Saturday, November 29, 2014

Breen: The Charities Act 2009 and Recent Developments in Irish Charity Law

T4_1284948265Oonagh B. Breen (University College Dublin) has posted Long Day's Journey: The Charities Act 2009 and Recent Developments in Irish Charity Law, Charity Law and Practice Review (forthcoming).  Here is the abstract:

It is now twelve years since the Irish Government committed in its Agreed Programme for Government to the introduction of a modern statutory framework for the regulation of Irish charities. Twelve years on, in 2014, the promise of reform to ensure “greater accountability and to protect against abuse of charitable status and fraud . . . [and increased] transparency in the sector has never been more necessary and yet still remains to be delivered. Despite the passage of the Charities Act 2009, its non-implementation has created a regulatory void into which allegations of charity maladministration and misfeasance have filled the public consciousness.

In his seminal work on the formation of public policy, John Kingdon provides a persuasive theory to explain the opening, operation and outcomes of so-called ‘policy windows.’ According to Kingdon, at any given time, a ‘problem stream’ exists representing all the issues that are wrong in a given system. Running (often) parallel to the problem stream will be a ‘solution stream’ containing all of those suggested fixes to make a system work better. It is only when there is a convergence of those two streams within a third ‘political stream’ that policy change occurs. The nature of the political stream within which this convergence occurs can take many forms. In the words of Kingdon, it can comprise “public mood, pressure group campaigns, election results, partisan or ideological distributions in Congress and changes of administration.” The collision of problem and solution streams within this political stream results in the temporary opening of a policy window, allowing policy change to occur. The form of such resultant change may be shaped further by coincidental influences or agenda issues hovering in the vicinity of the window which attach themselves to the coat tails of the newly minted policy outcome. This conception of the policymaking process is useful, providing as it does some insight into how certain policy solutions come to be expectations or have other unintended consequences.

In an Irish context, Kingdon’s framework provides a useful lens through which to analyse the ‘fits and starts’ approach to charity law reform. Against the backdrop of the recent revelations concerning the Central Remedial Clinic and the Rehab Group charities and the catalytic effect of these scandals on the Irish charity sector and charity regulation more generally, this article reviews the current progress in the implementation of the Charities Act 2009, recent moves towards the establishment of the long awaited Charities Regulatory Authority and the prospects and challenges for better charity governance ahead.

Part I of this article reviews the existing Irish ‘problem’ and ‘solution’ streams in the context of charity regulation and outlines the political catalysts that are now instrumental in driving reform. Part II outlines the pending changes to be introduced over the coming months and the implementation challenges that will face the new Charities Regulator. Part III attempts to align the recent shortfalls in charity governance with the forthcoming statutory requirements and assesses whether the policy changes that the public are so desperately seeking will be delivered by the much anticipated commencement of the Charities Act 2009.

Lloyd Mayer

November 29, 2014 in International, Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Chan: The Co-Optation of Charitable Resources by Threatened Welfare States

Chan-profileKathryn Chan (University of Victoria) has posted The Co-Optation of Charitable Resources by Threatened Welfare States, 40 Queen's Law Journal (forthcoming 2015).  Here is the abstract:

This paper addresses the emerging issue of the governmental co-optation of charitable resources, considering to what extent modern pressures associated with the retrenchment of welfare states are undermining the charitable sector’s traditional independence from government. It pursues this goal by advancing a theoretical contrast between ‘independent’ and ‘co-opted’ charities, and by identifying and contrasting certain legal and institutional mechanisms that either encourage or limit the co-optation ofcharitable resources by governments in England and in Canada.

The paper proceeds in the following way. I begin by advancing an argument in support of the value of an “independent” charitable sector, and the perils of allowing a nation’s charitable resources to be co-opted by the state. I proceed from this argument to articulate two indicia of a “co-opted” charity, relating these indicia to an important body of Anglo-Commonwealth law on the functional public law-private law divide and thus to debates over whether charities should bear human rights obligations and the other special responsibilities of the state. In part four, I distinguish three broad categories of co-optation that are applicable to charities: definitional (or existential) co-optation, managerial co-optation, and contractual (or fiscal) co-optation. I then examine several modern phenomena that tend towards the co-optation ofcharitable resources by government: the exertion of government influence over the legal definition of charity, the creation of statutory charities that are controlled by government or directed towards its purposes, and the exertion of influence over the administration of charitable resources through the negotiation of funding agreements or the appointment of government authority trustees. I consider how, in their response to each of these phenomena, English and Canadian laws and institutions either assist or obstruct government efforts to make charities comply with particular public welfare goals. I conclude that English law does far more than Canadian law to prevent charities from coming to function as agents of government policy, and may thus be regarded as a source of ideas on how Canada might manifest a stronger political commitment to the charitable sector’s independence.

Lloyd Mayer

November 29, 2014 in International, Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Faulhaber: Charitable Giving, Tax Expenditures, and Direct Spending in the US and the EU

Lilian-FaulhaberLilian V. Faulhaber (Boston University) has published Charitable Giving, Tax Expenditures, and Direct Spending in the United States and the European Union, 39 Yale Journal of International Law 87 (2014).  Here is the abstract:

This Article compares the ways in which the United States and the European Union limit the ability of state-level entities to subsidize their own residents, whether through direct subsidies or through tax expenditures. It uses four recent charitable giving cases decided by the European Court of Justice (ECJ) to illustrate the ECJ’s evolving tax expenditure jurisprudence and argues that, while this jurisprudence may suggest a new and promising model for fiscal federalism, it may also have negative social policy implications. It also points out that the court analyzes direct spending and tax expenditures under different rubrics despite their economic equivalence and does not provide a clear rule for distinguishing between the two, adding to the confusion of Member States and taxpayers. The Article then surveys the Supreme Court’s Dormant Commerce Clause jurisprudence, under which the Court analyzes discriminatory state spending provisions. The Article concludes that although both the Supreme Court and the ECJ prioritize formalism over economic equivalence, the Supreme Court’s approach to tax expenditures is more defensible than that of the ECJ due to the different federal structures of the two jurisdictions.

Lloyd Mayer

November 29, 2014 in International, Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Fishman: Prudent Management of Endowment Funds and Imprudent Endowment Investing Policies

James_FishmanJames Fishman (Pace) has posted What Went Wrong: Prudent Management of Endowment Funds and Imprudent Endowment Investing Policies, 40 Journal of College and University Law (forthcoming 2014).  Here is the abstract:

Most colleges and universities of all sizes have an endowment, a fund that provides a stream of income and maintains the corpus of the fund in perpetuity. Organizations with large endowments, such as colleges, universities, and private foundations, all finance a significant part of their operations through the return received from the investment of this capital. This article examines the legal framework for endowment investing, endowment investing policies, their evolution to more sophisticated and riskier strategies, and the consequences evinced during the financial crisis of 2008 and beyond. It traces the approaches to endowment investing and chronicles the rise and, if not the fall, the challenges to modern portfolio management. It examines the impact of endowment losses on colleges and universities and their constituencies, as well as the problem of trustee deference to boards' investment committees. This article concludes that universities have learned little from the financial crisis and are more invested in illiquid, nontransparent assets than before the financial crisis. Finally, this article recommends the establishment of board level risk management committees to evaluate endowment investing policies.

Lloyd Mayer

November 29, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Frye: Solving Charity Failures

Brian-Frye-FULLBrian L. Frye (Kentucky) has published Solving Charity Failures, 93 Oregon Law Review 155 (2014).  Here is the abstract:

“Crowdfunding” is a way of using the Internet to raise money by asking the public to contribute to a project. This Article argues that crowdfunding has succeeded, at least in part, because it makes charitable giving more efficient by solving certain “charity failures,” or inefficiencies created by the inability of the charitable contribution deduction to subsidize the charitable giving from low-income donors. The economic subsidy theory of the charitable contribution deduction explains that the deduction is justified because it solves market failures and government failures in charitable goods. According to this theory, free riding causes market failures in charitable goods, and majoritarianism causes government failures in charitable goods. The charitable contribution deduction solves these market and government failures by indirectly subsidizing charitable contributions, thereby compensating for free riding and avoiding majoritarianism. Crowdfunding is successful because it provides a technological solution to some of those charity failures. While the charitable contribution deduction causes charity failures because the deduction cannot subsidize contributions from low-income donors, crowdfunding can subsidize those contributions by offering rewards instead. As a result, crowdfunding should solve at least some of the charity failures caused by the deduction through providing an incentive for low-income donors to contribute. The remarkable success of crowdfunding suggests that the inefficiency associated with charity failures is quite large.

Lloyd Mayer

November 29, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Johnson: The Charitable Deduction Games: Catching Change

KmccardeKhrista Johnson (Pepperdine) has posted The Charitable Deduction Games: Catching Change, 31 Georgia Statue University Law Review (forthcoming 2014).  Here is the abstract:

The article addresses a matter that could result in profound changes in the ability of the United States to ameliorate the most pressing humanitarian and global problems of our times. It provides the mechanics and addresses the solutions required to enable US donors to do more good. In an efficient market, capital ends up in its most productive use. In charitable giving, donations are not always allocated to their most effective use due in no small part to current cross-border giving laws impeding that result. The article sets forth the concept of an “efficient charitable market,” which is predicated upon unshackling the hands of the giver. The article proposes a system for implementing a new law that would allow US donors to make contributions to non-US charities.

Lloyd Mayer

November 29, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Keller: The Prosocial Brain & The Charitable Tax Deduction

Ryan S. Keller (Ph.D. candidate, Cambridge) has posted Beyond Homo Economicus: The Prosocial Brain & The Charitable Tax Deduction, Virginia Tax Review (forthcoming).  Here is the abstract:

Charitable tax policy is at an impasse. Historically, citizens have overwhelmingly supported the charitable tax deduction as a means of fostering diversity, encouraging donations and supporting the nonprofit sector. Yet various policymakers and academics have increasingly disputed the deduction’s cogency and justifiability. In response, legal scholars and economists have offered various defenses and assessments of the deduction, but these have not convinced skeptics or placed the deduction on sufficiently solid theoretical and policy footing. The article adopts a novel approach by instead employing recent research in the neuroscience and psychology of prosocial behavior and charitable giving. Specifically, it identifies structural advantages specific to the deduction, rather than to charity or nonprofits more broadly. It then delineates key neural mechanisms and psychological functions that provide evidence linking dimensions of the deduction to distinct, previously neglected positive externalities. Amidst growing skepticism, developing a more capacious understanding of the deduction’s worth to society is essential. Indeed, failure to consider more robust, innovative analyses of the deduction compels authorities to craft policy without adequate information, and leaves the deduction and thus many philanthropic endeavors needlessly vulnerable.

Lloyd Mayer

November 29, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Update on Nonprofits & Politics: Aprill and Colinvaux Articles, AALS Program, IRS Controversy Developments & More

13-Colinvaux-Roger-004 Aprill_new_webWhile perhaps the congressional attention to the now 18 months old and counting IRS controversy will decline as the focus shifts to governing (we hope) and 2016 (unavoidably), the bubbling pot that is now nonprofits and politics continues to boil.  Here are some of the latest developments:

Ellen Aprill (Loyola-L.A.) has posted The Latest Installment of the Section 501(c)(4) Saga: The Section 527 Obstacle to Effective Section 501(c)(4) Regulations, and Roger Colinvaux (Catholic) has posted Political Activity Limits and Tax Exemption: A Gordian's Knot, Virginia Tax Review (forthcoming).  (And, as noted by Paul Caron when I presented at Loyola-L.A., I am working on a draft article currently titled Taxing Politics, which I should hopefully be able to post early in the new year.)

At the 2015 AALS Annual Meeting, the Section on Nonprofit and Philanthropy Law and the Section on Taxation are co-sponsoring IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable? on Saturday, January 3rd, from 10:30 a.m. to 12:15 p.m.  The topic grew out of the IRS controversy, although the panel's scope will be much broader.  Marcus Owens (Caplin & Drysdale) will be moderating, and panelists include Ellen Aprill (Loyola-LA), Phil Hackney (LSU), Jim Fishman (Pace), Terri Helge (Texas A&M), Dan Tokaji (Ohio State), and Donald Tobin (Maryland).

In news relating directly to the IRS controversy, the staffs of the Senate Permanent Subcommittee on Investigations issued dueling reports, neither of which said much more than we have already heard (repeatedly) from both sides of the aisle.  At the IRS, new TE/GE Commissioner Sunita Lough issued her annual Program Letter, emphasizing accountability and transparency as she continues to try to move the division beyond the controversy (referenced obliquely as "the challenges over the last year for the IRS and TE/GE specifically").  And to the annoyance of her critics, Lois Lerner gave an extensive interview to Politico.  

And there is more:

  • On the election law/FEC side of things, there are lawsuits still pending that asset Crossroads GPS (Public Citzen v. FEC) and American Action Network and Americans for Job Security (CREW v. FEC) should have registered and reported as political commitees.  (Hat tip: Paul Barton's article this past week in the BNA Daily Tax Report)

Lloyd Mayer

 

November 29, 2014 in Church and State, Federal – Executive, Federal – Judicial, Federal – Legislative, In the News, Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 25, 2014

Esposito, McDonnell, Reiser, Yockey, and the HBLR on Social Enterprise

HBLRThe scholarly discussion of social enterprise and hybrid legal entities shows no signs of abating. The most recent crop of articles includes the following four plus an entire issue of the Harvard Business Law Review.

Robert T. Esposito (NYU Fellow), Using a Canon to Kill a Fly: Charitable Soliciation Acts and Social Enterprise, NYU Journal of Law and Business (forthcoming)

Brett McDonnell (Minnesota), Committing to Doing Good and Doing Well: Fiduciary Duty in Benefit Corporations

Dana Brakman Reiser (Brooklyn), Regulating Social Enterprise, 14 UC Davis Business Law Journal 231 (2014) 

Joseph W. Yockey (Iowa), The Compliance Case for Social Enterprise, Michigan Business & Entrepreneurial Law Review (forthcoming)

The Harvard Business Law Review, Volume 4, Issue 2 (2014) - Benefit Corporations includes five articles relating to these hybrid entities, including one by Delaware Chief Justice Leo E. Strine, Jr.

Lloyd Mayer

November 25, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Thursday, October 2, 2014

Leff: Preventing Private Inurement in Tranched Social Enterprises

h/t to our friends over at TaxProf Blog:

Benjamin M. Leff (American), Preventing Private Inurement in Tranched Social Enterprises, 41 Seton Hall L. Rev. ___ (2015):

Social Enterprises are organizations that are operated for the dual purpose of engaging in profit-making activity and furthering a social good. Because of their “hybrid” nature, social enterprises are perceived to be stymied by a legal system that is overly devoted to defining organizations as either businesses or nonprofits. Legal academics and legislatures have been hard at work trying to make room for social enterprises by experimenting with modifications the laws that constrain both businesses and nonprofits. One significant sector of this reform movement is devoted to making it easier for social enterprises to receive funding from both for-profit investors and charitable non-profits. They argue that social enterprises will not flourish until charitable non-profits are permitted make below-market investments in social enterprises for the purpose of subsidizing the return expected by for-profit investors. This combination of below-market charitable investments and market-rate for-profit investments is generally called a “tranched investment structure.” It is not impossible under current law, but reformers argue that it is unnecessarily difficult, primarily because of federal laws restricting nonprofit activities.

This article addresses the specific legal issues raised by a tranched investment structure. Previous scholarship (and legislative reform) has focused on specific rules that apply only to “private foundations,” a subcategory of § 501(c)(3) organizations, the general federal classification of charities. But, surprisingly, commentators have largely ignored the laws that apply to tranched investment structures involving any § 501(c)(3) organization. This article fills that gap.

This article argues that the IRS should issue guidance clarifying that the "private inurement regime" prevents a charity's insiders from investing in a for-profit social enterprise in which the charity is also an investor. At the same time, it should issue guidance clarifying that a fully independent charity investing in a for-profit social enterprise is not at risk of losing its tax exemption because of the "private benefit regime." Emphasizing the importance of independence as a check on abuses of the tranched structure will enable social entrepreneurs to innovate while the law continues to protect the interests of charitable contributors, the federal government and the charitable sector.

October 2, 2014 in Federal – Executive, Paper Presentations and Seminars, Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Monday, August 25, 2014

Chester on Ipswich Grammar School and Dead Hand Control

IGSlogoRonald Chester (New England) has posted The Life and Death of the Ipswich Grammar School: Is Enduring Dead Hand Control Possible?, ACTEC Journal (forthcoming).  Here is the abstract:

This article examines the reasons for the 360-year longevity of the Ipswich (Mass.) Grammar School trust, which was in force from 1652 to 2012, the longest-running charitable trust in American history. It concludes that the cornerstone of the trust’s longevity was the emphasis of its major donor, the Puritan William Paine, on open-handed contribution to the community, rather than dead hand control. A wealthy merchant and landowner and friend of Massachusetts Bay Colony Governor John Winthrop and his son, Paine imbued his commercial activities with a profound civic-mindedness. 

A 1647 law required the establishment of a grammar school by any town within the Colony that had 100 families or more. The town of Ipswich, where Paine then resided, established a formal trust in 1652 to fund the school. Upon his death in 1660, Paine devised a unique parcel of land called Little Neck to the trust, whose trustees (“feoffees”) were the elders of Ipswich. The only restriction on Paine's gift of the land “forever” was that the property not be “sold or wasted.” 

Although the trust was terminated by agreement of the feoffees and their tenants, and approved by the Massachusetts Attorney General and Courts, the author contends that it could easily have survived with Paine’s vision intact had the feoffees, many of whom were conflicted and inexperienced, been replaced by more professional trustees. The article compares and contrasts the Ipswich trust to the less successful 17th century Hopkins trust and to the modern Barnes Foundation trust in Pennsylvania. The Hopkins trust, which created the Cambridge (Mass.) Grammar School among other entities, spawned litigation lasting 135 years. The Barnes trust, founded in the early- and mid- 20th century and containing some of the most important art works in the world, likewise triggered much litigation, which may not be over, even today. The article concludes that “the longevity a donor’s charity achieves depends on the donor’s swallowing his or her ego and leaving the charitable vehicle open to change by the living.”

Lloyd Mayer

August 25, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Jensen on College Sports and UBIT

Jensen_erikErik Jensen (Case Western Reserve) has posted Taking the Student Out of Student Athlete: College Sports and the Unrelated Business Income Tax, Journal of Taxation of Investments (forthcoming).  Here is the abstract:

A recent decision by a National Labor Relations Board regional director, concluding that football players at Northwestern University are employees for purposes of the National Labor Relations Act, could have spillover effects in tax law. This article considers whether severing the connection between participation in athletics and the educational function of a university — i.e., ending the pretense that athletes are student athletes — could lead to imposition of the unrelated business income tax (UBIT) on the net revenue of some intercollegiate teams at big-time athletic colleges.

 Lloyd Mayer

 

August 25, 2014 in Publications – Articles | Permalink | Comments (1) | TrackBack (0)

Friday, August 22, 2014

Article on NY Version of UPMIFA

Harvey Dale (NYU School of Law), along with Victoria Bjorklund, Jennifer I. Reynoso, and Jillian P. Diamant (all three affiliated with Simpson Thacher & Bartlett LLP), have posted to SSRN “Evolution, Not Revolution: A Legislative History of the New York Prudent Management of Institutional Funds Act,” 17 N.Y.U.  J. Legis. & Pub. Pol’y 377 (2014).  A pdf version of the article, made available by the publishing journal, is available here.   The “roadmap” of the article, set forth in its introduction, follows:

 

Part I of this article examines the history of the laws that have addressed investment management and appropriation of charitable and not-for-profit assets. Part II provides an overview of the current uniform law as well as the version enacted in New York. Part III reviews the Act in detail, examining what types of organizations and funds come within the Act’s scope, assessing the evolution of the individual provisions, and, where relevant, discussing selected controversies and legislative drafting issues.  Part IV reviews the Act’s impact on other New York Laws.  Part V addresses the so-called internal affairs doctrine and related choice of law issues.  Part VI examines the importance of uniformity of interpretation of law. Part VII considers selected financial accounting rules.  Finally, Part VIII concludes the article with suggestions for further action—via technical corrections, substantive amendments, and regulatory guidance—that are recommended for clarification or correction of NYPMIFA’s current provisions.


JRB

August 22, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 12, 2014

Stanford Study: Nonprofits Need More of a Say in Measuring Social Impact

        Nonprofit evaluation is a key component of establishing an efficient charitable market. Without a way to measure social impact, both nonprofits and donors remain unaware of whether investment is being put to its most productive use. (Social impact may be thought of as what the charity has accomplished with a donation). As Stephen Goldberg has noted in his book Billions of Drops in Millions of Buckets, one of the reasons inefficiency exists in the charitable market is because funders currently cannot differentiate between effective and ineffective charities. The Stanford Social Innovation Review recently examined the need for a shift in nonprofit evaluation and the discourse surrounding it in “Measuring Social Impact: Lost in Translation,” and the ideas expressed hold valuable insights for the sector.

        Most importantly, the authors contend that nonprofits need to set the agenda in terms of evaluation and should use a qualitative approach in addition to a quantitative one. They point out that if nonprofits do not shape the evaluation conversation, funders will do it for them. They note five specific items that nonprofits should “talk more about” in terms of evaluation. First, nonprofits should focus more on their purpose and their strategy for achieving it. As the authors advise, “[A]ll nonprofits should have a clearly defined theory for how they will create change that connects their strategies and programs to the results that they anticipate.” Second, nonprofits should spend more time discussing people. Funders often want nonprofit assessment to include quantitative assessments, e.g., the number of people indirectly affected. However, too much emphasis on quantitative analysis reduces a nonprofit’s impact to a series of numbers. The authors promote a more balanced approach that includes qualitative assessments as well: “Qualitative assessments that draw on conversations with people are often more consistent with how nonprofits operate, and they are also a methodologically valid form of evaluation.” Third, nonprofits would benefit from drawing attention to the big picture. In other words, evaluation should consider how a given nonprofit’s work fits within the collective transformation of an area. Fourth, nonprofits should not shy away from discussing their challenges. Their failures and lessons learned are beneficial in terms of collective learning. Accordingly, the authors urge nonprofits to highlight not only monitoring but also transparency as a goal in evaluation. Finally, nonprofits should encourage more learning. Currently, funders (who focus more on monitoring than learning) have a much louder voice in evaluation than beneficiaries and nonprofit workers who are directly involved and who may facilitate learning.

        In terms of the discourse surrounding nonprofit evaluation, the authors caution that business, managerial, and scientific language is drowning out the nonprofit voice. This underscores the need for nonprofits to take charge of shaping evaluation. Too often terms such as “investment,” “returns,” “output,” and “outcomes” are used to discuss social impact, without regard to the five other areas identified. The Stanford team’s study of 400 individuals and organizations in the nonprofit sector revealed that the vocabulary of nonprofit evaluation typically falls within 3 cultural domains: (1) managerial, (2) scientific, and (3) associational, with managerial terms dominating the discourse. All of these domains hold valuable insights for the nonprofit sector; however, nonprofits themselves should be the ones to shape their evaluation and the discourse surrounding it.  

Khrista Johnson

August 12, 2014 in In the News, Publications – Articles, Studies and Reports | Permalink | Comments (1) | TrackBack (0)

Wednesday, August 6, 2014

Rossman on "Trickle Down Charity"

"Trickle Down" economics, in the perjorative, "voodoo economic" sense, maintains that lowering taxes on the wealthest taxpayers invariably benefits everyone else because wealthy taxpayers will invest in jobs and infrastrucure at higher rates with the savings from lower taxes.  Opponents argue that giving benefits to the wealthy only enriches the wealthy, without any distributed benefits to anyone else.  The same issue arises with respect to the private benefit doctrine, I think.  I must admit that I believe in the trickle down theory when it comes to private benefit.   The natural law of self interest requires that somebody benefit in particular, if everyone is to benefit in general.  We pay teachers if we want an educated society.  A doctor has to be paid, if patients are going to be healed.  Nobody works for free, not even for charity and the truly altruistic are natural law breakers, unfortunately.  Economic revitalization, too, requires, that we support particular business -- and their owners who might get richer -- if a blighted area is to be revitalized.  In other words, the public good cannot be achieved without private benefit.  And so the alleged "prohibition against private benefit" cannot mean just that.  Like everything else pertaining to charitable tax exemption, even political endorsement, its all a matter of degree.  We can and should prohibit unnecessary private benefit, but not private benefit per se.  To do so would be to prohibit the public good.  

Professor Matthew Rossman's latest article, Evaluating Trickle Down Charity -- A Solution for Determining When Economic Development Aimed at Revitalizing America's Cities and Regions is Really Charitable addresses the extent to which private benefit is necessary to the public good.  Here is the abstract:

As our nation's philanthropic sector becomes more entrepreneurial, ambitious and influenced by the private sector, longstanding legal standards on what constitutes “charity” struggle to stay relevant. More and more often, organizations that seek classification by the Internal Revenue Service as a Section 501(c)(3) charity (and the substantial public subsidy that this status unlocks) are not the soup kitchens and homeless shelters of yesteryear, but highly sophisticated ventures which accomplish their missions in ways that are less obviously charitable. In no case is this more true than in the recent widespread emergence of nonprofit organizations whose primary activity is providing direct aid to for-profit businesses.

This Article examines this trend and coins the phrase “trickle down charity” to encapsulate the analytic challenge these organizations (which the article terms REDOs, short for “regional economic development organizations”) pose when they seek classification as a charity. REDOs hope that the privately-owned, profit-seeking ventures they aid will ultimately help those in need in the form of jobs and a flourishing economy. While influential and, in some cases, transformative to cities and regions in economic distress, REDOs turn the traditional charitable services delivery model on its head by advancing private interests first and betting that benefit to a charitable class will follow. By relying on standards designed for more conventional charities, current IRS scrutiny of this new model is outdated, inconsistent and mistimed. The most significant consequence of this imprecision is that the publicly funded subsidy American laws have created to incentivize charitable work may be misused to support organizations that are not really charitable while subtracting from the pool of funds available to those that clearly are.

To solve this problem, I propose that the IRS rely on the law of charity’s often overlooked and sometimes maligned “private benefit doctrine.” Specifically, this doctrine should inform new IRS procedures that (1) require all REDOs to make a more compelling demonstration of the nexus between their activities and the accomplishment of charitable purposes and (2) provide a system of ongoing accountability with respect to those claims. Enlivening, rather than ignoring, the private benefit doctrine in this way will not only address the problem of regulating REDOs but should also serve as a useful template for the IRS in examining other emerging forms of 21st century charity and, thus, in maintaining the overall integrity ofthe philanthropic sector.

I just wish I had thought of describing the private benefit process using the analogy to "trickle down" economics.  The phrase captures both the intended process and the theoretical objection all at once.

dkj

August 6, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Friday, June 20, 2014

Recent Business Law Today Dedicated to Nonprofit Issues

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.

 

Nicholas Mirkay

June 20, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 17, 2014

Munson: Fraud on the Faithful? Charitable Intentions of Religious Congregations' Members & Church Property Law

Valerie Munson 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.

Nicholas Mirkay

June 17, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Charitable Giving & Donors: Charities' Financial Efficiency v. Social Image

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.
Nicholas Mirkay

June 17, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Gerzog: Façade Easement Deduction

GerzogWendy Gerzog (Baltimore) has posted "Alms to the Rich:  The Façade Deduction" to SSRN.  Here is the abstract:

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.
(Hat tip:  TaxProfBlog)
 

Nicholas Mirkay

June 17, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Friday, June 6, 2014

Galle: How Do Nonprofit Firms Respond to Tax Policy?

With h/t to Paul Caron at the mother of all blogs, TaxProf Blog:

Brian D. Galle (Boston College), How Do Nonprofit Firms Respond to Tax Policy?:

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.

EWW

June 6, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)