Saturday, July 7, 2018
Last fall the NYU Law School's National Center on Philanthropy and the Law focused its annual conference on section 501(c)(4) social welfare organizations. The conference papers will be published in the NYU Journal of Legislation & Public Policy, but for those who can't wait the following papers are now available on SSRN (in the order they were presented at the conference):
David S. Miller, Advice for Jeff Bezos: Social Welfare Organizations as Grantmakers
Lloyd Hitoshi Mayer, A (Partial) Defense of Section 501(c)(4)'s "Catchall" Nature
For those particularly interested in the use of 501(c)(4)s as part of a group of affiliated organizations engaged in advocacy and other political activity, the Alliance for Justice has recently released the 4th edition of The Connection: Strategies for Creating and Operating 501(c)(3)s, 501(c)(4)s, and Political Organizations (written by B. Holly Schadler).
The much discussed attempts by high-tax states to find a way for their residents to continue to contribute to state and local coffers without running smack into the new $10,000 limit on deducting state and local taxes (SALT) raises an important issue relating to the charitable contribution deduction - when, if ever, is a SALT reduction a return benefit that reduces or eliminates the deduction for the "charitable" contribution that triggered the SALT reduction? While the Treasury Department has expressed its disapproval of such workarounds, its task is complicated by the fact that there were more than a 100 state charitable tax credit provisions in place across 33 states before the recent federal tax legislation.
For the arguments in favor of permitting the charitable contribution deduction under these circumstances (and a list of the previously existing state charitable tax credits), see Joseph Bankman et al., State Responses to Federal Tax Reform: Charitable Tax Credits, published in Tax Notes, April 30, 2018. Here is the abstract:
This paper summarizes the current federal income tax treatment of charitable contributions where the gift entitles the donor to a state tax credit. Such credits are very common and are used by the states to encourage private donations to a wide range of activities, including natural resource preservation through conservation easements, private school tuition scholarship programs, financial aid for college-bound children from low-income households, shelters for victims of domestic violence, and numerous other state-supported programs. Under these programs, taxpayers receive tax credits for donations to governments, government-created funds, and nonprofits.
A central federal income tax question raised by these donations is whether the donor must reduce the amount of the charitable contribution deduction claimed on her federal income tax return by the value of state tax benefits generated by the gift. Under current law, expressed through both court opinions and rulings from the Internal Revenue Service, the amount of the donor’s charitable contribution deduction is not reduced by the value of state tax benefits. The effect of this "Full Deduction Rule" is that a taxpayer can reduce her state tax liability by making a charitable contribution that is deductible on her federal income tax return.
In a tax system where both charitable contributions and state/local taxes are deductible, the ability to reduce state tax liabilities via charitable contributions confers no particular federal tax advantage. However, in a tax system where charitable contributions are deductible but state/local taxes are not, it may be possible for states to provide their residents a means of preserving the effects of a state/local tax deduction, at least in part, by granting a charitable tax credit for federally deductible gifts, including gifts to the state or one of its political subdivisions. In light of recent federal legislation further limiting the deductibility of state and local taxes, states may expand their use of charitable tax credits in this manner, focusing new attention on the legal underpinnings of the Full Deduction Rule.
The Full Deduction Rule has been applied to credits that completely offset the pre-tax cost of the contribution. In most cases, however, the state credits offset less than 100% of the cost. We believe that, at least in this latter and more typical set of cases, the Full Deduction Rule represents a correct and long-standing trans-substantive principle of federal tax law. According to judicial and administrative pronouncements issued over several decades, nonrefundable state tax credits are treated as a reduction or potential reduction of the credit recipient’s state tax liability rather than as a receipt of money, property, contribution to capital, or other item of gross income. The Full Deduction Rule is also supported by a host of policy considerations, including federal respect for state initiatives and allocation of tax liabilities, and near-insuperable administrative burdens posed by alternative rules.
It is possible to devise alternatives to the Full Deduction Rule that would require donors to reduce the amount of their charitable contribution deductions by some or all of the federal, state, or local tax benefits generated by making a gift. Whether those alternatives could be accomplished administratively or would require legislation depends on the details of any such proposal. We believe that Congress is best situated to balance the many competing interests that changes to current law would necessarily implicate. We also caution Congress that a legislative override of the Full Deduction Rule would raise significant administrability concerns and would implicate important federalism values. Congress should tread carefully if it seeks to alter the Full Deduction Rule by statute.
For a contrary view, see Roger Colinvaux, Failed Charity, Taking State Tax Benefits into Account for Purposes of the Charitable Deduction, Buffalo Law Review (forthcoming). Here is the abstract:
The Tax Cuts and Jobs Act (TCJA) substantially limited the ability of individuals to deduct state and local taxes (SALT) on their federal income tax returns. Some states are advancing schemes (CILOTs) to allow taxpayers a state tax credit for contributions to a 501(c)(3) organization controlled by the state. The issue is whether CILOTs are deductible as charitable contributions on federal returns. Under a general rule of prior law – the full deduction rule – state tax benefits were ignored for purposes of the charitable deduction. If the full deduction rule is applied to CILOTs, then the SALT limitation can successfully be avoided. This article explains that after the TCJA, state tax benefits are more valuable and it no longer makes sense to ignore them for purposes of determining whether a taxpayer has made a charitable contribution. To allow a charitable deduction for payments that make a taxpayer better off would undermine a fundamental purpose of the charitable deduction: that it is meant to encourage personal sacrifice, not tax avoidance. Thus, CILOTs likely fail as charitable contributions. Further, by changing the economics of state tax benefits, Congress inadvertently has called into question the deductibility of a variety of other payments that trigger state tax benefits and that previously have been deducted as charitable contributions.
The recently enacted federal excise tax on private college and university endowments may not be the last congressional word relating to such endowments. Research relating to such endowments, including a recent Congressional Research Service report and a recent report out of the Federal Reserve Bank of Cleveland therefore may have important policy implications.
The CRS report is titled College and University Endowments: Overview and Tax Policy Options. Here is the Summary:
Colleges and universities maintain endowments to directly support their activities as institutions of higher education. Endowments are typically investment funds, but may also consist of cash or property. Current tax law benefits endowments and the accumulation of endowment assets. Generally, endowment fund earnings are exempt from federal income tax. The 2017 tax revision (P.L. 115-97), however, imposes a new 1.4% excise tax on the net investment earnings of certain college and university endowments. Taxpayers making contributions to college and university endowment funds may be able to deduct the value of their contribution from income subject to tax. The purpose of this report is to provide background information on college and university endowments, and discuss various options for changing their tax treatment.
This report uses data from the U.S. Department of Education, the National Association of College and University Business Officers (NACUBO) and Commonfund Institute, and the Internal Revenue Service to provide background information on college and university endowments. Key statistics, as discussed further within, include the following:
In 2017, college and university endowment assets were $566.8 billion. Endowment assets have been growing, in real terms, since 2009. Endowment asset values fell during the 2007-2008 financial crisis, and took several years to fully recover.
Endowment assets are concentrated, with 12% of institutions holding 75% of all endowment assets in 2017. Institutions with the largest endowments (Yale, Princeton, Harvard, and Stanford) each hold more than 4% of total endowment assets.
The average spending (payout) rate from endowments in 2017 was 4.4%. Between 1998 and 2017, average payout rates have fluctuated between 4.2% and 5.1%. In recent years, institutions with larger endowments have tended to have higher payout rates.
In 2017, endowment assets earned a rate of return of 12.2%, on average. Larger institutions tended to earn higher returns. Larger institutions also tended to have a larger share of assets invested in alternative strategies, including hedge funds and private equity.
Changing the tax treatment of college and university endowments could be used to further various policy objectives. Current-law tax treatment could be modified to increase federal revenues. The tax treatment of college and university endowments could also be changed to encourage additional spending from endowments on specific purposes (tuition assistance, for example).
Policy options discussed in this report include (1) a payout requirement, possibly similar to that imposed on private foundations, requiring a certain percentage of funds be paid out annually in support of charitable activities; (2) modifying the excise tax on endowment investment earnings; (3) a limitation on the charitable deduction for certain gifts to endowments; and (4) a change to the tax treatment of certain debt-financed investments in strategies often employed by endowments.
The Federal Reserve Bank report is authored by one the Bank's Senior Research Economists and titled simply College Endowments. Here are the first three paragraphs (footnotes omitted):
The Tax Cuts and Jobs Act (Public Law 115-97) was signed into law by President Trump on December 22, 2017. Among the law’s numerous provisions is a new 1.4 percent tax on the investment income of private colleges and universities enrolling at least 500 students and with assets of at least $500,000 per student.
Opinions on this “endowment tax” vary. Some commentators argue that it makes it more difficult for colleges and universities to fulfill their educational missions, while others feel that it rightly incentivizes them to spend endowment funds on beneficial research and teaching rather than receiving tax advantages to invest their endowments in risky assets.
No matter what the case may be, now is an opportune time to take a deeper look at college endowments. What are endowments, and what is their purpose? How have the values of endowments at US colleges fluctuated over time, and what is their distribution currently? How many colleges will be affected by the new law? I consider these questions using data on college endowments from the National Center for Education Statistics’ Integrated Postsecondary Education Data System.
Two important recent reports provide information regarding trends in charitable giving, the annual Giving USA report and a report from the American Enterprise Institute on the likely effects of the recent federal tax legislation on charitable giving.
The Giving USA 2018 report shows continued growth in charitable giving, by 5.2 percent (3.0 percent adjusted for inflation) over 2016 to an estimated $410.02 billion in 2017. Individuals continue to provide most of the giving (70 percent), although foundation giving has increased by an annualized average of 7.6 percent over the past five years. Religious organizations continue to receive the largest proportion (31 percent) of giving among types of charities. These numbers mask at least two interesting trends, however. One is the well-known growth in donor-advised funds (see, e.g., this Atlantic article and this ThinkAdvisor article, both gathering data about such growth). The other is a decline in the number of donors, even as the total amount of donations has increased, as documented in data collected by the Indiana University's Lilly School of Philanthropy showing that from 2000 to 2014 the share of Americans donating dropped from 66.2 percent to 55.5 percent. See Chronicle of Philanthropy article.
The Giving USA report almost certainly does not reflect much impact from the recent federal tax legislation, given its passage in December 2017, but the AEI report fills that gap by trying to predict how the legislation as enacted will affect charitable giving. It concludes that the tax law changes will reduce charitable giving by 4.0 percent or $17.2 billion in 2018 under a static model and by $16.3 billion if the changes also provide a modest boost to growth. Four-fifths of this effect is driven by the increased number of taxpayers who will claim the enhanced standard deduction and so will no longer benefit from the itemized charitable contribution deduction.
Monday, May 7, 2018
Marianne Bertrand (Chicago Booth School of Business), Matilde Bombardini (Vancouver School of Economics), Raymond Fisman (Boston University), and Francesco Trebbi (Vancouver School of Economics) have posted Tax Exempt Lobbying: Corporate Philanthropy as a Tool for Political Influence. Here is the abstract:
We explore the role of charitable giving as a means of political influence, a channel that has been heretofore unexplored in the political economy literature. For philanthropic foundations associated with Fortune 500 and S&P500 corporations, we show that grants given to charitable organizations located in a congressional district increase when its representative obtains seats on committees that are of policy relevance to the firm associated with the foundation. This pattern parallels that of publicly disclosed Political Action Committee (PAC) spending. As further evidence on firms’ political motivations for charitable giving, we show that a member of Congress’s departure leads to a short-term decline in charitable giving to his district, and we again observe similar patterns in PAC spending. Charities directly linked to politicians through personal financial disclosure forms filed in accordance to Ethics in Government Act requirements exhibit similar patterns of political dependence. Our analysis suggests that firms deploy their charitable foundations as a form of tax-exempt influence seeking. Based on a straightforward model of political influence, our estimates imply that 7.1 percent of total U.S. corporate charitable giving is politically motivated, an amount that is economically significant: it is 280 percent larger than annual PAC contributions and about 40 percent of total federal lobbying expenditures. Given the lack of formal electoral or regulatory disclosure requirements, charitable giving may be a form of political influence that goes mostly undetected by voters and shareholders
Oonagh B. Breen (Dublin) has posted Redefining the Measure of Success: A Historical and Comparative Look at Charity Regulation, forthcoming in Matthew Harding (ed.), The Research Handbook on Not-for-Profit Law (Edward Elgar, 2018). Here is the abstract:
This chapter focuses on three questions in its quest to better understand the historical and comparative perspectives of charity regulation. Accepting the traditional rationales for such regulation, it first explores the question of ‘how we regulate’ followed by the interrelated question of the associated cost of such regulation. Finally, the chapter examines the important issues concerning how we currently (or could better) measure the success of charity regulatory efforts. The paper draws upon the experiences of charity regulators in a range of common law countries across the UK, Ireland, Australia, New Zealand and Singapore.
In his Article, Professor Drennan notes that naming rights often have significant value. Therefore, he reasons that, when charitable contributions are made, the value of such naming rights should be subtracted from the amount of the contribution. Only the excess should be a tax-deductible contribution, and the burden should be on the donor to show that such an excess exists. To make this proposal work, there must be a way to determine (1) which categories of naming rights might be significant benefits; and (2) how such benefits can be valued. As to the first, Professor Drennan has given us some examples of some rights that are clearly significant, and some rights that are clearly not. However, there are a lot of rights in between that should be addressed. As to the second, in the noncommercial context, valuation is impossible. Therefore, donors will fail to meet their burden, and their contributions will be nondeductible. To solve this problem, as Professor Drennan suggests, donors and donees will agree at the outset on the value of the naming rights. However, such agreed valuations will also serve as liquidated damages, making it easier for donees to renege. As a result, donors will probably limit the duration of their naming rights in the first place. This result would be a step forward.
Linda Sugin (Fordham) has posted Competitive Philanthropy: Charitable Naming Rights, Inequality, and Social Norms, 79 Ohio State Law Journal (forthcoming 2018). Here is the abstract:
Income inequality today is at a high not seen since the 1920s, and one way the very richest display their wealth is through charitable giving. Gifts in excess of $100 million are no longer rare, and in return for their mega-gifts, the biggest donors get their names on buildings, an astonishingly valuable benefit that the tax law ignores. The law makes no distinction between a gift of $100 and a gift of $100 million.
This Article argues that the tax law of charity should focus on the very rich and harness the culture of philanthropy among the elite. The law should encourage and celebrate what this Article calls “competitive philanthropy,” which defines philanthropic success as inspiring others to exceed your generosity. To promote competitive philanthropy, this Article proposes a legal regime that includes both more and less generous elements for donors than current law. It introduces a hierarchy of gift restrictions that calibrates the charitable deduction to reflect the burdens that restrictions impose on charities, disfavoring perpetuity and mission-diverting restrictions. It recommends eschewing the standard donor-centered perspective of the tax law to consider the perspective of charities.
While scholars have traditionally analyzed the charitable deduction in terms of economic incentives, this Article contends that the deduction may be more important in creating expectations and reinforcing social norms. By focusing on the largest gifts, this Article breaks new ground by integrating concerns about increasing inequality with tax benefits for charities. Policy makers can better design the tax law to address inequality while furthering the dual goals of distributing away from the very rich and protecting charities.
Edward A. Zelinsky (Cardozo) has posted Section 4968 and Taxing All Charitable Endowments: A Critique and Proposal, 38 Virginia Tax Review (forthcoming). Here is the abstract:
Section 4968, recently added to the Internal Revenue Code,imposes a tax on the investment incomes of some college and university endowments. Critics of Section 4968 disparage this new tax as selectively targeting what are widely perceived as wealthy, politically liberal institutions such as Harvard, Yale, Princeton, M.I.T. and Stanford.
There is a strong tax policy argument for taxing the net investment incomes of all charitable endowments including donor-advised funds, community foundations, all educational endowments, and foundations supporting hospitals, museums and other eleemosynary institutions. Like corporations and private foundations that currently pay revenue-generating income taxes,charitable endowments use public services and have capacity to pay tax. Such traditional tax policy criteria as equity and economic neutrality counsel that similar entities and persons should be taxed similarly. Just as corporations and private foundations pay income taxes to support federally-provided social overhead, by analogy, all charitable endowments, as similar entities, should pay similar taxes as well.
Section 4968 falls far short of the goal of a comprehensive, revenue-generating tax on the universe of charitable endowments. Section 4968 is poorly designed to boot. Most anomalously, Section 4968 taxes some relatively small educational endowments while leaving other, much larger endowments untaxed.
Important voices (most prominently, Senate majority leader Mitch McConnell) defend Section 4968 as a regulation of university tuition policies. However, this defense of Section 4968 as a regulatory tax fails since Section 4968 does not regulate tuition or anything else. When it crafted Section 4968, Congress had before it the examples of the Code’s many taxes governing private foundations and other eleemosynary institutions. Had Congress sought to impose on college and university endowments a regulatory tax along these lines, it could have emulated these examples in the design of Section 4968. Congress did not.
Section 4968 is best defended in political terms as an incremental step towards the kind of comprehensive tax on all charitable endowments suggested by conventional tax policy criteria. But, standing on its own, Section 4968 falls well short of this goal and is deeply flawed in its design.
Section 4968 does not create a broad-based tax on eleemosynary endowments. It should be the harbinger of one.
Sunday, February 25, 2018
In this piece, Professors Adam Chodorow and Ellen Aprill discuss section 107(2), which permits churches and other religious organizations to provide tax-housing to their ordained ministers, in the context of litigation involving the provision. They argue that the exemption provides special benefits unavailable to laypeople and thus raises serious establishment clause concerns.
Readers please note: After this piece went to press, the court enjoined enforcement of section 107(2) beginning 180 days after the later of the conclusion of any appeals or expiration of time for filing any appeal.
Is is timely because an appeal has just been filed in Gaylor v. Mnuchin, seeking to overturn the federal district decision concluding that the parsonage allowance found in section 107 of the Internal Revenue Code is an unconstitutional establishment of religion. We therefore will eventually know whether the U.S. Court of Appeals for the Seventh Circuit agrees with Chodorow and Aprill or with those, such as Edward Zelinsky (Cardozo), who take a contrary position.
Brian D. Galle (Georgetown) has posted Design and Implementation of a Charitable Regulation Regime. Here is the abstract:
Why is regulation of charity so pervasive? Is regulation justifiable from a perspective of economic theory? How can it be squared with the fundamentally private—that is, non-governmental—nature of charitable firms? This chapter explores five major questions in the design and implementation of regimes for regulation of charity, with the analysis centered in transaction-cost economics.
I first consider the bedrock issue of what, if anything, justifies the extensive modern role government regulation plays in the private nonprofit sector. In many respects the question is not particularly different for charitable firms than it is for commercial operations. Unlike many commercial firms, however, charities in many developed countries are subsidized by the state, and these subsidies offer additional reasons for public oversight.
The second and third sections are closely related, and examine from different perspectives the extent to which regulation of charity need be provided by government, rather than by private auditors or other monitors. The second section reviews the alternative of "voluntary regulation" or "self-regulation." In the third section, I evaluate arguments about whether private parties should be granted the right to sue charitable organizations to enforce compliance with law or self-imposed governance standards. In both sections I conclude that, while active government monitoring is likely essential to any effective regime, there also are openings for important contributions from private oversight.
The fourth section considers a recurring tension in public supervision of charities, namely: how can charities represent a diverse array of private views when closely supervised by a possibly unsympathetic government? Courts and scholars of charity law tend to favor minimalist, bright-line, and procedure-based rules for charity governance, on the theory that these approaches reduce the room for bureaucratic discretion. I argue, to the contrary, that other institutional design choices can strike a better balance between safeguarding public interests and minimizing damage to the charitable sector.
Lastly, in the fifth section, I examine what little is known about charitable compliance with law. The section provides an overview of compliance theory and evidence in the context of commercial firms, as well as the limited evidence available for charity.
Saturday, February 24, 2018
Alicia E. Plerhoples (Georgetown) has published Nonprofit Displacement and the Pursuit of Charity Through Public Benefit Corporations in the Lewis & Clark Law Review. Here is the abstract:
Nonprofits dominate the charitable sector. Until recently, this statement was tautological. Charity is increasingly being conducted through for-profit entities, raising concerns about the marketization of the charitable sector. This Article examines for-profit charity conducted through the public benefit corporation, a new corporate form that allows its owners to blend mission and profit in a single entity. Proponents of public benefit corporations intended it as an alternative to a for-profit corporation and largely ignored its impact on the charitable sector. While public benefit corporations are ripe for conducting charity because they can pursue dual missions, they lack the transparency and accountability mechanisms of charitable organizations.
This Article: chronicles the supply and demand for public benefit corporations that conduct charity (i.e., “charitable public benefit corporations”) and hypothesizes the micro and macro level harms caused by them. At the micro level, the harm is fraud or “greenwashing,” i.e., deceiving unwitting stockholders, customers, or other stakeholders into investing or spending their time and money in the negligent or fraudulent enterprise. At the macro level, the more pernicious harm is that “market-based charity” injects individualistic and autocratic business values and methods into charitable work. Proposals have been made to mitigate these harms, but none are satisfactory, making additional measures necessary.
Natalie Silver (Sydney) has posted Regulating the Foreign Activities of Charities: A Comparative Perspective, Report for the Pemel Case Foundation. Here is the abstract:
The globalization of charity has provided enormous challenges for governments in regulating the foreign activities of charities. As the subsector of charities operating internationally continues to evolve in the wake of new technologies and financing mechanisms used to transfer charitable funds across borders, as well as the advent of new terrorism challenges, it is critical for governments to re-examine their regulatory objectives for charities operating overseas and adjust their strategies accordingly. This paper, commissioned by the Pemsel Case Foundation in Canada, examines the different approaches undertaken in four jurisdictions – Australia, the United Kingdom, the United States and Canada – to regulate the foreign activities of charities. The aim is to inform the development of law and policy for governments seeking to undertake reform in this important area of cross-border regulation.
Especially in the context of income inequality, however, the opportunity to invest directly in alternative for-profit solutions has a third option: cooperatives. The modern cooperative business model devel- oped in direct response to social unrest, unemployment, poverty, and inequality. Community benefit is not just a consequence of the cooperative business model; it is a fundamental part of its structure. Yet the cooperative is a for-profit entity, and therefore not exclusively charitable. As a result, the charitable sector can look to cooperatives as a social enterprise-based solution to important and seemingly intractable social issues, such as income inequality.
A cooperative is a business entity that is owned and managed by its members—those individuals for whose benefit the cooperative was organized. These members may be individual laborers in a workers’ cooperative, farmers in an agricultural marketing coop, or consumers in search of organic and fair trade produce at the local food coop. Unlike the standard investor capital-based business organization (sometimes referred to as an investor-owned firm or IOF), a cooperative’s mission is not necessarily to make a profit or to increase shareholder value; rather, the cooperative’s mission is to serve the needs of its members, whomever and whatever they may be. Historically, these members have often been a class of individuals in need of assistance, such as the unemployed weavers of the Rochdale cooperative or the poor farmers in California studied by Aaron Sapiro. Because the history of the cooperative is rooted in social change, the cooperative movement has developed a set of internationally recognized values that emphasize democracy, community, equality and sustainability, which are inherent to all cooperatives.
Due to their member-focused mission, cooperatives have difficulty obtaining capital from profit-oriented sources. Foundations and other charitable organizations looking to make social enterprise investments may be able to fill this funding gap. By definition, the goal of a mission-related investment by a charity is to achieve a charitable goal, sometimes while making a profit and sometimes while intentionally sacrificing profit. While a charitable investor is still just an investor in, and not a member of, a cooperative, the charitable investor’s goals and the member-owners’ goals can still be in alignment. If the charitable investor can assure itself that the cooperative business model is, at least in part, “charitable,” then it can find a way to invest in coopera- tives in the same manner as it might invest in a benefit corporation or a L3C (or for that matter, any for-profit business with a distinct charitable activity).
This is not to say that cooperatives, specifically, or social enterprises, generally, are the solution to all that ails; rather, the intention is to find a place for cooperatives in the dialogue about social enterprise. As the cooperative and social enterprise movements merge, it is necessary to examine the legal and tax structures governing the entities to see if they help or hinder growth. If the ultimate decision is to support the growth of cooperatives as social enterprise, then those legal and tax structures that might impede this progress need to be reexamined.
Wednesday, February 14, 2018
Fershee: The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy
My friend and colleague Josh Fershee recently posted this piece on SSRN, which is cross blogged at the Business Law Prof Blog under the screaming headline, “These Reasons Social Benefit Entities Hurt Business and Philanthropy Will Blow Your Mind!!!!!” Okay - I added the exclamation points. And the bold. Alas, there are no cat pictures or bad high school year book photos of celebrities, but there is an important discussion about impact of the existence of social enterprise entities on traditional for profit businesses engaged in social activity. The abstract:
The emergence of social enterprise enabling statutes and the demise of director primacy run the risk of derailing large-scale socially responsible business decisions. This could have the parallel impacts of limiting business leader creativity and risk taking. In addition to reducing socially responsible business activities, this could also serve to limit economic growth. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, all to the detriment of employees, society, and, yes, shareholders.
The potential harm from social benefit entities and eroding director primacy is not inevitable, and the challenges are not insurmountable. This essay is designed to highlight and explain these risks with the hope that identifying and explaining the risks will help courts avoid them. This essay first discusses the role and purpose of limited liability entities and explains the foundational concept of director primacy and the risks associated with eroding that norm. Next, the essay describes the emergence of social benefit entities and describes how the mere existence of such entities can serve to further erode director primacy and limit business leader discretion, leading to lost social benefit and reduced profit making. Finally, the essay makes a recommendation about how courts can help avoid these harms.
Saturday, December 23, 2017
William A. Drennan (Southern Illinois University School of Law) has written Conspicuous Philanthropy: Reconciling Contract and Tax Laws, 66 Am. U. L. Rev. 1323 (2017). Below is Professor Drennan's abstract:
It sold for $15 million, and the IRS treated it as worthless. Avery Fisher, a titan of industry and a lover of classical music, made a generous contribution to renovate a charity’s building, and in exchange the charity agreed to name the building after Fisher in perpetuity. Forty years later, the Fisher family sold the naming rights back to the charity for $15 million in cash. The IRS treats these publicity rights as worthless when charities grant them, and this generates substantial tax benefits for the donor and the donor’s family. In contrast, the common law can treat these publicity rights as valuable consideration supporting an enforceable contract, and a charity may be liable for damages if it renames a building. Why the contradiction? What are the consequences? Should we reconcile these positions? How? This Article asserts that the common law contract approach is well-suited for today’s mega-million dollar charitable building naming rights deals, but the tax approach is outdated and inconsistent with U.S. Supreme Court precedents.
At a 1996 conference on the “Law of Cyberspace,” Judge Frank Easterbrook famously criticized “cyberlaw” as the equivalent of “The Law of the Horse”: superficial and unilluminating. He argued that we should study general legal principles and apply them to cyberspace and horses alike. Easterbrook’s genial jeremiad provoked a litany of responses defending the worthiness of cyberlaw, typically arguing that cyberspace regulation is sui generis and studying it illuminates general legal principles.
“Art law” is arguably analogous to “cyberlaw.” Or at least the “law of the horse.” While precious little law is specific to art, a rich and complex body of social norms and customs effectively governs artworld transactions and informs the resolution of artworld disputes. In any case, a smattering of scholars study art law and a similar number of lawyers practice it. In this essay, I will provide a brief overview of art law from three different perspectives: the artist, the art market, and the art museum.
Brian D. Galle (Georgetown University Law Center) has written The Dark Money Subsidy? Tax Policy and Donations to 501(c)(4) Organizations. Below is Professor Galle's abstract:
This Article presents the first empirical examination of giving to § 501(c)(4) organizations, which have recently become central players in U.S. politics. Although donations to a 501(c)(4) are not legally deductible, the elasticity of c(4) giving to the top-bracket tax-price of charitable giving is - 1.24, very close to the elasticity for charities. 501c(4) donations also correlate with changes in the tax savings from in-kind gifts. These responses could be driven either by donor-side behavior, such as misunderstandings or intentional over-claiming, or by firm-side fundraising.
I find evidence consistent with both explanations. 501(c)(4) fundraising is also highly responsive to the value of the deduction, with an elasticity of -2.9, and is more effective when the value of the deduction rises. These results imply that the U.S. is currently granting much larger subsidies to c(4) firms than is generally understood, and that subsidies for charity cause previously unobserved pressures on competing c(4)s.
Ellen P. Aprill (Loyola Law School - Los Angeles) has written Amending the Johnson Amendment in the Age of Cheap Speech, University of Illinois Law Review On-Line (Forthcoming). Below is Professor Aprill's abstract:
On November 2, 2017, the House Ways and Means Committee released its proposed tax reform legislation. It includes a provision amending the provision of the Internal Revenue Code, sometimes called the Johnson Amendment, that prohibits charities, including churches, from intervening in campaigns for elected office, at risk of loss of their exemption under section 501(c)(3). Under the Ways and Means proposal, as later revised and passed by the House, organizations exempt as charities under section 501(c)(3) would be permitted to engage in campaign intervention if “the preparation and presentation of such content . . . is in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose and . . . results in the organization incurring not more than de minimis incremental expenses.”
If such legislation becomes law, the IRS and the Department will be faced with the difficult task of giving guidance as to the meaning of “regular and customary,” “de minimis,” and “incidental.” It would likely have to address whether donations could be earmarked for campaign intervention so long as they were within the organization’s de minimis limit and involved regular and customary activities. Whatever rules are announced are sure to be controversial and complicate enforcement of the prohibition for campaign intervention that is more than de minimis. Given the lack of IRS resources and controversy regarding its attempts to regulate political activities of exempt organizations, the IRS may well hesitate to take action against possible violations.
However these terms are defined and enforced, a de minimis exception raises significant issues that demand attention in an era of what Professors Eugene Volokh and Richard Hasen have called “cheap speech.” These are issues that require consideration whether or not a de minimis exception is adopted in the current tax reform legislation.
After giving background on the Johnson Amendment, this essay discusses the impact of any de minimis exception regarding campaign intervention in the age of cheap speech. It concludes that the availability of cheap speech may have undermined the most common constitutional justification for the prohibition – that the government has no duty to subsidize speech – such that a new approach to limiting the political speech of charities is needed.
Wednesday, December 20, 2017