Thursday, May 14, 2015
The Treasury Inspector General for Tax Administration issued a new "Final Report" on the IRS handling of exemption applications involving political campaign intervention. Here are excerpts from the conclusions:
The IRS has taken significant actions to eliminate the selection of potential political cases based on names and policy positions, expedite processing of Internal Revenue Code (I.R.C.) Section (§) 501(c)(4) social welfare organization applications, and eliminate unnecessary information requests.
First, the IRS eliminated the use of Be On the organizations, if it becomes a permanent Look Out (BOLO) listings, . . . .
Second, the Exempt Organizations function completed processing for 149 of the 160 applications for tax-exempt status that, as of December 2012, had been open for lengthy periods. . . . .
The report further provides that in the absence of BOLO listings the IRS has created an "Emerging Issues Committee" to screen, review, and monitor emerging issues based on actual or planned activities of applicants, as opposed to names or policy positions. The report also provides of 149 closed applications, the IRS approved 107 (72%) and disapproved 7 (5%), while applicants either withdrew (8 or 5%) or failed to respond to requests for information (27 or 18%) the remaining applications. Of the 11 applications still open, six are in litigation and five have either proposed adverse determinations or are in Appeals. Reading between the lines, a Bloomberg article notes that these figures suggest that the IRS has sent Crossroads GPS a denial letter, since the Crossroads application is still outstanding and is not in litigation. As the Center for Responsive Politics notes, however, the statute of limitations might now bar collection of any taxes from Crossroads even if its application is ultimately denied. Additional Coverage: Forbes (Peter Reilly).
Relatedly, the NorCal Tea Party Patriots have convinced the federal judge overseeing their lawsuit against the IRS to require the IRS to identify the 298 groups that had submitted applications identified as potential political cases as of May 31, 2012 (mentioned on page 4 of the TIGTA Final Report) in order to facilitate class certification in that litigation. The Judge's order explains why she concluded Internal Revenue Code section 6103 does not prevent this limited discovery. Additional coverage: Forbes (Peter Reilly).
In other news, TIGTA managed to recover 6,400 emails to or from Lois Lerner from between 2004 and 2013, although it is unclear how many might be duplicates of the tens of thousands of emails previously recovered by the IRS and turned over to Congress. No final word from the congressional committees reviewing the emails regarding whether they add anything to the ongoing investigations, although initial indications are that there is little new in them. Coverage: CNN; Forbes (Kelly Phillips Erb); The Hill.
Finally, the House has passed a package of bills relating to the 501(c)(4) application mess, although their fate in the Senate (and on the President's desk) is uncertain. The most prominent is H.R. 1104, which would extend a gift tax exemption to 501(c)(4) social welfare organizations, 501(c)(5) labor, agricultural, and horticultural organizations, and 501(c)(6) trade associations and chambers of commerce. Currently donors to 501(c)(3) charities generally enjoy such a deduction (under Internal Revenue Code section 2522), and transfers to 527 political organizations are exempt from the gift tax (under section 2501(a)(4)). The other bills are H.R. 709 (termination for political targetting), H.R. 1026 (taxpayer privacy), H.R. 1058 (Taxpayer Bill of Rights), H.R. 1152 (use of personal email accounts prohibition), H.R. 1295 (self declaration process and declaratory judgment actions for 501(c)(4)s), and H.R. 1314 (right to appeal). Coverage: Forbes (Robert W. Wood); Politico.
Wednesday, May 13, 2015
In high-profile case causing political ripples in Virginia, Amherst County Attorney Emily Bowyer convinced a Bedford County Circuit Court judge, over the objections of Virginia's Attorney General, that she has standing to challenge the decision by the board of directors of Sweet Briar College to close the school. The 114-years-old all-women's college is apparently in financial trouble, which led the board of directors to announce in late March that the school would be closing effective as the end of the summer. In the same ruling, the judge held the college was a nonprofit corporation and not a trust and so was not subject to the Uniform Trust Act. The judge then issued a temporary injunction barring the sale or other disposition of any college assets, although he recently permitted some exceptions to that prohbition. All of these matters are now before the Virginia Supreme Court on expedited appeal according to the most recent Washington Post report.
In other news, Johnny Rex Buckles (Houston) previously blogged about the lawsuit by Harvard students to force Harvard College to divest from companies that produce fossil fuels. As he predicted was likely, the Massachusetts Superior Court has dismissed the lawsuit on standing grounds, although the students have vowed to appeal that decision. For the reasons detailed in the previous blog post, it seems unlikely that they will succeed.
The oral argument before the Supreme Court in Obergefell v. Hodges (the same-sex marriage case) included the following exchange between Justice Alito and Solicitor General Verrilli (on page 38 of the transcript):
JUSTICE ALITO: Well, in the Bob Jones [University v. United States, 461 U.S. 574 (1983)] case, the Court held that a college was not entitled to tax-exempt status if it opposed interracial marriage or interracial dating. So would the same apply to a university or college if it opposed same-sex marriage?
GENERAL VERRILLI: You know, I -- I don't think I can answer that question without knowing more specifics, but it's certainly going to be an issue. I -- I don't deny that. I don't deny that, Justice Alito. It is -- it is going to be an issue.
The possibility that the contrary to fundamental public policy limitation found by the Court in Bob Jones to be included in Internal Revenue Code section 501(c)(3) might prohibit 501(c)(3) organizations from engaging in discrimination based on sexual orientation had been raised before this argument, including by fellow blogger Nicholas Mikay (Creighton) in a 2007 article (where he concluded a statutory amendment prohibiting discrimination would provide a stronger legal basis for such a prohibition). This exchange highlights the fact that how the Supreme Court decides the same-sex marriage case could have strong ripple effects for tax-exempt organizations, even though the IRS has for more than 30 years been reluctant to apply Bob Jones beyond the context of racial discrimination and even though any supporters of LGBT rights will have difficulty establishing their standing to force the IRS' hand in this area.
In another court in DC, the government found itself on the defensive as a three-judge panel expressed shock that the Justice Department would even assert that the IRS' treatment of applications for recognition of exemption under section 501(c)(3) during the 270 days before such applicants gained the right to go to court (assuming no substantive interaction with the IRS during that period) could somehow escape scrutiny under the Constitution. During oral argument (large MP3 file) before the U.S. Court of Appeals for the D.C. Circuit in case involving the application of Z Street, judges repeatedly expressed skepticism that somehow the application process was shielded from constitutional requirements, including First Amendment concerns. Additional coverage: Wall Street Journal (opinion); see also previous blog post.
Finally, the U.S. Court of Appeals for the Sixth Circuit recently upheld a preliminary injunction barring the enforcement of a local ordinance that banned outdoor, unattended donation bins. The court found that plaintiff Planet Aid (a 501(c)(3) organization) had demonstrated a strong likelihood of success on the merits of its constitutional claim under the First Amendment, finding that the ordinance was a content-based regulation of speech because it only applied to outdoor receptacles with an express message relating to charitable solicitation and giving. As such, it is subject to strict scrutiny, and the court concluded that the ordinance likely would not survive such scrutiny given the weak relationship between the ban and the city's interest in aesthetics and preventing blight and the availability of other, lesser content-neutral restrictions that could further the same interest.
Earlier this month the U.S. Court of Appeals for the Ninth Circuit upheld a lower court's denial of a preliminary injunction against the California Attorney General. The injunction would have prevented the AG from requiring the section 501(c)(3) Center for Competitive Politics (CCP) to provide an unredacted copy of its Schedule B to IRS Form 990, which schedule identifies significant donors to the group. The AG had required the filing of the schedule as a condition of the group maintaining its registration with the state as a charity eligible to solicit contributions in California.
The court, applying exacting scrutiny, rejected what it characterized as CCP's facial challenge to the disclosure requirement, concluding that CCP had failed to either allege or produce evidence that the disclosure of their identities to the AG would cause these significant donors to "experience threats, harassment, or other potentially chilling conduct." Slip. Op. at 16. While the court noted that the AG planned to keep the donors' identities confidential and so not release them to the public, it also concluded that CCP had failed to provide evidence that even public disclosure would chill the First Amendment activities of its donors, so the potential for the AG to change her policy in this regard did not salvage CCP's claim. Slip Op. at 18 n.9. Finally, the court concluded that the Internal Revenue Code section 6104, to the extent it governs the ability of the Treasury Department to make information regarding tax-exempt organizations available to state officials, did not preempt the AG's disclosure requirement.
The decision has ramifications for both the pending lawsuit by the Americans for Prosperity Foundation (APF) challenging the same requirement and for the authority of AGs more generally to demand unredacted copies of Schedule B and other donor information. APF was initially more successful than CCP in its lawsuit, obtaining a preliminary injunction blocking the application of the requirement to it, but that victory may now be in doubt given this decision relating to CCP. As for other states, the court noted in a footnote the several states that already have similar requirements, and more states may seek to gather this information if this appellate court decision stands.
Additional Coverage: LA Times.
Thursday, May 7, 2015
New York City seems to be in the news a lot this week. In a press release issued yesterday, the Carnegie Corporation of New York announced grants totaling $3.6 million in support of education and enrichment programs in the greater New York City region.
The awards form part of the foundation's 2015 Presidential Discretionary Grants program. Pursuant to that program, eighteen museums, libraries, and performing arts and science centers received grants of $200,000 each for existing programs aimed at K-12 students. Grant recipients include the American Museum of Natural History; the Asia Society; the Brooklyn Academy of Music; Carnegie Hall; Cooper Hewitt, Smithsonian Design Museum; Liberty Science Center; Lincoln Center for the Performing Arts; the Metropolitan Museum of Art; the Morgan Library & Museum; the Museum of Modern Art; the National September 11 Memorial & Museum; New Jersey Performing Arts Center; the New York Botanical Garden; the New York-Historical Society; the New York, Brooklyn, and Queens public libraries; and Studio in a School.
Commenting on the awards, Carnegie president, Vartan Gregorian, said:
New York City, one of the cultural capitals on the United States, has the largest public school system in the nation. Carnegie Corporation is proud to support the City's cultural institutions in order to enhance the curriculum of our public as well as private and parochial schools with the riches these museums, libraries, and centers possess. It speaks well of these organizations' leaders that they have developed education programs to help students overcome deficiencies in the arts and sciences that our schools can't provide due to financial factors.
Today's Philanthropy News Digest is reporting that as Africa "struggles to address the effects of climate change and an unprecedented youth bulge, the Rockefeller Foundation is working across multiple fronts to build the resilience of African economies."
Attributing the report to the Voice of America, the Digest reports that current efforts includes the $100 million Digital Jobs Africa initiative, which was launched in 2013 with the aim of boosting the information and communications technology (ICT) sector in six African countries -- Ghana, Kenya, South Africa, Nigeria, Morocco, and Egypt. Foundation president, Judith Rodin, told the VOA:
We are excited to see so much opportunity and such a growth market in the ICT sector more broadly across the continent. [There are] so many technology parks growing [and] so many companies really growing on technology-based platforms. We know that ... the continent has to focus on employing this extraordinary youth bulge that we are going to see. We think ... a critical part of shared prosperity as we go forward [means] developing growth in the ICT sector which often yields some of the better paying jobs.
Elsewhere on the continent, the foundation is working to help small farmers adapt to climate change by collaborating with local partners to capture run-off from flooding for use in irrigating fields. It is also working in partnership with the World Food Programme and has bankrolled a technology called risk metrics that can help predict an impending drought. As a final matter, the foundation is also -- again in conjunction with the World Food Programme -- creating a country-level insurance mechanism that enables countries to access resources in the immediate aftermath of a natural disaster rather than having to wait for international development assistance to arrive.
Wednesday, May 6, 2015
The Washington Post is reporting that just as business, political, and philanthropic leaders gathered in Marrakesh, Morocco, for the first Clinton Global Initiative meeting on Africa and the Middle East, Chelsea Clinton, the former President's daughter, said there is a "political dimension" to the controversy over multimillion-dollar gifts from foreign governments and corporations to her family's foundation.
Ms. Clinton, the Clinton Foundation's vice chair, said the scrutiny has intensified with the launch of her mother Hillary Clinton's White House run. She dismissed the idea, raised by some Republicans and campaign watchdog groups, that foundation donors seek to curry favor with her powerful parents.
I was wondering what all the traffic gridlock was about when I got out of LaGuardia airport early Monday afternoon and tried to make my way to Poughkeepsie. fearing the worst, I tuned in to 1010 WINS to catch the traffic report. That was when I heard it: President Obama had been at Lehman College where he had announced the creation of a nonprofit called the My Brother's Keeper Alliance. The new organization is a spinoff of a White House initiative of the same name aimed at uplifting African American and Hispanic boys from preschool through high school.
In launching the new Charity, President Obama stated that the My Brother’s Keeper Alliance will "continue the work of opening doors for young people -- all our young people -- long after I've left office."
Reporting on the launch, TheNonProfitTimes reports that the President
told the audience at Lehman that the new organization has secured $80 million from companies such as Deloitte, News Corp and American Express. The group's star-studded executive team and advisor board will include former Secretary of State Gen. Colin Powell, Sen. Cory Booker (D-N.J.), basketball stars Alonzo Mourning and Shaquille O'Neal, and former Attorney General Eric Holder, among others.
The new organization will be led by former Deloitte CEO Joe Echevarria and might serve as a vehicle through which the president can influence policy after his second term is up. Speaking to reporters, White House Press Secretary Josh Ernest stated:
While I'm not in a position to describe the specific, detailed relationship between the president and this alliance that will continue after his presidency, I can tell you that this is an issue that the president intends to continue to be focused on long after he has left the Oval Office.
Meanwhile, Broderick Johnson, chair of the White House initiative, linked the My Brother's Keeper with the unrest in Baltimore following the death of Freddie Gray. Writing on the My Brother's Keeper initiative's website, Johnson stated:
For so many of us, the My Brother's Keeper initiative is deeply personal. As a proud son of Baltimore, this week's announcement comes at a time of unique and special resonance for me. As the country reflects on our shared responsibility to ensure that opportunity reaches every young person, I urge everyone to look at their own capacity to make a difference.
The My Brother's Keeper initiative was designed to focus federal resources towards closing the opportunity gap experienced by African American and Latino males. To that end, Johnson identified almost $1 million in funds from a number of federal agencies: the departments of Education and Health and Human Services announced $750 million in Preschool Development Grants for 18 states this past December, and the Department of Labor and the National Guard have programs that will together expend $100 million to improve career prospects for minorities.
Friday, May 1, 2015
Today, the academy lost a leading scholar of the history of the nonprofit sector – as judged not just by the quality of his output but also by the role he played in influencing the work of others, inside and outside his discipline, in both the academic and policy arenas. Today I lost a dear mentor, colleague, and friend, Peter Dobkin Hall.
I started my academic career as a tax lawyer, but as any nonprofit researcher quickly learns, nonprofit studies is a broad and multi-disciplinary business. I became aware of Peter’s work from his chapter in PONPO’s recently published compendium of the state-of-the-art nonprofit scholarship in political science, economics, law, history, sociology, management, and policy studies – The Nonprofit Sector: A Research Handbook (Walter F. Powell, editor) (Program on Non-Profit Organizations, Yale University Press 1987). But I became hooked on Peter’s work when I read his collection of essays in Inventing the Nonprofit Sector (Johns Hopkins 1992). To some degree, the field of nonprofit studies suffers from “cheerleading” by some of its practitioners. As a lawyer, I was skeptical of claims of exceptionalism on the part of “unowned” organizations controlling vast sums of wealth, no matter how good their intentions. As a tax lawyer, I was baffled by the structure of the federal tax-exemption scheme and the variety of organizations it embraces. I found persuasive and eye-opening Peter’s account of a relatively recent “invention” of a “nonprofit sector” – in part initiated by those who sought to draw under a single umbrella a group of firms that had not previously identified with each other, in order to defend against congressional attack. Indeed, I found Peter’s overall analysis so compelling that I introduced my second nonprofit article with the following quote from Peter’s 1992 book:
[Nonprofit organizations’] crucially important function in the American polity [derives from] their concrete historical association with a particular institutional culture, a configuration of values, resources, organizational technologies, legal infrastructure, and styles of leadership. This institutional culture originated at the end of the eighteenth century, became dominant . . . in the twentieth, and entered a period of crisis – quite possibly a crisis of success rather than of failure – in our own time.
So of course I was thrilled when Peter, then serving as PONPO director, invited me join a project studying the changing dimensions of trusteeship. Pushed beyond my tax-law comfort zone, I found myself exploring issues of corporate and trust fiduciary law, ultimately leading to my writing the chapter on the legal framework for nonprofit organizations for the second edition of The Nonprofit Sector: A Research Handbook (edited by Richard Steinberg and Walter W. Powell) (Yale University Press 2006). In addition, at Peter’s invitation, I supplied a legal scholar’s perspective to the multi-disciplinary Symposium Book Review of Henry Hansmann’s The Ownership of Enterprise, published in the Nonprofit and Voluntary Sector Quarterly (1999). Peter provided a historical perspective for both these projects. As a Research Scholar with the Urban Institute’s Center on Nonprofits and Philanthropy, I was delighted to reverse roles: I recruited Peter to contribute a chapter – on the history of nonprofit property-tax exemptions in his beloved New Haven – to the book I was editing, Property Tax Exemption for Charities: Mapping the Battlefield (Urban institute Press 2002).
It was not always easy for Peter to meet every deadline he’d agreed to; his prolific research agenda was to a large extent driven by demands made by others. And readers outside his field, like me, appreciate the simplicity, drama, and beauty of his writing style and presentation. As a separate matter, Peter was one of the rare scholars in the nonprofit field to have taken seriously (and produced nuanced and serious) research on religious organizations.
Finally, I would like to praise the energy and intelligence that Peter brought to the formation and activities of the multi-disciplinary Association of Research on Nonprofit Organizations and Voluntary Association (ARNOVA). From 1996, when I joined the association, for many years I thought Peter always was and always would be the book review editor, producing a plethora of thoughtful book reviews. As chair of the Annual Book Award Committee, Peter sought to identify the definitive meritorious publication by assembling a comprehensive list of the several dozen volumes published in the most recent five years on philanthropy, voluntary organizations, nonprofits, civil society, and related topics.
I always looked forward to spotting Peter’s dapper broad-brimmed hat and handle-bar mustache at ARNOVA meetings and other academic conferences. He loved nonprofits both as an intellectual subject and as a vehicle for social change. His enthusiasm, perceptiveness, and eagerness to right injustices served him not only as a leading nonprofit academic, but also as an inspiring community leader.
I also received the following message via the ARNOVA list-serv: "Peter's family suggests that anyone wishing to make contribution in his memory consider his favorite nonprofit: The Northwest Chicago Film Society, 1635 East 55th St. Chicago, IL 60615, www.northwestchicagofilmsociety.org.
I know we all join with Evelyn in mourning the loss of Peter as a scholar, colleague, and friend.
The season for introducing recent scholarship to the world is upon us, and scholars of nonprofits law have been busily posting their work to SSRN. This blog entry features abstracts of SSRN postings to the Nonprofit & Philanthropy Law eJournal over the past ten days.
Eric A. Lustig of New England Law on Boston PILOTs (two postings):
This article will address two specific developments in the PILOT program. First, the PILOT Task Force issued its final report in December, 2010. Second, the Lincoln Institute of Land Policy published a comprehensive report in the fall of 2010.
This article examines the first three years of results under the revised Boston Payment-in-Lieu of Taxes (PILOT) Program. The article updates two previous articles on the proposals and roll-out of the program. The revised Boston program and these results continue to be significant for several reasons. First, the Boston program is a long-standing one which is acknowledged as a national leader. Second, the creation of the task force and its resulting recommendations reflected a collaborative and transparent process. Finally, PILOT programs, particularly in the northeast, are an increasingly popular and controversial revenue producing source for local governments. The article concludes that the revised Boston program has led to a broader base of contributions from the Boston nonprofit community. The overall effectiveness of the changes may be limited by the voluntary basis of the program and the non-monolithic nature of the Boston nonprofit community.
Miranda Perry Fleischer of University of San Diego School of Law on Charity Tax Subsidies:
Tax scholarship is largely silent about the interaction between libertarian principles and the structure of our tax system. If all taxation is indeed slavery, as Nozick suggested, why bother analyzing libertarianism for insights into our tax system? This dismissal, however, ignores the diversity of libertarian thought. To that end, this Article mines the nuances of libertarian theory for insights into one feature of our tax system: the charitable tax subsidies.
One strand of libertarianism suggests that the charitable tax subsidies are in and of themselves illegitimate. Yet several other understandings of libertarianism see a role for the state to engage in a varying amount of redistribution or to provide varying amounts of public goods. One reading of minimal state libertarianism, for example, suggests that only charities that help the very poor should be subsidized, while another implies that only organizations assisting individuals who have been harmed by past injustices should be subsidized. A strict reading of classical liberalism suggests that groups providing public goods should be subsidized regardless of whether they assist the poor, but would likely narrow the definition of what counts as a public good suffering from market failure. Only a more lenient interpretation of classical liberalism that conceives of a vibrant nonprofit sector as a public good in and of itself and an expansive reading of left-libertarianism support something akin to our current structure, in which elite cultural institutions such as the opera are subsidized even if they provide no free or discounted services to the poor.
Jacqueline R. Moss on the Charitable Contributions Deduction:
Ostensibly, the purpose of the tax code is to raise revenue. But the tax code, like most laws, the United States tax code is a tool for social engineering, for better or for worse. Laws function not just to create stability, establish rules, or enshrine moral values; laws provide incentives for obeying the rules and disincentives for breaking them. The tax code, perhaps more than other body law, explicitly encourages and rewards behavior deemed valuable by society with tax credits and tax deductions while discouraging undesirable behavior through tax rates and the withholding of credits and deductions.
The tax code is the instrument through which government drives investment in economic activities deemed valuable, like research and development, education, small-business, and the nonprofit sector. The merit of using the tax code as a method for social engineering is not the subject of this article, but it is necessary to understand that whether one agrees or not with this use of the code, it is how it functions. Because the tax code functions to raise revenue and a policy tool, tax credits, deductions, and subsidies are frequently evaluated to determine if they are efficient – that is, do they work? Because if these tax incentives don’t work, they end up costing the government – and tax payers – a great deal of money with little to no benefit.
The creation of the individual charitable tax deduction exemplifies the debate over efficiency and the social engineering function of the tax code. The charitable deduction was created and lives on because we, through our representatives in Congress who author the tax code, have deemed charitable donations as socially and morally valuable, and thus as behavior that should be encouraged and rewarded. However, the deduction was created not only to reward and encourage charitable giving, but also to provide tax relief to wealthy Americans. The charitable tax deduction, quite intentionally, doesn’t recognize the charitable donations of all those who donate. Indeed, the charitable deduction – by design – tends to recognize and reward the charitable donations of high income individuals. In fact, as ones’ income rises, so does the value of the charitable deduction. Rewarding the wealthy but not lower-income individuals’ for their charitable contributions raises serious questions about the efficiency and equity of the charitable deduction. Surely, if the vast majority of Americans give to charity, and we, as a society, value and wish to encourage, reward, and maximize charitable giving, shouldn’t the tax code recognize the contributions of all taxpayers?
This article seeks to answer some of the questions raised by the purpose and function of the charitable tax deduction. In part one I will summarize the impact and role of the nonprofit sector and the impact of the charitable deduction upon that sector on the United States economy. Part two will examine the history and purpose of the charitable deduction and how the provision evolved since its creation in 1917. Part three will review how the charitable currently deduction functions. Part four will examine the inequity of the deduction in its treatment of similarly-situated taxpayers. Part five will explore the motivation – economic and otherwise – for donating to charity as well as the benefit of subsidizing nonprofits. Part six will examine various proposals for reform, the predicted effect of such reforms, and options to potentially maximize charitable giving among all income levels and increase equity.
Joseph Mead of Cleveland State University and Michael Pollack on Fiduciary Duties:
Directors of nonprofit organizations owe fiduciary duties to their organization, but the content of these duties -- and how and when courts should enforce these duties -- has long been debated among scholars and courts. This debate emerges in several areas, including the level of deference to be shown by courts to nonprofit directors (the business judgment rule), who should be allowed to sue to enforce duties (standing), and the type of relief available to prevailing plaintiffs (remedies). Existing literature debates these legal rules in isolation and in abstraction, generally failing to consider how the rules interact with each other and ignoring the empirical reality of the nonprofit sector.
Because for-profit and nonprofit corporations evolved from a common ancestor, courts generally apply the corporation law principles developed in the context of for-profit corporations to nonprofit corporations as well. But for-profit and nonprofit corporations often differ in key ways, including sources of income, constituencies, and other institutional characteristics. These differences make rote application of corporation law principles to nonprofit corporations a conceptually questionable endeavor. Rather than setting nonprofit rules through strained analogies to for-profit concepts of ownership and profit-maximization, we propose an employing an analysis of institutional features that can operate in a whole range of governance contexts, including the nonprofit sector. This approach rigorously considers opportunities for voice and exit, impact range, homogeneity, and comparative competence between boards and courts, and it does so among different types of nonprofit actors, like directors, members, employees, donors, customers, and beneficiaries.
Using this institutional analysis with for-profit corporation law as the baseline, we compare emerging legal rules in the nonprofit sector against existing empirical literature. We find that, with one exception, institutional characteristics vis-à-vis nonprofit actors are reasonably comparable to their for-profit counterparts, and we therefore place the applicable legal regime with respect to those actors on a more conceptually sound footing. In contrast, beneficiaries of a nonprofit organization tend to lack opportunities for exit or voice, face risk of considerable deprivation, and often differ considerably in relevant aspects from the individuals who manage the organization. We argue that the law should take into account the limited power of beneficiaries in nonprofit governance structures, and we analyze options for reform.
Fiona Martin of the Australian School of Business, UNSW on the Charities Act 2013:
In 2013, the Charities Act 2013 (Cth) was enacted and it came into effect on 1 January 2014. This is the first time that there has been an enactment of a statutory definition of the legal concept of “charity” in Australia. The definition is important for many areas of personal and commercial life, however one of the most significant, at least from a legal point of view, is how this definition operates in the context of Australian taxation law. This is particularly relevant in view of the fact that charities are exempt from income tax and subject to many other tax concessions at federal, state and local government level. Under Australian common law, a charitable entity was required to have a charitable purpose and be of benefit to the public. This article introduces the statutory definition and how it confirms the common law definition of charity and charitable purpose in certain instances, but also amends and expands these concepts. This discussion is provided as a context for the analysis of how the issue of public benefit has been dealt with under the statute. The article concludes with an analysis of how the Act has amended the application of the public benefit test to recipients of payments in respect of native title and traditional Indigenous lands.
Thursday, April 30, 2015
The Washington Post reports that the Fraternal Government Relations Coalition, which represents 100 fraternities and sororities collectively owning $3.2 billion in real estate, “is lobbying Congress this week to urge legislators to pass a bill that would allow charitable donations to fund up to $1 billion in housing construction for Greek-letter houses across the country.” The story reports that lobbyists justify the tax expenditure on grounds of safety, lowering costs of student housing, spurring small business jobs, and granting “tax parity between the colleges and the Greek houses that serve the same students.”
I did a little digging, and I am finding some curiosities with the Post’s legal analysis. The Post reports that the lobbyist group is urging adoption of the Collegiate Housing and Infrastructure Act, and that the “current bill, H.R. 1718, is sponsored by Rep. Pete Sessions (R-Tex.) and has 14 bipartisan sponsors.” The story further states that the bill would amend the Internal Revenue Code “to allow donations to Greek groups for student housing to be fully tax deductible.” But according to the text of H.R. 1718, the general rule of the proposed legislation simply states as follows:
For purposes of subsection (c)(3) and sections 170(c)(2)(B), 2055(a)(2), and 2522(a)(2), an organization shall not fail to be treated as organized and operated exclusively for charitable or educational purposes solely because such organization makes collegiate housing and infrastructure grants to an organization described in subsection (c)(7) which applies the grant to its collegiate housing property.
Thus, the bill in question would only indirectly do what the story says, insofar as a section 501(c)(3) entity receiving tax-deductible contributions could use donated funds to finance the construction or refurbishing of fraternity and sorority houses owned by those section 501(c)(7) entities.
The story also mysteriously states as follows:
Under current tax rules, just 30 percent of a single donation to a Greek organization for housing is considered tax deductible. The bill would permit as much as 100 percent of the donation to be deductible, which already is allowed for donors who give directly to universities and colleges.
I have no idea why the Post reports that “30 percent of a single donation to a Greek organization for housing is considered tax deductible” under current law. Fraternities and sororities are tax-exempt as section 501(c)(7) entities, not section 501(c)(3) entities qualifying for tax-deductible donations under Code section 170(c)(2).
But my main concern is not with the misleading technical analysis of the Post. I am quite skeptical that this proposed tax expenditure is justified. The IRS long ago issued a revenue ruling that supports the deductibility of charitable contributions to universities that use the donations to build housing owned by the universities and leased to fraternities and sororities. See Rev. Rul. 60-367, 1960-2 C.B. 73. Here are the key excerpts from the ruling:
A college might properly adopt as incident to its educational activities a program to assist in the housing of all its students by providing dormitories, by providing an information or rental office to obtain accommodations for its students in private homes, by exercising control over housing for its students, by purchasing or constructing, owning and operating houses for fraternity students, or by a combination of such activities. The furnishing of housing for fraternity members would not cease to be a college activity because the college participated in or undertook plans to have the whole or a part of the cost of a fraternity house defrayed by gifts from alumni of a particular fraternity. In order, however, for the gift to be deductible as a gift to the college, it must in reality be a gift to the college and must not be a gift to the fraternity by using the college as a conduit.
The effect of designation by a donor as to the fraternity house for which his gift is to be used must not be such that his gift is for the benefit of the fraternity rather than for the benefit of the college. Therefore, the college must, as the result of the gift, have the attributes of ownership in respect of the donated property, and its rights as an owner must not, as a condition of the gift, be limited by conditions or restrictions which in effect make a private group the beneficiary of the donated property. The making and acceptance of a gift on conditions which confer substantial rights on a private group are inconsistent with a gift wholly to the college. The college should, as an owner, be free to use the property acquired with the gift as its future policy suggests or requires.
I do not believe that the proposed bill is necessary to achieve the benefits claimed by the lobbyists. Construction and renovation of university-owned housing generates just as much economic boom as that associated with privately owned housing, and it is easier for a university to ensure that frat housing is safe and affordable if the university is in charge of it than if a frat is. Further, in light of recent nationally publicized events associated with Greek life, I would modestly suggest that policies promoting greater university control of fraternity and sorority housing are not necessarily a bad idea.
So here’s an alternative idea. Keep current law in place. Universities can welcome donations of existing Greek houses to the universities, which would then lease the houses back to the section 501(c)(7) entities on terms that ensure fair student housing prices and safe conditions. And if the fraternities violate anti-hazing or anti-discrimination policies of the universities, they have breached their leases and must find new safe, affordable housing.
Wednesday, April 29, 2015
The Los Angeles Times reports that the City of Los Angeles has sued Gardens Regional Hospital & Medical Center for “repeatedly dumping patients … without appropriate treatment or discharge plans.” According to the Times, L.A. City Attorney Mike Feuer has sued several hospitals over the past two years on similar grounds, and he is currently investigating other facilities. One example cited by the story is Glendale Adventist Medical Center, which is reported to have “paid $700,000 last year to settle dumping allegations without admitting wrongdoing.”
As to the predicament facing hospitals, the story explains as follows:
Some hospitals maintain they are hamstrung by laws that stop them from confining all but the most severely psychotic homeless people. State law requires discharge planning, but hospitals say there is nowhere for homeless patients to go — especially those with mental conditions.
But Feuer maintains that several hospitals have agreed to proper protocols. The Times cites him as saying, “In each of the cases we've resolved with a medical care facility we've not had a single problem," and that "it is possible for a healthcare facility to adopt humane and decent treatment."
The National Football League has announced that it will no longer file as a tax-exempt entity, notwithstanding its long-standing status as an organization described in section 501(c)(6) of the Internal Revenue Code. As reported in Bloomberg, NFL Commissioner Roger Goodell characterized the decision as eliminating a “distraction.” The Bloomberg piece also opines on the calculus behind the tax-exemption audible:
The league’s decision pre-empts a move to revoke the tax break that had been led by former Senator Tom Coburn of Oklahoma. That effort has gained some momentum in recent years, but not enough to pass either the House or the Senate. The NFL’s action removes a point of leverage for Congress in its continuing inquiries into the league’s handling of concussions and domestic violence.
For the NFL, the costs of losing the tax break are minimal, an estimated $109 million over the next decade. There are benefits for the league, too, including the end of federal disclosure requirements that put Goodell’s salary and some other league information in the public domain.
The tax cost of the league’s foregoing federal income tax exemption is not precisely known. According to the Wall Street Journal,
The size of the NFL’s tax bill is unclear. In 2013, a report by Sen. Tom Coburn (R., Okla.) calling for the NFL and National Hockey League to give up their tax-exempt status estimated that such a move would generate $91 million annually for the federal government. But Congress’s Joint Committee on Taxation pegged the amount at just $109 million over the next 10 years.
As to the benefit of not disclosing salaries to Monday morning quarterbacks, the Washington Post makes an interesting observation:
[T]he NFL’s executives will gain cover from criticism over their paychecks. The league’s 2013 tax filing revealed that, besides Goodell’s $44 million, six other executives drew seven-figure salaries and 298 employees made $100,000 or more.
Tuesday, April 28, 2015
As reported in the Chronicle of Philanthropy and Reuters, the home ministry of the government of India has cancelled the registration of 8,975 nonprofit associations for failing to declare details of foreign donations that they have received over a three-year period. The action reportedly followed India’s suspension of the license of Greenpeace India and the government’s placement of the Ford Foundation on a watch list. According to Reuters, “Critics have argued that the government's decision to restrict the movement of foreign funding to local charities is an attempt to stifle the voices of those who oppose Prime Minister Narendra Modi's economic agenda.”
Charity Navigator has published a list of charitable nonprofits that are working to aid the victims of the tragic, enormous earthquake that struck Nepal about 50 miles from Kathmandu three days ago. According to Charity Navigator’s website, “the charities on our list have indicated that they plan to assist in the relief efforts in some way,” and they “have a 3 or 4 star Charity Navigator rating.” Donations to these charities also may be designated specifically for the relief of victims of the Nepal earthquake.
Monday, April 27, 2015
Accounting Today reports that the Financial Accounting Standards Board has issued a proposed accounting standards update that would modify how nonprofits must report information in their financial statements and notes thereto. Proposed changes address the reporting of restricted assets, results of operations, expenses by both nature and function, investment returns net of expenses, operating cash flows, and quantitative and qualitative information about liquidity.
The Clinton Foundation is obviously making headlines these days. I hardly know anything at this point begging for this nonprofit law professor’s comment. But for those who would like a sampling of stories from the past week’s news cycle, here is coverage from the Chicago Tribune, USA Today, the New York Times, and the Washington Post.
Tuesday, April 21, 2015
Thomas E. Rutledge, Member of Stoll Keenon Ogden, PLLC, has authored an article entitled “Who Will Watch the Watchers?: Derivative Actions in Nonprofit Corporations” on SSRN. Rutledge argues that derivative actions may be available within organizations such as LLCs and nonprofit corporations through the judiciary’s equitable powers. Here is the abstract:
Unlike the Kentucky statutes governing business corporations, limited partnerships and statutory trusts, both the Kentucky Limited Liability Company Act and the Kentucky Nonprofit Corporation Acts are silent as to the requirements for “derivative actions” brought on behalf of the LLC or corporation by a member or other constituent thereof. Some have suggested that this absence indicates that derivative actions do not exist in those organizational forms, positing, it would seem, that it is the statute governing derivative actions that gives rise to the actions. This assessment is incorrect, and, presumably, arises out of a misunderstanding of the basis for derivative actions. In fact, the derivative action is a question of equitable standing that was later, in certain contexts, reduced to statute. It does not follow, therefore, that there are not derivative actions in LLCs and nonprofit corporations consequent to the failure of the statute to provide for them. Rather, equity will provide the rules applicable when the organizational statute does not specify the rules governing derivative actions.
Wednesday, April 15, 2015
Happy Tax Day all - and a special happy statute of limitations day to all of those involved in the preparation of tax returns!
Sunday, April 12, 2015
In The Nature Conservancy v. Deep Creek Grazing Ass’n, No. DV 14-015 (Mont. 9th Jud. Dist. Ct., Teton County, Mar. 31, 2015), a Montana trial court held that the owner of ranchland subject to a conservation easement had violated the easement by constructing ponds and filling a wetland area without obtaining prior approval from The Nature Conservancy (TNC), which holds the easement on behalf of the public. The court ordered the landowner to promptly restore the property to its condition prior to the violations, but declined to order the landowner to pay TNC’s attorney fees.
In March 2008, TNC purchased the conservation easement from Deep Creek Grazing Association (Deep Creek) for $3.5 million. The easement encumbers approximately 11,365 acres in Teton County, Montana.
The easement limits Deep Creek’s right to develop the property. The easement also permits Deep Creek to use the property in ways consistent with the easement, but identifies certain “consistent uses” as being subject to TNC’s prior approval. In particular, the easement provides that "construction of ponds requires prior approval from [TNC]." The easement also expressly prohibits the filling of wetlands or riparian areas.
In November 2013, during a routine monitoring visit, a TNC scientist and land manager observed that seven ponds had been constructed on the property without TNC’s prior approval. TNC sent a Notice of Violation informing Deep Creek that the pond construction violated the easement and requesting restoration of the pond sites to their preexisting conditions within 30 days as required by the easement. Due to winter conditions, however, TNC stated its willingness to accept Deep Creek’s agreement to undertake the restoration activities as soon as conditions permitted, provided the work was completed no later than May 1, 2014.
In early January 2014, during another routine monitoring visit, the same TNC scientist and land manager observed that gravel fill had been placed in a wetland area on the property. TNC sent a second Notice of Violation to Deep Creek regarding the fill.
Shortly thereafter Deep Creek sent a letter to TNC acknowledging that it undertook the pond construction activities “without recognizing or remembering” the requirements of the easement. As of April 2014, however, Deep Creek had not corrected the violations and TNC filed suit.
The Court’s Holdings
The court held that Deep Creek had clearly violated the conservation easement by constructing seven ponds on the property without obtaining prior approval from TNC as required by the easement. Despite having earlier admitted that it had violated the easement by constructing the ponds, at trial Deep Creek claimed it had not violated the easement because, according to a report it obtained from a Professor at Montana State University, the ponds were not ponds but were instead “earthen berms.” The court dismissed this argument, noting that it did “not hold water.” The court explained that (i) Deep Creek had itself repeatedly referred to the ponds as ponds, (ii) Deep Creek had filed for water rights as stock reservoirs for the ponds, and (iii) the ponds appeared to be “ordinary livestock ponds common to Montana ranches; the fact they are dry on occasion does not mean they are not ponds or that there is a factual dispute over the term.” The court further noted that Deep Creek’s post hoc attempt to have an expert opine that the ponds were “earthen berms” was not credible in the face of Deep Creek’s repeated statements to the contrary.
The court also noted that the Professor’s statements that the ponds benefited stock and wildlife were not relevant. “It is not for this Court to assess whether the ponds are a benefit to stock and wildlife,” said the court. Rather, its task was “to interpret the plain language of the easement, which requires prior notification and approval by [TNC for pond construction]."
The Filling of the Wetland
The court also held that Deep Creek had violated the conservation easement by filing a riparian or wet area on the property with material excavated from a nearby location, an action that was prohibited in four different sections of the easement. TNC was able to prove that the fill was not present at the time of the easement’s conveyance through the “baseline report,” which established the condition of the property at the time of the easement’s conveyance.
Good Faith and Fair Dealing
Deep Creek asserted that TNC breached the covenant of good faith and fair dealing that comes with every contract, presumably because TNC would not agree after the fact to allow the ponds and the fill. The court dismissed this argument, noting that Deep Creek could not claim that TNC violated the covenant of good faith and fair dealing when it was Deep Creek’s breach of the easement that led to the litigation. “Deep Creek never asked permission for its actions, which it admits were wrong,” said the court, “[r]equesting permission after the fact is not the same and violates the terms of the easement.” The court also noted that any obligations TNC might have to consider Deep Creek’s requests to construct the ponds and place fill in the wetland “were never triggered” because Deep Creek never requested prior approval from TNC as required by the easement.
The court concluded that Deep Creek had surrendered some of its real property interests when it granted the conservation easement and it was not for the court to determine whether filling the wetland served a beneficial purpose as Deep Creek suggested. Rather, said the court, its task was “to apply the plain language of the easement to the undisputed facts” and, based on those facts, the court found that TNC was entitled to summary judgment regarding the easement violations. The court also noted, however, that “[i]f Deep Creek had requested permission prior to constructing the ponds or filling wetland areas, the results in this case would undoubtedly be different.”
Citing to both the terms of the easement and a recent easement enforcement case from Maryland, McClure v. Montgomery County Planning Board, 103 A.3d 1111 (Md. App. 2014), the court found that restoration of the property to its condition prior to the unauthorized activities was an appropriate remedy.
Although the easement allows TNC to undertake the restoration, the court noted that, “cognizant of Deep Creek’s ranching operations,” it would provide Deep Creek with an opportunity to undertake the restoration. The court ordered Deep Creek to, within 20 days of the court’s order, submit a restoration plan to TNC for TNC’s approval. The order also provides that, if Deep Creek fails to submit such a plan, or if the plan does not meet the requirements for prompt restoration of the property as provided in the easement, TNC can undertake the restoration and Deep Creek would be liable for the costs.
Deep Creek was not, however, required to pay TNC’s attorney fees. According to the court, the conservation easement allows for attorney fees to be awarded to TNC if TNC files an action to correct a violation of the easement, but each party must pay its own attorney fees if the Court finds that no “material” violation has occurred. The court noted that whether Deep Creek’s actions constituted “material” violations was a question of fact the court was not required to resolve. The court explained that Deep Creek did not follow proper procedures and give TNC advance notice of its actions. Accordingly, Deep Creek was required by the easement to return the property to its prior condition regardless of the whether the violations were material. “Under these circumstances” the court found it appropriate for Deep Creek to pay TNCs court costs, but for each party to pay its own attorney fees.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law