Monday, March 13, 2017
Affordable Care Act Repeal (and Replace?)
The effort to repeal (and replace?) the Affordable Care Act would almost certainly have major effects on nonprofit health care providers, particularly hospitals, as well as likely every nonprofit that provides health insurance or health care to its employees or beneficiaries. The Nonprofit Quarterly provides a good summary of the current version of the repeal and replace legislation, including its likely effect on nonprofits. The full text of the current bill is available here.
"Johnson Amendment" Repeal or Modification
OpEds and lobbying letters continue to proliferate even as it is unclear when legislation removing or modifying the political campaign intervention prohibition for charities will advance. Pending bills include:
- The Free Speech Fairness Act (H.R. 781 and S. 264), which would modify the prohibition so as not to apply to "any statement which (A) is made in the ordinary course of the organization's regular and customary activities in carrying out its exempt purpose, and (B) results in the organization incurring not more than de minimis incremental expenses."
- H.R. 172, which would remove the prohibition entirely but, in an apparent oversight, only from Internal Revenue Code section 501(c)(3) and so not from section 170(c)(2) and other sections relating to charitable contribution deductions.
The two House bills have been referred to the House Ways and Means Committee, while the Senate bill has been referred to the Senate Finance Committee.
Recently expressed views on the legislation including statements from Douglas Laycock (UVA), Edward Zelinsky (Cardozo), the Council on Foundations, a community letter campaign launched by the National Council of Nonprofits and others, a letter from 86, mostly progressive groups (including the National Council of Churches), and a published debate in U.S. News & World Report featuring Doug Bandow (Cato Institute), Alan Brownstein (U.C. Davis), Roger Colinvaux (Catholic University), Barry Lynn (Americans United for Separation of Church and State), and Matthew Schmalz (College of Holy Cross).
The year began with fears that tax reform could sharply limit the availability of the charitable contribution deduction through such measures as limits on itemized deductions and estate tax repeal (see, for example, this Forbes piece). There are, however some recent indications that Congress is moving away from measures that would limit the deduction for at least income tax purposes, and even considering expanding the income tax deduction in several ways (see, for example, this report from the Council on Foundations on recent comments by members of Congress). The Trump administration has yet to release its tax reform proposals, however, and tax reform generally is a moving target as this story from The Hill underlines.
Friday, March 3, 2017
FTC & NASCO Will be Hosting a Conference to Discuss Consumer Protection and Charitable Giving: March 21
The Federal Trade Commission and the National Association of State Charities Officials will be hosting a conference to bring together various stakeholders to discuss charitable solicitation and consumer protection. It will take place all day on March 21, 2017, at the Constitution Center, 400 7th St., SW, Washington, DC 20024. From the event website:
The event will bring together leading stakeholders -- regulators, researchers, practitioners, charity watchdogs, donor advocates, and members of the nonprofit sector. Discussions will focus on consumer protection concerns in the sector, including available data on donor expectations and perceptions, deceptive fundraising practices, the regulatory and enforcement environment, and new charitable giving options...
The conference is free and the first day is open to the public.
See you there!
Wednesday, March 1, 2017
Yesterday, a class action lawsuit was filed against PayPal, accusing the website of redirecting donations made through its "Giving Fund" portal.
The website invites users to donate to more than a million charities through their system, promising that 100% of the funds will go to the identified nonprofit. However, the complaint alleges, if the donee nonprofit does not have a registered account set up with PayPal (and many organizations don't), the money will never reach the intended organization, and instead be redistributed to other nonprofits.
The complaint asserts legal theories of theft, breach of fiduciary obligations, and violation of consumer protection laws.
Schizer: Subsidies and Nonprofit Governance: Comparing the Charitable Deduction with the Exemption for Endowment Income
David Schizer has posted a new working paper, entitled "Subsidies and Nonprofit Governance: Comparing the Charitable Deduction with the Exemption for Endowment Income." From the abstract:
Charitable subsidies are supposed to encourage positive externalities from charity. In principle, the government can pursue this goal by evaluating specific charitable initiatives and deciding how much each should receive. But this Article focuses on two income tax rules that leave the government very little discretion about which charities to fund: the deduction for donations to charity (“the deduction”) and the exemption of a charity’s investment income (“the exemption”). Under each rule, as long as charities satisfy very general criteria, federal dollars flow automatically. While both of these sibling subsidies delegate key decisions to private individuals, they create very different incentives and effects. This Article breaks new ground by showing their different effects on the governance of nonprofits.
Specifically, the deduction has three advantages over the exemption. First, the deduction uses a more reliable test for determining whether a charity should receive government funding: a charity has to attract donations, which means donors believe in the charity. For the exemption, by contrast, a charity has to run a surplus, which is less dependable evidence of social value. Second, the deduction empowers donors to monitor nonprofit managers, while the exemption undercuts this monitoring. Since the exemption offers tax-free returns only to charities, and not to donors, it encourages donors to turn over assets to charities (“endowment gifts”), instead of keeping these assets and making annual gifts of the investment return (“spendable gifts”). But once a donor gives an endowment to an operating charity, she cannot redirect this money to another charity, even if she later develops doubts about the charity’s mission or management. Third, in favoring endowments, the exemption exacerbates another familiar governance problem: cumbersome or stale limits on endowments.
These governance issues are an important, but largely overlooked, reason to favor the deduction over the exemption. Yet although scaling back the exemption solves one set of problems, it creates another: charities would begin making tax-motivated saving and investment decisions. In deciding how much of the subsidy for charities should be delivered through the exemption, as opposed to the deduction, Congress needs to manage this tradeoff. This Article explores various ways to do so.
Wednesday, February 22, 2017
Today, the IRS released complete publicly available data on the over 105,000 organizations that were approved for tax-exemption using the streamlined application process, Form 1023-EZ from its inception in July 2014 through December 2016. From the IRS news release:
The data on IRS.gov is available in spreadsheet format and includes information for approved applications beginning in mid-2014, when the 1023-EZ form was introduced, through 2016. The information will be updated quarterly, starting with the first quarter of calendar year 2017. The IRS’s Tax Exempt and Government Entities division approved more than 105,000 applications for exemption submitted on the Form 1023-EZ from 2014 through 2016.
In reviewing the data for these organizations, I noted something odd -- there was an organization approved using the streamlined process which by its name appeared to be a church. According to the Form 1023-EZ instructions and Form 1023-EZ eligibility worksheet, churches are not eligible to use Form 1023-EZ and instead must use Form 1023 to apply for a determination letter from the IRS. In particular, the eligibility worksheet states that if the applicant answers "yes" to any question on the worksheet, the applicant is not eligible to use Form 1023-EZ. Question 12 on the worksheet asks, "Are you a church . . .?" Applicants using Form 1023-EZ must attest on the form that the applicant has completed the eligibility worksheet and is eligible to use the form.
The Form 1023-EZ is filed electronically and is composed of several self-certifying statements made by the applicant to the effect that the applicant qualifies for tax-exempt status as an organization described in Section 501(c)(3). No supporting documentation is required to be submitted with the application so that the IRS can verify the applicant's qualification for tax-exemption. With over 105,000 organizations approved and no way to verify the information, I was not surprised that perhaps a few organizations not eligible to file slipped through the cracks.
However, I was curious to see just how many churches incorrectly used Form 1023-EZ to obtain an IRS determination letter. I conducted a search of the names of all of the organizations approved for exemption using Form 1023-EZ for the word "church" using the new searchable data released by the IRS. I found 623 of the approved organizations had "church" in the name. Upon closer review, not all of these organizations appeared to be churches. Some appeared to be a separately organized ministry of a church or a church foundation or an organization in a town named "Churchville." But in my cursory review of the names of these 623 organizations, I would estimate that over 90% appeared to be churches. Some of these organizations provided website addresses, and a visit to these website addresses confirmed these organizations operated as churches. Even though churches are not eligible to file Form 1023-EZ, all of these organizations attested that they had completed the eligibility worksheet and were eligible to use Form 1023-EZ.
Churches are not required to file an application for exemption to be exempt as a church described in Section 501(c)(3). However, many churches opt to apply for exemption so that the church can receive an IRS determination letter stating that the church qualifies for exemption. The IRS determination letter serves as evidence to donors that the church is recognized as being tax-exempt and contributions made to the church qualify for the charitable contribution deduction.
The churches that received an IRS determination letter using the Form 1023-EZ process may very well meet the requirements for exemption as a church described in Section 501(c)(3). But the IRS decided that it wanted to take a closer look at the applicants claiming to be churches, and thus requires them to use the normal Form 1023 process. By inappropriately using the Form 1023-EZ process, these churches have gotten the benefit of voluntarily applying for tax exemption - the IRS determination letter - without having to go through the scrutiny of the normal Form 1023 application process as the IRS requires.
Additionally, this information is but one example of the problems with the streamlined Form 1023-EZ process. A quick review of the organization's name (for example "** Baptist Church" or "** Church of Christ") should have given one pause about whether the organization was eligible to use Form 1023-EZ. This should have resulted in an inquiry to the organization about whether it planned to operate as a church, or one could have visited the organization's website provided on the form to see that the organization had regularly scheduled church services and appeared to operate as a church. The organization then should have been directed to apply using Form 1023. All of these organizations attested that they were eligible to use Form 1023-EZ, but a quick independent verification of this attestation likely would have shown the attestation to be false in a significant number of cases. This is one small example of the need to independently verify the applicant's statements made on the Form 1023-EZ, or organizations which do not meet the requirements for exemption or the eligibility requirements to use Form 1023-EZ will inappropriately be approved for exemption.
For additional examples of the need for independent verification of the information provided on Form 1023-EZ, see the Taxpayer Advocate Service 2015 Report to Congress and the Taxpayer Advocate Service 2016 Report to Congress.
Wednesday, February 8, 2017
Plenty of articles regarding whether to repeal or relax the Johnson Amendment. Here is a sample:
Chronicle of Philanthropy: Doug White, “Mr. Trump, Let’s End the Hypocrisy and Deny Tax Breaks to Churches"
Tax Prof Blog: collecting articles by the New York Times, Daniel Hemel (Chicago), Roger Colinvaux (Catholic), Ellen Aprill (Loyola-LA), and Andrew Lewis (Cincinnati).
Washington Post: containing a defense of legislation not to repeal but relax the Johnson amendment from the legislation’s sponsors: James Lankford, Steve Scalise, and Jody Hice.
Washington Times (editorial): Be Careful What You Wish For.
Inside Philanthropy: Jon Levine and David Callahan, "The Biggest Loser From Repealing the Johnson Amendment? Philanthropy.
Monday, February 6, 2017
In this post on the Surly Subgroup, Prof. Lloyd Mayer discusses the effectiveness (or lack thereof) of the IRS as a regulator of the nonprofit sector. Here is the opening paragraph:
The Donald J. Trump Foundation admits to illegal self-dealing (The Washington Post). The Bill, Hillary & Chelsea Clinton Foundation files amended annual returns to correct numerous reporting errors (Amended Returns Fact Sheet). A white nationalist group avoids filing annual returns for several years, apparently in reliance on a bureaucratic misclassification (The Washington Post). On “Pulpit Freedom Sunday,” thousands of churches violate the prohibition on IRC section 501(c)(3) organizations supporting or opposing candidates (CNN). These and numerous other recent examples of behavior by tax-exempt organizations that clearly violates the applicable tax laws lead to one obvious question: where was the IRS? The growing perception – and sometimes although not always the reality – is that when it comes to the administration and enforcement of those laws there is no one home.
Friday, February 3, 2017
...but gaining a tax deduction!
At the recent National Prayer Breakfast, President Trump stated:
It was the great Thomas Jefferson** who said, the God who gave us life, gave us liberty. Jefferson asked, can the liberties of a nation be secure when we have removed a conviction that these liberties are the gift of God. Among those freedoms is the right to worship according to our own beliefs. That is why I will get rid of and totally destroy the Johnson Amendment and allow our representatives of faith to speak freely and without fear of retribution. I will do that, remember.
Some may not know the term “the Johnson Amendment,” but I am guessing that most of the readers of this blog would be familiar with Code Section 501(c)(3)’s prohibition on election intervention (“and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”) Famously, Lyndon Johnson was somewhat irritated by negative comments made by a tax-exempt organization (note: not a church… ) during his campaign for re-election to the Senate; thus the Johnson Amendment adding the prohibition on electioneering was born in 1954
Of course, “totally destroying” statutory provisions is traditionally the prerogative of Congress, so it remains to be seen whether this change will come to pass. A bill repealing the Johnson Amendment is introduced regularly each legislative session and rarely makes any progress; query if the current political climate would give it more traction. One wonders if the change takes the form of a repeal of the Section 501(c)(3) language (which would open electioneering to all c3s) or a special exception just for churches or religious organizations. Finally, would such repeal include rules that mirror the income tax provisions that disallow deductions for membership dues allocable to lobbying? If not, I suspect that a large number of political donors of all stripes will suddenly find religion right quick.
For further discussion of these issues, please see this piece by the most awesome Ellen Aprill in the Washington Post, who has probably forgotten more about the political and lobbying rules for nonprofits than I ever hope to know.
*With apologies to R.E.M.
**cough** This is me not commenting on the fact that Trump is quoting Thomas Jefferson, author of the First Amendment. Of course, all political commentary (or non-commentary, as the case may be) is my own individually and should not be attributed to anyone else. EWW
Wednesday, January 25, 2017
The NonProfit Times reports that the new year and new administration brings uncertainty to the future of the H-1B visa program. “The H-1B visa is a non-immigrant visa that allows for-profit companies and nonprofits to employ people in graduate level fields that require expertise in areas such as science, technology, engineering and mathematics (STEM).”
The program is a vital way in which universities attract and retain the best and brightest minds across the globe. In 2016, 29,227 H-1B applications were approved for non-profits, with almost 27,000 of those being universities. Commentators are concerned that a change in the program could hinder both the quantity and quality of research in American universities.
While President Trump has not taken an official stance on the H-1B program, his insistence on immigration reform leaves the future of the program less than certain. Some of President Trump’s appointees have openly opposed H-1B visas, leading to further speculation of the program’s prospects.
Anita Drummond, a non-profit attorney, stated that the United States higher education sector “prides itself on being a global citizen, bringing together perspectives and the best of the best.” Hopefully the new administration can build on this pride, offering our students a place where they may thrive.
David A. Brennen
Tuesday, January 24, 2017
A recent article from Non-Profit Quarterly speaks to the ability of not-for-profits to accumulate valuable assets, that is, social media capital. Although not appearing on the balance sheet, a solid social media presence can help non-profits reach their target audience both more efficiently and effectively.
While many non-profit managers may assume that spending valuable resources on a social media presence may be frivolous, in the end it may be a more economical way to solicit donations and spread the organizational mission to others. On the flip side, having immediate access and accessibility to these organizations changes the competitive landscape of non-profits.
The article brings to light an outline of how to both understand social media capital, and leverage it to your organization’s benefit. Although there are currently no accounting methods to account for social media assets, with the growing importance of social media coupled with the massive value associated with these presences, it is not impossible to envision a time in the coming years where these assets appear on the balance sheet, fundamentally changing how non-profits operate.
In a digital age it is of the utmost importance of all those involved in the management of a non-profit to understand how their organizations can build a sustainable advantage, lowering their operating costs while maximizing their potential reach.
David A. Brennen
The Supreme Court of Illinois is hearing arguments to determine the constitutionality of a 2012 law which exempts not-for-profit hospitals from paying property taxes, as long as their charity provided is at least equal to their property tax liability.
Some Illinois municipalities believe the hospitals are in fact making a profit, and should be held accountable for their fair share of property taxes. These municipalities believe the exemption may only be constitutionally granted if the property is used exclusively for charitable purposes.
The hospitals under review, however, argue that under the constitution the “exclusive use for charitable purposes” standard may be met as long as the hospital is “made available to all who need it regardless of ability to pay.”
Clearly this ruling will carry important policy implications that will impact the landscape of the health care industry. 156 of Illinois’ approximately 200 hospitals carry a not-for-profit status. Further, a report furnished for this case indicates that 47 Chicago area non-profit hospitals received property tax exemptions worth $279 million.
David A. Brennen
Saturday, January 21, 2017
More than a million people attended protests and marches over the weekend, including half a million in Washington DC. Protests and social movements are obviously an important part of civil society, but are rarely the focus of nonprofit scholars (aside: why is this?). But can one deduct the out-of-pocket expenses for traveling to participate in a protest/march?
Maybe. The tax code allows an itemized deduction for contributions made to a recognized 501(c)(3) nonprofit, which includes out-of-pocket expenses (such as travel) incurred while performing volunteer services for a nonprofit. Under some circumstances, traveling to a demonstration could meet this standard.
Thursday, January 19, 2017
Haskell Murray, one of our co-conspirators over at the Business Law Prof Blog, recently wrote about a recent post by Rick Alexander, the head of Legal Policy at B Lab (of B Corp certification fame) on Benefit Corporations. Here's Prof. Murray's post:
Over at the Harvard Law School Forum on Corporate Governance and Financial Regulation, Rick Alexander has a post on benefit corporations. I plan to post some comments on Rick's post next week, when I have a bit more time, but for now, I will just bring our readers' attention to the post and include a small portion of his post below:
Benefit corporations dovetail with the movement to require corporations to act more sustainably. However, the sustainability movement often treats the symptom (irresponsible behavior), not the root cause—the focus on individual corporate financial performance. Proponents of corporate responsibility often emphasize “responsible” actions that increase share value, by protecting reputation or decreasing costs. Enlightened self-interest is an excellent idea, but it is not enough. As long as investment managers and corporate executives are rewarded for maximizing the share value of individual companies, they will have incentives to impose costs and risks on everyone else.
Personally, I would argue that part of the root cause is that corporate financial performance is not required to appropriate take into account societal externalities, such as pollution - the true root cause. Nothing is going to make a corporation be a good citizen if it doesn't want to do so, even if it could under a benefit corporation structure. But that's just me. I am really looking forward to Prof. Murray's thoughts, and will try to post them when I see them.
Wednesday, January 18, 2017
By Professor Alina S. Ball, UC Hastings - from the SSRN Abstract:
The social enterprise movement has ushered in a promising new wave of companies using market-based strategies to advance social and environmental change. The
longevity and growth of social enterprises will be determined by their ability to balance the complex and often competing interests within these unique business entities. The established corporate governance regime, which predominately addresses the characteristics of public companies, does not provide adequate oversight for promoting good corporate governance within the social enterprise sector. This Article argues that the benefit reporting requirements in hybrid-corporation statutes offer an innovative mechanism for encouraging and maintaining good social enterprise governance. Using the benefit reporting requirements within hybrid-corporation statutes as a model, this Article provides a normative framework and establishes the implementation principles for social enterprise governance across various legal entities. By counseling social enterprises on how to promote participatory democracy and increase the company’s capacity to detect and address problems, corporate lawyers serve a critical function in developing social enterprise governance. Using an approach guided by corporate lawyers and informed by social enterprise practitioners would build on the traditional corporate governance paradigm to develop narrowly tailored mechanisms that facilitate a more resilient social enterprise sector.
Suggested Citation: Ball, Alina S, Social Enterprise Governance (August 22, 2016). 18 U. PA. J. BUS. L. 919 (2016); UC Hastings Research Paper No. 179. Available at SSRN: https://ssrn.com/abstract=2827913.
Tuesday, January 17, 2017
Lecy, Van Lyke and Yoon: "What Do We Know About Nonprofit Entrepreneurs?: Results from a Large-Scale Survey"
Jesse Lecy, David Van Slyke, and Nara Yoon (all affiliated with Syracuse University) recently posted to SSRN an article detailing the results of a survey of the motivations behind the creation of new tax-exempt organizations. The SSRN abstract reads as follows:
While the academic fields of entrepreneurship and social entrepreneurship have grown rapidly, nonprofit entrepreneurship has remained a minor field of inquiry, even though 50,000 nonprofits are started each year. Using a survey of 7,000 nonprofit founders, we provide baseline data on key dimensions of nonprofit entrepreneurship. We find that typical nonprofit entrepreneurs are distinct from for-profit entrepreneurs in several ways; they have bigger founding teams, are wealthier, older, more educated, and are less driven by self-employment. These differences inform a research agenda for the field. This study represents the first large-scale empirical analysis of entrepreneurship in the nonprofit sector.
Suggested Citation: Lecy, Jesse D. and Van Slyke, David M. and Yoon, Nara, What Do We Know About Nonprofit Entrepreneurs?: Results from a Large-Scale Survey (December 01, 2016). Available at SSRN: https://ssrn.com/abstract=2890231
From a legal perspective, I found two items immediately interesting: (1) the high number of new organizations that were "spin-offs" of projects that were housed elsewhere or had been operating informally, and (2) the barriers to entry created by paperwork (and knowledge thereof). It reinforces my personal concerns about the "informal" charitable economy, which simultaneously accomplishes many great things off-the-grid, and yet raises issues for me of inefficiency and diversion in limited charitable resources. An interesting read!
Wednesday, January 11, 2017
Philanthropy Roundtable (represented by Morgan Lewis & Brockius) filed an amicus brief in the Supreme Court in support of a challenge to an aspect of McCain-Feingold/Bipartisan Campaign Reform Act that requires disclosure of certain large donors to 501(c)(3) nonprofits if the nonprofit engages in election-related speech. The brief argues that donors to 501(c)(3) organizations have an interest in anonymity for three principal reasons:
- Religious or moral reasons for not wanting to have one's charitable contributions made public
- Concerns about public abuse or even government retaliation, and
- Practical concerns about finding oneself placed on additional mailing lists
For more information about the case, see the FEC's litigation page. Among the plaintiff's arguments is that the government's interest in mandating disclosure of information on donors to 501(c)(3) organizations is less than to 501(c)(4) organizations, distinguishing Citizens United on that basis. Because this is a direct appeal from a three-judge district court panel under a special review provision, the usual certiorari procedures do not apply.
Hat tip Election Law Blog/Rick Hasen. Who else?
Thursday, January 5, 2017
Happy New Year nonprofit champions and scholars! It's time for the obligatory predictions-about-new-year post: What legal and policy issues will be among the hottest in the new year? With the caveat that I'm particularly bad at predicting the future (me, 2006: "texting will never catch on"), I'll throw out a few USA-specific possibilities:
- Changing government funding environment, with potential for sharp decreases in both federal and state funding of health and social services
- Even more diminished role for IRS in charity oversight, shifting power to state attorneys general
- Additional attempts by to withhold government funding from nonprofits based on ideological disagreements (e.g., Planned Parenthood, anti-BDS laws)
- Debate over the extent of funding houses of worship and religious programming (e.g., the upcoming Trinity Lutheran case in the Supreme Court)
- Increased state disclosure mandates for politically active nonprofits (e.g., New York)
What else? What do you think will be the biggest issues facing the nonprofit sector this year?
Tuesday, January 3, 2017
In the face of a massive 200-percent expansion of registered Colorado nonprofits over the past 11 years, and following a model active in 13 other states, Colorado Attorney General Cynthia Coffman says she wants $350,000 to fund a new charity oversight unit and that nonprofit infrastructure groups have given the proposal some support.
Read the full article here. The author closes with the prediction that other states may also consider forming or strengthening charitable enforcement units in 2017.
Sunday, January 1, 2017
A recent Chronicle of Philanthropy study reports that over 50 "hate groups" have been granted tax exemption as 501(c)(3) charitable organizations:
The federal government has granted tax-exempt status to more than 60 controversial nonprofits branded by critics as "hate groups," including anti-immigrant and anti-gay-rights organizations, white nationalists, and Holocaust deniers, according to a Chronicle of Philanthropy analysis.
The issue is a thorny one for the Internal Revenue Service, which must balance First Amendment rights against concerns that it is essentially granting government subsidies to groups holding views that millions of Americans may find abhorrent. Complicating matters, the IRS is already under fire from critics who say the agency has discriminated against conservative political organizations.
The Southern Poverty Law Center has compiled a list of nearly 900 so-called hate groups, most of them on the far right (although the roster also includes radical Islamists, black separatists, and other fringe groups) and many with deceptively innocuous-sounding names. The Chronicle analysis found that 55 of those organizations are registered as charities and eight are 501(c)(4) "social welfare" groups, which also enjoy tax exemptions.
Many groups on the list vehemently dispute the "hate" designation and say the Southern Poverty Law Center — known as SPLC and itself a tax-exempt organization — is a left-wing attack group.
For commentary on this issue, see Philip Hackney (LSU), "White Nationalists Groups are Charitable? Apparently so According to IRS"(The Surly Subgroup), and Eugene Volokh (UCLA), "No, the IRS may not deny tax exemptions on the grounds that a group is a supposed ‘hate group’" (The Washington Post op-ed).
Franklin: Philanthrocapitalism: Exacerbating the Antidemocratic, Paternalistic, and Amateuristic Nature of Philanthropy
Eric Franklin (UNLV) posted Philanthrocapitalism: Exacerbating the Antidemocratic, Paternalistic, and Amateuristic Nature of Philanthropy to SSRN. The article's abstract is:
The recent announcement by Mark Zuckerberg and Dr. Priscilla Chan to pledge Facebook stock worth $45 billion to various philanthropic efforts was met with more skepticism than praise. Most of the criticism concerned the couple’s decision to organize the CZI as a for-profit limited liability company (LLC), rather than the more traditional tax-exempt private foundation. Despite the tax benefits of private foundations, Zuckerberg and Chan were attracted to the fact that LLCs may freely engage in political activity, fund any type of entity, and participate in policy debates.
This begs the question: why should we care how Zuckerberg and Chan engage in charitable activity? The Facebook stock is, after all, their property, and the general public does not generally have any say in how the wealthy dispose of their property. This Article argues that the criticisms are warranted. The reason the public does (and should) care, is that the decision presents troubling questions about the role of philanthropy in our society and the consequences of philanthropists using for-profit vehicles to engage in charitable work.
For more than a century, sociologists have criticized philanthropy as antidemocratic, paternalistic, and amateuristic. However, the regulatory mechanisms governing private foundations ensure that the entities actually engage in publicly-blessed charitable activity, require numerous disclosures to increase accountability, and restrict certain political and lobbying activities. Although these mechanisms do not eliminate the negatives of philanthropy, they do limit their negative effect. As such, there is a convincing argument that philanthropy is worth these costs. The hope is that the mechanisms regulating private foundations result in a palatable balance between philanthropy’s negative and positive aspects.
However, the recent trend of conducting charity through for-profit vehicles throws that balance off. The regulatory bulwarks designed to encourage the positive aspects of philanthropy do not exist in the for-profit realm. As such, philanthropy conducted through for-profit vehicles encourages entities to engage in matters of public concern free from meaningful regulation and limitations.
This Article discusses each of the traditional critiques of philanthropy and explores how they are exacerbated when philanthropic efforts are conducted through a for-profit vehicles, such as LLCs.