Nonprofit Law Prof Blog

Church Autonomy vs. Test-or-Vaccinate Mandates

Bloomberg Law is reporting on a number of nonprofit Christian schools, churches, and seminaries that are launching legal challenges to the OSHA test-or-vaccinate rules. (To add nonprofit on top of nonprofit, at least a handful of the cases are being handled by the nonprofit Alliance Defending Freedom.)

Essentially, the ADF's suit (and, I imagine, many of the others) assert that the OSHA mandate overreaches and represents a "serious intrusion on religious autonomy and free exercise that cannot withstand scrutiny under the First Amendment and the Religious Freedom Restoration Act." 

I'm not a Religion Clauses scholar but I know enough to know that Religion Clause jurisprudence is kind of a mess. Enough of a mess that I wouldn't put money down on how these challenges turn out. Still, because the religious organizations challenging the test-or-vaccine mandate fit into the world of nonprofits, it's worth keeping an eye on how these challenges turn out.

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Qu & Daniel, Tangible information and charitable giving: When do nonprofit overhead costs matter?

Heng Qu (Texas A&M) and Jamie Levine Daniel (Indiana University Purdue University at Indianapolis) have published Tangible Information and Charitable Giving: When Do Nonprofit Overhead Costs Matter? in the Journal of Behavioral Public Administration. Here is the abstract:

Nonprofit organizations in the U.S. have been under the pressure to demonstrate their “worthiness” by minimizing overhead costs. Prior experiment studies find that donors respond negatively to high overhead costs when overhead information is highlighted. In reality, donors receive all sorts of information about nonprofit organizations from various channels. While high overhead has been found to reduce donors’ perceived impact and donations, providing other types of tangible information can increase charitable giving by enhancing donors’ perceived impact. When other types of information are available, to what degree overhead aversion still exists? We use two online survey experiments to examine how information on overhead costs and donation use affect giving decisions in a single-organization and two-organization evaluation setting. We found that only a small proportion of people demonstrated overhead aversion when presented with a single organization. There was stronger evidence of overhead aversion when participants were asked to compare and choose between two organizations. Nonetheless, providing tangible information about what donations can buy mitigated overhead aversion in both settings. This study contributes to the growing experimental research on the relationship between overhead ratios and charitable giving, and provides practical insights for nonprofits hoping to ameliorate overhead aversion and increase donation support.

Samuel D.  Brunson

Mayo, Navigating the Notches: Charity Responses to Ratings

Jennifer Mayo (Ph.D. Candidate in Economics, University of Michigan) has posted Navigating the Notches: Charity Responses to Ratings. She summarizes her research in a Twitter thread here. Here is her introduction:

This paper studies both donor and nonprofit responses to the star rating system designed by Charity Navigator. Using IRS Form 990 data from 2002 to 2019, I find that an increase in a charity’s rating from 3- to the highest 4-star rating is associated with a 6% rise in contributions, with larger effects among smaller charities. Some charities respond to the incentives by changing their behavior to try to get themselves above the star thresholds, leading to “bunching” at the thresholds. This response is equal to the effect of charities halving spending on administration. I find that some of the response is due to misreporting of expenses in order to achieve a higher star rating. The analysis suggests that a notched rating system induces greater behavioral change than a continuous measure, but affects a smaller number of charities. Which rating system is preferred depends on the relative value placed on these effects.

Samuel D. Brunson

Burnet, Leshy & McLaughlin: Building Better Conservation Easements

King Burnett (Uniform Law Commission), John D. Leshy (Hastings), and Nancy A. McLaughlin (Utah) have published Building Better Conservation Easements for American the Beautiful at the Harvard Environmental Law Review online. Here is the introduction:

In January 2021, the Biden Administration endorsed the goal of protecting 30 percent of the nation’s lands and waters by 2030 to conserve biodiversity and help curb greenhouse gas emissions. The Administration’s initial report on this “America the Beautiful” initiative, issued in May, indicates that federally-deductible conservation easements are likely to play an important role in its implementation. This essay addresses whether and how such easements should be counted in this process.

This matter is of great importance. Donations of conservation easements, by which landowners receive generous federal tax deductions if they restrict the use of their properties in perpetuity in the interest of conservation, cost American taxpayers billions of dollars annually in foregone revenue. In addition, growing reports of abuse and other developments raise serious questions about the effectiveness of deductible easements in achieving durable conservation outcomes.

This essay outlines the fundamental problems plaguing the deductible conservation easement program. It compares practices regarding deductible conservation easements with the protocols employed in various government conservation easement purchase programs. It concludes with specific suggestions for making deductible easements an effective tool for achieving the America the Beautiful goal. Simply accelerating the pace of conservation easement donations is not enough—“to achiev[e] durable outcomes that meaningfully improve the lives of Americans,” better conservation easements need to be built.

Lloyd Mayer

Horwitz Named Inaugural Faculty Director of New UCLA Program on Philanthropy and Nonprofits

Jill Horwitz (UCLA) has been named the inaugural faculty director of the Program on Philanthropy and Nonprofits at the UCLA School of Law, residing within the law school's Lowell Milken Institute for Business Law and Policy. The Program's initial three main goals are:

1. Become a research center that develops and shares scholarship and knowledge on issues relating to nonprofits, including tax policy, governance, and the role of nonprofits in developing and promoting social policies. This goal will provide resources to a wide range of participants in the nonprofit sector, including policymakers, regulators, lawyers, and senior managers of nonprofits.
    
2. Develop and expand education at UCLA Law for students, lawyers, directors, and senior managers of nonprofits on issues that are central to nonprofit operations, financial management, and governance.
    
3. Support thought leadership on legal issues material to nonprofits so that the program serves as an important resource for the operation and governance of nonprofits and as a venue to bring together practitioners, scholars, and regulators.

The Program is now seeing its first Director, with applications due by November 30th. Here is the position posting.

Lloyd Mayer

Zelinsky: The Case for Limiting the Estate and Gift Tax Charitable Deductions

Edward A. Zelinsky (Cardozo) has published The Case for Limiting the Estate and Gift Tax Charitable Deductions in Tax Notes. Here is the brief description:

In this article, Zelinsky argues that all large estates should support the federal treasury and that Congress should limit the estate and gift tax charitable deductions to ensure that they pay some tax.

Hat Tip: TaxProf Blog.

Lloyd Mayer

DAFs, Private Foundations, and Payout Rates

While the Accelerating Charitable Efforts (ACE) Act appears to be stuck in the Senate Finance Committee, at least for now, that has not slowed the publication of studies focusing on donor advised funds, private foundations, and payout rates. This includes reports from Giving USA, the National Philanthropic Trust, and the American Enterprise Institute, along with the latest case study of a wealth individual's private foundation.

Giving USA released this week a special report titled Donor-Advised Funds: New Insights. Here is the description:

This new special report analyzes $74 billion in grant funds going to over 240,000 organizations, answering important questions like:

1. What types of organizations receive grants from DAFs?
2. How have DAF trends changed over time?
3. How do trends differ among various types of DAF sponsoring organizations – for example, how might granting patterns at community foundations differ from grants at other types of DAF-sponsoring organizations such as national funds or single-issue charities?

Unfortunately it is only available on a paid basis, either as part of the paid annual subscription to Giving USA or separately.

The National Philanthropic Trust also just released The 2021 DAF Report. Key findings include:

• DAF donors granted at historic levels. Grants from DAFs to qualified charities totaled an estimated $34.67 billion, representing a 27.0 percent increase compared to 2019 and a new high-water mark. This is the highest DAF grant increase in a decade.
• The DAF payout rate was 23.8 percent, one of the highest payouts on record. Payout has remained above 20 percent for every year on record, reflecting the consistent charitable support that DAF donors provide.
• Other key metrics, like contributions and charitable assets, also increased. These increases demonstrate that DAF donors are committed to supporting charities now and in the future.

And Howard Husock at the American Enterprise Institute has published America’s largest foundations: Examining payout rates and perpetuity. Here are its key points:

• An examination of payout rates of the largest American philanthropic foundations reveals that the growth of their financial assets is significantly greater than the percentage of increased wealth distributed as grants. Foundation payout rates are also significantly lower than those of the individual charitable accounts known as donor-advised funds (DAFs), a growing philanthropic financial vehicle.
• DAFs, their relatively high payout rates notwithstanding, have been targeted by proposed legislation aimed at increasing those rates. Large foundations, despite controlling far more wealth and distributing a lower percentage of assets, have not been singled out. The substantial increase in the assets and extent of US private charitable foundations over the past 10 years suggest that foundation payout rates might be increased in light of substantial asset growth. Ideally, America’s largest private foundations would do this voluntarily.
• Foundations should, as best practice, seek to align grant payouts with asset growth, rather than settling for adhering to the 5 percent minimum.  In doing so, they could both better fulfill their mission and preempt what could be potential regulatory demands.  At the same time, asset growth should be the occasion for foundations to reflect on the perpetuity issue—and regulation should call for explicit indication as to whether foundations choose perpetuity and, if so, why.

Finally, in case anyone needs another real life example of how the wealthy use private foundations in their giving, the Institute for Policy Studies has posted an article (Phil Knight’s Billion-Dollar Philanthropy: Generosity or Self-Service?) based on a Bloomberg piece that is behind a paywall. The article focuses on "Nike founder and billionaire Phil Knight’s strategies to avoid estate tax and maximize transfers to his heirs and charitable foundations."

Lloyd Mayer

Three Books on Giving and Philanthropy: Bernholz on How We Give Now, Breeze In Defense of Philanthropy, and Lechterman on The Tyranny of Generosity

At least three books on giving and philanthropy are coming out this month:

Lucy Bernholz (Stanford) has written How We Give Now: A Philanthropic Guide for the Rest of Us (MIT Press). Here is the summary:

From Go Fund Me to philanthropy: the everyday ways that we can give our money, our time, and even our data to help our communities and seek justice.

In How We Give Now, Lucy Bernholz shows that philanthropy is more than writing a check and claiming a tax deduction. For most of us—the non-wealthy givers—philanthropy can be a way of living our values and fully participating in society. We give in all kinds of ways—shopping at certain businesses, canvassing for candidates, donating money, and making conscious choices with our retirement funds. We give our cash, our time, and even our data to make the world a better place. Bernholz takes readers on a tour of the often-overlooked worlds of participatory philanthropy, learning from a diverse group of forty resourceful givers.

Donating our digitized personal data is an emerging form of philanthropy, and Bernholz describes safe, equitable, and effective ways of doing so—giving genetic data for medical research through a nonprofit genetics organization rather than a commercial one, for example, or contributing photographs to an online archive like the Densho Digital Repository, which documents America's internment of 120,000 Americans of Japanese descent. Bernholz tells us to “follow the money,” however, when we're asked to “add a dollar” to our total at the cash register, or when we buy a charity-branded product; it's more effective to give directly than to give while shopping.

Giving is a form of participation. Philanthropy by the rest of us—across geographies and cultural traditions—begins with and builds on active commitment to our communities.

Beth Breeze (University of Kent) has written In Defense of Philanthropy (Columbia University Press). Here is the summary:

Running down "do-gooders" has become a popular pastime in recent years. Journalists and academics alike have lampooned and criticized philanthropists and big donors for their charitable activities, which are often characterized as a means of self-aggrandisement or tax evasion. Yet, it is widely acknowledged that philanthropy - from the establishment of Carnegie libraries in the nineteenth century to the recent global health interventions of the Gates Foundation - has played a critical role in both developed and developing societies. In an impassioned defence of the role of philanthropy in society, Beth Breeze tackles the main critiques levelled at philanthropy and questions the rationale for undermining and disparaging philanthropic acts. She contends that although it might be flawed, philanthropy is a sector that ought to be celebrated and championed so that an abundance of causes and interests can flourish.

And Theodore M. Lechterman (University of Oxford) has written The Tyranny of Generosity: Why Philanthropy Corrupts Our Politics and How We Can Fix It (Oxford University Press). Here is the summary:

The practice of philanthropy, which releases private property for public purposes, represents in many ways the best angels of our nature. But this practice's noteworthy virtues often obscure the fact that philanthropy also represents the exercise of private power.

In The Tyranny of Generosity, Theodore Lechterman shows how this private power can threaten the foundations of a democratic society. The deployment of private wealth for public ends may rival the authority of communities to determine their own affairs. And, in societies characterized by wide disparities in wealth, philanthropy often combines with background inequalities to make public decisions overwhelmingly sensitive to the preferences of the rich. Allowing private wealth to dictate social outcomes collides with core commitments of a democratic society, a society in which people are supposed to determine their common affairs together, on equal terms.

But why exactly is democracy valuable? How should these values be weighed against the liberty of donors and the many social benefits that philanthropy promises? Lechterman explores these questions by examining various topics in the practice of philanthropy: the respective roles of philanthropy and government, public subsidies for private giving, the use of donations for political speech, instruments of perpetual giving, the rise in giving by commercial corporations, and "effective altruism" as a guide for individual giving. These studies build to a surprising conclusion: realizing the democratic ideal may be impossible without philanthropy--but making philanthropy safe for democracy also requires fundamental changes to policy and practice.

Lloyd Mayer

Giving Remains Steady As Pandemic Continues, But Some Giving Patterns Change

Several recent studies of giving in the United States reveal various trends as the pandemic and other crises continue.

The Fundraising Effectiveness Project released this week its 2021 Second Quarter Fundraising Report. According to the report's announcement, the key findings include: 

• While giving in 2021 has not seen the explosive growth of 2020, the pace of giving and number of donors has remained roughly the same or even a little higher. The estimated number of donors increased by 0.7% in the first half of 2021 compared to the same period in 2020, while the total amount of money given has risen by a projected 1.7%.
•  
• Fundraising has remained strong in the first half of the year due to the number of newly retained donors—that is, the number of new donors in 2020 who have continued to give in 2021. The number of newly retained donors increased 22.4% over the first half of 2021. 
•  
• Total giving and the number of donors grew by record rates in the first quarter of 2021 (10% and 6%, respectively), but the growth was much more nominal in the second quarter. The drop in growth in the second quarter might be a developing trend that leads to flat or decreasing in the third quarter, or the result of abnormally strong first quarter growth.

The IUPUI Lilly Family School of Philanthropy also released this month Understanding Philanthropy in Times of Crisis: The Role of Giving Back During COVID-19. Its key findings were:

• Individual Giving: 1. Americans have maintained their commitment to charitable giving throughout the pandemic, with some notable exceptions. 2. Donors who gave to COVID-related causes often indicated that other people can be trusted and were more motivated to strive for the wellbeing of others and society. 3. End-of-year giving made up a larger portion of giving in 2020 than in the previous two years. 4. Nonprofit subsectors directly related to responding to the pandemic, such as human services, health, and public-society benefit, saw significant increases in donations. 5. The characteristics of donors to COVID-related causes appear similar to general patterns in giving to charitable causes more broadly. 6. Innovation and digital adaptation were vital to meeting new demands during COVID-19.
•  
• Corporate Giving: 1. Corporations responded to the increased health demands imposed by COVID-19 with increased giving and multi-year pledges. 2. The commitment of corporate philanthropy to health causes is distinct from other types of donors. 3. Finance and insurance companies dominated U.S. corporate giving to COVID-19 relief in 2020. 4. Corporations (that participated in interviews with the school) adapted their workplace giving programs in response to COVID-19, with a heavy reliance on technology.

Earlier this fall, Bank of American and the IUPUI Lilly Family School of Philanthropy released The 2021 Bank of America Study of Philanthropy: Charitable Giving by Affluent Households. According to the overview, it found "[t]he vast majority (88.1 percent) of affluent households gave to charity in 2020, and nearly a third (30.4 percent) of affluent individuals volunteered their time (down significantly from 47.8 percent in 2017), despite the COVID-19 global pandemic. On average, affluent donor households gave $43,195 to charity in 2020. By comparison, donor households in the general population gave $2,581." It also found that issues drove giving roughly as much as organizations, in a shift from previous studies indicating that organizations were a strong influence, and that support for social and racial justice grew in significance. 

Lloyd Mayer

Can the Influence of Major Donors to Charities or Governments Go Too Far?

Social media has been filled recently with criticism of the University of California at Santa Barbara and billionaire Charlie Munger for plans to build a massive dorm at the University following detailed plans provided by amateur architect Munger and paid for with a $200 million donation from him. A Washington Post headline summarizes the criticisms (Two doors, few windows, and 4,500 students: Architect quits over billionaire's mega dorm). Of course questions about the possible undue influence of major donors are not new, although usually they involve less prominent projects. For example, earlier this fall the N.Y. Times reported Leader of Prestigious Yale Program Resigns, Citing Donor Pressure (additional coverage: The Economist).

What is perhaps new, or at least newly prominent, are similar controversies relating to donations to governments. For example, over the summer NPR reported A GOP Donor is Funding South Dakota National Guard Troops In Texas, and this fall the Texas Tribune reported Texas has raised $54 million in private donations for its border wall plan. Almost all of it came from this one billionaire. But the biggest such recent gift was detailed in The Chronicle of Philanthropy: Should Philanthropy Fund Government? A $400 Million Gift Settles That Question in Kalamazoo, Mich., for Years to Come (subscription required, but also available from U.S. News/AP). The anonymous gift is almost double the city's annual budget.

Donations to governments raises additional issues, including whether they risk distorting government priorities that otherwise would be decided through the political process and whether they shift power to executive branch officials who solicit such donations and away from the legislatures that normally control government spending. Of course not all government agencies can accept donations. For example, GoFundMe shut down a campaign to raise funds for the federal government's border wall in part because it would have required congressional approval for the government to have accepted the funds. So it is unclear how widespread such donor influence can be on government actions, absent legislative action.

Lloyd Mayer

The Nonprofit News Trend Continues in Baltimore and Cleveland

We have covered shifts of news outlets toward nonprofit status or ownership by nonprofits in a variety of locations, including Philadelphia, Salt Lake City, and Texas. Here are two more recent developments in this area:

• The N.Y. Times reports that having failed to buy The Baltimore Sun, Steven Bainum is now pivoting to launching The Baltimore Banner, a nonprofit digital news outlet, a story first reported by The Atlantic (see end of article). The Washington Post further reports that Bainum has committed $50 million to this new venture, which has hired Kimi Yoshino (pictured), formerly managing editor with the L.A. Times, to help launch it.

• And Cleveland.com reports that a coalition of Cleveland-based organizations have raised more than $5.8 in partnership with the American Journalism Project to launch a nonprofit newsroom there in 2022. The eventual goal is to open newsrooms across Ohio as part of the Ohio Local News Initiative.

That these developments are part of a larger trend in the United States is documented by recent data from the Institute for Nonprofit News. Findings included:

• A total of 33 nonprofit local news outlets launched in 2018-2020, with at least 92 total such outlets as of the end of 2020.
• As of 2020, there were 60 state and 21 regional nonprofit news outlets. 
• Also as of 2020, there were 47 national and 23 global nonprofit news outlets.
• There are at least 50 nonprofit news outlets that primarily serve communities of color.

Lloyd Mayer

Nonprofits & Politics: VP Harris & Virginia Churches, The Left & Dark Money, Liberty University

Perhaps driven by the sharpness of our current political divides, even the relatively few elections this year generated a steady stream of stories about nonprofits, politics, and possible violations of the federal tax laws. Here are some highlights:

• A video message from Vice President Kamala Harris that reportedly was played in more than 300 black churches in Virginia strongly supported gubernatorial candidate Terry McAuliffe and so appears to have violated the Internal Revenue Code section 501(c)(3) prohibition on tax-exempt charities, including churches, intervening in political campaigns. Demonstrating its consistent opposition to such activities, whether favoring Republican or Democratic candidates, the Freedom from Religion Foundation promptly filed a complaint with the IRS about churches airing the video and other pro-McAuliffe activities in Virginia churches.

• The Atlantic published a lengthy interview titled The Massive Progressive Dark-Money Group You've Never Head Of. The interview is with Sampriti Ganguli, the CEO of little known business-services group Arabella Advisors, which the interviewer asserts has played a major role in helping left-leaning "dark money" groups quietly pull ahead of right-leaning groups in total spending. Relatedly, OpenSecrets last spring published a report titled 'Dark money' topped $1 billion in 2020, largely boosting Democrats. Such groups are section 501(c)(4)s or other non-charities that are permitted to engage in a limited amount of political campaign intervention, so their activities may be in compliance with their federal tax status.

• Politico reported late last month that the new president of Liberty University said in a recorded phone call that one of the main goals so the University's Standing for Freedom Center is "getting people elected". In response to concerns that doing so would be problematic under Internal Revenue Code section 501(c)(3), President Jerry Prevo responded "I know how to work 50c3". The University official who raised the concerns was fired earlier last month, which he asserts was in part in retaliation for him doing so. Additional coverage: Forbes, Salon.

Lloyd Mayer

Minnesota AG Forces Charity to Restructure & Replace Leadership

Minnesota Attorney General Keith Ellison announced in early September that his office had agreed to a settlement with the nonprofit BFW Institute of Education & Research that requires the organization to replace its directors and officers and restructure its operations to end alleged self-dealing transactions. While allegations of self-dealing are unfortunately all to common with nonprofits, the complexity of the alleged scheme here is interesting.

From the AG's press release:

BFW issues grants for pain-relief care to veterans, first responders, law enforcement personnel, and their family members. The court order that the Attorney General’s Office filed today alleges that, under prior leadership, BFW approved only its related pain-relief provider, Ultimate Wellness Center (“UWC”) for grantees to seek care.  BFW’s relationship with UWC — which is wholly owned by BFW’s founder — had never been competitively evaluated, appropriately documented, or negotiated at arm’s length. 

BFW’s structural issues also contributed to unchecked conflicted decision-making. These conflicts took several forms, including:  

• Four of BFW’s five directors had a financial interest in or were otherwise affiliated with UWC or in the two entities subcontracted to provide patient care at the clinic. 
• None of BFW’s “approved provider” relationships, financial transactions, or other conflicted director arrangements were disclosed to or discussed by the Board of Directors when it entered into transactions, renewed agreements, or elected directors to the Board. 
• Save for one, none of BFW’s board members signed required annual statements disclosing potential conflicts. 
• BFW gave its founder and its Treasurer the authority to borrow money on behalf of the corporation and did not require the Board to approve loans—even those taken from BFW’s founder. 

As a result, BFW became heavily indebted to its founder and his related entities. BFW started borrowing money from its founder and his businesses as far back as FYE 2012, when it owed $88k. As of FYE 2020, BFW owed $712k to its founder individually and $1k to one of his businesses. The loans were not board-approved, had no written agreement, and some were not disclosed on BFW’s tax returns as insider loans. The loans were ostensibly taken out to fund veteran care, but grantee checks were to be redeemed only at insiders’ for-profit care providers. From 2016 through 2019, BFW made $2,020,607 in grants for care that were to be redeemed at those insider-owned providers. 

Coverage: Minnesota Star Tribune; Sun Post.

Lloyd Mayer

Feds Indict Alleged Scam PAC Operators

Politico reports that an indictment unsealed today reveals federal prosecutors have charged three individuals with conspiracy to commit wire fraud and lying to the Federal Election Commission. The allegations relate to the raising of approximately $3.5 million during the 2016 election, with almost none of those funds going to any political cause. Instead a large portion of the funds allegedly went to organizers personally. The two PACs involved were bipartisan - one claimed to raise funds to support Donald Trump, and the other claimed to raise funds to support Hillary Clinton.

While the indictment relates to activities back in 2016, the Daily Beast and OpenSecrets have been investigating a network of alleged scam PACs that has been operating since then, as detailed in this report from last month. The latest twist appears to involve organizations that register as section 527 political organizations with the IRS but not as political committees with the FEC, presumably in order to take advantage of the harder to access IRS-collected data and lesser IRS enforcement resources. The FBI views these activities as serious enough to warrant a public warning last April.

Additional Coverage: N.Y. Times; SFist.

Lloyd Mayer

California Enacts First State Charitable Crowdfunding Laws

California has enacted what I believe is the first U.S. law specifically relating to crowdfunding for the benefit of charities. The legislation is A.B. 488, which the Governor signed on October 7, 2021 and that will be effective on January 1, 2023. I have been tracking developments in this area for an article that is currently in the editing process at the Indiana Law Journal.

Here is a summary of its key provisions from the Legislative Counsel's Digest:

This bill, beginning January 1, 2023, would establish that charitable fundraising platforms and platform charities are trustees for charitable purposes subject to the Attorney General’s supervision. The bill would define “charitable fundraising platform” to mean certain legal entities that use the internet to provide a website, service, or other platform to persons in this state, and perform, permit, or otherwise enable certain acts of solicitation to occur. A “platform charity” would be defined to mean a trustee or charitable corporation as defined under the act that facilitates described acts of solicitation on a charitable fundraising platform.

 

The bill would require a charitable fundraising platform, before soliciting, permitting, or otherwise enabling solicitations, to register with the Attorney General’s Registry of Charitable Trusts, under oath, on a form provided by the Attorney General. The bill would require persons or entities that meet the definition of a charitable fundraising platform and platform charity to register as a charitable fundraising platform. The bill would require annual renewal of registration. The bill would require the Attorney General to impose registration and renewal fees and deposit revenues in the Registry of Charitable Trusts Fund, for use as specified.

 

The bill would require a charitable fundraising platform to file annual reports, under oath, with the registry on a form provided by the Attorney General. The bill would restrict a charitable fundraising platform or platform charity to soliciting, permitting, or otherwise enabling solicitations, or receiving, controlling, or distributing funds from donations for recipient or other charitable organizations in good standing, as defined. The bill would require a charitable fundraising platform or platform charity that performs, permits, or otherwise enables specific acts of solicitation, before a person can complete a donation or select or change a recipient charitable organization, to provide prescribed conspicuous disclosures that prevent a likelihood of deception, confusion, or misunderstanding.

 

The bill would require a charitable fundraising platform or platform charity that solicits, permits, or otherwise enables solicitations to obtain the written consent of a recipient charitable organization before using its name in a solicitation, as prescribed. Written consent would not be required for certain acts of solicitation if specific requirements are met. The bill would require a charitable fundraising platform or platform charity, after donors contribute donations based on certain solicitations, to promptly provide a tax donation receipt in accordance with specified provisions. The bill would prohibit a charitable fundraising platform or platform charity from diverting or otherwise misusing the donations received through solicitation on the charitable fundraising platform, and require the entity to hold them in a separate account and to ensure donations and grants of recommended donations are sent promptly to recipient charitable organizations with an accounting of any fees imposed for processing the funds and in accordance with rules and regulations.

Law Firm Summaries: For Purpose Law Group; Perlman & Perlman; Greenberg Traurig (addressing effects on cause-related marketing).

Lloyd Mayer

Treasury Priority Guidance Plan and TE/GE Program Letter Tell Us Nothing New

We have been slow in blogging about the Treasury Department's 2021-2022 Priority Guidance Plan and the latest Tax Exempt & Government Entities Program Letter, in part because neither document tells us anything new. Given the pandemic-related backlog of returns and other matters the IRS is currently trying to resolve, this is not surprising. Nevertheless, it is to be hoped that future years will be more productive, especially if more funding is provided to the IRS.

Starting with the Priority Guidance Plan, for Exempt Organizations (page 7) it only repeats items from previous plans, some of which are getting quite dated:

1. Guidance revising Rev. Proc. 80-27 regarding group exemption letters. Notice 2020-36 was published on May 18, 2020.
2. Guidance on circumstances under which an LLC can qualify for recognition under §501(c)(3). [Now provided in Notice 2021-56.]
3. Final regulations on §509(a)(3) supporting organizations. Proposed regulations were published on February 19, 2016.
4. Regulations under §512 regarding the allocation of expenses in computing unrelated business taxable income and addressing how changes made to §172 net operating losses by section 2303(b) of the CARES Act apply for purposes of §512(a)(6).
5. Guidance under §4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners.
6. Regulations regarding the excise taxes on donor advised funds and fund management.
7. Regulations under §6104(c). Proposed regulations were published on March 15, 2011.
8. Regulations designating an appropriate high-level Treasury official under §7611. Proposed regulations were published on August 5, 2009.

Exempt organizations items in other sections include guidance under section 501(c)(9) relating to welfare benefit funds, final regulations relating to the fractions rule under section 514(c)(9)(E), and partnership loss regulations relating to charitable contributions under section 704(d).

Similarly, most if not all of the priorities listed in the Program Letter (page 2) appear to repeat previously announced priorities or are obvious needs (e.g., the "Develop Our Workforce" priorities). Perhaps the most significant development mentioned is the hiring of a Chief Taxpayer Experience Officer and the opening of a Taxpayer Experience Office, but that is an agency-wide development and so probably will have limited (if any) impact on TE/GE operations.

Lloyd Mayer

IRS Notice on Standards for LLCs to Qualify Under Section 501(c)(3)

Last month the IRS issued Notice 2021-56, providing the first formal guidance regarding under what conditions limited liability companies can qualify for tax exemption under section 501(a) because they are described in section 501(c)(3). The guidance is generally consistent with previous, informal guidance, found in now twenty year old continuing professional education articles (first published in the 2000 EO CPE text and updated in the 2001 EO CPE text).

More specifically, the Notice imposes the following requirements:

3.02 Required provisions of LLC articles of organization and operating agreement

Except as set forth in section 3.04 of this notice, the IRS will issue a determination letter recognizing an LLC as exempt from tax and described in section 501(c)(3) only if both the LLC’s articles of organization and its operating agreement each include:

(1) Provisions requiring that each member of the LLC be either (i) an organization described in section 501(c)(3) and exempt from taxation under section 501(a) or (ii) a governmental unit described in section 170(c)(1) (or wholly-owned instrumentality of such a governmental unit).

(2) Express charitable purposes and charitable dissolution provisions in compliance with § 1.501(c)(3)-1(b)(1) and (4).

(3) The express chapter 42 compliance provisions described in section 508(e)(1), if the LLC is a private foundation.

(4) An acceptable contingency plan (such as suspension of its membership rights until a member regains recognition of its section 501(c)(3) status) in the event that one or more members cease to be section 501(c)(3) organizations or governmental units (or wholly-owned instrumentalities thereof).

3.03 Representation on enforceability

The LLC must represent that all provisions in its articles of organization and operating agreement are consistent with applicable state LLC law and are legally enforceable.

3.04 States with limitations on articles provisions

If an LLC is formed under a state LLC law that prohibits the addition of provisions to articles of organization other than certain specific provisions required by the state LLC law, the requirements of section 3.02 of this notice will be deemed satisfied if the LLC’s operating agreement includes the provisions set forth in section 3.02 of this notice and if the articles of organization and operating agreement do not include any inconsistent provisions.

The Notice also asks for public comments on a variety of issues, mostly relating to the effects of variations in state laws relating to limited liability companies. The deadline for comments in February 6, 2022.

The Notice does not address what conditions would apply to an LLC seeking to qualify for exemption by being described in other paragraphs of section 501(c). 

Lloyd Mayer

Western Conference on Tax Exempt Organizations (virtual, December 2-3, 2021)

I am fortunate to have the opportunity to present at this year's Western Conference on Tax Exempt Organizations, to be held virtually on Thursday, December 2nd, and Friday, December 3rd. As always, Ellen Aprill (Loyola - Los Angeles), Jill Horwitz (UCLA), and the rest of the organizing committee have put together a great program. Registration is required by December 1st.

Here is the schedule (all times Pacific):

Thursday, December 2, 2021

Welcome and Introduction, 8:30 AM-8:35 AM PT

 

Lessons from Headlines, 8:35 AM-9:30 AM PT

 

Current Employment Issues, 9:30 AM-10:30 AM PT

 

Break, 10:30 AM-10:40 AM PT

 

Equity Based Compensation, 10:40 AM-11:40 AM PT

 

Keynote, 11:40 AM-12:10 PM PT

 

 

Friday, December 3, 2021

Becoming an Anti-Racist Nonprofit: Legal Issues, 8:30 AM-9:30 AM PT

 

Consequences of Americans for Prosperity Foundation v. Bonta, 9:30 AM-10:30 AM PT

 

Break, 10:30 AM-10:40 AM PT

 

Breakout: UBIT Silos - Overview and Lessons Learned, 10:40 AM-11:40 AM PT

 

Breakout: Cryptocurrency and Non-Fungible Tokens, 10:40 AM-11:40 AM PT

 

Breakout: Private Foundation Terminations - Frequent Flashpoints, 10:40 AM-11:40 AM PT

 

Making a Splash – Charitable Giving Update, 11:40 AM-12:40 PM PT

Celebrating Ellen Aprill, 12:40 PM-1:00 PM PT

More details are available through the link provided above.

 

Lloyd Mayer

 

 

Where Did the Billions in Federal COVID-19 Funds to Schools Go?

In prior scholarship, I have addressed how the specific metrics used in the impact investing sector may be used to measure and report social good in the charitable sector to increase transparency and accountability about how donated funds are used.  The issue of incomplete reporting in the nonprofit sector is highlighted in a recent ProPublica article about the shortcomings of reports by state school districts on how they have used federal aid funds disbursed to remedy educational fallout from the pandemic.  Specifically, the ProPublica article addresses the gap between federal governmental aid to schools during the pandemic and measurable results from state school districts.  According to the article, the federal government gave around $190 billion in aid to help schools reopen and to address the effects of the pandemic.  In the year and a half since school doors were closed to millions of children, the Education Department has done only limited tracking to determine how the funds were used.  As a result, Washington, D.C. is in the dark about the effectiveness of the aid, especially in terms of those communities that have struggled the most during the pandemic.  

State education agencies were required to submit provisional annual reports to the federal government.  However, their reports only utilized six very broad categories, including technology and sanitation, to disclose how funds were used.  ProPublica analyzed more than 16,000 of such reports for the period March 2020 to September 2020 and found that billions of dollars were categorized as funding “Other.”  For example, some of the largest school districts in the country categorized all of their aid under the “Other” category, including Los Angeles Unified, which spent $49.5 million, and New York City’s schools, which spent $111.5 million.

ProPublica points out that since there is not a centralized and detailed federal tracking system, monitoring of how the relief funds given to over 13,000 school districts has been up to individual states.  Some school districts have expended the funds in a way that it is not at all consistent with the federal aid program, such as by using the funds for track and field facilities and bleachers.  The article cited both a school district in Iowa (Creston Community School District) and one in Pulaski County, Kentucky as engaging in such spending.

Importantly, the federal aid program delineated at least one very clear goal.  The funds were to be used to re-open schools to maximize in-person learning.  Broadly speaking, the funds were to be used to address the impact of the pandemic.  There have been numerous articles that have detailed the educational and emotional fallout from remote learning.  It is surprising to learn that there have not been directed efforts to help students make a smooth transition back to in-person learning and to recover from any lapses in their educational and/or social, emotional development as a result of the pandemic.  Instead, for example, in Texas, the McAllen Independent School District spent $4 million of its relief funds to build a 5-acre outdoor learning environment associated with a local nature and birding center owned by the city.  Although the concept may be a good one in theory, it fails to address  “the urgent learning needs of children who have been directly impacted by the pandemic.”  Critics have pointed out that the outdoor area will not even be completed before 2024, so half of the children there will not benefit from the outdoor center at all. 

Perhaps it is not too late for school districts to make the right choices in terms of spending federal aid.  Although most of the aid was dispensed from March 2020 to March 2021, the school districts have until 2024 to budget how the funds will be utilized.  Given the federal government has started to request basic information from states about how their school districts have used their funds, hopefully, the school districts will re-calibrate their spending and set forth goals consistent with the overall aim of the relief program. 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law, Tulane Law School

Requiring Private Schools to Have More Diverse Boards

In prior posts, I have examined the problem of racial discrimination in private schools and how tax-exempt law might address this systemic problem.  Today, I wanted to explore race issues that are present in tax-exempt law more broadly.  Ideally, examining the issue from a broader perspective will produce creative ways of addressing racial discrimination in private schools.

A great primer on race issues and tax-exempt law is the 2004 article entitled Race and Equality Across the Law School Curriculum: The Law of Tax Exemption by David A. Brennen.  As Brennen observes, race bias in terms of tax-exempt law is focused on the justice or injustice in regard to blacks of the statutory requirements to gain and keep tax-exemption.  One of the main advantages of pursuing an activity through a tax-exempt organization is that such activity may be funded through public and governmental financial support, namely through tax expenditures.  In other words, tax-exempt organizations receive a financial subsidy or financial benefit from the government by virtue of their tax-exempt status.  Brennen asks a poignant question: “How should the government allow tax-exempt organizations to use this indirect, but admittedly financial government/public benefit?”  Accordingly, he next turns directly to an examination of the Bob Jones University public policy doctrine and its implications for racial preferences of tax-exempt charities. 

At the same time, Brennen raises at least two distinct issues aside from the public policy doctrine that are relevant to tax-exempt private schools.  First, he queries whether a charity (such as a private school) should be required to have a racially diverse board of directors if indeed it is to represent the broad community that it claims it serves.  This makes sense because one of the conditions for receiving tax-exempt status is to show that the organization will benefit the public broadly, rather than a group of pre-selected individuals.  Second, Brennen considers whether the prohibition on tax-exempt social clubs’ engaging in racial discrimination should be expanded or revised.   (As an aside, a third interesting point that Brennen raises is how restrictions on political activity might affect tax-exempt charities that have historically served as a meeting ground and voice for the black community, such as black churches).   One must conclude as Brennen does that it is important to examine how certain laws are affecting different racial groups with an eye to possible correction.   His solution of requiring board diversity in the context of tax-exempt private schools is one worth noting.

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law, Tulane Law School