Nonprofit Law Prof Blog

Feed the Children Founder Files Suit Challenging Firing by Board

We previously blogged about the governance dispute at Feed the Children, a Christian ministry that is among the ten largest recipients of charitable contributions (over $1.1 billion in 2008) according to the Chronicle of Philanthropy.  While that dispute appeared to have been close to resolution last spring, recent public developments reveal that it has only moved into a new phase.  According to local news reports in Oklahoma City, where Feed the Children is headquartered, the organization's Board of Directors fired President and founder Larry Jones on November 6th.  The firing may have been triggered by Jones' alleged placement of microphones in the offices of several board members, although apparently the recording system connected to those microphones was never operational.  Jones has responded by filing a lawsuit against the charity and its board demanding reinstatement.  The Oklahoman is providing ongoing coverage of the dispute and related developments through a dedicated webpage.

LHM

Tax Breaks for Non-profit Health Facilities

“How much charity care must a hospital provide to get tax breaks?”  This was the question asked by the Chicago Tribune on Monday, September 21, 2009.  The question comes in anticipation of today’s examination by the Illinois Supreme Court of a case raising just that issue.  The case pits Provena Covenant, a Catholic-run hospital, against the Illinois Department of Revenue.  The high court’s answer may affect nonprofit health service providers outside Illinois, health service consumers and taxpayers in general.

The Tribune goes on to identify a key issue: “The state has no clear definition of how much charity care should be provided or whether unpaid medical bills and services that are offered for free, among other practices, should be included to determine whether a hospital receives a property tax exemption.”

While the Illinois Supreme Court does not have jurisdiction outside its state, many hospitals across the country are concerned about the impact of the court’s decision on legislators and courts nationwide.  Nonprofit hospitals account for the majority of health facilities in the U.S. 

Nonprofit hospitals provide services at no cost to patients without the ability to pay for services and those costs are passed on to the consumer.  If nonprofit hospitals are stripped of their tax exempt status, consumers could face higher medical bills or see a reduction in health services.

The case arose in 2003 when the local tax review board stripped the hospital of its tax exemption because of concerns that the hospital was not providing enough free care.  In response, Provena argues, as other hospitals do, that its resource expenditure in making up for shortfalls from government health programs like Medicaid and Medicare, as well as investments in education, research, and loss-generating trauma units more than justify its charitable status. 

SS

Nonprofit Wins Appeal to Build Affordable Housing in New Jersey

The Philadelphia Inquirer reports that a three-judge appeals panel upheld a lower New Jersey court ruling requiring the town of Eastampton to grant a zoning request to nonprofit Homes of Hope for an exception to build two multifamily duplexes in a neighborhood zoned for single-family homes.  Eastampton had argued that because they already had 21 more affordable-housing units than required by New Jersey law, they were not required to grant the zoning variance.  But the appeals court agreed with an earlier ruling by Superior Court Judge John Sweeney that the state's affordable housing regulations did not intend for each town only to meet the needs of the homeless within its own boundaries, but rather to contribute to the needs of the entire state.  Accordingly, building the affordable housing was an "inherently beneficial use" under New Jersey law, and local authorities could not deny the zoning exception.

JDC

Georgia O'Keefe Foundation v. Fisk University (Full Text)

Here is the full text of the opinion in Georgia O'Keefe Foundation v. Fisk University.  We previously reported that Fisk recently won the right to request cy pres relief in order to sell parts of the Stieglitz Art Collection in order "to save the University." 

dkj

Fisk University Wins On Appeal

In 1949 Georgia O'Keefe donated the Stieglitz Art Collection to Fisk University.  The collection includes art by O'Keefe, her husband Alfred Stieglitz, other American artists, and European artists including Cezanne, Picasso, and Renoir.  

Several years ago, faced with financial difficulties, Fisk sought to sell two paintings from the collection. In 2005, the Georgia O'Keefe Museum, located in Santa Fe, New Mexico and the successor to the O'Keefe estate, filed suit to block the sale.  A proposed settlement would have allowed the O'Keefe Museum to buy one of the paintings and would have allowed Fisk to sell the other painting to another buyer.  Then in September 2007, Fisk and Crystal Bridges, a new museum created with a gift from Alice Walton (the Walmart heiress) and located in Arkansas, agreed to a plan that involved co-ownership of the entire collection and a payment of $30 million by Crystal Bridges to Fisk.  In addition, Ms. Walton pledged $1 million to renovate Fisk's museum and also pledged to finance an art internship.

In a press release issued yesterday (July 15, 2009), and posted on the Fisk University website, Fisk announced that the Tennessee Court of Appeals has ruled that the O'Keefe Museum does not have standing to try to block the sale of the paintings and that Fisk may request cy pres relief.  If the O'Keefe Museum does not file an appeal, the case will return to the Chancery Court for a hearing on whether application of cy pres will permit the sale of a half interest to Crystal Bridges.  The appellate opinion noted that O'Keefe had a "general charitable intent" that the art be displayed "in Tennessee and in the South." This language may be significant for the cy pres proceeding, because a concern may be whether O'Keefe intended that all the art stay in Tennessee in perpetuity.

Thanks to Anne-Marie Rhodes, of Loyola-Chicago, for sending me the New York Times story that appeared yesterday in the ArtsBeat blog

sng

  

More Evidence of trend towards increased local taxation of Nonprofits

Another state court has imposed local taxes on nonprofits, providing more evidence that state and local governments are looking greedily towards nonprofits as means to shore up budget deficits.  In Wisconsin, a Wukesha County Judge ruled, after a three year court battle, that a nonprofit health care provider must pay taxes on all of its office equipment, according to the Milwaukee Journal Sentinel:

Waukesha County Circuit Judge Michael O. Bohren determined that ProHealth Care could be taxed on its headquarters because the corporation supports many for-profit ventures and because it does not pass a litmus test as a "benevolent" organization. The leader of a statewide coalition of 170 nonprofit groups said the case appears to represent the latest example of government tax collectors turning to nonprofit entities to replenish depleted tax coffers. "That's a topic that's rising," said Deborah Blanks, president of the Wisconsin Nonprofits Association. "That's something that a lot of nonprofits are going to have to look at."

 The following blurb is particularly ominous for nonprofits resisting local taxation:  

Attorney Stan Riffle, who represented the City of Pewaukee in the case, said he suspects ProHealth Care hoped to establish a precedent in Pewaukee that could be used later to seek property tax exemptions in other communities where the company has property. Instead, Riffle said, the ruling likely will embolden other municipal tax assessors faced with nonprofit property owners trying to avoid paying taxes. "Obviously assessors talk to one another," he said. "The word of this decision will get around."

The sentiment towards increased local and even national taxation of tax exempt nonprofits is fueled not only by the pragmatic need for government funding but also by an implicit, widely held belief or stereotype that nonprofits are getting away with tax fraud, a sentiment expressed in this Athens (Georgia) Banner-Herald op-ed piece:

Charitable organizations are part of the basic fabric of American life. There is a nonprofit for just about any cause or concern, often with all sorts of subspecialties. Each was developed to provide a service, even if it's only for one individual with special needs. Because we believe they are important to our collective well-being, we have exempted them from certain requirements of the tax code, including local and state property taxes and state and federal income taxes. Recent news stories about whether Nu i's Space, which provides services to local musicians, should pay property taxes (probably not, in my view) or how Angel Food Ministries, an area-based Christian food charity, provided millions in loans and housing to its founder, could well be warning signs for taking another look at requirements and limitations of these charities. The lines may not be drawn the right way. . . .

In our attempt to foster the American spirit of volunteerism, we have created a system full of loopholes and potential for serious fraud and abuse. With little effort, I could set up my own nonprofit - call it Myra's Garden, located in my own backyard. The purpose is environmental education. I could get three of my friends or family members to agree to serve on the board of directors and give a couple of children's programs each year, maybe for my three grandchildren or a couple of neighborhood kids. I then could apply for grants and seek tax-deductible contributions to help with my garden. My garden property could become tax-exempt. Once I generate enough income, I could begin to pay myself a salary, all for working in my yard and throwing a kids' garden party each year. I could charge all my plants, tools and fertilizers to Myra's Garden. Someone probably would (and should) suggest the IRS or state of Georgia take a closer look at what I'm doing. However, as long as my reports are in order and I remit payroll and sales taxes on time, no government agency is likely to come looking into my little scheme. Sadly, this kind of abuse is widespread in our nation. It's time to take a cold, hard look at what it means to be a "charity." It's time we carefully review the rules for nonprofit status and figure out how, as a community and a nation, we provide the appropriate incentives and supports while eliminating misuse and abuse of tax-exempt status.

This cases are seemingly few, far between, and of little consequence.  But as I said in my immediately previous post, they represent a disturbing devaluation of nonprofits everywhere.  I suppose its easier to tax nonprofits but in the long run the strategy is counterproductive if one assumes that the revenues lost by nonprofits will be less effectively or efficiently, and more uniformly spent after being sifted through government mazes.

dkj

Credit Union Beats IRS - Income from Insurance Sales Not Taxable

We previously blogged about the test case brought by Community First Credit Unionof Appleton, Wisconsin challenging the IRS position that the sale of credit life and credit disability insurance and guaranteed auto protection insurance resulted in taxable, unrelated business income.  The major national Credit Union associations supported the lawsuit, which they characterized as the lead case in the nation on this issue.  The Appleton Post-Crescent now reports that the Credit Union has won its case, having successfully proved that the income from these insurance sales is substantially related to the Credit Union's exempt purposes.  The article quotes the Credit Union's President as celebrating the victory as one for all state-chartered credit unions and their customers, a sentiment echoed by the Credit Union National Association.  While the amount at issue in this case was relatively small ($54,000), the issue appears to be a significant one for many if not most tax-exempt credit unions.  According to the Credit Union Times, a second lawsuit raising the same issue is already pending, brought by the Bellco Credit Union of Greenwood Village, Colorado.  The IRS does not appear to have commented on the decision or decided whether to challenge it with post-trial motions or an appeal.

(Hat tip: EO Tax Journal)

LHM

Donor Sues Brandeis Over Razing of Named Building

In an article I should have caught last week, the Wall Street Journal reportedthat Sumner Kalman is suing Brandeis Universityto block the demolition of the Kalman Science Building, named after Sumner Kalman's great uncle, Julius Kalman.  The University is building a new science center that will be named after another donor to replace the original building.  The University has said it is working with the Kalman family to make sure Julius Kalman continues to be honored appropriately.  Sumner Kalman apparently filed the suit in Suffolk County Probate Court after the Massachusetts Attorney General's office declined to take action having concluded the university was under no obligation to maintain the original building beyond its useful life.

LHM

AP: "Pennsylvania Supreme Court Eyes Grant Rules for Nonprofits"

The Associated Press reports that the Pennsylvania Supreme Court is considering whether nonprofits should be considered "businesses" for purposes of the state's Ethics Act.  The specific issue before the court is whether a statutory requirement that directs government officials to avoid conflicts of interests relating to a business that they or an immediate family members is involved with would bar such officials from approving grants to nonprofit groups that employ a relative.  On one side of the dispute is Governor Ed Rendell and two of his cabinet secretaries, who are arguing that this provision was only meant to reach for-profit entities and not nonprofits.  On the other side is the State Ethics Commission that came to the opposite conclusion.  The Governor's side previously won a split decision in the Commonwealth Court.

LHM

Nonprofit Low-Income Housing Losing Exemptions in Wisconsin

This story in the Wisconsin State Journal details how low-income housing organizations are facing the loss of property tax exemption in Wisconsin due to an interpretation of state law by the Wisonsin Supreme Court.  The issues involved apparently started in 2003, when the Wisconsin Supreme Court decided Columbus Park Housing Corporation v. City of Kenosha.  At the time, Wisconsin state law provided that rental property would be exempt only if two requirements were met: (1) the property would be exempt in the hands of the lessee if the lessee owned it and (2) all rental income had to be reinvested in the property or used for debt reduction.  Obviously, low-income housing did not meet requirement (1), since the renters were individuals, not tax-exemption charities. And the case in question affirmed that these requirements applied to low-income housing units, which accordingly failed the exemption test.  The Wisconsin legislature then passed a law clarifying that requirement (1) did not apply to low income housing.    But the law did not address requirement (2), and in fact many low income housing organizations use rental funds for other purposes, such as to subsidize care provided to others served by those organizations, to refinance debt, to offset Medicaid losses and to purchase new properties for low-income housing development (see this article for an excellent discussion of the background to this issue).

The Wisconsin legislature apparently has considered fixes for this problem, but has not yet enacted them into law.  And given the current economic/budget situation at the state and local level, one wonders whether fixing this issue is going to be a political problem . . .

JDC

Bank Trustee Asks for Higher Fees Despite Fee Agreement - AG Says No

With stories about dropping endowment values and struggling charities sharing newspaper pages with stories about overpaid bankers, an article posted by the Philadelphia Inquirer seems hard to believe. A bank trustee wants to double its fees, taking money away from a summer camp for poor children, scholarships for art students, and the episcopal cathedral in Philadelphia.  The two primary charitable beneficiaries are fighting back, and they are getting support from the Attorney General of Pennsylvania. A court hearing is scheduled for July.

Since 1973 two Pennsylvania charities - the College Settlement Camp in Horsham (a camp for poor children who would not otherwise go to summer camp) and the Church of the Savior in West Philadelphia (now the Episcopal Cathedral) - have benefited from a trust created under the will of Elizabeth R. England.  As recently as last year, the trust distributed $450,000 to each charity, an amount that covered one-third of the camp's budget and over one-half of the cathedral's budget.  This year each distribution is expected to be $100,000 less and both charities have had to cut programs.

A big part of the reason behind the lower distribution is a dispute with the Bank of New York Mellon Corp., successor to Ms. England's original trustee, Girard Trust Corn Exchange Bank.  Mellon has asked the Philadelphia Orphans' Court to double its fees, altering an agreement that Ms. England made with Girard in 1963, 10 years before her death.  The trustee has operated under the agreement since the trust's inception, but Mellon now says it should be paid at its standard rate and also argues that it has been underpaid since 1994, the date it last filed a formal accounting with the court.  On top of all that, Mellon is charging the trust for the legal costs incurred in connection with its attempt to increase its trustee's fees.

According to the story in the Inquirer, the fee agreement includes a mechanism that allows the two charities to replace a trustee if it seeks a fee change but no agreement with the charities can be reached. The charities have asked Mellon to turn the trust over to Brown Bros. Harriman & Co., but Mellon has refused.  Mellon may think recent changes to Pennsylvania's trust law strengthen its position, because the changes permit a court to adjust fees in certain situations.  Whether any grounds for adjustment exist remains to be seen.  The charity division of the Attorney General's office has already gotten involved, opposing the request for higher and retroactive fees and also opposing the use of trust funds to pay the trustee's costs.  And that - the AG's involvement - may be a very good sign for kids who want to go to summer camp and for the neighborhood programs the cathedral has had to cut.

sng

Angel Food Settlement Falls Apart

We have previously informed readers of a settlement agreement reached between the disputing board members of Angel Food Ministries. Today's Atlanta Journal Constitution reports that the parties have scuttled the agreement because of a dispute over money. 

Two sides battling for control of Georgia’s $140-million Angel Food Ministries are blaming each other for the collapse of an agreement that would have ended the controversy at the troubled nonprofit.  Once more, money is at the heart of the issue.  The two break-away board members at odds with the nonprofit, Craig Atnip of Texas and David “Tony” Prather of Monroe, alleged in a lawsuit March 5 that Joe Wingo and his family, enriched themselves at Angel Food’s expense.  The two men agreed to drop their suit after a court-supervised verbal agreement was negotiated. They agreed to leave the nonprofit, and financial controls were put in place on the Wingo family, founders of Angel Food Ministries. The judge asked the two parties to put their agreement in writing.  Juda Engelmayer, spokesman for Angel Food, said there was no discussion in court about severance payments for Atnip and Prather, or payment of their legal fees. Those issues came up in subsequent meetings between attorneys. “They were asking for things that were not in the agreement,” Englemayer said.

Seems to me both sides are suffering from a bad case of "throwing the baby out with the bathwater" - itis.  The longer this suit goes on the more harm to needy beneficiaries.  I happen to attend a Church, as a matter of fact, that is affiliated with Angel Food Ministries.  By that I mean that our Church takes food orders that are filled by Angel Food Ministries and then distributed to people in the community.  Yesterday, for example, we were given a handout with the April menu -- essentially bags of groceries that members of the congregation can purchase for delivery to needy people within our community.  The prices are well below normal grocery store prices and all the food products are name brand.  I was tempted to order some groceries for myself, but God was watching, I felt his eyeballs on the back of my head.  Anyway, there can be little doubt that, except for the allegations of personal enrichment, this is an operation that functions the way a 501(c)(3) ought to.  They need to put aside ego and greed, resolve their differences now, and drive on with the mission.

dkj

Historic Preservationists are Concerned That Recent Court Action in Illinois Might Hamper Efforts to Maintin Historic Buildings and Neighborrhods

Today's New York Times reports that the Illinois Supreme Court is considering accepting a case concerning the rights of citizens to challenge historic preservation ordinances.  Here is an excerpt from the article:

A state appellate court sided with Ms. Mrowka and Al Hanna, a resident of Lincoln Park, another neighborhood where a section has landmark status, finding that Chicago’s four-decades-old ordinance for designating landmarks used “vague, ambiguous and overly broad” terms to sort out what buildings and neighborhoods should be protected from change or demolition.

The City of Chicago appealed that decision this month, and both sides are waiting to hear if the Illinois Supreme Court will take the case.

City lawyers say that if the ruling stands, any of the city’s landmarks — except perhaps those that are protected through separate federal or state programs — could have their protected status challenged, said Jennifer Hoyle, a spokeswoman for the city’s law department.

Advocates of preservation worry that the ruling might ultimately threaten popular landmarks like Wrigley Field and the works of the architects like Louis Sullivan and Mies van der Rohe and Frank Lloyd Wright. The outcome could also have legal consequences for other Illinois cities with similar ordinances. And while it would set no legal precedent outside the state, the case threatens to embolden opponents with like-minded challenges, given the similarities of many landmark ordinances, advocates say.

Cities and towns across Illinois, as well as preservation advocates from places like Cleveland, New York and Pittsburgh, have filed court documents supporting Chicago’s appeal.

“Once the door opens, other people will be making the same argument,” said Julia H. Miller, special counsel at the National Trust for Historic Preservation. “The potential for havoc is there.”

For the entire story, see "Challenge to Landmark Law Worries Preservationists" in the March 24, 2009, issue of the New York Times.

DAB

Say it Ain't So! MLB Players Association Files Grievance to Stop Mandatory Charitable Contributions

Baseball season starts soon.  I live in Florida -- in St. Petersburg, to be exact -- where baseball is not at all appreciated.  St. Pete, for example, has the worst baseball stadium in the whole world.  Its dark and dank with artificial turf, just awful.  Like playing baseball in an old, poorly lit basketball arena.  People in Florida don't appreciate a warm day at the ballpark like they do in places like Pittsburgh and Chicago.  Ah yes, the wafting smell of hotdogs, brats, and cotton candy in the stands.  I suppose I understand why, but there are ways to provide shade even at outdoor stadiums in Florida.  Fortunately, I will be spending some time in Pittsburgh this summer -- the team there ain't that good, but they have a terrific stadium and there are always good seats. 

But I digress.  On Friday, the major league baseball association filed a grievance alleging that major league teams are acting unfairly when they insert clauses in ballplayers' contracts requiring that the players contribute a certain percentage of their salaries to team affiliated charities.  The players' association website has information and press releases on just about all the great things ball players do, including volunteer service and pharmaceutical commericals (not really), but strangely no mention of the grievance.  I guess they prefer not to publicize this part of their community spirit.  To get an idea of what's going on, see this Newsday article.  Here is a teaser:

On Friday, a rare day without a WBC game during the tournament's 19-day run, the players association filed a grievance regarding, of all things, the inclusion of designated charity contributions in players' contracts. What the union wants from a third-party arbitrator, should the grievance get that far in the process, is money returned to the players who already have made such donations.  The Mets are one of 22 teams identified that have utilized this practice, according to the union's notice of grievance to central baseball. The others are Arizona, Atlanta, Baltimore, the Cubs, Cincinnati, Cleveland, Colorado, Detroit, Florida, Houston, the Angels and Dodgers, Milwaukee, Philadelphia, Pittsburgh, San Diego, San Francisco, Seattle, Tampa Bay, Texas and Toronto.  It's a growing trend in baseball: When free agents sign with teams, they're essentially required to donate a percentage of their salary to a charity "associated or affiliated with the Club," to use the union's wording.

I guess I am all for "freedom of giving" and don't like the idea of forced contributions.  I would side with the teams, nevertheless, if the clauses merely required players to give to a charity of their own selection.  Why should the team get to select the charity?  On the other hand, these are not really "mandatory" charitable contributions.  A player can always turn down the contract -- but who would do such a foolish thing, give up a major league baseball career over a charitable contribution dispute.  MLB is a buyer's market.  Only a few players are so rare that they cannot be replaced by someone else laboring away in the minor leagues -- and thus can demand the removal of the clause.  So maybe the charitable contribution clause is a contract of adhesion after all. 

dkj

In the Name of Governance, Board Members and Founders of One of the Largest Antipoverty Charities Battle it Out in Court

The Chronicle of Philanthropy reports on yet another Court Battle at a nationally ranked charity, Feed the Children.  Just Yesterday, we posted a story about another nationally known relief charity, The Angel Food Network, that is also struggling under the weight of turf wars/lawsuits between its founders and board members. At the heart of both of these stories, there is a closely-held, family run charity.  The founders are deeply connected to the charities through founding the charity, legacy and passion.  That the IRS requires diverse boards of a reasonable size and is starting to emphasize good governance is possibly threatening to the founders of a closely-held family charity.  And yes, Feed the Children is the charity you often see advertised on late night TV or the equivalent.  The founder, Larry Jones, is known for his emotional appeals on behalf of impoverished children in the United States and abroad.

If you listen to both sides, both sides sound reasonable. The founders in this case, Feed the Children, argue that the Charity's mission is being hampered by the unnecessary imposition of cumbersome committees that aren't working or fast enough, and the board members argue that the founders are taking liberties (i.e., making decisions without board input, and even at times, against board advice). Governance and transparency continue to be important topics for nonprofits, and increasingly so in these recessionary times. Below is an excerpt of the story. If you would like to read the full story, please click here.

A bitter court battle over the control of Feed the Children, one of the nation’s biggest antipoverty charities, reveals an organization in turmoil and a power struggle that pits the group’s founder, Larry Jones, against his daughter, a top official who was fired in December, according to documents filed in the case.

. . .

Feed the Children, a charity in Oklahoma City, provides food, clothing, medicine, books and other supplies and services to needy children and families in the United States and overseas. It ranks No. 7 on the most recent Philanthropy 400, The Chronicle’s list of the charities that raise the most each year from private sources. Feed the Children reported raising more than $932-million in cash, products, and other donations in 2007.

Board Members Go to Court

Controversy at the 30-year-old Christian relief organization became public when five members of the Board of Directors who were fired in December went to court to claim that they had been improperly replaced. The five, who have been at least temporarily reinstated by a court, said they had been removed just before a board meeting at which several members planned to discuss placing Mr. Jones on sabbatical.

. . .

A countersuit filed on behalf of the five new members, all of whom are Christian ministers, said that “documents gleaned from corporate computers reveal” that the fired board members “were, in fact, recruited into an attempted and unjustified clandestine mutiny by one or more salaried employees who hoped to oust Mr. Jones from the organization that he founded.”

. . .

Court papers show that in December, the revised board fired Mr. Jones’s daughter, Larri Sue Jones, vice president and general counsel. Also removed were the chief financial officer, Christy Tharp; chief operating officer, Travis Arnold; and an internal auditor, George Stevens, who also was a non-voting board member.

The reasons for the dismissals, according to court papers filed in the countersuit, included alleged failure by these employees to dutifully implement, as had been repeatedly directed, substantially any of the suggestions of the auditors that related to subjects other than placing restraints upon the powers and authority of Larry Jones.

. . .

Much Sorrow

Minutes of a meeting of the revised board make clear that Mr. Jones had felt hamstrung by committees that board members had formed earlier in 2008 to handle the organizations business. The board had created an executive finance committee and an executive hiring committee and had plans for an executive human-resources committee and a temporary committee to review the charity’s organizational structure.

Dr. Jones with much sorrow explained he did not understand why over the last six months the ministry had not been focused on feeding children, said the minutes, which were taken by Mr. Jones’s wife, Frances Jones, the charity’s co-founder who now serves as executive vice president and secretary. All Dr. Jones and Frances could do was beg for help and attend committee meetings as their hands had been tied from doing anything or moving forward to provide assistance to needy children,the minutes said.

To read another account of this story in a local paper in Oklahoma City, please click here.

AMT

Angel Food Ministry Board Members File Suit; What Should a Faithful Board Member Do?

In another sad development in what promises to be a very sad story, two board members of Angel Food Ministries, about which we reported last week, have filed suit against three of the nonprofit's founders, Joe and Linda Wingo and their son.  According to the Atlanta Journal Constitution, "the suit by board members Craig Atnip from Texas and David “Tony” Prather of Georgia, attempts to remove Joe and Linda Wingo and their son Wesley from their controlling positions. Another son, Andy, is a former ministry officer. The suit alleges the Wingos enriched themselves by millions of dollars through sweetheart deals, kickbacks from grocery vendors and using company credit cards to buy personal items."  The Wingos called the suit a "power grab" motivated by money in this press release:

The lawsuit filed yesterday in Walton County, Georgia was initiated by two directors who are interested in removing the founders of the Ministry – Pastors Joe and Linda Wingo – only to install themselves in the founders place. This is a power grab plain and simple, and the people of Walton County and those who look to Angel Food Ministries for relief need to understand what and who are actually behind this effort. The essence of this lawsuit aims to wrest control of this $140 million organization that was the brainchild of Joe and Linda Wingo in the years prior to 1994. AFM, a staple in Walton County for 15 years, went from 34 boxes of food in its first month to the six million served across 39 states in 2008. It employs 300 people full time, and had a payroll exceeding $10 million in 2008. As one of the largest employers in the area, it serves as a vital revenue base for Walton County, Monroe and the State of Georgia.

The plaintiffs responded with their own press release, one that sheds light on the inner workings and conflicts that nonprofits -- especially those that experience sudden and staggering financial success -- must experience often.  For example, the plaintiffs state that there have been disputes on the board since 2006 over the Wingo's refusal to adopt "IRS recommended good governance practices."   One of the plaintiffs, who now serves as CEO but spends most of this time responding to the FBI and IRS according to the press release, reports that he resigned from the Board of Directors over that dispute but rejoined the board only after receivng assurances that "many of the bad practices of the past had been corrected."  Sadly, the case will provide fertile discussion of a nonprofit board member's obligations when faced with allegations of mismanagement.   Board members faced with these sorts of allegations find themselves in difficult situations.  Both state and federal tax law suggest they have an affirmative duty to act but, as this case demonstrates, acting upon that duty can make a bad situation worse, ultimately to the detriment of charitable beneficiaries.  Still, there are certain cases when board members must act even if doing so will shed some bad light on the nonprofit.  I suppose in really bad cases, a board member might just have to burn down the organization to save it (or him or herself).  IRC 4958, for example, seems to impose excise tax liability on board members who affirmatively fail in their obligation to prevent insider siphoning.  If nothing else, the record in this case might prevent the imposition of 4958 liability on the board members who complained, even if only quietly.   The lawsuit only adds to the record.

dkj

More on Charities and Same Sex Marriages

Thanks to a reader response to an earlier post regarding charities and same sex marriages, we have been pointed to a New Jersey Civil Rights Division ruling finding probable cause to believe that a religiously owned nonprofit organization illegally discriminated against a lesbian couple who where denied the opportunity to rent the nonprofit's publicly available space for a civil union ceremony.  The case is Bernstein v. OGCMA.  In a separate case, Moore v. OGCMA, the Commission found no probable cause.  From a federal tax exemption standpoint, does the ruling mean that the organization operated for an illegal purpose and is therefore not deserving of federal tax exemption?  Anyway, according to the Division's December 29, 2008 press release:

The Division on Civil Rights announced today that it had issued a Finding of Probable Cause against the Ocean Grove Camp Meeting Association for allegedly discriminating against a lesbian couple who had sought permission to hold their civil union ceremony at the Boardwalk Pavilion.

The finding, issued by Division on Civil Rights Director J. Frank Vespa-Papaleo, said an investigation had determined there was reason to pursue anti-discrimination charges against the Ocean Grove Camp Meeting Association for denying Harriet Bernstein and Luisa Paster permission to rent its Boardwalk Pavilion for their civil union ceremony. Vespa-Papaleo also intervened as a complainant in the case.

Separately, Vespa-Papaleo found no finding of probable cause in a second case involving Janice Moore and Emily Sonnessa because the Ocean Grove Camp Meeting Association had changed its policy about renting the pavilion for any weddings at the time of their application.

The Division’s jurisdiction in the case, which began in 2007, has been upheld in U.S. District Court, but the Ocean Grove Camp Meeting Association has appealed to the 3rd Circuit Court of Appeals.

Bernstein and Paster, who live in Ocean Grove, had applied for permission to rent the Boardwalk Pavilion for their civil union ceremony in March 2007, but the Ocean Grove Camp Meeting Association denied their request because it said the civil union ceremony conflicted with the religious beliefs of the United Methodist Church. The Association said it was not required to permit civil union ceremonies in its Boardwalk Pavilion based on First Amendment rights.

However, an investigation found that the refusal to permit the civil union ceremony violated the public accommodation provisions of the state’s Law Against Discrimination and did not violate First Amendment Rights. The Division investigation found that the Camp Meeting Association had been permitting the public to use the Boardwalk Pavilion for weddings and secular events and that the Association had gained a Green Acres tax exemption from the state Department of Environmental Protection nearly 20 years ago after a finding that the Pavilion will be open to the public “on an equal basis.” (Following filing of the civil rights complaint, the DEP rejected a renewal of the Green Acres tax exemption for the Boardwalk Pavilion in September 2007.)

The Finding of Probable Cause states in part, “When it invites the public at large to use it, the Association is subject to the Law Against Discrimination, and enforcement of that law in this context does not affect the Association’s constitutionally protected right to free exercise of religion.”

The application from Bernstein and Paster to hold their civil union ceremony prompted a swift change in policy by the Association. By April 1, it was decided by the Association president that it would cease permitting the public to reserve the use of the Boardwalk Pavilion for any wedding and other events.

Therefore, Vespa-Papaleo found no probable cause in the complaint filed by Moore and Sonnessa, who also live in Ocean Grove, because they had applied for permission to use the Pavilion after the Association had ceased permitting any of the public to use the Pavilion for weddings.

A Finding of Probable Cause does not resolve a civil rights complaint. Rather, it means the state has concluded its preliminary investigation and determined there is sufficient evidence to support a reasonable suspicion the New Jersey Law Against Discrimination (LAD) has been violated.

dkj

Brennen Speaks on Diverging Perspectives of "Charitable" Today at Hamline Health Law Institute

I will be speaking today at the Hamline Health Law institute in St. Paul, Minnesota, on the topic: Diverging Perspectives of "Charitable": Federal Income Tax Versus State Property Tax Exemptions for Hospitals and Homes for the Elderly.  Here is the description:

Many states are challenging property tax exemptions for charitable hospitals and elderly housing under the guise of preventing superfluous flows of tax benefits to the rich or middle class. State tax officials resort to "quid pro quo" or similar notions to justify claims that the financially well-off are not entitled to this government largess. Federal law recognizes, though, that "charitable" includes benefits to the poor, in addition to hospital care to all and elderly housing. Using these examples (hospitals and elderly housing), this presentation will explore the impact on state exemption law of two perspectives of "charitable" - the narrow alms giving view of many states versus the broader societal view of federal law.

Nonprofit Law Prof Blog contributing editor, John Colombo, has spoken to this issue on many occasions(here, here and here) and is quoted quite extensively in the Provena case.

One of the points I intend to bring out is that the diverging views of what is "charitable" from the federal law perspective and from the state law perspective is at odds with the goal of charity to create contextual diversity.  For example, in the Provena case in Illinois, the court states explicitly: "In this respect, the Illinois standard for exemption from property taxes is different from the more diffuse "community benefit" standard for exemption from the federal income tax."  Astonishingly, the court interprets the law in Illinois in a way that completely ignores the benefits to society of the many non-charity care activities of a hospital - medical education, crisis nursery services, behavioral health benefits, and Medicaid and Medicare subsidies, for example.  True, many of these non-charity care community benefits are not directly linked to notions of "free care" or "gifts" to the poor, but they are valuable in their own right.  The real likelihood is that the many states that have this narrow view of charity will, inevitably, adversely affect the ability of nonprofits in general to use creativity, innovation and a myriad of other ideas as a way to advance the marketplace and make society all the better.

DAB

Nonprofit Hospital Charity Care Under Scrutiny Again

Recent news reports indicate that nonprofit hospital charity care is again under scrutiny. Increased scrutiny is, in part motivated by states greedily eyeing what they view as deep pockets and in part by watchdog groups pushing for more accountability and transparency from nonprofit hospitals.  A January 26, 2009 Houston Chronicle article, for example, states:

Scrutiny could increase for Texas' nonprofit hospitals as the state and the IRS try to determine the true value of uncompensated care the hospitals provide.  State Sen. Jane Nelson wants the hospitals to submit data about the care they provide and the way state and federal indigent-care reimbursement funds are spent.  Nelson, R-Flower Mound, was behind legislation that created a work group to study and redefine charity-care terms, the Fort Worth Star-Telegram reported in its Monday's editions. "We need to be reimbursing our hospitals fairly for the uncompensated care they provide. But we also have a responsibility to the taxpayer, which means more transparency and consistency is needed," she said in a statement. The work group appointed by Texas legislators has devised a standard way of defining and calculating the cost of charity care. The group says that right now, it's hard to get a clear pictures of how the system is working. For instance, Texas nonprofit hospitals report up to six different calculations of the charity care they provide.

A January 28, 2009 article in the Wisconsin State Journal states: 

Nonprofit hospitals will have to file a new report next year with the Internal Revenue Service — for the first time accounting for the free health care and other benefits they provide to justify their tax breaks.  The move is one of several measures being taken by federal, state and local governments to make nonprofit hospitals prove they deserve their tax-free status or pay up. The pressure could increase in Wisconsin and elsewhere this year because of budget shortfalls stemming from the economic recession, observers say.  "I expect a resurgence of interest among municipalities in extracting payments in lieu of taxes," said Alan Zuckerman, a health-care consultant in Philadelphia. "Municipal budgets are going to be strained. Not-for-profits are a logical target." . . .  Nationally, a bill to be introduced in Congress soon would require nonprofit hospitals to spend at least 5 percent of their budgets on charity care.  Meanwhile, a decision in Illinois to strip a hospital of its tax exemption is headed for the state Supreme Court. The state says the hospital provided too little charity care.  Hospitals are closely following the Illinois case as a possible sign of challenges to come, said James Orlikoff, a health-care consultant in Chicago.

Meanwhile, class action lawsuits against nonprofit hospitals based on their failure to provide adequate charity care are winding their way through courts.  In Illinois, hospitals appear eager to enter into settlement agreements in the wake of the state's denial of tax exemption to Provena Health Care System.  For example, Ressurection Health Care Corporation, a Catholic based tax exempt hospital, recently entered into this class action settlement agreement requiring it to increase and document the amount of its charity care, as well as to change its billing procedures with respect to uninsured patients. 

dkj

NC Court of Appeals Denies Tax Exemption to 501(c)(3) Summer Educational Camp: Should Below Market (or Cost) Fees Be Required for Tax Exempt Status?

In what seems like a continuing trend, a North Carolina court recently ruled that an educational summer camp exempt under IRC 501(c)(3) was still not entitled to property tax exemption as a charitable organization under state law.  Here is the sum and substance of the Court's analysis:

“The first step in an analysis under section 105-278.7(a) is to determine that the entity seeking an exemption qualifies as oneof the types of agencies entitled to an exemption pursuant to section 105-278.7(c).” Totsland, 180 N.C. App. at 164, 636 S.E.2d at 295. Relying exclusively on Totsland, the Foundation argues that it is an agency entitled to an exemption because its articles of incorporation and bylaws state that the Foundation is to “use its funds exclusively for . . . charitable purposes[,]” and because the Foundation is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. Although the Totsland Court concluded that the taxpayer in that case was a charitable institution based in part on the purposes stated in the taxpayer's organizational documents and on the fact that the taxpayer was a 501(c)(3) organization, the Totsland Court also noted that the taxpayer provides day care services to the children of low-income individuals. The day care services are offered at significantly reduced rate[s] to the parents, all of whom qualify for government subsidies. The parents are required only to pay a small portion of the cost of the day care services, and the county Department of Social Services (“DSS”) provides subsidies for the remaining portion of the cost of care. Totsland's services are not limited to a specific segment of the community, and are available to parents in three counties. Totsland does not have any control over how much it charges for day care services, or how much each parent is required to pay, as the cost of its day care services is set by DSS. In addition, Totsland does not operate its child care center for the purpose of making money, and it is not engaged in commercial competition with other area child care centers.   Id. at 166, 636 S.E.2d at 297. In the case at bar, by contrast, the Foundation operates a semester-long school for select highschool students, charging each student approximately $15,000.00 per semester. The Foundation also operates a camp which, according to the Foundation's executive director, charged campers “[m]arket rate[.]” Furthermore, the Commission found that the Camp charged its campers $150.00 per day and that, from the Camp's revenue of $390,108.07, the Foundation provided only about $20,000.00, or approximately 2% of the Camp's revenues, to campers in the form of financial aid. Finally, although neither “charitable association” nor “charitable institution” are defined in Section 105-278.7, “charitable purpose” is defined as a purpose “that has humane and philanthropic objectives; it is an activity that benefits humanity or a significant rather than limited segment of the community without expectation of pecuniary profit or reward.” N.C. Gen. Stat. § 105-278.7(f)(4) (2005). The Commission's conclusion that the Foundation did not meet its burden of proving that it is a charitable association or institution is supported by substantial evidence in the record. The Foundation, therefore, is not entitled to a property tax exemption under Section 105-278.7.

The interesting part of the opinion is that it seems to suggest that even an educational organization -- though not a formal educational institution -- must offer services at less than market rates in order to obtain tax exemption.  Note too that the organization apparently had no problem achieving federal income tax exemption as a charitable organization.  The trend, not an entirely new one, is that federal examiners rather routinely grant tax exempt status so long as the 1023 is properly completed and does not touch on any hot button issues (such as joint ventures).  By contrast, the states seem to be restricting the definition of "charity" to suit whatever economic conditions prevail (though in this case the denial originally issued in 2006 when the party was still going on).  I wonder if the states will ultimately force a reconsideration of the term "charity."  I agree that "charity" is a fluid concept that ought not to require any single factor in every case but I can't disagree with the notion that charging market rates is a factor that makes an organization less deserving of tax exempt status.  In fact, until I see the tragic case that proves otherwise, I have no problem at all with a trend that returns the concept of charity to that which inevitably and primarily assists the poor (as in, charging less than market or cost for services).

dkj