Nonprofit Law Prof Blog

Broad Overviews of Civil Society Research, Form 990 Data, Nonprofit Studies, Political Activities, and Scandals

There have been a series of recent publications either pulling together past nonprofit research, looking forward to future nonprofit research, or both, including articles in the special issue of the Nonprofit & Voluntary Sector Quarterly marking that publication's 50th anniversary. These include:

• A Research Agenda for Civil Society (Kees Biekart & Alan Fowler, editors; Edward Elgar Publishing): "Mapping a wide range of civil society research perspectives, this pioneering Research Agenda offers a rich and clear insight for academics and practitioners hoping to embark on future civil society research. Kees Biekart and Alan Fowler bring together over 20 expert contributions from researchers across the globe who are actively engaged in testing the old and generating new knowledge about civil society."

• Unlocking the Potential of Open 990 Data (Cinthia Schuman Ottinger & Jeff Williams; Stanford Social Innovation Review): "As the movement to expand public use of nonprofit data collected by the Internal Revenue Service advances, it’s a good time to review how far the social sector has come and how much work remains to reach the full potential of this treasure trove."

• Disciplinary Contributions to Nonprofit Studies: A 20-Year Empirical Mapping of Journals Publishing Nonprofit Research and Journal Citations by Nonprofit Scholars (Megan LePere-Schloop & Rebecca Nesbit; Nonprofit & Voluntary Sector Quarterly)): "In celebration of Nonprofit and Voluntary Sector Quarterly’s 50th anniversary, we present a bibliometric analysis of nonprofit research published between 1999 and 2019, within and outside of three core nonprofit journals—NVSQ, NML, and Voluntas. We seek to understand which journals, across scientific domains and social science disciplines, inform nonprofit research in one of three ways, by (a) publishing articles, (b) citing the three core journals, or being cited in these core journals. We found that nonprofit research published in economics and social sciences journals has kept pace with a large increase in indexed research. Meanwhile, though the core nonprofit journals robustly cite and are increasingly cited by business and management and public administration journals, they are less engaged with other social science disciplines. We discuss ways that the core journals could increase their visibility and penetration into these other disciplines and highlight perspectives potentially missing from the core journals."

• Government Regulation and the Political Activities of Nonprofits (Deborah A. Carroll, Suzette Myser & Seongho An; Nonprofit & Voluntary Sector Quarterly): "We propose a conceptual model of the political activities of nonprofits that qualify for exemption under subsections of the Internal Revenue Code other than 501(c)(3), including social welfare organizations, civic leagues, social clubs, and so on, which considers three categories of explanatory factors: organizational capacity, financial strategy, and operating environment. Using a Heckman selection model with longitudinal IRS 990 data, we find government regulation to be an obstacle for nonprofits to engage in the policy process. Political activities of non-501(c)(3) organizations are also negatively associated with government support, suggesting these organizations perceive government intervention differently from 501(c)(3) organizations when engaging in political activities."

• Nonprofit Scandals: A Systematic Review and Conceptual Framework (Cassandra M. Chapman, Matthew J. Hornsey, Nicole Gillespie & Steve Lockey; Nonprofit and Voluntary Sector Quarterly): "High-profile charity scandals have always represented a threat to the nonprofit sector, which relies on public trust and funding to operate. We systematically review 30 years of empirical research on scandals involving nonprofits and present both quantitative and qualitative syntheses of the 71 articles identified. Informed by this review, we generate a conceptual model theorizing the causes and consequences of scandals, as well as how nonprofits can best prevent and respond to organizational transgressions. We then put forward a research agenda that elaborates five key factors that are especially important for understanding nonprofit scandals but remain understudied: (a) integrity versus competence violations, (b) moral licensing, (c) the multilevel nature of organizational transgressions, (d) sectoral causes of scandal, and (e) effective responses. We close the article with recommendations for nonprofit managers about how to conceptualize, prevent, plan for, and respond to transgressions occurring within their organizations, and any resulting scandals."

Lloyd Mayer

Grossman & Reid: The Liberation of Civil Society

Andrew Grossman and Alexander Lyman Reid (both at BokerHostetler) have posted "And the Walls Came Tumbling Down: TheLiberation of Civil Society." Here is the opening paragraph:

As anyone who has seen a building collapse or a bridge buckle can attest, it can be harrowing to witness the failure of a major structure, particularly one that is historic and relied upon heavily. Sometimes, however, falling walls can be a welcome change. The Berlin Wall, for example, unfairly separated the people of Berlin, and its demise was celebrated worldwide by lovers of freedom. Perhaps one day we too will celebrate the liberation of nonprofit organizations from the walls erected by the regulatory state to protect the powerful from the people. That day may come sooner than expected, as the Supreme Court recently recognized the freedom of association as a constitutionally protected right (Americans for Prosperity Foundation v. Bonta) and rejected the deference historically granted to the executive branch to write regulations without adequate legislative authority (West Virginia v. Environmental Protection Agency).

Lloyd Mayer

Donor Advised Funds Update: Continued Growth, Continued Scrutiny

Donor advised funds are both continuing to grow and continuing to be subject to government and academic scrutiny, as illustrated by a new report, an Attorney General review, and a new academic article. 

First, the National Philanthropic trust issued its 2022 DAF Report. Highlights include:

• DAF donors granted at historic levels. Grants from DAFs to qualified charities totaled an estimated $45.74 billion, representing a 28.2 percent increase compared to 2020, which itself was 28.3 percent higher than in 2019. The ten-year average rate of change for DAF grantmaking is 17.5 percent from 2011 to 2020.

• The DAF grant payout rate was 27.3 percent, the highest grant payout rate on record. Payout has remained above 20 percent for every year on record, reflecting the consistent charitable support that DAF donors provide. The ten-year average payout rate from DAFs is 22.2 percent.

• Other key metrics, like contributions and charitable assets, also increased at rates much higher than the ten-year average. For example, charitable assets in DAFs increased significantly as the stock market surged and donors made more contributions than ever before. Historically, periods with very strong growth in charitable assets (20 percent increases or more) are immediately followed by large increases in grantmaking.

Second, the California Attorney General issued a report on its audit of donor advised fund sponsors registered in California. (Hat tip: Bloomberg (subscription required).) Here are the "notable takeaways" from the Executive Summary:

• The results show a growth in DAFs, with average annual growth in assets above 20 percent (Tables 3 and 4).

• Commercial DAFs saw the most growth in dollar terms, topping $20 billion in contributions and $75 billion in year-end assets (Figures 2 and 7). The growth in commercial DAF sponsors was fueled by donations of equity securities, with equities representing between 50 to 65 percent of donations received each year, compared with the rate of equity security donations among all sponsors ranging between 34 to 38 percent (Tables 7 and 11).

• Grant payouts by DAFs increased across sponsor types and sponsor locations, with the exception of community foundations where the payouts remained somewhat flat (Figures 13 and 14).

• The data suggests that 20 percent of DAFs pay out less than 5 percent in a given year (Figure 30).

• On average, 32 percent of DAFs in commercial sponsors and 42 percent of DAFs in community foundations paid out less than 5 percent (Figures 37-38).

• DAF-to-DAF transfers accounted for 10.8 percent of all grants (Figure 23).

• The boost in payout and fund flow rates due to DAF-to-DAF transfers was most pronounced in community foundations, with DAF-to-DAF transfers representing 17.8 percent of all grants made by community foundation DAFs (Figure 26).

• Private foundation distributions account for 5.3 percent of all contributions received by DAFs (Figure 10). For commercial sponsors, private foundation contributions represented 3.1 percent of all contributions; for mission-based sponsors and community foundations it was higher, making up 9.8 and 12.2 percent of all contributions received, respectively (Figure 12).

Third, David I. Walker (Boston University) has posted "Donor-Advised Funds in the Wake of the Tax Cuts and Jobs Act." Here is the abstract:

Donor-advised funds (DAFs) are conduits for charitable giving that support immediate tax deductions while creating a reservoir of assets for subsequent disposition to end-use charities. The number of new DAF accounts has skyrocketed in the wake of the 2017 Tax Cuts and Jobs Act (TCJA). This Article presents evidence suggesting that bunching charitable contributions to game the TCJA-enhanced standard deduction likely motivates much of the onslaught of new DAF accounts established since 2016 and argues that the typical buncher is likely to differ from other DAF account holders in ways that matter from a policy perspective. Thus, while DAF critics have generally focused on the unproductive accumulation of assets in DAF accounts and have advanced reforms aimed at speeding up DAF payouts, this Article argues that in the context of bunchers, unproductive accumulation of assets in DAF accounts is unlikely to be a major problem. The more significant problem with DAF-facilitated bunching is that the cost to the public fisc is unlikely to be justified by incremental charitable giving. Thus, while this Article concludes that regulation targeting DAF payouts is unobjectionable, it argues that a wholly different set of reforms targeting the deductibility of charitable giving generally would be needed to address the cost of DAF-facilitated bunching under current law and under thoughtfully reformed laws involving universal charitable deductions above a floor.

Lloyd Mayer

 

More Charity Care and Commerciality Criticisms of Tax-Exempt, Nonprofit Hospitals

Another month, another set of criticisms of tax-exempt, nonprofit hospitals. The latest group includes a report on low levels of charity care at many hospitals, an analysis revealing that some hospitals make it difficult for financially needy patients to access charity care, and a call for removing tax exemption entirely on commerciality grounds.

First, the Kaiser Family Foundation issued a report finding that "[h]alf of hospitals reported that the cost of providing charity care to patients represented 1.4% or less of their operating expenses in 2020, though the rates vary widely from hospital to hospital." While its analysis was not limited to tax-exempt, nonprofit hospitals, it noted that almost 60 percent of community hospitals are nonprofits. Here is an excerpt from the description of the analysis:

This issue brief addresses key questions about hospital charity care programs. According to our analysis of hospital cost reports, charity care costs represented 1.4 percent or less of operating expenses at half of all hospitals in 2020, though the level of charity care varied substantially across facilities (Figure 1) (see Methods for details about our calculations). For example, while charity care costs represented 0.1 percent of operating expenses or less on the lower end of the spectrum (for 8% of hospitals), they represented 7.0 percent of operating expenses or more among a similar share of hospitals (9%). The variation in charity care costs as a percent of operating expenses likely reflects differences in hospitals’ missions and business practices; the need for charity care among patients; and federal, state, and local policy and regulation.

Second, the Wall Street Journal reports in "Hospitals Often Don’t Help Needy Patients, Even Those Who Qualify" (subscription required) that some nonprofit hospitals make it difficult for needy patients to receive financial assistance as they "put up obstacles, delay checking eligibility and sometimes press for payments that aren’t refunded even if a patient eventually gets qualified for assistance." Its findings included:

•Though hospitals have the power to prequalify low-income patients for charity care and never send a bill, about 450 nonprofit facilities—roughly 15% of the 3,100 nonprofit facilities in the Journal’s analysis of tax documents—didn’t report using the option.

•Even among the hospitals that told the IRS they do prequalify people, many spent months chasing patients for payment before checking eligibility. The parent organizations for roughly 1,000 of those facilities reported pursuing at least $2 billion in billings to patients who likely qualified for aid.

•In scripts and other training material for staff who talk to patients about bills, obtained through public-record requests to more than 100 government hospitals, the possibility of financial assistance is sometimes raised only as a last resort, or not at all.

Third and finally, Edward A. Zelinsky (Cardoza) has posted "The Commerciality of Non-Profit Hospitals Requires Them to Be Taxed: Bringing the Debate to a Conclusion," 42 Virginia Tax Review (forthcoming 2022). Here is the abstract:

It is now time to conclude our prolonged debate about the tax-exempt status of nonprofit hospitals. The contemporary nonprofit hospital is a commercial enterprise, materially indistinguishable for tax purposes from its profit-making, taxed competitor. The federal income tax and the states’ income, sales and property taxes should treat all hospitals alike, regardless of whether such hospitals are nonprofit or for-profit enterprises. In the interests of equity and efficiency, these similar institutions should be taxed similarly.

As a political matter, nonprofit hospitals will continue to defend their tax-exempt status. Like any other lucrative, vested interest, nonprofit hospitals will continue to fight hard to protect their valuable tax benefits. But, on the substantive merits, the case for taxing the contemporary nonprofit hospital is compelling, given the commerciality of today’s nonprofit hospitals. Such nonprofit hospitals are not materially distinguishable for tax purposes from their profit-making, taxed competitors.

Lloyd Mayer

Politics & Money: Hundreds of Millions from Philanthropists or to DAF Sponsor; Donor Lawsuit (Mostly) Fails

A previous post reported on billions of dollars flowing to section 501(c)(4) organizations with at least partially political agendas, and related critical commentary. The recent midterm elections have now sparked two stories about philanthropists, nonprofits, hundreds of millions of dollars, and politics. We also have the latest court decision in a frustrated donor lawsuit arising out of the 2020 election.

First, the Chronicle of Philanthropy reported in "A Half-Billion Dollars of Influence: Big Philanthropists and the MidtermElections" that 32 of the 100 biggest political donors are also major philanthropists by one measure or another, and that collectively these philanthropists made political contributions in the 2021-22 election cycle of at least half a billion dollars based on federal campaign finance reports. As the article notes, this almost certainly understates their political spending since it does not capture contributions to organizations not subject to public disclosure of donors or spending that is reported under state campaign finance laws. George Soros leads the pack with at least $125 million contributed to a super PAC, but 14 others have given at least $10 million.

Second,  Politico reported in "Two anonymous $425 million donations give dark money conservative group a massive haul" that the section 501(c)(3) DonorsTrust received two enormous gifts, sources unknown. Since DonorsTrust is a sponsoring organization for donor-advised funds, presumably the donors can advise as to the ultimate recipients of their largesse even though ultimate control rests with the 501(c)(3). One of the 2021 donations (for $427 million) was apparently in cash, while the other (for $426 million) was in the form of "closely held common stock in a C-corporation."

Third and finally, the fate of a donor's lawsuit shows the risks of large donations since they do not always obtain the desired results and the donor may not have legal recourse. In Eshelman v. True the Vote, a Texas appellate court affirmed the dismissal of a multi-million dollar donor's lawsuit agains the named nonprofit and its leaders on standing grounds. It did so based on the failure of the plaintiff to provide evidence that the gift was conditional on certain uses of the gifted funds (to challenge alleged voter fraud in the 2020 elections), which failure meant that the plaintiff lacked an injury sufficient to grant him standing. (The court reversed the dismissal of the lawsuit as against the nonprofit's law firm and lawyer because it found they had not raised the evidentiary issue but relied solely on alleged deficiencies in the plaintiff's complaint, which the court found did not exist; presumably those defendants will raise the evidentiary issue on remand.) The lower court's dismissal was without prejudice, however, so the donor may still attempt to correct the standing issue so as to pursue his lawsuit against the nonprofit and its leaders.

Lloyd Mayer

New Vehicles for Philanthropy: Three Considerations

Three new publications by Ofer Eldar (Duke), Dana Brakman Reiser & Steven Dean (Brooklyn), and Rasheda L. Weaver (Rutgers) highlight the myriad of possible forms for pursuing philanthropy currently, as well as their pros and cons. Here are summaries:

• Are Enterprise Foundations Possible in the United States? (Eldar): "This book chapter discusses the ability of entrepreneurs to form enterprise foundations in the US and the hurdles for forming them. The US regime for tax-exempt private foundations is very restrictive and does not practically allow them to have substantial ownership of for-profit firms. As a result, there is a perception that enterprise foundations are not feasible in the US. However, enterprise foundations, broadly defined as industrial firms controlled by any nonprofit firm, need not involve ownership by a private foundation (as it is defined in the US Tax Code) and could also be owned by other types of nonprofits. Such enterprise foundations are unlikely to benefit from key tax exemptions (such as tax-deductible donations or income tax exemptions), which probably explains their unpopularity. The chapter evaluates recent developments to liberalize the law of enterprise foundations, including (1) the "Newman's Own" exception that permits private foundations to own business firms under certain restrictive conditions, and (2) the perpetual purpose trust, which was recently utilized to transfer the ownership of Patagonia from the founder to a trust and a non-exempt nonprofit."

• For-Profit Philanthropy: Elite Power and the Threat of Limited Liability Companies, Donor-Advised Funds, and Strategic Corporate Giving (Reiser & Dean): "This book exposes a migration of business practices, players, and norms into philanthropy that strains the regulatory regime sustaining public trust in elite generosity through accountability and transparency and proposes legal reforms and private solutions to restore it."

• Social Entrepreneurship: A Practical Introduction (Weaver): "[This book] equips aspiring entrepreneurs with the tools needed to design and launch businesses to create positive social change in their communities. This accessible textbook aims to educate and motivate people interested in social entrepreneurship, showing that such businesses are a valuable part of the community development toolbox. Each chapter focuses on a key aspect of social entrepreneurship, from value creation and business planning to impact measurement and scaling up. Different social business models are presented, with analysis of their strengths and weaknesses. Cases and examples are included throughout the book and showcase real-life social enterprises in North America, South America, Europe, Australia, Africa, and the Caribbean. Discussion questions also support reflection and learning. A downloadable workbook offers support with checklists, social impact measurement, and other areas. An instructor manual containing test questions and experiential exercises is also available as a digital supplement for adopters. This book is ideal for introductory courses in social entrepreneurship and community development. It will also be valuable for those involved in social enterprises on the ground."

Lloyd Mayer

California Issues Modifications to Proposed Crowdfunding Regulations (Comments Due 12/7)

The California Department of Justice today issued modifications to its proposed regulations under a new charitable crowdfunding law enacted by the state legislature. The new law is effective on January 1, 2023, but the DOJ is proposing to delay the effective date of the modified proposed regulation sections until January 1, 2024. The California DOJ published the initial draft of the proposed regulations on May 27, 2022. Comments on the modifications are due by December 7, 2022. 

I have not had a chance to review the (many) modifications as the email announcing them just arrived in my inbox. But I suspect the NEO Law Group, which has been carefully following these new rules, will soon have a summary available.

Lloyd Mayer

California Proposes Rules Relating to Disposal of Charitable Assets (Comments Due 12/6)

The California Department of Justice is proposing new rules relating to transactions involving all or substantially all of the assets of a charitable corporation or trust, or assets in charitable trust held by a mutual benefit corporation. Comments are due by 5:00 p.m. December 6, 2022.

Here is a summary of the effect of the proposed rulemaking:

For purposes of giving notice to the Attorney General of certain transactions involving all or substantially all of the assets of a charitable corporation or trust, the proposed rulemaking defines “substantially all” assets to mean an asset or assets equal to or exceeding 75 percent of the value of all assets held at the time of the notice or at any time during the six-month period before submitting the notice.

The proposed rulemaking also sets a standard for the Attorney General’s review of requests for waiver of the notice requirements. The Attorney General may waive notice for a particular transaction if the Attorney General determines that the transaction poses no risk to the public interest and the financial cost to the charitable corporation, trust, or mutual benefit corporation of providing notice to the Attorney General outweighs the potential benefit to the public interest.

Lloyd Mayer

Steve Bannon Associate Convicted For We Build The Wall Fraud

The N.Y. Times reports that a federal jury has convicted Timothy Shea, who was charged along with former advisor to President Trump Stephen K. Bannon (since pardoned) and two others for federal crimes relating to raising funds for the section 501(c)(4) We Build the Wall, Inc. Mr. Bannon currently faces state charges, not forestalled by the pardon, relating to the same facts. The other two defendants pled guilty to federal crimes.

According to the original federal indictment, the crimes stemmed from the defendants' promises to donors not to use any funds raised for salary or compensation. Instead, they promised that all of the millions of dollars raised would be used for private efforts to build a border wall. These promises were made as part of an effort to convince donors to an initial crowdfunding effort to permit their donations to be redirected to the new nonprofit, once it became clear the crowdfunding campaign was not legally allowed to donate the funds raised to the U.S. government for construction of a border wall. But the defendants allegedly instead directed hundreds of thousands of dollars in donor funds toward compensation of themselves and personal expenses. 

Lloyd Mayer

Tax Court Conservation Easement Setbacks for IRS

The IRS suffered two significant partial defeats this month in the U.S. Tax Court relating to conservation easements.

First, the court in Green Valley Investors, LLC v. Commissioner held that the listing notice (Notice 2017-10) for syndicated conservation easements was invalid because of the failure of the IRS to comply with procedures required by the Administrative Procedure Act (APA). Coverage: Bloomberg (subscription required); Forbes; JDSupra; National Law Review.

Second, the court in four cases denied government motions for partial summary judgment on the grounds that the regulation relied upon by the IRS had been found invalid (you guessed it - on APA grounds) by the relevant circuit court and because "partial summary judgment would neither expedite resolution of this case nor make trial unnecessary" with respect to a Form 8283 issue raised by the government. The relevant, essentially identical orders are in Baker's Farm Nature Reserve LLC v. Commissioner, East Village Reserve LLC v. Commissioner, Jack's Creek Reserve LLC v. Commisioner, and Rock Cliff Reserve LLC v. Commissioner. 

Lloyd Mayer

An Understandably Modest IRS Agenda for Fiscal Year 2023

This month saw three updates on IRS (and Treasury) tax-exempt organization plans or possible plans for fiscal year 2023, and those plans are (understandably) modest. The highlights from the 2022-2023 Priority Guidance Plan, the TE/GE FY2023 Program Letter, and the annual IRSAC report are:

• Six of the ten Priority Guidance Plan exempt organizations items are repeats from last year (group exemptions, supporting organization final regs, section 512 allocation regs, section 4941 partnership investment guidance, section 6104(c) final regulations, and section 7611 appropriate high-level official final regs). The section 6104(c) item is listed only to say it was completed (T.D. 9964), and the section 7611 issue may be moot as the IRS has identified the Commissioner, TE/GE and the Deputy Commissioner for Services and Enforcement as the appropriate officials in IRM 4.76.39.1.1.

• The other four Priority Guidance Plan EO items are an expansion of the single donor advised fund item from last year. The expanded items identify specifically donor advised fund regulations under sections 4966, 4967, and 4958, as well as guidance regarding the public-support computation with respect to DAF distributions.

• The Priority Guidance Plan drops guidance relating to LLCs and section 501(c)(3), apparently because the IRS has decided not to issue any additional guidance in response to comments on Notice 2021-56, as Paul Streckfus reported today.

• Other exempt organizations related Priority Guidance Plan items include section 170 general guidance and also specific guidance relating to conservation easements, section 414(e) definition of a church plan regulations, section 501(c)(9) voluntary employees' beneficiary associations regulations and other guidance, and section 514(c)(9)(E) fractions rule final regulations.

• The TE/GE Program Letter focuses on high-level, relatively vague goals (Service, Enforcement, People, Transformation) as has been typical in recent years. That said, it does report that TE/GE hired 187 new employees in FY2022 and anticipates hiring a greater number in FY2023.

• The IRS Advisory Council Public Report only contains two recommendations of tax-exempt organization interest, one relating to tax-exempt bonds and the other to the tax-exempt organization data. The former has to do with form revisions, and the latter with ensuring functionality of data sharing in compliance with section 6104.

Lloyd Mayer

Denying Tax Exemption to Hate Groups

I have been thinking about denying tax exemption to hate groups at least ever since 2016, when the constitutional scholar Eugene Volokh categorically dismissed the idea with barely a flip of the wrist.  The First Amendment, he said, won't allow it.  He and Marcus Owens later testified to that effect at a Congressional Hearing.  I gotta admit, I was indignant and disappointed in the rigor with which either one addressed the problem.  They pretty much threw up their hands and said, "sorry, nothing can be done about calling a hate group charity."  I was so disappointed that I decided to tackle the problem myself.  Here it is six years later and I have finally finished my first draft (I have made innumerable revisions by section, but I have not read the entire paper from start to finish yet, nor made final edits).  I am happy to send a draft to anybody who requests (via email) and agrees to an unwritten NDA.  Even if you hate the article you must also agree to provide at least two paragraphs of comments to me in early spring.  Here is the abstract:

 

DEFUNDING HATE:  CHARITY, EPISTEMOLOGY, SPEECH INCANTATIONS, AND

FEDERAL TAX EXEMPTION

 

Darryll K. Jones

              That it would strike most people as entirely absurd to refer to hate groups as charitable has, to this point, not discouraged more than a few scholars from doing exactly that.  Thus, conventional wisdom holds that hate groups – groups that teach people how and why they should hate the “other” – educate and are ipso facto entitled to tax exemption under IRC 501(c)(3).  It is not that sloven minds truly believe that hate groups are charities, it is that they think there is no justification for denying tax exemption to hate groups other than that government – we the people – despise their ideas.  Even tax scholars understand that government may not interact with people on the basis of their ideas. Those who have thrown up their hands, even in the face of absurdity, recognize that our instinct is to deny tax exemption because we don’t like what hate groups say when they teach.  This is an admitted fact in my thesis, but I nevertheless prove a constitutional justification for excluding hate groups from tax exemption.

              But it may not be necessary to trigger a constitutional battle between government of the good and free speech.  Those who have already conceded are incorrect about a condition precedent that avoids constitutional inquiry.  They assume that charity and education – two “purposes” for which tax exemption is granted – are so ill-defined and incapable of precise definition that to deny any teaching activity is necessarily to run afoul of the free speech guarantee.  As regards hate groups, denial of tax exemption is thought analogous enough to direct prohibition that denial should be treated as speech prohibition.  But this equates the “carrot” of subsidy to the “stick” of prohibition, something the Supreme Court seems especially reluctant to do, though it admits of the possibility.  In any event, charity has been sufficiently defined in both positive law and by the Supreme Court to exclude invidious discrimination.  Teaching hate does just that.  Scholars miss this point, and that government may regulate activity even if doing so impacts speech.  Education, too, can be adequately defined to exclude the processes used by hate groups to teach what they teach.  This paper labels those processes, “indoctrination,” the illiberal and undemocratic connotation of which could not have been what government sought to subsidize through tax exemption.  In either case – defining charity or education – the only real constitutional concern is vagueness.  Vague laws chill speech or grant government discretion to deny tax exemption because we hate their ideas.  I show that vagueness concerns are hardly insurmountable. 

              The analysis might end there, except that my admitted bias wants to prove that government may, and perhaps must deny tax exemption to hate groups by name.  In other words, government must affirmatively deny tax exemption to groups that teach hate precisely because of what they teach, rather than because what they teach is neither charitable nor educational in purpose.  We needn't dance around the First Amendment elephant in the room even if we admit that free speech jurisprudence is full of "incantations," that do not readily illuminate a dark landscape.  Ultimately, the argument rests on the distinction between the carrot and the stick.  Taking away the carrot does not prohibit speech – it does not implicate the normative values protected by free speech – precisely because denying subsidy is not prohibition.  The Supreme Court has admitted as much even as it sometimes equates subsidy and prohibition.    But not only that.  Government may talk and spend money for the public good.  Under the government speech doctrine, government may express its ideas – thereby adopting the center’s views and rejecting others.  Government may discriminate amongst ideas in the marketplace when government speaks for itself.  Government may also discriminate when it spends for the public good.  It may buy family planning services for citizens, for example, while declining to purchase abortion counseling for those citizens.  Likewise, government may patronize education that counsels love and boycott education that counsels hate.  In both examples, government is a legitimately discriminating buyer for the public good.  Whatever service or speech is left unfunded does not implicate free speech. 

    In some circumstances, though, government’s spending and speaking power is constrained.  Government may not post a billboard proclaiming, “America is a Christian nation.”  To do so government would exercise its right to speak for the center, but in a manner that violated the First Amendment’s Establishment Clause.  The center has a right to speak, but not to make that proclamation.  Government’s speech would be unconstitutional.  Likewise, government could not proclaim from a billboard that “African Americans are dangerous, and Jews are greedy.”  Government could not post that billboard itself because the center is constitutionally prohibited from having that view.  Government may not prohibit expression of that view, but government is as much prohibited from indirectly expressing the view as it is directly.   Can it be that tolerating hate speech, if we must, demands subsidizing hate groups?  To that question Justice Stevens once stated, “[a] free society must tolerate such groups.  It need not subsidize them, give them its official imprimatur, or grant them equal access to . . . facilities.”    

 

dkj

 

 

 

 

IRS Commissioner Nominee Evokes Memories of Alleged IRS Bias Against Conservative Nonprofits

The Washington Post reports that the White House announced on Thursday that President Biden will nominate Daniel Werfel to lead the Internal Revenue Service, tapping a former budget official to spearhead implementation of key parts of the administration’s economic agenda. 

Mr. Werfel served in the George W. Bush and Obama administrations, working at senior levels of the White House Office of Management and Budget and at the IRS. He was acting IRS commissioner in 2013, taking over after top officials resigned over a controversy involving the agency’s scrutiny of nonprofit groups.

What was the controversy about? 

NPR provides the answer. In an October 5, 2017, report, NPR revealed that in 2013, IRS official Lois Lerner revealed that conservative groups seeking tax-exempt status had been getting extra scrutiny, based on words such as "tea party" or "patriots" in their names. For conservatives, Ms. Lerner's statement confirmed their darkest suspicions: in the Tea Party heyday years of 2009 and 2010, hundreds of groups affiliated with the party had sought tax-exempt status as 501(c)(4) "social welfare" organizations. IRS demands for documents left many of them in bureaucratic limbo for a year or more.

The NPR report revealed that an audit by the Treasury Inspector General overseeing the IRS had found that the agency had targeted not just conservatives but also scores of groups with words like "progressive" in their names. The Treasury Inspector General for Tax Administration, or TIGTA, did the report at the request of a bipartisan group of senators.

The report did not satisfy everyone, particularly supporters of the conservative groups who had sought tax-exempt status during that period. Conservative lawyer Cleta Mitchell, who represented eight groups that were given the extra scrutiny, said at the time that the approval process took far too long. In one case, she said, "the IRS wanted every communication that this organization had made about Obamacare," as the Affordable Care Act is commonly called. 

Mitchell opined that even if progressive groups were targeted, "they didn't get subjected to the kinds of follow-up the Tea Party groups did." Meanwhile, in June 2013, Rep. Hal Rogers, R-Ky., told Fox News the IRS had an "enemies list out of the White House." Also, at a Tea Party rally on Capitol Hill, Sen. Rand Paul said an out-of-control government was "persecuting people for their religious and their political beliefs."

According to the NPR report, 

Then-President Obama quickly cleaned house in the upper echelons of the IRS, but congressional hearings ran more than three years before they spun off into secondary issues, which inevitably included missing emails. Lerner became a target for conservative attacks when she took the Fifth Amendment at a House investigative hearing.

In cleaning house, President Obama appointed Mr. Werfel acting IRS Commissioner. According to the Washington Post, current Treasury Secretary Janet Yellen reacted positively to Mr. Werfel's pending nomination:

Danny’s prior service under both Democratic and Republican administrations, his deep management experience, and his work directing significant transformation efforts, make him uniquely qualified to lead the agency at this critical juncture. Danny’s deep commitment to fairness and making sure government works for all will also be invaluable as we improve the taxpayer experience and eliminate a two-tiered tax system.

John Koskinen, who served as IRS commissioner after being nominated by President Obama, also had words of praise for Mr. Werfel. According to Mr. Koskinen, Mr. Werfel worked effectively with the GOP at the height of the anger over accusations that the tax agency had targeted tea party groups for additional scrutiny. He continued: "Werfel was dropped into the middle of a maelstrom [yet] did a good job of responding positively to congressional inquiries.”

But not everyone is sold on the idea that Mr. Werfel is the best person for the job. The Post reports that at least one leading House Republican on Thursday criticized Mr. Werfel’s performance during that period. According to Rep. Kevin Brady (R-Tex.), the top Republican on the House Ways and Means Committee, "Daniel Werfel was named acting IRS commissioner in 2013 with the goal of restoring credibility and confidence in the IRS after the agency’s shameful targeting of conservative groups. He didn’t succeed in 2013 and I’m concerned about whether he can succeed in 2023 and beyond."

We shall have to wait to find out. If the Senate confirms Mr. Werfel's appointment as IRS Commissioner, he will face many challenges, including the challenge of improving IRS customer service, which struggled amid the pandemic after years of budget cuts. The IRS taxpayer watchdog reported over this summer that the agency had a backlog of 21.3 million returns, and call response rates have plummeted. Only 1 in 10 of the 73 million taxpayer calls for help reached an employee in the last filing season. 

Whatever he does, though, it would be wise for Mr. Werfel to ensure that the IRS does not unnecessarily target nonprofit organizations for extra scrutiny. 

Prof. Vaughn E. James, Texas Tech University School of Law

 

    

IRS to Hire Over 700 Employees to Help Taxpayers in Person

In an statement issued on its website yesterday, the IRS announced that it is now seeking over 700 new employees to help taxpayers at Taxpayer Assistance Centers across the country. In making the announcement,  Ken Corbin, the Service's Taxpayer Experience Officer and Wage and Investment Commissioner, stated: "This is an important priority to provide more service at the IRS for the upcoming filing season." According to Mr. Corbin, the IRS is "working to have more than 270 walk-in sites properly staffed to provide the help taxpayers need and deserve. This will be the first time in a decade our walk-in sites will be fully staffed." 

The Service's announcement goes on to state that the "increase in staffing is part of much wider IRS improvements enabled by the Inflation Reduction Act funding approved in August 2022, and additional updates on the implementation of the landmark 10-year legislation will be provided soon."

According to the IRS, these 700 new positions will include technical positions such as Individual Taxpayer Advisory Specialists who provide face-to-face assistance in IRS TAC offices and Initial Assistance Representatives, responsible for greeting and determining the needs of taxpayers visiting TAC offices. In addition to the face-to-face representatives and phone assistors, the IRS is also working to hire additional people throughout the agency, not just in taxpayer service areas but in Information Technology and compliance positions – all with a goal of improving the work the IRS does.

The announcement concludes by stating that

All employees must be U.S. citizens and pass an FBI fingerprint check and tax compliance verification. Federal experience is not required. The applicant may have gained experience in the public sector, private sector or volunteer service.

Prospective employees are encouraged to attend an upcoming IRS Careers information session to learn more about the position and requirements, how to apply, and all the benefits of federal service.

The public will undoubtedly welcome the upcoming assistance from the IRS.

Prof. Vaughn E. James, Texas Tech University School of Law

Texas Tribune & ProPublica Investigate Churches Politicking

The Texas Tribune and Propublica published an investigation into churches, politicking and lack of IRS enforcement and quote a couple members, including myself, of this blog. From the article:

"At one point, churches fretted over losing their tax-exempt status for even unintentional missteps. But the IRS has largely abdicated its enforcement responsibilities as churches have become more brazen. In fact, the number of apparent violations found by ProPublica and the Tribune, and confirmed by three nonprofit tax law experts, are greater than the total number of churches the federal agency has investigated for intervening in political campaigns over the past decade, according to records obtained by the news organizations." . . . 

"Among the violations the newsrooms identified: In January, an Alaska pastor told his congregation that he was voting for a GOP candidate who is aiming to unseat Republican U.S. Sen. Lisa Murkowski, saying the challenger was the “only candidate for Senate that can flat-out preach.” During a May 15 sermon, a pastor in Rocklin, California, asked voters to get behind “a Christian conservative candidate” challenging Gov. Gavin Newsom. And in July, a New Mexico pastor called Democratic Gov. Michelle Lujan Grisham “beyond evil” and “demonic” for supporting abortion access. He urged congregants to “vote her behind right out of office” and challenged the media to call him out for violating the Johnson Amendment."

Though the story is perhaps not news to those who follow this topic closely, it's a good piece, documenting pretty clear violations of the prohibition on charities from intervening in a political campaign. It has some nice history on the adoption of the amendment that I found useful alone. It also gives nice context for the PACI project where the IRS actually began actively looking at political activities in general, where many of the charities were indeed churches.

Though it is true that the IRS has barely enforced this provision over the years, the fact that there is a large effort among some churches to vigorously move into the politicking space today that is documented in this story is of concern. The biggest policy reason to focus in on this issue is summarized pretty well by the following quote by Andrew Seidel, vice president of strategic communications for the advocacy group Americans United for Separation of Church and State: “If you pair the ability to wade into partisan politics with a total absence of financial oversight and transparency, you’re essentially creating super PACs that are black holes.” 

Philip Hackney

 

S Corporations and Charitable Contributions

In light of the recent changes to the AGI limitations for charitable contributions, it is interesting to explore charitable giving in the S Corporation context.  In 2019, a CPA Journal article noted that unique planning opportunities exist for charitably minded S corporation shareholders.  For example, the rule that limits the pass-through deduction to the shareholder’s basis in S corporation stock and debt is not applicable when the S corporation donates appreciated property to a charity.  Thus, even if a shareholder has a zero basis in his/her S corporation stock, appreciated property donated to a charity would pass through as a charitable contribution.  In effect, the deduction becomes the portion limited by (and reducing) basis, plus the appreciation in the donated property. This interesting article addresses the incentives Congress has provided since 2006, which are still applicable under the TCJA.

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law

Tulane Law School 

Millennials and Impact Investing

According to an impact investing article from earlier this year, millennials are driving an increasing trend toward impact investment and away from traditional charitable giving.  The article addressees a 2021 study by Fidelity Charitable that revealed millennials are much more likely to engage in impact investing than older investors.  The study examined impact investing and charitable giving among 1,216 US investors, who have at least 25,000 in investable assets from sources other than an employer retirement plan.  Approximately 61% of millennials reported that they had participated in impact investing.  Tellingly, 62% of millennials reported that they believed impact investing has a greater potential than traditional philanthropy to “create long-term positive change.”  In sharp contrast, 72% of baby boomers reported that charitable giving rather than impact investing was the better course to create meaningful change.

Scott Nance, Vice President of Impact Investing at Fidelity Charitable, has remarked, “The trend toward values-based investing will only grow as millennials come to control a larger share of wealth.”  Millennials are focused on having their broader values and social good align with their investments.    The study also revealed that only one third of all investors engage in impact investing.  However, 40% of those surveyed responded that they would consider making their first impact investment in 2022. Of those investors who already participate in impact investing, 41% plan to dedicate an even greater amount to impact investments.

Among the participants, the most cited barrier to participation in impact investing is a lack of knowledge.  Interestingly, of those already participating in impact investing, 42% learned about it from a financial advisor and 30% from an investment firm. The most common vehicles for investment among those surveyed are mutual funds or individual publicly traded companies that meet criteria along environmental, social, or governance themes.  Of these three themes, environmental was at the top with half of impact investors polled citing it as their top concern.   Social themes garnered the second spot with 27% whereas governance themes came in last with 16%.

As discussed in yesterday’s post, it is interesting to note the ways that impact investing may work in tandem with traditional philanthropy.  Fidelity commented upon its Giving Accounts, which allows donors to combine philanthropy with impact investing.  Its Giving Accounts saw a 67% increase in assets allocated to impact investments, raising the total to $3 billion in 2021.  

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law

Tulane Law School

Private Foundations and Impact Investing - Social Issuance Bonds

The U.S. Impact Investing Alliance is an organization dedicated to raising awareness of impact investing in the United States, increasing deployment of impact capital, and collaborating with stakeholders to help build the impact investing ecosystem.  Recently, the Alliance released a study regarding impact investing tools and private foundations.

The authors conclude that foundations can and should more effectively use their balance sheets, even if the tools they are using have different degrees of mission alignment.

For example, the authors argue for greater use of guarantees by foundations.  At the same time, they note that a recent innovation is to combine an investment grade credit rating with a guarantee project. RWJF is one example of a foundation securing a AAA credit rating from S&P and Moody’s in 2021 that in turn allowed it to provide investment grade guarantees.

They also the address social bond issuances. This tool was used to increase several foundations’ programmatic activity in the face of COVID-19, the economic crisis, and increasing racial unrest in the United States. While use of a bond is not new, use of bonds by foundations is new, especially in terms of grantmaking activity.  For example, the Ford Foundation was an early user of bonds, having a $273 million bond issuance in 2017 that was used to finance renovations of its New York City headquarters.  Since 2020, even more foundations have issued social bonds, which include some of the most notable ones, such as the MacArthur Foundation, the W. K. Kellogg Foundation, the Andrew W. Mellon Foundation and others.

The set of three crises--- COVID-19 pandemic, economic downturn, and racial injustice--- was a catalyst for many foundations to utilize social bonds in order to quickly provide a response. However, some foundations specifically issued longer-term bonds, such as the Ford Foundation, and acknowledged this was a “once in a lifetime” event. Others, such as the MacArthur Foundation, issued only ten-year bonds, which suggests they may use bonds as a funding source again in the near future.

Also, the authors note the effect of stock market performance on endowment annual giving. They note that during troubling times, endowments decrease in value as the stock market plummets, which in turn decreases payouts at a time of crisis when they are needed most. This was apparent in early 2020 even though the stock market rebounded relatively soon. Foundation executives anticipated a tightening of their grant budgets in early 2020, so they searched for other ways to increase giving while leaving their endowments untouched.

Finally, the authors address the importance of a strong credit rating. They note that a precondition to fully utilizing the capital market is a strong credit rating which allows an issuer to attract low-cost debt. Notably, the Ford Foundation, Rockefeller Foundation, and W. K. Kellogg Foundation all received AAA ratings from S&P and Moody’s. Because their balance sheets were so strong and given the low levels of leverage and social bond designation, their bond issuances were oversubscribed by both impact and traditional investors. As of now, foundations ranging from 1.6 billion to 17.8 billion have been have issued investment-grade bonds.

Also, interestingly social bond issuance was combined with a decision to hire minority-led underwriting firms in addition to more traditional actors. Some foundations, such as the MacArthur Foundation, engaged minority-led firms like Loop Capital and Seibert Williams Shank. This was an outstanding example of extending the impact of social bond issuance from serving as a mere tool to the social processes as well.

The authors urge foundations to do more with more. By this, they mean to implement new strategies that increase the use of balance sheets for mission as well as to modify existing tools to promote risk-taking, innovation, and field building. They provide examples of many foundations that are already engaging in these steps as a way of encouraging other foundations to expand their breath and for foundations as a whole to more greatly utilize these tools on a regular basis and on a greater scale in the future.

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax

Tulane Law School

Newman’s Own Billboard

This morning, driving back from taking my daughter to school for a cross-country meet, I passed this billboard. And, while it doesn't have any particular legal significance, it struck me as an apropos way to follow up Wednesday's post and my general interest in the interfamilial drama arising out of the Newman's Own Foundation.

The billboard's a little hard to read--the sun was rising in a terrible place for the picture, but it says: "We're not in the food business to get rich. We're in it to enrich kids' lives. Newman's Own: Radically good. 100% Profits to Help Kids."

Have a happy weekend!

Samuel D. Brunson

Nonprofit News and New Streams of Revenue

Something I've been following for a while is the shift of news reporting from for- to nonprofit. I've even blogged here about it, most recently last October when WBEZ acquired the Chicago Sun-Times.

The deal closed in January, making the Sun-Times the newest entrant in Chicago's nonprofit news constellation. And just last week, the Sun-Times made another announcement: given the critical nature of local journalism, it was dropping its paywall and making all of its online content entirely free.

Since the advent of the internet, newspapers have gone between paywalled and non-paywalled content. Could advertising alone fund journalism?

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