Nonprofit Law Prof Blog

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