Nonprofit Law Prof Blog

Russia Brings Charges Against Election Monitoring Nonprofit

In Russia Takes Legal Action against Election Monitors, the New York Times reports that Russia’s Justice Ministry has charged Golos, “Russia’s only independent election monitoring organization,” and its executive director with violating Russia’s controversial law that requires a nonprofit group to register as a “foreign agent” if it receives financing from abroad.  The law is described by the Times as “among the most provocative in a passel of Kremlin-supported legislation in recent months that was aimed at tightening restrictions and limiting foreign influence on nonprofit groups.”  According to the story, Golos was formed in 2000 with American support to monitor and comment on elections in Russia and other countries, and it “had a prominent role in drawing attention to fraud, including blatant ballot-stuffing and other crude measures, in the Russian parliamentary elections of December 2011.”  A conviction reportedly would cost Golos fines in excess of $15,000, and its executive director a fine of approximately $10,000.  An official with Golos is quoted as stating that the nonprofit has received no grants “from the moment the law on agents went into effect.”

The story presents the investigation against the backdrop of recent raids by Russian authorities on “some of the most prominent international organizations working here, including Amnesty International and Human Rights Watch,” as well as on “two of Germany’s most respected political foundations.”  The Times notes that Chancellor Angela Merkel of Germany recently has publicly criticized Russia’s treatment of nonprofits.

JRB

Article on Citizens United and the Internal Revenue Code

John L. Buckley, a professor in the graduate tax program at Georgetown University Law Center, and Dallas Woodrum, a Georgetown law student serving as executive articles editor for The Georgetown Law Journal, have published an article in Tax Notes discussing the use of tax-exempt organizations for political purposes following Supreme Court decisions on campaign finance.  They propose legislative reforms, including (1) removing the benefit currently enjoyed by Code section 527 organizations of the income tax exclusion for dues and contributions from a single source that exceed a specified amount; (2) eliminating the exclusion for capital contributions (and consideration in exchange for issued stock) received by corporations when they have been utilized to expend such funds for political purposes without disclosing the ultimate source of funds; (3) deeming political contributions to result in dividend income to corporate insiders who authorize political contributions in the absence of ex ante disclosure to, and authorization by, shareholders; and (4) providing more objective standards for determining whether issue advertising constitutes political campaign activity.  The electronic citation to the article is 2013 TNT 68-5.

JRB

IRS Releases More Data on Information Returns

Here is some news that should interest scholars desiring to conduct empirical analysis of the charitable sector.  As reported by the Chronicle of Philanthropy, the IRS has begun to release data appearing on the information returns filed by charities in a format that will aid analysis.  The story states that, although not everything disclosed on Forms 990 and related forms appears in the new format, it does include “figures on sources of financial support, total assets and revenue, spending on overhead and programs, and compensation paid to a group’s top-paid officials.”   The measure has reportedly drawn praise from Tom Pollak, program director of the National Center for Charitable Statistics at the Urban Institute, which intends to post the data on its Web site soon.

JRB

Blanchard: Charitable Nonprofits' Use of Noncompetition Agreements

Lindsey D. Blanchard (University of St. Thomas (Minnesota)) has posted Charitable Nonprofits' Use of Nonpcompetition Agreements: Having the Best of Both Worlds.  Here is the abstract:

For years, individuals have been challenging the noncompetition agreements they entered into with their employers on the basis that the agreements violate public policy. However, in a competitive marketplace, courts and legislatures in many jurisdictions are reluctant to invalidate otherwise reasonable noncompetition agreements. Perhaps they are right, at least when it comes to the general class of nonprofits and to nonprofits that are protecting their interests against for-profit entities. As for charitable — or § 501(c)(3) — nonprofits that are attempting to protect their interests against other charitable nonprofits, however, the decision-making bodies should reconsider their position.

Unlike traditional for-profit entities, whose main goal is profit maximization, charitable nonprofits are organized and operated to benefit some greater good. As a result, charitable nonprofits receive donations from individuals and corporations, as well as tax breaks from the government, which are unavailable to for-profit entities. At the same time, charitable nonprofits use many of the same tools that for-profit firms utilize to maximize profits, including noncompetition agreements. Thus, charitable nonprofits are able to benefit from an anti-competition, profit-maximizing tool while also reaping the rewards of their tax-exempt status. In short, charitable nonprofits (wrongly) enjoy the best of both the for-profit and nonprofit worlds.

This article discusses the unique nature of the charitable nonprofit’s mission and the tax benefits conferred on charitable nonprofits by the federal and state governments. It then discusses noncompetition agreements and demonstrates that charitable nonprofits’ use of noncompetition agreements is contrary to their mission and tax-exempt status, as well as to the public interest. Finally, the article proposes an amendment to the federal tax code that would render unenforceable any language in a noncompetition agreement that prevents an individual from leaving the employment of one charitable nonprofit for employment at another.

LHM

Plerhoples: Representing Social Enterprise

Alicia Plerhoples (Georgetown) has posted Representing Social Enterprise, Teaching (Sustainable) Corporate Governance on SSRN.  Here is the abstract:

Careful consideration and selection of clients facilitate the pedagogical objectives of a clinical law program or other experiential learning course. This article explores the selection of social enterprises - i.e., nonprofit and for-profit organizations whose managers strategically and purposefully work to create social, environmental, and economic value or achieve a social good through the use of business techniques - as clients of two experiential learning courses at Georgetown University Law Center. Representation of social enterprises helps create a dynamic curriculum through which law students learn to merge legal theory and practice. Through service to social enterprises, law students learn about corporate governance and corporate legal theory as well as business models and mechanisms that support social and environmental value creation at a time when the corporate sector is increasingly concerned with sustainability issues; and engage in solving novel and unstructured problems, advocacy work, knowledge creation, and information facilitation to assist the developing social enterprise sector. Legal issues unique to social enterprises compel students to learn corporate governance and corporate practice methods in a manner not typically available to the non-experiential classroom.

LHM

NVSQ April 2013 Issue

The Nonprofit and Voluntary Sector Quarterly has published its April 2013 issue.  Here is the table of contents:

• Femida Handy, Jeffrey L. Brudney, and Lucas C.P.M. Meijs, From the Editors’ Desk

Symposium: National Campaigns for Charitable Causes (Guest Editors Marco H. D. van Leeuwen and Pamala Wiepking)

• Marco H. D. van Leeuwen and Pamala Wiepking, National Campaigns for Charitable Causes: A Literature Review

• Christopher J. Einolf, Deborah M. Philbrick,and Kelly Slay, National Giving Campaigns in the United States: Entertainment, Empathy, and the National Peer Group
• Pamala Wiepking and Marco H.D. van Leeuwen, Picturing Generosity: Explaining the Success of National Campaigns in the Netherlands

• Johan Vamstad and Johan von Essen, Charitable Giving in a Universal Welfare State—Charity and Social Rights in Sweden

• Marta Rey-García, Luis Ignacio Álvarez-González, and Ricard Valls-Riera, The Evolution of National Fundraising Campaigns in Spain: Nonprofit Organizations Between the State and Emerging Civil Society

Articles

• George E. Mitchell, The Construct of Organizational Effectiveness: Perspectives From Leaders of International Nonprofits in the United States

• Shannon Gleeson and Irene Bloemraad, Assessing the Scope of Immigrant Organizations: Official Undercounts and Actual Underrepresentation

• Melissa Torgerson and Mark Evan Edwards, Demographic Determinants of Perceived Barriers to Community Involvement: Examining Rural/Urban Differences

Research Notes

• Grace L. Chikoto, Abdul-Akeem Sadiq, and Erin Fordyce, Disaster Mitigation and Preparedness: Comparison of Nonprofit, Public, and Private Organizations

IRS Issues Proposed Charity Hospital Community Health Needs Assessments Regs

The IRS released yesterday the proposed regulations under Internal Revenue Code section 501(r)(3) relating to community health needs assessments by charitable hospitals that are tax-exempt under section 501(c)(3).  Perhaps the most significant part of the proposed regulations is they provide guidance on the consequences for failing to meet one or more of the requirements of section 501(r), including but not limited to the assessments requirement.  The proposed regulations provide that omissions or errors that are minor, inadvertent, and due to reasonable cause will not be considered such a failure as long as the hospital facility at issue corrects the omission or error promptly after discovery.  The proposed regulations further provide that a failure will be excused if it was neither willful nor egregious and the hospital facility at issue both corrects and discloses the failure.  Failures that are not excused will result in the hospital facility at issue being subject to corporate income tax, but the entire hospital organization will only have its tax-exempt status revoked after consideration of all the relevant facts and circumstances relating to the failure(s) and any past failures.

The proposed regulations follow two earlier IRS notices regarding these assessments (Notice 2010-39 and Notice 2011-52), both of which generated numerous comments, and join previously issued proposed regulations under sections 501(r)(4), (5), and (6). 

LHM

IRS Questions Self-Declared Tax-Exempt Organizations

The IRS has announced that it is asking more than 1,000 organizations that self-declare they are tax-exempt under sections 501(c)(4), (5), or (6) to complete a questionnaire regarding their characteristics and activities.  Identified as a compliance check, the questionnaire asks for the reasons why the organization chose not to apply for tax-exempt status, when it began claiming tax-exempt status, and whether it sought outside professional advice regarding whether it qualified for exemption.  The questionnaire also asks detailed questions regarding the percentage of revenue, expenses, and time spent on various activities, as well as specifically asking for detailed information regarding the amount of money and time spent by both volunteers and paid staff on political campaign intervention.  Some questions appear redundant with the Form 990, such as questions relating to compensation, but many questions go into much greater detail than found on the Form 990. 

It is clear that the IRS is trying to get a handle on the most common types of self-declared tax-exempt organizations.  At the same time, the fact that it took this long for the IRS to even begin looking into such entities underlines the slow reaction speed that has been so frustrating for those who have called for the IRS to look into the political activities of tax-exempt organizations. Yet it is arguably unfair to expect the IRS, which is designed to audit situations well after the fact, to exhibit the level of responsiveness that politics demands (shameless self promotion - see my article regarding regulation of 527s for more on this point).

LHM

Hudson Institute: "The Charitable Deduction in American Political Thought"

The Hudson Institute's Bradley Center for Philanthropy and Civic Renewal presents in Washington, DC on Tuesday, April 16th a lunchtime discussion on the charitable contribution deduction.  Registration and further details available online.  Here is the agenda:

Program and Panel

11:30 a.m.
Registration, lunch buffet

12:00 p.m.
Introduction by Bradley Center Director William Schambra

12:10
Panel discussion
Stanley Katz, Professor of Public and International Affairs at Princeton University
Rob Reich, Associate Professor at Stanford University
Alex Reid, Counsel in Morgan Lewis’s Tax Practice

1:10
Question-and-answer session

1:30
Adjournment

LHM

NCAA student-athletes risk losing scholarship money

The NCAA is a § 501(c)(3) tax-exempt organization organized for the charitable purpose of fostering national amateur sports competition. Additionally, the NCAA asserts that it was founded “as a way to protect student-athletes.” The recent injury suffered by University of Louisville basketball player and NCAA student-athlete Kevin Ware, however, may alert people as to the NCAA’s potential shortcomings.

The NCAA does not require member institutions to provide guaranteed multi-year scholarships to student-athletes. While member institutions are free to do so on their own, many schools elect not to. This means that each year many NCAA student-athletes risk losing scholarship money. Further, if a student-athlete attending a school that has decided not to offer guaranteed a multi-year scholarship is injured, his/her athletic scholarship may be, and often is, revoked.

http://www.salon.com/2013/03/31/will_ware_be_stuck_with_the_bill/ 

dab 

Aprill: Reforming the Charitable Contribution Substantiation Rules

Following up on last week's post regarding documenting charitable contributions, I should note that Ellen Aprill (Loyola-LA) recently posted on SSRN Reforming the Charitable Contribution Substantiation Rules, forthcoming Florida Tax Review.  As well as discussing the substantiation rules, the articles explains that the federal government, in enacting the rule of contemporaneous acknowledgement, apparently feared that taxpayers were deducting amounts that were not in fact charitable contributions, such as scrip or school tuition.  The JCT therefore scored the contemporaneous acknowledgment provision as raising $469 million between 1994 and 1998.  Here is the abstract:

In May 2012, the Tax Court issued two decisions denying income tax deductions for gifts to charitable organizations because they failed to meet the requirements for a qualified appraisal. These cases lit a firestorm of outrage in various circles, raising questions of how strictly substation rules should be applied. This article begins by reviewing two reasons why the charitable contribution substantiation rules applicable to the income tax merit consideration. First, the charitable contribution deduction is important for both its size and its distribution, and the substantiation rules work to safeguard its integrity. Second, in the case of the charitable contribution, unlike many other income tax provisions, the Treasury and the Internal Revenue Service cannot look to third parties with self-interested incentives that help ensure compliance. The substantiation rules substitute for third party corroboration. Part II of the paper sets out, as briefly as possible, the complicated regime regarding the substantiation of charitable contributions, including the legislative history and applicable regulations. Part III examines applicable case law. Review of legislation, regulations, and case law suggests strongly that we make an effort to reform the current scheme, and Part IV presents a number of possible reforms. These suggestions include inflation adjustments, regulatory changes, and making greater use of technology, with the government working with providers of computer software and those involved in texting of charitable donation. Finding approaches that appropriately balance the need to control overvaluation with the need to encourage legitimate charitable contributions is a difficult but important challenge.

LHM

ESPN: "Athlete Charities Often Lack Standards"

ESPN reports that many of the 115 charities founded by high-profile athletes that it investigated had relatively few assets, engaged in little actual charitable work, lacked effective boards, or had relatively high administrative expenses.  For example, only about a third of such charities had assets of $500,000 or more.  Other charities appear to have gone inactive, sometimes without providing a clear accounting of the use of their remaining funds.  Some charities appear to have had at least questionable expenses, including spending that bordered on providing a personal benefit to the founding athletes or their family and friends.  The more common complaint, however, seems to be simply that even when launched with great fanfare most charities founded by athletes are mostly ignored by their founders and so fizzle.

Hat tip:  EO Tax Journal; Tax Prof Blog

LHM

Urban Institute Hosts "Charity and Government: Tax Reform and Beyond"

The Urban Institute will be hosting in Washington, DC on Monday, April 15th a conference titled Charity and Government: Tax Reform and Beyond.  Registration is required.  The conference is co-sponsored by the Urban Institute's Center on Nonprofits and Philanthropy and the Alliance for Charitable Reform.

Here is the agenda and the presenters:

9:30am-10:40am
Session One: As an Independent Sector, Is Charity a Substitute, Complement, Adversary, or Something Else for Government?

Moderator: Eugene Tempel, Indiana University
Speakers: Adam Parachin, University of Western Ontario, Eugene Steuerle, Urban Institute, Joseph Thorndike, Tax Analysts, University of Virginia

10:40am-11:50am
Session Two: What Is the Definition of Charity, and Who Decides How to Define It?

Moderator: John Tyler, Kauffman Foundation
Speakers: Bradford Gray, Urban Institute, Daniel Halperin, Harvard Law School, Alex Reid, of counsel, Morgan Lewis, Marion Fremont-Smith, Hauser Center for Nonprofit Organizations, Harvard University

11:50am-12:20pm: Lunch

12:20pm-1:30pm
Session Three: Philanthropy’s Relationship to Current Policy Debate

Moderator: Elizabeth Boris, Urban Institute
Speakers: Arthur Brooks, American Enterprise Institute, Joanne Florino, Philanthropy Roundtable, William Galston, Brookings Institution, Pat Read, consultant

LHM

Canadian House Committee Issues Tax Incentives for Charitable Giving Report

While incentives for charitable giving have been a topic of much debate in Washington, DC, this topic is also of interest to our neighbor to the north.  In a detailed report, the Standing Committee on Finance for Canada's House of Commons considered the effectiveness of existing and proposed tax incentives for charitable giving based on evidence provided by numerous organizations and individuals and put forward a dozen recommendations for legislative and executive branch action.  Those recommendations include eliminating or reducing the capital gains tax on charitable donations of certain property and exploring an enhanced tax credit for donors who increase their contributions over time, while at the same time promoting greater accountability and transparency in the charitable sector.

Hat tip: Miller Thomson Charities and Not-for-Profit Newsletter.

LHM

The Downfall of Angel Food Ministries

Christianity Today reports that the founders of Angel Food Ministries, once a high-flying $140 million annual budget distributor of discounted food via church networks, will be sentenced next month in federal court.  We previously blogged about the indictment issued against those founders, as well as about various governance disputes and compensation issues.  According to the news report and an earlier Atlanta-Journal Constitution article, the founding couple and their son pled guilty to various federal charges.

This situation is a textbook example of how an innovative, entrepreneurial, family controlled charity can go off the rails.  We previously noted that the organization's co-founder and CEO defended the compensation and loans it provided to its senior management, its lack of an independent board, and its various conflicts of interest by citing its great success in helping those in need.  Success does not, however, ensure compliance with the law and may in fact provide a justification for providing financial awards and practices that ultimately do not withstand legal scrutiny. Nonprofit leaders and scholars are of course familiar with the tensions that can develop between a visionary, risk-taking founder and more cautious independent board members, but this case is an object lesson in why eliminating this tension by not having an effective, independent board is a dangerous route to pursue.

LHM

Don’t Forget: IRS requires written acknowledgement for contributions of more than $250

In 2006, the co-founder of NDM Ferret Rescue Sanctuary, Inc. made forty-four (44) contributions to her organization totaling $10,022.  Seventeen (17) of those contributions, totaling $7,629, were each for $250 or more. While the IRS was satisfied that the co-founder actually made the contributions and that the organization was a valid charity, the IRS did not allow deductions for the seventeen (17) contributions over $249.99.

This is because the IRS requires a written acknowledgement from the donee for a charitable contribution of $250 or more. Moreover, the IRS imposes a timing requirement for the acknowledgement. The person wanting to claim the deduction must get the acknowledgement “on or before the earlier of” the dates he/she files the return for the year the contribution was made or the due date, including any extension, for filing the return.

The obvious moral of the story is that if you are a person who made a contribution of $250 or more to a qualified organization and you want to claim a deduction, get an acknowledgement before you file your return.

Interesting, however, is the ease with which the acknowledgement condition can be met. In the case involving NDM Ferret Rescue, one option for the co-founder would have been to write herself a letter. She would have had to provide the letter to the IRS, however, only if the deduction was questioned in an audit. Does this make much sense? What are the likely policy reasons for this requirement?

http://www.irs.gov/publications/p526/ar02.html#en_US_2012_publink1000229696

http://www.forbes.com/sites/peterjreilly/2013/03/23/charity-president-needed-to-write-herself-a-letter-to-claim-charitable-deduction/

dab

Investment making named most disabling “Nonprofit Fear”

The subject of today’s post comes from a Huffington Post article discussing the fears present in the nonprofit sector. The article provides a list of the different forms of “Nonprofit Fear.” The list includes:

• Fear of making an investment
• Fear of change
• Fear of losing a donor
• Fear of being honest
• Fear of money
• Fear of competition

The article claims these fears are disabling and they prevent nonprofit organizations from realizing their full potential. The author suggests that the biggest fear of nonprofits is the fear of making an investment.

For many nonprofit organizations, the fear of making an investment is a legitimate one. Many nonprofit organizations do not generate a lot of money, their funders are tired, and they are often working just to get by. However, the article argues that if more nonprofits would make an investment in transformation, this change would help to effectuate the organization's vision. Essentially, this type of an investment is one in which nonprofits investment time, energy, and mind share to come up with new opportunities. It involves the organization taking risks in situations when it normally would not be inclined to do otherwise.

http://www.huffingtonpost.com/nell-edgington/the-nonprofit-sector-need_b_2949069.html

dab 

Should private health clubs receive property tax-exemption?

Overtime, the YMCA has become one of the largest income earning charities in the United States. Some private health facilities see the YMCA’s exempt status, which enables them to operate and offer service for less, as an unfair advantage. Consequently, some private health facilities are frustrated because they view tax-exempt health facilities like the YMCA as competitors, not as charities. 

Recently, the owner of a series of private health facilities in Kansas spent $45,000 in campaigns of senators who would build support in the Legislature for property tax-exemption applicable to private health facilities statewide. The owner of the private health facilities argues that its largest competitor in nearly every city home to one of his facilities is a tax-exempt facility. Further, the owner argues it is time to treat all health club facilities the same.

Is there anything troubling about the competition argument? Are there any concerns with adding private health club businesses to the list of organizations receiving property tax-exemption? What impact, if any, would adding private health clubs to the list have on the local tax base?

http://cjonline.com/news/state/2013-03-25/wichita-fitness-club-owner-bets-45k-healthy-tax-break 

dab

The role the nonprofit world plays in “economic bullying”

A recent article in The Chronicle of Philanthropy uses the inequitable salaries of nonprofit employees as an example of “ economic bullying.” The article adopts the position that civil society accepts this sort of economic bullying and offers social exploitation as one the reasons. Interestingly, while the article suggests that the nonprofit world is a victim of social exploitation, it also suggests the nonprofit world is a victimizer.

The argument for the nonprofit world as victimizer is that it underpays women and human-service workers and relies heavily on unpaid volunteers for essential labor. The article goes on to suggest volunteerism in the nonprofit world presents problems because nonprofits have failed to articulate their value to society or what it costs to provide that value. Consequently, nonprofits are victimizers because they are guilty of engaging in the practice of paying people as little as possible.

To be fair to the nonprofit world, the article suggests the government plays a contributing role in social exploitation because as the major purchaser of social services, the government forces costs down to balance the budget. Still, given the characteristics of nonprofit and other exempt organizations, what alternatives are available to prevent from contributing to social exploitation?

http://philanthropy.com/blogs/money-and-mission/inequitable-salaries-at-nonprofits-are-a-kind-of-bullying/28125

dab

Tax season and the charitable gift deduction

It is that time of year again. It is tax season! So what does this mean for people who made donations to an exempt organization last year?

For people who itemize deductions on their federal tax return, one of the most popular deductions is the deduction for charitable gifts. However, for the donation to be deductible, the IRS requires the donation be made to a qualified charitable organization. To assist people wanting to utilize the charitable gift donation, the IRS has created an online search tool that enables people to find out whether the exempt charity to which they have donated is able to receive tax-deductible charitable contributions.

Generally, the IRS allows people to utilize the charitable gift deduction for donations of money and property made to a qualified charitable organization. While the value of cash donations are easily determined, donations of property must be determined by the property’s fair market value at the time of contribution.

Determining the value of the fair market value, and thus the benefit the donor stands to receive, is often a complex process and it raises interesting questions regarding the motives driving people to make donations of property. Do people donate property to an exempt organization because they believe in its purpose? Is it more likely that people donate property for tax benefits? If so, what are the benefits a person stands to receive from donating property? How are those benefits different from the benefits of donating money?

http://www.irs.gov/taxtopics/tc506.html

dab