Wednesday, August 10, 2016
The NY Times is running a series of articles on the influence donors, particularly large corporations, appear to have over research conducted by some prominent think tanks. As its front page articles on August 8th and August 9th detail, many researchers associated with think tanks are paid consultants or lobbyists for corporate clients, and many think tanks also receive contributions directly from corporations that have an interest in the research the think tank is conducting. Some of the think tanks identified have either admitted to lapses in oversight or adopted more stringent conflict of interest and disclosure policies, but it is not clear how widespread such admissions or changes are within the think tank community.
While in theory reaching research conclusions that are helpful to donors or clients could constitute providing prohibited private benefit on the part of the think tanks, which are generally tax-exempt under Internal Revenue Code section 501(c)(3), the connections detailed in the articles seem too tenuous to support such a claim. This is especially true given both that proving a solid link between a donation and research results is difficult and that the think tanks identified generally engage in a broad range of research projects, only a small portion of which may be tainted by donor influence. Similarly, while some think tanks then arrange for meetings or conferences centering on their research and attended by government policy makers that might constitute lobbying for federal tax purposes, most such events likely fall outside of the technical definition of lobbying and the few that may not are almost certainly within the limited amount of lobbying permitted for tax-exempt charitable organizations such as think tanks.
Nevertheless, the stories are troubling because they throw into question the ability of government policymakers to rely on such research, as noted by Senator Elizabeth Warren in a video the NY Times posted with these stories. In its regular Room for the Debate feature, the NY Times therefore invited a number of commentators to suggest possible ways to address the concerns raised in its stories. Suggestions ranged from greater transparency about possible conflicts (including a certification process), better internal procedures to ensure unbiased research results, greater skepticism regarding those results on the part of journalists and others who report or rely on those results, and a diversification of funding sources (including ensuring various governmental funding sources) to support such research. I frankly am skeptical of transparency, certification, and internal procedure improvement if only because it may be too difficult for busy lawmakers, much less journalists and other members of the public, to shift through various disclosures or to determine what certification schemes or particular think tanks are reliable. I believe the diversification of funding sources idea has more promise, particularly if there are (nonpartisan) ways for government agencies to provide such funding conditioned on accurate, unbiased results. Bottom line, this strikes me as not a narrow federal tax issue but a larger issue about how to incentivize truth telling in public policy research.
Following up on David Brennan's previous blog post and thanks to a comment from a reader, I can now report that a conference committee of the Massachusetts legislature removed the provision in a pending economic development bill that would have kept property acquired by nonprofits on the property tax rolls for four years if the property had been taxable before the nonprofit's acquisition. The provision at issue in what was then Bill H.4483 read as follows:
SECTION 127. Chapter 59 of the General Laws is hereby amended by inserting after section 2D the following section:-
2E. Any charitable organization or educational institution otherwise exempt from the payment of property taxes pursuant to section 5 of chapter 59, or any nonprofit charitable corporation or public charity otherwise exempt from the payment of property taxes, that purchases real property that was subject to taxation under said chapter 59 at the time of the purchase, shall pay property taxes on the assessed value of said property for a period of 4 years after the purchase, the amount of said property taxes paid to be phased out as follows: in the first year, 100 per cent of the property tax; in the second year, 75 per cent of the property tax; in the third year, 50 per cent of the property tax; and in the fourth year, 25 per cent of the property tax.
In the final bill, renumbered as Bill H.4569 and currently pending before the governor, this section has been deleted.
Friday, August 5, 2016
Twin Cities Pioneer Press reports that two private colleges alone in Minnesota have combined endowments of over $1.5 billion. This seems wonderful in a time where education budgets are on the chopping block. However, critics of the colleges and universities contend the institutions need to be less scrooge-like and spread the wealth to meet the financial needs of their students. “Private foundations with nonprofit status must spend five percent of their fund’s value each year under federal law.” But, this requirement does not apply to colleges and universities.
As of 2013, there were 138 educational institutions with over $500 million in endowment. A study of 67 private schools revealed that just over half of those schools did not meet the 5 percent mark required by other nonprofits. With an estimated 40 percent of college students receiving Pell grants, it is clear that there remains unmet financial needs for students.
An official from one of the colleges studied said “it’s unfair to expect colleges to spend their endowments at the same rate as charitable nonprofits. If a college’s endowment earns 7 percent but they spend 5 percent, it won’t grow fast enough to keep up with inflation.”
Time will tell if the Legislature will require colleges and universities to meet the five percent mark as their nonprofit peers must. With the rising cost of education, one can assume debate will arise sooner than later.
Thursday, August 4, 2016
A recent post on Non Profit Quarterly by Ruth McCambridge explains tensions between nonprofits in big cities (Such as D.C. in this article) and the legislature. In Washington D.C., nonprofits occupy over $10 billion worth of real estate, which could generate over $111 million per year in tax revenue. Instead, the district collects nothing from them.
Two universities in the district alone account for $48 million in uncollectable property tax revenue. The District is considering the idea of making a change requiring payments in PILOT form, but has been pondering this idea for nearly fifty years.
Undoubtedly, these institutions bring an immense amount of revenue to the District, through research, attracted talent, and general expenditures by students and faculty. However, it is not clear if these benefits outweigh the costs of not receiving property taxes.
It is estimated that currently 28 different states have municipalities that collect PILOT payments; however these payments amount to far less than what the property taxes would have been worth.
It will be interesting to see if the legislature changes the current set up. Between the federally owned tax-exempt buildings, and those occupied by nonprofits, the district is missing out on over one billion dollars of tax revenue.
Tuesday, August 2, 2016
A recent development in California leaves the status of a local non-profit blood bank in question. However, Hemopet is not your typical blood bank, it is a blood bank for animals. Founded in 1986, Hemopet was the nation’s first 501(c)(3) non-profit blood bank and quickly grew to national scale. Currently, Hemopet supplies 40% of the nation’s emergency canine blood, and saves the lives of thousands of dogs each year.
In 1965, a law was enacted that exempted blood banks from taxation. Unfortunately, animal blood banks were not around at the time. A recent audit by state officials led to the conclusion that Hemopet should not be considered tax exempt, and that they owed over $80,000 in unpaid taxes. A bill is set to be presented to the California Assembly Committee on Appropriations on August 3rd that will clear up the status of the non-profit. Dr. Jean Dodds, president and founder of Hemopet, believes that if the bill passes requiring Hemopet to pay the $80,000 they will be forced to shut down. In addition to the potential shortage on emergency canine blood, closing Hemopet would leave over 200 Greyhounds homeless and 45 people would lose their jobs.
Hemopet officials are encouraging Californians to contact the Assembly Committee on Appropriations to voice their support for the organization.
Sunday, July 31, 2016
Proposed legislation in Massachusetts would potentially shake-up the current state of their local non-profits. The proposal would make it necessary for current non-profits to begin paying property taxes, and continue to do so for the next four years (churches and houses of worship remain exempt). Currently, non-profit organizations are exempted from paying property tax, but occupy more than 13 percent of taxable property within the state. The proposal is a small part of an overall economic stimulus plan that seeks to provide over $700 million in assistance throughout the state.
Proponents of the legislation argue that aggressive land purchases by larger non-profits make it more difficult for smaller entities to find land. They also believe exempting the non-profits ultimately raises property taxes for others in the community. Opponents believe that taxing non-profits will make it necessary for them to cut back on their services provided, and could lead to employees being laid off. This could have a wide impact, as non-profit jobs are an estimated 17 percent of the state’s workforce (approximately 500,000 jobs), and pay more than $30 billion in wages.
Although both sides present compelling arguments, it is imperative for policy makers to thoroughly analyze the true impacts of their decisions. It will be interesting to see what how the good people of Massachusetts respond to this proposal.
Monday, May 23, 2016
A recent article on proposed Delaware legislation highlights the complexities and competing objectives lawmakers face when deciding if a nonprofit should be exempt from paying local property taxes. Here, the decision is whether or not to add the Milford Housing Development Corporation, EJB Inc., and Martha and Mary’s Place Inc., to the current list of 76 nonprofits in Delaware that currently enjoy being exempt from local property tax. These entities provide housing and/or drug treatment services to community members in need. While these organizations undoubtedly provide essential public services, granting these entities tax exempt status can have negative effects on other public services.
For example, the Milford Housing Development Corporation paid almost $30,000 in property taxes last year. To further add to the conundrum, almost all of those funds were appropriated to a local school district. In times of financial hardship, policy makers are faced with tough decisions and must balance different objectives in deciding where tax revenue should come from, and what that revenue should benefit. A thorough cost-benefit analysis must be undertaken to determine the full reach of granting an entity tax-exempt states, including both positive and negative effects. Granting an entity tax-exempt status, or deciding to appropriate tax funds to a particular area, almost inevitably means that another worthy entity will bear the cost.
Some municipalities try to alleviate this burden by requiring those entities that are designated tax-exempt to pay set fees to contribute back to the greater good. However, this can hinder the accomplishment of the entity’s purpose and cause due to a lack of funds.
Ultimately, it would take an army of professionals to make a “perfect” decision on who should be granted tax-exempt status, and who should bear the cost of that status. Even then, by the time a thorough analysis has been undertaken, the state or municipality will likely be facing different needs as a community. Policy makers must employ great foresight in making these tough appropriation decisions.
Wednesday, May 18, 2016
The California Legislature is currently considering a bill (AB 2855) that would mandate that all nonprofits who are soliciting donations in California to "include a prominent link [on their website] that immediately directs all consumers to the Attorney General’s Internet Web site, which contains information about consumer rights and protections and charity research resources." The bill as initially proposed would have required soliciting charities to prominently disclose the amount of money that the organization spent on overhead and on the executive director's salary and benefits.
The bill has been sharply criticized by many nonprofits, including the California Association of Nonprofits and the National Council on Nonprofits, who argue that the bill essentially attaches a "warning label" to all organizations that would scare off donors. The Bill's sponsor, Assemblymemeber Jim Frazier, defended the bill as a needed tool to protect worthy organizations from the "shadow cast upon them by bad actors." (In something of a jab at critics, Assemblymember Frazier paused to highlight that the "president, executive director, and chief operating officer [of the California Association of Nonprofits] made over $600,000 combined in salary and benefits."). Other critical commentary on the bill comes from Carol Luong (Great Positive) and Gene Takagi (NEO Law Group / Nonprofit Law Blog).
Some of the critics have argued that the bill would raise a First Amendment objection by compelling speech (i.e., including a link to the Attorney General's website on the organization's webpage and in solicitation materials). In Riley v. National Federation of the Blind of North Carolina, Inc., 487 U.S. 781, 795 (1988), the Supreme Court struck down a state mandate that professional solicitors disclose, as part of their solicitation, the percentage of funds turned over to the nonprofit. The Court reasoned that this disclosure would necessarily change the content of the message, and the disclosure would have the anticipated and intended effect of making solicitation on behalf of certain causes less effective.
Although the criticisms have some weight as a policy matter, the California bill is arguably distinguishable from the law struck down in Riley in several respects. Most significantly, the California bill would require only a link to a website, and not the direct disclosure of any particular substantive statement or content in the course of solicitation. See Riley's footnote 11. This makes the compelled speech more akin to a mandate to disclose the phone number of a regulatory body or to display a license. See Dayton Area Visually Impaired Persons, Inc. v. Fisher, 70 F.3d 1474, 1485 (6th Cir. 1995) (upholding limited point-of solicitation disclosures). Such mandates are common in the commercial & professional speech realm, although their application to charitable solicitation is much less certain. (There are lots of unsettled issues in the regulation of charitable solicitation. In fact, we recently filed a successful First Amendment challenge to a set of local restrictions on charitable solicitation, including a licensing requirement.)
Riley and its related cases recognize a distrust of government restrictions sprung from a history of government (typically with the support of established nonprofits) creating barriers to charitable speech in order to burden disfavored causes. Yet the Supreme Court has also recognized the legitimate objective of providing accurate information to facilitate well-informed decisions by donors. Striking this balance is no easy matter, as Assemblymember Frazier is learning the hard way.
Friday, May 6, 2016
As has been covered in this space repeatedly (for example, with respect to Illinois and Maine), the combination of wealthy nonprofits, valuable real estate, and government budget pressures continues to lead to battles between those nonprofits and governments over property tax exemptions. New Jersey has become perhaps the most active battleground - NorthJersey.com reported last month that 26 of the state's 62 nonprofit hospitals are now embroiled in tax-court cases, building on a 2015 Tax Court of New Jersey ruling against Morristown Medical Center. While earlier this year New Jersey Governor Chris Christie announced an agreement to freeze property tax assessments for nonprofit hospitals for two years in order to give a to-be-formed Property Tax Exemption Study Commission time to review the issue, the legislature has yet to act on the legislation needed to implement this proposal. Additional coverage: NJ.com. The hospital battles join the ongoing lawsuit by individual residents of Princeton, N.J. against Princeton University that a state trial judge has refused to dismiss (a decision now upheld earlier this year by a state appellate court). For recent coverage of that suit, see Bloomberg and Fortune.
In related news, Gerard F. Anderson (John Hopkins) and Ge Bai (Washington & Lee) just published a study reporting that seven of the ten most profitable hospitals in the United States in 2013 were nonprofits. At the same time, they found more than half of the hospitals they studied (which included for-profit and public hospitals as well as nonprofits) incurred losses from patient care services and only 2.5 percent earned more than $2,475 per adjusted discharge. Here is the abstract for the study, which appears in HealthAffairs:
To identify the characteristics of the most profitable US hospitals, we examined the profitability of acute care hospitals in fiscal year 2013, measured as net income from patient care services per adjusted discharge. Based on Medicare Cost Reports and Final Rule Data, the median hospital lost $82 for each such discharge. Forty-five percent of hospitals were profitable, with 2.5 percent earning more than $2,475 per adjusted discharge. The ten most profitable hospitals, seven of which were nonprofit, each earned more than $163 million in total profits from patient care services. Hospitals with for-profit status, higher markups, system affiliation, or regional power, as well as those located in states with price regulation, tended to be more profitable than other hospitals. Hospitals that treated a higher proportion of Medicare patients, had higher expenditures per adjusted discharge, were located in counties with a high proportion of uninsured patients, or were located in states with a dominant insurer or greater health maintenance organization (HMO) penetration had lower profitability than hospitals that did not have these characteristics. These findings can inform policy reforms, while providing a baseline against which to measure the impact of any subsequent reforms.
Tuesday, February 23, 2016
This weekend, Ohio joined the group of states that have “defunded” Planned Parenthood. Ohio’s bill follows the model used by other states, and bans certain funding to go to any organization or affiliate that performs or promotes elective abortions. (Before the bill, there was no government funding of elective abortions.) “Affiliate” means any organization that shares common ownership or control, has a franchise agreement, or shares a trademark or brand name. Under this bill, an independently incorporated organization that, for example, licenses the Planned Parenthood logo would be precluded from participating in funding, even if it does not perform or promote elective abortions. Ohio’s restrictions apply to several specific programs, including the Violence Against Women Act and the Breast and Cervical Cancer Mortality Prevention Act.
Against my better judgment, I’m wading into these treacherous waters because these bills pose interesting legal and theoretical issues about the ability of government condition the receipt of funding to nonprofits based on disagreement with the organizations’ ideology.
Friday, February 19, 2016
The San Antonio City Council plans to privatize its Convention & Visitors Bureau by creating a new nonprofit to house the operations currently conducted by a governmental agency. The plan is that this restructuring will allow the CVB to increase its budget by leveraging additional funding sources from the private sector (including “corporate sponsors, memberships, partnerships and advertising dollars”), which would allow it to be more competitive in its spending relative to other Texas cities.
According to press reports, the Council has not yet finalized the structure of the governing board. Options include having representatives of the council and the mayor’s office sit on the board alongside representatives from the tourism and business community, and/or having board members voted upon by the city council. Although having publicly-appointed and publicly–affiliated board members running a nominal nonprofit is hardly unique to San Antonio, these public-private nonprofit hybrids don’t fit neatly into either public or nonprofit legal regimes. As a result, it is often unclear whether quasi-governmental organizations must comply with state public record laws, which vary from state to state. (See, for example, the Texas Supreme Court’s 2015 decision regarding the Greater Houston Partnership.)
Moreover, what are the specific fiduciary obligations of board members who are city council members, or who are appointed (and, in many cases, removable by) city councils or mayors? One easy answer might be that all nonprofit directors share identical fiduciary duties to the organization; however, expecting city councilmembers and their representatives to abandon their political perspectives may not be realistic, and arguably would run counter to the very purpose of structuring the board to include city councilmembers. One solution would be for the City to clarify these rules through the process of creating the organization.
PS I’m new to the blog, and thrilled to be joining such a great line-up. I’m in my second year of academia as an Assistant Professor at Cleveland State University, where I have the fortune of holding a joint appointment with the Cleveland-Marshall College of Law and with the nonprofit management and public administration programs at the Maxine Goodman Levin College of Urban Affairs. My research interests include legal issues of volunteering, questions of board governance, and Constitutional rights of nonprofits, with a particular attention to how legal rules change behavior of nonprofit actors. I also continue to practice law from time to time, advising nonprofits and litigating matters pro bono. I’m happy to be on the team.
Monday, January 4, 2016
The Philadelphia Inquirer reports that a bill passed by the Budget Committee of the New Jersey Senate and referred to the State and Local Government Committee of the New Jersey General Assembly would maintain property tax exemption for New Jersey nonprofit hospitals – for a price. Says the story:
The bill comes in response to a June tax court ruling that found that Morristown Medical Center in Morris County failed to qualify for the exemption from tax years 2006 to 2008.
The court found that the nonprofit hospital "operated and used its property for a profit-making purpose," violating a legal standard used to determine whether it owed property taxes.
For example, in addition to employing its own physicians, Morristown Medical Center contracted with for-profit doctors that used the hospital's facilities and who directly charged patients. The court said it was impossible to delineate between the hospital's nonprofit and for-profit operations.
The property tax exemption for nonprofit hospitals granted by the bill reportedly would extend to hospitals with on-site for-profit medical providers. But there is a catch. According to the Inquirer, the bill would also generally require hospitals to pay an annual community service fee to local governments:
[Nonprofit hospitals would] also pay an annual community fee, most of which would go to municipalities and 5 percent to counties. Acute care hospitals would pay $2.50 per day for each licensed bed, while satellite emergency care facilities would pay $250 per day.
The fees could generate up to $21 million for municipalities and counties by one estimate. The bill is reported to limit the use of this revenue for “public safety or to reduce municipal and county property taxes.”
Thursday, July 9, 2015
The ABA's Real Property, Trust and Estate Section has a series called "Professors' Corner," which puts on some really great free webinars for ABA members (sorry - no CLE, but what do you want for free?) on real estate and T&E topics from both academic and practitioner view points. This Wednesday I was in the midst of a road trip, during which I dialed in to the latest in the series on an update to UPMIFA. (Don't worry, I pulled over to a Tim Horton's to dial in. And get coffee. Because road trip.)
The webinar featured Susan Gary from UOregon and Terry Knowles, the Assistant Director of Charitable Trusts in the New Hampshire Attorney General's office. Many of you may know that Susan was the Reporter for UPMIFA with the Uniform Law Commission, and that Terry was an advisor (I believe on behalf of NASCO but I could be wrong on that.) In any event, it was really interesting to hear both of them talk about what's happened in the nine years (has it really been nine years!!!) since UPMIFA was passed by the ULC.
I highly recommend listening to the whole webinar (I think that it will archive soon so ABA should be able to access it) but here are three big picture take aways:
- FIGHT! The lawyers and accountants continue to use different definitions when dealing with endowed funds, which causes confusion all over the place. Susan talked about how the accountants have defaulted to having their clients use historic dollar value to define restricted assets, even thought that isn't required anywhere and actually sort of undercuts what UPMIFA is trying to do. Often, if there is professional advice to small nonprofits, it's from the accounting folks and not the legal folks, so this problem really has cause some issues. I was happy to hear from Susan that FASB is looking to revise this, and that it has some draft rules out for comment.
- UNSAFE HARBORS. As some of you may know, the original UPMIFA draft from the ULC has a provisions that says that endowment spending in excess of 7% is subject to a rebuttable presumption of unreasonableness. Many states didn't adopt - it was interesting to hear that one of the professed rationales for not adopting the 7% rules was the concern that it would cause a safe harbor for 6.99% and under. It was also intersting to hear Terry talk about what her office sees as overcoming that presumption - "we needed it because our budget is short" is insufficient!
- WHAT IS THIS IPS OF WHICH YOU SPEAK? Again, it was interesting to hear Terry talk about what her office needs to do when evaluating spending decisions from endowments. If an endowment is supposed to be perpetual, it really is important to take into account inflation as a factor for consideration, even if there is no magic in how you do it exactly. It seems like the AGs are really looking for a thoughtful process and adherence to an investment policy statement.
In any event, I do recommend the webinar to anyone interested in the endowment spending issue (which seems to be getting some attention from Congress and otherwise as of late - I've linked to Brian Galle's thought-provoking paper on endowment spending) and I really recommend the webinar if you find yourself with lots of time on I-90.
Safe summer travels, all.
Thursday, May 28, 2015
According to this Fresno Bee article, The California Nurses Association (CNA) is up in arms regarding the extent to which California nonprofit hospitals generate community benefit. CNA argues that federal law (see IRC 501(r)) does not sufficiently hold nonprofit hospitals' feet to the fire when it comes to proving their entitlement to tax exemption. The article provides a link to a recently defeated bill (SB346) in the California legislature that would have strictly defined "community benefit." The bill will be reintroduced, apparently, in the next legislative session. Here is a summary of what the bill would require:
Existing law makes certain findings and declarations regarding the social obligation of private nonprofit hospitals to provide community benefits in the public interest, and requires these hospitals, among other responsibilities, to adopt and update a community benefits plan for providing community benefits either alone, in conjunction with other health care providers, or through other organizational arrangements. Existing law requires each private nonprofit hospital, as defined, to complete a community needs assessment, as defined, and to thereafter update the community needs assessment at least once every 3 years. Existing law also requires the hospital to file a report on its community benefits plan and the activities undertaken to address community needs with the Office of Statewide Health Planning and Development. Existing law requires the statewide office to make the plans available to the public. Existing law requires that each hospital include in its community benefits plan measurable objectives and specific benefits.This bill would declare the necessity of establishing uniform standards for reporting the amount of charity care and community benefits a facility provides to ensure that private nonprofit hospitals and nonprofit multispecialty clinics actually meet the social obligations for which they receive favorable tax treatment, among other findings and declarations.This bill would require a private nonprofit hospital and nonprofit multispecialty clinic, as defined, to provide community benefits to the public by allocating a specified percentage of the economic value of community benefits to charity health care, as defined, and community building activities, as specified. The bill would, by January 1, 2018, require a private nonprofit hospital or nonprofit multispecialty clinic to develop, in collaboration with the community benefits planning committee, as established, a community health needs assessment that evaluates the health needs and resources of the community. The bill would also require these entities, prior to completing the needs assessment, to develop a community benefits statement and a description of the process for approval of the community benefits plan by the hospital’s or clinic’s governing board, as specified. The bill would authorize the hospital or clinic to create a community benefits advisory committee for the purpose of soliciting community input. This bill would require the hospital or clinic to make available to the public a copy of the assessment, file the assessment with the Office of Statewide Health Planning and Development, and update the assessment at least every 3 years.This bill would also require a private nonprofit hospital and nonprofit multispecialty clinic, by April 1, 2018, to develop a community benefits plan that includes a summary of the needs assessment and a statement of the community health care needs that will be addressed by the plan, and list the services, as provided, that the hospital or clinic intends to provide in the following year to address community health needs identified in the community health needs assessments. The bill would require the hospital or clinic to make its community health needs assessment and community benefits plan or community health plan available to the public on its Internet Web site and would require that a copy of the assessment and plan be given free of charge to any person upon request.This bill would require a private nonprofit hospital or nonprofit multispecialty clinic, after April 1, 2018, every 2 years to annually submit a community benefits plan to the Office of Statewide Health Planning and Development, as specified, and would allow a hospital or clinic under the common control of a single corporation or other entity to file a consolidated plan, as provided. The bill would require that the governing board of each hospital or clinic adopt the community benefits plan and make it available to the public, as specified.
Thursday, March 19, 2015
As often reported here, an increasing number of states and localities are challenging the property and other tax exemptions of nonprofits within their jurisdictions. Some of the most notable recent developments have been in Maine, where the governor's budget proposal includes a tax on "large" nonprofit organizations in the state, and Pennsylvania, where a state constitutional amendment that would shift control over the standard for exemption to the state legislature is working its way through the amendment process. Along these lines, the Stateline news project of the Pew Charitable Trusts recently published a article titled "Should Nonprofits Have to Pay Taxes?" that provides an overview of recent developments in this area. Besides discussing the the situations in Maine and Pennsylvania, it also discusses developments in Ohio, Vermont, and New York, as well as providing a chart showing the number of federally tax-exempt nonprofits in each state and their assets. Of course those assets include both assets on which the owning nonprofit does pay tax (because no available exemption applies) and also assets that are not subject to property or similar state and local taxes regardless of what type of entity owns them (e.g., investment assets).
Friday, January 30, 2015
According to The Times Herald in Harrisburg, Pennsylvania voters could may be voting on a state constitutional amendment to resolve a long-running dispute about who decides which charities should be exempt from taxes, a determination that has serious repercussions not only for the purported charity itself but also the cities and towns in which they are based. A constitutional amendment passed the Pa. Legislature during its last session that would confer upon the Legislature explicit authority to “establish uniform standards and qualifications” in determining what constitutes a "purely public charity" (and thus tax-exempt) under the Pennsylvania Institutions of Purely Public Charity Act (Act 55 of 1997). According to The Times Herald, "hospital and health-related organizations, religious groups and other nonprofits have urged lawmakers to advance the proposal, while municipal officials say it might add to their already disproportionate number of tax-exempt properties."
If Pennsylvania legislators approve the legislation again within the next two years, voters will vote on the measure as a referendum. According to the article, the May 19 primary is the earliest possible date it could reach voters.
(See a Senate Co-Sponsorship Memoranda for further information on the legislation).
Monday, September 29, 2014
An article last week in the Washington Post (h/t Chronicle of Philanthropy) discussed a report by the Department of Health and Human Services that indicated that hospitals are experiencing significant declines in charity care and bad debt, thanks to expansions in Medicaid and a drop in the number of otherwise uninsured individuals due to the Affordable Care Act. The report projects $5.7 billion (that’s billion, with a “b”) in savings in uncompensated care costs in 2014.
The first thing that I thought was, “Wow, that’s a big number! Great news!” The second thing I thought was, “Gee, I wonder if that will change how we evaluate nonprofit hospitals.” What that might say about my mental state aside, it will be interesting to see how this structural change to the way we pay for health care works its way through the standards for tax exemption.
I note that the HHS report tracks “uncompensated care,” which it treats as the sum of bad debt and charity care. While the HHS report does indicate that there is a difference between “self-pay” patients and “charity care”, the report is quick to note that not all hospitals break down their reporting this way. (See HHS Report, FN 6). Of course, part of the raging debate is whether bad debt is charity care – the Catholic Hospital Association says it isn’t but not all hospitals agree.
Either way, under traditional formulations of the community benefit standard, charity care is not the be-all and end-all of for exempt status – it might not even be necessary. The recent trend, first evident in the Revised 990 Form’s Schedule H and then in the community assessment report requirements of the ACA, appears to lean toward wanting more discussion and disclosure of charity care as component of tax-exemption, even if that doesn’t appear anywhere formally quite yet. It will be interesting to see if a structural reduction in the need for charity care (however defined) changes that conversation.
Then, of course, there are the states. Having practiced in Illinois at the time of the Provena decision (good summary here), I’m particularly curious to see how that might play out. For those of you who weren’t following Provena, Illinois revoked the property tax exemption for a number of nonprofit hospitals, stating that the Illinois property tax charitable exemption provisions (some of which are in the state constitution) require actual charitable use (as in relieving- poverty-charitable-use) of the property. While denying that charitable use is a numbers game (that is, you need to show that there are enough charitable dollars spent to offset the property tax uncollected) – the court then engages in exactly that mathematical exercise.
I’ve moved from Illinois since Provena came down, but I understand there was a legislative fix (SB 2194 and SB 3261, passed in 2012), that partially codifies this math-based analysis. What happens if a hospital doesn’t meet its charity care dollars spent requirement because they are simply not necessary anymore due to ACA?
I might be going out on a limb here, but I’m guessing that Prof. Colombo might have a thought or two on this…
Wednesday, September 24, 2014
March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well? (Part III)
(Note: This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. The previous installments can be found here and here (NLPB) and here and here (BLPB).)
In prior posts we talked about what a benefit corporation is and is not. In this post, we’ll cover whether the benefit corporation is really necessary at all.
Under the Delaware General Corporation Code § 101(b), “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes . . . .” Certainly there is nothing there that indicates a company must maximize profits or take risks or “monetize” anything. (Delaware law warrants inclusion in any discussion of corporate law because the state's law is so influential, even where it is not binding.)
Back in 2010, Josh Fershee wrote a post questioning the need for such legislation shortly after Maryland passed the first benefit corporation legislation:
I am not sure what think about this benefit corporation legislation. I can understand how expressly stating such public benefits goals might have value and provide both guidance and cover for a board of directors. However, I am skeptical it was necessary.
Not to overstate its binding effects today, but we learned from Dodge v. Ford that if you have a traditional corporation, formed under a traditional certificate of incorporation and bylaws, you are restricted in your ability to “share the wealth” with the general public for purposes of “philanthropic and altruistic” goals. But that doesn't mean current law doesn't permit such actions in any situation, does it?
The idea that a corporation could choose to adopt any of a wide range of corporate philosophies is supported by multiple concepts, such as director primacy in carrying out shareholder wealth maximization, the business judgment rule, and the mandate that directors be the ones to lead the entity. Is it not reasonable for a group of directors to determine that the best way to create a long-term and profitable business is to build customer loyalty to the company via reasonable prices, high wages to employees, generous giving to charity, and thoughtful environmental stewardship? Suppose that directors even stated in their certificate that the board of directors, in carrying out their duties, must consider the corporate purpose as part of exercising their business judgment.
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Wednesday, September 3, 2014
(Note: This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. The previous installment can be found here (NLPB) and here (BLPB).)
What It Is: So now that we’ve told you (in Part I) what the benefit corporation isn’t, we should probably tell you what it is. The West Virginia statute is based on Model Benefit Corporation Legislation, which (according to B Lab’s website) was drafted originally by Bill Clark from Drinker, Biddle, & Reath LLP. The statute, a copy of which can be found, not surprisingly, at B Lab’s website, “has evolved based on comments from corporate attorneys in the states in which the legislation has been passed or introduced.” B Lab specifically states that part of its mission is to pass legislation, such as benefit corporation statutes.
As stated by the drafter’s “White Paper, The Need and Rationale for the Benefit Corporation: Why It is the Legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public” (PDF here), the benefit corporation was designed to be “a new type of corporate legal entity.” Despite this claim, it’s likely that the entity should be looked at as a modified version of traditional corporation rather than at a new entity.
This is because the Benefit Corporation Act appears to leave a lot of room for the traditional business corporations act to serve as a gap-filler. West Virginia Code § 31F-1-103(c), for example, explains, “The specific provisions of this chapter control over the general provisions of other chapters of this code.” Thus, the benefit corporation provisions supplant the traditional business corporation act where stated specifically, such as with regard to fiduciary duties, but general provisions of the business corporations act apply where the benefit corporation act is silent, such as with regard to dissolution.
In contrast, the West Virginia Nonprofit Corporation Act is a broader act that discusses dissolution, mergers, and other items specifically in a way that more clearly indicates the nonprofit is a distinct, rather than modified, entity form. Furthermore, a benefit corporation is actually formed under the Business Corporations Act: “A benefit corporation shall be formed in accordance with article two, chapter thirty-one-d of this code, and its articles as initially filed with the Secretary of State or as amended, shall state that it is a benefit corporation.” W. Va. Code § 31F-2-201.
So what makes a benefit corporation unique?
1. Corporate purpose - The traditional West Virginia business corporation is created for the purpose “of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation.” W. Va. Code § 31D-3-301. Under the Benefit Corporation Act, “A benefit corporation shall have as one of its purposes the purpose of creating a general public benefit.” Id. § 31F-3-301. A specific benefit may be stated as an option, but is not required. Note similarly that a part of the corporation’s purpose must be for general public benefit, but that benefit need not be a primary, substantial, significant or other part of the corporation’s purpose.
For purpose of comparison, the low-profit limited liability company (or L3C) typically has a much more onerous purpose requirement. For example, the Illinois L3C law requires
(a) A low-profit limited liability company shall at all times significantly further the accomplishment of one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the Internal Revenue Code of 1986, 26 U.S.C. 170(c)(2)(B), or its successor, and would not have been formed but for the relationship to the accomplishment of such charitable or educational purposes.
2. Standard of conduct – The statute requires, in § 31F-4-401, that the directors and others related to the entity:
(1) Shall consider the effects of any corporate action upon:
(A) The shareholders of the benefit corporation;
(B) The employees and workforce of the benefit corporation, its subsidiaries, and suppliers;
(C) The interests of customers as beneficiaries of the general or specific public benefit purposes of the benefit corporation;
(D) Community and societal considerations, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries, or suppliers are located;
(E) The local and global environment;
(F) The short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests and the general and specific public benefit purposes of the benefit corporation may be best served by the continued independence of the benefit corporation; and
(G) The ability of the benefit corporation to accomplish its general and any specific public benefit purpose;
(emphasis added). While these are significant mandatory considerations, they are nothing more than considerations. Directors and others “[n]eed not give priority to the interests of a particular person referred to in subdivisions (1) and (2) of this section over the interests of any other person unless the benefit corporation has stated its intention to give priority to interests related to a specific public benefit purpose identified in its articles.” § 31F-4-401(a)(3).
As such, while directors must consider the general public benefit of their decisions (and any specific benefits if so chosen), it is not clear the ultimate decision making of a benefit corporation director would necessarily be any different than a traditional corporation. That is, a director of a benefit corporation could, for example, consider the impacts on a town of closing a plant (and determine it would be hard on the town and the workforce), but ultimately decide to close the plant anyway.
Furthermore, many corporations seek to serve communities and benefit the public. McDonald’s, Coca-Cola, and many others already have programs to benefit the public, so it appears that many traditional corporations have already volunteered to meet and exceed the standards of the West Virginia benefit corporations act.
3. Formation – An entity becomes a benefit corporation by saying so when filing initial articles of incorporation with the Secretary of State, § 31F-2-201, or by amending the articles of an already created corporation, § 31F-2-202. Presumably, this serves a notice function, informing the benefit corporation’s current and potential constituents that there is the possibility that profit maximization will not be (or may not be) the corporation’s primary goal. The notice function does not work in reverse, however, as benefit corporation status does guarantee that public benefits have any primacy at all, merely that such benefits will be considered.
4. Termination - Termination of the benefit corporation status is allowed and is achieved by changing the articles of incorporation in the same manner in which traditional corporations modify their articles. § 31D-10-1003. As a result, it doesn’t appear that there is anything in the statute from preventing a benefit corporation from reaping the public relations or capital raising upside of being a benefit corporation, and thereafter abandoning the status should it become inconvenient. Query whether to the extent a transfer to a benefit corporation could be deemed a gift for a public purpose, the Attorney General might have oversight over the contribution in the same manner as it has oversight in cy pres and similar proceedings.
5. Enforcement – Third parties have no right of action to enforce the benefit goals unless they are allowed to use derivatively as “specified in the articles of incorporation or bylaws of the benefit corporation.” Id. § 31F-4-403. Otherwise, a direct action of the corporation or derivative actions from a director or shareholder are the only ways to commence a “benefit enforcement proceeding.” Again, the statute does not give the Attorney General specific statutory authorization to proceed on the basis that a member of the public may have transferred funds to the benefit corporation in reliance upon its benefit corporation status.
So, the statute provides the option for stating and pursuing general and specific benefits, but there are not a lot of structural assurances to anyone—investor, lender, public—that a benefit corporation will actually benefit anyone other than its equity holders. But benefit corporations are required to consider doing so. This is not to say there isn’t some value. As Haskell Murray has noted,
Directors would benefit from having a primary master and a clear objective. . . . [But,] [t]he mandate that a benefit corporation pursue a "general public benefit purpose" is too vague because it does not provide a practical way for directors to make decisions.
As such, an entity may create a clear set of priorities and guidelines that could provide useful and lead to benefits, but the benefit corporation act most certainly does not mandate that.
Finally, although most of the above is focused on the West Virginia benefit corporation law, much of it applies to the other versions of such laws in other states. Cass Brewer notes
Effective July 1, 2014, West Virginia’s benefit corporation statute generally follows the B-Lab model legislation, but among other things relaxes the “independence” tests for adopting third-party standards and does not require the annual benefit report to disclose director compensation.
As an additional resource, Haskell Murray provides a detailed chart of the state-by-state differences, here.
Next up: Part III - So Why Bother? Isn’t the Business Judgment Rule Alive and Well?
EWW & JPF
Tuesday, August 26, 2014
West Virginia is the latest jurisdiction to adopt benefit corporations – the text of our legislation can be found here. As with all benefit corporation legislation, the thrust of West Virginia’s statute is to provide a different standard of conduct for the directors of an otherwise for-profit corporation that holds itself out as being formed, at least in part, for a public benefit. (Current and pending state legislation for benefit corporations can be found here.)
As WVU Law has two members of the ProfBlog family in its ranks (Prof. Josh Fershee (on the Business Law Prof Blog) and Prof. Elaine Waterhouse Wilson (on the Nonprofit Law Prof Blog)), we combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. For those of you on the Business Prof blog, some of the information to come on the Business Judgment Rule may be old hat; similarly, the tax discussion for those on the Nonprofit Blog will probably not be earth-shaking. Hopefully, this series will address something you didn’t know from the other side of the discussion!
Part I: The Benefit Corporation: What It’s Not: Before going into the details of West Virginia’s legislation (which is similar to statutes in other jurisdictions), however, a little background and clarification is in order for those new to the social enterprise world. A benefit corporation is different than a B Corporation (or B Corp). B Lab, which states that it is a “501(c)(3) nonprofit” on its website, essentially evaluates business entities in order to brand them as “Certified B Corps.”
It wants to be the Good Housekeeping seal of approval for social enterprise organizations. In order to be a Certified B Corp, organizations must pass performance and legal requirements that demonstrate that it meets certain standards regarding “social and environmental performance, accountability, and transparency.” Thus, a business organized as a benefit corporation could seek certification by B Lab as a B Corp, but a business is not automatically a B Corp because it’s a state-sanctioned benefit corporation – nor is it necessary to be a benefit corporation to be certified by B Labs.
In fact, it’s not even necessary to be a corporation to be one of the 1000+ Certified B Corps by B Lab. As Haskell Murray has explained,
I have told a number of folks at B Lab that "certified B corporation" is an inappropriate name, given that they certify limited liability companies, among other entity types, but they do not seem bothered by that technicality. I am guessing my fellow blogger Professor Josh Fershee would share my concern. [He was right.]
A benefit corporation is similar to, although different from, the low-profit limited liability company (or L3C), which West Virginia has not yet adopted. (An interesting side note: North Carolina abolished its 2010 L3C law as of January 1, 2014.) The primary difference, of course, is that a benefit corporation is a corporation and an L3C is a limited liability company. As both the benefit corporation and the L3C are generally not going to be tax-exempt for federal income tax purposes, the state law distinction makes a pretty big difference to the IRS. The benefit corporation is presumably going to be taxed as a C Corporation, unless it qualifies and makes the election to be an S Corp (and there’s nothing in the legislation that leads us to believe that it couldn’t qualify as an S Corp as a matter of law). By contrast, the L3C, by default will be taxed as a partnership, although again we see nothing that would prevent it from checking the box to be treated as a C Corp (and even then making an S election). The choice of entity determination presumably would be made, in part, based upon the planning needs of the individual equity holders and the potential for venture capital or an IPO in the future (both very for-profit type considerations, by the way). The benefit corporation and the L3C also approach the issue of social enterprise in a very different way, which raises serious operational issues – but more on that later.
Finally, let’s be clear – a benefit corporation is not a nonprofit corporation. A benefit corporation is organized at least, in some part, to profit to its owners. The “nondistribution constraint” famously identified by Prof. Henry Hansmann (The Role of Nonprofit Enterprise, 89 Yale Law Journal 5 (1980), p. 835, 838 – JSTOR link here) as the hallmark of a nonprofit entity does not apply to the benefit corporation. Rather, the shareholders of a benefit corporation intend to get something out of the entity other than warm and fuzzy do-gooder feelings – and that something usually involves cash.
In the next installments:
Part II – The Benefit Corporation: What It Is.
Part III – So Why Bother? Isn’t the Business Judgment Rule Alive and Well?
Part IV – So Why Bother, Redux? Maybe It’s a Tax Thing?
Part V - Random Thoughts and Conclusions
EWW and JPF