Saturday, January 24, 2015
Hemphill & Cullari: The Benefit Corporation: Corporate Governance and the For-profit Social Entrepreneur
Thomas A. Hemphill and Francine Cullari (both School of Management, Michigan-Flint) have published The Benefit Corporation: Corporate Governance and the For-profit Social Entrepreneur, 119 Business and Society Review 519 (2014). Here is the abstract:
The adoption by 19 states and the District of Columbia of a new variant of the business corporation form—known as the benefit corporation—presents several issues for legislatures, for entrepreneurs electing to organize as benefit corporations, for existing corporations that are converting to the new form, and for the stakeholders (other than shareholders) who are intended to be considered in benefit corporation governance. The article presents the history and structure of the new business form and a discussion of what has become its predecessor—the constituency statute. The model benefit corporation statute provisions are reviewed, which many states have adopted in toto. The authors address the obstacles that should be overcome by legislatures, businesses, and stakeholders before further legislative adoptions occur, as well as considerations for effective implementation by government, corporations, and stakeholders under existing and proposed variations of the statute.
Samuel D. Brunson (Loyola-Chicago) has posted Dear I.R.S., It Is Time to Enforce the Campaigning Prohibition, Even Against Churches. Here is the abstract:
In 1954, Congress prohibited tax-exempt public charities, including churches, from endorsing or opposing candidates for office. To the extent a tax-exempt public charity violated this prohibition, it would no longer qualify as tax-exempt, and the I.R.S. was to revoke its exemption.
While simple in theory, in practice, the I.R.S. rarely penalizes churches that violate the campaigning prohibition, and virtually never revokes a church’s tax exemption. And, because no taxpayer has standing to challenge the I.R.S.’s inaction, the I.R.S. has no external imperative to revoke the exemptions of churches that do campaign on behalf of or against candidates for office.
This argument makes the normative case that, notwithstanding the I.R.S.’s administrative discretion and the inability of taxpayers to challenge its nonenforcement in court, the time has come for the I.R.S. to begin enforcing the campaigning prohibition. Failing to do so harms the Rule of Law, the taxpaying public, and churches themselves. Moreover, the moment is correct for enforcement, as Pulpit Freedom Sunday has virtually eliminated the I.R.S.’s search costs, people are more aware than ever that churches are violating the prohibition, and, in the aftermath of the Supreme Court’s Citizens United decision, the campaigning prohibition may represent the final regulatory barrier between charities and politicking.
Even if enforcing the campaigning prohibition is the right thing to do, it would potentially be unpopular, and could provoke a backlash against the I.R.S. After making the normative case for enforcement, then, this Article provides a strategy for enforcement that will allow the I.R.S. to explain what it is doing and why to the general taxpaying public, and will further permit the I.R.S. to avoid the appearance of partisanship. Ultimately, enforcement will allow the I.R.S. to responsibly administer the tax law, will permit the question of the prohibition’s constitutionality to get in front of the judiciary, and will demonstrate dedication to the Rule of Law.
To this day, the law of charity is often thought of as a matter for the states. In fact, the crucial law relating to charity is now almost always federal. For certain purposes, state law still determines whether a given entity is “charitable.” It also determines the propriety of a charitable fiduciary’s conduct when someone who has standing sues. But federal law determines whether an entity qualifies for various tax incentives, such as exemption from the federal income tax and eligibility to receive tax-deductible gifts, and qualification for these incentives generally determines whether the entity comes into existence and, if so, whether it survives. Federal law also wields a bewildering array of draconian penalties against both charities and their fiduciaries for failure to comply with federally specified rules of behavior. This Article examines both of these and other ways in which federal law has essentially taken over the law of charity. The point is not whether federalization of the law of charity is good or bad. The point is simply this: During the last century, Congress and the federal courts federalized the law of charity.
Saturday, November 29, 2014
Oonagh B. Breen (University College Dublin) has posted Long Day's Journey: The Charities Act 2009 and Recent Developments in Irish Charity Law, Charity Law and Practice Review (forthcoming). Here is the abstract:
It is now twelve years since the Irish Government committed in its Agreed Programme for Government to the introduction of a modern statutory framework for the regulation of Irish charities. Twelve years on, in 2014, the promise of reform to ensure “greater accountability and to protect against abuse of charitable status and fraud . . . [and increased] transparency in the sector has never been more necessary and yet still remains to be delivered. Despite the passage of the Charities Act 2009, its non-implementation has created a regulatory void into which allegations of charity maladministration and misfeasance have filled the public consciousness.
In his seminal work on the formation of public policy, John Kingdon provides a persuasive theory to explain the opening, operation and outcomes of so-called ‘policy windows.’ According to Kingdon, at any given time, a ‘problem stream’ exists representing all the issues that are wrong in a given system. Running (often) parallel to the problem stream will be a ‘solution stream’ containing all of those suggested fixes to make a system work better. It is only when there is a convergence of those two streams within a third ‘political stream’ that policy change occurs. The nature of the political stream within which this convergence occurs can take many forms. In the words of Kingdon, it can comprise “public mood, pressure group campaigns, election results, partisan or ideological distributions in Congress and changes of administration.” The collision of problem and solution streams within this political stream results in the temporary opening of a policy window, allowing policy change to occur. The form of such resultant change may be shaped further by coincidental influences or agenda issues hovering in the vicinity of the window which attach themselves to the coat tails of the newly minted policy outcome. This conception of the policymaking process is useful, providing as it does some insight into how certain policy solutions come to be expectations or have other unintended consequences.
In an Irish context, Kingdon’s framework provides a useful lens through which to analyse the ‘fits and starts’ approach to charity law reform. Against the backdrop of the recent revelations concerning the Central Remedial Clinic and the Rehab Group charities and the catalytic effect of these scandals on the Irish charity sector and charity regulation more generally, this article reviews the current progress in the implementation of the Charities Act 2009, recent moves towards the establishment of the long awaited Charities Regulatory Authority and the prospects and challenges for better charity governance ahead.
Part I of this article reviews the existing Irish ‘problem’ and ‘solution’ streams in the context of charity regulation and outlines the political catalysts that are now instrumental in driving reform. Part II outlines the pending changes to be introduced over the coming months and the implementation challenges that will face the new Charities Regulator. Part III attempts to align the recent shortfalls in charity governance with the forthcoming statutory requirements and assesses whether the policy changes that the public are so desperately seeking will be delivered by the much anticipated commencement of the Charities Act 2009.
Kathryn Chan (University of Victoria) has posted The Co-Optation of Charitable Resources by Threatened Welfare States, 40 Queen's Law Journal (forthcoming 2015). Here is the abstract:
This paper addresses the emerging issue of the governmental co-optation of charitable resources, considering to what extent modern pressures associated with the retrenchment of welfare states are undermining the charitable sector’s traditional independence from government. It pursues this goal by advancing a theoretical contrast between ‘independent’ and ‘co-opted’ charities, and by identifying and contrasting certain legal and institutional mechanisms that either encourage or limit the co-optation ofcharitable resources by governments in England and in Canada.
The paper proceeds in the following way. I begin by advancing an argument in support of the value of an “independent” charitable sector, and the perils of allowing a nation’s charitable resources to be co-opted by the state. I proceed from this argument to articulate two indicia of a “co-opted” charity, relating these indicia to an important body of Anglo-Commonwealth law on the functional public law-private law divide and thus to debates over whether charities should bear human rights obligations and the other special responsibilities of the state. In part four, I distinguish three broad categories of co-optation that are applicable to charities: definitional (or existential) co-optation, managerial co-optation, and contractual (or fiscal) co-optation. I then examine several modern phenomena that tend towards the co-optation ofcharitable resources by government: the exertion of government influence over the legal definition of charity, the creation of statutory charities that are controlled by government or directed towards its purposes, and the exertion of influence over the administration of charitable resources through the negotiation of funding agreements or the appointment of government authority trustees. I consider how, in their response to each of these phenomena, English and Canadian laws and institutions either assist or obstruct government efforts to make charities comply with particular public welfare goals. I conclude that English law does far more than Canadian law to prevent charities from coming to function as agents of government policy, and may thus be regarded as a source of ideas on how Canada might manifest a stronger political commitment to the charitable sector’s independence.
Lilian V. Faulhaber (Boston University) has published Charitable Giving, Tax Expenditures, and Direct Spending in the United States and the European Union, 39 Yale Journal of International Law 87 (2014). Here is the abstract:
This Article compares the ways in which the United States and the European Union limit the ability of state-level entities to subsidize their own residents, whether through direct subsidies or through tax expenditures. It uses four recent charitable giving cases decided by the European Court of Justice (ECJ) to illustrate the ECJ’s evolving tax expenditure jurisprudence and argues that, while this jurisprudence may suggest a new and promising model for fiscal federalism, it may also have negative social policy implications. It also points out that the court analyzes direct spending and tax expenditures under different rubrics despite their economic equivalence and does not provide a clear rule for distinguishing between the two, adding to the confusion of Member States and taxpayers. The Article then surveys the Supreme Court’s Dormant Commerce Clause jurisprudence, under which the Court analyzes discriminatory state spending provisions. The Article concludes that although both the Supreme Court and the ECJ prioritize formalism over economic equivalence, the Supreme Court’s approach to tax expenditures is more defensible than that of the ECJ due to the different federal structures of the two jurisdictions.
James Fishman (Pace) has posted What Went Wrong: Prudent Management of Endowment Funds and Imprudent Endowment Investing Policies, 40 Journal of College and University Law (forthcoming 2014). Here is the abstract:
Most colleges and universities of all sizes have an endowment, a fund that provides a stream of income and maintains the corpus of the fund in perpetuity. Organizations with large endowments, such as colleges, universities, and private foundations, all finance a significant part of their operations through the return received from the investment of this capital. This article examines the legal framework for endowment investing, endowment investing policies, their evolution to more sophisticated and riskier strategies, and the consequences evinced during the financial crisis of 2008 and beyond. It traces the approaches to endowment investing and chronicles the rise and, if not the fall, the challenges to modern portfolio management. It examines the impact of endowment losses on colleges and universities and their constituencies, as well as the problem of trustee deference to boards' investment committees. This article concludes that universities have learned little from the financial crisis and are more invested in illiquid, nontransparent assets than before the financial crisis. Finally, this article recommends the establishment of board level risk management committees to evaluate endowment investing policies.
Brian L. Frye (Kentucky) has published Solving Charity Failures, 93 Oregon Law Review 155 (2014). Here is the abstract:
“Crowdfunding” is a way of using the Internet to raise money by asking the public to contribute to a project. This Article argues that crowdfunding has succeeded, at least in part, because it makes charitable giving more efficient by solving certain “charity failures,” or inefficiencies created by the inability of the charitable contribution deduction to subsidize the charitable giving from low-income donors. The economic subsidy theory of the charitable contribution deduction explains that the deduction is justified because it solves market failures and government failures in charitable goods. According to this theory, free riding causes market failures in charitable goods, and majoritarianism causes government failures in charitable goods. The charitable contribution deduction solves these market and government failures by indirectly subsidizing charitable contributions, thereby compensating for free riding and avoiding majoritarianism. Crowdfunding is successful because it provides a technological solution to some of those charity failures. While the charitable contribution deduction causes charity failures because the deduction cannot subsidize contributions from low-income donors, crowdfunding can subsidize those contributions by offering rewards instead. As a result, crowdfunding should solve at least some of the charity failures caused by the deduction through providing an incentive for low-income donors to contribute. The remarkable success of crowdfunding suggests that the inefficiency associated with charity failures is quite large.
The article addresses a matter that could result in profound changes in the ability of the United States to ameliorate the most pressing humanitarian and global problems of our times. It provides the mechanics and addresses the solutions required to enable US donors to do more good. In an efficient market, capital ends up in its most productive use. In charitable giving, donations are not always allocated to their most effective use due in no small part to current cross-border giving laws impeding that result. The article sets forth the concept of an “efficient charitable market,” which is predicated upon unshackling the hands of the giver. The article proposes a system for implementing a new law that would allow US donors to make contributions to non-US charities.
Ryan S. Keller (Ph.D. candidate, Cambridge) has posted Beyond Homo Economicus: The Prosocial Brain & The Charitable Tax Deduction, Virginia Tax Review (forthcoming). Here is the abstract:
Charitable tax policy is at an impasse. Historically, citizens have overwhelmingly supported the charitable tax deduction as a means of fostering diversity, encouraging donations and supporting the nonprofit sector. Yet various policymakers and academics have increasingly disputed the deduction’s cogency and justifiability. In response, legal scholars and economists have offered various defenses and assessments of the deduction, but these have not convinced skeptics or placed the deduction on sufficiently solid theoretical and policy footing. The article adopts a novel approach by instead employing recent research in the neuroscience and psychology of prosocial behavior and charitable giving. Specifically, it identifies structural advantages specific to the deduction, rather than to charity or nonprofits more broadly. It then delineates key neural mechanisms and psychological functions that provide evidence linking dimensions of the deduction to distinct, previously neglected positive externalities. Amidst growing skepticism, developing a more capacious understanding of the deduction’s worth to society is essential. Indeed, failure to consider more robust, innovative analyses of the deduction compels authorities to craft policy without adequate information, and leaves the deduction and thus many philanthropic endeavors needlessly vulnerable.
Update on Nonprofits & Politics: Aprill and Colinvaux Articles, AALS Program, IRS Controversy Developments & More
While perhaps the congressional attention to the now 18 months old and counting IRS controversy will decline as the focus shifts to governing (we hope) and 2016 (unavoidably), the bubbling pot that is now nonprofits and politics continues to boil. Here are some of the latest developments:
Ellen Aprill (Loyola-L.A.) has posted The Latest Installment of the Section 501(c)(4) Saga: The Section 527 Obstacle to Effective Section 501(c)(4) Regulations, and Roger Colinvaux (Catholic) has posted Political Activity Limits and Tax Exemption: A Gordian's Knot, Virginia Tax Review (forthcoming). (And, as noted by Paul Caron when I presented at Loyola-L.A., I am working on a draft article currently titled Taxing Politics, which I should hopefully be able to post early in the new year.)
At the 2015 AALS Annual Meeting, the Section on Nonprofit and Philanthropy Law and the Section on Taxation are co-sponsoring IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable? on Saturday, January 3rd, from 10:30 a.m. to 12:15 p.m. The topic grew out of the IRS controversy, although the panel's scope will be much broader. Marcus Owens (Caplin & Drysdale) will be moderating, and panelists include Ellen Aprill (Loyola-LA), Phil Hackney (LSU), Jim Fishman (Pace), Terri Helge (Texas A&M), Dan Tokaji (Ohio State), and Donald Tobin (Maryland).
In news relating directly to the IRS controversy, the staffs of the Senate Permanent Subcommittee on Investigations issued dueling reports, neither of which said much more than we have already heard (repeatedly) from both sides of the aisle. At the IRS, new TE/GE Commissioner Sunita Lough issued her annual Program Letter, emphasizing accountability and transparency as she continues to try to move the division beyond the controversy (referenced obliquely as "the challenges over the last year for the IRS and TE/GE specifically"). And to the annoyance of her critics, Lois Lerner gave an extensive interview to Politico.
And there is more:
- Pulpit Freedom Sunday 2014 launched on October 5th, to very limited media coverage, although there were a few stories right around election day about the over 1600 participating pastors and churches. See the stories in Politico, a Washington Post blog, and the Washington Times.
- On the election law/FEC side of things, there are lawsuits still pending that asset Crossroads GPS (Public Citzen v. FEC) and American Action Network and Americans for Job Security (CREW v. FEC) should have registered and reported as political commitees. (Hat tip: Paul Barton's article this past week in the BNA Daily Tax Report)
Tuesday, November 25, 2014
The scholarly discussion of social enterprise and hybrid legal entities shows no signs of abating. The most recent crop of articles includes the following four plus an entire issue of the Harvard Business Law Review.
Robert T. Esposito (NYU Fellow), Using a Canon to Kill a Fly: Charitable Soliciation Acts and Social Enterprise, NYU Journal of Law and Business (forthcoming)
The Harvard Business Law Review, Volume 4, Issue 2 (2014) - Benefit Corporations includes five articles relating to these hybrid entities, including one by Delaware Chief Justice Leo E. Strine, Jr.
Thursday, October 2, 2014
h/t to our friends over at TaxProf Blog:
Benjamin M. Leff (American), Preventing Private Inurement in Tranched Social Enterprises, 41 Seton Hall L. Rev. ___ (2015):
Monday, August 25, 2014
Ronald Chester (New England) has posted The Life and Death of the Ipswich Grammar School: Is Enduring Dead Hand Control Possible?, ACTEC Journal (forthcoming). Here is the abstract:
This article examines the reasons for the 360-year longevity of the Ipswich (Mass.) Grammar School trust, which was in force from 1652 to 2012, the longest-running charitable trust in American history. It concludes that the cornerstone of the trust’s longevity was the emphasis of its major donor, the Puritan William Paine, on open-handed contribution to the community, rather than dead hand control. A wealthy merchant and landowner and friend of Massachusetts Bay Colony Governor John Winthrop and his son, Paine imbued his commercial activities with a profound civic-mindedness.
A 1647 law required the establishment of a grammar school by any town within the Colony that had 100 families or more. The town of Ipswich, where Paine then resided, established a formal trust in 1652 to fund the school. Upon his death in 1660, Paine devised a unique parcel of land called Little Neck to the trust, whose trustees (“feoffees”) were the elders of Ipswich. The only restriction on Paine's gift of the land “forever” was that the property not be “sold or wasted.”
Although the trust was terminated by agreement of the feoffees and their tenants, and approved by the Massachusetts Attorney General and Courts, the author contends that it could easily have survived with Paine’s vision intact had the feoffees, many of whom were conflicted and inexperienced, been replaced by more professional trustees. The article compares and contrasts the Ipswich trust to the less successful 17th century Hopkins trust and to the modern Barnes Foundation trust in Pennsylvania. The Hopkins trust, which created the Cambridge (Mass.) Grammar School among other entities, spawned litigation lasting 135 years. The Barnes trust, founded in the early- and mid- 20th century and containing some of the most important art works in the world, likewise triggered much litigation, which may not be over, even today. The article concludes that “the longevity a donor’s charity achieves depends on the donor’s swallowing his or her ego and leaving the charitable vehicle open to change by the living.”
Erik Jensen (Case Western Reserve) has posted Taking the Student Out of Student Athlete: College Sports and the Unrelated Business Income Tax, Journal of Taxation of Investments (forthcoming). Here is the abstract:
A recent decision by a National Labor Relations Board regional director, concluding that football players at Northwestern University are employees for purposes of the National Labor Relations Act, could have spillover effects in tax law. This article considers whether severing the connection between participation in athletics and the educational function of a university — i.e., ending the pretense that athletes are student athletes — could lead to imposition of the unrelated business income tax (UBIT) on the net revenue of some intercollegiate teams at big-time athletic colleges.
Friday, August 22, 2014
Harvey Dale (NYU School of Law), along with Victoria Bjorklund, Jennifer I. Reynoso, and Jillian P. Diamant (all three affiliated with Simpson Thacher & Bartlett LLP), have posted to SSRN “Evolution, Not Revolution: A Legislative History of the New York Prudent Management of Institutional Funds Act,” 17 N.Y.U. J. Legis. & Pub. Pol’y 377 (2014). A pdf version of the article, made available by the publishing journal, is available here. The “roadmap” of the article, set forth in its introduction, follows:
Part I of this article examines the history of the laws that have addressed investment management and appropriation of charitable and not-for-profit assets. Part II provides an overview of the current uniform law as well as the version enacted in New York. Part III reviews the Act in detail, examining what types of organizations and funds come within the Act’s scope, assessing the evolution of the individual provisions, and, where relevant, discussing selected controversies and legislative drafting issues. Part IV reviews the Act’s impact on other New York Laws. Part V addresses the so-called internal affairs doctrine and related choice of law issues. Part VI examines the importance of uniformity of interpretation of law. Part VII considers selected financial accounting rules. Finally, Part VIII concludes the article with suggestions for further action—via technical corrections, substantive amendments, and regulatory guidance—that are recommended for clarification or correction of NYPMIFA’s current provisions.
Tuesday, August 12, 2014
Nonprofit evaluation is a key component of establishing an efficient charitable market. Without a way to measure social impact, both nonprofits and donors remain unaware of whether investment is being put to its most productive use. (Social impact may be thought of as what the charity has accomplished with a donation). As Stephen Goldberg has noted in his book Billions of Drops in Millions of Buckets, one of the reasons inefficiency exists in the charitable market is because funders currently cannot differentiate between effective and ineffective charities. The Stanford Social Innovation Review recently examined the need for a shift in nonprofit evaluation and the discourse surrounding it in “Measuring Social Impact: Lost in Translation,” and the ideas expressed hold valuable insights for the sector.
Most importantly, the authors contend that nonprofits need to set the agenda in terms of evaluation and should use a qualitative approach in addition to a quantitative one. They point out that if nonprofits do not shape the evaluation conversation, funders will do it for them. They note five specific items that nonprofits should “talk more about” in terms of evaluation. First, nonprofits should focus more on their purpose and their strategy for achieving it. As the authors advise, “[A]ll nonprofits should have a clearly defined theory for how they will create change that connects their strategies and programs to the results that they anticipate.” Second, nonprofits should spend more time discussing people. Funders often want nonprofit assessment to include quantitative assessments, e.g., the number of people indirectly affected. However, too much emphasis on quantitative analysis reduces a nonprofit’s impact to a series of numbers. The authors promote a more balanced approach that includes qualitative assessments as well: “Qualitative assessments that draw on conversations with people are often more consistent with how nonprofits operate, and they are also a methodologically valid form of evaluation.” Third, nonprofits would benefit from drawing attention to the big picture. In other words, evaluation should consider how a given nonprofit’s work fits within the collective transformation of an area. Fourth, nonprofits should not shy away from discussing their challenges. Their failures and lessons learned are beneficial in terms of collective learning. Accordingly, the authors urge nonprofits to highlight not only monitoring but also transparency as a goal in evaluation. Finally, nonprofits should encourage more learning. Currently, funders (who focus more on monitoring than learning) have a much louder voice in evaluation than beneficiaries and nonprofit workers who are directly involved and who may facilitate learning.
In terms of the discourse surrounding nonprofit evaluation, the authors caution that business, managerial, and scientific language is drowning out the nonprofit voice. This underscores the need for nonprofits to take charge of shaping evaluation. Too often terms such as “investment,” “returns,” “output,” and “outcomes” are used to discuss social impact, without regard to the five other areas identified. The Stanford team’s study of 400 individuals and organizations in the nonprofit sector revealed that the vocabulary of nonprofit evaluation typically falls within 3 cultural domains: (1) managerial, (2) scientific, and (3) associational, with managerial terms dominating the discourse. All of these domains hold valuable insights for the nonprofit sector; however, nonprofits themselves should be the ones to shape their evaluation and the discourse surrounding it.
Wednesday, August 6, 2014
"Trickle Down" economics, in the perjorative, "voodoo economic" sense, maintains that lowering taxes on the wealthest taxpayers invariably benefits everyone else because wealthy taxpayers will invest in jobs and infrastrucure at higher rates with the savings from lower taxes. Opponents argue that giving benefits to the wealthy only enriches the wealthy, without any distributed benefits to anyone else. The same issue arises with respect to the private benefit doctrine, I think. I must admit that I believe in the trickle down theory when it comes to private benefit. The natural law of self interest requires that somebody benefit in particular, if everyone is to benefit in general. We pay teachers if we want an educated society. A doctor has to be paid, if patients are going to be healed. Nobody works for free, not even for charity and the truly altruistic are natural law breakers, unfortunately. Economic revitalization, too, requires, that we support particular business -- and their owners who might get richer -- if a blighted area is to be revitalized. In other words, the public good cannot be achieved without private benefit. And so the alleged "prohibition against private benefit" cannot mean just that. Like everything else pertaining to charitable tax exemption, even political endorsement, its all a matter of degree. We can and should prohibit unnecessary private benefit, but not private benefit per se. To do so would be to prohibit the public good.
Professor Matthew Rossman's latest article, Evaluating Trickle Down Charity -- A Solution for Determining When Economic Development Aimed at Revitalizing America's Cities and Regions is Really Charitable addresses the extent to which private benefit is necessary to the public good. Here is the abstract:
As our nation's philanthropic sector becomes more entrepreneurial, ambitious and influenced by the private sector, longstanding legal standards on what constitutes “charity” struggle to stay relevant. More and more often, organizations that seek classification by the Internal Revenue Service as a Section 501(c)(3) charity (and the substantial public subsidy that this status unlocks) are not the soup kitchens and homeless shelters of yesteryear, but highly sophisticated ventures which accomplish their missions in ways that are less obviously charitable. In no case is this more true than in the recent widespread emergence of nonprofit organizations whose primary activity is providing direct aid to for-profit businesses.
This Article examines this trend and coins the phrase “trickle down charity” to encapsulate the analytic challenge these organizations (which the article terms REDOs, short for “regional economic development organizations”) pose when they seek classification as a charity. REDOs hope that the privately-owned, profit-seeking ventures they aid will ultimately help those in need in the form of jobs and a flourishing economy. While influential and, in some cases, transformative to cities and regions in economic distress, REDOs turn the traditional charitable services delivery model on its head by advancing private interests first and betting that benefit to a charitable class will follow. By relying on standards designed for more conventional charities, current IRS scrutiny of this new model is outdated, inconsistent and mistimed. The most significant consequence of this imprecision is that the publicly funded subsidy American laws have created to incentivize charitable work may be misused to support organizations that are not really charitable while subtracting from the pool of funds available to those that clearly are.
To solve this problem, I propose that the IRS rely on the law of charity’s often overlooked and sometimes maligned “private benefit doctrine.” Specifically, this doctrine should inform new IRS procedures that (1) require all REDOs to make a more compelling demonstration of the nexus between their activities and the accomplishment of charitable purposes and (2) provide a system of ongoing accountability with respect to those claims. Enlivening, rather than ignoring, the private benefit doctrine in this way will not only address the problem of regulating REDOs but should also serve as a useful template for the IRS in examining other emerging forms of 21st century charity and, thus, in maintaining the overall integrity ofthe philanthropic sector.
I just wish I had thought of describing the private benefit process using the analogy to "trickle down" economics. The phrase captures both the intended process and the theoretical objection all at once.
Friday, June 20, 2014
The June 2014 edition of the American Bar Association's publication, Business Law Today, contains a "mini-theme" dedicated to nonprofit organizations, with an introduction entitled "Nonprofit Organizations: Changes in Challenging Times." Articles in the edition include:
1. "The Messiest Catch: Fishing for Health-Care Institution Donors in a Changing Sea" by Matthew G. Wright.
2. "Mergers, Acquisitions, and Affiliations Involving Nonprofits: Not Typical M&A Transactions" by William L. Boyd III.
3. "Taking Care of Business: Use of a For-Profit Subsidiary by a Nonprofit Organization" by David A. Levitt and Steven R. Chiodini.
4. "Five Tax Traps for Business Lawyers Advising Nonprofit Clients" by Cynthia R. Rowland and Deborah K. Tellier.
5. "Whither the Parsonage Allowance? Will It Survive the Most Recent Attack?" by Lisa A. Runquist and David T. Ball.
6. "E-mail Voting: A Practical Approach to a Difficult Trap" by Leah Cohen Chatinover.
Tuesday, June 17, 2014
Munson: Fraud on the Faithful? Charitable Intentions of Religious Congregations' Members & Church Property Law
Valerie J. Munson (SIU Carbondale) has posted "Fraud on the Faithful? The Charitable Intentions of Members of Religious Congregations and the Peculiar Body of Law Governing Religious Property in the United States" to SSRN. Here is an abstract:
This article examines American church property law, past and present, and discusses its inconsistencies and ambiguities. It then suggests how state governments could play an important role in clarifying this area of the law and protecting the intentions and expectations of local church donors who may well be unaware that a general church organization (denomination) is the ultimate beneficiary of their donations. The article is unique in that it is written with a perspective that takes into account the real world contexts of church property disputes, in history and today. (The author was aided in this regard by historic Supreme Court documents that became available to scholars just this spring through a recent digitalization project.)
The article begins by placing the reader in the midst of a church property dispute as seen through the eyes of Sandra and John Cook, fictional characters whose experiences accurately reflect those of the author’s former clients. It then proceeds in three parts.
The first part is an overview of church property rights under American law and begins with a short discussion of the religious context in which this country was founded, the legal existence and power given religious organizations in the post-revolutionary period, and early concerns about the need to limit the power of church authorities over non-spiritual matters like possession and control of church property. It then discusses the three very different approaches used to resolve church property disputes by different states, at different times. The first is the “departure from doctrine” rule first announced in the Scottish case, Craigdaillie v. Aikman in 1813. That approach turns on a determination of which faction in a church property dispute most closely follows the religious tenets that existed at the time a local church was founded. The second approach is the “deference” approach which was first articulated by the Supreme Court in 1871 in Watson v. Jones, a case arising out of the civil war. Using that approach, if a court determines that a local church belonged to a general church organization having its own authoritative structure and means of deciding disputes, the court must defer to the decision of the highest judicatory of the general church organization as to which party is entitled to possession and control of church property. The third, and now most prevalent, approach is the “neutral principles” approach endorsed by the Supreme Court in 1979 in the case of Jones v. Wolf. Under that approach, a court may decide a church property dispute if it can do so without deciding any religious issue. That is, it can decide the dispute if it can do so by simply applying neutral principles of state property, contract, and trust law. The first part of the article concludes with a summary of how the state courts have applied the neutral principles approach in recent years, which has continued the ambiguity and inconsistency in this area of the law.
The second part of the article discusses the context in which individuals today decide to donate money to local churches. It looks at what historic case law provides by way of context as well as at current data on church affiliation practices in the United States.
The third, and final, part of the article suggests three ways in which state governments can assume a role in clarifying the area of church property law, a role they have been urged to assume by the Supreme Court for over forty years. The suggested state government actions would also protect the intentions and expectations of potential donors to local churches in a manner consistent with current public policy favoring financial transparency, especially full disclosure in charitable fundraising. One possible action is the amending of state charitable solicitation or church incorporation laws to require specific disclosure of any beneficial interest a general church organization holds in local church property. A second is through vigorous enforcement of existing state anti-fraud laws. A third is through vigorous enforcement of the public policy requirement for continued tax exemption.
The article concludes by bringing the discussion of church property law back to real people, like Sandra and John Cook, who are deeply affected by church property disputes, and suggesting that now is the time for state governments to step up and assume the role envisioned for them by the Supreme Court by acting to protect the intentions and expectations of those who give of their time and money to support local churches.