Monday, June 6, 2016

Senate Finance Scrutiny of Private Museums Continues

According to this Chronicle of Philanthropy article (citing arts newsletter Hyperallergic), Senate Finance Committee Chair is continuing his scrutiny of private museums, now by requesting clarification from the IRS regarding its stance on private museums.    You may recall that last fall, Senator Hatch sent a letter of inquiry to a number of private museums, requesting details regarding the museum's operation - fellow blogger Nickolas Mirkay detailed those letters here.   Hyperallergic indicated that one of Hatch's primary concerns was the public availability of collections  (including limited hours and advance reservations)  and the continuing role of donor of the art collection in the management of the museums.   Much of this scrutiny may stem from a series of New York Times articles regarding private museums, including here and here.

Inquiries of this type bother me somewhat.   It seems to me that current law regarding private benefit is probably sufficient to handle many of the perceived abuses (maybe it's an enforcement issue - just throwin' it out there).   The drumbeat of the articles and the Senate inquiry may lead to additional regulation - and I suspect they will use a mallet rather than a surgical instrument to deal with the issue, if history is any guide.



June 6, 2016 in Current Affairs, Federal – Executive, Federal – Legislative, In the News | Permalink | Comments (0)

Friday, June 3, 2016

Lamboy-Ruiz, Cannon Watanabe on Earnings Management in U. S. Hospitals

Melvin A Lamboy-Ruiz, James N. Cannon, and Olena Watanabe have posted The Influence of Ownership and Regulatory Scrutiny on Earnings Management in U. S. Hospitals on SSRN with the following abstract:

We examine accrual and real earnings manipulations in U.S. hospitals, where we expect differences in hospital ownership (nonprofit vs. for-profit) will result in varying incentives to manage earnings. First, we document that nonprofit hospitals have lower levels of income-increasing and income-decreasing earnings manipulations than for-profit hospitals. Second, when we partition nonprofit hospitals by states with community benefits laws, we find that this greater regulatory scrutiny is associated with lower income-decreasing and income-increasing earnings management. Further, under regulatory scrutiny, nonprofit hospitals provide a greater proportion of uncompensated (charity) care with respect to net revenue. By examining differences in regulatory scrutiny types (i.e. reporting only vs. provision only), we find that either requirement is associated with less severe earnings management. Turning to actual patient care provided, we document that hospitals under regulatory scrutiny provide more uncompensated care, while reporting less compensated care costs as a proportion of net revenue. Notably, the higher uncompensated care observed under regulatory scrutiny is associated with the community benefits provision only requirement, but not with the reporting only requirement. Overall, our findings suggest that reporting incentives associated with ownership and those influenced by increased regulatory scrutiny help to improve earnings quality, and that the provision requirement alone benefits stakeholders more than reporting requirement alone by incentivizing nonprofit hospitals to offer more community benefits.

--Eric C. Chaffee

June 3, 2016 | Permalink | Comments (0)

Thursday, June 2, 2016

Mountanos v. Commissioner—9th Circuit Affirmed Tax Court’s Denial of Conservation Easement Donation Deductions and Imposition of Penalties

Mountanos new pic copyMountanos involved a landowner who donated a conservation easement with respect to undeveloped land in Lake County, California, in 2005. The landowner reported that the easement had a value of $4.69 million, claimed a federal charitable income tax deduction of $1.3 million on his 2005 income tax return, and claimed the remaining $3.39 million in the form of carryover deductions on his 2006, 2007, and 2008 returns.  

In Mountanos v. Comm’r, T.C. Memo. 2013-138 (Mountanos I), the Tax Court sustained the IRS’s disallowance of the carryover deductions, finding that the taxpayer failed to prove that the highest and best use of the land changed as a result of the donation and, thus, that the easement had any value. The statute of limitations had apparently run on the landowner’s 2005 return. The Tax Court also found that the taxpayer was liable for strict liability gross valuation misstatement penalties under IRC § 6662(h).

In Mountanos v. Comm'r, T.C. Memo. 2014-38 (Mountanos II), the Tax Court denied the taxpayer’s motions to reconsider, vacate, or revise its opinion in Mountanos I. Asking the court to consider alternative (non valuation) grounds for denying the deduction in Mountanos II was, said the Tax Court, “a calculated maneuver to avoid the accuracy-related penalty.”

In a short (just over 3-page) unpublished opinion, Mountanos v. Comm’r, No. 14-71580 (9th Cir., June 1, 2016) (Mountanos III), the Ninth Circuit affirmed the Tax Court’s holding that the landowner (i) was not eligible for the carryover deductions claimed on his 2006, 2007, and 2008 income tax returns and (ii) was liable for a strict liability gross valuation misstatement penalty with regard to each return. The Ninth Circuit explained that, even if the Tax Court erred in failing to assign some non-zero value to the potential to subdivide the property into seven separately salable parcels, the error was harmless because the evidence indicated the easement had a value of no more than $210,000, which was far less than the $1.3 million the landowner claimed as a deduction on his 2005 return. In addition, even if the easement had a value of up to $210,000, the landowner remained subject to gross valuation misstatement penalties because the value he reported on his income tax returns for the easement ($4.69 million) was more than four times (400%) of that value. Finally, the Ninth Circuit rejected the landowner’s argument that not allowing him to raise the reasonable cause defense for his gross valuation misstatements on his 2006, 2007, and 2008 returns constituted an improper retroactive application of the strict liability penalty, which was enacted as part of the Pension Protection Act of 2006. Citing Chandler v. Comm'r, 142 T.C. 279 (2014), the Ninth Circuit explained that the landowner had "reaffirmed" his gross valuation misstatement with respect to the easement on the returns in which he claimed the carryover deductions.  

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law

June 2, 2016 | Permalink | Comments (0)

Wednesday, June 1, 2016

International Committee of the Red Cross E-Briefing: Principles Guiding Humanitarian Action

The International Committee of the Red Cross has compiled an E-Briefing on Principles Guiding Humanitarian Action.  The introduction describes the E-Briefing as follows:

The seven "Fundamental Principles of the International Red Cross and Red Crescent Movement" are the expression of a set of values and experiences distilled from over a century and a half of protecting the lives and dignity of people affected by conflict and disaster worldwide. This e-briefing is intended as a multimedia resource that traces the latest developments in the contemporary debate on these principles. Far from having being limited to reaffirming their enduring relevance and far-reaching influence, this worldwide reflection also refined our mastery of the humanitarian principles as eminently pragmatic tools that, when applied judiciously on the ground, carry the power for more humanitarian effectiveness amidst the most challenging crises of our times.

--Eric C. Chaffee

June 1, 2016 | Permalink | Comments (0)

Tuesday, May 31, 2016

June 1 Deadline Reminder - Call For Papers Joint Program of the AALS Sections on Agency, Partnerships LLCs, and Unincorporated Associations & Nonprofit and Philanthropy Law



2017 AALS Annual Meeting
January 3-7, 2017
San Francisco, CA
In December 2015, Facebook founder Mark Zuckerberg and his wife, Dr. Priscilla Chan, pledged their personal fortune—then valued at $45 billion—to the Chan-Zuckerberg Initiative (CZI), a philanthropic effort aimed at “advancing human potential and promoting equality.” But instead of organizing CZI using a traditional charitable structure, the couple organized CZI as a for-profit Delaware LLC. CZI is perhaps the most notable example, but not the only example, of Silicon Valley billionaires exploiting the LLC form to advance philanthropic efforts. But are LLCs and other for-profit business structures compatible with philanthropy? What are the tax, governance, and other policy implications of this new tool of philanthrocapitalism? What happens when LLCs, rather than traditional charitable forms, are used for “philanthropic” purposes?

From the heart of Silicon Valley, the AALS Section on Agency, Partnerships LLCs, and Unincorporated Associations and Section on Nonprofit and Philanthropy Law will host a joint program tackling these timely issues. In addition to featuring invited speakers, we seek speakers (and papers) selected from this call.

Any full-time faculty of an AALS member or fee-paid school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1- or 2-page proposal by June 1, 2016. The Executive Committees of the Sections will review all submissions and select two papers by July 1, 2016. If selected, a very polished draft must be submitted by November 30, 2016. All submissions and inquiries should be directed to the Chairs of the Sections at the email addresses below:

Mohsen Manesh
Associate Professor
University of Oregon School of Law

Garry W. Jenkins
Associate Dean for Academic Affairs
John C. Elam/Vorys Sater Professor of Law
The Ohio State University Moritz College of Law


--Eric C. Chaffee

May 31, 2016 | Permalink | Comments (0)

Monday, May 30, 2016

Brody on the Charity Property Tax Exemption

Evelyn Brody has posted The 21st Century Fight Over Who Sets the Terms of the Charity Property Tax Exemption on SSRN with the following abstract:

Turning from the substantive issue of defining charity, this article considers the “who” question by examining the roles of the courts, legislatures, municipalities, and charities in determining exemption and payments in lieu of taxes. The three covered topics – constitutional power, statutory interpretation, and the “intermediate sanctions” of user fees and PILOTs – braid together to form the procedural framework for the financial relationship between nonprofit property owners and the taxing jurisdictions that host them. Change the parameters of one, and you change the others.

Staying off the rolls or minimizing the tax bite often results from compromise – whether at the state constitutional level; in state statutes; as a matter of assessment; or through negotiation with local governmental bodies. But such an application of a multi-level framework for mischief leads to legal incoherence. The article begins with the knockdown, drag-out separation-of-powers fight that has arisen in Illinois and Pennsylvania: Which branch, the judicial or legislative, defines “charities” granted exemption by the state constitution?

Next up is the more mundane world of statutory interpretation, where even here courts second-guess the legislature. A June 2015 decision by the New Jersey tax court exemplifies what could be view as “passive-aggressive separation of powers,” when the court basically says, “Surely the legislature could not have meant this entity (or this use of property) to qualify as charity.” This latest decision not only seems to render all “sophisticated centers of medical care” in New Jersey taxable, but also is causing sleepless nights for Princeton University: The same judge is hearing a challenge to the university’s exemption brought by local taxpayers.

New Jersey’s January 2016 proposed legislation fell a pocket veto short of enactment: It would have imposed a formulary community-service fee on nonprofit hospitals. Legislative efforts are again underway. Perhaps such a third-way solution might become more common. Voluntary agreements for payments in lieu of taxes are literally all over the map, from Boston’s revamped comprehensive PILOT program to a Florida appellate court’s striking of a PILOT program as inconsistent with statutory exemption. Will the people’s branch get the last word after all?

--Eric C. Chaffee


May 30, 2016 | Permalink | Comments (0)

Berg on Religious Nonprofits

Thomas C. Berg has posted Partly Acculturated Religious Activity: A Case for Accommodating Religious Nonprofits on SSRN with the following abstract:

Many of today’s most vexing problems concerning the accommodation of religion involve religious organizations that straddle the perceived boundary of the public and private: that is, not the "private" instance of churches and their clergy, but rather nonprofit organizations (religious colleges, adoption agencies, etc.) that employ or serve people outside their faith but also make religious freedom claims to follow their religious norms in the face of generally applicable laws (contraception mandates, anti-discrimination laws, etc.). I refer to these organizations and activities as "partly acculturated": acculturated in that they reach out to the broader society to provide services of general civic value, but unacculturated in that some of their doctrines and practices clash with dominant secular values. To many critics, it is plainly improper to accommodate partly acculturated activity: when an organizations hires or serves people outside its faith, it must follow whatever rules the government sets.

This paper argues that we should make real efforts to protect religious freedom for partly acculturated religious activities. The law should not force all religious organizations and activities into one of the two polar categories, acculturated or unacculturated. Part II presents several reasons why there is a strong interest in protecting the freedom to engage in partly acculturated religious activity. Among other things, I argue, relying on work in sociology of religion, that refusing accommodation to partly acculturated activity risks losing the distinctive vigor that such organizations offer in providing services to society: their countercultural positions tend to create a sense of identity and commitment, while their acculturation means they apply that identity to serve society rather than withdraw from it.

Accommodating partially acculturated activity does present distinctive challenges because of effects on non-adherents. Part III proposes addressing those, and drawing lines concerning accommodation, by relying on concepts of:(1) notice to employees and clients concerning the organization’s religious identity, and (2) alternative sources of receiving the services or opportunities in question.

--Eric C. Chaffee

May 30, 2016 | Permalink | Comments (0)

Sunday, May 29, 2016

Educational Nonprofit Under Investigation

A South Carolina nonprofit has recently come under fire for their practices in fund disbursement. Palmetto Kids First Scholarship Program is an organization that gives students with disabilities scholarships to obtain private school education in South Carolina. Currently, the nonprofit has been banned from raising money, and if the proposal becomes a law, the state would take over operation of the charity.

Although the nonprofit has given out over $17 million dollars in scholarships since 2014, questions have been raised about who is receiving these scholarships. The government contends that many of the recipients of these scholarships were donors themselves, an arrangement that violates the law. Further, the government alleges that some of the parents whose children received scholarships claimed the donation they made to the program as a tax deduction, which is not allowed. Executives from the organization refute the allegations, claiming nothing wrong has been done. However, executives are aware of the ramifications of the allegations, and the issues are being addressed internally.

Deciding to shut down an organization like this, even if temporarily, has major implications for the community at large. There will be families who do not receive the funds they would normally be entitled to, and some children may not be able to receive the education they otherwise would have enjoyed. However, if the allegations are true, serious reforms are needed, and the takeover will certainly be justified.

David Brennen

May 29, 2016 in In the News | Permalink | Comments (0)

Saturday, May 28, 2016

The "Google Cultural Institute" & Open Access to Cultural Heritage

The "Google Cultural Institute" recently announced its initiative to document and provide access to works of art owned by museums from around the world, facilitated by the Google "art camera," which enables the production of ultra-high resolution “gigapixel” images. As Google explains:

The Art Camera is a robotic camera, custom-built to create gigapixel images faster and more easily. A robotic system steers the camera automatically from detail to detail, taking hundreds of high resolution close-ups of the painting. To make sure the focus is right on each brush stroke, it’s equipped with a laser and a sonar that—much like a bat—uses high frequency sound to measure the distance of the artwork. Once each detail is captured, our software takes the thousands of close-up shots and, like a jigsaw, stitches the pieces together into one single image.

I think this is a very exciting and important development, which reflects a welcome shift in the priorities of many art museums. Many (most?) artworks owned by museums are in the public domain. But many museums have restricted access to those artworks, in order to profit from reproductions of those works. The Google Cultural Institute project reflects a welcome re-alignment of art museum priorities, focused on maximizing access, rather than profits. Art museums are typically charities, with the charitable purpose of preserving and providing access to works of art. Hopefully, the Google Cultural Institute project will encourage more art museums to recognize that their charitable purpose implies an obligation to observe open access principles.

Port of rotterdam

Brian L. Frye 

May 28, 2016 | Permalink | Comments (0)

Thursday, May 26, 2016

Iowa Casino Battles to Keep 501(c) (4) Status

A recent story describes the battle an Iowa casino faces in trying to keep its non-profit status as a 501(c) (4) social welfare organization. The IRS believes that the casino is too commercially successful to be considered a charitable organization, and calls into question how their revenue is truly being used after it is earned. Of course, non-profits may have a commercial enterprise as long as the organization is lessening the burden of the government.

According to the casino, they certainly have a large impact on the surrounding community, paying over $54 million in wages last year. Further, the casino gifted nearly $20 million to local charities, including school districts. According to the casino’s website, they have also given out over 500 scholarships for students to attend state colleges or universities in Iowa. The Casino also gives out “Legacy Grants” to help fund projects that benefit the community, these grants range from $100,000 to $1 million. Lastly, the casino has paid over $800 million in taxes so far.

No matter the ultimate outcome of the IRS ruling, it is clear that many will be impacted from the decision. It will be interesting to see if the IRS determines that all of this charitable giving lessens the burden of the government, or if other competing objectives drive them to take away the casino’s 501(c) (4) status.

David Brennen

May 26, 2016 in Current Affairs, Games, In the News | Permalink | Comments (0)

Wednesday, May 25, 2016

Amazon's Temporary Donation to Local Non-Profit

A recent article highlights Amazon’s unique combination of business foresight and philanthropic giving. Amazon has purchased a former motel that it eventually plans to use for expansion of its Seattle campus. However, it is not quite ready for the expansion. In the meantime, Amazon has teamed up with a local non-profit, Mary’s Place, to use the space as a temporary homeless shelter.

The shelter will have the capacity to house up to 200 people at a time, helping alleviate the growing homeless crisis plaguing Seattle. At the shelter, residents will be provided with two meals per day, and will be able to work three hours per week to earn credit towards obtaining items at the facility’s store.

Although Amazon plans to reclaim the land near 2018, the short-term impact will certainly benefit the local community. Amazon was going to purchases the property anyway, but with this arrangement, both Amazon and Mary’s Place (as well as the people they serve) reap the benefit. Amazon most likely is receiving tax credit for the temporary donation, while Mary’s Place gets expanded resources they otherwise may not have received, and their philanthropic purpose is spread further throughout the community.

Maybe this type temporary giving can become the norm for businesses planning to expand. Mary’s Place states that many homeless families simply need temporary assistance to get back on their feet after a tough setback. If this is the case, there could be a huge potential benefit from this type of giving. It will be interesting to see if other companies follow Amazon’s expansion strategy of partnering with local non-profits.

David Brennen

May 25, 2016 in In the News | Permalink | Comments (0)

Amazon's Temporary Donation to Local Non-Profit

A recent article highlights Amazon’s unique combination of business foresight and philanthropic giving. Amazon has purchased a former motel that it eventually plans to use for expansion of its Seattle campus. However, it is not quite ready for the expansion. In the meantime, Amazon has teamed up with a local non-profit, Mary’s Place, to use the space as a temporary homeless shelter.

The shelter will have the capacity to house up to 200 people at a time, helping alleviate the growing homeless crisis plaguing Seattle. At the shelter, residents will be provided with two meals per day, and will be able to work three hours per week to earn credit towards obtaining items at the facility’s store.

Although Amazon plans to reclaim the land near 2018, the short-term impact will certainly benefit the local community. Amazon was going to purchases the property anyway, but with this arrangement, both Amazon and Mary’s Place (as well as the people they serve) reap the benefit. Amazon most likely is receiving tax credit for the temporary donation, while Mary’s Place gets expanded resources they otherwise may not have received, and their philanthropic purpose is spread further throughout the community.

Maybe this type temporary giving can become the norm for businesses planning to expand. Mary’s Place states that many homeless families simply need temporary assistance to get back on their feet after a tough setback. If this is the case, there could be a huge potential benefit from this type of giving. It will be interesting to see if other companies follow Amazon’s expansion strategy of partnering with local non-profits.

David Brennen

May 25, 2016 in In the News | Permalink | Comments (0)

Tuesday, May 24, 2016

Cyber-Attacks and Risk Allocation

A compelling article from the ABA’s Business Law Today on the risk of loss to client bank accounts from cyber-theft highlights the dangers faced by all bank account holders across the United States, including non-profits. In a technology driven economy, while efficiency is promoted through instantaneous transfers, a door has opened for a new type of cyber-crime.

This article explores some of the inconsistent and unpredictable case law that has developed over who should bear the risk of loss from a cyber-attack, the bank or the customer. Loose standards of “commercial reasonableness” lead to a wide range of possible interpretations. For example, the same banking practice was “reasonable” for one bank, but “unreasonable” for another.

This issue is particularly important for non-profits, who would likely be forced to close their doors if they were to bear the consequences of a large cyber-attack, leaving them without the necessary funds to continue operation.  

The article concludes with some practical advice on how an organization should assess their banking needs and what type of protection is best for their own needs.

David Brennen

May 24, 2016 in Current Affairs, Publications – Articles, Web/Tech | Permalink | Comments (0)

Overtime Pay Regulations Impacting Non-Profits

The new overtime regulations taking place on Dec. 1, 2016, will certainly effect labor decisions across the country. For the first time in twelve years, the threshold amount to determine if salaried workers are exempt from overtime pay will be raised from $23,660 per year, to $47,476 per year. Generally, an employer paid a salary under the new threshold will be required to be compensated for overtime worked, unless an exemption applies. In order to qualify for the new overtime payment rules, an employee must work for a covered enterprise, or be a particular worker who is covered.

If a non-profit meets the “enterprise coverage test,” all employees working for the organization are covered by the new regulations (unless an exemption applies). To be considered a covered enterprise, “an entity must have annual revenues, that is, volume of sales made or business done, of at least $500,000.” However, non-profits are not considered covered enterprises unless they engage in “ordinary commercial activities that result in sales made or business done” that exceeds $500,000. Ordinary commercial activities are those normally associated with operating a business, such as selling products or services. Charitable activities, however, such as providing food, shelter, or clothing, generally are not ordinary commercial activities.

To determine if a non-profit is a covered enterprise, only business purpose activities are considered. Income used to further the non-profit’s charitable activities is not factored into the $500,000 (e.g., membership fees and donations). Organizations can engage in both charitable acts, as well as business activities, and such organizations could potentially qualify as a covered enterprise.

Finally, the new regulations will automatically apply to some entities unless there is a specific exception. These entities include: “hospitals; institutions primarily engaged in the care of older adults and people with disabilities who reside on the premises; schools for children who are mentally or physically disabled or gifted; federal, state, and local governments; and preschools, elementary and secondary schools, and institutions of higher education.”

These regulations will certainly impact the way in which non-profits decide how to earn and spend revenue, attempting to have as much revenue as possible further its charitable activities to keep them below the $500,000 threshold. One thing is for sure, volunteers and donations will be crucial to a non-profits’ success.

For a detailed look at individual exemptions, please see the provided link.

David Brennen

May 24, 2016 in Current Affairs, In the News | Permalink | Comments (0)

Monday, May 23, 2016

Balancing Competing Policy Interests in Determining Tax Status

A recent article on proposed Delaware legislation highlights the complexities and competing objectives lawmakers face when deciding if a nonprofit should be exempt from paying local property taxes. Here, the decision is whether or not to add the Milford Housing Development Corporation, EJB Inc., and Martha and Mary’s Place Inc., to the current list of 76 nonprofits in Delaware that currently enjoy being exempt from local property tax. These entities provide housing and/or drug treatment services to community members in need. While these organizations undoubtedly provide essential public services, granting these entities tax exempt status can have negative effects on other public services.

For example, the Milford Housing Development Corporation paid almost $30,000 in property taxes last year. To further add to the conundrum, almost all of those funds were appropriated to a local school district. In times of financial hardship, policy makers are faced with tough decisions and must balance different objectives in deciding where tax revenue should come from, and what that revenue should benefit. A thorough cost-benefit analysis must be undertaken to determine the full reach of granting an entity tax-exempt states, including both positive and negative effects. Granting an entity tax-exempt status, or deciding to appropriate tax funds to a particular area, almost inevitably means that another worthy entity will bear the cost.

Some municipalities try to alleviate this burden by requiring those entities that are designated tax-exempt to pay set fees to contribute back to the greater good. However, this can hinder the accomplishment of the entity’s purpose and cause due to a lack of funds.

Ultimately, it would take an army of professionals to make a “perfect” decision on who should be granted tax-exempt status, and who should bear the cost of that status. Even then, by the time a thorough analysis has been undertaken, the state or municipality will likely be facing different needs as a community. Policy makers must employ great foresight in making these tough appropriation decisions.


David Brennen

May 23, 2016 in Current Affairs, In the News, State – Legislative | Permalink | Comments (1)

Sunday, May 22, 2016

Exam Alternatives

The spring semester is over, but Facebook tells me that plenty of law professors are still grading exams. It's no secret that grading is not the most popular part of the job, at least in part because traditional issue-spotters can get ... a little tedious after reading 30 or more. Not to mention the less than stellar prose typically produced by law students rushing to cram as much of their outline as possible into a three-hour exam. But I'd like to share an alternative approach to the end of semester exam that I used this past semester in my Nonprofit Organizations class, as well as my other classes.

After teaching law for several years, I began to notice that many law students had remarkably few opportunities to practice formal legal writing. In fact, when I asked one class of about 35 2Ls and 3Ls how many had written a memo or brief since their 1L year, only a few raised their hands. Of course, the writing requirement for graduation means that they all have to produce some form of long-form legal writing before graduating. But for most, that means a research paper, a form of legal writing they are unlikely to produce in practice. Writing memos and briefs is an important skill, and a skill that students can only develop with practice, but most get very little.

So, rather than write a traditional 3-hour issue spotter exam, I wrote three questions based on real-world events - i.e. news stories, real organizations, or pending litigation - and asked the students to provide a 1000-word memo answering each one, from the perspective of a law clerk or junior associate. The exam was open-universe, and I encouraged them to do research, talk to the research librarians, talk to each other - anything a real law clerk or junior associate could do. The students had 3+ weeks to write their memos and were told that they would be graded on the basis of how helpful and useful their memos would be to a real partner or judge. 

I've found that this approach to the exam has several benefits. As noted above, it forces students to practice critical legal research and writing skills. In addition, it also provides them with an additional writing sample that they can use when applying for jobs, at least if they put a meaningful effort into writing it. During the semester, it (hopefully) encourages students to approach the class more holistically and focus on ideas, rather than trying to cram every doctrine point into their notes. And - in my experience anyway - it rewards creativity and critical thinking.

It also has a lot of benefits on my end. The exams are much more varied and interesting to read, because different students take different approaches to answering the questions. Because the questions are based on the real world, there isn't one right answer and one wrong answer, but more and less helpful ways of answering the question. In a pleasant surprise, students routinely turn up facts, cases, and ideas that I didn't know about or hadn't considered. And the varying levels of effort and skill make the (unfortunately) mandatory curve typically easy to maintain.

I suspect that this approach to exams wouldn't work for all classes or teaching styles. But I have found it very effective, and many students have mentioned - with some surprise - how much they enjoyed taking the exam.

Brian L. Frye

May 22, 2016 | Permalink | Comments (0)

Saturday, May 21, 2016

Arts Funding & "Private Benefit"

In a recent post to this blog, Lloyd Mayer reported on allegations that the Clinton Foundation improperly provided a "private benefit" to a for-profit company, and found them wanting. Among other things, Mayer noted that the Clinton Foundation did not provide a substantial benefit to the for-profit, and that its actions were consistent with its charitable purpose.

As a follow-up to Mayer's post, I'd like to direct your attention to a story that recently came to my attention, which raises similar concerns. On June 22, 2014, the Greensboro, NC News & Record reported that it had formed an agreement with ArtsGreensboro, a charity that supports the Greensboro art community, to publish at least 70 stories about local arts topics during the following year, in exchange for an unspecified sum. According to the News & Record, it would not have published any (!) stories about arts topics without the agreement. In addition, the News & Record specified that it would retain absolute editorial independence and would not receive any "taxpayer money" from ArtsGreensboro.

For its part, ArtsGreensboro described the agreement as "an innovative agreement similar to the underwriting model for public broadcasting." Which is true, except for the detail that public broadcasters are charities, but the News & Record is a business. While charities like ArtsGreensboro can make grants to other charities without implicating the "private benefit" prohibition, making a grant to a business is a much closer question.

Contemporary concerns about the agreement understandably were largely directed to the editorial independence of the newspaper. But I wonder about the "private benefit" prohibition as well. While neither the News & Record nor ArtsGreensboro reported the amount of money at stake, others have pegged the sum at $15,000. While not extravagant, it is certainly "substantial." Of course, ArtsGreensboro can legitimately argue that its grant was consistent with its charitable purpose of promoting local artists and arts organizations. Arts charities routinely make grants to individuals and businesses in order to enable them to produce artistic works. And promoting the distribution of art journalism and criticism could fairly be characterized as a legitimate purpose for a charitable organization (see the Warhol Foundation). Nevertheless, it seems odd for charitable organization to pay a business to do what it should do anyway.

Brian L. Frye

May 21, 2016 | Permalink | Comments (0)

Wednesday, May 18, 2016

Does it Violate Free Speech to Require Charities to Link to a Government Website?

Warning sign LuongThe California Legislature is currently considering a bill (AB 2855) that would mandate that all nonprofits who are soliciting donations in California to "include a prominent link [on their website] that immediately directs all consumers to the Attorney General’s Internet Web site, which contains information about consumer rights and protections and charity research resources."  The bill as initially proposed would have required soliciting charities to prominently disclose the amount of money that the organization spent on overhead and on the executive director's salary and benefits. 

The bill has been sharply criticized by many nonprofits, including the California Association of Nonprofits and the National Council on Nonprofits, who argue that the bill essentially attaches a "warning label" to all organizations that would scare off donors.  The Bill's sponsor, Assemblymemeber Jim Frazier, defended the bill as a needed tool to protect worthy organizations from the "shadow cast upon them by bad actors." (In something of a jab at critics, Assemblymember Frazier paused to highlight that the "president, executive director, and chief operating officer [of the California Association of Nonprofits] made over $600,000 combined in salary and benefits.").  Other critical commentary on the bill comes from Carol Luong (Great Positive) and Gene Takagi (NEO Law Group / Nonprofit Law Blog).

Some of the critics have argued that the bill would raise a First Amendment objection by compelling speech (i.e., including a link to the Attorney General's website on the organization's webpage and in solicitation materials).  In Riley v. National Federation of the Blind of North Carolina, Inc., 487 U.S. 781, 795 (1988), the Supreme Court struck down a state mandate that professional solicitors disclose, as part of their solicitation, the percentage of funds turned over to the nonprofit.  The Court reasoned that this disclosure would necessarily change the content of the message, and the disclosure would have the anticipated and intended effect of making solicitation on behalf of certain causes less effective.

Although the criticisms have some weight as a policy matter, the California bill is arguably distinguishable from the law struck down in Riley in several respects. Most significantly, the California bill would require only a link to a website, and not the direct disclosure of any particular substantive statement or content in the course of solicitation.  See Riley's footnote 11.  This makes the compelled speech more akin to a mandate to disclose the phone number of a regulatory body or to display a license. See Dayton Area Visually Impaired Persons, Inc. v. Fisher, 70 F.3d 1474, 1485 (6th Cir. 1995) (upholding limited point-of solicitation disclosures).  Such mandates are common in the commercial & professional speech realm, although their application to charitable solicitation is much less certain.  (There are lots of unsettled issues in the regulation of charitable solicitation. In fact, we recently filed a successful First Amendment challenge to a set of local restrictions on charitable solicitation, including a licensing requirement.)  

 Riley and its related cases recognize a distrust of government restrictions sprung from a history of government (typically with the support of established nonprofits) creating barriers to charitable speech in order to burden disfavored causes.  Yet the Supreme Court has also recognized the legitimate objective of providing accurate information to facilitate well-informed decisions by donors.  Striking this balance is no easy matter, as Assemblymember Frazier is learning the hard way.

(Hat-tip and image credit go to Carol Luong, Great Positive)


May 18, 2016 in Current Affairs, State – Legislative | Permalink | Comments (0)

Saturday, May 14, 2016

The Clinton Foundation Provided "Private Benefit" - Or Did It?

Clinton foundationThe Wall Street Journal reports that the Bill, Hillary & Chelsea Clinton Foundation may have violated federal tax law by facilitating investment in the for-profit company Energy Pioneer Solutions Inc. According to the article, the Clinton Foundation claimed in September 2010 that it helped arrange a $2 million commitment from a private individual to the then new business. It also notes that some of the owners of the business have either Democratic political ties or, in one case, is a close friend of former President Bill Clinton. What the article fails to do, however, is explain in any detail how this situation constitutes "private benefit" in legal sense. This failure creates a false impression regarding what that term actually means and how it applies to the Clinton Foundation in this situation.

It should be noted initially that the Clinton Foundation, despite its name, is not a "private foundation" for federal tax purposes and therefore is not subject to the more restrictive rules applicable to private foundations. It is not a private foundation for the simple reason that it receives financial support from a broad range of sources. It is therefore only subject, like other public charities, to the relatively vague prohibitions against private inurement and private benefit.

The Wall Street Journal article correctly does not invoke the private inurement prohibition. That prohibition only applies to benefits provided to insiders of a charity. Nothing in the story indicates that was the case here, as the only party that benefitted was Energy Pioneer Solutions and its owners, none of whom were insiders of the Clinton Foundation or even family members of insiders. The article instead invokes the more amorphous private benefit limitation, that bars a charity from unduly benefitting any private party.

This is where a careful legal analysis was needed but is lacking. Based on the facts reported in the article, the situation described does not run afoul of the private benefit limitation for at least two reasons. First, the amount of benefit allegedly provided by the Clinton Foundation, as opposed to the private investors, was minimal and so does not rise to a level that constitutes a prohibited private benefit. The article does not assert that the Clinton Foundation provided any funds to Energy Pioneer Solutions, nor does it even explain what resources the Clinton Foundation expended (if any) to facilitate the investment by private individuals of their own funds in the for-profit company. Cases where the IRS has asserted a private benefit violation have usually involved a charity devoting essentially all of its efforts to benefitting a private party. For example, one often-cited case involved a charity that essentially served as a marketing arm for intellectual property owned by (and licensed from) a for-profit company (Est of Hawaii v. Commissioner, 71 T.C. 1067 (1979)). Another prominent case involved a charity that trained political campaign professionals, but only ones who then went on to work for a single political party's candidates and affiliates (American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989)).

Second, most charitable activities unavoidably provide private benefit. For example, schools provide a private benefit to all of their students as a necessary part of furthering an educational purpose.  The key issue is therefore whether any private benefit here was in furtherance of, and therefore incidental to, the charitable purpose served. The facilitated investment was in a start-up company that focused on protecting the environment through its business activities. Even more restricted private foundations are permitted to invest, whether in the form of loans or equity stakes, in for-profit business that promote charitable purposes such as environmental protection if the primary purpose of the investment is to promote a charitable purpose and production of income or appreciation of property is not a significant purpose. And private foundations are even permitted to count such "program-related investments" as charitable spending that counts toward their annual minimum payout requirement. In this instance the Clinton Foundation only facilitated an investment by private parties in a company with a mission that matched the Clinton Foundation's charitable purposes and that likely needed the assistance to further its environmental protection goals given its start-up nature. Any private benefit to the company and its owners was therefore incidental to the furtherance of the Clinton Foundation's charitable purposes by arranging this investment and so permitted legally. The fact that Energy Pioneer Solutions has struggled financially, as detailed in the article, actually demonstrates the importance of the Clinton Foundation's efforts to help this (for-profit) environmental protection effort.

Finally, it should be noted that the article makes much of the fact that at least one advisor to former President Bill Clinton objected to the Clinton Foundation publicly touting its role in facilitating this investment, and that this role was eventually removed from a public database of such facilitations maintained by the foundation. There are at least two plausible explanations for these actions, neither of which indicates any violation of federal tax law. First, and as the article itself demonstrates, touting the investment risked vague allegations that something improper had occurred even though legally nothing had. Second, it actually is not clear from the article how much of a role the Clinton Foundation actually had in facilitating the investment; touting the foundation's publicly therefore might actually have been overstating the foundation's involvement. But neither a sensitivity to public perceptions nor perhaps a little undue boasting violates the law. The bottom line is that whatever public perception concerns the investment may raise, it does not raise any federal tax concerns for the Clinton Foundation based on the reported facts.

Lloyd Mayer

May 14, 2016 in In the News | Permalink | Comments (2)

Thursday, May 12, 2016

Government v. Philanthropy: The Case of Flint, Michigan

For months now we have been bombarded with stories of the water crisis in Flint, Michigan. The press, politicians, legislators, residents of Flint, even Tax Law professors, have been expressing their opinions on who is to blame for the crisis. Some people have called for the Governor's resignation. The government -- federal and state -- eventually sprang into action by allocating funds to address the problems caused by the water crisis. Meanwhile, the people of Flint are waiting for the money to show up.

Yesterday's Christian Science Monitor brought some good news to the people of Flint: ten charitable organizations have pooled their resources to donate $125 million toward recovery efforts in Flint. Highlighting the fact that philanthropy has bested the government, the Monitor states:

Funds are about to flood into Flint, Mich. -- but they are not coming from the government.

The aid will support ongoing testing of lead levels as well as community groups, economic development, and other efforts to revive the largely black and low-income city. "This is the new normal, in terms of how philanthropy can really increase its impact and can be nimble while we wait for the state and federal government" to act, says La June Montgomery Tabron, CEO of the W.K. Kellogg Foundation, one of the participating grant makers.

The responses by the foundations give credence to what some observers see as a trend for philanthropy to step in when bureaucracy and partisanship bog down government's response in times of crisis. "It's great that we have charitable organizations that are willing to step up and try to help," said Charles Ballard, a Michigan State University economics professor. "But the only reason we're talking about this in the first place is that governments, most notably the state of Michigan, just dropped the ball in a huge way."

That's one man's opinion; what's yours?



May 12, 2016 in Current Affairs, In the News | Permalink | Comments (0)