Monday, September 21, 2015
Last week, the IRS issued Notice 2015-62 discussing the tax treatment of an investment made for charitable purposes that does not otherwise qualify for status as a “program-related investment” under Code Section 4944(c). If you are reading this blog, you probably know that Code Section 4944 imposes a prudent investor-type rule on private foundations by imposing an excise tax on investments that jeopardize a private foundation’s charitable purposes. There is an exception to this general rule under Code Section 4944(c) for program-related investments (PRIs). For an otherwise charitably-motivated investment to qualify as a program-related investment, however, no significant purpose of the investment can be the production of income or the appreciation of property (among other things...).
The news is awash with discussions of socially-responsible investing, impact investing, mission-related investing and the like - however, none of these types of investing are tax concepts. Rather, they are ways that a foundation (or other endowment-type entity) can approach investing in a manner that considers charitable outcomes. Such categories of investments do not necessarily qualify as "program-related investments." Rather, PRIs are a thing, as my students would say - a specific term of art used in the tax code for which an investment must specifically qualify. As indicated above, in order to qualify as a PRI, no significant purpose of the investment can be for the production of income or appreciation of property. Of course, many investments view charitable outcomes as one of many bottom line results, along side of the potential for profit. Such charitably-inclined investments may fall into one or more of the categories of social investing, but they are not PRIs.
Notice 2015-62 clarifies the manner in which the prudent investor standard of Code Section 4944 treats the accomplishment of charitable purposes as a relevant factor when evaluating an investment that is NOT a PRI. For many years, there was some question as to whether fiduciary standards would allow a foundation to settle for a lesser yield in order to accomplish other charitable goals – for example, universities divesting in South Africa companies during the apartheid era, the Catholic Church not investing in contraception or land mine manufacturers, or affirmative investments in emerging green energy technologies. (For more discussion on this topic, see this very awesome article by the very awesome Susan Gary: It is Prudent to Be Responsible? The Legal Rules for Charities that Engage in Socially Responsible Investing and Mission Investing).
With the adoption of UPMIFA in 2006 by NCCUSL and UPMIFA’s subsequent adoption in almost all jurisdictions (what's up with that, Pennsylvania?), it became clear that most jurisdictions would allow for the consideration of charitable goals as an appropriate factor in evaluating an investment, so long as the overall determination was reasonable. Notice 2015-62 adopts a similar standard for Section 4944, stating that “foundation managers may consider all relevant facts and circumstances, including the relationship between a particular investment and the foundation’s charitable purpose.”
This Notice is certainly good news for private foundations involved in socially-responsible, mission-related, or impact investing. Of course, the Notice does not solve all of a private foundation’s worries in this area. A private foundation must still comply with Code Section 4944’s overall requirement that foundation managers exercise ordinary business care and prudence in selecting investments. For state law purposes, UPMIFA does not necessarily cover every type of charitable organization; therefore a foundation needs to determine whether or not a different state investment standard might apply. And of course, for excise tax purposes, only a program-related investment will be treated as a qualifying distribution for purposes of Code Section 4942.
Wednesday, September 9, 2015
In addition to our previous post on fellow blogger Lloyd Hitoshi Mayer's opinion piece regarding John Oliver's segment on the tax exemption of churches, Edward Zelinsky (Cardozo) posted to the Oxford University Press Blog, John Oliver, Televangelists, and the Internal Revenue Service:
John Oliver’s sardonic spoof of televangelists raises important issues that deserve more than comic treatment. Oliver’s satire was aimed both at the televangelists themselves and at the IRS. In Oliver’s narrative, the IRS acquiesces to televangelists’ abuse by granting their churches tax-exempt status and failing to audit these churches. The law defines the term “church” vaguely. The IRS’s allegedly lackadaisical approach, Oliver tells us, permits televangelical preachers to live luxurious lives replete with private planes and tax-free cash, financed by naive and exploited believers.
An initial problem with this critique is that the IRS does not write the Internal Revenue Code. Congress writes the Code, and the American people elect Congress. As Peter Reilly of Forbes observes, in section 7611 of the Internal Revenue Code, Congress constrained the IRS’s ability to audit churches. Oliver criticizes the resulting low audit rate of churches without explaining who is responsible for this low audit rate—namely, Congress.
There are competing interpretations of section 7611. This provision of the Internal Revenue Code might be viewed as a plausible effort to minimize church-state entanglement by constraining the IRS’s ability to audit churches. Alternatively, Code section 7611 might be understood as Congress bending to political pressures from churches. Both narratives might contain part of the truth.
In any event, the low audit rate of churches, which Oliver blames on the IRS, is the responsibility of Congress. For better or worse, Congress has made it more difficult for the IRS to audit churches than to audit other persons and institutions in Code section 7611.
Another bête noire of Oliver’s critique is the private planes used by some televangelists. However, a minister’s personal use of a church-owned plane is taxable income to him, just as a corporate executive’s personal use of a company plane is taxable income to him.
More generally, churches pay more taxes than many people believe (including, apparently, John Oliver). For example, ministers pay self-employment taxes while churches pay FICA taxes on the salaries of their nonclerical employees. In many states, churches are subject to the sales tax, either as buyers or sellers and sometimes in both capacities.
Churches do not pay federal and state income taxes on their basic operations. However, neither do other nonprofit organizations such as colleges, universities, hospitals, and private foundations. It would be interesting for Oliver to compare the lifestyles of the individuals who lead these tax-exempt institutions with the life-styles of the church leaders of whom Oliver is so critical.
Interestingly, one phenomenon which troubles Oliver—small donors sending cash contributions to televangelical churches—is not problematic from a tax perspective. Oliver obviously disapproves of these donors and their responsiveness to televangelists’ appeals. However, small donors’ contributions are typically not tax deductible. Contributions to churches and other charitable institutions are deductible by the taxpayer only if the taxpayer itemizes personal deductions on his Form 1040. This occurs only among more affluent donors whose deductible outlays exceed their standard deduction for income tax purposes.
For 2015, a single taxpayer’s standard deduction is $6,300, while the standard deduction for a married couple filing jointly is $12,600. Thus, the modest donations cited by Oliver, while large relative to the donors’ low incomes, are generally not tax deductible because donors with limited incomes typically do not contribute enough to itemize their deductions. The real beneficiaries of the Internal Revenue Code’s charitable deduction are upper-middle class and wealthy taxpayers. These affluent taxpayers typically do not contribute to churches, but to such secular entities as universities and museums.
Finally, the legal issue of defining a church involves serious trade-offs that Oliver does not explore. Again, Congress, not the IRS, writes the tax law. Congress could, through the Internal Revenue Code, define “church” more restrictively to crack down on the kind of arrangements Oliver satirizes. However, a narrower definition of a “church” could also be used against nonconformist and unconventional religions—which, at times in our country’s history, would have included abolitionist churches, the Catholic Church, the Church of Latter Day Saints, and other now mainstream organizations. For that reason, as a society, we generally seek to minimize church-state entanglement, even though the resulting zone of religious autonomy can be exploited by the kind of ministers Oliver skewers.
Since at least Sinclair Lewis’s Elmer Gantry, evangelical preachers have been subject to the kind of criticism Oliver advances. The IRS, particularly in its handling of exempt organizations, is in many ways a troubled and poorly-managed agency. If we categorize Oliver’s skit as mere entertainment, it was, well, entertaining. However, Oliver evidently seeks to place himself in another tradition of American life, the tradition of Mark Twain, Ambrose Bierce, Will Rogers, and Mort Sahl. These humorists participated in important political discussions through their comedic commentary.
By the demanding standards of this tradition, Oliver’s satire of televangelists falls short.
[Hat tip: TaxProf Blog]
Wednesday, August 19, 2015
Professor Victor Fleischer from the University of San Diego has an opinion piece in today's New York Times advocating an 8% annual required payout for university endowments over $100 million. Such a payout is more than the 5% amount required for private foundations under Section 4941, and well more than the payouts for medical research organizations and private operating foundations. In fact, it is more than the amount set as a rebuttable presumption of unreasonableness for endowment spending under Section 4(d) of UPMIFA, which is 7%.
Fleischer's concern was prompted by his research into investment manager compensation, which indicated that that private equity fund managers received more in payouts than students at at least five universities: Harvard, Yale, Texas, Stanford and Princeton. Much of this compensation was in the form of the dreaded carried interest, which is under scrutiny in numerous arenas, not just the nonprofit world.
It is an interesting proposition. I am somewhat dubious of an 8% payout, wondering whether that might have an adverse impact on the risk profile of endowments, which by all accounts already have fairly aggressive asset allocations (Fleischer says that endowments this size are returning over 8% already so it won't matter). I also wonder what rationale there is for subjecting only university endowments to such a rule, as it seems to me that there may be other exempt organizations of a similar size that might have a similar investment compensation issues (large foundations, for example, only pay 5%) that are not subject to such a high payout requirement. Finally, isn't the issue really the investment manager compensation, so mandating a payout isn't really reaching the root of the problem? But I may be picking around the edges on this. Would love to hear others thoughts.
Thursday, August 13, 2015
As announced Wednesday in a blog post by the head of the White House Office of Faith-based and Neighborhood Partnerships, nine federal agencies are issuing notices of proposed rulemaking (NPRMs) that will codify recommendations made by an advisory council to the President on "strengthening the social service partnerships the government forms with nongovernmental providers, including strengthening the constitutional and legal footing of these partnerships." The blog post further provides the overall content of the NPRMs:
The proposed rules clarify the principle that organizations offering explicitly religious activities may not subsidize those activities with direct federal financial assistance and must separate such activities in time or location from programs supported with direct federal financial assistance. For example, if a faith-based provider offers a Bible study as well as a federally supported job training program, the Bible study must be privately funded and separated in time or location from the job training program.
The NPRMs also propose new protections for beneficiaries or prospective beneficiaries of social service programs that are supported by direct federal financial assistance. In the proposed rules, the agencies set forth a notice to beneficiaries and prospective beneficiaries that informs them of these protections. These notices would make it clear, for example, that beneficiaries may not be discriminated against on the basis of religion or religious belief or be required to participate in any religious activities and advises beneficiaries that they may request an alternative provider if they object to the religious character of their current provider.
At the same time, the NPRMs assure religious providers of their equal ability to compete for government funds and of continuing protections for their religious identity like the ability of providers to use religious terms in their organizational names and to include religious references in mission statements and in other organizational documents. The NPRMs also state that the standards in the proposed regulations apply to sub-awards as well as prime awards, and set forth definitions of “direct” and “indirect” federal financial assistance. These areas have been sources of confusion for some providers.
The NPRMs are to be issued by the federal departments of Agriculture, Education, Health and Human Services, Homeland Security, Housing and Urban Development, Justice, Labor and Veterans Affairs as well as the U.S. Agency for International Development, and will apply to a broad range of federal programs that have involved faith-based organizations for years. These federal agencies will be requesting interested parties to submit comments over the next 60 days, which will then be considered in issuing final regulations.
The Supreme Court ruling on same-sex marriage has yielded a lot of commentary regarding its potential effect on tax-exempt, religious organizations, including religiously-affiliated educational organizations. The Washington Post article referenced below sets forth the IRS Commissioner's commitment to not change its stance and begin revoking the exemption of religiously-affiliated educational institutions that oppose the ruling. The second set of blog posts looks at the issue more broadly, generally making the argument that opposition from such educational and other religious institutions results in "vibrant" and essential pluralism.
After the Supreme Court’s decision on gay marriage, religious leaders feared that religious universities, nonprofits and other institutions could lose their tax-exempt status. IRS Commissioner John Koskinen has promised the Senate Judiciary Oversight Subcommittee that his agency would not go after the tax-exempt status of religious colleges and universities that oppose gay marriage.
During a hearing Wednesday conducted by the Senate Subcommittee on Oversight, Agency Action, Federal Rights and Federal Courts, Sen. Mike Lee (R-Utah) asked Koskinen whether the IRS would “not, in the absence of a directive by Congress or by the courts," take action to remove religious schools’ tax exemption.
“I can make that commitment,” Koskinen said, explaining that “we see no basis for changing our examination criteria as a result of this Supreme Court case.”
Koskinen discussed the potential for such schools’ tax exemption to go under scrutiny down the road. “If we ever did that, we would issue it for public comment. There would be no surprises,” Koskinen said. “The public would have plenty of notice and plenty of opportunity to comment, and that’s not going to happen in the next two and a half years.” [emphasis added]
PrawfsBlog, "Garnett et al. on Tax-Exempt Status and Religious (and Other) Organizations" by Paul Horwitz (Alabama)::
Should government insist that all private organizations comply with its own sense of the good? Most people, I think, still agree that the answer to this question is no. However strongly they feel that those public values are the right values, and however devoutly they may hope that all people and all groups come to share them and to act accordingly, they still believe for various reasons--not least a sense that the public-private distinction, however imperfect and vulnerable to critique, represents an important value of its own--that government should not and perhaps cannot rigorously or ruthlessly enforce what Nancy Rosenblum has called a "logic of congruence" between public and private organizations. ...
Our friend and fellow Prawfs writer Rick Garnett discusses that question in a new editorial co-written with John Inazu and Michael McConnell [see below]. The title, which I gather its writers did not choose and might not be completely comfortable with, is "How to Protect Endangered Religious Groups You Admire." They argue, in brief, that we should, at a minimum, be willing to protect religious non-profits that provide significant contributions to the public good despite their now heterodox views.
Read the whole thing. Feel free to disagree. I will add two points. I agree, in sensibility at least, with a point made by Marc DeGirolami in a recent post about the editorial: "We use the language of 'exemption' when we speak of the taxable status of nonprofits, but it would be better instead to think of their nontaxable status as marking a boundary of the government's power to tax." Reasonable disagreement is available about whether "power" is an apt word here, but for those who believe that whatever the extent of state power, it ought not lightly be exercised in a way that circumscribes civil society and a vibrant pluralism, the sensibility is right. Second, it ought not be only pluralists, and certainly not only social conservatives, who support these arguments. This is an argument that liberals ought to be taking seriously now, especially as progressive thought continues to drift in a more illiberal direction.
Christianity Today op-ed: How to Protect Endangered Religious Groups You Admire, by Richard W. Garnett (Notre Dame), John D. Inazu (Washington University) & Michael W. McConnell (Stanford):
Today, tens of thousands of religious organizations, and tens of millions of Americans, continue to believe and teach that the proper understanding of marriage is a union of one man and one woman. But they do far more than believe and teach this and other views.
They also give food, clothing, shelter, counsel, and comfort to millions of Americans in need. They offer some of the most important and desperately needed health, educational, and social services in the country. And they provide billions of dollars and thousands of full-time workers for international relief aid that serves vulnerable migrants, refugees, and persecuted minorities. The work of religious organizations has long been and continues to be central both to religious believers’ lives and to the welfare of others. Our communities—and, indeed, communities around the globe—would be much worse off without these organizations and their faith-informed good works.
Despite the crucial role that religious organizations and individuals have long played in our country, some voices now suggest that they and their work are somehow tainted because of their beliefs about marriage and sexuality. Some argue that the time has come to push religious believers out of the public square and confine them to the quiet, private realm of personal prayer and worship. This despite the Supreme Court's recent decision in Obergefell v. Hodges, which not only required states to legally recognize same-sex marriages but also said, “the First Amendment ensures that religious organizations and persons are given proper protection as they seek to teach the principles that are so fulfilling and so central to their lives and faiths.”
Nonetheless, because of their traditional views on human sexuality, religious organizations have already been threatened with heavy-handed government action. ...
[W]ithin days of the Court’s decision in Obergefell, New York Times columnist Mark Oppenheimer wrote that the government should eliminate tax-exempt status from “organizations that dissent from settled public policy on matters of race or sexuality.”
Mr. Oppenheimer failed to acknowledge that in a pluralistic and democratic society, government routinely recognizes the tax-exempt status of organizations that differ from “settled public policy.” For example, not that long ago, the Human Rights Campaign was tax-exempt when it differed from settled policy on matters of sexuality; the same is true of organizations, like the Sierra Club, who push for changes in environmental regulation, or anti-war groups, who oppose US military policy. One of the principal purposes of civil society organizations is to challenge “settled public policy.”
Moreover, the majority opinion in the 5-4 decision in Obergefell earlier this summer made clear that “Many who deem same-sex marriage to be wrong reach that conclusion based on decent and honorable religious or philosophical premises, and neither they nor their beliefs are disparaged here.” ...
Some members of Congress have now introduced the First Amendment Defense Act (FADA) in an effort to ensure that overheated rhetoric and political opportunism do not endanger the important work of faith-based organizations. The core of FADA would require the federal government to honor its longstanding commitments to treat all such organizations with an even hand. It would prevent federal officials from attempting to strip tax-exempt status, from denying equal access to federal facilities and entitlements, or from taking adverse actions related to licensing or accreditation. ... We think the best approach is to tailor FADA to the core area of concern: religious nonprofits. That focus would serve the cause of religious freedom by making it more likely that this important legislation can move forward.
[Hat tip: TaxProfBlog]
Friday, July 24, 2015
As previously blogged, the GAO Report to Congress (the full report is here) on the IRS processes for political activity referrals found significant deficiencies with respect to the initial allegations that triggered an audit. In some cases, no case files were found by the GAO. These deficiencies "increase the risk that EO could select exempt organizations for examination in an unfair manner - for example, based on an organization's religious, educational, political or other views." According to Bloomberg BNA, in the hearing before the Ways and Means Oversight Committee in which the GAO report was released, it was determined that for the past six years, "one person working alone at the IRS has been deciding which complaints about the political activities of exempt organizations should be followed up."
Following the above-referenced hearing, IRS Commissioner John Koskinen reported to Bloomberg BNA that final regulations on political campaign activities by exempt organizations will not be in place prior to the 2016 presidential election (see proposed regulations here). The regulations will likely not be effective until January 2017. See prior blog posts on the proposed regulations and political activity regulations generally (April 16, 2014; July 16, 2015).
Thursday, July 23, 2015
As reported by The New York Times, a charity fraud case in the New York court is a great teaching case reminiscent in part of United Cancer Council, except this case involves potentially both private benefit and private inurement. The National Children's Leukemia Foundation, based in Brooklyn, is accused of paying more than 80% of the $9.75 million it raised from 2009 to 2013 in telemarketing and direct-mail fundraising campaigns. In contrast, the Foundation only expended $57,451 in "direct cash assistance to leukemia patients" in the same time period. The Foundation's "Make A Dream Come True" program, which arranged family trips and celebrity introductions to children with cancer, was primarily a phantom effort, with only $7,866 paid out prior to 2009 and nothing thereafter. The Foundation's claims of maintaining a bone marrow registry and "banking stem cells" were admitted to be mostly false.
Reeking of private inurement, the Foundation was essentially a one-person operation, operated from the founder's basement. The founder extracted a $595,000 salary and $600,000 deferred compensation from 2009 to 2013, along with a future pension. The court petition also accuses the founder of using Foundation funds for personal expenses, including house renovations. A lack of board oversight and internal accounting controls appear to have contributed to the founder's ability to control both operations and raised funds. In addition, the Foundation transferred $655,000 to an Israeli research foundation created by the Foundation's founder.
Thursday, July 9, 2015
The ABA's Real Property, Trust and Estate Section has a series called "Professors' Corner," which puts on some really great free webinars for ABA members (sorry - no CLE, but what do you want for free?) on real estate and T&E topics from both academic and practitioner view points. This Wednesday I was in the midst of a road trip, during which I dialed in to the latest in the series on an update to UPMIFA. (Don't worry, I pulled over to a Tim Horton's to dial in. And get coffee. Because road trip.)
The webinar featured Susan Gary from UOregon and Terry Knowles, the Assistant Director of Charitable Trusts in the New Hampshire Attorney General's office. Many of you may know that Susan was the Reporter for UPMIFA with the Uniform Law Commission, and that Terry was an advisor (I believe on behalf of NASCO but I could be wrong on that.) In any event, it was really interesting to hear both of them talk about what's happened in the nine years (has it really been nine years!!!) since UPMIFA was passed by the ULC.
I highly recommend listening to the whole webinar (I think that it will archive soon so ABA should be able to access it) but here are three big picture take aways:
- FIGHT! The lawyers and accountants continue to use different definitions when dealing with endowed funds, which causes confusion all over the place. Susan talked about how the accountants have defaulted to having their clients use historic dollar value to define restricted assets, even thought that isn't required anywhere and actually sort of undercuts what UPMIFA is trying to do. Often, if there is professional advice to small nonprofits, it's from the accounting folks and not the legal folks, so this problem really has cause some issues. I was happy to hear from Susan that FASB is looking to revise this, and that it has some draft rules out for comment.
- UNSAFE HARBORS. As some of you may know, the original UPMIFA draft from the ULC has a provisions that says that endowment spending in excess of 7% is subject to a rebuttable presumption of unreasonableness. Many states didn't adopt - it was interesting to hear that one of the professed rationales for not adopting the 7% rules was the concern that it would cause a safe harbor for 6.99% and under. It was also intersting to hear Terry talk about what her office sees as overcoming that presumption - "we needed it because our budget is short" is insufficient!
- WHAT IS THIS IPS OF WHICH YOU SPEAK? Again, it was interesting to hear Terry talk about what her office needs to do when evaluating spending decisions from endowments. If an endowment is supposed to be perpetual, it really is important to take into account inflation as a factor for consideration, even if there is no magic in how you do it exactly. It seems like the AGs are really looking for a thoughtful process and adherence to an investment policy statement.
In any event, I do recommend the webinar to anyone interested in the endowment spending issue (which seems to be getting some attention from Congress and otherwise as of late - I've linked to Brian Galle's thought-provoking paper on endowment spending) and I really recommend the webinar if you find yourself with lots of time on I-90.
Safe summer travels, all.
Monday, July 6, 2015
In the wake of Obergefell, the Internet was a dangerous place to be as a tax lawyer. Oh, a nickel for all the posts that lamented the loss of tax-exempt status for churches that didn't perform same sex marriages forthwith! Of course, I was sure to correct them all right away, because you know, nothing on the internet can be wrong, right?
There's been a lot of coverage by the news media on this issue as we've had some more time to discuss the issues, as discussed previously here at the Nonprofit Tax Prof Blog. Here's the latest in the coverage from the Baltimore Sun, which discusses the tax exempt status of religiously-affiliated universities. The article hedges on the issue of tax-exempt status, but I think both sides of the tax argument can find some common ground in the discussion found there. Under a Bob Jones University analysis, I'm not sure that we are there yet - there being that discrimination on the basis of sexual orientation is so fundamentally against public policy as to cause loss of tax-exempt status. While Obergefell certain makes it a stronger case, I think we will need to see more from the other branches of government before we get to that level. That being said, I agree with the Sun article in the thought that even if we aren't there now, I think we may be within my lifetime.
I do think that it is important to point out that Bob Jones University specifically talked about racial discrimination in education as being the fundamental public policy at issue and that the case involved the tax-exempt status of a university, not a church. Note that this article only talks about colleges and universities - the question of the tax-exempt status of churches is much more complicated. I don't believe there there is a case that we know of that where a church lost its tax-exempt status on the basis of religious discrimination. Can any of my Tax Prof or Nonprofit Prof Blog colleagues think of any example?
Tuesday, June 16, 2015
The Washington Post reported yesterday that a coalition of community groups filed a 22 page complaint against WalMart Foundation, essentially accusing the foundation of operating for private benefit rather than the public good: From the Post article:
More than a dozen community groups filed a complaint with the Internal Revenue Service Monday alleging that the Walmart Foundation violated its tax-exempt status by using charitable funds to advance the retailer’s entrance into urban markets including Washington. The 22-page complaint, addressed to IRS Commissioner John Koskinen, details the retailer’s marketing and lobbying activities as it sought approval to open stores in New York City, Boston, Chicago, Los Angeles and other cities. The groups allege that the foundation is completely controlled by the company and that it “appears to target its donations and influence its grantees primarily to assist WalMart to achieve those expansion goals, ultimately providing Walmart more than an incidental benefit. Walmart Foundation’s activities are impermissible under the Code.”
Walmart has been forced to defend itself against allegations that its multi-billion dollar foundation has been using tax-exempt funds to help the retail chain expand into urban areas. On Monday, more than a dozen community groups filed a complaint with the Internal Revenue Service alleging that the WalMart Foundation violated tax code by targeting its donations to cities where the big-box giant has faced opposition to its growth plans. Data analysis of tax returns by these local nonprofits shows an uptick to the tune of millions in donations from the WalMart Foundation to organizations in Boston, New York, Washington D.C., and Los Angeles as WalMart pursued store openings in these cities.
What I found most curious and -- from a purist's standpoint, I suppose -- most disconcerting is the complaint's imprecise sort of casual discussion of private inurement and private benefit. Granted, I have only skimmed the complaint thus far but it seems the complainers are really just sorta casting a wide net and hoping to catch violations that might be lurking rather than making a strong case to suggest any real violations they know to exists. Sometimes premature accusations made for the purpose of attention or sensationalism do more harm than good. I can't help but wonder if this is a case in point.
Wednesday, June 10, 2015
One of my least favorite days in Nonprofits class is the day that we discuss the difference between trust and corporate fiduciary duties (Sibley Hospital, anyone?). Lest one think that the distinction is purely academic, along comes the sad case of Sweet Briar College to reaffirm that this area of law remains completely and utterly confusing.
If you’ve not been following the story, Sweet Briar College’s operating entity is a “non-profit corporation” (Complaint, Para. 6) which was created by the Virginia General Assembly “to administer the trust created by the will” of its primary funder, Indiana Fletcher Williams. The Complaint also asserts that SBC is a charitable organization under the Virginia Charitable Solicitation laws and is a “trustee” under Virginia’s version of the Uniform Trust Code. (So I’m confused already….)
According to the Complaint, the provisions of Mr. Williams’ will place his residuary estate in a trust. The trustees of that trust were instructed to create a corporation to run a women’s college in perpetuity. It would appear that in 1901 in Virginia, a nonprofit corporate charter could only be obtained by act of the General Assembly, and so it was. (Complaint, p. 17). The corporate charter incorporated the terms and conditions of Mr. Williams’ will, which required the assets to be held in perpetuity for the women’s college and directed that the assets not be sold.
Fast forward to March, 2015, when the current Board of Directors of the college announced that it would close the doors of the college, and liquidate its assets, including its endowment (Complaint, p. 26) due to the college’s poor financial condition. Litigation, of course, ensued.
The Complaint alleges violations of the Uniform Trust Code, which it asserts is applicable not only the original funding of the College occurred through the trust under Mr. Williams’ will, but also because “the Act of the Assembly creating the College requires that the College be administered in the manner of an express or charitable trust” (Complaint, p. 55). It then states, “Because the College is a charitable corporation, the assets held by Defendants are deemed to be held in trust for the public.” (Complaint, p. 56). Among other things, the original Complaint requested a temporary restraining order and a preliminary injunction restraining actions in furtherance of closing the school.
So the question then becomes, Sweet Briar College a trust? Is it a corporation? Does it matter? Should it?
More on this Nonprofit Law Prof Blog Cliffhanger next time….
Tuesday, June 9, 2015
You may have been following the FOIA lawsuit by Public.Resource.org, (a Section 501(c)(3) organization headed by Carl Malamud that is dedicated to open government) against the IRS. Public.Resource.org filed a FOIA request for information on the Sheet Metal and Air Conditional National Association (SMACNA) and its affiliated entities (the original complaint is here), but demanded that the IRS turn over the information in electronic format (not paper copy). The IRS resisted, arguing that it was administratively burdensome and that the paper copies were sufficient. In January of this year, however, the District Court ordered the IRS to turn over the electronic files of the requested Forms 990 within sixty days.
Sixty days came and went. Appeals happened. According to The Chronicle of Philanthropy, however, it looks like the IRS apparently finally released the SMACNA documents this week (the documents are here). Of greater interest (not that sheet metal isn’t interesting, … I guess… ) is the article’s report that the IRS is dropping its appeal. Given that Malamud wants the IRS to create a fully searchable database of all electronically filed Forms 990, I wonder what comes next? Will the IRS voluntarily comply with electronic file FOIA requests? In the process of responding to this law suit, did the IRS set up a procedure that could be replicated easily? Are they going the full database route – according to the article, it appears that discussions are underway. In the grand scheme of things, such a database would be very useful, but so would a great number of things administratively at the IRS. After all, the IRS has so many spare folks sitting around with nothing to do…
As an aside, I wondered why the sheet metal folks drew the ire of Public.Resource.org – the backstory appears to be that Public.Resource.org investigated and sued the SMACNA with regard to the association’s efforts to have its standards incorporated into state and local safety codes.
Thursday, May 28, 2015
Public Interest Registry (PIR), administrator of the .org top-level domain, has launched two new domains that nonprofits all over the world may use: .ngo and .ong. This development is directly on target with creating more transparency and accountability for nonprofits as discussed earlier this week. Purchasers of the domains become members of PIR’s online directory, OnGood. As members, they may elect to set up profile pages and accept online donations. A Nonprofit Quarterly article discusses four reasons why nonprofits should consider registering with the new domains. Overall, this may serve as an important step toward making measurements of social impact more accessible to donors.
Wednesday, May 27, 2015
Continuing from yesterday’s post, it looks like donors are not the only ones looking for a return on their investment. Private foundations are acting more like venture capitalists these days. Today Fortune featured an article on the ability of foundations to make grants to start-up ventures that the IRS treats as regular charitable gifts in terms of tax treatment. Several of these transactions are occurring in the medical research area. What are the foundations receiving in return? According to the article, “the foundations typically take an equity stake, claim the rights to a portion of the company’s future sales, or require a payment when a drug achieves a clinical milestone.” Some nonprofits have actually earned returns totaling millions of dollars.
I have been thinking about the impact of yesterday's indictment of numerous FIFA officials on the various organizations' tax statuses, both here in the United States and abroad -- particularly under the tax laws of Switzerland. The FIFA matter would make for good class discussion, I think. According to a DOJ Press Release issued this morning:
A 47-count indictment was unsealed early this morning in federal court in Brooklyn, New York, charging 14 defendants with racketeering, wire fraud and money laundering conspiracies, among other offenses, in connection with the defendants’ participation in a 24-year scheme to enrich themselves through the corruption of international soccer. The guilty pleas of four individual defendants and two corporate defendants were also unsealed today.
The defendants charged in the indictment include high-ranking officials of the Fédération Internationale de Football Association (FIFA), the organization responsible for the regulation and promotion of soccer worldwide, as well as leading officials of other soccer governing bodies that operate under the FIFA umbrella. Jeffrey Webb and Jack Warner – the current and former presidents of CONCACAF, the continental confederation under FIFA headquartered in the United States – are among the soccer officials charged with racketeering and bribery offenses. The defendants also include U.S. and South American sports marketing executives who are alleged to have systematically paid and agreed to pay well over $150 million in bribes and kickbacks to obtain lucrative media and marketing rights to international soccer tournaments.
I did some preliminary checking and learned that FIFA is a complicated Swiss based international charitable organization comprising several other national and international nonprofit and tax exempt organizations, including the U.S. Soccer Foundation. It seems rather axiomatic that when executives -- insiders and disqualified persons, likely -- use the organization's venue selection and contracting processes to extract bribes, kickbacks, and other illicit payments from third parties, the organization is being operated for private benefit. I wonder, though, about the extent to which an umbrella organization's misdeeds can cause legal issues for one or more of its member organizations, such as the U.S. Soccer Foundation. And even if the bribes and kickbacks constitute or indicate private benefit, would the organizations subject to U.S. law be able to point to their other activities to support an argument that whatever private benefit existed was substantially outweighed by their good deeds and therefore not fatal to tax exemption? Anyway, the whole topic, along with all the exhibits and so forth available online would make for good discussion fodder in a class or seminar dealing with tax exemption in the international arena. The L.A. Times has some useful articles on the subject.
Tuesday, May 26, 2015
I have blogged often about the rise of a donor base that demands results from the nonprofits. My theory is that an efficient charitable market, where investment ends up in the hands of those charities that will put it to its most productive use, is crucial. Of course that necessitates reform to our US cross-border giving laws so that donors truly may have the ability to weigh the social impact (or return) associated with US versus non-US charities before deciding where to give. This was the subject of two parts of a three part series I have written. An efficient charitable market also requires the charitable sector to learn from the impact investing sector in terms of measuring and reporting social impact, which is the topic of my forthcoming final article in the series.
CNBC dealt with the donor dilemma of where to give effectively earlier this month. It announced that well-known think tank in the nonprofit arena, Milken Institute, has developed the Center for Strategic Philanthropy (CSP), which is designed to help donors make better giving choices. The main arm of the CSP is the Philanthropy Advisory Service. As Executive Director of the CSP, Melissa Stevens, commented, donors "are spending so much more time on their philanthropy because they want to do it well." The need for providing donors with concrete information about return on their investments is no secret to other competitors in the space such as Rockefeller Philanthropy Advisors, Pembroke and the Giving Pledge. With over $250 billion being given annually in the US, there is plenty of room for advising according to area of expertise. The CSP has already laid claim to the medical research area. According to Stevens, donors are focusing on “maximizing the social return on their philanthropic portfolios,” a phrase which necessitates the development of an efficient charitable market.
Monday, May 25, 2015
Earlier this month, we covered the 9th Circuit decision that denied the Center for Competitive Politics (CCP) an injunction that would have restricted California Attorney General Kamala Harris from requiring a list of donors who had contributed more than $5,000 in a year. See Lloyd Mayer's post.
Under current California law, nonprofit groups seeking donations from California are required to disclose donor names to the AG and to the IRS. The CCP and America for Prosperity have refused to surrender these lists asserting that their donors would be harassed. Harris has indicated that the lists would be kept confidential and used only for investigatory purposes.
As an update, the Supreme Court has denied an emergency appeal from the CCP. The CCP filed the appeal with Justice Kennedy, who denied it without prejudice. David Keating, President of the CCP, has stated that the center will continue injunction efforts in the event Harris attempts to collect donor information. Interesting, Justice Kennedy is a proponent of free speech and free spending in terms of politics, two aims the CCP promotes; however, he is also in favor of disclosure laws. This case raises important First Amendment questions for the sector. See LA Times.
Thursday, May 14, 2015
In an apparent pro-active effort to engage with a charitable nonprofit before it collapses, the Wall Street Journal and the NY Times report that Attorney General Eric T. Schneiderman has sent inquiries to board members of the Cooper Union for the Advance of Science and Art, asking about management of the college's endowment and transactions relating to the Chrysler Building, the land under which the college owns. The attention comes at least in part because of the college's decision in 2014 to begin charging undergraduate tuition, allegedly in order to avoid insolvency. The ongoing investigation has threatened the tenure of the college's president, although his position may already been at risk given apparent tensions between him and the board chairman. According to these various news reports, the potential issues center around possible financial mismanagement, including a failure to sufficient diversity investment holdings and questionable loan terms related to a new building, and lack of transparency, including with respect to regulators. Stay tuned.
There has been a drumbeat of allegations in Canada that the Canada Revenue Agency is targeting left-leaning charities for special scrutiny with respect to their alleged political activity. The latest group to make this assertion is Sierra Club Canada Foundation, which according to a CBCNews report expected auditors to arrive at its offices this week to look for evidence of political activity exceeding the permitted 10 percent level for Canadian charities. Concerns about such audits began in 2012, when 60 political audits of charities began that allegedly disproportionately hit environmental and other left-leaning charities. In 2014 the National Post reported that more than 400 academics had demanded the end of a CRA audit focused on the left-leaning Canadian Centre for Policy Alternatives, and last month CBCNews reported on a Steelworkers charity protesting being subject to a similar audit (hat tip: David Herzig).
According to the various press reports, the National Revenue Minister has repeatedly denied any bias in audit selection, stating that CRA officials make such decisions independently of political appointees. As in the United States, CRA is not able to comment on specific audits because of tax law confidentiality rules. A left-leaning think tank has called for an independent probe, however, asserting that right-leaning charities with apparent political involvement appear to have escaped scrutiny (see also CBCNews report). There does not appear to be an investigative body, such as the Treasury Inspector General for Tax Administration in the U.S., that is well positioned to engage in such a probe, however (Canadian readers, please correct me if I am wrong on this point).
The Daily Beast reports that questions and outrage are swirling around the transfer of $863,000 from the New Orleans Public Library Foundation to the Peoples Health Jazz Market, a new $10 million home for the acclaimed New Orleans Jazz Orchestra. The transfer allegedly came about because of the efforts of the orchestra's CEO and the orchestra's musical leader. The CEO served on the Foundation's board and eventually became its board chair, while the musical leader also served on the board and then was given discretion in 2012 over the Foundation's spending by the board. Both the CEO and musical leader are paid salaries by the orchestra. Since the story broke the orchestra CEO has resigned from the Foundation's board, the orchestra has pledged to return the funds at issue to the Foundation, and New Orlean's Mayor Mitch Landrieu has met with the boards of both groups and demanded changes at the Foundation.