparently arose from Rhode island's acting state auditor raising questions about the Institute's use of a $575,000 government grant, and over the past month the Providence Journal has run dozens of stories on the Institute, including its financial and other connections to the University of Rhode Island.
Kwak: The Impact of Taxes on Charitable Giving (South Korea)
Sungil Kwak (Korea Institute for International Economic Policy) has posted The Impact of Taxes on Charitable Giving: Empirical Evidence from the Korea Labor and Income Panel Study on SSRN. Here is the abstract:
Households’ or individuals’ decision regarding charitable giving may differ by type of recipient of the gift. In light of the relative paucity of empirical research on the impact of tax incentives on charitable giving outside Western countries, empirical research on this topic in South Korea is valuable in order to compare effects across difference tax regimes and in different institutional environments. We use the Korean Labor and Income Panel Study (KLIPS), whose panel structure helps alleviate the omitted variable bias that has often appeared in previous literature using cross-sectional data. This study aims to perform a robust estimation of tax price and income elasticities for charitable contributions in South Korea. First, we use exogenous changes in tax rates resulting from Korean Tax Reform to construct instrumental variables (IVs) for the change in the price of giving. Two tests are undertaken to determine whether the IVs are weak or not: a size-corrected test of a weak IV robust inference for the linear instrumental variable model with autocorrelation and heteroscedasticity recently devised by Finlay and Magnusson; and the LIML CUE-GMM estimation. We find that our instruments are not weak. Following Smith and Blundell, and Rivers and Vuong, we then estimate the random effect (RE) Tobit Model using a control function based on the IVs. Using the procedure developed by Mundlak, we estimated a fixed effect model from the RE Tobit model. The tax price and income elasticities from the pseudo-fixed effect Tobit model are found to be significant and the magnitudes are similar to those from the GMM fixed effect and CUE-GMM models. To investigate additional features of the conditional distribution of charitable giving in South Korea, we use the Censored Quantile regression with instrumental variables (CQIV) recently proposed by Chernozhukov, Fernandex-Val, and Kowalski. These estimate indicate that the price elasticity of charitable giving is very heterogeneous among donors, while income has a quite uniform and positive effect over the whole range of the giving distribution significantly.
March 15, 2012
The Other Shoe Drops - Republican Senators Urge IRS Not to Be Political When Examining 501(c)(4)s
Led by Senator Orrin Hatch (R-UT), the ranking member of the Senate Finance Committee, a dozen Republican Senators urged the IRS to ensure that its treatment of section 501(c)(4) organizations is both based in law and fair across the political spectrum. Unlike the letter two days earlier from Democratic Senators on the same topic, which urged the IRS to make specific changes to its rules and practices relating to 501(c)(4)s, the Republican Senators instead asked the IRS to respond to specific questions relating to the exemption application process for 501(c)(4)s. The questions are tied to the complaints by various Tea Party groups that the IRS has singled them out for unduly burdensome questions relating to their 501(c)(4) applications.
When Business Goes South: The Troubles of New York's Community Preservation Corporation
The NY Times reports that the Community Preservation Corporation, which has helped finance tens of thousands of affordable housing units throughout the New York City area over the past 38 years, is now in financial trouble because of failed loans for condos and other high-end developments. This example illustrates that while legal and management concerns about for-profit business ventures creating the risk of private inurement and distracting charity leaders from their core mission are very real, nonprofits also must always remember the financial and prudential issues raised by the inherent riskiness of such ventures. Here it appears that CPC, both directly and through a for-profit affiliate, lent millions of dollars to luxury condo projects on which the borrowers have now defaulted, leaving nearly two-thirds of such loans delinquent. According to the article, the leader who led this effort - and received compensation that rose to over $1 million - has been forced into retirement, CPC has dismissed 40 percent of its staff, and CPC only avoided complete collapse because its lenders were willing to work out an extension of its revolving loan program. In hindsight, as one board member is quoted as saying in the article, it was "wrong" for CPC to pursue this risky investments.
March 14, 2012
Democratic Senators Urge IRS to Change 501(c)(4) Rules
In a letter and related press release issued earlier this week, Senator Charles E. Schumer (D-NY) and six Democratic colleagues in the Senate urged the IRS to revise its rules and practices relating to section 501(c)(4) organizations. More specifically, they proposed the following:
First, we urge the IRS to adopt a bright line test in applying its “primary purpose” regulation that is consistent with the Code’s 501(c)(4) exclusivity language. The IRS currently only requires that the purpose of these non-profits be “primarily” related to social welfare activities, without defining what “primarily” means. This standard should be spelled out more fully by the IRS. Some have suggested 51 percent as an appropriate threshold for establishing that a nonprofit is adhering to its mission, but even this number would seem to allow for more political election activity than should be permitted under the law. In the absence of clarity in the administration of section 501(c)(4), organizations are tempted to abuse its vagueness, or worse, to organize under section 501(c)(4) so that they may avail themselves of its advantages even though they are not legitimate social welfare organizations. If the IRS does not adopt a bright line test, or if it adopts one that is inconsistent with the Code’s exclusivity language, then we plan to pursue legislation codifying such a test.
Second, such organizations should be further obligated to document in their 990 IRS form the exact percentage of their undertakings dedicated to “social welfare.” Organizations should be required to “show their math” to demonstrate that political election activities and other statutorily limited or prohibited activities do not violate the “primary purpose” regulation.
Third, 501(c)(4) organizations should be required to state forthrightly to potential donors what percentage of a donation, if any, may be taken as a business expense deduction. As the New York Times reported in its March 7tharticle, some of these organizations do not currently inform donors whether a contribution is tax deductible as a business expense at all.
China—Developments Regarding Charity and Civil Society at the “Two Sessions” of the Ruling Bodies
- Most importantly, Premier Wen Jiabao mentioned charity and civil society in his work report his “State of the Union-style” address for 2012 read out to the National People’s Congress (NPC) on March 5, 2012. His remarks include mention of the need “to accelerate the development of social welfare and charitable / philanthropic pursuits / efforts.” In addition he vowed that the government would “push for innovations in administering rule of law and social management, and put in order (or rationalize) the relationship between government and civic and social organizations.”
- In addition, an interview with Yang Lan about philanthropy was featured prominently on Main Page (an English language CCTV broadcast) during the sessions. Ms. Yang, a former television hostess, current philanthropist and National People’s Consultative Congress (NPCC) member was interviewed during the “2 Sessions” of the NPC, and focused her remarks on philanthropic legal reform. The video is available at http://english.cntv.cn/program/newshour/20120304/112026.shtml
NVSQ: February 2012 Issue Available
The February 2012 issue of the Nonprofit and Voluntary Sector Quarterly is now available online. Here is the table of contents:
- Femida Handy, Jeffrey L. Brudney,and Lucas C. P. M. Meijs, From the Editors’ Desk
Taedong Lee, Erica Johnson, and Aseem Prakash, Media Independence and Trust in NGOs: The Case of Postcommunist Countries
Catherine Leviten-Reid, Organizational Form, Parental Involvement, and Quality of Care in Child Day Care Centers
Maurice Gesthuizen and Peer Scheepers, Educational Differences in Volunteering in Cross-National Perspective: Individual and Contextual Explanations
Wendy Reid and Johanne Turbide, Board/Staff Relationships in a Growth Crisis: Implications for Nonprofit Governance
Jarosław Domanński, Competitiveness of Nongovernmental Organizations in Developing Countries: Evidence From Poland
Marc Hooghe and Sarah Botterman, Urbanization, Community Size, and Population Density: Is There a Rural-Urban Divide in Participation in Voluntary Organizations or Social Network Formation?
William A. Brown, Amy J. Hillman, and Morris A. Okun, Factors That Influence Monitoring and Resource Provision Among Nonprofit Board Members
Edward L. Queen, Book Review: Wealth and the Will of God: Discerning the Use of Riches in the Service of Ultimate Purpose and Religious Giving: For Love of God
Diane Vinokur-Kaplan, Book Review: Developing a Learning Culture in Nonprofit Organizations
Rebecca Nesbit, Book Review: The American Way to Change: How National Service & Volunteers Are Transforming America
March 13, 2012
Egypt - Draft NGO Law Withdrawn by Government
The government has withdrawn a controversial draft law on civil society organizations, said Mohamed Esmat al-Sadat, chairman of Parliament’s Human Rights Committee. The draft, which would amend the existing law, was said to be a combination of proposals from a number of NGOs. “No law would be issued if NGOs themselves do not approve it,” Sadat told Al-Masry Al-Youm, adding that the former regime drafted the original law. Critics say that the current Law on Associations (Law 84 of 2002) does not guarantee freedom of association since it gives the government the right to refuse the registration of an NGO and to dissolve its board. “The authorities use strict legislation on registration, regulation and foreign funding to restrict the activities of civil society. Under Mubarak, the law was often used against human rights organizations to punish the reporting of human rights violations,” said Amnesty International in a report published last year. For more information see http://www.egyptindependent.com/node/656141.
Common Cause Rallies to Save the Cato Institute & More Thoughts re the Cato Dispute
In reaction to the controversy over the Koch brothers' attempt to take control of the Cato Institute, previously blogged about here, Common Cause - yes, Common Cause - is supporting a public "Save the Cato Institute Rally" in Washington, D.C. and has urged the IRS to review the Koch brothers' actions. The rally is apparently organized by United Republic, which describes itself as "a new organization fighting the corrupting influence of well-financed special interests over American politics and government." As for the IRS complaint, in its letter Common Cause cites a Chronicle of Philanthropy article in which Marcus Owens, former IRS Exempt Organizations director, is quoted as saying that the dispute reveals a "fatal flaw" in Cato's structure. That flaw is that Cato has private shareholders who appear to be able to sell their rights in the organization.
I agree with Marc that if the ownership of the Cato Institute's "capital stock" carries with it the ability for the owners, whether individually or acting collectively, to sell their shares to the highest bidder that is inherently inconsistent with section 501(c)(3) status. If, however, the capital stock by its very terms prohibits such a transaction or any other transaction that would permit the owners to financially reap the benefit of their ownership of the shares, and also prohibits any change to its terms that would eliminate this restriction, then I think there is a reasonably strong argument that the capital stock provision of the articles (when combined with the private inurement prohibition also found in the articles) is not automatically inconsistent with the organizational test. Cato's Forms 990s (available on Guidestar) state Cato has four shareholders with 16 shares each, that those shareholders elect the board of directors, and that the shareholders may remove directors by majority vote, but they do not provide any more details. The various shareholder agreements, which are available through a link at the bottom of one of the Washington Post articles about this dispute, appear to limit the price that can be paid for the shares to their original purchase price, which the article indicates was $16 or $1 per share, however.
That said, I have not seen all of the relevant documents and I do not claim any expertise when it comes to Kansas law, under which Cato is incorporated, including how that law would apply to the current litigation. I therefore think the jury is still out on whether this admittedly unusual governance structure is inherently inconsistent with section 501(c)(3) status or is only potentially so, in that control by a limited group of individuals – however provided for legally – raises a significant risk of private inurement inconsistent with 501(c)(3) status.
7th Circuit Rejects Charitable Contribution Deduction for Donated Home Used for Fire Department Training
The U.S. Court of Appeals for the Seventh Circuit recently affirmed the Tax Court's denial of a $76,000 charitable contribution deduction for a house donated by the taxpayers to a local fire department for use in a firefighting training exercise. The exercise resulted in the demolition of the house, which then permitted the taxpayers to proceed with their plan to build a new house on the same location. In Rolfs v. Commissioner, the appellate court concluded that by conditioning the donation on the house being destroyed, the taxpayers effectively reduced the net value of the gift to zero given that the value to the taxpayers of the demolition services provided by the fire department was approximately $10,000.
Hat Tip: TaxProf Blog
Moreno: Governance of Microcredit Article
Frede Moreno (Western Midanao State University, Philippines and Alliance for International Education, Germany) has posted a short paper on Governance of Microcredit as a Strategy for Poverty Reduction in the Philippines on SSRN. Here is the abstract:
Microcredit can be an effective tool for tackling the global poverty problem. Making microcredit work better for the poor necessitates a framework that integrates the principles of good governance in the design and implementation of a microcredit program. The integration of good governance principles in microfinance is argued to have positive consequences in improving financial viability and increasing social outreach of microcredit programs as well as in widening the livelihood and economic options of Agrarian Reform Beneficiaries within Third World economic and poverty conditions. Governance principles can be applied as implementation strategies of Official Development Assistance (ODA)-assisted microfinance program as a tool for poverty reduction and development. In view of the Philippine government’s limitations, economic and fiscal challenges, the financial and technical support programs of the international donor community provide a big boost to the effectiveness and impact of microfinance in reducing the incidents of poverty in Third World countries such as the Philippines. As a tool for poverty reduction, microcredit is applicable only to the enterprising poor. The use of microcredit to assist poverty groups is recommended to be based on existing livelihood activities and micro-entrepreneurial skills and capabilities. Furthermore, the program design of the Bangladesh Rural Advancement Committee (BRAC) is found to be appropriate for the agrarian reform beneficiaries in Zamboanga Peninsula (Region IX), Philippines. Joe Remenyi’s (1999) Poverty Pyramid reinforces BRAC’s graduated strategy for helping the poor when they are grouped into: (1) micro-enterprise operators or the less poor, (2) enterprising or moderately poor, (3) laboring or very poor, and (4) poorest of the poor and most vulnerable or the ultra-poor.
March 12, 2012
More Coverage of IRS v. 501(c)(4)s
Dan Froomkin at Huffington Post has a detailed story regarding the ongoing dispute between the IRS and Tea Party groups and possibly other organizations claiming tax exemption under Internal Revenue Code section 501(c)(4). As most readers of this blog know, the IRS concerns almost certainly center around whether these groups are engaging in more candidate-related activity than permitted under that section. The story highlights the fact that loss of section 501(c)(4), and presumably classification as a section 527 organization instead, could lead to the donors to these groups losing their anonymity. At the same time, a NY Times editorial applauds the IRS for questioning the claimed 501(c)(4) status, and Senate Democrats are reportedly pushing for even more action by the IRS. To get a sense of how much money could potential flow through 501(c) organizations during 2012, see the Center for Responsive Politics figures for outside spending in 2010.
By the way, in case anyone wants to see examples of the actual letters that are generating this controversy here is the February 1, 2012 IRS Letter to the Waco Tea Party (courtesy of Fox News). Similar letters to the Richmond Tea Party have also been posted on Scribd.
Previous Nonprofit Law Prof Blog Coverage: 501(c)(4) Battles Continue (3/6/12); NY Times Editorial - Curb 501(c)(4) Political Entities (1/2/12)
11th Circuit Rules Parsonage Allowance Limited to One Home
I previously blogged about a divided Tax Court decision concluding that the parsonage allowance could extend to more than one home, a decision that generated concern from the ever-vigilant Senator Charles Grassley. Senator Grassley can now rest easy, as the U.S. Court of Appeals for the Eleventh Circuit has now reversed the Tax Court. In Commissioner v. Driscoll, the Court of Appeals concluded that the phrase "a home" in Internal Revenue Code section 107 both as a textual matter and based on the relevant legislative history should be read in the singular. Christian Singer Phil Driscoll and his wife will not, therefore, be permitted to exclude from their gross income the rental allowance for their second home.
Hat Tip: TaxProf Blog (with a chart of the additional exclusion claimed for the second home)
Conaway: The Global Use of the Delaware Limited Liability Company for Socially Driven Purposes
Ann E. Conaway (Widener) has posted The Global Use of the Delaware Limited Liability Company for Social Driven Purposes on SSRN (published at 38 William Mitchell Law Review 772). Here is the abstract:
In the past, United States “for-benefit” entities were generally organized as non-profit corporations. The same choice is available in the United Kingdom, but the entity’s purpose is traditionally limited to charities. However, a true non-profit entity does not allow an investor to receive any return on her investment, i.e., all “profits” are redistributed to the entity and not to its members/investors. In the present economy, entrepreneurs increasingly wish to invest capital in socially responsible businesses and to receive an internal return - a true admixture of “profit” and “social benefit.” In addition, these “social entrepreneurs” increasingly seek capital from private investors or foundations with “program related investments” or, “PRIs,” that include low-interest loans or loan guarantees to non-profit charities or organizations engaged in socially beneficial efforts. Examples of hybrid organizations blending “profit” with “benefit” in the United States include the “B,” or “benefit,” corporation, and the L3C. Each of these hybrid entities carries significant pre-packaged disadvantages.
The thesis of this Article is that presently the Delaware LLC provides global investors maximum internal efficiency as well as asset protection at a decreased agency cost for businesses operating solely within or outside the United States for socially driven enterprises. The Delaware LLC offers contractual freedom to investors, managers, owners, funds and foundations to structure a for-benefit, for profit socially responsible business internal plan with limited liability for owners and investors, including maximum tax efficiencies within the United States or the United Kingdom due to its completely mobile, contractual character.