June 22, 2012
Delaware AG Alleges Mismanagement of Charitable duPont Trust
As reported in The Washington Post, a $4 billion charitable trust created by the late Alfred I. duPont is the subject of scrutiny by the Delaware Attorney General Beau Biden. Biden alleges in court documents filed in Florida, where the trust is managed, that the trustees have mismanaged the trust and not adhered to the grantor's intentions. Specifically, the trustees are accused of deviating significantly from duPont's original intent by not focusing the trust on Delaware, as stipulated in duPont's will. The trust provides annuity payments to certain beneficiaries of duPont's will and, more significantly, funds the Nemours Foundation which operates health care facilities in Delaware, Florida, New Jersey, and Pennyslvania. The Foundation also operates the Nemours Mansion and Gardens in Wilmington, Delaware. Among some of the allegations in the court filing, the Delaware AG claims that certain renovation costs of the Mansion as well as administrative expenses were over-attributed to Delaware, thereby reducing its annual trust distributions over a 6-year period. As a result, the trust has not been operating more for the benefit of Delawareans.
The trustees "welcome a dialogue" with the Delaware AG. This court filing adds further complications to the trustees' efforts to bifurcate the existing trust to achieve better foreign tax treatment for its overseas investments. For more details on the lawsuit, see the Delaware AG's media release.
(Hat tip: Philanthropy News Digest)
Colinvaux: Testimony at Oversight Hearing on Tax Exempt Organizations
Roger Colinvaux (Catholic University) has posted "Testimony of Professor Roger Colinvaux Before the House Committee on Ways & Means, Subcommittee on Oversight Hearing on Tax Exempt Organizations" to SSRN. The article was published in Tax Notes. His testimony was previously blogged herein. The abstract provides:
Recent legislation has established new legislative precedents that run counter to the traditional regulatory approach of 501(c)(3) organizations: precedents for distinct exemption standards based on the type of organization, a weakening of the basis for distinguishing among charities as “public” or “private,” and a related preference for brighter enforcement lines and frustration with the status quo. These trends make for growing complexity, but are in large part a reasonable response to the historic legacy of defining a sector based on broadly conceived purposes and the inherent difficulties of oversight that follow. Going forward, it is critical to assess the federal role in support of the section 501(c)(3) sector, and at a minimum, take steps to further the integrity of the sector by minimizing opportunities for abuse. More broadly, if the federal approach is to be reconceived, the tax policy focus should shift to greater promotion of activities rather than purposes, and require more from the sector than avoiding bad outcomes.
Churches Gearing Up For Election Season - Fortnight for Freedom and Pulpit Freedom Sunday
As reported in the Chicago Tribune, a recent Reuters article discusses the ongoing work of the Alliance Defense Fund, the creator of Pulpit Freedom Sunday. As previously blogged, this event's purpose is to "have the Johnson Amendment [adding the political activity prohibition to section 501(c)(3)] declared unconstitutional – and once and for all remove the ability of the IRS to censor what a pastor says from the pulpit." In 2011, approximately 540 pastors in churches around the country "preached sermons that compared the positions held by candidates with what Scripture says about those issues. The pastors then made specific recommendations about those candidates (including recommendations about whether the congregation should vote for or against them)." The goal of the movement is to force a court case on the issue, with hopes that it will result in their favor - striking the prohibition from 501(c)(3). The article discusses the continuing recruitment of new pastors to join the movement, forcing the IRS to act and begin the ultimate court fight.
In a similar, but unrelated event, The U.S. Conference of Catholic Bishops have called for their own Fortnight for Freedom beginning this week (from June 21 to July 4), which encompasses holding masses and rallies, and using parish bulletins to voice opposition to the Obama administration's healthcare regulations on contraceptives. The Conference's website describes this event as a "special period of prayer, study, catechesis, and public action [that] will emphasize both our Christian and American heritage of liberty. Dioceses and parishes around the country have scheduled special events that support a great national campaign of teaching and witness for religious liberty."
The article concludes with some interesting data from recent Pew Research Center studies on this issue. In a January 2012 poll, only 18% of the participants responded that a candidate endorsement by their minister, priest or rabbi would impact their voting decision; 70% polled that it would have no impact.
In a second study conducted this spring, Pew discovered that most parishioners prefer that their religious leaders stay out of the political realm, with Catholic participants being the "most adamant."
June 21, 2012
More on 501(c)(4)s - Disclosure, Private Benefit and Political Activities
Disclosure. The Daily Tax Report discusses a June 18 letter written by eleven Republican Senators questing the IRS's continuing practice of requesting donor information from organizations seeking a 501(c)(4) tax exemption. The letter requests that Commissioner Shulman provide more answers to questions regarding the IRS's statutory authority for, as well as its process in, requesting such information. The letter points out the asserted inconsistency between such IRS requests and the Form 1024, which does not specifically ask for the names and addresses of potential financing sources. The signatories assert that Congress has provided for statutory protections of donors' privacy and that the IRS practice is circumventing that protection. This letter follows up on a March 14 letter to the IRS on requests for information sent to 501(c)(4) exemption applicants.
Private Benefit. In PLR_201224034, the IRS revoked the exemption of a 501(c)(4) organization, determining that its primary purpose was to advance the private interests of its founder, a "political figure" who was a candidate for elected office in 2004 and 2010. The organization asserted that it was a citizen's advocacy group focused on solving some of the state's critical problems. In reviewing the organization's blog posts, the IRS found that most centered on current or pending legislation, as well as the agendas of elected political officials. Of 17 blog posts reviewed, five criticized the founder's former opponent in a race for elected office, occurring both before and after the election. Furthermore, the blog page on the organization's website contained links to the founder's campaign website. Most of the organization's funding came from the founder's donations. The IRS found that the organization's purpose was to primarily benefit the founder and founder's political "agenda and platforms." This was further supported by the fact that the founder is the only board member and officer. Consequently, no community input, oversight, or independence from the founder is present. The IRS further concluded that the organization had "not established that your primary activity is not to engage in direct or indirect political intervention." According to the Daily Tax Report, some commentators, such as Marcus Owens at Caplin & Drysdale, find that conclusion to be out of the norm, as Owens stated: "It suggests that the test for exempt status isn't just that the applicant describe how its activities come within (c)(4), but that it must affirmatively establish what it is not, namely, a political organization." The PLR did note, however, that a 501(c)(4) organization may engage in political activities, provided it is not "primarily engaged" in politics.
Political Activity Spending. The Nonprofit Quarterly discusses a report revealing that in the 2010 election, 501(c)(4) organizations outspent super PACs by a three to two margin ($95 million to $65 million). Ninety percent of the (c)(4)s did not reveal their donors' identity, consistent with the lack of a requirement for them to do so. The two centers that issued the report (Center for Responsive Politics and the Center for Public Integrity) noted that the vast majority of (c)(4) spending came from conservatively-aligned groups.
Another Politically-Motivated (c)(4)? The Nonprofit Quarterly reports that former Senator Rick Santorum is forming a new 501(c)(4) organization, Patriot Voices. The purpose of this organization is reportedly “to mobilize 1 million conservatives around the country to promote faith, family, freedom and opportunity.” Once again, the primary motivation of forming the 501(c)(4), despite Santorum already having a PAC, is to avoid the donor disclosure rules associated with PACs. The Nonprofit Quarterly article states that Santorum confirmed that the new (c)(4) will work with his PAC, the Red White and Blue Fund. As the article further explains, these two organizations can be interdependent, with the (c)(4) accepting privacy-protected donations and then turning around and making contributions to the PAC.
Op-Ed in Support of Minimum Charity Care Requirement for Nonprofit Hospitals
Pablo Eisenberg, a senior Fellow at the Georgetown Public Policy Institute, opined in a recent piece for the Huffington Post that Congress needs to set a benchmark for nonprofit hospitals to provide a minimum amount of charity care in exchange for their tax-exempt status. Eisenberg discusses a recent investigative report on North Carolina nonprofit hospitals revealing increases in profits, reserves and compensation packages for their executives in recent years while less than 3 percent of their operating budgets were spent on charity care. Eisenberg also references the recent legislative solution to the standoff between Illinois hospitals and the counties seeking to require a minimum charity care standard in exchange for property tax exemption. He frames that solution as a success for those hospitals in avoiding revocation of their tax exemptions. A federal legislative solution is necessary, Eisenberg opines, to ensure nonprofit hospitals "earn" their tax-exempt status by adequately serving the poor.
June 18, 2012
The Abusive Power of Philanthropy: Myth or Reality?
I stopped for a moment to read about the mess going on at the University of Viginia over on Slate this afternoon to find this interesting tidbit on the price colleges, universities and other institutions may have to pay as they are increasingly deprived of state funding and become more dependent on private altruism for their survival. In case you have not heard, the University of Virginia's Board of Visitors suddenly and without warning fired President Teresa Sullivan. Apparently, Sullivan had an unknown enemy in the person of Board Rector (or chairperson), Helen Dragas. Why Ms. Dragas harbors such antipathy to UVA's first woman President remains a mystery but according to a whole slew of media reports, it was Helen Dragas who engineered the vote that led to President Sullivan's firing, all at the behest of wealthy UVA alum and donor, Peter Kiernan . What I found fascinating in a Slate op-ed piece was this observation:
So as tuition peaks and federal support dries up, the only stream still flowing is philanthropy. Our addiction to philanthropy carries great costs as well as benefits to public higher education in America. We are hooked on it because we have no choice. Either we beg people for favors or our research grinds to a halt and we charge students even more. I am complicit in this. I enthusiastically help raise money for the university. And my salary is subsidized by a generous endowment from board member Tim Robertson, son of the Rev. Pat Robertson.
The reason folks such as Dragas and Kiernan get to call the shots at major universities is that they write huge, tax-deductable checks to them. They buy influence and we subsidize their purchases. So too often an institution that is supposed to set its priorities based on the needs of a state or the needs of the planet instead alters its profile and curriculum to reflect the whims of the wealthy. Fortunately this does not happen often, and the vast majority of donors simply want to give back to the institutions that gave them so much. They ask nothing in return and admire the work we do. But it happens often enough to significantly undermine any sense of democratic accountability for public institutions.
True altruism hardly exists. There is always a price to be paid. Apparently, Kiernan thought he had purchased the power to hire and fire UVA's president via his "tax deductible checks" to UVA. One supposes that the same power might apply all the way down to the hiring of Dean's and even faculty. Now this is really fascinating, the argument that as state subsidization of public colleges and universities dry up, higher education stakeholders will become increasingly "addicted" to philanthropy -- I always thought philanthropy was a good thing, but asserting an addiction to philanthropy in perjorative terms is like suggesting moderate daily exercise is a bad thing. And that addiction will make colleges and universities beholden to private foundations. I have heard this argument before. Anyway, the writer, a professor at UVA, goes on to suggest that larger donors will increasingly be able to dictate what happens on college campuses and, inevitably, this will lead to the ruination of higher education. Apparently, though, stakeholder outrage is causing a serious backlash against the power-grab, according to a recent post on the Washington Post Blog. Big donors and their surrogates are backtracking and apologizing all over the place. In fact, President Sullivan appears to be in a stronger position now than she was before "big donor" attempted the coup. It is too soon to start articulating the proverbial "moral of the story," but it appears that philanthropy, itself, is not the problem; that is, there is nothing inherent about philanthropy that ought to make us suspicious. Indeed, it is more likely that the unabashed chutzpah that donor's sometimes mistakenly assume is justified by their philanathropy will not be tolerated. So, let's not start adding to the already existing morass of rules and regulations pertaining to private foundations. It seems to me that the drama will play itself out to a correct conclusion, whatever that may be.
Briffault, Brody, and Mayer on Disclosure
Briffault's Updating Disclosure for the New Era of Independent Spending (SSRN) (abstract):
One of the most striking developments in recent elections has been the upsurge in spending by independent committees, particularly Super PACs and 501(c) nonprofit corporations, that are not technically affiliated with specific candidates or parties but that frequently work to promote or oppose specific candidates or parties. In many elections, these committees are de facto surrogates for the candidates they are aiding. Although our disclosure laws are reasonably effective at obtaining the disclosure of the identities of donors to candidates and parties, they fail to provide effective disclosure of the identities of the donors to independent committees. The Citizens United decision indicates that expanding disclosure to address the surge is independent is primarily a technical and political one, not a constitutional one, as the Court has strongly endorsed the disclosure laws and their application to independent committees.
This article lays out a reform agenda for adapting our disclosure laws to this new era of independent spending. It addresses four issues: how to obtain the identities of the donors who contribute to organizations that engage in independent spending; how to define the election-related activity that triggers the duty to disclose; how to obtain the identities of the natural persons behind corporate contributions and expenditures; and how to assure that disclosure is made in a timely fashion.
In earlier work, I have suggested that we require too much disclosure of personal information concerning relatively small donors. However, we currently provide too little information about the donors who are financing the independent committees that loom increasingly large over our elections. Rightsizing disclosure to enable voters to understand the financial forces behind our candidates requires that we both raise the monetary thresholds for disclosure and extend the ambit of disclosure to include the donors who are paying for independent spending.
Brody's Sunshine and Shadows on Charity Governance: Public Disclosure as a Regulatory Tool (12 Fla. Tax Rev. 183 (2012)) (paragraph from introduction):
Sunlight, of course, creates both clarity and shadows. Knowing that detailed information about charity
structure and practices will be available to the public can—as no doubt intended—influence charity behavior. However, requiring charities to disclose information to the IRS is a separate question from requiring charities to disclose their IRS filings to the public. Since 1987 exempt organizations have operated under a statutory obligation to provide their Forms 990 upon demand. That significant development has long made me wonder about the effect on the nonprofit sector from mandated public disclosure of tax filings.4 In a March 2010 letter, then-ranking member (and former chair) of the Senate Finance Committee, Charles Grassley, praised the 2008 redesign of the Form 990 in declaring: “The best way I know to increase voluntary compliance is to inject transparency.”
Mayer's Nonporofits, Politics, and Privacy (62 Case Western Reserve L. Rev. (forthcoming)) (abstract):
With the rapidly increasing flows of money into politics and accompanying calls for greater disclosure of the sources of those funds, the time is ripe for a deeper consideration of the policy concerns that underlie disclosure requirements and the related issue of privacy. One important aspect of this deeper consideration is recognizing that this particular area is at the intersection of three significantly different disclosure regimes. Those three regimes are (1) federal tax law generally, (2) federal tax law as it applies to tax-exempt nonprofit organizations, and (3) federal election law. These regimes are a study in contrasts. Federal tax law strongly protects taxpayer information from public disclosure. Federal tax exemption law strongly favors public disclosure of institutional information, but it is more ambivalent about public disclosure of information relating to individuals. Federal election law strongly favors public disclosure of all relevant financial information, including information relating to individuals. Understanding the reasons for these differences is important when determining whether disclosures at the intersection of the three regimes are appropriate and desirable. The other, related aspect of this deeper consideration is privacy. The concept of privacy is one that is instantly recognizable and yet theoretically, much less legally, hard to define. This difficulty stems in part from the many possible applications of the privacy concept. Fortunately for the purposes of this Article, the context here is fairly clear and narrow: the public disclosure of information relating to nonprofit organizations involved in politics and their supporters. Even in this narrow context, however, there are at least two competing approaches with respect to privacy. One approach takes a cost-benefit approach. It judges disclosure requirements based on their quantifiable costs and benefits, including among those costs the harm to privacy, however measured. The other, less frequently used approach is a right-to-privacy approach that considers privacy a fundamental right that can only be abridged if there is a relatively strong interest for doing so and then only to the extent required to further that interest.
The first Part of this Article briefly reviews and contrasts the history and current rules governing disclosure and privacy in the federal tax, federal tax exemption, and federal election law contexts. This review reveals that both the cost-benefit approach and the right-to-privacy approach can be found in this history, but to a greater or lesser extent depending on the context. The second Part explores these two different approaches and the extent to which the existing disclosure rules reflect those approaches. This Part shows that the rules are sometimes but not always based both on the cost-benefit approach to disclosure, in which privacy harms are but one possible cost, and on the right-to-privacy approach. The third Part considers recent proposals for disclosure rules relating to nonprofit organizations engaged in political activity using both the cost-benefit approach and the right-to-privacy approach. This consideration reveals that certain proposals, which relate to disclosure of financial information primarily about the organizations themselves, generally are justifiable under either approach. Certain other proposals that would require disclosure of financial information primarily relating to individuals, however, are more difficult to justify under a right-to-privacy approach. I conclude by discussing why this difference exists and what it means for the desirability of disclosure in this area.
Law, Society & Taxation Nonprofit Panel & Papers
The Law and Society Association's 2012 International Meeting in Honolulu earlier this month featured the following panel and additional papers relating to nonprofits:
- Charities and Public Policy Panel
- Nina J. Crimm (St John's) & Laurence H. Winer (Arizona State),
- Terri Lynne Helge (Texas Wesleyan), Reforming the Private Benefit Doctrine
- Grace S. Lee (Alabama), Toward a More Dynamic Theory Regarding the Charitable Deduction
- Henry Ordower (Saint Lewis), Charitable Contributions of Services
- Miranda L. Stewart (Melborne), Doing Business to Do Good: Should We Tax the Business Profits of Not for Profits
- Meredith A. Cartwright (York), Tax Subsidies for the Religious Training of Children in Religious Schools in US and Canadian Tax and Constitutional Law: “Public” or “Private” “Personal” (In)Tangible Benefits of a Suspect “Gift”
- Daniel B. Rubin (Michigan), A Population Health-Based Approach to Nonprofit Hospital Tax Exemption
- Richard Schmalbeck (Duke), The Role of Declaratory Judgments in Shaping the Concept of Charity
Call for Papers from Columbia Law School Charities Law Project
The Charities Regulation and Oversight Project, which is part of the National State Attorneys General Program at Columbia Law School, has issued a call for papers for its February 2013 conference "The Future of State Charities Regulation". Here are the details: