Friday, October 17, 2014
A low-income housing cooperative that sought reconsideration of the IRS’s determination that it did not qualify as a 501(c)(3) received a final determination earlier this month that it indeed fail to meet the requirements of 501(c)(3). The IRS found that it did not operate exclusively for exempt purposes, did not meet the operational test, and possibly allowed its net earnings to inure to private individuals. The membership requirements of the housing cooperative appear to reflect the safe harbor provisions detailed in Revenue Procedure 96-32; however, the IRS’s ruling pointed out that the low income housing in question benefited the individuals who controlled the cooperative. This seems to have been the straw that broke the 501(c)(3) status’ back. One cannot help but ask whether the outcome would have been different if the housing cooperative simply had elected a board that was independent from those residing in the housing.
Thursday, October 16, 2014
An insightful Wall Street Journal commentary addresses the likely outcome for the IRA Charitable Rollover Provision. This provision allows taxpayers aged 70.5 and older to make deductible charitable contributions (up to $100,000) from their IRAs without having to include such charitable contributions in their income. In addition, the charitable contributions count against minimum IRA distribution requirements. The Wall Street Journal concludes that while Congress is likely to extend the provision this year, it is unlikely to do so before the November election. At the same time, it is possible that Congress will restore this break retroactively. The commentary provides a good balance of the implications should Congress choose to extend or not to extend.
Wednesday, October 15, 2014
A concept that I have introduced through scholarly writing and blogged about here is the need for a more efficient charitable market. In August, I commented upon a Vanguard Charitable study that found millennials are more likely to see their charitable giving as a form of investment and thus promote a culture of giving that demands more transparency and accountability, two hallmarks of a more efficient charitable market. A recent NPR broadcast that examined the work of Scott Harrison’s nonprofit, Charity: Water, confirmed just that.
In the segment, Harrison spoke about his dual purpose in forming Charity: Water. First, he wanted to provide clean water to the almost 800 million people globally who lack access to it by building wells. Second, he sought to make an example of how a nonprofit could do its work in a way that would resonate with the next generation of givers. He recounted his own experience of being hesitant to give to charities prior to starting Charity: Water, which stemmed from the absence of information on how a charity would use the funds. Today the nonprofit world is concerned with how approximately 80 millennials make their decisions about giving, and not surprisingly, it is different from the prior generation(s). As stated in my prior post, it is widely accepted that millennials want to view their “donation” as “investment,” and at least one commentator recommends that nonprofits refer to the latter. Another salient point is how technology intersects with millennial giving. Millennials value their time, and as a result, any form of technology that makes it easier for them to invest is preferable. Moreover, the Ice Bucket Challenge that swept through social networks over the summer shows that the desire of millennials to share the details of their lives extends to their giving. In response, Charity: Water is utilizing a birthday campaign where donors can ask their network to donate one dollar for each year celebrated, i.e., $25 dollars to celebrate a 25th birthday. Charity: Water is also placing sensors on its wells, so donors may interact with the impact of their investment in a novel manner. Charity: Water’s innovative approaches are proving successful. They have helped over 4 million more people in twenty-two countries gain access to clean water. Millennials and nonprofits like Charity: Water may just help move giving into the next century and towards a more efficient charitable market.
Tuesday, October 14, 2014
In PLR 201438032, the Service considered whether donations to a nonprofit public benefit corporation that engages in transactions of funds with its foreign subsidiary are tax deductible and whether such transactions would harm its 501(c)(3) status. The PLR confirms aspects of how a transaction between a 501(c)(3) and a wholly-owned foreign subsidiary should be structured to secure a favorable tax result. One question the IRS still has not resolved is whether a donation to a wholly-owned foreign single-member LLC is deductible. The nonprofit world will be waiting.
In the ruling, the subsidiary in question is a foreign nonprofit foundation whose activities, namely seeking to aid foreign orphanages, are carried out internationally. The governing board and governing officers are under the control of the public benefit corporation. The stated purpose of the subsidiary is to carry out the purposes and objectives of the public benefit corporation. In terms of board overlap, at least three of the five board members of the subsidiary are members of the public benefit corporation’s board. In terms of governance, it is clear that the public benefit corporation is involved in each area and ensures that the subsidiary complies with U.S. tax rules and regulations regarding tax-exempt entities, e.g., restrictions regarding private inurement and lobbying expenditures. The public benefit corporation also has the ability to expel members from the board of directors and to dissolve the subsidiary. Under the “Proposed Transaction,” the public benefit corporation may vote to transfer funds to the subsidiary. There are also mechanisms in place to ensure a type of expenditure responsibility-like accountability for the maintenance and use of funds. Finally, the public benefit corporation disallows earmarking, and its board maintains the requisite discretion and control over funds, i.e., does not have an obligation to transfer funds to the subsidiary.
Both of the public benefit corporation’s requested rulings were granted. First, the Proposed Transaction was deemed not to jeopardize the public benefit corporation’s tax-exempt status. Second, donations made to the public benefit corporation were deemed deductible under Code section 170(a). In reaching this ruling, Treasury stated that the Proposed Transaction is consistent with the anti-conduit rules of Rev. Ruling 63-252 and the discretion and control requirement of Rev. Ruling 66-79. Moreover, it looked to Revenue Ruling 68-49 which states that a 501(c)(3) organization does not jeopardize its tax-exempt status by contributing funds to non-501(c)(3) organizations as long as it can show the funds were used for 501(c)(3) purposes. Ultimately, Treasury found the public benefit corporation’s actions congruent with this ruling. In terms of the second ruling, Treasury found that since the public benefit corporation is an organization described in Section 170(c), contributions to it are deductible under Section 170(a).
Monday, October 13, 2014
As the Ebola threat looms, many observers are considering whether the responses of the U.S. government, the CDC, and the World Health Organization, inter alia, are appropriate. Similarly, nonprofit commentators are considering whether private donations of funds and resources from the U.S. are adequate. As one commentator reports, there have been several U.S. private foundations that have made large-scale contributions to the fight against Ebola; in addition, the experience of two U.S. Christian organizations operating in West Africa evinces that publicity helps generate more donations. The U.N. has estimated that $1 billion is necessary to effectively combat the Ebola virus.
A recent article in The Chronicle of Philanthropy has predicted that the first confirmed case of Ebola in the United States will lead to greater charitable donations to stop a further outbreak of Ebola abroad. Several U.S. private foundations have already made multi-million dollar gifts to combat a spread of the virus. The Bill & Melinda Gates Foundation has decided to contribute $50 million to U.N. agencies and other organizations. The Paul G. Allen Family Foundation donated $9 million to the CDC, $2.8 million to the American Red Cross, and $100,000 in the form of matching funds to Global Giving. The William and Flora Hewlett Foundation contributed $5 million to various international health organizations. Moreover, the U.S. government has provided numerous resources, including, inter alia, individuals to build treatment units and training for health-care providers. The USAID has expended over $100 million in an effort to quell the outbreak and is on record for the contribution of an additional $75 million.
At the same time, commentators have denounced U.S. donors as not donating enough. The Director of International Communications at the Red Cross has stated that the Ebola outbreak is not “top of mind as a place to donate” precisely because of the involvement of the U.S. government, the CDC, and the World Health Organization. Nevertheless, SIM USA, a Christian mission organization who had two health-care workers infected with Ebola in Liberia late in the summer, has received sizable donations to support its work in West Africa. SIM USA has seen an increase in volunteers, and although these actions are later than anticipated, they show promise for a mobilization of donors and volunteers to fight the deadly virus. Additionally, Samaritan’s Purse, also a Christian organization working in West Africa, experienced a 13% increase in cash contributions (when compared to last year’s donations) after one of its doctors was infected with Ebola and successfully treated at Emory University Hospital. (For more on Samaritan’s Purse, see JRB’s insightful post). Thus far, $4.4 million of its donations has been designated for fighting the Ebola outbreak. As the speculation about a U.S. outbreak grows, the public’s attention has become more focused on donating to assist with the global efforts already underway, e.g., see the following article on UK donations. For a complete list of non-governmental organizations responding to the Ebola outbreak, see here).
Tuesday, September 30, 2014
Preliminary planning is underway for a group of donors to form a nonprofit organization that would own the U-T San Diego, according to the U-T itself. It looks like the newspaper would stay as a for-profit organizaton, and the nonprofit would own the equity of the for profit. Random thoughts:
- I'm not sure that such a structure would insulate the for profit from political and lobbying concerns. It's an interesting question, however - one they recognize as they state that the editorial policy would be "as inclusive and community-focused as possible. 'Almost by definition, if not be law, a nonprofit has to be nonpartisan.'" Hmmm.
- Could they make the media company an L3C? That would automatically read in the prohibition on lobbying and political activity.
- It looks like a handful of donors would fund the nonprofit. Query whether that means that they would be a private foundation or whether they tried to form as a supporting organization). Either way, they would have to deal with the excess business holdings rules - I would presume they would try to say that it is a functionally related business under Section 4943(d)(3)(A), and therefore, not a "business enterprise" covered by the rules.
- If a private foundation - presumably operating foundation status would be necessary to avoid mandatory distributions under Section 4942.
- Looks like they went ahead and started the Form 1023 process to get approval for the nonprofit, even though the actual transaction to purchase the media company hasn't been consummated.
Anyone have any details?
Monday, September 29, 2014
An article last week in the Washington Post (h/t Chronicle of Philanthropy) discussed a report by the Department of Health and Human Services that indicated that hospitals are experiencing significant declines in charity care and bad debt, thanks to expansions in Medicaid and a drop in the number of otherwise uninsured individuals due to the Affordable Care Act. The report projects $5.7 billion (that’s billion, with a “b”) in savings in uncompensated care costs in 2014.
The first thing that I thought was, “Wow, that’s a big number! Great news!” The second thing I thought was, “Gee, I wonder if that will change how we evaluate nonprofit hospitals.” What that might say about my mental state aside, it will be interesting to see how this structural change to the way we pay for health care works its way through the standards for tax exemption.
I note that the HHS report tracks “uncompensated care,” which it treats as the sum of bad debt and charity care. While the HHS report does indicate that there is a difference between “self-pay” patients and “charity care”, the report is quick to note that not all hospitals break down their reporting this way. (See HHS Report, FN 6). Of course, part of the raging debate is whether bad debt is charity care – the Catholic Hospital Association says it isn’t but not all hospitals agree.
Either way, under traditional formulations of the community benefit standard, charity care is not the be-all and end-all of for exempt status – it might not even be necessary. The recent trend, first evident in the Revised 990 Form’s Schedule H and then in the community assessment report requirements of the ACA, appears to lean toward wanting more discussion and disclosure of charity care as component of tax-exemption, even if that doesn’t appear anywhere formally quite yet. It will be interesting to see if a structural reduction in the need for charity care (however defined) changes that conversation.
Then, of course, there are the states. Having practiced in Illinois at the time of the Provena decision (good summary here), I’m particularly curious to see how that might play out. For those of you who weren’t following Provena, Illinois revoked the property tax exemption for a number of nonprofit hospitals, stating that the Illinois property tax charitable exemption provisions (some of which are in the state constitution) require actual charitable use (as in relieving- poverty-charitable-use) of the property. While denying that charitable use is a numbers game (that is, you need to show that there are enough charitable dollars spent to offset the property tax uncollected) – the court then engages in exactly that mathematical exercise.
I’ve moved from Illinois since Provena came down, but I understand there was a legislative fix (SB 2194 and SB 3261, passed in 2012), that partially codifies this math-based analysis. What happens if a hospital doesn’t meet its charity care dollars spent requirement because they are simply not necessary anymore due to ACA?
I might be going out on a limb here, but I’m guessing that Prof. Colombo might have a thought or two on this…
Friday, September 26, 2014
Reuters is reporting that over 120 Islamic scholars from around the world have issued an open letter denouncing Islamic State militants and refuting their religious arguments. Many of these scholars are themselves leading Muslim voices in their own countries.
The 22-page letter, written in Arabic and heavy with quotes from the Koran and other Islamic sources, strongly condemns the torture, murder and destruction Islamic State militants have committed in areas they control.
The Reuters report states in part:
"You have misinterpreted Islam into a religion of harshness, brutality, torture and murder," the letter said. "This is a great wrong and an offense to Islam, to Muslims and to the entire world."
[The letter's] originality lies in its use of Islamic theological arguments to refute statements made by self-declared Caliph Abu Bakr al-Baghdadi and his spokesman Abu Muhammad al-Adnani to justify their actions and attract more recruits to their cause.
The letter is addressed to al-Baghdadi and "the fighters and followers of the self-declared 'Islamic State'", but is also aimed at potential recruits and imams or others trying to dissuade young Muslims from going to join the fight.
Nihad Awad of the Council on American Islamic Relations (CAIR), which presented the letter in Washington on Wednesday, said he hoped potential fighters would read the document and see through the arguments of Islamic State recruiters.
"They have a twisted theology," he said in a video explaining the letter. "They have relied many times, to mobilize and recruit young people, on classic religious texts that have been misinterpreted and misunderstood."
Reuters describes the 126 signatories as "prominent" Sunni men from across the Muslim world -- from Indonesia to Morocco, and from other countries such as the United States, Britain, France and Belgium.
Among those who signed are "the current and former grand muftis of Egypt, Shawqi Allam and Ali Gomaa, former Bosnian grand mufti Mustafa Ceric, the Nigerian Sultan of Sokoto Muhammad Sa'ad Abubakar and Din Syamsuddin, head of the large Muhammadiyah organization in Indonesia. Eight scholars from Cairo's Al-Azhar University, the highest seat of Sunni learning, also put their names to the document."
The Philanthropy News Digest is reporting that the American Association of School Librarians, a division of the American Library Association, is accepting applications from school librarians for its AASL Innovative Reading Grant program.
One grant in the amount of $2,500 will be awarded in support of the planning and implementation of a unique and innovative program for children that motivates and encourages reading, especially among struggling readers.
Projects should promote the importance of reading and facilitate literacy development by supporting current reading research, practice, and policy. In addition, projects must be specifically designed for children (grades K-9) in the school library setting, encourage innovative ways to motivate and involve children in reading, and should demonstrate potential to improve student learning.
To be eligible, applicants must be a member of AASL. Grant recipients may be invited to write an article that delineates their reading incentive project and demonstrates their successes, trials, and recommendations so others may replicate the project.
Thursday, September 25, 2014
The NFL has garnered a great deal of unwanted attention lately. However, as of last week, things seem to have taken a turn for the worse. On September 18, a group of Democratic Senators introduced a bill that would ultimately revoke the NFL’s tax-exempt status under 501(c)(6) if the league continues to support the Washington Redskins name and logo.
Recently, the Redskins franchise has been under fire for its racially insensitive depiction of Native Americans, prompting the U. S. Patent Office to cancel the Redskins’ trademark protection. While this hasn’t been the first time the patent office has revoked the Redskin’s trademark, the serious prospect of Congress revoking the NFL’s tax-exempt status may be a first, and it raises some interesting questions about the league’s protection under 501(c)(6). Should the NFL—a powerful, high revenue generating American institution—continue to enjoy tax-exempt status? If not, what are some of the potential implications for taxpayers and other tax-exempt organizations? For the full article click the link below.
Wednesday, September 24, 2014
The Clinton Global Initiative, former President Bill Clinton's annual philanthrophy summit held in New York ends today. The summit opened on Sunday and has thus far heard from speakers include actor Matt Damon, representing the charity he co-founded, Water.org; Laurent Lamothe, Prime Minister of Haiti; and Judith Rodin, president of the Rockefeller Foundation.
Ever since it was established in 2005, the Clinton Global Initiative has drawn more than 180 world leaders and more than 2,900 commitments worth an estimated $103-billion. This year's announced pledges include:
- $280-million from BRAC International to help more than 2.7 million girls across eight countries to finish school and go on to careers;
- $100-million from Camfed to help girls in Sub-Saharan Africa complete secondary school;
- $50-million from Grameen America to support 7,000 female entrepreneurs in Harlem;
- $19-million from Discovery Communications and the United Kingdom’s Department for Internaitonal Development to improve learning for girls in Ghana, Kenya, and Nigeria;
- $16-million from Plan International to prevent and respond to gender-based violence at schools in Asia;
- $12-million from Room to Read to help an additional 15,000 girls in nine countries to finish secondary school and go on to college and careers;
- $6-million noncash support from Direct Relief, Last Mile Health, Wellbody Alliance, and Africare to airlift 100 tons of medical supplies to West Africa to combat the Ebola outbreak;
- $4-million from the FHI Foundation and FHI 360 to study how to improve international-development projects across different fields;
- $3.2-million from the Lumina Foundation and $3-million challenge grant from Cisco to the National Service Alliance for its Service Year program, which encourages young adults ages 18 to 28 to embark on community service for a year;
- $3-million from Comcast and NBCUniversal, Airbnb, Jonathan and Jeanne Lavine, and Josh and Anita Bekenstein to Be the Change for its ServiceNation campaign to encourage people to volunteer for a year.
March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well? (Part III)
(Note: This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. The previous installments can be found here and here (NLPB) and here and here (BLPB).)
In prior posts we talked about what a benefit corporation is and is not. In this post, we’ll cover whether the benefit corporation is really necessary at all.
Under the Delaware General Corporation Code § 101(b), “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes . . . .” Certainly there is nothing there that indicates a company must maximize profits or take risks or “monetize” anything. (Delaware law warrants inclusion in any discussion of corporate law because the state's law is so influential, even where it is not binding.)
Back in 2010, Josh Fershee wrote a post questioning the need for such legislation shortly after Maryland passed the first benefit corporation legislation:
I am not sure what think about this benefit corporation legislation. I can understand how expressly stating such public benefits goals might have value and provide both guidance and cover for a board of directors. However, I am skeptical it was necessary.
Not to overstate its binding effects today, but we learned from Dodge v. Ford that if you have a traditional corporation, formed under a traditional certificate of incorporation and bylaws, you are restricted in your ability to “share the wealth” with the general public for purposes of “philanthropic and altruistic” goals. But that doesn't mean current law doesn't permit such actions in any situation, does it?
The idea that a corporation could choose to adopt any of a wide range of corporate philosophies is supported by multiple concepts, such as director primacy in carrying out shareholder wealth maximization, the business judgment rule, and the mandate that directors be the ones to lead the entity. Is it not reasonable for a group of directors to determine that the best way to create a long-term and profitable business is to build customer loyalty to the company via reasonable prices, high wages to employees, generous giving to charity, and thoughtful environmental stewardship? Suppose that directors even stated in their certificate that the board of directors, in carrying out their duties, must consider the corporate purpose as part of exercising their business judgment.
Please click below to read more.
Wednesday, September 3, 2014
(Note: This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. The previous installment can be found here (NLPB) and here (BLPB).)
What It Is: So now that we’ve told you (in Part I) what the benefit corporation isn’t, we should probably tell you what it is. The West Virginia statute is based on Model Benefit Corporation Legislation, which (according to B Lab’s website) was drafted originally by Bill Clark from Drinker, Biddle, & Reath LLP. The statute, a copy of which can be found, not surprisingly, at B Lab’s website, “has evolved based on comments from corporate attorneys in the states in which the legislation has been passed or introduced.” B Lab specifically states that part of its mission is to pass legislation, such as benefit corporation statutes.
As stated by the drafter’s “White Paper, The Need and Rationale for the Benefit Corporation: Why It is the Legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public” (PDF here), the benefit corporation was designed to be “a new type of corporate legal entity.” Despite this claim, it’s likely that the entity should be looked at as a modified version of traditional corporation rather than at a new entity.
This is because the Benefit Corporation Act appears to leave a lot of room for the traditional business corporations act to serve as a gap-filler. West Virginia Code § 31F-1-103(c), for example, explains, “The specific provisions of this chapter control over the general provisions of other chapters of this code.” Thus, the benefit corporation provisions supplant the traditional business corporation act where stated specifically, such as with regard to fiduciary duties, but general provisions of the business corporations act apply where the benefit corporation act is silent, such as with regard to dissolution.
In contrast, the West Virginia Nonprofit Corporation Act is a broader act that discusses dissolution, mergers, and other items specifically in a way that more clearly indicates the nonprofit is a distinct, rather than modified, entity form. Furthermore, a benefit corporation is actually formed under the Business Corporations Act: “A benefit corporation shall be formed in accordance with article two, chapter thirty-one-d of this code, and its articles as initially filed with the Secretary of State or as amended, shall state that it is a benefit corporation.” W. Va. Code § 31F-2-201.
So what makes a benefit corporation unique?
1. Corporate purpose - The traditional West Virginia business corporation is created for the purpose “of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation.” W. Va. Code § 31D-3-301. Under the Benefit Corporation Act, “A benefit corporation shall have as one of its purposes the purpose of creating a general public benefit.” Id. § 31F-3-301. A specific benefit may be stated as an option, but is not required. Note similarly that a part of the corporation’s purpose must be for general public benefit, but that benefit need not be a primary, substantial, significant or other part of the corporation’s purpose.
For purpose of comparison, the low-profit limited liability company (or L3C) typically has a much more onerous purpose requirement. For example, the Illinois L3C law requires
(a) A low-profit limited liability company shall at all times significantly further the accomplishment of one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the Internal Revenue Code of 1986, 26 U.S.C. 170(c)(2)(B), or its successor, and would not have been formed but for the relationship to the accomplishment of such charitable or educational purposes.
2. Standard of conduct – The statute requires, in § 31F-4-401, that the directors and others related to the entity:
(1) Shall consider the effects of any corporate action upon:
(A) The shareholders of the benefit corporation;
(B) The employees and workforce of the benefit corporation, its subsidiaries, and suppliers;
(C) The interests of customers as beneficiaries of the general or specific public benefit purposes of the benefit corporation;
(D) Community and societal considerations, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries, or suppliers are located;
(E) The local and global environment;
(F) The short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests and the general and specific public benefit purposes of the benefit corporation may be best served by the continued independence of the benefit corporation; and
(G) The ability of the benefit corporation to accomplish its general and any specific public benefit purpose;
(emphasis added). While these are significant mandatory considerations, they are nothing more than considerations. Directors and others “[n]eed not give priority to the interests of a particular person referred to in subdivisions (1) and (2) of this section over the interests of any other person unless the benefit corporation has stated its intention to give priority to interests related to a specific public benefit purpose identified in its articles.” § 31F-4-401(a)(3).
As such, while directors must consider the general public benefit of their decisions (and any specific benefits if so chosen), it is not clear the ultimate decision making of a benefit corporation director would necessarily be any different than a traditional corporation. That is, a director of a benefit corporation could, for example, consider the impacts on a town of closing a plant (and determine it would be hard on the town and the workforce), but ultimately decide to close the plant anyway.
Furthermore, many corporations seek to serve communities and benefit the public. McDonald’s, Coca-Cola, and many others already have programs to benefit the public, so it appears that many traditional corporations have already volunteered to meet and exceed the standards of the West Virginia benefit corporations act.
3. Formation – An entity becomes a benefit corporation by saying so when filing initial articles of incorporation with the Secretary of State, § 31F-2-201, or by amending the articles of an already created corporation, § 31F-2-202. Presumably, this serves a notice function, informing the benefit corporation’s current and potential constituents that there is the possibility that profit maximization will not be (or may not be) the corporation’s primary goal. The notice function does not work in reverse, however, as benefit corporation status does guarantee that public benefits have any primacy at all, merely that such benefits will be considered.
4. Termination - Termination of the benefit corporation status is allowed and is achieved by changing the articles of incorporation in the same manner in which traditional corporations modify their articles. § 31D-10-1003. As a result, it doesn’t appear that there is anything in the statute from preventing a benefit corporation from reaping the public relations or capital raising upside of being a benefit corporation, and thereafter abandoning the status should it become inconvenient. Query whether to the extent a transfer to a benefit corporation could be deemed a gift for a public purpose, the Attorney General might have oversight over the contribution in the same manner as it has oversight in cy pres and similar proceedings.
5. Enforcement – Third parties have no right of action to enforce the benefit goals unless they are allowed to use derivatively as “specified in the articles of incorporation or bylaws of the benefit corporation.” Id. § 31F-4-403. Otherwise, a direct action of the corporation or derivative actions from a director or shareholder are the only ways to commence a “benefit enforcement proceeding.” Again, the statute does not give the Attorney General specific statutory authorization to proceed on the basis that a member of the public may have transferred funds to the benefit corporation in reliance upon its benefit corporation status.
So, the statute provides the option for stating and pursuing general and specific benefits, but there are not a lot of structural assurances to anyone—investor, lender, public—that a benefit corporation will actually benefit anyone other than its equity holders. But benefit corporations are required to consider doing so. This is not to say there isn’t some value. As Haskell Murray has noted,
Directors would benefit from having a primary master and a clear objective. . . . [But,] [t]he mandate that a benefit corporation pursue a "general public benefit purpose" is too vague because it does not provide a practical way for directors to make decisions.
As such, an entity may create a clear set of priorities and guidelines that could provide useful and lead to benefits, but the benefit corporation act most certainly does not mandate that.
Finally, although most of the above is focused on the West Virginia benefit corporation law, much of it applies to the other versions of such laws in other states. Cass Brewer notes
Effective July 1, 2014, West Virginia’s benefit corporation statute generally follows the B-Lab model legislation, but among other things relaxes the “independence” tests for adopting third-party standards and does not require the annual benefit report to disclose director compensation.
As an additional resource, Haskell Murray provides a detailed chart of the state-by-state differences, here.
Next up: Part III - So Why Bother? Isn’t the Business Judgment Rule Alive and Well?
EWW & JPF
Tuesday, August 26, 2014
West Virginia is the latest jurisdiction to adopt benefit corporations – the text of our legislation can be found here. As with all benefit corporation legislation, the thrust of West Virginia’s statute is to provide a different standard of conduct for the directors of an otherwise for-profit corporation that holds itself out as being formed, at least in part, for a public benefit. (Current and pending state legislation for benefit corporations can be found here.)
As WVU Law has two members of the ProfBlog family in its ranks (Prof. Josh Fershee (on the Business Law Prof Blog) and Prof. Elaine Waterhouse Wilson (on the Nonprofit Law Prof Blog)), we combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. For those of you on the Business Prof blog, some of the information to come on the Business Judgment Rule may be old hat; similarly, the tax discussion for those on the Nonprofit Blog will probably not be earth-shaking. Hopefully, this series will address something you didn’t know from the other side of the discussion!
Part I: The Benefit Corporation: What It’s Not: Before going into the details of West Virginia’s legislation (which is similar to statutes in other jurisdictions), however, a little background and clarification is in order for those new to the social enterprise world. A benefit corporation is different than a B Corporation (or B Corp). B Lab, which states that it is a “501(c)(3) nonprofit” on its website, essentially evaluates business entities in order to brand them as “Certified B Corps.”
It wants to be the Good Housekeeping seal of approval for social enterprise organizations. In order to be a Certified B Corp, organizations must pass performance and legal requirements that demonstrate that it meets certain standards regarding “social and environmental performance, accountability, and transparency.” Thus, a business organized as a benefit corporation could seek certification by B Lab as a B Corp, but a business is not automatically a B Corp because it’s a state-sanctioned benefit corporation – nor is it necessary to be a benefit corporation to be certified by B Labs.
In fact, it’s not even necessary to be a corporation to be one of the 1000+ Certified B Corps by B Lab. As Haskell Murray has explained,
I have told a number of folks at B Lab that "certified B corporation" is an inappropriate name, given that they certify limited liability companies, among other entity types, but they do not seem bothered by that technicality. I am guessing my fellow blogger Professor Josh Fershee would share my concern. [He was right.]
A benefit corporation is similar to, although different from, the low-profit limited liability company (or L3C), which West Virginia has not yet adopted. (An interesting side note: North Carolina abolished its 2010 L3C law as of January 1, 2014.) The primary difference, of course, is that a benefit corporation is a corporation and an L3C is a limited liability company. As both the benefit corporation and the L3C are generally not going to be tax-exempt for federal income tax purposes, the state law distinction makes a pretty big difference to the IRS. The benefit corporation is presumably going to be taxed as a C Corporation, unless it qualifies and makes the election to be an S Corp (and there’s nothing in the legislation that leads us to believe that it couldn’t qualify as an S Corp as a matter of law). By contrast, the L3C, by default will be taxed as a partnership, although again we see nothing that would prevent it from checking the box to be treated as a C Corp (and even then making an S election). The choice of entity determination presumably would be made, in part, based upon the planning needs of the individual equity holders and the potential for venture capital or an IPO in the future (both very for-profit type considerations, by the way). The benefit corporation and the L3C also approach the issue of social enterprise in a very different way, which raises serious operational issues – but more on that later.
Finally, let’s be clear – a benefit corporation is not a nonprofit corporation. A benefit corporation is organized at least, in some part, to profit to its owners. The “nondistribution constraint” famously identified by Prof. Henry Hansmann (The Role of Nonprofit Enterprise, 89 Yale Law Journal 5 (1980), p. 835, 838 – JSTOR link here) as the hallmark of a nonprofit entity does not apply to the benefit corporation. Rather, the shareholders of a benefit corporation intend to get something out of the entity other than warm and fuzzy do-gooder feelings – and that something usually involves cash.
In the next installments:
Part II – The Benefit Corporation: What It Is.
Part III – So Why Bother? Isn’t the Business Judgment Rule Alive and Well?
Part IV – So Why Bother, Redux? Maybe It’s a Tax Thing?
Part V - Random Thoughts and Conclusions
EWW and JPF
Thursday, August 21, 2014
Samaritan’s Purse as Illustrative of the Benefits and Challenges of Government-Nonprofit Collaboration
The Washington Post has published a piece featuring Samaritan’s Purse – the charitable nonprofit making headline news for its role in helping save the lives of two front-line medical missionaries who contracted Ebola while serving in Liberia. The story describes the world-wide humanitarian relief provided by Samaritan’s Purse, its role in partnering with governmental and nonprofit agencies to address international public health crises, and the occasional controversies that have arisen from its faith-based mission or some of the opinions that its president, Franklin Graham, has expressed on contemporary issues.
As to its important role in promoting international public health, the story states the following:
… Smart Money magazine has named Samaritan’s Purse the most efficient religious charity numerous times, and the group maintains a reputation of being among the first to combat the worst public health crises around the world.
Given the remote and hard-to-reach areas they work in, there’s been many instances in the past where we’ve first heard of specific suspected clusters of illnesses through them,” Rima Khabbaz, the CDC’s deputy director for infectious diseases, said of NGOs such as Samaritan’s Purse. “They are no doubt very important partners in our global public health work. Not infrequently, [the] first unconfirmed reports reach the public health community through them.”
Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota, said in many parts of the world, groups such as Samaritan’s Purse and Doctors Without Borders “are the safety net for global health.” He added: “They are the ones in the areas of war and civil unrest.”
As to the “controversies” involving the organization itself, the story first cites criticism by the New York Times when SP communicated a religious message while assisting victims of an earthquake in El Salvador. Apparently the Times objected to such communications because SP had received $200,000 from USAID – though SP was later found not to have violated governmental guidelines. Another alleged controversy involved an effort by SP to distribute Arabic-language Bibles during the 1990-1991 gulf war through U.S. troops (presumably volunteers, although the story never says so) – a plan that reportedly “drew a sharp rebuke” from General Norman Schwarzkopf because it would have violated a US-Saudi agreement that there would be no proselytizing.
In my judgment, the story illustrates inevitable differences between the public and nonprofit sector. What SP does effectively by way of humanitarian relief depends on its faith – at numerous levels. SP assists the suffering because of theological commitments to meet both spiritual and physical needs. Indeed, a tenet of SP's Statement of Faith reads as follows:
We believe that human life is sacred from conception to its natural end; and that we must have concern for the physical and spiritual needs of our fellowmen. Psalm 139:13; Isaiah 49:1; Jeremiah 1:5; Matthew 22:37-39; Romans 12:20-21; Galatians 6:10.
SP’s faith-based mission takes it to isolated places many governmental agencies would otherwise overlook – places where not just spiritual needs, but also pressing medical and other physical needs, surface. SP’s vast network of volunteers and staff likely works with unusual dedication because of their commitment not just to a “cause,” but to a “Cause.”
Yet care must be taken when government partners with nonprofits – by both partners. A religious nonprofit must be careful not to use government resources in a manner inconsistent with valid secular objectives. And government must be careful not to try to transform the religious nonprofit into a neutral, nonsectarian agency. The public is right to demand that both hold up their obligations in such a partnership. On the whole, the story suggests that SP and public bodies that have worked with them generally follow the rules of the partnership.
Tuesday, August 19, 2014
We previously blogged about the efforts of ProPublica to obtain from the American Red Cross (ARC) information about how the ARC has spent its $300 million-plus in donations that it received for humanitarian aid following Hurricane Sandy. The blog entry opines as follows:
Soliciting and expending funds in connection with major disasters can present some thorny legal issues (as several of us tax and nonprofit law scholars have discussed in our scholarship). In general, analyzing whether these issues pose a problem in any given case does require assessment of the type of information that ProPublica seeks. While privacy laws protecting individuals should certainly be observed, I would think the public interest better served by erring on the side of full disclosure.
Perhaps the ARC has come to appreciate this viewpoint. The Chronicle of Philanthropy reports that the ARC has sent a 108-page document disclosing that it “has used roughly three-quarters of the $312-million raised, with just under $130-million going to ‘financial assistance’ and $46-million dedicated to the deployment of staff and volunteers.” Additional details are available on ProPublica’s website.
Monday, August 18, 2014
In Hospitals Reassess Charity as Obamacare Options Become Available, the Washington Post reports that “hospitals are rethinking their charity programs, with some scaling back help for those who could have signed up for coverage but didn’t.” The story cites concern “that offering free or discounted care to low-income, uninsured patients might dissuade them from getting government-subsidized coverage,” and notes the obvious financial interest that hospitals have in treating “more patients covered by insurance as the federal government makes big cuts in funding for uncompensated care.”
The story reveals the calculus facing hospital decision-makers:
Hospital executives say they are weighing many questions in evaluating whether to change their policies. Did people choose not to enroll, or were they unable to get through the new health insurance marketplaces during the open enrollment in the fall and spring? Did they know subsidized coverage is available? Could they afford insurance?
“That’s something hospitals have struggled with for decades: Is the patient unwilling to pay or unable to pay?” says Katherine Arbuckle, senior vice president and chief financial officer at Ascension Health based in St. Louis.
The story further reports that some hospitals, including those managed by two major chains, plan no major changes to their charity care policies under Obamacare.
In a recent opinion editorial in the Boston Globe, John E. Sununu, former Republican senator from New Hampshire, argues that the recent decision of O’Bannon v. NCAA sounds the death knell for the federal income tax exemption of universities with major athletics programs. In the O’Bannon case, a federal district judge ruled that the NCAA’s rules prohibiting student-athletes from receiving payments of a share of licensing fees for the use of their names and likenesses violates federal antitrust laws. Sununu opines that the “ultimate destination” of the O’Bannon case is “a date with the Internal Revenue Service.”
His argument appears to be simple initially: “If universities are going to compensate athletes for supporting multi-million dollar sports programs, the idea that these organizations are tax-exempt nonprofits becomes absurd.”
But then Sununu cites many other factors to support his conclusion that the “far bigger lie is that these major sports schools are nonprofit institutions.” He continues:
Today, at least a dozen schools generate $100 million per year from sports programs -- a figure that approaches 10 percent of the operating budget for powerhouses like Auburn and Louisville. Paying athletes strips away whatever pretense remains of that educational mission, at least for a significant portion of their student body and revenue base. As payments flow and revenues grow, the school administrators, NCAA officials, and IRS bureaucrats who have colluded to maintain that pretense will have little left to argue.
It’s especially hard to hide behind the educational mission when the highest paid employee at your school is a coach. Last year, 25 college football coaches took home more than $2.5 million each. At Alabama, Coach Nick Saban’s salary topped $5 million. The issue here is not whether they are worth it, or whether the schools are justified in paying that freight, but whether the business entity paying such rich contracts should operate tax-free.
The eye-popping numbers on ESPN’s recent deal for a Southeast Conference Sports Network lay bare the economics at stake. With $800 million in profits, each of the 14 schools can expect yearly distributions of roughly $50 million tax-free. … Paying coaches and athletes, selling tickets and television rights, licensing merchandise and fight-song ringtones. Sounds like a business to me.
Yes, in a non-technical, intuitive sense, it “sounds like a business.” But I am not nearly as quick as Sununu to jump to the conclusion that O’Bannon means that all universities with major sports programs are now doomed to lose federal income tax exemption.
First, it is doubtful that the payment of athletes for the use of their likenesses – which the O’Bannon court decision permits to be done, subject to an NCAA-imposed cap – is the decisive factor that should transform an institution from “educational” under the law to one that is not. An educational institution compensates those who perform services in the pursuit of the institution’s mission – including students. The bigger question is whether what athletic programs do is really properly characterized as educational or otherwise charitable. A modest payment for the use of a student-athlete’s likeness is probably not sufficient to tip the scales in one direction or another with respect to that larger question.
And although I, too, tend to be shocked at the amount of money some head coaches are paid and feel a sense of disbelief at what such compensation says about the priority that we, as a society, place upon sports, it is also true that large, tax-exempt charitable institutions of many types pay their top executives very well. My point is not that such compensation is normatively justifiable (although in many cases, it probably is). My point is simply that under current law, a very large salary is not necessarily inconsistent with a charitable institution’s income tax exemption. (And of course, if the athletics department were treated as a distinct, taxable entity, the payment of the coaches’ salaries would generally be fully deductible in computing the payor’s taxable income.)
Moreover, even if a school’s athletics program were properly viewed as an unrelated trade or business – a question that I do not intend to answer in this post – it does not follow that the university itself should lose federal income tax exemption because of its athletics program. The dollar value of these programs is indeed high. But the significance of these programs does not necessarily surpass that of the clearly educational operations of major universities. I am far from convinced that a major teaching and research institution fails the organizational and operational tests of the Treasury regulations just because it also operates a prominent national athletics program.
Thus, while I share many of the concerns of Mr. Sununu, I think that the O’Bannon case alone is unlikely to prompt a wave of revocations of university tax exemptions.
Monday, July 28, 2014
The 2013 Common Fund/Council on Foundation study of private foundation investments is available here, and it's generally pretty good news.
According to a summary article at Chronicle of Philanthropy, private foundation investments grew on average 15.6% in 2013. The five year annual return, including 2013, is now at 12%; compare that to last year's five year annual return, which was only 1.7%. The article notes that the disasterous retuns of 2008 have now rolled out of the 5 year running average. In additional good news, foundation debt is down and spending is up.
The bad news - nonprofit grant recipientss are still in a rough state, which is part of the reason why foundation giving is up. In addition, the report warns of increasing volatility and, therefore, likely lower returns in the coming year.
Friday, July 25, 2014
The Chronicle of Philanthropy is commenting on billionaire businessman Ted Stanley's recent $650-million pledge to the Broad Institute to study the genetics of psychiatric disorders. The pledge is one of the largest individual donations ever to medical research.
The pledge comes at a very opportune moment. According to the Chronicle,
About one in four adults suffers from a mental disorder, and one in 17 people live with a serious mental illness like major depression, bipolar disorder, or schizophrenia, according to the National Institute on Mental Health. The World Health Organization estimates 450 million people worldwide suffer from such diseases.
One would think that such staggering statistics would lead state and national leaders to allocate more funds to addressing the needs of the mentally ill. Not so, says the Chronicle. Instead,
. . . from 2009 to 2011, states cut more than $1.8-billion from their budgets for services helping children and adults who have mental illnesses, states the National Alliance on Mental Illness. Support for scientific research has dwindled, and what remains is difficult to obtain because of increased competition for scarce dollars.
This is a sad situation. Like the Chronicle, I hope Mr. Stanley's gift will "spark a flurry of additional donations to mental-health causes."