Monday, November 9, 2015

LA County Leads the Way on Reimbursing Indirect Costs

According to Nonprofit Quarterly, Los Angeles County has adopted new beneficial rules regarding payments to nonprofits that contract with the government to provide services, such as social service agencies.

Anyone who has worked with charities that contract with the government (or anyone else, for that matter) knows that it is often very difficult for a charity to be reimbursed for the indirect costs associated with programming, such as utilities.  At the end of last year, the Office of Management and Budget recently issued a "super circular" addressing indirect cost reimbursement, clarifying issues regarding the applicability of these rules to all federally-funded grants and contracts, and reiterinat that it is not appropriate for governmental agencies to request waivers of these rights. 

Of course OMB directives can only govern grants and contracts using federal funds - clearly, all federal contracts, but also state and local contracts to the extent they utilize federal funding.   Strictly state-funded (or local-funded) grants, however, are not covered by the OMB guidelines.   Thus, LA County's adoption of the standards is a big deal for local nonprofits, and hopefully sets a trend for other state and local jurisdictions.

H/t to Jennifer Chandler at the National Council of Nonprofits, which has been active in this area.



November 9, 2015 in Federal – Executive, State – Executive | Permalink | Comments (0)

Monday, November 2, 2015

Donor Control And The Gift Economy

Professor Allison Tait of the University Of Richmond School of Law has authored an interesting and thoughtful paper entitled The Secret Economy of Charitable Giving. In it, Tait argues that judicial reforms which ultimately limit the level of donor control over charitable gift and trusts should be embraced and expanded. Tait suggests that such limitations are justified in light of the wide range of both tangible and intangible benefits that flow to donors as part of the “charitable gift economy.” You can read Tait’s paper it its entirety here.

November 2, 2015 | Permalink | Comments (0)

Wednesday, October 21, 2015

(Not So?) Charitable IP

It's no secret that certain charitable organizations aggressively assert intellectual property claims. For example, the Susan G. Komen "For the Cure" foundation is a notorious trademark bully, filing trademark oppositions and sending cease and desist letters to any charity that uses the phrase "for the cure," or even variations thereof. And charitable universities and colleges are no exception, often asserting aggressive trademark, copyright, and patent claims. As a theoretical matter, it's difficult to understand how those intellectual property claims benefit the public interest, in a fashion consistent with prevailing theories of charity law. Isn't the whole point of charities to solve market failures in public goods? How is that purpose efficiently advanced by making them more expensive? 

In any case, representatives of my employer, the University of Kentucky, appear to have truly jumped the shark on ridiculous intellectual property claims, by sending a cease and desist letter claiming exclusive rights to use the word "Kentucky." Apparently, Michael S. Hargis of the Lexington, KY law firm King & Schickli sent a cease and desist letter to Kentucky Mist Moonshine of Whitesburg, KY (home of Appalshop, of which I am a proud trustee!), opposing their trademark application and claiming that the University owns a trademark in the word "Kentucky." Hopefully, there is more to the story, because otherwise it seems that Mr. Hargis failed to read the Lanham Act, which explicitly provides, "No trademark by which the goods of the applicant may be distinguished from the goods of others shall be refused registration on the principal register on account of its nature unless it ... Consists of a mark which ... when used on or in connection with the goods of the applicant is primarily geographically descriptive of them." 15 U.S.C. § 1052(e)(2). In other words, if the "moonshine" was made in Kentucky, you can say so.

UPDATE: Thanks to Mr. Dorisio for pointing out in the comments that geographically descriptive marks can become "incontestable" under the Lanham Act after five years of uncontested use, and that the cease and desist letter only objects to registration of "Kentucky Mist Moonshine" under Class 25 or "clothing." While it is true that geographically descriptive marks can become incontestable, incontestability only goes to the validity of the mark, not its strength. Geographically descriptive marks are typically quite weak, especially when they are used by third parties. Incidentally, as the International Trademark Association has observed:

[I]nfringers often are not aware of the infirmities that may attend even an incontestable registration. As a result, the biggest benefit from claiming incontestability may be in providing the registrant with the ability to say so in a cease and desist or other objection letter. Stating that a registration is active, valid, in full force and effect and “incontestable” may scare the recipient of the letter into giving up on the thought of attacking the registration without ever even exploring any of the many grounds for cancellation that survive incontestability.

Hmm. In any case, a cursory search turned up 446 active trademarks containing the word "Kentucky," including quite a few in Class 25. Irrespective of the incontestability of the University of Kentucky's mark, the Kentucky Mist Moonshine trademark application, is surely a descriptive fair use. Again, as the International Trademark Association has observed:

Using a geographical name relating to the user’s business location, even if that name is the same as or similar to another’s mark, generally is considered fair use. Under the fair use exception, a user generally is permitted to use descriptive indications concerning the kind, quality, quantity, intended purpose, value, geographical origin, time of production of the goods or of rendering of the service, main raw materials, functions, weight, or other characteristics of the goods or services.

It strikes me as highly implausible that anyone could possibly be misled into believing that the University of Kentucky is the source of clothing bearing the mark "Kentucky Mist Moonshine," especially given the fact that the University of Kentucky is still a dry campus. Hopefully not for much longer. In any case, it is disheartening to see the representatives of a charitable organization aggressively asserting intellectual property rights in this fashion, regardless of their likelihood of success on the merits, which I believe to be zero in this chase.

I attach a copy of the cease and desist letter, for those interested. Download Letter 10-12-15

Brian L. Frye

October 21, 2015 | Permalink | Comments (3)

Tuesday, October 6, 2015

Reiser & Dean publish SE(c)(3): A Catalyst for Social Enterprise Crowdfunding

Dana Brakman Reiser (Brooklyn) and Steven A. Dean (Brooklyn) recently published SE(c)(3): A Catalyst for Social Enterprise Crowdfunding, 90 Ind. L.J. 1090 (2015).  Below is the abstract of their article:

The emerging consensus among scholars rejects the notion of tax breaks for social enterprises, concluding that such prizes will attract strategic claimants, ultimately doing more harm than good. The SE(c)(3) regime proposed by this Article offers entrepreneurs and investors committed to combining financial returns and social good with a means of broadcasting that shared resolve. Combining a measured tax benefit for mission-driven activities with a heightened burden on shareholder financial gains, the revenue-neutral SE(c)(3) regime would provide investors and funding platforms with a low-cost means of screening out “greenwashed” ventures.

Terri Lynn Helge

October 6, 2015 in Publications – Articles | Permalink | Comments (0)

Saturday, October 3, 2015

Intellectual Property & Charity Law

Intellectual property and charity law are typically considered distinct and unrelated bodies of law. But as I have observed, they are structurally similar, because both are intended to use indirect subsidies to solve market failures in public goods. The prevailing theory of intellectual property holds that it is justified because it solves market failures in innovation caused by free riding (and transaction costs) by giving inventors and authors certain exclusive rights in their discoveries and works of authorship. And the prevailing theory of charity law holds that the charitable contribution deduction is justified because it solves market failures in charitable goods caused by free riding (and transaction costs) by indirectly subsidizing charitable contributions. I believe this structural similarity suggests that intellectual property and charity law are complementary. Unsurprisingly, promoting innovation is typically considered a charitable purpose.

In any case, Mark Lemley recently published a controversial essay titled Faith-Based Intellectual Property, which argued that consequentialist and deontological theories of intellectual property are fundamentally incompatible. The tension between consequentialist and deontological moral theories will be familiar to nonprofit law scholars. For what it's worth, I recently posted an essay reflecting on Lemley's argument, suggesting that Lemley's article was controversial at least in part because it observed that consequentialist and deontological theories of intellectual property are not merely in tension, but fundamentally incompatible. My essay considers Lemley's argument in light of Isaiah Berlin's essay The Question of Machiavelli, and argues that the incompatibility of consequentialist and deontological theories of intellectual property can be resolved by adopting consequentialist public theories and deontological private theories.

Of course, this insight was largely informed by charity law, which is all about reconciling different values. I think there is a lot of opportunity for productive conversation between intellectual property and charity law scholars, given their common goals.

Brian L. Frye

October 3, 2015 | Permalink | Comments (0)

Thursday, October 1, 2015

CFP: University of Detroit Mercy Law Review Symposium on "The Past, Present, and Future of the City of Detroit"

The University of Detroit Mercy Law Review has posted a call for papers for its 100th Anniversary symposium on the past, present, and future of the City of Detroit. According to the call for papers:

Specific topics could include, but are not limited to:
    1. The Past
        o Civil rights and race relations
        o Labor law
        o Relationship between the City and the suburbs (or the rest of Michigan)
    2. The Present
        o The Impact of the Bankruptcy
        o Efforts to eradicate blight and abandoned buildings
        o Public Education in Detroit
    3. The Future
        o Impact of new developments on the future of Detroit
        o Relations between the City and the suburbs
        o The role of the law in developing new economic opportunities

I imagine that some of the suggested topics might appeals to readers of this blog, who might also have additional thoughts about the role of nonprofit institutions in the past, present, and future of Detroit.

The full call for papers for the University of Detroit Mercy Law Review Symposium is available here.

Brian L. Frye

October 1, 2015 | Permalink | Comments (0)

Wednesday, September 30, 2015

How (Not?) to Crowdfund?

If you are interested in the nuts & bolts of the art market, I recommend Tim Schneider's blog and newsletter The Gray Market, which offers remarkably astute insights on "the economics, technology, and business practices of the fine art market" on a weekly basis.

But while I admire Schneider's work, I don't necessarily agree with all of his observations. For example, his August 19, 2015 post titled "The Wisdom(?) of the Crowdfund" suggests that crowdfunding may be incompatibly with the art market because "fine art is largely, if not entirely, a niche medium rather than a mass one." Now, Schneider is absolutely correct to observe a tension between the traditional art market model of selling unique or "semi-unique" objects at high prices and the typical crowdfunding model of pre-selling an indefinite number of reproductions at relatively low prices. And yet, as Schneider himself concedes, many fine artists, especially those selling digital works, effectively engage in a form of "crowdfunding" by pre-selling their works to a small number of collectors, and selling associated works at lower price points.

I would observe that Schneider assumes a market based on scarcity. And that's understandable, considering that the art market has always depended on scarcity! Hence, its peculiar relationship to intellectual property, especially copyright. Unlike other works of authorship, the market value of an artwork typically inheres in the tangible (unique or "semi-unique") "copies," rather than in the intangible underlying work of authorship. As a result, artists and owners of artworks typically welcome the reproduction of their artworks without compensation, because publicity increases the value of the unique object.

But why assume that has to rely on scarcity, just because it did in the past? Especially when new forms of artwork, especially digital works, are not intrinsically scarce, and the artificial scarcity imposed by "editioning" and similar practices is of dubious credibility or effect? In other words, Schneider is correct that crowdfunding is a poor fit for the traditional art market, which relied on scarcity. And he is correct to observe that artists will have to rethink their business model in order to use crowdfunding effectively. But I don't see why artists ought to depend on scarcity, if it isn't credible or enforceable. There's a reason the market for digital editions is ... anemic.

Sure, artists are notoriously (and rather ironically) "small-c" conservative when it comes to business, and expect to do things the way they've always been done. But maybe crowdfunding could help encourage some artists to see new ways of framing their work and reaching audiences. In many ways, I think it already has. Art used to be about scarcity, but any economist will tell you that scarcity is the problem, not the solution. Or to put it another way, Walter Benjamin famously argued that the "aura" or social value of art depended on its scarcity, or "uniqueness." And it turned out he was dead wrong! Too bad for him (although no one seems to have noticed...), and bully for us.

Brian L. Frye

September 30, 2015 | Permalink | Comments (2)

Tuesday, September 29, 2015

Deaccessioning & "Private Choice"?

The art world is notoriously (and controversially) posh and awash in money. Over the summer, several commentators opined on whether or not those remarkably high prices and levels of investment reflect a bubble about to burst. But one player in the art world isn't about money, at least in theory.

The social and institutional norms of the art world prohibit museums from selling or "deaccessioning" works of art, except in order to purchase more works of art. The deaccessioning policy of the Association of Art Museum Directors (AAMD) is representative. Essentially, the argument is that museums hold artworks in the "public trust" and therefore cannot treat them like commodities by selling them, except in order to purchase more and better art.

Of course, as Donn Zaretsky of The Art Law Blog has observed over and over again, deaccessioning norms are both harmful and incoherent. They are harmful because they prohibit museums from selling artworks, even if the alternative is bankruptcy. For example, the Corcoran recently sacrificed its independence, which it almost certainly could have preserved by selling a few artworks. Moreover, they prohibit the sale of artwork, irrespective of consequences. For example, the art world establishment angrily objected to the City of Detroit selling artworks in the Detroit Institute of Art, even if doing so would enable the city to make pensioners whole. Even if you believe that holding artworks in the "public trust" is public good, it's hard to see why it should trump other public goods.

But the most curious aspect of deaccessioning norms is their incoherence. As Zaretsky has memorably and humorously observed, artworks are apparently held in the "public trust" unless they are not. It makes no sense to insist that artworks cannot be sold for one purpose, but can be sold for another. As Zaretsky observes:

Look, there are two coherent positions on this whole issue.

One is the one O'Toole sketches out here: works of art should not be converted into cash. They are records of human creativity that are held in the public trust. To sell them is an ugly deed.

That's a coherent position. It needs, in my view, to reckon with the kinds of counterargument that Michael O'Hare, for example, makes against it here. But it's not an irrational stance to take.

The other coherent position is O'Hare's: yes, these are enormously valuable things, and generally worth holding onto, but sometimes, depending on the circumstances, the benefits of selling one may exceed the costs. You may not agree with it, you may make a different value judgment, but it's clearly not an irrational view.

But what's not a coherent position is the one the AAMD (and the rest of art world establishment) takes -- that works of art are records of human creativity held in the public trust and cannot be converted for cash, except when the museum wants to use the proceeds for one particular purpose (out of the hundreds of possible purposes), in which event they somehow cease to be held in the public trust and suddenly can be converted into cash without controversy.

Or, put even more simply (and to sum up thousands and thousands of words I've written on this issue at the blog): they're either held in the public trust or they're not.

And, as I've also argued repeatedly, the museums themselves, by their own actions (routinely selling off works from their collections), tell us the answer is they're not.

Interestingly, while Zaretsky is memorably (and unfailingly humorously!) critical of the value and coherence of deaccessioning norms, he refrains from opining as to their motivation. In my experience, when people get very upset about a practice, but cannot provide a coherent explanation of why they are upset, there is usually something unspoken or unrecognized motivating their objections.

As any economist knows, incentives matter. So what are the incentives for deaccessioning norms? The art market depends on scarcity. For most works of authorship, scarcity is ensured by copyright. But the art world is unusual in that the scarcity of artworks is ensured by the fact that they are unique or artificially limited objects. In other words, the value of artworks is maintained by the fact that there is a limited number of works on the market. At least in part because a vast number of artworks are in the collection of museums, which are largely prevented from selling those works by deaccessioning norms.

How do museums obtain those works? Often by donation, typically from the very people who buy and sell those works for profit. The people who donate works to museums have a vested interest in ensuring that donated works stay out of the market, in order to ensure scarcity. In other words, participants in the art market want to ensure that they can capture any capital gains, rather than museums. Which tracks nicely with deaccessioning norms. Museums cannot sell artworks in order to capture capital gains, unless they immediately plow that money back into the art market.

In other words, I suspect that public choice theory may provide a useful model for explaining why art world insiders defend deaccessioning norms so forcefully and uniformly. Or rather, given that art museums are typically private, charitable institutions, we ought to call this a form of "private choice" theory? Or maybe even something worth analyzing under antitrust principles?

Brian L. Frye

September 29, 2015 | Permalink | Comments (3)

Monday, September 28, 2015

Kickstarter, Benefit Corporations & Charities

The last decade has seen a lot of interest in hybrid business/nonprofit organizational forms, of various kinds. In the early 2000s, an assortment of people began advocating the creation of such hybrid organizational forms, and in 2008, Vermont became the first state to create one, the "low-profit limited liability corporation" or "L3C." The new form immediately attracted the attention of nonprofit law scholars. For example, I found Dana Brakman Reiser's Charity Law's Essentials (2009) an excellent early attempt to understand the emerging organizational forms in relation to existing law.

Since then, 31 states have passed legislation authorizing the creation of various kinds of "benefit corporations," or hybrid business/nonprofit organizational forms. And more than 1000 organizations have adopted the form. The defining feature of a "benefit corporation" or "B corp" is that its corporate purposes include providing a social benefit of some kind. 

Some scholars and commentators have argued that B corps and other hybrid forms are pointless, because business corporations can also make providing a social benefit part of their social purpose. But the demand for the B corp form suggests that they are mistaken. Perhaps the B corp form is seen as providing more certainty that the organization will maintain its focus on providing a social benefit. In any case, I could not help noticing that the B corp form seems to revive many of the values expressed by the post-war managerialist theory of corporation law, which is now largely forgotten.

Today, corporation law scholars typically assume that shareholder wealth maximization is the primary purpose of a corporation, but managerialist theory held that corporate purposes could include a wide range of values. On this point, I recommend Harwell Wells's article 'Corporation Law is Dead': Heroic Managerialism, the Cold War, and the Puzzle of Corporation Law at the Height of the American Century. While some of the corporatist values have been revived by corporate social responsibility theories, the structural arguments implicit in the B corp movement are unique.

In any case, I can't help but wonder whether the demand for the B corp form suggests that the managerialist theory had a point. Perhaps some people creating and investing in corporations believe that incorporating social benefits into the mission of the corporation is a valuable option. Or to put it another way, perhaps some entrepreneurs and investors want the option to choose to be a little bit charitable.

So, I was pleasantly surprised to learn that Kickstarter just became a benefit corporation. I personally found this interesting because I have previously written about the curious way in which Kickstarter looks like both a business and a charity. But I was surprised by the decision, because in the past Kickstarter's founders have been so adamant that Kickstarter is not about charity, but entrepreneurialism. As I have observed, charity and entrepreneurialism are complements, not opposites. Perhaps this new move reflects a recognition that Kickstarter is all about enabling people to be more altruistic, and that crowdfunding is important because it has enables altruism by lowering transaction costs on giving.

Brian L. Frye


September 28, 2015 | Permalink | Comments (2)

Brian L. Frye Signing On

Greetings, Nonprofit Law Prof Blog readers! This is Brian L. Frye, signing on as a new "contributing editor." I am an Assistant Professor of Law at the University of Kentucky College of Law, where I teach classes on nonprofit organizations and intellectual property, among other things. My scholarship focuses on how the law affects artists and arts organizations. Again, among other things. Accordingly, my posts this week, and later this semester, will address nonprofit law in relation to the arts. I look forward to hearing from you.

September 28, 2015 | Permalink | Comments (0)

Thursday, September 24, 2015

Boy, Treasury's Been Busy... Prop Regs under Section 170

In the third piece of guidance issued over the last seven days, the IRS issued proposed regulations under Section 170(f)(8) last week.  On September 17, 2015, the IRS issued a notice of proposed rulemaking regarding the donee reporting exception to the contemporaneous written acknowledgement requirements for charitable contributions.

Code Section 170(f)(8) requires a taxpayer claiming a Section 170 charitable contribution deduction in excess of $250 to substantiate the contribution by a contemporaneous written acknowledgement received from the charity, which must include certain designated information and be provided in a timely manner (a.k.a, contemporaneously!).   You all are familiar with the “thank you for your contribution – you have received no goods and services in consideration for your contribution” letter.   That letter is designed to be the “contemporaneous written acknowledgement” or “CWA” required to be sent by the charity and retained by the donor for purposes of Section 170(f)(8) substantiation.  

However, the statutory language of Section 170(f)(8) contains an exception to the general rule disallowing contributions that are not substantiated by a CWA.   Under Section 170(f)(8)(D), a donor’s deduction will not be disallowed if the charity files a return (on a form and in a manner set forth in Treasury Regulations) that includes the information otherwise required to be disclosed on the CWA.

Even though this statutory language exists,  the preamble indicates that the IRS purposely never issued regulations implementing the donee reporting provisions of Section 170(f)(8)(D).   The “goods and services” letter methodology was working out well enough, and there had been no outcry for charity reporting.  Apparently, the issue has arisen in a litigation context, however, with donors who had failed otherwise to use the CWA substantiation methodology trying to save their deductions with alternative documentation – specifically (according the preamble, anyway) by having the charity file an amended Form 990.   

In the proposed regulations, the IRS states that Form 990 disclosure is not adequate for a CWA substitute under Section 170(f)(3)(D).  Accordingly, the proposed form to be filed by the charity would set forth all of the information required on the CWA, the name and address of the charity, and the name, address, and tax ID of the donee.  The charity must send a copy of this new  form to the IRS and to the donor (unlike the CWA, which just goes to the donor).  In each case, must be provided by February 28th of the year following the year of contribution - which is earlier than the CWA, which is generally due by April 15th of the following year (unless the donor files his or her tax return earlier).

It's not obvious to me when a charity would elect to do this in lieu of the existing CWA letter - did the IRS make it purposefully difficult so that no charity would  use it?    In each case, the charity still needs to mail something to the donor – in the donee reporting case, the charity must also send the form to the IRS and sent earlier than the due date of the Form 990, so there really isn't any cost savings.    As a practical matter, it seems to me that these regulations do very little other than place a road block in front of individuals trying to litigate their way around a substantiation foot fault.

If you are interested, comments are due by December 16, 2015.


September 24, 2015 in Federal – Executive | Permalink | Comments (0)

Wednesday, September 23, 2015

Breaking News! Final Regs on Equivalency Determinations

Good morning all!   I just got an alert in my mailbox that Treasury has issued final regulations on equivalency determinations - you may all recall the proposed regulations that were issued in 2012.

I'm in the process of printing out the final regs and comparing them to the proposed regs, so I'll update the post later today.  Bloomberg BNA's blurb on it says that the final regulations "incorporate the thrust of" the 2012 rules.   I'll try to get some links up as soon as I can find them in a non-subscription database, although I know you can get them in both Bloomberg BNA and Tax Analyst already if you have access.     Citation is T.D. 9740, RIN 1545-BL23. 


 Update at 6:30 p.m., 9/23/2015

I've not gotten all the way through the final regs to give you all a complete summary, but I wanted to mention a few highlights from the preamble:

  • It appears that the Regulations expand the definition of  "qualified tax practitioner" for purposes of who can make equivalency determinations that can be relied upon in good faith.
  • The Regulations appear to scale back the ability of a charity to rely on a good faith affidavit as the sole means of making an equivalency determination.     Briefly, it appears that you can rely on the information in good faith, but there needs to be an additional showing that the evaluation of the data and the equivalency determination based on that data occurred in a manner that demonstrates a knowledge of US tax law.   In theory, anyway, there are more qualified tax practitioners (including folks that may be in house at the foundation) to help with such a determination, so it shouldn't (in theory again) be a significant bar to international grant making.
  • Some clarification on how long you can rely on written advice, which looks like (a) so long as there is no change in the law or otherwise for most things, except (b) two years for public charity determinations based on financials.
  • It looks like there may be limited opportunity to share equivalency determinations, but it can't be foundation to foundation - it may be that the first foundation has to authorize the release of that information to a second foundation from its qualified tax practitioner because only there would there be reasonable reliance.   So not quite the equivalency determination banking that the sector wanted, but it may be a step in that direction.   
  • Looks like donor advised funds can use these rules, at least for now, for purposes of compliance with Section 4966(d)(4).



September 23, 2015 in Current Affairs, Federal – Executive, International | Permalink | Comments (0)

Monday, September 21, 2015

The IRS Says It's Okay To Be Charitable - Notice 2015-62

Last week, the IRS issued Notice 2015-62 discussing the tax treatment of an investment made for charitable purposes that does not otherwise qualify for status as a “program-related investment” under Code Section 4944(c).  If you are reading this blog, you probably know that Code Section 4944 imposes a prudent investor-type rule on private foundations by imposing an excise tax on investments that jeopardize a private foundation’s charitable purposes.  There is an exception to this general rule under Code Section 4944(c) for program-related investments (PRIs).   For an otherwise charitably-motivated investment to qualify as a program-related investment, however, no significant purpose of the investment can be the production of income or the appreciation of property (among other things...).  

The news is awash with discussions of socially-responsible investing, impact investing, mission-related investing and the like - however, none of these types of investing are tax concepts.   Rather, they are ways that a foundation (or other endowment-type entity) can approach investing in a manner that considers charitable outcomes.  Such categories of investments do not necessarily qualify as "program-related investments." Rather, PRIs are a thing, as my students would say - a specific term of art used in the tax code for which an investment must specifically qualify.   As indicated above, in order to qualify as a PRI, no significant purpose of the investment can be for the production of income or appreciation of property.   Of course, many investments view charitable outcomes as one of many bottom line results, along side of the potential for profit.   Such charitably-inclined investments may fall into one or more of the categories of social investing, but they are not PRIs.

Notice 2015-62 clarifies the manner in which the prudent investor standard of Code Section 4944 treats the accomplishment of charitable purposes as a relevant factor when evaluating an investment that is NOT a PRI.   For many years, there was some question as to whether fiduciary standards would allow a foundation to settle for a lesser yield in order to accomplish other charitable goals – for example, universities divesting in South Africa companies during the apartheid era, the Catholic Church not investing in contraception or land mine manufacturers, or affirmative investments in emerging green energy technologies. (For more discussion on this topic, see this very awesome article by the very awesome Susan Gary:   It is Prudent to Be Responsible?  The Legal Rules for Charities that Engage in Socially Responsible Investing and Mission Investing).   

With the adoption of UPMIFA in 2006 by NCCUSL and UPMIFA’s subsequent adoption in almost all jurisdictions (what's up with that, Pennsylvania?), it became clear that most jurisdictions would allow for the consideration of charitable goals as an appropriate factor in evaluating an investment, so long as the overall determination was reasonable.  Notice 2015-62 adopts a similar standard for Section 4944, stating that “foundation managers may consider all relevant facts and circumstances, including the relationship between a particular investment and the foundation’s charitable purpose.”  

This Notice is certainly good news for private foundations involved in socially-responsible, mission-related, or impact investing.  Of course, the Notice does not solve all of a private foundation’s worries in this area.  A private foundation must still comply with Code Section 4944’s overall requirement that foundation managers exercise ordinary business care and prudence in selecting investments.  For state law purposes, UPMIFA does not necessarily cover every type of charitable organization; therefore a foundation needs to determine whether or not a different state investment standard might apply.   And of course, for excise tax purposes, only a program-related investment will be treated as a qualifying distribution for purposes of Code Section 4942.    



September 21, 2015 in Federal – Executive, In the News | Permalink | Comments (0)

Friday, September 18, 2015

8th Circuit Rules ACA Opt-Out Provision May Violate RFRA

As reported (slightly imprecisely from my legal perspective) in Reuters, the United States Court of Appeals for the 8th Circuit, parting ways with other appellate courts deciding the issue, has issued two rulings lending support to the position that the Affordable Care Act (“ACA”) violates the rights of religiously affiliated employers by forcing them to take action that they sincerely believe would constitute complicity in the provision of contraceptive coverage, including abortifacients.  The cases are Dordt College v. Burwell and Sharpe Holdings, Inc. v. United States Department of Health and Human Services.  This post will highlight language from Sharpe Holdings.


As many readers are aware, regulations under the ACA require nonexempt employers to provide their employees with insurance coverage for FDA-approved contraception, which, as the United States Supreme Court has recognized, includes drugs that may prevent a fertilized egg from attaching to the uterus.  The same regulations permit certain religious organizations that object to providing such coverage to opt out of the coverage by filing a form with their third party administrators or by notifying the Department of Health and Human Services of their objection. In Sharpe Holdings, the plaintiffs argued that “both the contraceptive mandate and the accommodation process impose a substantial burden on their exercise of religion in violation of the Religious Freedom Restoration Act of 1993 (RFRA).”  More precisely, the plaintiffs ”contend that the government is coercing them to violate their religious beliefs by threatening to impose severe monetary penalties unless they either directly provide coverage for objectionable contraceptives through their group health plans or indirectly provide, trigger, and facilitate that objectionable coverage through the Form 700/HHS Notice accommodation process.”  Accordingly, they petitioned the district court to “enjoin enforcement of the contraceptive mandate and the accommodation regulations against them.” The district court granted the requested injunctive relief.


The United States Court of Appeals for the 8th Circuit in Sharpe Holdings affirmed the district court’s order granting injunctive relief.   The appellate court concluded that the district court “did not abuse its discretion in finding that [two nonprofits] were substantially likely to succeed on the merits of their claim that the contraceptive mandate and the accommodation process substantially burden their exercise of religion in violation of RFRA and that the current accommodation process is not the least restrictive means of furthering the government’s interests.”


In accepting the plaintiffs’ argument that the ACA regulations substantially burdened their exercise of religion, the court relied heavily on the Supreme Court’s Hobby Lobby decision:


As Hobby Lobby instructs, however, we must accept CNS and HCC’s assertion that self-certification under the accommodation process—using either Form 700 or HHS Notice—would violate their sincerely held religious beliefs. See Hobby Lobby, 134 S. Ct. at 2778; see also Hernandez v. Comm’r, 490 U.S. 680, 699 (1989) (“It is not within the judicial ken to question the centrality of particular beliefs or practices to a faith, or the validity of particular litigants’ interpretations of those creeds.”). It is not our role to second-guess CNS and HCC’s honest assessment of a “difficult and important question of religion and moral philosophy, namely, the circumstances under which it is wrong for a person to perform an act that is innocent in itself but that has the effect of enabling or facilitating the commission of an immoral act by another.” Hobby Lobby, 134 S. Ct. at 2778. As discussed above, Form 700 or HHS Notice will inform CNS and HCC’s TPA of its obligations to facilitate contraceptive coverage for CNS and HCC’s employees and plan beneficiaries and thus will play a part in providing the objectionable contraceptives. As in Hobby Lobby, CNS and HCC sincerely believe that the actions “demanded by the . . . regulations [are] connected to” illicit conduct “in a way that is sufficient to make it immoral for them to” take those actions. Id. CNS and HCC have drawn a line between actions they find “to be consistent with [their] religious beliefs” and actions they consider “morally objectionable.” Id. (citing Thomas, 450 U.S. at 715). And it is not for us “‘to say that the line [they] drew was an unreasonable one.’” Id. (quoting Thomas, 450 U.S. at 715); see also Priests for Life, slip op. at 12 (Kavanaugh, J., dissenting from denial of rehearing en banc) (“Judicially second-guessing the correctness or reasonableness (as opposed to the sincerity) of plaintiffs’ religious beliefs is exactly what the Supreme Court in Hobby Lobby told us not to do.”).


In holding against the government on whether the ACA regulations are the least restrictive means for furthering a compelling government interest, the 8th Circuit emphasized the government’s burden of proof on the issue, and found that it “has not shown that these [several possible] alternatives [discussed in the opinion] are infeasible.”



September 18, 2015 in Church and State, Federal – Legislative | Permalink | Comments (0)

Carnegie Hall’s Board Chair Will Step Down

Today’s news cycle features developments in the dispute over the governance of Carnegie Hall.  According to the New York Times, Ronald Perelman, who just this year accepted his position as Chairman of Carnegie’s Board, told his fellow trustees at a meeting yesterday that he would leave the Chair role next month, rather than seek re-election. His announced departure is tied to his concerns that Carnegie Hall’s governance practices are legally suspect, and that these concerns have not been adequately addressed.  Says the Times:


The climax came on Thursday afternoon at a joint meeting of the board’s executive and audit committees, when Mr. Perelman told his fellow trustees that he believed some of the laws governing nonprofits were not being followed at Carnegie and expressed frustration that no investigation into his concerns had been initiated, according to someone familiar with the proceedings, who was granted anonymity to describe what happened at a confidential meeting.


Mr. Perelman criticized board members for placing “a premium on avoiding tension and disagreement,” the person said, and told them that while he would serve out his term, he would not run for re-election as chairman at the board meeting next month. The board then agreed to hire a lawyer to examine his concerns, which involved how Carnegie vetted what Mr. Perelman called “related-party transactions” in looking at deals that posed potential conflicts of interest.


The Times further reports that one member of Carnegie’s Board speculated that Mr. Perelman would not likely have been re-elected as Chair, and that “the trustees had felt blindsided this summer” when Mr. Perelman briefly suspended Carnegie’s executive and artistic director, Clive Gillinson.  The same board member reportedly voiced that the board did not share Perelman’s view that Carnegie had governance or transparency problems, but that the board would investigate the matters raised.



September 18, 2015 in Current Affairs | Permalink | Comments (0)

Thursday, September 17, 2015

GAO Report on American Red Cross Released; Federal Legislation Proposed

NPR reports that the “American Red Cross is facing new criticism today as government investigators and a congressman call for independent oversight over the long-venerated charity.”  NPR explains that Representative Bennie Thompson has introduced a bill called the American Red Cross Sunshine Act on the heels of the release of a report by the United States Government Accountability Office (“GAO”) that examined the charity’s operations.  The GAO report, says NPR, “finds oversight of the charity lacking and recommends that Congress find a way to fill the gap.”


The “Conclusions” section of the GAO report states as follows:


The nation’s disaster response system relies to a significant extent on the nonprofit sector, which harnesses the public’s generosity to provide funding for disaster response and recovery efforts. This approach can support the nation’s efforts to assist disaster victims, but it also has limited accountability for disaster assistance. The Red Cross, the organization most responsible for providing shelter and other mass care services to disaster victims, exemplifies this tension. It has been designated by law as an instrumentality of the United States and has a critical, formalized role in coordinating and providing disaster response services across the nation. At the same time it remains a nonprofit organization that generally makes its own decisions about what services to provide. This reliance on an independent organization can be effective if government and the donating public have confidence that [the] Red Cross is providing the services that are most needed in an effective and efficient manner. Further, in disasters in which the federal government is involved, the extent and effectiveness of the Red Cross’s activities could have a direct impact on the nature and scope of the federal government’s activities.


With regard to oversight, while the Red Cross has some internal evaluation processes in place, such as after action reviews and surveys of state emergency managers and other stakeholders, Red Cross officials told us that the results of their internal evaluations are typically not made available to the general public. The absence of regular, external evaluations of its disaster services that are publicly disseminated could affect the confidence of both the donating public and the federal agencies that rely on the Red Cross. This is especially true in light of questions raised by the federal government and others in recent years about the organization’s performance in disasters. Given the Red Cross’s status as an instrumentality of the United States and the critical responsibilities assigned to it by its federal charter and by federal policies, the federal government has a clear stake and role in ensuring that proper oversight takes place.


In a section entitled “Matters for Congressional Consideration,” the GAO report further recommends legislative action:


To maintain governmental and public confidence in the Red Cross, Congress should consider establishing a federal mechanism for conducting regular, external, independent, and publicly disseminated evaluations of the Red Cross’s disaster assistance services in domestic disasters in which the federal government provides leadership or support. This mechanism might involve annual evaluations of whether the services achieved their objectives or of their impact on disaster victims. This evaluation could be performed, for example, by a federal agency such as DHS, by an IG office such as the DHS IG, or by a private research firm under contract to a federal agency.


The American Red Cross Sunshine Act, according to its preface, would “enhance oversight of the American National Red Cross by the Government Accountability Office and Inspectors General at the Departments of Homeland Security, Treasury, and State,” and would require the Department of Homeland Security to conduct a pilot program with the charity to research and develop mechanisms to improve the charity’s preparedness and response capabilities through social media.


Additional Coverage: The Chronicle of Philanthropy




September 17, 2015 in Current Affairs, Federal – Executive, Federal – Legislative | Permalink | Comments (0)

Governance Concern at Carnegie Hall

The New York Times reports that the Chairman of the Board governing Carnegie Hall, Ronald Perelman, is calling out the nonprofit’s executive and artistic director, Clive Gillinson, for operating without adequate transparency, and fellow board members for failing to exercise proper oversight of the iconic nonprofit.  These details appear in the story:


Mr. Perelman wrote to the board that he had initially grown concerned over “an inability to obtain a full picture of Carnegie Hall’s financial operations, especially as it related to profits and losses involving performances,” according to a copy of the email obtained by The New York Times. He wrote that he had become “troubled by the manner in which related-party transactions” — essentially deals presenting potential conflicts of interest — “were being identified, vetted and approved.”


The story further reports that, according to Perelman, although “an agreement had been reached last month to hire an independent lawyer to investigate his concerns” about governance, no investigation has yet begun, and that Perelman “was calling a joint meeting of the board’s executive and audit committees” to handle the matter.



September 17, 2015 in Current Affairs | Permalink | Comments (0)

Wednesday, September 16, 2015

Latest Nonprofit Advocacy Matters

In the latest issue of Nonprofit Advocacy Matters, published electronically by the National Council of Nonprofits, two entries caught my eye.  In one, it is reported that the United States Department of Labor has received nearly 250,000 comments to its proposed amendments to overtime regulations issued under the Fair Labor Standards Act (FLSA). The proposal would, in part, increase the minimum salary level that employers must annually pay their administrative/executive/professional employees in order to exempt the employers from paying overtime wages to those employees; the proposal would raise that minimum from $23,660 to $50,400. Readers interested in reviewing the full text of the proposal, as well as comments to it, may link to this website.


Another item of note in the recent Nonprofit Advocacy Matters is a description of how the State of Indiana “is experimenting with the creation of nonprofits to enable government to secure greater returns on investments and to fund key programs.”  Under one new state law, cities can create and fund special foundations with the proceeds of government property sales.  The charities can then invest in corporate stocks more liberally than can most governmental bodies. Secondly, the state has founded a nonprofit organization to raise money “from private investors to pay for public health initiatives.”  Noting that Indiana is one of the states that devote the least resources to public health programs, the piece explains that lawmakers hope the newly minted nonprofit will help redress the situation.  



September 16, 2015 in Current Affairs | Permalink | Comments (0)

Tuesday, September 15, 2015

Nonprofit Hospital Exercising Rights to Religious Accommodation Threatened with Lawsuit

The Washington Post reports that, after Catholic hospital Genesys Regional Medical Center denied a request from Jessica Mann to perform a tubal ligation following the future delivery of her baby by Caesarean section, Mann “sent a letter through the American Civil Liberties Union threatening legal action.”  The hospital denied the request, reports the Post, because “Catholic mandates forbid procedures that cause sterilization … and officials said she did not qualify for an exception.”  


Fellow law professor Robin Wilson of Illinois is quoted as saying that “[f]ederal law provides an ‘iron-clad’ exemption for medical providers who do not want to provide abortion or sterilization services.”  Professor Wilson is further quoted as articulating a reason for the statutory accommodation:


Wilson said judges must tread especially carefully in situations such as Mann’s, which are not acute emergencies.


“If it’s not an emergency, why should you wash out the religious character of that hospital?” she said. “You want a diversity of providers so people who have different values can actually find providers who match those values.”


The post reports that ACLU officials “argue that the federal protections cited by Wilson do not apply in the Mann case.”  The grounds for the ACLU’s argument are not entirely clear from the Post’s coverage.



September 15, 2015 in Current Affairs | Permalink | Comments (0)

Monday, September 14, 2015

Scientology Accountant Calls for Removal of Key Leader

The Tampa Bay Times is running a story that may interest those familiar with the legal battles involving the Church of Scientology.  According to the story, certified public accountant and former church attorney James J. Jackson, still a Scientology adherent, is seeking to remove David Miscavige from his position as Chair of the governing board of the Religious Technology Center (“RTC”).  The RTC reportedly owns the intellectual property rights in Scientology's practices.  The article is interesting on multiple counts, including its discussion of Jackson’s representation of leading scientologists and its description of the reorganization that the church undertook in the 1980s and the institutional culture that developed after the death of founder L. Ron Hubbard.  As to the attempted ouster of Miscavige, the Times states as follows:


Like many critics, Jackson sees the church's leader as a dictator steering Scientology toward ruin. Allegations over the years that Miscavige mentally and physically abused church staffers continue to yield public scorn, even though repeatedly denied by the church. While other detractors have tried to pressure Miscavige in civil court and on the Internet, Jackson is pursuing a novel, perhaps quixotic strategy: He believes Miscavige can be toppled by insiders.


After studying corporate bylaws the church presented to the IRS to gain tax exempt status and hiring three non-Scientology lawyers who specialize in matters regarding religious organizations, he argues Scientology's nearly three dozen trustees, directors and officers have the power — whether they know it or not — to exercise oversight over the lucrative corporate enterprise.


They have a legal right and responsibility to investigate, or even remove, Miscavige, Jackson says.


But can they do their job? Or is Miscavige running everything, as defectors have alleged?


"Fights over control of the board, failing to follow bylaws, all this is proper subject matter for a California court," said Mark Cohen of Fremont, Calif., one of Jackson's lawyers.


The Times further reports that Jackson has appeared in a video in which he calls upon the two trustees of RTC (besides Miscavige) to remove Miscavige from office.  The piece also links to various items of correspondence relevant to the controversy.




September 14, 2015 in Current Affairs | Permalink | Comments (0)