Wednesday, December 12, 2018

David Pozen, "The Tax-Code Shift That's Changing Liberal Activism"


David Pozen has an interesting piece in The Atlantic regarding social justice organizations' increasing embrace of 501(c)(4) status over (c)(3) status.  Here is an excerpt:

Many groups gravitated to section 501(c)(3) because public charities enjoy unique tax benefits—most notably, they can receive deductible donations—and tend to be favored by wealthy foundation funders. But these perks come at a price. Public charities are required by law to keep their legislative lobbying to a minimum and to forgo politicking altogether. Taking a stand for or against a candidate for elective office is strictly prohibited. The 501(c)(3) form fit snugly into the postwar theory of legal liberalism, in which the federal courts were seen as the key agents of social reform and professionally managed nonprofits as their partners in that effort.  

This model had been fraying long before the Trump presidency. Labor unions, under sustained attack from the right, suffered a steep decline in membership and clout over the latter half of the 20th century. Public charities continued to proliferate, but as progress on racial integration stalled out and levels of economic inequality and partisan polarization crept up and up, many on the left began to question whether a court-centric approach was capable of producing lasting social change.

The 2016 election pushed these concerns past the breaking point. Thousands upon thousands of well-established public charities, after all, didn’t translate into robust voter turnout. Nor did they halt the ascent of a demagogue. And with Brett Kavanaugh’s recent confirmation, whatever remained of the left’s faith in the Supreme Court as an engine of justice has crumbled. While lawsuits may be crucial for challenging certain flagrant abuses of power, many resistance groups feel compelled to participate directly in the rough-and-tumble of electoral politics.

And so they have turned to … section 501(c)(4) of the Internal Revenue Code. Many of the key groups founded to resist Trump, including Indivisible Project, Onward Together, Our Revolution, Sixteen Thirty Fund, Stand Up America, and Women’s March, are abandoning the 501(c)(3) public-charity route and incorporating as 501(c)(4) “social welfare” organizations instead. Social-welfare organizations are also exempt from federal income tax, but they have fewer fiscal privileges. Donations to them are not deductible. Yet unlike public charities, they may lobby as much as they wish, and they may engage in partisan political work—from asking candidates to sign pledges to registering like-minded voters to endorsing specific pieces of legislation—as long as that work is not their “primary” purpose or activity (a requirement so hard to define and enforce that, in the words of one leading nonprofit tax scholar [John Colombo], it “virtually invites wholesale noncompliance”). Since this past summer, social-welfare organizations have also been allowed to withhold the names of their donors from the Internal Revenue Service.

. . . 

Federal tax law allows social-welfare organizations to be affiliated with public charities as well as with pacs. So while anti-Trump start-ups are setting up shop as 501(c)(4)s, long-standing civil-liberties and civil-rights groups are reallocating resources to (c)(4) arms. In fiscal year 2017, for example, total assets of the American Civil Liberties Union’s (c)(3) grew 17 percent. Total assets of its (c)(4), on the other hand, grew 89 percent. This past June, the Southern Poverty Law Center spun off a (c)(4), the SPLC Action Fund. The NAACP went further and transformed itself entirely last year from a 501(c)(3) into a 501(c)(4). This restructuring was necessary, the incoming president explained, for the NAACP to “have the collective voice and impact that a civil-rights organization in 2017 and forward should have.”

Hat Tip:  Nonprofit Law Blog


December 12, 2018 in Current Affairs | Permalink | Comments (0)

Tuesday, December 11, 2018

Treasury Issues Interim Guidance (and Request for Comments) on Calculation of UBTI from Qualified Transportation Fringe Benefits.

In Notice 2018-99, issued yesterday, Treasury issued interim guidance on how to calculate the increase in unrelated business taxable income resulting from an exempt organization's provision of qualified transportation fringe benefits under newly enacted 512(a)(7).  The notice states that Treasury intends to issue proposed regulations on the topic, but "until such guidance is issued . . . tax-exempt organizations that own or lease parking facilities where their employees park may use any reasonable method . . . to determine the amount of the increase in UBTI under 512(a)(7)."   Rather significantly, the Notice allows an organization to use a net loss from an actual unrelated trade or business to offset the increase in UBTI under 512(a)(7) if the organization has only one real unrelated trade or business (i.e., one unrelated business without regard to 512(a)(7)).  There is a lot of aggravating detail in the Notice relating to one such "reasonable method," but fortunately the Notice includes helpful examples.  

For interesting commentary on 512(a)(7) and the interim guidance, mostly unfavorable, see this article in Accounting Today.  Public Comments are solicited with regard to the Notice and should be submitted by February 22, 2019.  


December 11, 2018 | Permalink | Comments (0)

Treasury Issues One Time Waiver of Penalty for Failure to Pay Estimated Tax Related to UBIT on Nondeductible Qualified Transportation Fringe Benefits


In Notice 2018-100, issued yesterday, the Treasury Department, "in the interest of sound tax administration" provides a waiver of penalties for exempt organizations that would not have been required to file a UBIT return (990-T) for 2017.  Recall that new 512(a)(7) makes the amount of qualified transportation fringe benefits taxable as unrelated business taxable income.  This new tax means that many organizations that would not have had to make estimated tax payments in 2018 under IRC 6655 in the absence of 512()(7) could be subject to an additional tax for failure to make estimated taxes in 2018 (because they suddenly had "phantom" UBTI by providing QTFBs).  The Notice waives the additional tax for those tax exempt organizations so that organizations can have "additional time to develop the knowledge and processes to comply with the estimated income tax requirements."  



December 11, 2018 | Permalink | Comments (0)

Executive Pay at Private and Public Colleges


The Chronicle of Higher Education has released its survey of Executive Compensation at Private and Public Colleges.  



December 11, 2018 | Permalink | Comments (0)

Monday, December 10, 2018

Massachusetts Town Considers Seeking Voluntary Patron Payments in Lieu of PILOTS


From The Berkshire Eagle, a newspaper serving Western Massachusetts:  

Are the town's numerous nonprofit businesses, ranging in size from Tanglewood to Chesterwood, willing to ask patrons for a voluntary surcharge on their ticket prices?  That's one of the questions that the town's PILOT Program Committee will present when it sends out a survey to the organizations, committee Chairman Tom Stokes told the Select Board on Monday.  The committee's mission is to find out whether the nonprofit groups, exempt from property taxes, can contribute toward the town's expenses, he said. The group was set up by the Select Board this year to consider a policy for voluntary payments in lieu of taxes.  Recommendations for setting up the PILOT program will be submitted to the Select Board for consideration, Stokes said. If approved, the proposal would appear as an article on the annual town meeting warrant for next May, seeking support from registered voters through a nonbinding resolution, preceded by another public forum.  The questionnaire includes the following points:

- Would nonprofit groups that charge admission be open to a voluntary surcharge on tickets purchased by the public, instead of a PILOT payment to the town?

- What town services do the nonprofit groups use, and how much are they aware of the benefits of those services?

- What type of in-kind services might be offered to the town, which could cut in half the amount of a voluntary contribution based on 25 percent of the taxes that would be due if the property were a commercial venture? Examples of in-kind services include the value of discounted or free tickets for residents or public forums on mental health offered by Austen Riggs, Stokes said.

- Other than in-kind services, what are some ways a nonprofit agency could contribute to the town?

- What's your feeling about a voluntary PILOT program — is it a worthy effort or are you against it?

I imagine nonprofits that make payments in lieu of taxes (PILOTS) already implicitly pass the cost along to patrons or benefactors, but this is the first I have heard of an explicit sort of voluntary sales tax on nonprofit patrons.  Presumably, the voluntary "surcharge" would be in addition to whatever sales or use taxes the nonprofit collects from patrons on the sale of even its charitable goods and services.   Massachusetts, Pennsylvania, and, surprisingly, New Hampshire, are the states containing the most cities and towns collecting PILOTS, according to this article from the Lincoln Land Institute.



December 10, 2018 | Permalink | Comments (0)

Indian Tribes Sue Wisconsin Claiming Exemption from Property Tax

From Wisconsin Public Radio:

Four northern Wisconsin tribes have filed a federal lawsuit against Gov. Scott Walker, the state and town officials over the taxation of reservation lands. The tribes argue the state and towns don’t have the right to tax reservation lands.  The complaint was filed Friday, Nov. 30, in the U.S. District Court for the Western District Court of Wisconsin by the Red Cliff, Bad River, Lac du Flambeau and Lac Courte Oreilles tribes. They contend the Wisconsin Department of Revenue, 11 towns and their assessors have been taxing fee simple lands on reservations in violation of the Treaty of 1854 between the United States government and Lake Superior Chippewa. Fee simple lands mean that the owner of the property can do whatever they want with the land, without being subject to limitations or conditions.  "The 1854 Treaty does not authorize the imposition of state taxes of any kind on the property of the tribes located within the reservations created therein," the complaint reads. "None of the historical documents relating to the negotiation of the 1854 Treaty indicate that the Indians were told that the lands reserved for them by the 1854 Treaty would be subject to state property taxes."

Wisconsin tribes


The Plaintiffs are represented by the Colette Routel of the Indian Law Litigation Clinic at Mitchell Hamline School of Law in St. Paul Minnesota.  The full complaint, particularly starting at paragraph 37, makes for very interesting and instructive reading regarding tax exemption of tribal lands.  


December 10, 2018 | Permalink | Comments (0)

Friday, December 7, 2018

Aprill Adds More Light to IRC 4960


Following up on my post regarding [Questionable] Strategies to Avoid IRC 4960.  Professor Ellen Aprill's excellent article earlier this year provides needed clarity:

New section 4960 imposes a 21% excise tax on certain organizations not subject to income tax, including organizations exempt under section 501(c)(3) and those for which income is excluded from taxation under section 115(1), if any of their five highest paid employees have annual compensation above $1 million. (It also imposes the tax on “excess parachute payments,” as defined in the statute.) In December, 2017, I wrote a blog post on “Medium: Whatever Source Derived,” arguing that, whatever the Congressional intent, the language of the statute did not reach states, their political subdivisions or integral parts of either.

In particular, the post contrasted the basis of income tax exemption for states and their political subdivision to entities that fall under section 115(1). Section 115(1) excludes from gross income “income derived from...the exercise of essential governmental function and accruing to a state or any political subdivision thereof.” This provision, however, is not the basis for exempting from income tax the income of states and their political subdivisions. The IRS has long exempted states and their political subdivisions from income tax under a doctrine of implied statutory immunity, not under section 115(1). For many decades, the IRS has interpreted section 115(1) not refer to states and their political subdivisions, but only to organizations that are organized separately from a state or political subdivision and meet certain other requirements. The blog post is reprinted here as Part I of this piece.

Professor Douglas Kahn of University of Michigan took issue with my position on the basis that the new section does apply to section 501(c)(3) organizations and that state universities are educational institutions. I responded to him in an article originally published in Tax Notes that constitutes Part II of this piece. It corrects an error in my earlier piece by acknowledging that some state universities have indeed received recognition under section 501(c)(3) from the IRS. Not all, however, have done so. Thus, I assert again my position that new section 4960 does not by its terms apply to entities free of income tax by virtue of their status as a state, political subdivision, or an integral part of either. Moreover, as the piece explains, those state universities that have received a section 501(c)(3) determination can, if they choose, relinquish their section 501(c)(3) status. The piece discusses the various options available to tax authorities and public universities confronting this new excise tax.

Since publication of these pieces, Treasury and the Joint Committee of Taxation have acknowledged that a technical correction is need in order for section 4960 to apply to all governmental entities, as Congress intended. Technical corrections, however, are not anticipated any time soon. Even though not all public universities and other governmental entities are subject to the strictures of section 4960, guidance could specify that its excise tax applies to those that have sought section 501(c)(3) status. On the other hand, until there is a technical correction, out of considerations of federal-state comity and to avoid differential treatment of various state universities and other governmental entities, Treasury and the IRS could decide that such governmental entities with 501(c)(3) status are to be treated as exempt from this excise tax, on the model of the special treatment they currently receive in being exempt from the Form 990 filing requirement and from the intermediate sanctions excise tax regime. I do not envy Treasury and the IRS in having to make this difficult choice.

I think state universities still have a problem because most of their football coaches' compensation is typically paid not by the University itself, but through related foundations that are exempt under 501(c)(3).   See  


December 7, 2018 in Publications – Articles | Permalink | Comments (0)

Wednesday, December 5, 2018

"A Thousand Points of Light:" Volunteerism in 2018 and Beyond


In honor of President George H.W. Bush's passing, I thought I would post his speech in which he called for greater volunteerism, painting a picture of a thousand points of light.  We live, of course, in cynical and mean times (and yes, the Willie Horton advertisement didn't help).  But there is still reason to believe in the "kindler and gentler" mantra the President talked about after the campaign was over.  Here is what the UN's 2018 Report, "The Thread that Binds:  Volunteerism and Community Resilience" says about the spirit of volunteerism and its impact on communities:

Resilient communities allow for dynamic interactions between people facing threats and their environments. Understanding how such interactions occur is essential for supporting people-led approaches to peace and development. Volunteerism enables individuals to work together, shaping collective opportunities for dealing with risk and connecting individuals and communities with wider systems of support. Volunteerism as a universal social behaviour is therefore a critical resource for community resilience.  At the same time, communities around the world are changing, often in response to an increased frequency and intensity of shocks and stresses. Little is known about how this influences volunteerism and its manifestations across different contexts. In light of these changing patterns of risk, it is important to understand if and how individuals and groups are continuing to organize and connect and whether collective responses within communities are ultimately reinforcing or challenging the wider social, political and economic inequalities that exacerbate the vulnerability of marginalized groups.  This 2018 State of the World’s Volunteerism Report (SWVR), The thread that binds, looks at how volunteerism and community resilience interact across diverse contexts. It explores the strengths and limitations of community responses to a range of shocks and stresses, and it examines how external actors can build on  communities’ self-organization in a complementary way, nurturing the most beneficial characteristics of volunteerism while mitigating against potential harms to the most vulnerable. In doing so, the report provides an important contribution to the evidence base on inclusive, citizen-led approaches to resilience-building.

Voluntary, nongovernmental organizations are still indispensable to societies of all sorts.  Some protest, some build, some seek to tear down the old order.  Whatever the case, tax and non-tax laws should be continually scrutinized to ensure those laws do not dim the thousand points of light.




December 5, 2018 | Permalink | Comments (0)

Tuesday, December 4, 2018

UK's Cabinet Office Urges Charities to Speak Out about Public Grants

Apparently in response to increasing use of "gagging clauses" in grants that forbid public commentary on public grants, the United Kingdom's Cabinet Office recently urged charities to report improper behavior and wasteful government grants "without fear of consequences." From the full story at Third Sector, "The new rules have been prompted by concerns in the media that charities working on the Department for Work and Pensions’ universal credit programme were unable to speak about their concerns with how the programme was being delivered because of clauses in government contracts."

It will be interesting to see if this move actually emboldens charity whistleblowing, or if more concrete protections are needed.


December 4, 2018 in In the News, International | Permalink | Comments (0)

Monday, December 3, 2018


In the first ever #AccountabilityMonday, which took place before Giving Tuesday, a group of scholars and journalists initiated a conversation (covered by Nonprofit Times) about nonprofit accountability and transparency. Using the hashtag #AccountabilityMonday, people posed questions and offered ideas on nonprofit topics ranging from DAFs to reading a Form 990. One of the most interesting exchanges was prompted by Phillip Hackney, who asked "What would you add to (or remove from) the Form 990 that charities file with the IRS to make it a more useful document for holding charities accountable?"

<blockquote class="twitter-tweet" data-lang="en"><p lang="en" dir="ltr">What would you add to (or remove from) the Form 990 that charities file with the IRS to make it a more useful document for holding charities accountable? <a href=";ref_src=twsrc%5Etfw">#AccountabilityMonday</a> <a href="">@CountingCharity</a> <a href="">@BenSoskis</a> <a href="">@EllenAprill</a> <a href="">@BDGesq</a> <a href="">@joshnathankazis</a> <a href="">@JosephWMead</a></p>&mdash; Philip Hackney (@EOTaxProf) <a href="">November 27, 2018</a></blockquote>
<script async src="" charset="utf-8"></script>

Lots of great ideas in the replies. What would you like to see changed?


December 3, 2018 in Current Affairs, Federal – Executive | Permalink | Comments (0)

Freedom From Religion Foundation Challenges Church Exemption from 990 Requirement

From the "good luck with that" department:  

The Freedom From Religion Foundation is taking the Internal Revenue Service to court over yet another religion-related tax privilege.

The national state/church watchdog has filed a federal lawsuit this morning in D.C. district court to challenge the preferential exemption of churches and related organizations from reporting annual information returns required of all other tax-exempt groups. The defendant is David J. Kautter, acting IRS commissioner.

The plaintiff is Nonbelief Relief, a humanitarian group created by FFRF’s executive board in 2015 as a separate 501(c)(3) entity for atheists, agnostics and freethinkers to remediate conditions of human suffering and injustice on a global scale “whether the result of natural disasters, human actions or adherence to religious dogma.” That relief is not limited to but includes assistance to individuals targeted for nonbelief, secular activism or blasphemy.

The IRS refused a request by Nonbelief Relief to be excused from registering the annual Form 990, citing the discriminatory treatment of churches vis-à-vis other tax-exempt nonprofits. Nonbelief Relief’s tax exemption was revoked on Aug. 20 for failure to file the Form 990 return for three consecutive years. Nonbelief Relief “has and will suffer harm, detriment and disadvantage as a result of the revocation of its tax-exempt status, including tax liabilities and loss of charitable donations which are no longer tax-deductible by donors.”

Nonbelief Relief is asking the court to reinstate its tax-exempt status, and to enjoin the IRS from continuing to preferentially exempt churches and other affiliated religious organizations from annual information filings required of other 501(c)(3) nonprofits.

From 2015 through August 2018, Nonbelief Relief has given out nearly $600,000 in charitable grants — work which will now be injured and imperiled by the government’s actions.

The significant tax benefits to charitable organizations under §501(c)(3) of the IRS code include exemption from federal income taxes and deductibility of donations for income-tax purposes, incentivizing contributions. In return, tax-exempt groups are expected to annually show that they deserve to retain these benefits by filing the Form 990, which explicitly details income, expenditures, balance sheet, staff compensation, fundraising, lobbying expenses etc., thus ensuring there is no diversion of funds from the organization’s exempt purpose. The Form 990 is made public by the IRS. Yet churches are automatically exempted from filing these returns.

Such preferential treatment results in obligations and penalties imposed on secular nonprofits that are not imposed on churches, in violation of the Establishment Clause of the First Amendment and equal protection rights, FFRF charges.

Not only do churches receive preferential treatment over filing requirements, but the IRS preferentially does not enforce restrictions on political campaign activity by churches, the complaint notes. Many churches, FFRF alleges, “are quite deliberate and open in their defiance of the politicking prohibition,” such as coordinating “Pulpit Sundays.” The complaint cites a recent violation involving President Trump’s evangelical adviser Paula White, who engaged in explicit partisan politicking from the pulpit on Sept. 18.

FFRF is also in federal court challenging the discriminatory clergy housing allowance, whereby “ministers of the gospel” can be uniquely provided a housing allowance as part of their salary, which is subtracted from taxable income.

“Tax-exempt groups, whether religious or nonreligious, must be treated equally by our government,” says Annie Laurie Gaylor, Nonbelief Relief administrator and FFRF co-president. “The IRS has revoked Nonbelief Relief’s tax exemption for failure to file information returns, even though virtually all churches in America fail to file such returns while not endangering their tax exemption. That's invidious discrimination and favoritism toward religion.”

The Freedom From Religion Foundation is a 501(c)(3) educational nonprofit (which files its annual information returns), created as a national group in 1978. FFRF has 32,000 nonreligious members and is dedicated to upholding the constitutional principle of separation between religion and government.

Representing FFRF in the suit is outside litigator Richard L. Bolton, with FFRF Attorneys Patrick Elliott and Sam Grover serving as co-counsel. The lawsuit was filed in the U.S. District Court for the District of Columbia.


December 3, 2018 | Permalink | Comments (1)

In Defense of Southern Charity

From today's NY Times:

NASHVILLE — There’s a meme about charitable giving that makes the rounds in Southern social media circles from time to time. It’s a map of United States counties color-coded by charitable giving, and it purports to demonstrate that people living in red states give a greater percentage of their income to charity than people living in blue states. The caption beneath the map reads, “Those heartless conservatives — am I right?”

The map was created in 2013 from a report in The Chronicle of Philanthropy. “Donors in Southern states,” the report notes, “give roughly 5.2 percent of their discretionary income to charity — both to religious and to secular groups — compared with donors in the Northeast, who give 4.0 percent.”

These are figures that Southerners, accustomed to being thought selfish and cruel by the rest of the country, will happily create a meme to promote.

There are many problems with a map like this, but the biggest is that it’s based on the filings of taxpayers who itemize deductions. The vast majority of American taxpayers — some 70 percent — don’t itemize anyway, so there’s really no way to know how many people actually make charitable donations and how much they give when they do. Even so, it has become a cultural commonplace: People in red states are more generous than everyone else.

Read more here.  The Op/ed relies in part on this new study conducted with the the help of Tax Profs Mike Livingston and Fred Brown.  The study concludes, contrary to other studies, that citizens in Blue States are as generous in their giving as citizens in Red States.  



December 3, 2018 in Studies and Reports | Permalink | Comments (0)

More Concerns regarding Top Heavy Charitable Contribution Deductions

The Institute for Policy Studies has issued a report subtitled, "Top-Heavy Philanthropy and Its Perils to the Independent Sector and Democracy."  Here is a the executive summary:

What are the risks to the autonomy of the independent nonprofit sector—not to mention our democracy—when a growing amount of philanthropic power is held in fewer hands?

A new Institute for Policy Studies report, Gilded Giving 2018: Top-Heavy Philanthropy and Its Risks to the Independent Sector, takes a close look at the impact of increasing economic inequality on the philanthropic sector. Co-authored by Chuck Collins, Josh Hoxie, and Helen Flannery of the Institute for Policy Studies, the report finds that our charitable sector is currently experiencing a transition from broad-based support across a wide range of donors to top-heavy philanthropy increasingly dominated by a small number of very wealthy individuals and foundations.

As we reported in 2016, growing inequity in charitable giving continues to hold risks not only for nonprofits themselves, but also for the nation. This is truer now than ever, as ever-greater proportions of charitable dollars technically qualifying as tax-deductible donations are diverted into wealth-warehousing vehicles such as private foundations and donor-advised funds, and away from direct nonprofits serving immediate needs.

This updated edition of Gilded Giving focuses on the impact of increasing financial inequality on the philanthropic sector, highlights trends that have either arisen or increased in intensity since the initial publication of our report, puts forward several possible implications of these changes, and suggests some solutions.

Key Findings

  • Charitable contributions from donors at the top of the income and wealth ladder have increased significantly over the past decade. In the early 2000s, households earning $200,000 or more made up only 30 percent of all charitable deductions. But by 2017, this group accounted for 52 percent. And the percent of charitable deductions from households making over one million dollars grew from 12 percent in 1995 to 30 percent in 2015.
  • There has been a marked increase in mega-gifting. In 2012, the threshold for mega-gifts was $50 million or more; gifts of that size amounted to $1.2 billion and accounted for just one-half of one percent of all individual giving in the United States that year. In 2017, just five years later, the threshold for mega-gifts jumped to $300 million or more; gifts of that size totaled $4.1 billion and accounted for about one and a half percent of all individual giving that year.
  • In the past two decades, the number of households that give to charity has declined significantly. From 2000 to 2014, the proportion of households giving to charity dropped from 66 percent to 55 percent.
  • The number of donors giving at typical donation levels has been steadily declining. Low-dollar and mid-level donors have declined by about two percent each year for more than fifteen years. These donors traditionally have made up the vast majority of donor files and solicitation lists for most national nonprofits since their inception.
  • The number and size of private grant-making foundations and donor-advised funds have shown dramatic growth. The funds held in private foundations grew 62 percent between 2005 and 2015; the number of private foundations chartered in the United States grew 21 percent over that same period.
  • Donor-Advised Funds (DAFs) are on the rise. Donations to donor-advised funds increased from just under $14 billion in 2012 to $23 billion in 2016—growth of 66 percent over five years. DAFs, a giving vehicle used primarily by the wealthy, are currently the largest and fastest-growing recipients of charitable giving in the United States.


Our charitable sector is currently experiencing a transition from broad-based support across a wide range of donors to top-heavy philanthropy increasingly dominated by a small number of very wealthy individuals and foundations. This has significant implications for the practice of fundraising, the role of the independent nonprofit sector, and the health of our larger democratic civil society.

  • Risks to charitable independent sector organizations include increased volatility and unpredictability in funding, making it more difficult to budget and forecast income into the future; an increased need to shift toward major donor cultivation; and an increased bias toward funding heavily major-donor-directed boutique organizations and projects. The increasing power of a small number of donors also greatly increases the potential for mission distortion.
  • Risks to the public include an increasingly unaccountable and undemocratic philanthropic sector; the rise of tax avoidance philanthropy; the warehousing of wealth in the face of urgent needs; self-dealing philanthropy; and the increasing use of philanthropy as an extension of power and privilege protection.


This report calls for an urgent reform of the philanthropic sector to encourage broader giving, protect the health of the independent sector, discourage the warehousing of wealth in private foundations and donor-advised funds, and increase accountability to protect the public interest and the integrity of our tax system.

Changes in the rules governing philanthropy should include:

  • Increasing the minimum annual distribution payout for foundations.
  • Excluding foundation overhead from the payout percentage.
  • Linking the excise tax on foundations to payout distribution amounts.
  • Reforming the rules governing donor-advised funds to require distribution of DAF donations within three years.
  • Banning gifts from private foundations to DAFs and vice-versa.
  • Setting a lifetime cap on tax-deductible charitable giving.
  • Establishing a universal charitable deduction to encourage giving by low and middle-income givers.

To fully address the risks of top-heavy philanthropy, however, policymakers will need to not only reform the rules of charitable giving, but also establish policies to reduce, over time, concentrations of wealth and power in our society at large. This would include restoring steeply progressive income and wealth taxation, and closing loopholes.


December 3, 2018 in Studies and Reports | Permalink | Comments (0)

Friday, November 30, 2018

Pomeroy, On Job's Defense (and the Duty of Charity, not Business, by Houses of Worship)

Chad J. Pomeroy has just published "Let My Arm Be Broken Off at the Elbow" (Job 31:22) in the Oklahoma Law Review.  Here is the introduction (sans footnotes):


The largest producer of nuts in the United States. A multi-billion dollar insurance and financial services company. The fourteenth largest radio chain in the country. “A catering company, a major television channel, an internet marketing company.” And real estate! Enormous real estate holdings in Hawaii, Montana, Nebraska, Oklahoma, Texas, Washington, and Wyoming. Probably more land in both Utah and Florida than any other private actor. Internationally, there are major investments in Argentina, Australia, Brazil, Canada, and Mexico, and about as much land in Britain as the Crown Estate.  Take these assets, add billions in stocks and bonds and other securities, and include another $6-$8 billion per year of donated funds. To most of us, such a collection of assets and income probably seems appropriate for a large, public corporation.

However, as the preceding footnotes make clear, the entity described is not a titan of industry but is instead a church. And that is the starting point for this Article: though the American legal system is deferential toward religion and churches, it is undeniable that the Church of Latter-day Saints--and other like organizations--are not just churches. They are, instead, important participants in the market economy, some of them global business enterprises of major proportions. This twinning of profit and spirit is seamless for many religions, with numerous modern churches preaching a “prosperity gospel” that promises spiritual and temporal blessings in return for donations. Still other churches--such as the Church of Scientology--directly charge for religious services that are “necessary” for spiritual improvement and advancement in the church hierarchy. And still others accumulate their own reserves of property and wealth. This asset assemblage leads, ineluctably, to enormous income and wealth concentrated in the hands of religious organizations across America.

While there is nothing inherently wrong with religious organizations amassing wealth, it is troubling that they do so while enjoying informational and tax advantages not afforded to other entities. However, these benefits are not “tax advantages”; these are “tax advantages that are expressly made unavailable to other, competing, profit-seeking entities that suffer greatly due to their comparative disadvantage.” Indeed, this Article’s foundational claim is these advantages are so significant that they have come to shape the aims and actions of many religions, effectively bending the nature of many organizations away from traditionally religious and charitable work and toward profit-seeking. This state is both unintended and inequitable. As such, these advantages should be eliminated.

Before describing any recommended changes to these tax benefits, it is critical to first understand how the American tax system treats churches. As explained in Part I, our legal and tax system is laced with a series of benefits and exemptions that favor churches over virtually every other kind of entity. These benefits permit churches to bring in funds under the auspices of a non-profit entity and then direct those funds to for-profit endeavors. Indeed, not only are churches permitted to do this, they are incentivized to do so. Because these organizations are uniquely permitted to build up networks of interlocking entities of non-profit and for-profit subsidiaries and freely funnel funds from one to the other, churches are effectively permitted to own profit-seeking entities that have an intrinsically lower cost of capital than their competitors. This system ensures that church-affiliated companies will always enjoy a superior market position. In the face of such economic opportunity, how could any entity not do what these churches have done? It is difficult to blame churches for taking advantage of a U.S. system of religious tax exemption that effectively guarantees them preferential returns on church-sourced funds when those funds are directed to profit-seeking instead of charity.

Blameworthy or not, this tax structure is problematic. Such a market-oriented incentive discourages churches from expending funds in pursuit of charitable goals. The American economy is a capitalistic one, rewarding capital, among other things. Permitting churches, with their lower cost of capital, to access markets that reward capital means that every dollar devoted to the needy is not being devoted to its highest and best use--from an internal rate-of-return perspective. That, of course, will lead to “under-spending” on charity, which is deleterious to the public policy underlying the relevant sections of the Internal Revenue Code.

The United States was clear in its reasoning when it made the decision that churches should enjoy special tax status: the government explicitly decided to forego the substantial tax revenues associated with funds raised and expended by churches because it believed that these entities--of all entities--would use those funds to do the “good works” that would otherwise be the responsibility of government. Taxing a church on funds that it could use to set up an orphanage makes no sense, for example, if such taxation would force the church to abandon its plans for the orphanage and leave the government to ultimately clean up the remains itself. Indeed, the U.S. government--through Congress, the judiciary, and the IRS--has been extraordinarily generous in its treatment of churches in connection with tax law, both in terms of how it has interpreted and applied tax laws and rules to churches and in terms of how much tax money the government has foregone. But that attempt to generate private party charity is defeated, at great expense to the American taxpayer, when churches invest instead of help.

Even more troubling than the undercutting of U.S. tax policy is when churches use their tax exempt funds to engage in massive business operations instead of directing funds toward charity. This does actual damage to the broader market economy. As discussed in Part II below, when non-taxed organizations compete against ordinary business entities in the market, they operate under different economic constraints and disrupt the normal functioning of capital supply and demand, fundamentally distorting the market place. By tapping into untaxed capital, these non-taxed businesses put downward pressure on the rates of return that would otherwise be available in an equally constructed market place, which burdens other economic actors. Accordingly, it is not simply that charitable entities undermine the intent of the IRC when they engage in profit-seeking activities--it is that by doing so, they distort the economy and introduce inherent market inefficiencies.

Part III makes recommendations intended to resolve this problem as it manifests itself in the context of churches. These suggestions largely revolve around increased transparency and the potential imposition of a tax on funds that are not spent on charitable endeavors. Laying bare the finances of these organizations will enable all stakeholders in charitable giving-- including, importantly, U.S. taxpayers--to see how their investments are being spent. Furthermore, taxing non-charitable funds would ensure that our tax system functions the way it is intended--without favor or distortion.


November 30, 2018 in Publications – Articles | Permalink | Comments (0)

NY vs. The Donald J. Trump Foundation: Complaint and Order on Motion to Dismiss

Trump petition

There is just not enough news about the President on CNN or Fox, right.  So here is the complaint in NY's litigation against the Trump Foundation:  And here is the recent order denying Defendants' Motion to Dismiss.   Thank me later.  



November 30, 2018 | Permalink | Comments (0)

NPR: What Do African Aid Recipients Think of Charity Ads?



From NPR yesterday:

It's a question that charities often debate: How should their fund-raising ads portray the people they're trying to help?  If the ads display graphic human suffering to elicit donations, they run the risk of exploiting the subjects or making them look helpless.  If the ads are more upbeat — showing aid recipients who are smiling, for example — they may ignore the subject's strife and put the power to transform the subject's life in the hands of rich, Western donors.  While this dilemma is often discussed among charity professionals, the debate hasn't always included the people in the images — the aid recipients themselves.  So a group of researchers wanted to turn the tables. What do those who are supported by aid think? That's the topic of a new survey, "Which Image Do You Prefer? A Study Of Visual Communications In Six African Countries."  The findings show a mixed bag of reactions from the survey respondents to 10 ads — but the most common emotion was sadness.  "Right now, I feel like we are inferiors as a continent. It's as if we are always begging," said one 22-year-old Ethiopian man. "I understand that there are some of our people who are in need, who cannot even have a meal a day. But are we the only ones to whom that happens? The Western countries have problems, too."  Researchers from the University of East Anglia and Radi-Aid, a charity watchdog project of the Norwegian Students' and Academics' International Assistance Fund (SAIH), surveyed 74 people who live in communities supported by aid in Ethiopia, Ghana, Malawi, South Africa, Uganda and Zambia.



November 30, 2018 | Permalink | Comments (0)

Delany and Steckel on the Private Benefit Doctrine and Pay for Success Programs

Sean Delany and Jeremy Steckel have published "Balancing Public and Private Interests In Pay for Success Programs:  Should we Care About the Private Benefit Doctrine?" in the New York University Journal of Law & Business.  Here is the abstract:

In the rapidly expanding world of social impact finance, “pay for success” or “PFS” programs are increasingly popular vehicles for attracting private resources to address historically intractable social problems. Also known as “social impact bonds,” these programs are designed to encourage private investors to advance capital to fund social services and receive a return from the government only if predetermined “success metrics” for the target populations are met. As well as private investors and government agencies, participants include social service providers, technical advisors, and other entities that have been recognized as tax-exempt under section 501(c)(3) of the Internal Revenue Code.  This Article is an effort to understand how the private benefit doctrine might affect the structures of PFS programs in the United States, and might limit or encourage their expansion in the future. The doctrine prohibits charitable entities from being operated more than incidentally for the benefit of private interests. The boundaries that tax-exempt organizations must observe when engaging with profit-making entities—whether through transactional relationships or joint ventures—to achieve their charitable missions are far from clear, because the private benefit doctrine has evolved in piecemeal fashion without a coherent conceptual framework. As PFS programs evolve and relationships between participating exempt organizations and profit-making investors are designed, how will the exempt organizations ensure they are not violating the private benefit doctrine? Despite the inconsistent jurisprudence surrounding the private benefit doctrine, applying it to PFS programs demonstrates that it protects against valid concerns not addressed elsewhere in the Code, and offers a cost-benefit framework which we use to draw conclusions about the desirability of funding social services through PFS programs.



November 30, 2018 in Publications – Articles | Permalink | Comments (0)

Thursday, November 29, 2018

Ebenezer Scrooge on Tax Exempt Status for Pups.


I am feeling a little like Ebenezer Scrooge today so I thought I would raise an objection to tax exempt status for a group of very friendly people who, nevertheless, seem to have no real charitable raison d’etre, and yet have been granted 501(c)(3) status.  I’m talking about a delightful little organization called People for Urban Progress.  I will say right up front that nobody's getting rich here and there is no secret political slush fund.  Its just that some people are having fun doing something worthwhile, just like the folks at Louis Vuitton, Gucci, or Michael Kors, and not paying taxes.  This is a complete outrage!  According to their Mission description in Part III, question 4a, of the 2016 Form 990:

“People for Urban Progress [PUP] is an Indianapolis-based 501c3 non-profit organization that advances connectivity, environmental awareness, and good design, rescues discarded materials, redesigning them for public benefit.  These locally-designed goods fund projects and big ideas that improve indianopolis’ urban spaces.  Simply put, we make goods for Indy’s Good.  We turn useless into useful.  We’re the not-for-profit that turned the RCA Dome roof into wallets, messenger bags and shade structures.  We turned bush stadium seats into bus stops.  We fund projects and ideas that enhance the city’s quality of life, connectedness and design culture. 

In other words, PUP gathers up old leather from public and private companies and uses the materials to create handbags and stuff. Then they sell that stuff via their website at regular retail prices.  Bravo and humbug, I say!  But most prominent on PUP’s website is its catalog of handbags, wallets, sports bags, totes, and bookbags, all made from recycled leather from Amtrack train seats.  Here is a picture of some their very fine products:


As far as tax exemption, "Bah Humbug!"  Here is how PUP describes its start-up: 

Sometimes, a great idea takes time to become a reality. Sometimes, you just say yes and figure out the rest. Sometimes it really works and turns out better than you ever imagined. That’s what I like to think happened when we said yes to Amtrak earlier this year.  This one is a long time coming. Years ago, a fan of PUP happened to be working with Amtrak and started mentioning our name and our work in reuse. In early 2017, we were sent a wool train seat cover to prototype into a bag.  The conversation resurfaced this year and we made friends with Kara from Amtrak’s Office of Sustainability. She was asking how we could collaborate as they updated 100 train cars from the Acela Express. The Acela Express line featured leather seat covers. We’ve been wanting to work with leather for a while now and this seemed like a great opportunity to collaborate with a company that was just as dedicated to transit, sustainability and connectivity as PUP.

This is the start of something new, this is an opportunity for PUP’s greater work to reach a national audience. We have a chance to prove to the whole world that material reuse can be practical, well designed, socially responsible and beautiful.  We said yes, we took our first delivery of material, figured it out and here we are. It’s what we do - ta da - used into usable!

I’d like to say this was an easy process and as straightforward as I just made it sound, but, that’s just not the case. This was a tough one. We received the seats, and they were dirty. Like, they had seen some gum, some coffee and a few ice cream sandwiches. We had to clean these babies before we could start. We tried all kinds of things and finally settled on dry cleaning them with a company that uses an eco-friendly process. Once they were cleaned, we unleashed our designers. They prototyped and prototyped and prototyped. I’ve been amazed by the creativity and ingenuity of our team. They took bits and pieces of leather and transformed them. The results are beautifully designed bags meant to take your next journey to a whole new level.

Over the next 10-12 months, we are on track to create approximately 2,500 bags that will roll out in small-batch releases of 150 as we repurpose the seat coverings. Products in our Amtrak Collection retail from $75 to $750 dollars. We expect to release more new designs during that time, as well, so stay tuned and we’ll let you know when the next train (or product) arrives at the station. Our hope is that you’re just as excited about this new product launch as we are! We look forward to seeing where this takes us!

PUP is creating a smarter, more sustainable and more resilient world by combining good design with existing resources. For us, it’s important to show the public that things can have a life beyond their original purpose. This project serves as an example for how that can be done in a sophisticated and innovative way. 

The bags sell for what seem like the same prices you can buy bags at moderate to high end stores that sell handbags and such.  Some bags are kinda pricey.  Like the “Agent Backpack” which sells for $385.00 or another Amtrack leather bag that’ll run you $750.  Granted this is a small organization with gross receipts of slightly less than $300,000 and net assets of about $70,000.  The currently reported gross receipts are slightly higher than during the receipts in annual periods from 2012 (gross receipts of $151,000) to 2016 (gross receipts of $197,020).  Still, it’s Christmas, and well . . . dammit people can’t just stop working to run a nonprofit with no charitable goal!  According to their 2016 Form 990, the only two compensated employees are husband and wife who, together earn about $50,000.  So no, nobody is getting rich . . . but still!  Here is what Amtrack said in its press release when it announced that the PUP will start marketing handbags made from old Amtrack leather: 

(October 16, 2018 – INDIANAPOLIS, Ind) – People for Urban Progress (PUP), an Indianapolis-based nonprofit specializing in advancing good design and civic sustainability, announced today a partnership with Amtrak to repurpose leather seat covers from 20 refreshed Amtrak Acela Express train sets and save those materials from landfills by transforming them into luxury bags. The partnership is a direct result of how both companies fully embrace sustainability as a fundamental part of their businesses. This landmark project is PUP’s first national endeavor, and a new initiative for Amtrak as well.

The limited-edition launch of the Amtrak Collection includes handmade accessories from Amtrak’s flagship Acela Express. The first launch of the slate blue luxury leather bags includes totes, backpacks and dopp kit. Approximately 2,500 bags are expected to roll out in small-batch releases during the next 10 to 12 months as the seat coverings are repurposed. All designs are developed and hand-made by the designers at PUP, who also developed the process of repurposing the seats. This includes separating the leather from the foam seat, dry cleaning the leather utilizing an environmentally friendly process and then cutting the leather and sewing it together to create each product.

“This is an exciting opportunity to showcase the work we do to remake waste and create change through the creation of our products,” said Andrea Cowley, Executive Director at People for Urban Progress. “Collaborations like this allow us to continue to advance the idea of taking careful consideration of how we recycle our cities’ resources. We make the used into useful through great design which, in turn, allows us to address civic sustainability.”

“One of the main objectives of this Upcycling Project is to divert as much waste from landfills as possible,” said Senior Sustainability Manager Kara Angotti. “We have set a corporate recycling target of 20 percent by 2020 and this project will help us advance closer to achieving that goal. This is a unique opportunity to explore the extended value in our trash and to focus on ensuring we consider what happens to our materials at the end of their useful life.”

Amtrak’s Acela Express service, best known for transporting business commuters is a high-speed train operating between Washington D.C. and Boston with stops in Baltimore, Philadelphia, New York City, Providence and more. Amtrak is refreshing the interiors of its current Acela trainsets before the next-generation Acela fleet becomes active in 2021. These seat materials from the current Acelatrainsets, which are being donated, were retired after approximately 10 years of service.

PUP is known for repurposing dated infrastructure through design and fabrication projects. In 2008, they upcycled the roof of the RCA Dome, previously the home of the Indianapolis Colts. Materials from the dome were used to design wallets, handbags, office bins and more, saving 13 acres’ worth of material from the landfill. Promotional banners and materials from Gen Con, the longest running gaming convention in the world, were fashioned into messenger bags and wallets. Baseball stadium seats were transformed into bus stops and public seating around the city of Indianapolis, still giving residents something to cheer about. The Amtrak collaboration offers a unique national opportunity to expand PUP’s mission and vision.

The full line of the Amtrak Collection will retail between $75 to $750 dollars. In addition to the new Amtrak collection, PUP sells a variety of bags and wallets made from arena roofing materials, event banners, reclaimed seatbelts and more, ranging in price between $12 and $172.

Ok, so in that press release is perhaps a slight hook.  The press release states that PUP seeks to “divert as much waste from landfills as possible.”  I suppose that could be a charitable purpose, something that helps the environment and lessens the burden of government.  But even if those are charitable goals, they seem minimal relative to the selling of leather totes and such, particularly at high end prices and as seemingly the primary activity (according to the website).  At a minimum, the regular and continuous sales of “luxury leather bags” is a substantial non-exempt activity and we all know what Better Business Bureau says about that!  "[T]he presence of a single non-[exempt] purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly [charitable] purposes."  The revenue from that activity is UBIT, at best, and a complete disqualifier at worst. 

Now everybody get back to work.  This ain't Christmas!


November 29, 2018 in In the News | Permalink | Comments (0)

Prentice, "Misreporting Nonprofit Lobbying Engagement and Expenses: Charitable Regulation and Managerial Discretion"



ARNOVA's (Association for Research on Nonprofits and Voluntary ActionNonprofit Policy Forum (Volume 9 (2018) (I think your law library has to have an electronic subscription) has an interesting article by Christopher Prentice on how nonprofits [mis]report lobbying activities and expenses.  Here is the abstract:


On the one hand, nonprofits are expected to protect values, promote ideals, and effect change, and on the other hand, they are normatively and legally discouraged from engaging in advocacy and lobbying. These countervailing forces produce a tension that nonprofit managers must navigate. Although previous research suggests that normative boundaries and legal implications constrain lobbying efforts, it is possible that these factors merely influence how some charities report their lobbying activities to authorities. Indeed, incentives to misreport lobbying engagement exist at the federal level where regulatory oversight is lax. This article compares state data obtained for a sample of charities to contemporaneous federal data regarding the lobbying engagement, payments, and expenses of these organizations and their registered lobbyists. Findings demonstrate that roughly half of the charities sampled engage in more lobbying than they report to federal authorities, lending support to the premise that managerial discretion influences nonprofit reporting. 

Other articles in Volume 9 include:

ARNOVA also has a page containing forthcoming articles.  The most recent forthcoming issue contains several articles regarding nonprofit health care.  I recommend the website for anyone writing or thinking about how tax policy impacts nonprofits. 


November 29, 2018 in Publications – Articles | Permalink | Comments (0)

Wednesday, November 28, 2018

Charities in China


The China Law Philanthropy Report, updated in August 2018, is definitely worth reading.  Here is a brief excerpt from the introduction:

Since the establishment of the People’s Republic of China (PRC) in 1949, China’s legal framework has mainly followed the civil law tradition. At the same time, it has significant characteristics of a Leninist state in which all state institutions come under the control of the Communist Party of China. At present there is no civil code in China. The General Principles of Civil Law, which came into effect in 1987, intend to create a consistent framework for the interpretation of civil law.  China’s legal framework is constraining for civil society in general and philanthropic giving in particular. During the current administration of President Xi Jinping, Chinese civil society has come under a great deal of pressure. In terms of both freedom for civil society and philanthropy, China ranks very low among the world’s countries. In 2016, Freedom House gave China the lowest possible ranking of seven for political rights, along with six for civil liberties.2 Similarly, the World Giving Index 2016 ranked China near the bottom with a score of 140 for philanthropic giving. The
Hudson Institute’s Index of Philanthropic Freedom 2015 ranked China 52 out of 64 countries in terms of creating an enabling environment for philanthropy.

Nevertheless, philanthropy has a rich and varied history in China, which is still felt in the practice of philanthropy in Taiwan and among the Chinese diaspora.  In the PRC, in contrast, philanthropic traditions were largely erased as a result of the Communist Party’s rigid rule from 1949 to 1978, when the state dominated all forms of social life, including voluntary giving. Even during the 1980s and 1990s, most philanthropic activity was controlled and shaped by government policies, priorities, and institutions. The government organized charitable donations, and people gave not because they wanted to but because they were politically and socially pressured to do so. There was little choice about the recipients either. Donations generally went directly to the government or to government-organized NGOs (GONGOs), which dominated the nonprofit sector and had a monopoly on public fundraising.

There was also little information or transparency about the use of donations. Companies donated as well, but their donations almost always went to projects in conventional areas, such as poverty alleviation, disaster relief, education, or health, which were carried out by the government or GONGOs. During this period the idea of corporate social responsibility (CSR) began to gain traction in Chinese companies, but it was regarded more as means to strengthen the private sector’s relationship with the government than with target communities.  This situation began to change about ten or fifteen years ago, as private foundations—or what the Chinese call “non-public fundraising foundations” (that is, mostly corporate and family foundations)—mushroomed and exceeded the number of GONGOs, many of which are public foundations or, in Chinese, “public fundraising foundations” (for more, see our interactive timeline The Rise of Philanthropy and Civil Society in China, 1976-2017). In addition, scandals in the philanthropic sector, primarily with GONGOs, were publicized on social media and generated public debate about reducing the government’s monopoly on philanthropic activities and promoting greater transparency and accountability in the sector. At the same time, the CSR programs implemented by Chinese companies became somewhat more diverse as companies began to work with nonprofit organizations (NPOs) as well as GONGOs.   International influences also played an increasingly important role as both NPOs and philanthropists looked overseas, particularly to the United States, for models for shaping the philanthropic sector.


November 28, 2018 | Permalink | Comments (0)