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…
Friday, August 22, 2014
Study Finds Increase in Charitable Donations by Puerto Rican Taxpayers after Charitable Contribution Deduction Limitations Were Removed
As reported by the Philanthropy News Digest, a recent analysis discloses that charitable gifts reported by taxpayers in Puerto Rico increased by about $5 million in the year following a change in the law that expanded the deductibility of charitable contributions. The change in giving patterns varied among income groups (predictably in part, but perhaps surprisingly in some respects). A summary follows:
The report … analyzed tax data from the Puerto Rico Treasury Department for 2011 — the first year that individual taxpayers in Puerto Rico were allowed to deduct 100 percent of their donations to nonprofits, up to a maximum of 50 percent of their adjusted gross income — and found that the number of people who claimed a charitable deduction jumped from 27,644 in 2010 to 47,004, or 4.6 percent of all tax filers, in 2011. Previously, Puerto Rican taxpayers were only allowed to claim a deduction of 33 percent on their charitable donations, or 100 percent of their donations in excess of 3 percent of their adjusted gross income.
The report also found that while the number of taxpayers claiming a charitable deduction increased across all income groups, the average amount claimed fell some 39 percent, with the total increasing 7 percent and 27 percent among individuals with an adjusted gross income of between $25,000 and $50,000 and more than $150,000, respectively, and falling among those with an adjusted gross income of between $100,000 and $150,000 (-8 percent), $75,000 and $100,000 (-2 percent), $50,000 and $75,000 (-1 percent), and less than $25,000 (-9 percent).
A copy of the full report is available here.
Wednesday, August 20, 2014
The Chronicle of Higher Education is running a story on a recent report exhorting college boards of trustees to engage more actively in governance. The key details follow:
The report, “Governance for a New Era: A Blueprint for Higher Education Trustees,” was released on Tuesday by the American Council of Trustees and Alumni. It stemmed from a project led by Benno Schmidt, chairman of the City University of New York’s Board of Trustees and a former president of Yale University.
The document calls on trustees to rethink their leadership roles in light of colleges’ current challenges. Broadly, it asserts that trustees should take a strong role in areas such as defining an institution’s goals, protecting academic freedom, ensuring educational quality, and holding colleges accountable for their performance.
Interested readers may access the full report here.
Wednesday, August 13, 2014
Earlier this week, I wrote about the need for donors to view their charitable giving as a form of investment. According to the results from a Vanguard Charitable study released earlier this month, Millennials are doing just that. See The NonProfit Times article "Millennials More Generous with Donor-Advised Funds." Millennials want to track the results of their giving and be involved in implementation associated with their donations. They are frequently turning to donor-advised funds ("DAFs") in this endeavor, including Mark Zuckerberg and his wife. (If you are interested in the overall DAF debate, see the Forbes article from earlier this year).
In “An Inside Look,” Vanguard Charitable looked at 15,330 donors over a 10-year period. These donors used Vanguard’s DAF to make their donations. Although Millennials comprised the smallest percentage of donors when compared to Baby Boomers and Traditionalists (those born before 1946), as a whole, they contributed more money on average. According to Vanguard Charitable, Millennials gave $9,065 compared to an average of $6,979 and $7,877 for Traditionalists and Baby Boomers, respectively.
At the same time, Millennials report that they are unsure of how to give outside of using DAFs. Clearly, Millennials want their charitable dollars to end up with those charities that will put them to their most productive use. Although the chief philanthropic officer at Vanguard Charitable has recommended that they hold board positions as a way to achieve this result, I would argue that charities themselves should assume responsibility for communicating to donors what their “return” or “social impact” is for a given investment. Donors should not want to give a substantial amount to a charity or to charities without understanding what the resulting social impact is. Millennials are creating a culture in their giving that will demand more transparency and accountability and that has the ability to re-shape the future of the nonprofit sector.
Tuesday, August 12, 2014
Nonprofit evaluation is a key component of establishing an efficient charitable market. Without a way to measure social impact, both nonprofits and donors remain unaware of whether investment is being put to its most productive use. (Social impact may be thought of as what the charity has accomplished with a donation). As Stephen Goldberg has noted in his book Billions of Drops in Millions of Buckets, one of the reasons inefficiency exists in the charitable market is because funders currently cannot differentiate between effective and ineffective charities. The Stanford Social Innovation Review recently examined the need for a shift in nonprofit evaluation and the discourse surrounding it in “Measuring Social Impact: Lost in Translation,” and the ideas expressed hold valuable insights for the sector.
Most importantly, the authors contend that nonprofits need to set the agenda in terms of evaluation and should use a qualitative approach in addition to a quantitative one. They point out that if nonprofits do not shape the evaluation conversation, funders will do it for them. They note five specific items that nonprofits should “talk more about” in terms of evaluation. First, nonprofits should focus more on their purpose and their strategy for achieving it. As the authors advise, “[A]ll nonprofits should have a clearly defined theory for how they will create change that connects their strategies and programs to the results that they anticipate.” Second, nonprofits should spend more time discussing people. Funders often want nonprofit assessment to include quantitative assessments, e.g., the number of people indirectly affected. However, too much emphasis on quantitative analysis reduces a nonprofit’s impact to a series of numbers. The authors promote a more balanced approach that includes qualitative assessments as well: “Qualitative assessments that draw on conversations with people are often more consistent with how nonprofits operate, and they are also a methodologically valid form of evaluation.” Third, nonprofits would benefit from drawing attention to the big picture. In other words, evaluation should consider how a given nonprofit’s work fits within the collective transformation of an area. Fourth, nonprofits should not shy away from discussing their challenges. Their failures and lessons learned are beneficial in terms of collective learning. Accordingly, the authors urge nonprofits to highlight not only monitoring but also transparency as a goal in evaluation. Finally, nonprofits should encourage more learning. Currently, funders (who focus more on monitoring than learning) have a much louder voice in evaluation than beneficiaries and nonprofit workers who are directly involved and who may facilitate learning.
In terms of the discourse surrounding nonprofit evaluation, the authors caution that business, managerial, and scientific language is drowning out the nonprofit voice. This underscores the need for nonprofits to take charge of shaping evaluation. Too often terms such as “investment,” “returns,” “output,” and “outcomes” are used to discuss social impact, without regard to the five other areas identified. The Stanford team’s study of 400 individuals and organizations in the nonprofit sector revealed that the vocabulary of nonprofit evaluation typically falls within 3 cultural domains: (1) managerial, (2) scientific, and (3) associational, with managerial terms dominating the discourse. All of these domains hold valuable insights for the nonprofit sector; however, nonprofits themselves should be the ones to shape their evaluation and the discourse surrounding it.
Wednesday, July 16, 2014
The Center for Public Integrity has released an investigative report about the IRS Tea Party targeting scandal, in which the CPI reviewed thousands of pages of documents and interviewed dozens of insiders. The report provides a good high-level overview of the scandal, and makes a few useful findings about the Exempt Organization function within the IRS. To many, the findings may come as no surprise, but bear repeating: over time the IRS has fewer employees to regulate a rapidly growing sector, the already low rate at which the IRS investigates exempt organizations is shrinking, the social welfare category (i.e., the one at the heart of the targeting scandal) is growing, and the IRS is increasingly timid – backing down to political pressure. Unfortunately, none of this makes for an effective overseer of a vital part of civil society.
Although the report is useful, some peripheral statements should be more closely considered if only because a number of misconceptions about the IRS targeting scandal continue inadvertently to be spread. One statement in the report is that “It wasnʼt until the Supreme Courtʼs Citizens United v. Federal Election Commission decision in 2010, however, that politically active nonprofits — social welfare groups as well as 501(c)(5) labor unions and 501(c)(6) trade groups — became a major force in political elections, all while receiving a de facto tax subsidy.” The implication from the “de facto tax subsidy” language is that political activity, when conducted after Citizens United by a noncharitable tax-exempt like a 501(c)(4), (5), or (6), gets an unwarranted subsidy and is abusive. But this is not really right. Political activity by a noncharitable exempt generally is not tax-advantaged relative to the same activity by a political organization (aka a “527”). Rather, political activity by a noncharitable exempt actually triggers a tax that is intended to make the tax treatment of political activity consistent across sections of the tax code. There is no abusive subsidy for political activity here.
Later, the report notes that “Social welfare and other nonprofit groups galloped into the post-Citizens United era with an inherent advantage over overtly political groups: They could hide the source of their funding, regardless of whether those sources were corporations, individuals or other special interests. And they're only required tell the FEC the names of donors who give money to help produce specific ads — something that rarely happens.” This point bears more than passing emphasis. The anonymity offered to donors by noncharitable exempt status, and not a tax subsidy, is the underlying legal issue at the heart of the targeting scandal post-Citizens United. In other words, the targeting scandal is not really about taxes at all, it is about donor disclosure or the lack thereof.
The report says that: “The tea party affair has directed attention away from what many IRS workers say is the much larger problem — regulating the activities of politically charged nonprofits.” and also that the IRS is “supposed to ensure 501(c) nonprofit organizations don't become more political than the law allows.” The broad meaning here is right: the targeting scandal has diverted attention from some real problems with the legal architecture. Also, the IRS does have a legitimate role to play when it comes to political activity and tax exemption. But these statements unintentionally play into another misconception about the IRS’s role when it comes to the political activity of noncharitable exempts and political organizations. In this context, the IRS does not really “regulate” political activity in the sense of deciding whether or not the activity is permitted. Rather, the IRS’s function is to classify organizations based on their purpose as measured by the quantum of their activities. This is an important distinction. The IRS does not regulate speech or activity as such; rather, the IRS, as charged by Congress, assesses organization purposes and activities and applies a tax label ((c)(4), 527, etc.). So political activity is relevant to tax classification, but it is not a question of permitting or prohibiting political activity.
The report also states that “Political ‘527 groups’ are tax exempt like 501(c)(4) groups, but unlike them, they must disclose their donors.” It should be noted that the point about disclosure is correct, but not the point about tax-exemption. Broadly, 527 groups are taxed on their investment income whereas 501(c)(4)s and other noncharitable exempts are not. So the tax treatment is not equivalent. But as noted earlier, if a noncharitable exempt engages in political activity, then a tax is triggered, which is intended to make the organizational tax treatment of political activity broadly uniform across exemption categories.
But none of this undermines the key thrust of the report's message -- that the regulatory environment of the IRS exempt organization function is in crisis and in need of constructive solutions.
Thursday, July 3, 2014
Third Sector reports that the Charities Aid Foundation has issued a report criticizing several countries for introducing legislation or taking other steps aimed at preventing nonprofits from criticizing their governments. Titled Future World Giving: Enabling an Independent Not-for-profit Sector, the report highlights six countries that have introduced such legislation and several others where government critics, including the leaders and members of NGOs, face prosecution and other government persecution. The report also highlights how governments often use their funding of NGOs to impose conditions on those groups that effectively silence them, an issue that recently reached the Supreme Court here in the United States.
Monday, June 9, 2014
The early indicators regarding the effect of the Affordable Care Act on the demand for free health care are mixed, but seem to be trending towards decreasing that demand very quickly. If the trend continues, we should continue seeing a blending of nonprofit and investor owned hospitals. By that, I mean that the two types of hospitals will continue to morph into indistinguishable sides of the same coin. The law already allows for insiders of nonprofit hospitals to be compensated on the same scale applied to investor owned hospitals. And we already know that nonprofit hospitals are allowed -- nay, expected -- to apply the same business practices as investor owned hospitals. Just as direct government subsidy for health care and the influence of managed care policies have already erased the historical distinctions between "alms houses for the poor" and investor owned hospitals, Obamacare will further eliminate whatever distinctions still exist between nonprofit and for profit hospitals. When all is said and done, will the "nondistribution constraint" (which may exist as a hard and fast rule in theory more than reality) be enough to justify continued exemption for customer supported health care? I am not the first to make this observation, I'm sure, but as government continues to grow as the primary arbiter of health care -- I'm not saying whether this is a good thing or not -- in effect requiring all health care providers to serve the poor, tax exemption for health care seems less and less justifiable.
According to this recent NY Times editorial:
Some hospital systems have started tightening the requirements for charity care in efforts to push uninsured people into signing up for subsidized health plans on the insurance exchanges created by the reform law. In St. Louis, for example, Barnes-Jewish Hospital has started charging co-payments to uninsured patients no matter how poor they are. Those at or below the poverty level ($11,670 for an individual) are charged $100 for emergency care and $50 for an office visit. But some medical centers have seen their charity care costs decline. A report late last month in Kaiser Health News and USA Today said that Seattle’s largest “safety net” hospital, run by the University of Washington, saw its proportion of uninsured patients drop from 12 percent last year to a surprisingly low 2 percent this spring, putting the hospital on track to increase its revenue by $20 million this year from annual revenues of about $800 million.
The editorial links to this report by Kaiser, suggesting that the ACA has resulted in a marked decrease in uncompensated health care.
That’s one of the reasons the hospital industry was among the first groups to support President Barack Obama’s health plan,agreeing to Medicare and Medicaid funding cuts exceeding $150 billion over a decade in return for getting more paying patients to reduce their uncompensated care.
Many hospital executives were unnerved, therefore, when the Supreme Court ruled in 2012 that states could not be forced to implement the Medicaid expansion and nearly half of them have refused. As a result, hospitals in non-expansion states are undergoing the funding cuts without a corresponding reduction in uncompensated care.
Big Impact On Patients
In Seattle, Harborview had projected a $10 million gain in revenue this year because it would be able to recoup payments for services provided to the newly insured. Now, with a 10-percentage-point drop in uninsured patients in one year, the hospital system managed by the University of Washington is projecting a $20 million revenue increase on annual revenue of about $800 million, said Associate Administrator Elise Chayet.
Hospital officials say the biggest impact of the change is on patients themselves. Rather than having to rely on emergency rooms, newly insured patients can see primary care doctors and get diagnostic tests and prescription drugs, among other services.
Some safety-net hospitals say they started to see their numbers of uninsured patients dropping almost immediately after the Medicaid expansion took effect in January.
“We have seen a steady decline in our uninsured visits,” said Roxane Townsend, CEO of UAMS. “We did not anticipate this big a drop this quickly.”
About 80 percent of the system’s new Medicaid patients had previously been seen by the hospital as uninsured patients, she said. Their enrollment in coverage means the hospital is paid more for their care and is able to direct them to outpatient services and preventive care.
She said that UAMS has also seen a drop in ER visits by uninsured patients — from 6,000 visits in first three months of 2013 to about 4,000 visits in first three months of this year, calling the decline “significant.”
An even more comprehensive study published in Health Affairs confirms society's growing resolution of charity care and, without saying so, provides more reason to question the continuing tax exemption of nonprofit hospitals, which are no longer the exclusive providers of charity care:
The Affordable Care Act (ACA) is fundamentally reshaping the nation’s health care landscape, particularly in terms of how care is delivered to the low-income uninsured and how that care is financed. Chief among the ACA’s provisions is the expansion of eligibility for Medicaid, in which states can choose to cover people who have incomes of up to 138 percent of the federal poverty level. The ACA also provides subsidies for people with incomes below 400 percent of poverty to purchase health insurance and establishes health insurance exchanges, known as Marketplaces, through which people can obtain coverage. Over the next decade an estimated twenty-five million people will gain health insurance through the ACA.
Ideally, nonprofit ventures thrive and grow to eliminate a market failure problem. They should, perhaps, be subsidized only so long as the problem exists and only to the extent necessary to solve the problem. States, for example, are already in the process of a wholesale reconsideration of the necessity of property tax exemption for health care organizations. I should think too that income tax exemption for hospitals should be reconsidered.
Friday, April 25, 2014
American Academy of Arts and Sciences Self-Reports Excess Benefit Transaction after Internal Investigation
Those of you in the Boston area are probably aware of the simmering controversy regarding the allegation of unreasonable compensation paid to, and the allegedly embellished academic credentialsl of Leslie Berlowitz, former President of the American Academy of Arts and Sciences. This Boston Globe story triggered an avalanche of consequences, including separate investigations by the Academy (the Report of which blames the President, but not the Board), the Massachusettes AG, the National Endowment for the Arts Humanities, the National Science Foundation, and ultlimately the President's resignation. After the President's resignation, the Academy amended its 990's to report excess benefit transactions primarily because of the finding that the President exerted improper influence on the Academy's compensation committee and that the President caused the Board not to follow the 4958 safe harbor procedures that would have protected the organization from an allegation that it engaged in an excess benefit transaction. The Report presents a nice case study for the nonprofit governance, determining reasonable compensation under IRC 4958, and the application of IRC 4958 as it relates to an insider's -- or a disqualified person's -- compensation. You can read many of the source documents, including the Board's mea culpa to its Fellows, and the former President's response to the report, via this Boston Globe link. The Boston Globe limits visitors to ten free articles so you can also access the full report here.
The other thing that seems apparent from the report is that you are more likely to be found to have engaged in an excess benefit transaction, or some other conduct frowned upon in the Code if you are just a plain old meanie!
Tuesday, April 15, 2014
New York – April 7, 2014– The economic recovery is not offering signs of relief for the nonprofit sector, and many organizations are now looking to new models of funding, according to the results of the Nonprofit Finance Fund’s 2014 State of the Nonprofit Sector Survey. Leaders from more than 5,000 nonprofits nationwide participated in this sixth annual survey. Many reported daunting financial situations, and said they are looking at new ways to secure the future of their organizations for the benefit of the people they serve. The survey was supported by longtime partner the Bank of America Charitable Foundation as well as the Ford Foundation.
The economic recovery is leaving behind many nonprofits and communities in need:
- 80% of respondents reported an increase in demand for services, the 6th straight year of increased demand.
- 56% were unable to meet demand in 2013—the highest reported in the survey’s history.
- Only 11% expect 2014 to be easier than 2013 for the people they serve.
“Americans rely on nonprofits for food shelter, education, healthcare and other necessities, and everyone has a stake in strengthening this social infrastructure,” said Antony Bugg-Levine, CEO of Nonprofit Finance Fund. “The struggles nonprofits face are not the short-term result of an economic cycle, they are the results of fundamental flaws in the way we finance social good.”
For many nonprofits, the funding landscape is changing. Of respondents who receive government funding, nearly half have seen support decline over the past five years.
Nonprofits are working to bring in new money; in the next 12 months:
- 31% will change the main ways in which they raise and spend money.
- 26% will pursue an earned income venture.
- 20% will seek funding other than grants & contracts, such as loans or other investments.
“Today’s environment requires creative problem-solving and good communication with funders and partners,” said Robert Chávez, Chief Executive Officer of Urban Corps of San Diego County, which provides a high school education and green job training to young adults. “As a conservation corps, we have always relied on a fee-for-service program model to fund job training projects. Now, we are diversifying our services and exploring new income-generating partnerships in order to supplement at-risk funding, become fully self-sufficient, and ultimately better serve youth.”
41% of nonprofits named “achieving long-term financial stability” as a top challenge, yet:
- More than half of nonprofits (55%) have 3 months or less cash-on-hand.
- 28% ended their 2013 fiscal year with a deficit.
- Only 9% can have an open dialogue with funders about developing reserves for operating needs, and only 6% about developing reserves for long-term facility needs.
“The closer a system gets to failure, the harder it becomes to devote scarce resources toward building a better future,” said Bugg-Levine. “The nonprofit sector’s greatest asset is tenacious, creative, smart leaders who, despite significant challenges and with the right support, have the capacity to lead the United States into a new era of civic and social greatness.”
Nonprofits are taking wide-ranging steps to survive and succeed.
In the past 12 months:
- 49% collaborated with another organization to improve or increase services.
- 48% invested money or time in professional development.
- 40% upgraded hardware or software to improve organizational efficiency.
- 39% conducted long-term strategic or financial planning.
“Today, it’s clear that government funding and traditional philanthropy alone can’t cover the critical work of nonprofits addressing pressing challenges in our communities,” said Kerry Sullivan, president of the Bank of America Charitable Foundation. “Tools like the Nonprofit Finance Fund survey can help fuel discussion among nonprofits and the private sector about how new funding models and strategies can better support shared goals of stronger organizations and communities.”
For the first time, the annual survey delved into impact measurement, a core component of some emerging funding models such as pay-for-success:
- Respondents said that more than 70% of their funders requested impact or program metrics.
- 77% agreed that the metrics funders ask for are helpful in assessing impact.
- Only 1% reported that funders always cover the costs of impact measurement; 71% said costs were rarely or never covered.
“The NFF survey results illustrate the ongoing risks of a frayed social safety net dealing with increasing demand,” said Hilary Pennington, vice president of the Ford Foundation’s program for Education, Creativity and Free Expression. “If we continue to expect nonprofits and their dedicated staff to meet society’s most critical needs at the most crucial times– we need to recommit as a society to strengthen the necessary supports to do just that.”
Thursday, April 10, 2014
Last week we blogged on a report out of the University of Michigan regarding the impact of tax exempt property owners on city coffers. Click here to listen to Michigan Public Radio discuss the report. There is an accompanying article here.
Tuesday, April 1, 2014
When it comes to the benefits and burdens that tax exempt organizations bring to local communities, there is always unsupported rhetoric on both sides. Supporters of tax exempt organizations claim, if only meekly, that they bring more benefits to their communities then their communities bring to them. Local government leaders claim just the opposite, particularly in connection with their demands for PILOTS. A March 2014 report from the Gerald Ford Center at the University of Michigan contains a dispassionate discussion of the issue and, though it focuses on local governments in Michigan, is well worth reading. Here is the conclusion:
ConclusionMichigan’s local governments have been hit by decreasing revenues, due largely to both falling property values and the taxes those properties generate, and cuts to revenue sharing from the state government. Property tax revenues—one of the most important sources of funding for local government—are further constrained by the fact that many properties within Michigan’s communities are exempted from paying taxes in the first place. While Michigan’s local leaders are more likely to say the tax-exempt properties (TEPs) in their communities are relatively insignificant when measured as a portion of their jurisdictions’ total land area, potential tax revenues, and sources of service demands, nonetheless, significant percentages say TEPs are in fact moderate or significant factors in these ways. Tax-exempt properties, and the organizations that own them, can be assets and/or liabilities to their local communities. On one hand, they can help attract tourists and can provide jobs, medical services, human services, a more highly educated workforce, and much more. In these ways they might help produce more economic and quality of life benefits to a community than they cost in forfeited revenues. On the other hand, they can also introduce additional costs and burdens on the local government, such as the need for police and fire protection, water and sewer services, street lighting, and street plowing and maintenance. And because they don’t pay property taxes, they enjoy these kinds of benefits while others in the community must cover the associated costs.For the most part, the MPPS finds that local leaders in Michigan see the TEPs in their jurisdictions as a mixed blessing in terms of their impact on the jurisdictions fiscal health. Overall, 40% say their TEPs are both assets and liabilities to fiscal health, while 26% say they are primarily assets, and just 15% say they are primarily liabilities. However, in jurisdictions where TEPs have a significant presence, 40% of local leaders view them primarily as liabilities to fiscal health. In terms of their impact on a community’s quality of life, TEPs are more likely to be viewed as assets. Overall, 46% of local leadersview their TEPs as assets in this way, while just 7% see them as liabilities. Statewide, a relatively small portion of Michigan’s local jurisdictions appear to be actively investigating options to generate new revenues to offset the property tax revenues that are currently exempted. Just 24% of local jurisdictions with TEPs say these kinds of issues have been discussed recently among local leaders. However, this shifts dramatically in locations where local leaders say TEPs have a significant presence. In these cases, 60% of MPPS respondents say local leaders in their jurisdictions have discussed these issues ecently, and note that they are looking into a range of options to charge currently exempted properties for the services they receive, with policies such as new millages, fees-for-service, payments-in-lieu-of-taxes agreements, and special assessment districts.
Thursday, November 28, 2013
The NonProfitTimes is reporting that a recent study on charitable giving reveals that charitable giving increases significantly when the recipients are religiously-linked nonprofits. According to the Times:
Some 41 percent of all U.S. donations go to religious congregations. That number jumps to 73 percent when religiously-linked nonprofits such as Catholic Charities, the Salvation Army and Jewish federations are included. Those are some results from the Lilly Family School of Philanthropy at Indiana University study called “Connected to Give: Faith Communities.”
The study, carried out by the Lilly School in conjunction with Los Angeles, Calif. nonprofit research lab Jumpstart and GBA Strategies in Washington, D.C., is the third of six reports. It surveyed 4,862 American households of various religious traditions.
Four out of five Americans identify themselves with a particular religion. Of those, 65 percent give to congregations or charities. Of those who do not identify with a religion, 56 percent give. “The 9-point difference is due largely to contributions from (religiously) affiliated Americans to organizations with religious ties,” wrote the study’s authors.
“It’s like putting on 3-D glasses,” said one of the study’s authors, Shawn Landres, Ph.D., CEO and research director of Jumpstart, via a statement from the Lilly School. “In addition to looking at congregations, when we also look at the religious identity of the organization and the religious or spiritual orientation of the donor, it turns out that a majority of Americans contribute to organizations with religious ties and a majority of Americans cite religious commitments as key motivations for their giving.”
Almost two-thirds, or 63 percent, of Americans gave to congregations or charitable organizations in 2012, with a median gift of $660. Congregations saw the highest median gift at $375. The median gift to not religiously identified organizations (NRIOs) was greater than that of religiously identified organizations (RIOs), at $250 to $150.
“When it comes to religious identity and giving, demographic categories like income and age resist generalization,” wrote the report’s authors. While the report says that religious denomination alone does not affect giving, other factors help shape rates of giving among the denominations, according to the authors. Jews give at the highest rate to religious and charitable denominations, at 76 percent. Christians — black Protestants, Evangelical Protestants, mainline Protestants and Roman Catholics — all give at similar rates, between 61 percent and 68 percent. Those identifying as not religiously affiliated give at the lowest rate, 46 percent.
The study also examined people's motivation for giving. As reported by the NonProfitTimes, the study revealed that
More than half of Americans who give, or 55 percent, said that religion is an important or very important motivation for charitable giving. Other common motivations include believing they can make a change through giving (57 percent) and thinking they should help others who have less (55 percent).
What a heart-warming story. Happy Thanksgiving to all.
Tuesday, October 15, 2013
Evaluating the reasonableness of compensation paid by charities to their executive officers is, of course, essential to determine compliance with Internal Revenue Code section 501(c)(3)’s prohibition against private inurement of net earnings and to avoid excise taxes under Code section 4958 (in the case of public charities and section 501(c)(4) entities) and Code Section 4941 (in the case of private foundations). A helpful resource for evaluating executive compensation is Charity Navigator’s recently issued annual study of charity CEO pay, available here. Among the more interesting findings highlighted in the accompanying press release are these:
Modest raises are the norm since the recession: Salaries for the CEOs in this study increased modestly since the recession: just 0.8% from 2008 to 2009 and 1.5% from 2009 to 2010 and 2.5% from 2010 to 2011. These fairly small increases come after the 4.7% median increase charity CEOs received from 2007 to 2008.
Charity CEOs that aspire to have big salaries are more likely to succeed if they work at an Educational charity: The data shows that top pay at charities can vary greatly by mission with the heads of Educational charities earning as much as $90,000 more than those running Religious charities.
Geography influences the top executive's salary: CEO salaries at nonprofits reflect the regional variation in the cost of living. For example, CEOs at charities in the Northeast ($149,523) and Mid-Atlantic ($147,474), which include Boston, Washington D.C. and New York, tend to earn higher salaries, than those in the Mountain West ($108,893) and Midwest ($114,050), which include Milwaukee, Boise and Salt Lake City.
Notably, the study concludes by acknowledging “that the paychecks of some nonprofit executives are outrageously high,” but confirming “that those receiving excessive pay are in the minority.”JRB
Monday, October 14, 2013
The Chronicle of Philanthropy today is reporting the results of a nonscientific poll conducted by the Nonprofit Finance Fund on the effects of the partial government shutdown on the nonprofit sector. Of participating nonprofits that receive federal aid, 43 percent of 97 respondents report that their payments have been delayed, and 15 percent report that their payments have been halted. The remainder report either timely payments, or payments that are late, as usual. Further poll results are that 18 percent of respondents have ceased or reduced the scale of programs in response to the shutdown, and 5 percent have terminated or furloughed employees. Human-service and arts organizations reportedly comprise a slim majority of the poll to date.
Sunday, September 22, 2013
The Congressional Research Service has issued a report on "501(c)(3)s and Campaign Activity: Analysis Under Tax and Campaign Finance Laws" (copy courtesy of the Election Law Blog). Here is the CRS-prepared summary of the report:
The political activities of Section 501(c)(3) organizations are often in the news, with allegations made that some groups engaged in impermissible activities. These groups are absolutely prohibited from participating in campaign activity under the Internal Revenue Code (IRC). On the other hand, they are permitted to engage in nonpartisan political activities (e.g., distributing voter guides and conducting get-out-the-vote drives) that do not support or oppose a candidate. Determining whether an activity violates the IRC prohibition depends on the facts and circumstances of each case, and the line between impermissible and permissible activities can sometimes be difficult to discern.
Due to the IRC prohibition, Section 501(c)(3) organizations generally are not permitted to engage in the types of activities regulated by the Federal Election Campaign Act (FECA). However, the activities regulated under the IRC and FECA are not necessarily identical. An organization must comply with any applicable FECA provisions if engaging in activities regulated by FECA (e.g., making an issue advocacy communication under the IRC that constitutes an electioneering communication under FECA).
A 2010 Supreme Court case, Citizens United v. FEC, has received considerable attention for invalidating several long-standing prohibitions in FECA on corporate and labor union campaign treasury spending. This case does not appear to significantly impact the political activities of Section 501(c)(3) organizations because they remain subject to the prohibition on such activity under the IRC.
This report examines the restrictions imposed on campaign activity by Section 501(c)(3) organizations under the tax and campaign finance laws. For a discussion limited to the ability of churches and other houses of worship to engage in campaign activity, see CRS Report RL34447, Churches and Campaign Activity: Analysis Under Tax and Campaign Finance Laws, by Erika K. Lunder and L. Paige Whitaker.
Thursday, July 25, 2013
The National Council of Nonprofits has issued the July 15 edition of Nonprofit Advocacy Matters. An outline of the contents of this issue follows:
- Tax Reform
- Sequestration Spotlight
- Federal Workforce Giving
- Charitable Giving Incentives: HI, ME, NC, OR
- Taxes, Fees, PILOTs: NJ, RI, TX
- Government-Nonprofit Contracting: CO, NY
- Parks Funding: NY
- Music Funding: NY
Advocacy in Action
Of the several stories of interest, one may foreshadow the continued viability of the charitable contributions deduction through federal income tax reform. The story reports that a handful of states have either enacted or proposed to enact caps on itemized deductions for state income tax purposes, but have not subjected the charitable contributions deduction to those caps. An exception is Maine, which has passed a budget limiting total itemized deductions (including the deduction for charitable gifts) to $27,500.
Friday, May 31, 2013
In addition to the 501(c)(4) exemption application bombshell, attendees at this month's ABA Tax Section meeting also learned about the serious bipartisan tax reform effort being led by House Ways & Means Committee Chairman Dave Camp (R-Michigan) and Senate Finance Committee Chairman Max Baucus (D-Montana). Because Representive Camp is approaching his term-limit as Ways and Means Chairman at the end of 2014 and Senator Baucus has already announced his retirement as of 2014, these two experienced members of Congress are somewhat insulated from the normal political pressures that might derail such an initiative. Their effort has already generated a series of "option papers" that are actually what they say they are - a discussion of possible tax reform options in a variety of areas without endorsement of or partisan sniping regarding any particular set of possible changes. It also has been the subject of 20 separate Ways and Means Committee hearings, as described on the Committee's Comprehensive Tax Reform website.
Tax reform has also been the focus of eleven Ways and Means Committee working groups, including one relating to Charitable/Exempt Organizations. For a detailed summary of both the present law in this area and the suggestions and comments received by this working group and the other working groups, see the Joint Committee on Taxation report issued earlier this month. The exempt organization sections can be found on pages 19-57 (present law) and 491-497 (suggestions and comments received). Here are the headings for the latter section, which covered the whole gamut of possible options:
1. The Charitable Deduction
General support for preservation of the charitable deduction or opposition to changes to
the charitable deduction
General support for reform of the charitable deduction
Charitable contributions of property
Other comments relating to the charitable deduction
2. Tax-Exempt Status
Public charity status and private foundation operating rules
Unrelated business income tax (“UBIT”)
Specific types of tax-exempt organizations
3. Reporting, Disclosure, or Tax Administration
4. Exclusion from Gross Income for Qualified Charitable Distributions fron an Individual Retireement Arrangement ("IRA")
5. Miscellaneous Comments Submitted by Indiana Tribal Governments
Having reviewed these materials and talked with some of the staffers at the ABA meeting, I actually am cautiously optimistic that tax reform is a possibility. What effect any reform will have on exempt organizations is impossible to predict at this point, but certainly significant changes to both the charitable contribution deduction and the requirements for tax exemption are on the table.
Friday, May 3, 2013
Late last month, the Service issued its Final Report of the Colleges and Universities Compliance Project. The report is based on "the responses to Questionnaires the IRS sent to a sample of 400 colleges and universities and on the results of examinations of 34 colleges and universities. Among the highlights:
- Increases to unrelated business taxable income for 90% of colleges and universities examined totaling about $90 million;
- Over 180 changes to the amounts of UBTI reported by colleges and universities on Form 990-T; and
- Disallowance of more than $170 million in losses and NOL's (i.e., losses reported in one year that are used to offset profits in other years) which could amount to more than $60 million in assessed taxes.
The IRS also determined that nearly 40% of colleges and universities examined had misclassified certain activities as exempt or otherwise not reportable on Form 990-T. Fewer than 20 percent of these activities generated a loss. The examinations resulted in the reclassficiation of nearly $4 million in income as unrelated, subjecting those activities to tax.
Finally, the report notes that about 20% of private colleges and universities implemented procedures that would qualify them for the rebuttable presumption against engaging in an excess benefit transaction with respect to IRS 4958 (Intermediate Sanctions). Those institutions not qualifying for the rebuttable presumption had the following problems:
- Comparability data from institutions that were not similarly situated to the school relying on the data, based on at least one of the following factors: location, endowment size, revenues, total net assets, number of students, and selectivity;
- Compensation studies that neither documented the selection criteria for the schools included nor explained why those schools were deemed comparable to the school relying on the study.
- Compensation surveys that did not specify whether amounts reported included only salary or included total other types of compensation, as required by section 4958.
The Executive Summary suggests that the IRS will focus on UBTI issues more closely, as those issues relate to Colleges and Universities:
The examinations of college and universities identified some significant issues with respect to both UBI and compensation that may well be present elsewhere across the tax-exempt sector. As a result, the IRS plans to look at UBI reporting more broadly, especially at recurring losses and the allocation of expenses, and to ensure, through education and examinations, that tax-exempt organizations are aware of the importance of using appropriate comparability data when setting compensation.
Tuesday, March 5, 2013
From the Council on Foundations Press Release regarding its March 4, 2013, 70 page report entitled, "The IRS and Nonprofit Media: Towards Creating a More Informed Public".
(Washington, D.C.) The Nonprofit Media Working Group, a nonpartisan group of foundation and nonprofit media leaders, today recommended that the IRS modernize its rules to remove obstacles in the way of nonprofit news outlets.The group, created by the Council on Foundations, released a report, “The IRS and Nonprofit Media: Toward Creating a More Informed Public,” which states that the agency’s “antiquated” approach to granting tax-exempt status has undermined the creation of new media models. Although the IRS has a long history of approving the tax-exempt status of media organizations ranging from National Geographic to Pro Publica, in recent years it has become inconsistent and slower in its approvals. “Over the last several decades, accountability reporting, especially at the local level, has contracted dramatically, with potentially grave consequences for communities, government accountability, and democracy,” said Steven Waldman, chair of the Nonprofit Media Working Group. “Nonprofit media provides an innovative solution to help fill this vacuum, but only if the IRS modernizes its approach.”
The Nonprofit Media Working Group was created by the Council on Foundations with a grant from the John S. and James L. Knight Foundation, following the recommendation by the Federal Communications Commission that a group of nonprofit tax and journalism expert convene on the topic. The new report highlights five key problems with the current IRS approach to granting nonprofit status:
1. Applications for tax-exempt status are processed inconsistently and take too long.
2. The IRS approach appears to undervalue journalism by sometimes not viewing it as “educational.”
3. The IRS approach appears to inhibit the long-term sustainability of tax-exempt media organizations.
4. Confusion may be inhibiting nonprofit entrepreneurs trying to address the information needs of communities.
5. The IRS approach does not sufficiently recognize the changing nature of digital media.
Several of these problems stem from the IRS apparently relying on rules developed in the 1960s and 1970s. Under these rules, the IRS may deny tax-exempt status to nonprofits that gather or distribute news in a similar way to commercial outlets. This approach, the group concluded, is no longer a sensible standard. “There must be clear rules distinguishing nonprofit and commercial media but they should be logical rules,” continued Waldman.
Among the most significant recommendations:
- The IRS methodology for analyzing whether a media organization qualifies for exemption should not take into account irrelevant operational similarities to for-profits.
- Rather, the IRS should evaluate whether the media organization is engaged primarily in educational activities that provide a community benefit, as opposed to advancing private interests, and whether it is organized and managed as a nonprofit, tax-exempt organization.
- News and journalism do count as “educational” under the tax-exempt rules.
- The IRS should maintain the key structural requirements for being a tax-exempt media organization that properly distinguish it from commercial enterprise, such as: it cannot have shareholders or investors, it must have a governing board that is independent of private interests, and it cannot endorse candidates or lobby lawmakers.
“With the growing lack of accountability and investigative reporting, particularly in local communities, the Council convened a panel of experts to make recommendations on how the IRS can better facilitate the creation of new nonprofit media,” said Vikki Spruill, the Council’s president and CEO. “We strongly encourage the IRS to implement the recommendations made by the Nonprofit Media Working Group, as they will allow nonprofit media to fill the void in today’s reporting.” Eric Newton, vice president of the Knight Foundation, said clearing up the IRS issues is important for efforts to improve local news. “The recession and the digital age combined to slash local news, leading to many new nonprofit media applications,” he said. “But the IRS fell back on industrial age standards and suddenly started delaying or denying requests strikingly similar to ones it had approved just months earlier. Applying 1970s rules to Web media makes about as much sense as telling spaceships they have to use the freeway.”
The Nonprofit Media Working Group includes: Chair Steven Waldman, journalist and former senior adviser to the FCC chairman; Clark Bell, Robert R. McCormick Foundation; Jim Bettinger, Stanford University; Kevin Davis, Investigative News Network; Cecilia Garcia, Benton Foundation; John Hood, John Locke Foundation; James T. Hamilton, Duke University; Joel Kramer, MinnPost; Juan Martinez, John S. and James L. Knight Foundation; Jeanne Pearlman, Pittsburgh Foundation; Calvin Sims, Ford Foundation; and Vince Stehle, Media Impact Funders. Legal Counsel was provided by Marc Owens, former director of the IRS’s Exempt Organizations Division, and Sharon Nokes of Caplin & Drysdale.