Friday, March 17, 2017
Samuel D. Brunson (Loyola-Chicago) and David Herzig (Valparaiso) have posted A Diachronic Approach to Bob Jones: Religious Tax Exemptions after Obergefell, Indiana Law Journal (forthcoming). Here is the abstract:
In Bob Jones v. U.S., 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 Lawrence 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 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 suggest recommended 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 allow 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.
Roger Colinvaux (Catholic) has posted The Importance of a Participatory Charitable Giving Incentive, 154 Tax Notes No. 5 (2017). Here is the abstract:
Leading tax reform proposals contemplate a charitable deduction claimed by just five percent of taxpayers. Such a limited deduction would fatally undermine the foundations of a giving incentive that has fostered an altruistic and pluralistic society through its broad-based participation and would seriously harm the charitable sector. Section 501(c)(3) would recede in importance as setting the standard for a public benefit organization. More gifts would go to private benefit and political organizations. The article argues that a charitable deduction for the few should be rejected. Instead, Congress should consider expanding the charitable giving incentive by extending it to more taxpayers in the form of a credit. A credit would remove long-standing inequities, allow for smarter charitable giving policy in the future, and improve transparency. If a charitable deduction for the few does become part of tax reform, however, changes should be made to ensure that deductible contributions are not abused but go to active public charities.
Our Constitution enshrines two bedrock principles of Western liberal democracies: limited government and equal opportunity. This Chapter explores the extent to which the charitable tax subsidies reflect these principles, as expressed in the two theories of distributive justice respectively associated with them, libertarianism and resource egalitarianism. This analysis shows that the subsidies’ current structure is much broader than necessary to reflect libertarian ideals, even under the more permissive classical liberal theories. As a result, the subsidies undermine the principle of limited government by coercing taxpayers to subsidize activities that are not the legitimate purview of government. The subsidies’ relation to resource egalitarianism is more complex: They are broader than the most common interpretations of resource egalitarianism justify, and undermine basic equality of opportunity notions both by subsidizing activities that increase the head-start of the wealthy and by giving wealthy taxpayers more say over government resources than poorer taxpayers. That said, the subsidies do reflect less well-known and more controversial accounts of resource egalitarianism that address expensive tastes and talent-pooling.
Margaret H. Lemos (Duke) and Guy-Uriel E. Charles (Duke) have posted Patriotic Philanthropy? Financing the State with Gifts to Government. Here is the abstract:
Federal and state law prohibit government officials from accepting gifts or “emoluments” from outside sources. The purpose of gift bans, like restrictions on more explicit forms of bribery, is to protect the integrity of political processes and to ensure that decisions about public policy are made in the public interest — not to advance a private agenda. Similar considerations animate regulations on campaign funding and lobbying. Yet private entities remain free to offer gifts to government itself, to foot the bill for particular public projects they would like to see government pursue. Such gifts — dubbed “patriotic philanthropy” by one prominent donor — raise fundamental questions about the private role in public policymaking, questions that are central to debates over campaign finance, private philanthropy, and the privatization of government functions. Nevertheless, they have received virtually no attention in the legal literature. This Article offers a positive and normative account of gifts to government. Although we do not question the enormous good that patriotic philanthropy can do, we argue that gifts raise significant concerns about democratic process, equality, and state capacity.
I have posted Globalization Without a Safety Net: The Challenge of Protecting Cross-Border Funding of NGOs, 102 Minnesota Law Review (forthcoming). Here is the abstract:
More than 50 countries around the world have sharply increased legal restrictions on both domestic non-governmental organizations (“NGOs”) that receive funding from outside their home country and the foreign NGOs that provide such funding and other support. These restrictions include requiring advance government approval before a domestic NGO can accept cross-border funding, requiring such funding to be routed through government agencies, and prohibiting such funding for NGOs engaged in certain activities. Publicly justified by national security, accountability, and other concerns, these measures often go well beyond what is reasonably supported by such legitimate interests. These restrictions therefore violate international law, which provides that the right to receive such funding is an essential aspect of freedom of association. Yet affected NGOs cannot rely on the international human rights treaties that codify this right because those treaties have limited reach and lack effective avenues for remedying these violations.
There is, however, a growing web of international investment treaties designed to protect cross-border flows of funds, leading some supporters of cross-border funding for NGOs to argue that NGOs can instead use these investment treaties to protect such funding. In this Article, I provide the most thorough consideration of this proposal to date, including taking into account not only the legal hurdles to invoking investment treaty protections in this context but also the practical hurdles based on recently gathered information regarding the costs to parties who pursue claims under these treaties. I conclude that while it may be possible to overcome both sets of hurdles in some situations, these hurdles are higher than previous commentators have acknowledged. In particular, overcoming the high costs of bringing claims under these treaties would at a minimum require a concerted effort to fund or reduce such costs through either securing substantial third party financing or recruiting significant pro bono assistance.
Given these obstacles to invoking the protections of international investment treaties, I then explore the insights that the remarkable growth in such treaties provide regarding the conditions that would need to exist for countries to be convinced to enact a similar set of agreements to protect cross-border funding of NGOs. I conclude that such conditions are currently absent and that it will take many years to see if they could develop, even assuming that many countries continue to increasingly restrict or effectively prohibit such funding. In the meantime, both recipients and providers of cross-border funding for NGOs will need to consider alternate strategies that do not rely on international law to counter such restrictions.
The final version of Conservation Easements and the Valuation Conundrum, 19 Florida Tax Review 225 (2016), written by Nancy McLaughlin (Utah) is now available. Here is the abstract:
For more than fifty years, taxpayers have been able to claim a federal charitable income tax deduction under Internal Revenue Code § 170(h) for the donation of a conservation easement or a façade easement. For just as long, the deduction has been subject to abuse, including valuation abuse. Dismayed by the expenditure of significant judicial and administrative resources to combat abuse in the easement donation context, the Treasury Department recently proposed reforms, including reforms to address valuation abuse. The reforms were proposed in somewhat of an analytical vacuum, however, because there has been no comprehensive analysis of the easement valuation case law. This article fills that void. It examines the easement valuation case law and discusses the most common methods by which taxpayers or, more precisely, their appraisers overvalue easements. It also proposes alternative reforms informed by the lessons learned from the case law. Concise summaries of the relevant facts and holdings of the cases are included in appendices.
Wednesday, March 1, 2017
Schizer: Subsidies and Nonprofit Governance: Comparing the Charitable Deduction with the Exemption for Endowment Income
David Schizer has posted a new working paper, entitled "Subsidies and Nonprofit Governance: Comparing the Charitable Deduction with the Exemption for Endowment Income." From the abstract:
Charitable subsidies are supposed to encourage positive externalities from charity. In principle, the government can pursue this goal by evaluating specific charitable initiatives and deciding how much each should receive. But this Article focuses on two income tax rules that leave the government very little discretion about which charities to fund: the deduction for donations to charity (“the deduction”) and the exemption of a charity’s investment income (“the exemption”). Under each rule, as long as charities satisfy very general criteria, federal dollars flow automatically. While both of these sibling subsidies delegate key decisions to private individuals, they create very different incentives and effects. This Article breaks new ground by showing their different effects on the governance of nonprofits.
Specifically, the deduction has three advantages over the exemption. First, the deduction uses a more reliable test for determining whether a charity should receive government funding: a charity has to attract donations, which means donors believe in the charity. For the exemption, by contrast, a charity has to run a surplus, which is less dependable evidence of social value. Second, the deduction empowers donors to monitor nonprofit managers, while the exemption undercuts this monitoring. Since the exemption offers tax-free returns only to charities, and not to donors, it encourages donors to turn over assets to charities (“endowment gifts”), instead of keeping these assets and making annual gifts of the investment return (“spendable gifts”). But once a donor gives an endowment to an operating charity, she cannot redirect this money to another charity, even if she later develops doubts about the charity’s mission or management. Third, in favoring endowments, the exemption exacerbates another familiar governance problem: cumbersome or stale limits on endowments.
These governance issues are an important, but largely overlooked, reason to favor the deduction over the exemption. Yet although scaling back the exemption solves one set of problems, it creates another: charities would begin making tax-motivated saving and investment decisions. In deciding how much of the subsidy for charities should be delivered through the exemption, as opposed to the deduction, Congress needs to manage this tradeoff. This Article explores various ways to do so.
Wednesday, January 18, 2017
By Professor Alina S. Ball, UC Hastings - from the SSRN Abstract:
The social enterprise movement has ushered in a promising new wave of companies using market-based strategies to advance social and environmental change. The
longevity and growth of social enterprises will be determined by their ability to balance the complex and often competing interests within these unique business entities. The established corporate governance regime, which predominately addresses the characteristics of public companies, does not provide adequate oversight for promoting good corporate governance within the social enterprise sector. This Article argues that the benefit reporting requirements in hybrid-corporation statutes offer an innovative mechanism for encouraging and maintaining good social enterprise governance. Using the benefit reporting requirements within hybrid-corporation statutes as a model, this Article provides a normative framework and establishes the implementation principles for social enterprise governance across various legal entities. By counseling social enterprises on how to promote participatory democracy and increase the company’s capacity to detect and address problems, corporate lawyers serve a critical function in developing social enterprise governance. Using an approach guided by corporate lawyers and informed by social enterprise practitioners would build on the traditional corporate governance paradigm to develop narrowly tailored mechanisms that facilitate a more resilient social enterprise sector.
Suggested Citation: Ball, Alina S, Social Enterprise Governance (August 22, 2016). 18 U. PA. J. BUS. L. 919 (2016); UC Hastings Research Paper No. 179. Available at SSRN: https://ssrn.com/abstract=2827913.
Tuesday, January 17, 2017
Lecy, Van Lyke and Yoon: "What Do We Know About Nonprofit Entrepreneurs?: Results from a Large-Scale Survey"
Jesse Lecy, David Van Slyke, and Nara Yoon (all affiliated with Syracuse University) recently posted to SSRN an article detailing the results of a survey of the motivations behind the creation of new tax-exempt organizations. The SSRN abstract reads as follows:
While the academic fields of entrepreneurship and social entrepreneurship have grown rapidly, nonprofit entrepreneurship has remained a minor field of inquiry, even though 50,000 nonprofits are started each year. Using a survey of 7,000 nonprofit founders, we provide baseline data on key dimensions of nonprofit entrepreneurship. We find that typical nonprofit entrepreneurs are distinct from for-profit entrepreneurs in several ways; they have bigger founding teams, are wealthier, older, more educated, and are less driven by self-employment. These differences inform a research agenda for the field. This study represents the first large-scale empirical analysis of entrepreneurship in the nonprofit sector.
Suggested Citation: Lecy, Jesse D. and Van Slyke, David M. and Yoon, Nara, What Do We Know About Nonprofit Entrepreneurs?: Results from a Large-Scale Survey (December 01, 2016). Available at SSRN: https://ssrn.com/abstract=2890231
From a legal perspective, I found two items immediately interesting: (1) the high number of new organizations that were "spin-offs" of projects that were housed elsewhere or had been operating informally, and (2) the barriers to entry created by paperwork (and knowledge thereof). It reinforces my personal concerns about the "informal" charitable economy, which simultaneously accomplishes many great things off-the-grid, and yet raises issues for me of inefficiency and diversion in limited charitable resources. An interesting read!
Sunday, January 1, 2017
Franklin: Philanthrocapitalism: Exacerbating the Antidemocratic, Paternalistic, and Amateuristic Nature of Philanthropy
Eric Franklin (UNLV) posted Philanthrocapitalism: Exacerbating the Antidemocratic, Paternalistic, and Amateuristic Nature of Philanthropy to SSRN. The article's abstract is:
The recent announcement by Mark Zuckerberg and Dr. Priscilla Chan to pledge Facebook stock worth $45 billion to various philanthropic efforts was met with more skepticism than praise. Most of the criticism concerned the couple’s decision to organize the CZI as a for-profit limited liability company (LLC), rather than the more traditional tax-exempt private foundation. Despite the tax benefits of private foundations, Zuckerberg and Chan were attracted to the fact that LLCs may freely engage in political activity, fund any type of entity, and participate in policy debates.
This begs the question: why should we care how Zuckerberg and Chan engage in charitable activity? The Facebook stock is, after all, their property, and the general public does not generally have any say in how the wealthy dispose of their property. This Article argues that the criticisms are warranted. The reason the public does (and should) care, is that the decision presents troubling questions about the role of philanthropy in our society and the consequences of philanthropists using for-profit vehicles to engage in charitable work.
For more than a century, sociologists have criticized philanthropy as antidemocratic, paternalistic, and amateuristic. However, the regulatory mechanisms governing private foundations ensure that the entities actually engage in publicly-blessed charitable activity, require numerous disclosures to increase accountability, and restrict certain political and lobbying activities. Although these mechanisms do not eliminate the negatives of philanthropy, they do limit their negative effect. As such, there is a convincing argument that philanthropy is worth these costs. The hope is that the mechanisms regulating private foundations result in a palatable balance between philanthropy’s negative and positive aspects.
However, the recent trend of conducting charity through for-profit vehicles throws that balance off. The regulatory bulwarks designed to encourage the positive aspects of philanthropy do not exist in the for-profit realm. As such, philanthropy conducted through for-profit vehicles encourages entities to engage in matters of public concern free from meaningful regulation and limitations.
This Article discusses each of the traditional critiques of philanthropy and explores how they are exacerbated when philanthropic efforts are conducted through a for-profit vehicles, such as LLCs.
Tuesday, November 15, 2016
Volume 45, Issue 5 of the Nonprofit and Voluntary Sector Quarterly is now available. Here is the table of contents:
- , , and From the Editors’ Desk
- : Exploring the Effects of Organizational and Environmental Variables Understanding Nonprofit Financial Health
- and Evolution in Board Chair–CEO Relationships: A Negotiated Order Perspective
- , Carmen Marcuello-Servós, and Youth Volunteering in Countries in the European Union: Approximation to Differences
- and The Internet and the Commitment of Volunteers: Empirical Evidence for the Red Cross
- : Racial Prejudice Affect as a Mediating Factor Perceived Group Competition and Charitable Giving
- and What Big Data Can Tell Us About Government Awards to the Nonprofit Sector: Using the FAADS
- Book Review: Challenging the third sector: Global prospects for active citizenship by S. Kenny, M. Taylor, J. Onyx & M. Mayo and The NGO challenge for international relations theory edited by W. E. DeMars & D. Dijkzeul
- Book Review: The nonprofit world: Civil society and the rise of the nonprofit sector by J. Casey
- Book Review: Faculty work and the public good by G. G. Shaker
Volume 27, Issue 6 (December 2016) of VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations is now available. Here is the table of contents:
- Disentangling the Financial Vulnerability of Nonprofits
Pablo de Andres-Alonso, Inigo Garcia-Rodriguez & M. Elena Romero-Merino
- Exploring the Nexus of Nonprofit Financial Stability and Financial Growth
Grace L. Chikoto-Schultz & Daniel Gordon Neely
- Doing Well by Returning to the Origin. Mission Drift, Outreach and Financial Performance of Microfinance Institutions
Matteo Pedrini & Laura Maria Ferri
- Funding and Financial Regulation for Third Sector Broadcasters: What Can Be Learned From the Australian and Canadian Experiences?
Fernando Méndez Powell
- Funding Civil Society? Bilateral Government Support for Development NGOs
David Suárez & Mary Kay Gugerty
- Resource Dependence In Non-profit Organizations: Is It Harder To Fundraise If You Diversify Your Revenue Structure?
Ignacio Sacristán López de los Mozos, Antonio Rodríguez Duarte & Óscar Rodríguez Ruiz
- Resisting Hybridity in Community-Based Third Sector Organisations in Aotearoa New Zealand
Jenny Aimers & Peter Walker
- NPO Financial Statement Quality: An Empirical Analysis Based on Benford’s Law
Tom Van Caneghem
- A Review of Research on Nonprofit Communications from Mission Statements to Annual Reports
- NGOs in the News: The Road to Taken-for-Grantedness
Angela Marberg, Hans van Kranenburg & Hubert Korzilius
- Understanding Contemporary Challenges to INGO Legitimacy: Integrating Top-Down and Bottom-Up Perspectives
Oliver Edward Walton, Thomas Davies, Erla Thrandardottir & Vincent Charles Keating
- Sensegiving, Leadership, and Nonprofit Crises: How Nonprofit Leaders Make and Give Sense to Organizational Crisis
Curt A. Gilstrap, Cristina M. Gilstrap, Kendra Nigel Holderby & Katrina Maria Valera
- Organizational Crisis Resistance: Examining Leadership Mental Models of Necessary Practices to Resist Crises and the Role of Organizational Context
- Ideology, Practice, and Process? A Review of the Concept of Managerialism in Civil Society Studies
- Toward More Targeted Capacity Building: Diagnosing Capacity Needs Across Organizational Life Stages
Fredrik O. Andersson, Lewis Faulk & Amanda J. Stewart
- Dimensions of Capacity in Nonprofit Human Service Organizations
William A. Brown, Fredrik O. Andersson & Suyeon Jo
- The Effect of Attitudinal and Behavioral Commitment on the Internal Assessment of Organizational Effectiveness: A Multilevel Analysis
Patrick Valeau, Jurgen Willems & Hassen Parak
- Testing an Economic Model of Nonprofit Growth: Analyzing the Behaviors and Decisions of Nonprofit Organizations, Private Donors, and Governments
You Hyun Kim & Seok Eun Kim
- Book Review, David Fishel: The Book of the Board: Effective Governance for Non-profit Organisations (3rd edition)
- Book Review, Block, Stephen R.: Social Work and Boards of Directors: The Relationship Model
- Book Review, Judith McMorland, Ljiljana Eraković, Stepping Through Transitions: Management, Leadership & Governance in Not-for-Profit Organisations
Dyana P. Mason
- Erratum to: Dependent Interdependence: The Complicated Dance of Government–Nonprofit Relations in China
- Erratum to: Institutional Variation Among Russian Regional Regimes: Implications for Social Policy and the Development of Non-governmental Organizations
Thomas F. Remington
- Erratum to: Modernizing State Support of Nonprofit Service Provision: The Case of Kyrgyzstan
- Erratum to: France: A Late-Comer to Government–Nonprofit Partnership
- Erratum to: New Winds of Social Policy in the East
Linda J. Cook
- Erratum to: The Long-Term Evolution of the Government–Third Sector Partnership in Italy: Old Wine in a New Bottle?
- Erratum to: Poland: A New Model of Government–Nonprofit Relations for the East?
Sławomir Nałęcz, Ewa Leś & Bartosz Pieliński
Larry Catá Backer (Pennsylvania State University) has posted Commentary on the New Charity Undertakings Law: Socialist Modernization Through Collective Organizations, The China Non Profit Law Review (Tsinghua University) (forthcoming 2016). Here is the abstract:
China’s new Charity Law represents the culmination of over a decade of planning for the appropriate development of the productive forces of the charity sector in aid of socialist modernization. Together with the related Foreign NGO Management Law, it represents an important advance in the organization of the civil society sector within emerging structures of Socialist Rule of Law principles. While both Charity and Foreign NGO Management Laws could profitably be considered as parts of a whole, each merits discussion for its own unique contribution to national development. One can understand, both the need to manage Chinese civil society within the context of charity ideals, and the need to constrain foreign non-governmental organizations to ensure national control over its own development. Moreover, the decision to invite global comment also evidenced Chinese understanding of the global ramifications of its approach to the management of its civil society, and its importance in the global discourse about consensus standards for that management among states. This becomes more important as Chinese civil society try to emerge onto the world stage. This essay considers the role of the Charity Law in advancing Socialist Modernization through the realization of the Chinese Communist Party(CCP) Basic Line. The essay is organized as follows: Section II considers the specific provisions of the Charity Law, with some reference to changes between the first draft and the final version of the Charity Law. Section III then considers some of the more theoretical considerations that suggest a framework for understanding the great contribution of the Charity Law as well as the challenges that remain for the development of the productive forces of the civil society sector at this historical stage of China’s development.
Kathryn Chan (University of Victoria) has posted (on SSRN) The Function (or Malfunction) of Equity in the Charity Law of Canada's Federal Courts, 2 Canadian Journal of Comparative and Contemporary Law 33 (2016). Here is the abstract:
This essay explores what, if anything, it means for the Federal Court of Appeal to be a “court of equity” in the exercise of its jurisdiction over matters related to charitable registration under the Income Tax Act. The equitable jurisdiction over charities encompasses a number of curative principles, which the Court of Chancery traditionally invoked to save indefinite or otherwise defective charitable gifts. The author identifies some of these equitable principles and contemplates how their invocation might have altered the course of certain unsuccessful charitable registration appeals. She then considers the principal arguments for and against the Federal Court of Appeal applying these equitable principles when adjudicating matters related to registered charity status.
Matthew S. Erie (Oxford) has posted (on SSRN) Sharia, Charity, and Minjian Autonomy in Muslim China: Gift Giving in a Plural World, 43 American Ethnologist 311 (2016). Here is the abstract:
In Marcel Mauss's analysis, the gift exists in the context of a homogenous system of values. But in fact, different types of normative systems can inhabit the same social field. This is the case among Hui, the largest Muslim minority group in China, for whom the “freedom” of the gift resides in the giver's capacity to follow the rules underlying gifting, in this case, the rules of sharia. I call this capacity “minjian (unofficial, popular) autonomy.” Hui follow sharia in pursuit of a good life, but their practices are also informed by mainstream Han Chinese gift practices and by the anxieties of the security state. In their gifting practices, Hui thus endeavor to reconcile the demands of Islamic, postsocialist, and gift economies.
Monday, November 14, 2016
Benjamin W. Akins (Georgia Gwinnett College School of Business) has posted State of Confusion: A Non-Profit's Right to Withhold Information from State Regulators on SSRN. Here is the abstract:
A tempest is brewing, and the non-profit community is sounding an alarm. What started as a simple overlooked regulatory requirement has blossomed into a battlefield as Federal circuits from east to west are weighing the breadth of power state regulators may wield when dealing with charities. The trouble started when some states made the bold move to start enforcing their existing laws. More specifically, the Attorneys General in New York and California started requiring non-profits to disclose the identity of their donors before allowing solicitation activities to occur.
Initially, two organizations filed suit to enjoin the states from collecting their donor information. The charities argued that being compelled to disclose this information would result in a chilling effect, reasoning that donors would shy away from making contributions, which would cause the charities to lose support. Early on in the litigation, courts held that the states had every right to the charities’ donor information and denied injunctive relief.
Then a third organization joined the fray with a similar plan, but in the midst of a wending judicial path, a different course was forged. The organization was granted a full trial and walked away with a win on the merits. While this signaled a temporary change in fortunes for the affected charities, the inconsistent judicial results have left all parties with more uncertainty than when they began. Now, this nascent line of jurisprudence is muddled, and it is up to either the courts or Congress to bring resolution and consistency to this sensitive Constitutional issue.
Brian L. Frye (University of Kentucky), a contributing editor to this blog, has posted Art & the "Public Trust" in Municipal Bankruptcy, University of Detroit Mercy Law Review (forthcoming). Here is the abstract:
In 2013, the City of Detroit filed the largest municipal bankruptcy action in United States history, affecting about $20 billion in municipal debt. Unusually, Detroit owned its municipal art museum, the Detroit Institute of Arts (“DIA”) and all of the works of art in the DIA collection, which were potentially worth billions of dollars. Detroit’s creditors wanted Detroit to sell the DIA art in order to satisfy its debts. Key to the confirmation of Detroit’s plan of adjustment was the DIA settlement, under which Detroit agreed to sell the DIA art to the DIA corporation in exchange for $816 million over 20 years.
The bankruptcy court approved the DIA settlement as fair and in the best interests of the creditors because it found that Detroit could not, would not, and should not sell the DIA art. The bankruptcy court’s conclusion that Detroit could not sell the DIA art was wrong. It could and did sell the DIA art. But the bankruptcy court’s effective conclusion that Detroit was free to sell the DIA art on its own terms was correct.
The Detroit bankruptcy and DIA settlement suggest that art museums should be permitted and even encouraged to sell works of art in order to preserve the rest of their collections and continue operations. Professional standards that prohibit art museums from selling works of art for any purpose other than purchasing works of art are unjustified and should be abandoned.
Brian Galle (Georgetown) has posted Valuing the Right to Sue: An Empirical Examination of Nonprofit Agency Costs on SSRN. Here is the abstract:
Do stakeholder suits against managers reduce agency costs? I examine this question using a large panel of private foundation tax returns, together with hand-collected data on state-law variations in the right of donors to sue wayward nonprofit managers. In both difference-in-differences and triple-difference estimations, I find on average that standing to sue substantially increases donations and reduces the share of firm expenses devoted to administrative costs among private foundations. These outcomes are robust to other estimating strategies, such as propensity-score matching and regression adjustment with inverse probability weights. Coefficients are smaller and less precise among large operating charities. I argue that my results weigh in favor of expanded donor standing to sue, at least for foundations. My findings also suggest that the agency costs of philanthropic organizations are substantial, which has implications for, among other policy debates, tax policies that encourage perpetual-lived philanthropy.
Robert Shireman (The Century Foundation) has published Public and Nonprofit Higher Education as the Optimal Second-Best, 76 Public Administration Review 758 (2016). Here are the first two paragraphs:
A reporter who covers Wall Street recently asked me whether the for-profit college industry has hit bottom yet. She meant the stock price, but my mind went immediately to the predatory behavior—aggressive and misleading marketing and low-quality programs leading hundreds of thousands of students into crippling debt—that has plagued the industry. Those egregious practices were at their worst precisely when the stock prices of for-profit colleges were at their highest. And therein lies the market failure that burdens for-profit higher education: While in other industries consumer value and shareholder value can move in tandem, with products and services like education, the guiding light of the enterprise—the stock price—can lead to the worst outcomes for students.
Education exhibits a problem known as contract failure, in which the buyer cannot reliably evaluate the quality of the promised or provided product or service. As a consequence, profit maximization fails to produce optimal outcomes because the profit-seekers’ drive to overpromise and underdeliver is rewarded rather than punished by the market, causing other firms to emulate the bad behavior. The problem becomes particularly severe if the firms target the least sophisticated or most desperate customers, those who are least able to evaluate the quality of the service provided. Contract failure is common in enterprises with ambiguous goals like building character, developing critical thinking skills, or spiritual fulfillment, or in industries involving vulnerable populations like children (schools) and the elderly (nursing homes).
Kenya J.H. Smith (Arizona Summit) has published Charitable Choice: The Need for a Uniform Nonprofit Limited Liability Company Act (UNLLCA), 49 University of Michigan Journal of Law Reform 405 (2016). Here is the abstract:
Uniform laws serve an important role in our society, balancing state autonomy and the need to provide consistent solutions to common problems among the states. The Uniform Law Commission (ULC) is the preeminent authority that promulgates uniform laws. To date, the ULC has promulgated over 150 uniform and model acts. ULC tackles a wide array of issues, including child custody and protection, probate, electronic records, and commercial law. The ULC aims to “provide[ ] states with non-partisan, well-conceived and well-drafted legislation that brings clarity and stability to critical areas of state statutory law.”