Tuesday, March 8, 2016
The NonProfit Times is reporting that under a tax proposal put forth by Democratic presidential hopeful Hillary Clinton, the charitable deduction would be exempt from a 28-percent deduction cap and the estate tax exclusion would return to 2009 levels.
According to the Times:
The tax benefit from specified deductions and exclusions would be limited to 28 percent. The cap would apply to all itemized deductions except charitable contributions but would reduce the value of deductions and exclusions for taxpayers in the 33 percent and higher tax brackets.
The proposals also would permanently reduce the tax threshold for estate taxes to $3.5 million ($7 million for married couples) with no adjustment for inflation, increase the top tax rate to 45 percent, and set the lifetime gift tax exemption at $1 million. In 2015, the basic exclusion for the estate tax is $5.45 million and Clinton’s plan would return it back to 2009 levels.
Friday, March 4, 2016
Jonathan Backer (Michigan '15) has published Thou Shalt Not Electioneer: Religious Nonprofit Political Activity and the Threat "God PACs" Pose to Democracy and Religion, 114 Mich. L. Rev. 619 (2016). Here is the abstract:
The Supreme Court’s 2010 decision in Citizens United v. FEC invalidated a longstanding restriction on corporate and union campaign spending in federal elections, freeing entities with diverse political goals to spend unlimited amounts supporting candidates for federal office. Houses of worship and other religious nonprofits, however, remain strictly prohibited from engaging in partisan political activity as a condition of tax-exempt status under Internal Revenue Code § 501(c)(3). Absent this “electioneering prohibition,” religious nonprofits would be very attractive vehicles for political activity. These 501(c)(3) organizations can attract donors with the incentive of tax deductions for contributions. Moreover, houses of worship need not file with a government agency to begin operating and deriving tax benefits, and the IRS has shown reluctance to aggressively audit their activities. Two circuits have previously upheld the electioneering prohibition against legal challenges, but recent jurisprudential shifts expose the tax code provision to challenge under the Religious Freedom Restoration Act (RFRA), which directs courts to apply strict scrutiny to facially neutral laws that substantially burden the free exercise of religion. First, Burwell v. Hobby Lobby Stores, Inc. greatly reduced the barriers to successful RFRA claims. Second, by lifting restrictions on political speech for many other types of organizations, Citizens United magnified the burden the electioneering prohibition imposes on religious organizations. The decision also rejected compelling state interests that might have previously shielded the law from invalidation. This Note is the first analysis of the electioneering prohibition’s vulnerability in this new legal climate. Despite these significant developments, this Note ultimately concludes that the electioneering prohibition can survive RFRA challenges because the prospect for widespread use of religious organizations as conduits for political activity undermines the values reflected in Establishment Clause jurisprudence.
Ellen Aprill (Loyola L.A.) has published The Section 527 Obstacle to Meaningful Section 501(c)(4) Regulation, 13 Pitt. Tax Rev. 43 (2015). Here is the abstract:
Antonio Fici (European Research Institute on Cooperative & Social Enterprise) has posted on SSRN Recognition and Legal Forms of Social Enterprise in Europe: A Critical Analysis from a Comparative Law Perspective. Here is the abstract:
Social enterprise lawmaking is a growth industry. In the United States alone, over the last few years, there has been a proliferation of state laws establishing specific legal forms for social enterprises. The situation is not different in Europe, where the process began much earlier than in the United States and today at least fifteen European Union member states have specific laws for social enterprise. This article will describe the current state of the legislation on social enterprise in Europe, inquiring into its fundamental role in the development of the social economy and its particular logics as distinct from those of the for-profit capitalistic economy. It will explore the models of social enterprise regulation that seem more consistent with the economic growth inspired by the paradigms of the social economy. It will finally explain why, in regulating and shaping social enterprise, the model of the social enterprise in the cooperative form is to be preferred to that of the social enterprise in the company form.
James Fishman (Pace) has published Who Can Regulate Fraudulent Charitable Solicitation?, 13 Pitt. Tax Rev. 1 (2015). Here is the abstract:
The scenario is common: a charity, typically with a name including an emotional word like “cancer,” “children,” “veterans,” “police,” or “firefighters,” signs a contract with a professional fundraiser to organize and run a campaign to solicit charitable contributions. The charity may be legitimate or a sham. The directors of the charity may be allied or coconspirators with the fundraiser, or as likely, well-meaning but naïve individuals. The fundraiser raises millions of dollars through telemarketing, Internet, or direct mail solicitation. The charity receives but a small percentage of the amount. In some cases, at the close of the campaign, the organization owes the solicitor more than the amount raised for the charity. Thereafter, the state attorney general investigates the charity and finds fraud in the solicitation or an improper use of the funds raised. As part of the settlement, the professional solicitor agrees to be barred from operating in that particular state. Thereafter, the fundraiser moves to a neighboring jurisdiction, opens business (perhaps under a different name), and commences the same cycle of fraudulent fundraising using another charity
Deception in solicitation and misuse of monies raised for charitable purposes is not only a fraud on the donor; it also can be a diversion of tax dollars from state or federal treasuries. This article examines several approaches for regulating unscrupulous professional fundraisers and preventing carpetbagging, moving from jurisdiction to jurisdiction, committing fraud, or willfully violating regulatory requirements. It examines limitations in the existing regulatory framework to prevent charity fraud and offers possible solutions to the problem. As a first solution, the Internal Revenue Service should revitalize and extend the “private benefit doctrine” as a tool of enforcement. Second, Congress and the Service should amend § 4958 to address excess benefit transactions to more clearly include unscrupulous solicitors. A third possible resolution to the problem outlined would be the expansion of the Federal Trade Commission’s enforcement authority to cover charitable solicitation generally. Currently, the FTC has authority over telemarketing by for-profit fundraisers.3 The legislation proposed would enable the creation of a self-regulatory organization under Federal Trade Commission aegis that fundraisers would be required to join. This new organization would enforce norms and rules for professional fundraisers, have the authority to discipline and, if necessary, to bar dishonest fundraisers from the fundraising industry. A final recommendation is the creation of an online, readily accessible database containing records of violations of professional fundraising companies and the individuals who own and work for them, the contracts between professional solicitors and the charities they work for, the results of fundraising campaigns listing the percentage of dollars raised that goes to the charity, and the texts of settlement agreements between state charity officials and fundraisers and the charities involved. An important issue not addressed in detail is the fiduciary responsibility of charity boards to carefully select the firms that manage their solicitation campaigns.
Miranda Perry Fleischer (San Diego) has published on SSRN How is the Opera Like a Soup Kitchen, The Philosophical Foundations of Tax Law (Oxford University Press, forthcoming 2016). Here is the abstract:
The charitable tax subsidies are, at heart, redistributive. Some individuals (the recipients of charitable goods and services, such as students, museum-goers, and soup kitchen patrons) receive benefits. Other individuals pay for these benefits, both voluntarily (through donations) and involuntarily (in the form of higher taxes or reduced benefits). At first glance, it appears that the redistribution effectuated by the subsidies violates commonly-held notions of distributive justice. After all, the subsidies treat charities that serve the wealthy (like the opera) the same as charities that aid the poor (such as the soup kitchen). How can spending public funds on the wealthy in this manner be considered just? As this Chapter shows, so doing is just under expansive interpretations of resource egalitarianism and left-libertarianism that account for expensive tastes and talent-pooling. These understandings argue that individuals with expensive tastes deserve compensation to put them on equal footing with individuals with ordinary tastes when pursuing their visions of the good life – just as individuals who lack financial resources deserve compensation to put them on equal footing with the financially-advantaged when pursuing their life plans. Subsidizing not only the soup kitchen but also the opera thus helps a variety of individuals who are disadvantaged in their ability to pursue their visions of a good life to achieve those visions.
Philip Hackney (LSU) has published Charity Organization Oversight: Rules v. Standards, 13 Pitt. Tax Rev. 83 (2015). Here is the abstract:
Congress has traditionally utilized standards as a means of communicating charitable tax law in the Code. In the past fifteen years, however, Congress has increasingly turned to rules to stop fraud and abuse in the charitable sector. I review the rules versus standards debate to evaluate this trend. Are Congressional rules the best method for regulating the charitable sector? While the complex changing nature of charitable purpose would suggest standards are better, the inadequacy of IRS enforcement and the large number of unsophisticated charitable organizations both augur strongly in favor of rules. Congress, however, is not the ideal institution to implement rules for charitable purpose. The IRS is the better institution generally to institute rules there because of its informational advantage over Congress. Additionally, the IRS can implement rules in a more flexible rule format than can Congress. Still, Congress as a rulemaker makes sense in a few scenarios: (1) where it implements transparent procedural requirements; (2) where it regulates discrete behavior of charitable organization acts; and, (3) where it intends to remove a set of organizations from charitable status through simple rules.
Kristine Knaplund (Pepperdine) has published Becoming Charitable: Predicting and Encouraging Charitable Bequests of Wills, 77 Pitt. L. Rev. 1 (2015). Here is the abstract from the SSRN posting of the article:
What causes people to leave their property to charity in their wills? Many scholars have explored the effects of tax laws on charitable bequests, but now that more than 99% of Americans’ estates are exempt from federal taxes, what non-tax factors predict charitable giving? This Article explores charitable bequests before the federal estate tax and a deduction for charitable bequests were enacted by Congress. By examining two years of probate files in Los Angeles and St. Louis, in which 16.6% of St. Louis testators, but only 8.3% in Los Angeles, made charitable bequests, we can begin to discern why testators in St. Louis were far more inclined to give to charity. The surprising results may help policy makers encourage those in the United States and in developing countries to give beyond their family and friends.
This Article is unique in that it is the first to examine not just whether a will included a charitable bequest, but whether the charity received it. This crucial information adds key insights to who gives to charity. In fact, if we compare the two cities by looking at charitable bequests which were actually received, St. Louis testators are even farther ahead of their Los Angeles counterparts, with 15% of St. Louis testators giving to charity compared to 6% in LA.
By examining hundreds of wills executed before the federal estate tax was enacted, we can see patterns for the vast majority of people who die with estates far too small to be impacted by the estate tax. Five clear steps emerge to ensure that testators will give to charity.
Michael McConnell (Stanford) and Luke Goodrich (Becket Fund for Religious Liberty; Utah) have posted on SSRN On Resolving Church Property Disputes, Arizona Law Review (forthcoming). Here is the abstract:
In recent decades, major religious denominations have experienced some of the largest schisms in our nation’s history, resulting in a flood of church property disputes. Unfortunately, the law governing these disputes is in disarray. Some states treat church property disputes just like disputes within other voluntary associations — applying ordinary principles of trust and property law to the deeds and other written legal instruments. Other states resolve church property disputes by deferring to religious documents such as church constitutions — even when those documents would have no legal effect under ordinary principles of trust or property law.
We argue that both courts and churches are better served by relying on ordinary principles of trust and property law, and that only this approach is fully consistent with the church autonomy principles of the First Amendment. Only this approach preserves the right of churches to adopt any form of governance they wish, keeps courts from becoming entangled in religious questions, and promotes clear property rights. By contrast, deferring to internal religious documents unconstitutionally pressures churches toward more hierarchical governance, invites courts to resolve disputes over internal church rules and practices, and creates costly uncertainty.
Joel Newman (Wake Forest) has posted on SSRN What is a Church? A Look at Tax Exemptions for the Original Kleptonian Neo-American Church and the First Church of Cannabis, Lexis Federal Tax J.Q. (Dec. 2015). Here is the abstract:
The tax definition of "church," as well as the definition of "religion," have evolved. For years, the IRS defined churches with a fourteen factor test. More recent cases and rulings, however, have used an "associational" test.
This article applies these two definitions to two "marijuana churches" -- the Original Kleptonian Neo-American Church, founded in the 1960's, and the First Church of Cannabis, founded in 2015. I conclude that both churches either would already pass muster under either definition, or could easily do so with a bit of tweaking and some lawyerly advice. Therefore, it would not be too difficult to game the system, and to create a religious organization and a church for tax purposes, even when that status is not legitimate.
However, in light of First Amendment concerns, there are no alternative definitions that would do the job any better. The risk that an occasional illegitimate organization might derive the tax benefits of being a religious organization or church is an acceptable price to pay for a robust First Amendment.
Joseph Yockey (Iowa) has published Using Form to Counter Corruption: The Promise of the Public Benefit Corporation, 49 U.C. Davis L. Rev. 623 (2015). Here is the abstract from the paper's SSRN posting:
Many observers argue that part of the blame for foreign corrupt practices should be placed on legal form. Their claim is that traditional corporate norms of shareholder wealth maximization help explain why corporate corruption is so prevalent. This essay shifts that argument to examine whether there are characteristics among corporate forms that can boost the efficacy of internal compliance strategies. In doing so, the paper’s primary recommendation is for founders to focus greater attention on an emerging new corporate association — the public benefit corporation — as a promising option for blueprinting sustainable anti-corruption compliance.
: The Development of an Informal Support Network to Increase Access to ServicesLeadership in an Asian American Community in the South
, , and The Local Embedding of Community-Based Organizations
, , , and Episodic Volunteering and Retention: An Integrated Theoretical Approach
, , and Nonprofit Organizations Becoming Business-Like: A Systematic Review
, , and Workplace Giving in Universities: A U.S. Case Study at Indiana University
, , , , and Motivations to Volunteer and Their Associations With Volunteers’ Well-Being
, , , and Nonprofit Financing to the Rescue? The Slightly Twisted Case of Local Educational Foundations and Public Education in New Jersey
and Kristina T. Lambright, Program Performance and Multiple Constituency Theory
and Sharyn Rundle-Thiele, Supporter Loyalty: Conceptualization, Measurement, and Outcomes
: A Field ExperimentRecognition and Cross-Cultural Communications as Motivators for Charitable Giving
Book Review: Creating Value in Nonprofit-Business Collaborations: New Thinking and Practice by J. E. Austin and M. M. Seitanidi
Tobias Bürger, Book Review: Social Purpose Enterprises: Case Studies for Social Change by J. Quarter, S. Ryan and A. Chan (Eds.)
Amy Blackford, Book Review: Catalysts for Change by M. Martinez-Cosio and M. Rabinowitz Bussell
IRS Scandal Update: Crossroad GPS Approval, Class Certification in One Case, Settlement of Another, and 501(c)(4) Notices
The biggest development coming out of the IRS scandal in recent months was the public revelation that in November 2015 the IRS approved the application by Crossroads GPS for recognition of exemption under Internal Revenue Code section 501(c)(4). This approval means the entire application file is available to the public, and Robert Maguire has very helpfully made all the documents available at OpenSecrets.org at the end of his analysis of them. Based on a quick review of these hundreds of pages of documents, here are several take-aways:
- Part V of the Protest (and Part VI of the Revised Protest) highlights the most constitutionally problematic aspect of the existing limit on political activity by section 501(c)(4) organizations (and also of the prohibition on such activity by section 501(c)(3) organizations) - the vagueness of the facts and circumstances approach for determining whether a given communication or other activity is actually political campaign intervention.
- Regardless of your views on the merits of the application and the final IRS decision regarding it, the legal writing and submissions by the attorneys representing Crossroads GPS provide a good example of professional but strong (and ultimately effective) advocacy based on an extensive factual record. This advocacy both focused on small but critical details - such as whether particular communications were in fact political campaign intervention - and larger legal issues such as the constitutional issue mentioned above.
- The application materials provide many examples of communications and other activities that may - or may not - cross the line into political campaign intervention. In addition, most and possibly all of the communications are helpfully summarized in charts submitted by Crossroads GPS that include the geographic area of distribution, whether the organization asserted that the communication was part of an ongoing series, and other facts that the IRS has identified as relevant.
- Taken as a whole, the documents provide a comprehensive illustration of the application for recognition of exemption process, including the initial application, IRS questions and detailed responses, proposed denial, protest, communications with IRS Appeals regarding the protest, and then finally the favorable determination letter. It also reveals several apparent procedural missteps on the part of the IRS that Crossroads GPS then used to strengthen its case for granting the application.
Media coverage: Politico; ProPublica; Washington Post. Not surprisingly, the IRS decision has generated both scathing criticism (see this NY Times editorial), as well as defenders (see this commentary by exempt organizations and constitutional law attorney Barnaby Zall).
In other news, the IRS lost a motion in one case related to the scandal but managed to settle another case. The loss came in NorCal Tea Party Patriots v. IRS, where a U.S. District Court certified a class consisting of various groups that allege they were subject to an improper level of scrutiny by the IRS during the exemption application process because of their political views. For an analysis of the decision, see this Forbes column by Peter J. Reilly. More positively for the IRS, Law360 reports that the IRS agreed with the Republican National Committee to dismiss a federal suit by the RNC against the Service involving a request for documents relating to the Service's treatment of exemption applications under section 501(c)(4). As part of the settlement, the IRS agreed to pay more than $20,000 in attorney's fees.
Finally, the IRS announced in Notice 2016-09 that the new notice required from certain section 501(c)(4) organizations based on a statutory change Congress made this past December will not be due until at least 60 days after Treasury and the IRS issue temporary regulations under new section 506. The Notice also clarifies that an organization seeking recognition from the IRS of its exemption under section 501(c)(4) will still need to apply for such recognition and, until further guidance is issued, organizations seeking such recognition should continue to use Form 1024. Such an application remains optional, however.
Social Enterprise Update: A New Model of Philanthropy and a Newspaper's Creative Use of a Public Benefit Corporation
The Christian Science Monitor recently published an article titled "Should Saving the World Be Profitable?" It highlights the different approach that many of today's philanthropists - Mark Zuckerberg, Bill Gates, Warren Buffett, for example - take to doing good as compared to past major philanthropists. The following quote in the article highlights this difference:
“Older practitioners of philanthropy were far more responsive to the needs and desires of the public, supporting projects that were controlled largely by local communities or even government,” writes Garry Jenkins, a professor at The Ohio State University Moritz College of Law who focuses on philanthropy and corporate governance, in an e-mail. “Today’s philanthrocapitalists are much more controlling, more directive, more confident that they have all the answers to the social problems.”
And just a month earlier The Washington Post reported that the owner of a major newspaper operation was transferring its ownership to a nonprofit. That operation included the Philadelphia Inquirer, which the article identifies as the third-oldest newspaper in the United States and the winner of 20 Pulitzer Prizes, and its related website. What made the transfer particularly interesting is that it used a public benefit corporation, which actually owns the newspaper operations (and remains a taxable entity) but now is owned by the tax-exempt nonprofit Institute for Journalism in New Media, which in turn is operated under the auspices of the Philadelphia Foundation. Additional coverage: NY Times.
Last month the Boston Globe reported that the chairman of both the Senate Finance Committee and the House Ways and Means Committee sent joint letters to 56 colleges and universities with endowments of $1 billion or more. The letter asked 13 sets of questions covering topics ranging from categories of assets to management costs to spending policies. While it is now a common practice for the congressional tax writing committees to investigate various types of tax-exempt organizations - see the recent Senate Finance scrutiny of private museums opened by individual collectors and the 2008 Senate Finance letter to colleges and universities about their financial practices - it is interesting and perhaps significant that this latest inquiry is a joint one by committee chairmen in both chambers (including also the chairman of the House Ways and Means Subcommittee on Oversight). The current set of inquiries come in the wake of endowments (mostly) recovering from the Great Recession, a Congressional Research Service report focusing on college and university endowments, and prominent calls for wealthy educational institutions to provide more need-based financial aid (for example, see the recent NY Times Op-Ed by Victor Fleischer (San Diego)).
Thursday, March 3, 2016
IRS Changes to Advisory Committee, EO Audits, Form 990-N Filing, and Supporting Org Regs (latter only proposed)
Since the beginning of the year the IRS has proposed several minor but still significant changes to its practices relating to tax-exempt organizations:
- In January the IRS announced that because of structural changes within the TE/GE Division the Advisory Committee on Tax Exempt and Government Entities (ACT) will now focus on tax administration issues encountered across that Division and have, as of June 2016, a smaller membership of 15 as opposed to the current 21. ACT's new charter, effective as of last May, also changed the terms of members to a flat three years as opposed to the previous two years plus the option of a one-year extension.
- Bloomberg BNA Daily Tax Report reported (subscription required) yesterday that the IRS has issued an internal memorandum (TEGE-04-0216-0003) stating that the IRS will no longer modify an organization's exemption category when the organization is found to no longer qualify for exemption under its original exemption category. So, for example, if an organization originally recognized as exempt under section 501(c)(4) is found to no longer qualify for that status but could qualify for recognition of exemption under section 501(c)(7), the IRS will no longer modify its status to exemption under section 501(c)(7) but will instead simply revoke (or treat as revoked for declaratory judgment purposes) its status under section 501(c)(4). Such an organization may, however, apply or reapply for recognition of exemption under a new exemption category. The memorandum states this change is necessary because Congress has now made a declaratory judgment process available for all revoked exempt organizations, not just revoked 501(c)(3)s, and so all revocations must be treated the same. While not completely clear, this change appears to driven by a need to ensure all organizations that lose their recognition of exemption under a particular category have the option to seek declaratory judgment because modifying an organization's status to place it under a different category would, or at least could, prevent it from exercising its declaratory judgment rights.
- Effective as of the end of last month, the e-filing system for Form 990-N has moved to the IRS website. Filers will need to complete a one-time registration form when they first file on the IRS website. Previously the Urban Institute hosted the e-filing webpage for this form, but that webpage now sends readers to the new IRS webpage.
- Last month the IRS issued a set of proposed regulations for Type I and Type III Supporting Organizations. The preamble to the proposed regulations states "[t]hese proposed regulations focus primarily on the relationship test for Type III supporting organizations." Comments on the proposed regulations are due by May 19, 2016.
The IRS Statistics of Income Division has published Nonprofit Charitable Organizations and Donor-Advised Funds, 2012, reporting on selected data for Internal Revenue Code section 501(c)(3) organizations and donor-advised funds. Highlights from the tax year 2012 Form 990 and Form 990-EZ filings include the following:
- 279,405 501(c)(3)s reported an estimated $3.3 trillion in assets, $1.3 trillion in liabilities, $1.7 trillion in revenues, and $1.6 trillion in expenses, representing modest increases in all of these categories over amounts reported for tax year 2011
- 501(c)(3) with $10 million or more in assets represented only 8% of returns but reported 92% of total assets and 86% of total revenues
- donor-advised funds, which less than 1% of 501(c)(3)s sponsor (2,121 total), had a value of nearly $53 billion
- only 4% of 501(c)(3)s had donor-advised fund holdings over $100 million, but these organizations held over 80% of the total value of such funds and Fidelity Investments Charitable Gift Fund held $24 billion in such funds alone
Wednesday, March 2, 2016
Georgetown University recently invoked Internal Revenue Code section 501(c)(3) as the basis for its policy prohibiting students from engaging in any political campaign activity on campus (see this The Hoya article for more details). Today the House Ways and Means Oversight Subcommittee held a hearing focusing on that policy and its alleged basis in the federal tax laws. Among others, Professor Frances Hill (University of Miami) provided testimony on the issue of whether such activities by students would be attributed to the University under section 501(c)(3) and so cause the University to violate that section's prohibition on political campaign intervention. As she details, the IRS has a long-standing, public position that generally the the political activity of students is not attributed to their schools, indicating that Georgetown University is incorrect in its assertion that federal tax law compels its current policy. That said, as a private institution the University is free to limit or even prohibit political activity on its property as long as it does so in a manner that does not favor a particular candidate or political party.
Hat tip: EO Tax Journal.
HuffPost Politics reports that a number of significant donations to the charitable foundations associated with Hillary Clinton and Donald Trump may not have been true gifts to the foundations from the original payors but instead payments for services to the now candidates, followed by gifts by Clinton and Trump to the foundations. Quoting three of this blog's contributing editors (Alice Thomas, Roger Colinvaux, and Nick Mirkay), the article questions whether contributions made in exchange for speeches (Clinton), a Comedy Central appearance (Trump), and other appearances and meetings (Trump) should have instead been treated as income to Clinton and Trump and subsequent contributions by them, not the original payors, to the respective foundations. The author of the article is careful to note that "[n]one of this necessarily means that Trump or Clinton has bilked taxpayers out of revenue" but also says "[m]ore information from both candidates' camps would be helpful." This is particularly true given that the two foundations at issue - the Bill, Hillary and Chelsea Clinton Foundation and the Donald J. Trump Foundation - each have a close relationship with their respective namesakes and have benefitted them in various ways (although all of those benefits may be perfectly legal).
(Photo from original story (Clinton: Mark Makela/Getty Images; Trump: John Gurzinski/AFP/Getty Images).)
UPDATE: The first sentence of this post has been revised to clarify the tax issue raised by the payments.
Monday, February 29, 2016
This Friday, March 4, I will be participating in the University of Detroit Mercy School of Law Centennial Conference on the past, present, and future of the City of Detroit. The lineup looks really great, including among others Andrea Boyack from Washburn University School of Law. I will be participating in a panel on the Detroit bankruptcy and the "grand bargain" surrounding the Detroit Institute of Arts collection. It's a little daunting, not only because I am not a bankruptcy law scholar, but also because my co-panelists are The Honorable Gerald E. Rosen, Former Chief Judge of the US District Court for Eastern District of Michigan, and the architect of the "grand bargain," and Eugene A. Gargaro, Chair of the Board of Directors of the Detroit Institute of Arts.
Making matters worse, while I am personally very pleased by the outcome and the preservation of the DIA collection, I expect to be somewhat critical of the bankruptcy court's opinion, which held (without explanation or authority) that Detroit probably could not have sold the DIA collection. According to the bankruptcy court, the collection was protected by both the "public trust" doctrine and specific transfer restrictions. However, neither of those conclusions are supported by the evidence. Few (if any) of the works in the collection were protected by specific transfer restrictions. And the "public trust" doctrine simply doesn't apply to art museums, in the absence of state laws specifically imposing restrictions on the sale of artworks by charitable museums.
That museums are public trusts is a truism in academic discourse and industry discussion. What various commentators mean when they speak about museums as public trusts, however, is less clear. This Article untangles and analyzes the various meanings of “public trust” and how these meanings translate into regulatory systems. I propose that two predominant meanings - the public resource and trust law meanings - jointly constitute the definition of a public trust, and that each meaning has a consequent regulatory framework. These definitional and regulatory frameworks coexist without conflict in most contexts. In the context of deaccessioning, however, they collide.
Deaccessioning - the practice of a museum selling art from its collection - is highly contested because it is perceived to be a significant violation of the public trust, in all meanings of the term. Nonetheless, public resource and trust law rules treat deaccessioning quite differently. Public resource rules, exemplified by industry standards and state statutes, strictly prohibit the use of deaccessioning funds for any purposes other than to purchase new art. Trust law rules, on the other hand, work primarily to ensure that the terms of organizational charters, trust instruments, and gift agreements are met. One goal of this Article is to identify and describe the public resource and trust law frameworks. A second goal is to leverage the debate surrounding deaccessioning as a means for discussing how the two frameworks compete and why the trust law framework, enhanced by the addition of corporate governance principles and grounded in “publicity” values, is preferable.
I would go further. The "public trust" doctrine simply shouldn't apply to museums. By way of explanation, the Association of Art Museum Directors (AAMD) and the American Alliance of Museums (AAM), the primary professional organizations governing art museums, have adopted rules governing the sale or "deaccessioning" of works owned by museums. Essentially, those rules provide that works can be sold in order to purchase new works, but cannot be sold for any other purpose, including to cover operational costs. The supposed rationale for this rule is that the works are held in the "public trust" by the museum. But as Donn Zaretsky has observed over and over, this is nonsense on stilts. Normally, if property is held in the "public trust," it cannot be sold for any reason. But somehow, the museum version of the "public trust" doctrine provides that artworks protected by the public trust cannot be sold unless it is convenient. It is telling that the legal scholars who have considered this argument have been ... unsympathetic. And that proponent of the "public trust" argument tend to respond to criticism by raising their voices.
However, public choice theory provides a plausible explanation for the museum version of the "public trust" doctrine. Art museums typically obtain the overwhelming majority of their works via gift or bequest. Under the current deaccessioning rules promulgated by the AAMD and the AAM, once a work is donated to an art museum, it is off the market forever, unless it sold to purchase another work. Moreover, most of the works owned by art museums simply sit in storage. For example, the Metropolitan Museum of Art currently owns more than 2 million objects, but exhibits only about 20,000. In other words, the deaccessioning rules effectively promote scarcity and increase the price of works not owned by museums. So, the deaccessioning rules effectively ensure that private owners of artworks get to claim any capital gains, rather than museums. While I doubt than many (any?) museums or museum directors have considered the issue on those terms, I suspect a version of "agency capture" encourages them to rationalize self-imposed rules that make no sense. And occasionally lead to the dissolution of museums that own many valuable works, but cannot monetize them to cover operational costs.
For one thing, the AAMD & AAM rules conflict with the duty of a charitable organization to increase public welfare. It makes no sense for an art museum to close, rather than sell one artwork. Especially when the (implicit) purpose of preventing the sale of artworks is to increase the value of works owned by private parties. One wonders how the AAMD and AAM would fare in an antitrust action.
Brian L. Frye