Nonprofit Law Prof Blog

Louisiana Supreme Court Finds Standing for Donors to Sue Charities

Insidehighered.com reports that the Supreme Court of Louisiana has ruled donors and their heirs have standing to sue charities regarding alleged failures to comply with the terms of their gifts.  The lawsuit at issue arose out of Tulane University's decision, in the wake of Hurricane Katrina, to merge its women's college and other undergraduate units into one unified college. 

The court's opinion is available through a link in the court's press release from July 1, 2008 under the name Pamra Matthis Howard and Jane Matthis Smith v. Administrators of the Tulane Educational Fund (no. 2007-C-2224).  It details that the gifts at issue were from Josephine Louise LeMonnier Newcomb and were allegedly intended to be used to establish and maintain the women's college, named after Mrs. Newcomb's deceased daughter.  Mrs. Newcomb made the first gift of $100,000 in 1886 (yes, in the nineteenth century), and continued to make donations to support the college for the rest of her life and through her estate.  She died in 1901. 

While the court found standing for donors or their heirs under Louisiana law, it noted that the plaintiffs had failed in their pleadings to establish that they were the "would-be heirs and legatees" of Mrs. Newcomb under Louisiana law.  The court therefore remanded the case to allow the plaintiffs an opportunity to amend their pleadings to address this issue.

The impact of the decision outside of Louisiana is unclear, as it relied upon an extensive review of Louisiana's Civil Code and the Napoleon Code upon which it is based, and so not on common law principles.

LHM

NY AG Drops Final Claims Against Grasso for Excess Executive Compensation

We previously blogged that Richard Grasso, the former chairman and chief executive of the then not-for-profit New York Stock Exchange, had convinced New York's highest court to affirm the dismissal of four of the six counts brought against him by the New York Attorney General relating to Grasso's allegedly excessive compensation.  The Associated Press and the New York Times now report that the Attorney General has decided to drop the case after another New York court threw out the remaining two counts. 

According to the New York Appellate Division's opinion, the authority of the Attorney General to bring the last two statutory counts lapsed when the NYSE merged with a for-profit company, as the sole relief sought for any excessive compensation was repayment of the excess, which in this case would be paid to a now for-profit entity and so inure to its private owners.  While not completely clear from the opinion, it appears that court may also have dismissed the only other remaining claim against Mr. Grasso, relating to whether he breached his fiduciary duty to keep the board informed about his pay, especially since the AP article indicates that the AG's office believes the case against Mr. Grasso is at an end.  The full opinion can be found by going to the Appellate Division's appeals and motion calendar for July 2008, clicking on the "Appeals" link for July 1, 2008, and then scrolling to the 22nd page of the resulting PDF file, where the opinion begins.

LHM

Judge Orders Reorganization of Nonprofit's Board to End Split

The Orland Sentinel reports that Florida Circuit Judge Mark Nacke has ordered the restructuring of the governing board for the Community Development Corporation of Leesburg & Vicinity following an acrimonious split among the board's members.  According to the article, the nonprofit organization grew out of the settlement ten years ago of a multi-million-dollar racial-discrimination suit against the city of Leesburg and the Leesburg Regional medical Center.  The organization's mission is to help revitalize blighted neighborhoods and help the poor with housing and economic opportunities.  It currently receives the bulk of its funding from the city government. 

The rift apparently developed on the board of directors between seven directors on one side and two on the other side, with each faction claiming that one of its members was the board chairman.  The rift also led to an attempt to suspend the organization's executive director, the closing of the organization's office, and the freezing of its bank accounts.

The judge melded both old and new board members into a reorganized, 15-member board, and chose one of the claimants as the board's chairman.  He also found that while the organization had the authority to suspend its executive director, it owed her five weeks backpay because her suspension had not been approved by a properly seated board.  The case docket provides further information about the lawsuit, although the judge's order is not yet available.  A previous Orlando Sentinel story about the dispute concluded that it arose in large part because the board of directors failed to adhere to the organization's bylaws, such as by deciding issues or electing new directors at meetings that lacked a quorum.

LHM

Tort Suit by Mother of Church Member Blocked by Charitable Immunity Law

The Newark Star-Ledger reports that a New Jersey state appeals court has ruled that Joan Patterson could not sue a church because her son was a member.  Ms. Patterson slipped on ice outside of the Liberty Corner Presbyterian Church and fractured her wrist in February 2005.  Although Ms. Patterson did not attend the church and was Roman Catholic, not Presbyterian, the court held that New Jersey's Charitable Immunity Act barred her negligence suit because her 17-year old son was a member of the church.  Ms. Patterson was picking him up from a youth event when the accident occurred.  According to court's opinion, while the Act only bars suits by persons who are beneficiaries of the sued nonprofit's works, it found that Ms. Patterson benefited from her son's attendance at the church although she may have preferred to have him attend a Roman Catholic Church instead.  While not stated explicitly, the court's decision may have turned in part on the fact that she apparently had, albeit perhaps somewhat grudgingly, given her permission for her son to attend the church.

LHM

Richard Grasso Wins a Round in the Challenge to His NYSE Compensation

The New York Times reports that Richard A. Grasso, the former chairman and chief executive of the then not-for-profit New York Stock Exchange, has convinced New York's highest court to uphold the dismissal of four counts originally brought against him by the Attorney General's office relating to his compensation.  The court upheld the dismissal on the grounds that the Attorney General did not have the statutory authority to bring the claims.  Two other counts remain against Mr. Grasso relating to whether he violated his fiduciary duties to the NYSE by accepting compensation that he knew was excessive, as well as a separate lower court decision that he breached his fiduciary duty to keep the board informed about his pay, a decision that Mr. Grasso is also appealing.

The New York Court of Appeals' opinion provides further details.  The NYSE employed Mr. Gross as its chairman and chief executive officer from 1995 until his resignation in 2003 (caused by the public outrage over his compensation).  That compensation grew to approximately $12 million by 2002, and then leaped to $139.5 million in 2003 plus an additional $48 million payable over four years.  The court characterized the four counts brought by the AG that the lower appellate court had dismissed as "nonstatutory claims . . . premised on provisions of [New York's not-for-profit corporation law] but clothed in the common law."  The counts involved constructive trust and unjust enrichment claims based on the statutory reasonable compensation provisions, a restitution claim based on the assertion that a majority of the Board had failed to approve the compensation at issue as required by statute, and a claim based on the assertion that certain advance payments from a retirement plan violated the statutory prohibition against loan to officers.  The Court of Appeals found, however, that these nonstatutory counts exceeded the AG's authority because they would have required a lower burden of proof than that specified by the legislature in its fault-based enforcement scheme that explicitly gave the AG authority to enforce certain provisions of the New York not-for-profit corporation law.  The two surviving counts, in contrast, are for statutory violations - unlawful transfer of corporate assets and breach of fiduciary duty - that the AG has express authority to pursue in court, although Mr. Grasso is challenging the AG's current standing to bring those claims in a separate pending appeal.

LHM

St. Olaf College Case Highlights Troubles with Restricted Gifts

Litigation over whether charities can change the use of restricted gifts is becoming more common and the legal issues involved more complex. The most visible of these cases over the past few years has been the litigation involving Princeton and the Robertson Foundation over the Woodrow Wilson School of Public and International Affairs. In this case, the Robertson family has argued that Princeton violated the terms of the gift that funded the Wilson School (originally $35 million, now almost $800 million, and more than 5% of Princeton's total endowment). The Robertson family has a whole website devoted to the litigation here; and of course Princeton has published rebuttals on its own web site here. See also the prior blog post regarding Professor Iris Goodwin's article about the Princeton litigation here.

Now a trial judge in Minnesota has taken both the Minnesota Attorney General and St. Olaf's College to the woodshed regarding St. Olaf's sale of WCAL, its public radio station (which St. Olaf sold to Minnesota Public Radio). St. Olaf's had sought to remove the restrictions on certain gifts to the college that were for the benefit of supporting WCAL, and the judge in this case refused St. Olaf's request with respect to several of the gifts in question (the judge did permit certain gifts to be used to support St. Olaf's production of certain radio shows that would continue to be broadcast over the MPR network).

In the opening part of his opinion, Judge Gerald Wolf stated,

The Minnesota Attorney General is the watchdog of all trusts throughout the state of Minnesota. Deplorably, when St. Olaf made the decision to sell WCAL, no one from the Attorney General's Office intervened to safeguard the trust. The Attorney General's Office was notified by SaveWCAL of the pending sale yet they failed to do anything. The undersigned is absolutely mystified as to why the State Attorney General did not become involved in a sale of trust assets valued at $12 million when it is its statutory obligation to do so.

The undersigned does recognize that there is a newly elected Attorney General who was not in office at the time of the sale. However, the office is painted with the same brush. Her office is tainted with this lapse of duty even though she did not hold her present position at the time. Regardless of who was serving as Minnesota Attorney General at the time of the sale, the office as an institution has a duty to the people of Minnesota to serve as guardian of all trusts created and operated in this state. The Minnesota Attorney General's Office failed in its duty in this case.

Ouch!

The opinion in the case is available here (fairly large PDF file with a fairly slow link, so give it time to load).

JDC

No Surprises at Provena Oral Argument

Well, I wish I could say that the Provena oral argument held this morning at the Illinois 4th District Court of Appeals in Springfield was riveting, or that it really illuminated some specific aspect of the case or the policy debate about hospital tax exemption, but it wasn't and didn't. I suppose I shouldn't be surprised; as I noted in my earlier blog post here, the issues in Provena have been hashed and rehashed for over 20 years at the state and federal levels without much progress, so I'm not sure there is anything new to say about tax exemption for nonprofit hospitals. Each attorney (Evan Siegel from the State AG's office for the State, Patrick Coffey of Lord Bissell & Brook for Provena) stuck to their main points: on the government side, these points were that Provena provided inadequate charity care and sent charity patients to debt collectors; on the Provena side, the main points were emphasizing the vast array of "community benefits" that Provena claims it offers and the testimony from its witnesses in the administrative record regarding its commitment to serving all patients without regard to ability to pay.

I was somewhat surprised at the relatively few questions asked by the 4th District panel (Judge Appleton, presiding, with Judges McCullough and Knecht); in fact the court asked only two questions in the State's opening argument, both pretty predictable (Judge Appleton asked how the court should "draw the line" regarding how much charity care was required for exemption about 15 seconds into oral argument and then toward the end of Siegel's opening argument he also asked whether the current standards for tax exemption outlined in a 40-year-old Illinois Supreme Court case could rationally be applied to modern health care). Patrick Coffey got a little more heat; when he claimed that the Provena case was "unprecedented," Judge Appleton interrupted him to note that the Illinois Court of Appeals had decided FOUR health care exemption cases fairly recently -- ergo, this case was not so "unprecedented." Coffey also got questions from Judges McCullough and Knecht about the size of Provena's charity care program and whether it was advertised to potential charity patients, but again these were pretty predictable questions. When Judge Knecht asked Coffey to pick out something that a marketing person would trumpet as a major benefit to the community, Coffey used Medicaid shortfalls as his example (undoubtedly because in the year in question, Provena claimed it suffered over $10 million in such shortfalls, while giving out only about $800,000 in outright charity care). In fact, it was only at the very end of the argument, in Siegel's rebuttal, that Judge Knecht asked the tough policy question, which was whether the various "community benefits" cited by Provena as grounds for its exemption (e.g., running an ambulance service, a men's shelter and a charity nursery) should "count" for exemption. I was a little disappointed in Siegel's response, which stuck to the technical argument that no activity should count that was not conducted on the property in question; though this may have been the right tactical move, I sort of wish he had taken on the policy question more directly and noted that many of the "community benefits" cited by Provena were in fact a way to get paying customers to their hospital (to his credit, he did make that point very briefly with respect to the ambulance service).

I also had hoped to gain more insight into how the appellate court might view Provena's claim to exemption as a religious institution, but the panel asked nary a question about that, and only Siegel mentioned it in argument (and his argument on that point was that Provena was really a commercial enterprise, not a religious organization).

So not much to say here other than we'll all wait for the court's opinion, and then what almost inevitably will be the next step no matter who wins this round: an appeal to the Illinois Supreme Court.

JDC

Provena-Covenant Oral Argument Set for Wednesday, June 18

On the heels of Senator Grassley's less-than-favorable comments regarding tax-exemption for nonprofit hospitals (blogged by Darryll Jones earlier this week here), the Illinois 4th District Court of Appeals will hear oral argument in Provena-Covenant Medical Center v. Dept. of Revenue this Wednesday, June 18 at 9:00 a.m. in Springfield, Illinois (the oral argument calendar is available here).

For those who haven't kept up with this saga, Provena-Covenant is a nonprofit hospital located in Urbana, IL whose state property tax exemption was revoked by the Illinois Department of Revenue in September, 2006. The case actually began two years earlier, with a recommendation in 2004 by the Champaign County Board of Review (a citizens' board that reviews property tax disputes) to revoke Provena's exemption. Prior to the Board of Review's recommendation, Provena had received national attention (ignominy?) for its widespread use of the quaint Illinois procedural device called a "body attachment" that permits creditors to have debtors thrown in jail for missing a court hearing on a debt collection case. After a series of internal appeals to the Department of Revenue, the Director of the Illinois DOR, Brian Hamer, issued a final opinion revoking Provena's tax exemption, primarily on the grounds that Provena provided inadequate charity care - according to Hamer, Provena's charity care expenditures during the tax year in question (2002) amounted to less than 7/10 of 1 percent (0.7 percent) of its revenues. Hamer's opinion is available here.

Provena then appealed the DOR's decision to circuit court, and in an oral decision delivered from the bench, Circuit Judge Patrick J. Londrigan reinstated Provena's exemption on July 20, 2007. The DOR then appealed to the 4th District court of appeals, which is where the case currently stands.

The Provena case is fascinating on a number of fronts. One of the fascinating aspects is that the main issues in the case are essentially the same ones that the Utah Supreme Court considered over 20 years ago in the famous Utah County v. Intermountain Health Care decision: should tax-exemption for nonprofit hospitals be tied solely to charity care? If so, how much charity care is necessary? And how do we even define what charity care is (for example, should Medicare and Medicaid "shortfalls" count as charity care)? The Provena case highlights how little progress we have made in addressing these issues from a policy perspective over the past two decades. Provena also raises some questions about how relationships between a nonprofit and various for-profit sibling entities should affect exempt status. One of the things that troubled both the Champaign County Board of Review and Brian Hamer was how much of the operation of Provena was "outsourced" to sibling nonprofit and for-profit entities, and the fact that Provena made substantial distributions of net revenues to its parent corporation, Provena Health. I reviewed most of these issues in an article I wrote a couple of years ago about the Provena case that was published in the Loyola University Chicago Law Journal, 37 Loy. U. Chi. L.J. 493, available from Lexis here. An edited version of this article, updated to consider the DOR's final disposition of the case, was published by the Exempt Organizations Tax Review and is available on Lexis here.

One final fascinating part of Provena: before the DOR and in the circuit court, Provena argued that even if it did not meet the standards for exemtion as a nonprofit hospital, it should be exempt as a religious organization (Provena is part of the Catholic Provena Health system). This argument basically was ignored by Brian Hamer in his opinion for the DOR, but Judge Londrigan stated in his opinion that the evidence established that Provena "satisfied the relevant factors used to determine qualification for charitable- and religious-exempt use for the real estate at issue in this proceeding.’’ It will be interesting to see how the 4th District handles this if it gets to that issue (I think that Rob Katz may be working on a research project that involves this very question).

If all goes well, I intend to attend the oral argument on Wednesday and will try to post a summary to the blog Wednesday afternoon.

JDC

Another State Court Defines Charity to Require Free or "nearly free" goods or services

In In Re: Appeal of InterFaith Villa,  L.P.,  (June 6, 2008) another state court has defined charity as a concept that requires the provision of free or "very nearly" free goods or services:

Our Supreme Court in Lutheran Home adopted a strict two-element definition of "charity" or "charitable purposes," as required by Article 11, § 1(b)(2) and K.S.A. 79-201. 211 Kan. at 277-78. K.S.A. 2007 Supp. 79-201 Second follows the language of the constitutional charitable purposes exemption by exempting "[a]ll real property, and all tangible personal property, actually and regularly used exclusively for literary, educational, scientific, religious, benevolent or charitable purposes . . . ." Under the first part of the definition for "charity" adopted in Lutheran Home, the services must be provided "free of charge, or, at least, so nearly free of charge as to make the charges nominal or negligible." 211 Kan. at 278. Second, the services must be rendered to "those who are unable to provide themselves with what the institution provides for them, that is, they are legitimate subjects of charity." 211 Kan. at 278.

Nonprofit scholars and stakeholders have tried (mostly in vain) to define "charity" for tax purposes, with some arguring that the concept of charity should be returned to its roots -- alms for the poor [the "original intentors" lets call them] -- and others arguing that "charity" is an elastic concept that should be adapted to the needs of contemporary society.  Of course, its hard to justify applying the label "charity" to multi-million dollar hospitals, opera houses, and universities that serve primarily the wants (rather than needs) of humankind.  It seems though that states -- particularly in cash strapped times -- are taking the former approach.

dkj

Virginia Supreme Court Rejects Donors' Trust Law Based Challenge to Randolph-Macon College's Admission of Men

In Jenna Dodge v. Trustees of Randolph Macon Woman's College, a case decided yesterday, students alumni and donors sued the University alleging that it violated the Uniform Trust Code: 

The plaintiffs allege in their amended complaint that the College was established in 1891 for the primary purpose of educating women, and that all gifts and donations to the College since its inception were given to support that objective. The plaintiffs allege that the College acquired, improved, and maintained real property with funds donated to the College for the purpose of supporting the College as a liberal arts, educational institution for women. The plaintiffs also allege that the College acquired numerous valuable works of art placed in various locations "across [the College's] campus and in [its] Maier Museum" and that the art and "the facilities to house such works[,] were bought and improved and are maintained by funds donated to [the College] for the purpose of supporting . . . a liberal arts, single-sex educational institution." The plaintiffs allege that the College plans to sell assets, including its valuable art collection, to finance physical changes at the campus that will enable the College to educate both men and women. The plaintiffs also allege that the College plans to amend its articles of incorporation to reflect that the College will educate men and women. The plaintiffs further allege that the aforementioned acts are "contrary to [the College's] original and ongoing express charitable purpose as an institution created primarily to educate women in a liberal arts curriculum under the name of Randolph-Macon Woman's College."

From these facts, plaintiffs allege that the College violated its fiduciary duties owed to the plaintiffs who are intended beneficiaries, as well as its obligations under the State's Uniform Trust Law.  The court rejected the plaintiffs' claim.  A significant and contemporary issue is whether trust or corporate law should apply to nonprofit orgnanizations.  To that, the court stated:

We reject the plaintiffs' contention that Code § 2.2-507.1 requires the application of trust law, rather than corporate law, to the College, a nonstock charitable corporation. Acceptance of the plaintiffs' position would transform all charitable Virginia nonstock corporations into charitable trusts, and we find no language in [Virginia] Code §2.2-507.1 that manifests any intent of the General Assembly to make such a drastic change in Virginia's established law.

The case should provide interesting context for the debate regarding whether nonprofits should be governed under trust law or corporate law.

dkj

Arizona Court of Appeals Upholds Property Tax Exemption for Botanical Garden in Face of UBIT Challenge

In Tuscon Botanical Gardens, Inc. v. Pima County, the Arizaon Court of Appeal ruled that an organization dedicated to horticultural and botanical education was entitled to property tax exemption even though it operates a gift shop, book store, and meeting area rented out for weddings and other social events.  Here are the relevant facts as found by the court:

TBG is dedicated to horticultural and ecological education. It operates 16 different gardens representing a variety of gardening traditions and botanical themes on its 5.74 acre (249,840 square feet) site in central Tucson. Six buildings totaling 8,533 square feet are located on the site. A meeting hall known as "Porter Hall," a "sun porch," (collectively, unless otherwise specified, the "meeting areas") and a gift shop are located in Building 2. According to Defendant/Appellant Pima County ("County"), the gift shop and meeting areas encompass 2,101 square feet out of Building 2’s 3,887 square feet.

TBG designed the gift shop to enhance its educational mission and the books and other materials sold are primarily educational. In addition to educational items, however, TBG also sells non-educational items such as stationary, napkins, baskets, salsa seasonings, dishes, wall ornaments, hats, and t-shirts. TBG makes a profit from the gift shop in that its receipts from sales exceed the cost of goods sold. But it does not make a profit from the shop if staffing and utility costs, the value of unpaid rent for the space it occupies, and other operating expenses are considered. square feet out of Building 2’s 3,887 square feet. 

Porter Hall is one of TBG’s main meeting rooms; it is used primarily by TBG for its staff and committee meetings. TBG does, however, exhibit art for sale in the meeting areas and it earns a commission on the occasional art sales. This commission income does not cover the true cost of TBG’s operation of the meeting areas. TBG also rents the meeting areas to third parties from time to time for various activities such as weddings, private parties, and meetings. TBG does not realize a profit from these rental activities.

The Court found that despite these activities, the organization operated exclusively for charitable purposes and thus deserved tax exemption.  Perhaps the organization, also exempt under IRC 501(c)(3) will owe federal tax on unrelated business (or maybe not, depending on how often the activities occur).  But apparently, there is no unrelated business income tax under Arizona law. 

dkj

State Court Removes Museum Board for Breach of Fiduciary Duties

The New York Times reports that the Montana Supreme Court dismissed the board of the Charles M. Bair Family Museum.  According to the court's opinion, Alberta M. Bair caused the creation of the Charles M. Bair Family Trust upon her death in 1993.  Her estate funded the trust with assets then worth approximately $23.5 million, including her personal residence which the trust agreement stated should be used to establish the Charles M. Bair Family Museum.  The agreement also made the First Trust Company of Montana, since succeeded in interest by U.S. Bank,the sole trustee, but granted the exclusive authority to make charitable distributions from the trust's income to a Board of Advisors.  The five-member Board consisted of the president or president's nominee of the First Trust Company of Montana, of the First Bank in Billings, and of the Billings' law firm of Moulton, Bellingham, Long & Mather, P.C., with the other two members to be appointed by the trustee from three local counties.

Under the direction of the Board of Advisors, the Museum opened to the public in 1996 with a collection of unique Native American Art, European furniture and other items, Edward S. Curtis photographs,  and various paintings and watercolors by noted artists.  The first year saw over 14,000 visitors, but by 2002 the number of annual visitors had declined to slightly over 4,000.  The Board therefore decided to at least temporarily close the Museum pending a review of its continuing operations.  A group of local residents, the Friends of the Bair, objected to the continuing closure of the museum and when the trustee sought court guidance in 2004 regarding the authority of the Board under the trust agreement, Friends of the Bair successfully intervened in the case that eventually made its way to Montana Supreme Court.  The Attorney General also eventually intervened in the case.  While the case was pending, the Board decided to permanently close the museum based on its claim that continuing to operate the museum was not feasible.

The Montana Supreme Court, overruling a lower court decision, concluded that the primary purpose of the trust agreement was to establish the museum.  It also concluded that the Board breached its fiduciary duty to administer the trust with the care, skill, prudence, and diligence of a prudent person when it failed to pay for significant improvements to the Blair residence recommended by the museum consultants it had hired, when it failed to make funding the museum the first priority for the trust's income, and by deciding to close the museum.  The court ordered the trustee, U.S. Bank, to appoint two new Board members for the two Board positions over which it had appointment power, and the three presidents of the institutions named in the trust agreement to appoint nominees as Board members in their place.  The court also ordered the new Board to meet within six months of the decision and to take all necessary steps to comply with the trust agreement, as interpreted by the court.

LHM

Opponents of Barnes Foundation Art Relocation Are Back in Court

Now more than three years after a judge in Pennsylvania ruled that the Barnes Foundation's $6 billion (with a "B") art collection could be moved from Lower Merion Township in Montgomery County Pennsylvania to Philadelphia, opponents of the relocation are back in court arguing that the collection should stay put and not move to Philly.  Here is an excerpt from the article:

Speaking for the move's opponents, Carluccio and Eric Spade, attorney for the Montgomery County-based Friends of the Barnes Foundation, said the financial stakes have changed during the last three-plus years.

Lower Merion Township changed a zoning ordinance in July to allow 140,000 visitors annually to view the collection, twice as many as before. Montgomery County has offered to issue $50 million in bonds to buy the institution's Latchs Lane real estate and lease it back to the foundation. The Friends of the Barnes Foundation is trying to get the current site recognized as a national historic landmark, which would make it newly eligible for preservation grants.

For the entire article, see "Opponents of Barnes Foundation move urge judge to reopen case" in the March 25, 2008, issue of the Philadelphia Inquirer.

DAB

New Hampshire Supreme Court Upholds Charitable Status for Artist Colony in Face of Private Benefit Challenge

In an interesting state law opinion relating to the federal "public benefit" doctrine, the New Hampshire Supreme Court concluded in Peterborough v. MacDowell Colony, Inc. (Download Peterborough.pdf) that an organization that operated an Artist Colony in Peterborough was entitled to state tax exemption as a charitable organization.  The interesting thing about the case is that it involves a statute that apparently defines "public benefit" by reference to whether the organization serves a sufficiently large "indefinite segment of the general public:"

In turn, RSA 72:23-l defines charitable as follows:

The term "charitable" as used to describe a corporation, society or other organization within the scope of this chapter, including RSA 72:23 . . . , shall mean a corporation, society or organization established and administered for the purpose of performing, and obligated, by its charter or otherwise, to perform some service of public good or welfare advancing the spiritual, physical, intellectual, social or economic well-being of the general public or a substantial and indefinite segment of the general public that includes residents of the state of New Hampshire, with no pecuniary profit or benefit to its officers or members, or any restrictions which confine its benefits or services to such officers or members, or those of any related organization. The fact that an organization’s activities are not conducted for profit shall not in itself be sufficient to render the organization "charitable" for purposes of this chapter . . .

The issue in the case was whether the artist colony served an indefinite segment of the public even though it limited residence in the colony during its 3 separate four month sessions to a limited number of artists who are provided free room and board, along with supplies, to create their artistic creations (literature, music composition, visual art, film and video, architectural design, and "interdisciplinary art."  Organizations designed to assist "starving artists" always raise "private benefit" issues at the federal level, though usually for different reasons that those stated in the New Hampshire opinion.  At the federal level, the private benefit doctrine is implicated because the organization actually promotes individual artist's financial interests by working to generate a market for his or her work.  See, e.g., Aid to Artisans v. Commissioner, 71 T.C. 202 (1978).  In the New Hampshire case, the New Hampshire Supreme Court made the subtle distinction not often made at the federal level, to wit:  private benefit is sometimes an inevitably exclusive means by which to achieve a public good.  The failure to recognize this Adam Smith type of sentiment in the private sector, for example, is one of the reasons why joint ventures are subject to such withering scrutiny.  In the New Hampshire case, though, the New Hampshire Supreme Court stated:

The town first contends that "MacDowell is not a public charity because the creative artists who gained access to the Peterborough property in 2005 were not a substantial and indefinite segment of the general public." The town’s argument assumes that the artists admitted to the artist-in-residence program are its sole beneficiaries. In its tax-exempt survey, however, MacDowell asserted that its mission advances "the intellectual well being of the general public." (Emphasis added.) The trial court concurred, at least in part, with MacDowell’s assertion, concluding that by "supporting the artistic process," MacDowell benefits "at the very least, artists across the world, and, in a broader sense, the general public." The court further concluded that MacDowell’s artist-in–residence "program primarily benefits society as a whole." We agree. Therefore, performance of MacDowell’s mission satisfies RSA 72:23-l without inquiry into whether Colony Fellows constitute "a substantial and indefinite segment of the general public," RSA 72:23-l.

The town nevertheless urges us to reject the proposition that "the beneficiary of the Peterborough property is the general public based upon what [the admitted artists] may or may not do at the Peterborough property." The town’s argument, however, conflates the second and third ElderTrust factors – the requirements of public service and of use and occupancy. The relevant inquiry is not whether the public, or a substantial and indefinite segment of it, benefits from the organization’s property, but whether the public, or a substantial and indefinite segment thereof, benefits from the organization’s performance of its stated purpose. See ElderTrust, 154 N.H. at 697-98. Thus, the town’s argument that "MacDowell’s service is room, board, and a studio, which is entirely consumed by the creative artists invited to the Peterborough property," misses the mark. While MacDowell does provide those services to the Colony Fellows, its charitable purpose is, as the trial court determined, "promotion of the arts." The provision of that service benefits a far greater segment of society than the artists who actually use MacDowell’s property and, in so doing, serves the "general public" as that term is used in RSA 72:23-l.

Suspicion rightly arises whenever a charitable group must conspicuously benefit a defined and apparently noncharitable group of people in order to achieve a greater public good, but suspicion ought not to lead to categorical proibitions, as is practically the case with joint ventures.  The separate concurring opinion, by the way, is particularly insightful in relating the private benefit to the law of charitable trusts. 

dkj

Fisk Can Keep Georgia O'Keeffe Art Collection Despite Violating Gift Terms

According to the Associated Press, a Tennessee Chancellor ruled yesterday that financially strapped Fisk University can keep its collection of Georgia O'Keeffe artwork obtained via a testamentary gift.  The Court ruled that Fisk violated the terms of the gift but rebuffed efforts by the Georgia O'Keeffe Museum to take position of the works.  Fisk had previously failed in its efforts to obtain judicial permission to sell the artwork for $30 million.  After the initial opinion, the court held further hearings on the Museum's argument that Fisk should forfeit the artwork because it violated the terms of the gift.

dkj

Kentucky Judge Rules Appropriation to Religious University for Pharmacy Building Violates State Constitution

In PennyBacker v. Beshear, a Kentucky Circuit Court Judge ruled on March 6, 2008 that the Kentucky legislature's appropriation of $10 million to the University of the Cumberlands violated the state's ban on direct support of religous organizations.  The University of the Cumberlands is a private university affiliated with the Kentucky Baptist Convention, but the appropriation was for the construction of a pharmacy building.  Simliar to the arguments in support of the Faith and Community Based Initiative, the defendants argued (according to aMarch 7, 2009 Inside Higher Education Article) "that as long as Cumberlands pledged to keep the pharmacy school secular, there were no church-state implications, and that Kentucky legislators needed the flexibility to use private religious colleges, as well as public ones, to advance state [secular] goals."  In rejecting that argument, the Kentucky Court stated, "there is no question that the appropriation of $10 million tax dollars to the University to construct a pharmacy building is a direct payment to a non-public religious school for educational purposes. This type of direct expenditure is not permitted by the Constitution of Kentucky." 

I can't tell from the opinion whether the judge rejected the legal argument -- that appropriations to religious [nonprofit] groups are permissable for secular purposes -- or whether he concluded as a matter of fact in this particular case that the government appropriation violated First Amendment type restrictions against church-state entanglement.  The former interpretation seems more likely and would, if applied on a national level, call into question direct grants to religous nonprofits for secular purposes.  A comment posted to the Inside Higher Education website captures the church-state concerns relating to direct grants to religious organizations:  "do you really think this university could keep the pharmacy school secular? I am sure they would indoctrinate students into not dispensing birth control or the morning after pill because that is what God told them to do."  On the other hand, sentiments like those expressed in the Amherst Student Newspaper suggest that it is possible and efficient to provide government funding to religous organizations in support of their secular activities.

Another interesting point about this case is that there is usually not sufficient opposition to whatever social service the religious organization is providing to force a judicial confrontation.  But in this case, according to the Inside Higher Education Article, the Kentucky Fairness Alliance, a nonprofit that argues against discrimination based on sexual preference, brought suit only after the University expelled an openly gay student. 

dkj

Tennessee Court Rejects Fisk University's Cy Pres Petition Seeking to Sell Donated O'Keeffe Collection: Fisk Survival at Stake

In Fisk University v. Georgia O'Keeffe Foundation, (full text of the opinion) a Tennessee chancery court declined to apply the cy pres doctrine in a manner that would allow struggling Fisk University to sell all or part of the artwork donated by the late, great artist Georgia O'Keeffe.  The Court acknowledged Fisk's dire circumstances but concluded that the law requires that it not allow Fisk to sell the artwork despite the fact that Fisk is in critical condition.  The Court also ruled that the case should proceed to trial to determine whether Fisk's violation of the terms of the gift allows the gift to revert to a secondary beneficiary.  Things are looking bad for W.E.B. Dubois' alma mater.  For an interesting critique of the opinion, see Jack Siegel's column.

dkj

Cy Pres - Iowa case

In the current issue of Probate & Property, Prof. Gerry Beyer reports on a cy pres case, Kolb v. City of Storm Lake, 736 N.W.2d 546 (Iowa 2007). 

Henry and Martha Kolb entered into an agreement with the city of Storm Lake, Iowa, to establish a garden and a fountain in memory of a grandson who died in a hunting accident.  The Kolbs funded a trust to provide money for maintenance of the garden and foundation.  Many years later, after both donors had died, the city began an economic development project that required the use of the garden's site.  The city and the trustee of the trust, one of the Kolbs' sons, began discussing moving the garden, but before they reached agreement the trustee/son decided to oppose the move.  The city continued to move ahead with the development project and destroyed the fountain and garden.  The city then requested a modification of the trust in order to move the garden to a nearby site.  The district court refused to permit the modification, stating that the trust's purpose had not become "impracticable, Impossible or unlawful to fulfill" except by the city's own action.  The appellate court reversed and allowed the modification under the doctrine of cy pres.  Although the city created the conditions that made continuing to maintain the garden in the same place impossible, the city was responding to "natural and unavoidable" changes in economic and societal needs.  The court concluded that the Kolbs' primary purposes were to create a perpetual memorial to their grandson and to benefit the city.  The location was important to them, but had no particular significance other than being a nice setting.  The court hinted that if the location had particular significance then location would have been a stronger factor.

The court's opinion provides a detailed look at the doctrine of cy pres in Iowa.

sng

Judge Orders Class-Action Settlement Paid to Nonprofits

The Orlando Sentinel reports that Florida Circuit Court Judge James E.C. Perry has ordered $3.4 million from a class-action settlement pool paid to a variety of nonprofits, including more than $1 million to several Central Florida charities.  The settlement arose out of an alleged price-fixing scheme by Bayer A.G. (see the class action notice for more information), but if it were distributed to the approximately 130 million affected consumers they would only receive a few pennies each.  The plaintiffs' attorneys, Mark Nation and Kenneth G. Gilman, therefore suggested that the settlement be paid to several consumer nonprofits, including the National Consumer Law Center in Boston, the American Anti-trust Institute in Washington, DC., and Public Citizen.  Judge Perry decided instead, however, to pay only $138,000 to the nonprofits recommended by the attorneys and to distribute the balance to a variety of national and local organizations.  The national entities include the Make-A-Wish Foundation of America, Covenant House International, Shriners Hospital for Children, Special Olympics Inc. and Ronald McDonald House Charities Inc.  The local entities included Safe House of Seminole, which provides for battered women and children, and Seminole affiliates of the Boys and Girls Clubs of America and Habitat for Humanity.  The $3.4 million represents the balance in the settlement pool of $4.75 million, after payment to the plaintiffs' attorneys of $1.19 million plus $152,000 for expenses.

LHM

Minnesota Nonprofits Worried after Minnesota Supreme Court's Definition of "Charity"

Two weeks ago, we BLOGGed the Minnesota Suprem Court's decision in Under the Rainbow Childcare Center, Inc.  In that case, a 4-3 majority ruled that a nonprofit could not be deemed "charitable" for purposes of the state's constitutional exemption from taxes (including property taxes) unless the nonprofit provided its goods or services free or at reduced charges.  Minnesota Public Radio today reports (real player audio file) on reaction within the Minnesota nonprofit community.  The report notes that one nonprofit is now worried that it will have to come up with at least $100,000 to pay property taxes. 

dkj

Ski Season - Are Volunteers Employees?

Ski season is underway in Oregon, with Mt. Bachelor already open and Willamette Pass (my family's favorite) due to open soon, maybe this weekend.  Volunteers may be in shorter supply this season, due to a case decided by the Oregon Court of Appeals.  In Mt. Bachelor Ski Education Foundation v. Employment Dept., 215 Or. App. 607, 170 P.3d 1106 (Oct. 31, 2007), the court held that a "volunteer" who received an annual ski pass was, in fact, an employee.

The Foundation provides volunteers to help with ski training and races.  The volunteer form states, "I am aware that I am NOT an employee."  Each volunteer is given an annual pass to Mt. Bachelor, valued at $910 for the year in question (2004-05)  After a volunteer filed for unemployment compensation, the Employment Department assessed unpaid employment taxes against the "employer."  The Foundation challenged the assessment, arguing that the ski pass was necessary for the volunteer to have access to the slopes and do carry out her volunteer work.  The ALJ agreed with the Employment Dept. and so did the Court of Appeals.

If a ski pass makes a volunteer an employee for purposes of an unemployment claim, then it presumably carries income tax consequences as well.  The fallout is significant for ski areas that count on volunteers for ski patrols as well as for race supervision and ski education.  The Foundation has decided not to appeal the ruling, and is hoping for a legislative solution.  A House committee has authorized the drafting of a bill that would say that volunteers are not employees, even when they are compensated in some (presumably de minimis) way.  Churck Burley, R-Bend, the State Representative who requested the bill is a longtime ski patrol volunteer and understands the need for volunteers to keep ski slopes safe.  Colorado has a statute that exempts ski volunteers from employment status, and presumably Oregon will soon have a similar statute.  This story was reported by Mike Stahberg, The Register Guard, Eugene, Oregon, Dec. 18, 2007.

sng

Minnesota Supreme Court Says "Charity" Requires Free or Reduced Charge Goods or Services

In Under the Rainbow Child Care Center, Inc. v. County of Goodhue, (December 6, 2007) the Minnesota Supreme Court ruled that an organization cannot be considered "charitable" under the Article X, Section I of the Minnesota State Constitution unless it provides free or reduced cost goods or services, stating:

It is, thus, inherent in the concept of charity that there is a gift—that is, the services, goods, or whatever is conceived as the charitable benefit must be provided to the recipients of the charity without requiring them to pay full value for it.  Nevertheless, the expanded legal definition of charity that has evolved in the context of tax exemptions does not require that the charitable benefit be provided to all recipients entirely free of charge.  Therefore, the third North Star factor has been refined to require that the charity be provided “free of charge, or at considerably reduced rates.”  Cmty. Mem’l Home, 573 N.W.2d at 87 (emphasis added).  And the “considerably reduced rates” requirement has been described as meaning “considerably less than market value or cost.”  Id.

The dissent argued that the 4-3 majority dilutes the concept of "charity" by focusing exclusively on the charity's funding mechanisms. 

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