Nonprofit Law Prof Blog

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

Forbes Magazine Reports that Wealthier Americans are Giving More During These Tough Economic Times

Today, Forbes Magazine reports that wealthier Americans are donating larger sums of money to the nation's charities.  See story excerpt below:

The Police Athletic League. The Alzheimer's Association. The Boy Scouts of America. The list of charities and other non-profits that John Catsimatidis supports runs for 57 more names.

This year isn't the best one on record to be sending out 60 checks, even if they are going to worthy causes. The sputtering economy and soaring food prices are just a couple of concerns for a supermarket magnate like Catsimatidis. The Greek-born New Yorker is also planning a run for mayor, which could cost him $100 million.

So is Catsimatidis going to temper his generosity? "I don't have any plans on cutting back," he says. He actually expects to give slightly more this year than he has previously.

Catsimatidis isn't alone. America's wealthiest are upping their contributions to charity, even with the country on the brink of recession. A new survey by the private wealth-research firm Prince & Associates found that six in 10 Americans with net worths over $30 million intend to give more this year than they did last.

And they're following through with their intentions. According to the Center on Philanthropy at Indiana University, big gifts are climbing. Individuals made 267 gifts of more than a million dollars during the first quarter, up 43% from 186 the previous year.

For the full story, click here.

AMT

The Chronicle of Philanthropy Reports that Catholic Leaders in Viriginia Apologize for Helping Teen Get An Abortion

Today, the Chronicle of Philanthropy reports that "Catholic leaders in Richmond, Va., are apologizing after a teenage immigrant in a Catholic charity’s care obtained an abortion with help from charity staff members, reports the Associated Press." It is reported that four of the staff members were fired for helping the teen.  For the full story and a link to the Associated Press, please click here.

AMT

Democratic Presidential Candidate Barack Obama Calls for the Creation of a Social Investment Fund Network to Support the Nonprofit Sector

The Washington Post reports today that Democratic Presidential Nominee Barack Obama, campaigning in Colorado (highly thought favor Republicans) called for all Americans irrespective of party-affiliation "'to step into the strong currents of history' and volunteer for service to their country, pledging to dramatically expand opportunities for those accepting his challenge."

The newspaper further reports that Senator Obama pressed the "themes of values, faith and patriotism."  In addition to calling for all Americans to volunteer for service to their country, Senator Obama, to support this proposal, laid out his $3.5. billion a year service plan that would "would expand the AmeriCorps program established by President Bill Clinton by 250,000 slots, double the size of the Peace Corps by 2011, expand the Foreign Service, and create an Energy Corps to conduct renewable-energy and environmental-cleanup projects. Veterans would be enlisted to help other veterans find jobs and support, and a Social Investment Fund Network would support the nonprofit sector."  Here is a link to an Obama Policy Paper explaining the Social Investment Fund Network.  Also, click here to view an earlier article that appeared in the Chronicle of Philanthropy in December 2007 when Senator Obama first introduced the idea of Social Investment Fund Networks.  The earlier article provides a larger discussion of Senator Obama's views on the nonprofit sector.

In addition, he called for "[a]n American Opportunity Tax Credit [that] would offer $4,000 to college students for 100 hours of public service. A planned expansion of the Army and Marines by 92,000 would be fostered with pay raises, more family-friendly policies and an end to recruiting impediments such as "stop-loss" decrees that prevent service members from leaving on schedule."

For the full article, click here.

AMT

Nonprofit Hospital CEO's in New Hampshire Getting Paid Highs and Lows

According to a weekend article in the Concord Monitor, CEO's in New Hampshire make the least to the most amoungst hospital administrators: 

Pay for nonprofit hospital executives in New Hampshire ranges widely, from a salary less than that of a pediatrician to one higher than the best-paid surgeons, according to a review of tax records for the state's 25 acute care hospitals.  Those records reveal that Concord Hospital's Mike Green is among the best-paid hospital executives in the state. According to a filing made in 2007, he earned more than $730,000 in combined salary and benefits. On the low end of the scale is Louise McCleery, the CEO of the state's smallest hospital in Colebrook. McCleery makes just more than $125,000, and said she's grateful for what she gets.

The best part of the article is a data chart showing the wide variation in nonprofit hospital CEO salaries.  To the extent the hospitals themselves vary widely in characteristics, I suppose the larger salaries may be somewhat bullet-proof against an excess benefit challenge.  On the other hand, to the extent the variatins in salaries are based on the variations in hospital revenues, that seems a different story.  The 4958 excess benefit regs say that nonprofit CEO salaries are to be judged by looking to like organization in like circumstances (or something like that).  Does that mean the profitability of like for-profit hospitals are also relevant?

dkj

Louisiana Supreme Court Finds Standing for Donors to Sue Charities

Insidehighered.com reports that the Supreme Court of Louisiana has ruled donors and their heirs have standing to sue charities regarding alleged failures to comply with the terms of their gifts.  The lawsuit at issue arose out of Tulane University's decision, in the wake of Hurricane Katrina, to merge its women's college and other undergraduate units into one unified college. 

The court's opinion is available through a link in the court's press release from July 1, 2008 under the name Pamra Matthis Howard and Jane Matthis Smith v. Administrators of the Tulane Educational Fund (no. 2007-C-2224).  It details that the gifts at issue were from Josephine Louise LeMonnier Newcomb and were allegedly intended to be used to establish and maintain the women's college, named after Mrs. Newcomb's deceased daughter.  Mrs. Newcomb made the first gift of $100,000 in 1886 (yes, in the nineteenth century), and continued to make donations to support the college for the rest of her life and through her estate.  She died in 1901. 

While the court found standing for donors or their heirs under Louisiana law, it noted that the plaintiffs had failed in their pleadings to establish that they were the "would-be heirs and legatees" of Mrs. Newcomb under Louisiana law.  The court therefore remanded the case to allow the plaintiffs an opportunity to amend their pleadings to address this issue.

The impact of the decision outside of Louisiana is unclear, as it relied upon an extensive review of Louisiana's Civil Code and the Napoleon Code upon which it is based, and so not on common law principles.

LHM

Michigan Legislature Passes Modest Nonprofit Governance Law

Crain's Detroit Business reports that the Michigan State Legislature has passed a bill that requires nonprofit corporations formed in that state to follow certain modest new governance requirements.  HB 5681 amends Michigan's Nonprofit Corporation Law to (1) require nonprofit corporations to have at least three directors on their governing boards (previous law only required a single director), (2) prohibit such corporations from making loans to or loan guarantees for officers or directors, and (3) require "charitable purpose" nonprofit corporations to notify the Michigan Attorney General and not to dispose of any assets without the AG's written approval if they are dissolved by the state's Corporations Division for failure to file annual information returns.  It also makes a number of minor changes, including to the procedures for amending a Michigan nonprofit's articles of incorporation and, in order to implement the third change listed above, creating a definition of "charitable purpose corporation" that includes but is not limited to organizations that are tax-exempt under section 501(c)(3) of the Internal Revenue Code.

The bill is currently awaiting Michigan Governor Jennifer Granholm's signature.  The article does not indicate whether there have been any statements from her office regarding her willingness to sign the bill, although given the relatively modest changes it is difficult to see what about the bill would be objectionable to either her or the nonprofit community.

LHM

NY AG Drops Final Claims Against Grasso for Excess Executive Compensation

We previously blogged that Richard Grasso, the former chairman and chief executive of the then not-for-profit New York Stock Exchange, had convinced New York's highest court to affirm the dismissal of four of the six counts brought against him by the New York Attorney General relating to Grasso's allegedly excessive compensation.  The Associated Press and the New York Times now report that the Attorney General has decided to drop the case after another New York court threw out the remaining two counts. 

According to the New York Appellate Division's opinion, the authority of the Attorney General to bring the last two statutory counts lapsed when the NYSE merged with a for-profit company, as the sole relief sought for any excessive compensation was repayment of the excess, which in this case would be paid to a now for-profit entity and so inure to its private owners.  While not completely clear from the opinion, it appears that court may also have dismissed the only other remaining claim against Mr. Grasso, relating to whether he breached his fiduciary duty to keep the board informed about his pay, especially since the AP article indicates that the AG's office believes the case against Mr. Grasso is at an end.  The full opinion can be found by going to the Appellate Division's appeals and motion calendar for July 2008, clicking on the "Appeals" link for July 1, 2008, and then scrolling to the 22nd page of the resulting PDF file, where the opinion begins.

LHM

Further Coverage of Obama's Promise to Increase Aid to Religious Charities

Yesterday we blogged about presumed Democratic presidential nominee Barack Obama's comments criticizing President Bush's faith-based initiatives but also promising to expand the cooperation between the federal government and faith-based groups, including the funding available.  Today's press is reporting the reactions to his comments, including positive and negative comments from former officials of President Bush's Office of Faith-Based and Community Initiatives and various religious leaders.  Articles can be found in the Los Angeles Times, the New York Times, and the Wall Street Journal (subscription required).

LHM

Obama Criticizes, Announces Plan to Extend Bush' Faith Based and Community Initiative Program

In the wake of a two day White House Conference on President Bush' Community and Faith-Based Initiative and the President's weekly radio address on the topic last weekend, Senator Obama today announced his intention to extend the program should he be elected President: 

Now, I know there are some who bristle at the notion that faith has a place in the public square. But the fact is, leaders in both parties have recognized the value of a partnership between the White House and faith-based groups. President Clinton signed legislation that opened the door for faith-based groups to play a role in a number of areas, including helping people move from welfare to work. Al Gore proposed a partnership between Washington and faith-based groups to provide more support for the least of these. And President Bush came into office with a promise to "rally the armies of compassion," establishing a new Office of Faith-Based and Community Initiatives.

But what we saw instead was that the Office never fulfilled its promise. Support for social services to the poor and the needy have been consistently underfunded. Rather than promoting the cause of all faith-based organizations, former officials in the Office have described how it was used to promote partisan interests. As a result, the smaller congregations and community groups that were supposed to be empowered ended up getting short-changed.

Well, I still believe it's a good idea to have a partnership between the White House and grassroots groups, both faith-based and secular. But it has to be a real partnership - not a photo-op. That's what it will be when I'm President. I'll establish a new Council for Faith-Based and Neighborhood Partnerships. The new name will reflect a new commitment. This Council will not just be another name on the White House organization chart - it will be a critical part of my administration.

Now, make no mistake, as someone who used to teach constitutional law, I believe deeply in the separation of church and state, but I don't believe this partnership will endanger that idea - so long as we follow a few basic principles. First, if you get a federal grant, you can't use that grant money to proselytize to the people you help and you can't discriminate against them - or against the people you hire - on the basis of their religion. Second, federal dollars that go directly to churches, temples, and mosques can only be used on secular programs. And we'll also ensure that taxpayer dollars only go to those programs that actually work.

With these principles as a guide, my Council for Faith-Based and Neighborhood Partnerships will strengthen faith-based groups by making sure they know the opportunities open to them to build on their good works. Too often, faith-based groups - especially smaller congregations and those that aren't well connected - don't know how to apply for federal dollars, or how to navigate a government website to see what grants are available, or how to comply with federal laws and regulations. We rely too much on conferences in Washington, instead of getting technical assistance to the people who need it on the ground. What this means is that what's stopping many faith-based groups from helping struggling families is simply a lack of knowledge about how the system works.

Well, that will change when I'm President. I will empower the nonprofit religious and community groups that do understand how this process works to train the thousands of groups that don't. We'll "train the trainers" by giving larger faith-based partners like Catholic Charities and Lutheran Services and secular nonprofits like Public/Private Ventures the support they need to help other groups build and run effective programs. Every house of worship that wants to run an effective program and that's willing to abide by our constitution - from the largest mega-churches and synagogues to the smallest store-front churches and mosques - can and will have access to the information and support they need to run that program.

Senator McCain also supports the making of federal grants to religious groups, according to The Pew Forum on Religion and Public Life, but has not yet spoken out on the issue in any great detail.  It seems to be a no-brainer, at least from a political perspective.  Recall that the proposal is to allow religious charities to compete for federal grants and contracts previously reserved for nonprofit organizations.  Opponents, including some religious organizations, have argued that federal grants to religious charities violate the Establishment Clause of the First Amendment.  Without sufficient Congressional support, the President instituted the program on a smaller scale via executive order that prohibited the use of the federal monies for proselytizing.  I think it is difficult, if not impossible, to meet that standard.  The White House's seven year report on the program is available online (click on "The Quiet Revolution" in the right hand column).  According to a WSJ article, Obama alluded to criticisms leveled against President Bush's proposal by Bush's previous Director of the Faith Based and Community Initiative Program. 

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 Comments on Micro-Finance in Mexico

Yesterday we blogged about a Wall Street Journal op-ed piece defending the growth of for-profit microfinance companies in Mexico.  In its most recent edition, The Economist takes a similar position.  It argues that for-profit microfinance lenders such as Mexico's publicly traded CompartamosBanco can grow faster and so achieve greater economies of scale than their nonprofit counterparts, plus if they are successful the for-profit lenders will attract new investors to the microfinance field.  To support this last point, The Economist notes that since Compartamos started to pursue a profit, seven new regulated microfinance providers have begun to compete with it in Mexico.  Compartamos itself has provided a more detailed defense of its activities through an 11-page "Letter to Our Peers" available on its homepage.

LHM

Further Coverage of IRS Investigation Into Colorado Conservation Easements

The Denver Post has a follow-up story regarding the IRS involvement in an initially state-level investigation of conservation easement donations in Colorado, which we blogged about earlier this week.

LHM

Is For Profit Micro-Finance Squeezing Out Nonprofits In Mexico

A op-ed piece in today's WSJ talks about the effect of for-profit microfinance companies in Mexico and whether they are getting in the way of Mexican nonprofit success.  Micro-finance operates under the assumption that if the very poor had access to capital, they would be resourceful enough (given the hard times they've seen) to lift themselves out of poverty.  Loans from microfinance companies are typically very small (in Mexico, the average loan is $450).  The op-ed challenges the notion that nonprofit organizations, subject to the nondistribution constraint, do a better job than profit seeking microfinance companies in lifting people from poverty.  In doing so, the article provokes us to think about the nondistribution constraint in general:

In his "reflections" on "microfinance interest rates and profits," Mr. Rosenberg writes that "overcharg[ing]" clients under a nonprofit model is OK because it is done for the sake of future borrowers. But when profits go to providers of capital through dividends, then there is a "conflict between the welfare of clients and the welfare of investors." It's not the commercialization of the lending, we're told, but the "size" of the profits that must be scrutinized. 

What seems to elude Mr. Rosenberg is the fact that there is no way for him to know whether there is "overcharg[ing]" or by how much. That information can be delivered only by the market, when innovative new entrants see they can provide services at a better price. This has been happening since for-profit microfinance began to emerge, and the result has been greater competition. Rates have been coming down even as the demand for and availability of services have gone up.

Hmmmm.  Does the argument suggest that there is a sort of negative nonprofit "antitrust" effect caused by the nondistribution constraint?  If all social entities are subject to the nondistribution constraint does the lack of price competition thwart the better delivery of goods and services?  These are interesting questions for those recently advocating L3C's and the repeal or the relaxation of the nondistribution constraint.

dkj

Former Trustee Indicted for Alleged $6 Million Theft from Charity

The Chicago Tribune reports that the federal government has indicted Dr. Robert Weinstein for conspiring to steal millions from the Northshore Supporting Organization, a charity formed ostensibly to support the Rosalind Franklin University of Medicine and Science in North Chicago.  Dr. Weinstein served as a trustee of both organizations and allegedly worked with Stuart Levine, the government's star witness in its case against Illinois political fundraiser and insider Antoin "Tony" Rezko, to divert $6 million from the Supporting Organization using a Scandinavian accomplice, fake contributions to the University, and sealed promissory notes. 

According to the U.S. Attorney's press release and the indictment, Weinstein and Levine caused the Supporting Organization to transfer $3 million each to them in return for promissory notes that neither of them intended to repay.  They managed to buyback the notes for only $1 million through a complicated scheme involving the University, an intermediary, and sealed envelopes holding the notes but which the University was not permitted to open.  According to the indictment a third charity, identified only as IDDRS, was allegedly the original source of the $6 million ultimately diverted from the Supporting Organization, and Dr. Weinstein was the president and sole director of IDDRS. 

Weinstein and Levine also allegedly used their positions as University trustees to try to require a developer working with the University to pay 20 percent of the developer's net profits their designee, who was then to transfer some or all of that amount to them.  Finally, Weinstein is also charged with having lied to an FBI agent during the course of the Rezko investigation.  The specific federal charges against Dr. Weinstein are wire fraud, mail fraud and making false statements. 

The press release and the indictment are available through the U.S. Attorney's Chicago Press Room website. 

LHM

Beer Company Works Through Nonprofit to Help Small Businesses

The Boston Globe reports that Boston Beer, the brewer of Samuel Adams beer, has teamed up with Accion USA, which is headquartered in Boston, to launch an initiative to assist small-business owners.  The "Samuel Adams: Brewing the American Dream" initiative will provide loans from a Boston Beer $250,000 donation and business consulting services, all targeted at New England entrepreneurs working the food and beverage industry.  It will also establish a mentoring program with executives from Boston Beer and other companies.  The first company to receive a loan under the program will be Delectable Desires, a pastry company that rents kitchen space in the same complex as Boston Beer's headquarters.  That complex houses approximately 50 small companies in total, a rental program that like the more recent initiative grew out of Boston Beer founder Jim Koch's desire to help small business entrepreneurs.

LHM

IRS Joins Colorado Conservation Easement Investigation

The Denver Rocky Mountain News reports that the Internal Revenue Service has accepted the invitation of the Colorado Division of Real Estate to join the Division's investigation of conservation easement transactions in Colorado.  The state's investigation arose because of a generous income tax credit program - up to $375,000 per easement - for landowners who agree to permanently prohibit development on their lands.  The credits can apparently be sold for cash.  The criteria for receiving the credit closely follow the federal tax law requirements for receiving a charitable contribution deduction based on a conservation easement.  The IRS is currently reviewing documents collected by the Division relating to the easements.

According to the article, the concerns arise because of possibly inflated appraisals of the value of the easements involved, as initially reported by the Rocky Mountain News in February.  Colorado Attorney General John Suthers has also opened up a criminal grand jury investigation.  Land trusts identified in the article as having received easements under review include Greenlands Reserve and Colorado Natural Land (formerly Noah Land Trust).  A spokesperson for Greenlands Reserve denied any wrongdoing.

The Denver Post has also published an article providing further details regarding the IRS investigation, including that "[o]f the more than 400 tax returns involving conservation easements that the IRS is investigating nationwide, 290 are in Colorado."

LHM

UK Law Enforcement Investigating 25 Charities for Terrorist Ties

The Sunday Mirror reports that Scotland Yard and United Kingdom security services are investigating 25 charities that apparently raise funds in the UK and may support terrorist training camps and attacks.  Eight of the charities have ties to the 7/7 (2005) London bombings that killed 52 people and another three to a failed plot to blow up several airplanes.  The article does not identify any of the charities under investigation, but the New York Times in an August 14, 2006 article identified one of the latter charities as Jama'at-ud-Da'wah, a Pakistani-based charity active in the mosques of Britain's largest cities.

The UK government has taken significant steps to protect the charitable sector from being used to support terrorism, as detailed in "consultation" documents issued last year, and according to a recent news report the Charity Commission plans to issue counter-terrorism guidelines later this year.  The Charity Commission already issued, in August 2007, "operational guidance" on how it will handle cases where it suspects a terrorist organization is involved.

LHM

Judge Orders Reorganization of Nonprofit's Board to End Split

The Orland Sentinel reports that Florida Circuit Judge Mark Nacke has ordered the restructuring of the governing board for the Community Development Corporation of Leesburg & Vicinity following an acrimonious split among the board's members.  According to the article, the nonprofit organization grew out of the settlement ten years ago of a multi-million-dollar racial-discrimination suit against the city of Leesburg and the Leesburg Regional medical Center.  The organization's mission is to help revitalize blighted neighborhoods and help the poor with housing and economic opportunities.  It currently receives the bulk of its funding from the city government. 

The rift apparently developed on the board of directors between seven directors on one side and two on the other side, with each faction claiming that one of its members was the board chairman.  The rift also led to an attempt to suspend the organization's executive director, the closing of the organization's office, and the freezing of its bank accounts.

The judge melded both old and new board members into a reorganized, 15-member board, and chose one of the claimants as the board's chairman.  He also found that while the organization had the authority to suspend its executive director, it owed her five weeks backpay because her suspension had not been approved by a properly seated board.  The case docket provides further information about the lawsuit, although the judge's order is not yet available.  A previous Orlando Sentinel story about the dispute concluded that it arose in large part because the board of directors failed to adhere to the organization's bylaws, such as by deciding issues or electing new directors at meetings that lacked a quorum.

LHM

DC Sues BlueCross BlueShield Affiliate to Force Distribution of Profits

The Washington Post reports that the District of Columbia interim Attorney General has filed a lawsuit against CareFirst BlueCross BlueShield to force it to contribute at least $100 million to the local community.  The D.C. Council Committee on Public Services and Consumer Affairs also launched an investigation of CareFirst, including granting the Committee's chairman the authority to issue subpoenas.  As the article notes, CareFirst has had several previous run-ins with local and state governments, including over both executive compensation and a failed attempt to merge with a for-profit organization. 

The complaint, filed in the Superior Court of the District of Columbia, Civil Division, is against both CareFirst, Inc. and its subsidiary, Group Hospitalization and Medical Services, Inc. ("GHMSI"), which together do business as CareFirst BlueCross BlueShield in the District of Columbia.  Both organizations are nonprofits, although it does not appear from either the complaint or a Guidestar search that either organization is exempt from federal income tax.  GHMSI's federal charter states, however, that it is a "charitable and benevolent institution" according to the complaint.

The complaint alleges that CareFirst, Inc. took control of GHMSI in 1997 and since then has operated it as essentially a for-profit business, leading to a $754 million "surplus" at the end of 2007, which represented almost two-and-a-half times the total adjusted risk-based capital ratio recommended by the Blue Cross and Blue Shield Association.   The District of Columbia asserts that accumulating this, in its view, excessively large surplus is contrary to GHMSI's charter and is a breach of common law charitable trust principles that apply to GHMSI's assets.  The District is requesting that the court grant authority to both the Commissioner for the District's Department of Insurance Securities and Banking and a court-appointed Special Master to rehabilitate GHMSI and rededicate its operations and surplus to its charitable, public health mission.

LHM

Canada Disallows Millions in Donations to Foundation

The Toronto Globe and Mail reports that the Canada Revenue Agency has disallowed $208 million in donations to the Banyan Tree Foundation.  The Foundation apparently used a giving program under which donors, through the Foundation, pledged part of a donation to another charity and supposedly made loans to provide for the rest of the pledged donation.  The Foundation purportedly used the loans to purchase millions of dollars in term annuities from an insurance company, with the payments from the annuities to be used to fund the rest of the pledged donation.  A Revenue Agency investigation found, however, that the Foundation never provided the insurance company with the loan funds to support the purchase of the annuities.  Instead, it appears that just enough funds were provided to the insurance company to ensure that the purported annuity payments would be made to the various charities, but these payments ceased in 2008.  The Revenue Agency's conclusion is that the program was a sham to make it appear that that there were legitimate loans being used for charitable purposes, which apparently would create significant tax benefits for the donors, when in fact those loans never existed.  The Foundation is challenging the Revenue Agency's claims, according to letters available on the Foundation's website.

LHM

Politician Taps Charity's Email List Without Its Permission

The Atlanta Journal-Constitution reports that Cobb County Commissioner Joe Lee Thompson sent political emails to the email list of a charity without the charity's permission.  The Friends for the East Cobb Park is a section 501(c)(3) nonprofit formed to support the creation and maintenance of a park in Marietta, Georgia.  According to its website, it has worked closely with Cobb County since essentially its inception in 1998.  This close relationship may have been what led Commissioner Thompson to use the organization's email database, along with legally obtained email addresses belonging to the Police Department and the county, to send a May 12th message seeking re-election support.  The charity's Vice President also designed the Commissioner's website and may have been the avenue for obtaining access to the charity's database.  Commissioner Thompson is facing a challenger in the July 15th Republican primary.

While the article highlights the risk created by this use to the charity's federal tax-exempt status, the apparent one-time nature of the inappropriate use and the statements by the charity that it has taken steps to ensure no such use occurs again suggest it is probably a prime candidate for the warning letters the IRS has been using when it has come across isolated and apparently inadvertent violations of the political campaign intervention prohibition.   Perhaps the most interesting part of the article is the fact that knowledge about the prohibition has now widespread enough that a major regional paper spotted and reported on the apparent violation even though it only involved a relatively small, local charity.

LHM

Texas AG Sues Nonprofit and its Leaders for Alleged Misuse of Funds

The Dallas Morning News reports that the State of Texas has filed a lawsuit relating to alleged misuse of charitable funds.  According to the Attorney General Greg Abbott's press release, the suit is against People Against Drugs Affordable Housing, Inc., its founders, and three of its directors for alleged violations of the Texas Nonprofit Corporation Act.  The AG's complaint asserts that the charity's primary asset and source of revenue is an apartment complex it acquired in 1993 and that it operates in a manner indistinguishable from a for-profit business.  The complaint further alleges that the charity, under the sole direction of its founder and Executive Director Gene Christensen but with the knowledge of the three directors, used those revenues to (1) operate a NASCAR truck racing team, (2) pay Mr. Christensen annual compensation approaching $200,000 a year plus benefits in exchange for negligible services, and (3) pay for numerous personal expenses of Mr. Christensen, and (4) make no-interest loans to Mr. Christensen and to Mr. Christensen's election campaign for public office.  The AG is seeking the appointment of a temporary receiver for the charity and the replacement of all of its officers and directors.

While the accusations against People Against Drugs and its officers are sadly not unique in the charitable world, what is perhaps surprising is that the charity appears to have operated for almost 15 years "under the radar," thereby allowing the purported abuses to continue for many years.  Perhaps for this reason, the AG is seeking not only to have a receiver take control of the charity and to hold the primary beneficiary - the Executive Director - personally liable, but also, in a relatively unusual step, to hold the three directors personally liable as well.  It will be interesting to see, if the allegations are proven, whether the directors will in fact receive a penalty beyond removal and embarrassment.

LHM

Indictment for Refusing to Testify About Islamic Charities

The Washington Post reports that the Justice Department filed an indictment in U.S. District Court in Alexandria, Virginia charging Sami al-Arian with two counts of criminal contempt for refusing to testify before a grand jury investigating Islamic charities in Northern Virginia.  Dr. al-Arian is a former University of South Florida professor who recently finished serving time in federal prison after pleading guilty to a single county of conspiracy relating to the Palestinian Islamic Jihad group.  He also had been jailed for a year on civil contempt charges relating to his previous refusals to testify.  Prosecutors are particularly interested in what he knows about the International Institute of Islamic Thought or IIIT, a Herndon, Virginia think tank that they believe is one of the key organizations in a Herndon-based network of Muslim charities and other entities that they began aggressively investigating shortly after 9/11.  IIIT denies any terrorist ties.  Dr. al-Arian is represented by George Washington University law professor Jonathan Turley, who has posted his criticisms of the indictment.

LHM

NY Legislature Ends Nonprofit Access to Low-Cost Industrial Development Funding

Newsday reports that a dispute between organized labor and industrial development agencies (IDAs) has resulted in nonprofits no longer having access to IDA funding.  Unions objected to IDAs funding nonprofits unless they conditioned that funding on the nonprofits paying union-level wages.  Unable to overcome this objection, the New York State Legislature let the law providing nonprofits access to these funds lapse.  According to the article, the lapsing of the law has put nonprofit plans to build several nursing homes, senior citizen apartments, libraries and schools on hold indefinitely.

LHM

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

The Next Frontier of Naming Rights

The receipt by substantial donors of naming rights to nonprofit-owned buildings, classrooms, and even entire schools is now so common it hardly raises any eyebrows - at least as long as the donor's reputation remains intact.  Of course, the donor always runs the risk that the named building will eventually be razed or replaced.  But the Christian Science Monitor reports on a new naming trend with greater permanency, at least unless extinction intervenes - having an entire species named after you.  The Scripps Institution of Oceanography at the University of California San Diego will now permit donors to name an as-yet unnamed ocean species in exchange for donations of various sizes - presumably set based on the attractiveness or rarity of the species involved.

As the article details, the Institution is far from alone.  In recent years there have been various auctions selling species-naming rights to raise funds for preservation and research, and Rwanda - yes, the country - annually sells the rights to name individual guerrillas.  Not that selling such rights is always been as successful as hoped.  Amphibian Ark has tried the online auction route for the right to name frog species but only received modest amounts - $5,500 last month, for example - so far.  And the practice is not without controversy among scientists, which could lead to changes in how species are named in the future.  It appears currently that the name for a newly discovered species is generally at the discretion of the discoverer.  One possible legal issue is therefore what will happen if there is some future attempt to re-organize or rationalize species names?  It is far from clear what the rights of these donors or their heirs would be, especially if the original naming institution does not control such a process.

LHM

Tort Suit by Mother of Church Member Blocked by Charitable Immunity Law

The Newark Star-Ledger reports that a New Jersey state appeals court has ruled that Joan Patterson could not sue a church because her son was a member.  Ms. Patterson slipped on ice outside of the Liberty Corner Presbyterian Church and fractured her wrist in February 2005.  Although Ms. Patterson did not attend the church and was Roman Catholic, not Presbyterian, the court held that New Jersey's Charitable Immunity Act barred her negligence suit because her 17-year old son was a member of the church.  Ms. Patterson was picking him up from a youth event when the accident occurred.  According to court's opinion, while the Act only bars suits by persons who are beneficiaries of the sued nonprofit's works, it found that Ms. Patterson benefited from her son's attendance at the church although she may have preferred to have him attend a Roman Catholic Church instead.  While not stated explicitly, the court's decision may have turned in part on the fact that she apparently had, albeit perhaps somewhat grudgingly, given her permission for her son to attend the church.

LHM

Unusual Hedge Fund Fee Arrangement Supports Foundation

The New York Times reports that the $1.6 billion Children's Investment Fund Foundation is funded through an unusual fee arrangement with the Children's Investment Fund or T.C.I., a hedge fund.  T.C.I. investors agree to pay a 0.5 percent fee to the Foundation in addition to a 1 percent fee to T.C.I., with the Foundation fee increased by an additional 0.5 percent if T.C.I. earns more than an 11 percent profit.  T.C.I.'s profits are also contributed to the Foundation.  The close relationship between the Foundation and T.C.I. dates from their simultaneous creation in 2003 by Christopher Cooper-Hohn, who runs T.C.I., and his wife Jamie Cooper-Hohn, who runs the Foundation.  The Foundation also invests 90 percent of its assets with T.C.I., with no fees charged and no restrictions on withdrawals.  T.C.I.'s success - a 42 percent annual internal rate of return - has allowed the Foundation to play a major role in shaping programs to benefit children in developing countries.  The Foundation has a smaller U.S. affiliate with current assets of approximately $156 million.

LHM

Another Possible Blue Cross Conversion to For-Profit Status

The Newark Star Ledger reports that New Jersey's largest health insurer is seriously considering converting to for-profit status.  Although Horizon Blue Cross Blue Shield of New Jersey twice before considered but then rejected converting to for-profit status during the past ten years, the political climate may be more favorable now because New Jersey is looking for funding to help it implement universal health insurance.   The conversion would result in payments to the state of $1 billion to $3 billion over five years as compensation for the tax breaks Horizon had previously enjoyed.  The incentive on Horizon's part for converting appears to be a desire to reduce the level of public scrutiny it faces, particularly with respect to executive compensation and the size of its reserves.  Horizon currently covers approximately 3.6 million individuals, including more than million Medicaid participants.

LHM

Another Politician, Another Non-Compliant Charity

The New Orleans Times-Picayune reports that Jefferson Parish Councilman and recently announced 2nd Congressional District candidate Byron Lee sponsored a resolution to send $50,000 of the parish's federal Community Development Block Grant to the nonprofit Jefferson Sports and Scholastic Foundation to pay for two summer camps.  The Parish Council unanimously passed the resolution, despite an earlier public protest about Lee's direction of funds from a landfill settlement to the nonprofit and the nonprofit's apparent failure to file required IRS Forms 990.  Lee started the foundation to fulfill a campaign promise to help low-income children find summer enrichment, and his campaign treasurer directs the group.  In a previous story, the Times-Picayune reported that the Foundation had applied for tax exemption under section 501(c)(3) of the Internal Revenue Code but had never apparently filed a Form 990, even a year after the failure to file had been brought to the attention of Lee's campaign treasurer.

LHM

Richard Grasso Wins a Round in the Challenge to His NYSE Compensation

The New York Times reports that Richard A. Grasso, the former chairman and chief executive of the then not-for-profit New York Stock Exchange, has convinced New York's highest court to uphold the dismissal of four counts originally brought against him by the Attorney General's office relating to his compensation.  The court upheld the dismissal on the grounds that the Attorney General did not have the statutory authority to bring the claims.  Two other counts remain against Mr. Grasso relating to whether he violated his fiduciary duties to the NYSE by accepting compensation that he knew was excessive, as well as a separate lower court decision that he breached his fiduciary duty to keep the board informed about his pay, a decision that Mr. Grasso is also appealing.

The New York Court of Appeals' opinion provides further details.  The NYSE employed Mr. Gross as its chairman and chief executive officer from 1995 until his resignation in 2003 (caused by the public outrage over his compensation).  That compensation grew to approximately $12 million by 2002, and then leaped to $139.5 million in 2003 plus an additional $48 million payable over four years.  The court characterized the four counts brought by the AG that the lower appellate court had dismissed as "nonstatutory claims . . . premised on provisions of [New York's not-for-profit corporation law] but clothed in the common law."  The counts involved constructive trust and unjust enrichment claims based on the statutory reasonable compensation provisions, a restitution claim based on the assertion that a majority of the Board had failed to approve the compensation at issue as required by statute, and a claim based on the assertion that certain advance payments from a retirement plan violated the statutory prohibition against loan to officers.  The Court of Appeals found, however, that these nonstatutory counts exceeded the AG's authority because they would have required a lower burden of proof than that specified by the legislature in its fault-based enforcement scheme that explicitly gave the AG authority to enforce certain provisions of the New York not-for-profit corporation law.  The two surviving counts, in contrast, are for statutory violations - unlawful transfer of corporate assets and breach of fiduciary duty - that the AG has express authority to pursue in court, although Mr. Grasso is challenging the AG's current standing to bring those claims in a separate pending appeal.

LHM

Bill Said to Impose Racial Diversity on Charities Withdrawn by California Legislator

The Sacramento Bee reported yesterday, June 24, that legislation, Assembly Bill 624, introduced by a California Legislator, Joe Coto (D-San Jose), was withdrawn by the legislator after 10 of the largest California foundations agreed to a multimillion-dollar, multiyear investment in minority communities.  According to the Assemblyman's website, the "bill requires large foundations to disclose the racial and gender composition of their boards of directors and the number of grants awarded to organizations serving ethnic minority communities."  The bill was introduced following the release of a study in August 2007, Investing in a Diverse Democracy: Foundation Giving to Minority-Led Nonprofits, prepared and conducted by The Greenlining Institute, a California-based research and advocacy nonprofit, highlighting the failure of California foundations to support minority-led nonprofits.  The organization posted a response to the foundations and others who challenged the need for AB 624 on its website. 

Below is an excerpt of the Sacramento Bee story:

Faced with legislation that would require them to disclose their ethnic composition and detail grants awarded to minority organizations, 10 of California's largest foundations agreed Monday to a multimillion-dollar, multiyear investment in minority communities.

In return, Assemblyman Joe Coto, D-San Jose, dropped a bill that opponents said was an effort to impose racial diversity on charities and threatened to drive donors out of California.

Many foundations enjoy tax-exempt status. But according to a 2006 study by the Berkeley-based Greenlining Institute, which sponsored Coto's legislation, only 3.6 percent of grant dollars from the nation's top 24 private foundations went to minority-led organizations.

"The Greenlining Institute provided us some evidence that the level of investment by these foundations in minority communities was inadequate compared to the level of investment they are making elsewhere," Coto said.

Coto said by asking foundations "to shed some light on their investments," he hoped "they would then be in a position to make greater investments."

"They saw this as an opportunity to do what we were suggesting and we've worked out this agreement that I think will be positive for everyone," he said.

The foundations, including the William and Flora Hewlett Foundation, the Ahmanson Foundation and the California Endowment – said in a joint statement that nonprofits play a critical role in addressing the challenges facing minority and low-income communities.

The foundations reaffirmed their commitment to help minority organizations compete for grants and said they would issue annual reports about their efforts.

For the full story, click here.

The comments to the story posted on the Sacremento Bee's website, for me, are the story within the story.  The comments range from supportive to racially antagonistic.  For me, the comments reflect the deeper divide along racial lines that is being brought to light by the presidential race.  A recent Washington Post Story about the significance race will play in the upcoming presidential election captures this divide.

I encourage you to review the comments, too, and to draw your own conclusions.  Click here for the comments.

AMT

Article Provides an Indepth Look at Nonprofit Mergers Through the Eyes of the Minneapolis/St. Paul Twin Citiies Red Cross

Below is a summary of a recent article entitled, "Putting Good Will To The Test: Nonprofits Find Mergers Can Be A Messy Business At Times," written by Scott Russell, and published through Minnpost.com, which is a non-traditional print and web-based publishing source of articles written by professional journalists who exert greater control over their article's content in order to provide more in-depth and comprehensive coverage of a news topic.  Here is the summary:

When nonprofit organizations face mounting service demands and tight budgets, an oft-offered solution from funders and academics is: "think merger."  Though some combinations work out eventually, the process can be grueling if not "pretty awful," says Jan McDaniel of the Twin Cities Red Cross.  McDaniel and other executives from merged nonprofits share what they've learned.

You can find the full story at Minnpost.com by clicking here.

AMT