Nonprofit Law Prof Blog

Philadelphia Inquirer Three Years a Nonprofit. How is it Faring?

The newspaper business has been a dying business for some time now. It has been hard to make ends meet. As a result of that challenge some newspapers have considered converting to charitable entities with tax exemption. Some have made the conversion. 

The Philadelphia Inquirer, a long and storied institution, made that choice three years ago. How's it faring? NiemanLab provides a good look 

From the story: "The Inquirer was once arguably the nation’s premier metro daily, with a 700-strong newsroom, bureaus around the world, and a run of 17 Pulitzer Prizes in 18 years. But it suffered through a miserable stretch between 2006 and 2016, with five different owners (and two bankruptcy auctions). When that last owner, Gerry Lenfest, decided three years ago to donate the paper into nonprofit ownership — what would become the Lenfest Institute for Journalism — it sparked a lot of hope and excitement in a depressed industry."

The Inquirer "brought a new twist, too, a public benefit corporation model. The nonprofit Lenfest Institute is the sole owner of the for-profit Inquirer."

I recommend a review of the article. It gets fairly wonky in terms of income tax exemption rules that have been challenges for this structure.

Perhaps the bottom line though is: "Or as that memo to staff put it: “Being owned by a not-for-profit entity makes us unique among our industry peers, but it does not make us immune from the challenges facing the local newspapers across the country.”

Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law

A Nonprofit Running a Job reTraining Program that Works?

I hear members of the nonprofit community often talking about how to measure success. A story in the New York Times tells the story of a nonprofit, Project Quest out of San Antonio, that retrains people who have lost jobs to work in a new profession. Professors who study labor say the program really works and they have numbers to back that claim up. 

From the story: "In a nine-year trial comparing a group of people who took part in Project Quest with a group who did not, the Quest graduates ended up earning $5,000 more annually. That was especially significant since earnings gains from training programs typically fade over time, Mr. Osterman said."

“People feel like we cost so much per individual,” said Dr. Todd Thames, Project Quest’s board chairman. “That’s what makes it work — child care, mentorship, transportation, tuition, bus passes. These are the barriers that prevent people from successfully completing training programs and finding meaningful employment.”

Just one nonprofit, but it is a nice example of a nonprofit able to demonstrate its results through data.

Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law

Epstein donations to MIT Media Lab Cause Fallout

NYTimes details how two professors at MIT Media Lab are leaving the organization. They are disappointed that the director accepted money from Jeffrey Epstein for the Lab. 

From the story: "The planned departures follow an apology by Mr. Ito posted on the M.I.T. Media Lab website on Aug. 15. “In my fund-raising efforts for M.I.T. Media Lab, I invited him to the lab and visited several of his residences,” Mr. Ito said in the statement. “I want you to know that in all of my interactions with Epstein, I was never involved in, never heard him talk about and never saw any evidence of the horrific acts that he was accused of.”

Only noting because of the connection to the travails of nonprofits that take money from tainted sources. Discussed this problematic theme with some board directors to be one time and found that a number of them could not understand the problem. Money is money they said.  Rhodri Davis has a nice tweet thread on this that is worth a view. His bottom line is you cannot do good with bad money - it's a real problem.

For Profit Corporations with a Social Purpose?

America's CEO's came out, through the Business Roundtable, with (from my perspective) an odd new statement yesterday that shareholder primacy should no longer guide their mission as for-profit corporations. Instead, it highlights the importance of other values like: “value for customers,” “investing in employees,”  “diversity and inclusion,” “dealing fairly and ethically with suppliers,” “supporting the communities in which we work,” “the environment.”

It's odd because from a legal and practical perspective, I don't see the institution of the for-profit corporation as able to make this change. These entities are structured to first, second, third, and last maximize profit. 

Fortune Magzine wrote about the statement here.

This post is obviously not directly about nonprofits. But, I think for watchers of nonprofits and philanthropy this is an interesting moment. My sense is this is related to two different trends. The first and maybe the most important is the growing sense of inequality worldwide. This is perhaps a primary function and is there to be a PR appeaser to those types of concerns, but maybe is at least a signal that they are aware of the democratic concerns. The second though is the very real trend of new businesses choosing to form as benefit corporations. This suggests that many think it at least important for for-profit corps to be viewed as sustainable, genuinely good, and a part of the community. Whether driven by employees, consumers or the larger public this seems to be a real trend.

Why do I think this relates to nonprofits? Because these moves begin to tread on nonprofit territory. What that will mean for the nonprofit brand long term will be interesting to watch. Nonprofits have long been involved in for-profit spaces like health clubs or program related investments. The latter have been growing through things like "impact investing." Now, for-profits increasingly see a need to be mission directed like the nonprofit world.

Anyway, no major thoughts on this other than this moment is worth sticking a pin in for those in the nonprofit space as well. What it will mean remains to be seen, but I think this trend will cause an impact in the nonprofit world that we are just not able to appreciate yet.  

Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law

Pharma Charities?

The Economist had an interesting story this past week on some of our largest charities - charities associated with drugmakers.

Perhaps you have also noticed the tendency that when you go to buy an expensive brand drug that despite the fact that you have insurance, there is still an expensive co-pay involved. However, there are sometimes charities that can help you with that co-pay depending on your circumstances. You might have wondered why they do that.

Well, the Economist has investigated. 

From the story: "According to public tax filings for 2016, the last year for which data are available, total spending across 13 of the largest pharmaceutical companies operating in America was $7.4bn. The charity run by AbbVie, a drugmaker that manufactures Humira, a widely taken immuno-suppressant, is the third-largest charity in America. Its competitors are not far behind. Bristol-Myers Squibb, which makes cancer drugs, runs the fourth-largest. Johnson & Johnson, an American health conglomerate, runs the fifth-largest. Half of America’s 20 largest charities are affiliated with pharmaceutical companies.

Not everyone qualifies for their help. Unsurprisingly, pharma-affiliated charities fund co-payments only on prescriptions for drugs that they manufacture. There is often an income threshold, too, which excludes the richest Americans—though it is usually set quite high, at around five times the household poverty line. They are prohibited from funding co-payments for those on Medicaid (which helps the poor) and Medicare (which helps the elderly) by the anti-kickback statute, which prevents private companies from inducing people to use government services. Those patients can accept co-pay support from independent charities, such as the Patient Advocate Foundation."

I am a bit troubled by the idea of the IRS granting and maintaining exemption for a charity that is associated with a for-profit that only pays for drugs that the for-profit provides. I have not investigated any of these enough to come to any conclusion. However, the fact that this is now a significant part of the charitable environment, and it is associated with a major public policy suggests to me that Congress needs to give real thought to how this system fits in with charity and with prescription drugs generally. More reasoned thought is needed. The IRS needs to do its best job in assessing whether these organizations meet the requirements of charity, but given the significant policy domains this issue crosses, it's probably not the best place to answer such questions.

As it is now, it appears that Pharma has cobbled together a financial solution to a problem they faced as a business, that happens to involve "charity," rather than that Pharma is seeking to do charitable things that deserves the moniker. 

I have not personally seen any guidance or determ letters from the IRS on this matter. If anyone has one, would love to see what the IRS has concluded on the matter.

Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law

Should Physicians Who Treat Indigent Patients Be Tax Exempt Just Like Hospitals?

My research assistants scour many sources to find information of relevance to those who study and practice nonprofit and nonprofit tax law.  I usually discard items that, IMHO, have no validity and therefore do not edify the conversation.  But some assertions are so terribly wrong as to be instructive.  And when those conversations appear in otherwise reputable and usually informative venue, I draw attention to the conversation if only to make a different point.  And since Fridays are usually the slowest day, its also the best day to step back and ruminate.  So anyway, Forbes Magazine published a piece yesterday entitled "Equal Treatment Under the Law:  Isn't it Time For Fairness".  The gist of the op/ed piece is that if nonprofit hospitals get tax exemption [loosely] based on the provision of indigent care, so too should physicians when they render uncompensated services for indigent patients (the subsidiary assertion is that many physicians don't bother submitting bills to Medicare administrators because the medicare rates are just not worth the administrative hassle.  The penultimate complaint is that so long as nonprofit hospitals are tax exempt, physicians who provide pro bono services should receive [an apparently] similar tax benefit.  

Countless physicians have contributed billions of dollars of uncompensated care over their careers and still do. One physician estimated recently that he had “written off over $8 million of free care to the uninsured” over his 26-year career – but he is “still liable” for the results of those free treatments.  Where is the tax break for him or his countless other physician colleagues who give or have given free care? A number of physicians over the years have told us that they see Medicaid patients but never submit a bill. “The payment isn’t worth the paperwork, etc,” is the common refrain.  If non-profit hospitals can receive substantial tax breaks despite making huge profits, why can’t all physicians (at least those in solo or small practices) be eligible for the same? After all, they need it far more than those billion-dollar non-profit hospitals and it would help sustain many marginally sustainable practices. More physician resources mean better patient care and more face/contact time with their chosen physicians. That works for everybody!

This is a Forbes piece, don't forget.  I hardly know where to begin.  First, there is the general proposition that the charitable contribution is generally not available for the value of services contributed to individuals (or even organizations contributions to which are deductible).  Second, and more fundamentally is that a tax deduction -- at least in high theory -- is based on income having been taxed to a recipient who then uses the income in a tax favored manner indicating the income was not used for personal consumption.  In other words, income that was initially taxed on the premise it would be used for personal consumption is backed out of the taxpayer's tax based when the assumption proves false.  Of course, theory and practice are not identical.  For many reasons beside high theory, deductions are allowed for certain spending that results in personal consumption.  

Anyway, the physicians -- no more than attorneys who engage in pro bono services -- should not get a deduction for uncompensated services precisely because there was no proper antecedent.  No income from the transaction was ever taxed (under the assumption it would be used for future personal consumption) and so no deduction is warranted based on the antecedent assumption having been proven false.  Now, there might be a different argument is the writer is just complaining that the donation of services ought to generate a charitable contribution.  That might be a good argument to have, setting aside administrative burdens of compliance.  But I am surprised that Forbes would have printed a piece so at odds with tax common sense.

Darryll K. Jones

Update Available for Fishman, Schwarz, and Mayer Nonprofit Organizations: Cases and Materials (5th ed.)

For those of you who use the Nonprofit Organizations casebook I co-author with James J. Fishman (Pace) and Stephen Schwarz (Hastings, emeritus), a new Student Update Memorandum is available for download (at no charge to you or your students) and and a new Teacher's Manual Update Memorandum is also available (also at no charge, but requires a West Academic Account). Both are current through July 15, 2019, and so include discussions of all relevant provisions of the 2017 Tax Cuts and Jobs Act (TCJA) as well as guidance relating to those provisions. The Student Update Memorandum also includes the text of new provisions added by TCJA and the Bipartisan Budget Act of 2018, as well as the text of other changed or added provisions that are included in the Nonprofit Organizations Statutes, Regulations and Forms book that we also author.

As always, any feedback - positive or negative - regarding the casebook and the updates is greatly appreciated. 

Lloyd Mayer

Klees & Berg: Are Tax-Exempt Investors Really Tax-Exempt?

Edward H. Klees (Hirschler Law) and Mark E. Berg (Feingold & Alpert) have published a short commentary title Are Tax-Exempt Investors Really Tax-Exempt? on the Pensions & Investments website (photo from that website). Here is the introduction:

Call us old-fashioned, but we think of tax-exempt institutions as exempt from taxes.

Under a federal law that took effect in 2018, however, the IRS may audit investment funds structured as limited partnerships, limited liability companies or other pass-through vehicles and collect any resulting underpayments of the investors' income taxes from the fund itself. Unless its governing documents say otherwise, the fund may pass along the bill to its investors, including tax-exempts, however it sees fit, even though none of the tax is attributable to the tax-exempt investors. Plus, if the fund is unable to obtain reimbursement from a taxable investor for its share of the tax, the other investors, including tax-exempts, could be required to pony up. Unfortunately, the contracts we have seen so far leave the door open for these outcomes.

We note some possible fixes below. If left unaddressed, the potential tax liability in investment funds is a ticking time bomb for tax-exempt investors. Until such time as fund documents evolve toward provisions more favorable to tax-exempt investors, it is essential that tax-exempts and their advisers be aware of the implications of the new tax audit rules and the possible solutions to the significant problems they raise.

Lloyd Mayer

Klimon: Beyond the Board: Alternatives in Nonprofit Corporate Governance

William M. Klimon (Caplin & Drysdale) has published Beyond the Board: Alternatives in Nonprofit Corporation Governance, Harvard Business Law Review Online (2019). It is a detailed and fascinating account of how flexible many state laws are regarding the governance structures of nonprofit corporations. Here is the introduction (citations omitted):

The diversity of the nonprofit sector is manifold. There is great variety in organizational form; nonprofit organizations have long been structured as corporations, charitable trusts, and unincorporated associations. Now the Internal Revenue Service (IRS) has recognized the exempt status of standalone limited liability companies. Likewise, the range of activities across the sector is stunning: healthcare, education, welfare, religion, the arts, and the environment. And even within those fields the diversity astounds: from a tiny free clinic to the Adventist Health System; from a new public charter school to Harvard University; from a Primitive Baptist chapel to the thousands of Roman Catholic congregations, orders, and organizations; from a community theater to the Metropolitan Opera. That immense diversity has affected even the relatively uniform world of nonprofit corporate governance.

The basic principle of board governance remains the standard for nonprofit corporations: “[e]ach nonprofit corporation must have a board of directors.” But attempting to legislate for such a diverse sector has led lawmakers to realize that one size does not fit all and not every nonprofitmaking corporation is best served by traditional board governance. Consequently, the various state nonprofit corporation statutes include a really amazing variety of mechanisms to deviate from, supplement, or even override that basic principle.

The following discussion reviews many of these mechanisms. Reference will be made repeatedly to the Revised Model Nonprofit Corporation Act, promulgated by the Business Law Section of the American Bar Association (ABA) in 1987 and subsequently adopted by at least half of the states. The widespread adoption of that model law makes it a useful touchstone for exploring alternatives to board governance. But the great variety of nonprofit governance innovations is not ignored and several nonuniform state-specific provisions are also discussed.

Lloyd Mayer

Smith: Exploiting the Charitable Contribution Deduction's Hypersalience

Eric Smith (Weber State University) has posted Exploiting the Charitable Contribution Deduction's Hypersalience, Utah Law Review (forthcoming). Here is the abstract:

Hypersalience describes the cognitive error that occurs when taxpayers are highly aware of a tax provision generally, but fail to correctly perceive its associated limitations. The charitable contribution deduction provides a strong example of hypersalience as taxpayers have general awareness that tax benefit follows charitable giving, but often fail to understand the deduction’s limits—most notably the standard deduction’s preclusion to any direct tax benefit for charitable giving. As cognitive error drives inaccurate perception of the tax law, the question arises: what, if anything, should the government do to correct taxpayer understanding?

This paper considers this question from two perspectives. The first is market or economic salience, a measure of salience based on taxpayer reaction towards the market. The case is made here for exploitation of hypersalience—an argument that endorses the status quo. Effective curtailment of hypersalience could bear with it constitutionally worrisome burdens on free speech and an overregulated, less viable charities sector. Benefits of leaving hypersalience intact include a more vibrant charities sector. In some cases, giving induced by hypersalience could result in zero utility loss. 

The second measure, political salience, considers taxpayer reaction as expressed through the political process. This paper argues that exploitation of hypersalience is justifiable in that taxpayers could interpret additional regulation to correct hypersalience as a tax increase (or at least as the denial of perceived tax benefit). Given the taxpaying electorate’s strong aversion to taxes, in an era of political polarization and massive deficits, Congress can ill afford to expend constrained political capital unwinding taxpayer cognitive bias with no increase in revenues.

Lloyd Mayer

Business Group Lobbying & Advocacy Spending Exceeded $1 Billion in 2017

According to the group MapLight, "corporate trade organizations and nonprofits spent $535 million on lobbying in 2017 and as much as another $675 million on unregulated efforts to influence public policy." MapLight is a section 501(c)(3) organization "that reveals the influence of money in politics, informs and empowers voters, and advances reforms that promote a more responsive democracy." The group based its findings on a two-month review of the tax returns from almost 100 trade organizations and nonprofits, finding that dozens of such organizations raise eight or nine-figure amounts each year to support their activities. 

Lloyd Mayer

University of Pittsburgh Medical Center Settles Dispute with Competitor and AG

I previously blogged about Pennsylvania Attorney General Josh Shapiro's attempt to modify consent decrees governing the relationship between the University of Pittsburgh Medical Center (UPMC) and Highmark (a health insurer and health care provider). I recently learned that days before the decrees were set to expire, UPMC and Highmark agreed to "give many Highmark insurance members in-network access to UPMC doctors for the next 10 years," access that was set to expire with the decrees. The Pittsburgh Post-Gazette news report linked to in the previous sentence notes that the Highmark CEO credits the AG with helping broker the talks that led to the agreement, and also that the AG planned to withdraw his lawsuit against UPMC. For those interested in the details of the long-running dispute involving UPMC, Highmark, and the AG's office, this news story also has a helpful timeline.

Lloyd Mayer

Sticky Law: No One Likes the Parking Tax, But We Are Still Stuck With It

We all know how hard it can be for the federal government to enact new laws. It appears to be equally hard to repeal existing law, even when no one now thinks it is a good idea. The current example in the exempt organizations world is Internal Revenue Code section 512(a)(7), a/k/a the parking tax. By my count (and the JCT's) six bills have been introduced in the current Congress that specifically target this provision for repeal, three in each chamber, with sponsors ranging across the political spectrum from Representative James Clyburn to Senator Ted Cruz. (H.R. 513, H.R. 1223, H.R. 1545, S. 501, S. 632, and S. 1282).  All six bills are currently in the respective tax writing committees. These bills are in addition to activity in the last Congress, which included to five bills plus a manager's amendment that would have also repealed the provision and was part of a bill that passed the House but not the Senate. The Joint Committee on Taxation also issued a report specifically on this provision earlier this summer. 

To be fair, I exaggerate when I say no one likes the parking tax. At least the Tax Foundation supports it for bringing parity between exempt organizations and for-profit businesses, although that reasoning ignores the disparate administrative burden created by many exempt organizations now having to newly file a additional tax form (Form 990-T) and adopt administrative procedures they did not have previously in order to comply with their obligations under the new tax.

Previous 2019 blog coverage of this topic includes: Ways and Means Channels Its Inner Emily Litella on Parking: Never Mind; Much Ado About Parking (House Committee hearing); Renewed Calls to Repeal "Nonprofit Parking Tax"; IRS Issues Guidance Aimed at Limiting Impact on Nonprofits' Parking Expenses; House Majority Whip Renews Push to Repeal Taxation of Qualified Fringes as UBIT.

Lloyd Mayer

Slow Summer for IRS on EO Issues: 4968 Proposed Regs, Final 501(c)(4) Notice Regs, 2018 EO Return Data

There has not been a lot of exempt organizations guidance or data activity from the IRS this summer, but here are a few items:

• Proposed Section 4958 Regulations: Darryll Jones previously blogged in this space about both the proposed regs and the perhaps inadvertent affect those regs could have on Berea College, located in Senator Mitch McConnell's home state. Now Alexander Reid and Kensington Wolgamott, the latter a former student of mine, have written an analysis of those proposed regs titled For Colleges, IRS' Endowment Tax Proposal is Overly Taxing in Law360. In addition, James Fishman (Pace) has posted a critique of the underlying statute and a proposed alternative, titled How Big Is Too Big: Should Certain Higher Educational Endowments' Net Investment Income Be Subject to Tax? Here is the abstract:

Section 13701 of the 2017 Tax Reform Act created new Internal Revenue Code § 4968 that imposes a 1.4% excise tax on the net investment income of certain large private college and university endowments. The affected institutions must have at least 500 tuition-paying students during the preceding taxable year, provided more than 50% of its students are located in the United States, plus assets (other than assets used directly in carrying out the institution’s exempt purpose) with an aggregate fair market value at the end of the preceding taxable year equal to at least $500,000 per full-time or full-time equivalent student. Approximately twenty-seven to thirty-five colleges and universities are affected.

This paper argues that the legislation as enacted is politically motivated and fatally flawed. The “assets per student” ratio that triggers the tax is both over and under-inclusive, and irrelevant and arbitrary as a guide to excessive endowment accumulation. The legislation serves to exempt multi-billion dollar endowments of many universities yet ensnare smaller colleges that may have more limited resources, but the endowment to student ration exceeds $500,000.

The growing income inequality in American society is reflected in the inequality of access to elite schools with billion dollar endowments. While large endowment schools have increased financial aid, the percentage of students from lower income families has remained the same. A student whose parents come from the top one percent of income distribution is 77 times more likely to attend an Ivy League college than one from the bottom income quintile. Among “Ivy League Plus” colleges (the eight Ivy League colleges plus Chicago, Stanford, MIT and Duke), more students come from families in the top 1% of income distribution (14.5%) than the bottom half of the income distribution (13.5%).

Recommended is that the investment income tax be triggered for all billion dollar endowment institutions when the endowment earns $75 million in net investment income ($150 million for public school billion dollar endowments). The endowment per student ratio should be jettisoned. Schools could offset the net income investment tax on a one dollar to one dollar basis by increasing financial assistance to the student body. If the school increases the admission of students from underrepresented constituencies, the tax offset would be two dollars for each dollar spent in expanding the number of such students.

• Final Section 506 Regulations: Last month the IRS issued final regulations implementing the notice requirement for new section 501(c)(4) organizations, codified in section 506 of the Internal Revenue Code. The final regs are little changed from the previously issued temporary regs and notice of proposed rulemaking, as the IRS generally rejected changes proposed by the few parties who submitted comments, as detailed in the comments and explanation of provisions section that accompanies the final regs. The final regs do clarify that a subordinate organization included in a group exemption letter is still subject to the notice requirement.

• 2018 EO Financial Data: The IRS Statistics of Income Division has released selected financial data from exempt organization returns (Forms 990 and 990-EZ) filed in calendar year 2018. These data are available in two large Excel spreadsheets, which should be helpful for empirically minded nonprofit researchers.

Lloyd Mayer

NRA Mess Continues to Expand

Here are the most recent National Rifle Association (NRA) developments:

• In July, the Attorney General for the District of Columbia issued subpoenas to both the NRA and its related charitable foundation focusing on whether the organizations violated DC's nonprofit laws. The foundation is chartered in the District of Columbia. More specifically, the AG's office said: ""We are seeking documents from these two nonprofits detailing, among other things, their financial records, payments to vendors, and payments to officers and directors." Coverage: ABC News; Washington Post.

• Earlier this month, the New York Attorney General issued subpoenas to 90 current and former NRA board members. The NRA is chartered in New York. While the AG's office did not provide any details, the subpoenas come in the wake of reports regarding financial transactions with numerous board members or entities owned by them. Coverage: CNN; N.Y. Times.

• Also earlier this month, the Washington Post reported that the NRA had considered purchasing a $6 million mansion for its chief executive officer, Wayne LaPierre. The NRA ultimately did not proceed with the purchase, but the details regarding the decisions related to the purchase are disputed by NRA officials and its former outside ad agency.

Lloyd Mayer

The Debate Over Donor-Advised Funds: New Research & New Data

There have been several notable recent additions to the donor-advised fund (DAF) debate. In June, H. Daniel Heist (U. Penn Social Policy & Practice) and Danielle Vance-McMullen (DePaul School of Public Service) published Understanding Donor-Advised Funds: How Grants Flow During Recessions, Nonprofit and Voluntary Sector Quarterly (2019). Here is abstract:

Donor-advised funds (DAFs) are becoming increasingly popular in the United States. DAFs receive a growing share of all charitable donations and control a sizable proportion of grants made to other nonprofits. The growth of DAFs has generated controversy over their function as intermediary philanthropic vehicles. Using a panel data set of 996 DAF organizations from 2007 to 2016, this article provides an empirical analysis of DAF activity. We conduct longitudinal analyses of key DAF metrics, such as grants and payout rates. We find that a few large organizations heavily skew the aggregated data for a rather heterogeneous group of nonprofits. These panel data are then analyzed with macroeconomic indicators to analyze changes in DAF metrics during economic recessions. We find that, in general, DAF grantmaking is relatively resilient to recessions. We find payout rates increased during times of recession, as did a new variable we call the flow rate.

Earlier this month Candid (formerly the Foundation Center and GuideStar), released the results of a community foundation survey. Included in those results is the following information regarding donor-advised funds maintained by the surveyed foundations (citations omitted):

Product Mix: On average, donor advised funds make up more than a third of assets for community foundations larger than $250M. Although DAFs continue to grow, they don't appear to comprise significantly more of respondents' asset bases than in previous years.

Total Donor Advised Fund Assets, Gifts, and Grants: Aggregate community foundation donor advised fund (DAF) asset, gift, and grant totals all saw a higher rate of increase in FY18 than the field as a whole. DAF grantmaking grew at a higher rate (4%) than assets and gifts (2% each).

Donor Advised Fund Flow Rate: The "flow rate" of DAFs compares a given year's grantmaking total with its gift total, dividing grants by gifts. This metric may help capture the activity of donors who contribute to their DAF and grant from it that same year. As with distribution rate and other measures of DAF activity in this survey, data is collected in the aggregate by sponsoring community foundation. Data collection on the account level would be necessary to analyze the activity of individual DAF holders. 39% of FY18 Columbus Survey respondents had a DAF flow rate of over 100%, meaning that they granted out more from DAFs than they received that year. 

Distribution Rates: DAFs at community foundations tend to be highly active grantmaking vehicles; more than half (53%) of all survey respondents granted more than 10% of their DAF assets out in FY2018. Larger community foundations, which as noted above tend to carry more non-endowed assets, also have the highest distribution rates.

Hat tip: Nonprofit Quarterly.

Finally, a piece in the Nonprofit Quarterly written by Alfred E. Osborne, Jr. (UCLA Anderson School of Management and also Fidelity Charitable Board Chairman) titled Fidelity Charitable 2019 DAF Grants Spike: How Donor-Advised Funds Changed Giving for the Better triggered a response (in the comments) from Al Cantor raising issues about Fidelity Charitable's influence over news coverage of it that is worth reading along with the main article.

Lloyd Mayer

Congressional and Academic Scrutiny of Conservation Easements Continues

We have previously blogged about congressional, DOJ, and IRS scrutiny of conservation easement donations, as well as academic coverage of this topic led by our contributing editor, Nancy A. McLaughlin (Utah). This scrutiny shows no signs of abating, with the following developments just in the past couple of months:

• Senators Chuck Grassley and Ron Wyden, Chair and ranking member of the Senate Finance Committee, sent three letters in June asking for further answers to their questions relating to syndicated conservation easements. Hat tip: Tax Analysts (Fred Stokeld) (subscription required).

• The Joint Committee on Taxation issued a report last month concluding that enactment of the Charitable Conservation Easement Program Integrity Act of 2019 (S. 170), which is designed to end abusive conservation easement tax breaks would raise $6.6 billion over several years. The JCT letter is available from Tax Analysts (subscription required).

• That followed a June report (revised slightly in July) from the Congressional Research Service describing the concerns regarding abuse of conservation easement tax breaks.

• It also coincided with three recent publications relating to conservation articles, including from the ABA Real Property Trust and Estate Conservation Easement Task Force (Recommendations Regarding Conservation Easements and Federal Tax Law), attorney Jenny L. Johnson Ware of the Johnson Moore LLC firm (Valuing Conservation Easements: An Empirical Analysis of Decided Cases), and Professor McLaughlin, who posted an updated version of Trying Times: Conservation Easements and Federal Tax Law (last revised June 2019).

With organizations that support appropriate tax breaks for legitimate conservation easements, such as the Land Trust Alliance, trying to avoid having Congress throw the baby out with the bath water, while DOJ and the IRS battle promoters and contributors of allegedly abusive conservation easement donations in the courts, it will be interesting to see how this issue ultimately shakes out both legislatively and in litigation.

Lloyd Mayer

Obamacare Reduced the Need for Charity Care (and the justification for tax exempt healthcare?)

Two recent articles in California Healthcare literature, this one and this one, conclude that the amount spent on charity care by hospitals of all sorts (government, for profit, and non-profit) declined after the passage of the Affordable Care Act -- Obamacare.  The magazine, California Healthline, states:

The biggest decline in charity care spending occurred from 2013 to 2015, when it dropped from just over 2% to just under 1%. The spending has continued to decline, though less dramatically, since then.  The decline was true of for-profit hospitals, so-called nonprofit hospitals and those designated as city, county, district or state hospitals.  Health experts attribute the drop in charity care spending largely to the implementation of the federal Affordable Care Act, popularly known as Obamacare. The law expanded insurance coverage to millions of Californians, starting in 2014, and hospitals are now treating far fewer uninsured patients who cannot pay for the care they receive.  With fewer uninsured patients, fewer patients seek financial assistance through the charity care programs, according to the California Hospital Association.

A slightly older (2017) study by the Kellogg School of Management found that the trend was true across the country and that nonprofit and government hospitals benefited the most from the decrease in the number of uninsured patients.  Kinda makes you wonder whether tax exemption for hospitals is still justifiable as the nation moves closer to universal health care (even if that progress has been stalled under the current administration).  Sooner or later, it seems to me, there has to be a reckoning between tax exempt hospitals and the inevitable trend towards health care as a right rather than a privilege.

 

Darryll K. Jones 

Aprill: Revisiting Federal Tax Treatment of States, Political Subdivisions, and their Affiliates

Ellen Aprill (Loyola LA Law) posted Revisiting Federal Tax Treatment of States, Political Subdivisions, and their Affiliates to SSRN (Florida Tax Review, forthcoming).  Here is the abstract:

Several provisions of the 2017 tax legislation, known as Tax Cuts and Jobs Act (TCJA), focused attention on federal taxation of states, their political subdivisions and their affiliates. Most prominently, TCJA limited the federal income tax deduction for state and local taxes to $10,000. States have sued and attempted work-arounds. Another provision, which imposes an excise tax of 21% on “excessive compensation” paid by certain entities not subject to income tax, inadvertently failed to subject to tax entities that are integral parts of states or political subdivisions or are themselves political subdivisions. Calls for a technical correction have so far gone unheeded.

More than twenty years ago, I wrote two articles about federal taxation of state governments, political subdivisions, and their affiliates. The Teacher’s Manual to a leading casebook on nonprofit organizations describes these two articles as “as much as anyone knows about this confusing patchwork and its ramifications.” The passage of time, changes in my own thinking and new developments call for my returning to this topic. I do so here. Moreover, far more than in my earlier work, I examine the applicable rules regarding charitable contribution deductions to these entities as well as discuss the special rules applicable to governmental charities and the category of charities that lessen the burdens of government. 

In light of the 2017 tax legislation, I not only renew recommendations made long ago, but also extend them to the criteria for exempting entities that lessen the burdens of government, a category that has received little scholarly attention. I also call for establishing a system by which states, political subdivisions, and their affiliates could receive determination letters, like those issued to section 501(c) organizations and thus familiar to potential donors. Such an approach would avoid the distortion of the rules applicable to section 501(c)(3) that arises from the current special treatment of governmental charities. Treating governmental entities as a distinct category under the Internal Revenue Code, with their own criteria and their own determination letter, would also acknowledge and honor their role in our federalist system.

 

Nicholas Mirkay

 

Quinn: Wealth Accumulation at Elite Colleges, Endowment Taxation

Mae Quinn (Florida-Levin College of Law) posted Wealth Accumulation at Elite Colleges, Endowment Taxation, and the Unlikely Story of How Donald Trump Got One Thing Right to SSRN (Wake Forest Law Review, forthcoming).  Here is the abstract:

President Donald Trump has declared war on immigrants, diversity, and those who dare to dissent. Rooted in resentments about who people are, where they were born, and what they believe, these executive-led assaults are dangerous developments in the modern era. However, in the course of Trump's many retrograde tirades, he has somehow managed to get one thing right-too many elite private colleges in the United States, considered nonprofit entities, have amassed way too much wealth.

This Article recounts this unlikely story, including how the Trump Administration's 2017 endowment tax could work to advance diversity. The new endowment tax penalizes private colleges for stockpiling assets. In response, potentially impacted universities have argued they are victims of an unfair conservative conspiracy intended to target liberal ideology. But the data demonstrates that this is not true. And concerns about rich colleges hoarding their resources have come from both the right and the left.

Moreover, Trump's endowment tax could be seen as an opportunity and invitation to increase egalitarianism and equity in this country. If rich colleges simply utilize more of their massive savings to further social justice, impact poverty, and enhance public good-particularly in their own at-risk communities-they will not only avoid federal taxation but also begin to address critiques about their elitism and greed. In doing so such universities would not only thwart Trump and his tax but stand with vulnerable groups who are the true victims of the Trump Administration's ever-expanding conservative attacks. 

Nicholas Mirkay