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
Goodrich & Busick: Sex, Drugs, and Eagle Feathers: An Empirical Study of Federal Religious Freedom Cases
Luke W. Goodrich (The Becket Fund for Religious Liberty; University of Utah - S.J. Quinney College of Law) and Rachel N. Busick (The Becket Fund for Religious Liberty Fellow) have written Sex, Drugs, and Eagle Feathers: An Empirical Study of Federal Religious Freedom Cases, Seton Hall Law Review (forthcoming). Below is their abstract:
This Article presents one of the first empirical studies of federal religious freedom cases since the Supreme Court’s landmark decision in Hobby Lobby. Critics of Hobby Lobby predicted that it would open the floodgates to a host of novel claims, transforming “religious freedom” from a shield for protecting religious minorities into a sword for imposing Christian values in the areas of abortion, contraception, and gay rights.
Our study finds that this prediction is unsupported. Instead, we find that religious freedom cases remain scarce. Successful cases are even scarcer. Religious minorities remain significantly overrepresented in religious freedom cases; Christians remain significantly underrepresented. And while there was an uptick of litigation over the Affordable Care Act’s contraception mandate — culminating in Hobby Lobby and Little Sisters of the Poor — those cases have subsided, and no similar cases have materialized. Courts continue to weed out weak or insincere religious freedom claims; if anything, religious freedom protections are underenforced.
Our study also highlights three important doctrinal developments in religious freedom jurisprudence. The first is a new circuit split over the Religious Freedom Restoration Act. The second is confusion over the relationship between the Free Exercise and Establishment Clauses that is currently plaguing litigation over President Trump’s travel ban. The third is a new path forward for the Supreme Court’s muddled Establishment Clause jurisprudence.
Sunday, November 19, 2017
LDF trusts raise questions as to tax treatment of the trust, whether the trust can take advantage of special rules applicable to political organizations, whether contributions to the LFD trusts can be deemed gifts excluded from the official’s income, whether donors to LDF trusts are subject to gift tax liability, whether the government official must report amounts distributed from the fund for legal expenses as income, and the extent to which deductions are available to the government officials for amounts expended from the trust on his or her behalf.
Samuel D. Brunson (Loyola-Chicago) and David J. Herzig (Valparaiso) have written A Diachronic Approach to Bob Jones: Religious Tax Exemptions after Obergefell, 92 Indiana Law Journal 1175 (2017). Here is the abstract:
In Bob Jones University v. United States, the Supreme Court held that an entity may lose its tax exemption if it violates a fundamental public policy, even where religious beliefs demand that violation. In that case, the Court held that racial discrimination violated fundamental public policy. Could the determination to exclude same-sex individuals from marriage or attending a college also be considered a violation of fundamental public policy? There is uncertainty in the answer. In the recent Obergefell v. Hodges case that legalized same-sex marriage, the Court asserted that LGBT individuals are entitled to “equal dignity in the eyes of the law.” Constitutional law scholars, such as Laurence Tribe, are advocating that faith groups might lose their status, citing that this decision is the dawning of a new era of constitutional doctrine in which fundamental public policy will have a more broad application.
Regardless of whether Obergefell marks a shift in fundamental public policy, that shift will happen at some point. The problem is, under the current diachronic fundamental-public-policy regime, tax-exempt organizations have no way to know, ex ante, what will violate a fundamental public policy. We believe that the purpose of the fundamental-public-policy requirement is to discourage bad behavior in advance, rather than merely to punish it after it occurs. As a result, we believe that the government should clearly delineate a manner for determining what constitutes a fundamental public policy. We recommend three safe harbor regimes that would allow religiously affiliated tax-exempt organizations to know what kinds of discrimination are incompatible with tax exemption. Tying the definition of fundamental public policy to strict scrutiny, to the Civil Rights Act, or to equal protection allows a tax-exempt entity to ensure compliance, ex post. In the end, though, we believe that the flexibility attendant to equal protection, mixed with the nimbleness that the Treasury Department would enjoy in crafting a blacklist of prohibited discrimination, would provide the best and most effective safe harbor regime.
Adam Chodorow (Arizona State) has written a brief analysis of Gaylor v. Mnuchin for the ABA Tax Times. titled A Step Toward Greater Clarity on Clergy Tax Exemptions? Here is the first paragraph:
On October 6, 2017, the U.S. District Court for the Western District of Wisconsin declared section 107(2) of the Internal Revenue Code unconstitutional. The provision permits “ministers of the gospel” to exclude from income compensation designated as a housing allowance, thus giving churches and other religious organizations the ability to provide tax-free housing to their ordained ministers. The provision applies not only to parish priests living in modest housing, but also to televangelists like Joel Osteen, who currently lives tax-free in his $10.3 million mansion. It also applies to ministers who work in church-affiliated schools as teachers and administrators. This affords a significant benefit for certain schools whose religious tenets include the ministry of all believers. In one case, a basketball coach was entitled to exclude his housing allowance from income. The government foregoes around $800 million in revenue per year as a result of this provision, and, if the decision stands, it could have a significant impact on churches and other religious institutions.
Cummings & Rawhouser: Lawyers and Bar Associations as Influencers in the Negotiated Landscape of Social-Business Hybridization
Michael E. Cummings (Arkansas Business) and Hans Rawhouser (UNLV Business) have written Lawyers and Bar Associations as Influencers in the Negotiated Landscape of Social-Business Hybridization, 17 Wyoming Law Review 457 (2017). From the introduction:
To complement prior legal scholarship on the Benefit Corporation and L3C movements—which focused on comparing the nuances in various states’ legal approaches, or compared firms’ adoption rates across jurisdictions—this article focuses on understanding the various interests that shaped these laws in different states. This article analyzes a diverse and content-rich product of the legislative process: transcripts and written testimony from over 100 separate committee hearings and legislative floor debates. This approach to understanding the legislative process helps identify patterns and tensions between actors with similar but divergent interests. Although these potential tensions are present between several different groups involved in this process, such as business owners, nonprofit leaders, legislators and other public officials, this article mainly focuses on the policy development involvement of the legal community—attorneys and bar associations.
Marina Nehme (UNSW Australia) has written Australian Charities and Not-for-Profit Commission: Enforcement Tools and Regulatory Approaches, 45 Australian Business Law Review 79 (2017). Here is the abstract:
The Australian Charities and Not-for-profits Commission (ACNC) commenced operation on 3 December 2012 after a decade of inquiries and recommendations about the establishment of an independent “one-stop-shop” regulator for the charity sector. The introduction of this regulator is a move that recognises the unique and distinctive role that charities play in Australia. This article reviews the sanctions available to the ACNC. It considers some key aspects of the ACNC’s regulatory approach to date and discusses the benefits arising from this approach. The article then assesses whether the current enforcement regime available to the regulator supports the continued implementation of such a regulatory approach and empowers the ACNC to enforce the provisions in the legislation or whether some changes may be needed.
Thursday, November 2, 2017
Picton, A. J. (2017). Egoism and the Return of Charitable Gifts. In R. Hickey, & H. Conway (Eds.), Modern Studies in Property Law (Vol. 9, pp. 175-194). Oxford: Hart.
The law assumes that all donors are altruistic, when they are not. It assumes that all donors care about the charitable ends to which they give their money, when they do not. In consequence of the law's misconception, judges sometimes proceed to return gifts without a sound legal rationale for doing so. It is argued that where gifts fail, the legal basis of return is that, in analogy with frustrated consumers who have paid for unobtainable goods, donors should get their money back. With reference to altruism and egoism as the concepts are understood in economic donative theory, it will be seen that this legal logic only bites in relation to individuals who genuinely care about the delivery of charitable outcomes. The paper applies warm glow theory, alongside more traditional understandings of economic altruism to the law of failed testamentary gifts.
An idiosyncratic array of international rules allows “consultants” to gain special access to international officials and lawmakers. Historically, many of these consultants were public-interest associations like Amnesty International. For this reason, the access rules have long been celebrated as a way to democratize international organizations, enhancing their legitimacy and that of the rules they produce. But focusing on the classic public-law virtues of democracy and legitimacy obscures an important fact: many of these international consultants are now industry and trade associations like the World Coal Association, whose principal purpose is to lobby for their corporate clients.
Lifting the veil on the corporate lobbyists challenges the conventional view, which I call “strong legitimacy optimism,” by bringing a set of longstanding critiques into focus: Consultant associations are not always representatives of the “global public” and consultation is not robust participation in governance. Moreover, the access rules both overregulate and underregulate access to lawmakers, producing a “medieval fair” of unaccountable associations that can obscure meaningful contributions. This critique is particularly salient in the context of business lobbying, where the access rules can shut out valuable business expertise, sacrifice transparency, or unnecessarily expose officials and lawmakers to capture.
This Article introduces a theory of international lobbying law. Reframing the access rules as lobbying regulation delivers explanatory and normative payoffs by focusing reformers on relevant actors and points of access, and promising regulatory tools. Specifically, two regulatory models emerge: One draws on the flawed but best-available registration and disclosure norms of domestic lobbying regulation. The other is a multi-stakeholder model pioneered by 21st century public-private partnership organizations. The Article develops an original typology to organize and identify features of the international access rules across diverse international organizations, thereby clarifying the regulatory tradeoffs that accompany each choice. Perhaps counterintuitively, reformers should likely eschew the most common middle-of-the-road access models — which are grounded in the flawed strong legitimacy optimist view — and instead choose among the two divergent regulatory models, with the choice driven by organizational mission.
Dana Brakman Reiser (Brooklyn) has posted "Disruptive Philanthropy: Zuckerberg, the Limited Liability Company, and the Millionaire Next Door" to SSRN. Here is the abstract:
Facebook founder Mark Zuckerberg and his wife, Dr. Priscilla Chan, announced they would give 99% of their net worth to – in their words – “advance[e] human potential and promot[e] equal opportunity.” To make good on this promise, however, they did not set up a traditional nonprofit, tax-exempt organization. Instead, they founded the Chan-Zuckerberg Initiative, a for-profit, limited liability company. The bulk of this Article provides the definitive explanation for this seemingly bizarre choice. Most importantly, the philanthropy LLC structure offers donors the flexibility to bolster charitable grantmaking with impact investment and political advocacy, free of the restrictions, penalties, and transparency requirements applied to tax-exempt vehicles. In addition, the LLC form provides donors complete control over the organizations they found, including an ability to reclaim donated assets that is absolutely prohibited in nonprofit forms. With careful planning, all of these advantages can be gained at relatively little tax cost. The philanthropy LLC is poised to spread far beyond Silicon Valley to the millionaire next door, a development with the potential to do both good and harm. In its concluding section, the Article explores how a turn to for-profit philanthropic vehicles can both unleash tremendous capital for solving society’s most challenging problems and magnify the influence of our most powerful elites.