Monday, June 22, 2015
The Affordable Care Act (“ACA”) is in the forefront of newspaper coverage these days, with the United States Supreme Court set to decide in King v. Burwell whether enrollees in federal exchanges in states that have not established their own exchanges have subsidized insurance under the ACA. The ACA directly and indirectly impacts a significant portion of the nonprofit sector, both its service providers (i.e., nonprofit hospitals and other health care providers) and its service recipients (i.e., health care consumers). Several articles may interest readers. One is an article published by the St. Louis Post-Dispatch, which discusses the consolidation of the health care industry (and its likely effect on pricing) wrought by the ACA. Another article, this one from the Los Angeles Times, maps out the various legal arguments (e.g., textualism, administrative agency deference, and protection of states’ rights) that could sway Supreme Court justices as they decide the Burwell case. Perhaps most interesting of all is a piece by Emily Bazelon, who, writing for the New York Times, takes a somewhat scholarly look at the role of empiricism and consequentialism in judicial decisions, and speculates how they might affect Burwell and other cases currently before the Supreme Court.
Tuesday, June 16, 2015
The Washington Post reported yesterday that a coalition of community groups filed a 22 page complaint against WalMart Foundation, essentially accusing the foundation of operating for private benefit rather than the public good: From the Post article:
More than a dozen community groups filed a complaint with the Internal Revenue Service Monday alleging that the Walmart Foundation violated its tax-exempt status by using charitable funds to advance the retailer’s entrance into urban markets including Washington. The 22-page complaint, addressed to IRS Commissioner John Koskinen, details the retailer’s marketing and lobbying activities as it sought approval to open stores in New York City, Boston, Chicago, Los Angeles and other cities. The groups allege that the foundation is completely controlled by the company and that it “appears to target its donations and influence its grantees primarily to assist WalMart to achieve those expansion goals, ultimately providing Walmart more than an incidental benefit. Walmart Foundation’s activities are impermissible under the Code.”
Walmart has been forced to defend itself against allegations that its multi-billion dollar foundation has been using tax-exempt funds to help the retail chain expand into urban areas. On Monday, more than a dozen community groups filed a complaint with the Internal Revenue Service alleging that the WalMart Foundation violated tax code by targeting its donations to cities where the big-box giant has faced opposition to its growth plans. Data analysis of tax returns by these local nonprofits shows an uptick to the tune of millions in donations from the WalMart Foundation to organizations in Boston, New York, Washington D.C., and Los Angeles as WalMart pursued store openings in these cities.
What I found most curious and -- from a purist's standpoint, I suppose -- most disconcerting is the complaint's imprecise sort of casual discussion of private inurement and private benefit. Granted, I have only skimmed the complaint thus far but it seems the complainers are really just sorta casting a wide net and hoping to catch violations that might be lurking rather than making a strong case to suggest any real violations they know to exists. Sometimes premature accusations made for the purpose of attention or sensationalism do more harm than good. I can't help but wonder if this is a case in point.
Wednesday, June 10, 2015
One of my least favorite days in Nonprofits class is the day that we discuss the difference between trust and corporate fiduciary duties (Sibley Hospital, anyone?). Lest one think that the distinction is purely academic, along comes the sad case of Sweet Briar College to reaffirm that this area of law remains completely and utterly confusing.
If you’ve not been following the story, Sweet Briar College’s operating entity is a “non-profit corporation” (Complaint, Para. 6) which was created by the Virginia General Assembly “to administer the trust created by the will” of its primary funder, Indiana Fletcher Williams. The Complaint also asserts that SBC is a charitable organization under the Virginia Charitable Solicitation laws and is a “trustee” under Virginia’s version of the Uniform Trust Code. (So I’m confused already….)
According to the Complaint, the provisions of Mr. Williams’ will place his residuary estate in a trust. The trustees of that trust were instructed to create a corporation to run a women’s college in perpetuity. It would appear that in 1901 in Virginia, a nonprofit corporate charter could only be obtained by act of the General Assembly, and so it was. (Complaint, p. 17). The corporate charter incorporated the terms and conditions of Mr. Williams’ will, which required the assets to be held in perpetuity for the women’s college and directed that the assets not be sold.
Fast forward to March, 2015, when the current Board of Directors of the college announced that it would close the doors of the college, and liquidate its assets, including its endowment (Complaint, p. 26) due to the college’s poor financial condition. Litigation, of course, ensued.
The Complaint alleges violations of the Uniform Trust Code, which it asserts is applicable not only the original funding of the College occurred through the trust under Mr. Williams’ will, but also because “the Act of the Assembly creating the College requires that the College be administered in the manner of an express or charitable trust” (Complaint, p. 55). It then states, “Because the College is a charitable corporation, the assets held by Defendants are deemed to be held in trust for the public.” (Complaint, p. 56). Among other things, the original Complaint requested a temporary restraining order and a preliminary injunction restraining actions in furtherance of closing the school.
So the question then becomes, Sweet Briar College a trust? Is it a corporation? Does it matter? Should it?
More on this Nonprofit Law Prof Blog Cliffhanger next time….
Tuesday, June 9, 2015
You may have been following the FOIA lawsuit by Public.Resource.org, (a Section 501(c)(3) organization headed by Carl Malamud that is dedicated to open government) against the IRS. Public.Resource.org filed a FOIA request for information on the Sheet Metal and Air Conditional National Association (SMACNA) and its affiliated entities (the original complaint is here), but demanded that the IRS turn over the information in electronic format (not paper copy). The IRS resisted, arguing that it was administratively burdensome and that the paper copies were sufficient. In January of this year, however, the District Court ordered the IRS to turn over the electronic files of the requested Forms 990 within sixty days.
Sixty days came and went. Appeals happened. According to The Chronicle of Philanthropy, however, it looks like the IRS apparently finally released the SMACNA documents this week (the documents are here). Of greater interest (not that sheet metal isn’t interesting, … I guess… ) is the article’s report that the IRS is dropping its appeal. Given that Malamud wants the IRS to create a fully searchable database of all electronically filed Forms 990, I wonder what comes next? Will the IRS voluntarily comply with electronic file FOIA requests? In the process of responding to this law suit, did the IRS set up a procedure that could be replicated easily? Are they going the full database route – according to the article, it appears that discussions are underway. In the grand scheme of things, such a database would be very useful, but so would a great number of things administratively at the IRS. After all, the IRS has so many spare folks sitting around with nothing to do…
As an aside, I wondered why the sheet metal folks drew the ire of Public.Resource.org – the backstory appears to be that Public.Resource.org investigated and sued the SMACNA with regard to the association’s efforts to have its standards incorporated into state and local safety codes.
Thursday, June 4, 2015
Neoclassic thinkers describe nonprofit organizations in terms of "nondistribution constraint" and "market failure." I beg to differ; nonprofits are better described in terms of distributive justice. In various other places, I have tried to develop the idea that profit-seekers are amoral, at best, in the sense that profit seekers indulge the highest bidder without regard to anything else. Profit cares nothing for social welfare, only exploitation. Capitalist reject the label and resulting assertion. They even more vigorously defend against being labeled "immoral" by arguing that "greed is good" essentially; that the search for profit makes life better for everybody who participates. It is only the lazy -- defined as those who will not get up in the morning and go hunting for profit; in other words those who do not participate -- who get hurt in a capitalist system.
There is no amorality or immorality in that because the lazy have only themselves to blame. But capitalism necessarily presupposes winners. There can be no winners without losers. There is something immoral, or at least amoral, about a system that demands that someone loses. That's what underlies Rawlsian theory regarding optimal laws, which are laws we would adopt if we knew we would be losers in an ostensibly fair game. If we economic actors knew ahead of time we were going to lose in a fair game, we would probably insist upon marxism over capitalism even if we also knew that societies would be worse off in the aggregate.
Americans are taught that the Marxist creed -- "from each according to his ability, to each according to his need"-- embodies the real immorality since communism and socialism invariably stifle the human instinct for the responsible individual pursuit of "mo' better" (more and better) upon which the aggregate is dependent for advancement towards Utopia. In the Capitalists' moral view, nonprofits' Marxists/Socialists tendencies are indulged only to ameliorate whatever lesser immorality (relative to the immorality in Marxists Socialists societies) exists in the capitalists "winner take all" societies requiring the presence of losers. Remember, nobody can be rich unless someone is poor. We create the poor by indulging the rich. We offer riches to stimulate the individual pursuit of profit upon which the aggregate benefits. Capitalists admit, in other words, that not only are the lazy hurt in a capitalist society; because of flaws (inherited wealth, fraud, cheating, discrimination, for example) which belie the idea of perfect competition, good faith participants are often wronged just like the lazy in a capitalists system. Nonprofits exist to ameliorate the lesser moral failures inherent in a capitalists system operated by fallible human beings. By providing "to each according to his need' but not demanding "from each according to his ability" nonprofits ignore but do not override the profit motive as the dominate driver of our existence. They serve as recognition that the profit motive is morally superior to the sharing motive only to the extent that flaws in human behavior upon which the capitalist system operate can be eliminated. Those flaws cannot be eliminated. They can be punished or regulated by laws, but not eliminated.
Three German economist are about to publish an article entitled "Nonprofit Organizations, Instutitional Economics, and Systems Thinking" in the journal, Economic Systems. Here is part of the argument which seems to support the foregoing discussion:
The relation between the societal effects of corporate power and the role of nonprofit organizations requires more elaboration, and indeed presents the key theme of this paper. The inspiration for this argument stems from both Galbraith's work and Kenneth Boulding's (1984) inquiry into “the ethics of economic organization”. Galbraith (1967) provided a rich and nuanced analysis of the degrading effects of corporate domination of society. In addition to undermining consumer sovereignty, these effects include neglect of the higher dimensions of life, such as social welfare, aesthetics and freedom. Stanfield and Stanfield (2011, p. 141) explain “the social predicament of the new industrial state” as follows: “industrial society embodies core tendencies that chronically undermine the quality of human life and threaten to acutely diminish it in a flash of military or ecological bedlam”. The contribution of Boulding lies in calling attention to a further important effect, namely the tendency of corporations to lower the relative status of certain social groups, most prominently workers and farmers. Boulding noted that the role of some nonprofits, such as labor unions and farmer organizations, is to improve the status of precisely these social groups. Put together, the arguments of Galbraith and Boulding suggest that the role of nonprofits can be more generally seen in compensating for the degrading effects of corporate domination of society. This view of nonprofits clearly differs from the neoclassical market failure approach and is free from the latter's limitations identified by Steinberg (2006, p. 129). The justification of this view will be the main aim of the present paper.
The paper's strategy is to embed the suggested institutional economics perspective on nonprofit organizations into a recent strand of the general systems theory associated with the voluminous work of the German sociologist Niklas Luhmann. Analyzing the regime of functional differentiation as a key attribute of modernity, Luhmann pointed out that the functional systems, such as the economy, law, and politics, tend to develop so much internal complexity that their continued self-reproduction (i.e., autopoiesis) in their respective environment becomes precarious. The present paper will show that Luhmann's ideas about the precarious relation between complexity and sustainability of social systems shed considerable light on the complementary societal effects of profit-seeking corporations and nonprofit organizations. In Luhmannian terms, the degrading effects of corporate domination of society exemplify the tendency of the functional system of the economy to overstrain the carrying capacity of the societal environment; the role of nonprofits is to improve the societal sustainability of this system. The following section summarizes the main thrust of the Luhmannian vision of complexity and sustainability of social systems. The rest of the paper builds on the institutional economics literature, particularly on Galbraith and Boulding, in order to apply the Luhmannian argument to the relation between profit-seeking corporations and nonprofit organizations.
The article is a fascinating read, I think. It argues that profit-seekers simultaneously depend upon and destroy the dignity of [wo]man for the exact successes that lead to a better aggregate society. Nonprofits help redeem that dignity and by doing so support the tracks upon which rats race to the betterment of society -- if one believes that profit may not be entirely "good" but is at least better than wholesale sharing; that is if one believes that capitalism is morally superior to Marxism.
Wednesday, June 3, 2015
Let me just be honest about my biases. I think it is absolutely shameful that 19 states, including Florida, have refused to participate in Medicaid expansion. It's free money, for Christ's sake, you idiots! But I digress and I am supposed to be a scholar and speak in cold unemotional logic. So let me restate my opinion in the language of a scholar: Ahem . . . . It's free money, for Christ's sake, you idiots! Anyway, we have previously blogged about the early impact of the affordable care act on hospital charity care costs. A more recent report by the Kaiser Family Foundation confirms the early trend:
Looking at particular cost items, charity care costs decreased 40.1 percent among hospitals in Medicaid expansion states compared to 6.2 percent in non-expansion states. However, another component of cost of care to the poor, Medicaid shortfalls – the difference between what Medicaid pays and the costs of treating Medicaid patients – increased 31.9 percent between 2013 and 2014. Shortfalls increased for hospitals in expansion states but were more than offset by increases in Medicaid revenue. Shortfalls increased more among hospitals in non-expansion states than expansion states and were not offset by increases in Medicaid revenue, possibly due to state cuts in provider reimbursement. Combining the decrease in charity care costs with the increase in Medicaid shortfalls, the net cost of caring for low income patients decreased among hospitals in expansion states, while these costs increased among hospitals in non-expansion states.
So let me get this straight. The feds, using our tax dollars, will pay 90% of the costs of Medicaid expansion -- 100% until 2020. Charitable costs will likely increase without medicaid expansion anyway, meaning we will pay for indigent care one way or the other. But the nefarious nineteen (as I will call them from now on) don't want any of "Obama's stinking money." Yeah, that'll teach us, alright! We should remind the knuckleheads that Obamacare was based entirely on Romneycare!
Tuesday, June 2, 2015
We previously blogged on the efforts of the Bright Lines Project to come up with draft political activity regulations here and here. Bright Lines continues the work with these draft regulations. The latest draft, by the way is dated November 11, 2014. Recent reports suggest the real draft regulations may issue sometime this month.
China's draft "Foreign NGO Management Law" continues to spark criticism that it is actually an effort to silence criticism of the central government. The Wall Street Journal has run two recent articles, one of which states:
A Chinese draft law treats the entire sector of foreign nonprofits as potential enemies of the state, placing them under the management of the Ministry of Public Security. To drive home the point, the law is being readied as part of a package of legislation that also includes a national-security law and an anti-terrorism law—and it contains similar language, according to Western legal experts who have studied the texts . . . Undoubtedly, the undercover operations of a few politically motivated nonprofits in China have complicated life for the vast majority offering philanthropic assistance. Foreign nonprofits are widely viewed as a bridgehead for subversion. Intensely suspicious of any networked activity it doesn’t directly control, the government is especially wary of the grants they scatter that have allowed the domestic NGO sector to flourish. In a preamble, the draft law says its aim is to protect the “rights and interests” of foreign NGOs while “promoting exchange and cooperation.” But it piles on new layers of bureaucracy. Nonprofits will have to pay tax and hire Chinese accountants to conduct regular audits. They will have to go through approved agencies to hire staff and recruit volunteers. To enforce compliance, police will have unchallenged rights to enter offices, seize documents and inspect bank accounts.
The International Center for Not for Profit has a very use primer on Chinese NGO laws.
Monday, June 1, 2015
Garry Jenkins has an interesting piece in the Stanford Social Innovation Review regarding the growing presence of capitalist minded people, particularly those from the Wall Street Finance sector, on Nonprofit Boards. I have, in the past, argued that the Service should allow exempt organizations greater flexibility to use profit-seeking approaches in the pursuit of the charitable goal. The danger has been that the more an exempt organization looks and acts like a for-profit, the more vulnerable it is to the argument that it ought to lose its tax exemption, perhaps under the commerciality doctrine. But lately, I have had to rethink my belief that for profit and non-profit motives can actually live as happy neighbors in the same charitable neighborhood. That rethinking was prompted mostly by the absolute mess at the Charleston School of Law, (I want to use that for context in a later post about the interplay between for profit and nonprofit motives in a social enterprise) where apparent profit-seeking influences have all but destroyed what originated from altruistic motives. Jenkins explores the longstanding pressures on nonprofits to "get that money" by adoption of for-profit processes. Here are the first few interesting paragraphs:
Over the past twenty-five years the composition of the boards at some of America’s most important nonprofit organizations has dramatically changed. Without much notice, a legion of Wall Street executives (investment bankers, hedge fund managers, and others) has taken a growing number of seats in nonprofit boardrooms. Not only that, they hold a disproportionate share of the leadership positions on these boards.
One of the obvious reasons for this shift is undoubtedly the pressure that nonprofit organizations are under to raise more private funds. After all, given the significant growth in personal wealth generated by those working in high finance, it shouldn’t be too surprising to find more of them on nonprofit boards. A more subtle reason for the growth of financiers on nonprofit boards is likely the growing popularity of using business approaches (and talent) to run nonprofit organizations.
Since 2008, when Matthew Bishop and Michael Green popularized the term “philanthrocapitalism” to describe a new trend of donors seeking to conflate business aims with charitable endeavors, the nonprofit sector has engaged in active interrogation and discussion about the trend and its effect on public charities. Scholars and practitioners have documented various pressures placed on nonprofit organizations by donors and private foundations to adopt business approaches.
Although some of the pressure to adopt business approaches has come from external forces, it may also be true that the concepts and norms of philanthrocapitalism are also now carried into nonprofit organizations by the directors of public charities themselves. Perhaps a new fault line to consider is the very makeup of the governing boards of nonprofit institutions.
To understand the ways in which the composition of nonprofit boards has evolved in recent years, my research team and I examined the biographies of governing directors in 1989 and 2014 of three sets of nonprofit organizations: major private research universities, elite small liberal arts colleges, and prominent New York City cultural and health institutions. The most striking finding was the sizable presence and growth on charitable boards of those whose primary professional background and skill set were drawn from the financial services industry. The tally indicates that the percentage of people from finance on the boards virtually doubled at all three types of nonprofits between 1989 and 2014.
More striking, the data reveal that finance professionals hold an even greater percentage of nonprofit board leadership positions (i.e., board chair, vice chair, or their equivalent). In the case of liberal arts colleges and New York City nonprofits, financiers make up 44 percent of board leadership positions, and in the case of private universities they hold 56 percent of leadership slots.
Of course the social sector, especially the largest and most powerful nonprofit organizations such as those represented by the three types of institutions studied, has long populated its boards with men and women of wealth and professional backgrounds tied to the corporate world. Indeed, it is not unusual for many (although not all) of such members to have the capacity to contribute substantial resources, especially those from business and industry. What’s new is the increased concentration of directors drawn from one narrow sector of business and industry: finance.
This quiet yet dramatic self-transformation of the nonprofit boardroom has come about with little notice and discussion. To understand fully these trends and the impact, the nonprofit sector should ask itself some tough questions: What is sparking these changes in board composition? What values are being represented and promoted? What are the consequences for organizations and the people they serve? How might they affect the quality of board governance? How might the sector respond?
This article begins to shed light on the increasing influence of the finance industry on nonprofit boards. In addition to examining the data, it explores some of the explanations and consequences of these prevailing governance composition choices—and they are choices—that deserve attention and reflection from nonprofit leaders, trustees, and constituents.
Friday, May 29, 2015
If I were King of the world, I would allow for only a few majors at the undergraduate level. Literature, Languages, History, Mathematics, Science, Art and Philosophy. I would forbid students from majoring in jobs or careers. On the other hand, I have a daughter going into her junior year in college and three more in line and they all need to get jobs to support me and my old bones one day. Georgetown University's Center on College and the Workforce has an informative study out this month quantifying the economic value of a college education by major. I intend to send this to all four of my daughters phones because they won't hear me unless they get it by text or snapchat or whatever other social media is out these days.
Thursday, May 28, 2015
Public Interest Registry (PIR), administrator of the .org top-level domain, has launched two new domains that nonprofits all over the world may use: .ngo and .ong. This development is directly on target with creating more transparency and accountability for nonprofits as discussed earlier this week. Purchasers of the domains become members of PIR’s online directory, OnGood. As members, they may elect to set up profile pages and accept online donations. A Nonprofit Quarterly article discusses four reasons why nonprofits should consider registering with the new domains. Overall, this may serve as an important step toward making measurements of social impact more accessible to donors.
I think I would have been a much better and more engaged tax student back at UF if the internet had been around back then. Sheeesh, I feel old as old dirt! Anyway, the Washington Post has a story today about the Clinton Foundation, basically suggesting that former Secretary of State Hillary Clinton sold the influence of her office in exchange for large contributions to the Clinton Foundation. The whole thing might well amount to something later on but if the accusation is that donors gave big money to the Clinton Foundation with specific hopes of currying favor or influencing State Department policies, I am fairly agnostic about it. . . "nonplussed" I guess. Maybe I should be more concerned. But judging by the absence of comments to the story, I think I am not unlike most people. I read all the way to the bottom of the article anyway where I found this link to some interesting briefing memos prepared for Hillary Clinton when she was first lady. The memos talk about proposals to reduce the private foundation excise tax, increase the charitable contribution limit, and Paul Newman's lobbying efforts with regard to his feeder organization (Newman's Own). They brief the first lady on the policy pros and cons, and distributional effects, of changing those provisions within the context of the Taxpayer Relief Act of 199. I like to see (and show my students) behind the scenes or inner workings of legislative proposals. Today's students really have no reason to ever have a boring day in any tax class if you ask me.
According to this Fresno Bee article, The California Nurses Association (CNA) is up in arms regarding the extent to which California nonprofit hospitals generate community benefit. CNA argues that federal law (see IRC 501(r)) does not sufficiently hold nonprofit hospitals' feet to the fire when it comes to proving their entitlement to tax exemption. The article provides a link to a recently defeated bill (SB346) in the California legislature that would have strictly defined "community benefit." The bill will be reintroduced, apparently, in the next legislative session. Here is a summary of what the bill would require:
Existing law makes certain findings and declarations regarding the social obligation of private nonprofit hospitals to provide community benefits in the public interest, and requires these hospitals, among other responsibilities, to adopt and update a community benefits plan for providing community benefits either alone, in conjunction with other health care providers, or through other organizational arrangements. Existing law requires each private nonprofit hospital, as defined, to complete a community needs assessment, as defined, and to thereafter update the community needs assessment at least once every 3 years. Existing law also requires the hospital to file a report on its community benefits plan and the activities undertaken to address community needs with the Office of Statewide Health Planning and Development. Existing law requires the statewide office to make the plans available to the public. Existing law requires that each hospital include in its community benefits plan measurable objectives and specific benefits.This bill would declare the necessity of establishing uniform standards for reporting the amount of charity care and community benefits a facility provides to ensure that private nonprofit hospitals and nonprofit multispecialty clinics actually meet the social obligations for which they receive favorable tax treatment, among other findings and declarations.This bill would require a private nonprofit hospital and nonprofit multispecialty clinic, as defined, to provide community benefits to the public by allocating a specified percentage of the economic value of community benefits to charity health care, as defined, and community building activities, as specified. The bill would, by January 1, 2018, require a private nonprofit hospital or nonprofit multispecialty clinic to develop, in collaboration with the community benefits planning committee, as established, a community health needs assessment that evaluates the health needs and resources of the community. The bill would also require these entities, prior to completing the needs assessment, to develop a community benefits statement and a description of the process for approval of the community benefits plan by the hospital’s or clinic’s governing board, as specified. The bill would authorize the hospital or clinic to create a community benefits advisory committee for the purpose of soliciting community input. This bill would require the hospital or clinic to make available to the public a copy of the assessment, file the assessment with the Office of Statewide Health Planning and Development, and update the assessment at least every 3 years.This bill would also require a private nonprofit hospital and nonprofit multispecialty clinic, by April 1, 2018, to develop a community benefits plan that includes a summary of the needs assessment and a statement of the community health care needs that will be addressed by the plan, and list the services, as provided, that the hospital or clinic intends to provide in the following year to address community health needs identified in the community health needs assessments. The bill would require the hospital or clinic to make its community health needs assessment and community benefits plan or community health plan available to the public on its Internet Web site and would require that a copy of the assessment and plan be given free of charge to any person upon request.This bill would require a private nonprofit hospital or nonprofit multispecialty clinic, after April 1, 2018, every 2 years to annually submit a community benefits plan to the Office of Statewide Health Planning and Development, as specified, and would allow a hospital or clinic under the common control of a single corporation or other entity to file a consolidated plan, as provided. The bill would require that the governing board of each hospital or clinic adopt the community benefits plan and make it available to the public, as specified.
Wednesday, May 27, 2015
Continuing from yesterday’s post, it looks like donors are not the only ones looking for a return on their investment. Private foundations are acting more like venture capitalists these days. Today Fortune featured an article on the ability of foundations to make grants to start-up ventures that the IRS treats as regular charitable gifts in terms of tax treatment. Several of these transactions are occurring in the medical research area. What are the foundations receiving in return? According to the article, “the foundations typically take an equity stake, claim the rights to a portion of the company’s future sales, or require a payment when a drug achieves a clinical milestone.” Some nonprofits have actually earned returns totaling millions of dollars.
I have been thinking about the impact of yesterday's indictment of numerous FIFA officials on the various organizations' tax statuses, both here in the United States and abroad -- particularly under the tax laws of Switzerland. The FIFA matter would make for good class discussion, I think. According to a DOJ Press Release issued this morning:
A 47-count indictment was unsealed early this morning in federal court in Brooklyn, New York, charging 14 defendants with racketeering, wire fraud and money laundering conspiracies, among other offenses, in connection with the defendants’ participation in a 24-year scheme to enrich themselves through the corruption of international soccer. The guilty pleas of four individual defendants and two corporate defendants were also unsealed today.
The defendants charged in the indictment include high-ranking officials of the Fédération Internationale de Football Association (FIFA), the organization responsible for the regulation and promotion of soccer worldwide, as well as leading officials of other soccer governing bodies that operate under the FIFA umbrella. Jeffrey Webb and Jack Warner – the current and former presidents of CONCACAF, the continental confederation under FIFA headquartered in the United States – are among the soccer officials charged with racketeering and bribery offenses. The defendants also include U.S. and South American sports marketing executives who are alleged to have systematically paid and agreed to pay well over $150 million in bribes and kickbacks to obtain lucrative media and marketing rights to international soccer tournaments.
I did some preliminary checking and learned that FIFA is a complicated Swiss based international charitable organization comprising several other national and international nonprofit and tax exempt organizations, including the U.S. Soccer Foundation. It seems rather axiomatic that when executives -- insiders and disqualified persons, likely -- use the organization's venue selection and contracting processes to extract bribes, kickbacks, and other illicit payments from third parties, the organization is being operated for private benefit. I wonder, though, about the extent to which an umbrella organization's misdeeds can cause legal issues for one or more of its member organizations, such as the U.S. Soccer Foundation. And even if the bribes and kickbacks constitute or indicate private benefit, would the organizations subject to U.S. law be able to point to their other activities to support an argument that whatever private benefit existed was substantially outweighed by their good deeds and therefore not fatal to tax exemption? Anyway, the whole topic, along with all the exhibits and so forth available online would make for good discussion fodder in a class or seminar dealing with tax exemption in the international arena. The L.A. Times has some useful articles on the subject.
Tuesday, May 26, 2015
I have blogged often about the rise of a donor base that demands results from the nonprofits. My theory is that an efficient charitable market, where investment ends up in the hands of those charities that will put it to its most productive use, is crucial. Of course that necessitates reform to our US cross-border giving laws so that donors truly may have the ability to weigh the social impact (or return) associated with US versus non-US charities before deciding where to give. This was the subject of two parts of a three part series I have written. An efficient charitable market also requires the charitable sector to learn from the impact investing sector in terms of measuring and reporting social impact, which is the topic of my forthcoming final article in the series.
CNBC dealt with the donor dilemma of where to give effectively earlier this month. It announced that well-known think tank in the nonprofit arena, Milken Institute, has developed the Center for Strategic Philanthropy (CSP), which is designed to help donors make better giving choices. The main arm of the CSP is the Philanthropy Advisory Service. As Executive Director of the CSP, Melissa Stevens, commented, donors "are spending so much more time on their philanthropy because they want to do it well." The need for providing donors with concrete information about return on their investments is no secret to other competitors in the space such as Rockefeller Philanthropy Advisors, Pembroke and the Giving Pledge. With over $250 billion being given annually in the US, there is plenty of room for advising according to area of expertise. The CSP has already laid claim to the medical research area. According to Stevens, donors are focusing on “maximizing the social return on their philanthropic portfolios,” a phrase which necessitates the development of an efficient charitable market.
How much should charity and business intersect? Recent trends point toward a growing entanglement between the for-profit and nonprofit sectors, as evidenced by the growth of the social enterprise movement. The issue of the entanglement of business and charity is, however, not new; it was one of the primary concerns behind the enactment of the private foundation excise taxes in 1969, including the excess business holding excise tax of Code Section 4943. While Code Section 4943 has changed little since its original enactment, the business and investment world has changed substantially, specifically including the introduction and growth of the LLC as a business entity. This Article looks at the current treatment of LLCs under Code Section 4943 and considers various options for incorporating LLCs into the statutory framework. It then evaluates these options in light of the original concerns about the interaction between business and charity voiced in the debate over the 1969 excise taxes and echoed today in the evaluation of social enterprise as a viable means of accomplishing charitable goals. The article concludes with a recommendation for change to Code Section 4943 that would incorporate LLCs specifically, provides administrative clarity, minimize the possibility of abuse, and allowing for modern investment practices and innovation.
Accepted wisdom, lore, or legend has it that LBJ, in the dead of night when nobody was paying attention, inserted the prohibition against campaign intervention because he was running for Senatorial reelection and he wanted to shut down opposition emanating from a Texas nonprofit. If that is true, we probably should have spoken up earlier and not deemed that action a harmless imposition on civil liberties. In the age of the GWOT, I admit that I sometimes shake my head at die hard civil libertarians who object to "every little" imposition on individual liberties undertaken for our own good, according to our government. I appreciate those impositions whenever I get on a plane. The danger is that when we get used to letting the little impositions go unchallenged, we are just asking for trouble at home or elsewhere, now or some time in the future. One day we wake up and all the little rights we took for granted are gone . . . . and by then its too late to say anything. I will resist the urge to quote Martin Niemoller here.
The U.S. and the EU are up in arms, and rightly so, I'm sure, about amendments to a 2012 Russian law giving "the Kremlin" more authority to crack down on "illegal activity" by NGO's. U.S. laws are not so draconian in their punishment of political activities by NGO's but I still wonder whether we ought to deal with "the log in our own eye" while we are condemning Russia's NGO law. I am not sure the same - that they are not draconian -- can be said of U.S. laws relating to NGO's suspected of allowing the use of their assets in support of terrorism. I have not read those provision in a while but I recall being troubled by the "before the facts are established" authority Executive Order 13224 gave the government; authority, it seemed to me, to just swoop in and shut a charity down under the umbrella of fighting terrorism. Whatever process was allowed under that order and subsequent laws comes only after the fact and presumably without use of funds previously frozen. When I read about the Russian NGO law this weekend and all the resulting criticism, I wondered about our own laws. For their part, and quite predictably, the Russians are claiming that in their recently amended NGO law they are doing no more than what the U.S. and many other countries have done in their treatment of political activity and terrorist support groups masquerading as tax exempt charities.
In 2012 Russia’s parliament adopted a law that required nongovernmental organizations (NGO)s to register as "foreign agents" with the Ministry of Justice if they engage in “political activity” and receive foreign funding. The definition of “political activity” under the law is so broad and vague that it can extend to all aspects of advocacy and human rights work. Initially, the law required all respective NGOs to request the Ministry to have them registered and implied legal consequences for failure to do so. Because in Russia “foreign agent” can be interpreted only as “spy” or “traitor,” there is little doubt that the law aims to demonize and marginalize independent advocacy groups. Russia’s vibrant human rights groups resolutely boycotted the law, calling it “unjust” and “slanderous.” In early March 2013 the Russian government launched a nationwide campaign of intrusive inspections of hundreds of NGOs to identify advocacy groups the government deems " foreign agents" and force them to register as such. After the inspection wave, at least 55 groups received warnings not to violate the law and at least 20 groups received official notices of violation directly requiring them to register as “foreign agents.” Also, the prosecutor’s office and Ministry of Justice filed at least 12 administrative cases against NGOs for failure to abide by the “foreign agents” law and at least six administrative cases against NGO leaders. Additionally, the prosecutors brought civil law suits against six NGOs for failure to register under the law. Since the law entered into force, numerous rights groups challenged the prosecutor’s office and the Ministry of Justice in courts; most lost their cases. As a result, by February 2015 at least 12 groups chose to shut down rather than wear the shameful “foreign agent” label, including Association of NGOs in Defense of Voters’ Rights “Golos”, JURIX (Lawyers for Constitutional Rights and Freedoms), the Moscow School of Civic Education (Moscow), Kostroma Center for Civic Initiatives Support, Anti-Discrimination Center (ADC) Memorial, Side by Side LGBT Film Festival, Coming Out, “Freedom of Information” Foundation, the League of Women Voters and Human Rights Resource Center (Saint-Petersburg), Center for Social Policy and Gender Studies and Association “Partnership for Development” (Saratov).
According to this news report, the latest amendments provide sweeping authority to the government to respond to "undesirable" NGO's engaging in vaguely defined activities, including prison sentences:
Under the law signed by president Vladimir Putin on Saturday evening, Russian prosecutors will be able to target foreign groups whose "undesirable activities" are deemed to threaten "state security" or the "basic values of the Russian state". Such groups and their publications risk being banned in Russia, having their bank accounts blocked and violators face fines or prison terms of up to six years. People cooperating with such entities would also be hit with fines and could be banned from entering Russia, according to the text, which sailed through the two chambers of Russia's parliament. Critics have said the vague wording of the legislation, and a process that bypasses the court system, means that any group or business could be targeted.
I am not defending the Russian actions. I'm just wondering whether we have done all we should to make sure our own laws are not as reactionary.
Monday, May 25, 2015
Earlier this month, we covered the 9th Circuit decision that denied the Center for Competitive Politics (CCP) an injunction that would have restricted California Attorney General Kamala Harris from requiring a list of donors who had contributed more than $5,000 in a year. See Lloyd Mayer's post.
Under current California law, nonprofit groups seeking donations from California are required to disclose donor names to the AG and to the IRS. The CCP and America for Prosperity have refused to surrender these lists asserting that their donors would be harassed. Harris has indicated that the lists would be kept confidential and used only for investigatory purposes.
As an update, the Supreme Court has denied an emergency appeal from the CCP. The CCP filed the appeal with Justice Kennedy, who denied it without prejudice. David Keating, President of the CCP, has stated that the center will continue injunction efforts in the event Harris attempts to collect donor information. Interesting, Justice Kennedy is a proponent of free speech and free spending in terms of politics, two aims the CCP promotes; however, he is also in favor of disclosure laws. This case raises important First Amendment questions for the sector. See LA Times.
Thursday, May 21, 2015
FTC and All 50 States File 148 Page Complaint Alleging Massive Fraud by Cancer Charities, Collect More than $100 Million in Restitution
I have not yet even begun to read the alleged details yet, but two days ago the Federal Trade Commission and all 50 states of the Union plus the District of Columbia filed a nearly 150 page complaint against four cancer charities alleging fraud and what amounts to massive examples of private inurement and excess benefit transactions. What interested me most in the complaint were allegations pertaining to defendants' failure to "observe rudimentary corporate governance practices" used apparently to bolster the allegations of private benefit that run throughout the complaint. I am going to give it a more thorough read and talk more about that later. From the Press Release:
The Federal Trade Commission and 58 law enforcement partners from every state and the District of Columbia have charged four sham cancer charities and their operators with bilking more than $187 million from consumers. The defendants told donors their money would help cancer patients, including children and women suffering from breast cancer, but the overwhelming majority of donations benefitted only the perpetrators, their families and friends, and fundraisers. This is one of the largest actions brought to date by enforcers against charity fraud.Named in the federal court complaint are Cancer Fund of America, Inc. (CFA), Cancer Support Services Inc. (CSS), their president, James Reynolds, Sr., and their chief financial officer and CSS’s former president, Kyle Effler; Children’s Cancer Fund of America Inc. (CCFOA) and its president and executive director, Rose Perkins; and The Breast Cancer Society Inc. (BCS) and its executive director and former president, James Reynolds II.
CCFOA and Perkins, BCS, Reynolds II and Effler have agreed to settle the charges against them. Under the proposed settlement orders, Effler, Perkins and Reynolds II will be banned from fundraising, charity management, and oversight of charitable assets, and CCFOA and BCS will be dissolved. Litigation will continue against CFA, CSS and James Reynolds Sr.
. . . . . .
According to the complaint, the defendants used telemarketing calls, direct mail, websites, and materials distributed by the Combined Federal Campaign, which raises money from federal employees for non-profit organizations, to portray themselves as legitimate charities with substantial programs that provided direct support to cancer patients in the United States, such as providing patients with pain medication, transportation to chemotherapy, and hospice care. In fact, the complaint alleges that these claims were deceptive and that the charities “operated as personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation, with none of the financial and governance controls that any bona fide charity would have adopted.” According to the complaint, the defendants used the organizations for lucrative employment for family members and friends, and spent consumer donations on cars, trips, luxury cruises, college tuition, gym memberships, jet ski outings, sporting event and concert tickets, and dating site memberships. They hired professional fundraisers who often received 85 percent or more of every donation. The complaint alleges that, to hide their high administrative and fundraising costs from donors and regulators, the defendants falsely inflated their revenues by reporting in publicly filed financial documents more than $223 million in donated “gifts in kind” which they claimed to distribute to international recipients. In fact, the defendants were merely pass-through agents for such goods. By reporting the inflated “gift in kind” donations, the defendants created the illusion that they were larger and more efficient with donors’ dollars than they actually were. Thirty-five states alleged that the defendants filed false and misleading financial statements with state charities regulators. In addition, the FTC and 36 states charged CFA, CCFOA and BCS with providing professional fundraisers with deceptive fundraising materials. The FTC and the attorneys general also charged the defendants with violating the FTC’s Telemarketing Sales Rule (TSR), CFA, CCFOA and BCS with assisting and facilitating in TSR violations, and CSS with making deceptive charitable solicitations.
The Press Release contains links to the complaint the proposed final orders against two of the four malefactors as well as stipulated orders resulting in restitution in excess of $100,000,000.