Wednesday, March 18, 2015
Mueller: An Argument for Continued Use of Standards to Evaluate the Campaign Activities of 501(c)(4) Organizations
Jennifer Mueller (American) has published "Defending Nuance in an Era of Tea Party Politics: An Argument for the Continued Use of Standards to Evaluate the Campaign Activities of 501(c)(4) Organizations," 22 George Mason Law Review 103 (2014). The following excerpt is from the introduction (citations omitted):
As this Article shows below, many of these premises are true: this is a complex area of law, and under the current system the agency’s final determination is, at the margins, unpredictable. When it comes to both tax and campaign finance, there will always be individuals seeking to circumvent the law. And certainly the public should be concerned for the robustness of the entire system. But all of these considerations counsel for retaining, with some modifications, the IRS’s standards-based approach to policing the campaign intervention line. They certainly do not support the contention that bright-line rules will markedly improve compliance or reduce the level of political participation by newly formed social welfare groups. Moreover, notwithstanding the political appeal of anti-IRS rhetoric, constraining the agency’s discretion in these cases will help no one but private actors looking for loopholes.
This Article reaches this conclusion through two independent lines of analysis. The first is largely theoretical. It examines the characteristics of rules—where the content of a legal command is provided ex ante—and standards—where the exact contours are determined as applied to a concrete set of facts ex post—as set out in legal scholarship over the last several decades. Following the lead of Professor Ellen Aprill, who recently conducted a similar inquiry with regard to 501(c)(3) charitable organizations but reached a different conclusion, this Article relies on the comprehensive framework set out by Professor Louis Kaplow in his article “Rules Versus Standards: An Economic Analysis.”
The second line of analysis is based on the observed effects of brightline rules in the parallel regime of campaign finance law. Campaign finance is an obvious choice for comparison for several reasons. First, many of the concerns and considerations set forth above, including complexity and circumvention, apply with equal force in the campaign finance arena. Second, it is a natural foil: the Federal Election Campaign Act (“FECA”) is increasingly administered through bright-line rules. Finally, many of those calling for reform of Section 501(c)(4) are motivated by concerns about the evasion of existing campaign finance laws, so there is a practical appeal to testing the hypothesis that rules in this area would be more effective.
501(c)(4) Update: Handful of Applications Still Pending, Do Lost Emails = A Crime?, and (Another) Court Dismisses Claims Against Lerner
IRC Section 501(c)(4) Applications: The IRS reported that as of last month it had closed 138 or 95% of the 145 organizations that had applied for recognition of exemption under section 501(c)(4) and were eligible for optional expedited processing because the only issues their applications raised were possible involvement in political campaign intervention or providing private benefit to a political party. The optional expedited process results in a favorable determination letter if the applicant represents that it devotes (1) 60 percent or more of both spending and time to activities that promote social welfare and (2) 40 percent or less of both spending and time to political campaign intervention. Of the 106 favorable determination letters issued by the IRS, 43 were the result of applicants choosing this process. Nevertheless a handful of such applications are still pending, including the application for Crossroads GPS and also several much smaller "mom-and-pop outfits," according to Politico.
Lost Emails: Politico also reports that in response to questioning from members of Congress a representative of the Treasury Inspector General for Tax Administration told a congressional Committee that TIGTA's ongoing search for IRS emails has revealed "potential criminal activity" in that the IRS failed to initially disclose some backup tapes and that other tapes were erased. The TIGTA representatives emphasized, however, that the investigation was still ongoing and it was too soon to determine if the actions were purposeful or the result of ill intent. A video of the full hearing is available here.
Federal Court Dismisses Claims Against Lerner: In a decision issued late last month, the U.S. District Court for the Northern District of Texas (Dallas Division) dismissed claims brought by Freedom Path, Inc. against Lois Lerner without prejudice for lack of personal jurisdiction. The claims arose out of the IRS's alleged mishandling of Freedom Path's application for recognition of exemption under IRC section 501(c)(4). The court found that the group's allegations did not demonstrate sufficient contacts with the state of Texas to grant the court personal jurisdiction over Lerner. The court also rejected several of the group's claims against the IRS and unnamed federal officials, including claims that challenged the constitutionality of two revenue rulings relating to political activity (2004-6 and 2007-41), finding the group had not pled sufficient facts to establish standing to challenge those rulings, and two other claims (for other deficiencies). The court did, however, give the group 28 days to file an amended complaint although it felt that the defects in some of the dismissed claims appeared to be incurable.
Tuesday, March 17, 2015
Third Circuit Affirms Multi-Million Damage Awards for Breach of Fiduciary Duties and Deepening Insolvency
Earlier this year, the U.S. Court of Appeals for the Third Circuit affirmed (for the most part) a multi-million jury damages award against the former officers and directors of the Lemington Home for the Aged. The Home entered bankruptcy in 2005, and the Bankruptcy Court later that same year granted the request of the Committee of Unsecured Creditors to file suit against the former Chief Executive Officer, the former Chief Financial Officer, and the former directors of the Home. After trial, a jury concluded that the two former officers had breached their duties of both care and loyalty, that the former directors had breached their duty of care, and that all of the defendants had deepened the insolvency of the Home by concealing the board's decision to close the Home and so defrauded the Home's creditors. The court therefore affirmed an award of $2,250,000 in compensatory damages against all but two of the defendants (jointly and severally) and punitive damages against the former CEO and CFO in the amounts of $1 million and #$750,000, respectively, rejecting only the award of $350,000 in punitive damages against five of the former directors.
The appellate court found that facts supporting the jury's verdict include repeated failures to comply with applicable federal and state regulations, the failure of the CEO to work full-time at the Home despite collecting her full salary and a state law requiring that she be full-time, and the failure of the CFO to provide a representative of a major creditor with basic financial information, to keep a general ledger for almost a year, and to bill Medicare for $500,000 owed. The court also found that the directors had failed to remove the CEO and CFO despite being aware of many of their failings, and the Home's failings, in part through independent reports documenting those failings.
This case therefore presents a rare but unfortunately actual case study in how officers and directors can fail to fulfill their fiduciary duties, and the liabilities they can incur as a result.
The City of Mercer Island, a suburb of Seattle, sought to prohibit solicitation activities between 7:00 p.m. and 10:00 a.m. The nonprofit United States Mission Corporation (doing business as United States Mission) objected because it desired to have the participants in its transition program for homeless people solicit contributions on weekday evenings until 8:00 p.m. The dispute eventually made its way to the U.S. District Court for the Western District of Washington, which has now granted a preliminary injunction to United States Mission barring enforcement of the 7:00 p.m. curfew on solicitation. The court concluded that the ordinance as written was content-based because it only reaches individuals or organizations that ask for donations or contributions, but not non-commercial organizations that do not ask for funds, and so is subject to strict scrutiny review under the First Amendment. Given that there were other, less restrictive ways to address the City's concerns regarding possible crime and protecting residential privacy, the court found a substantial likelihood that United States Mission would succeed on the merits and also that the other requirements for granting a preliminary injunction had been met.
The case demonstrates the difficult line that not only states, which presumably have relatively deep legal resources on which to draw, but also localities that may lack ready access to First Amendment legal counsel, have to walk to ensure that their attempts to regulate charitable solicitation efforts do not run afoul of the Constitution. Ironically, the ordinance at issue in the case was a newly-enacted one, adopted to replace an earlier ordinance that had been enjoined since 2001, presumably also on First Amendment grounds. Maybe the third try will be the charm.
Additional coverage: Mercer Island Reporter.
Monday, March 16, 2015
Tax Analysts reports (subscription required) that the IRS has deciding to stop automatically providing the media with copies of favorable determination letters issued in response to applications for recognition of exemption because of the changes in the structure and geographic location of the IRS Exempt Organizations Division and related IRS Office of Chief Counsel functions. Practitioners quoted in the article expressed disappointment with this decision. While the media and other members of the public can still request such letters by submitting Form 4506-A for each organization for which the letter is sought, practitioners noted the burden doing so imposes and the usually lengthy delay in the IRS response to such requests.
Additional coverage: Forbes (contributor opinion).
UPDATE: To clarify, the letters were previously provided by the IRS National Office and so were limited to the relatively few letters issued by that office, as opposed to the Cincinnati office that issues the vast majority of determination letters. That said, the National Office tended to handle the most difficult - and interesting - cases. According to later comments from the IRS, the change is apparently driven by the fact that the National Office will no longer be issuing determination letters.
The issuance of a new, streamlined Form 1023-EZ has caused a major shift in the exemption application world of the IRS. The IRS reported last week that it has received 20,103 such forms, or approximately half of all applications for recognition of exemption under Internal Revenue Code section 501(c)(3) since the IRS introduced the Form 1023-EZ. The IRS also reported that using streamlined procedures based on the Form 1023-EZ - that is, resolving open issues by asking applicants to attest to certain facts as opposed to requesting documents or narrative statements - it has reduced the backlog of all applications that had been pending for more than 270 days by 91 percent (from 54,564 in April 2014 to 4,791 in September 2014). The GAO previously also reported that the IRS closed 117,000 cases in fiscal year 2014, more than double the closure rate for the previous fiscal year. Not everyone is happy with the new form - see previous posts reporting concerns expressed by the National Association of State Charity Officials and the National Taxpayer Advocate, plus having a shortened form was not part of the recommendations promulgated by the IRS Advisory Committee on Tax Exempt and Government Entities when it looked at the application process.
UPDATE: New memo dated March 12, 2015 regarding the streamlined application process that replaces the previously linked to February 27, 2015 memo.
Last week the IRS issued Revenue Procedure 2015-21, which provides "guidance regarding correction and disclosure procedures for hospital organizations to follow so that certain failures to meet the requirements of § 501(r) of the Internal Revenue Code will be excused for purposes of § 501(r)(1) and 501(r)(2)(B)." Failures that are not willful or egregious may generally be resolved without financial penalty if they are both (1) corrected in a timely fashion, including restoring affecting individuals to the position they would have been in absent the failure and ensuring appropriate safeguards to prevent future failures, and (2) disclosed on the next Form 990 filed by the organization. If the IRS has contacted the hospital organization concerning an examination, the organization must have already corrected or be in the process of correcting the failure and must have disclosed the failure on its annual information return for the year in which the failure was discovered (if the due date, including extensions, for that return has passed).
The IRS has issued both final regulations and Revenue Procedure 2015-17 providing the final procedures for issuing determination letters and rulings relating to exemption under Internal Revenue Code section 501(c)(29). Paragraph 29 is the latest addition to section 501(c); it provides a federal income tax exemption for qualified nonprofit health insurance issuers (QNHIIs), also known as CO-OP health insurance insurers, that under the Affordable Care Act receive a loan or grant under the federal Consumer Operated and Oriented Plan Program. The CO-OP Program is designed to foster the creation of these new nonprofits to offer competitive health plans. These health care co-ops have had mixed success, as NPR reported earlier this year that the second largest one in the country recently collapsed.
Additional coverage: Squire Patton Boggs Alert.
Friday, March 13, 2015
Balsam Mountain v. Commissioner—Conservation Easement Authorizing Limited Swaps Not Deductible Under § 170(h)
In Balsam Mountain v. Commissioner, T.C. Memo. 2015-43, that Tax Court held that a conservation easement that authorized the parties, for a period of up to 5 years, to remove up to 5% of the land from the easement in exchange for protecting a similar amount of contiguous land was not eligible for a deduction under IRC § 170(h). Citing to the 4th Circuit’s recent decision in Belk v. Commissioner, 774 F.3d 221 (4th Cir. 2014), the Tax Court explained that the easement did not qualify as a “restriction (granted in perpetuity) on the real property” as required by 170(h)(2)(C).
In 2003, Balsam Mountain Investments, LLC (BMI), granted a conservation easement on 22-acres in North Carolina to the North American Land Trust (NALT). BMI reserved the right in the easement to, for five years following the donation, make alterations to the boundaries of the area protected by the easement, subject to the following conditions:
- the total amount of land protected by the easement could not be reduced,
- land added to the easement had to be contiguous to the originally protected land,
- land added to the easement had to, in NALT’s reasonable judgment, make an equal or greater contribution to the easement’s conservation purpose,
- the “location and reconfiguration of a boundary” could not, in NALT’s judgment, result in any material adverse effect on the easement’s conservation purposes, and
- no more than 5% of the originally protected land could be removed from the easement as a result of such alterations.
In Belk, the 4th Circuit affirmed the Tax Court’s holding that a conservation easement was not “a restriction (granted in perpetuity) on the use which may be made of the real property” as required by § 170(h)(2)(C) because the easement permitted the grantor and grantee to swap land in and out of the easement, subject to the approval of the grantee and certain other conditions. The 4th Circuit explained that, to be eligible for a deduction, an easement must protect, in perpetuity, a “defined and static” (or in the Tax Court’s words, “identifiable, specific”) parcel of real property. Based on Belk, the Tax Court held that the Balsam easement, which authorized the grantor to change the property subject to the easement, was not a “a restriction (granted in perpetuity) on the use which may be made of the real property” and, thus, was not eligible for a deduction.
BMI argued that Belk was distinguishable because the Belk easement allowed for the substitution of all of the land originally protected by the easement, while the Balsam easement allowed for the substitution of only 5% of the originally protected land. The Tax Court was not persuaded. While the court agreed that the Belk and Balsam easements were different, it said “the difference does not matter.” For five years following the donation, BMI, with the approval of NALT, could change the boundaries of the area protected by the easement. Accordingly, the easement was not an interest in an identifiable, specific piece of real property and, thus, was not deductible. Finding no genuine dispute as to any material fact, the court granted the IRS’s motion for summary judgment on the issue.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law
Thursday, March 12, 2015
The Chronicle of Philanthropy is reporting that ten individuals using technology to improve the world will be honored tonight at the Dewey Winburne Community Service Awards at the South by Southwest (SXSW) Interactive Conference. The awards honor the late Dewey Wineburne, a co-founder of SXSW Interactive, who had deep interests in education and technology.
According to the Chronicle:
This year’s honorees, selected by a panel of previous winners who live in Austin, represent five countries and a range of interests, including literacy, economic opportunity, and journalism. Each will receive $1,000 for the charity of their choice.
Among the honorees are:
- Rebecca McDonald of Australia who, after seeing footage of the 2010 earthquake in Haiti, quit her job in Australia and moved with her husband to the Caribbean country where she founded Library for All, an online digital library accessible using tablets distributed to schools across Haiti. Books are carefully selected to be culturally relevant and language-appropriate, with most written in French or Creole. The organization pays local publishers for texts and asks larger companies, which do not usually sell books to Haiti, to donate books.
- Jukay Hsu, a native of Queens, New York, who founded Coalition for Queens, a nonprofit designed, according to Mr. Hsu, to foster "a more inclusive tech ecosystem" and "pioneer a pathway from poverty to the middle class." The organization's keystone program, Access Code, trains people — many of them immigrants — to create mobile applications and prepare for entry-level developer jobs. So far, the average income of participants going into the program has been $26,000, while their average income after completion is $73,000.
- Libby Powell, of London, England, who has used her training as a journalist to found Radar, a communications-rights organization that trains citizen reporters and promotes the stories they tell through social media and other ways online. Based in the United Kingdom, the staff offers editorial guidance to local correspondents who report from the field. The group has generated coverage about elections and Ebola in Sierra Leone and slavery in India and is working on new projects that give voice to people living with dementia and those who are homeless. Created with money raised through the crowdfunding site Indiegogo, Radar works to raise awareness among the public, policy makers, and service providers about issues affecting marginalized groups. The organization has helped place articles in The Guardian and the BBC.
- Tembinkosi Qondela, of Cape Town, South Africa, who founded Whizz ICT Centre, an organization that seeks to facilitate the use of information communication technology (ICT) tools for development efforts of the community in Khayelitsha, one of the largest and poorest areas of Cape Town, South Africa. Mr. Qondela observed that marginalization of poor people in the use of ICT and the lack of access to information perpetuates the inequalities and poverty that face most young South Africans. Whizz ICT runs a center which gives young people access to computer training, other ICT related services and training in a range of income generating skills. To date Whizz ICT has provided training to over 1000 youth.
The names and brief profiles of the other six honorees are available on SXSW's website. We congratulate them all.
Wednesday, March 11, 2015
Study Finds Combination of Employment and Income Policies, New Tax Credit, Could Cut NYC Poverty Rate
I just came across this 116-page report commissioned by the Federation of Protestant Welfare Agencies, Catholic Charities of the Archdiocese of New York, and the UJA-Federation of New York titled How Much Could Policy Changes Reduce Poverty in New York City? The report was actually prepared by the Urban Institute. According to the report, a combination of employment and income policies, in-kind benefits, and a new tax credit could significantly reduce the poverty rate in New York City, where 20 percent of all residents currently live in poverty.
Giving a summary of the report, the Philanthropy News Digest states that
the report . . . analyzed the potential impact of a transitional jobs program, increased earnings supplements, a $15/hour minimum wage, increased Supplemental Nutritional Assistance Program benefits, more housing vouchers, guaranteed childcare subsidies, and a tax credit for non-working seniors and people with disabilities. Among the individual policy options, the study found the jobs program likely to be most effective (assuming that 50 percent of the unemployed living under the poverty line participate), reducing the poverty rate from 21.4 percent to an estimated 15.9 percent, followed by the tax credit for seniors and people with disabilities, a $15/hour minimum wage, and increased SNAP benefits.
The combined effect of multiple policy options, however, would be far greater, the report argues. Based on an analysis of three scenarios, the study found that even the least extensive combination — increased SNAP benefits, Earned Income Tax Credit, and childcare benefits; the tax credit for non-working seniors and people with disabilities; and 25 percent participation in the transitional jobs program at $9/hour but no change in the minimum wage or housing subsidies — would nearly halve the city's poverty rate to 12.1 percent. In the scenario with the most extensive combination of policy options, including 50 percent participation in the jobs program at a minimum wage of $15/hour, Paycheck Plus earning supplements, and housing vouchers for half the people on the waiting list, the poverty rate would fall by more than two-thirds, to 6.7 percent.
The study also found that the most effective individual policies, the jobs program and the tax credit, were the most expensive, and that total costs for the combination of policy options was estimated to range from $6.5 billion to $9.1 billion. While the costs are substantial, the report concludes, the analysis shows "that a package of policies can greatly reduce the number of people living in poverty," with potential long-term effects "that differ from those in the short run, especially if less near-term poverty helps more of today’s children avoid poverty in adulthood."
Monday, March 9, 2015
I have always found it troubling when people donate to charity but the donees receive a very small share of the donation. And yesterday's Orange County Register published a story about such a practice, a story that made me see, well, not orange, but red. According to the Register, in 2013, the for profit firms that raise money for charities collected $361.3 million from well-meaning Californians and pocketed $161.2 million, or 45.4 percent, of the take, this according to the latest figures from the Office of the Attorney General. Incidentally, those figures were better than those for 2012, when the for-profit firms pocketed 63 percent of the money raised in nonprofits' names.
California Attorney General Kamala Harris has bemoaned "the alarming extent to which charitable donations are often diverted to for-profit companies." However, Assemblywoman Jaqui Irwin, D-Thousand Oaks, noted that at least the trend seems to be going in the right direction (i.e., from 63 percent last year to 45.4 percent this year). Meanwhile, here's an interesting statistic: "generally speaking, charities with the words 'police' or 'firefighter' in their names kept less than one-third of what was raised on their behalf, with the overwhelming majority going to the for-profit fundraiser," reports the Register.
The Register continues:
In their defense, officials said some campaigns costing millions were strategic investments that will pay off far more than they cost, in future contributions.
Others, however, are run-of-the-mill, we-need-your-money-now-please affairs, where for-profit firms kept huge chunks of what donors believed would fund good works.
Charities often argue that it’s not really money out of their pockets, since professional fundraisers take a percentage of proceeds, or a pre-determined amount if a minimum is not met, said Sandra Miniutti, vice president of Charity Navigator, a nonprofit watchdog.
“However, from a donor’s perspective, that argument does not hold, since it is actually the donor’s money that is going to a professional fundraiser as opposed to the charity they thought they were supporting,” Miniutti said by email. “In large part, it is still professional companies taking advantage of the lack of education on the giving public’s part.”
And that’s why the Attorney General’s Office started gathering these numbers to begin with.
Well, I hope the Attorney General's Office can use these numbers to do something to change this sad situation.
OK; I'll admit it: my heart is breaking as I write this blog. I was Orange before I stepped foot on the SU campus, remained Orange while I was a student there, and am still Orange. And now my Orange pride has taken a hit. All weekend long I've been hanging my head in shame as the TV stations have kept repeating the news over and over: "The NCAA suspended Syracuse University basketball coach Jim Boeheim on Friday for nine Atlantic Coast Conference games and took away scholarships after a lengthy investigation of the school's athletic programs."
I've been trying to figure out just what happened. What did Boeheim and my alma mater do? I'll let Reuters tell the story:
Syracuse discovered and self-reported 10 violations, over an eight-year period dating to 2001, that primarily involved men’s basketball but also football, the NCAA Committee on Infractions said.
Those infractions included academic misconduct, extra benefits, failure to follow the school's drug testing policy and impermissible booster activity.
"Over the course of a decade, Syracuse University did not control and monitor its athletics programs," the committee said in a statement, "and its head men's basketball coach failed to monitor his program."
Boeheim's suspension will cover the first nine ACC games of the 2015-2016 season.
The National Collegiate Athletic Association's penalties include five years' probation, financial penalties, and a reduction of three men’s basketball scholarships per year through 2018-19.
Also Syracuse will vacate all wins in which ineligible men's basketball students played in 2004-05, 2005-06, 2006-07, 2010-11 and 2011-12 and all wins in which ineligible football students played in 2004-05, 2005-06 and 2006-07.
Boeheim, a Hall of Famer who has been the Syracuse head coach since 1976, won 135 games in those five seasons and 108 of those wins will be wiped out.
Say what? One hundred and eight wins erased? Treated like losses? How is that possible? Well, I guess the games are being forfeited after they were played and won! And in addition to that, Syracuse must return to the NCAA all money it received through the former Big East Conference for its appearances in the 2011, 2012 and 2013 NCAA Men's Basketball Tournament.
I'll be honest: I find these sanctions harsh -- and not only because Syracuse is my alma mater. These sanctions are saying to me, "Let us pretend that Syracuse did not play basketball in 2011, 2012 and 2013." That doesn't make much sense.
On the other hand, I find one sentence of the report of the NCAA Committee on Infractions troubling:
- Two staff members completed course work for an academically ineligible student "when the school was under investigation for other potential violations."
I have a problem with that. That was dishonest. It was wrong.
Not surprisingly, Chancellor Kent Syverud is not amused. According to the Chancellor, "Syracuse University did not and does not agree with all the conclusions reached by the NCAA, including some of the findings and penalties included in [the] report. However, we take the report and the issues it identifies very seriously, particularly those that involve academic integrity and the overall well-being of student-athletes."
There is much talk about an appeal by Boeheim and an appeal by Syracuse. I guess this is not over. Stayed tuned for the next installment.
Philanthropy News Digest reports that L'Oreal Paris has announced a Call for Nominations for the 2015 L'Oreal Paris Women of Worth awards, an annual program designed to honor women making a "beautiful difference" in the world through voluntarism.
According to the Digest,
Since 2006, the program, in partnership with Points of Light, has recognized eighty inspiring women who have selflessly devoted themselves to causes at the local and national level and motivated others to get involved. Past honorees have been involved in a range of important causes, from advocating for victims of childhood abuse and mentoring homeless children, to helping break the cycle of poverty and empowering teens with disabilities.
As regards the current Call for Nominations, the Digest states that this year, "ten women will be awarded $10,000 each and one woman will be named the national honoree and receive an additional $25,000 to further her charitable efforts. All ten honorees will be recognized in December at a star-studded awards ceremony hosted by L'Oreal Paris in New York."
Complete program guidelines, information about previous recipients, and nomination instructions are available at the Women of Worth website.
Friday, March 6, 2015
The Internal Revenue Service has issued a newly revised Publication 557, Tax-Exempt Status for Your Organization. The beginning “What’s New” section lists the following topics: IRS issues new interim guidance for supporting organizations and grantors; New guidance provides transition relief for employee health insurance expenses; Final regulations under section 501(r) issued in December 2014; Correction and disclosure procedures under section 501(r); New Form 1023EZ; Exempt Organizations Division Limited the Types of Cases that Are Referred to Exempt Organizations (“EO”) Technical, and Provided for Administrative Review of EO Technical Determinations; and Future developments.
The Chronicle of Philanthropy reports that proposed legislation in California would impose greater disclosure requirements on charity fundraisers. Explains the article:
California law requires "commercial fundraisers" to include a disclosure in charity solicitations whenever a portion of a donor’s charitable contributions will go to a for-profit company. However, some fundraisers have skirted that requirement by establishing their operations as "fundraising counsel" instead of "commercial fundraiser."
According to the story, the bill, sponsored by California Assembly member Jacqui Irwin and supported by California Attorney General Kamala Harris, would impose the transparency requirement on “all for-profit companies involved in fundraising for charities,” and would also lengthen to 10 years the statute of limitations applicable to particular offenses relating to "the exploitation of charitable assets." The article states that a recent attorney general’s report has found that “an average of 54.6 percent of funds raised through campaigns conducted by commercial fundraisers in the state in 2013 went to the charities.”
Thursday, March 5, 2015
Readers interested in a non-inflammatory piece on the Tea Party controversy should take a look at "Citizens United Spurs Social Welfare," published in Tax Notes Today (subscription required) and authored by Jasper L. Cummings, Jr. Jack is legal counsel in the Federal Tax Group of Alston & Bird and has an impressive record of legal service, including academic service as an acting assistant professor of tax at NYU and as a visiting professor of law at my home school, the University of Houston Law Center. In the article, Jack discusses the predictable rise in the use of social welfare organizations following Citizens United, and offers a measured perspective reflecting willingness to consider the best intentions of the Internal Revenue Service in regulating section 501(c)(4) entities in the wake of Citizens United.
In the piece, Jack presents a “short summary” of his article advancing the following points:
(1) To “expect an explosion of independent expenditures on federal elections after Citizens United” was reasonable.
(2) To expect that section 501(c)(4) entities “would receive a significant amount in additional contributions for such spending” was also reasonable.
(3) The new level of funding politically oriented 501(c)(4)s “could be so different in quantity that it would explain and justify a new look at the woefully inadequate published tax guidance for those organizations, and, in the meantime, at the administration of the tax law as it existed.”
(4) “We know now that the IRS did not carry out that new look in the right way,” but because of the “politically charged” nature of the relevant issues, “it is reasonably possible that the new look itself might have been a proper response to changing circumstances, as opposed to evidence of political bias.”
Electronic cite: 2015 TNT 43-10
Wednesday, March 4, 2015
The Los Angeles Times is running a piece that calls into question the creation and use of charitable nonprofits by political leaders to raise money funding activities that accomplish the leaders’ agendas. The focus of the article is the charity established by Los Angeles Mayor Eric Garcetti, the Mayor’s Fund for Los Angeles. There is no allegation that the fund is intervening in political campaigns or otherwise unlawfully influencing the political process. The concern is that big donors to the fund can obtain influence by supporting the Mayor’s pet projects. The story explains:
The contribution is one of dozens the Mayor's Fund has received, from companies with a stake in City Hall decisions and from charitable foundations, according to records reviewed by The Times. Modeled on similar nonprofits in New York and other cities, the fund provides a financial boost for civic programs — as diverse as environmental initiatives and summer jobs for thousands of inner-city kids — that might otherwise fall victim to city belt-tightening.
But the nonprofit, which took in about $5.2 million between its formation in June and last month, can also offer a discreet destination for special-interest money that is not subject to campaign finance restrictions. City law caps contributions by individuals or businesses at $1,300 per election for mayoral candidates. By contrast, the average donation to the Mayor's Fund has been $111,000.
According to the Times piece, “Garcetti's fund has benefited from donations of as much as $1 million from prominent charities as well as manufacturing, engineering, telecommunications, software and financial firms, or foundations linked to those companies.” The Times also reports that “some donors to the fund said they had enjoyed one-on-one meetings with the mayor and dinner receptions at his official residence.” The mayor, for his part, is reported to have insisted that “he keeps his distance from the organization's operations and that donors are dealt with by the nonprofit's staff.”
The Chicago Tribune reports that the Bernie Mac Foundation (“BMF”) has adopted numerous reforms to improve its governance following an audit by the Illinois Attorney General prompted by a journalistic probe by the Tribune. The need for change is perhaps best captured by the following fact reported by the Tribune: Only $152,000 of $900,000 worth of the BMF’s expenditures from 2009 to 2013 “went to charitable programs.”
The late comedian Bernie Mac created the BMF to combat sarcoidosis, a disease that afflicted Mac. After his death, the BMF’s board at one point reportedly dwindled to three people consisting of two family members and a long-time associate of Mac. The BMF received several hundred thousand dollars of charitable contributions after Mac’s death, but problems soon surfaced. According to the story, much of the donated money “ended up going to salaries and contracts that benefited board members, and the foundation fell far short of recognized benchmarks for charitable spending.”
But all of that now appears to have changed. The BMF is reported to have increased its board membership to eight people, giving the board “a range of community leaders and professionals.” The Tribune further reports:
[T]he Bernie Mac Foundation's charitable spending is expected to increase this year.
The organization also will stop contracting with two companies controlled by Mac's longtime associate, board Treasurer Edward Williams, according to new board member Manotti L. Jenkins, who is serving as a spokesman for the group. Several experts told the Tribune that the sums paid out to one of Williams' companies seemed large for the financial consulting and investment management services it was listed as providing.
In addition, says the piece, the BMF’s bylaws now prohibit board members from receiving salaries from the charity and from voting on transactions in which they are financially interested. Other reforms include (1) formalizing the BMF’s support of its primary charitable beneficiary, the Bernie Mac Sarcoidosis Translational Advanced Research (STAR) Center, established at the University of Illinois Hospital & Health Sciences System, and (2) requiring modest participation in fundraising by board members.
Tuesday, March 3, 2015
Readers of this blog are likely familiar with issues surrounding nonprofit hospital conversions. It appears that we may be witnessing a trend of conversions in the opposite direction (i.e., from for-profit to nonprofit form) in another field – education. In Some Owners of Private Colleges Turn a Tidy Profit by Going Nonprofit, the New York Times reports that recent governmental regulations and extensive negative publicity have led some for-profit colleges to opt for a solution quite distinct from going out of business. These schools have chosen to convert to nonprofit corporations. Apparently to illustrate the risk that for-profit culture may (or at least may be perceived to) carry through to the newly created nonprofit entities, the Times presents the case of Florida’s Keiser University. Says the Times:
In 2011, the Keiser family, the school’s founder and owner, sold it to a tiny nonprofit called Everglades College, which it had created. As president of Everglades, Arthur Keiser earned a salary of nearly $856,000, more than his counterpart at Harvard, according to the college’s 2012 tax return, the most recent publicly available. He is receiving payments and interest on more than $321 million he lent the tax-exempt nonprofit so that it could buy his university. And he has an ownership interest in properties that the college pays $14.6 million in rent for, as well as a stake in the charter airplane that the college’s managers fly in and the Holiday Inn where its employees stay, the returns show. A family member also has an ownership interest in the computer company the college uses.
The piece quotes fellow blogger Lloyd Mayer of the law school at the University of Notre Dame as observing the concern that newly formed nonprofit schools “may be providing an impermissible private benefit to their former owners.”
Dr. Arthur Keiser reportedly has dismissed the notion that the conversion of Keiser University raises concerns by stating that transitioning to the nonprofit form was long contemplated and by observing, “We disclosed everything. There’s nothing wrong with it.” However, not all appear convinced. According to the Times, former Education Department official Robert Shireman “filed a complaint with the Internal Revenue Service accusing Mr. Keiser and three board members of violating tax regulations and using the nonprofit ‘for personal gain.’” Keiser is reported to have responded to these allegations by stating that “all the financial arrangements ‘are at fair market value terms and conditions,’ and that the college adheres to ‘generally accepted auditing and accounting principles.’” Further, Dr. Keiser points out that the valuation of the college when sold was supported by “two independent auditors” and that he donated much of the value to the new school.
The Times reports that the structure of the Keiser University conversion is not atypical. Others are reported to have financed the purchase of for-profit colleges through a combination of loans and charitable contributions “to a closely affiliated nonprofit.” According to the story, the newly formed tax-exempt schools also may lease space from the original owners at hefty rents. The piece discusses conversions of Stevens-Henager, CollegeAmerica, California College (all owned by Carl B. Barney), Remington College and Herzing University, and a planned conversion of Grand Canyon University.