Friday, June 20, 2014
The June 2014 edition of the American Bar Association's publication, Business Law Today, contains a "mini-theme" dedicated to nonprofit organizations, with an introduction entitled "Nonprofit Organizations: Changes in Challenging Times." Articles in the edition include:
1. "The Messiest Catch: Fishing for Health-Care Institution Donors in a Changing Sea" by Matthew G. Wright.
2. "Mergers, Acquisitions, and Affiliations Involving Nonprofits: Not Typical M&A Transactions" by William L. Boyd III.
3. "Taking Care of Business: Use of a For-Profit Subsidiary by a Nonprofit Organization" by David A. Levitt and Steven R. Chiodini.
4. "Five Tax Traps for Business Lawyers Advising Nonprofit Clients" by Cynthia R. Rowland and Deborah K. Tellier.
5. "Whither the Parsonage Allowance? Will It Survive the Most Recent Attack?" by Lisa A. Runquist and David T. Ball.
6. "E-mail Voting: A Practical Approach to a Difficult Trap" by Leah Cohen Chatinover.
Tuesday, June 17, 2014
Munson: Fraud on the Faithful? Charitable Intentions of Religious Congregations' Members & Church Property Law
Valerie J. Munson (SIU Carbondale) has posted "Fraud on the Faithful? The Charitable Intentions of Members of Religious Congregations and the Peculiar Body of Law Governing Religious Property in the United States" to SSRN. Here is an abstract:
This article examines American church property law, past and present, and discusses its inconsistencies and ambiguities. It then suggests how state governments could play an important role in clarifying this area of the law and protecting the intentions and expectations of local church donors who may well be unaware that a general church organization (denomination) is the ultimate beneficiary of their donations. The article is unique in that it is written with a perspective that takes into account the real world contexts of church property disputes, in history and today. (The author was aided in this regard by historic Supreme Court documents that became available to scholars just this spring through a recent digitalization project.)
The article begins by placing the reader in the midst of a church property dispute as seen through the eyes of Sandra and John Cook, fictional characters whose experiences accurately reflect those of the author’s former clients. It then proceeds in three parts.
The first part is an overview of church property rights under American law and begins with a short discussion of the religious context in which this country was founded, the legal existence and power given religious organizations in the post-revolutionary period, and early concerns about the need to limit the power of church authorities over non-spiritual matters like possession and control of church property. It then discusses the three very different approaches used to resolve church property disputes by different states, at different times. The first is the “departure from doctrine” rule first announced in the Scottish case, Craigdaillie v. Aikman in 1813. That approach turns on a determination of which faction in a church property dispute most closely follows the religious tenets that existed at the time a local church was founded. The second approach is the “deference” approach which was first articulated by the Supreme Court in 1871 in Watson v. Jones, a case arising out of the civil war. Using that approach, if a court determines that a local church belonged to a general church organization having its own authoritative structure and means of deciding disputes, the court must defer to the decision of the highest judicatory of the general church organization as to which party is entitled to possession and control of church property. The third, and now most prevalent, approach is the “neutral principles” approach endorsed by the Supreme Court in 1979 in the case of Jones v. Wolf. Under that approach, a court may decide a church property dispute if it can do so without deciding any religious issue. That is, it can decide the dispute if it can do so by simply applying neutral principles of state property, contract, and trust law. The first part of the article concludes with a summary of how the state courts have applied the neutral principles approach in recent years, which has continued the ambiguity and inconsistency in this area of the law.
The second part of the article discusses the context in which individuals today decide to donate money to local churches. It looks at what historic case law provides by way of context as well as at current data on church affiliation practices in the United States.
The third, and final, part of the article suggests three ways in which state governments can assume a role in clarifying the area of church property law, a role they have been urged to assume by the Supreme Court for over forty years. The suggested state government actions would also protect the intentions and expectations of potential donors to local churches in a manner consistent with current public policy favoring financial transparency, especially full disclosure in charitable fundraising. One possible action is the amending of state charitable solicitation or church incorporation laws to require specific disclosure of any beneficial interest a general church organization holds in local church property. A second is through vigorous enforcement of existing state anti-fraud laws. A third is through vigorous enforcement of the public policy requirement for continued tax exemption.
The article concludes by bringing the discussion of church property law back to real people, like Sandra and John Cook, who are deeply affected by church property disputes, and suggesting that now is the time for state governments to step up and assume the role envisioned for them by the Supreme Court by acting to protect the intentions and expectations of those who give of their time and money to support local churches.
Luigi Butera (George Mason, Interdiscplinary Center for Economic Science) and Jeffrey Ryan Horn (George Mason, Economics Department) have posted "Good News, Bad News and Social Image: The Market for Charitable Giving" to SSRN. Here is an abstract:
Financial efficiency represents a desirable quality in charitable organizations. Yet, different theories of intrinsic and extrinsic preferences for charitable giving offer opposite predictions about donors’ reaction to this information. On one hand, learning that one’s charity is better than expected directly increases the marginal impact of giving, making donations non-decreasing in the quality of news. This behavior is consistent with warm-glow theory. On the other hand, higher efficiency has an indirect negative effect on giving, since now less money is needed to produce one unit of effective charitable good. Most notably, theories of pure altruism and guilt aversion predict this behavior. A similar tension arises for prestige motivated donors whenever information provides extrinsic incentives to give (e.g. information has a social signaling value). We model this simple framework and test it using a laboratory experiment. We show that when information about efficiency is private, giving is always non-decreasing in the quality of news. However, when the efficiency of donor’ charities is public information, this relationship breaks down: 34% of donors who respond to new information do so by reducing their giving when charities are better-than expected, and increasing it when are worse. We show that this result is driven by image-motivated donors, who treat the size of their gift and the efficiency of their chosen charities as substitutes in terms of social image payoffs.
This article presents the case for repeal of the façade easement deduction. Proponents of this benefit argue that the deduction encourages historic preservation by reimbursing property owners for relinquishing their right to alter the façade of their property in a way inconsistent with that conservation goal; however, this article shows that there are many reasons to urge its repeal: the revenue loss, the small number of beneficiaries, the financial demographics of that group of beneficiaries; the dubious industries that are supported by the deduction; and the continual marked overvaluation and abuse despite Congressional, court, and administrative review and expense.
After the last major reform effort, the Pension Protection Act of 2006 (PPA), in 2009, only 94 taxpayers claimed the façade easement charitable deduction with an average return deduction of $477,225. While there may be a desire to retain a tax benefit with purported charitable aims, the long history of unbridled abuse even with repeated legislative and administrative response should make it clear that amending the façade easement deduction is an unending proposition. In today’s world, real estate is often subject to regulation that buyers and their neighbors accept in order to retain and increase a community’s property values. The very wealthiest of homeowners who purchase homes in historic districts willingly accept local restrictions on their property’s use. There is no evidence that façade easements significantly alter the behavior of property owners. It provides them with huge tax savings for doing what they would do anyway.
Friday, June 6, 2014
With h/t to Paul Caron at the mother of all blogs, TaxProf Blog:
We investigate the effects of variations in the value of the charitable contribution deduction on nonprofit firm behavior, including exploring for the first time the effects of the tax-price of giving on fundraising and returns to fundraising. We find that a one-percent increase in tax subsidies drives a 1.7-percent increase in fundraising, and decreases average returns to fundraising by two percent. We also find that tax subsidies deliver less than a dollar of value, net of fundraising, for each dollar foregone by the government, and that program-related expenditures are largely unresponsive to subsidies, at least in the short run. We argue that these results may imply that the charitable contribution deduction is less effective than prior research has suggested. For example, we argue our results are consistent with the hypothesis that subsidies trigger a destructive arms’ race for donor funds. The modest elasticity of real charitable output to tax price implies that tax subsidies may simply crowd out other revenue sources, such that the efficacy of the subsidy depends on the relative efficiency of these alternative sources.
Friday, May 30, 2014
Johnny Rex Buckles (Houston) published "How Deep Are the Springs of Obedience Norms that Bind the Overseers of Charities?," in 62 Cath. U. L. Rev. 913 (2013). Here are some excerpts from the article's introduction:
This Article explores whether and how the exercise of discretion by charity fiduciaries in recasting a charity’s direction is, and should be, limited. Analyzing this basic issue raises additional, difficult inquiries: If the law does limit the ability of charity fiduciaries to determine the charitable paths of their entities, what standards govern the exercise of fiduciary discretion? To what extent does , and should, the law treat fiduciaries of charitable trusts dissimilarly from those who govern charitable nonprofit corporations? What role should governmental actors play in monitoring these decisions by charity managers? If governmental actors should assume some monitoring role, should their review of fiduciary decisions be ex ante or ex post? Which governmental actors should be involved? Can donors and other stakeholders sufficiently protect their interests absent a strong supervisory role by the government?
These questions are not simply esoteric enigmas deisgned to tickle the ears of legal scholars. . . . Moreover, these questions are especially timely, for the law of obedience norms governing fiduciaries of charitable corporations is unsettled and in great need of refinement. Even the law governing trustees of charitable trusts, which is comparatively stable and uniform, merits reassessment once the meaning and purposes of obedience norms are thoroughly examined.
To foster the development of the law governing charity fiduciaries, this Article presents a taxonomy of obedience norms,20 a doctrinal analysis of these norms, and a policy discussion to help answer these questions. Part I explains the fundamental nature of obedience norms and articulates and illustrates the various types of obedience norms. Parts II and III discuss legal authorities supporting or rejecting various obedience norms as applied to trustees of charitable trusts and directors of charitable nonprofit corporations, respectively. Part IV this Article evaluates the policy considerations that may justify one or more obedience norms. Finally, by presenting an analytical series of questions, Part V explains how the law should develop in imposing, and declining to impose, obedience norms on charity fiduciaries.
Thursday, May 29, 2014
Philip Hackney (LSU), has posted "Taxing the Unheavenly Chorus: Why Section 501(C)(6) Trade Associations Are Undeserving of Tax Exemption," to SSRN. It is forthcoming in 92 Denv. U. L. Rev. ___ (2014):
Our federal, state, and local governments provide a subsidy that enhances the political voice of business interests. This article discusses the federal subsidy for business interests provided through the Internal Revenue Code (“Code”) and argues why we should end that subsidy. Under the same section that provides exemption from income tax for charitable organizations, the Code also exempts nonprofit organizations classified as “business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues.” Theory supporting tax exemption states that we should subsidize nonprofit organizations that provide goods or services that are undersupplied by the market. A charitable organization that assists the poor is a classic example of a service undersupplied by the market. Business interest group services, however, are found in abundance. Data shows that there is a significant bias in the interest group system in favor of business interests and away from interests such as labor, the poor, and the environment. Tax-exemption at federal, state, and local levels likely fosters at least some of this bias in our democracy. Rather than enhancing a pluralistic society, as some argue is a prime benefit of our tax-exempt system, tax-exemption for business interest groups enhances the voice of the powerful and detracts from the voice of the weak. Thus, because business interests experience little in the way of market failure and tax-exemption for such groups likely leads to a bias in our democratic system I argue we should end exemption for nonprofit business interests.
(Hat tip: TaxProfBlog)
Friday, May 9, 2014
Damian Alexander Bethke and Jędrzej Górski (both Chinese University of Hong Kong) have posted Rethinking Social Ventures in Hong Kong (Richmond Journal of Global Law and Business, Spring 2014). Here is the abstract:
Hong Kong has experienced a significant transformation in its understanding of business, which concerns the phenomenon of social ventures that attempt to combine a make money and do good approach and to apply business skills to address social needs. Social ventures live a mystical existence, as they are fully ignored from a legal perspective despite the recent reform of laws on charitable activities. This causes problems as to their general understanding, which the authors try to address with their own typology, systematically characterizing social ventures. Then the authors examine the legal environment of social ventures in Hong Kong and identify the challenges they face. Hong Kong’s company law and related public/administrative law issues are considered. The answer searched for is: what is the appropriate legal vehicle for social ventures, and what are the practical legal questions when a social venture wants to structure its make money and do good business? As to the first problem, the legal non-existence of social ventures results in coupled privileges — meaning a system which favors traditional business forms such as for-profit and not-for-profit companies and discourages doing good approaches by social ventures. The authors identify instances where privileges crediting charitable activities are coupled with not-for-profit status, and propose solutions under which social ventures could be registered and have tax privileges efficiently assigned by a one-stop supervision body. As the second problem, the situation of social ventures abandoning their mission of doing good poses further challenges to the legal system, and the authors propose a regime under which business organizations can easily adopt or abandon a social mission based on a partial application of the cy-près doctrine. The authors come to the conclusion that the social venture sector bears immense potential for Hong Kong as well as for all of Asia. But in order to use this potential, Hong Kong has to show a more refined understanding and has to be open to a profound discussion.
Sunday, April 27, 2014
Cass Brewer (Georgia State) has posted Gift Horses, Choosy Beggars, and Other Reflections on the Role and Utility of Social Enterprise Law. Here is the abstract:
The U.S. law of social enterprise is growing rapidly. Since 2008, one-half of all U.S. states have modified their business law to establish special legal forms designed for social enterprise. Meanwhile, even with twenty-five states adopting special laws for social enterprise, the legal debate surrounding social enterprise continues. Rather than rehashing that debate, this essay sets forth the author’s personal perspective on the role and utility of social enterprise. The essay argues that, except in limited circumstances, social enterprise is superior to traditional philanthropy when it comes to solving longstanding humanitarian or environmental problems. U.S. business law thus should continue to evolve to facilitate social enterprise.
He also is a co-author (with Elizabeth Carrott Minnigh and Robert Wexler) for the just released BNA Tax Management Portfolio Social Enterprise by Non-Profits and Hybrid Organizations, No. 489-1st.
Albert Choi (UVA) has posted Relational Sanctions against Non-Profit Organizations: Why a Selfish Entrepreneur Would Organize a Non-Profit Enterprise. Here is the abstract:
This paper examines how relational sanctions can affect organizational choice. An entrepreneur can set up either a for-profit or a non-profit organization in selling product or service to customers. While the entrepreneur can distribute all the profits from a for-profit organization to herself, she faces a non-distribution constraint with respect to a non-profit organization and has to convert a non-profit firm’s profits into private benefits (such as perquisites). Because realized quality is not verifiable and is subject to error, customers, in equilibrium, impose relational sanctions against the firm when low quality product or service is delivered. With the relational sanctions, for-profit and non-profit firms provide the same (expected) level of quality to the consumers. The size of the relational sanctions and the entrepreneur’s preference over the organizational form differ, however. When converting profit into private benefits becomes more difficult at the margin, i.e., conversion exhibits decreasing returns to scale, because temptation to shirk from investing in quality gets weaker (but still positive), a non-profit organization is subject to shorter (less severe) relational sanctions. Shorter relational sanctions, in turn, can make a non-profit organization’s long-run return to the entrepreneur (in terms of private benefits) higher than that from a for-profit organization (in terms of distributed profits). Hence, even if the entrepreneur has no altruistic motive and cares only about the returns she derives from the organization, she may still choose a non-profit form. The entrepreneur is more likely to organize a non-profit firm (1) as the correlation between investment and quality gets weaker; (2) as the non-distribution constraint gets stronger at the margin; (3) when a for-profit firm is subject to tax; or (4) and as the profit margin gets smaller due, for instance, to stronger competition in the market.
Ofer Eldar (J.S.D. candidate & Ph.D. candidate, Yale) has posted The Role of Social Enterprise and Hybrid Organizations. Here is the abstract:
Recent years have brought remarkable growth in hybrid organizations that combine profit-seeking and social missions. Despite popular enthusiasm for such organizations, legal reforms to facilitate their formation and growth – including, in particular, special enabling statutes for hybrid firms – have largely been ineffective. This failure stems in large part from the lack of a theory that identifies the structural and functional elements that make some types of hybrid organizations more effective than others. In pursuit of such a theory, this article focuses on a large class of hybrid organizations that has been effective in addressing development problems, such as increasing access to capital and improving employment opportunities. These organizations, which are commonly referred to as “social enterprises,” include microfinance institutions, firms that sell fair trade products, work integration firms, and low-cost sellers of essential goods and services such as eyeglasses, bed-nets and healthcare. The common characteristic of social enterprises is that they have a transactional relationship with their beneficiaries, who are either purchasers of the firms’ goods or services or suppliers of input (including labor) to the firm. The essence of the theory is that through these transactions, social enterprises gather information on their patron-beneficiaries’ ability to transact with commercial firms (e.g., workers’ skills, borrowers’ creditworthiness and consumers’ ability to pay). That information permits social enterprises to tailor the form and amount of subsidies to the specific needs of individual beneficiaries. This “measurement” function makes social enterprises relatively efficient vehicles for allocating subsidies as compared with more traditional donative organizations and with other forms of hybrid organization, in particular firms that pursue corporate social responsibility policies. The measurement function can serve as the basis for designing a new social enterprise legal form and subsidy policy to promote development.
Pamela Foohey (Illinois) has posted Perspectives on Religious Organizations' Reorganizations, to be published in the American Bankruptcy Law Journal. Here is the abstract:
This Article, written in conjunction with the Empirical Studies in Bankruptcy panel hosted by the Section on Creditors’ and Debtors’ Rights at the AALS’ 2014 Annual Meeting, combines an analysis of documents submitted in connection with Chapter 11 cases filed by religious organizations with the results of in-depth interviews with these organizations’ leaders and their bankruptcy attorneys to assess whether reorganization has the potential to offer an effective solution to these debtors’ financial distress. The data indicate that Chapter 11 oftentimes can be beneficial for religious organizations. For instance, over 60% of the Chapter 11 cases discussed by attorneys ended productively in that the debtor confirmed a reorganization plan or entered into an agreement with its creditors that allowed the congregation to continue operating post-bankruptcy. Based on attorneys’ experiences, in the future, focusing on organizational structure, cash collateral, and sources of revenue may enhance the efficiency and effectiveness of these reorganizations.
The interviews also call attention to two aspects of these bankruptcies that were less obvious from an examination of court records alone. First, a subset of religious organizations may more likely to file under Chapter 11: smaller congregationalist and nondenominational Christian churches with a predominately minority membership base. Second, these churches’ secured creditors may negotiate in ways that lead these churches to turn to bankruptcy. Further research regarding the denominational and demographic skew of religious organization debtors and the role of secured creditors in funding religious organizations will help to refine our understanding of these institutions’ financial distress.
Deborah Kearns (Albany) has posted For Treasury Charity Starts at Home: Treasury's New Interpretation of the Fiduciary Income Tax Charitable Deduction, which the Virginia Tax Review just published. Here is the abstract:
This Article challenges Treasury’s recent regulations narrowly interpreting the fiduciary income tax charitable deduction under IRC § 642(c). Treasury’s new interpretation highlights a fundamental tension in the federal tax system, which involves identifying transactions that are abusive versus transactions that take advantage of congressionally sanctioned tax incentives that were designed to further important public policies like charitable giving. For almost forty years, IRC § 642(c) had been liberally construed by Treasury, which was consistent with the legislative history and principles of statutory construction traditionally applicable to charitable deductions. Treasury’s new restriction on income ordering rules in charitable trusts overrides the legal norms historically applicable to charitable deductions and is contrary to the legislative history, case law interpreting charitable deductions and Subchapter J of the Internal Revenue Code. If left unchallenged, this new interpretation has the potential to erode congressionally sanctioned tax incentives, charitable and otherwise, which is cause for great concern. This Article examines the history of charitable deductions in the United States and the case law that has liberally construed the deductions for almost a century. The Article also examines the statutory framework of Subchapter J of the Internal Revenue Code and concludes that Treasury’s justification for its new interpretation of the deduction is without merit and that the regulations should be invalidated if challenged.
Here is the table of contents for the just published April 2014 issue of the Nonprofit and Voluntary Sector Quarterly:
- Femida Handy, Jeffrey L. Brudney, and Lucas C. P. M. Meijs, From the Editors’ Desk
Kevin F. Forbes and Ernest M. Zampelli, Volunteerism: The Influences of Social, Religious, and Human Capital
Nevbahar Ertas, Public Service Motivation Theory and Voluntary Organizations: Do Government Employees Volunteer More?
Kelly LeRoux and Kelly Krawczyk, Can Nonprofit Organizations Increase Voter Turnout? Findings From an Agency-Based Voter Mobilization Experiment
Bram Verschuere and Joris De Corte, The Impact of Public Resource Dependence on the Autonomy of NPOs in Their Strategic Decision Making
Hyo Jung Kim, Hyun Jee Oh, and Esther Thorson, Embedding a Social Cause in News Features: The Effects of Corporate Sponsorship and Localization on Audience’s Attitudes Toward Nonprofit Coverage
Thomas Longoria, Jr., Predicting Use and Solicitation of Payments in Lieu of Taxes
Russell N. James III and Michael W. O’Boyle, Charitable Estate Planning as Visualized Autobiography: An fMRI Study of Its Neural Correlates
Walter J. Mayer, Hui-chen Wang, Jared F. Egginton, and Hannah S. Flint, The Impact of Revenue Diversification on Expected Revenue and Volatility for Nonprofit Organizations
Sangmi Choi, Learning Orientation and Market Orientation as Catalysts for Innovation in Nonprofit Organizations
Jennifer Amanda Jones, Book Review: Measuring the Networked Nonprofit, by B. Kanter & K. Paine
Howard Lune, Book Review: Charity Case: How the Nonprofit Community Can Stand Up for Itself and Really Change the World, by D. Pallotta
Michael Hammer and Chao Guo, Book Review: The State of the Nonprofit Sector, 2nd ed, by L. Salamon
Wolfgang Bielefeld, Book Review: Players in the Public Policy Process: Nonprofits as Social Capital and Agents (2nd ed), by H. J. Bryce
Social enterprise laws are sweeping through the nation. Entrepreneurs can now organize under one of several new legal forms, including the “benefit corporation” form. In theory, these options will make it easier for socially minded firms to pursue a double bottom line of profit and public benefit — that is, to do well while doing good.
This Article tests that theory. In asking whether social enterprise laws matter, I find that the answer is “yes,” but not for the reasons most people think. The standard rationale for social enterprise laws is that they free managers from the “duty” to put profits ahead of social objectives. But that idea misses the point; existing corporate law is already flexible enough to permit most social/economic tradeoffs. Instead, I argue that social enterprise laws add value by creating a new institutional structure that will motivate the development of self-regulatory standards and provide a helpful coordinating mechanism for legal advisors and pro-social investors. The Article thus offers a unique way of thinking about social enterprise laws. Rather than simply provide new off-the-rack legal forms, these laws encourage a process of norm creation and private engagement that ought to drive the social enterprise movement forward. I conclude by offering firms and lawmakers several strategies to reinforce this dynamic.
Thursday, April 24, 2014
From SSRN . . .
The tradition of giving finds itself in every religious text across the world. There seem to be few other principles which are so globally accepted. Whether it is the Zakat, the Islamic practice of giving and consequent self-purification, or the Dāna, the practice of giving in both Hinduism and Buddhism, the concept of gratuitous transfer of wealth to the less privileged strikes a common chord between the three most popular religions in Asia.
This paper seeks to first identify the traditions relating to charity within religious texts such as the Hadith, the Manusmriti and the Tipataka. In the absence of institutions, including the concept of the corporation, during the time when such religious texts were envisaged, the directions mandating charity are by default, applicable to individuals. This paper goes on to examine the creation of the modern-day corporation through the lens of independent corporate personality as well as a nexus of contracts.
Arguing further that -- in the absence of a large number of shareholders, Asian corporations tend to be family and individual driven -- such families and individuals may have a propensity to inculcate their individual traditions into inanimate and juristic bodies such as the corporations they run and control. As a result, this paper finally considers whether the tradition of giving, as mandated by religion may be a significant factor to boost Corporate Social Responsibility. While most Asian countries have some form of voluntary guidelines on corporate social responsibility, mandatory laws relating to CSR have been passed in Indonesia and India. A recent report even suggests that Asian consumers would be willing to spend more on products manufactured by socially responsible companies. This paper posits that a tradition of giving, spurred by religious mandate, does make CSR far more relevant in Asia.
Tuesday, April 8, 2014
A Case Study of Legislation vs. Regulation: Defining Political Campaign Intervention under Federal Tax Law
The rules that should govern political campaign intervention by social welfare organizations exempt from taxation under § 501(c)(4) of the Internal Revenue Code have been the subject of recent controversy. Long before all the attention, a group of dedicated and experienced experts on the topic, under the auspices of two well-known nonprofit groups, undertook the task of clarifying the rules regarding tax-exempt political activity. In light of the issues becoming national news, the group, known as the Bright Lines Project, also converted the regulatory proposal into legislative language. These two versions of the same rules — as a set of regulations and as a set of statutes — provide a natural laboratory to compare the administrative law implications of choosing between legislation and regulation to establish a set of tax rules. This Article undertakes that examination. It concludes that, if revenue rulings interpreting regulations are afforded deference under Auer v. Robbins and Bowles v. Seminole Rock & Sand Co., promulgating the initial definition of political campaign intervention as a set of regulations may well give the Internal Revenue Service greater power to police political campaign intervention by exempt organizations than would the enactment of detailed legislation. It recommends, however, that broad statutory guidance, followed by regulations, and then by revenue rulings strike the best balance between democratic concerns and administrative flexibility.
This article explores the impact of such a covenant on the characterization for tax purposes of expenditures to maintain the facade. In particular this article explores the following question: Given that the charitable easement holder owns a nonpossessory interest in the facade, which imposes on the charity an obligation to repair and maintain the facade and entitles it to benefit from increases in the value of the facade, is a donor's assumption of the charity's obligation to repair the facade an additional charitable contribution to the charity? If a donor gratuitously makes improvements to property owned outright by a charity, such improvements are deductible charitable contributions. Similarly, if a donor gives money to a charitable easement holder to enable it to maintain the property subject to the easement, such donations are deductible charitable contributions. This article goes one step further and asks whether a donor who assumes the cost of maintaining the charity's nonpossessory interest in the facade makes an indirect deductible charitable contribution to the charity when such repairs are made. Having done so, this article concludes that if the general rule imposes the obligation to repair the facade on the charitable easement on the easement holder, the covenant in which the donor assumes liability to repair the servient estate represents the donor's promise to make gifts in the future and that payments pursuant to such a promise constitute, to the extent of the charity's obligation to repair, additional indirect charitable contributions. This article also concludes that current law supports the allowance of a deduction for indirect, as well as direct, charitable contributions.
The article appeared in the Akron Tax Journal.
Tuesday, March 25, 2014
It is worthwhile, despite the incessant call for experiential learning, to think theoretically about Civil Society. Doing so helps us focus our debates on more immediate problems such as the workings of the charitable contribution deduction or the extent to which charity, social welfare, and politics may coexist. In the absence of deep theoretical thinking, our legislative and judicial statements pertaining to the nonprofit world degenerte into ad hoc tinkering resulting in pronouncements without purpose.
It just so happens that The Atlantic this week contains a concisely-written essay addressing the proper balance between civil society and the state. Mike Konczal argues that the idea of extremely limited government in a society where compassion for one another is instead exercised through a vibrant Independent Sector is but a myth. Shrinking government will not expand Civil Society. One should not dismiss the essay merely because of its partisan sounding title, The Conservative Myth of a Social Safety Net Built on Charity. The essay is actually more reasoned than dogmatic, and certainly worth twenty minutes. Citing Lester Salamon's work, Konczal argues that the State is the only vehicle by which people can provide a reliable safety net. The State should address "absolute poverty," and presumably health care and education, while Civil Society appropriately fills in more targeted "needs" and preferences. Limiting government will not result in a more vibrant civil society comprising a reliable safety net, he argues. This is because Civil Society is too often characterized by patterns that tend to reinforce the status quo (as opposed to efficiently addressing real needs), or if not that, the relatively whimsical or self-serving desires of those who fund civil society:
With this in mind, we can examine why voluntary efforts fail consistently. Despite the general under-theorizing of the voluntary sector, the scholar Lester Salamon in the 1980s did build a theory of “voluntary failures” to contrast with market and government failures. There are three parts to the theory that especially stand out in the wake of the Great Recession.
The first is what Salamon describes as philanthropic insufficiency. This occurs when the voluntary sector can’t generate enough resources to provide social insurance at a sufficient scale, which, as noted, is exactly what happened in 2008. There is also the problem here of geographic coverage. As Hoover discovered, charity will exist in some places more abundantly than in others; the government has the ability to provide a more universal baseline of coverage.
But it isn’t just about the business cycle. A second issue Salamon identified is philanthropic particularism. Private charity has a tendency to focus only on specific groups, particularly groups that are considered either “deserving” or similar in-groups. Indeed, in one telling, this is the entire point of private charity. The largest single category of charitable giving in the United States goes not to caring for the poor but for the sustenance of religious institutions (at 32 percent of donations). Using very generous assumptions, Indiana University’s Center for Philanthropy finds that only one-third of charitable giving actually goes to the poor. Almost by definition, there will be people who need access to social insurance who will be left out of such targeted giving.
The third element of voluntary failure relevant here is philanthropic paternalism. Instead of charity representing a purely spontaneous response by civil society, or a community of equals responding to issues in the commons, there is, in practice, a disproportionate amount of power that rests in the hands of those with the greatest resources. This narrow control of charitable resources, in turn, channels aid toward the interests and needs of those who already hold large amounts of power. Prime examples of this voluntary failure can be seen in the amount of charitable giving that goes to political advocacy, or to elite colleges in order to help secure admission for already privileged children, even as the needs of the truly desperate go unmet.
At a basic level, much of our elite charitable giving is about status signaling, especially in donations to elite cultural and educational institutions. And much of it is also about political mobilization to pursue objectives favorable to rich elites. As the judge Richard Posner once wrote, a charitable foundation “is a completely irresponsible institution, answerable to nobody” that closely resembles a hereditary monarchy. Why would we put our entire society’s ability to manage the deadly risks we face in the hands of such a creature?
The essay reminded me of Miranda Fliescher's point made last week regarding the proper structuring of the charitable contribution deduction (i.e., the law should encourage real relief of poverty rather than rewarding spending that might occur anyway as an expression of personal consumption preferences or status). In any event, it would be nice if we could more often discern a theoretical belief or assumption -- any assumption -- in our legal jurisprudence regarding nonprofit organizations.
Saturday, February 8, 2014
As noted by TaxProf Blog, David Cay Johnston (Syracuse) has written a piece in State Tax Notes that highlights the ability of certain high-income donors living in Arizona to combine Arizona tax credits with the federal charitable contribution deduction to actually make money by giving to charity. This is because each of the state tax credits reduce state income tax liability dollar-for-dollar, thereby allowing the taxes saved through the federal income tax deduction to be all profit. According to Johnston, a married couple in the top federal income tax bracket can make almost $1,300 off charitable contributions of just under $3,300, or almost a 40 percent return.