Friday, July 19, 2013
George Dent (Case Western) has posted on SSRN Probing Corporate Governance Without Shareholders: A Cautionary Lesson From Non-Profit Organizations. Here is the abstract:
over 80 years, debate over corporate governance has centered on the
balance of authority between the board and shareholders. One side in
this debate advocates “shareholder primacy”, so that directors would
actually be chosen by and accountable to the stockholders. The other
side touts “director primacy” and keeping shareholders weak. This side
claims that directors who are free of shareholder control would strive
to maximize long-term firm value, and have the wisdom and independence
to pursue this goal intelligently and conscientiously.
The boards of non-profit organizations (“NPOs”) are self-perpetuating: They are not answerable to shareholders because they have no shareholders. If director primacists are right, NPO boards should function as director primacists wish corporate boards would. The reality is quite the contrary. Commentators agree that NPO boards are generally worse than corporate boards. This brief article describes the functioning of NPO boards, discusses why they are so dysfunctional, and what lessons their example holds for corporate governance.
From the Editors' Desk
- Femida Handy, Jeffrey L. Brudney, and Lucas C.P.M. Meijs, From the Editors' Desk
- Jo Anne Schneider, Introduction to the Symposium: Faith-Based Organizations in Context
- Wolfgang Bielefeld and William Suhs Cleveland, Defining Faith-Based Organizations and Understanding Them Through Research
- Wolfgang Bielefeld and William Suhs Cleveland, Faith-Based Organizations as Service Providers and Their Relationship to Government
- İpek Göçmen, The Role of Faith-Based Organizations in Social Welfare Systems: A comparison of France, Germany, Sweden, and the United Kingdom
- Jo Anne Schneider, Comparing Stewardship Across Faith-Based Organizations
- Patricia A. Wittberg, Faith-Based Umbrella Organizations: Implications for Religious Identity
- Jill Witmer Sinha, Unintended Consequence of the Faith-Based Initiative: Organizational Practices and Religious Identity Within Faith-Based Human Service Organizations
- Khaldoun AbouAssi, Hands in the Pockets of Mercurial Donors: NGO Response to Shifting Funding Priorities
- Joanne G. Carman and Rebecca Nesbit, Founding New Nonprofit Organizations: Syndrome or Symptom?
- David C. Hammack, Book Review: Civic Engagement in Postwar Japan: The Revival of a Defeated Society, by R. Kage
- Marne Bariso, Book Review: The Volunteer Management Handbook: Leadership Strategies for Success, by T.D. Connors
- Wesley E. Lindahl, Book Review: The Science of Giving: Experimental Approaches to the Study of Charity, by D.M. Oppenheimer and C.Y. Olivola
Alicia Plerhoples (Georgetown) has posted Is Chick-Fil-A a Social Enterprise?: The Place of Conservative Values within Social Enterprise Legislation on SSRN. Here is the abstract:
This article examines whether recent social enterprise legislation (i.e., the benefit corporation and its various iterations) accommodates companies that have ideologically conservative social missions in addition to internal governance structures and operations that embrace corporate sustainability principles. The article examines whether the benefit corporation and the social and environmental standards employed to measure “general and specific public benefits” are ideologically neutral, and explores what normative values are incorporated into social enterprise legislation. This examination will be conducted through inquiring into whether Chick-fil-A, the popular U.S. fast food restaurant that donates to conservative causes and nonprofit organizations, and also embraces environmentalism and fair employment standards in its internal governance structure, could re-incorporate as a benefit corporation. The author argues that while the corporate legal form might be ideologically neutral, measurements of social and environmental benefits play a critical role in determining what constitutes sustainability and the public benefit produced. These measurements often incorporate ideologically liberal values and exclude conservative values.
Yuan Ji (Wilson Sonsini) has posted Burning Man: A Case Study of Altruism Thriving in a For-profit Organizational Form and the Rationales for LLC-to-Nonprofit Conversion, 9 Hastings Business Law Journal 449 (2013). Here is the abstract:
Burning Man is a temporary city of over 50,000 citizens that exists for one week every year in Nevada’s Black Rock Desert. Burning Man is perhaps best known in popular culture for its celebration of interactive art, experimental community building, gift economy, and ritual burning of a large wooden structure in the shape of a man. The case study of Burning Man is used to illustrate that an altruistic organization, one that is ideologically committed to the provision of public goods and not driven by profit, can nevertheless thrive in a for-profit legal form while staying true to its mission. Depending on organization-specific conditions, the nonprofit form can be, but does not necessarily have to be, the best structure for the provision of altruism and public goods (or quasi-public goods). As an organization evolves and becomes more complex overtime, however, the organization form that best serves its mission can change as well. Still, the nonprofit form alone neither guarantees altruistic commitment nor is immune from abusive practices within the management or board of directors. This Article discusses the theories on nonprofit formation that make persuasive rationales for Burning Man’s conversion to a nonprofit structure; it also makes specific recommendations for better organizational accountability and transparency in the Project’s current and future operations.
Under the Internal Revenue Code, certain nonprofit organizations are granted exemption from federal income tax (“tax-exemption”). Most tax-exemption rationales assume tax-exemption is a subsidy for organizations such as charities that provide some underprovided good or service. These theories assume there should be a tax on the income of nonprofit organizations but provide no justification for this assumption. This article contributes to the literature by examining the corporate income tax rationales as a proxy for why we might tax nonprofit organizations. The primary two theories hold that the corporate tax is imposed to: (1) tax shareholders (“shareholder theory”), and (2) regulate corporate manager control over large sources of wealth (“regulatory theory”). The shareholder theory supports the basic tax-exemption organizational structure preventing the distribution of earnings to private shareholders. However, the shareholder theory does not support tax-exemption for mutual benefit organizations such as business leagues because their members are arguably the equivalent of shareholders. The regulatory theory highlights that exempting an organization from income tax removes a regulatory regime. As a result of tax-exemption, organizations become subject to another regulatory regime with some federal oversight of political activity and self-dealing transactions. This article makes some tentative steps towards determining when that substitution of a regulatory regime might be appropriate. The article concludes the regulatory regime imposed on charitable organizations is sufficient to substitute for the regulatory role of the corporate income tax, but concludes that the regulatory regime for mutual benefits is lacking. This article submits it is time to revamp our tax-exempt structure for mutual benefit tax-exempt organizations.
Lapo Filistrucchi and Jens Prufer (both Tiburg Unviersity School of Economics and Management) have posted on SSRN Nonprofits are Not Alike: The Role of Catholic and Protestant Affiliation. Here is the abstract:
There are no generally accepted results regarding the objectives, decisions, and economic outcomes of nonprofit organizations, as compared to forprodit or public firms. We posit that this inconclusiveness is due to a too broad definition of nonprofits and that different types of nonprofits exist. This conjecture is investigated by constructing a model in which nonprofits differ by religious affiliation and testing the resulting hypotheses on the observed behavior of German nonprofit hospitals. We find that Catholic and Protestant nonprofits adopt significantly different strategies in the market. This confirms our conjecture and the importance of religion for economic outcomes.
Mark Cowan (Boise State College of Business and Economics) has posted on SSRN Assignment of Income at the Ivory Tower: Relaxing the Tax Treatment of Services Donated to Charities by their Employees, Journal of College and University Law (forthcoming). Here is the abstract:
When a faculty member donates time to a college or university by, for example, teaching a summer course for no compensation, the federal income tax treatment of the donation can take one of two forms. One possibility is that the donation will have no tax consequences. The faculty member realizes no income from the donation and gets no charitable deduction. A second possibility is that the faculty member will be required to recognize taxable income equal to the value of the services provided and then may (subject to certain limits) be allowed a charitable contribution deduction. In many cases, the income and deduction do not fully offset, resulting in negative tax consequences for the faculty member. This second possibility occurs when the faculty member directs where the funds saved by the donation are used within the institution. Since faculty members normally would prefer to control the specific use of the saved funds, many donations would result in negative tax consequences sufficient to stifle the donation in the first place. This Article argues that the tax law should be clarified and relaxed to allow faculty members (and other employees of charitable organizations) to donate time to their employer institutions on a tax-free basis in more situations than is currently the case. Alternatively, the Article suggests ways for charities to encourage donations of time by employees, even in the absence of a favorable law change.
James Piereson (Manhattan Institute) has published an Opinion piece in the Wall Street Journal highlighting the increasing dependence of many charities on government funding, particularly federal government funding. While this trend will not be news to anyone familiar with the funding sources for the charitable sector, his particular criticism is the alleged connectino between the lobbying activities of charities and this funding. For example, he criticizes Independent Sector for purportedly "suppport[ing] a tax increase in exchange for President Obama's agreement to maintain the charitable deduction."
Whether there really is much of a "charitable-industrial complex" that seeks to use government for its own advancement and enrichment can be debated. What cannot be debated is that the growth of government at all levels means that few charitable organizations can responsibly fulfill their missions without at least considering whether to take advantage of available government funding; even religious organizations, such as Catholic Charities, the U.S. Conference of Catholic Biships, and World Vision, receive funding for some activities according to the piece. The difficult choice for charities is, of course, whether the cost of accepting such funding in terms of strings and conditions is worth it, and for government what strings and conditions should and can it attach. The Supreme Court recently reaffirmed in Agency for Int'l Development v. Alliance for Open Society Int'l that there are significant constitutional limits on those strings, at least when speech by the recipient charities is implicated. What prudential limits should apply, however, to ensure both accomplishment of government goals and sufficient independence for charities is far from settled.
Lost in the IRS storm was the news that New York recently adopted new regulations that will require many nonprofit groups, including Internal Revenue Code § 501(c)(4) organizations, to disclosure their contributions and expenditures relating to sate and local electioneering. NY Attorney General Eric T. Schneiderman announced the rules, which are effective immediately. The activities reached by the rules are "election related expenditures," which include both "express election advocacy" and "election targeted issue advocacy," by any organization that is tax-exempt under Internal Revenue Code § 501(c) except for 501(c)(3) organizations. More specifically, according to the AG's summary of the regulations:
- Express Advocacy means "advertisements and other communications that call specifically for (or are susceptible of no reasonable interpretation other than as a call for) the election or defeat of a particular candidate, referendum, or party."
- Election Targeted Issue Advocacy means "communications made within 45 days of a primary election or 90 days of a general election that identify or depict particular candidates, referenda, or parties by name, but do not explicitly call for their election or defeat."
Covered communications include essentially all paid advertising, as well as telephone communications that reach 1,000 or more households, mailings that reach 5,000 or more recipients, and other printed materials that exceed 5,000 copies. If the amount spent reaches $10,000 in a year, then each expenditure of $50 or more and each contributor who gives $1,000 or more must be disclosed. Exceptions exist for candidate forums and certain member communications, as well as for information already publicly disclosed through another agency. There will also be a waiver application process in the event there is a reasonable likelihood that disclosure of donors "will cause undue harm, threats, harassment or reprisals."
Thursday, July 18, 2013
The N.Y. Times reports that New York Attorney General Eric T. Schneiderman is demanding that some of the large charities that received donations for Hurricane Sandy relief explain how they have handled those donations, including why almost half of the more than $575 billion raised has not been spent as of April 2013. He documented his concerns in a report issued this week that found charities reported as of April not having spent $238 million, or 42 percent, of these donations. The N.Y. Charities Bureau has also posted the responses of the charities to November 2012 and March 2013 inquiries regarding their Hurricane Sandy fundraising and spending. Among the charities that received the largest amounts, the Robin Hood Foundation stands out because it reported as of March 21, 2013 having made grants representing 97% of the $70.5 million in Hurricane Sandy funds it raised, and according to the NY Times article it has now given out all of those funds. In contrast, the American Red Cross reported on April 15, 2013 that through the end of March it had raised $323.5 million and spent $153.5 million.
Of course, there are many legitimate reasons why such funds would remain unspent even five months after Hurricane Sandy hit the Northeast in late October 2012. For example, the American Red Cross' response notes that it is still providing emergency relief in the form of food and mental health counseling to some hurricane victims while also providing long term assistance that can extend over a period of months or years, such disaster clean up, individual case work, financial assistance relating to housing, and grants to local organizations designed to help communities recover. Nevertheless, this high profile criticism shows the need for groups involved in disaster relief to explain why such relief is necessarily spread out over a significant amount of time as individuals and communities struggle to recover.
Roger Colinvaux (Catholic University) has posted Charitable Contributions of Property: A Broken System Reimagined, 50 Harvard Journal on Legislation (forthcoming 2013). Here is the abstract:
On average, nearly $46 billion of property is given to charitable organizations each year, about twenty-five percent of the total charitable deduction. This makes the charitable contribution deduction for property a tax expenditure within a tax expenditure, yet it is rarely analyzed as such. It emerged as part of a noble effort to encourage contributions to worthy organizations. But the deduction for property has never worked well. The general rule allowing a deduction based on the fair market value of the property may have some intuitive appeal, but its implementation has yielded numerous exceptions and immense complexity. The Article argues that the extensive historical effort to allow a deduction for property contributions is a failure. Given the substantial direct and indirect costs involved, the uncertain benefit to the donee from property contributions, and the absence of any affirmative policy to favor property contributions as such, it is time to reverse the general rule and not allow a charitable deduction for property contributions. Reversing the general rule would provide many benefits — increased revenue, improved tax administration, fewer abusive transactions, a simpler and more equitable tax code, and a preference for cash. Exceptions to the general rule of disallowance may be warranted, but any exception should be analyzed and fashioned according to whether it provides a measurable benefit to the donee. By following a measurable benefit to the donee standard, emphasis will be placed on providing a tax benefit that is administrable and that is based on the goal — donee benefit. Any resulting complexity should be viewed as a cost of the incentive, and weighed accordingly in deciding whether it should be provided.
John Colombo (Illinois) has posted The Federal Tax Exemption Aspects of Law Schools Running Their Own Law Firms. Here is the abstract:
A current hot topic in legal education is the law-school-sponsored law firm. Bradley T. Borden and Robert J. Rhee introduced the idea in a short article published in the South Carolina Law Review and the concept was soon picked up by articles in the National Law Journal, the ABA Journal and others. The purpose of this essay is to explore the federal tax-exemption and UBIT questions raised by the law-school-sponsored law firm. I conclude that a law firm operated as a single-member LLC with the sponsoring law school as the single member offers the best protection for the law school's underlying exempt status, and also should avoid issues with the UBIT.
Wednesday, July 17, 2013
The IRS 501(c)(4) application mess continues to percolate, although most media attention has moved elsewhere. For those who want all the details, Paul Caron continues his comprehensive coverage at TaxProf Blog (The IRS Scandal, Day 69). Here are some highlights:
Congressional Hearings Relating to the IRS (including non-501(c)(4) issues)
- House Committee on Oversight & Government Reform
- House Committee on Ways and Means
- Status of IRS' Review of Taxpayer Targeting Practices (June 27th)
- Organizations Targeted by IRS for Their Personal Beliefs (June 4th)
- IRS Targeting Conservative Groups (May 17th)
- House Subcommittee on Financial Services and General Government
- Oversight Hearing - Internal Revenue Service (June 3rd)
- Senate Committee on Finance
- Treasury Inspector General for Tax Administration, Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review (May 14th)
- Congressional Research Service, 501(c)(4)s and Campaign Activity: Analysis Under Tax and Campaign Finance Laws (May 17th)
- Internal Revenue Service, Charting a Path Forward at the IRS: Initial Assessment and Plan of Action (June 24th)
- National Taxpayer Advocate, Special Report to Congress: Political Activity and the Rights of Applicants for Tax-Exempt Status (June 30th)
No word at this point on whether the Department of Justice will eventually generate a report (or indictments) based on its investigation, announced by U.S. Attorney General Eric Holder (from about the 22:45 mark to the 25:30 mark) on May 14th, after President Barack Obama personally addressed the IRS situation on May 13th.
If there is any silver lining to this situation, it is the possibility that needed reform in this area may gain traction. As fellow blogger John Colombo has already noted (and critiqued), The Bright Lines Project has been quietly working for more than four years to revise the definition of political campaign intervention in the federal tax laws. In response to the IRS mess, it has now accelerated its public push for legislation and regulations to implement its proposals. This push has already drawn public opposition from a senior fellow at the Center for Competitive Politics, indicating that The Bright Lines Project may in fact have some hope of changing the legal landscape for politically active tax-exempt organizations. Stay tuned.
Tuesday, July 16, 2013
The N.Y. Times reports Russian prosecutors have stated that 215 nongovernmental organizations are in violation of a new law requiring them to register as "foreign agents" if they receive funds from outside of the country and engage in political activity. As the N.Y. Times previously reported, many of the groups that are allegedly subject to the new law have vowed to defy it by refusing to register. The United States also withdrew from a US-Russia civil society working group, apparently in part because of Russia's adoption of this law. The human rights commissioner for the Council of Europe has called for the suspension of the new law in the wake of the prosecutors' statement, according to Reuters. It is not yet clear how Russia, which is a member of the Council of Europe, will respond to this call, if at all. The prosecutors' statement comes in the wake of raids by Russian police and tax inspectors on the offices of Russian human rights groups.
Even since NYU's executive compensation practices became an issue during the February confirmation hearing for now Treasury Secretary Jacob Lew (as reported by the Chronicle of Higher Education, among others), Senator Charles Grassley has been seeking additional information regarding those practices. The N.Y. Times now reports that Senator Grassley is unhappy with the limited information provided by NYU and the restrictions it has placed on access to some of that information. The practices that have drawn Senator Grassley's ire include loans both for principal homes and summer homes of top administrators and star faculty and sizable severance payments. Of course while Senator Grassley constantly asserts that such generous benefits are inconsistent with nonprofit and tax-exempt status, the legal standard is not public perception but instead whether the total compensation received by the relevant individuals is reasonable when compared to the value of the salaries and other benefits provided to comparable individuals by comparable institutions. It is also far from clear whether Senator Grassley, as a minority member in the Democratic-controlled Senate, has any leverage other than his bully pulpit to force NYU to provide any information at all.
Monday, July 15, 2013
Affirming a trial court's grant of summary judgment, the U.S. Court of Appeals for the District of Columbia Circuit recently concluded that an organization seeking tax exemption under Internal Revenue Code § 501(c)(3) did not operate exclusively for charitable purposes because it operated for a substantial commercial purpose. In Family Trust of Massachusetts v. United States, decided June 28th, the named organization sought a declaratory judgement that it fell with section 501(c)(3). Family Trust of Massachusetts manages pooled account trusts that benefit individuals with disabilities without the assets in those trusts being counted for purposes of determining eligibility for certain government benefit programs.
After reviewing Family Trust's operations, the court concluded it operated in a commercial manner for several reasons. Those reasons included the fact that the organization consistently produced profits, apparently charged market rate fees, did not solicit charitable contributions to defray its costs, and did not use its accumulated funds to offset or waive trust management fees. The court also found that the Family Trust had a close relationship with its President's private law firm and marketed its services to affluent (and disabled) elder law clients who could afford both the minimum $25,000 deposit and $750 annual fee. The court therefore concluded that the Family Trust had a "pervasive commercial hue" that prevented it from qualifying for exemption under section 501(c)(3).
A Maine Superior Court has overruled the decision by the Town of Limington to deny or limit property tax exemption for several parcels of land identified as either "Tree Growth" or "Open Space" properties under the applicable state law. In Francis Small Heritage Trust v. The Town of Limington, the court briefly described the broader context of tax exemptions for charitable institutions under both federal and state law before providing a detailed recitation of the law relating to Maine's property tax exemptions (including a reference to the Elizabethan Charitable Uses Act of 1601!). It both concluded that the Francis Small Heritage Trust "is operated for purely benevolent and charitable purposes in good faith" and rejected the Board of Property Tax Review's argument that permitting logging, farming, and other compatible commercial activities was disqualifying given that so such activities had never in fact taken place and even if they had limited, purely incidental such activities did not undermine exemption. The fact that the properties at issue were indisputedly used to conserve wildlife habitat and were open to the public year-around at no cost also contributed to the court's decision.
The Texas Court of Appeals (Seventh District) recently had occasion to consider the state's law relating to exemption from ad valorum taxes applicable to real and business personal property. While the factual details of the Texas Student Housing Authority v. Brazos Country Appraisal District decision may only be of interest to the parties involved, what is of more general interest is the court's lengthy discussion of both the statutory and constitutional grounds for such exemptions. For both the statutory provision, relating to property "held for educational purposes only" and "devoted exclusively to the use and benefits of the students, faculty, and staff members of an accredited institution of higher education," and the state constitutional provision, relating to "property of counties, cities and towns" (read broadly by the court) and "devoted exclusively to the use and benefit of the public," the court found that exclusively means, well, exclusively. The court therefore concluded under both provisions that while providing housing to participants in state legislatively sanctioned programs associated with the Texas A&M University system fell within these "exclusively" provisions, providing housing for participants in programs sponsored by a private charity unaffiliated with the state government or the Texas A&M system and by an out-of-state for-profit corporation did not, and so providing such housing caused the properties not to be exempt from tax during the years those activities occurred. The Texas Student Housing Authority therefore received a split decision, reacquiring exemption for one year but unable to reverse the lower court's decision denying exemption for three other years.