May 11, 2012
Peregrine on CEO Expense Accounts
Chicago lawyer Michael Peregrine of McDermott Will & Emery has written an opinion piece in the Chronicle of Philanthropy discussing questionable spending by a top administrator of a foundation benefitting the University of Texas Southwestern Medical Center. In Why Watching CEO Expense Accounts Matters, Peregrine argues that adopting a few procedural safeguards can prevent spending missteps:
The first task is to craft workable guidelines for distinguishing business and personal expenses and identifying the appropriate business-related expenses for the chief executive’s spouse. The guidelines should also discuss how to account for and acknowledge donations to the charity from the CEO and how those will be reported for tax purposes.
Second, the nonprofit should create a system that makes it routine and easy for the board chairman to review expense-account spending. Auditors who work for the CEO can’t be the ones to raise the questions if something goes wrong; that is a board duty, and in some cases, one for the general counsel.
Boards should take action to step up their oversight of expense accounts, not solely out of concern with the CEO’s actual practices but also because it is a smart way to protect the institution and the office of its chief executive from scandal. CEO’s deserve effective guidelines from board leaders.
Peregrine concludes, “[B]oard chairmen have no choice but to make sure they are able to raise tough questions about personal spending even when that makes things uncomfortable for an otherwise outstanding chief executive.”
Galle Posts Paper on SSRN
Federal law significantly limits the political activities of charities, but no one really knows why. In the wake of Citizens United, the absence of any strong normative grounding for the limits may leave the rules vulnerable to constitutional challenge. This Article steps into that breach, offering a set of policy reasons to separate politics from charity. I also sketch ways in which my more-precise exposition of the rationale for the limits helps guide interpretation of the complex legal rules implementing them.
Any defense of the political limits begins with significant challenges because of a long tradition of scholarly criticism of them. Critics of the limits suggest that the “market failures” that justify tax subsidies for charity also afflict group efforts to monitor politicians and organize politically, so that the subsidy should extend to cover those activities. These claims, though, overlook a series of additional issues suggested by transaction cost economics and other aspects of economic theory.
Most significantly, even if lobbying and electioneering should be subsidized, it does not follow that these functions should be carried out by charities. I argue that combining politics with charity produces a set of diseconomies of scope, including higher agency costs, diminished “warm glow” from giving, and greater inframarginality of deduction recipients. In addition, I argue that the economically ideal tools for reaching the socially optimal levels of charity and lobbying are incompatible with one another. While there are also off-setting gains from the combination, many of these gains further exacerbate the diseconomies.
May 10, 2012
Boustany Announces Hearing on Tax-Exempt Organizations
The Chronicle of Philanthropy reports that a congressional hearing will be held next week to examine various tax issues affecting nonprofits organizations. Congressman Charles W. Boustany Jr., a Lousiana Republican and Chairman of the Subcommittee on Oversight of the Committee on Ways and Means, announced that the subcommittee’s hearing will be the first in a series of hearings on the tax-exempt sector and Internal Revenue Service oversight of tax-exempt activities. The official announcement describes the focus of the hearing as follows:
The hearing will focus on certain current issues related to tax-exempt organizations, including the current IRS compliance initiative related to Universities, recently enacted reporting requirements for tax-exempt hospitals, recent efforts by tax-exempt organizations to design and implement good governance standards, and taxpayer involvement in redesigning the Form 990. In addition, the hearing will discuss the history of recent legislative changes to the tax code dealing with tax-exempt organizations and what prompted those changes.
Those who are not scheduled for an oral appearance may still submit a written statement for consideration by the committee and for inclusion in the printed record of the hearing.
May 9, 2012
Cuomo Proposes Changes in Regulating Care of Mentally Disabled
The New York Times reports that New York Governor Andrew Cuomo has proposed the creation of a new law enforcement and oversight agency to monitor people in state or private care who have developmental disabilities, mental illnesses, and other brain-related conditions. The governor, says the story, is also calling for tougher punishment of those who abuse people with developmental or other cognitive disabilities. Part of Governor Cuomo’s proposal reportedly would directly affect nonprofit transparency by expanding New York’s Freedom of Information Law to require nonprofits that house publicly supported patients to make abuse and neglect records public:
Under the proposal, the public could submit requests for abuse and neglect records to nonprofit groups that provide residential or even daytime activity programs. The new state agency would provide the legal staff to help the nonprofit organizations respond to such requests and redact documents as needed.
The Times also states that Governor Cuomo, keeping in step with other states, “intends to establish an independent nonprofit organization that would serve as an outside advocate for those with disabilities and mental illnesses and that could bring litigation against the state.”
FCC Proposes to Lift Ban on Charitable Fundraising by Noncommercial Broadcasters
The Christian Science Monitor reports that the Federal Communications Commission (“FCC”) has proposed relaxing a rule that generally prohibits noncommercial public broadcast stations from raising funds for third parties. The existing regulatory framework is said to rest on the premise that “stations must meet their educational mission to local communities through programming, not through fundraising for other organizations.” However, the strictures of the current regulations reportedly have occasionally been waived by the FCC – as in the case of relief efforts for the families of 9/11 victims and for the victims of Hurricanes Andrew and Katrina – and religious and other noncommercial broadcasters have shown themselves capable actors in helping meet pressing needs when given the chance to do so. According to the story, the new proposal would permit noncommercial stations to spend as much as 1 percent of their total annual broadcast time, or approximately 88 hours per year, conducting fundraising activities on behalf of nonprofit organizations. FCC Chairman Julius Genachowski justifies the proposal in part as follows:
Given our experience …, where the ability to raise funds for third-party non-profits has been invaluable, we question whether it remains appropriate to require noncommercial stations to seek a waiver just as emergencies are occurring. This new FCC proposal would eliminate the need for such waivers and special requests.
Noncommercial broadcasters have long served the American public by providing high quality and innovative educational, cultural, and news programming to their local communities. By changing our ban against fundraising by public or religious broadcasters, the FCC can give them a chance to deepen their relationship with their communities, and heighten awareness about disasters at home and around the world.
Genachowski further characterizes the proposal as “another step in our ongoing efforts to modernize the FCC and eliminate unnecessary regulations.”
May 8, 2012
Quick Regulatory Update
Our friends at Treasury have been busy over the last two weeks, with two sets of regulations coming out in the charitable area:
1. Final Regulations Under Section 642(c). The IRS issued final regulations under Section 642(c) regarding the character of income for charitable lead trusts.
2. Additional Examples of PRIs under Section 4944. The IRS issued proposed regulations under Section 4944, adding a number of updated examples of "program related investments" for private foundations. Lots of good stuff in there.
I wanted to make you all aware these were out there - hopefully, more analysis later!