Nonprofit Law Prof Blog

Senate Adds Charity Provisions to Bailout Bill

Just three days ago we blogged about the unlikehood that Congress would be able to agree upon and pass the charity tax bill before adjournment.  Senators resolved the problem by adding the charitable provisions to the bailout bill, signed by Pres. Bush on Friday.  The charitable provisions include an extension of the ability of a taxpayer older than 70 1/2 to contribute up to $100,000 to an IRA without income tax and extensions or renewals of breaks for businesses that contribute books or computers to schools.  The bill creates tax incentives for donations to help victims of recent floods, tornados and storms in the Midwest, and volunteers who help with disaster relief in the Midwest can deduct mileage at the rate of 42 cents a mile, until the end of 2008.  That amount is 70% of the business rate (58.5 cents) but significantly more than the rate for charitable activities (14 cents a mile).  The Chronicle of Philanthropy reported on the charity provisions of the tax bill.

sng

Charities Bill Unlikely to Pass

The Wall Street Journal reports that tax legislation has stalled in Congress and that Congress will likely adjourn before passing the legislation.  As we blogged a few days ago, the Senate passed a bill extending a number of tax provisions related to charitable giving.  Because the Senate bill differed from the earlier-passed House bill, though, enactment is now unlikely.  The bill would have renewed the provision permitting people 70 1/2 years of age and older to contribute up to $100,000 from an IRA without paying income tax on the money.  The bill also contained incentives for charitable contributions to help victims of recent storms, floods, and tornadoes.

sng

House Passes Charitable Tax Provisions

The Chronicle on Philanthropy reports that the House of Representatives on Friday passed the tax bill that had already cleared the Senate.  The tax bill extends some of the charity tax breaks due to expire.  Because the House bill is different from the Senate bill, the ultimate fate of the bill remains uncertain.

sng

Brennen, Moran and Havard to Speak at Congressional Black Caucus Foundation Issues Forum on "Living in the Black: Barriers to Wealth Creation in the African American Community"

Congressman John Lewis has invited law professors David A. Brennen (AALS and University of Georgia), Beverly I. Moran (Vanderbilt University), and Cassandra Jones Havard (University of Baltimore) and university professor Jessica Gordon Nembhard (Howard University) to hold an issues forum this Friday, on September 26, 2008, on the topic "Living in the Black: Barriers to Wealth Creation in the African American Community."  The forum will be a part of the annual legislative conference of the CBC Foundation.

Professor Brennen will address the topic of racial inequality in the tax exemption context.  Professor Moran will discuss the topic of tax policy and its impact on wealth inequality among racial populations.  Professor Havard will talk about the impact on effective wealth transfer mechanisms of the failure to properly regulate U.S. financial markets.  And, finally, Professor Nembhard will discuss the topic "Alternative Asset Building in African American Communities: Wealth Accumulation through Cooperative Ownership."

For other CBC Foundation legislative conference events, go to http://www.alc2008.org/ and view the complete schedule of issues forums and brain trusts.

DAB

Senator Grassley and Congressman Welch to Hold University Endowment Roundtable

Senator Charles Grassley and Congressman Peter Welch have released the agenda and participant list for a September 8, 2008 Congressional roundtable on university endowments.  Here is the Agenda (scroll down to September 4; the agenda includes links to lots of interesting background reading material) and here is the participant list.  Amongst the law school academics who will be participating are Professors Iris Goodwin, Henry Hansmann, and Michael Klausner.

dkj

Senator Grassley Questions Two Tax-Exempt Hospitals About Patient Practices

Continuing his investigation into tax-exempt hospitals, Senator Chuck Grassley (R-Iowa) issued a press release stating that he has written letters to the M.D. Anderson Cancer Center in Houston and the University of Chicago Medical Center based on news reports raising concerns about some of their practices.  The story about the M.D. Anderson appeared in an April Wall Street Journal article (see previous blog entry) focusing on the adoption by some nonprofit hospitals, including Anderson, of up-front payment policies.  The University of Chicago story appeared in a Washington Post article last month (see previous blog entry) discussing the Medical Center's alleged policy of steering poor and uninsured patients to neightborhood clinics and the role of Michelle Obama in developing that policy.  In his letters, Senator Grassley has asked both institutions for detailed information about their organization and operations, including their billing practices, charity care policies, and compensation of senior employees.  The letters are available through links in the press release.

LHM

Congressional Roundtable on Endowments

The Chronicle of Philanthropy reports that Senator Chuck Grassley (R-Iowa) and Representative Peter Welch (D-Vermont) announced last week that they will hold a roundtable with university officials and others to discuss endowments and college costs on Monday, September 8th.  Their press release is available in an announcement about the roundtable from the Council for Advancement and Support of Education (CASE).  The title of the roundtable will be "Maximizing the Use of Endowment Funds and Making Higher Education More Affordable."  Confirmed speakers include law professors Iris Goodwin (Tennessee) and Michael Klausner (Stanford), as well as representatives of the American Council on Education, the National Association of College and University Business Officers, and the Association of American Universities.

LHM

Peace Corps Downsizing Amid Budget Woes

Though a government agency, rather than a private nonprofit, the Peace Corps certainly has long been a bastion of volunteerism since its creation by President Kennedy in 1961. Now, however, a story in today's Washington Post notes that the Peace Corps (which, as the story notes, President Bush once promised to double in size) is accepting fewer volunteers and cutting other costs as it faces a budget shortfall of $18 million during this and next fiscal year. Part of the problem has been a weak dollar; the Corps estimates that it endured over $9 million in foreign-currency-related losses during the past year. The other problem is the continued stalemate between the Bush administration and Congress on the budget for the new fiscal year.

JDC

Senators Create Philanthropy Caucus

The Chronicle of Philanthropy reports that Sens. Charles Schumer, Democrat of New York, and Richard Burr, Republican of North Carolina have created a Senate Philanthropy Caucus to look at ways to help foundations and charities. The action follows the creation of a similar group in the House over a year ago. The letter that Schumer and Burr sent to their colleagues asked them to join the caucus to “support the long tradition of good works by the philanthropic and nonprofit sectors.”

JDC

Housing Bill Signed - Includes Money for Low Income Housing

The federal housing bill, HR 3221 was signed by the President today.  The bill includes funding for the creation of the Housing Trust Fund, a fund that will provide money for low-income housing, especially rental units.  The fund could distribute as much as $300 million a year for new low-income housing and some of the grants could go directly to nonprofit housing organizations.

See a description of the Housing Trust Fund in the Chronicle of Philanthropy.

sng

Frances Hill, Ellen Aprill, and Marilyn Phelan Comment on Copeland Ministries Investigation

Frances Hill, of the University of Miami, Ellen Aprill, of Loyola Los Angeles, and Marilyn Phelan, of Texas Tech, were all interviewed in connection with an AP investigation of the Kenneth Copeland Ministries. 

Kenneth Copeland Ministries is one of the six churches Sen. Grassley has contacted for information.  Copeland Ministries has refused to provide any information to the Senate Finance Committee.  (See information on the Senate Finance Committee website about March 11 follow-up letter to Copeland).   The AP investigation was able to review public documents and church records and conduct interviews.  Hill, Aprill, and Phelan all comment in an article published today in the Chicago Tribune.  All three say that the documents, which they were shown, raise questions.  Hill notes, "There's too much money sloshing around . . . with people with overlapping affiliations and allegiances by either blood or friendship or just ties over the years."  Aprill adds that "leasing and selling land to the church's top executive raises concerns."  And Phelan says that paying honorariums to members of the board for speaking at the church "could pose problems."

Kenneth Copeland Ministries is organized as a church and therefore is subject to fewer reporting requirements than other 501(c)(3) organizations.  Copeland preaches that believers are destined to prosper financially, spiritually, and physically and that they should share their wealth with others.  Apparently many believers have shared their wealth with Copeland Ministries, which owns a 1,500 acre campus in Texas, a campus that includes a $6 million mansion.  The AP investigation found records from 1995 that indicate that Kenneth Copeland was paid $364,577 that year, and his wife, Gloria, earned an additional $292,593.  Beyond benefits to the senior Copelands, the investigation has found what appear to be private benefits to family and friends.  The Copeland's son, John Copeland purchased land from the Ministries, land that increased significantly in value a short time after the purchase.  Board members, although not compensated through salaries, are paid for speaking at church events.  And a company owned by Gloria Copeland's brother-in-law buys television time for the ministry.

The Kenneth Copeland Ministries has refused to respong to Sen. Grassley's requests for information.  Perhaps with the help of the AP investigation, Sen. Grassley will be ready to seek a subpoena for the information.

sng

Downpayment Assistance Programs Appear Doomed

We have previously blogged on the efforts in Congress to shut down seller-funded down-payment assistance programs here and here.  It looks as though defenders of seller-funded down-payment assistance programs (including me) will soon lose the battle, if not the war.  Today's Washington Post reports that the House has agreed to a Senate provision that will effectively eliminate those charities -- at least for the time being:

Mortgage programs that helped nearly 79,000 people buy homes using government-insured loans last year would be eliminated as part of a broader housing package that Congress expects to pass this week, key lawmakers said. Under these programs, nonprofit groups provide buyers with money for down payments. Home sellers then reimburse the organizations and pay an administrative fee. More than half a million people -- including many first-time home buyers, minorities and single mothers -- have bought homes this way in the past decade using loans insured by the Federal Housing Administration.

I still say the Congress is "throwing the baby out with the bath water" as one reader put it.  Members of the Congressional Black Caucus and the Congressional Hispanic Caucus say they will try to revive seller funded down-payment assistance charities when the next president takes office, according to the article.

dkj

More on Fractional and Retained Interests

We have recently blogged stories relating to Congress closing the loophole provided to wealthy donors of fractional interests in artwork here, here, and here.  Today's Wall Street Journal has another story (page D1) regarding the perceived need to loosen rules restricting art donations to museums passed in 2006.  The article notes that art donations have almost dried up since the 2006 law was passed:

Jon and Mary Shirley used to give artwork by the likes of Jackson Pollock, Mark Rothko and Alberto Giacometti to the Seattle Art Museum. No longer. A federal crackdown on deductions for so-called fractional gifts of art has made donating too onerous for them.   Before, the Shirleys could donate small stakes in their artwork to the museum over time and reap increasingly larger deductions as their collectibles appreciated. But Congress changed the rules nearly two years ago, capping those deductions.  "There's just no point in doing it," says the 70-year-old Mr. Shirley, a former Microsoft Corp. executive. He says the couple has made no art donations to the museum since the rule change.  Museum directors say these restrictions -- which limit tax breaks for givers -- have crimped donations of valuable collections. "Many of the significant gifts we've had in our history have come from fractional gifts," says Kaywin Feldman, the director of the Minneapolis Institute of Arts. "The new law has virtually stopped new fractional gifts from being started. It's a real problem for us and other museums."

The article notes that the Senate is likely to pass a law to revive fractional art donations while still preventing the abuse that led to the 2006 crackdown.  The WSJ article provides a pretty good example of the proposed changes:

The Schumer-Grassley plan would ease some of these restrictions, but would add others, according to the people briefed on the negotiations. Collectors would once again be allowed to take bigger deductions over time as their art appreciated. But higher art values, for tax purposes, would be restrained by any deductions taken previously, under one option being discussed. For example, say a donor gave 10% of a painting valued at $100,000. For that initial gift, the donor could deduct $10,000.  But when calculating the next deduction for a partial gift in a later year, the painting would be valued at only 90% of its fair-market value. If in the later year the market valued it at $200,000, the IRS would peg its taxable worth at $180,000.  A collector would also be required to submit appreciated artwork valuations to the IRS's long-established art advisory panel for approval, the people familiar with the negotiations said.

dkj

Kenneth Copeland Ministries Responds to Grassley Memo: Through a Glass, Darkly

Last week, we reported that Senator Charles Grassley had issued a lengthy and detailed memorandum regarding the status of his investigation of certain Megachurches.  Kenneth Copeland Ministries recently responded to Grassley's memorandum with its own press release (scroll down one third):

The Church’s position continues to be that it has responded to the request of Senator Grassley in good faith and to the greatest extent possible without compromising the privacy, confidentiality, and freedom of association rights and protections afforded to the Church by the United States Constitution and the Internal Revenue Code (the “Code”).  As stated in the Church’s letters of December 6, 2007, and March 31, 2008, to Senators Grassley and Baucus, and in discussions with Committee staff members, the Church continues to believe that the most timely and efficient way for the Committee to obtain the requested confidential information — without compromising the universally recognized fundamental constitutional and statutorily based rights of this Church and all religious institutions — is for the IRS to request and obtain the information through a “church tax inquiry” under section 7611 of the Code.  At the completion of the 90-day inquiry period provided by section 7611 of the Code, the IRS would have in its possession and available for disclosure to Senator Grassley all of the confidential information, including financial data, Senator Grassley is seeking from the Church.

In his memorandum, Grassley accused some of the churches of hiring Washington DC law firms to assist them in "foot-dragging".  I'm a praying man, but I'm not quite sure at all what to make of the Kenneth Copeland response.  On the one hand, I gotta say that the Kenneth Copeland response seems to confirm that allegation.  The IRS is extremely loathe to initiate a church tax inquiry and Kenneth Copeland's lawyers probably understand that all too well.  And while Grassley sits on a committee that no doubt has the IRS' ear, he cannot simply mandate that the IRS initiate a church tax inquiry under IRC 7611. There is, indeed, a question as to whether the statute is yet applicable.  I suspect that if the Service did initiate a church tax inquiry, Kenneth Copeland ministries would argue that the Service does not meet the "reasonable belief" standard required of that statute.  The press release does not say that 7611 applies, exactly, but merely that the IRS should "request the information" under that statute.  I doubt that the press release will be construed as a waiver of the requirements under that statute, nor will Kenneth Copeland treat it as such. 

On the other hand, I agree with Kenneth Copeland when he asserts that houses of worship are a different sort of tax exempt entity and should not be subject to the regular sort of government oversight Grassley asserts:

However, the Church respectfully disagrees with Senator Grassley’s position that churches are no different from any other tax-exempt organization.  Any government inquiry into the affairs of a church raises serious constitutional issues that must be carefully balanced against the government’s need to evaluate the effectiveness of the laws of the land.  To ensure its constitutional rights are not unnecessarily infringed upon, the Church firmly believes that it must be given the protections from disclosure afforded by the federal tax laws and the benefit of the processes and procedures that apply to inquires of churches made by the IRS.  Without such confidentiality and due process of law, the potential exists for the information to be used in an effort to damage or attempt to embarrass the Church, its pastors, and its members.  Any such use of the information provided interferes with, and ultimately threatens, the religious liberties of this Church, the thousands of other Pentecostal and Charismatic Churches who preach the “Word of Faith” message, and all other churches — irrespective of their particular doctrine or faith.

Though the religious blogs (like this  one) seem on both sides of the issue, those in support of Kenneth Copeland generally assert that the government has no business prying into the finances of houses of worship (see the comments to the blog linked above).  They basically state that followers can make their own decisions regarding the extent to which they financially support their religious leaders.  Gotta point there. 

The Senate Finance Committee, and Grassley in particular, present an interesting context in which to study the effects of the "bully pulpit" on tax exemption jurisprudence.  It doesn't yet appear that Grassley will push this to the point of a Congressional subpoena -- IRC 7611 imposes limitations on the Secretary, by the way, not the Congress -- but as with colleges and  universities, he is seeking to bring public attention and pressure on houses of worship in an effort to influence their financial affairs.  While the effort seems to have resulted in symbolic gestures in the higher education community, I'm not quite sure they have had (or should have) any effect in the religious community.  We see through a glass, darkly.

dkj

Chairman Rangel's Charity Fundraising Under Scrutiny

On Tuesday the Washington Post reported that Representative Charles B. Rangel, Chairman of the House Ways and Means Committee, used his congressional stationary to solicit donations from corporations and foundations for a center that will bear his name and house his papers when he retires.  The center will be located at the City College of New York.  Chairman Rangel responded to concerns that some of those solicited have business before the Ways and Means Committee but noting that he never discusses congressional matters with potential donors, and today's Washington Post reports that he has announced he would welcome an ethics committee investigation into his fundraising efforts.

LHM

Grassley Demands From Nonprofit Association Accounting of its Financing from Pharmaceutical Industry

On July 12, 2008, the New York Times reported that Senator Grassley is asking for an accounting of financial and other arrangements between the nonprofit American Psychiatric Association and the pharmaceutical industry.  Here is a quote from the article:

“I have come to understand that money from the pharmaceutical industry can shape the practices of nonprofit organizations that purport to be independent in their viewpoints and actions,” Mr. Grassley said Thursday in a letter to the association.

In 2006, the latest year for which numbers are available, the drug industry accounted for about 30 percent of the association’s $62.5 million in financing. About half of that money went to drug advertisements in psychiatric journals and exhibits at the annual meeting, and the other half to sponsor fellowships, conferences and industry symposiums at the annual meeting.

This weekend in Chicago, the psychiatry association’s board will meet behind closed doors, in part to discuss how to respond to the increasingly intense scrutiny and questions about conflicts of interest.

For the entire story, see Psychiatric Group Faces Scrutiny Over Drug Industry Ties in the July 12, 2008, issue of the New York Times.

DAB

Retained Interest in Gifted Art Work

The Chronicle of Philanthropy and the New York Times report that Congress is considering tinkering with the rules that place limits on how and when donors who retain an interest in donated art work may receive tax deductions.  Under current rules,  donors are required to relinquish ownership of donated art work within 10 years of making the gift.  Also, donors cannot write off more than the value of the art at the time it is first donated instead of adjusting the value each year to reflect appreciated fair market value.  As one might imagine, these rules - which were implemented in 2006  and are much more onerous than previous rules - adversely impact the level of donations to the art and museum communities significantly.  Congress's proposed changes, as reported in the New York Times and in the Chronicle of Philanthropy, would loosen these rules somewhat.  Here is a quote from the Chronicle of Philanthropy article of July 10, 2008:

Mr. Grassley said his office is pushing language that would require donors who want deductions for partial donations to submit the valuations of their donations to the Internal Revenue Service for independent review.

Another change would require charities to take possession of donated materials for a set amount of time before a donor could claim a deduction.

For the entire article, see "Lawmakers Discuss Changes to Rules Governing Some Gifts of Art" in the July 10, 2008, issue of the Chronicle of Philanthropy.  For additional coverage of this story, see "Senate Panel Close to Deal on Donations of Artwork " in the July 10, 2008, issue of the New York Times.

DAB

The Fair Deal for Volunteers Act

Here is an idea the nonprofit should definitely support.  The "Fair Deal for Volunteers Act" would allow the IRS to adjust the mileage rate that volunteers use in computing their charitable contribution deduction from the use of their POV to provide voluntary services to charitable organizations.  According to a press release issued by the Senate sponsors,  "[the Bill] would provide the IRS with flexibility in setting the mileage rate deduction for volunteers. Currently, the IRS is able to increase the deduction amount for medical and moving expenses to reflect current economic conditions because the rate is not written into the law. By allowing the IRS flexibility in setting the mileage rate for charitable work, volunteers and organizations could be allowed the same tax benefit as those who take deductions for moving and medical expenses.   In today’s climate of increasing food and fuel prices, this bill will help relieve some of the pressure felt by charitable organizations and their volunteers."

The actual text of the bill is not yet available but the Baltimore Sun has an informative report on the effect of gas prices on the willingness of volunteers to assist organizations such as Meals on Wheels.  For a list of other news reports regarding the impact of gas prices on volunteer willingness see the Meals on Wheels bibliography, which includes a CBS News video report  that describes the potentially devastating effect of the current deduction limitation on senior citizens who rely on volunteer home visits.

dkj

Senate Panel Will Likely Loosen Strict Tax Deduction Rules for "Partial Gift" Art Donations

Members of the Senate Finance Committee have agreed in principle to loosen the strict limits on "partial gifts" to museums, in which collectors claim tax deductions for donating artwork in increments to museums even though the art may remain in the donors' private homes.

In making a partial gift, a donor gives a percentage of interest in an artwork to a museum, receiving a tax deduction for an equivalent percentage of the work’s value. The museum has the right to exhibit the artwork for a period of each year proportionate to the interest it owns, but, in reality, the art rarely enters the museums.

The practice of "partial gifts" was common until almost two years ago, when Senator Charles E. Grassley added provisions to the Pension Protection Act of 2006 requiring donors to turn over both the artwork itself and full ownership within ten years of donating the first part. Because art tends to appreciate in value after being displayed in museums, another provision capped the deduction at the value prevailing when the donor gave away the first fraction or subsequent fractions, whichever was lowest, to limit the amount of tax deductions available.

However, The New York Times reports that it now appears that Senator Grassley is willing to allow donors to claim deductions for subsequent donations that reflect increases in the value of the portion of the artwork they still own. Many of the proposed changes would impose greater accountability on donors, such as requiring that all partial gifts be subject to binding written contracts to prevent heirs from reneging on the gifts after a donor’s death.

The changes could be attached to tax-related legislation sometime next week or as an independent bill.

SS

Two Recent Case Studies on How to Respond to Embezzlement/Excess Benefit Transactions

I have occasionally been asked how a nonprofit organization should react when it (i.e., responsible people within the organization) learns that an insider has engaged in some serious excess benefit type behavior -- ok, just plain old embezzlement or overspending.  There are, of course, two options.  One is to handle the matter in-house and quietly, no matter how mad the board and certain other key employees are at the miscreant.  The benefit to that approach is that past, present, and future donors don't find out that their money has, is being, or might be mispent in the future.  Private inurement and excess benefit scandals typically result in a serious decline in donor revenues.  And yet, punishment is often appropriate and necessary and  damn well deserved.  I once advised a nonprofit that immediately informed a private foundation that the grant the foundation made had been misspent -- the board sent the letter to the foundation before I got involved.  Even though the public charity had sufficient funds to  make up the  short-fall and  had reported the matter to local district attorney, the private foundation demanded and eventually received a refund of the grant despite our contractural right to keep the grant, in my opinion.  No good deed goes unpunished, I suppose.  Had we insisted that we were not liable for the refund of the grant we might have won the legal battle but lost the donor and volunteeer war.  Therein lies the rub.  In cases of embezzlement, (which is not private inurement but probably is excess benefit), the nonprofit is in a catch-22.  If it reports the matter, the nonprofit might die from lack of future donations.  If it does not report the matter, several negative consequences apply.  Board members and other managers risk being treated as complicit or negligent with regard to the excess benefit transaction; they too are subject to excise penalties.  In the shorter term, the nonprofit reduces its legal leverage to seek repayment by the greedy insider.

The New York Times ran a story today that describes two "case studies."  In one, the insider skimmed about a million dollars and the nonprofit decided to handle the matter in-house.  In another, the nonprofit immediately reported the matter to law enforcement even before it determined the full extent of the wrong doing.  Ironically, both cases ended up in the press anyway so perhaps the lesson to be learned is "disclose, disclose, disclose" in any event.  Still, in the case I was involved in the amount was relatively small (less than $50,000) and had I been asked, I might have said let's handle this quietly to protect our reputation in the donor  community.  Here is an excerpt from the Times article describing how one nonprofit decided to handle the matter quietly (until a whistleblower went public):

The [founder's] brother, Dale Rathke, embezzled nearly $1 million from Acorn and affiliated charitable organizations in 1999 and 2000, Acorn officials said, but a small group of executives decided to keep the information from almost all of the group’s board members and not to alert law enforcement.  Dale Rathke remained on Acorn’s payroll until a month ago, when disclosure of his theft by foundations and other donors forced the organization to dismiss him. “We thought it best at the time to protect the organization, as well as to get the funds back into the organization, to deal with it in-house,” said Maude Hurd, president of Acorn. “It was a judgment call at the time, and looking back, people can agree or disagree with it, but we did what we thought was right.” The amount Dale Rathke embezzled, $948,607.50, was carried as a loan on the books of Citizens consulting Inc., which provides bookkeeping, accounting and other financial management services to Acorn and many of its affiliated entities. Wade Rathke said the organization had signed a restitution agreement with his brother in which his family agreed to repay the amount embezzled in exchange for confidentiality.

Hmmmm.  I wonder what the accounting firm's exposure is, and to whom, from its cooperation.  Clearly the decision whether to report the matter to law enforcement is the board's so the "small group  of executives" messed up from the start.  They should and had an obligation to inform the board and let the board decide how to proceed.  This points to another consequence of insider bad behavior (at least at sub-board level).  If I had been on or advised someone on that board, I would probably consider or advise stepping down immediately and perhaps indignantly (though not necessarily loudly) with a CYA letter.  The other significant point to be made about this case is that the "embezzlement" occured eight years before it came to light, suggesting that the "disclose, disclose, disclose" rule is most prudent because bad things will eventually come out.  Here is how the second organization handled the problem.  Notice the concern voiced regarding the effect on the donor and volunteer community:

Officials at Points of Light began looking into complaints about a store the organization operated on eBay and by late June had discovered what its president and chief executive, Michelle Nunn, called “abnormalities” in the business practices of an independent contractor hired to run the store, which did a brisk business auctioning travel packages and items donated to the organization. The travel auctions were stopped immediately, Ms. Nunn said, and the store was shut down a short time later. Points of Light also posted a statement on its Web site last weekend about the problems and contacted the United States Attorney’s Office in Washington, as well as people who had bought the travel packages.  Two people who have been involved in the internal investigation at Points of Light, who spoke on the condition of anonymity because it is incomplete, said it appeared that Maria Herrmann, a former Points of Light fund-raiser who was hired as an independent contractor to manage the eBay store operation, may have been auctioning off bogus trip packages.  Ms. Herrmann did not respond to a message left at her home on Tuesday, and phone and e-mail messages to the office were answered by automated responses from the service Points of Light has hired to process reimbursement applications for the packages.  The organization is making good on trips scheduled through next Tuesday, Ms. Nunn said, and hopes to repay consumers for the rest of the packages that were sold. She said Points of Light began alerting donors last week about the problem, and some have agreed to help it repay customers who bought the packages.  Ms. Nunn also said she did not know how much the group would lose. “Our hope is that this is an isolated event, and that the actions of what we believe to be a single individual at this point doesn’t jeopardize the work of millions of volunteers,” she said.

[emphasis  added].  Lies and cover-ups have a way of making things that much worse, and then you are always waking up in the middle of the night wondering when you will get caught.  I suppose the damage to an organization's donor and volunteer support is inevitable, and  even worse when stakeholders learn that the nonprofit tried to hide the matter.  Better to come clean right away.  Still, being the human that I am, I might advise keeping things on the down low when the amount is relatively small; once it hits a certain amount, I think nonprofits are better off biting the bullet now rather than later.  Points of Light  will probably come out of this better than Acorn.  A criminal scholar of mine once opined that there are cases where you just what to "take the bastard out back and shoot him."  The emotion applies to nonprofit embezzlement, but cooler heads must prevail. 

dkj

Senator Grassley's Memorandum Re Investigation of MegaChurches

Last night Senator Charles Grassely released a lengthy and detailed memorandum regarding his ongoing investigation of certain church financial practices.  In brief, the memorandum describes Grassley's concerns, his support of self-regulation of the nonprofit sector, cooperative and uncooperative responses from some churches, witness intimidation by others, lavish parties by other tax exempt organizations, "foot-dragging" Washington D.C. law firms employed by some of the churches and Grassley's intent to press on with the investigation until satisfactory responses are obtained.  The witness intimidation is said to have occured because some churches have called employees to remind them they are subject to confidentiality agreements and that legal action would be taken in case those employees violated those agreements. 

dkj

NPR Report on Debate on Downpayment Assistance Charities

Happy Birthday America!

NPR Radio recently ran a story (audio version) (print version) in yesterday's Morning Edition on the effort in Congress to shut down downpayment assistance charities.  The story recounts the FHA assertion that donwpayment assistance charities contribute to the growing foreclosure rate.  On the other hand, the story quotes a Republican Congressman's and an downpayment assistance industry representative's assertions that the FHA is engaging in hypocritical turf protection (not to mention "beside-the-pointism"):

There are too many questions that are not answered here," says Rep. Gary Miller (R-Calif.).  Miller, a former homebuilder, argues that the FHA's data on defaults is suspect and says the agency has refused to provide adequate documentation. He also argues the FHA is trying to imitate nonprofit assistance through its own program called The American Dream Downpayment Initiative.  "What they've said to us is, 'Let's continue the American Dream Downpayment Assistance program and that's using taxpayer dollars to give to somebody, but let's exclude the private sector, which doesn't cost the taxpayer anything from participating in the same program,'" Miller says. "That's a problem I'm having."  Scott Syphax, CEO of Nehemiah Corporation of America, the originator of the non-profit down-payment model, sees the conflict as bureaucrats flexing their muscles. "HUD has never forgiven the fact that we have been more successful at bringing people to FHA and creating new homeowners through their programs than they've been themselves," Syphax says. "And that's the reason that they want to take over the program and do it themselves … they feel essentially we're operating their franchise."

As some readers may be aware, I have been involved in a running debate with an anonymous reader regarding the issue. (see comments to the linked post).  One question raised by the NPR report is that if it is the downpayment assistance that is causing the housing mess, why does the FHA maintain its own such program (with taxpayer dollars, no less), while simultaneously seeking to prohibit privately funded programs?  Granted, the law is clear that "contributions," the benefits of which are earmarked for the donor (any any other specifically identified individual, for that matter), generally do not and should not generate a charitable contribution; but the question of tax exemption for the downpayment assistnce charity is slightly to the left (or right) of that assertion.  That is, denying the charitable contribution deduction for a seller who makes a "donation" to a downpayment assistance charity does not necessarily imply that the charity is not entitled to tax exempt status. And singling out the beneficiaries of downpayment assistance grants as the special causes of the housing mess is ridiculous.

dkj

"Voluntourism" -- The New Frontier of [tax free] Nonprofit Travel Agencies

Remember back in 2000 when the IRS issued weak and spineless regulations pertaining to the taxation (or not) of revenues that nonprofits -- primarily colleges and universities -- generate from essentially running travel agencies under the guise of tax exempt educational tours.  The commercial travel industry fought tooth and nail to get the new regulation, thinking it would finally put them on an even playing field with those tax free travel agencies run by colleges and universities offered to alumni in hopes of getting even more tax free donations.  Those alumni were likely to go on vacations anyway, why not give them a team jersey, a few seminars and collect the cash?  The commercial industry had to have been sorely disappointed when the regs were finally issued.  Here, in all its glory is the rule (1.513-7):

(a) Travel tour activities that constitute a trade or business, as defined in §1.513-1(b), and that are not substantially related to the purposes for which exemption has been granted to the organization constitute an unrelated trade or business with respect to that organization. Whether travel tour activities conducted by an organization are substantially related to the organization's exempt purpose is determined by looking at all relevant facts and circumstances, including, but not limited to, how a travel tour is developed, promoted and operated. Section 513(c) and §1.513-1(b) also apply to travel tour activity. Application of the rules of section 513(c) and §1.513-1(b) may result in different treatment for individual tours within an organization's travel tour program.

I doubt that there has been a single dollar of tax imposed either before or after the regulation.  After all, under those regulations, the nonprofit need only include a few more "mandatory" (wink, wink) educational seminars to make travel to the Great Barrier Reef, for example, distinguishable from taxable Travelocity.com.  I remember getting a good chuckle when, as a university counsel, I first read the regulation and the accompanying helpful (to college and universities) examples.  Anyway, the WSJ recently ran an article describing the new generation of nonprofit travel tours referred to as "voluntourism:"

Voluntourism -- a trip to an exotic destination combined with charitable work -- is booming. The group Greenforce offers a $2,150 penguin rescue-and-rehabilitation program in South Africa with accommodations and a "meal allowance" during six weeks of catching, feeding and cleaning up after penguins and other seabirds. But there also are mountain-biking and wine tours available for visitors' two days off per week. 

Some first-generation voluntourism programs were criticized as being less-than-fun for participants. And organizations such as London watchdog group Tourism Concern question the wisdom of dispatching unskilled volunteers for stints so short they're just disorienting. The group also questions projects where voluntourists displace locals on routine work, "as if local people weren't able to cook things or clean things or teach," says Tricia Barnett, the group's director.  As a result, a growing number of charities and tour groups are returning to the idea that tourists should just be tourists. Groups that want to funnel aid to poor communities now are appealing first to visitors' desire for a good experience, ahead of their work ethic and sense of sympathy. The rationale is that more tourists doing less produces more sustainable income and aid for local economies.

If I understand the article correctly, the nonprofit charges the "voluntourist" a nice fee (in this case $2,150) to catch and bathe penguins in between biking and wine tasting.  I wonder if voluntourism would be considered an unrelated business and therefore taxable under the previously mentioned joke of a regulation.  No classes being offered, just a chance to pay the organization for travel to a place at which to perform "charitable services," perhaps while also taking in the sights and doing what tourists do.  We could whip out our handy dandy all purpose tax tool -- bifurcation -- and tax the part of the fee alloted to biking and wine tasting.   But the examples to the regulation quoted above don't seem to anticipate use of that tool.  I suppose if the "voluntourism" industry includes enough fun community building "work" -- perhaps some salmon or trout fishing to help wean the overpopulated rivers and streams -- in the "voluntour" to Alaska, the hills of North Carolina, or the Austrailian Outback (no salmon, but surely lots of Kangaroos to observe scientifically), that $2,150 fee is just entirely tax free.  But I am in a cynical mood these days. 

dkj

Further Coverage of Down-Payment Assistance Program Provision

Business Week has published an Associated Press story providing an update on the status of the federal legislative proposal to eliminate nonprofit down-payment assistance programs, initially blogged about yesterday.

LHM

Down payment assistance charities, blamed for housing crisis, targeted for elimination in housing bill

The Senate version of the Foreclosure Prevention Act of 2008 (Section 113) contains the following language, designed to shut down seller-funded down payment assistance charities:  [the quoted provision imposes a down-payment requirement on first time home buyers who seek FHA assistance, but, in effect, prohibits the use of funds from a seller-funded down payment assistance charity]

SEC. 113. CASH INVESTMENT REQUIREMENT AND PROHIBITION OF SELLER-FUNDED DOWNPAYMENT ASSISTANCE.

Paragraph 9 of section 203(b) of the National Housing Act (12 U.S.C. 1709(b)(9)) is amended to read as follows:

`(9) CASH INVESTMENT REQUIREMENT-

(A) IN GENERAL- A mortgage insured under this section shall be executed by a mortgagor who shall have paid, in cash, on account of the property an amount equal to not less than 3.5 percent of the appraised value of the property or such larger amount as the Secretary may determine.

(B) FAMILY MEMBERS- For purposes of this paragraph, the Secretary shall consider as cash or its equivalent any amounts borrowed from a family member (as such term is defined in section 201), subject only to the requirements that, in any case in which the repayment of such borrowed amounts is secured by a lien against the property, that--

(i) such lien shall be subordinate to the mortgage; and

(ii) the sum of the principal obligation of the mortgage and the obligation secured by such lien may not exceed 100 percent of the appraised value of the property.

(C) PROHIBITED SOURCES- In no case shall the funds required by subparagraph (A) consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale:

(i) The seller or any other person or entity that financially benefits from the transaction.

(ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).

The red-lettering in section (C) is my own gloss on the language in the statute.  Even most real-estate lawyers would miss the significance of that section without a bit of important context.   For years, the Service has been trying to shut down seller-funded down payment assistance charities.   These are 501(c)(3) organizations that solicit funds from home builders and developers.  The charities then make grant to lower and middle income families sufficient to make a down payment on a home, perhaps built by the same builder or developer who made the contribution.  In essence, the charity convinces the home builder to provide a discount (equal to the down payment necessary to obtain third party financing) for first time home buyers.  Oftentimes those homes are FHA backed, providing the creditor with even more protection.  The Service mistakenly asserts that the seller-funding of the downpayment creates an improper private benefit, nevermind the public benefit gained from encouraging home ownership.  Even if that were true, the answer, of course, would be to deny the seller a charitable contribution deduction not shut down the charity altogether!

The Foreclosure Prevention Act, a monstrous amalgamation of provisions that would make even a tax lawyer blush, does just that, shuts down the charities altogether.  Proponents blame down payment assistance programs for the housing mess, never-mind the greed and graft of lenders, speculators, and adjustable rate mortgage brokers who really caused the mess.  Talk about a regressive policy.  From a Wall Street Journal Article last weekend:

The [no down-payment] offers -- including "100% financing" -- are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment.  Supporters of the down-payment programs say they help the FHA fulfill its goal of assisting first-time home buyers. But critics say the programs will burden the government agency, and taxpayers, with bad loans. The FHA, which essentially is filling the void left by the collapse of the subprime market, renewed a push to eliminate the programs this month, after warning that above-average default rates for seller-assisted down-payment programs will force the agency to request a government subsidy for the first time in its 74-year history. The agency says it will need $1.4 billion next year. The FHA estimates that down payments provided by nonprofit groups account for 34% of all 200,000 loans backed by the FHA so far this year, up from 18% in all of 2003 and less than 2% in 2000. And the agency says that borrowers are two to three times as likely to default on their payments when they receive a down payment from a nonprofit.

This all seems ridiculous to me.  Blaming the charity and their beneficiaries for the housing mess is like blaming a lowly gas station attendant for price of gasoline.  Everybody knows that the housing market crash is more a result of "irrational exuberance" of better off investors than the poor first time home buyers.  Indeed, most down-payment assistance charities engage in extensive screening and require beneficiaries to attend long hours of budgeting classes before they are granted down payment assistance.  Moreover, most of the homes in default these days were financed through adjustable rate mortgages, which FHA and most down-payment assistance charities do not support!  No wonder both the Congressional Black and Hispanic Caucuses smell a rat:

The nonprofit groups have the backing of several influential members of Congress, including Reps. Maxine Waters (D., Calif.) and Barney Frank (D., Mass.). The Congressional Black Caucus and the Congressional Hispanic Caucus sent letters this month to House and Senate leaders urging that the programs stay intact, citing their role in improving minority home-ownership rates.

Fortunately, the House version of the bill does not contain a prohibition against seller-funded downpayment assistance.  Still, the IRS is nevertheless pursuing its policy of denying or revoking tax exempt status to charities that receive funding from sellers or developers.  For more discussion on the FHA efforts against downpayment assistance charities see this entry in the WSJ's Development Blog.

dkj

Congressman Questions Use of PILOTS to justify tax exempt bond financing for new sports stadiums

Have you ever been to Tropicana Field in St. Petersburg, Florida (pictured above, notice the lack of fans)?  I am a baseball pursit.  The Tampa Bay Rays (formerly the "Devil Rays") play home games in this dark, dank, place.  After one game there, I vowed never to return.  Baseball should be played outdoors on natural grass, period.  Anyway, Tropicana Field is the worst place in the world to watch a baseball game.  Its dark, even with the lights on, it has an echo like an old abandoned construction warehouse, its just a terrible place to watch and play a baseball game.  I loved PNC Park in Pittsurgh -- now that is a place to watch a game! 

Anyway, this is a blog about tax so I'll get to the point.  The hated Yankees (I hate the Red Sox too!) -- may they never win another penant -- are building a new ballpark as we all know.  As a matter of fact, the Rays are trying to get the taxpayers to help pay the $16 billion bill necessary for a new ballpark that will look sort of like the San Francisco Giants' waterfront stadium (a beautiful partk that is!).  Here is an artist rendering of the proposed St. Petersburg beauty:

 

Now THAT is a stadium at which to watch a ballgame.  Fruition, of course, depends on taxpayer support and no doubt a plain old hotdog will cost about $20.00 if the stadium is built.  Recently, Representative Dennis Kucinich wrote a letter to the IRS a few weeks ago questioning the appropriateness of using tax exempt financing to support such quintessentially private activities.  Like I said, I love baseball and hope the stadium in St. Petersburg gets built.  But intellectually, one has to admit that tax exempt financing for sports stadiums cannot be described as anything  but tax exemption for private benefit.

The issue with respect to taxpayer financing of sports stadiums -- via tax exempt bond financing -- is whether more than 10% of the payments on the bonds will come from private business proceeds.  If more than 10% of the payments on the bonds come from private sources, that's a pretty good  indication that the bonds are being used to an excessive extent to finance private benefit.  The IRS has interpreted the so called "private payment test" to exclude PILOTs -- payments in lieu of taxes -- as private payments.  In other words, if the Steinbrenners (and whoever owns the Rays) make payments in lieu of taxes towards the repayment of tax exempt bonds, those payments are not treated as payments from private business sources but essentially as taxes (and thus pubic sources, suggesting public rather than private benefit).  The treatment of private payments as public taxes allows for the legal fiction that the subsidy embodied in tax exempt bonds are for public rather than private benefit.  Kucinich has a point, though, when he argues that PILOTS are more like special assessments for individual private benefit than generally applicable taxes:

On March 29, 2007, the Domestic Policy Subcommittee held a hearing that looked at the promises of economic prosperity that are made to cities which finance professional sports stadiums. The first hearing revealed that no evidence has been found to suggest that professional sports stadiums create jobs, raise incomes, or raise local tax revenues.  America’s infrastructure is crumbling while state and local officials approve taxpayer-financed professional sports stadiums. About 31 percent of the nation’s urban bridges are deemed structurally deficient, awaiting public investment. At the same time the public is paying about 80 percent of the costs for new professional sports facilities.

Like I said, Kucinich has a point.  Mine is less sophisticated and perhaps less civically motivated:  As long as ticket and hot dog prices are so outrageously high, the financial side of me hopes people admit the logic of Kucinich's argument.  But I'll patronize the new stadiums even if they don't.  I love real baseball better than logical tax policy -- hey, I'm just being honest about it!

For the full transcript on the hearing regarding public support for privately owned sports stadiums go here.

dkj

Grassley Slams Nonprofit Hospitals in Hearing Over Health Care Costs

In a Senate Finance Committee hearing held June 10 regarding the high cost of health care, Senator Chuck Grassley took time out to particularly slam the financial practices of nonprofit hospitals.  He told the story of an acute lukemia patient who received care from a nonprofit hospital and then before and after receiving treatment became the "victim" of the hospital's collection efforts.  In a remarkable bit of dicta (even if true), Grassley stated:

I guess I shouldn’t have been shocked given what was uncovered by my staff’s investigation of hospitals that purport to provide care for the neediest in society and receive significant tax benefits for doing so. In addition to not paying income taxes, non-profit hospitals receive tax-deductible contributions, issue tax-exempt bonds and receive exemptions from state and local property and sales taxes. This committee heard testimony that these hospitals receive benefits of more than $40 billion annually for the care they are supposed to provide. These benefits were granted to hospitals back at the turn of the last century when hospitals were the only places where the poor could go when they were sick. The enactment of Medicare in 1965 and the explosion of the insurance market since then has resulted in incentives for hospitals to treat only paying patients. The current environment is no different than where we were over a hundred years ago. Back then, people with money had private physicians who made home visits. The poor received treatment at alms houses supported by philanthropy. The only difference now is that many of those former “alms houses” have become rich institutions that believe they no longer need to serve the poor to reap all the benefits of their tax exempt status.

Whew.  Hard to rebut, I'd say.  As I used to tell my criminal clients, "sure its anecdotal, but it starts to be a problem when one has to continually explain anecdotes." Nonprofit hospitals are slowly but surely being villified as criminals, I think.  Anyway, I wonder if this means that Grassley intends to start linking the health care crisis in this country to the practices of nonprofit hospitals.  I suppose it would not be unfair to at least lay some of the blame on those who pose as charities.  Indeed, the witness referred to in Grassley's statement could serve as a poster child for bad nonprofit hospitals, according to a Wall Street Journal article included in the hearing record:

An Ohio State University study found net income per bed nearly tripled at nonprofit hospitals to $146,273 in 2005 from $50,669 in 2000. According to the American Hospital irectory, 77% of nonprofit hospitals are in the black, compared with 61% of for-profit hospitals. Nonprofit hospitals are exempt from taxes and are supposed to channel the income they generate back into their operations. Many have used their growing surpluses to reward their executives with rich pay packages, build new wings and accumulate large cash reserves.  M.D. Anderson, which is part of the University of Texas, is a nonprofit institution exempt from taxes. In 2007, it recorded net income of $310 million, bringing its cash, investments and endowment to nearly $1.9 billion. "When you have that much money in the till and that much profit, it's kind of hard to say no" to sick patients by asking for money upfront, says Uwe Reinhardt, a health-care economist at Princeton University, who thinks all hospitals should pay taxes. Nonprofit organizations "shouldn't behave this way," he says.  It isn't clear how many of the nation's 2,033 nonprofit hospitals require upfront payments.  A voluntary 2006 survey by the Internal Revenue Service found 14% of 481 nonprofit hospitals required patients to pay or make an arrangement to pay before being admitted.  It was the first time the agency asked that question.  Nataline Sarkisyan, a 17-year-old cancer patient who died in December waiting for a liver transplant, drew national attention when former presidential candidate John Edwards lambasted her health insurer for refusing to pay for the operation. But what went largely unnoticed is that Ms. Sarkisyan's hospital, UCLA Medical Center, a nonprofit hospital that is part of the University of California system, refused to do the procedure after the insurance denial unless the family paid it $75,000 upfront, according to the family's lawyer, Tamar Arminak. The family got that money together, but then the hospital demanded $300,000 to cover costs of caring for Nataline after surgery, Ms. Arminak says.

Not good.  Not good at all.

dkj

House Bill Would Extend Tax Break for Gifts of IRAs to Charity

Until the provision expired at the end of 2007, an IRA owner who was older than 70 1/2 could transfer up to $100,000 from his or her IRA to charity without paying income tax on the withdrawal from the IRA.  On May 21 the House passed a bill that would extend this tax break for one more year, untill December 31, 2008.  See the story in the Chronicle on Philanthropy.

sng

Tribal Charities Fairness Act introduced

On May 8, Representative Becerra (for himself and several others) introducted HR 6005, a bill to treat Indian tribal governments as state governments for purposes of the public charity/private foundation distinction under the tax laws.  Contributions by state governments are treated as contributions that affect qualification as a public charity under IRS 509(a)(1) and 509(a)(2).  By treating tribal governments as state governments, the bill would help charities that receive support from tribal governments obtain public charity status.  The bill was referred to the Committee on Ways and Means.

sng

Decrease in Car Donations

The Chronicle on Philanthropy notes that a recently released IRS report shows a significant decrease - 80% - in deductions claimed for car donations in 2005, the year more restrictive rules on deductibility went into effect. 

Prior to 2005 donors could take as a deduction the fair market value of the car.  The IRS worried about inflated values, and the worry appears to be borne out by the decrease in claimed deductions.  Under the new rules, the donor can deduct only the amount the charity receives when it sells the car - the true fair market value.  The IRS report shows a drop from $2.4 billion in 2004 to $470 million in 2005 in deductions claimed between 2004 and 2005.  The report does not indicate whether the drop in value also reflects a decrease in cars donated.  Many people may not claim the deduction and those that do may simply claim the more appropriate amount, so the number of cars in charities' hands probably did not drop as much as the 80% decline might suggest on first glance.

sng