Nonprofit Law Prof Blog

Keith Blair: Churches, Political Speech and Tax Exemption

Keith Blair will soon publish Praying for a Tax Break:  Churches, Political Speech and The Loss of Section 501(c)(3) Tax Exempt Status.  Here is the interesting abstract:

Churches in the United States, like individuals, are free to speak on any issue that they choose. However, if a church wishes to retain tax-exempt status, it must comply with the requirements of Section 501(c)(3) of the Internal Revenue Code. One of those requirements is that churches may not participate or intervene in political campaigns. Some churches, however, believe that their mission includes not just traditional religious teachings, but guidance on issue that affect the lives of their parishioners including politics. Those churches believe they are fulfilling their faith and mission when they offer this guidance.

This has caused a tension between the Internal Revenue Service, which must enforce the tax laws, and churches that feel that it is part of their mission to speak out on social issues of the day, which may include political issues. With the 2008 U.S. Presidential election already in full swing, this issue has become more visible and more contentious.

This paper examines the issues involved in churches, political speeches and tax-exempt status. It will propose that a limited exception be created for churches so that they may speak freely on all issues to their congregants, including politics, during regularly scheduled religious services.

dkj

Horowitz and Meade on Volunteer Immunity Laws

Jill Horowitz and Joseph Meade have posted Letting Good Deeds Go Unpunished:  Volunteer Immunity Laws and Tort Deterrence.  Here is the abstract:

Does tort law deter risky behavior in individuals? We explore this question by examining the relationship between tort immunity and volunteering. During the 1980s and 1990s, nearly every state provided some degree of volunteer immunity. Congress followed with the 1997 Volunteer Protection Act. This article analyzes these acts, identifying three motivations for them: the chilling effects of tort liability, limits on liability insurance, and moral concerns. Using data from the Independent Survey's Giving and Volunteering surveys, we then identify a large and positive correlation between immunity and volunteering. We next consider the implications of the findings for tort theory and nonprofit law.

dkj

Jennifer Lynn Bell Publishes "Terrorist Abuse of Non-profits and Charities: A Proactive Approach to Preventing Terrorist Financing"

Jennifer Lynn Bell (Goodwin Procter LLP) published "Terrorist Abuse of Non-profits and Charities: A Proactive Approach to Preventing Terrorist Financing," an article arguing that the government should adopt a more proactive role in monitoring terror financing via non-profit organizations.  Here is an excerpt:

The Bush administration reports that more than $139.1 million in assets were frozen worldwide, including $36.7 million in the U.S., and an additional $64 million in terrorist related assets were seized by authorities globally between September 11, 2001 and January 2004. As of the Fall of 2002, $7.3 million was seized from charities that U.S. investigators believe were linked to al-Qaeda or other terrorist organizations and $5.7 million was frozen internationally by countries concerned that “spurious charitable organizations” were functioning within their borders.  Based on figures from the Department of Justice, one scholar suggests that Al-Qaeda received approximately 30% of its financial resources from donations solicited in the United States and abroad.  As of September 2006, the Treasury Department identified 43 charities worldwide and 29 associated individuals as Specially Designated Nationals (“SDN”) for their support of terrorist organizations and operations.  The Treasury Report found that “these seventy-two charities and individuals comprise over fifteen percent of all U.S.-designated terrorist supporters or financiers, indicating the primary importance of charities as a critical means of support for terrorist organizations and activities.”

This article argues that the government should adopt a more active role in monitoring terror financing via non-profit organizations. Part I of this paper addresses the problem of non-profit organizations and terror financing while summarizing the purpose of tax exemption and advantages of operating as a non-profit organization.  Additionally, it briefly defines terrorism and terror financing. Finally, it introduces the relationship between terror financing and non-profit organizations. Part II discusses the current government's counter-terrorism regulations most relevant to non-profit organizations and the flaws of these initiatives. Part III addresses the need for modification of existing regulations and proposes several proactive initiatives to reduce the revenue stream flowing through non-profits to finance terrorist operations without incapacitating legitimate charitable organizations.

For the entire article, see "Terrorist Abuse of Non-profits and Charities: A Proactive Approach to Preventing Terrorist Financing," 17 Kan. J.L. & Pub. Pol'y 450 (2008).

DAB

UCLA and UC Irvine Consider Removing Donor's Name From Campus Buildings After Guilty Plea

The L.A. Times reports that UCLA and UC Irvine are considering whether to remove the name of a wealthy donor from their buildings after the donor's guilty plea to federal charges: 

The [Henry] Samueli name could be stripped from engineering schools at UCLA and UC Irvine as a result of his recent guilty plea to a felony charge of lying to financial regulators. A review of the issue is being launched by the University of California's general counsel, officials said.  The two engineering schools were named for Samueli after the Broadcom Corp. co-founder and his wife donated a total of $50 million to those programs in 1999. Samueli, who earned his doctorate in electrical engineering at UCLA and is a professor there, is widely admired for his pioneering work in telecommunications microchip technology and his extensive philanthropy.  But his guilty plea last month to making a false statement to federal authorities investigating the alleged backdating of stock options awarded to employees at Irvine-based Broadcom has triggered a review of the name of each school, UC spokesman Brad Hayward said. UC policy on such matters is vague, and questions of timing and what factors should be considered have yet to be determined.  "Quite honestly, this is new territory for us, so we don't have answers to a lot of specific questions at this point," Hayward said. He said he and other UC officials could not recall a case in which a donor's name was removed from a building or program at the university because of a crime.

Counsel for the two schools should take a look at Professor John K. Eason's excellent article, Private Motive and Perpetual Conditions in Charitable Naming Gifts: When Good Names Go Bad, 38 U.C. Davis L. Rev. 375 (2005).  Here is the on-point abstract:

This Article explores the problems that often result from a charitable naming opportunity contribution. A charitable naming opportunity contribution exists when a donor transfers money or property to a charitable organization upon terms that result in an individual's name being associated in some way with the organization, its institutions, activities, or facilities. Implementing such arrangements can become problematic as circumstances change over time. Matters considered here include the meaning of "charity" as affected by a donor's personal desire to perpetuate a name. This Article also highlights the quite varied doctrinal analyses that may apply when deviation from the precise terms of a charitable naming arrangement is suggested. The enduring nature of naming agreements, imprecise donor-charity dealings, malleable equitable doctrines, and the vagaries facilitated through reverence to donor intent are shown to contribute to this variability. Specific examples are employed to demonstrate relevant points. Those examples include the well-publicized, but as yet unresolved, charitable naming dispute over the Lincoln Center's Avery Fisher Hall. Also considered is the modern spate of philanthropically inclined, but ethically challenged, "bad actors" whose notorious names now adorn various charitable facilities and institutions across the nation. This Article ultimately presents suggestions for dealing with both existing and future charitable naming arrangements where some deviation from the original charitable naming scheme is suggested.

How to avoid the legal issue?  One way is to insert a clause in the gift document allowing the university to remove the donor's name upon the happening of certain bad events.  But from my days as university counsel, I can surmise how sensitive it might be to ask a donor to agree to such a clause allowing the university to remove the name if the donor violated some sort of moral turpitude provision.  Just asking for the concession could cause the donor to forego the gift out of indignation. 

dkj

Eason Posts "The Restricted Gift Life Cycle, or, What Comes Around Goes Around"

Professor John Eason (Tulane) posted an abstract of his draft Fordham Law Review article about donor control of gifted property on SSRN's Nonprofit and Philanthropy Law Abstracting Journal.  The article is entitled "The Restricted Gift Life Cycle, or, What Comes Around Goes Around."  Here is the abstract:

The conflict regarding enduring donor control over property gifted for charitable uses implicates issues of current relevance to donors and nonprofit charitable organizations, and to those who represent them. Not surprisingly, these issues, and the possible ways of both addressing and accounting for their resolution, vary by circumstance. In this Article, I frame the issues and explore the relevant circumstances by reference to the particular stage in the lifecycle of a donor's restricted gift at which conflict might arise. That lifecycle spans the time from initial negotiation of the gift to its potential modification or termination due to unanticipated circumstances. In between, of course, is the period during which the charitable organization is actively engaged in managing the restricted gift in pursuit of the organization's broader mission.

Framing the issues in this manner permits an exploration of several important ideas and offers insights into the concerns that affect restricted giving and the management of restricted gifts. First among these is the question of whether restricted gifts can, in fact, be viewed as having a particular lifecycle comprised of discrete stages. The answer, not surprisingly, is yes, as elaborated upon in Part II of this Article. Second, acknowledging this restricted gift lifecycle focuses attention on specific influences driving the noted dead hand dynamic at various stages in that evolution, with resulting implications for both the donor and recipient organization. These influences and implications are the subject of Parts III and IV, with particular emphasis in Part IV upon the fiduciary duties attendant a charitable organization's management of a restricted gift.

Finally, the forced effort to evaluate a given influence as relevant to only one stage in the noted lifecycle is difficult to maintain. It is, in other words, impossible to isolate a particular consideration as playing a limited role at a single, finite point in the evolution of a charitable organization's ongoing efforts to accommodate donor directives. This evaluative effort, however, ultimately highlights the pervasive relevance of each such influence throughout the organization's dealings with the donor and her enduring demands. This, in turn, suggests that a more comprehensive donor and organizational perspective towards their restricted gift dealings might at all times illuminate more mutually advantageous choices and opportunities, thus reducing the overall level of conflict throughout the life of that gift. Demonstrative of these points is the ongoing dispute between Princeton University and certain descendants of Charles and Marie Robertson, which dispute is explored more fully in Parts V and VI.

DAB

Meghaan McElroy Posts "Private Religious Hospitals: Limitations Upon Autonomous Moral Choices in Reproductive Medicine"

Meghaan McElroy (William & Mary Law School) posted an abstract of her forthcoming William & Mary Law Review article about division of church property in Virginia on SSRN's Nonprofit and Philanthropy Law Abstracting Journal.  The article is entitled "Possession is Nine Tenths of the Law: But Who Really Owns a Church's Property in the Wake of a Religious Split within a Hierarchical Church?"  Here is the abstract:

Courts across the country face a perplexing legal issue regarding the ownership of church property. In the wake of the ordination of an openly gay bishop in 2003, local congregations have broken away from the Protestant Episcopal Church in the United States of America, leading to contentious property disputes over both the real and personal property of the churches. The problem that arises in adjudicating this legal issue is the sparse continuity in court decisions addressing property ownership in the wake of a religious "divorce." With limited guidelines articulated by the Supreme Court, the states are free to craft their own arsenal for handling church property disputes. Virginia provides a perfect starting point for crafting a bright-line rule that all states should eventually follow, considering the existence of a post- Civil War statute meant to handle such religious property disputes.

Beginning in December 2006, fifteen traditionalist Virginia Episcopal parishes voted to break away from the Episcopal Diocese of Virginia and the Episcopal Church of the United States. The decision to disaffiliate with the Diocese and Episcopal Church stemmed from a disagreement over the Episcopal Church's position on homosexuality, representing what the Diocese considered a deeper affront to the teachings of the Christian faith. The parishes voted to affiliate themselves with the Convocation of Anglicans in North America. As a result of the separation, the local parishes and the Episcopal Church, along with the Diocese, have both claimed ownership of the real and personal property presently occupied and held by the parishes' trustees.

In order to settle the present dispute among the eleven Virginia Episcopal parishes, as well as any future disputes among congregations and the hierarchical church to which they belonged, this Note proposes that courts within the Commonwealth of Virginia should adopt a bright-line rule for interpreting Virginia Code section 57-9. Specifically, "division" as used in section 57-9 should mean a factional separation within the hierarchical church between the national church and an aggregate of congregations, determined on a macro level. Such an approach will be beneficial for the judicial system because it will enable courts to resolve church property disputes expeditiously by addressing the sole question of whether a division existed within the church.

DAB

Does the Nondistribution Constraint Inhibit Profit-Seekers?

We have recently posted a rash of stories about insiders caught with their hands in the proverbial cookie jars.  And, truth be told, I have had clients who wanted to start a business and get rich using nonprofits to get seed money from grants available only to 501(c)(3) organizations.  These would-be entrepreneuers usually assume that they can pay themselves handsomely, directly or through fringe benefits, to get around the prohibition against private inurement.  My stock advice is that you might get away with it for awhile, but greed has a way of taking over and soon enough the cards will come crashing down. 

Greed amongst wayward nonprofit insiders is not only "not good" but it also seems quite universal.  Two researchers from Prague, Petra Brhlikova and Andreas Ortmann recently posted The Impact of the Nondistribution Constraint and its Enforcement On Entrepreneurial Choice, Price, and Quality.  Here is the interesting abstract:

We study the conditions under which it is rational for a representative entrepreneur to start a nonprofit firm. Taking as point of departure a model of entrepreneurial choice proposed by Glaeser and Shleifer (2001), we analyze consequences of weak enforcement of the non-distribution constraint on entrepreneurial choice and price and quality of the product. We find that the nonprofit organizational form becomes unequivocally more attractive to entrepreneurs if enforcement of the non-distribution constraint is weak. We also find that the quality delivered by nonprofit firms is lower under weak enforcement than that of the nonprofit firm under strict enforcement, but higher than the quality delivered by a for-profit firm. We discuss the implications and limitations of our results.

Interesting.  The abstract suggests that for-profit wolves in nonprofit clothing guage the extent to which they can "get away with it" in deciding whether to use a nonprofit or for-profit to get rich.  I guess that's just rational "economic" behavior.

dkj

Ranjani Krishnan and Michelle Yetman: Strategic Cost Shifting By Nonprofit Hospitals

Ranjani Krishnan and Michelle Yetman have posted Strategic Cost Shifting by Nonprofit Hospitals.  Here is the abstract:

This paper examines cost shifting behaviors by nonprofit hospitals in their publicly reported tax statements. We explore the following questions: first, do nonprofit hospitals shift costs towards patient-related program services and away from administrative and fundraising categories to improve their financial ratios to appear more efficient? Second, do economic incentives such as ability to procure future donations influence the extent of such cost shifting behavior? Third, do institutional constraints and pressures such as membership in a church system and level of charity care influence the extent of cost shifting. Finally, does the likelihood of detection influence cost shifting behaviors? We conduct an empirical test by merging two datasets: the IRS 990 forms and regulatory reports from California hospitals (OSHPD data) and test our hypotheses using 727 hospital-year observations. We find that nonprofit hospitals that obtain higher donations revenue shift costs to a greater extent, as do hospitals that face higher institutional pressures. Hospitals that face higher likelihood of detection shift costs to a lesser extent. Our results show that economic, institutional, as well as regulatory pressures drive nonprofit hospitals' cost shifting behaviors.

The findings suggest that nonprofit hospitals in California, already beleagured by accusations that they do not provide enough charity care to justify tax exemption, crunch their numbers in a way that increases the perceived levels of charity care they provide.

dkj

Crimm Argues for Reconsidering Anti-Terrorism Financing Rules

Nina J. Crimm (St. John's University) has posted The Moral Hazard of Anti-Terrorism Financing Measures: A Potential to Compromise Civil Societies and National Interests, which will be published in the Wake Forest Law Review.  The abstract is as follows:

Radical, fundamentalist Islamic terrorists have targeted civil societies for attack, in the course of which they are using and abusing philanthropic structures and charitable institutions. In the wake of the 9/11 attacks, the global war on terrorism took shape. President George W. Bush issued Executive Order 13,224 in which he declared a national emergency to deal with the threat of future terrorism. Congress responded with a powerful weapon, the USA Patriot Act, that provided measures aimed to detect, prevent, and suppress terrorist financing. The U.N. Security Council unanimously adopted Resolution 1373, and the intergovernmental Financial Action Task Force (F.A.T.F.) released Nine Special Recommendations that have influenced numerous countries across the globe in structuring their responsive anti-terrorism financial regulatory schemes. Although countries reactive regulatory regimes would be intended to serve the extremely important national interest of protecting security within their borders, such legal systems may simultaneously constrain philanthropic aid structures and nongovernmental organizations crucial to healthy civil societies. In so doing, anti-terrorism finance regulatory regimes ironically may compromise essential national interests, including national security. This effect perhaps may be particularly pronounced within some predominantly Muslim countries.

As Islam places a high value on compassion, wealth redistributions, social justice, and supporting and enhancing fellow humans, both philanthropy and charity play crucial roles for Muslims and their civil societies. The flow of such funds is economically essential to, and provides critical building blocks for, Muslim civil societies. By adopting, implementing, and enforcing strict and comprehensive anti-terrorism laws modeled on the F.A.T.F. standards, countries could alter the legal landscape for philanthropic and charitable giving by Muslim-Americans, as well as other Muslims, and effectively cut off financial support for needy Muslims and Muslim civil societies actors. By doing so, the same destabilizing factors that vigorous civil societies work to alleviate relative economic, social and political inequalities within a society, such as structured educational deprivations, lack of civil liberties, and political alienation could be aggravated. Because these are several troubling factors touted as key causes of terrorism, I suggest that their exacerbation could compromise national security interests, as well as other national interests, of the U.S. and other countries around the globe. Such possible costs are high and should not be overlooked as countries are prodded to adopt comprehensive and strict anti-terrorism finance legal regimes. I conclude that now, nearly seven years after the U.S., U.N., F.A.T.F., and some countries around the world adopted anti-terrorism finance strategies in the first reactive wave to the 9/11 tragedies, it may be time to rethink them. Perhaps more nuanced, targeted, and tailored approaches could be developed to mitigate the moral hazard of the current anti-terrorism finance tactics.

LHM

Horwitz and Mead on the Effect of Volunteer Immunity Laws

Jill R. Horwitz (Michigan) and Joseph Mead (Michigan) have posted Letting Good Deeds Go Unpunished: Volunteer Immunity Laws and Tort Deterrence, which will be published in the Journal of Empirical Legal Studies.  The abstract is as follows:

Does tort law deter risky behavior in individuals? We explore this question by examining the relationship between tort immunity and volunteering. During the 1980s and 1990s, nearly every state provided some degree of volunteer immunity. Congress followed with the 1997 Volunteer Protection Act. This article analyzes these acts, identifying three motivations for them: the chilling effects of tort liability, limits on liability insurance, and moral concerns. Using data from the Independent Survey's Giving and Volunteering surveys, we then identify a large and positive correlation between immunity and volunteering. We next consider the implications of the findings for tort theory and nonprofit law.

LHM

June Issue of Nonprofit and Voluntary Sector Quarterly Available

The June issue of the Nonprofit and Voluntary Sector Quarterly is now available on that journal's website.  Excluding book reviews, the articles are:

• Lehn M. Benjamin, Account Space: How Accountability Requirements Shape Nonprofit Practice
• Nancy Strichman, W.E. Bickel, and Fathi Marshood, Adaptive Capacity in Israeli Social Change Nonprofits
• Dag Wollebæk and Kristin Strømsnes, Voluntary Associations, Trust, and Civic Engagement: A Multilevel Approach
• Patricia Hughes and William Luksetich, Income Volatility and Wealth: The Effect on Charitable Giving
• Tone Alm Andreassen, Asymmetric Mutuality: User Involvement as a Government—Voluntary Sector Relationship in Norway
• Scott R. Swanson, J. Charlene Davis, and Yushan Zhao, Art for Art's Sake? An Examination of Motives for Arts Performance Attendance
• Michael Moody, "Building a Culture": The Construction and Evolution of Venture Philanthropy as a New Organizational Field
• Jacqueline Jacobs Caster, A New Direction in Women's Philanthropy

LHM

Sidel on Philanthopy in Asia

We previously blogged about Mark Sidel's (University of Iowa) article on The Promise and Limits for Collective Action for Nonprofit Self-Regulation: Evidence from Asia.  He recently posted two other articles relating to philanthropy in Asia.  Here is the abstract for Philanthropy and Law in South Asia: Recent Developments in Bangladesh, India, Nepal, Pakistan and Sri Lanka:

This report, edited by Mark Sidel and written by Sanjay Agarwal (India), Qadeer Baig (Pakistan), Noshir Dadrawala (India), Zafar Ismail (Pakistan), Thanuja Jayawardene (Sri Lanka), Sumaiya Khair (Bangladesh), Sapana Pradhan Malla (Nepal), Mark Sidel (US), Anil Kumar Sinha (Nepal), Priya Viswanath (India), Arittha Wikramanayake (Sri Lanka), and Iftekhar Zaman (Bangladesh), provides a comprehensive discussion and analysis of recent developments in state-nonprofit relations and the regulation of the nonprofit sector and philanthropy in five key countries of South Asia - Bangladesh, India, Nepal, Pakistan, and Sri Lanka.

The report covers the full range of government regulation of the nonprofit sector and philanthropy, including registration and incorporation, governance requirements, board, trustee and staff issues, tax treatment, regulation of foreign and domestic donations, regulation of special sectors and issues (such as microcredit organizations, foreign donations, and other topics), nonprofit self-regulation, and other areas. It serves as an update to Mark Sidel and Iftekhar Zaman (eds.), Philanthropy and Law in South Asia (Asia Pacific Philanthropy Consortium, 2004). Both the 2004 volume and this update report are also available at http://www.asiapacificphilanthropy.org/. This multi-year, multi-country research study has been generously supported by the Ford Foundation, Asia Foundation, Myer Foundation, Himalaya Foundation, and the University of Iowa, and sponsored by the Asia Pacific Philanthropy Consortium.

And here is the abstract for A Decade of Research and Practice of Diaspora Philanthropy in the Asia Pacific Region: The State of the Field:

This paper provides an overview of research on diaspora philanthropy to the Asia Pacific region over the past ten years (1997-2008), with a focus on diaspora giving to China, India, the Philippines, Vietnam, Bangladesh, Pakistan, Indonesia, and other countries in the Asia Pacific region. It identifies practices in social investment and social entrepreneurship through strategic philanthropy by migrants and discusses how these may have facilitated sustainable social change and development in the diasporas' communities of origin; analyzes the enabling environment for diaspora philanthropy in the key countries of the region with respect to its degree of conduciveness in allowing or encouraging diaspora giving; and focuses on identifing and analyzing the gaps in research on diaspora philanthropy in Asia. The paper was prepared for presentation to the international conference on diaspora philanthropy convened by the Asia Pacific Philanthropy Consortium in Hanoi, Vietnam in May 2008.

LHM

Halperin: Does Tax Exemption for Charitable Endowments Subsidize Excessive Accumulation?

Dan Halperin has posted a timely piece -- given the recent attention paid to university endowments -- entitled, Does Tax Exemption for Charitable Endowments Subsidize Excessive Accumulation?"  Here is the abstract:

This paper examines the concern over large endowments from the perspective of tax policy as it applies to the income tax exemption for charitable organizations. It suggests that because unlike other subsidies, income tax exemption only affects those charities that accumulate funds for the future, such exemption does not follow automatically from the charitable deduction but requires a showing that accumulation is appropriately treated. The paper concludes that unlike the treatment of gifts and income from related goods and services, exemption of investment income from an endowment, represents a departure from normal tax principles. Whether a subsidy is nevertheless appropriate depends upon whether one believes that current accumulation is likely to be excessive. I believe that the bias of donors, trustees and key employees indicates that endowments may well exceed the level that public policy would suggest and recommend a tax based on assets and a reduced limit on the charitable deductions for the largest endowments. While a mandatory distribution level is considered, I conclude that such a requirement is both intrusive and unlikely to have a significant impact on the level of accumulation.

dkj

Sidel on "Counter-Terrorism and the Enabling Legal and Political Environment for Civil Society: A Comparative Analysis of War on Terror” States

The latest issue of the online International Journal for Not For Profit Law contains Mark Sidel's article, "Counter-Terrorism and the Enabling Legal and Political Environment for Civil Society: A Comparative Analysis of “War on Terror” States".  Here is the introduction:

This article focuses on the legal and political environment for civil society in an era in which counter-terrorism policy and law have challenged civil society and civil liberties in a number of countries. The ways in which counter-terrorism law and policy affect civil society can differ dramatically by country and region. So this article seeks to provide some comparative analysis of the impact of counter-terrorism policy and law on civil society in several countries in which the “war on terror” is being fought, emphasizing impacts on the enabling environment for civil society such as laws, regulations, policies, and practice influencing the existence, structure, activities, and ibrancy of civil society.

dkj

How Much Should the IRS Regulate Nonprofit Governance?

The revised IRS Form 990, along with various comments from IRS TE/GE personnel (particularly Steve Miller), make clear that the IRS is delving ever deeper into issues of nonprofit governance. Not everyone, however, thinks this is a good idea. The former head of TE/GE, Marcus Owens, wrote a short piece in The Exempt Organizations Tax Review for June criticizing the IRS's intrusion in nonprofit governance in the Form 990; his article is available from Lexis here. Of course, Owens now represents nonprofit clients in private practice, so one might be tempted to take his current views with a grain of salt; but even the IRS's own advisory committee now urges caution by the IRS on the nonprofit governance front.

In a report issued on June 11 (available here, then scroll to page 82 of the PDF file), the TE/GE Advisory Council urges the IRS to be cautious in exercising regulatory authority over nonprofit governance. The beginning of its "Recommendations" section is an excellent summary of the Committee's views:

We begin our recommendations by again acknowledging the IRS’s longstanding stake and legitimate interest in governance issues as they relate directly to compliance with the laws under its jurisdiction. As we stated in the introduction, the IRS’s view that “a well-governed charity is more likely to obey the tax laws, safeguard charitable assets, and serve charitable interests than one with poor or lax governance” seems self evident. But efforts to promote good governance are fraught with complexity. While we may all agree that governance matters, the empirical evidence does not support the proposition that requiring specific governance practices results in greater compliance with the tax laws. Effective governance likely is much more a question of the attitude of responsibility and accountability of those in charge than the adoption of specific policies and practices. Given the diversity of the sector and the varying, and often unpredictable, challenges facing an organization, the organization’s governing board generally is in the best position to determine what the most appropriate practices are for its organization. We are very mindful of the fact that even the most modest level of prescription from a regulatory body such as the IRS regarding what constitutes “good” governance can undermine the fundamental and wholly legitimate authority of the organization’s governing board and can suggest a one-size-fits-all approach that can place undue burdens on an organization, divert the organization’s attention from meaningful governance to polices and procedures, and do damage to the uniquely diverse and vibrant charitable sector in this country. Accordingly, we believe that the IRS should approach the governance area with caution.

Very good advice, indeed, methinks.

JDC

More Angst Re College Endowments: Waldeck on Limiting Deductions for Gifts to Very Wealthy Universities

Speaking of huge untapped endowments, over on TaxProf Paul Caron reports that Sarah Waldeck (Seton Hall) has posted The Coming Showdown Over University Endowments: Enlisting the Donors, 77 Fordham L. Rev. ___ (2009), on SSRN.  Here is the abstract:

This essay focuses on the discordance between universities with endowments in excess of one billion dollars and what is occurring in the rest of higher education, particularly with respect to skyrocketing tuition and a growing institutional wealth gap. The essay analyzes absolute endowment values, the amount of endowment per student, and expense-endowment ratios at 60 private universities. It concludes that a small number of schools have an excess endowment, and then provides a convenient proxy for determining when an endowment is so large that it should receive less-preferential tax treatment. The essay then considers the effects that large endowments have at their home institutions and throughout higher education, the arguments in defense of large endowments, and some frequently-proposed modifications to the tax code. The essay recommends that policymakers modify the charitable deduction for gifts to universities with mega-endowments, as part of a multi-faceted effort to spur endowment spending and control tuition.

The redistributive idea of drying up donations to universities with "excess endowments" (by reducing or removing the tax subsidy for the very wealthy, apparently) is provocative, to say the least.  I suspect Waldeck's piece will be one of the more frequently downloaded papers (at least amongst nonprofit and higher ed scholars) over the next few months.

dkj

Bassett Posts "Private Religious Hospitals: Limitations Upon Autonomous Moral Choices in Reproductive Medicine"

Professor William Bassett (University of San Francisco - School of Law) posted an abstract of his forthcoming Journal of Contemporary Health Law and Policy Working article about the private religious hospitals and autonomous healthcare decisions on SSRN's Nonprofit and Philanthropy Law Abstracting Journal.  The article is entitled "Private Religious Hospitals: Limitations Upon Autonomous Moral Choices in Reproductive Medicine."  Here is the abstract:

Contemporary managed care imperatives have severely limited an individual's right to make free and informed choices regarding his or her own health care. The author posits that legislation allowing private, religiously affiliated hospitals to refuse patient requests for legitimate health care services - particularly reproductive medicine - must be reconsidered.

Ethical exemptions allowing religious hospitals to refuse sensitive and controversial medical services such as abortion, sterilization and prescription of contraceptive drugs, AIDS counseling, and fertilization are virtually unlimited. However, these institutional privileges cannot remain absolute. Private hospital exemptions should be re-written, with clear limitations conditioned upon newly evolving public policy imperatives for informed choice in comprehensive patient health care plans.

DAB

Rhine and Garrett Post "Government Growth and Private Contributions to Charity"

Professor Russell M. Rhine (St. Mary's College of Maryland - Department of Economics) and Thomas A. Garrett (Federal Reserve Bank of St. Louis - Research Division) posted an abstract of their Federal Reserve Bank of St. Louis Working Paper about the relationship between charitable contributions and government spending on SSRN's Nonprofit and Philanthropy Law Abstracting Journal.  The article is entitled "Government Growth and Private Contributions to Charity."  Here is the abstract:

We exploit the time series properties of charitable giving data to provide additional insights into the relationship between charitable contributions and government spending. Our sample period covers the last half of the 20th century, a period marked by increased growth in both government spending and charitable giving. Cointegration tests reveal a significant long-run relationship between several categories of charitable giving and government spending. Granger causality tests are designed to capture any short-run giving and spending relationship, and provide the opportunity to examine whether changes in fundraising efforts by charities influence government spending. Evidence suggests that charitable contributions to education responds quite differently to state and local government education expenditures versus federal government expenditures. We argue that the government spending and charitable giving relationship is dependent upon the source of government revenue, how this revenue is used by institutions of learning, and the rational ignorance of private donors.

DAB

Blair Posts "Praying for a Tax Break: Churches, Political Speech and the Loss of Section 501(C)(3) Tax Exempt Status"

Professor Keith Blair (Baltimore) posted an abstract of his draft Denver University Law Review article about the political campaign prohibition for churches on SSRN's Nonprofit and Philanthropy Law Abstracting Journal. The article is entitled "Praying for a Tax Break: Churches, Political Speech and the Loss of Section 501(C)(3) Tax Exempt Status." Here is the abstract:

Churches in the United States, like individuals, are free to speak on any issue that they choose. However, if a church wishes to retain tax-exempt status, it must comply with the requirements of Section 501(c)(3) of the Internal Revenue Code. One of those requirements is that churches may not participate or intervene in political campaigns. Some churches, however, believe that their mission includes not just traditional religious teachings, but guidance on issue that affect the lives of their parishioners including politics. Those churches believe they are fulfilling their faith and mission when they offer this guidance.

This has caused a tension between the Internal Revenue Service, which must enforce the tax laws, and churches that feel that it is part of their mission to speak out on social issues of the day, which may include political issues. With the 2008 U.S. Presidential election already in full swing, this issue has become more visible and more contentious.

This paper examines the issues involved in churches, political speeches and tax-exempt status. It will propose that a limited exception created for churches so that they may speak freely on all issues to their congregants, including politics, during regularly scheduled religious services.

DAB

Brody and Fremont-Smith on the Proposed Model Nonprofit Corporations Act

To follow up on David's posts today about the Model Nonprofit Corporations Act, anyone interested in this subject should read the short article in the May 12 Tax Notes (page 617) by Evelyn Brody and Marion Fremont-Smith. They note some key problems with the proposed new Act that should concern anyone working in the nonprofit area. The article is available on Lexis here.

JDC

Karl Emerson Publishes "COMMENTS ON THE ROLE OF THE MODERN CHARITABLE HEALTH CARE PROVIDERS"

Attorney Karl Emerson (Montgomery, McCracken Walker & Rhoads, LLP) published an article on increasing state and federal scrutiny of tax exempt charitable hospitals in Pittsburgh Journal of Environmental and Public Health Law.  The article is entitled "COMMENTS ON THE ROLE OF THE MODERN CHARITABLE HEALTH CARE PROVIDERS"  Here is an excerpt:

Hospitals and their foundations, just like other types of charitable organizations, are increasingly having their operations scrutinized much more closely by not just state enforcement authorities—but also by the IRS, the media, and the public at large. As a result, they need to know what the applicable state and federal statutes require and, equally important, the types of conduct these statutes prohibit. In this age of significantly heightened governmental and media scrutiny, hospitals and their foundations, like all other charitable organizations, need to ensure they are operating in conformity with all applicable state and federal laws. If they do not, they can be held accountable by the federal government through the IRS which has recently begun to significantly ramp up its enforcement efforts; by the various states through their attorneys general, district attorneys, and/or secretaries of state; by private watchdog organizations such as the Better Business Bureau’s Wise Giving Alliance; by an ever-vigilant media always eager to expose irregularities and fraud in the sector; and lastly, but in many cases most importantly, by the donating public that can, and does, stop its support of organizations that violate its trust.

DAB

Thomas K. Hyatt Publishes "THE ROLE OF THE MODERN CHARITABLE HOSPITAL"

Attorney Thomas K. Hyatt (Ober, Kaler, Grimes & Shriver, P.C.) published an article on public policy aspects of tax exempt charitable hospitals in Pittsburgh Journal of Environmental and Public Health Law.  The article is entitled "THE ROLE OF THE MODERN CHARITABLE HOSPITAL"  Here is an excerpt:

The question that I bring to you today is one of those questions. I would argue it is one of the most formidable public policy questions of our time. That question is: What is the role of a modern charitable tax-exempt hospital? I would suggest you take note of the date April 28, 2005. That was the date that the following comment was made: "What’s the difference between a profit making hospital and a not-for-profit hospital these days? Not a lot." Who do you suppose said that? If it was an executive from the Federation of American Hospital Systems, the for-profit hospital trade association, I’d have said, "to be expected." If it was a grandstanding politician, I’d say, "it’s okay, it comes with the territory." Do you know who said that? Mark Everson, the Commissioner of the Internal Revenue Service. The regulator in chief of tax exempt hospitals. If the IRS Commissioner says he can’t really tell you the difference between a for-profit and a nonprofit hospital, you had better be worried. It’s a rallying cry if ever I heard one. Clearly, nonprofit hospitals must do a better job of making their case as to why in their current iteration they ought to continue to be recognized as charitable organizations. This is not a new debate. It has been going on for over 50 years. Certainly the health care field has changed a great deal in that period of time. Still, the debate continues.

My premise today is that the role of a modern charitable hospital is threefold. First, it is nonprofit organization. It is a member of the community of nonprofit organizations and as such has a responsibility to that community. Second, it is a tax-exempt public charity. In exchange for freedom from taxation, it has certain obligations to fulfill. Finally, and let there be no mistake about it, a modern charitable hospital is a business enterprise. There are lines to be drawn, lines not to be crossed, but that business enterprise function is a very real part of what they do every day. So let’s look at charitable hospitals’ roles through those three prisms and see where that leads us.

DAB

Klick and Sitkoff Publish "AGENCY COSTS, CHARITABLE TRUSTS, AND CORPORATE CONTROL: EVIDENCE FROM HERSHEY'S KISS-OFF"

Professor Jonathan Klick (Florida State) and Professor Robert H. Sitkoff (Harvard) posted an abstract of their Columbia Law Review article on charitable trust governance on SSRN.  The article is entitled "AGENCY COSTS, CHARITABLE TRUSTS, AND CORPORATE CONTROL: EVIDENCE FROM HERSHEY'S KISS-OFF"  Here is the abstract:

In July 2002, the trustees of the Milton Hershey School Trust announced a plan to diversify the Trust's investment portfolio by selling the Trust's controlling interest in the Hershey Company. The Company's stock jumped from $62.50 to $78.30 on news of the proposed sale. But the Pennsylvania attorney general, who was then running for governor, brought suit to stop the sale on the grounds that it would harm the central Pennsylvania community. In September 2002, after the attorney general obtained a preliminary injunction, the trustees abandoned the sale and the Company's stock dropped to $65.00. Using standard event study econometric analysis, we find that the sale announcement was associated with a positive abnormal return of over 25 percent and that canceling the sale was followed by a negative abnormal return of nearly 12 percent. Our findings imply that instead of improving the welfare of the needy children who are the Trust's main beneficiaries, the attorney general's intervention preserved charitable trust agency costs on the order of roughly $850 million and prevented the Trust from achieving salutary portfolio diversification. Overall, blocking the sale destroyed roughly $2.7 billion in shareholder wealth, reducing aggregate social welfare by preserving a suboptimal ownership structure of the Company. Our findings contribute to the literature of trust law by supplying the first empirical analysis of agency costs in the charitable trust form and by highlighting shortcomings in supervision of charitable entities by the state attorneys general. Our findings also contribute to the literature of corporate governance by measuring the change in the Hershey Company's market value when the Trust exposed the Company to the market for corporate control.

DAB

Lipman and Williamson Post "Avoiding Malpractice Traps in Noncash Charitable Contributions"

Professors Francine Lipman (Chapman) and James E. Williamson (PhD, CPA) posted an abstract of their Practical Tax Lawyer article about charitable contributions of property on SSRN's Nonprofit and Philanthropy Law Abstracting Journal.  The article is entitled "Avoiding Malpractice Traps in Noncash Charitable Contributions"  Here is the abstract:

Substance usually rules over form, but form is a very necessary and critical component of any tax practice. This maxim is especially true when taxpayers claim tax deductions for the FMV of their noncash charitable contributions. As the recent Tax Court decision in Hewitt v. Commissioner, 109 T.C. 258 (1997), and that decision's subsequent affirmation, 166 F.3d 332, 98-2 U.S.T.C. (CCH) P50,880 (4th Cir. 1998), demonstrate, taxpayers must follow very detailed and technical rules to substantiate deductions for charitable contributions of property. The Internal Revenue Service and the courts have confirmed that unless taxpayers (and their tax attorneys) follow the letter of the law, their noncash charitable contribution deductions may be limited to the taxpayers' cost basis in the property. Tax attorneys should use this clearly stated position to support and not undermine their clients' noncash charitable deductions.

DAB

Goodwin Posts "Ask Not What Your Charity Can Do for You: Robertson v. Princeton Provides Liberal-Democratic Insights into Cy Pres Reform"

Professor Iris Goodwin (Tennessee) posted an abstract of her draft Arizona Law Review article about the cy pres doctrine on SSRN's Nonprofit and Philanthropy Law Abstracting Journal.  The article is entitled "Ask Not What Your Charity Can Do for You: Robertson v. Princeton Provides Liberal-Democratic Insights into Cy Pres Reform."  Here is the abstract:

This article centers on a long-standing problem in the law of public charity: how to ameliorate the force of restrictions imposed by donors on large gifts in the face of societal change. Seeking to advance personal beliefs or social agenda, donors of large gifts commonly limit the application of donated funds to particular programs. Under current law, such restrictions obtain in perpetuity. A restriction, if socially apposite when made, often functions as a dead hand upon the charity with the passage of time. What has long been sought by the legal community is a substantive standard by which to evaluate the continued social efficacy of these donor-imposed restrictions and to justify interpreting them more liberally in the face of change. This article sheds light on this challenge by first understanding these restrictions as private views of the public good, and by then locating charitable mission and in particular restricted gifts in the context of liberal democracy. At that point, we can discern the deep, normative reasons for which this criterion has eluded commentators, judges and legislatures operating in a tradition of political liberalism. This argument is grounded in John Rawls's use of the distinction, fundamental to liberal political thought, between the concepts of the right and the good, to locate within a liberal democracy certain claims about the public good.

By way of illustration, this article also examines aspects of the ongoing legal dispute between the Robertson family and Princeton University. The Robertsons allege that the University has failed to comply with a restriction that the family imposed on a gift made decades earlier and, further, has applied Robertson funds far outside the compass of the grant. Now valued at almost $800 million, the gift represents 6% of Princeton's endowment. The Robertsons' gift was made in response to President Kennedy's challenge to Ask not what your country... The Robertsons claim that, consistent with the patriotic impulse that motivated the grant, funds were to be used to establish a graduate program to educate students for careers in the U.S. government. As one family's response to Kennedy's challenge to the nation, the Robertson restriction is a quintessential example of a private view of the public good. Within a few short years, however, the moment of idealism that inspired the gift came to an abrupt end with the assassination of Kennedy, the mire of Vietnam and other national embarrassments, and young people were not interested in working for the U.S. government. No case or controversy better illustrates the role that restricted gifts play in the charitable sector or demonstrates the particular inadequacies of the current law in guiding charities in their stewardship of such gifts over time.

DAB

Crimm Posts "Muslim-Americans' Charitable Giving Dilemma: What About a Centralized Terror-Free Donor Advised Fund?"

Professor Nina J. Crimm (St. John's) posted an abstract of her draft Roger Williams University Law Review article about the challenges Muslim-Amreicans face when giving to some charities on SSRN's Nonprofit and Philanthropy Law Abstracting Journal.  The article is entitled "Muslim-Americans' Charitable Giving Dilemma: What About a Centralized Terror-Free Donor Advised Fund?"  Here is the abstract:

In the post-9/11 national security oriented environment, many Muslim-Americans face an inhospitable philanthropic environment and the dilemma of how to satisfy their religious charitable giving obligations and goals. The Article addresses the chilled philanthropic climate by suggesting that it might be moderated through the creation of a centralized terror-free donor advised fund aimed specifically at enabling Muslim-Americans discreetly to direct their diaspora philanthropy to needy Muslims in a few targeted regions and communities abroad. It presents the financial feasibility of, and the essential requirements for, creating such a terror-free donor advised fund. The Article suggests how the benefits of a terror-free donor advised fund would inure not only to Muslim-Americans and the neediest Muslims abroad, but also to the American public.

DAB

Report on Fraud in Nonprofits - A $40 Billion Problem?

The Nonprofit and Voluntary Quarterly recently published a report on fraud in nonprofits authored by Janet Greenlee (University of Dayton), Mary Fischer (University of Texas at Tyler), Teresa Gordon (University of Idaho), and Elizabeth Keating (Harvard Law School and the Hauser Center for Nonprofit Organizations).  The report begins by noting that if an Association of Certified Fraud Examiners (ACFE) estimate that all organizations lose an average of 6 percent of their revenue to fraud each year, the fraud loss in the nonprofit sector would be approximately $40 billion.  The report then analyzes 2004 data on actual fraud cases at nonprofits reported by ACFE members and involving almost $30 million in losses.  Based on this review, it concludes with a series of recommendations for how nonprofits can protect against fraud, including strengthening internal controls, creating a board audit committee, improving board quality and oversight generally, better vetting and education of employees, and providing an easy means for employees and others to confidentially report suspected fraud.

(hat tip: Alice Thomas)

LHM

Ben-Ner and Ren Post Does Organization Ownership Matter?

Avner Ben-Ner (University of Minnesota's Carlson School of Management) and Tin Ren (a Ph.D. candidate at the same institution) have posted Does Organization Ownership Matter?  Structure and Performance in For-Profit, Nonprofit and Local Government Nursing Homes on SSRN.  Here is the abstract:

We compare the structure and performance of for-profit (FP), nonprofit (NP) and local government (LG) organizations. These organizations differ in their ownership structure, objectives and agency relations. We conjecture that, compared to NP and LG, FP firms (a) delegate less decision-making power to employees, (b) provide more incentives and fewer fringe benefits, (c) monitor less, and (d) rely less on social networks to recruit employees. We also hypothesize that, relative to NP and LG, FP firms (i) are more efficient, (ii) provide similar levels of service elements that observable to their customers, (iii) provide lower levels of less-well observable elements, and (iv) provide less of the relational elements. Differences in structure and performance are likely to be tempered by market competition and institutional pressures for similarity. Our empirical investigation of Minnesota nursing homes (utilizing state, federal and survey data) supports these hypotheses.

Interestingly, their findings appear to be similar to initial findings by other scholars, such as Jill Horwitz (University of Michigan Law School) in her article Does Nonprofit Ownership Matter?, 24 Yale J. Reg. 139 (2007) (SSRN version), that in the hospital field nonprofit institutions are qualitatively different from their for-profit counterparts with respect to such items as the mix of services provided.  The still open question for many considering these fields is whether this qualitative difference, if it exists, is sufficient in a quantitative sense to justify the legal benefits enjoyed by the nonprofit institutions such as federal income tax exemption, access to tax-exempt bond financing, and property tax exemption.

LHM

Benshalom Posts The Dual Subsidy Theory of Charitable Deductions

Ilan Benshalom (Visiting Assistant Professor, Northwestern University School of Law) has posted The Dual Subsidy Theory of Charitable Deductions on SSRN.  Here is the abstract:

Americans contribute billions of dollars to charities on an annual basis. Charitable contributions do not only represent American generosity, however; they also represent a form of giving that provides dono